Huron Consulting Group Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 30, 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 Q2 20 24. 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. 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. The news release is posted on Huron's website.

Operator

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. Mr.

Operator

Hussey, please go ahead.

Speaker 1

Good afternoon, and welcome to Huron Consulting Group's Q2 2024 Earnings Call. With me today are John Kelly, our Chief Financial Officer and Ronnie Dale, our Chief Operating Officer. In the Q2, we achieved record revenues, led by solid growth in our Healthcare and Education segments and we expanded our adjusted EBITDA margin to 15%. Our adjusted earnings per share also expanded to a record level, 20% higher than the previous high watermark established in the Q3 of last year. We generated record cash flow in the Q2, enabling us to meaningfully reduce our debt, while returning capital to shareholders through ongoing share repurchases.

Speaker 1

Our record second quarter results capped the strong first half performance for 2024. In the first half of twenty twenty four, revenues grew 9.5%, adjusted EBITDA margins increased 60 basis points and adjusted diluted earnings per share increased 28% over the same period a year ago. Our results demonstrate strong execution against our strategy as well as the positive impact of the changes we made to our enterprise operating model at the outset of 2022. These changes have broadened the set of offerings we deliver to clients our core industries and allows us to operate our business at new levels of efficiency. Our strategic focus continues to be on driving sustainable revenue growth, expanding margins and effectively deploying capital to deliver superior returns for our shareholders.

Speaker 1

As it relates to improving profitability, despite a difficult comparison, adjusted EBITDA margins grew 100 basis points in the Q2 over the same period a year ago. The scaling of our business over the past 3 years combined with the build out of our global delivery capabilities and our team's focus on our key operating levers like pricing and utilization have meaningfully enhanced Huron's earnings power. We expect this trend to continue as we progress towards our mid teen EBITDA margin target. I'm incredibly proud of our team for delivering performance over the last 10 quarters that has outpaced our 2022 Investor Day financial objectives. Looking ahead to the remainder of 2024, we expect our progress towards our medium term financial goals to continue.

Speaker 1

As reflected by the midpoint of our updated revenue guidance, we expect sequential growth in the second half over the first half of twenty twenty four and 9% annual revenue growth year over year. Let me make one final comment before diving into more detail on our performance in the quarter. Our success in the market and in delivering these financial results is only possible because of our incredibly talented team. We've received numerous recognitions for being an employer of choice in 2024, more than in any year in our 22 year history. Our people are the heart of our business and these honors acknowledge the power of our collaborative culture as demonstrated by our team's commitment to our clients and to one another.

Speaker 1

Our culture is one of our greatest competitive advantages and enables us to operate as one firm and to realize our full potential. Now I'll share some additional insights into our 2nd quarter performance. In the Healthcare segment, 2nd quarter revenues grew 9% over the prior year quarter on top of 35% growth in the year ago quarter over Q2 of 2022. The increase in revenues in the quarter was driven by continued strong demand for our digital performance improvement, culture and organizational excellence and strategy and innovation offerings. The operating environment for healthcare organizations remains mixed and highly competitive, which continues to create solid demand across the breadth of our portfolio of offerings.

Speaker 1

While some health systems have realized improving margins over the past few quarters, many have not. In some cases, volumes have improved, but reimbursement trends continue to be challenging. Whether a hospital or health system is experiencing financial distress or seeking opportunities to advance their competitive advantage from a position of strength, our clients turned Huron to shape their future strategies, evolve their business models and optimize their operations to address the ongoing challenges and opportunities in the market. Our depth of industry expertise, broad array of offerings and long track record of proven results for the clients positions us very well to provide strategic, operational, financial and digital solutions to help them achieve a more sustainable future in this complex and challenging healthcare environment. Turning now to Education.

Speaker 1

Education segment revenues grew 11% in the Q2 of 2024 over the prior year quarter, on top of 25% growth in the year ago quarter over Q2 of 2022. The increase in revenues in the quarter was driven by increased demand for our strategy and operations and digital product offerings. Higher education institutions are facing complex challenges that threaten their historical business models. The issues facing university leadership are vast and they span all areas of the institution. For example, declining affordability continues to challenge the perceived value of a college degree in the face of unfavorable demographic trends.

Speaker 1

Rising costs and decreased public funding have made achieving enrollment goals even more difficult and the need to operate more efficiently while differentiating the student experience requires investments in both new operating models and new technologies. Building on our deep industry expertise, we've strategically expanded our portfolio of offerings. We serve the needs of nearly every role in a university president's leadership team as they collectively focus on advancing the institutional mission and planning for a sustainable long term future. We've hired several industry leaders whose experience further strengthens our position as the trusted advisor and partner of choice to our clients. And as the needs of our clients continue to evolve, we're a unique partner in the higher education market, given the strength of our relationships, the diversity of our offerings and the depth of our experience.

Speaker 1

And that collectively positions us very well for continued solid growth in this business. Now turning to the Commercial segment, revenues declined 6% in the Q2 over the prior year quarter, reflecting softer demand for our digital offerings, partially offset by an increase in demand for our financial advisory offerings, which remains strong given the continued impact of challenging capital markets and expanding competitive pressures. In our digital business, we continue to see our commercial clients taking a more cautious approach to executing large scale initiatives and strategy related engagements as uncertainties in the macroeconomic and political environment persist. Like many of our competitors in the IT services industry, we're seeing some delays in decision making and a slower pace of spending on our digital offerings. We have confidence this softening of demand is temporary and our pipeline remains solid across our broad set of solutions and the underlying needs of our clients remain robust.

Speaker 1

We believe demand for our digital offerings will return to their historic double digit levels as macroeconomic pressures begin to abate. The commercial segment is a key pillar of our enterprise growth strategy. We believe that our broad portfolio of digital, financial advisory and strategy and innovation offerings coupled with deepening industry expertise will continue to be a solid platform for growth in this segment. We expect clients will continue to demand technology solutions delivered by partners that can enable transformation of their businesses and strengthen their competitive advantages. The breadth of our offerings, proven track record of delivering results positions us very well for continued growth of our commercial segment over time.

Speaker 1

And we continue to see M and A opportunities that will complement and expand our capabilities and deepen our expertise in our industries of focus. Let me make one final comment before turning to our outlook for the remaining of the year. One distinguishing feature of our business that drives significant value for shareholders is our strong free cash flow model. In the Q2, we generated record cash flows, while executing our balanced capital deployment strategy. We continue to manage the balance sheet in a manner that provides us with the flexibility and capacity to enhance returns to shareholders and to fund accretive M and A, which we continue to believe is an important part of our growth strategy.

Speaker 1

And now finally, let me turn to our outlook. So press release indicates we're narrowing our annual revenue guidance to 1,460,000,000 to $1,500,000,000 and we're raising our annual adjusted EBITDA margin guidance by 25 basis points to a range of 13% to 13.5%. Finally, we're raising our full year adjusted diluted earnings per share to a range of $5.85 to $6.15 which at the midpoint represents 22% growth over 2023. We are narrowing our full year revenue guidance to the lower half of our previously stated range due to the shorter term softening of demand for our digital offerings in the commercial segment. Our full year earnings guidance reflects our first half performance and the scale efficiency we've made.

Speaker 1

And coupled with our team's discipline around expense management, we continue to make steady progress towards the medium term financial goals set forth at our 2022 Investor Day. As we enter the second half of our 5 year strategy that we outlined at our 2022 Investor Day, I'm proud of what we've been able to accomplish in the market, with our clients, our business and for our teams. Our record results in the Q2 of 2024 demonstrate our focus on achieving our strategic and financial goals. We believe we're well positioned for continued growth in the years ahead. We have strong client relationships we've built, the depth of our industry expertise, the balanced portfolio of offerings that will continue to evolve and address our clients' most complex challenges.

Speaker 1

And now let me turn it over to John for a more detailed discussion of financial results. John?

Speaker 2

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 the 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. Before discussing our financial results for the quarter, I would like to acknowledge 2 housekeeping items. First, in the Q2 of 2024, we settled a litigation matter for $15,000,000 for which year out was appointed.

Speaker 2

This $15,000,000 settlement gain was recorded as a component of other gains net on our consolidated statement of operations. We have excluded from our non GAAP measures $11,700,000 which is the value of the settlement gain that exceeds the 3rd party legal costs incurred during 2024 specific to this litigation matter. 2nd, I want to make a comment on revenue generating professional headcount growth. Our year over year headcount growth of 13% as of June 30 included the expansion of our India based healthcare managed services team. Excluding the impact of the India based managed services team, headcount growth was 6%.

Speaker 2

Now, I'll share some of the key financial results from the Q2. Revenues for the Q2 of 2024 were a record high, achieving $371,700,000 up 7.2% from $346,800,000 in the same quarter of 2023. The increase in revenues for the quarter was driven by solid growth in our healthcare and education segments and included a full quarter contribution of $6,800,000 from our PG and A acquisition, which closed during the Q1 of 2024. Net income for the Q2 of 2024 was $37,500,000 or $2.03 per diluted share compared to net income of $24,700,000 or $1.27 per diluted share in the Q2 of 2023. The increase in net income was driven by the litigation settlement gain I mentioned earlier and revenues that outpaced expenses.

Speaker 2

Our effective income tax rate in the Q2 of 2024 was 28.1%, which is less favorable than the statutory rate inclusive of state income taxes, primarily due to certain nondeductible expense items. Adjusted EBITDA was a record $55,700,000 in Q2 2024 or 15% of revenues compared to $48,500,000 or 14% of revenues in Q2 2023. The increase in adjusted EBITDA for the quarter was primarily due to the increase in segment operating income, excluding the impact of segment restructuring charges. We are proud of our progress in improving margins and we remain confident in our ability to achieve full year mid teen margins in 2025, consistent with the goal we set forth in our 2022 Investor Day. Adjusted net income was $30,900,000 a record $1.68 per diluted share in Q2 2024 compared to $27,000,000 or $1.38 per diluted share in the Q2 of 2023, resulting in a 22% increase adjusted diluted earnings per share over Q2 2023.

Speaker 2

Now I'll discuss the performance of each of our operating segments. ValliCare segment generated 51% of total company revenues during the Q2 of 2024. This segment posted revenues of $190,100,000 up $16,300,000 or 9.4% from the Q2 of 2023. The increase in revenues in the quarter reflects continued strong demand for our digital, performance improvement, culture and organizational excellence and strategy and innovation offerings. Healthcare's digital and consulting and managed services capabilities grew 15% and 7% respectively in the Q2, reflecting the continued broad based demand for our offerings.

Speaker 2

Q2 of 2024 included $17,000,000 of favorable performance based fee adjustments compared to $16,000,000 of such adjustments in the Q2 of 2023. The ability to earn performance based fees as we drive benefits for our clients is a favorable and ongoing attribute of our healthcare business, so the recognition of revenue for such adjustments can vary significantly quarter to quarter. Operating margin for healthcare was 29.1 percent in Q2 2024 compared to 28.3 percent in Q2 2023. The increase in margin was primarily due to a decrease in contractor expenses, partially offset by an increase in compensation costs for our revenue generating professionals as a percentage of revenues. The Education segment generated 33% of total company revenues during the Q2 of 2024.

Speaker 2

The Education segment posted revenues of $122,800,000 up $12,100,000 or 10.9 percent from the Q2 of 2023 and included $6,800,000 from our acquisition of DG and A. The increase in revenues in the quarter was driven by increased demand for our strategy and operations and digital product offerings. Education's consulting and managed services capability revenue grew 19% over the Q2 of 2023. The operating margin for Education was 25.1% for Q2 2024 compared to 24.8% for the same quarter in 2023. The increase in operating margin in the quarter was primarily driven by revenue growth that outpaced an increase in compensation costs for our revenue generating professionals and a decrease in contractor expenses, partially offset by an increase in compensation costs for our support 2024 and posted revenues of $58,800,000 compared to $62,300,000 in the Q2 of 2023.

Speaker 2

The decrease in revenues was driven by lower sales cycle for our digital offerings, partially offset by an increase in demand for our financial advisory offerings. As Mark mentioned, despite the shorter term softening of market demand for our digital offerings, we are confident in the long term growth trajectory of the commercial segment temporary macro headwinds ease when we fully capture the ongoing strength in our sales pipeline. Operating margin for the commercial segment was 15.3% in Q2, 2024 compared to 16.8% for the same quarter in 2023. The decrease in operating margin was driven by an increase in compensation costs for our revenue generating professionals as a percentage of revenues, partially offset by decreases in restructuring charges and contractor expenses as a percentage of revenues. Corporate expenses not allocated at the segment level excluding the $15,000,000 litigation settlement gain and corporate restructuring charges were $45,600,000 in Q2, 2024 compared to $43,000,000 in Q2, 2023.

Speaker 2

Unallocated corporate expenses in the Q2 of 20242023 included $700,000 $1,400,000 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 used to fund that plan reflected in other income. Excluding the impact of the deferred compensation plan in both periods, unallocated corporate expenses increased $3,200,000 primarily due to increases in software and data hosting expenses and compensation expense for our support personnel. Now turning to the balance sheet and cash flows. Cash flow from operations in the Q2 of 2024 was a record $107,200,000 In the quarter, we invested $9,000,000 in capital expenditures inclusive of internally fell software costs, resulting in free cash flow of $98,200,000 DSO was 81 days at the close of the Q2 of 2024 compared to 91 days for the Q1 of 2024 and 77 days for the Q2 of 2023. Total debt as of June 30, 2024 was $511,600,000 consisting entirely of our senior bank debt And we finished the quarter with cash of $17,600,000 or net debt of $493,900,000 This was a $61,100,000 decrease in net debt compared to Q1 of 2024.

Speaker 2

Our leverage ratio defined in our senior bank agreement was 2.2 times adjusted EBITDA as of June 30, 2024, consistent with the leverage ratio as of June 30, 2023. During the second quarter, we used $34,400,000 to repurchase approximately 376,000 shares. Since the beginning of 2024, we have repurchased 1,000,000 shares, representing 5.4 percent of our common stock outstanding as of December 31, 2023. As of June 30, 2024, dollars 90,000,000 remained available for share repurchases under our current share repurchase program. We achieved record free cash flow in the Q2 of 2024 and continue to execute on our balanced capital deployment strategy.

Speaker 2

We believe the cumulative effect of our return to shareholders via share repurchases over the last several years has well positioned us for continued strong EPS expansion. At the same time, our balance sheet remains strong providing us the capacity for continued share repurchases and accretive M and A. Finally, let me turn to our guidance for the full year 2024. As Mark mentioned, we are updating our full year 2024 revenue and earnings guidance as follows: narrowing our revenues before reimbursable expenses guidance to a range of $1,460,000,000 to $1,500,000,000 reflecting the lower half of our previous revenue guidance range, Increasing our adjusted EBITDA as a percentage of revenues guidance to a range of 13% to 13.5% and increasing our adjusted diluted earnings per share guidance to a range of $5.85 to $6.15 Thanks everyone. I would now like to open the call to questions.

Speaker 2

Operator?

Operator

Thank Our first question comes from the line of Andrew Nicholas of William Blair and Company.

Speaker 3

Hi, everyone. Good afternoon. I wanted to ask on commercial weakness first. Mark, you're pretty confident in this being temporary weakness. Just kind of curious if you could speak to what gives you that confidence and over what timeframe you would expect this to kind of play itself out?

Speaker 3

Is it just a matter of getting through some difficult comps and some of these budget restrictions? Or is there any other catalyst you're looking for? And then somewhat relatedly, is the plan to

Speaker 2

put the foot off

Speaker 3

the gas a little bit on the headcount growth side until you start to see evidence of those budgets thawing out?

Speaker 1

Yes, Andrew. I would start with the reason for our confidence. It's really the pipeline itself. When we look at kinds of projects that we're bidding on and the clients that are engaging us, we look at the size of that at historical levels. We feel confident that the demand is there and that really what we've got is delays in decision making that to me we've seen in other environments where there's some macro environment uncertainty that the elections going on.

Speaker 1

So we believe that ultimately there's the tailwinds are going to come back and we see signs from time to time. We're not ready to call that in the second half of the year. We have tapped the brakes on headcount additions, but there's we see nothing that really gives us any kind of view of change in trajectory for the longer term. And Andrew, I'll add. When we

Speaker 2

look at the guidance update and the lowering of the midpoint of our revenue guidance about $20,000,000 The majority of that actually relates to some of the softness that we experienced during the 1st 6 months of the year. When we look at the back half of the year and our projections for the back half of the year, which is supported by our pipeline and by our backlog, that's actually much more consistent with the expectations that we had at the front half of the year. So I think we've already digested a significant component of the weakness that Mark was referring to.

Speaker 3

And John, maybe to clarify that that's specific to commercial you're saying in terms of growth consistent with maybe that's a good segue then to just ask a follow-up on segment level expectations. You had given us or outlined that for us on the Q4 call. Q1 was a little bit different, somewhat with commercial. I think healthcare was a little bit better than you had thought going after just 3 months. So if you could just outline maybe where segment level expectations are today relative to the Q4 call, I think that would be some helpful additional context for the guidance changes.

Speaker 2

Sure, Andrew. From a I'll start with healthcare. From a healthcare perspective, we're expecting the full year growth rate at this point to be in the upper single digit to lower double digit range. So that's up from the mid to upper single digit range back from the February call. And we still expect margins for healthcare to be in the 25% to 27% range.

Speaker 2

From an education perspective, we're expecting revenues now for the full year to be in the low double digit range. We described it as the low teen range on the call back in February. I think we still expect to be in the low double digit range. And there the margins, again, we expect to be in the 24% to 26% range, which is consistent from the February call. And then from a commercial perspective, we're now expecting the full year to be relatively flat with last year.

Speaker 2

So that was an area where we expected at the outset of the year, low double digit growth. And the margins for this part of the business remain unchanged in the 21% to 23% range.

Speaker 3

Great. Thank you. And then if I could just squeeze one more in. I mean, some movement there at the segment level, but the margin outlook consistent at the segment level and also you were able to raise it for the full year. I mean what gives you the ability to do that?

Speaker 3

Is it just really, really strong utilization trends? Is it plans to lower headcount growth in the back half of the year? Anything else that you would touch on that'd be great?

Speaker 2

Yes, Andrew, it's John. Our team has done an excellent job of really managing expenses throughout the first half of the year. For context, attrition as we've talked about on the past couple of calls has been much lower than what we anticipated at the beginning of the year, which means that careful stewardship by our teams has been all the more important. To your point about utilization as the year does go on, based on our forecast, we do expect utilization to continue to ramp up in the back half of the year. And so we think that's going to be another margin accretive item as we get towards the back half of the year.

Speaker 2

And then finally, we mentioned the litigation settlement gain having those litigation expenses for that settlement behind fully behind us at this point that's another positive factor in terms of our full year margin outlook.

Speaker 3

Thanks again.

Speaker 2

Thank you. Thank you.

Operator

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

Speaker 1

Thank you. I wanted to ask

Speaker 4

a sort of a broad question about incremental margins. Can you achieve the mid teens margin target for next year, the 15%, I guess, at this kind of revenue growth rate? Or do you need revenue growth to accelerate for that to be achievable?

Speaker 2

Hey, Tobey, it's John. We don't need revenue to accelerate beyond really the revenue growth profile that we're seeing this year just for the sake of discussion order to continue to ramp forward that we see with margins for the full year next year. That's an area where when we look at the different levers that we have from a margin perspective, scaling our SG and A, continued deployment using our global delivery model, utilization, some of the pricing initiatives that we have underway. We feel good that those individual levers in fact probably over solve the margin targets that we have out there, which of course gives us some capacity to continue to invest in the business. So we feel good about our ability to continue to manage towards the March targets in a variety of different revenue growth rates.

Speaker 2

And Tobey, I'll add,

Speaker 1

I think what is a very important addition to that, which is in our managing director compensation, the targets that we set, we really have built into everybody's objectives a margin component, which really is very important because many of the decisions that are made are really at the micro level by individual managing directors as they manage their engagements have been sold and delivered. And so that really has shifted to a nice balance between not only revenue growth, but making sure that we preserve the profitability at the bottom line. So the rate of growth on the top line certainly is very helpful when we look at the component contributed by leveraging SG and A, but there's many other levers that we have that so we're not certainly not single threaded around just revenue growth.

Speaker 4

Within the education business and what you're seeing from customers there, There's certainly been news over the last the first half of the year with protests and potential impacts on fundraising, the delays with FAFSA and impacts on enrollment and now like having to pay student athletes.

Speaker 1

Is the do those factors potentially

Speaker 4

alter the growth rate for the segment? Or like how does news flow today impact your outlook for the business in 12 months, so to speak?

Speaker 1

It's a very fair question just given the promise in the headlines that you've seen. But really when you look at it, it's really centered around the office of the President. And as I mentioned even in my remarks, so much of our work is done with people within the President's cabinet, if you will, that and they all have responsibilities that are really tied to the improvements they need to make across their own institutions. And so we have not really seen any kind of impact out of that, although we watch it, we monitor it. So at this point, it is not something that we're terribly concerned about.

Speaker 1

But just because we've had some degree of time already between now and when some of those initial challenges happen in the IVs.

Speaker 4

Right. And then within the healthcare portfolio that you've broadened demand and can have services that can match a wider spectrum of sort of healthy or sick conditions at hospital customers. How are you seeing the spectrum of demand evolve? Several quarters ago, we had mostly performance improvements and the complexion of that seems to be shifting. How would you characterize the balance of demand and where it's strongest currently?

Speaker 1

Yes. I'll let John elaborate, but I would just say as a general expectation, I think the areas that are first of all, I'd say the comments that we hear from our teams are that margins are pretty razor thin or better, but it's not like there's a big buffers. But there is definitely a barbell, if you will, of clients that are doing quite well and are being aggressive toward their growth. Those are the areas that they're investing in technology and our digital solutions, So the strategy areas and financial advisory, things that are on the proactive growth side. And yet we still see those systems that are really challenged with just headwinds around the competitive markets, the reimbursement models and the like.

Speaker 1

And so there's been a pretty healthy mix that I would say is leaning towards digital as the area that you're really seeing people within the systems leading into healthcare.

Speaker 2

Yes. From the market overview, when you look at our pipeline, Tobey continues to be really well balanced. So that segment of the market that's going through financial pressures right now, that's still driving significant demand for our performance improvement offerings. And our teams continue to relay back to us that it's a robust market for those types of offerings right now and that's supported by the data that we see in our backlog and our pipeline. Yet at the same time, the digital needs that Mark just referred to also are a big growth area.

Speaker 2

We also see a number of meaningful projects in the pipeline and opportunities related to that part of our business. So to your the way you asked the question about the trajectory of things, you're right, it was a performance improvement weighted pipeline last year. We talked about more balance at the beginning of this year and I'd say we continue to see that balance at this point this year.

Speaker 4

Thank you. And then just on your headcount growth, particularly digital in your offshore operations.

Speaker 1

Is it fair to assume

Speaker 4

that that headcount growth is attached to sales already sort of consummated and in the bag as opposed to prospective sales out in future quarters?

Speaker 2

Yes. I would say our digital what I referred to earlier at the end of the call was our managed services team in India, our delivery team for managed services. And yes, to answer your question, that team is related to projects that have already been sold and they're executing on those. To broaden the question to our digital team, which is also based in India, they're largely deployed and have strong utilization on our ongoing digital projects as well.

Speaker 4

And then last numerical question for me. Will in the context of improving EBITDA margins and getting up to the mid teens, does that have any implications or changes to the cash flow conversion or should the rules of thumb of the past hold true as the margins expand?

Speaker 2

I think the rules of thumb should hold true from our perspective, Tony. Thank you very much.

Operator

Thank you. Our next question comes from the line of Bill Sutherland of The Benchmark Company.

Speaker 4

Thanks. Hey, everybody. I wanted to maybe, Mark, untangle not untangle, but take apart the digital demand a little bit. And obviously, particularly interested in how you guys are participating in the AI initiatives that health systems are increasingly taking on. I noticed one just announced ahead of AI projects.

Speaker 4

I think it was Cleveland. Anyway, just whatever you guys are doing there and kind of how much of it is starting to move the needle?

Speaker 1

Yes. I would say it's still in the early innings in general, but there's a tremendous amount of activity, Bill, to your point. We're definitely seeing many, many organizations are piloting AI ideas before they're scaling them across the organization. And it's really true in education as well. We do see some areas as an example in education on the research side that seem to be accelerating as well.

Speaker 1

I think for us it continues to be upside, but we're very active not only in the healthcare and higher ed, but certainly in the commercial markets as well. You see a lot of activity going on. So I think we're feel like we're well positioned. We're very aggressive and active in the marketplace and we're getting very good response for clients as we work with them.

Speaker 4

And you're able to build up the bench in terms of AI credentials?

Speaker 1

Yes. There's the issue of we're not going out and needing to hire deep data scientists, but people who have prompt engineering backgrounds and other types of skills, we have not found the issue finding the right numbers of people that we need to at the scale. And then internally, we're also using AI to at a greater level as we look at our own delivery methodologies as well. And so it's very pervasive, I would say, increasing in scope and scale.

Speaker 4

That was my follow-up actually was to what degree are you seeing or hope to see benefit on the margin in terms of implementing AI?

Speaker 1

Yes. We're not dependent on it in the sense that while there's we don't automate things, we're not going to be able to achieve our goals. But feel like it's certainly and I take AI and expand that to really the whole concept of automation in general, because there's a lot more beyond just AI that we can benefit from collectively. And so we do think that will ultimately become an increasing benefit for us as we look ahead to 2025 as an example.

Speaker 4

I missed John, I missed what you said, Gigi. This is a couple of housekeeping. What Gigi and A contributed?

Speaker 2

It was $6,800,000 for the quarter, Bill.

Speaker 4

6,800,000 percent?

Speaker 2

Yes, correct.

Speaker 4

Okay. Couldn't quite hear you. And then, did you discuss the interest expense as it's presented for the Q2? And what I'm just kind of wondering about the size of it and what how to think about the next few quarters?

Speaker 2

So the Q2 from an interest expense perspective is really our high watermark, bill. If you think about it, we pay out the annual incentives in kind of mid March. So you really get the full higher borrowing levels for a full quarter in the second quarter. And you can see based on what we discussed from a free cash flow perspective, we had some really nice pay down of our debt as the quarter progressed. We expect that trend to continue in the 3rd Q4.

Speaker 2

And so that really should be the high watermark. I would think of the back half of the year probably being more all in and kind of the $10,000,000 range.

Speaker 1

Okay. That's helpful.

Speaker 4

Yes. Okay. Thanks. Thanks, everybody. Thank you.

Operator

Our next question comes from the line of Kevin Steinke of Barrington Research Associates.

Speaker 5

Thanks. So as you mentioned in your prepared remarks, the full year revenue guidance still continues to imply sequential revenue growth in the second half of twenty twenty four. But looking specifically at commercial, to get to that relatively flat outlook, it looks like you have to have some pretty nice sequential revenue growth in commercial specifically. So can you comment on that? Is that correct?

Speaker 5

And if so, what would drive that? Is it some of the pipeline beginning to move that's currently being pushed out? Or what would be to that?

Speaker 2

That's right, Kevin. You named it. It's the pipeline converting to hard backlog now in the back half of the year. I think that's true both from a digital perspective as well as a consulting perspective within the commercial segment. So our teams have had some really nice conversion on the consulting side as well from a distressed financial advisory perspective.

Speaker 2

And so we're entering a period of higher run rate on some of those projects during the 3rd Q4. And then on top of that, some of the delays that we've seen in pipeline or in the slower sales cycle on the digital side, our expectation is that we have more conversions there in the back half

Speaker 4

of the year too that firms up the digital side as well.

Speaker 5

Okay. That's helpful. And then looking at Healthcare, the increase to the full year 2024 growth expectations for that segment, can you just maybe comment on what's trended a bit better than you would have expected at the outset of the year that enables you to increase that outlook for healthcare?

Speaker 2

It's been broad based, Kevin, within the healthcare segment and it goes back to that conversation we had a couple of minutes ago about the pipeline and where we've been seeing demand. So I think from a performance improvement perspective, we continue to see some really strong demand from our clients there in terms of needing help from a margin improvement perspective. And so that I think has been a positive item relative to our beginning of the year expectations. But then also on the digital side of the shop and that probably relates to the customers at the other end of the spectrum who are feeling like they're in a stronger financial position than they were a year ago. Those clients and their investments in digital has been stronger than we expected as well.

Speaker 2

So I'd say it's a story of balance both in terms of the pipeline, but then also in terms of the improvement in our guidance versus what our beginning of the year expectations were.

Speaker 5

Okay, thanks. That's helpful. I'll turn it back over.

Operator

Thank you. Seeing no more questions in the queue, I'd like to turn the call back to Mr. Hussey.

Speaker 1

Well, thanks everyone for spending time with us this afternoon. We look forward to speaking with you again in October when we announce our Q3 results. Have a good evening.

Operator

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

Powered by Quartr
Earnings Conference Call
Huron Consulting Group Q2 2024
00:00 / 00:00