Maximus Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 3, 2023

There are 7 speakers on the call.

Operator

Greetings, and welcome to the MAXIMUS Fiscal Year 2023 Third Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jessica Batt, Vice President of Investor Relations for MAXIMUS.

Operator

Please go ahead Ms. Batt, you may begin.

Speaker 1

Good morning and thanks for joining us. With me today is Bruce Caswell, President and CEO David Mutryn, 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 1A of our most recent Forms 10Q and we encourage you to review the information contained in our recent filings with the SEC and our earnings press release.

Speaker 1

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 believe it may be informative to investors engaging the quality of our financial performance, identifying trends I'm providing meaningful period to period comparisons. For a reconciliation of the non GAAP measures presented, please see the company's most recent Forms 10 Q and 10 ks. And with that, I'll hand the call over to David.

Speaker 2

Thanks, Jessica, and good morning. Our 3rd quarter results reflect strong organic revenue growth and progress on our commitment to margin improvement, particularly in the U. S. Federal and U. S.

Speaker 2

Services segments. Our federal team is successfully ramping up to meet the unprecedented demand for clinical assessments for veterans. Our team supporting state customers have begun assisting beneficiaries in navigating the unwinding effort as redeterminations resume. 3rd quarter results include an expense of approximately $22,000,000 for the cybersecurity incident that we disclosed last week. This charge represents our updated best estimate of cost to be incurred related to the incident for the total investigation, which is expected to be concluded this month and remediation activities.

Speaker 2

The Outside the U. S. Segment realized a much greater than anticipated operating loss driven in large part by macroeconomic factors that have caused our expectations to decline on our employment services contracts. Looking ahead, we feel confident in ongoing successful delivery to enable a step up in earnings in the 4th quarter with our expectations for the quarter largely intact from last quarter. Turning back to 3rd quarter results, MAXIMUS reported revenue of $1,190,000,000 which represents 5.6% year over year growth or 6.7% we are confident that we will be able to continue to grow our business on an organic basis.

Speaker 2

This growth was driven by both the U. S. Federal and U. S. Services segments, which I'll cover shortly.

Speaker 2

Adjusted operating income margin, which excludes only intangibles amortization, was 6.9% and adjusted EPS was $0.78 This compares to 6.9% and $0.78 respectively for the prior year period. To be clear, the approximately $22,000,000 expense related to the cybersecurity incident I mentioned earlier is included in this quarter's results, reducing our adjusted margin by approximately 180 basis points and our adjusted EPS by $0.26 it is accounted for in other SG and A and not allocated to the segments. Absent these incident costs, adjusted operating income margin would have been 8.7% and adjusted EPS 1 $0.04 I'll also point out that last year's period had less interest expense due to lower interest rates, while in this quarter, our tax rate had favorability from a number of discrete items, which benefited EPS by approximately 0 point 0 $6 let's go into detail around the segments. For the U. S.

Speaker 2

Federal Services segment, revenue increased 11.1% we are pleased to report that we are in the call to $584,000,000 which was all organic. The key drivers were volume growth on both the Veterans Affairs Medical Disability Exam contracts, which comprise the Veterans Evaluation Services or VES Business and on our student loan servicing work. The operating income margin for U. S. Federal Services in the 3rd quarter was 12.7% as compared to 10.4% in the prior year period we are confident that we anticipated strong delivery by VES driven by ramping Pact Act related volumes drove the improved margin.

Speaker 2

For the U. S. Services segment, revenue increased 12.5 percent to $449,000,000 also all organic. Contributions from new work wins last year are still driving strong growth numbers in the segment, plus we have an uptick to revenue from beginning to process redetermination volume. The U.

Speaker 2

S. Services operating income margin was 10.5 this compares to 8.0% in the prior year period when redeterminations remained paused expectations for an improving trend in this segment across the remainder of fiscal year 2023 as redetermination activities ramp. As a reminder, over the last 3 years, many programs in this segment have been operating with depressed margins resulting from the pause we expect a full period of conducting redeterminations in the 4th quarter. Turning to the Outside the U. S.

Speaker 2

Segment, revenue decreased 22.5% year over year to $156,000,000 for the quarter. Organic revenue contracted 16.6 percent, driven primarily by a lower run rate in Australia following last year's rebid outcome And a $14,400,000 reduction due to lower estimates for future period outcomes based payments on employment services programs, predominantly in the United Kingdom. Last quarter's 2 divestitures and currency impacts reduced revenue by 4.5%

Speaker 3

we are pleased to report

Speaker 4

that we are making progress

Speaker 2

as compared to an operating loss of $11,200,000 in the prior year period. The much greater than anticipated loss this quarter is attributable to the aforementioned $14,400,000 reduction due to lower estimates, which falls to the bottom line. The revenue recognition for many of our employment services contracts requires us to reflect in our current period our best estimate of future employment outcomes. Since last quarter, both our view and our customers' view of macroeconomic conditions have moderated. We are not satisfied with the financial performance of this business.

Speaker 2

And with the disappointing 3rd quarter results, we reiterate our commitment to shaping this segment, bearing in mind practical constraints to represent a portfolio that is strategically aligned and drives consistent profitability. To that end, we divested 2 businesses in the March quarter and we continue to execute on multiple cost saving initiatives in the segment. Let's now turn to cash flow and balance sheet items. Cash used in operating activities for the Q3 was $5,000,000 and free cash flow was an outflow of $30,000,000 DSOs were 61 days near the low end of our expected range of 60 to 70, But an increase from 56 days in the prior quarter and thus increased our working capital. There was also a timing impact we expect an improvement to 4th quarter cash flows.

Speaker 2

I would like to note that our CapEx has begun to increase and we expect it to run at these higher levels through fiscal year 2024. The main driver is investment in capitalized software on a number of systems that we anticipate providing enhanced efficiency, especially in highly scaled areas of the business. We ended the 3rd quarter with total debt of $1,320,000,000 our net debt to EBITDA ratio remained unchanged at 2.5 times from last quarter. As a reminder, this ratio is our debt net of allowed cash to adjusted EBITDA for the last 12 months as calculated in accordance with our credit agreement. Our priority in the remaining quarter of fiscal year 2023 is further debt reduction, which our projected cash flows should afford.

Speaker 2

We remain on track to finish the fiscal year below 2.5 times. This will offer us flexibility to execute we will be conducting a few questions on our longer term capital allocation priority, which is strategic acquisitions to accelerate organic growth. Let me update you on fiscal year 2023 guidance, which has been impacted on the bottom line by 3rd quarter results. Revenue is holding and we are tightening the range now expecting to be between $4,875,000,000 $4,975,000,000 the midpoint of this range is unchanged from last quarter at $4,925,000,000 representing year over year growth of approximately 6 we are pleased to report that we are in the range of $100,000,000 reduction in short term COVID response work. Adjusted operating income following our pattern to exclude only intangibles amortization is now estimated we expect to be between $387,000,000 $401,000,000 This includes the approximately $22,000,000 from the cybersecurity incident, whereas excluding this expense, our range is $409,000,000 to $423,000,000 This is down modestly from last quarter's 4 we expect to be between 3 point we are currently conducting a $0.74 per share.

Speaker 2

Again, this includes the $0.26 from the cybersecurity incident, whereas excluding these costs, our adjusted EPS guide would have been intact from last quarter and tightened to between $4.20 our EPS guide has better holding power due to an improvement to the full year tax rate. Finally, free cash flow is now estimated we expect to be between $190,000,000 $230,000,000 for fiscal 2023. As with adjusted OI, our free cash flow would have seen less of an impact we're guiding to between $212,000,000 $252,000,000 excluding the cybersecurity incident costs. I should also note that our full year CapEx projection is now approximately $85,000,000 our 3rd quarter results offer us yet further visibility to our projections for the last quarter of this year. U.

Speaker 2

S. Federal is demonstrating solid momentum 2nd driver to 4th quarter improvement is a full period of Medicaid redeterminations, which should continue ramping as compared to 3rd quarter, albeit not with a sharp step up and that ramp should continue into fiscal year 2024. With just 1 quarter remaining, the adjusted EPS guidance implies $1.22 to $1.42 in Q4. Thus our expectations for strong sequential earnings growth are largely unchanged from last quarter. Let me briefly touch on segment margins for the full fiscal 2023 year.

Speaker 2

No change to U. S. Federal Services expectations we should finish towards the lower end of the 10% to 11% range as noted last quarter. Also, no change to U. S.

Speaker 2

Services we expect to continue

Speaker 4

to

Speaker 2

be in a loss position with the 4th quarter expected to be slightly below breakeven. Our interest expense projection is still between $82,000,000 $85,000,000 we expect to come in toward the lower end of the range. Our full year effective income tax rate projection is now between 23.0 percent 23.5 percent and weighted average shares outstanding between $61,400,000 $61,500,000 Our guidance ranges do not include any additional costs related to the cybersecurity incident, other than the approximately $22,000,000 recorded in Q3, which reflects our best estimate based on the currently available information. Let me now share some early thinking on fiscal year 2024 we are ahead of our November call when we typically issue guidance. From a revenue standpoint, our current line of sight suggests we have a positive organic growth projection aligned with our mid single digit growth target.

Speaker 2

From an earnings standpoint, we expect a meaningful lift in fiscal year 2024 as compared to this year. Our current thinking is the Q4 of this year is a good proxy for the earnings power of the business going into next year. One thing to be aware of is the redetermination dynamic. I mentioned earlier that we expect volumes to continue ramping into fiscal year 2024, driven by anticipated higher volumes we are pleased to announce that our quarterly results are in the quarter. We are pleased to announce that our quarterly results are in the quarter, which have grown substantially over the course of the pandemic.

Speaker 2

So we would expect the contribution from these volumes in U. S. Services to grow from the Q4 into the first half of fiscal year twenty twenty four we will be able to settle back to a steady state level in the back half of the fiscal year. Consistent with our past practice, we will provide guidance for fiscal year 2024 in November. With that, I will turn the call over to Bruce.

Speaker 4

Thank you, David, and good morning, everyone. I'm pleased with our progress executing on programs of national policy significance and importance to our customers and the citizens we serve each day. As we deliver on Medicaid redeterminations and enhanced benefits for our nation's veterans, our core business reflects strength we have not seen in several years. Operating margin improvement in our U. S.

Speaker 4

Segments reflects the business operating at scale and momentum that has enabled us to more than overcome the year over year decline of short term COVID work. Let me provide an update on return to repayment in our student loan business where you will recall, we act as a servicer of federal direct loans working under the rules and oversight of the Department of Education Federal Student Aid or FSA and not as a loan originator. The suspension of federal student loan payments, interest and collections has ended with payments beginning again in October 2023. Our teams are preparing now to ensure a smooth transition to repayment, a few details of which I'll share. 1st, communication with borrowers is key.

Speaker 4

For the loans we service, MAXIMUS is supplementing FSA communications with more get ready for repayment information. 2nd, MAXIMUS began hiring and training in July to support the increased demands as borrowers enter repayment with forecasts based on prepayment pause volumes. This will continue through August, well in advance of the first billing notices being sent in September. Finally, consistent with our strategic focus on customer is digitally enabled. MAXIMUS continues to develop solutions, including chatbots, web chat and web information to support greater opportunities for borrowers to self-service, thus creating reductions in call volumes and staffing demands.

Speaker 4

The restart of tens of millions of borrowers' student loan payments marks an unprecedented event, one that our teams are preparing to deliver on in a thoughtful and well organized manner. Similar to our student loan business, over the last several quarters, our Medicaid eligibility and enrollment teams have been preparing for the unwind phase, which commenced in April of this year. The unprecedented nature of this unwind phase makes it inherently difficult to forecast eligibility redetermination volumes, as many beneficiaries have never been through the process we are learning and adjusting program forecasts in an educated manner. Some lessons learned thus far include ex parte redeterminations where 3rd party data matching makes interaction with the beneficiary unnecessary to support a state's determination have been first priority for many states. Further, beneficiary behavior has been hard to predict for ourselves and our Medicaid clients.

Speaker 4

As an example, in one large state, a significant cohort of individuals has been far less responsive than anticipated. This group may not realize that they've been disenrolled until they need to seek service. In light of this, while staffing has been a challenge, we have staffed to ensure a high degree of quality and customer service, because this is a high priority for our clients. With this being said, early review of July data shows volume activity for the 4th quarter is trending upward, giving us confidence in the volumes moving into fiscal year 2024. We believe this trend will continue and eventually peak and plateau in the first half of the next fiscal year.

Speaker 4

Turning to VES, as David conveyed, we are happy to report that volumes in the quarter met our customers' high expectations for forecasted exams. The increased volumes from the PACT Act are anticipated to continue ramping upward through Q4 of the current fiscal year and be sustained throughout fiscal year 2024. With the future of health as a key pillar in our 3 to 5 year strategy, solid performance on this contract demonstrates that our core business is doing well and we are continuing to deliver on the goals we laid out in 2022. Like many companies, innovation and in particular artificial intelligence is woven into our strategic direction. In each pillar of our plan, the future of health, customer services, digitally enabled and advanced technologies for modernization, innovation is at the core of our success.

Speaker 4

Across our programs in Technology Solutions, innovation goes beyond cost savings and margin enhancement, although there is certainly an element of this, to creating differentiating capabilities in our highest value programs. Examples, which I have spoken of before, include innovations we have developed and patented by which we can intake, index and categorize large volumes of unstructured data And use machine learning to enable more efficient navigation of these files by our clinical assessors. Turning to AI, while in commercial contact centers AI might be seen as purely an opportunity to reduce headcount through more automated consumer interactions, our view is that government customers will see it as a tool to increase accuracy and improve quality, enabling our staff to provide greater value to citizens. In this vein, our teams have identified use cases for AI, some of which we are piloting presently, where the technology is used to support our CSRs, improving the quality of calls by providing more timely feedback and quality assurance. While we are excited about the opportunities AI creates across our business, we are also measured, pragmatic and committed to doing the right thing and putting our people first.

Speaker 4

Our commitment is demonstrated through the establishment of our AI Governance Board, organized under leadership in the Office of the General Counsel and made up of cross functional and interdisciplinary team members, the Board will enable adaptive risk management and organized collaborative oversight to ensure AI aligns with existing and future legal and regulatory frameworks, our client expectations and requirements, organizational values and ethical considerations and business objectives. We look forward to sharing more about our innovation journey on future I would be remiss if I did not comment on the recent cybersecurity incident that has impacted hundreds of companies thus far and which resulted in the recognition of a significant expense in the quarter. As we previously disclosed, MoveIt is a 3rd party application licensed from Progress Software that is used by our project teams to share our government customers' data and in some instances that data pertains to individuals who participate in various government programs. The Move It vulnerability that was exploited was a critical 0 day vulnerability, which is a flaw in a piece of software that's unknown to the owner of the application. Because the vulnerability wasn't known, there was no patch or remediation option available to companies like MAXIMUS prior to the exploitation of the vulnerability.

Speaker 4

We investigated the incident promptly with expert assistance and took remedial steps to address the reported vulnerabilities. Data privacy and security remain a top priority and we are committed to protecting the data entrusted to us. We have not identified any impact from this vulnerability we are confident in the integrity of the network. Finally, we have been working with the subset of our customers who are using the impacted application as part of their workflows and continue to provide updates and support to them as our investigation proceeds. Turning to outside the U.

Speaker 4

S. Segment. Earlier in the quarter, we announced that MAXIMUS has been selected as the largest provider of the new functional assessment services or FAST contract we are pleased to announce that we are in the Q4 of fiscal year 2024. Since 2015, MAXIMUS has been the only national provider of the Health Assessment Advisory Service we will be conducting a number of our employees and employees. The FAST contract replaces HOSS and expands our scope we are now with 2 health and disability assessment types and maintains our position as a leading provider of health assessments to the U.

Speaker 4

K. Government. Similar to my earlier discussion on VES, this win also shows our commitment to the strategy we articulated last year and ability to deliver on our goals. The combined estimated value of the contract, including subcontracting is $1,000,000,000 over 5 years, with the option to extend for a further 2 years. Remaining outside the U.

Speaker 4

S, David discussed the disappointing results in our Employment Services business in the quarter, a reflection of macroeconomic conditions, particularly in the United Kingdom, we have further evidence that we must remain focused on restructuring and optimizing this business. Last quarter, we announced the divestiture of 2 small businesses in the OUS segment. The divestitures demonstrate our commitment to analyzing the segment's operations we are taking measures to optimize this portfolio. In the near term, we will continue to optimize performance and tightly manage costs while evaluating additional actions in the context of current market conditions. I will now turn to award metrics in the pipeline as of June 30.

Speaker 4

Earlier in my prepared remarks, I discussed the good news regarding the $1,000,000,000 FAST contract in the United Kingdom. Last quarter, we discussed the IRS Enterprise Development Operations Services or EDOS contract in our federal segment. As a reminder, the EDOS agreement is worth up to $2,600,000,000 to the awardees over 7 years for the resulting task orders, the awards from which are expected to contribute in our fiscal year 2024 and beyond. Moving to rebids, fiscal year 2023 has been a successful rebid year, providing stability and line of sight to our revenue and earnings for fiscal year 2024 and beyond. Having a solid base, a testament to the strong relationships we maintain with our customers, gives us the space to focus on the new work opportunities that exist in our broader addressable market.

Speaker 4

In April, we were awarded the rebid of the USAC Lifeline and Affordable Connectivity program business process outsourcing contract valued at $92,000,000 over 5 years, including option periods. This contract began in 2021 as an emergency surge program to support the emergency broadband benefit program. The successful rebid is another we will be conducting a few key examples of our success in transitioning short term COVID work into longer term contracts. In May, we were awarded a 2 year extension for our Service BC contact center contract with a 1 year option to extend to 2026. Under this contract, MAXIMUS delivers multi channel contact center services this is on behalf of British Columbia's Ministry of Citizen Services.

Speaker 4

For the Q3 of fiscal 2023, signed awards totaled $4,300,000,000 of total contract value. Further, at June 30, there were $3,100,000,000 worth of contracts that had been awarded but not yet signed. These awards translate into a book to bill of approximately 2.2 times for the trailing 12 month period. As a reminder, this includes our large CCO award from Q4 of the last fiscal year. Normalizing for this award, which will no longer be part of the calculation next quarter, the trailing 12 month book to bill would be 1.1 times.

Speaker 4

Let's turn our attention to our pipeline of opportunities. Our pipeline at June 30th was $32,100,000,000 compared to $31,900,000,000 reported in the Q2 of fiscal 2023. The June 30 pipeline is comprised of approximately $2,600,000,000 in proposals pending, dollars 850,000,000 in proposals in preparation And $28,700,000,000 in opportunities tracking. Of our total pipeline of sales opportunities, 80% represents new work. Additionally, 62% of the $32,100,000,000 total pipeline is attributable to our U.

Speaker 4

S. Federal Services segment. As I conclude, I'd like to congratulate our Vice President of Diversity, Equity and Inclusion, Doctor. Arvanita Washington Cherry and the broader DE and I team. MAXIMUS was recently named number 13 on Forbes 2023 Best Employers for Diversity list.

Speaker 4

This is a 209 spot improvement from 2022, Which was only possible thanks to the dedication and commitment of Doctor. Cherry and her team. We continue to take steps to integrate DE and I into the important work we do each day, strengthening the fabric of our company. I'm grateful for the enthusiastic response and engagement of thousands of our employees as evidenced by their participation in the 6 employee resource groups we've launched over the last year. The Forbes recognition is validation of the success of our journey thus far.

Speaker 4

With a quarter to go, in addition to our confidence in our core business performance, the success of our rebids this year has created a solid foundation for the future, enabling our teams to focus on new work in the form of competitive wins and scope expansion of existing contracts, historically a major element of our organic growth. With fiscal year 2023 nearing its end and fiscal year 2024 on the horizon, we remain focused on executing on our 3 to 5 year strategy and achieving mid single digit organic revenue growth supporting longer term total company operating income margins of 10% to 14%. As I've mentioned, innovation is one tool in our toolbox that will help us get there. But there is also no substitute for the traditional tools that benchmarking, operational analysis, process optimization and performance management provide. On prior calls, we've acknowledged that the way we structure and operate the business must continue to evolve in concert with our growth and execution of our strategy.

Speaker 4

I anticipate that over time, these efforts will further underpin our reliable financial performance. And with that, we'll open the line for Q and A. Operator?

Operator

Thank you. Good morning. We will now be conducting a question and answer session. I'll turn it over to Mr. Francis?

Speaker 5

I was quick there. Good morning. Welcome to the Q and A session. Let's first please go to the line of Charlie Strauzer with CJS Securities. Charlie, do we have you?

Speaker 3

Okay.

Speaker 5

Hey, good morning. We hear you loud and clear.

Speaker 3

Excellent. Great. If we can maybe start off by talking a little bit more about the 2024, your kind of initial views there and your top line in terms of top line expectations and maybe a little bit more color just around the assumptions

Speaker 6

Sure. Thanks, Charlie. It's David. So yes, as I said in my remarks, we currently do see a good line of sight to continued mid single digit organic growth. And we look to Q4 as a good barometer for the run rate of the business going forward.

Speaker 6

So if you begin with the midpoint of our implied Q4 range for adjusted EPS at $1.32 Our current view today that this is in the range of the run rate we'd expect through adjusted OI margin, which is also consistent with our current thinking around what to expect for fiscal year 'twenty four. Now, of course, that doesn't mean that earnings will be evenly spread over the year. So to elaborate on my prepared remarks, we now see the contribution from redeterminations actually growing from Q4 of we expect to continue to be in the first half and peaking sometime in the first half of fiscal year twenty twenty four and then subsiding to a new steady state. The other big driver would be VES. And simply put here, we expect the strong demand to continue at least through fiscal year 2024 and really for the foreseeable future.

Speaker 6

And then I'd caution, while these are 2 growth areas for sure, that our business also has a normal component of erosion. That's typically at least in the mid we are now in the range of $1,000,000 and that can result from many factors, including programs coming to a natural end, some portion of lost rebids or volume decline. That said, this year we've certainly seen success at defending our major recompetes, which provides a good foundation. So all that put together, as I said, we currently have the good line of sight to mid single digit organic growth and then maintaining that Q4 level of adjusted OI margins Of approximately 10%.

Speaker 3

Great. That's very helpful. And then built into that, what are your thoughts on The redetermination uptick there, the $0.15 to $0.30 range that we've talked about in the past, kind of what's the status of that, if you don't mind?

Speaker 4

Hey, Charlie, it's Bruce. Good morning. Great question. As we've done in the past, I'll start and provide a little bit of a policy backdrop and then David can get you to the numbers. I mentioned in my prepared remarks that obviously this is an unprecedented journey that states are going on.

Speaker 4

And in fact, we laid out on the last call kind of the timing with which states are doing their disenrollments. And as you may recall, that began in April, as we've said, with only 4 states, but really kind of has peaked and is coming to an end in July with the final 11 states beginning their disenrollments. And so all of that means that the process is a bit more back end loaded and we would see kind of the crest of this wave, if you will, a little bit later And outside of this fiscal year, likely in the Q1 of FY 'twenty four. So it's made it difficult to forecast we're learning a few things as we go along the way. And if I were to net out my prior comments from my prepared remarks, I would tell you that we're seeing meaningful month to month growth and quarter over quarter growth in the consumer interactions that we're having as people receive their redetermination packets and engage with Certainly, the fact that there were these ex parte determinations that were done initially where the enrollment, the reenrollment or the dis enrollment was based on 3rd party available data, contributed to the fact that we didn't get as many consumer interactions in the early months.

Speaker 4

So there's a number of factors there, as I mentioned, that are contributing to the gradual ramp. We're learning that there FX are cohorts of beneficiaries that are harder to reach and engage than states would have anticipated. New York highlighted this in their report recently That the 18 to 34 year olds had a reenrollment rate of only 62%, whereas the statewide number was 72%. It could be because this is their first time through the process. It also could be that certain beneficiaries are ignoring or even the fact that they're being disenrolled until they have a medical need, an urgent I mentioned the ex parte determinations.

Speaker 4

It could very well be that there despite states' desire to have the 3rd party data be as current as possible, it's likely that there are individuals out there for which the Part A data is outdated and that leads to an administrative disenrollment that beneficiaries then will need to appeal and reapply into the program. So all these trends are tough because you can't really forecast them for a population that we've not dealt with before. And we're working with our clients to the data and update our volume forecast accordingly. And there could be new trends as well that present themselves along the way. So when they do, we'll continue to analyze and learn and update our outlook, but that's the way we're seeing things presently.

Speaker 4

David?

Speaker 6

Yes. So just to add, our Q4 projection that is included in our guidance does have us in the previously communicated range of $0.15 to $0.30 a quarter benefit from those volumes. As I have noted before, isolating the impact precisely of the redeterminations is imperfect. And since we've now provided a fairly specific Q4 forecast Inclusive of a full quarter of redeterminations, we think this is more of a helpful way to guide than ongoing efforts The specific impact of this one component of our volume.

Speaker 3

Great. Thank you for that. Maybe we can have a little bit more of a discussion on the OUS segments, just in terms of the employment contracts that have been You're causing you had some problems there. Just how fixable is it? And what are the steps that you need to take to kind of get The margin is back on track to where you think you can get to that 3% to 7% range?

Speaker 4

Sure. So Charlie, I'll take that and of course welcome David's additional comments. We've stated pretty We're not satisfied with the financial performance of the business and we're very committed to shaping the segment, bearing in mind that there are macroeconomic headwinds that we're facing And we're seeing low unemployment rates in a number of countries, including the United Kingdom and in the UK, in particular, there's persistent high inflation Across the board and that includes with wages. So it's a difficult environment to operate in. I will say we're seeing early indications in the United Kingdom that the unemployment rate may grow in the next There are certain macroeconomic predictions that are being made that would suggest that unemployment would bottom out at about 4.1% in calendar 'twenty three and then increase to 4 point in calendar 24.

Speaker 4

Depending on whether we see that and see that outcome there and maybe in other economies like Australia that could provide an increased flow of job ready beneficiaries Into the system and provide some relief to that dynamic that we've been seeing. Overall though, I guess I would back out a ways and just say the Key to improving margins in the OUS portfolio in our view is to continue to scale the business and diversify the business, but in those geographies where you can really have a larger footprint. So we see our established geographies like the United Kingdom, followed by Australia and Canada as being those anchors. We're also excited, I should note about our growth in the Gulf region, which has been fantastic. We've been operating there for over a decade now and I think that we've really Earned a position as a trusted supplier to governments there.

Speaker 4

There are increasing demands for government programs from their citizens and certainly, that environment is supported by strong government balance sheets. So what this means is we're going to continue to focus our efforts on addressing the underperforming strategic areas of the business and the portfolio with all options being considered. Getting back to breakeven is our first objective and we believe over time, a well diversified but narrower footprint can deliver acceptable margins even above the near term target that we've established at 3% to 7% Towards the higher single digit margins. David, would you want to add anything further to that?

Speaker 6

Sure. I would completely agree and we certainly aspire to at least High single digit margins in this segment, albeit the timeline to achieve this would likely be over a multi year period. So what we're doing now really with urgency is moving to be at least a breakeven, if not better.

Speaker 3

Great. Thank you very much. Helpful.

Speaker 5

Thanks, Charlie. First, David, I've got a couple of emailed questions here for you. So first, if you Well, as you look forward to results normalizing at higher margins across each segment, how should we consider the cadence of improvement from VA exams Sure.

Speaker 6

This is David. I'll begin with the VA exam. When we look at the VA claims inventory log, which is publicly available, we see that the number of claims in the queue is growing every day even with the added capacity by us and the VA and the other providers. So this certainly supports our expectation that the strong volumes here will continue for the foreseeable future and surely through fiscal year 'twenty four. We're also continuously implementing technology and process enhancements to further optimize our operations there, of course, being done in concert with the VA, leveraging our close partnership.

Speaker 6

So turning to redeterminations, I've touched on this a bit already. While the unprecedented nature of the unwind has It's difficult to forecast with precision. We've definitely learned more and are applying this to our future forecast. And based on that, we do now believe that redetermination volumes will continue to grow, reach a peak in the first half of our fiscal year twenty twenty four And then settle into a range that is steady state and still very accretive compared to the pandemic period.

Speaker 5

Thanks, David. Last question, free cash flow, any early thoughts around FY 'twenty four? Yes.

Speaker 6

So I would go back to what we committed and guided to in our Investor Day last year, which should still hold, which is that we would we expect at least 1.3x free cash flow to GAAP net income, and that's really as a result of our non cash expenses like intangibles, amortization and stock comp And then just a reminder that cash flow can certainly be lumpy quarter to quarter based on changing working capital needs and sometimes just the timing of certain payments or collections.

Speaker 5

Great. Thanks. And Bruce, last one for you. What's the latest on EDAS? And how do you see task orders helping FY 'twenty four?

Speaker 4

Well, we still expect to see task orders, the first half quarters on the IRS EDOS program coming out soon. We know that they've stood up the program office And they're working with their counterparts internally to determine which task orders to put through the pipeline initially. Our other view is that in FY 'twenty four, we're not currently dependent on a high contribution from this new work from EDOS, Rather, it's really a program that's going to be multiyear in nature and support to a certain degree FY 2024, but certainly the out years. EDOS contract is a vehicle that we announced last quarter, as folks will remember. And due to its nature, it effectively has a $0 value in our reporting of the awards.

Speaker 4

So the subsequent task orders that we'll bid on will carry the value and come through our pipeline and ultimately be bid on obviously by us and the other awardee.

Speaker 5

Great. Thanks for joining us and that concludes the Q and A session. Operator, back to you.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Key Takeaways

  • MAXIMUS delivered Q3 revenue of $1.19 billion, up 5.6% year-over-year (6.7% organically), with adjusted operating margin of 6.9% (8.7% excluding a $22 million cybersecurity charge) and EPS of $0.78 ($1.04 ex-incident).
  • U.S. Federal Services revenue grew 11.1% to $584 million with margin improving to 12.7%, driven by a ramp in VA medical disability exams and student loan servicing, while U.S. Services revenue rose 12.5% to $449 million as Medicaid redeterminations resumed, lifting margin to 10.5%.
  • The Outside the U.S. segment saw revenue decline 22.5% to $156 million and a deeper operating loss, primarily from a $14.4 million hit to outcome-based employment services contracts amid weaker macroeconomic assumptions, prompting divestitures and cost-saving measures.
  • Management recorded a $22 million expense in Q3 for investigation and remediation of a third-party MoveIt cybersecurity vulnerability, which cut margin by ~180 basis points and EPS by $0.26, but expects no further material costs.
  • Looking ahead, Q4 guidance remains largely intact with full-year revenue narrowed to $4.875–4.975 billion and adjusted EPS at $3.96–4.14 (including cyber costs), while FY 2024 is expected to deliver mid-single-digit organic growth, higher margins, continued debt reduction, and a normalized tax rate of 23–23.5%.
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Earnings Conference Call
Maximus Q3 2023
00:00 / 00:00