Huron Consulting Group Q3 2023 Earnings Call Transcript

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November 2, 2023

There are 5 speakers on the call.

Operator

Good afternoon, and welcome to Huron Consulting Group's webcast to discuss Financial Results for the Q3 of 2023. At this time, all conference call lines are in a listen only mode. Later, we will conduct our question and answer session For conference call participants and instructions will follow at that time. As a reminder, this conference call is being recorded. Before we begin, I would like to point all of you to the disclosure at the end of the company's news release for information about any forward looking statements that may be made or discussed on this call.

Operator

The news release is posted on Huron's website. Please review that information along with the filings with the SEC for a disclosure of factors that may impact subjects discussed in this afternoon's webcast. The company will be discussing 1 or more non GAAP financial measures. Please look at the earnings release and on Huron's website for all of the disclosures required by the SEC, including reconciliation to the most comparable GAAP numbers. And now, I would like to turn the call over to Mark Hussey, Chief Executive Officer and President of Huron Consulting Group.

Operator

Mr. Hussey, please go ahead.

Speaker 1

Good afternoon, and welcome to Huron Consulting Group's Q3 2023 earnings call. With me today are John Kelly, our Chief Financial Officer and Ronnie Dale, our Chief Operating Officer. Huron's strong performance continued in the 3rd quarter with revenues growing 26% over the prior year quarter and a 9th consecutive quarter of year over year margin expansion. Compared to the same period 2 years ago, Q3 of 2021, our revenues have grown 60% reflecting sustained strength across our industry segments and In the 1st 9 months of 2023, revenues grew organically across all three operating segments led by 32% growth in the Healthcare segment, our largest business. Our financial results and increased guidance reflect ongoing solid demand For a broad portfolio of offerings, our deep industry and capability expertise, our highly talented team and our strong collaborative culture.

Speaker 1

Our Q3 results continue our solid momentum toward our investor goals of achieving double digit revenue growth, expanding our adjusted EBITDA margins to mid teen levels and accelerating adjusted EPS growth. I'll now share some additional insights into our 3rd quarter performance. In the Healthcare segment, 3rd quarter revenues grew 36% Over the prior year quarter achieving record quarterly revenues, market demand was strongest for our performance improvement and financial advisory offerings reflective of ongoing challenges among our provider clients. Our strategy and innovation and our digital offerings also continued to perform very well. While the operating environment for healthcare providers has improved slightly in 2023, The healthcare industry continues to be challenged by reimbursement rates that are not keeping pace with inflation driven labor and supply costs.

Speaker 1

Competitive market dynamics and a less favorable payer mix are challenging the financial and operating models of many providers. The financial headwinds created by these market conditions are significant and continue to challenge the efforts of hospitals and health systems to sustainably close the gaps without degrading the quality of care. Our comprehensive set of strategy, operations And financial focused offerings make Huron a unique and trusted partner throughout the healthcare industry. We help our clients solve issues such as driving higher yield in the revenue cycle, expanding access to care, transforming the cost structures and clinical operations and deploying digital solutions to improve care and the patient experience. We are also uniquely positioned to address their highly complex challenges, including situations that require integrating our strategy, performance improvement, digital and financial advisory offerings.

Speaker 1

We're proud of our broad and deep capabilities to help our clients redefine their strategies and transform their businesses for long term growth and financial stability. We believe the persistent market headwinds facing our clients coupled with our distinct and broad offerings positions our Healthcare segment very well for continued growth. Education segment revenues grew 18% in the Q3 of 2023 over the prior year quarter, driven by strong demand for our digital offerings, which grew 23%, as well as our strategy and operations and research offerings within our consulting and managed services capability. The education industry also faces significant financial challenges As costs are increasing faster than revenue for many institutions, the demographic cliff reflecting a declining population of college age students has been well anticipated and studied for many years. Since the pandemic, the enrollment challenges have worsened.

Speaker 1

An increasing number of college age students are electing not to pursue a college degree due in part to a lack of affordability. Enrollment challenges are increasing the competition for students, while rising costs and the need to streamline administrative operations and rationalize academic portfolios is pressuring the higher education business model. We believe these market trends will create tailwinds for all the offerings in our Education segment for the foreseeable future. Our ability to help an institution deliver on its academic and research missions is unmatched in the industry and will continue to deepen our industry expertise, broaden our portfolio of offerings and strengthen our competitive advantage to remain the leading partner in the higher education industry. In In the Q3 of 2023, Commercial segment revenues grew 14% over the prior year quarter, driven by strong demand for our distressed Financial advisory offerings, partially offset by declines in our strategy and innovation and digital offerings in the commercial industries.

Speaker 1

Higher interest rates, challenging capital markets and economic headwinds have created a solid demand environment for our distressed financial advisory offerings. Our strategy and innovation and digital offerings have seen solid growth within healthcare and education. We have seen some delayed project starts for our commercial clients as we continue to manage through the uncertainties in the broader economic environment. We continue to believe the commercial industries create new avenues of growth for Huron And as part of our strategy, we'll continue to invest in growing our industry expertise across certain industries, while continuing to mature and align Advisory and digital capabilities across the segment. Now let me turn to our outlook for the year.

Speaker 1

So press release indicates We're increasing and narrowing our annual revenue guidance to $1,350,000,000 to 1,370,000,000 an increase of $40,000,000 at the midpoint. We continue to expect our adjusted EBITDA margin to be in a range of 12% to 12.5% of revenues and we're raising and narrowing our full year adjusted diluted earnings per share to a range of $4.70 to $4.90 an increase of $0.30 per share at the midpoint. Our performance through the 1st 9 months of 2023 reflects the market tailwinds for our offerings and the benefits of our operating model changes in our ability to deliver greater value to our clients. When we outlined the realignment of our businesses under new operating model in our Q4 2021 earnings call, We believed these changes would accelerate our growth by strengthening our go to market strategy and competitive advantage, drive greater efficiencies across our business and enhanced transparency for investors into the core drivers of our business. We're pleased with the progress we've made in the execution of our operating model and its demonstrated benefits.

Speaker 1

Since making the initial changes at the beginning of 2022, we've achieved quarterly revenue growth ranging from high teens to mid-twenty percent growth, which exceeds our expectations for our stated medium term revenue target. We benefited from strong demand for our offerings in the market The changes we made to our operating model have created a more enduring and sustainable business. Our ability to deliver revenue growth and margin expansion, including the solid increase in utilization in the 1st 9 months of 2023 over the same prior year period It's only possible because of our outstanding team, which is now better aligned to serve the comprehensive needs of our clients in their markets. I'm pleased with our progress to deliver strong growth, drive greater efficiencies across our business and advance our competitive advantage. And while we're pleased with our 2023 performance to date, we remain focused on advancing our growth strategy and delivering upon our long term financial goals in 2024 and beyond.

Speaker 1

And with that, let me now turn it over to John for a more detailed discussion of our financial results.

Speaker 2

John? Thank you, Mark, and good afternoon, everyone. Before I begin, please note that I will be discussing non GAAP financial measures such as EBITDA, adjusted EBITDA, adjusted net income, adjusted EPS and free cash flow. Our press release, 10 Q and Investor Relations page on the Huron website have reconciliations of these non GAAP measures to the most comparable GAAP measures along with a discussion of why management uses these non GAAP measures and why management believes they provide useful information to investors regarding our financial condition and operating results. Now I will share some of the key financial results for the quarter.

Speaker 2

Revenues for the Q3 of 2023 were $358,200,000 up 25.5 percent from $285,400,000 in the same quarter of 2022, highlighted by 36.4% growth in the Healthcare segment, along with continued strong growth in the Education and Commercial segments. From a capability perspective, Consulting and Managed Services revenues grew 37.7% and digital revenues grew 10.8% when compared to the same quarter in 2022. Net income for the Q3 of 2023 was $21,500,000 or $1.10 per diluted share compared to net income of $17,700,000 or $0.86 per diluted share in the Q3 of 2022. Our effective income tax rate in the Q3 of 2023 was 31.2% compared to 30.2% in the same prior year period. Our effective tax rate for Q3 of 2023 was less favorable than the statutory rate inclusive of state income taxes, primarily due to tax expense related to non deductible losses on our investments used to fund our deferred compensation liability and certain non deductible expense items.

Speaker 2

Adjusted EBITDA was $48,000,000 in Q3 2023 or 13.4 percent of revenues compared to $36,500,000 in Q3 2022 or 12.8 percent of revenues. The increase in adjusted EBITDA in the quarter was primarily attributable to the increase in segment operating income, excluding the impact of segment restructuring charges, partially offset by an increase in corporate expenses. As Mark noted, With our performance in the Q3 of 2023, we've achieved 9 consecutive quarters of year over year margin expansion, reflecting progress toward our stated financial goal of achieving mid teen adjusted EBITDA margins by 2025. Adjusted net income was $27,200,000 or $1.39 per diluted share compared to $20,700,000 or $1.01 per diluted share in the Q3 of 2022. Adjusted diluted earnings per share grew 37.6 percent over Q3 2022.

Speaker 2

Now I'll make a few comments about the performance of each of our operating segments. The Healthcare segment generated 50% of total company revenues This segment posted record quarterly revenues of $179,200,000 up $47,900,000 or 36.4 percent from the Q3 of 2022. The increase in revenues in the quarter reflects strong demand for our performance improvement, strategy and innovation and financial advisory offerings within our consulting and managed services capability as well as continued strong demand for our digital offerings. Our Healthcare segment is on track to achieve record Full year revenue growth in 2023, driven by the strong demand for our broad portfolio of offerings across the industry. In particular, the consulting and managed services capability, which has grown nearly 40% through the 1st 9 months of 2023 compared to the same prior year period.

Speaker 2

Operating income margin for Healthcare was 26.2 percent for Q3 2023 compared to 25.2% for the same quarter in 20 22. The quarter over quarter increase in margin was primarily due to a decrease in practice administration and meeting expense In revenue growth that outpaced an increase in salaries and related expenses for our revenue generating professionals, partially offset by increases and performance bonus expense for our revenue generating professionals and contractor expenses both as percentages of revenues. The Education segment generated 31% of total company revenues during the Q3 of 2023. The Education segment posted revenues of $111,000,000 up $16,700,000 or 17.7 percent the Q3 of 2022. The increase in revenues in the quarter was driven by broad based demand across the segment, including for our digital offerings as well as our strategy and operations and research offerings within our consulting and managed services capability.

Speaker 2

Operating income margin for Education was 23.9 percent for Q3 2023 compared to 24.2% the same quarter in 2022. The quarter over quarter decrease in margin was primarily due to increases in compensation costs for our revenue generating professionals, Technology expenses as percentages of revenue partially offset by a decrease in contractor expenses. The commercial segment generated 19% of total company revenues during Q3 of 2023 and posted revenues of $68,000,000 up $8,300,000 or 13.8 percent from the Q3 of 2022. The quarter over quarter increase in revenue was primarily attributable Strong demand for our distressed focused financial advisory offerings, partially offset by declines in our strategy and innovation and digital offerings. With regard to our strategy and digital offerings, we experienced some project delays in a longer sales cycle for some of our commercial clients during the quarter, reflecting the uncertainty in the broader macro environment.

Speaker 2

Operating income margin for the Commercial segment was 22.7% for Q3 2020 compared to 23.7 percent for the same quarter in 2022. The quarter over quarter decrease was primarily driven by increases in compensation costs for our revenue generating professionals and support personnel as percentages of revenues partially offset by a decrease in contractor expenses. Corporate expenses not allocated at the segment level and excluding restructuring charges were $43,100,000 in Q3 2023 compared to $34,900,000 in Q3 2022. The $8,200,000 increase in unallocated corporate expenses was primarily driven by increases in salaries and related expenses, performance bonus expense and performance based stock compensation expense for our support personnel. Corporate restructuring charges were $4,100,000 for the Q3 of 2023 compared to $800,000 for the same quarter last year.

Speaker 2

The corporate restructuring charge in Q3 2023 primarily consisted of a non cash charge related to office space that we exited during the quarter. Now turning to the balance sheet and cash flows. We finished the quarter with total debt of $358,000,000 consisting entirely of our senior bank debt and cash of $9,400,000 from net debt of $348,600,000 Our leverage ratio is defined in our senior bank agreement was 1.8 times adjusted EBITDA as of September 30, 2023 compared to 2.1 times adjusted EBITDA at the end of Q3 2022. Cash flow generated from operations in the Q3 of 2023 with $68,800,000 We used $8,000,000 of our cash to invest in capital expenditures, inclusive of internally developed software costs and purchases of property and equipment resulting in free cash flow of $60,700,000 DSO came in at 83 days in the Q2 of 2023 compared to 77 days in the Q2 of 2023 and 85 days for the Q3 of 2022. The increase in DSO over the Q2 of 2023 is primarily driven by certain large healthcare and education industry projects with extended billing and payment terms.

Speaker 2

During the Q3, we repurchased approximately 290,000 shares for $28,800,000 under our share repurchase program. In October, our Board of Directors increased the authorized amounts under the share repurchase program by an additional $100,000,000 for a total authorization since 2020 of $400,000,000 which expires in December 2024. Since November 2020 and through September 30, 2023, we purchased 4,500,000 shares at a total purchase price of $279,600,000 at an average share price of $61.70 The shares repurchased since 2020 represent an approximate 20% reduction in our shares outstanding. Consistent with the capital strategy communicated at our 2022 Investor Day. We remain committed to balancing growth, flexibility and return of capital to shareholders through strategic tuck in acquisitions, debt pay down and continued share repurchases.

Speaker 2

Finally, let me turn to our expectations and guidance for 2023. As Mark noted, we are raising our full year 2023 revenue guidance to be in a range of $1,350,000,000 to $1,370,000,000 In addition, we are maintaining our adjusted EBITDA guidance range of 12% to 12.5 percent of revenues and raising and narrowing our full year adjusted non GAAP diluted earnings per share guidance to be in a range of $4.70 to $4.90 Finally, we continue to expect our full year effective tax rate to be in a range of 28% to 30%. Thanks everyone. I would now like to open the call to questions. Operator?

Operator

Thank Our first question comes from the line of Tobey Sommer of Truist Securities.

Speaker 3

Hey, this is Jack Wilson on for Tobey. So my first question, can you talk a little about sort of demand by capability across segments?

Speaker 2

Sure thing, Jack. So overall, the pipeline remains robust. And even with the 2023 guidance that we provided, we're seeing similar pipeline and backlog coverage ratios as in recent quarters, which gives us a lot of confidence in our guidance range. In healthcare, we have seen continued robust broad based demand for our services. In particular, performance improvement in financial advisory demand has Strong as many of our healthcare provider clients continue to face significant financial pressures.

Speaker 2

There's been strong demand for our healthcare digital offerings our clients try to capture returns on the investments in technology and drive operating efficiencies in a high labor cost environment, Improve care outcomes and enhance access and consumer experience. We've also seen increased demand for our revenue cycle in managed services and strategy offerings. Increasingly, we're seeing situations where our clients are looking for help across multiple of these capabilities within the scope of a single project. We're seeing continued broad based demand in the education industry, inclusive of our digital offerings and similar to healthcare, This demand is reflective of a financially strained environment in higher ed characterized by student enrollment volume and mix pressures, Tuition pricing pressure and escalating costs. We're also seeing strong pipeline and sales conversion in our distressed advisory business in the commercial segment.

Speaker 2

Our commercial digital business is an area where we as Mark and I both alluded to in our prepared remarks, that's an area where we have overall solid pipeline, But we've seen some project deferrals in longer sales cycles, which I don't think is a surprise just given some of the macro conditions that we see going on in the environment right now. And our strategy business has experienced some softness in demand in the commercial industry, which is Due to similar reasons probably to the commercial digital pipeline, but they've seen increasing demand in the healthcare industry. And so that's actually an area that we're pretty excited about the growth prospects moving forward.

Speaker 3

Thanks for that color there. That's very helpful. So as a follow-up, How would you describe sort of the hiring environment across both consulting and digital? It seems like you made an impressive gains in the headcount in both of those capabilities.

Speaker 2

So we're from a hiring perspective, I guess maybe I'll start actually With the attrition side of the equation and we continue to experience very low attrition compared to historical periods. I'd say at this point Across the business and it's fairly consistent across the different parts of the business, we're looking at full year attrition rates, it's probably going to be below double digits from an annualized perspective. And so that is good news for us given the growth that we've seen and the demand that we're seeing across the business and the pipeline that we just talked about. With all that said, given the pace of the growth and given the pipeline that we see as we head into next year, We've been continuing to hire and I think in terms of finding talent, I think it's been a good environment for us. I don't think we've had any challenges I'm finding the talent that we need and it's been pretty well balanced across different parts of the portfolio, really focusing though on the areas where we see the most demand right now.

Speaker 3

Thank you. I'll turn it over.

Operator

Thank you. Our next question comes from the line of Andrew Nicholas of William Blair and Company. Please go ahead, Andrew.

Speaker 4

Hi, good afternoon. Thanks for taking my questions. I wanted to ask, I appreciate all the commentary on Pipeline, but maybe specific to kind of the 'twenty four outlook. I know it's early. I know you'll give the official guidance next year.

Speaker 4

But Obviously, the last 2 years now, you posted growth that's well in excess of those medium term targets. So I just kind of want to get your sense for if that's something certainly maybe not 23 rates or 22 rates, but if you're still kind of operating under the assumption that you can run out of those of that target next year or I just don't want us to get ahead of ourselves after 7 or 8 quarters of 20% plus type growth.

Speaker 2

Right. Thanks for the question, Andrew. I think the good news from our perspective and the way we framed it at our Investor Day Towards the beginning of last year was that we anticipated double low double digit growth on an annual basis. And to your point, I'm really pleased that we've been able to exceed that rate of growth in 20222023. And I think the good news from our perspective is Even with the bigger base of revenue that implies based on the growth that we've had in the past 2 years that's exceeded those targets, We still feel good about our ability to grow at a double digit pace moving forward.

Speaker 2

To your point, to the extent that Our teams will be working to beat that and we'll be looking for ways to drive growth as high as we can. But into your other point, we're We're not through our planning cycle yet and we're still we'll give guidance at the end of February. But I think going back to those targets off of kind of the revised base that we have here at 2023 is a good way of looking at it.

Speaker 1

Yes. Andrew, it's Mark. I'll add a couple of comments. One is Now the end markets that we have in healthcare and education, we have very strong market positions, which in the healthcare segment has been obviously Great momentum this year. And coming into next year, we feel good about the early part of the year.

Speaker 1

But over time, the other thing we've been very Active working on over the last several years has been adding capabilities that will be in demand in the positive cycle when Hospitals and health systems are going to be investing more, whether it's in digital capabilities, getting back to more in their people and patient experience In the areas of financial advisory and then strategy as well. So we've balanced out some of The variability that we knew was kind of inherent in some of the cycle. I don't think we feel that we're through the cycle. As I said, we have seen signs of softening demand, but It's something we watch carefully, but with an eye toward making sure that we have less cyclicality around that particular business. Education is one also that I think you've got just very strong tailwinds across the needs of the industry and we're very well positioned in the base.

Speaker 1

And underlying both of those in tying into our commercial markets is really the ongoing transformation to the cloud and the ability to use technology to deliver Whether it's on the growth side of a business or whether it's more efficient operations, it's a nice combination of that industry expertise and capability Working well together. As we look in the commercial markets as well, we think we certainly have capital to continue to put to work where we think we can strengthen of businesses even outside of healthcare and education. So we feel like we've made great progress as we said ahead of where we to be in our medium term financial targets, but by no means do we see ourselves shrinking away from changes in the environment. Our model we think is robust enough and our business continues to evolve in ways that we feel attaining those targets is quite reasonable for us.

Speaker 4

That's helpful. Thank you very much. And then, I wanted to ask on restructuring or Distressed Financial Advisory and Commercial. I think it's a hard environment to Maybe manage headcount in that space, long overdue restructuring cycle, at least in my opinion. I'm just kind of wondering how much you're leaning to headcount growth there, because it's been a couple of quarters now of that being what I think is an outperformer.

Speaker 4

So if you could just kind of speak to momentum there and hiring plans. And then also from a profitability perspective, And I realize any single quarter can be lumpy, but over any kind of longer term timeframe, is restructuring going to be a positive kind of mix component of margin expansion there, is that higher margins than the strategy and digital businesses there? Or how should we think about that evolving mix impacting margins?

Speaker 1

Andrew, it's Mark. In terms of the hiring environment, you're absolutely right. The cycle right now is hot. You see that across all the competitors in the space. And so there is a strong demand for head That is qualified in those skill sets across the industry.

Speaker 1

Having said that, the size and scale of our business and really I would characterize The kind of culture that we have and the kind of people that are attracted to work in our environment is a differentiator for us. So we've been able to continue to add People at the levels that have enabled us to sustain what is right now very hot sales cycle. And so we feel good about what that Looks like over time just because it's a smaller part of our business, but it's done really, really well. And I would just add in terms of your question to margins, John, add commentary, but just in general, it is definitely a contributor to profitability. And for us, obviously, The kind of rates that you realize in this part of the cycle and the environment when things are really troubled and there's need for very rapid actions puts us in a very Strong position within the marketplace and the range of capabilities we have in that business, which is not just consulting and advisory, but The investment banking capabilities that we have in special situations also positions us very well to be able to capitalize on full range of opportunities in the market.

Speaker 1

But John, I'll let you speak to mix and its contribution as well.

Speaker 2

Yes. No, Mark, I agree with what you said. It's definitely one of our stronger margin Businesses in the entire portfolio across segments. So when that business is performing well, that's a positive contributor from a margin perspective. So As Mark said, we continue to see robust demand there, continue to kind of lean into that demand With headcount growth, so we're excited about the prospects for that part of the business.

Speaker 4

Thank you. And maybe just one quick Follow-up that I could squeeze in. I think last quarter you called out a favorable adjustment of I think it was $16,000,000 in healthcare. Was there anything kind of lumpy or one time in results that is worth calling out or that I might have missed in the prepared remarks?

Speaker 2

No, no Andrew. There really wasn't this quarter anything significant to note in that regard. There was Mid single digit $1,000,000 of performance based fee adjustments in healthcare, but I probably particularly at the scale that we're at now, I'd probably consider that to be more of a normal course thing. But other than that, there really wasn't Anything notable to call out.

Speaker 4

Perfect. Thanks again.

Operator

Our next question comes from the line of Kevin Steinke of Barrington Research Associates. Please go ahead, Kevin. All right. Kevin Steinke, your line is open.

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