HMS Holdings Corp
Q4 2007 Earnings Call Transcript

Published: 29 Feb 2008

[Operator:]

Good morning. My name is Carmen, and I will be your conference operator today. At this time, I would like to welcome everyone to the HMS Holdings Corporation fourth quarter and full year financial results conference call. (Operator Instructions) Mr. Robert Holster, you may begin your conference.

[Bob Holster:]

Thank you, Carmen. Good morning, everyone. It's a pleasure to have you join our fourth quarter and full year 2007 earnings call. I'm Bob Holster, Chairman and CEO of HMS Holdings. I'll be hosting the call along with Bill Lucia, our President and Chief Operating Officer and Walter Hosp, our CFO. A slide presentation designed to complement the conference call may be found on our website, www.hmsholdings.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 yesterday evening's press release and the Safe Harbor statement on Slide One of the presentation. This morning, Walter will review with review HMS' fourth quarter and full year 2007 financial results. Bill Lucia will update you on our new business and then I will go over our guidance for next year. Walter?

[Walter Hosp:]

Thank you, Bob, and good morning, everyone. HMS posted yet another record quarter of financial results in Q4 '07. This is also the first quarter which includes the full quarter of BSPA results in both 2006 and 2007. Let me note at the onset that HMS exceeded its guidance for fourth quarter and full year by approximately $1.7 million in revenue and approximately $700,000 in adjusted EBITDA. Revenue resulted in a quarterly record of $41.7 million, an increase of $8.1 million or 24% from the $33.6 million reported for the same quarter of 2006. As we've mentioned at some recently attended Investor conferences, the quarter was fueled by exceptional growth in our MCO business which recorded $7.7 million of revenue in the quarter. We have already explained that the MCO result was due in part to a pile up of revenue into the quarter due to large account implementations coming in online. We think that MCO will return to its normal growth trajectory in the first quarter of 2008 and we are expecting approximately 50% growth for MCO for the full year 2008. We also recorded $0.9 million of revenue from our acquisition of Permedion which occurred in early October 2007. Adjusting for Permedion, our revenues increased 21% for the quarter versus prior year. Now let's turn to the expenses for the quarter. Total operating expenses for the quarter were $34.1 million, an increase of $4.4 million or 15% compared to the $29.7 million in the same quarter last year. Compensation expense of $16.3 million increased $2.6 million or 19% from the same quarter of the prior year. We ended this quarter with an average headcount of 743 employees, a 29% increase over the average 577 employees at the end of the prior year quarter. Much of this increase has been for new staffing to handle higher transaction processing levels and bringing in additional executive talent in the areas of client account management, government relations, finance and human resources. Data processing expense of $2.9 million increased $0.9 million or 44% from the prior year quarter. This increase was primarily due to $0.6 million of additional software licensing fee cost resulting from dialing up our MIPs on our mainframe platform and $200,000 from higher hardware expense. Occupancy costs of $3 million increased $0.8 million or 38% from prior year, as a result of an expansion in the number and size of our locations, particularly our New Irving, Texas location. Direct project costs of $6 million increased $0.4 million or 7% from the same quarter of the prior year. As a percentage of revenue, direct costs were 14.4% compared to 16.7% in the prior year. Other operating costs of $4.8 million were $2.1 million higher than the same period prior year. Almost half of this increase resulted from additional non-payroll temporary health expenses in our service centers which fluctuate with increases in quarterly transaction volumes. The remaining increases came from professional and consulting expenses, insurance, travel and office supplies. Amortization of intangibles associated with the BSPA acquisition was $1.2 million for the quarter, a decrease of $2.4 million from the same quarter last year. Ongoing intangible amortization will continue at the rate of approximately $4.6 million per year. This resulted in operating income for the quarter of $7.6 million, an increase of $3.7 million or 95% versus Q4 '06. Our operating income margin for the quarter was 18.1%. This included approximately $800,000 of non-reoccurring expenses. These expenses are primarily related to accelerating from 2008 the relocation of certain offices, particularly our largest office space which relocated from Dallas, Texas to Irving, Texas and which is now our company's largest location with current capacity for up to 400 employees. Adjusting for these expenses, the operating margin would be 20.1% for the quarter. Interest expense was $0.5 million for the quarter due mainly to acquisition related indebtedness. This expense was partially offset by $100,000 of interest income generated over the quarter. In 2008, we forecast the net interest expense will be nominal as interest income on growing cash balances offset decreasing interest expense on our amortizing loan. With regard to taxes, the company has $3.2 million of income tax expense for the fourth quarter, an effective tax rate of 43.8%. Our effective tax rate for the full year of 2007 was 43.7%. During the fourth quarter, the company conducted a review of our state tax apportionment and existing entity structure. As a result of this study, we've realigned our state apportionment with our current business configuration and reorganized our subsidiary entities to take full advantage of our business services company. This will have the effect of lowering our projected 2008 effective tax rate to 42% and positions the company for potential future reductions in our effective tax rate should our business configuration continued to be distributed more nationally. It should be noted, however, that the effective tax rates can vary by quarter depending up on the level and geographic mix of our products. Our net income for the quarter was $4 million, an increase of $2.2 million from the fourth quarter of 2006. Fully diluted weighted average shares outstanding for the quarter were $26.7 million, resulting in a fully diluted EPS of $0.15 for the quarter, more than doubling the $0.07 reported for the same quarter prior year. Looking at the full year income statement, revenue for 2007 was $146.7 million, which exceeded our prior guidance of a $145 million by $1.7 million. The result was 67% above the revenue of $87.9 million for 2006. Operating income for the year was $28.3 million, which resulted in a full year operating margin of 19.3% compared to an 8.8% operating margin for 2006. Adjusting for the before mentioned $800,000 in non-recurring expenses in Q4, the full year operating margin would be 19.8%. Net income from continuing operations was $15 million for 2007 or $0.57 per diluted share common share, versus $4.9 million of income from continuing operations or $0.21 per diluted common share in the prior year. Adjusted EBITDA for the full year 2007 was $40.7 million, which was above our most recent guidance of $40 million. This resulted in adjusted EBITDA margin of 27.7% for the year. We now turn to the balance sheet and look at our general financial condition at December 31, 2007. Our cash and cash equivalents were $21.3 million, having grown from the $6.7 million at the end of Q3 '07 or an increase of $14.6 million for Q4. This cash is invested in taxable money market accounts with a major money center bank and we have not been subject to any valuation adjustments in these investments. Accounts receivable at $39.7 million were nearly flat when compared with the $39.6 million at the end of September 2007, despite of substantial increase in revenue for the quarter. The number of day sales outstanding at year end decreased to 86 days compared to the 94 days at the end of September 2007. We had $23.6 million of debt outstanding at year end from a $40 million term loan originally borrowed to fund the BSPA acquisition. We continue to make principal repayments of $1.575 million each quarter. There still have been no borrowings under our $25 million revolving credit facility. For 2008, we anticipate that existing cash balances and funds generated by operations will be sufficient for all our cash needs. Looking at the statement of cash flows for the year ended 2007, cash provided by operations increased to $28.2 million compared to $17.5 million for the same period of the prior year. The $28.2 million cash from operations was comprised of net income of $15 million, non-cash charges and depreciation and amortization expense of $10.6 million, non-cash share-based compensation expense of $2.2 million, a change in deferred taxes of $3.4 million and increase in accounts payable and other accrued expenses of $6.3 million. This is offset by an increase in accounts receivable of $8.2 million and other uses of cash of $1.1 million. During 2007 cash used in investing activities was $26.5 million, of which $15 million was the payment of the PCG payable recorded in the second quarter of 2007 related to the BSPA acquisition and paid at the end of September. Purchases of property, equipment and software development were $10.8 million. These expenditures were higher than planned due to acceleration of the office moves mentioned before which were originally planned to be completed in 2008. Capital expenditures in 2008 are forecast at $8 million. Cash provided from financing activities of $7 million consisted of principal payments of the term loan of $7.9 million, offset by $6.6 million received in stock option exercises and $8.3 million for the tax benefit from disqualifying dispositions. We expect that given our outstanding pool of unexercised stock options, our cash taxes will continue to benefit substantially from disqualifying dispositions into 2008. We do not foresee paying a higher level of cash taxes until the second half of 2008. However, this assumption is based upon continued exercise of employee stock options which the company does not control. Now I'll just review EBITDA for the fourth quarter of 2007. EBITDA for the quarter was $10.4 million compared to $8.5 million in the same quarter of the prior year. Adjusted EBITDA was $11.1 million for the quarter, an increase of $2 million or 21.4% over the same period of the prior year. For the full year 2007, adjusted EBITDA was $40.7 million, more than double the level of 2006. EBITDA is defined as earnings before interest, taxes, depreciation and amortization. Adjusted EBITDA represents EBITDA adjusted for share-based compensation expense. We have provided a reconciliation of EBITDA and adjusted EBITDA to net income in the press release and the conference call slide. Please refer to them for a more detailed explanation of these measures. And that concludes our review of the financial results and financial position of the company. Bob?

[Bob Holster:]

Thank you, Walter. Bill Lucia is now going to update you on the new business brought in-house in the last quarter.

[Bill Lucia:]

Thank you, Bob, and good morning, everyone. Focusing now on new business in our government sector; after a competitive procurement process, the state of New Jersey awarded HMS the contract to provide third-party identification and recovery and cost containment services for the Department of Human Services. We now serve the Medicaid program, SCHIP, the pharmaceutical assistance to the Aged and Disabled and the AIDS Drug Distribution Programs. This continues our relationship with New Jersey where we've recovered $850 million since 1986. The scope is very similar to our last contract and the term is for three years with options to renew for two additional one year periods. We also expanded the scope of our relationship in West Virginia by adding a state SCHIP program, where we now provide other health insurance identification to assist them in making enrollment decisions and various recovery and cost containment initiatives. In our managed care market, we were awarded the contract to provide third-party liability cost avoidance services to Network Health, 150,000 member of health plan serving the Massachusetts Medicaid Program otherwise known as MassHealth. And as in our government market, we are experiencing same scope expansion opportunities for up-selling with existing customers evidenced by the expansion of our recently awarded contract with Centene Corporation. We will now perform pharmacy recovery for all of Centene's plans nationwide. Our original contract included providing only HMS' cost avoidance services. And at Molina Healthcare, we added Michigan to our original three states Ohio, Indiana and Washington and also increased the scope of the contract to add major medical claims recoveries to our existing pharmacy recovery and cost avoidance services. We continue to focus on opportunities in the federal market, and in December, HMS was one of five vendors awarded an umbrella audit contract by the Centers for Medicare & Medicaid Services under the new Medicaid Integrity Program. The contract qualifies us to bid on individual Task Orders issued by CMS for a variety of auditing functions designed to identify inappropriate payments. The term of the contract is one year; however, CMS has the option to renew the contract on an annual basis. The first Task Order was issued in January 2008 and includes audits of Medicaid providers located in CMS regions, three and four, which includes 14 Southeast and Midatlantic states. CMS is currently expected to select the vendor for Task Order one by the end of March. The CMS audit MIP award is a reflection of HMS' growing capabilities and corporate commitment to assuring the integrity of our government funded healthcare programs.

[Bob Holster:]

Before we move on to a discussion of our 2008 numbers, I would like to comment on the environment we expect to be operating and for the balance of the year. Medicaid spending the primary driver of our government managed care businesses and the key economic metric that underlies our planning projected by the Congressional Budget Office and by CMS to grow at a rate of approximately 7% in 2008. To the extent we enter a recession and the rate of unemployment rises from present 4.9% level, Medicaid spending has the potential to increase more rapidly which is what we saw in the 2001-2002 recession. We don't see much comprehensive state level healthcare reform initiatives having much of the Medicaid expanding impact in 2008. Given the failure of the California initiative and the overspending generated by the Massachusetts' Commonwealth Care program, we think there will be proposals but not much action until we have new leadership at the federal level beginning in 2009. Whether or not the US is in recession, the states with the large Medicaid populations and that includes California, New York, Ohio, New Jersey, Florida and others that are our largest customers, might as well be in recession based on the significant budget shortfalls they're projecting for FY 2009 which begins in July. You are beginning to hear budget cut proposals from the governors of these states and most of the proposals called to cut back some Medicaid which is not a largest line item in most state budgets. But the chances that Medicaid will be cut once the governors proposals actually make through state legislatures are slim for a couple of reasons. First, cuts in Medicaid because each state dollar carries with it approximately $1 of Federal Matching Funds are twice as painful to constituencies cuts in programs that are solely state funded. Second, cuts in Medicaid reimbursement make it more difficult to keep providers in the Medicaid network and that tends to push patients to emergency room settings which are generally more expensive than either doctor or clinic places. The states have an additional problem in that stage budget deficits tend to come in pairs as lower personal and corporate earnings in one year translate into lower estimated tax deposits in the second year, even if the economies otherwise started to recover. The combined effect of all this is that we expect states to be actively seeking new ways to reduce cost and control spending and that makes for a good selling environment for our services. Federal attention in the last year of President Bush's term seems to be focused primarily on restricting the increase in Medicare cost which because of the size of the program and current demographic trends, the scene is far more dangerous to a nation's economic health. We think that bodes well for the future of audit and control initiatives and we hope to support through program integrity efforts like MIP as Bill Lucia has just described. Looking beyond 2008, we believe that the new President and the new Congress in 2009 are likely to enact a major expansion of the Medicaid and SCHIP programs which implies significant acceleration of growth in government healthcare expenditure, an HMS' coordination of benefits and program integrity opportunities and we are investing in expanding our capabilities with that future in mind. With that as a backdrop, let's talk about projected 2008 financial performance. For 2008, we are projecting and actually are continuing to project that HMS revenues will grow to $170 million, that's about 16% growth rate and that adjusted EBITDA will grow 21% to $49 million. Beginning for 2008 we will be providing EPS guidance. We estimate the fully diluted GAAP EPS to increase by 28% to $0.73 with help from effective tax rate that will drop from 43.7% to approximately 42% as Walter described a few minutes ago. As we've also said we expect our managed care revenues to grow approximately 50% and our government revenues to grow at a low-teens rate, both assisted by an increase of approximately 7% in total Medicaid program expenditures. To the extent the states respond to budgetary pressures by accelerating the move of Medicaid lives into managed care, we would expect that our product revenue mix might change but not necessarily the total revenue picture. We have not included in this projection any revenues associated with the Audit MIP project that Bill just described or the Medicare claim RAC projects that most of our listeners should probably familiar with. By the end of the first quarter, we expect to have a better handle on how states are actually reacting to their budgetary problems, how fast Medicaid expenditures are really growing and we might know the outcomes of the MIP and RAC procurements so we'll adjust guidance then if it's appropriate to do so. Our 2008 budget calls for quarter-to-quarter revenue growth to be fairly smooth through the year, but as we've pointed out consistently we can have substantial variation in quarterly results caused by the timing of individual large projects for our clients. Irrespective of the whether we win the first MIP Task Order, we are committed to expanding our program integrity capabilities in both state and federal markets. We've already stepped up spending in that connection so we may see earnings slightly more skew to the second half than was the case in 2007. We should see extremely healthy cash flow in 2008, with adjusted EBITDA projected at $49 million, with CapEx of only about $8 million and a fairly small likelihood of paying cash taxes before late in the year. And finally while it's not reflected in our guidance, we continue to actively explore acquisition opportunities as a means of rounding out our program integrity product offering just as we did by acquiring Permedion in the fourth quarter of 2007. That concludes our formal presentation. We're happy to take your questions.

[Operator:]

(Operator Instructions) Your first question comes from Whit Mayo of Stephens Inc.

[Whit Mayo:]

Walter, you mentioned in your prepared remarks about an $800,000 expense which looks like about $0.03 from relocation expenses. Can you expand a little more on that and does that include any write-offs with respect to any operating leases?

[Walter Hosp:]

Yes, it does. Again that $800,000 is primarily related to office relocations, the biggest one of which I outlined is in Dallas, Texas. We did leave some old space that did require write-off on that and that's why we think this is non-reoccurring. The majority of that $800,000 you'll find in our occupancy line for the fourth quarter.

[Whit Mayo:]

Okay. Any idea of what kind of a normal, I am just trying to isolate kind of what that the lease would have been without writing it off. Any idea of what kind of a normal number would have been, obviously significantly lower than the $800,000?

[Walter Hosp:]

No, the $800,000 are one-time charges, but the ongoing occupancy expense will be higher than what it was trending without the $800,000. So we went into larger and slightly more expensive space there, but one shouldn't conclude that the higher expenses in Q4 and occupancy are going to continue at those levels.

[Whit Mayo:]

Okay. That's helpful. And this obviously was the very first quarter, as you guys mentioned in your remarks that we've seen the combined HMS and BSPA company and I understand the projects are very intertwined at this point in time, a very difficult to isolate kind of what's what. But, I think in 2006 you guys were still making a little bit of money on the dual eligibles that you obviously don't see now in your pool of claims. So in your press release you indicated that on an apples-to-apples basis you felt that organic growth was around 20%. Can you help us understand a little bit what's underpinning that calculation?

[Bob Holster:]

Whit, we grew 24% Q4-to-Q4, 21% excluding Permedion as Walter indicated. Our MCO business was of course much stronger. If you exclude our MCO businesses, everything else grew at about an 8% rate in the fourth quarter, but that was a function of our comparison to a tough Q4 '06, that did include a couple million dollars of pharmacy revenue associated with the dual eligibles. That was sort of a last hurrah for us as Part D moved dual eligible pharmacy expense to Medicare from Medicaid. In the fourth quarter of '06, we were still processing '05 dates of services that predated the implementation of Part D. We believe that our non-MCO businesses in general are growing at a low-teens rate and we believe that that's the rate they experienced if look at the totality of 2007.

[Whit Mayo:]

Okay. So that's consistent with what we've referred some time. And just looking at Permedion now and you've owned it for a couple of quarters. Do you guys have any earn-out with that management team?

[Bob Holster:]

No.

[Whit Mayo:]

Okay. And can we get just kind of a spot number for the end of the quarter with the number of covered lives that you had under contract with your managed care business? And how many of those were revenue producing, I understand the number was relatively strong?

[Bill Lucia:]

Yeah, Whit, this is Bill. We had about $9 million lives contracted at the end of the quarter with close to $7 million implemented, so we've significantly reduced our backlog.

[Whit Mayo:]

Okay. And looking at the managed care business a little bit, I mean obviously we heard some news over the past quarter about WellPoint assessing the Ohio market and leading that and I understand it's a very, very competitive state and unique from many others. But just any thoughts on the impact from you guys whether not any they were in fact the customer and I believe you guys said several other customers within that state. So just any sense for how you see that playing out?

[Bob Holster:]

Well, our other customers in that state have not exceeded and when one exceeds the market, usually those lines go into the other plan. So, as you know, WellPoint was pretty new state for them. So we didn't feel much of an impact from a positive perspective yet. Because our contract with WellPoint started in California and grew, moved east. So those lives, I believe they are being observed by the other plans that exist in Ohio which are clients of ours.

[Whit Mayo:]

Okay. Can you remind us, I can't remember exactly when they are planning or leaving or if they have already exited the state?

[Bob Holster:]

I believe and I'm not sure but I believe they already exited the state.

[Whit Mayo:]

Okay. So those have already been distributed. And Walter just one last question, and just can we get an idea for what you think stock comp will be on a pre-tax basis for 2008?

[Walter Hosp:]

We don't get that specific in terms of the level of guidance that we provide on this. Having said that, I will indicate that it's higher than what we've experienced in 2007 and you'll see more specific disclosures on that in our upcoming 10-K and in our proxy.

[Whit Mayo:]

Okay. But is it fair to say that, if we look at in on a percentage of revenue basis, maybe it's not substantially higher, but given the new brands on a absolute basis it's clearly going up?

[Walter Hosp:]

Yeah. But you may see some increase on a percentage basis as well.

[Whit Mayo:]

Okay. We'll about that later. Okay, thanks guys.

[Bob Holster:]

Thank you.

[Operator:]

Your next question comes from Charles Strauzer with CJS Securities.

[Charles Strauzer:]

Hi, good morning.

[Bob Holster:]

Hi, Charlie.

[Charles Strauzer:]

(inaudible) I'm coming out to a number that $0.73 and especially given the lower tax rate, what should we be assuming in there for share count and interest, I mean either the other one variability of that maybe throwing me off there?

[Bob Holster:]

Well, on share count we finished the full year of '07 with 26.3 million shares and you should probably use a denominator of 27 million shares for '08.

[Charles Strauzer:]

Okay. And then your expectations on interest expense because you are almost at a net cash position now going into Q1 as you generate cash flow. Is it your intention to pay down that term loan or are the other penalties for prepayment on that?

[Bob Holster:]

There are no penalties but it's a modest level of leverage and we have some of that in floating rates which we're enjoying right now. The answer to your question regarding net interest expense as I made some comments in my prepared remarks is that that's going to be close to zero as our cash balances which have developed very, very nicely and we expect to continue to develop nicely. The interest income on that offsets the declining interest expense that we have as we're paying down our loan.

[Charles Strauzer:]

So if I factor that in, in the lower tax rate, that should be coming up at the higher EPS number versus if you take the $49 million of EBITDA and subtract out D&A and then the lack of having to pay interest and also the lower tax rate of $0.73 does not seem to equate and I'm kind of?

[Bob Holster:]

Well, looking at your numbers the only other direction I can provide you is that implied in our '08 guidance is approximately 20% operating margin.

[Charles Strauzer:]

Got it. Okay. So, may be in my D&A is off there. So, that's fine. We'll work on that later. The other question I had for you, Walter, while I've got you is, when you look at the various expense lines, the occupancy expense of about $3 million in the quarter, now that the move is kind of complete down in Texas. Is that kind of a good run rate number to be using going forward?

[Walter Hosp:]

As I explained to Whit, the Q4 number has the majority of that $800,000 of one-time charges in it, not all of it.

[Charles Strauzer:]

Got it.

[Walter Hosp:]

So, those are one-time. Now it will go up high, just to reiterate it will go up higher than what you see in Q3, but it certainly not going to be at the run rate of the $3 million.

[Charles Strauzer:]

Understood. And then obviously other operating costs, sound like you had some professional fees and then maybe from some lobbying efforts, the stuff related to some of the new opportunities out there. Is that expected to kind of continue with the '08 as well?

[Walter Hosp:]

Yes, these are ongoing levels of charges that, if you are specifically trying to other operating costs, those costs are not expected to decline.

[Charles Strauzer:]

Excellent, okay. Thank you very much.

[Operator:]

Your next question comes from Jefferies and Company.

[Richard Close:]

Bob, Richard here. You obviously painted I guess a positive environment, albeit negative I guess with respect to the economy and the state budgets and all that. How quickly does your company seem to benefit I guess maybe on a historical basis? When things are tougher for your state clients, how quickly do they usually come to the table to maybe seek you guys out or seek ways to your regain revenues and reduce costs?

[Bob Holster:]

I don't think you can make a precise assumption. I can tell you that as we move further into the year and certainly by the time we're six months into the year to the extent that the negative economic claim that will be generating higher unemployment will be expecting to see higher levels of Medicaid paid claims in the larger coordination of benefits opportunity. My comments about the selling environment really relate to just that the selling environment, you can't be, we'll be aggressively describing our capabilities to all our customers but it's impossible to say when any one particularly customer will buy.

[Richard Close:]

Okay. And it's a follow up to that the last part of your statement there. You talked about a government relations initiative over the last year and I was wondering if you can give as an update there, how active have guys been in going out and shaking hands with legislatures and people in the governors office out there in the states and maybe even on the federal level?

[Bob Holster:]

Well, I think it's fair to say that we're significantly more active. We think we're doing a better job of explaining the benefit we bring to federal and state programs. We've visited with scores of congressional offices for example. I can't really, I don't think it would be helpful to be more specific on that.

[Richard Close:]

And the response has been?

[Bob Holster:]

Our value proposition is pretty simple, Richard I think that when we have the opportunity to explain it to people, they don't understand that and we hope to see that translate into opportunity, particularly as Congress continues to revisit programs like SCHIP expansion or revisit the idea of expanding federal match to medical support enforcement.

[Richard Close:]

Okay. And I guess a question on the managed care business. You mention the scope expansion or Bill mentioned the scope expansion and talked about opportunities there and you had some team in Molina. I guess, my question is as you kept sort of your guidance for managed care revenues in '08 at that 50% year-over-year growth. I guess, why not expand that sort of guidance based on scope expansion?

[Bob Holster:]

Okay. Let me just comment on this the idea of updating guidance in general. We know that we've got a very significant event coming up. The MIC award, we either going to get it or not going to get it, but it is going to be a significant event. We didn't want to be -- to drop back to '07 as you may recall, I discussed in earlier conference call the fact that we found ourselves updating guidance very frequently. And we think that's probably disconcerting. We prefer a posture in which we wait for a significant event or a significant new measurement point, like a quarter end to come up before we consider updating guidance and that's the philosophy we're going to apply going forward. We think what MIC ride around the corner for better or force. It was premature update guidance.

[Richard Close:]

Okay. And I guess a follow-up on that would be, you've talked in the past about your current book of business and I guess feeling comfortable with what you're projections are or guidance is for 2008. How big is the delta versus what you currently have in hand versus what you need to add maybe a new business to get to your '08 guidance or I guess I am trying to gauge your level of confidence in the guidance that you've provided?

[Bob Holster:]

Richard, when we give guidance we have a high level of confidence in it, in particular for the full year. Our projection model does not work as well on a quarterly basis because of the capacity of major projects to swing back and forth between quarters. To be specific, we have a high level of confidence in the guidance we've issued for 2008.

[Richard Close:]

And then maybe deteriorating environment on the state level would only, maybe enhance that confidence?

[Bob Holster:]

There will be lots of noise that surrounds the deteriorating environment. For example, you will hear one governor or after another talk about how they are going to cut this in Medicaid or that in Medicaid. But that said, we think that in general, deteriorating economic environments can lead the higher unemployment and higher unemployment will drive Medicaid. So, to the extent the economy is worse, our prospects did not improve.

[Richard Close:]

Okay. And I guess just one final question, you've thrown out a number in the past in terms of total recoveries and I think it was $2.6 billion or something in '06 or can you give us an update on the level of the recoveries that you guys did in '07?

[Bob Holster:]

We did about $1 billion in '06 and we advertised that we've saved several billion more in cost avoidance. But we are generally relying on state numbers and reconciling the state number. So we don't have a number available yet for 2007. I think we believe that it was than in 2006. But we don't have a number available yet.

[Richard Close:]

Okay. Thank you.

[Operator:]

Your next question comes from [Ivan Sachs with Ivan Sachs Equities].

[Ivan Sachs:]

Hello, Bob, Bill and Walter. If I could just going to more macro situation, what conditions in accounting environment. I know you discussed a little bit about or really quick be helpful or hurtful to any all of your business segments?

[Bob Holster:]

Let just answer the question first for 2008, we don't see any significant reform initiative that's likely a passage of the state level. And what that means is that there is going to be fundamentally no change in our operating environment or in the framework of our operating environment for 2008. And we even expect whether it would take well, well into 2009 if in 2009 at all for there to be significant change at the federal level. So the primary driver than becomes not what's going on through "reform" but what's going on in the broader economy. Unemployment drives Medicaid enrollment and Medicaid spending. And further that we announced sufficiently present on both the fee for service and managed care side of the Medicaid equation. So if budgetary responses by governors in 2008 including using more managed cares of vehicle for cost control and Medicaid we believe that we are in a position to pick the lives up on through our managed care clients as they move out of fee for service. So not a lot of change, the big variables what happens with the economy.

[Ivan Sachs:]

As far as you had mentioned the potential of may be getting an acquisition or two, do you see this as being accretive, I mean, always all of a sudden if you are at that level of knowing whether that be accretive or not immediately? And secondly, how many opportunities are there, are they several or they just about a couple that could be potentially in your target area?

[Bob Holster:]

We are looking at several, but we are pretty picky because for us acquisition at the current stage of our corporate existence is really about rounding on our program integrity product line. And for us every acquisition is a make versus by decision. We'd be surprised if we find ourselves in a situation in which an acquisition was decretive unless it happened very late in the year.

[Ivan Sachs:]

And then finally, obviously you made acquisition of a number of people in your organization and obviously people are the drivers to your future. Are there any particular people or situation that you -- people that you have acquired on brought in board that could make significant changes or be helpful to the business, if you could speak about or address?

[Bob Holster:]

I think Ivan that each of key hires we've made over the past year is in a position to make a significant contribution to the business. I wouldn't single out any individual we've hired perhaps a score of executive at a senior level or just below a Vice President level who we think will make an impact for us in 2008 and going forward.

[Ivan Sachs:]

Good. Thank you very much.

[Bob Holster:]

Thank you.

[Operator:]

Your next question is from Richard Close with Jefferies & Co.

[Richard Close:]

Hi. Just really quick, Bob. I was wondering if you can talk a little bit about program integrity but on the state level and housings are going there in that front for you guys. I know that, that's been a growing business and maybe how you expect that in 2008?

[Bill Lucia:]

Richard, this is Bill. We are actually we've been informing our team to be more aggressive in that marketplace and are developing products and the integration of Permedion helped us bolster that product line. As Bob had mentioned, our acquisition activity is focused in the area of supporting our program integrity initiatives. The state are becoming a little more active in the procurement process for program integrity related services. And we've been starting to roll out the marketing of our packaged solutions to the space. So, I think we will be able to talk about as more activity and program integrity as the year rolls out.

[Richard Close:]

Okay. Thank you.

[Bill Lucia:]

Thank you.

[Operator:]

At this time, there are no further questions. Gentlemen, do you have any closing remarks?

[Bob Holster:]

We'd like to thank everybody for calling in and we look forward to speaking with you soon at conferences or at the next quarterly call. Thank you.

[Operator:]

Thank you for participating in today's conference. You may now disconnect.