Huron Consulting Group Inc.

Good afternoon, ladies and gentlemen, and welcome to Huron Consulting Group's webcast to discuss financial results for the second 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 disclosures required by the SEC, including reconciliation of 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 second quarter 2022 earnings call. With me today are John Kelly, our Chief Financial Officer, and Mark Hussey, our President. In the second quarter, we continue to experience strong demand across all three operating segments, enabling us to achieve 19% revenue growth over the prior year quarter and record quarterly revenues. Our digital capability grew 47% over the prior year quarter, reflecting ongoing strong demand for our technology, and analytics offerings across the healthcare, education, and commercial industries. Despite uncertainties in the macro environment, we anticipate continued demand across all of our operating segments for the remainder of the year, leading us to raise and narrow our full-year revenue and earnings guidance. I will now share some additional insight into our second quarter performance. During the second quarter, healthcare segment revenues grew 12% over the prior year quarter. The increase in revenues was driven by strong demand for our health system clients for our digital and revenue cycle managed services offerings. Our digital capability revenues in healthcare grew 53% over the prior year quarter, reflective of the ongoing demand for enhanced technology and analytics offerings across the provider industry. While many hospitals received CARES Act funding to help address the significant losses incurred during the pandemic, that federal support is now largely gone. What remains for many health systems, and particularly academic medical centers, are significantly higher labor costs, ongoing supply chain issues, and more recently, higher debt financing and capital costs. Collectively, these factors are contributing to dramatically lower margins that are not expected to dissipate in the near future. While trying to offset spiraling operational costs, our hospital and health system clients continue to seek new sources of revenue and opportunities to optimize their operations, including through the use of technology and automation. With our broad array of offerings, we are well positioned to provide strategic operational, financial, and digital solutions to help them achieve a more sustainable future in this complex healthcare environment. Turning now to the education segment, in the second quarter of 2022, the education segment achieved record quarterly revenues, growing 46% over the prior year quarter. The increase in second quarter revenues was driven by strong, broad-based demand across all of our offerings, highlighted by 44% growth and our education digital capabilities. There are numerous reasons for the continued strong growth of our education business. I will mention a few of the primary drivers. First, there's been a significant increase in demand for our digital solutions, particularly our cloud-based ERP business. The recent demand is partly reflective of delays in starting new implementations stemming from the pandemic, but more broadly, It's an indicator that the education industry as a whole is in the early innings of its own digital transformation, including much needed enhancements to core administrative student and CRM systems. Second, our research business has been very strong, reflecting our clients' challenges managing complicated portfolios of clinical and federally funded research. Third, in recent years, we expanded our portfolio of strategy and operations offerings. The investments we've made in talent in this part of our business have enabled us to offer a wider array of services to the education industry at a point in time when traditional university operating models are increasingly at risk. Finally, in our student business, our investments in whiteboard higher education in the fourth quarter of 2021 has enabled us to increase the number of clients for our student solutions and deepen our education industry relationships, achieving the strategic goals we set forth as part of that transaction. To support this strong demand across the segment, we continue to make investments in our people. We are accelerating the hiring of resources, particularly in our digital capability, to support the backlog and anticipated demand for our ERP offerings. We have established a strong training and development program, which when combined with our deep industry, functional and technical expertise, provides us with additional leverage to achieve our strong growth goals in this segment. Turning to the commercial segment, in the second quarter of 2022, commercial segment revenues grew 3% over the prior year quarter, driven by strong demand for our digital offerings across commercial industries. The increase in second quarter revenues from our digital offerings were partly offset by a decrease in demand for our financial advisory offerings, as well as the decrease in revenues associated with our life sciences business, which we sold in the fourth quarter of 2021. Excluding the life sciences business, the commercial segment grew 13% in the second quarter of 2020-22 over the prior year quarter. Our digital offerings in the commercial markets grew 45% in the second quarter of 2022 as compared to the same period a year ago, further demonstrating the strong demand for our technology and analytics-related services across the commercial industries. Demand for our digital offerings in the commercial segment is coming primarily from the financial services and energy and utilities industries, where each industry is facing new competitive entrants as these markets evolve. These market attributes are fueling strong demand for our digital transformation services, and our deep industry expertise has provided us with an increasing competitive advantage. Similar to the investments we are making in education, we continue to invest in hiring and training of resources to support increased demand in the commercial industries. We believe these investments will further position us for accelerated growth in this segment. 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 $1.04 billion to $1.08 billion. We are also raising and narrowing our adjusted EBITDA guidance in a range of 11.5% to 12% of revenues and our adjusted diluted earnings per share in a range of $3.15 to $3.45. We are raising our revenue and earnings guidance to reflect the current and anticipated demand for our services across all segments. While we are cognizant of the challenges in the U.S. and global economies, we believe that the underlying demand for our offerings will continue to be strong throughout the remainder of the year, and we are encouraged by our growing pipeline and backlog for 2023. Among the key reasons for our belief in continued growth is the extent of the transformation that is taking place in our core industries where we have deep relationships and a tremendous amount of relevant experience. Our clients are operating in a challenging environment, and amidst those circumstances, they tend to rely on experts in whom they have confidence to help them achieve their desired strategic and financial goals. In turn, we remain focused on delivering on our commitment to sustainable revenue growth and improved profitability. Our first half results demonstrate our ability to achieve our financial objectives. The market remains vibrant for our offerings, and we anticipate demand across industries to continue as our clients' businesses face myriad strategic, operational, and digital challenges and opportunities. Before I turn it over to John, I'd like to make a few comments. First, as we execute our CEL transition, we are excited to have Ronnie Dale, promoted into the Chief Operating Officer role. Most recently, Rani led our Healthcare Performance Improvement Business Unit, the largest business within Tehran. In his new role, he will be responsible for ensuring operational excellence across the company while supporting our strategy of achieving consistent revenue growth and improved profitability. We look forward to working with Rani in his new role. Second, the strong results we achieved in the first half of the year are only possible because of the hard work of our incredible team. They have demonstrated a tremendous amount of dedication to our clients, our company, and to each other through a highly challenging time throughout the pandemic. I'm extremely proud of the team we have built and the culture we have fostered together, and I look forward to growing the company with the most talented team in the business. Now I want to turn it over to John for a more detailed discussion about 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 Geron 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. Now let me walk you through some of the key financial results for the quarter. Revenues for the second quarter of 2022 were $273.3 million, up 18.8% from $230.1 million in the same quarter of 2021. Increasing revenues in the quarter was driven by growth across all three operating segments, reflective of the strong demand for our digital offerings across all industries. Revenue within our digital capability increased 47% in the second quarter of 2022 over the same period in 2021. In addition, revenues reflect continued strong demand for our consulting and managed services offerings within the education segment. which grew 47% in the second quarter of 2022 over the same period in 2021. Net income was $13.9 million for 66 cents per diluted share in the second quarter of 2022 compared to $12.8 million for 59 cents per diluted share in the same quarter in the prior year. Our effective income tax rate in the second quarter of 2022 was 36% compared to 21.3% one year ago. Our effective tax rate for Q2 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, reflecting the broader investment market conditions during the second quarter. The earnings per share impact of the tax expense related to these non-deductible losses was six cents during the quarter. Adjusted EBITDA was $33.2 million in Q2 2022, or 12.2% of revenues, compared to $25.6 million in Q2 2021, or 11.1% of revenues. Adjusted non-GAAP net income was $17.5 million, or 83 cents per diluted share in the second quarter of 2022, compared to $15.1 million, or 69 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 second quarter of 2022. The segment posted revenues of $128.5 million for the second quarter of 2022, up $13.7 million for 12% from the second quarter of 2021. Revenues for the second quarter of 2022 included $1.2 million from our acquisition of Perception Health. The increase in revenue in the quarter reflects strong demand for our digital offerings, as well as our revenue cycle managed services offerings. The digital capability in healthcare grew by 53%, reflecting increased demand for our electronic health record and ERP offerings. Operating income margin for healthcare was 23.6% for Q2 2022, compared to 26.6% for the same quarter in 2021. The quarter-over-quarter decrease in margin percentage was primarily attributable to the mixed impact of the strength of our digital offerings during the quarter. We still expect full-year healthcare industry margins to be in a range of 24 to 26%. The education segment generated 32% of total company revenues during the second quarter of 2022. Segment posted record revenues of $88.2 million in Q2 2022, up $27.8 million, or 45.9% from the second quarter of 2021. Revenues in the second quarter of 2022 included $1.9 million from our acquisition of Whiteboard. The increase in revenue reflects the continued strong demand for all of our offerings across the segment. including digital capability growth in the education segments of 44%. The continued demand for offerings is further demonstrated by the education segments 9% sequential growth in the second quarter of 2022 over the previous record of first quarter of 2022. The operating income margin for education was 24.6% for Q2 2022 compared to 23.4% for the same quarter in 2021. Quarter-over-quarter increase in margin was primarily due to revenue growth that outpaced our corresponding costs to deliver during the quarter. We now expect full-year education industry margins to be in a range of 22% to 24% reflective of our investments in headcount growth and cloud-based technology training that we expect to drive continued strong growth for this industry into 2023. The commercial segment generated 21% of total company revenues during the second quarter of 2022. Segment posted revenues of $56.6 million in Q2 2022, up $1.7 million, or 3.1% from the second quarter of 2021. Revenues for the second quarter of 2022 included $900,000 of inorganic contributions from our acquisition of AIM data. The increase in revenues reflects continued strong demand for our digital offerings, partially offset by a decrease in demand for our financial advisory offerings, as well as a decline in revenues due to the divestiture of our life sciences business. In the second quarter of 2021, the life sciences business generated revenues of $5 million. Our digital offerings in the commercial markets grew 45% in the second quarter of 2022 as compared to the same period a year ago. The operating income margin for the commercial segment was 21% for Q2 2022, compared to 20.1% for the same quarter in 2021. We now expect full-year commercial industry margins to be in a range of 22 to 24%, reflecting favorable mix of revenue within our commercial technology offerings. Corporate expenses not allocated at segment level were $29.9 million in Q2 2022, compared with $34.3 million in QQ 2021. Unallocated corporate expenses in the second quarter of 2022 included a $5 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 second quarter of 2021 reflected an increase of expense of $2.1 million related to the deferred compensation plan. Absent the impact of our deferred compensation plan in both periods, unallocated corporate expenses increased $2.6 million, which is primarily due to increases in salaries and related expenses for our support personnel and a leadership meeting during the quarter, partially offset by a decrease in legal fees. Now turning to the balance sheet and cash flows. ESO came in at 81 days for the second quarter of 2022 compared to 75 days for the first quarter of 2022 and 73 days for the second quarter of 2021. We expect ESO to be between 70 and 75 days for the remainder of 2022 as we collect on several large projects that have contractual payment schedules extending into the back half of the year. We finished the quarter with borrowings on our revolving credit facility of $342 million and with cash of $12 million per net debt of $330 million. Second quarter also included $28.3 million of share repurchases for approximately 498,000 shares under our current authorization of up to $200 million. $78 million remained available for repurchases as of June 30th, 2022. Our leverage ratio, as defined in our senior bank agreement, was approximately 2.2 times adjusted EBITDA as of June 30, 2022, compared to 2.8 times adjusted EBITDA at the end of Q2 2021. Cash flow generated from operations in the second quarter of 2022 was $29 million, and we used $5 million of our cash to invest in capital expenditures, inclusive of internally developed software costs, resulting in free cash flow of $24 million. Finally, let me turn to our expectations and guidance for 2022. As Jim noted, we are raising and narrowing our four-year 2022 revenue guidance to be in a range of $1.04 billion to $1.08 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 narrowing our full-year adjusted EBITDA guidance to be in a range of 11.5% to 12% of revenues, and raising and narrowing our full-year adjusted non-GAAP diluted earnings per share guidance to be in a range of $3.15 to $3.45. Finally, we expect our full-year effective tax rate to be in a range of 29% to 31%. Thanks, everyone. I would now like to open up the call to questions. Operator.