Lisa Miles - SVP of IR Rich Montoni - CEO Bruce Caswell - President Rick Nadeau - CFO.
Dave Styblo - Jefferies Richard Close - Canaccord Genuity Charlie Strauzer - CJS Securities Stephen Lynch - Wells Fargo Frank Sparacino - First Analysis Brian Kinstlinger - Maxim Group Allen Klee - Sidoti and Company Shane Svenpladsen - Avondale Partners.
Greetings and welcome to the MAXIMUS Fiscal 2016 Second 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. [Operator Instructions] As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Lisa Miles, Senior Vice President of Investor Relations for MAXIMUS. Thank you. Ms. Miles, you may begin..
Good morning and thank you for joining us. With me today is Rich Montoni, CEO; Bruce Caswell, President; and Rick Nadeau, CFO. I would 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 and actual events and results may differ materially as a result of risks we face including those discussed in Exhibit 99.1 of our SEC filings. We encourage you to review the summary of these risks in our most recent 10-K filed with the SEC.
The company does not assume any obligation to revise or update these forward-looking statements to reflect subsequent events or circumstances. Today's presentation may contain non-GAAP financial information.
Management uses this information in its internal analysis of results and believes this information may be informative to investors in gauging the quality of our financial performance, identifying trends in our results and providing meaningful period to period comparisons.
For a reconciliation of the non-GAAP measures presented in this document, please view the company's most recent quarterly earnings press release. And with that, I'll hand the call over to Rick..
Thanks, Lisa This morning, MAXIMUS reported financial results for the second quarter of fiscal year 2016. Results in the quarter reflected steady progress on our programs in startup as well as solid organic growth. For the second quarter of fiscal year 2016, total company revenue grew 26% to $606.5 million compared to the same period last year.
This was comprised of organic revenue growth of 13%, which was driven by the Health Services segment, acquired revenue growth of 15% and total company revenue was unfavorably impacted by approximately $10.6 million or 2% from the effects of foreign currency translation as compared to the second quarter of fiscal year 2015.
Operating margin for the second quarter was 12.8% compared to 12.9% in the prior year. Operating margin in the second quarter of fiscal year 2016 benefited from out-of-period revenue and pre-tax income of approximately $6.6 million from modifications to the UK Health Assessment Advisory Service contract or HAAS.
For the second quarter of fiscal year 2016, net income attributable to MAXIMUS was $48.8 million and diluted earnings per share totaled $0.74. This includes approximately $0.08 of diluted earnings per share from the aforementioned modifications on the HAAS contract. Now, I will speak to segment results starting with Health Services.
Health Services segment revenue increased 22%. Nearly, all growth in the segment was organic. Revenue growth was driven principally by the UK HAAS contract and to a lesser extent new work and expansion on existing contracts in the US. This was offset by unfavorable foreign currency translation of 2%.
So that on a constant currency basis, revenue growth would have been 24%. We completed the Ascend acquisition in the second quarter, which accounts for less than 1% of revenue growth. Let me focus my health segment commentary today on our HAAS contract where we have completed several contract modifications.
Some of the HAAS modifications were normal course clean up items that can be required at the end of a contract year. And in this case, contract year one, which ended on February 29. These modifications included changes to certain performance benchmarks specified in the contract.
The contract was modified to put a greater emphasis on carrying out face-to-face assessments at a reduced level. This will achieve DWP’s Services goals, while at the same time, achieving greater value for money overall.
The financial impact from the HAAS contract modifications had an immediate pickup of $6.6 million of out-of-period revenue and income that was recognized in the second quarter of fiscal year 2016. These modifications are expected to lower our future revenue run rates in contract years two and three.
As you may recall, the contract year straddle our fiscal year and as a result, we now expect revenue from the HAAS contract to contribute approximately $225 million in fiscal 2016. This compares to our original November guidance of revenue from the HAAS contract in the range of $230 million to $280 million for fiscal year 2016.
While our revenue expectations are lower, we have made tremendous operational progress and we believe that we have achieved a stabilized level of operations. We are confident that this program will be profitable for fiscal year 2016 with an estimated margin in the mid-single digits for the full fiscal year.
We believe that this contract will yield operating income margins in our typical range of 10% to 15% in future years. Rich will provide a brief update on the ongoing operations of this contract. Let me speak now to the US Federal Services segment. Second quarter revenue for the Federal segment increased 51% compared to the prior year.
Acquired revenue growth from Acentia was offset by expected organic declines in the Legacy MAXIMUS business. As we mentioned last quarter, this included the expected closure of a customer contact center in Boise, Idaho where we provided support for the federal marketplace. Second quarter operating margin for the Federal segment was 10%.
Let me finish the operations discussions with the financial results for the Human Services segment. For the second quarter, revenue increased 13% compared to last year, driven principally by the Remploy acquisition. The segment was unfavorably impacted by a 5% decline from foreign currency translation.
As expected, operating margin in the second quarter was lower compared to the prior year and was 7.8%. The expected reduction in margin was a result of the ongoing start-up of the new jobactive contract in Australia.
We still expect that the new contract will achieve an operating margin in our target range of 10% to 15% sometime in the second half of fiscal year 2016. However, overall volumes in the new contract have been lower than both the client and vendors anticipated.
This means that while our start-up is progressing well and this is a desirable contributing contract, the revenue and operating income will not be at the level initially anticipated. Let me move on to discuss cash flow and balance sheet items. Days sales outstanding were lower on a sequential basis and were 70 days at March 31.
This is in line with our targeted range of 65 to 80 days. Subsequent to quarter close, we collected some significant past due receivables from one state, which was responsible for DSOs of 3 days at March 31. During the quarter, we completed the acquisition of Ascend using cash of approximately $39 million.
For the second quarter, cash provided by operating activities totaled $20.5 million with free cash flow of $11.3 million. For the remainder of the year, we would expect solid net income, improved cash collections and benefits from the timing of tax and other disbursements to drive and increase in cash from operating activities.
At March 31, we had cash and cash equivalents totaling $60.8 million with most of our cash held outside of the United States. We did not repurchase any shares during the second quarter. At March 31, we had an estimated $139.4 million remaining under our board authorized program.
We maintain adequate liquidity with our available line of credit and we continue to have a range of flexibility in our capital deployment plans. The management team remains focused on the most prudent and sensible uses of cash in support of our longer term strategic growth plans. And lastly, guidance.
MAXIMUS operates a portfolio of contracts, which includes a number of programs in start-up. Coming into this fiscal year, we had four sizable programs in the start-up phase. This includes the Department of Education contract, the Jobactive contract in Australia as well as the HAAS and Fit for Work contracts in the UK.
Today, three of the four start-ups are making steady forward progress. Fit for work is the single contract that is underperforming. The nature of the business is that we will always have puts and takes in the overall model and some programs will over-deliver compared to initial plan and others may under-deliver.
Each quarter, we complete a bottoms-up review. We consider the effects of currency, start-ups, rebids and contract mix, risks and opportunities. This analysis is the basis for our forecasting model in guidance each quarter.
As a result of the overall solid progress on our programs in start-up, most notably HAAS, we have modified our fiscal year 2016 guidance. We are maintaining our revenue guidance and still expect to be in the range of $2.4 billion to $2.5 billion. On the bottom line, we're tightening the range for fiscal year 2016.
We're bringing up the lower end from $2.40 to $2.50, so that we are now expecting diluted earnings per share to range between $2.50 and $2.70 for fiscal year 2016.
As a reminder, income and earnings in the second half of fiscal year 2016 are expected to be driven by the steady operational and financial progress of certain programs in start-up as they move towards maturity as well as the contributions from new work.
We still expect that total company operating margins for fiscal year 2016 will be in the lower end of the 10% to 15% range. We still expect our tax rate to run between 37% and 39%, but more towards the lower end of that range. Our cash flow guidance remains unchanged.
We expect strong cash flow generation in the back half of fiscal year 2016 and stable CapEx spending. We still expect cash provided by operating activities to be in the range of $200 million to $230 million for fiscal year 2016. We expect free cash flow to range between $130 million and $160 million.
Thanks for your continued interest and now, I will turn the call over to Rich..
Thank you, Rick and good morning, all. I’m pleased with our quarterly results and our ability to narrow our earnings guidance range for fiscal 2016. We’ve made meaningful advancements in the first half of fiscal 2016 to shore up and mitigate the risk of certain projects in startup mode.
As always, we remain focused on delivering on our promises and contractual obligations to our government clients. Our number one goal is solid service delivery and the programs we operate to ensure that citizens are able to seamlessly access critical government programs and services.
Let's start off with an update on our UK Health Assessment Advisory Service contract, also known as HAAS. As Rick mentioned, certain features of the HAAS contract had been modified to better align with the client’s programmatic objectives.
At the same time, our current trends confirm that we are on track to hit full productivity by the end of the summer. This positive contractual change coupled with the progress we have made in the past several months provides us with an increased level of confidence that we are on a path to achieve our long-term operational and financial goals.
We've also continued to receive any questions related to specific performance indicators under the HAAS contract. Unlike last quarter when we were able to provide a full update due to the timing of the public accounts committee hearing the day prior we are unable to provide specific statistical updates on a regular basis.
The release of this information is managed through a very formal process by our client, The Department for Work and Pensions. Qualitatively, what I can say is that we're making meaningful progress on the contract on all key factors.
Our productivity continues to improve as more of our healthcare professionals mature in their roles and others continue to receive accreditation. This means that we can complete an increasing number of assessments. Equally as important, we're continuing to see steady improvements in the quality of our assessment reports.
There has also been speculation within the investment community that the HAAS contract was under review for cancellation or significant changes. I want to dispel that myth today. We maintain a collaborative working relationship with our client.
To this end, we've had personal assurances from DWP that the Secretary of State has not expressed concern over the continuity of the HAAS contract. Further, there's no current plan on making substantial changes or terminating the HAAS contract.
Some of the modifications that were made to our contract were done in parallel with the government spending review. These changes were done to better align contract year two and three volumes to the client's needs and circumstances. This is commonplace.
As a result, we've lowered our revenue expectations on the contract and at the same time reduce costs for the client. Above all, we remain fully committed to the contract and our focus continues to be delivery of high quality assessment services.
Even with these changes, this contract is a positive contributor today and when fully mature will fall within our targeted portfolio range. Separately, DWP has confirmed with us that the Secretary of State is focused on potential changes to the Fit for Work contract. This is consistent with the information provided in our 8-K filing on April 7.
It's important to put this in context. The Fit for Work program is not achieving it's intended goals as the volume simply have not materialized. As a reminder, this is a voluntary program that's free to businesses and employees.
The program provides access to occupational health services for those employees who are sick for more than four weeks so that a return to work plan can be developed. The program is not mandated by law and also requires referrals from a general practitioner.
And as we disclosed in our last quarterly filing in February, the Fit for Work project is losing money and we're moving forward with changes. We've been actively working with DWP in a number of fronts as it relates to the Fit for Work project. At this point in time, it’s fair to say that options are on the table.
Our discussions with the client are ongoing and we are optimistic that we will achieve a solution that is beneficial to both parties. Moving on to the US health business, just last week, the centers for Medicare and Medicaid Services finalized Managed Care regulations and federal standards for the Medicaid and Children's Health Insurance Programs.
This is the first update since 2002 and much has changed. Not only has the Medicaid program grown substantially, but now more than 80% of enrollees are in Managed Care plans. While our teams are still dissecting the 1,400 page release, CMS has clearly outlined its long-term goals.
Our read of the rules is that there will be a continued effort and enhancing support for consumers including improving healthcare delivery and quality of care, providing greater access to healthcare and ensuring a modern set of rules that better align with the marketplace in Medicare Advantage plans.
The new rules reinforce the ongoing efforts to modernize and streamline the enrolment process and the continued value of independent choice counseling, both of which are core competencies of MAXIMUS.
Other services that MAXIMUS currently deploys to our customers such as document processing, data collection and analysis and customer support centers can help states meet the administrative and Managed Care oversight responsibilities which are also included in the new rules.
As Medicaid programs continue to monetize, states are taking greater leadership in imaging provider networks, including quality and access to providers. They are also evaluating new approaches to delivering long-term care services to the most vulnerable of Medicaid populations.
With a good success in creating an expanding list of qualifications in both these growing areas. Let me start with a provider services. Here in the US, Medicaid providers must undergo a rigorous credentialing on a state by state basis.
Many states are choosing to manage this important process and MAXIMUS has played an integral role for supporting these efforts. Our working provider credentialing started more than a decade ago. Our portfolio has since grown to include six contracts along with a healthy pipeline of additional opportunities.
While each of these individual contracts is small, together they comprise a nice portfolio of strategic contracts built of our core business, demonstrating our land-and-expand strategy. The same can be said for entrants into the long-term services and supports market, also known as LTSS.
Many governments are looking for innovative solutions to best deliver public benefits and services to diverse populations that address demographic challenges.
One of these challenges is supporting the increasingly complex disabled and elderly populations which includes a rise of a number of elderly people who face functional and cognitive limitations. The general trend in LTSS has been to ensure that individuals are in a right setting and receiving a right level of support and care.
Most individuals would rather receive care at home or in a community based setting rather than institutional facilities. Therefore providing LTSS has been increasingly directed to community based settings.
In response, MAXIMUS provides governments with solutions for their LTSS programs that combine technology, enhanced customer service and workforce strategies. We offer states conflict-free, independent assessment and review services to help states connect the right set of services to the right beneficiaries.
The new Medicaid regulations further strengthen the importance of independents in these programs. We recently broadened our LTSS capabilities through the acquisition of Ascend.
Based in Tennessee, Ascend is one of the largest health assessment providers on behalf of the US government agencies and offers conflict-free assessment services to assist them in determining the most appropriate placement in healthcare services for program beneficiaries.
Ascend provides a broad array of services including preadmission screening and resident review, supports intensity scale, inventory for client and agency planning, utilization reviews and other specialty and standardize assessments.
While the US LTSS market is largely still in its infancy, we continue to see a growing interest around the world for independent assessments and appeals. In December 2015, MAXIMUS established another foothold in this emerging market with the acquisition of Assessments Australia.
Assessments Australia delivers assessments as a means to identify what support services may be required in order to make individual successful in a community environment. Their client base includes government, non-government and private organizations and we're trying to make informed decisions about patients’ needs.
This acquisition has been integrated into our Human Services Segment. I'm pleased to share that the acquisition of Assessments Australia has already generated a small but strategic win in the disabilities services market.
MAXIMUS will be providing information gathering services for the majority of the trial regions across Australia through phone and face to face interviews of individuals with disabilities.
By taking the core capability and applying it to different government programs and new populations, MAXIMUS continues to build a strong portfolio and expand the business. Moving on to our new awards in the pipeline, we had solid awards in the second quarter with year-to-date signed contracts at March 31 of $1.1 billion.
We also had an additional $143 million in new awarded unsigned contracts. Our sales pipeline at March 31 was $3.2 billion compared to a pipeline of $2.6 billion for the same period last year. On a sequential basis, the pipeline is up from $2.8 billion reported in the first quarter of fiscal 2016.
As part of our long-term growth strategy we monitor a much broader pipeline that lays out our opportunities over the next three to five years and that will drive fiscal 2018 and beyond. In closing, our longer-term outlook remains very positive.
We continue to see favorable trends as demonstrated by the strength of our pipeline which contains new opportunities across the segments and in all of our existing geographies.
We will continue to deploy capital in a prudent fashion and look for strategic acquisitions like Ascend which further strengthen our foothold in the emerging global assessments and appeals markets. Above all, the management team is working hard every day to deliver long-term shareholder value.
So while it's too soon to speak specifically to fiscal 2017, we remain confident of our continued growth prospects given the favorable macro and demand trends that we see in the market. And with that, let's open it up for questions.
Operator?.
Thank you. [Operator Instructions] And our first question is from Dave Styblo from Jefferies. Please proceed with your question. .
Hi, good morning and thanks for the questions. Wanted to start out on HAAS and just get a little bit more insight about, first of all, the $0.08.
Was any of that assumed in guidance, in other words, was that pulled forward from quarters that were – that you are expecting now to benefit or is that just something catch up from year one and then as we think about years two and three, I know you talked about lower revenue trajectory, can you be a little bit more specific perhaps about what’s your thinking? I guess the revenue came down 10% versus your expectations, but what sort of - what was sort of the expected ramp of revenue for next year or is it not really going to be a ramp in revenue now that there is a new modifications on the contract?.
Okay. Good morning, Dave. And I think you put forth two questions. One is to give you a little bit of insight in terms of the $0.08 in the quarter relative to HAAS and with the reduced anticipated revenue what is in the end fiscal '17. I am going to ask Rick Nadeau, our CFO, to field both those questions..
Yes, thank you. Our revenue projection is approximately $225 million and our operating income is expected to be in the mid-single digits for fiscal year 2016.
As I mentioned in the prepared comments, we expect this contract to perform in our normal targeted operating range of 10% to 15% future years and the revenue for fiscal year '17 we would expect it to be similar to what FY16 is around $225 million.
I think as Rich said that new target for contract year two creates a straightforward path for us to achieving the targeted volumes and the targeted operating margins. So in another words, the new targets reduce the risk that we have and increase the likelihood of us achieving the contract volume targets.
And as we mentioned in the prepared remarks, this provides us with an increased level of confidence that we are on target to make our financial goals on this program..
Thanks, Dave. Next question please..
Our next question is from Richard Close from Canaccord Genuity..
Great, thank you. Congratulations on a good second quarter here. My question is around Fit to Work and I have two or three combined into one here. Can you just give us what the original revenue guidance was for fiscal ‘16 on Fit for Work and now what are you expecting Fit for Work in your updated guidance.
And then you say all options are on the table, what do you really mean by that, could you agree to terminate this contract just more clarification there. And then finally on Fit for Work, what is the profit drag so far through the first half of the year..
Okay, well let me take the all options on the table piece first and then Rick Nadeau can pick up in terms of revenue expectations for fiscal '16 versus - our current versus original and then the profit drag.
On the all options on the table, I think the appropriate backdrop is to appreciate that when we work with our clients, we really strive to develop a partnership.
So we are very sensitive to their needs, their desired outcomes, social outcomes and the real drivers behind even a creation of the program and oftentimes that will flow down in terms of the number of expected cases, the volumes et cetera and it's not uncommon to - as these programs especially those that are more novel in nature as Fit for Work is to get to the point where they require some sort of adjustment.
And I will say that by the way, we do this very, very often with our clients and have adjustments usually it's the upside but in this particular case given the novel nature of this program, these volumes just have not materialized.
And accordingly, it's appropriate to adjust the program in consultation in partnership with our client to the right level. And we are having active discussions from my perspective; I say all options are on the table, it could be rightsizing, so we take down the variable cost to do the appropriate level to serve the current level.
And it could be a wind down of the program, and it could be a termination of the program. Rick on the financial aspects..
Sure.
As a result of all of that we are only forecasting around $5 million of revenue from this contract for fiscal year 2016, which is well below our initial expectation and at this point built into our full guidance for fiscal year '16 we are presently forecasting that we will lose approximately $3 million more than what we had projected when we did our original guidance..
Next question please..
Our next question is from Charlie Strauzer from CJS Securities..
And just to expand a little bit more on the HAAS contract, I know you talked a little bit more about the profitability but maybe Rich can you talk a little bit more about some more color there on what exactly kind of changed there if you can expand on that.
And then my second question as a follow-up would be that the Medicaid opportunities that could be emerging from your prepared remarks talking about the changes in Medicaid, what potential positive opportunities could there be down the road? Thank you..
Hi Charlie, I'll fill the first question and Bruce Caswell, our President is here with us today and Bruce as you would imagine has been immersed in these new Medicaid rules and Bruce is going to give us a highlight in terms of what it means, what they are and what it means to MAXIMUS more specifically.
On the HAAS contract, I think I just mentioned the driver behind it that we work with our client to adjust these programs accordingly.
In the HAAS situation, this really emanated from clients routine annual evaluation of programs and their budget and their programmatic needs, I do think there has been behind the situation need for UK to do a spending review on all of its budget and they came back and simply said given and I think part of is reduction in backlog but we think the volumes won't be quite as high and demand for the program in years two and three.
So in partnership and negotiation with our client, the volumes were adjusted. At the end of the day, again as we work with our clients, I think we ended up with a better risk profile.
I mean - the prior volumes were very, very - were very challenging in some regards, so with the reduced volumes, I view it as a better risk profile, we really do have a more stable footing for both the client and MAXIMUS with these revisions.
Bruce?.
And I might just add one other comment to the HAAS contract and that is that we as part of those discussions and negotiations with the client if I might, we are able to adjust some of the performance benchmarks and you think about that program, you ask Charlie what are the things that are different out, what are the things improving and we've made some adjustments to things like customer call waiting times that are required and call center waiting times and those are metrics that while they're still challenging we feel they are very much achievable.
So we're pleased with the improvement that we see in productivity as more of our employees have graduated to become accredited. And we talk probably in prior discussions with you about how even when you're training employees, you're pulling other employees off the line to help train and mentor them.
So consequently you get the benefit of those folks who are turning to the lines across the board, productivity capability improves, quality improves as Rich mentioned. So to summarize as Rich said we feel quite good about the footing that we are on.
Turning now to your question about Medicaid rules, which is right, many of us have been in immersed I think is the right word in the 1,425 pages that dropped from CMS. It's still early days and a lot of folks are still on really trying to dissect them and understand what the potential impacts are going to be.
And quite honestly, it could be some time before the states themselves digest them and figure out how they're going to operationalize the rules.
We did hold the webinar two days ago and I was really proud that we were kind of first to market in that regard with a very comprehensive webinar held in conjunction with some consultants that we work with from health managed associates and you're welcome to go to our website and review the transcript from that and the materials from that webinar.
Our early read is that there are many things in the new rules were MAXIMUS can provide additional support for a state client and Rich mentioned several in his prepared remarks. I would lump them largely into four categories.
One is the area of beneficiary support services and the fact that the rule really does emphasize the importance of choice counseling for beneficiaries, assistance for enrollees and understanding managed care and all that be done in a conflict-free and independent fashion.
The second category would be really new standards and requirements for Medicaid long-term services and supports. And Rich spoke to a number of those, we're encouraged that the concept of beneficiaries support services really extends now to the Medicaid long-term services and supports communities.
So there is much more of a requirement to ensure that there is a single point of entry for example for choice counseling that there is independence and freedom or accomplished freedom from conflict in that choice counseling process.
Similarly, the process that we've discussed in terms of getting beneficiaries into the appropriate level of care and the work that we now do as our new colleagues from Ascend will become more important in that domain.
The third area is provider credentialing and enrollment, a greater burden has really fallen on this states to address and MAXIMUS is well-positioned to continue to grow on the six states where we do that presently.
and a fourth area probably worth considering is quality measures as you're well familiar quality measures are now going to be important aspect of plan selection and enrollment to that rule.
I'd also maybe make one final comment on the rule and that is that it creates a requirement for the medical loss ratio to be at 85% for Medicaid plans across the states.
And from our point of view, states are already overburdened with a lot of administrative tasks and they're going to look at ways that they can continue to offload some of that works so their staff can focus on higher level work.
There is an opportunity as planned, look at their MLRs to say they look at their maybe some administrators tasks that are quite common across all plans like the creation of member handbooks and notices and so forth that could be shifted back on the state side centralized and provided as a shared service.
So I hope that gives you a little bit color we think overall the rule creates a lot of good opportunities for MAXIMUS well into the future..
Thanks Charlie, next question please..
Our next question is from Stephen Lynch from Wells Fargo..
Maybe for Rich, I was wondering if you could walk us through some of the assumptions underpinning the new EPS guidance range, maybe volumes and margins for a different contracts whether it’s HAAS and jobactive that would support the low and the high end of the range..
We don't really call out specific contracts we did that run time with respect to HAAS because of the size of that contract but let me try as follows, I think it's really important that we focus on the fact that we do have a portfolio of contracts and that these contracts are really in different stages of maturity and different types of cost structures and contract structures that you have.
There really are many things that drive our guidance and that we put into there, when we consider that we're making good strides on a lot of the key elements of the portfolio particularly the startups but there are all kinds of different headwinds and tailwinds inside that. The start-ups are an important component of our organic growth this year.
I think that as you go forward and you look into future years, I think you would see a better operating income margin then you see this year because of those startups. And so I think when people think about startups they're really an important component of our organic growth.
They're really advantageous to us and they're critical in our development of long-term shareholder value. That's really what allows us to drive in some year’s double-digit organic growth to start-ups. But then what you have in that circumstances, you have revenue that lags the earnings which is really a normal course kind of event.
So you would tend to see this year being a year that you have revenue earnings like revenue, earnings like revenue, I say that backwards, sorry, earnings like revenue and I think you will see that normalize itself on the back half of the year and as you go into FY17.
But obviously the big story line this year, I mean this quarter is HAAS and that does create a situation where we feel like we stabilize that contract and we have a better feeling of confidence with respect to FY16 guidance and that's why we are able to really manage the bottom end of our guidance up and effectively raise the midpoint.
That answers your question?.
Steven, do you have another follow-up?.
No, I'll hop back into the queue for now..
Next question please..
Our next question is from Frank Sparacino from First Analysis..
Just hoping to get a little bit more color on the issues in Australia in terms of volumes?.
This is Bruce Caswell, let me give you a little bit more color on that, one of things we always look at in situations like this is what the employment rate looks like in Australia and I want to begin by saying that our understanding is that most if not all vendors that are involved in the contract are experiencing similar volume related challenges, it's not unusual in a contract like this to see fluctuations from the estimates that were first provided as part of the tender process, it's worth noting that the Australian unemployment rate is fairly low, it's at 5.7% reported this past March and hasn't been that low since 2013.
So while there are many factors that can ultimately factor into or play into the number of referrals that you get and the volumes that you're seeing, some can be related to public policy other to obviously broader market trends.
[indiscernible] that it's simply tied to the rates that were previously assumed that the tender time versus what we're seeing today in terms of employment environment. But I do want to note that as we said this program is profitable. It's going to continue to improve in the back half of fiscal '16 at this contract continues to mature.
And we're really focused now on really managing the margins, the contract because they obviously didn't turn out to be as robust as we might initially expected but we've got a great team working on it, we expect it to continue to improve this year..
Frank, do you have a follow-up?.
I do not, Lisa. Thanks..
Okay, thank you then, next question please?.
Our next question is from Brian Kinstlinger from Maxim Group..
I missed the prepared remarks, but I just want to be clear that HAAS contract was profitable before the unexpected 6.6 million in true-ups and based on the questions I heard from some analysts and I just want to be clear, the $6.6 million of benefits is completely separate from the $0.08 change request that we all expected right?.
Yes, with respect to the second question first that $0.08 that we had talked about in quarter one related to a domestic program that we had and it was a change order that had that we had in our hands but it was not signed yet, so it was one that had been negotiated but had not been fully executed with the customer.
The accounting rule is not allowing us to record revenue until we actually have the signed agreement. With respect to HAAS, yes, without that 6.6 million, we still had a profit this quarter too in fiscal year ’16.
Did that answer your question?.
Thank you.
And then the question I have got is, if I understand it correctly, the new change order, which places some focus on face-to-face meetings is going to make it easier for MAXIMUS to achieve your productivity goals and essentially your target profitability for that contract, is that right?.
Yes. And I don’t think it’s the fact that it’s a shift to more emphasis on face-to-face, Brian, but really the reduced volumes. .
Thanks, Brian. Next question please. .
Our next question is from Allen Klee from Sidoti and Company. .
Yes, good morning. Question one is, what was your previous revenue expectation for the HAAS contract for fiscal 2017? And then secondly, a bigger picture question.
Since you mentioned that one of the factors for why the contract is reduced on volumes is the budget, just in general, thinking about operating in the UK, do you think that given some of the budget issues there that’s – how that could impact you in some other programs?.
Rick, why don’t you take the first one.
I think the question was, what’s our previous expectation for revenue on the HAAS contract, was it – Allen, was that ’17 or ’16?.
You said ’17 Allen, I will answer ’16. That was $230 million to $280 million, was what our expectation was for revenue for HAAS for fiscal year 2016. .
So a hindsight, the revised expectation is really at the lower end being at $225 million. .
And we have not provided specific guidance relative to the HAAS contract in fiscal ’17..
Correct. The second part of Allen’s question I think was given the decreased volume, really the amendments on this contract and UK situations in general, what is our expectation.
My view is, I don’t differentiate between the UK and other governments that we serve, they are and we’ve said this folks, it’s really the intersection of these two drivers that sparks our growth, our long-term growth.
And governments are dealing with the fact that they have to serve more people and more people are looking to their governments for some form of welfare and at the same time, they have budgetary pressures that they need to deal within the UK and I think it’s a responsible thing does go through and analyze each program and toggles [ph] or adjust each program accordingly.
So in some cases, we see downward adjustments, in other situations, we see upward adjustments. I will say from a macro market perspective, we are seeing in general and this is in general, but better employment rates.
Lower employment rates in many of the markets where we serve, which as you can appreciate, that means there is fewer people looking for jobs and that has an impact on our programs.
On the other hand, what we are seeing is government shift their emphasis from the classic just long-term unemployed to those with disabilities and other challenging situations. So we are seeing the market shift in terms of what they are looking for. In aggregate, I think it’s still a growth situation.
I don’t think it’s a net reduction in the demand for what we do in that area. .
Thanks, Allen. Next question please. .
[Operator Instructions] Our next question is from Shane Svenpladsen from Avondale Partners..
Good morning.
With the new set of regulations mandating competitive bidding for one-stop operators of workforce development centers in the US, are you seeing more RFP activity as a result of that and have there been any changes to the competitive landscape?.
Bruce, why don’t you fill that..
I would say, we are beginning to see some changes in the competitive field there and some additional RFPs coming to market that we haven’t been historically seeing from clients that maybe haven’t even historically outsourced this function.
And you would expect the competitive landscape to include kind of a broad competition of not just for-profit vendors, but historically, you’ve seen a lot of the smaller non-profits and community-based type organizations locally providing services to workforce investment boards or WIBs that have been active in those types of programs.
So yes, I would say, it is a bit of a shift in the market, I wouldn’t call it a seismic shift at this point. .
Okay. That’s helpful. And then –.
Go ahead, Shane. .
And then related to the new work and health program RFP that’s out, other than a change in funding, are there any contract-specific changes that are worth calling out?.
Well, I might just provide a context, if that’s okay Shane on work and health. First of all, as we have been talking about, here the UK is experiencing really historically low unemployment.
So as a result, as Rich mentioned, governments are shifting their focus to reducing the employment gap for people with disabilities, and also -- focusing also on improving productivity and the work salary progression.
So work program historically is focused on long-term unemployed individuals, but that group interestingly has decreased by almost 75% since 2011.
So while there was significantly more money allocated to the work program, none of the participants or vendors in the work program really ever achieved the funding levels that we had been previously in vision due to those decreased caseloads.
So the government has now shifted and it created a new smaller program called work and health that’s expected to absorb both the work program and work choice. And that new program is going to be focused on people with health conditions and disabilities.
And as you probably well know and others, serving individuals of disabilities are core competency of Remploy, the organization with who we combined last year. So we feel like we are very well positioned for that change.
To give you just a sense of the economics, because I know that would be top of mind for you, combined the work performed by MAXIMUS and Remploy presently for both programs, work program and work choice program runs at about $80 million to $85 million a year.
But our profitability expectations for both of those programs are pretty low, in fact comprising less than $0.05 per share in fiscal ’16. So any proposed reduction under this new work and health contract that we might see in overall funding, would likely be a bigger hit to the topline and relatively immaterial to the bottom line..
Thanks, Shane. Next question please. .
Our next question comes from Richard Close from Canaccord Genuity..
Yes. Just one of the follow-up on my Fit for Work questions, Rick, you didn’t give the original revenue guidance and the original operating loss.
You gave us some update, but what is that compared to?.
Richard, we don’t generally give that. We don’t call out specific programs. I will tell you that $5 million is substantially less than what we had projected for this coming year, and that $3 million loss is reasonably worse than what we had expected. .
And then my – I guess, my follow-up is, there is some pretty strong positive commentary throughout your slide deck, specifically you talked about the long-term outlook being very positive and favorable trends.
It seems like just reading your body language or your text here that you guys are pretty optimistic on your business, it sounds over the next couple of years.
I was wondering if you could just provide any additional commentary on that level of confident?.
Richard, glad to do that. I think that – again, this is – the nature of our business is multiyear, we are dealing with governments and programs that take several years to go from concept to legislation, to program, to rule, to operate and to startup and then to real mature operations.
And I do think the nature of these programs is such that in some form, regardless of the party that’s in play, these programs will continue. So when we think about this, we think we have a long-term growth drivers. I’ve said several times that I think those growth drivers translate into 10% topline and bottom line growth potential year-in, year-out.
There will be within years, we will see situations where we may dip below 10% benchmark. But I think that really will be attributable to the various programs and the various stages. So there will be situations like we are this year where we have inordinate amount of startups.
And as Rick said earlier, what startups tend to do is that the revenue leads and the earnings lag, and in the following years, you will see the flipside of the equation. So that was really the intent. We remain very excited about the long-term drivers to the business.
The pipeline remains I think handsome, so we remain optimistic about our future growth prospects. .
Next question please. .
Our last question today is from Dave Styblo from Jefferies..
Hey, thanks for the follow-up. Following off of Richard’s question there, I did want to ask about the pipeline, which was pretty noticeably up above $400 million sequentially and it seems like quite a bit more of it is pending.
I am wondering if you could talk a little bit more, if that new business is driving the increase of reprocurement, I know there is some comments there that over 50% is new. I am wondering how that also compares to recent levels that have been in there.
And then finally, Rich I know for some point, when we sat down, you talked about beefing up the business development with the mandate, look for opportunities sort of the mountain, maybe into the next two years away.
Can you talk more specifically about what you’ve done in there and sort of early take on that?.
I would be glad to do that, and I know Bruce will be very proud to tag team on the latter part of your question.
As it relates to pipeline, Dave when I think about the pipeline, I think it has been of late several quarters running higher and I think we continue that trend with the quarterly statistics and we do pulse how much of it is in the form of new work versus the form of rebid.
And I think as I already mentioned on my call notes, a good portion of it happens to be new work and it’s interestingly spread across all of our businesses. It’s not predominantly in any one area or any one segment.
As it relates to the rebid situation, I think it’s important for folks to remember that 2016 is a light year versus other years from a rebid perspective. In terms of statistics where we are today, coming into this year, we had I think as you are aware 10 contracts worth of $170 million as it relates to contract value and rebids.
Thus far, we have won or extended I believe two of those. Basically we have a significant amount to go, but again, we feel comfortable to rebid situation. And on the options, they continue to come in at I think effectively in baseball terms of batting a 1,000% as it relates to options.
So on the pipeline, I think it’s strong, and most importantly, a lot of it is new, so I think that’s good. On the business development side, you are right that we’ve historically focused our pipeline metrics on what we call tier 1 and tier 2, those are situations where we think the RFP is going to be on the street within six months.
We had a strategic direction to open our aperture and look beyond that into what we call tier 3.
We have made investments in business development and resources and we have honed and we will continue hone our methodology really to look for new emerging opportunities, so we can out there ahead of the pack with solutions into our – frankly focusing our M&A program strategically on what we think will be new growth areas for MAXIMUS, either one or two adjacencies away.
Bruce, anything to add on that one?.
I think you’ve said it perfectly. The only thing I might say is and we do this on a global basis.
We have a great integrated business development community that gets together quite frequently, shares an awful lot in terms of capabilities and I think that really furthers our broad strategy at ensuring that we can take the full capabilities of MAXIMUS to our clients on a global basis, but deliver those at the local level.
So that emphasis on tier 3 is really something that cuts across all geographies and all business lines. .
And that’s maybe behind part of the growth and the pipeline. .
Yes..
Well, thank you very much for joining us today. There are no additional questions in the queue, and we look forward to future conference calls. Have a good day..