Huron Consulting Group Inc.

Good afternoon, ladies and gentlemen, and welcome to Huron Consulting Group's webcast to discuss financial results for the third quarter of 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 Huron's website. Please review that information, along with the filings with the SEC, for 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 earnest 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 third quarter 2021 earnings call. With me today are John Kelly, our Chief Financial Officer, and Mark Hussey, our President and Chief Operating Officer. Third quarter revenues grew 9% year over year, driven by growth across all three operating segments. This solid growth, coming off the heels of significant pandemic-related impact on our two largest industries, demonstrates the solid foundation of talent we have built to deliver our services. Our pipeline remains robust, and we are focused on converting sales opportunities to enable a strong start in 2022. I will now provide additional insight into our third quarter performance and then provide color on our expectations for the remainder of 2021. During the third quarter, healthcare segment revenues grew 6% over the prior year quarter, reflective of the continued recovery for our offerings in the healthcare industry as the pandemic appears to be waning. As a reminder from our prior earnings call, the strong second quarter revenue in the healthcare business included the achievement of certain performance-based milestones, which came earlier in the year than we had anticipated. In the third quarter, the delayed timing of certain project start dates and minor pauses in other projects related to the Delta variant surge created a modest headwind to our overall year-over-year growth. In the third quarter, however, we were able to start work on several significant new projects, and we continued to build a robust pipeline and experience near pre-pandemic demand for our assessments in our performance improvement business. The buildup of our pipeline is consistent with the challenges many hospitals and health systems are facing at this stage of the pandemic, notably increased labor costs, inefficiencies in clinical services due to COVID-related restrictions, and importantly, significant morale issues among the physician and nursing staff that are leading to higher turnover and staffing shortages. None of these issues are likely to ebb in the coming year, which will likely lead to increased pressure on margins across our entire client base. We believe that these attributes will enable us to accelerate growth in the fourth quarter and into 2022. In summary, our full year expectations for this business remain consistent with our previously communicated outlook. Amidst these industry pressures, we are well positioned to help our clients navigate the current challenges while providing strategic, operational, and technology services that prepare them for success in a still rapidly changing healthcare environment. Our healthcare business has evolved in recent years in anticipation of the changing landscape for many of our clients. For example, historically, our healthcare business focused predominantly on revenue cycle and cost improvement. Today, in addition to our traditional performance improvement offerings, we have evolved to add extensive capabilities for clinical transformation, strategy, clinical and administrative technologies, and analytics. Our clients are looking for a comprehensive set of offerings from an experienced team, and our 1,200-plus team of healthcare consultants provide a full suite of capabilities that help our clients address challenges that are more intense and potentially more disruptive than any other time in recent history. Turning to the business advisory segment, in the third quarter of 2021, business advisory segment revenues grew 6% over the prior year quarter. This growth was driven by our digital technology and analytics and strategy offerings, which together grew nearly 20% quarter over quarter. That growth was offset by lower revenues in our distressed advisory business, reflective of the difficult comparisons to the third quarter of 2020. and lower revenues in our life sciences business. We expect our distressed advisory offerings will achieve solid growth in the fourth quarter with the signing of new engagements and the anticipated closing of several broker-dealer success fees. This segment, which focuses primarily on serving the commercial sector, did not experience a material downturn in demand during the pandemic. Although our strategy business was challenged in 2020, Demand has picked up significantly this year, including the most recent quarter. Our technology business, which is the largest business within the business advisory segment, has continued to perform well over the past 18 months, and the third quarter was no exception. The growth of our commercial business and the continued expansion of our technology and analytic offerings are anticipated to lead to double-digit growth during the coming years in this segment. During the third quarter, we announced our intent to sell our life sciences practice, and I'd like to provide some color into our rationale for the divestiture. During our recent refresh of our five-year enterprise strategy, we concluded that our best opportunities for growth and margin expansion lie in areas outside of our life sciences commercial strategy, pricing, and market access practice. Accordingly, we commenced a process to divest this business to concentrate our resources in the areas that represent the best growth opportunities for Huron. Going forward, Huron will continue to serve the life sciences industry through our intersite, digital, and business advisory capabilities. Turning now to the education segment, in the third quarter of 2021, education segment revenues grew 18 percent over the prior year quarter, driven by strong demand for our student, research, and strategy offerings. During the third quarter, we also saw our pipeline for our technology-related offerings begin to convert, giving us confidence that revenue stemming from our cloud implementations will continue to strengthen in the fourth quarter and into 2022. The array of changes taking place in this industry has and will continue to create significant opportunities for Huron. The need to efficiently manage a complicated, decentralized educational institution is driving demand across our full spectrum of administrative, research, and academic offerings. In addition, technology continues to play a substantive role in changing the way education is delivered and administered. Our highly experienced team is well prepared to help our clients address the challenges that are endemic across the higher education industry as institutions, both large and small, compete in this rapidly evolving environment. The historical trajectory for this business yielded five years of double-digit revenue growth. That streak ended with the pandemic, which proved to be too much of a headwind to sustain the historical strong performance. We suspected the pandemic would exacerbate the many challenges facing educational institutions and that the trajectory of the revenue growth in our education business would return when the challenging circumstances began to wane. And we were correct on that front. The third quarter showed strength across our strategy and operations research and student offerings, and we won some meaningful new ERP engagements after a brief lull in the past 18 months. Our backlog and pipeline provide us with confidence that historical growth rates have returned for this business. Let me now turn to our outlook for the year. As our press release indicates, we are narrowing our annual revenue guidance to $885 to $905 million, increasing the midpoint by $5 million to $895 million. We are also forming our adjusted EBITDA guidance in a range of 10.8 percent to 11.3 percent of revenues and narrowing our adjusted diluted earnings per share to a range of $2.53 to $2.63, increasing the midpoint to $2.58. While our business strengthens as the pandemic begins to wane, our updated guidance reflects the continued momentum we anticipate in our business, driven by the market demand for our services. 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, 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 that 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, the divestiture of our life sciences business the closing of which we announced this morning, is included in our results for the quarter in the business advisory segment. Now let me walk you through some of the key financial results for the quarter. Revenues for the third quarter of 2021 were $224 million, up 9.1% from $205.3 million in the same quarter of 2020. The increase in revenues in the quarter was driven by growth across all three operating segments. That income was $13.7 million, or $0.64 per diluted share, in the third quarter of 2021, compared to $11.1 million, or $0.50 per diluted share, in the same quarter in the prior year. Our effective income tax rate in the third quarter of 2021 was 12.5%, compared to 17.7% one year ago. Our effective tax rate for Q3 of 2021 was more favorable than the statutory rate, inclusive of state income taxes, primarily due to discrete tax benefits for U.S. federal return-to-provision adjustments related to the 2020 corporate income tax return. Adjusted EBITDA was $26.4 million in Q3 2021 for 11.8 percent of revenues compared to $23.6 million in Q3 of 2020 for 11.5 percent of revenues. Adjusted non-GAAP net income with $16.8 million or 78 cents per diluted share in the third quarter of 2021 compared to $13 million or 59 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 42% of total company revenues during the third quarter of 2021. This segment posted revenues of $92.8 million for the third quarter of 2021 up $5.4 million, or 6.2%, from the third 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 32.6% in Q3 2021, compared to 29.3% for the same quarter in 2020. The increase in margin over the prior year quarter was primarily attributable to a decrease in performance bonus expense year over year. The business advisory segment generated 31% of total company revenues during the third quarter of 2021. The segment posted revenues of $70 million in Q3 2021, up $3.9 million, or 5.9% from the third quarter of 2020. Revenues for the third quarter of 2021 included $4.5 million from our acquisitions of Force IQ and Unico Solution. Revenues for the third quarter of 2021 also included $5.1 million from our life sciences practice, which was divested during the fourth quarter of 2021. The quarter-over-quarter increase in revenue was driven by our strategy and digital technology and analytics offerings. The operating income margin for the business advisory segment was 14.1 percent for Q3 2021 compared to 16.3 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 percentages of revenues. The operating margin also reflects the timing of success fees from our broker-dealer, which had fewer success fees in the third quarter than we anticipate in the fourth quarter. These decreases were partially offset by a decrease in performance bonus expense for our revenue generating professionals. The education segment generated 27% of total company revenues during the third quarter of 2021. The segment posted revenues of $61.2 million in Q3 2021, up $9.3 million or 18% from the third quarter of 2020. The increase in revenue reflects increased demand for our student research, and strategy offerings. The operating income margin for education was flat at 24.2% in the third quarter of 2021 when compared to the same quarter in 2020. Other corporate expenses not allocated at the segment level were $31.4 million in Q3 2021 compared with $29 million in Q3 2020. Unallocated corporate expenses in the third quarter of 2021 include $400,000 of income related to the decreased liability of our deferred compensation plan, which is fully offset in other income by the corresponding loss in assets used to fund that plan. Unallocated corporate expenses in the third quarter of 2020 included $1.8 million of similar expense related to our deferred compensation plan. Excluding the impact of the deferred compensation plan in both periods, the $4.6 million increase in unallocated expense primarily relates to increases in share-based compensation and salaries and related expenses for our support resources, restructuring charges, software and data hosting expenses, and legal expenses, partly offset by a decrease in performance bonus expense for our support resources. The year-over-year third quarter increase in stock compensation expense primarily reflects a reduction in expense related to our long-term incentive plan for executive officers in the third quarter of 2020. due to revised projections related to the pandemic at that time. Now turning to the balance sheet and cash flows. DSO came in at 76 days for the third quarter of 2021 compared to 73 days for the second quarter of 2021 and 62 days for the third quarter of 2020. The increase in DSO during the quarter is related to a slight increase in working capital primarily due to certain larger healthcare and education projects with contractual payment schedules where we anticipate to bill and collect in the fourth quarter of 2021 and, in some cases, the first quarter of 2022, coupled with a decrease in revenue during the quarter compared to the second quarter of 2021. We expect DSO to normalize to around 65 days over the remainder of 2021. Total debt includes the $260 million in senior bank debt and a $3 million promissory note for total debt of $263 million. We finished the quarter with cash of $11 million for net debt of $252 million. Our leverage ratio, as defined in our senior bank agreement, was approximately 2.7 times adjusted EBITDA as of September 30th, 2021, compared to 2.1 times adjusted EBITDA at the end of Q3 2020. We expect to finish the year with a leverage ratio below two times. adjusted EBITDA. Cash flow generated from operations in the third quarter of 2021 was $33.8 million, and we used $4.6 million of our cash to invest in capital expenditures, inclusive of internally developed software costs, resulting in free cash flow of $29.2 million. During the third quarter, we repaid $12 million in company portion FICA taxes related to 2020 that had been deferred under the CARES Act. We used $25 million of our cash to repurchase shares of our common stock during the quarter, bringing the year-to-date total up to $60.2 million. We now expect free cash flow for the full year 2021 to be at the low end of our original guidance range of $55 to $75 million. We anticipate our conversion of adjusted EBITDA to free cash flow in 2021 to be lower than our historical average due to an unusually low DSO of 52 days as of December 31st, 2020, which pulled some cash receipts that would have normally occurred in the first quarter of this year into the fourth quarter of last year, slightly higher than normal DSO expected as of December 31st, 2021, due to contractual payment schedules on certain larger healthcare and education segment projects. The previously mentioned 2021 repayment of deferred company portion FICA taxes from 2020 related to the CARES Act and the anticipated ramp in revenue for the fourth quarter of 2021. We expect our conversion of adjusted EBITDA to free cash flow to normalize to historic levels in 2022. Finally, let me turn to our expectations and guidance for 2021. As Jim noted, we are narrowing our full-year 2021 revenue guidance to $885 million to $905 million, raising the midpoint to $895 million. In addition, we are reaffirming our full-year adjusted EBITDA percentage 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 $2.53 to $2.63, raising the midpoint to $2.58. Finally, we expect our full-year effective tax rate to be in the low 20% range. Our updated guidance is inclusive of the impact of the divestiture of our life sciences practice. Looking beyond 2021, full-year 2022 revenues will reflect the impact of the sale of the life sciences business. However, we do not expect any significant impact related to the sale on our adjusted EBITDA margin percentage or adjusted earnings per share after consideration of corporate savings related to the transaction, as well as the anticipated use of the transaction proceeds. We will continue to execute our balanced capital allocation strategy with the proceeds received from the sale, as well as our free cash flow in the fourth quarter. We currently intend to use the net proceeds to reduce borrowings, purchase shares under our current share repurchase authorization, and execute strategic tuck-in acquisitions. Thanks, everyone. I would now like to open the call to questions.