Huron Consulting Group Inc.

Good afternoon, and welcome to Huron Consulting Group's webcast to discuss financial results for the second 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 out to 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 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 second quarter 2023 earnings call. With me today are John Kelly, our Chief Financial Officer, and Rodney Dale, our Chief Operating Officer. We continue to drive strong organic growth in each of our three operating segments while expanding our company-wide operating margin consistent with our growth strategy. Revenues in the second quarter of 2023 grew 27% over the prior year quarter, and for the first half of 2023, revenues grew 25% over the same period last year. reflective of the ongoing strength and demand for both our consulting and managed services and digital capabilities. Adjusted EBITDA margin increased 130 basis points in the first half of 2023 compared to the same period in 2022, as we make solid progress toward our goal of expanding company-wide profitability. We're pleased that our performances outpaced the financial objectives shared at our 2022 Investor Day, and we remain confident in our ability to deliver at or above these goals in the years ahead. I'll now share some additional insights into our second quarter performance. In the healthcare segment, second quarter revenues grew 35% over the prior year quarter. The increase in revenues in the quarter was driven by strong demand for performance improvement, financial advisory, and digital offerings. As the federal and state pandemic relief funding has waned, hospitals and health systems face ongoing financial and operational challenges. Many organizations have experienced workforce shortages, increased costs of labor and supplies, and increased competitive pressures in their markets, collectively leading to margin pressures and, in many cases, net operating losses. Healthcare organizations are focused on addressing these challenges and doing so in a manner that best positions them to stabilize near-term performance, and enables them to achieve their broader strategic goals. The shift in mindset highlights the need to implement more immediate financial improvements while also designing strategies for near and long-term growth centered around the consumer. In responding to clients' needs to address both immediate and longer-term improvements, we have significantly broadened our portfolio to create more balanced and diversification in our healthcare offerings. We strengthened our industry expertise and expanded our portfolio of capabilities to solidify our position as the partner of choice for clients seeking to address both current and longer-term challenges and opportunities, which has also in turn expanded our addressable market in the healthcare industry. Let me bring this to life with a couple of examples. We're working with several health systems facing the exact pressures I just noted. These systems need to identify significant and sustainable financial improvement across their operations, sometimes ranging into hundreds of millions of dollars. Opportunities like these play to our strengths in poor performance improvement as we help transform their current operating models and capabilities across such areas as revenue cycle, workforce, supply chain, and clinical optimization. In addition to driving near-term efficiency gains, Our clients are also focused on driving longer-term sustainable improvement and growth to support their strategic goals. To support the second objective, we bring together our strategy and innovation, care transformation, financial advisory, and digital offerings to redesign the client's operating and care delivery models in order to fundamentally strengthen the system's underlying economics. Our competitive differentiation stems from our ability to assemble and deploy a talented team of healthcare experts integrated across a broad set of capabilities and to work collaboratively to deliver the best solution possible for our clients. And that's at the heart of our new operating model. The second example of our work to improve performance in healthcare is an engagement in which we're using generative AI to drive efficiency in call center operations. Using our healthcare and contact center expertise, A digital team is implementing generative AI in conjunction with Salesforce to optimize and automate processes. While this example is very different in its scope and implementation than the first example I provided, it supports the same client goals to drive near-term and long-term sustained benefit to address financial and operational challenges. Our deep healthcare expertise and digital capabilities together enable us to design offerings that address a broad range of strategic and operational concerns of our healthcare clients. Turning now to education. Education segment revenues grew 25% from the second quarter of 2023 over the prior year quarter, driven by broad-based demand across all our offerings in this segment. Our digital offerings in education grew 47% over the prior year quarter, and her strategy and operations and her research offerings both continued to perform well. While some college business officers feel confident in the financial stability of their institutions over the next 10 years, colleges and universities have concerns over their near-term financial outlook, largely as a result of enrollment declines, reduced net tuition revenue, and an expense base that is increasing faster than revenues. Our education clients are not only focused on their near-term challenges, they're also committed to establishing a strong foundation to achieve their long-term strategic goals. Similar to healthcare, the confluence of these factors highlights the need to drive near-term improvements while establishing sustainable long-term strategies. Again, let me use a couple of examples to highlight the impact that our deep industry expertise and broad set of capabilities have on our higher education clients. As a first example, we've been engaged by a university to support the execution of their strategic plan. We're collaborating with them to identify opportunities that will drive growth and financial and operational improvements to create capacity to invest in the high priority areas within the plan. Our scope with the university is broad, spanning administration, research, facilities, technology, and more. To bring this to light, let me call out three of these areas. Within the research enterprise, we're helping the institution refine their research strategy and administrative operations. Within the technology function, we're executing a data and analytics strategy with a goal of driving greater value and insights across the entire institution. And finally, together with the academic units, we're working with academic affairs to empower academic leaders with greater access to data while advising on new offerings and capabilities to support the institution's growth goals. Our strategy operations and research teams have done a great job collaborating with the client, leading to additional opportunities to expand our efforts into new areas of the university, including their intercollegiate athletics program. Our second example highlights the power of a combined consulting and digital offerings. A recent client was seeking to create an agile operational foundation to support future growth focused on enabling a positive and engaging student experience as a competitive advantage. Huron was hired to help execute a digital transformation to establish a process-driven, technology-enabled organization across its multi-campus institution. Our strategy and operations, research, and digital teams are all collaborating to lay a new operational foundation for the university which will enhance their ability to recruit students, faculty, and staff, and create an agile and flexible foundation to help them achieve their future strategic goals. Together, a deep industry expertise and strong reputation coupled with the breadth of our offerings and a collaborative, nimble culture has solidified our strong competitive position, helping institutions address the challenging landscape that is in today in higher education. In the second quarter of 2023, turning to commercial, commercial segment revenues grew 10% over the prior year quarter, driven by strong demand for our distressed financial advisory offerings and our digital offerings, partially offset by a decline in our strategy and innovation offerings. Demand for our distressed financial advisory offerings remains strong, given the continued impact of higher interest rates, challenging capital markets, increasing costs, and expanding competitive pressures. Healthier companies are executing digital transformations to address some of the same pressures. Advanced and agile technology capabilities and strong data and analytics infrastructure are helping bend cost curves, enabling better, faster decision-making to improve how organizations engage with their customers. Growth in the commercial segment has increased diversification in the portfolio and markets, driving new avenues for growth and expanding our addressable market. We believe that a broad portfolio of digital, financial advisory, and strategy and innovation offerings coupled with deepening industry expertise will continue to be a solid platform for growth in this segment. Finally, let me turn to our outlook for the year. As our press release indicates, we're increasing and narrowing our annual revenue guidance to $1.3 billion to $1.34 billion, an increase of $70 million at the midpoint. We continue to expect our adjusted EBITDA margin to be in a range of 12% to 12.5% of revenues, and we're raising and narrowing our four-year adjusted diluted earnings per share to a range of $4.35 to $4.65, an increase of 50 cents per share at the midpoint. Our first half results demonstrate the continued demand for our services and products and the power of a collaborative culture and new operating model. In summary, we're pleased with the first half performance, and we expect the underlying demand across our segments to continue as reflected in our updated revenue and earnings guidance. I reiterate our commitment to our shareholders as we remain focused on advancing our growth strategy. Our strong relationships, industry expertise, and broad array of offerings in healthcare and education, along with a half-billion-dollar digital capability, which today represents about 45% of our total company revenues, provides a strong foundation from which to address the myriad of challenges our clients face today while positioning them for future success. We also believe the commercial segment will continue to drive new avenues of growth for our business as we expand upon our portfolio of offerings and further strengthen our industry expertise. While we're still in the early stages of the strategic journey we described at our 2022 Investor Day, we've demonstrated our ability to accelerate growth across the business over the last six quarters and we remain confident in our ability to meet or exceed our medium-term financial objectives. And 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 Investor Relations page on the Durham website have reconciliations of these nine gap measures to the most comparable gap measures. Along with the discussion of why management uses these nine gap measures and why management believes they provide useful information to investors regarding our financial condition and operating results. Now I'll share some of the key financial results for the quarter. Revenues for the second quarter of 2023 were $346.8 million, up 26.9% from $273.3 million in the same quarter of 2022, achieving another record of quarterly revenues as we continue to execute on our growth strategy. The increase in revenues in the quarter was driven by organic growth across all three of our operating segments. From a capability perspective, consulting and managed services revenues grew 33.4% and digital revenues grew 19.2% when compared to the same quarter in 2022, respectively. Net income was $24.7 million, or $1.27 per deleted share, compared to net income of $13.9 million, or $0.66 per deleted share in the second quarter of 2022. Our effective income tax rate in the second quarter of 2023 was 29.4% compared to 36% in the same prior year period. Our effective tax rate for Q2 of 2023 was less favorable than the statutory rate, inclusive of state income taxes, primarily due to certain non-deductible expense items, partially offset by the tax benefit of non-taxable gains on investments used to fund our deferred compensation liabilities. Adjusted EBITDA was $48.5 million, or 14% of revenues in Q2 2023, compared to $33.2 million, or 12.2% of revenues in Q2 2022. The increase in adjusted EBITDA in the quarter was primarily attributable to the increase in segment operating income, reflecting continued progress toward our goal of meeting adjusted EBITDA margins by 2025. Adjusted net income was $27 million in the second quarter of 2023 compared to $17.5 million in the second quarter of 2022. Adjusted diluted earnings per share was $1.38 in Q2 2023 compared to 83 cents in the prior year quarter, an increase of 66% year-over-year. Now I'll make a few comments about the performance of each of our operating segments. The healthcare segment generated 50% of total company revenues during the second quarter of 2023. This segment posted revenues of $173.8 million, up $45.3 million, or 35.3% from the second quarter of 2022. The increase in revenue reflects continued strong demand for performance improvement, financial advisory, digital, and revenue cycle managed services offerings. demonstrating broad-based demand across our portfolio of healthcare offerings. As a reminder, in accordance with US GAAP, we recognize performance-based fees on our healthcare performance improvement projects as we deliver on those projects using a percentage of completion methodology and our best estimate of the total performance-based fees that we expect to earn on each project, which is typically based on a portion of the recurring financial benefits that we expect to generate for our clients. To the extent that our estimate of those client financial benefits change in a given period due to our performance, we adjust the amount of revenue recognized under a contract to reflect the amount that we ultimately expect to bill to our clients. Our second quarter of healthcare consulting and managed services revenues included approximately $16 million in favorable adjustments related to several performance-based fee contracts where teams delivered financial benefits for our clients that exceeded our previous expectations. The ability to deliver financial benefits for our clients that exceed expectations and generate incremental revenues for Huron remains an ongoing opportunity for our healthcare performance improvement business and the strength of our business model. However, the timing and magnitude of such favorable revenue adjustments can vary from quarter to quarter. Operating income margin for healthcare was 28.3% for Q2 2023 compared to 23.6% for the same quarter in 2022. The quarter-over-quarter increase in margin was primarily due to revenue growth that outpaced the increase in salaries and related expenses for our revenue-generating professionals, partially offset by increases in contractor expenses and project costs as a percentage of revenues. The education segment generated 32% of total competitive revenues during the second quarter of 2023. The education segment boasted revenues of $110.7 million, up $22.5 million, or 25.5% from the second quarter of 2022. The increase in revenues in the quarter was driven by demand across our broad portfolio of offerings in the segment. Our digital capability in education grew 47% year-over-year, reflecting continued demand for our digital, technology, and analytics services and product offerings. Our strategy and operations and research offerings also continued their growth trajectory in the second quarter of 2023. Operating income margin for education was 24.8% for QT 2023 compared to 24.6% for the same quarter in 2022. The commercial segment generated 18% of total company revenues during the second quarter of 2023 and posted revenues of $62.3 million, up $5.7 million, or 10% from the second quarter of 2022. The quarter-over-quarter increase in revenue is primarily attributable to strong demand for our distressed financial advisory offerings and our digital offerings, partially offset by declines in our strategy offerings. Operating income margin for the commercial segment was 16.8% for Q2 2023 compared to 21% for the same quarter in 2022. The quarter over quarter decrease was primarily driven by the increase in performance bonus expense for our revenue generated professionals as a percentage of revenues based on our updated expectations for full year performance. Corporate expenses not allocated at the segment level were $42.9 million in Q2 2023 compared with $29.9 million in Q2 2022. Unallocated corporate expenses in the second quarter of 2023 included $1.4 million of expense related to the increase in the liability of our deferred compensation plan which is offset by the investment gain and the assets used to fund that plan, reflected in other income expense. Unallocated corporate expenses in the second quarter of 2022 reflected a $4.9 million reduction in expense related to the deferred compensation plan. Excluding the impact of the deferred compensation plan in both periods, unallocated corporate expenses increased $6.7 million, primarily due to increased compensation costs for our support personnel. Excluding the impact of the deferred compensation plan, unallocated corporate SG&A decreased with a percentage of revenues to 12% in the second quarter of 2023 compared to 12.7% in the same period of 2022. Now turning to the balance sheet and cash flows. We finished the quarter with total debt of $395 million. consisting entirely of our senior bank debt, with cash of $16.6 million for net debt of $378.4 million. Our leverage ratio, as defined in our senior bank agreement, was 2.2 times adjusted EBITDA as of both June 30, 2023 and June 30, 2022. Cash flow generated by operations in the second quarter of 2023 was $78.2 million, representing a record for the second quarter of a year. We used $8.2 million of our cash to invest in capital expenditures, inclusive of internally developed software costs, resulting in free cash flow of $70 million. We used $15.4 million of our cash to repurchase approximately 194,000 shares during the quarter. DSO came in at 77 days for the second quarter of 2023 compared to 83 days for the first quarter of 2023 and 81 days for the second quarter of 2022. Finally, let me turn to our expectations and guidance for 2023. As Mark noted, we are raising our full year of 2023 revenue guidance to be in the range of $1.3 billion to $1.34 billion. The increase in our revenue guidance primarily reflects strong momentum across our business. In addition, we are maintaining our adjusted EBITDA guidance range of 12% to 12.5% of revenues and raising and narrowing our full-year adjusted non-GAAP diluted earnings per share guidance to be in the range of $4.35 to $4.65. We now expect our full-year free cash flow to be in a range of $100 to $120 million. Finally, we expect our full-year effective tax rate to be in a range of 28 to 30%. Thanks, everyone. I would now like to open the call to questions. Operator?