Q3 2025 Maximus Inc Earnings Call
Greetings and welcome to the Maximus fiscal 2025 third quarter conference. Call at this time, all participants are in a 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Jessica bat, vice president of investor relations for Maximus. Thank you, Miss bait.
You may begin.
Good morning and thanks for joining us. With me today is Bruce casbel, president and CEO, David Metron CFO and James, Francis vice president of investor relations.
I'd 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 1. A of our most recent forms 10, q and 10K.
We encourage you to review the information contained in our recent filings with the SEC and our earnings press release.
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, also contains non-gaap financial information management uses. This information internally to analyze 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, please see the company's most recent forms, thank you, and 10K. And with that, I'll hand the call over to Bruce.
Thanks Jessica and good morning. I'm excited to share. Another record-breaking quarter for Max Miss earnings for the third quarter, fiscal year, 2025 adjusted diluted earnings per share reached 2.16 a 24% increase year-over-year. We realized 15% growth in adjusted Deepa.
Finally, Q3 revenue of 1.35 billion is growth of 4.3% on an organic basis year-over-year. Congratulations to the tens of thousands of Maximus. Team members responsible for these accomplishments.
In what has been for many in the government, it and Consulting sector and uncertain environment. We have remained resilient focused on our customers and on consistent quality delivery at scale.
Since our Q2 earnings call, we've seen clarification of certain priorities of the administration and the introduction of new legislation, the impacts of which will Cascade to our state customers.
As I've said for years, a core capability of Maximus is our ability to translate policy changes into operational models. Largely performance-based that deliver accountable outcomes, aligned with the mission of our customers.
In short, I believe we are purpose-built for the operating tempo of today's environment.
As part of our business update. I'd like to share why we believe that we are well positioned to assist both federal and state clients as the details of recent legislation. And Regulatory changes become more clearly understood and implementation planning begins.
Let's first look at the 1. Big beautiful bill act which we believe could create meaningful addressable opportunities for us. Following proposed changes in Medicaid and snap.
Turning to Medicaid the administration continues to focus on managing Federal spend on Medicaid.
The legislation will impose certain administrative activities, while shifting more enforcement responsibility to the states.
Most notably, there's now a twice yearly up for manual. Requirement to determine eligibility for the Medicaid expansion population.
This comprises an estimated 21 million people across the 41 states that have expanded Medicaid coverage to those making up to 138% of the federal poverty level.
States must review their program processes and implement changes to ensure compliance by December 2026.
Our us Services team will be working closely with current and prospective State clients to help them meet these new requirements while continuing to deliver exceptional customer service. As I noted on our last quarterly, call in many cases, this could include assisting beneficiaries in transitioning to a Marketplace plan to provide continuity of coverage.
Through waiver Authority are seeking to include certain individuals in traditional Medicaid categories.
Starting January. 1st 2027 States will be required to verify with participants completion of 80 hours per month of qualifying activities.
This is a major policy change but not 1 with which we lack familiarity.
During President Trump's prior administration at the direction of 1 of our state clients Maximus developed and implemented operational. Modifications designed to make beneficiary, work requirement reporting as accessible and efficient as possible while meeting policy objectives.
With this new Statute in effect, we are again working with our state customers to demonstrate how to modify program operations to comply with the new law. While maintaining a high level of quality of beneficiary engagement.
Notably, the new law prohibits managed care plans, from performing work activity, verifications or handling exemption requests, which would constitute a conflict of interest.
as an established conflict-free partner Maximus, has the independence necessary to support our state clients with compliance under the new legislation
Our human centered and Technology supported approach to compliance with the new law. If we leverages existing program Investments like contact center infrastructure and Digital Services,
Our goal is for beneficiaries to engage through, whatever modality is best for them. Call text mobile app, and so forth.
And that their experience is respectful and empathic.
The last piece of the bill I'll discuss is its impact on state, supplemental nutrition assistance programs or snap.
Driven by a nearly 11% national payment error rate in 2024, according to the USDA, the new legislation enacts eligibility accuracy requirements in order for states to maintain federal funding levels.
Beginning with 2025, or 2026 data states with higher snap payment, error rates will be required to cover more of the program's cost. Shifting, what was once a fully federally funded benefit partially onto State budgets.
Last quarter, we discussed the recent OPM guidance that increases flexibility states have to use contractors and contracted employees to execute programs.
This policy change allows companies like Maximus to help states meet new requirements whether in Medicaid unemployment insurance or in this case snap.
We are excited to help our current and prospective clients. Implement technology-led solutions that increase efficiencies accuracy and provide a consistent high-quality customer experience.
I'm pleased that subsequent to the quarter close, we executed a contract modification with 1 of our longtime State, customers to take on an expanded role in supporting snap Administration.
With a strong track record of partnering with state governments to navigate, and Implement complex policy changes. We are increasingly confident in the growth trajectory of our us Services segment. Over the next 18 to 24 months
as implementing regulations are formalized and States move from planning to operationalization of these new policies.
Beyond the bill.
We are seeing a heightened focus on reducing spending and increased efficiencies and greater use of Technology at the agency level.
We believe this is an excellent opportunity to implement more efficient. Technology-led models for the delivery of Citizen Services and program missions.
As I mentioned, last quarter, I'm pleased that we had minimal impact, this fiscal year, for many change in contract actions. We believe this speaks to the nature of the services. We provide and our earned reputation for delivering quality. Outcomes, accountability under performance-based, Contracting models.
Looking ahead as has been the case for years federal and state budget priorities and Cycles. Reflecting macroeconomic Trends will shape our FY. 26 Outlook, David will share more color in his prepared remarks and how specifically we've considered budget headwinds and policy-driven Tailwind in our early color for fiscal year 2026.
Now, let me turn to the business more, broadly.
During our 2022. Investor day, we committed to investing in our leadership team and building strength through client relationships and laid out a strategy for growth through targeting adjacent agencies.
This time last year, I shared that we were expanding our growth team, through leaders and teams aligned to specific US, Federal markets, civilian defense and health.
The combined success of these 2 strategies is evident in. Our recently announced win at the Department of Defense.
Maximus secured a 777 million dollar contract with the US Air Force life cycle Management Center to provide cyber security and cloud-based Services, aiming to enhance Innovation and operational Readiness across the dod.
The contract spans a base year with 4 1 year options and a potential 6-month extension.
This contract Maximus will work to deliver scalable and resilient cyber security cloud and Engineering support across multiple security, domains.
Congratulations to the team members who worked diligently to make this possible.
We believe this win is further evidence of our ability to expand into adjacent agencies and deliver capabilities aligned with the mission of our Air Force customer.
We're proud to have the opportunity to play an increasing role, supporting our country's National Security priorities.
Our 2022 strategy also emphasized expanding our technical capabilities which in the federal government often require independent certification, to broaden the aperture of our pipeline.
As part of that forward-looking approach we recently achieved cyber security maturity model certification or cmmc level 2 and important. Milestone effective mid December. 2024 cmmc 2.0 is a DOD initiative, designed to standardize and Elevate cyber security practices across the defense industrial base.
Our recent CMMC Level 2 certification validates our enhanced cybersecurity posture as a defense contractor. We also anticipate that it should position us to compete effectively across the entire federal government contracting landscape, as these standards are likely to become the norm.
This added certification has already resulted in the expansion of our Pipeline with potential new work in new addressable areas in FY, 26.
Within the US Federal segment, we expect that these and other accomplishments will contribute to the ongoing success. We are seeing in our financial results in 2022. We set a target of 10 to 12%, operating income in the segment.
This year, we are forecasting to meaningfully exceed. This target,
Now let me turn to Awards reporting and the pipeline through the third quarter of fiscal year, 2025 signed Awards totaled, 3.4 billion dollars of total contract value.
Further at June 30th, there were 1.4 billion dollars worth of contracts that have been awarded but not yet signed.
These awards translate into a book-to-bill ratio of approximately 0.8 times using our standard reporting for the trailing twelve months (TTM) period.
In a BPO Centric business like ours with average contract length and values at the higher end of the industry. The TTM booked to Bill metric is naturally sensitive to rebid timing.
We've seen this, in recent quarters characterized by lower than normal rebid levels.
As such we view book to Bill as only 1 measure of future growth.
To illustrate our book to Bill, at the end of the third quarter of fiscal year 2024, revenue was six times. Since then, revenue has grown 4.3%, and adjusted EBITDA at 15%.
Underscoring, how on contract growth is another important source of organic growth. Providing added strength and resilience to our portfolio.
We continue to view book to Bill as valuable metrics, but 1 that must be interpreted in the full context of contract timing, backlog Dynamics, and overall financial performance.
Our total pipeline of sales opportunities at June 30th was 44.7 billion compared to 41.2% at March 31st. The current pipeline is comprised of approximately 3.1 billion dollars in proposals. Pending 1.2 billion dollars in proposals, in preparation and 40.4 billion in Opportunities. We are tracking
of our current pipeline approximately 63% represents new work. Additionally, 67% of the 44.7 billion dollar total pipeline is attributable to our US Federal Services segment.
I'll wrap my remarks with a brief recognition of Maxim's 50 years of service which we celebrate this year.
Since 1975 Maximus has served as a delivery partner for government turning legislation and policy into real world results.
Our work spans, some of the nation's most complex high-volume programs delivered with speed Precision, efficiency and accountability.
Leveraging this strong, 50 year Foundation, we're excited about the Maximus of the future and our rapid transformation as a technology partner and solution provider to government.
Let me give you an example of where this is showing up today.
I'm excited about our role in the upcoming National Defense, industrial Association or ndia hackathon. Which we are co-sponsoring with organizations including AWS and palantir.
This first of its kind event will be held at George Mason University's fuse facility and the Washington Convention Center in late August.
The hackathon is intentionally designed to address real operational problems. Facing the US military today and accelerate the access to Innovative technology for our servicemen and women
Officer reflecting the impact of our Defense and National Security team. We believe this is another demonstration of Maximus leading the way with innovation.
Our drive to accelerate access to technology and its practical application to National Security mission objectives, reflects, an imperative of our nation.
And a strategic differentiator for Maximus.
And with that, I'll turn the call over to David.
thanks Bruce and good morning, we head outstanding third quarter results, particularly on the earnings side driven by solid execution on programs where our government customers increasingly rely on us for efficient handling of Greater work output, these results, reflect high demand in what our predominantly performance-based Arrangements across our contracts,
We are raising guidance again this year to not only account for the performance this quarter, but to also capture improved Clarity for the upcoming fourth quarter as compared to our thinking on the last call.
I'll end my remarks today by sharing early thinking on our expectations for fiscal year 2026, which precedes formal guidance. This November
turning to the results for this third quarter of fiscal year, 2025 Maximus, reported revenue of 1.35 billion dollars, representing 2.5% year-over-year growth or 4.3% on an organic basis.
The US Federal services and the outside the US segments, both posted positive organic growth with the US Federal Services segment, being the main driver of our Consolidated results. The US Services segment, delivered results in line with expectations.
On the bottom line, the Maximus adjusted IBA margin was 14.7% and adjusted. EPS was $2.16 cents for the quarter, which compares to 13.1% and $1.74 respectively, for the prior year period.
This quarter is adjusted. IBA margin is noticeably above the high end of our target range. This can happen in periods. Where volumes are stronger than anticipated. Thanks to our ability to gain operating leverage on incremental volumes.
This Leverage is partly the result of our intentional Investments and Technology workflow optimization and cost models.
Turning to segments revenue for the US Federal Services segment increased 11.4% to 761 million.
Growth was all organic. We've seen a favorable trend this year, where volumes on certain programs, especially in our clinical portfolio, have continued to come in at an elevated run rate.
2 years ago, we deliberately invested in added capacity for our clinical work and that action is now paying dividends as we can scale up to meet the high demand. The operating income margin for the segment in the third quarter was 18.1% as compared to 15.5% in the prior year period. This has set a new high water mark for the segment margin and is a testament to our ability to process elevated levels of work to help our customers.
As I mentioned, those elevated levels which can be unplanned, have a significant effect on the bottom line for the US Services. Segment Revenue decreased slightly to 440 million as compared to the prior year period revenue of 472 million
Last year's results were positively impacted by the excess volumes tied to the Medicaid unwinding exercise that was largely completed during the first three quarters of fiscal year 2024.
I'd like to acknowledge our success in addressing the unwinding exercise last year demonstrating how change can promote opportunity as noted in Bruce's prepared. Remarks regarding Medicaid and snap. We see a similar opportunity for Maximus to rapidly Implement policy and legislative changes in support of our customers.
The segments operating income margin for the third quarter was 10.2% compared to 13.0% for the prior year period, which benefited from the excess unwinding volumes in our view, the segment continues to perform and execute. Well, and we are focused on driving bottom line, Improvement headed into next fiscal year. When we expect stronger volume levels, even before taking into account New Market opportunities,
Turning to the outside, the U.S. segment revenue decreased to $147 million for the quarter, primarily due to destitution of multiple Employment Services businesses in prior periods. The related decrease in revenue was partially offset by organic growth of 7.3% and a slight currency benefit.
Margin Improvement through continued scaling in our present markets.
Turning to cash flow items. Cash provided by operating activities, was a net outflow of 183 million and free cash flow was a net outflow of 198 million for the quarter.
As we saw last quarter and anticipated for this current quarter, we saw a continued cash flow impact by payment delays.
Day sales outstanding or DSO, stepped up again, to 96 days for this quarter, which as I remarked on the last call we expect to be a peak.
It's also well above our historical range, and a dynamic that we view as temporary.
The payment delays and corresponding higher DSO were primarily driven by 2 Programs. Both of which have had positive updates in July that I will take a moment to describe
The first is 1 of our major US Federal programs, we experienced administrative delays that led to a significant increase in our build our balance as of June 30th.
I'm pleased to report that we made meaningful progress and collected more than $300 million related to this major US Federal program in July.
the second is 1 of our large state-based programs that we disclosed last quarter,
we faced administrative delays tied to a pending contractual extension of our work, which drove an increase to our unbilled AR balance.
The positive update is that we received the fully executed extension in July, which prompted 224 million, moving from unbilled AR to build our
This alone, brings our unbilled AR back into a normal range. We anticipate collecting this balance in the fourth quarter.
The positive impact of these 2 items. Give us confidence in our expectations for a strong fourth quarter of free cash flow as evident in our updated free cash flow guidance.
As a reminder, the exact timing of payments can impact, reported free cash flow at September 30th.
We ended the third quarter with total debt of 1.67 billion resulting in a Consolidated, net total, leverage ratio of 2.1 times.
High near-term borrowing necessary to cover. The higher DSO has increased. This ratio yet, we are still at the low end of our target. Range of 2 to 3 times.
As a reminder, this ratio is our debt. Net of allowed cash to Consolidated ibitta for the last 12 months, as calculated in accordance with our credit agreement.
Going forward by September 30. We expect the ratio to be comfortably below 2 times.
The delay in collections has also prompted a more constrained approach to Capital allocation, that we believe the recent improvements should enable us to return to our historic approach. This includes seeking potential opportunities on the m&a front and resuming opportunistic, share repurchases. Utilizing the approximately 66 million dollars remaining under the current $200 million board of directors, share repurchase authorization.
Moving to updated guidance for fiscal year 2025, we're announcing our third consecutive guidance raise, which reflects the exceptional results this quarter, as well as an improvement to our outlook for the fourth quarter. Thanks to better visibility and less uncertainty compared to our prior thinking.
For Revenue. The midpoint is increasing by 100 million to a range of 5.375 to 5.475 billion.
Are implied full year, organic growth rate now stands at about 4% over the prior year.
Our full year, adjusted ebata margin guidance for fiscal year 2025 is now approximately 13% which is a 130 basis point improvement from prior guidance.
Our adjusted EPS guidance increases by $1 at the midpoint to range between $7.35 and $755 per share.
At the midpoint, this reflects year-over-year earnings growth of 22%.
With the positive updates to the temporary conditions impacting DSO that I mentioned, we expect a strong finish to the year for free cash flow. We are guiding free cash flow to be between $370 million and $390 million.
We anticipate DSO falling back to more normal levels next quarter. Thanks in part to the now, finalized, State Extension and expected imminent payment to be clear, our guidance assumes that we will collect the 224 million. Now build related to that contract, prior to September 30th 2025.
is expected to be around 10.5% in the U.S., while outside the U.S. is expected to be between 3% and 5% for the full fiscal year.
We expect interest expense of approximately 81 million and our full year tax rate expectation of between 28 and 29% is unchanged.
As a reminder, the higher tax rate on a full year basis is tied to the destitute related charges in the first quarter.
The weighted average shares. Expectation is also unchanged at 58 million shares on a full year basis.
I'll wrap up by sharing our early thinking on our expectations for next fiscal year.
As always, this precedes official guidance that we will provide for fiscal year 2026 on the year-end call in November.
As context, a year ago, we expressed some caution on fiscal year. 25 year-over-year growth given the excess volumes, we experienced in fiscal year 24, most notably related to our support of Medicaid programs.
Our initial guidance for the year that we provided in November, then adjusted in December for the divestiture was revenue of 5.25 billion and adjusted EPS of 5.85 at the midpoints
Since then our midpoints have increased by 175 million for revenue and $1.60 for adjusted eps.
We have successfully delivered on higher volumes, particularly in our clinical portfolio in the US Federal segment. While also continuing to drive technology and process efficiencies in our cost structure.
We are purpose-built to enable us to scale up to meet increasing demand recognizing that from time to time. Components of our business that are volume sensitive can be less easy to precisely predict
As we now look to fiscal year 2026 Revenue, it's still early enough to have wide-ranging scenarios.
2 areas of focus that are Dynamic and create a wider range of scenarios are first volume-based contributions that we are not certain will recur at the same level as they have in fiscal year 2025.
Second, we are carefully watching for signs of budget, constraints, and efficiency, objectives from customers, which may create opportunities in the long run, but may create near-term. Headwinds on both, the federal and state side.
We are staying equally focused on the opportunities in front of us. Some of our material nature that could be decided in early fiscal year 2026. This includes proposals sitting in both, our in preparation and submitted buckets, that if successful, we anticipate could mildly contribute to fiscal year 2026 and then make stronger contributions to fiscal.
The year 2027.
We're also spending time now, preparing for opportunities tied to the 1, big, beautiful bill.
The exact implementation timeline related to these opportunities is uncertain and therefore, we are prudently forecasting. The revenue contribution in fiscal year 2027. Although it is possible, some portion could come in fiscal year 2026
All that said, at this stage, our preliminary thinking is we have visibility into an anticipated Revenue range that is roughly in line with or possibly just slightly below our now raised fiscal year 2025 guidance.
There are also scenarios of modest Revenue growth which we believe would result from some combination of less volume. Moderation on, current programs less impact from budget, constraints coming to fruition and acceleration in revenue from the opportunities. We've discussed and updates to the administration's priorities, that increase demand for our services.
I'll add that our early view also contemplates that in fiscal year 2027, we could see acceleration of organic growth that maps to these opportunities.
Stepping back, we believe this demonstrates. The business is running in a disciplined manner while we execute on our growth strategy that aligns with our customers priorities.
On the margin front, our current view is we expect next year's adjusted IBA margin to remain near the high end of our 10 to 13% target range. This is consistent with the implied guidance for our fourth quarter of about 12.5%.
This represents a significant improvement to our fiscal year 2024 adjusted EPA margin of 11.6% and our initial fiscal year 2025 guidance of approximately 11%.
We believe this sustainability of these higher levels, reflects our continuous Improvement of productivity and efficiency in our delivery while accommodating our growth Investments.
The final component, to this early view is interest expense where we anticipate a meaningful reduction next fiscal year.
November as usual.
In conclusion, we're pleased that recent performance shows us meeting our targets that we have set for ourselves and communicated to shareholders in recent years, with respect, to both our organic Revenue growth rate target, and our goal to grow earnings faster than Revenue.
From fiscal year 2022, to today's fiscal year, 2025 guidance, organic Revenue growth averages 7% comfortably achieving our mid single digit Target.
In addition, during that same period, we have been able to grow earnings by almost 20% on a compound annual growth rate basis.
Looking forward into fiscal year, 2026 and Beyond, we believe that our organic Revenue growth, potential remains well intact. And with that, we will open the line for Q&A operator.
We will now be conducting a
press star 1 on your telephone keypad. A confirmation to will. Indicate your line is in the question queue. You may press star 2. If you would like to remove your questions from the cube,
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1 moment, please while we pull for questions.
Thank you. Our first question comes from the line of Charlie staser with the CGS Securities. Please proceed.
Hi, good morning.
Hey, good morning, Charlie. Hope you're well
Thank you.
Likewise, and, um, just if we could start off with the big, beautiful bill. Um,
And where Maximus, you know, could or should benefit from, you know, potential. Um, you know, new work.
uh, can you talk about, uh, you know, what the key drivers are, you know, kind of behind that those opportunities and um,
you have, you know, um, some flexibility now to a lot to go up to, you know, some more Outsourcing type projects at the state level and the federal level level like, you know,
An employment or Social Security, things like that.
Sure, Charlie be happy to. And I and I appreciate, um, the last point of your comment, especially because, as we've looked at the market opportunities, what may be a bit counterintuitive is that the opportunities within those other program areas um are actually collectively more substantial than even the immediate opportunities within the Medicaid area. So let me kind of walk through all of that because that's a it's very important.
Area. So the um, as you you well know, the 1, big beautiful, Bill actor obba um has some significant outcomes for our us Services segment in the area is primarily of Medicaid and snap initially um, there's an increased in the Medicaid area, I'll just kind of a pack unpack. Each of them, there's an increased emphasis on program eligibility, uh, and on work requirements as I discussed in my prepared remarks, and we together view those as having a positive impact, um, and really an important lever for us services or organic growth, although we're presently really not incorporating that into our FY, 26 guidance to any substantive level, we really see it as an FY 27 uh growth factor for the company. Um, the main reason being that, it takes time to get from the legislation itself to the implementing regulations. And our understanding is that the implementing regulations for work. Requirements won't be finalized until June of 2026 giving States. Uh, you know, in this kind of sets up a bit of a squeeze, right? Because at the end, they then have until December of 2026.
To get ready and get implemented and be underway in January of uh of 2027. So we think that this putting this in the context of growth it's historically. We characterize the US Services segment as capable of low to mid single digit organic growth and whereas Federal would be more mid to high. So collectively, the total company would be a mid single digit grower this area that we're discussing, just the Medicaid work requirements and program Integrity which relates to needing to rederm an eligibility for the
Expansion population, uh, twice a year rather than once a year. We expect to be a positive uplift so that us Services growth rate. And while it's early days, it could bring that growth rate more to the mid to high single-digit range over time.
Pressures, uh, that are really, you know, indicating early headwinds for FY, 26, from States. But at the same time, we always view these as creating opportunity. Uh, and I
Opportunity, now than we've seen historically, uh, because we have the, um, the ability under the guidance. That was provided by OMB back on March 11th, uh, to give States greater flexibility in working with contracted vendors or contracted resources. Provided they meet Merit system principles, which we have certified. We, we do, uh, in delivering these programs, we have a great track record. Also having served, uh, I think about 17 States from an unemployment insurance standpoint back during the pandemic. And, so, depending on how things play out, States, could easily say look at, you know, these are, you know, kind of tighter times. We want to focus on, uh, on on working efficiently with private, sector partners and Max misses in an excellent position to uh, to assist them in that regard, from a, an opportunity sizing perspective. We actually are the way we look at that those markets we we see them as having larger average capture size than the Medicaid work that I described. And so it's early Innings and we've got less certainty around how all this.
Comes together at the state level and which states might move sooner than others. I mentioned in my prepared remarks that I was thrilled that we already have had 1 of our large State customers, um uh, expand a contract to enable us to do more work in the snap area. So, as that plays out, those new opportunities could collectively, tip the US Services segment into double digit growth over time. Again, we've taken a cautious view for FY, 26 of that, but we really feel like it could be a significant Tailwind for us as we go into uh go into FY, 27. So the conversations we're having with our customers are early days, they they remain in planning mode. Many customers wanted to wait to engage until the legislation was passed. Some customers are saying, well, we need to explore what they're implementing regulations. Might mean. Um, but you know, there's a another element of this to keep in mind is that this is not our first rodeo when it comes to implementing some of these requirements during the prior administration. At, as I mentioned, in my remarks, we really worked with the state all the way through and operating model to, uh, to enable them.
To address work requirements. And so we've got a Playbook that's ready. It's on the Shelf we've updated it. And it doesn't require significant investments in new Systems and Technology. It's more Investments to enable us to configure the infrastructure that we already have in place to handle things, like Medicaid Eligibility and so forth and consumer engagement as I mentioned. So with all that said, uh, that's why we're taking a view that we characterize it mostly as an FY, 27 opportunity, but really um a great opportunity for us Services. I know. David would you add anything to that?
Okay. Okay. Hope that helps Charlie other questions. Yes. Certainly, um, you know,
Taking on from the, you know, looking at these opportunities, I obviously, it's very early, but, uh, any chance of, you know, any kind of quantification of, you know, what the benefit might look like? Or, you know, give me the wide range, obviously.
Well, I I try to provide a little bit of that just in terms of what it could mean for the growth rate for the overall segment. So I think you can impute from that, you know, um, with the with work requirements and the enhanced eligibility requirements. We think it could lift us services from, you know, mid single digit to high single digit and certainly depending on the timing uh and size of opportunities in other areas including uh helping assisting states with SNAP and assisting states with UI. It could take it uh, conceivably into the low double digit area. You know, the snap 1 is um a particularly interesting 1 because many states are looking at their payment error rates and doing the math and saying, look at we stand to lose in some cases, hundreds of millions of dollars of federal funding. So the cost benefits pretty straightforward. You know, if they can make an investment of a fraction of that in addressing some of the key items that are bottlenecks that process leading to higher error rates, then there's a huge return for them. And that always can, you know, becomes a compelling, um, uh, platform for, you know, for
Um, for seeking assistance from companies like Maximus.
Great. Thanks Bruce. And it's just looking at your competitive Advantage, you know, look against potential. Um,
Competitors that are out there. Um, when you think about the conflict free nature of your business. Um, are there many competitors that can claim the same?
You know.
Level of you know, Conflict Free.
Because of that it it was very important to us as well as I mentioned in my remarks, that from a work, requirement standpoint. Uh, this is work that needs to be done in a very conflict-free manner. Where beneficiaries are reporting obviously? Uh, whether they're engaged in work, but more importantly, uh, whether they may have a qualifying condition that could exempt them from those requirements. And as I noted, um, that then becomes really off limits in terms of managed care plan and engagement with beneficiaries. And that's an important, very important element of the law that's been passed. That I think is only now becoming recognized within, uh, the state community and we're helping to ensure that that's the case. Um, in terms of other companies in a similar position. Um, you know, we've we've from time to time noted, um, smaller privately held companies that, um, have similar characteristics. Uh, but I would, I would just say, side matters in this market and we uh, I have a we have an established presence uh, as the Medicaid Managed Care, enrollment broker in, uh, I think it's about 23 States, presently. We
Probably serve. Um, I would say roughly 60% of the, uh, individuals nationally on the Medicaid Program. Uh, and as, as you've seen even just from evidence in this, uh, the results of this quarter scale is everything in in this area of the business and, uh, uh, we think that the invested infrastructure that's in bought and paid for by government that can be easily modified. Um, you know, at an incremental expense, and not a massive new, um, cost of investment puts maximus in a great position to help address.
These opportunities and creates uh, you know, candidly and bit of a competitive barrier. And I think that that's important because in this uh era of just intense focus on greater efficiency and greater Capital utilization, the government deserves the benefit from the Investments they've already made.
Hope that helps.
Very helpful. Thank you Bruce. And then looking at the the recent DOD win um,
For the Air Force. Um,
Is defense.
Going to become more of a kind of an increase in focus for you guys.
The short answer is. Yes. Um, and I appreciate the question. Um, I feel like I'm I'm uh, I'm disadvantaging David here in terms of questions, so I hope you have 1 for him too. Um, we we've long recognized that our core capabilities, uh, across the company have a role to play in the defense Community. Uh, but candidly we had so much, you know, work on our plate. Uh, historically, uh, integrating Acquisitions and expanding in certain areas of the civilian, uh, world that, um, had not been a focus. But, um, this has been something we've been planning for quite some time. Uh, in 2021, when we combined our business, with veterans evaluation Services, we identified what we call the Synergy Pipeline and those are the opportunities where we know that once combined with vests, we've now got the right to win in areas, um, that include the dod and in particular, the the defense Health Community which is something we've been um, focused on in Prior calls. I've mentioned that I've been
Please set up the 3 pipeline that we look at which is the civilian pipeline in federal the health Pipeline. And then the defense pipeline that defense Health area has been really moving nicely. It's kept going and so we are now seeing pipeline opportunities that we first identified back in 2021 coming to fruition and going through adjudication and that could lead to growth drivers for the company as we, um, Traverse 26 and really get into FY 27. So a little bit back and loaded but another um area to point to, as we think about our FY, 2727 modeling, the other point I'd make is that the technology modernization charges challenges that we're seeing in the civilian area in terms of, you know, modernizing anti Antiquated Legacy applications, migrating to the cloud. Uh and so forth our obviously seen in the defense Community as well. So some of the core competencies and skills that we need to bring to bear in terms of um assisting customers in moving if you will kind of payload so application Stacks into the cloud. Modernizing them even in some
Cases then buying those back as a service. That can be delivered, are important to the defense uh, the defense community. And that's why the achievement recently of the cmmc level 2. For us that I mentioned, is, was so critical and it was critical that we got it done quickly. And I would say compared to many in the community. We got it done. Um, uh, faster than others and we're, I'm, I'm super proud of the team for doing that. The third point I make is that, in terms of the positioning, is that we've really brought in some amazing, excellent new.
Overall, you know if we if we back up a little bit the the administration is saying they want a greater focus on performance-based contracts where it's practical. They want to open up the supplier community and engage more of the commercial providers and as you know, because you followed us for so many years. Charlie, the Maximus has deep experience and capabilities when it comes to performance-based Contracting. Uh, and in further we've got strategic relationships that we've been developing and that we have been kind of bringing to the market with key commercial software, providers that are addressing the government Marketplace. So, we're putting, you know, all of these pieces together and we feel that while the defense pipeline is a, is a, a substantive portion of our pipeline presently. It's got, um, a much greater potential for us over the longer term and then the current defense revenues we have today. So I'd wrap it all up by just saying that. You know, we view a very strong opportunity set that's out there. That's really untapped by us, we're by the early indication.
Of our right to win as evidenced by the Air Force award. And, uh, and in particular, you know, we've been, um, we've been doing things like demonstrating thought leadership, whether it's through the, uh, work in artificial intelligence and creating an AI roadmap for a certain defense customer that I've mentioned on previous calls, or the ndia hackathon that's coming up in August where um, we're front and center as a sponsor and participant in that. I really feel like we've got a bright future ahead and we're taking it in a very thoughtful, pragmatic way that, you know, allows us to
So, leverage our capabilities as we move adjacently into these areas and, um, deliver greater value for our nation.
Excellent. Okay.
I hope that helps. It it it definitely does and and even not to leave you out. Um, when you're looking at the the guidance, the rest of the year,
um, thank you for giving us the, uh,
The the operating margin and ranges but any chance you can share with with us the the splits of the top line for Q4.
But my segments, I'm sorry. What was the last part of your question?
Just, um, you know, looking at the total revenue, any chance you could give us some guidance for, um, how that should split up by segment?
Oh yeah, good. Good question. Um,
You know, it's it's probably a little too early to say because I think some of the same uh, some of the same kind of risks to an opportunity that I pointed to are present in both of the larger 2 segments and the the 2 Us segments. Um, so I think both have a wide range of scenarios in a similar manner. Yeah. So I'm a little different than other uh, with with the US Services Market, more sensitive to the timing of any opportunities that could result from the areas that Bruce highlighted in in your first question. Uh, and certainly, um, on the federal front, you know, budget constraints, as agencies are looking to become more efficient and whether that, you know, results in near-term.
Opportunity or risk and that whether or not the timing aligns on the 2, even though we think the opportunity, the great opportunity to bring new ideas and look for uh, potential growth such as contract consolidations and that sort of thing. It's, it's
That sometimes comes along with uh potentially giving up Revenue elsewhere.
so I I'm hesitant to give segment level, uh, guidance at this, at this stage,
Got it. Okay, that's fair. Um, just just looking at the, the overall early thoughts. Um, obviously if you you know you come in in line with you know, FY 255 Revenue in FY, 26. Um, is there you give me the the operating leverage of the model and the efficiencies you've you've been able to um Realize by segments. Um, if you look at the
um,
The bottom line the EPS if you will. Um, you know, is there a chance that that we should see some growth there? Um,
Even with flat, you know, revenue for next year.
Yeah, good question. So, you know, we were pretty specific with our thinking for the, you know, Eva margin, uh, which of course, you know, you could think of a range around, uh, the the, i, in my prepared remarks. I pointed to the implied margin for Q4 of this year, is about 12 and a half percent. Uh, you know, the as we look at fy2, you know, we've we've just reported here, uh, an extra
Pointing out on the earnings front, which I mentioned in my prepared remarks but didn't quantify, is that our interest expense could be another tailwind to our EPS.
Uh we if we look at our our projected cash flow, right? Just here ahead of us in the fourth quarter as well as through next year, absent m&a or Sherry purchases the de-levering. Uh, we anticipate would drive interest expense being 20 to 25 million lower next year. So that could be like a 30 Cent, EPS type uh, year-over-year Improvement there so that that provides some bottom line uh potential as well.
Excellent, great. This has been very helpful. Thanks so much.
Great.
Thank you. All right, thanks Charlie.
Our next question comes from the line of Brian guzzled with Raymond James. Please proceed.
Hey, good morning. Um, good morning, appreciate the uh the color and really, really strong results here.
Uh, a couple of questions I want to maybe start off with, uh, the VA you had made a lot of investments in the back office to increase those efficiency and capacity. Can you talk about where we're at, um, with those Investments you've made?
Sure, I’d be happy to, Brian. I’ll start, and then I’m going to turn it over to David for some additional thoughts. Um,
So, yeah, we we have uh, we began uh, by investing in building out our Network. The key. We Believe on this contract is to have a very broad national network that includes the ability to reach into rural areas. We've also invested heavily in, uh, in rural, uh, in, in the infrastructure field, the V literally the vehicles uh, that we use for mobile clinics so we can meet veterans on their terms. Uh, often in places like Walmart parking, lots and so forth to make sure we're serving veterans, wherever we possibly can. So there have been infrastructure, Investments, you know, brick and mortar vehicles, modernized vehicles, and so forth. There's been investments in building out the clinical networks, so that we've got the broad array of Specialists that are needed particularly uh, particularly because with the pact act, for example, you know, logical case would be, there is a lot more folks that need pulmonary lung function tests and so forth. So you have to build that out. Then there's been technology Investments and we've been, um, thoughtful and um, I would say phase wise in our approach of introducing technology because in
Some ways you're, you know, changing the engine in the plane while you're flying it, um, to use that analogy, um, the, the technology, uh, that we had been using, um, I would say, um, a way to characterize it would be it. It it, uh, was not as modern as other Technologies in the sense of allowing us to um uh uh for example identify potential.
Potential errors in a process early on and avoid them being created. So you end up putting more time and effort into the Quality Control Function. Downstream if you're not catching the potential area errors earlier the new technology that we're introducing, it's all focused on the veteran experience and on Expediting claims through the process with a high high degree of accuracy, unless need for individuals involved in more routine and mundane tasks in in processing the claims. And so it's still early days and, um, we'll be rolling those capabilities out, uh, as we close out this fiscal year and enter the next fiscal year and we expect that that will enable us to really Step Up, um, again, and now in that area the, um, the throughput of the business and the and the, uh, the quality process of the business should become, uh, simplified in that regard. Um, the last thing I say is that we are, you know, real partners with the VA and wanting to make sure veterans, um, have the best experience possible, and, in some cases,
That you that means doing um uh a greater job as we possibly can to get through very, very complicated medical records. Um, it's not uncommon in this business to have an average case File included, medical records, that that's 3,000 to 5,000 Pages, uh, in length, that's a lot of information for a clinical reviewer to get through. So, without giving up a lot of details, I will just say we've invested heavily in 2 areas, uh, where artificial intelligence and machine learning can be a a
Next thing we'll do and that will work on is making sure that if there is information in that medical record that's relevant timely meets the requirements, the VA that we extract it. Make use of it so that we're minimizing the requirement for veterans necessarily be seen if they may have been seen. You know, previously in the last, say, the last 6 months and, uh, and the results of that visit could be sufficient to meet the requirement of the of the, uh, of the exam. So a little bit down in the weeds for you, but those are examples of where those technology Investments are just progressing over time. We'll take hold, we'll continue to improve the veteran experience, and also streamline, the way we operate the business with that. I'll turn it over to David for a few comments. Yeah, maybe just the the well said, just a more of a housekeeping item that that reminded me of the, the technology roll out that Bruce noted uh, taking place around the end of our fiscal year here. Uh, is 1 driver that we expect to, uh, have our depreciation expense grow next year. Uh, on the other hand, as you can see in in our 10K. Uh, charts for example,
Our intangible theorization is anticipated to go down by about 11 million from 25 to 26. So, our total appreciation, our
should be somewhat similar year-over-year but wanted to point out that dynamic
Oh, appreciate, appreciate all the commentary. Um, I want to, you know, since the business is so sensitive on volumes, particularly with this, the VA work. Um, how are you thinking about the next few quarters? I mean, we're looking at, you know, inventory levels packed non-taxed greater than 700,000, you've added capacity and it seems like some of that capacity is benefiting the customer in that. We saw a 23%, uh, sequential increase.
In process claims. Um, how are we thinking about that over the next few quarters? Obviously, they're not in hand, but what would be reasons to slow that down? It seems like we have a very good line of sight for very good VA growth through June, at least.
Well, I'll I'll begin and then turn it over to David. Um, first of all, the VA has been very public about their effort to push to reduce the overall, um, backlog, uh, of of inventory levels and they issued a press release. In fact, in late June stating that they're ahead of their goal to, uh, for the highest number of claims processed in FY 255 and so forth. So we know it's been a big push and, um, and we know that there there are efforts are to really complete that, um, by the end of this fiscal year, uh, and and make great progress in that regard. Our current view is that the the unprecedented levels that we saw in the June quarter are likely to moderate somewhat as a as a result. And we've reflected that in our guidance you asked kind of what are the factors that would cause that you know um well the the main 1 would be
That as, um, each of the vendors ends up with the capacity. They now have working through, uh, their component of the backlog. Um, we're going to reach an equilibrium or a steady state, um, where the processing time timeliness, um, for the entire system is, is in a is in a good place and Veterans, the cases coming in are being are being processed and handled timely and veterans are getting great service, and the inventory, uh, becomes more kind of a, a working level over time. And we think that we're, we're kind of on that path. And and obviously, the vendors collectively have made a, a great progress with working with the customer to reduce the inventory levels. You see that reflected in the in the charts that are published, um, publicly. Um, so, you know, we're we're going to continue to focus on, uh, on that on that objective, which they've clearly stated is is a key 1. But I'd also note that, um, over time, um, there appears to be kind of a long-term, um, steady state, uh, inventory level and backlog level that these programs operate at where,
Uh, you're, you're going to, you know, there's always going to be some and the, uh, and the fact is, you can carry that with the capacity in the system and still meet the timeliness requirements, and the quality requirements that are are required for the program for veterans. Another point that I'd leave you with is that, um, veterans are as you well know, often, um, needing to be seen and requesting to be seen and to be reassessed it when they believe that there's a change in their condition that requires a re-rating of their benefit,
Uh, benefit to our own caseload, uh, and claims completed. So, they were especially strong results. We actually saw, as an aside, a similar dynamic on some of our, uh, smaller clinical programs in the segment where we just had a tremendous execution quarter that, uh, drove down our own caseload. So, as Bruce said, while we expect some moderation from the especially high levels in Q3, we also see sustained.
Right? And and I guess so so I guess a few questions off of that. Um 1 if I recall last quarter, uh, the federal segment had a FEMA in, you know, positive FEMA that went away sequentially. Can you maybe quantify that?
Um and in fact if that did occur because these numbers still look really good absorbing that and then, secondly, I guess the the previous kind of equilibrium run rate or capacity in the industry was about 640,000 call it.
Claims per quarter completed. It was 800 or you suggesting we go back to 640 because the comps just seemed very easy to me.
Could could you repeat that last part? Go back to
640. That's the last part was. Yeah, the so this quarter, the process completed claims packed and not packed for over 800,000 units, okay? Or or people versus what had been running at about 6:40. And I'm just the comps or the comps for the next. Few quarters seemed very easy to me because I wouldn't imagine, even if we're not running at 800, we wouldn't drop down.
And start running at the prior run rate when the whole industry has added capacity.
Ya know that I I follow you.
yeah, I mean, so those are the metrics for the overall program, which
Under. So, I think the, the point, um, the point we were making about our own Q3 was that we, we had a special high volume ourselves as we not only addressed the high demand, but also improved our own, uh, speed to from, um, receiving the claims to completing the claims.
But but I, I think you're correct on the whole program especially with the dated intent of the VA that they intend to continue to to drive this this High uh level for the next few quarters.
Fantastic and was there a FEMA? Um, contribution last quarter that was not in this quarter and can you maybe size that a little bit if that's the case?
Yeah, the yeah. So for female you know, 1 of the areas of the work we do is supporting Disaster Response, which can be, you know, obviously difficult to predict and and we're we're there ready to help as needed. Um, I I don't have the kind of precise size off the top of my head, for what it was. I I I would point out. It's more of a BPO type work. So the it's really Staffing up and Staffing down. Not not the same dynamic as the volume based program where we just have more volume come in that we can work. So, the bottom line,
Uh it it's not as sensitive.
Okay, appreciate that color. Um, just just maybe a couple couple quick ones to wrap up here. Um, as I look at the margin kind of setup over the next few quarters you, you've mentioned that it'll be on the the higher end of of your range that you typically guide to. I also want to kind of leave in the big, beautiful bill act as well. Um,
if if I think about VA volumes being above what they had been, that's generally a very good contribution on those volume increases, and then I guess you mentioned 27, for some obb
Um, impacts favorable impacts um, would it be possible to see some of those Medicaid redetermination that come in and extremely high margin levels incrementally? Um, come in in 26. I, I would assume the timing would be a little bit earlier than fiscal 27. For that part.
Well, on the twice, the yearly redetermination. So, first recognize that, that that requirement only applies to the expansion population which is about 20% of the overall Medicaid population. Uh, and that 1 too is required to be uh, in place by the end of calendar 2026.
So yeah, I guess I would agree with David that it's it's maybe not likely that states would want to begin sooner with that, but again, it's still, you know, it's still early days in those conversations are just starting. So, um, you know, it it could it states have the flexibility uh, to to begin sooner. They may seek to do that in some cases.
So, you want to discuss.
Yeah, you know, I'll begin um, with some high level and let David address, the specifics as it relates to the SEC and so forth. But, you know, I I noted in my prepared remarks that we're really pleased that, um, the impact of contract actions across our portfolio has been, um, uh, really minimal. Um, I'd say if we had to put a number on it, uh, conservatively, you know, less than 1 half of 1% of, of our FY, 25 revenue. And we'd expect that as well as we look at FY 26. Um, the, the as everybody is as, as seen, you know, the, the shift now that's occurred is, uh, where, uh, Doge, um, individuals who were previously assigned to the Doge in some cases, have taken positions within the agencies, um, to continue to address really the kind of primary objectives, um, that the Doge was set up to address, and that's really software and modernization process modernization, driving, efficiencies and so forth. And the agenda has really become that of the, um, agency heads and and department heads themselves or
In conjunction with the White House and with OMB. So what does that mean? You know is we're we're now seeing a shift in terms of phase uh and we've talked you know, kind of about phases here historically um to where we're having conversations about uh less about kind of the the immediate cost cutting objectives which were characterized by the earlier stages of this and more about how efficiencies can be gained and thoughtful ways to structure programs, going forward and delivery going forward, 1 area. I think that is on a lot.
A lot of people's minds is how student loan servicing will be handled going forward with the the trajectory of the Department of Education presently. If that function as has been widely, reported were to move over to another department like treasury. How will that be done? Uh, and what will the um, you know, what will the contractual structures be to support that? And how does that, perhaps present an opportunity to relook at the entire borrower experience? Um, as they navigate return to repayment and as we see um, you know the volumetrics in the default program likely um, shift uh, into the fall and the winter. So a lot of conversations going on right now that are um, uh, candidly very operationally focused. And there are opportunities now that are presented, um, given this environment and given the the budget environment that we're working in to talk about things like contract consolidations and um, and ways to uh, use technology more effectively, moved more performance-based Contracting models. So I I actually um, feel
Like we're you know, through an an important first stage and and and and and the the the business model of Maximus and the value that Maximus delivers is in critical programs held up well during that stage and now we're moving to the SEC, the next stage where uh we're focused on efficiency and on um uh in some cases you know redesign of the way programs are delivered. So um with that, David can add some additional colors, it relates to specific customers or, you know, the the sectors that you mentioned. Yeah. I I think Bruce summed, it up well up front.
That as we look at what you know what specifically have we seen? As far as just straight cuts that were initiated by buy Doge still a relatively small given that based on our revenue of less than 1 half of 1% of our total revenue. And that would include the that you mentioned. Uh, not not all that. Impactful, given the revenue base.
Perfect. I appreciate it, guys. Nice job on the quarter. About to hop back in the cube.
Okay, great. Thanks. Brian operator. Back to you.
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