HMSY

HMS Holdings Corp (HMSY)

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HMS Holdings Corp. HMSY

Q2 2008 Earnings Call

August 1, 2008 9:00 am ET

Executives

Bob Holster - Chairman and CEO

Bill Lucia - President and COO

Walter Hosp - CFO

Analysts

Charles Strauzer - CJS Securities

Richard Close - Jeffries

Tony Perkins - First Analysis

Greg Williams - Sidoti &Company

Kyle Evans - Stephens Inc

Whitt Mayo - Robert W. Baird & Co

Presentation

Operator

Good morning. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the HMS Second Quarter 2008 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

Thank you. Mr. Holster, you may begin your conference.

Bob Holster

Thank you, Chris. Good morning, everyone. It's a appreciate pleasure to have you join our second quarter 2008 earnings call. I am Bob Holster. I will be hosting the call along with Bill Lucia, our President and COO; and Walter Hosp, our CFO. The slide presentation designed to complement the conference call may be found at our website at HMS Holdings.com. Please see the quarterly results page under investors, and click on the link to the webcast.

We'll be making forward-looking statements in the course of this call, so please refer to the list of qualifiers included in this morning's press release and the Safe Harbor statement on slide 1 of the presentation. HMS turned in a strong second quarter with revenue up 26% and EPS up 27% from the second quarter of 2007.

Our managed care business continues to grow at better than 100% annual rate, but it is also very encouraging to us to observe that our core State Medicaid agency business, which contributes two-thirds of total revenue grew 15% over the prior year quarter. That's 15% growth in the face of relatively flat fee-for-service Medicaid spending, and speaks to say our continuing ability to increase the breadth of services utilized by our state government contract base, and improve the proportion of their Medicaid expenditures that we recovered.

Before I turn this over to Walter Hosp, I should note that there are three things about which there is no news. First, we're still waiting for the administrative law judge's opinion on our Florida protest. Second, we're still awaiting a CMS decision on [Med] task order 2. And third, along with many others, we're still awaiting a CMS decision on the Medicare rack award. Nick and rack are not in our guidance. We're hopeful the verdict on all three of these matters will become known in the August/September timeframe.

Now Walter Hosp will take you through financial statements, and Bill Lucia will update you on new business, then I will comment on general outlook and revised guidance. Walter.

Walter Hosp

Thank you, Bob, and good morning, everyone. HMS posted a new record quarter of financial results in Q2 '08. As Bob has already reported, revenue for the second quarter of 2008 increased 26% to 44.2 million, versus the second quarter of 2007. For the first half of 2008, revenue growth year-over-year was 23.5%. Total operating expenses for the quarter were $35.3 million, an increase of $7.5 million or 26.1%, compared to the $27.9 million in the same quarter last year.

Looking at the individual expense lines, we see the compensation expense of $17.3 million increase $3.9 million from the same quarter of 2007. We ended this quarter with an average headcount of 821 employees, a 28.5% increase over our average headcount of 639 employees in the prior quarter last year. Data processing expenses of $2.8 million increased $0.4 million or 18.7% from the prior year quarter.

Additional software expense associated with platform upgrades and an upgrading of data communication lines contributed a substantial portion of this increase. Occupancy costs of $2.6 million increased $0.3 million or 14.9% from the prior year, a result of new and expanded office space opened in the past year.

Direct project costs of $6.4 million increased $1 million or 19.1% year-over-year. As a percentage of revenue, direct project costs were 14.5% in the quarter. Other operating costs of $5.1 million were $1.8 million higher in the same period of the prior year. Almost 35% of this increase resulted from additional non-payroll contract staffing expenses in our service centers. The balance of the increase related to travel, office supplies and local municipal charges. Amortization of intangibles associated with the BSPA acquisition was $1.2 million for the quarter, the same as the last year.

Operating income for the quarter was $8.8 million, an increase of $1.7 million or 23.1% year-over-year. Operating margin was 20% for the quarter, and we continue to guide to the 20% operating margins for the full year 2008. Net interest expense was $0.2 million for the quarter, versus $0.4 million for the same quarter last year, which is due to lower debt levels and higher cash balances than in the comparable period.

Income taxes were $3.6 million for the current quarter, compared to $2.9 million for the same quarter in the prior year. The effective tax rate is now at 42% versus 43.7% for last year, reflecting a lower state tax rate as our business and operations are distributed across relatively more tax advantaged states. The above resulted in net income for the quarter of $5 million versus $3.8 million for the same period in 2007, a 31% increase.

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