Huron Consulting Group Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 27, 2024

There are 6 speakers on the call.

Operator

Good afternoon, and welcome to Huron Consulting Group's webcast to discuss Financial Results for the Q4 and Full Year of 2023. At this time, all conference lines are on a listen only mode. Later, we will conduct a 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 Q4 and full year 2023 earnings call. With me today are John Kelly, our Chief Financial Officer and Ronnie Dale, our Chief Operating Officer. Driven by strong growth across all three operating segments in 2023, we achieved record revenues and expanded our operating margins for the 3rd consecutive year. Our 4th quarter performance was consistent with our expectations, culminating in record financial performance for full year 2023. Revenues in the Q4 and full year 2023 grew 8% 20% respectively.

Speaker 1

In 2023, our consulting and managed services capability, which represents over half of our revenues grew 23%, while our digital capability grew 17%, achieving revenue that is approaching $600,000,000 and represented 43% of our revenues across all 3 operating segments. Full year adjusted EBITDA margins improved 70 basis points over the prior year, reflecting continued progress toward our objective of returning to mid teen EBITDA margins by 2025. And our strong cash flow enabled us to return $124,000,000 to shareholders via share repurchases in 2023, while maintaining a strong financial position. Our financial performance demonstrates the strength of the foundation we've established under our integrated go to market model to continue delivering on our medium term investor objectives. Our deep industry expertise and leading market positions in healthcare and education, our expanding presence in commercial industries and our growing portfolio of digital capabilities positions us well to meet or exceed our medium term financial objectives for low double digit revenue growth and increased profitability.

Speaker 1

Now I'll discuss our Q4 and full year 2023 performance along with our expectations for 2024. In the Q4 of 2023, Healthcare segment revenue grew 12% over the prior year quarter, reflecting the strong demand across our digital strategy and innovation, performance improvement and financial advisory offerings. On a full year basis, the Healthcare segment achieved record revenues of $674,000,000 growing 26% over 2022. Demand was widespread across our performance improvement, digital, financial advisory, strategy and innovation and managed services offerings. Our consulting and managed services revenues increased 30% and digital capability revenues increased 16% over the prior year.

Speaker 1

We continue to diversify our portfolio to meet the expanding needs of our healthcare clients and build a strong foundation for ongoing growth for this segment. As I mentioned on our last earnings call, the operating environment for healthcare providers began to improve in 2023. Despite some improvements in overall patient volume, many health systems continue to face significant financial pressures. A confluence of labor driven financial and operating challenges combined with increasing competition, deteriorating payer mix and inflationary and interest rate headwinds create challenges for health system business models. We believe these market pressures create opportunities for our diverse set of healthcare offerings.

Speaker 1

The investments we've made and will continue to make in innovation, new services, products and partnerships positions our Healthcare segment well, continued growth in 2024. Turning now to the Education segment. In the Q4 of 2023, Education segment revenues increased 7% over the prior year quarter, primarily driven by demand for our digital offerings. Annual revenues in the segment grew 19% compared to 2022, achieving record revenues of $430,000,000 For the full year, demand was broad based with our digital revenues and consulting advanced services revenues increasing 28% and 12% respectively over 2022. We believe the solid demand for our digital, research and strategy and operations offerings will remain strong as higher education institutions face continued financial and operational challenges.

Speaker 1

The frequently mentioned demographic challenges leading to declining numbers of college bound students creates a highly competitive environment for admissions. Similar to our healthcare clients, increased labor and facilities costs, unfunded government mandates and the increased reliance on digital platforms create financial pressures and challenges to the achievement of university admissions. Huron's well established reputation, long history of proven results and deep client relationships makes us one of the most trusted advisors to the industry, which we believe positions us well to support our clients through the diverse set of challenges faced by the higher education industry. Before I turn to the commercial segment, I would like to highlight the recently announced investment we will make to accelerate our growth in our mission driven end markets, which is a key pillar of our strategy. Earlier this month, we announced our intent to acquire Gg and A, a leading philanthropy focused management consulting firm that serves education institutions in healthcare, arts and other non profit organizations.

Speaker 1

This acquisition strengthens our philanthropic consulting offerings, complements our advancement focused digital services and creates new pathways for us to serve our mission driven clients. And we expect the transaction to close next month. Now turning to the Commercial segment. In the Q4 of 2023, Commercial segment revenues were flat over the prior year quarter, primarily attributable to growth for our digital offerings offset by declines in our strategy and innovation offerings. On a full year basis, commercial segment revenues grew 9% year over year.

Speaker 1

The growth was broad based as our consulting and managed services capability and digital capability grew 13% and 7% respectively. A standout performer within the commercial segment was our financial advisory business, which grew 68% for 2022, driven by strong demand for our restructuring and turnaround offerings. The uncertainties in the broader macroeconomic environment, including rising interest rates, inflationary pressures and geopolitical risks have created unique challenges, particularly among some of our mid market commercial clients. As is often the case, an uncertain economic environment needs many organizations to take a more cautious approach to executing large scale initiatives. This mixed demand for this created mixed demand for our offerings in 2023.

Speaker 1

Our financial advisory offerings were in strong demand during the past year as many organizations facing financial distress sought our expertise. Our digital offerings grew more slowly as some organizations were more cautious about their spending on large scale digital initiatives. We were now seeing positive indicators that demand for commercial digital projects is improving as we begin 2024. Our growth in 2023 demonstrates the importance of a balanced commercial portfolio. We remain focused on growing our presence in commercial industries by pulling more industry tap and expanding our capabilities, while maintaining balance within the commercial segment and across a more diversified enterprise platform.

Speaker 1

Now let me turn to our expectations and guidance for 2024, which contemplates our pending acquisition of Gg and A. Our revenue guidance for the year is $1,460,000,000 to $1,540,000,000 We also expect adjusted EBITDA in the range of 12.8% to 13.3% of revenues and adjusted diluted earnings per share of $5.35 to $5.95 company wide, guiding to 10% revenue growth at the midpoint for 2024. We're proud of the significant growth we achieved in 2020 2 and 2023 and we believe demand for our portfolio of offerings will continue to 2024. We remain focused on achieving low double digit annual revenue growth objectives that we established at our 2022 Investor Day, while pursuing opportunities to accelerate growth beyond those goals as demonstrated in recent years. In terms of margins, the midpoint of our 2024 guidance, we expect a 70 basis point improvement over 2023 building off the collective 150 basis point improvement achieved in 20222023.

Speaker 1

The midpoint of our guided adjusted earnings per share range of $5.35 to $5.95 per share is actually 116 percent higher than our 2021 adjusted EPS of $2.61 which reflects the compounding impact of revenue growth, margin expansion and return to shareholders via share repurchases. We remain committed to achieving our financial objectives for sustainable revenue growth and improved profitability. And to deliver these objectives, we remain focused in 5 key areas. 1st, accelerating growth in our core end markets of health care and education 2nd, expanding our growing commercial business 3rd, advancing our global digital technology and analytics platform 4th, broadening our offerings and capabilities to build a sustainable base from which drive consistent revenue growth and margin expansion and 5th, strategically deploying capital to invest in the areas of our business with the greatest growth potential of returning capital to shareholders. Our growth strategy has delivered strong results in recent years and we believe it will continue to be the foundation from which we will achieve top and bottom line growth in the future.

Speaker 1

Each of the pillars of our growth strategy reinforced and build upon one another and when executed together they'll help us enhance our ability to deliver on our clients' most complex challenges, strengthen our competitive advantage, create value for our shareholders. 2023 was a record year for Huron and these results are only possible because of our incredibly talented team and their commitment to making a lasting impact on our clients and our business. Karen has always had a vibrant and collaborative culture and that culture remains at the heart of our success. Together, we've collectively built a client centric culture and supportive work environment, which was reflected by Huron securing the 32nd position out of 100 on Glassdoor's best places to work U. S.

Speaker 1

Large companies less. The Glassdoor rankings and our financial results demonstrate considerable impact our team has had on Huron's performance. We don't take our recent success for granted. We remain focused on executing our strategy. We're excited about our prospects for 2024 as we strengthen our competitive position and take advantage of the market opportunities that lie ahead.

Speaker 1

Now before I lose my voice, I'm going to turn it over to John for

Speaker 2

a more detailed discussion of our financial results. 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 ks and Investor Relations page on the Euron website have reconciliations of these non GAAP measures 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.

Speaker 2

I'd first like to touch on 2 housekeeping items before discussing our financial results for the quarter. First, earlier this month, we announced our intent to acquire GG and A. We expect that transaction to close in the Q1 of 2024 and as such it is not included in our Q4 results. The acquisition of GG and A will strengthen our industry expertise, and expand our consulting offerings to help our mission driven clients build and accelerate their philanthropic programs. 2nd, let me provide a brief comment on a note in our press release.

Speaker 2

GAAP net income includes a non cash unrealized loss of $19,400,000 net of tax during the quarter related to our investment in a hospital at home company. As a reminder, in 2019, we invested $5,000,000 in a hospital at home company as a strategic investment that has annually produced meaningful implementation projects for our healthcare segment. In the Q1 of 2022, we recognized a non cash unrealized gain on this investment of $19,800,000 net of tax based on the valuation established and around the financing that closed that quarter. In the Q4 of 2023, the company recorded a non cash impairment loss of $19,400,000 net of tax on the investment, essentially reversing the 2022 gain based on the valuation established in the new round of financing expected to close in early 2024. As of December 31, 2023, the investments carrying value was $7,400,000 reflecting a net unrealized gain of $2,400,000 on the investments since inception.

Speaker 2

Geron's ownership percentage in this hospital at home company is less than 5%. Now I'll share some of the key financial results for the quarter and full year 2020. Revenues for the Q4 of 2023 were $339,200,000 up 8.1 percent from $313,700,000 in the same quarter of 2022. The increase in revenues in the quarter was driven by growth in the healthcare and education segments. In addition, our digital capability posted strong growth across all three segments.

Speaker 2

For the full year 2023, revenue was $1,362,000,000 up 20.3 percent from $1,132,000,000 in 2022. We achieved record revenues in 2023, reflecting broad based demand for our portfolio of offerings across all three operating segments. Our performance in 2023 also reflects strong execution on the key elements of our growth strategy. Accelerating growth in healthcare and education, expanding our presence in commercial industries and further growing our digital capability. Net income for the Q4 of 2023 was $2,800,000 or $0.15 per diluted share compared to net income of $17,100,000 or $0.85 per diluted share in the Q4 of 2022 and reflects the non cash unrealized loss of $19,400,000 net of tax or $1 per diluted earnings per share related to our investment in Hospital and Home Company as discussed earlier.

Speaker 2

For full year 2023, net income was $62,500,000 or $3.19 per diluted share. This compares to net income of $75,600,000 or $3.64 per diluted share in 2022. Both periods reflect the impact of non cash changes in fair value related to our investment in the hospital and home company as discussed earlier. Our effective income tax rate in the Q4 of 2023 was negative 60.2%, which is more favorable than the statutory rate inclusive of state income taxes, primarily due to a tax benefit related to non taxable gains and the investments used to fund our deferred compensation liability and a discrete tax benefit for share based compensation awards that vested during the quarter and the positive impact of certain federal tax credits. On a full year basis, our effective income tax rate for 2023 was 25.5%, which is more favorable than the statutory rate inclusive of state income taxes, primarily due to a discrete tax benefit for share based compensation awards that's been during the year with the positive impact of certain federal tax credits.

Speaker 2

These favorable items were partially offset by certain non deductible expense items. Adjusted EBITDA was $41,400,000 in Q4 2023, a 12.2 percent of revenues compared to $39,000,000 in Q4 2022, 12.4 percent of revenues. For full year 2023, adjusted EBITDA as a percentage of revenues increased 70 basis points to 12.3% compared to 11.6% in 2022. The increase in full year adjusted EBITDA reflects higher consultant utilization, improved pricing, expanded deployment of our global delivery capabilities and lower corporate SG and A expense as a percentage of revenues in 2023 compared to 2022 after adjusting for the impact of our deferred compensation plan liability. Partially offsetting these factors is continued investment in the growth of our business and increased bonus compensation related to the strong performances across our business.

Speaker 2

Adjusted net income was $25,100,000 or $1.29 per diluted share compared to $22,600,000 or $1.12 per diluted share in the Q4 of 20 22. For the full year 2023 adjusted net income was $96,200,000 or $4.91 per diluted share compared with $71,100,000 or $3.43 per diluted share in 2022. Now I'll discuss the performance of each of our operating segments. The Healthcare segment generated 51% of total company revenues during the Q4 of 20 23. This segment posted revenues of $172,000,000 up $18,700,000 or 12.2 percent from the Q4 of 2022.

Speaker 2

The increase in revenues in the quarter was driven by strong demand for our digital, strategy and innovation, performance improvement and financial advisory offerings. On a full year basis, healthcare revenue increased 26% to $674,000,000 compared to $535,000,000 in 2022, also driven by strong demand for our performance improvement in digital offerings as well as our financial advisory and strategy and innovation offerings. In 2023, consulting and managed services capabilities in healthcare, which is our largest capability company wide, grew 30%. Operating income margin for Healthcare was 25.9 percent in both Q4 2023 and Q4 2022. On a full year basis, the Healthcare segment's operating income margin was 25.7% compared to 24.5% in 2022.

Speaker 2

The increase in operating income margin year over year was primarily due to revenue growth outpacing compensation costs for our revenue generating professionals, partially offset by an increase in contractor expenses. The Education segment generated 31% of total company revenues during the Q4 2023. The Education segment posted revenues of $103,800,000 up $7,200,000 or 7.4 percent from the Q4 of 2022. The increase in revenues in the quarter was primarily driven by demand for our digital offerings. On a full year basis, Education segment revenues grew 19.4% year over year, driven by demand for our technology, analytics services and software products within our digital capability as well as increased demand for our strategy, operations and research solutions within our consulting and managed services capability.

Speaker 2

The operating income margin for Education was 21.2% q4 2023 compared to 20.8% for the same quarter in 2022. The increase in operating income margin in the quarter was primarily driven by decreased restructuring and contractor expenses, partially offset by increased compensation costs for our revenue generating professionals. On a full year basis, operating income margin was 23.1% compared to 21.9% in 2022, primarily due to a decrease in contractor expenses, partially offset by increases in compensation costs for our revenue generating professionals technology expenses. Commercial segment generated 18% of total company revenues during the Q4 of 2023 and posted revenues of $63,500,000 compared to $63,800,000 in the Q4 of 2022. On a full year basis, commercial segment revenues increased 8.7 percent to $258,400,000 compared to $237,600,000 in 2022.

Speaker 2

The increase in full year revenues was driven by strong demand for our financial advisory and digital offerings. Operating income margin for the commercial segment was 22.4% for Q4 2023 compared to 18.4% for the same quarter in 2022. The increase in operating income margin in the quarter was primarily driven by decreases in compensation costs for our revenue generating professionals and contractor expenses. On a full year basis, commercial segment operating income margin was relatively even at 21% in 2023 compared to 21.1% in 2022. Corporate expenses not allocated at the segment level and excluding restructuring charges were $45,200,000 in Q4 2023 compared to $40,100,000 in Q4 20 22.

Speaker 2

Unallocated corporate expenses in the Q4 of 2023 2022 included $3,200,000 $1,800,000 respectively of expense related to the increase in the liability of our deferred compensation plan, which is offset by the investment gain on the assets other income. Excluding the impact of the deferred compensation plan in both periods, unallocated corporate expenses increased $3,700,000 primarily due to increased compensation costs for our support personnel and 3rd party professional services expenses. On a full year basis, corporate expenses not allocated at the segment level increased to $174,800,000 including $5,500,000 of expense related to deferred compensation plan compared to $136,500,000 unallocated corporate expenses in 2022, which included a $6,900,000 reduction of expense related to the deferred compensation plan. Excluding the impact of the deferred compensation plan in both periods, unallocated corporate expenses increased $25,900,000 primarily driven by an increase in compensation costs for our support personnel as well as increases in third party professional services expenses and software and data hosting expenses. Now turning to the balance sheet and cash flows.

Speaker 2

Total debt as of December 31, 2023 was $324,000,000 consisting entirely of our senior bank debt. We finished the year with cash of $12,100,000 for net debt of $311,900,000 This was a $36,800,000 decrease in net debt compared to Q3 2023. The 4th quarter included $34,900,000 of share repurchases or approximately 345,000 shares. Our leverage ratio defined in our senior bank agreement was 1.6 times adjusted EBITDA as of December 31, 2023 compared to 1.9 times adjusted EBITDA as of December 31, 2022. Cash flow generated from operations for 2023 was $135,300,000 We used $35,200,000 of our cash to invest in capital expenditures inclusive of internally developed software costs, purchases of property and equipment, resulting in free cash flow of $100,100,000 In addition, in 2023, we used $123,600,000 to repurchase approximately 1,500,000 shares, representing 7.4% of our outstanding shares as of the beginning of the year.

Speaker 2

And we used $1,600,000 for strategic tuck in acquisitions. As of December 31, 2023, dollars 86,200,000 remained available for share repurchases under our current share repurchase program. DSO came in at 87 days in the Q4 of 2023 compared to 83 days in the Q3 of 2023 77 days in the Q4 of 2022. The increase in DSO during the Q4 when compared to the 3rd quarter reflects the impact of contractual payment schedules for certain larger healthcare projects. Today, we also announced that we have amended our senior secured credit facility to include a $275,000,000 term loan in addition to our existing $600,000,000 revolving credit facility, both of which matured in November of 2027.

Speaker 2

The proceeds from the term loan will be used to reduce borrowings under the company's revolving credit facility, which increases the company's capacity for investment by $275,000,000 This expanding capacity will enable us to continue executing on our balanced capital deployment strategy, inclusive of strategic tuck in acquisitions and returning capital to shareholders through targeted share repurchases. Finally, let me turn expectations and guidance for 2024, which contemplates our pending acquisition of GG and A. For the full year 2024, we anticipate revenues before reimbursable expenses in a range of $1,460,000,000 to $1,540,000,000 adjusted EBITDA in a range of 12.8 percent to 13.3 percent of revenues and adjusted non GAAP EPS in a range of $5.35 to $5.95 We expect cash flows from operations to be in a range of $155,000,000 to $185,000,000 Capital expenditures are expected to be approximately $40,000,000 inclusive of cost to develop our market facing products and analytical tools and free cash flows are expected to be in a range of $115,000,000 to $145,000,000 net of cash taxes and interest and excluding non cash stock compensation. Weighted average diluted share count for 2024 is expected to be in a range of 19,000,000 to 19,500,000 shares. Finally, with respect to taxes, you should assume an effective tax rate in the range of 28% to 30%, which compromises the federal tax rate of 21%, a blended state tax rate of 5% to 6% and incremental tax expense related to certain non deductible expense items.

Speaker 2

Let me add some color to our guidance starting with revenue. The midpoint of the revenue range reflects 10% growth over 2023. As Mark mentioned, while we are proud of the accelerated 20% plus growth we achieved in 20222023, we believe that our guidance aligns with a more normalized level of growth for our business and is consistent with our previously stated medium term financial objectives. We remain focused on executing our growth strategy across all segments of our business and fully align the incentives for all of our managing directors and principals with our strategic goals and integrated operating model. With regard to our Healthcare segment, we expect mid to high single digit percentage revenue growth for the full year 2024.

Speaker 2

We expect operating margins would be in a range of 25% to 27%. In the Education segment, we expect low teen percentage revenue growth for full year 2024 inclusive of a mid to high teen $1,000,000 contribution for 10 months of gg and a and we expect operating margins will be in a range of approximately 24% to 26%. In the commercial segment, we expect to see low double digit percentage revenue growth for 2024. We expect our operating margins in this segment to be in a range of approximately 21% to 23%. We expect unallocated corporate SG and A to increase in the low to mid single digit percentage range year over year.

Speaker 2

Also in the Q1, consistent with prior years, we note the following items as it relates to expenses. The reset of wage basis for FICA and our 401 match, our annual merit and promotion wage increases go into effect on January 1 and an increase in stock compensation expense for restricted stock awards that will be granted in March to retirement eligible employees. Based on these factors, we anticipate approximately 15% to 20% of our full year adjusted EBITDA and full year adjusted EPS to be generated during the Q1, consistent with the pattern we have seen for the last several years. As a closing reminder, with respect to 2024 adjusted EBITDA, adjusted net income and adjusted EPS, there are several items that you will need to consider when reconciling these non GAAP measures to comparable GAAP measures. The reconciliation schedules that we included in our press release will help walk you through these reconciliations.

Speaker 2

Thanks everyone. I'd now like to open the call to questions. Operator? Thank

Operator

Our first question comes from the line of Tobey Sommer of Truist Securities. Please go ahead, Tobey.

Speaker 2

Thank you. I was curious if you could speak to your medium term financial targets laid out at Investor Day. It's been, I don't know, for exactly the midpoint between when you

Speaker 1

gave them and when they'll ultimately be rendered. But how do

Speaker 2

you feel about those in particular the EBITDA margin figure? Thanks. Hey, Jovi, it's John. So we feel good about our progress against those medium term financial objectives that we established in our Investor Day back in 2022. Certainly, I think if you're looking at it from the perspective of EBITDA dollars and just EPS, we feel like we're pacing ahead of the projections that we talked about during that Investor Day.

Speaker 2

I think the mix has maybe been a little bit different than what we might have projected at that point in time. The growth has been much stronger. So we talked about low double digit growth and our growth has actually been in excess of 20% past couple of years. And related to that growth, we needed to continue to invest in our talent and our team to build out the resources to be able to deliver on that growth. And I think that's put a little bit of pressure on the margin percent.

Speaker 2

So the net net has us ahead in terms of the EBITDA dollars and in terms of the adjusted EPS, but the mix has probably been a little bit different. I think going forward from where we're at, we still feel good about our ability to meet those revenue objectives. And I think we feel really good about our guidance for 2024 from a margin perspective. And our focus will be on meeting or beating those margin percent objectives for 2024, which at the top end would be in the low 13% range. And if we're able to continue to execute and have a similar sort of step next year, I think that would get us comfortably into kind of that 14% plus range for the mid teen range at that point in time.

Speaker 2

But that's kind of the outlook halfway through. Yes. And maybe Tony,

Speaker 1

I'll add one comment to that just to say, when you look at the drivers, say, okay, what is it that we're doing that enables us to achieve those things? We've made really good progress on utilization. We have more room to run there. The pricing work that we've been doing is probably not fully baked in yet to everything we're doing across the enterprise. Our global delivery model continues to expand and then just continuing scaling our corporate SG and A.

Speaker 1

So we've got a lot of levers still that we're pretty confident in. As John said, there's been the system growth has created some headwinds, but we think we're going to get there. It will probably be in that 14% plus range into 2025.

Speaker 2

Thank you. How long sorry, do

Speaker 1

you think your hospital customers, what

Speaker 2

are you hearing from them in terms of how long they expect activity to remain at elevated levels and therefore some of them doing fine from a profitability perspective before that activity level normalizes? And maybe in the context of that answer, you could speak to what you're seeing from an assessment perspective in your PI offering?

Speaker 1

Sure, Tobey. This is Mark. I'll keep talking as long as my voice holds up. But we actually as I noted in the script, we started to see some improvement across the industry toward the latter half of twenty twenty three. There really is, I would say, a mixed story coming into 2024.

Speaker 1

So we have those systems, I think, that are actually done a pretty good job of recovering and we're seeing them continuing to spend, but they're spending on the growth aspect of what they're trying to do. They're trying to enhance their digital platforms and things that are perhaps more pro cyclical in nature. And we've repositioned our portfolio very well to be able to play both the up and down aspects of that. But having said that, there are still a number of clients and we are quite busy on a number of assessments coming into 2024 for those clients who are still facing ongoing challenges. So by no means do we think that demand is going to run out of the cycle here.

Speaker 1

We feel that 2024 will be just continuing to evolve. That's kind of reflective of the pipeline.

Speaker 2

Right. Yes, that's right, Mark. We look at the pipeline and what gives us confidence in our guidance for the year and the continued growth really is an evolving mix where we've got still plenty of projects in the pipeline that relate to clients that are going through some level of financial strain and are seeking performance improvement help. But now we're seeing increased pipeline activity related to some of our other offerings, which as Mark said, are more procyclical like our strategy offerings, our non distressed financial advisory offerings. And then critically, really the digital offerings, which I think a lot of clients at this point are now seeking to invest funds in their technology platforms and really try to modernize those to help them operate more efficiently, to help them better get actionable insight from their data to protect their data, to automate as many processes as possible in a high labor cost environment.

Speaker 2

So we're seeing a nice mix of projects right now that really reflect both dynamics going on in the market. Okay. Two things for me and I'll get back

Speaker 1

in the queue. Could you speak to why to expand liquidity now? And then John, if you could, what is the inorganic contribution to EBITDA and EPS in the initial guidance?

Speaker 2

Sure, Tobey. So the first question about why expanding the borrowing capacity now, it really just has to do with the significant growth we've seen in the company over the past couple of years. When we first entered into our $600,000,000 revolving credit facility, that was really designed to support 3.7 times EBITDA leverage, so our trailing 12 month bank debt distributions in EBITDA. And having seen our EBITDA practically double since 2021, that has significantly cut into our capacity on $600,000,000 revolver. So really adding the $275,000,000 term loan, that just kind of gets us back to the capacity that we originally had on a leverage basis given the much bigger side of the company now.

Speaker 2

So from our perspective, in terms of capital deployment strategy with that extra capacity, I think it's the same messaging. I think you're going to see some mix of strategic tuck in acquisitions as a result of our programmatic M and A process as well as continued targeted share buybacks. But we just felt like given our increased size that we needed some more capacity. And then as far as GGA and the guide, I commented from a revenue perspective given it's a partial year kind of high teens $1,000,000 revenue, I'd expect that to flow through at the same percent as our overall corporate EBITDA percentage just given that there will be some transition type expenses during the 1st year. And then from an EPS perspective, it's accretive, but in this 1st partial year, it's pretty minimal from an EPS perspective.

Speaker 2

Thank you.

Operator

Thank you. Our next question comes from the line of Andrew Nicholas of William Blair and Company. Your question please, Andrew.

Speaker 3

Thanks and good afternoon. I wanted to double back on the margin conversation. Pretty good expansion that you expect here in 2024. I think, Mark, you highlighted a few things, where there's more room to run between utilization and pricing and delivery model. I'm just wondering if there's any way to maybe split up the 70 or 80 basis points of expansion across some of those drivers?

Speaker 3

Like what is the primary set of drivers in 2024? And maybe related to that, how much of this is maybe expecting a pullback in headcount growth and some improved utilization as we progress through the year?

Speaker 2

Andrew, I don't know if I would describe it as a pullback in the headcount growth. I think what you'll probably see from a headcount growth perspective is headcount growth. I think the base case this year is that headcount growth will be generally in line with revenue growth. I think in terms of the breakout of that 70 basis points of improvement Between the key things that Mark mentioned, utilization, pricing and then SG and A leverage, that's actually more than 70 basis points of improvement that we're expecting. And then on the flip side of that, we do expect to continue to invest in our business, continuing to add talent in new areas to keep the growth going.

Speaker 2

So I think the initiatives that we have underway actually contribute more than 70 basis points margin improvement and then we do expect to invest some of that back in the business. So in terms of the think of those investments as 100 basis points of investment. So if you're thinking of then, okay, between 100 and 50 basis points to 200 basis points of operational efficiency improvement, I'd say that that's about split fifty-fifty between some of our pricing and utilization objectives as well as continued global deployment of our India team. And then just some of natural scaling of SG and A that we expect to experience this year.

Speaker 3

Great. That's helpful. Thank you. And then, you mentioned, I think briefly some pickup in Innosight and some of the strategy pieces. Can you unpack that a little bit more?

Speaker 3

And are there particular end markets where that is strongest? And how much of that recovery are you baking in for 2024?

Speaker 1

Yes. Andrew, it's Mark. I would say that in 2023 what we saw was for Innosight a little bit slower starts to the year, but really what we were very excited to see was very good strength in the healthcare market and really in conjunction with working across our team. So very, very much kind of integrated into our overall delivery. At the same time, some of the industrial areas that we've had great strength and had a little bit quieter year.

Speaker 1

But coming into 2024, we feel like they have a very strong pipeline across both sides of that business and we're excited about just the good recovery into 2024.

Speaker 3

Great. Thank you.

Operator

Thank you. Our next question comes from the line of Bill Sutherland of Benchmark. Please go ahead, Bill.

Speaker 4

Thank you. Hey, guys. Another terrific year in the books. I was curious on the refi, John, kind of the what's the did you mention kind of how to think about interest expense with the new change?

Speaker 2

The change is really pretty minimal, Bill, because it's a if you think about the funds flow on it, we added a $275,000,000 term loan, but then we use the proceeds from that term loan to immediately pay down the revolver. So it's really about adding capacity. There'll be some minimal incremental expense related to just the fees of establishing that, as well as now some more unused fees on the revolving credit facility, but that will be pretty minimal in the scheme of things.

Speaker 4

Okay. I wasn't sure if there was I don't think you mentioned if there's any change in rates.

Speaker 2

So on the ability, there's a 50 basis point additional spread on the term that we just think is more reflective of the market right now versus when we were able to lock in the revolving credit facility. But again, that probably in the scheme of things that will be pretty minimal. We did also in the early Q1 do an interest rate swap that we're able to lock in some more short term savings versus the silver spot rate right now that largely offsets any of that additional expense in 2024.

Speaker 1

Okay.

Speaker 4

John, when you were talking about the drivers for the 2023 segment results. It was interesting on education, you mentioned digital and then but for the year, there was the other parts of the business that seemed to be important. Was digital just kind of the centerpiece of the 4th quarter or was that just, am I reading too much into it? And I'm curious how you're thinking about the offerings in education contributing to 24's outlook?

Speaker 2

The Q4, it was broad based demand, Bill. I would say that the leader in the clubhouse though was the digital offerings during the Q4, which is why we highlighted. But our consulting offerings as well as our managed service offerings, which is a smaller base of revenue right now, they both also had healthy growth during the Q4. And then as you pivot towards 2024, again, I think it's going to be a broad based story in the education business. Clearly, from a digital perspective, we see clients investing in what many institutions right now are, gated legacy technology infrastructure that really needs to get modernized to help those universities meet their missions.

Speaker 2

But then even beyond the digital side and the consulting side, you probably see it quite a bit now in the headlines, a lot of the pressure that universities are under. And so some of our offerings that help our university partners enroll students from a philanthropic perspective that help them with their fundraising and then help them minimize risk and efficiently manage their research function. Those are all things that are very important to our education clients right now. So I think the growth we expect to see is pretty balanced across those areas.

Speaker 1

Yes. And I'll just add research as well. ReTRS has been a very important part of our portfolio, continues to be the area that clients pay a lot of attention to because it's so important not only to the revenues to their risk management around the research enterprise. So I think it's been a very balanced story. You may have quarters where one is a little bit ahead of another, but I would just say from any demand backdrop, it's been a very consistent demand across all of

Speaker 4

them. Right. No, it certainly has. And finally, I was just curious, as you look at your headcount plans this year, are you weighing it heavily towards offshore? Or is it going to be this kind of the same kind of mix?

Speaker 2

I think it's going to be a similar mix to our total ag count, Phil.

Speaker 4

Okay. So that's not part of the 150 bps to 200 bps?

Speaker 2

And so there is continued increased utilization out of our the team, the global delivery team in India is part of the margin story. But if you look at our headcount as of twelvethirty onetwenty 23, it's about 70% in North America and about 30% in India. When we look at our headcount modeling for the year, I don't think we expect any big shift in that percentage. It could be a little bit more weighted towards the year, but it will be modest. I think it's going to be pretty balanced.

Speaker 4

Okay. All right, guys.

Operator

Thanks. Thank you. Our next question comes from the line of Kevin Steinke of Barrington Research and Associates. Please go ahead, Kevin.

Speaker 5

Hi, Mark and John. So just wanted to ask about the Education segment, certainly another strong year, solid 4th quarter. We did see a sequential dip in revenue 4th quarter versus 3rd quarter. I guess we've kind of gotten spoiled by these continually sequential increases, although it's kind of flattened out Q3 versus Q2. But is there anything to note there in terms of timing of projects or anything that might have led to that sequential change 4th quarter versus 3rd quarter?

Speaker 2

Hey, Kevin. It's largely just related to business days and holidays during the Q4. We see it across the entire business. There's always less effective business days in the Q4 than there are in other quarters. Within education, just based on our client schedules, sometimes that can be even a little bit more pronounced and that's all that you're seeing.

Speaker 2

As I said in my remarks, we're expecting low teen growth for next year. So we feel good about the growth trajectory in the Education segment.

Speaker 5

Okay, great. So just following up on the DGA acquisition, maybe just a little more color on what attracted you to that business and how it fits in? And I guess it's slots into the education segment. So I'm assuming it predominantly serves education institutions, but you also mentioned healthcare nonprofit. Just also trying to get a sense for the business mix there.

Speaker 1

Yes. Kevin, this is Mark. We're very excited about the G and A acquisition and that John Greer is joining us as well and continue to be very active in the market. You noted correctly that their position in education, they actually do serve not profit much more broadly and also on a global basis. They have clients in Europe as well.

Speaker 1

And so as an example, what we believe will be the pitch here is obviously philanthropy is a huge lever within higher education to drive their revenue. At the same time, it really gives an opportunity for us to bring some of our digital solutions and enablement to advancement function, which has been just a great area of momentum for us from a sales force point of view. And we think the combination of that, their expertise around the whole management function will be highly accretive to us. So we think it's well positioned. And then at the same time, because of our operating model that really enables us to bring solutions across lines.

Speaker 1

We feel that as we have opportunities whether it's in healthcare or even outside of healthcare or not for profit more generally, we'll have really very full ability to take advantage of the full scope and scale of that acquisition.

Speaker 5

Okay, great. Thank you. John, I think when you're talking about the progression towards the mid teens margin target by 2025, you mentioned the mix has been maybe a little bit different than you would have expected. Is that just were you referring to mix of digital versus consulting or what was that comment targeted at?

Speaker 2

Thanks for asking, Kevin. And to clarify, I was more referring of the mix to get to the increase in adjusted EBITDA dollars and adjusted EPS that we've seen and how that's at this point pacing significantly ahead of our Investor Day targets. And then the path to getting to those increased EBITDA dollar amounts and increased EPS amounts, The mix has been a little bit more towards higher growth than what we had initially projected with a little bit of pressure on the margin percent just as we've been investing in our team to deliver that growth. So I was speaking about the two levers of revenue growth versus margin percent in getting to the nice results we've had from an increased EBITDA dollars and adjusted EPS.

Speaker 5

Okay, understood. Thanks. And then lastly, you mentioned continued ramp or greater utilization of your staff in India is one of the margin drivers going forward. Can you just update us on utilization there and plans to build out the team there, etcetera?

Speaker 1

So Kevin, I think John and I will tag team on this one. So let me just tell you I think from an expansion standpoint, we're really happy with how that team has been built out. And the way we view this is not an offshore capability. We really run the business truly on a global integrated basis by each service line. So our team in India and our team in the U.

Speaker 1

S, we consider part of 1 unified team and their goal is to optimize their performance in the market together. So over time, we've continued to expand that to other areas of service line. We've had a small team as an example in our business advisory practice doing some consulting support around financial advisory engagements. It's had great success and impact. But more broadly in terms of just the utilization numbers and sales, let me just ask John

Speaker 2

to just give you an update. Yes. Kevin, that's been a really great story for us as the year has progressed. So as you may recall, at the end of 2022, we had made some targeted investments in our team in India to really build out our capacity there in anticipation of growth. And part of that investment was we experienced some lower utilization in the back half of last year and into really the Q1 of this year.

Speaker 2

We've seen that utilization steadily increase over the course of the year. And by the time we got to the Q4, it's very much in line with our overall utilization, which I would note for the Q4, was in the 78% to 79% range overall as a company, which is really one of the strongest utilization metrics we posted that I can remember and definitely gives us encouragement about the margins heading into next year as we continue expect to continue to operate at roughly that level heading into 2024.

Speaker 5

All right. Thanks for the insight and for taking the questions.

Operator

And seeing no more questions in the queue, I'd like to turn the call back to Mr. Hussey.

Speaker 1

Thank you very much for joining us this afternoon. We look forward to speaking with you again in April, when we announce our Q1 results. Have a good

Operator

evening. That concludes today's conference call. Thank you everyone for your participation.

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Key Takeaways

  • Huron achieved record full-year revenues of $1.362 billion in 2023 (up 20% YoY) and Q4 revenues of $339.2 million (up 8%), driven by Healthcare (+26% to $674 million), Education (+19% to $430 million) and Commercial (+9% to $258 million), with consulting & managed services up 23% and digital capability growing 17% to nearly $600 million (43% of total).
  • Full-year adjusted EBITDA margin expanded by 70 basis points to 12.3%, fueled by higher consultant utilization, improved pricing, global delivery scale and SG&A leverage, advancing Huron’s goal of reaching mid-teens margins by 2025.
  • Strong cash flow in 2023 supported $124 million of share repurchases (1.5 million shares, 7.4% of float), reduced net debt to $311.9 million (1.6× EBITDA) and funded strategic tuck-in acquisitions.
  • The pending acquisition of GG&A, a philanthropy-focused consulting firm serving education, healthcare and non-profits, will enhance Huron’s advancement digital services and is expected to close in Q1 2024.
  • For 2024, Huron guides to revenues of $1.46–$1.54 billion (10% growth at midpoint), adjusted EBITDA of 12.8–13.3% and adjusted EPS of $5.35–$5.95, while executing five strategic priorities: accelerate core markets, expand commercial, grow digital platform, broaden capabilities and deploy capital for growth and returns.
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Earnings Conference Call
Huron Consulting Group Q4 2023
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