Huron Consulting Group Inc.

Good afternoon, ladies and gentlemen, and welcome to Huron Consulting Group's webcast to discuss financial results for the first quarter 2022. At this time, all conference call 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. 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 FCC, 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 2022 earnings call. With me today are John Kelly, our Chief Financial Officer, and Mark Hussey, our President and Chief Operating Officer. Our strong first quarter results reflect the continued momentum that started early in 2021 and has now expanded across all three of our operating segments. Revenues grew 28% over the prior year quarter, reflective of the strong demand in each of our core industries. In addition, our digital revenues increased 36% in the first quarter of 2022 over the same period in 2021, reflecting solid demand for improved integration of technology and analytics into our clients' business operations. As we've shared on previous earnings calls, our strong results further demonstrate that we are delivering on our commitment to sustainable revenue growth and improved profitability. As we will discuss in a few minutes, demand for our services across industries remains strong, and we are strategically and operationally well positioned to take advantage of the vibrant market ahead. I will now share some additional insight into our first quarter performance. During the first quarter, healthcare segment revenues grew 27 percent over the prior year quarter. The increase in revenues in Q1 of 2022 was driven by strength in demand for our performance improvement revenue cycle managed services, and digital offerings. We've mentioned on recent investor calls the ongoing challenges facing the healthcare industry. It's worth reiterating the primary challenges facing our clients as we expect these challenges to continue for the foreseeable future. We see the most difficult challenge as the strained cost structure stemming from dramatic increases in labor costs. High turnover, increased compensation for clinical and administrative staff, and a heavy reliance on contract labor has pushed costs well in excess of the trend in reimbursement rates. These factors, coupled with employee burnout, worsening payer mix, and inconsistent volume recovery, have all contributed to increased financial pressures for much of our client base. We expect these pressures will continue to drive increased demand for our performance improvement, strategy, and people-related offerings. In addition, healthcare providers are focused on evolving their care delivery models, including by establishing virtual care in the home. Through our exclusive partnership with Medically Home, we have successfully implemented the hospital-at-home model for numerous health systems to help them create competitive differentiation, expand consumer choice, and increase their growth potential. The opportunities to treat patients at home are part of a broader trend in digital transformation among healthcare providers. As reflected in the strong growth in our digital offerings, we are providing the data, analytics, and technology to help our clients achieve growth and scale in their business models, while helping them stay competitive amidst an increasing array of nontraditional participants in the healthcare market. Our deep subject matter expertise and our consistent ability to transform our clients' businesses and deliver measurable, improved outcomes positions us to address the demand in the market today and the growing market opportunity in the years to come. Turning now to the education segment, in the first quarter of 2022, education segment revenues grew 57% over the prior year quarter. driven by strong, broad-based demand across all of our offerings in this segment. Education segment revenues grew 20 percent sequentially over the fourth quarter of 2021, highlighting the continued momentum in demand for our services in the education industry. As we indicated in our recent investor day, over 75 percent of higher education institutions are seeking to change the way they do business following the pandemic. These changes include transitioning to the cloud, executing plans to ensure future financial sustainability, expanding the research enterprise, and seeking better ways to serve the student population while attracting new students in a demographically challenged environment. Our investor day created an opportunity for us to provide greater insight into aspects of our education industry capabilities that we believe are underappreciated among the investor community. We are bringing to market offerings that are in high demand as our client base makes long-awaited changes to the way they operate their business. In particular, many of our large research university clients are having to make significant investments in upgrading their digital capabilities and improving the efficiency in which they manage their academic and research operations. With our team of over a thousand employees focused exclusively in the education industry, we have a distinct competitive advantage and are well positioned to help our clients achieve their goals with our strong strategy and operations, research, student, and digital capabilities. Turning to the commercial segment, in the first quarter of 2022, commercial segment revenues grew 3% over the prior year quarter, driven by strong demand for our digital and strategy offerings in the commercial industries, particularly in financial services. The increase in revenues from our digital offerings were partially offset by the decrease in revenues from the divestiture of our life sciences business in the fourth quarter of 2021 and lower demand in our financial advisory capabilities. Excluding the impact of the life sciences business, the commercial segment grew 12% in Q1 2022 over the prior year quarter. Our digital and strategy capabilities continue to perform well leveraging our deep industry expertise and distinct reputation as we build market share in the large and growing commercial market, most notably in the financial services and energy and utilities industries. Our digital offerings in the commercial markets grew 23 percent in the first quarter of 2022 as compared to the same period a year ago, further demonstrating the strong demand for our technology and analytics-related services. We've established a strong set of offerings, building a solid foundation from which we believe we can further accelerate growth in this segment. Finally, let me turn to our outlook for the year. We typically do not adjust our annual guidance after the first quarter. However, our strong first quarter results and the demand across all of our operating segments lead us to increase our annual revenue and earnings guidance. As our press release indicates, we are increasing and narrowing our annual revenue guidance to $1 billion to $1.05 billion. We are also maintaining our adjusted EBITDA guidance in a range of 11.25% to 12.25% of revenues and increasing and narrowing our adjusted diluted earnings per share in a range of $3 to $3.40. We are raising our revenue guidance to reflect the current and anticipated demand for our services across all segments. As we mentioned at our recent investor day, to achieve our strategic and financial objectives, including delivering strong revenue growth and margin expansion, we are focused on accelerating growth in healthcare and education, growing our presence in the commercial industries, advancing our integrated digital platform, building a more sustainable base of revenue to drive consistent growth, and strategically deploying capital to accelerate our strategy and return capital to our shareholders. We believe we have a significant growth opportunity ahead of us, and we are well positioned to capitalize on that opportunity. Market conditions remain favorable for our core offerings, and we believe that we will continue to achieve strong results consistent with the outlook we described in our investor day presentation and our commentary today. Now let me turn it over to John Kelly 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, 10Q, 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. Now let me walk you through some of the key financial results for the quarter. Revenues for the first quarter of 2022 were $260 million, up 28% from $203.2 million in the same quarter of 2021. The increase in revenues in the quarter was driven by growth across all three operating segments, reflective of the significant growth opportunities in each of our core industries. In addition, revenue within our digital capability increased 36% in the first quarter of 2022 over the same period of 2021, reflecting increased demand across all of our core industries as our clients continue their digital transformation. Net income was $26.9 million, or $1.27 per diluted share in the first quarter of 2022, compared to $5.4 million or 24 cents per diluted share in the same quarter in the prior year. The increase in net income includes an unrealized gain of $19.8 million net of tax for our investment in Medically Home. As Jim mentioned, we are focused on growing and serving clients who are establishing acute care delivered in the home via our exclusive partnership with Medically Home. Our effective income tax rate in the first quarter of 2022 29.6% compared to 22.1% one year ago. Our effective tax rate for Q1 of 2022 was less favorable than the statutory rate, inclusive of state income taxes, primarily due to tax expense related to non-deductible losses on our investments used to fund our deferred compensation liability and certain non-deductible expense items. Adjusted EBITDA was $22.1 million in Q1 2022, or 8.5% of revenues, compared to $16.5 million in Q1 2021 for 8.1% of revenues. Adjusted non-GAAP net income was $10.3 million, or 49 cents per diluted share in the first quarter of 2022, compared to $7.8 million, or 35 cents per diluted share in the same period of 2021. Now I'll make a few comments about the performance of each of our operating segments. The healthcare segment generated 47% of total company revenues during the first quarter of 2022. This segment posted revenues of $121.9 million for the first quarter of 2022, up $25.9 million, or 27% from the first quarter of 2021. Revenues for the first quarter of 2022 included $600,000 from our acquisition of Perception Health. The increase in revenue in the quarter reflects strong demand across our consulting and managed services and digital capabilities within the segment. Our consulting and managed services capability within healthcare grew by 25% year-over-year during the first quarter, primarily reflecting increased demand for our performance improvement offerings. Our digital capability in healthcare grew by 31%, reflecting increased demand for our EHR and ERP offerings. Operating income margin for healthcare was 23% for Q1 2022 compared to 24.8% for the same quarter in 2021. The quarter-over-quarter decrease in margin percentage was primarily attributable to increased salaries and wages for our revenue-generating professionals, inclusive of higher performance bonuses reflective of our full-year expectations. As a reminder, our first quarter results also included the annual resetting of our wage basis for certain fringe items like the employer portion of FICA taxes and our 401 match. The education segment generated 31 percent of total company revenues during the first quarter of 2022. The segment posted record revenues of $80.7 million in Q1 2022, up $29.3 million or 57.1 percent from the first quarter of 2021. Revenues in the first quarter of 2022 included $2.3 million from our acquisition of Whiteboard. The increase in revenue reflects the continued strong demand for all of our offerings across the segment. The continued demand for our offerings is further demonstrated by the education segment's 20 percent sequential growth in the first quarter of 2022 over the record fourth quarter of 2021. The operating income margin for education was 17.7% for Q1 2022, compared to 16.6% for the same quarter in 2021. The quarter-over-quarter increase in margin was primarily due to revenue growth that outpaced increases in payroll costs, partially offset by an increase in contractor expenses as a percentage of revenues. The commercial segment generated 22% of total company revenues during the first quarter of 2022. The segment posted revenues of $57.5 million in Q1 2022, up $1.6 million, or 2.9% from the first quarter of 2021. Revenues for the first quarter of 2022 included $1 million of inorganic contributions from our acquisitions of Unico Solution and AIM data. The increase in revenues reflects strength in demand for our digital offerings, partially offset by a decrease in revenues due to the divestiture of our life sciences business, which generated $4.7 million in the first quarter of 2021. Our digital offerings in the commercial markets grew 23 percent in the first quarter of 2022 as compared to the same period a year ago. Operating income margin for the commercial segment was 21.2 percent for Q1 2022 compared to 17.6 percent for the same quarter in 2021. quarter-over-quarter increase in margin was primarily due to the decrease in expenses driven by the divestiture of our life sciences business, partially offset by increases in contractor expenses and payroll costs for our support personnel as a percentage of revenues. Let me provide some additional color on our capabilities before I turn to other corporate expenses. Our consulting and managed services and digital capabilities both achieved strong growth in the first quarter. On a full year basis, We expect the consulting and managed services capability to generate operating income margin in the upper 20 percent range and the digital capability to generate operating margin in the high teen percentage range. Turning to corporate expenses, corporate expenses not allocated at the segment level were $33.5 million in Q1 2022 compared with $28.9 million in Q1 2021. Unallocated corporate expenses in the first quarter of 2022 included a $2.6 million reduction of expense related to the decrease in liability to participants in our deferred compensation plan, which is fully offset by the corresponding loss in other income related to the decrease in value of the assets used to fund that plan. Conversely, unallocated corporate expenses in the first quarter of 2021 reflected an increase of expense of $800,000 related to the deferred compensation plan. Absent the impact of our deferred compensation plan in both periods, The $8 million increase in unallocated corporate expenses are primarily due to an increase in payroll costs, including increases in salary and related expenses, performance bonus expense, and share-based compensation expense for our support personnel. The overall increase in unallocated corporate expenses also includes an increase in non-payroll costs, primarily for legal fees and software and data hosting costs. We expect our quarterly run rate for corporate expenses to be in the low to mid $30 million range for the remainder of the year. Now turning to the balance sheet and cash flows. DSO came in at 75 days for the first quarter of 2022 compared to 69 days for the fourth quarter of 2021 and 64 days for the first quarter of 2021. We continue to expect DSO to normalize to between 60 and 65 days in 2022 as we collect on several large projects that have contractual payment schedules extending into the second and third quarters of the year. We finished the quarter with borrowings on a revolving credit facility of $335 million and with cash of $10 million for net debt of $325 million. This was a $113 million increase compared to Q4 2021 as the first quarter reflects the payment of our annual bonuses. The first quarter also included $24.1 million of share repurchases or approximately 527,000 shares under our current authorization of up to $200 million of which $106 million in repurchases remained available as of March 31st, 2022. Despite the significant outflows for annual bonus payments and share repurchases, Our leverage ratio, as defined in our senior bank agreement, was approximately 2.2 times adjusted EBITDA as of March 31, 2022, compared to 2.6 times adjusted EBITDA at the end of Q1 2021. Cash flow used in operations in the first quarter of 2022 was $79 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 negative $85 million. Finally, let me turn to our expectations and guidance for 2022. As Jim noted, we're raising and narrowing our full-year 2022 revenue guidance to $1 billion to $1.05 billion. The increase in our revenue guidance primarily reflects the strong momentum across our business and the significant growth opportunities in each of our core industries. In addition, we are reaffirming our full-year adjusted EBIT guidance to be in a range of 11.25% to 12.25% of revenues, and we are increasing our full-year adjusted non-GAAP diluted earnings per share guidance to be in a range of $3 to $3.40. Finally, we continue to expect our full-year effective tax rate to be in a range of 28% to 30%. We continue to expect to deploy our free cash flow, consistent with the guidelines shared in our Investor Day presentation, with 25% to 50% directed towards shareholder purchases and 50% to 75% towards debt paydown or tuck-in M&A. Thanks, everyone. I would now like to open the call up to questions. Operator?