Huron Consulting Group Inc.

Good afternoon and welcome to Huron Consulting Group's webcast to discuss financial results for the first quarter of 2023. 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 earnings 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 Mark Hussey, Chief Executive Officer and President of Huron Consulting Group. Mr. Hussey, please go ahead.

Good afternoon and welcome to Huron Consulting Group's first quarter 2023 earnings call. And with me today are John Kelly, our Chief Financial Officer, and Ronnie Dale, our Chief Operating Officer. Just over a year ago at our Investor Day, we outlined our strategy to achieve double-digit revenue growth, expand our adjusted EBITDA margins to mid-teen levels, and accelerate adjusted EPS growth. Together with our balanced capital deployment strategy, which prioritizes moderate leverage, share repurchases, and targeted M&A, These financial objectives are focused on driving greater returns for our shareholders. Our first quarter results reflect our steady progress toward achieving these medium-term financial goals. Driven by strong growth across all three operating segments and our digital capability, revenues grew 22% in the first quarter of 2023 over the prior year quarter. Our strong growth in the first quarter of 2023 was achieved on top of strong growth in the year-ago quarter with Q1 2022 growth of 28% over Q1 of 2021. Consistent with our goal to expand profitability, adjusted EBITDA margins increased 80 basis points over the prior year quarter, and adjusted diluted earnings per share grew 78% over Q1 2022. We're pleased that our continued strategic and operational performance have delivered upon enhanced shareholder value. Our first quarter results demonstrate the commitment to a growth strategy by the entire Huron team. I'm incredibly proud of the progress we've made, and I'm excited to share more about it today on our call and in the updated investor presentation on our website. I'll now share some additional insight into the progress we've made since last year's investor day, while providing color into our first quarter performance. To achieve our growth goals, we are committed to five strategic pillars. The first pillar of our strategy is to continue to focus on accelerating growth in our largest industries, healthcare and education, in which we have leading competitive positions. In the healthcare segment, first quarter revenues grew 22% over the prior year quarter. The increase in revenues in Q1 of 2023 was driven by strong demand for our performance improvement, revenue cycle managed services, and financial advisory offerings, as well as continued strong demand for our digital offerings, which grew 24% over Q1 of 2022. The healthcare industry is facing significant financial pressures stemming from increased labor costs, shifting sites of care from inpatient settings to outpatient and virtual care, entry of non-traditional providers into many highly competitive markets, a worsening payer mix, and the ongoing need for digital solutions to drive growth and efficiencies and improve patient outcomes. We're focused on expanding our offerings to meet our clients' growing needs as they face these pressures. A good example of this is a revenue cycle managed services offering. We introduced this offering in 2019 and have rapidly grown the business to serve multiple clients. It generated approximately 13% of total healthcare industry revenues in 2022 and in the first quarter of 2023. We also continue to strengthen and expand our performance improvement and technology and analytics offerings to comprehensively address our clients' most complex problems demonstrated by the rapid growth in our healthcare digital revenues, which grew 44% in full year 2022 over 2021. Education segment revenues grew 29% in first quarter of 2023 over the prior year quarter, driven by broad base demand across all our offerings in this segment, including our digital offerings in education, which grew 40% over the prior year quarter. Education segment revenues grew 8% sequentially over the fourth quarter of 2022, highlighting the continued momentum in demand in this segment. The education industry is also facing significant pressures, including difficulty achieving enrollment goals, challenges from discounts to tuition, ongoing questions about the value of a college degree, particularly in a strong labor market, increasing labor costs exceeding revenues, and for our clients with medical schools, decreases in support from the clinical enterprise. Similar to healthcare, we continue to strengthen and expand our offerings in the education industry to comprehensively address our clients' needs as they respond to these issues. For example, in research, we've advanced our Huron Research Suite software products to complement our consulting offerings and expand our managed services offerings. Collectively across our consulting, digital, and managed services offerings, Our research business represents over 35% of total education industry revenues. We are confident in our outlook for accelerated growth in both healthcare and education, anchored in our deep client relationships and our leading competitive positions in end markets facing ongoing financial pressure amidst disruption that has been exacerbated by the current macro environment. Our second strategic pillar is focused on growing our presence in the commercial industries. In the first quarter of 2023, commercial segment revenues grew 12% over the prior year quarter, driven by a strong demand for our digital and financial advisory offerings, especially our restructuring and turnaround offerings, partially offset by declines in our strategy and innovation offering. The competencies within our digital strategy and financial advisory capabilities span many industries. Although currently our primary focus is on the financial services and energy and utilities industries, we've built a strong foundation from which we can further accelerate growth in the commercial industries. Through organic investments and strategic tuck-in acquisitions, we have grown the commercial business to approximately 20% of total company revenues and established a formidable set of offerings and strong client and technology partner relationships. We've demonstrated that the commercial industries drive new avenues of growth for Huron, while increasing diversification in our portfolio and end markets. We believe that a balanced portfolio of offerings in the commercial sector, including a balance of cyclical and counter-cyclical services, and a broad portfolio of digital offerings, including emerging technologies, data and analytics, an enterprise platform, and industry ed solutions, will continue to help us consistently achieve our growth goals. Now let me turn to our third strategic pillar, advancing our integrated digital platform. In the first quarter of 2023, digital capability revenues grew 29% over the first quarter of 2022, driven by growth across the education, healthcare, and commercial segments. Our digital capabilities grew to just under a half billion dollars in 2022, and we continue to innovate to bring new offerings to our clients. We were recently recognized by one of our technology partners for market-leading innovations that we developed for the financial services industry and the office of the CFO. In addition, our expanded international presence, including in India, where we currently have 28% of our employees, reflects the full power of our global capabilities. In addition to its strategic advantages, including serving clients in the Asia Pacific region, This strong global foundation will also enable us to continue to expand our margins while achieving competitive price points for U.S.-based engagements. Expanding digital capabilities will continue to be an important driver of growth across our business in future years as our clients focus on driving growth and productivity in their own highly competitive markets. Now let me turn to our last two strategic pillars, which are more financially focused. First, We're executing on our primary revenue drivers and margin improvement levers to achieve consistent growth and enhanced profitability. Our confidence in our organic growth strategy is based upon the primary drivers of our historical success, resulting from our deep client relationships in the industries we serve. In 2022, 88% of Huron's revenue was derived from repeat clients. In addition, we grew annual recurring revenues 5% in 2022 over 2021, representing 13% of total company revenues in 2022. Our expanding array of offerings, including those with recurring revenue, increases our confidence in our ability to achieve more consistent and accelerated revenue growth. As it relates to margin expansion, we've established a company-wide focus on improving profitability within each of our segments and at the enterprise level. Building on the progress made in 2022, adjusted EBITDA margins increased 80 basis points in Q1 2023 over the prior year quarter, and adjusted diluted earnings per share grew 78% over Q1 2022. Our final pillar focuses on deploying capital to accelerate our strategy and return capital to our shareholders. In 2022, we repurchased over $120 million, or 9% of the company's outstanding shares. And in the first quarter of 2023, we've repurchased another $44 million, or 633,000 shares. In 2023, we expect to execute a balanced capital allocation strategy across share repurchases, token acquisitions, and debt repayment. In terms of M&A, we've aligned our M&A roadmap with a growth strategy and continue to be in the market to invest in businesses that enhance our competitive position and drive strong growth and returns for our shareholders. Finally, I'd like to highlight the most critical driver of our growth strategy, our people. We'll continue to invest in our talented team, building on our collaborative culture that is at the heart of what makes Huron so effective in serving clients as a unified team. Our strategy reinforces our ability to both attract and retain top diverse talent as accelerated growth creates outstanding career advancement and professional development opportunities in a business in which our people can see their visible impact on our clients and our company. Now let me turn to our outlook for the year. Today we affirm our 2023 revenue and earnings guidance. We're pleased with our first quarter performance and we expect the demand environment we saw in the first quarter of 2023 to continue. Our clients face multiple and often competing strategic financial and operational issues, particularly in this uncertain economic environment. which creates opportunities for all aspects of our business, but especially for performance improvement, digital, and financial advisory offerings. In summary, I want to reiterate our commitment to our shareholders as we remain focused on advancing our growth strategy and continuing to deliver upon our financial goals. We're excited about our business and our outlook, and while we've made significant progress in advancing our strategy, we have more work to do, but the future is bright for Huron. I look forward to continuing to growing our business in 2023 and beyond. Now let me turn it over to John for a more detailed discussion of our financial results.

John? Thank you, Mark, 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 2023 were $317.9 million, up 22.2% from $260 million in the same quarter of 2022, achieving another record quarter for our business. The increase in revenues in the quarter was driven by growth across all three operating segments, reflective of the continued strong demand for our digital offerings across segments, healthcare and education consulting and managed services offerings, and distressed financial advisory offerings. Net income was $13.4 million, or 68 cents per diluted share compared to net income of $26.9 million or $1.27 per diluted share in the first quarter of 2022. Net income in the first quarter of 2022 included a non-recurring $19.8 million unrealized gain net of tax related to the increase in fair value of our preferred stock investment in a hospital at home company. Our effective tax rate in the first quarter of 2023 was 15.3% compared to 29.6% in the same period last year. Our effective tax rate for Q1 of 2023 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 quarter and a tax benefit related to the non-taxable gains on our investments used to fund our deferred compensation liability partially offset by certain non-deductible expense items. Adjusted EBITDA was $29.5 million in Q1 2023, or 9.3% of revenues, compared to $22.1 million in Q1 2022, or 8.5% of revenues. The increase in adjusted EBITDA in the quarter was primarily attributable to the increase in segment operating income, excluding the impact of segment restructuring charges reflecting solid progress toward our objective of returning to mid-teen adjusted EBITDA margins by 2025. Adjusted net income was $17.1 million, or $0.87 per diluted share, compared to $10.3 million, or $0.49 per diluted share in the first quarter of 2022. Adjusted diluted earnings per share grew 78% over Q1 2022. 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 2023. This segment posted revenues of $149 million, up $27.2 million, or 22.3% from the first quarter of 2022. Revenues in the first quarter of 2023 included $300,000 of incremental revenues from our acquisition of customer Customer Evolution, which closed in December 2022. The increase in revenue in the quarter reflects strong demand across our consulting and managed services and digital capabilities in the segment. Our consulting and managed services capability in healthcare grew 21% year-over-year during the first quarter, driven by strong demand for our performance improvement, revenue cycle managed services, and financial advisory offerings. Our digital capability in healthcare grew 24% year-over-year. Operating income margin for healthcare was 21.6% for Q1 2023 compared to 23% for the same quarter in 2022. The quarter-over-quarter decrease in margin was primarily due to an increase in contractor expenses and performance bonus expense for our revenue-generating personnel as a percentage of revenues. partially offset by revenue growth that outpaced the increase in salaries, benefits, and related costs for our revenue generating professionals. The education segment generated 33% of total company revenues during the first quarter of 2023. The education segment posted record revenues of $104.1 million, up $23.5 million, or 29.1% from the first quarter of 2022. The increase in revenues in the quarter was driven by demand across our portfolio of offerings in this segment. Our digital capability in education grew 40%, demonstrating the strength and demand for our data, technology, and analytics offerings. Our consulting and managed services capability in education grew 20%, driven by continued demand for our strategy and operations and research offerings. Operating income margin for education was 22.2% for Q1 2023, compared to 17.7% for the same quarter in 2022. The quarter-over-quarter increase is primarily due to a decrease in contractor expenses as well as revenue growth that outpaced an increase in compensation costs for our revenue-generating professionals. The commercial segment generated 20% of total company revenues during the first quarter of 2023 and posted revenues of $64.7 million, up $7.2 million or 12.5% from the first quarter of 2022. The quarter-over-quarter increase in revenue was primarily attributable to strong demand for our digital and financial advisory offerings, partially offset by declines in our strategy offerings. Operating income margin for the commercial segment was 21.7% for Q1 2023 compared to 21.2% for the same quarter in 2022. The quarter-over-quarter increase was primarily due to decreases in compensation costs for our support personnel and restructuring charges, partially offset by an increase in promotion and marketing expenses as a percentage of revenues. Corporate expenses not allocated at the segment level were $46.3 million in Q1 2023, compared with $33.5 million in Q1 2022. Unallocated corporate expenses in the first quarter of 2023 includes $1.9 million of expense related to the increase in the liability of our deferred compensation plan, which is offset by the investment gain on the assets used to fund that plan reflected in other income expense. In the first quarter of 2022, we recognized a $2.4 million reduction of expense related to the decrease in our deferred compensation plan liability. Excluding the impact of the deferred compensation plan in both periods, Unallocated corporate expenses increased $8.6 million, primarily due to increased compensation costs for our support personnel, as well as increases in practice, administration, and meeting expenses and restructuring charges. The restructuring charges incurred in the first quarter of 2023 related to the reduction of office space. Now turning to the balance sheet and cash flows. We finished the quarter with total debt of $447 million, consisting entirely of our senior bank debt, with cash of $12 million for net debt of $435 million. This was a $157 million increase compared to Q4 2022, as the first quarter reflects the payment of our annual bonuses. The first quarter also included $44.3 million of share repurchases, or approximately 633,000 shares. is defining our senior bank agreement with 2.75 times adjusted EBITDA as of March 31, 2023, compared to 2.2 times adjusted EBITDA at the end of Q1 2022. Cash flow used in operations in the first quarter of 2023 was $92 million, and we used an additional $9 million of our cash to invest in capital expenditures, inclusive of internally developed software costs. resulting in free cash flow of negative $101 million. DSO came in at 83 days for the first quarter of 2023 compared to 77 days for the fourth quarter of 2022 and 75 days for the first quarter of 2022. The increase in DSO is primarily driven by certain large healthcare and education engagements where our revenue recognized exceeded the amounts billed to clients in accordance with the contractual billing terms. We expect to bill and collect for these services in the second half of 2023. Finally, as Mark mentioned, we are affirming the guidance that we provided during our February earnings call. Revenues before reimbursable expenses in a range of $1.22 billion to $1.28 billion, adjusted EBITDA in a range of 12% to 12.5% of revenues, and adjusted EPS in a range of $3.75 to $4.25. Thanks, everyone. I would now like to open the call to questions. Operator?