Huron Consulting Group Inc.

Good afternoon, ladies and gentlemen, and welcome to Hear On Consulting Group's webcast to discuss financial results for the fourth quarter and full year 2020. At this time, all conference call lines are in 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. 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 one 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 Jim Roth, Chief Executive Officer of Huron Consulting Group. Mr. Roth, please go ahead.

Good afternoon and welcome to Huron Consulting Group's fourth quarter and full year 2020 earnings call. With me today are John Kelly, our Chief Financial Officer, and Mark Hussey, our President and Chief Operating Officer. Before I begin, I would like to highlight that we have placed supplemental materials on our website at ir.huronconsultinggroup.com to provide additional detail about the range of our views on how the COVID-19 pandemic might influence our outlook for 2021. These supplemental materials should be reviewed in conjunction with our earnings call and not on a standalone basis. Company-wide revenues declined 4% in 2020 compared to 2019, reflecting the challenges that the pandemic presented to our two largest industry verticals, healthcare and education. These challenges were partially offset by strong growth in the business advisory segment, which achieved record revenues during the year and now represents 32% of total company revenues. Our strategic focus on expanding our offerings into commercial mark industries within the business advisory segment proved to be beneficial in 2020, highlighting the benefits of increased diversification in our portfolio and end markets. I want to spend a few minutes talking about 2020 to provide perspective on how the year evolved for Huron. Our primary focus has been and continues to be on profitable revenue growth. And while we didn't achieve our objectives set prior to the pandemic, Chiron's response during the pandemic was strengthened by our collective resiliency, creativity, and market relevancy amidst the many challenges that faced our client base. We were proactive and took critical actions during the year that we believe positioned this company for growth in 2021 and beyond. In 2020, when many of our clients were experiencing substantial losses, We worked closely with them to develop solutions which helped them manage through this period of significant disruption. In 2020, we generated over $30 million in revenue from offerings that were directly responsive to COVID-19 pressures faced by our clients. These critical efforts demonstrated the extent to which we can be nimble and innovative and quickly create new revenue opportunities. We also successfully recruited senior leaders into multiple businesses, including several experienced personnel that will help us further execute on our commercial strategy as we establish service lines that we believe will generate new avenues of collaborative growth beginning in 2021. We also took proactive measures to manage our cost base throughout the year, including tightly managing our discretionary spending, modestly adjusting our workforce, and reducing our real estate footprint to achieve a level of operating efficiency that we believe will create a foundation from which we can grow and expand margins in 2021. In addition to our cost management efforts, we effectively managed our cash position, increasing cash flows from operating activities to $137 million for the full year. Our strong cash flows enabled us to reduce our net debt by $60 million while also initiating and successfully completing the implementation of a new cloud ERP system, which went live on January 1st, 2021. We continue to strengthen our advanced technology offerings across all of our segments. While the term digital transformation has many meanings, the importance of technology in helping our clients survive and thrive in environments of disruption is very apparent. as evidenced by the strong demand we saw for our digital technology and analytics offerings in 2020. Revenue from technology services throughout the company has had a compound annual growth rate of nearly 20% since 2015 and has grown to over 30% of total company revenues in 2020. We believe this trend will continue based on the demand we anticipate for these services across all of our end markets. The pandemic has highlighted the need for many organizations to adopt cloud technologies, automation, and analytics to strengthen their competitive position and be responsive to this rapidly changing environment. Some professional services firms have strong technical competencies, while others have deep industry experience. Huron has both, and these competencies are integrated across all of our businesses, enabling us to provide digital technology and analytics offerings across multiple industries. Lastly, we continue to support our people professionally and personally as they manage through an incredibly taxing environment. Our efforts in 2020 increased our already high employee engagement scores, clearly demonstrating that our nearly 4,000-person team is supportive of how we manage through the pandemic and, equally important, that they continue to be excited about being a part of our growth strategy. I will now share some additional insight into our fourth quarter and full year 2020 performance, along with our expectations for 2021. On a full year basis, healthcare segment revenues declined 12% over 2019. In the fourth quarter of 2020, the healthcare segment declined 18% over the prior year quarter, consistent with our expectations. The resurgence in COVID-19 patients, while not as disruptive as it was at the onset of the pandemic, and the well-justified distraction caused by the vaccine rollout during the fourth quarter, took a toll on our healthcare clients, which resulted in some project deferrals. We remain cautiously optimistic about performance in this segment as our sales pipeline continues to develop, driven by the increased pressures facing the healthcare industry. When the ongoing impact of the pandemic eases, we expect there to be a resurgence of demand for our healthcare services across the portfolio, including our performance improvement offerings. We expect our clients will continue evolving their care delivery models and operations to accommodate the ongoing transformation taking place across the industry. Efforts to improve cash collections and create better access to care will also be important ongoing priorities for healthcare clients with margin challenges. Finally, and consistent with my prior comments, we expect to see an increase in technology spend among health systems, particularly in support of telehealth and the application of intelligent automation and analytics. Turning to the business advisory segment, on a full year basis, segment revenues grew 6% year over year. driven by strong demand in our digital technology and analytics and distressed advisory offerings, offset by softer performance in our strategy-related offerings. In the fourth quarter of 2020, business advisory segment revenues declined 4% over the prior year quarter. The business advisory segment faced tough comparisons following solid growth in the fourth quarter of 2019. The quarter-over-quarter decline in revenue was primarily attributable to our distressed advisory and strategy offerings, partially offset by continued growth in our digital, technology, and analytics offerings. Our technology and distressed advisory offerings both achieved record revenues in 2020, and each of the four businesses in this segment are well positioned for growth in 2021. Driving that growth will be the need for companies across all industries to reevaluate their market position, and future strategy to accommodate the disruptions and opportunities that have resulted from the pandemic. I want to highlight our continuing investment in expanding our commercial sector expertise and capabilities. We believe that our investments, all of which are contemplated within our guidance estimates, will accelerate new growth areas and position Huron to take advantage of the significant market opportunities that exist across the commercial industries we serve. in addition to the collaborative opportunities within healthcare and education. Turning now to the education segment, revenues in the segment were generally flat in 2020 as compared to 2019. In the fourth quarter of 2020, education segment revenues declined 21% over the prior year quarter. Coming off of a very strong first half of the year, this segment saw several engagements get deferred until 2021. The lack of growth in 2020, which stands in stark contrast to consistent growth in this segment over the past five years, reflects the dramatic impact of the pandemic on the operations and finances of our higher education clients. Since the beginning of 2021, we have seen positive momentum and demand for our research, strategy, business operations, and student-related offerings. While our clients remain cautious about starting significant technology-related engagements given the size of these investments, we believe that as the market stabilizes, previously deferred opportunities will begin to restart. Many educational institutions found that their digital platforms were insufficient to address the surge in remote learning and are equally deficient in terms of introducing cloud technology to the administrative, research, and student aspects of their business. While many of our higher education clients were focused entirely on transitioning to remote learning during the fall semester, most colleges and universities have brought students back to campus in early 2021. While there is some hope that this year will be less disruptive, educational institutions will face a dramatically different world in the future, and in many cases, current business models will not suffice in the future environment, creating numerous opportunities for our services. Let me turn to our expectations and guidance for 2021. Our revenue guidance for the year is $830 to $890 million. We also expect adjusted EBITDA in a range of 10.75 to 11.75% of revenues and adjusted diluted earnings per share of $2.25 to $2.75. I will now provide a few thoughts regarding our expectations for each segment, as well as overall company profitability. With the pandemic and its corresponding uncertainties still evolving, we believe we will have modest sequential revenue growth in the first half of the year as compared to the second half of 2020, followed by stronger growth in the second half of 2021, which translates into approximately 2% growth for the full year at the midpoint of our 2021 guidance. Several factors are in play in arriving at this estimate. First, while we have seen some positive and more sizable conversions recently in our pipeline, we believe it is appropriate to be conservative in our estimates until we get better visibility as to how and when the pandemic will ease, particularly in the health care and education industries. Second, this guidance reflects a tough comparison over the first half of 2020. Although our healthcare business felt its biggest impact in the March through June timeframe last year, the education and business advisory segments had a strong first six months last year. Third, we believe that the second half of 2021 will be better than the first half of this year, particularly for healthcare and education. It is our hope that our fourth quarter run rate will be closer to our pre-pandemic run rate in the fourth quarter of 2019. At the midpoint of our guidance, we anticipate healthcare segment revenues will grow in the low single-digit range in 2021 as compared to 2020. Our guidance also reflects mid-single-digit revenue growth in the business advisory segment. In the education segment, we anticipate a low single-digit decline in revenue growth for the year, reflective of the difficult first half comparisons driven by the strong growth we experienced in the segment at the beginning of 2020. In terms of margins in 2021, our guidance reflects our commitment to expanding margins and is inclusive of the proactive cost savings measures taken in the fourth quarter, as well as strategic and operational investments that we believe will enhance our revenue growth trajectory, drive deeper operational efficiencies, and create opportunities to better leverage our G&A. My management team and I firmly believe that we have positioned this company for solid growth in the coming years. Our growth in the commercial markets remains strong in 2020, and there is no question in my mind that we are well positioned to address the significant challenges that the pandemic has had on healthcare and education industries. Our cautiousness at this time, at the end of February, is indicative of our desire to be conservative as to the timing of increased conversion in our healthcare and education pipelines, although in both cases, we have already seen some reflection of that taking place. We are firmly committed to our financial strategy of achieving sustainable organic revenue growth and expanding margins over time. In summary, our clients are facing significant disruption and mounting financial and operational pressures that we believe will drive strong demand for our services as the economy stabilizes, and we believe we are well positioned to take advantage of these opportunities as they arise While we believe we have navigated the near-term disruption, our focus has consistently remained on positioning Huron for the longer term. We are committed to executing on priorities to drive shareholder value, which include achieving sustainable organic growth, driving margin expansion, strategically deploying capital, and investing in our people. Amidst the turmoil of 2020, we continue to execute on our five-year strategy that will strengthen our competitive advantage across markets. Now let me turn it over to John for a more detailed discussion of our financial results. John?

Thank you, Jim, 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-K, 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. Also, unless otherwise stated, my comments today are all on a continuing operations basis. Also, our acquisition of ForceIQ, which closed in November, is included in our fourth quarter financial results in the business advisory segment. Our recent acquisition of Unico Solutions, which closed in February, is not included in our fourth quarter financial results. Unico Solutions will be included in the business advisory segment beginning in the first quarter of 2021. The Unico Solutions acquisition strengthens our data management and governance capabilities as we help clients better manage their data and optimize their operations. Now let me walk you through some of the key financial results for the quarter. Revenues for the fourth quarter of 2020 were $198.3 million, down 14.6 percent from $232.3 million in the same quarter of 2019. The decline in revenues in the quarter was primarily driven by the healthcare and education segments as the impact of the pandemic continued. For full year 2020, revenue was $844.1 million, down 3.7% from $876.8 million in 2019. As Jim mentioned, the decline in revenue over the prior year was driven by the healthcare and education segments, which was partially offset by solid organic growth in the business advisory segment. The performance of the business advisory segment, which achieved record revenues in 2020, emphasizes the benefits of a more balanced portfolio across our services and end markets. Net loss was $6.1 million, or 28 cents per diluted share, in the fourth quarter of 2020, and includes the pre-tax impact of restructuring and lease impairment charges of $18.7 million. This compares to net income of $14.4 million, or 63 cents per diluted share, in the same quarter in the prior year. Full year 2020 net loss was $23.7 million, or $1.08 per diluted share, and includes the previously mentioned fourth quarter pre-tax restructuring charges, as well as the first quarter pre-tax goodwill impairment charge of $59.8 million. This compares to net income of $42 million, or $1.87 per diluted share in 2019. Our effective income tax rate in the fourth quarter of 2020 was a benefit of 43.7% on a pre-tax loss of $10.8 million, compared to 18.5% on pre-tax income of $17.6 million a year ago. Our effective tax rate for Q4 of 2020 was more favorable than the statutory rate, inclusive of state income taxes, primarily due to the impact of our net operating loss that will be carried back to prior year income at a higher prior year tax rate is provided for under the CARES Act and federal tax credits recognized during the quarter. On a full year basis, our effective income tax rate for 2020 was 30%, which is more favorable than the statutory rate, inclusive of state income taxes, primarily due to year-to-date pre-tax losses, tax benefits related to federal tax credits, a discrete tax benefit for vested share-based compensation awards, and tax benefits related to non-taxable gains on our investments used to fund our deferred compensation liability. These favorable items were partially offset by increases in our valuation allowance, primarily due to increases in deferred tax assets recorded for foreign tax credits, certain non-deductible business expenses, and the non-deductible portion of the goodwill impairment charges recorded during the first quarter of 2020. Adjusted EBITDA was $17.1 million in Q4 2020, or 8.6 percent of revenues, compared to $29.4 million in Q4 2019, or 12.6 percent of revenues. For full year 2020, adjusted EBITDA as a percentage of revenues declined to 10.3 percent compared to 12.0 percent in 2019. Adjusted non-GAAP net income was $10.2 million, or $0.45 per diluted share in the fourth quarter of 2020 compared to $18 million or $0.79 per diluted share in the fourth quarter of 2019. For the full year of 2020, adjusted non-GAAP net income was $47.9 million or $2.15 per share compared with $61.6 million or $2.74 per share in 2019. Now I'll make a few comments about the performance of each of our operating segments. The healthcare segment generated 43% of total company revenues during the fourth quarter of 2020 and posted revenues of $85.1 million, down $18.5 million, or 17.9% from the fourth quarter of 2019. The decline in revenue reflects the impact of the ongoing COVID-19 pandemic on our new business pipeline and related slower conversion of soft backlog during the quarter. On a full-year basis, healthcare revenue declined 11.5%. Performance-based fees for the full year 2020 were $69.3 million compared to $71.1 million in 2019. Operating income margin for healthcare was 28.3% for Q4 2020 compared to 30.6% for the same quarter in 2019. The quarter-over-quarter decline in margin was primarily due to a decrease in billable consultant utilization partially offset by higher average consultant bill rates and lower indirect costs. On a full year basis, operating margin was 26.9 percent compared to 31.5 percent in 2019. The business advisory segment generated 33 percent of total company revenues during the fourth quarter of 2020. It posted revenues of $65.9 million, down $3 million, or 4.3 percent from the fourth quarter of 2019. Revenues for the fourth quarter of 2020 included $1.3 million from our acquisition of ForceIQ. The quarter-over-quarter decline in revenue was primarily attributable to our distressed advisory and strategy offerings, partially offset by continued growth in our digital, technology, and analytics offerings. The business advisory segment faced a tough comparison relative to the fourth quarter of 2019, which benefited from higher success fees and the recognition of revenue that had been previously deferred upon receipt of a signed contract. On a full-year basis, the business advisory segment revenues grew 5.9 percent year-over-year, driven by strong demand for digital technology and analytics and distressed advisory offerings. The operating income margin for the business advisory segment was 16.3 percent for Q4 2020, compared to 24.2 percent for the same quarter in 2019. The quarter-over-quarter decline in margin was primarily due to increases in performance bonus expense based on full-year results for our revenue-generating professionals, increased contractor expenses, and increased restructuring charges. On a full-year basis, operating margin was 18% compared to 19.7% in 2019. The decrease in operating margin year-over-year was primarily attributable to the shift in revenue mix toward digital, technology, and analytics offerings which have a relatively lower margin, and away from our strategy offerings, which traditionally have a relatively higher margin. Our strategy offerings were impacted by the effects of the pandemic during 2020. The education segment generated 24 percent of total company revenues during the fourth quarter of 2020, and posted revenues of $47.3 million, down $12.5 million, or 20.8 percent from the fourth quarter of 2019. This decrease in revenue reflects the impact of the ongoing COVID-19 pandemic on our new business pipeline and related slower conversion of soft backlog during the quarter. On a full year basis, education segment revenues were largely flat versus the prior year. Our education business had a strong start to the year driven by the momentum we had built in 2019 before our clients were severely disrupted by the pandemic. The operating income margin for education was 12.1 percent for Q4 2020 compared to 20.9 percent for the same quarter in 2019. The quarter-over-quarter decline in margin was primarily due to a decrease in billable consultant utilization and restructuring charges related to the headcount reductions during the quarter. On a full-year basis, operating margin was 21.3 percent compared to 24.8 percent in 2019. Other corporate expenses not allocated to the segment level were $47.4 million in Q4 2020, compared with $34.9 million in Q4 2019. The quarter-over-quarter increase in corporate expenses is primarily attributable to $14.5 million of restructuring charges taken in the quarter to reduce our operating costs to address the impact of the COVID-19 pandemic on our business, including the workforce reduction announced on our last earnings call as well as certain office exit costs. Fourth quarter corporate expenses also included $3.1 million in expense related to the increase in liability for our deferred compensation plan, which is fully offset by a corresponding gain in other income related to the increased value of the assets used to fund that obligation. Now turning to the balance sheet and cash flows. DSO came in at 52 days for the fourth quarter of 2020 compared to 62 days for the third quarter of 2020. This record low DSO reflects the efforts of our project and corporate teams to work closely with our clients during 2020 to ensure collections while supporting the needs of our clients. Total debt includes the $200 million in senior bank debt and a $3 million promissory note for total debt of $203 million. We finished the year with cash of $67 million for net debt of $136 million. This was a $40 million decrease compared to Q3 2020 and a decrease of $60 million compared to year end 2019. Our leverage ratio is defined in our senior bank agreement as approximately 1.9 times adjusted EBITDA as of December 31st, 2020, compared to 1.6 times adjusted EBITDA as of December 31st, 2019. Our net leverage ratio was 1.3 times trailing 12 months EBITDA as of December 31st, 2020, when the bank's definition calculation is adjusted for cash on hand. This compares to 1.6 times trailing 12 months EBITDA as of December 31st, 2019, when calculating in the same manner. Cash flow from operations for 2020 was $137 million, and we used $60 million of our cash to invest in capital expenditures resulting in free cash flow of $121 million. We also used $27.1 million of our cash to repurchase approximately 425,000 shares in 2020 to partially offset the dilution created by our share-based compensation programs. Finally, let me turn to our expectations and guidance for 2021. For the full year of 2021, we anticipate Revenues before reimbursable expenses in a range of $830 million to $890 million. Adjusted EBITDA in a range of 10.75 percent to 11.75 percent of revenues. And adjusted non-GAAP EPS in a range of $2.25 to $2.75. We expect cash flows and operations to be in a range of $70 to $90 million. Capital expenditures are expected to be approximately $15 to $20 million. Free cash flows are expected to be in a range of $55 to $75 million. Net of cash taxes and interest, excluding non-cash stock compensation. Weighted average diluted share count for 2021 is expected to be $22.5 million. Finally, with respect to taxes, you should assume an effective tax rate in the range of 28 to 30%. comprises a 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. Let me add some color to our guidance, starting with revenue. Given the ongoing uncertainty created by the COVID-19 pandemic, we are issuing a wider revenue range than we typically would at the outset of the year. The midpoint of the guidance range reflects just under 2% revenue growth over 2020 revenue of $844 million. The midpoint of guidance assumes that we will report a year-over-year decline in revenue in the low double-digit range in the first quarter as the first quarter of 2020 was relatively unimpacted by the pandemic. Our guidance assumes that we'll see sequential growth in the second and third quarters and that the back half of 2021 will reflect strong year-over-year growth when compared to 2020. With regard to the healthcare segment, we expect low single-digit revenue growth for full year 2021. We expect operating margins will be in a range of approximately 26 to 30 percent, reflecting lower utilization in the first quarter that improves sequentially as the year progresses. In the business advisory segment, we expect to see mid-single-digit revenue growth for 2021 And we expect our operating margin in this segment to be in a range of approximately 19 to 21%. In the education segment, we expect revenue to decline in the mid single digit range in 2021, reflecting a very tough first half comparison to 2020 prior to the impact of the pandemic on this segment. We expect operating margins will be in a range of approximately 23 to 25%. reflecting lower utilization in the first quarter that improved sequentially as the year progresses. We expect unallocated corporate SG&A to be relatively flat on a full year basis in 2021 compared to 2020 when excluding the fourth quarter restructuring charges incurred during 2020 and the corporate expense impact of our deferred comp plan. Turning to the total company. Huron's adjusted EBITDA margin is expected to be in a range of 10.75% to 11.75% of revenues, an increase of 95 basis points at the midpoint of guidance compared to 2020. We anticipate that the first quarter of 2021 will be our lowest revenue-producing quarter of the year. Also in the first quarter, the reset of fringe rates at the beginning of the year, including FICA and our 401k match, will have an impact on our first quarter expenses as this reset is fairly significant given our people-driven business. Lastly, in the quarter, we expect 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 percent of our full-year adjusted EBITDA and full-year adjusted EPS to be generated during the first quarter. As a closing reminder with respect to 2020 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. Thank you, everyone. I would now like to open the call to questions. Operator?