Maximus Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2024

There are 6 speakers on the call.

Operator

Greetings, and welcome to the MAXIMUS Fiscal 20 24 Second 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 and ESG for MAXIMUS.

Operator

Thank you, 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 10 ks.

Speaker 1

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 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 engaging the quality of our financial performance, identifying trends and 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.

Speaker 1

And with that, I'll hand the call over to David.

Speaker 2

Thanks, Jessica, and good morning. Our second quarter results were exceptionally strong, driving the 2nd consecutive raise to our fiscal 2024 guidance. Demand remains high across our programs, which elevated volumes this quarter and perhaps more importantly is indicative of stability returning following the disruptive years of the pandemic. We are also acutely focused on cost management, which had a positive impact to this quarter and has added potential to further improve our bottom line in future periods. Turning to results, MAXIMUS reported revenue of 1.35 $1,000,000,000 for the Q2 of fiscal year 2024, which represents 11.7% year over year growth or 12.6% on an organic basis.

Speaker 2

Similar to last quarter, growth was driven by expanded programs in the U. S. Federal Services segment and a combination of resumed and expanded programs in the U. S. Services segment.

Speaker 2

Adjusted operating income margin was 11.1 percent and adjusted EPS was $1.57 for the quarter, which compares to 7.2% and $0.81 respectively for the prior year period. By our estimations, we set a high mark for earnings this quarter with the strength coming from no single area, but rather across our portfolio of domestic work. A portion of the over delivery in the quarter came from extra volumes in U. S. Services tied to Medicaid redetermination.

Speaker 2

Let's go to the segments. For the U. S. Federal Services segment, revenue increased 20.1 percent to $702,000,000 which was all organic and driven by volume growth on expanded programs, including the VA Medical Disability Examination or MDE contracts. The operating income margin for U.

Speaker 2

S. Federal Services in the 2nd quarter was 11.9% as compared to 8.2% in the prior year period. The segment margin this quarter was slightly better than expected, thanks to our MDE contracts exceeding their production goals and continuing to execute well in an environment with high demand for assessment. For the U. S.

Speaker 2

Services segment, revenue increased 8.1% to $486,000,000 also all organic. A portion of the growth stemmed from resumed Medicaid redetermination activities, which weren't present last year. The segment also has a large state based assessment program, which has ramped in previous periods and contributed to growth on a comparative basis. The U. S.

Speaker 2

Services operating income margin was 14.0% in the Q2 of this year. The prior year period's margin of 9.5% was before redetermination activities resumed. It's worth noting that this quarter's margin of 14.0 percent is likely the high watermark for the segment at least in the near term, bearing in mind our longer term target margin for this segment is 11% to 14%. As I mentioned earlier, a portion of this segment's over performance came from extra volumes tied to the restart of Medicaid redetermination, which is a process that has been playing out over the last several quarters. We continue to forecast slight segment margin normalization after the Q2 as the relatively limited amount of extra volumes conclude, meaning landing closer to the middle of that 11% to 14% margin range for the back half of the year.

Speaker 2

That said, the outlook is slightly improved for the back half as well and driven by improvement to other core areas of the business. Compared to this time last year, we are quite pleased that the segment is reflecting stabilized operations after being heavily disrupted during the pandemic. And in the case of Medicaid redetermination, which has occupied the spotlight recently, they should go back to quietly running in the background. Turning to the Outside the U. S.

Speaker 2

Segment, revenue decreased 7.2% year over year to $161,000,000 for the quarter. Most of the decline was attributable to less revenue following completed divestitures to date, while the rest of the segment was flat on an organic basis. The segment made a small profit of $700,000 as compared to an operating loss of $3,700,000 in the prior year period. Our commitment to reshape this segment is in progress and we remain on target this fiscal year. In the meantime, recent results demonstrate reduced volatility to the Employment Services portion of the segment now that the pandemic is behind us and we expect this trend to continue.

Speaker 2

Let's now turn to cash flow and balance sheet items. Cash provided by operating activities for the Q2 of this year was $130,000,000 and free cash flow was $105,000,000 DSOs finished the quarter at 62 days. Our free cash flow guidance for the rest of the year has increased due to the improved earnings forecast. We ended the 2nd quarter with total debt of 1 point and our net debt to EBITDA ratio improved from 2.1x to 1.7x. 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.

Speaker 2

Our long term target debt ratio remains 2 to 3 times. However, in the current interest rate environment, our bias is toward the lower end of that range. We are now below that range and are comfortable in the near term continuing to pay down to build capacity for future M and A, while also maintaining an opportunistic share repurchase program. On that front, post quarter end in the month of April, we repurchased nearly $20,000,000 worth of shares. Turning to fiscal year 2024, we are pleased to be raising guidance for the 2nd time with increases to both the top and bottom line guides.

Speaker 2

Revenue is now expected to be between $5,150,000,000 $5,250,000,000 which is up $75,000,000 at the midpoint compared to the previous guide. Adjusted operating income is estimated to be between $540,000,000 $560,000,000 which is an increase of more than $34,000,000 from prior guidance using the midpoints. Adjusted EPS excluding intangibles amortization and divestiture related charges is now projected to be between $5.65 $5.85 per share. Using the midpoints, this reflects a $0.40 raise from prior guidance and up $0.55 from our initial guidance in November. As a result of the improved earnings forecast, we are raising free cash flow guidance to between $330,000,000 $370,000,000 for fiscal 2024.

Speaker 2

The improved outlook reflects higher expectations for both organic revenue growth and margins. At the guidance midpoint, organic growth is projected to be nearly 7%, up from 5% in prior guidance and adjusted OI margin is 10.6%, up from 10.0% in prior guidance. Let me add some color on earnings in the back half of the year. We expect higher earnings in our fiscal Q3 compared to the 4th quarter due to a combination of factors in our U. S.

Speaker 2

Federal and U. S. Services segments. First, we are planning on some investment costs in the U. S.

Speaker 2

Federal segment in the 4th quarter, which will begin driving further operational efficiency in fiscal year 2025. On a full year basis, the Federal segment margin should be approximately 12%. 2nd, for the U. S. Services segment, as mentioned earlier, we expect this segment's margin to be more in the middle of the 11% to 14% target range for the back half of the year as volumes related to Medicaid The Outside the U.

Speaker 2

S. Segment remains on track to be slightly above breakeven for the full year, assuming status quo for the current footprint. We do expect further shaping of the segment to occur this fiscal year in an effort to deliver consistent profitability. A few other assumptions for fiscal 2024 include interest expense of approximately $77,000,000 and intangibles amortization expense of approximately $89,000,000 To conclude, I would like to congratulate the entire MAXIMUS team on executing another terrific quarter and reaffirming my comments on prior calls that the business is healthy with the ability to build momentum from previous quarters. The domestic segments both hit the upper ends of their long term margin targets this quarter, demonstrating the business has the earnings power that we have long signaled.

Speaker 2

Work remains on the outside the U. S. Segment and we have been clear that action in the remaining half of the year is a management priority. While we have been quite successful in navigating a period of higher rebid activity, there are 2 contracts that have some unique circumstances that Bruce will discuss further and do not change our positive view of the business nor disrupt the momentum we have built. Finally, our balance sheet is very strong as our debt ratio now sits below our long term target range.

Speaker 2

This provides us flexibility and capacity to execute on our capital allocation priorities. With that, I'll hand the call over to Bruce.

Speaker 3

Thanks, David, and good morning. As David presented, we have just completed a very strong quarter. Revenue grew 12.6% on an organic basis. Adjusted EPS was $1.57 up from $0.81 for the prior year period. Adjusted operating margin continues to meet our target range of 10% to 14%, with updated guidance now implying a 10.6% margin for full fiscal year 2024.

Speaker 3

And finally, we're increasing guidance for the remainder of the fiscal year. This is a notable accomplishment for the company as a whole, following our solid Q1. Congratulations to our program teams and our critical support functions, all of whom remained focused on quality delivery and are committed to meeting the needs of our clients. For the last several quarters, the company's top line revenue growth has been driven by expansion on current programs. This is not new for us.

Speaker 3

Building solid customer relationships through quality delivery has reliably enabled our teams to increase volumes and expand scope, ultimately benefiting our top and bottom lines. This quarter in particular, we continue to see increased volumes in our VES business, where as David mentioned, MDE claims exceeded their production goals. Growing current programs, including movement into near adjacencies, is fundamental to the MAXIMUS business model. That said, we're also keenly focused on new work wins, which underpin our long term growth goals. In this vein, and in the context of our MAXIMUS Forward initiative, we are making investments in our business development, capture and proposal teams and their supporting tools to help ensure their success.

Speaker 3

Across all segments, we have made a number of key hires. These leaders come to us with years of experience and proven capabilities. More specifically, as part of a reorganization within our U. S. Federal capture and proposal teams, our leaders are now aligned to the market areas and agencies where they bring the most expertise.

Speaker 3

This alignment allows heightened focus on the customer, enabling us to build better relationships and gain a deeper understanding of our clients' needs. We are seeing early success with some of the investments made thus far. Shortly after the quarter close, we were awarded a few contracts that align well with our strategy. We were awarded a $70,000,000 single award BPA with the Department of Energy or DOE, Office of Intelligence and Counterintelligence, providing specialized software application development, technical advisory and consulting services. Our support sits at the core of a crucial mission within the DOE enterprise at a pivotal moment for the agency.

Speaker 3

Security of our nation's critical infrastructure is an imperative, and MAXIMUS will provide support at the nexus of DOE headquarters, the National Labs and the broader intelligence community. Also in April, we were awarded our first task order on the OPM Customer Support Center or CSC BPA, Valued at nearly $21,000,000 over 3 years, including option periods, this win launches our support for OPM's expanded mission to provide benefits enrollment services for certain federal agencies, beginning with U. S. Postal Service employees. Under the task order, we will be building out a modern cloud based contact center platform and delivering customer support services.

Speaker 3

Delivering both staffed operations and innovative technology, the OPM CSC task order takes full advantage of our recently announced MAXIMUS Total Experience Management or TXM solution. The TXM solution supports our customer services digitally enabled strategy pillar, the goal of which is to elevate customer experience to achieve higher levels of satisfaction, performance and outcomes through intelligent automation and cognitive computing. DXM implements our strategy by helping federal agencies deliver trusted information and government services simply, consistently and securely. This solution seamlessly integrates people, experience, data insights and secure technologies into 1 digitally powered platform to reimagine government service delivery seamlessly across phone, text and chat channels. While on the topic of new wins, let me turn to our award metrics and pipeline.

Speaker 3

For the Q2 of fiscal 2024, signed awards totaled $568,000,000 of total contract value. Further, at March 31st, there were $797,000,000 worth of contracts that had been awarded but not yet signed. These awards translate into a book to bill of approximately 1.1 times for the trailing 12 month period. Our pipeline at March 31st was $37,800,000,000 compared to $37,700,000,000 reported in the Q1 of fiscal 2024. The March 31 pipeline is comprised of approximately $1,310,000,000 in proposals pending, dollars987,000,000 in proposals in preparation, and $35,500,000,000 in opportunities tracking.

Speaker 3

Of our total pipeline of sales opportunities, approximately 75% represents new work. Additionally, 56% of the $37,800,000,000 total pipeline is attributable to our U. S. Federal Services segment. Our pipeline figures are reported as of March 31.

Speaker 3

As a result, they do not include 2 important rebids that we were tracking, but on which we have greater clarity today. The first is our contact center operations contract with the Centers for Medicare and Medicaid Services, which we discussed at length last quarter. CMS has recently reported that the RFP is expected to be released on or around May 16. As a reminder, CMS is recompeting the program earlier than expected with the express purpose of including a labor harmony agreement requirement. While we and other industry stakeholders have respectfully communicated our disagreement with this decision, we, of course, remain committed to our customer and the citizens we serve as this matter runs its course.

Speaker 3

We have and will continue to provide best in class customer service to CMS and the tens of millions of Americans we interact with each and every day, most of whom are senior citizens. As I mentioned on our Q1 call, since assuming operational responsibility for the CCO contract, we have consistently met or exceeded all contractual service levels with uninterrupted operations, leading to the highest independently measured customer satisfaction in the history of the program, while accommodating occasional labor organizing events, which we have unequivocally respected. The second point I will make pertains to our medical disability exams contracts with the Veterans Benefit Administration or VBA. Several of these contracts will also be up for rebid later this year. The early rebid is required because the contracts in place include a ceiling on the claims volume.

Speaker 3

As we have communicated, volumes have increased significantly since the passing of the PACT Act. Therefore, the VBA must recompete some, but not all of the contracted regions in which we work. We remain optimistic about the outcome given our strong relationship with the VBA, demonstrated delivery capabilities and are continuing to invest in our operations. Our ability to deliver high quality exams at scale in a complex programmatic and operational environment positions us well to remain a committed partner to the customer and the veterans we are fortunate to serve. Returning to the success of the quarter, David shared that our adjusted operating income margin forecast is a healthy 60 basis point improvement for the full year.

Speaker 3

That's attributable in part to the strong second quarter results where adjusted margin was 11.1%. Some of this success is driven by the MAXIMUS forward initiatives I've mentioned on recent earnings calls. Fundamentally, this effort is a structured evaluation of the design, processes and resources that drive our delivery. We've taken a hard look at both client facing programs and our corporate functions, asking tough questions, promoting innovative ideas and making hard but necessary decisions. Example initiatives we've shared with you include the AI agent assist and AI training pilots presented last quarter, currently in progress and showing promising results.

Speaker 3

The hiring of our Chief Digital and Information Officer or CDIO was an early decision driven by MAXIMUS Forward. Under the leadership of Derek Pledger, the department is on its way to becoming a technology based and data driven organization designed to accelerate delivery of business outcomes, enhanced customer experiences and technology differentiation to drive competitive advantage. Since joining, Derek has completed a comprehensive review covering a lot of ground in a short amount of time and developed a plan aligned with our expanded vision for technology at MAXIMUS. He is aligning technical solutions to enterprise strategy and business needs, including key pipeline opportunities. We are prioritizing investments in research and development activities that can provide greater operating leverage and working with our operations to develop cutting edge technologies ahead of our customer needs.

Speaker 3

As part of the changes implemented, Derek has added a Chief Technology Officer to his team. Our CTO will lead our technology and innovation organization and will be vital for setting and executing our strategic technology direction. Within the CDIO organization and also driven by the MAXIMUS Forward program, we have recently invested in our supply chain through acquisition of 1 of our critical IT suppliers, which is expected to be accretive post integration. The group has been a long term contributor to the success on our U. S.

Speaker 3

Services programs, bringing extensive engineering and research talent to enable greater depth, scale and capabilities in administering large critical government programs. We are excited to bring their team in house and leverage their capabilities across our portfolio. While the success of the MAXIMUS Forward program is driving shareholder value, it's also allowing us to continue investing in our people. Enhancements to our employee value proposition are driven by employee feedback and the continued effort to be market competitive in the compensation and benefits we provide and a long term employer of choice. Our driving force is to provide for the physical, mental and financial well-being of our employees and their families.

Speaker 3

Over the past few years, our focus on our employee value proposition has led to significant enhancements to our benefits program. Examples include increasing the employer contribution and reducing deductibles on all HSA plans, launching a PPO plan and adding free telehealth options, all in the face of a macro backdrop of rising healthcare costs. As we look ahead at our 2025 benefits plan, we are excited to continue enhancing our offerings. The return on investments made in our people is clear when analyzing our recent independently conducted global employee engagement survey results. The KPI I find most meaningful is the employee Net Promoter Score, which measures employee loyalty to the company.

Speaker 3

Fiscal year 2024 survey results showed an overall Net Promoter Score of +31. This is an 11 point increase from the fiscal year 2023 results and a 26 point increase from 3 years ago, when we first asked PwC to conduct this annual survey. MAXIMUS has created a positive employee experience by fostering a culture of listening, feedback, transparency and accountability. I'm very grateful to everyone involved in driving such impactful change throughout our organization. As I wrap my prepared remarks, I'd like to take a moment to highlight our continued recognition as a leader in veteran employment.

Speaker 3

MAXIMUS has once again been honored as a Vets Index's 5 star employer, marking the 3rd consecutive year we've been recognized for our commitment to veterans and military connected individuals. This year, we were also proudly named a top veteran employer by military.com. These accolades underscore our dedication to recruiting, hiring, retaining, developing and supporting military personnel and their families. Our initiatives celebrate the unique skills and experiences that veterans bring to our organization, reflecting our deep rooted respect for military service as a core part of our identity and mission in public service for nearly 5 decades. In closing, we continue to be pleased with our fiscal year 2024 performance thus far and remain optimistic about the growth of the company through expansion in our core business, as well as a heightened focus on investment in new work opportunities.

Speaker 3

And with that, we'll open the line for Q and A. Operator?

Operator

Thank you. The floor is now open for questions. Today's first question is coming from Charlie Strauzer of CJS Securities. Please go ahead.

Speaker 4

Hi, good morning.

Speaker 3

Good morning, Charlie.

Speaker 4

Just a quick question. Obviously, very robust quarter, especially in federal, sales and margins kind of seeing some good uplift kind of ahead of schedule versus your prior guidance. Just when you look at that and the drivers, did you see any revenue pull forward? Maybe give us a little more color behind the drivers of that in the quarter?

Speaker 3

Sure. Great. This is David. Good morning, Charlie. So as I mentioned, there was no real single area that led to the Q2 over performance.

Speaker 3

It was a broad strong performance across the portfolio. The VA and the volumes in the federal segment were certainly a component that were particularly strong in the quarter. I did allude to some benefit from extra volumes tied to the Medicaid unwind effort, which ends soon, though it remains difficult to precisely quantify that. But I would leave you with the impression that this was only some of the Q2 over delivery. While I'm on it more broadly about the topic of redeterminations and sharing what we see today, Medicaid enrollments are landing a little higher.

Speaker 3

And as we expected, we are seeing continued engagement from the portion who have been redetermined and retained on the Medicaid role. So that effectively means it's back to business as usual for us for the work tied to the annual Medicaid renewals. And the normal base of beneficiaries that existed pre pandemic is engaging in typical fashion in the post pandemic environment, which is good since that drives activities in our operations. Lastly, the fact that there's slightly higher population doesn't hurt either. And while I've got the mic, as I reflect on the quarter, I'll offer one last thing that I'm especially proud as reflecting on the quarter for the team delivering on the financial commitments that we laid out back 2 years ago to the months in May of 2022 at our Investor Day.

Speaker 3

So we had said sustainable mid single digit organic growth and we delivered 7% in fiscal year 'twenty three and now guiding to near 7% this year. U. S. Services in particular, which was in the midst of the public health emergency, we guided 11% to 14% margin. Once the redeterminations resumed, we just posted 14% in a peak quarter and guiding to the middle of that range going forward.

Speaker 3

U. S. Federal operating at the high end of their 10% to 12% guidance we gave and then for the total company, we guided 9% to 12% adjusted OI margin. Our guidance for this year is now just above the midpoint of that. And now we're really focused on moving up further in the longer term range that we gave of 10% to 14%.

Speaker 3

Then last week, we've also met our commitment to delever in the near term having just crossed below the 2 to 3 times target. So a lot of milestones that we're proud of and much credit to the team here for delivering on these commitments.

Speaker 4

Great. Thank you for that. And just some housekeeping on the guidance. You talked about Q3 being stronger than Q4 in the back half. Any sense of the cadence from Q2 to Q3 that we should factor

Speaker 3

in? Sure. Well, yes, a couple of things. I mentioned in my remarks that we have some planned investments in the Q4. So first I'll talk about kind of Q3 to Q4 and why we a little more color on why we guided Q3 being higher than Q4.

Speaker 3

So a component of those investments are the start of expensing on some new internal capitalized software efforts. I've shared before on prior calls that we have increased investments in technology, particularly in the federal business that will provide enhanced efficiency, especially in highly scaled areas of the business. So in this area in particular, the Q4 is expected to be a transition period where we've been prudent and anticipating some duplicative costs. So in fiscal year 2025, we expect the legacy cost to sunset while the savings and the return on those investments would continue forward. So all that means is the Q4 is more of the outlier in our view that may be a bit below the core run rate, which would be manifest in the U.

Speaker 3

S. Federal Services margin. We are also forecasting some moderation in U. S. Services volume, both from Q2 to Q3 and then also a little bit more from Q3 to Q4.

Speaker 3

So that's a piece of the Q2 to Q3. So looking forward from Q4, our continued efforts that Bruce mentioned in his prepared remarks, including the MAXIMUS Forward initiative that we described, do give us confidence that there's more opportunity for continued margin improvement beyond fiscal year 'twenty four, which would mean continuing to move up in that range that I just quoted, the longer term range of 10% to 14% adjusted OI margin. And then of course, outside the U. S, our continued work shaping and improving the profitability there should also support further improvement.

Speaker 4

Great. Thank you.

Operator

Thank you. The next question is coming from Bert Soudin of Stifel. Please go ahead.

Speaker 5

Hey, good morning, Bruce and David.

Speaker 3

Good morning, Burt. Hope you're well.

Speaker 5

Thank you. Maybe I'll start on the VA side. So I mean, look, if we look go back last year, thought that was going to be a tailwind with TACT Act, anything that's played out more so than anyone could have anticipated. And if we look at where current inventories are and sort of where the burn rate is, changes, but it would indicate somewhere in the 1.5 to 2.5 years of sort of continued excess demand. I guess as you think about the recompete, what do you think changes?

Speaker 5

1 of your competitors said they think that'll wrap up by September. I'm curious if you think that's the case. Does that become does that drive pressure to your margins in the business? Is it an opportunity to get more share? And I guess do you agree with the runway sort of laid out of potential sort of the runway for MDEs to be strong for a longer period of time?

Speaker 3

Yes. Bert, David is going to take this one and I may add a little color commentary at the end. Great. Yes. A few things about the pending rebid.

Speaker 3

As Bruce mentioned in his remarks, the way we view it, this is a required action by the government, which is more procedural in nature due to hitting the ceiling on those claims volume. So really the result of some good news with the volume growth. Not only do we anticipate continuing to work uninterrupted until the process is complete, but we're still making investments to increase capacity in an effort to drive high quality and ongoing improvements to the veterans experience. The key really for us and any provider is the ability to operate at scale. This is a large program.

Speaker 3

Our experience tells us it's complex with an extensive nationwide network of clinicians. And while we'll be appropriately paranoid in the recompete process as always, we do anticipate being able to maintain scale and volumes given significant operational advantages and experience that we believe we possess. Therefore, we would agree with your assertion about the volumes remaining elevated for the foreseeable future as evidenced by the inventory. If you said that we think it will take some time for that to return to kind of normal levels. Based on the timeline for the rebid we've seen thus far, we also agree with what you said that the new contracts would essentially align with the start of our next fiscal year, so around September 30 timeframe.

Speaker 3

So worth pointing out no impact on our fiscal year 2024 expected. And as far as the financial details, I think at this point we can't really speculate what may or may not change as a result of those. I would agree with that, Burton. In fact, I'd only add one thing and that David mentioned, we're making significant investments in internal use software to further streamline processes and build capacity in that business. So we feel that those investments and when they will come online and be productive for us overlap well with this re procurement process.

Speaker 3

And so that in total, as we exit this fiscal year and go into the next fiscal year, we should be in a solid position in terms of capacity to handle the volumes in the newly completed program.

Speaker 5

Got it. Very helpful. Thank you. I guess maybe following on to that, like if we think about some of the out performances here, MDs have definitely helped, redeterminations, returning and the peak activity have helped. Could you maybe just give us or frame for us what's your expectation for like the next leg of growth is?

Speaker 5

It sounds like MDEs will continue to contribute to growth and profit redeterminations. I guess there's some opportunity perhaps to pick up states and just a higher population count. We'll keep that steady. But you're operating sort of on the higher end of mid single digits, almost in the high single digit organic growth range and your margins have been pretty strong. I'm just trying to get a feeling for sort of your confidence for that to continue as some of those tailwinds at some point start to moderate.

Speaker 3

Sure, Bert. I'll take that. So I would say, look, first of all, we continue to be very focused on executing on the 3 pillars of the strategy that we laid out back in May of 2020 2. And the one that I'd focus on right now is the technology solutions or technology modernization initiatives. Clearly, an area that's had a lot of focus and attention is the IRS EVOS contract.

Speaker 3

And that contract in our view is really just getting started in terms and so still very much in the early stages. It's been noted that the original awardee alongside us has been awarded one award funded at a funded value of about $35,000,000 and that's the highest award thus far. So we feel like we're still early days on EDAS and that there remain excellent opportunities and we remain very bullish on our ability to be recognized as a valuable partner in providing solutions to the IRS through that vehicle. At the same time, it's probably worth broadening the aperture and just speaking for a moment about IT modernization more generally in the federal environment. And I noted in my prepared remarks that, we're very pleased to have been awarded the BPA with Department of Energy, which includes specialized software, application development, technology consulting services.

Speaker 3

And as I take that and kind of look at the broader pipeline that we see out there, we do see a strong pipeline of new work opportunities that really align well with the technology focused competencies of the organization that are really a combination of the 2 combinations we did or acquisitions we did going back to 2015 with the Accenture business and then the Attain Federal Business in 2021. Those competencies and they're in high demand presently are digital modernization, cyber, hybrid cloud and infrastructure, AI and advanced analytics and data management because you can't do AI well without having the data in order, and then low code, no code solutions. So we continue to build out our competencies in those five areas. And I would say you got to make sure, of course, that the demand signal aligns with that. So I'd go back to some comments I made on the last quarter call that spoke to our confidence in the customer demand that we're seeing for longer term IT modernization initiatives.

Speaker 3

So like EDOS, we think those will continue, particularly for agencies that have been thoughtful and have planned out their procurements, many of which are already in process. To give you an example, many businesses in the industry are tracking an anticipated BPA from the Department of Energy that has a $10,000,000,000 ceiling on it. That's expected to go into the procurement process later this year. And that would span any potential change in the political setting in Washington. So to summarize, we feel that this area of IT modernization, technology services, particularly the competencies that I mentioned represent an excellent organic growth vector for the company as we move forward.

Speaker 3

But at the same time, we remain focused and I think this is one of the company's greatest competencies in combining technology with business process services to deliver programs at scale. And more and more these days, RFPs that we see do show a flavor or a combination of those where you need to deliver, for example, a cloud based technology solution that meets federal certification requirements, which themselves are changing with CMMC coming along, but also combined with the labor component to meet the mission requirements of the procuring agency. So we feel strongly that those two areas really when taken together represent a solid underpinning for the growth targets that we've laid out for the business. And I think David is going to add something to that. Yes.

Speaker 3

And Bert, just further on your margin question, at the risk of being repetitive, we do intend to continue to drive margin improvement up in that 10% to 14% range with what I mentioned before kind of the continued focus on standardization and operational efficiency through the MAXIMUS Forward program, as well, of course, with our ongoing efforts with the outside the U. S. Portfolio.

Speaker 5

Great. Just one last one for me. Can you give us you highlighted the VAMD recompete and the CCO recompete. I guess just maybe like a 2 part clarification. On the CCO, would you still be interested in bidding that if the terms change significantly?

Speaker 5

And like what's the timeline on that in your view? And then are there other recompetes to be aware of? Or is your profile pretty thin otherwise?

Speaker 3

I'll go ahead and address the first piece, the CCO rebid. And I don't want to offer too many comments as it relates to strategy here, obviously, because it's an active procurement process. When you really look at the context of the reprocurement and consider that, as I outlined in my prepared remarks, it's interesting but not entirely surprising that we're seeing continued action by the government here. I noted that there was communication posted last week suggesting an RFP date on or around May 16 and that the procurement would cover a contract for a transition period plus 9 option years. It's important to note that no further details are provided, including any specifics related to the planned labor harmony agreement requirement, which we understand is really the sole basis for triggering this premature readout of a successfully performing contract.

Speaker 3

Also, as I mentioned on the last call, a procurement of this size in the BLEXI can typically take up to a year or more to complete and it's not uncommon for the process to take up to 3 years. So we'll note that there is a strong likelihood that an RFP could trigger pre award protests to the GAO and potentially further given the unprecedented nature of the anticipated labor harmony requirement. It's also important to note here that further complicating the path forward is that there are significant operational impacts that would need to be accommodated and considered under resulting new contracts, including flow down requirements to significant small business subcontractors who may be, in our view, least equipped to comply. So it begins to get complicated when you kind of take theory and put it into practice. I mentioned in my prepared remarks that we remain very committed to continued high quality services while the rebid matter plays out.

Speaker 3

And but we do have genuine concerns regarding the impact of the rebid on the ecosystem of the So the theory behind the Labor Harmony Agreement is to ensure continuity of operations. And yet we've repeatedly noted our record of service continuity. And indeed, our view of the evidence suggests that any re procurement only increases the risk of service failure to tens of millions of seniors. So in summary, while the RP when the RP is released, we'll evaluate it comprehensively. We'll determine our appropriate course of action at that point in time, giving due consideration to all of our available options.

Speaker 3

So at this point, I'd probably stay away from speculating further on the competitive environment, but I'll just note that it's a major area of focus for the business. And Bert, on your second point, nothing else large on the in the near horizon to call out.

Speaker 5

Great. Great color,

Speaker 3

guys. Thank you.

Operator

Thank you. Time and enjoy the rest of your day.

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Earnings Conference Call
Maximus Q2 2024
00:00 / 00:00