Investors hunting for fast-growth technology firms that are focused on an out-of-the-way sector should check out little-known Maximus Inc. (NYSE: MMS). Founded in 1975, Maximus provides state and local organizations with health and human services program management and consulting services. It had $320 million in revenues last year.
President and CEO David Mastran spoke with The Motley Fool about integrating its string of recent acquisitions, competition with big guns such as Lockheed Martin (NYSE: LMT), and e-commerce trends in the government space.
TMF: Tell us about Maximus and how it makes money.
Mastran: We help government serve the people. Our focus is primarily on state and local government. We provide three types of services: information technology services like system integration; consulting in a wide range of areas, such as finance and airport management; and program management services, where we literally take over government programs and run them. That's the biggest part of what we do.
TMF: You take over healthcare programs?
Mastran: Health and human services, that's right.
TMF: Give us an example.
Mastran: Areas such as child support enforcement programs, child care programs, welfare, and administration of managed care program. We don't deliver services like an HMO, but we work on behalf of the state to enroll people in HMOs and administer them.
TMF: Is the administration of healthcare programs primarily an information technology challenge?
Mastran: There are three parts. One is systems integration, where you're pulling together all these legacy systems: claims processing, Medicaid eligibility, actuarial systems. The second is forms processing. We get thousands of enrollment forms in the mail. It's back-office processing. The final component is outreach where we have people in the field that go to welfare offices and community-based organizations to describe the healthcare program choices that are available to the population.
TMF: Is that how you make money?
Mastran: Government operations is about 60% of our revenues.
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The states and local governments spend roughly $25 billion to $30 billion a year administering those systems, and probably less than $1 billion is outsourced at this time. There's plenty of upside.
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TMF: What produces the bulk of your profits?
Mastran: The profit margins in government operations are around 10% pretax. Consulting is typically in the 17% or 18% range. The company-wide average is about 14% right now.
TMF: How many states and local governments are you working with?
Mastran: About 4,000. We're basically in most of the counties in the country and all the states. We have 130 offices around the U.S.
TMF: What's behind the outsourcing trends that are driving your business.
Mastran: Any time a government agency has a new program to administer -- the most recent one was the child health insurance program -- they tend to outsource the whole thing. They don't want to increase the size of the bureaucracy and the unions have no claim on existing jobs. They'll outsource the system and the operation of the system because traditionally it takes two to three years to build a proprietary system. They can get the whole package, a turnkey operation, by outsourcing.
TMF: Do you have a sense for the size of the market?
Mastran: Currently, state and local governments distribute about $300 billion in benefits in the health and human services area annually. This doesn't include Medicare or Social Security -- it's just state programs. The states and local governments spend roughly $25 billion to $30 billion a year administering those systems, and probably less than $1 billion is outsourced at this time. There's plenty of upside.
TMF: Of course there are plenty of incumbents in these fields, the big systems integrators like Electronic Data Systems (NYSE: EDS).
Mastran: Well, not in the outsourcing area. Generally we're the incumbent because we have the majority of outsourcing contracts. We do compete against Lockheed Martin at times. We compete with them in the welfare to work area.
TMF: Where does your toughest competition come from?
Mastran: Probably Lockheed.
TMF: What's your competitive advantage?
Mastran: We don't make fighter jets. The primary focus is health and human services with state and local governments.
TMF: There's a lot of complexity in government IT systems. Is that your barrier to entry?
Mastran: It's far more complex than anybody would believe. Maximus has been doing this for 25 years. We have cost models, we have computer systems already built, we have relationships that go back a long time. For someone new to come in and compete against us is tough.
TMF: How many acquisitions have you made in the last few years?
Mastran: We've done about 12 to date, but they tend to be small. We're trying to fill gaps in our service spectrum.
TMF: In health and human services?
Mastran: No, in two ways. One is functional. For example we just bought a company that's very heavy into smart cards and Internet security. We can now offer that at the state and local level. Also, we're looking to get into different government agencies. I mentioned airport consulting. That was an acquisition. We're trying to provide more services across all government agencies.
TMF: Are there a lot of holes to fill.
Mastran: No, we've pretty much filled the tank.
TMF: How many employees?
Mastran: Almost 4,000.
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Maximus has been doing this for 25 years. We have cost models, we have computer systems already built, we have relationships that go back a long time. For someone new to come in and compete against us is tough.
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TMF: So the challenge is integrating what you've bought?
Mastran: Yeah, the real challenge is to put them together into one package, one proposal. We've got capabilities and staff from four different divisions going after a particular project that we can integrate.
TMF: In other words, when you go to an agency, making sure that you're pitching all the services you can offer?
Mastran: Right, rather than trying to build systems separately.
TMF: How can investors keep on top of the progress you're making integrating these companies?
Mastran: We announce all of our significant contract wins -- from about $3 million up. They can watch that. We also put out our pipeline statistics every quarter that shows how many proposals are in progress, how many are pending, and the ones we're tracking. Do this and you get a pretty good sense of the market we're going after.
TMF: Any other issues worth mentioning?
Mastran: Investors should know that we're in the political crossfire at times. One of the factors in our prospectus was that we do get bad press from politicians and others. Right now we've had a problem in New York that we're working through, and one in Wisconsin. It's part of the normal course of business for us, but it's a risk factor investors should be aware of.
TMF: What's usually the issue?
Mastran: It's generally a fight between a Democrat and a Republican. This is the nature of the business. We've dealt with it all along.
TMF: Any emerging trends you're focused on?
Mastran: E-commerce is taking many forms in the government. A lot of the focus is on citizens interacting with the government to pay parking fines and such. Maximus is focusing on health and human services, to create Web portals for people who are low literacy to give them access to government programs. We're trying to attack the digital divide that separates the wealthy and the poor.
We want to make programs more accessible, not only through the hardware but also through portal designs and the services that are offered. I think that distinguishes Maximus. Anyone can provide the technology, but there are very few companies that provide the knowledge of government programs and how to implement that technology.
TMF: So investors should look for contracts in this area?
Mastran: We've been developing applications for about nine months and are in discussions with several agencies.
TMF: Thanks for talking with us.
Mastran: Thank you.
Related Links:
Maximus Maximizing Value, Fool News, 10/27/99
Maximus discussion board
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