HMS Holdings Management Discusses Q2 2012 Results - Earnings Call Transcript

HMS Holdings (HMSY)

Q2 2012 Earnings Call

July 27, 2012 9:00 am ET

Executives

William C. Lucia - Chief Executive Officer, President and Director

Walter D. Hosp - Chief Financial Officer, Chief Administrative Officer and Executive Vice President

Analysts

Jeffrey Garro - William Blair & Company L.L.C., Research Division

Rohit Vanjani - Oppenheimer & Co. Inc., Research Division

Scott J. Green - BofA Merrill Lynch, Research Division

Deepak Chaulagai - Dougherty & Company LLC, Research Division

Richard C. Close - Avondale Partners, LLC, Research Division

David H. Windley - Jefferies & Company, Inc., Research Division

Jamie Stockton - Wells Fargo Securities, LLC, Research Division

Presentation

Operator

Good morning, ladies and gentlemen. My name is Katherine. I'll be your conference operator today. At this time, I would like to welcome everyone to the HMS Holdings Corp. Second Quarter 2012 Earnings Call. [Operator Instructions] The slide presentation designed to complement the conference call can be found at our website at hms.com. Please click on Events & Presentations on the Investor Relations page to join the webcast.

Before we begin, let me remind you that some of the information presented today regarding the company's future expectations, plans and prospects are considered forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on the company's current expectations, and actual events may differ materially from those expectations. We refer you to the company's filings with the Securities and Exchange Commission, including its annual report on Form 10-K and its quarterly reports on Form 10-Q, which identify important risk factors that could cause actual results to differ materially from those contained in the company's projections or forward-looking statements. The company disclaims any intent or obligation to update any forward-looking statements as a result of developments occurring after today's call.

During this call, the company will also be referring to several non-GAAP measures. The press release issued this morning includes a reconciliation of these measures to GAAP measures and is available on the Investor Relations tab of the company's website.

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

William C. Lucia

Thank you, Katherine, and good morning, everyone. Thank you for joining our second quarter 2012 earnings call. I'm Bill Lucia, President and CEO of HMS Holdings. I'll be hosting the call, along with Walter Hosp, our CFO.

HMS had another strong quarter. Revenue was up 34.4% to $120.1 million compared to $89.3 million for the same period a year ago. Adjusted EPS grew 35% year-over-year to $0.23 per share. The backdrop for our call today is the Supreme Court decision to uphold the constitutionality of the ACA, providing clear support for HMS' long-term growth strategy. This ruling has removed many of the uncertainties related to the ACA, and many states are now moving forward with the law, including the Medicaid Recovery Audit Contractor program. I'll talk more about this later.

Walter will now review our financials and then I will discuss our sales and the Supreme Court ruling and its impact on HMS' growth strategy. Walter?

Walter D. Hosp

Thank you, Bill. Good morning, everyone. As Bill mentioned, revenue for the second quarter of 2012 increased 34.4% year-over-year due to $120.1 million. This nearly matches the $121.2 million consensus forecast of security analysts who follow HMS.

Revenue growth in the quarter was mixed across our markets. In our Medicaid market, which includes State Government and Medicaid managed care clients, year-over-year revenue growth was 12.2% for the quarter. In our federal business, we previously announced our decision to not rebid one CMS audit MIC contract. We also spoke of specific Medicare ZPIC contracts that we terminated due to conflicts with HDI's Medicare RAC contract. As a result of these decisions, revenues in our federal business was down 14.9% year-over-year. HDI revenues for the quarter were $23.8 million to go. Because HDI was not part of HMS in the second quarter of 2011, there is no comparable growth rate. However, we would estimate that HDI's year-over-year organic growth for the quarter is approximately 90% after adjusting for differences in revenue recognition. We are also reaffirming the 2012 revenue guidance for HDI at approximately $95 million.

Revenue growth across our products was also mixed. Our core Coordination of Benefits revenue grew 13% year-over-year in the quarter. Excluding the federal business area, Program Integrity revenues were flat year-over-year. This reflects the longer ramp-up time for the Medicaid RAC. We expect to see growth rates in the non-federal Program Integrity products area to increase in the second half of this year.

Total revenues in the quarter, excluding HDI and our federal businesses, were up 10.1% year-over-year. As a reminder, we continue to see revenue shortfalls in Q2 relating to 5010/D.0 transition issues with our trading partners as reported earlier this year. We expect these issues to be resolved in the second half of this year.

Revenue for the first half of 2012 increased 32.4% year-over-year to $227.4 million. This included $47.3 million of revenue associated with the acquisition of HDI. Excluding HDI, revenue for the first half of the year was $180.1 million.

At this time, we are also reaffirming our 2012 revenue guidance in the range of $500 million to $515 million.

Now let's look at expenses for the quarter. Total cost of services for the quarter was $79.6 million. Excluding HDI, total cost of services for the quarter were $60.4 million, an increase of $2.2 million or 3.8% compared to the $58.2 million last year.

Total cost of services for the first half of 2012 was $156 million. Excluding HDI, total cost of services were $120.3 million, an increase of $6.4 million or 5.6% compared to the $113.9 million last year.

Compensation related to cost of services was $40 million. Excluding HDI, total compensation related to cost of services for the quarter was $31.6 million, an increase of $0.1 million or 0.4% compared to the $31.5 million in last year. As a percentage of revenue, this expense was 33.3% versus 35.3% in the prior year.

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