Huron Consulting Group Inc.

Good afternoon, ladies and gentlemen, and welcome to the Huron Consulting Group's webcast to discuss financial results for the second quarter, 2021. At this time, all conference call lines are in a listen-only mode. Later, we will conduct our question and answer session for conference call participants, and instructions will follow at that time. As a reminder, this conference call is being recorded. Before we begin, I would like to point out to all of you to the disclosure at the end of the company's news release for information about any forelicking 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 the disclosures required by the SEC, including reconciliation to the most comparable gap 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 second quarter 2021 earnings call. With me today are John Kelly, our Chief Financial Officer, and Mark Hussey, our President and Chief Operating Officer. I'd like to spend a few minutes putting our second quarter results into context, as it will provide important insight into how we see things evolving for the rest of the year. Prior to the start of the pandemic, we finished 2019 with strong performance across all three operating segments, and we entered 2020 with much of that momentum continuing. At the midpoint of our initial guidance range for 2020, we anticipated a growth rate of 5 percent, and we believed at the time that the market demand for our services and our investments in growth would enable us to exceed that target. As we have discussed on prior calls, with the onset of the pandemic in early 2020, the healthcare segment was negatively impacted immediately, and the education segment was negatively impacted a quarter later. while the business advisory segment achieved strong growth through most of 2020, despite global economic challenges. Turning to 2021, when we released our first quarter results, we shared our belief that the education and healthcare segments reached their pandemic revenue low-water marks during the fourth quarter of 2020 and first quarter of 2021, respectively. We also shared that we saw an increase in our sales pipeline and the pace of signings in our healthcare and education business, which gave us further confidence in our ability to meet our updated full-year performance expectations. With that context, in the second quarter of 2021, revenues grew 6% year-over-year and 13% sequentially, reflecting the strength of the recovery in our healthcare and education segments. We anticipate the tailwinds that we experienced in the second quarter will continue across all segments, including in business advisory, further demonstrating that our pre-pandemic growth trajectory has returned and that we believe we have established a foundation for strong growth through the remainder of 2021. I will now share additional insight into our second quarter performance and then provide some color on our expectations for the remainder of 2021. During the second quarter, healthcare segment revenues grew 19 percent over the prior year quarter, reflective of the strength of the recovery for our offerings in the healthcare industry and strong performance in our revenue cycle managed services business. As we anticipated, utilization improved over the first quarter of 2021, and the pipeline of assessments for our performance improvement offerings continues to build, given the financial pressures facing hospitals and health systems. As previously discussed, during the second quarter, we continued to invest in our revenue cycle managed services offerings as we believe this business will be an ongoing source of growth for Huron. In addition, we recently onboarded the leadership of a West Coast academic health system, which is now our third revenue cycle managed services contract. As hospitals and health systems navigate challenging financial terrain, our comprehensive offerings spanning consulting, managed services and outsourcing, and our proven ability to achieve cost savings and yield improvement for our clients will continue to be attractive to the healthcare market. Turning to the business advisory segment, in the second quarter of 2021, business advisory segment revenues were flat compared to the prior year quarter, driven by another quarter of double-digit growth across our digital technology and analytics and strategy offerings. That growth was offset by lower revenues in our distressed advisory and life sciences businesses, reflective of the difficult comparisons in the second quarter of 2020. The primary growth driver in this segment is the ongoing demand for digital transformation stemming from the altered post-pandemic environment that has emerged across industries. Our digital and analytics offerings have been deployed in numerous commercial sectors, and they have also strengthened Huron's competitive advantage in our core industry verticals. As we've been indicating during the past two years, the investments we have made and continue to make throughout the business advisory segment are providing two key benefits to Huron. First, the investments are enhancing our ability to provide a broader array of technology, financial, and operational capabilities in new industries and geographies. Second, These investments are also yielding success in achieving new collaborative work within our healthcare and education segments. Collectively, we are excited about how these investments will continue to enable us to achieve our financial objectives. Turning now to the education segment, in the second quarter of 2021, education segment revenues declined 7% over the prior year quarter, reflective of the difficult comparisons in the second quarter of 2020. which as of that time had not been impacted by the pandemic. Sequentially, education segment revenues grew 14% over the first quarter of 2021, driven by record demand in our research strategy and operations and student offerings. As we've indicated, there was strong demand for our technology-related services in 2019 and early 2020, And many large universities halted or deferred their systems implementation efforts until they had more clarity as to how long it would take to return to a more normal environment. We believe that time is now. And in recent months, we have seen an increase in our pipeline for technology-related opportunities. We anticipate that the second half of the year will show continuous improvement in revenue coming from cloud implementations, adding to the strength and demand for the remainder of our education offerings. Before I turn to our outlook for the remainder of the year, I would like to make a few comments about our team. Last year, we had to make strategic decisions about our people and the duration of the pandemic. We didn't know how long the pandemic would last, nor did we have a full understanding of how deeply it would eventually impact our health and education businesses. What we did know is that we had and continue to have an incredibly talented team of people that would not be easily replaceable if we made a material reduction in our headcount. During the pandemic, we believed that retaining our people was in the best interest of our shareholders and critical to sustaining our culture and supporting the growth we anticipated as our clients' businesses began to stabilize. We believe that those decisions are reflected in the strong revenue growth this quarter and will yield positive results for our shareholders in terms of improved margins, and a robust workforce that is ready to meet the anticipated high demand for our services as the economy continues to rebuild. We believe that evidence of those improvements in revenue growth and profitability will continue to materialize in more normalized levels of utilization during the second half of this year and into subsequent years as demand returns across all segments. Finally, let me turn to our outlook for the year. As our press release indicates, we are increasing and narrowing our annual revenue guidance to $875 to $905 million. We are also narrowing our adjusted EBITDA guidance to a range of 10.8% to 11.3% of revenues and narrowing our adjusted diluted earnings per share to a range of $2.40 to $2.70. We raised our revenue guidance to reflect the anticipated recovery in demand for our healthcare and education offerings in the second half of the year, as well as continued growth in the business advisory segment. Across all three segments, we believe the market recovery presents strong tailwinds for demand for our business. Through the hard work and dedication of our teams, we believe we are well positioned to take advantage of these market opportunities with our deep client relationships, industry expertise, and extensive technology capabilities. I remain enthusiastic about our prospects for 2021, and we are committed to returning Huron to sustainable organic growth and increased profitability. Now let me turn it over to John for a more detailed discussion of the 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, 10Q 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. Also, unless otherwise stated, my comments today are all on a continuing operations basis. Now let me walk you through some of the key financial results for the quarter. Revenues for the second quarter of 2021 were $230.1 million, up 5.6% from $217.9 million in the same quarter of 2020. The increase in revenues in the quarter was driven by growth in our healthcare and business advisory segments, partially offset by a year-over-year decline in revenues in the education segment, which was not significantly impacted by the pandemic until the second half of 2020. Education segment revenues grew sequentially 14.3% compared to the first quarter of 2021. Net income was $12.8 million, or 59 cents per diluted share, in the second quarter of 2021-21. compared to $13.6 million, or 61 cents per diluted share, in the same quarter in the prior year. Our effective income tax rate in the second quarter of 2021 was 21.3 percent, compared to 20.1 percent one year ago. Our effective tax rate for Q2 of 2021 was more favorable than the statutory rate, inclusive of state income taxes, primarily due to a discrete tax benefit, related to electing the guilty high-tax exclusion retroactively to an earlier period. This favorable tax benefit was partially offset by certain non-deductible expenses. Adjusted EBITDA was $25.6 million in Q2 2021, or 11.1 percent of revenues, compared to $27.5 million in Q2 2020, or 12.6 percent of revenues. Adjusted non-GAAP net income was $15.1 million, or 69 cents per diluted share in the second quarter of 2021, compared to $14.9 million, or 68 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 44% of total company revenues during the second quarter of 2021. This segment posted revenues of $101.4 million for the second quarter of 2021, up $16 million or 18.7% from the second quarter of 2020. The increase in revenue primarily reflects increased demand for both our performance improvement and revenue cycle managed services offerings. Operating income margin for healthcare was 27.3% for Q2 of 2021 compared to 24.8% for the same quarter in 2020. The increase in margin over the prior year quarter was primarily attributable to higher utilization as well as decreases in salaries and related expense for our support personnel and contractor expense, partially offset by increases in performance bonus expense and signing, retention, and other bonus expense for our revenue-generating professionals as a percentage of revenues. Let me interject one housekeeping item. As our revenue cycle managed services business continues to grow and scale, we have provided metrics in our 10-Q to provide additional color into this portion of our business. We will also file a supplemental AK, which provides a historical recasting of our metrics to reflect this revised presentation. The business advisory segment generated 31 percent of total company revenues during the second quarter of 2021. The segment posted revenues of $70.9 million in Q2 2021, up $.4 million, or 0.6 percent, from the second quarter of 2020. Revenues for the second quarter of 2021 included $4.3 million from our acquisitions of Force IQ and Unico Solution. The quarter-over-quarter increase in revenue was driven by our digital technology and analytics and strategy offerings, partially offset by decreases in our distressed offerings and life sciences business. The operating income margin for the business advisory segment was 20.2 percent for Q2 2021 compared to 23.7 percent for the same quarter in 2020. The quarter-over-quarter decline in margin was primarily due to increases in salaries and related expenses for our revenue-generating professionals and contractor expense as a percentage of revenues, partially offset by a decrease in performance bonus expense. The education segment generated 25 percent of total company revenues during the second quarter of 2021. Segment posted revenues of $57.9 million in Q2 2021, down of $4.2 million, or 6.7% from the second quarter of 2020. The decline in revenue reflects a difficult prior year comparison as our education segment did not experience significant revenue impact from the pandemic until the third quarter of last year. The decrease reflects a decline in our technology implementation revenues, partially offset by increases in our research, strategy and operations, and student offerings. The operating income margin for education was 23.8% for Q2 2021, compared to 26% for the same quarter in 2020. The quarter-over-quarter decline in margin was primarily due to increases in performance bonus expense and signing retention and other bonus expense for our revenue-generating professionals and technology expenses, partially offset by decreases in contractor promotion, and marketing expenses as a percentage of revenues. Other corporate expenses not allocated at the segment level were $34.3 million in Q2 2021 compared with $31.6 million in Q2 2020. Unallocated corporate expenses in the second quarter of 2021 include $2.1 million of expense related to the increased liability of our deferred compensation plan which is fully offset in other income by the corresponding gain in assets used to fund that plan. Unallocated corporate expenses in the second quarter of 2020 included $3.9 million of similar expense related to our deferred compensation plan. Excluding the impact of the deferred compensation plan in both periods, the $4.4 million increase in unallocated expense primarily relates to increases in salaries, bonuses, related expense for our support personnel, legal expenses, restructuring expense, travel expenses, and software and data hosting expenses. For the first six months of 2021, other corporate expenses not allocated at the segment level to modestly decreased compared to the same period in 2020 when excluding the impact of the deferred compensation plan and restructuring charges. Now turning to the balance sheet and cash flows. DSO came in at 73 days for the second quarter of 2021 compared to 64 days for the first quarter of 2021 and 68 days for the second quarter of 2020. The increase in DSO during the quarter is related to the ramp up in revenue as the quarter progressed, as well as certain larger health care and education projects with contractual payment schedules where we anticipate to bill and collect on first half revenues in the second half of the year. We continue to expect the ESO 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 $13 million for net debt of $255 million. Our leverage ratio, defined in our senior bank agreement, was approximately 2.8 times adjusted EBITDA as of June 30th, 2021 compared to 2.6 times adjusted EBITDA at the end of Q2 2020. We expect to finish the year with a leverage ratio below 2 times EBITDA. Cash flow generated from operations in the second quarter of 2021 was $21 million, and we used $6 million of our cash to invest in capital expenditures, inclusive of internally developed software costs, resulting in free cash flow of $15 million. We used $23.8 million of our cash to repurchase shares of our common stock during the quarter, bringing the year-to-date total up to $35.2 million. Finally, let me turn now to our expectations and guidance for 2021. As Jim noted, we are raising and narrowing our full-year 2021 revenue guidance to $875 million to $905 million. The increase in our revenue guidance primarily reflects the ongoing recovery in our healthcare and education segments and continued growth in our business advisory segments. In addition, we are narrowing our full-year adjusted EBITDA guidance to be in a range of 10.8% to 11.3% of revenues, and we are narrowing our full-year adjusted non-GAAP diluted earnings per share guidance to be in a range of $2.40 to $2.70. Finally, we expect our full-year effective tax rate to be in a low 20% range. Thanks, everyone. I would now like to open up the call to questions. Operator?