Huron Consulting Group Inc.

Good afternoon, and welcome to Huron Consulting Group's webcast to discuss financial results for the second quarter, 2024. At this time, all conference 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 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 2024 earnings call. With me today are John Kelly, our Chief Financial Officer, and Ronnie Dale, our Chief Operating Officer. In the second quarter, we achieved record revenues, led by solid growth in our healthcare and education segments, and we expanded our adjusted EBITDA margin to 15%. Our adjusted earnings per share also expanded to a record level, 20% higher than the previous high watermark established in the third quarter of last year. We generated record cash flow in the second quarter, enabling us to meaningfully reduce our debt while returning capital to shareholders through ongoing share repurchases. Our record second quarter results capped a strong first half performance for 2024. In the first half of 2024, revenues grew 9.5%, adjusted EBITDA margins increased 60 basis points, and adjusted diluted earnings per share increased 28% over the same period a year ago. Our results demonstrate strong execution against our strategy, as well as the positive impact the changes we made to our enterprise operating model at the outset of 2022. These changes have broadened the set of offerings we deliver to clients in our core industries and allows us to operate our business at new levels of efficiency. Our strategic focus continues to be on driving sustainable revenue growth, expanding margins, and effectively deploying capital to deliver superior returns for our shareholders. As it relates to improving profitability, despite the difficult comparison, Adjusted EBITDA margins grew 100 basis points in the second quarter over the same period a year ago. The scaling of our business over the past three years, combined with the build-out of our global delivery capabilities and our team's focus on our key operating levers like pricing and utilization, have meaningfully enhanced Huron's earnings model. We expect this trend to continue as we progress towards our mid-teen EBITDA margin target. I'm incredibly proud of our team for delivering performance over the last 10 quarters that has outpaced our 2022 investor day financial objectives. Looking ahead to the remainder of 2024, we expect our progress towards our medium term financial goals to continue. As reflected by the midpoint of our updated revenue guidance, we expect sequential growth in the second half over the first half of 2024 and 9% annual revenue growth year over year. let me make one final comment before diving into more detail on our performance in the quarter our success in the market and in delivering these financial results is only possible because of an incredibly talented team we've received numerous recognitions for being an employer of choice in 2024 more than in any year in our 22-year history our people are the heart of our business and these honors acknowledge the power of our collaborative culture as demonstrated by our team's commitment to our clients and to one another. Our culture is one of our greatest competitive advantages and enables us to operate as one firm and to realize our full potential. Now I'll share some additional insights into our second quarter performance. In the healthcare segment, second quarter revenues grew 9% over the prior year quarter, on top of 35% growth in the year-ago quarter over Q2 of 2022. The increase in revenues in the quarter was driven by continued strong demand for digital performance improvement, culture and organizational excellence, and strategy and innovation offerings. The operating environment for healthcare organizations remains mixed and highly competitive, which continues to create solid demand across the breadth of our portfolio of offerings. While some health systems have realized improving margins over the past few quarters, many have not. In some cases, volumes have improved, but reimbursement trends continue to be challenging. Whether a hospital or health system is experiencing financial distress or seeking opportunities to advance their competitive advantage from a position of strength, our clients turn to Huron to shape their future strategies, evolve their business models, and optimize their operations to address the ongoing challenges and opportunities in the market. Our depth of industry expertise, broad array of offerings, and long track record of proven results for our clients positions us very well to provide strategic, operational, financial, and digital solutions to help them achieve a more sustainable future in this complex and challenging healthcare environment. Turning now to education, education segment revenues grew 11% in the second quarter of 2024 over the prior year quarter, On top of 25% growth in the year-ago quarter over Q2 of 2022, the increase in revenues in the quarter was driven by increased demand for our strategy and operations and digital product offerings. Higher education institutions are facing complex challenges that threaten their historical business models. The issues facing university leadership are vast, and they span all areas of the institution. For example, declining affordability continues to challenge the perceived value of a college degree in the face of unfavorable demographic trends. Rising costs and decreased public funding have made achieving enrollment goals even more difficult. And the need to operate more efficiently while differentiating the student experience requires investments in both new operating models and new technologies. Building on our deep industry expertise, we've strategically expanded our portfolio of offerings. We serve the needs of nearly every role in a university president's leadership team as they collectively focus on advancing the institutional mission and planning for a sustainable long-term future. We've hired several industry leaders whose experience further strengthens our position as the trusted advisor and partner of choice to our clients. And as the needs of our clients continue to evolve, we're a unique partner in the higher education market given the strength of our relationships, the diversity of our offerings, and the depth of our experience. And that collectively positions us very well for continued solid growth in this business. Now turning to the commercial segment, revenues declined 6% in the second quarter over the prior year quarter, reflecting softer demand for our digital offerings, partially offset by an increase in demand for our financial advisory offerings, which remains strong given the continued impact of challenging capital markets and expanding competitive pressures. In our digital business, we continue to see our commercial clients taking a more cautious approach to executing large-scale initiatives and strategy-related engagements as uncertainties in the macroeconomic and political environments persist. Like many of our competitors in the IT services industry, we're seeing some delays in decision-making and a slower pace of spending on our digital offerings. We have confidence this softening of demand is temporary and our pipeline remains solid across a broad set of solutions, and the underlying needs of our clients remain robust. We believe Japan for our digital offerings will return to their historic double-digit levels as macroeconomic pressures begin to abate. The commercial segment is a key pillar of our enterprise growth strategy. 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. We expect clients will continue to demand technology solutions delivered by partners that can enable transformation of their businesses and strengthen their competitive advantages. The breadth of our offerings and proven track record of delivering results positions us very well for continued growth of our commercial segment over time. And we continue to see M&A opportunities that will complement and expand our capabilities and deepen our expertise in our industries of focus. Let me make one final comment before turning to our outlook for the remaining of the year. One distinguishing feature of our business that drives significant value for shareholders is our strong free cash flow model. In the second quarter, we generated record cash flows while executing our balanced capital deployment strategy. We continue to manage the balance sheet in a manner that provides us with the flexibility and capacity to enhance returns to shareholders and to fund accretive M&As. which we continue to believe is an important part of our growth strategy. And now finally, let me turn to our outlook. As our press release indicates, we're narrowing our annual revenue guidance to $1.46 billion to $1.5 billion, and we're raising our annual adjusted EBITDA margin guidance by 25 basis points to a range of 13% to 13.5%. Finally, we're raising our full-year adjusted diluted earnings per share to a range of $5.85 $6.15, which at the midpoint represents 22% growth over 2023. We are narrowing our full-year revenue guidance to the lower half of our previously stated range due to the shorter-term softening of demand for our digital offerings in the commercial segment. Our full-year earnings guidance reflects our first-half performance and the scale efficiency we've made. Coupled with our team's discipline around expense management and continue to make steady progress towards the medium-term financial goals set forth at our 2022 Investor Day. As we enter the second half of our five-year strategy that we outlined at our 2022 Investor Day, I'm proud of what we've been able to accomplish in the market, for our clients, in our business, and for our teams. Our record results in the second quarter of 2024 demonstrate our focus on achieving our strategic and financial goals. We believe we're well positioned for continued growth in the years ahead with the strong client relationships we've built, the depth of our industry expertise, and a balanced portfolio of offerings that will continue to evolve and address our clients' most complex challenges. 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, and investor relations page on the year-round 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. Before discussing our financial results for the quarter, I would like to acknowledge two housekeeping items. First, in the second quarter of 2024, we'll settle the litigation matter for $15 million for which you're out with the plaintiff. This $15 million settlement gain was recorded as a component of other gains net on our consolidated statement of operations. We've excluded from our non-GAAP measures $11.7 million, which is the value of the settlement gain that exceeds the third-party legal cost incurred during 2024 specific to this litigation matter. Second, I want to make a comment on revenue-generating professional headcount growth. Our year-over-year headcount growth, 13% as of June 30th, included the expansion of our India-based healthcare managed services team, excluding the impact of the India-based managed services team. Headcount growth was 6%. Now we'll share some of the key financial results from the second quarter. Revenues for the second quarter of 2024 were a record high, achieving $371.7 million, up 7.2% from $346.8 million in the same quarter of 2023. The increase in revenues for the quarter was driven by solid growth in our healthcare and education segments and included a full quarter contribution of $6.8 million from our GG&A acquisition, which closed during the first quarter of 2024. Net income for the second quarter of 2024 was $37.5 million, $2.03 per diluted share, compared to net income of $24.7 million, or $1.27 per diluted share in the second quarter of 2023. The increase in net income was driven by the litigation settlement gain I mentioned earlier and revenues that outpaced expenses. Our effective income tax rate in the second quarter of 2024 was 28.1%, which is less favorable than the statutory rate, inclusive of state income taxes, primarily due to certain non-deductible expense items. Adjusted EBITDA was a record $55.7 million in Q2 2024, or 15% of revenues, compared to $48.5 million, or 14% of revenues, in Q2 2023. The increase in adjusted EBITDA for the quarter was primarily due to the increase in segment operating income, excluding the impact of segment restructuring charges. We are proud of our progress in improving margins remain confident in our ability to achieve full-year mid-teen margins in 2025, consistent with the goal we set forth in our 2022 Investor Day. Adjusted net income was $30.9 million, a record $1.68 per diluted share in Q2 2024, compared to $27 million, or $1.38 per diluted share in the second quarter of 2023. resulting in a 22% increase in adjusted diluted earnings per share over Q2, 2023. Now I'll discuss the performance of each of our operating segments. Valet care segment generated 51% of total company revenues during the second quarter of 2024. This segment posted revenues of $190.1 million, up $16.3 million, or 9.4% from the second quarter of 2023. The increase in revenues in the quarter reflects continued strong demand for our digital, performance improvement, culture and organizational excellence, and strategy and innovation offerings. Healthcare's digital and consulting and managed services capabilities grew 15% and 7% respectively in the second quarter, reflecting the continued fraud-based demand for our offerings. The second quarter of 2024 included $17 million of favorable performance-based fee adjustments compared to $16 million of such adjustments in the second quarter of 2023. The ability to earn performance-based fees as we drive benefits for our clients is a favorable and ongoing attribute of our healthcare business, so the recognition of revenue for such adjustments can vary significantly quarter to quarter. Operating margin for health care was 29.1% in Q2 2024, compared to 28.3% in Q2 2023. The increase in margin was primarily due to a decrease in contractor expenses, partially offset by an increase in compensation costs for our revenue-generating professionals as a percentage of revenues. The education segment generated 33% of total company revenues during the second quarter of 2024, The education segment posted revenues of $122.8 million, up $12.1 million, or 10.9% from the second quarter of 2023, and included $6.8 million from our acquisition of DG&A. The increase in revenues in the quarter was driven by increased demand for our strategy and operations and digital product offerings. Education's consulting and managed services capability revenue grew 19%, second quarter of 2023. The operating margin for education was 25.1% for Q2 2024 compared to 24.8% for the same quarter in 2023. The increase in operating margin in the quarter was primarily driven by revenue growth that outpaced an increase in compensation costs for our revenue-generating professionals and a decrease in contractor expenses, partially offset by an increase in compensation costs for our support personnel as a percentage of revenue. The commercial segment generated 16% of total company revenues during the second quarter of 2024 and posted revenues of $58.8 million compared to $62.3 million in the second quarter of 2023. The decrease in revenues was driven by a slower sales cycle for our digital offerings, partially offset by an increase in demand for our financial advisory offerings. As Mark mentioned, despite the shorter-term softening of market demand for our digital offerings, we are confident in the long-term growth trajectory of the commercial segment as temporary macro headwinds ease when we fully capture the ongoing strength in our sales pipeline. Operating margin for the commercial segment was 15.3% in Q2 2024, compared to 16.8% for the same quarter in 2023. The decrease in operating margin was driven by an increase in compensation costs for our revenue-generating professionals as a percentage of revenues, partially offset by decreases in restructuring charges and contractor expenses as a percentage of revenues. Corporate expenses not allocated at the segment level, excluding the $15 million litigation settlement gain and corporate restructuring charges, were $45.6 million in Q2 2024 compared to $43 million in Q2 2023. Unallocated corporate expenses in the second quarter of 2024 and 2023 included $700,000 and $1.4 million, respectively, 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. Excluding the impact of the deferred compensation plan in both periods, Unallocated corporate expenses increased $3.2 million, primarily due to increases in software and data hosting expenses and compensation expense for our support personnel. Now turning to the balance sheet and cash flows. Cash flow from operations in the second quarter of 2024 was a record $107.2 million. In the quarter, we invested $9 million in capital expenditures, inclusive of internally developed software costs resulting in free cash flow of $98.2 million. DSO was 81 days at the close of the second quarter of 2024, compared to 91 days for the first quarter of 2024, and 77 days for the second quarter of 2023. Total debt as of June 30th, 2024 was $511.6 million, consisting entirely of our senior bank debt. And we finished the quarter with cash of $17.6 million or net debt of $493.9 million. This was a $61.1 million decrease in net debt compared to Q1 of 2024. Our leverage ratio defined in our senior bank agreement was 2.2 times adjusted EBITDA as of June 30th, 2024, consistent with the leverage ratio as of June 30th, 2023. During the second quarter, we used $34.4 million to repurchase approximately 376,000 shares. Since the beginning of 2024, we have repurchased 1 million shares, representing 5.4% of our common stock outstanding as of December 31, 2023. As of June 30, 2024, $90 million remained available for share repurchases under our current share repurchase program. We achieved record free cash flow in the second quarter of 2024 and continue to execute on our balanced capital deployment strategy. We believe the cumulative effect of our return to shareholders via share repurchases over the last several years has well positioned us for continued strong EPS expansion. At the same time, our balance sheet remains strong, providing us the capacity for continued share repurchases and accretive M&A. Finally, let me turn to our guidance for the full year of 2024. Mark mentioned we are updating our full year 2024 revenue and earnings guidance as follows. Narrowing our revenues before reimbursable expenses guidance to a range of $1.46 billion to $1.5 billion, reflecting the lower half of our previous revenue guidance range. Increasing our adjusted EBITDA as a percentage of revenues guidance to a range of 13% to 13.5%. and increasing our adjusted diluted earnings per share guidance to a range of $5.85, $6.15. Thanks, everyone. I would now like to open the call to questions. Operator?