Huron Consulting Group Inc.

Good afternoon, ladies and gentlemen, and welcome to Yvonne's Consulting Groups webcast to discuss financial results for the first quarter 2021. At this time, all conference call lines are on a listen-only mode. Later, we will conduct our question and answer session for conference call participants, and instructions will follow at that time. As a reminder, this conference call is being recorded. Before we begin, I would like to point all of you to the disclosure at the end of the company's news release for information about any forward-looking statements that may be made or discussed on this call. The news release is posted on Neuron's website. Please review that information along with the filings with the SEC. For a disclosure or 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 Yaron's website for all 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 first quarter 2021 earnings call. With me today are John Kelly, our Chief Financial Officer, and Mark Hussey, our President and Chief Operating Officer. Our first quarter financial results were in line with our expectations. Revenues declined 9% in the first quarter of 2021 as compared to the same period in the prior year, driven by declines in the healthcare and education segments. Those declines were partially offset by strong growth in the business advisory segment. During the first quarter, we saw an increase in our sales pipeline and the pace of signings in our healthcare and education businesses. which gives us further confidence in our ability to meet our updated full-year performance expectations. As the overall demand for our services has increased during 2021, we now believe we are past the pandemic-driven low watermarks for education and healthcare segment revenues, and we expect sequential growth in these businesses moving forward in 2021. We believe the low point for the education segment occurred in the fourth quarter of 2020, while the low point for the healthcare segment was in the first quarter of 2021. Looking ahead, we see increased demand for our healthcare and education services as our clients prepare for a recovering economic environment, which has also strengthened growth in our business advisory segment. I will now share some additional insight into our first quarter performance. During the first quarter, healthcare segment revenues declined 17% over the prior year first quarter. reflective of the difficult first quarter comparisons driven by the growth we experienced in the segment at the beginning of 2020, prior to the impact of the pandemic. The healthcare business got off to a slower start this year, given the continued disruption of the pandemic and vaccine rollout on our hospital and health system clients. As the quarter progressed, our sales pipeline increased and remained at record levels, and the pace of signings and conversion to hard backlog also improved each month. Assessments for our performance improvement offerings have continued to grow, and in April, assessment volume neared pre-pandemic levels. As hospitals and health systems plan for a post-pandemic future, many organizations are prioritizing several key initiatives. Among the most important priorities is making care more affordable while also providing greater price transparency to consumers. As we look at our pipeline, market demand is focused on our core performance improvement and managed services offerings to address near-term financial pressures. In addition, we are seeing substantial demand for one of our newest offerings, which was developed collaboratively across our healthcare, strategy, and technology businesses. This offering helps health systems achieve structural changes to ensure the sustainability of their business model in the future. Given the near-term financial challenges and long-term growth aspirations of our clients, we believe our collective performance improvement-related offerings will continue to be an ongoing source of growth for our business. A second priority for healthcare providers is accelerating care transformation strategies to deliver a substantially greater amount of care virtually, including through telehealth, remote patient monitoring, and hospital-at-home models. The pandemic has highlighted the need for providers to formalize their long-term virtual care strategies and build the right consumer-centric infrastructure to support patients throughout their care journey. The breadth of our care delivery organizational transformation and digital technology and analytics offerings and deep expertise in implementing telehealth and hospital-at-home models positions Chiron to add significant value to our clients as they establish and implement their care transformation. The third priority among our healthcare clients is focusing on enhancing the digitization and use of clinical and operational data with a strong emphasis on planning and analytics. Many healthcare organizations are making significant investments in their administrative operations, comparable to some of the investments in clinical systems that have been made over the past decade. Once again, our healthcare business is well positioned to help our clients navigate this next wave of digital transformation. The growth of our healthcare pipeline and the pace of signings in recent months are indications that our offerings are resonating well with our client base as they seek assistance in addressing these key priorities. Turning to the business advisory segment, in the first quarter of 2021, business advisory segment revenues grew 12% over the prior year quarter, 9% organically, driven by strong, broad-based demand across our strategy, digital technology and analytics, and distress advisory offerings. As we've discussed on prior calls, we continue to execute on our commercial strategy, which is aimed at going to market collaboratively across the four businesses in this segment. The business advisory segment has grown revenues at a compound annual growth rate of 15% over the last five years, inclusive of the recent pandemic era, which reinforces the importance of this segment to our company's growth strategy. When looking beyond the numbers, you will find several important attributes of that revenue growth that bode well for the future of this segment. First, we are winning sizable projects among numerous Fortune 500 companies, particularly in energy and utilities, financial services, industrials and manufacturing, and life sciences. Second, we continue to capitalize on one of our greatest strategic advantages by integrating our deep industry and functional expertise with our strong strategy, technology, and operations capabilities. Coupled with our nimble approach to serving our clients from strategy through execution, Our expertise and experience allow us to compete and win against larger competitors. We are in the process of building additional competencies that will further position the segment for above-average growth in the coming years. In addition, our digital technology and analytics offerings continue to provide the foundation for growth in the commercial sector, and our distressed advisory services continue to perform well amidst the many financial challenges impacting middle market companies. We are also seeing solid demand for our strategy and innovation services as the economy continues to recover. Turning now to the education segment, in the first quarter of 2021, education segment revenues declined 19% over the prior year quarter, reflective of the difficult first quarter comparisons driven by the strong growth we experienced in this segment at the beginning of 2020 prior to the impact of the pandemic. Sequentially, education segments revenues grew 7% over the fourth quarter of 2020, driven by strong demand in our research, strategy, and operations offerings. Similar to healthcare, as the quarter progressed, our sales pipeline increased across our offerings and the pace of signings improved month over month. While some of the larger ERP-related engagements continue to be delayed, the pipeline of opportunities is widening and many institutions are beginning to feel more comfortable that they have the bandwidth and financial stability to undertake these significant projects. We have also seen smaller institutions moving ahead with their digital transformation, giving greater visibility into their financial position. While some higher education institutions face sizable COVID-19-related losses, others have found the losses to be less than initially anticipated. in part due to financial support by the federal government. Many colleges and universities are now more aggressively evaluating how to be successful in a post-pandemic environment, including trying to establish more sustainable operating models. These attributes will continue to drive demand for our broad set of offerings in this segment. Before I turn to our outlook for the year, I'd like to add several comments about our collective technology capabilities. As I mentioned last quarter, our technology services grew to over 30% of total company revenues in 2020. Technology has become an increasingly important pillar of growth for this company and is deeply embedded in each of our segments. We continue to grow our teams in North America as well as in India to support the market demand for these offerings. Finally, let me turn to our outlook for the year. Historically, we have not adjusted our annual guidance after the first quarter. Today, the signs of recovery in our healthcare and education businesses and continued momentum in the business advisory segment give us confidence to raise and narrow our full year guidance. As our press release indicates, we are increasing and narrowing our annual revenue guidance to $850 to $900 million. We are also maintaining our adjusted EBITDA guidance in a range of 10.8% to 11.8% of revenues and increasing our adjusted diluted earnings per share in a range of $2.35 to $2.75. We raised our revenue guidance to reflect the current and anticipated demand for our services across all segments. We continue to anticipate 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. We are also investing for the long term, further expanding our capabilities in areas we believe have strong growth potential given current market dynamics, including our healthcare managed services and our digital technology and analytics offerings across all of our segments. We are focused on our financial strategy of achieving sustainable organic revenue growth and expanding margins over time, And we continue to believe our business will generate mid to upper single digit growth over the medium term. The disruption facing our clients and primary end markets is substantial, stemming from the impacts of the COVID-19 pandemic, as well as the rapidly evolving competitive landscape. And we believe this disruption creates significant opportunities for growth in our business. Before I turn it over to John, let me make two final comments. First, I want to recognize the challenge that our Indian colleagues are facing given the recent surge in COVID-19 cases. We are working closely with our country leadership team to support our people and their loved ones, as well as the local community, and have executed our business continuity plans to minimize the disruption to our business. Lastly, I want to thank our entire team for all they have done during the pandemic. They have demonstrated an incredible amount of agility and creativity while also remaining focused on supporting our clients, our company, and each other. 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, Thank You, 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 Unico Solution, which closed on February 1st, is included in our first quarter financial results in the business advisory segment, subsequent to the acquisition date. Now, let me walk you through some of the key financial results of the quarter. Revenues for the first quarter of 2021 were $203.2 million, down 8.7% from $222.6 million in the same quarter of 2020. The decline in revenues in the quarter was driven by the healthcare and education segments, which faced challenging pre-pandemic year-over-year comparisons in the first quarter of 2021. This decline was partially offset by continued growth in the business advisory segment. Net income was $5.4 million, or 24 cents per diluted share, in the first quarter of 2021, compared to net loss of $42.3 million, or $1.94 per diluted share, in the same quarter in the prior year, which was inclusive of the $59.8 million pretax goodwill impairment charge taken in the first quarter of 2020. Our effective income tax expense rate in the first quarter of 2021 was 22.1 percent compared to 21 percent benefit rate one year ago. Our effective tax rate for Q1 of 2021 was more favorable than the statutory rate, inclusive of state income taxes, primarily due to a discrete tax benefit for share-based compensation awards that vested during the first quarter of 2021. This favorable tax benefit was partially offset by certain non-deductible expenses. Adjusted EBITDA was $16.5 million in Q1 2021, or 8.1 percent of revenues, compared to $19 million in Q1 of 2020, or 8.5 percent of revenues. Adjusted non-GAAP net income was $7.8 million or 35 cents per diluted share in the first quarter of 2021 compared to $9.8 million or 44 cents per diluted share in the same period of 2020. Now I'll make a few comments about the performance of each of our operating segments. The healthcare segment generated 39% of total company revenues during the first quarter of 2021. This segment posted revenues of $79.7 million for the first quarter of 2021, down $15.9 million, or 16.6% from the first quarter of 2020. The decline in revenue reflects the ongoing impact of the COVID-19 pandemic in the first quarter of this year, relative to a quarter that was largely unimpacted by COVID-19 last year. As Jim mentioned, we believe the first quarter of 2021 will be the revenue low point for this segment related to the pandemic as we expect sequential revenue growth moving forward in 2021, reflecting the ongoing recovery of the healthcare industry. Operating income margin for healthcare was 25.7% for Q1 of 2021 compared to 25.2% for the same quarter in 2020. The quarter-over-quarter increase in margin was primarily attributable to decreases in conference-related expenses performance bonus and share-based compensation expense, and promotion and marketing expenses, largely offset by an increase in salaries and related expenses for our revenue-generating professionals as a percentage of revenues, reflecting lower utilization. As a reminder, our first quarter results included the annual resetting of our wage basis for certain fringe items like the employer portion of FICA taxes and our 401 match. As Jim mentioned, we continue to invest in areas of our business that align with our enterprise strategy, including managed services. In April, we hired approximately 300 healthcare professionals to expand our managed services capacity to provide revenue cycle billing, collections, insurance verification, and charge integrity services to our healthcare clients. While we expect revenue of around $10 million during 2021 related to this group hire, We only expect modest accretion from an earnings perspective as we invest to build out our capabilities for future growth. The business advisory segment generated 36 percent of total company revenues during the first quarter of 2021. Segment posted revenues of $72.9 million in Q1 2021, up $8 million, or 12.3 percent, from the first quarter of 2020. Revenues for the first quarter of 2021 include $2.4 million from our acquisitions of ForceIQ and Unico Solution. Our organic revenue growth rate in the business advisory segment was 9% for the quarter. The quarter-over-quarter increase in revenue was broad-based across our strategy, digital technology and analytics, and distressed advisory offerings. The operating income margin for the business advisory segment was 17.9% for Q1 of 2021, compared to 15.2% for the same quarter in 2020. The quarter-over-quarter increase in margin was primarily due to increases and decreases, rather, in restructuring charges and promotion and marketing expenses, partially offset by an increase in performance bonus expense for our revenue-generating professionals. The education segment generated 25% of total company revenues during the first quarter of 2021. The segment posted revenues of $50.6 million in Q1 2021, down $11.5 million, or 18.5% from the first quarter of 2020. The decline in revenue reflects the ongoing impact of the COVID-19 pandemic as compared to a quarter that was largely unimpacted by the pandemic in 2020. The education segment grew 7% sequentially in the first quarter of 2021 over the fourth quarter of 2020. And as Jim mentioned, we believe the fourth quarter of 2020 will be the revenue low point for this segment related to the pandemic, as we expect sequential revenue growth moving forward in 2021, reflecting the ongoing recovery of the higher education industry. The operating income margin for education was 17.1%. for Q1 of 2021 compared to 21.1% for the same quarter in 2020. The quarter-over-quarter decline in margin was primarily due to a decrease in utilization, partially offset by decreases in contractor expense, promotion and marketing expense, and performance bonuses expense for our revenue-generating professionals. Other corporate expenses not allocated at the segment level were $28.8 million in Q1 2021 compared with $27.1 million in Q1 of 2020. Unallocated corporate expenses in the first quarter of 2021 include $800,000 of expense related to the increase in liability to participants in our deferred compensation plan, which is fully offset by the corresponding gain in other income related to the increase in value of the assets used to fund this plan. Conversely, unallocated corporate expenses in the first quarter of 2020 reflected a reduction of expense of $4.7 million related to our deferred compensation plan. Absent the impact of our deferred compensation plan in both periods, the $3.8 million decrease in unallocated corporate costs reflects decreased stock compensation and salaries and related costs for our support personnel, decreased practice administration and meeting expenses, and decreased training expenses as well as recruiting expenses. Now turning to the balance sheet and cash flows. DSO came in at 64 days for the first quarter of 2021 compared to 52 days for the fourth quarter of 2020 and 62 days for the first quarter of 2020. We expect DSO to normalize to around 60 days over the course of 2021. Total debt includes the $265 million in senior bank debt and a $3 million promissory note for total debt of $268 million. We finished the quarter with cash of $22 million for net debt of $246 million. This was a $110 million increase compared to Q4 of 2020, as the first quarter reflects the payment of our annual bonuses. The first quarter also included $11.5 million of share repurchases under our $50 million board authorization, $8.5 million of shares redeemed to satisfy employee tax withholdings related to our share-based compensation program, and $6 million related to business acquisitions. Our leverage ratio, as defined in our senior bank agreement, was approximately 2.6 times adjusted EBITDA as of March 31st, 2021, compared to 3.5 times adjusted EBITDA at the end of Q1 2020. The first quarter of 2020 leverage reflects borrowings of $125 million on a revolving line of credit out of an abundance of caution at the outset of the COVID-19 pandemic. Our net leverage ratio was 2.4 times trailing 12 months adjusted EBITDA as of March 31st, 2021 when the bank definition calculation is adjusted for cash on hand. This compares to 2.3 times trailing 12 months adjusted EBITDA as of March 31st, 2020 when calculating in the same manner. Cash flow used in operations in the first quarter of 2021 was $83 million. We used $2 million of our cash to invest in capital expenditures, inclusive of internally developed software costs, resulting in free cash flow of negative $85 million. Finally, let me turn to our expectations and guidance for 2021. As Jim noted, we are raising and narrowing our full-year 2021 revenue guidance to $850 million to $900 million. The increase in our revenue guidance primarily reflects the ongoing momentum in our business advisory segment and better visibility and increased confidence that we have progressed past the revenue low points related to our healthcare and education segments. In addition, we are forming our full year adjusted EBITDA guidance to be in a range of 10.8% to 11.8% of revenues. And we are increasing our full year adjusted non-GAAP diluted earnings per share guidance to be in a range of $2.35 to $2.75. Finally, we expect our full-year effective tax rate to be in a range of 26% to 29%. Thanks, everyone. I would now like to open the call up to questions. Operator?