Huron Consulting Group Inc.

Good afternoon and welcome to Huron Consulting Group's webcast to discuss financial results for the third quarter 2024. 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 SEC, including reconciliations 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 third quarter 2024 earnings call. With me today is John Kelly, our Chief Financial Officer. Revenue growth in the third quarter of 2024 was 3% over the prior year period, which reflected a difficult comparison against the exceptionally strong growth of 26% in Q3 of 2023 compared to Q3 of 2022. We also saw the shifting of some project work from the third quarter to the fourth quarter of 2024. Despite these timing factors, our healthcare and education segments continued their long track record of consistent growth since the beginning of 2021, reflecting the fundamental challenges that continue to drive demand for our services in each of these industries. Our commercial segment also rebounded well, achieving 12% sequential growth in the third quarter over the second quarter of 2024. While our revenue growth rate in the quarter was more modest than in recent quarters, we experienced a record sales quarter, achieving the highest quarterly bookings company-wide in our history. Strong sales conversion across all three operating segments in the third quarter positions us well to deliver on our annual revenue guidance. Our sales pipeline also continues to remain robust into the fourth quarter, laying the foundation for its continued growth in 2025. We're also very pleased with our team's execution against our margin enhancement initiatives during the quarter as our adjusted EBITDA margins increased 140 basis points and adjusted EPS increased 21% over the prior year quarter. The margin improvement reflects continued execution on our pricing initiatives, careful management of expenses, and continued build out of our global delivery capabilities. We've also deployed AI and automation capabilities to help our teams deliver their work more efficiently. I'll also note that our incentives are directly tied to the achievement of margin goals for the enterprise. For each of our teams and business units, and margin goals are reflected as a measure in managing director and principal performance scorecards. Our progress to date on expanding margins gives us confidence in our ability to achieve the 100 basis point increase at the midpoint of our full year 2024 earnings guidance. We also believe there's ample runway ahead for further margin expansion as we implement multiple drivers of efficiency across our business. I'll now share some additional insights into our third quarter performance. In the healthcare segment, third quarter revenues before reimbursable expenses, or RBR, grew 2% over the prior year quarter. For our healthcare business, the third quarter of 2023 was a record quarter at that time for RBR, growing 36% over Q3 2022. The increase in RBR in the third quarter of 2024 was primarily driven by continued strength in demand for managed services and digital offerings. Our performance improvement business was up slightly in the third quarter, despite the difficult year-over-year comparison, and our pipeline remains robust for these offerings. The healthcare provider market remains bifurcated, with the strongest systems performing well, investing for growth, improving their competitive positions, while many weaker systems are struggling to maintain margins in the face of the ongoing challenges impacting the industry. Revenue growth ranks as the top strategic initiative for the majority of healthcare leaders, while the credit rating agencies continue to highlight the unfavorable reimbursement and cost trends challenging the sustainability of positive cash flows and margins. Our portfolio of offerings is relevant to hospitals and health systems at both ends of the performance spectrum. Given the breadth of our offerings, we're well positioned to serve our clients no matter where they are in the economic cycle. The investments we're making in our healthcare business continue to both expand our existing capabilities and add new offerings, which positions us very well for continued growth. And now let me bring to life the range of these market dynamics with a couple of examples. Organizations in financial distress have historically been one of our strongest target markets. We're the clear leader with an unmatched track record of quickly reducing costs, increasing cash flows to solve budget challenges. Increasingly, We're also seeing financially stable clients engage our performance improvement team as they evolve their operating models and clinical operations to deliver more effectively on their missions. Our performance improvement offerings are perfectly suited to deliver both sustainable operating improvements and demonstrable ROI in these types of environments, and we see significant opportunities to continue serving our clients as they face current and emerging challenges. As I noted earlier, many healthcare leaders are focused on growth and expansion. Over the past decade, we have broadened our portfolio to include strategy and innovation, expansive digital capabilities, and care transformation offerings to help clients define and execute their growth strategies. For our financially healthy clients, we are actively collaborating with them to define their strategies and operating models for the future. helping them execute on the digital transformation and care model redesign investments needed to deliver on those strategies, and positioning their organizations to move from good to great. One example of this work is how we're supporting growth initiatives for a regional health system which is actively pursuing acquisitions. For this client, we're bringing together our financial advisory, Our digital performance improvement expertise provide day-one readiness and post-close integration support to enable successful acquisitions for our client. The examples describe opposite ends of the market in terms of performance and scale. Many hospitals and health systems are somewhere in between, focusing on shoring up their financial results and operations while seeking to advance their competitive advantage and pursue opportunities to expand in their markets. We expect these divergent market dynamics to persist and be a driver of broad demand for our business, as demonstrated by our strong sales conversion in the third quarter. As we look ahead, we don't anticipate significant changes in reimbursement rates or cost trends that will materially improve the operating environment for hospitals and health systems. As a result, we believe favorable demand tailwinds for our healthcare segment will continue. Education segment RBR grew 9% in the third quarter of 2024 over the prior year quarter, driven by incremental revenue generated by our GG&A acquisition, as well as increased demand for our technology services and software product offerings within our digital capability. Our education business has also had a track record of strong organic growth over many years. In the third quarter, our organic revenue growth slowed slightly, driven by delays in project starts that we believe are short-term and attributable to factors that are unique to those clients. Our sales pipeline remains solid across our education offerings, and the underlying needs of our clients remain robust, reflecting the significant challenges facing the higher education industry today. Let me highlight a few of the challenges that are driving demand for our business. starting with enrollment trends. Undergraduate enrollment peaked in 2011, and it's been steadily declining ever since. In 2025, the population of high school graduates is expected to peak at a steadily decline for the next 12 years and beyond, further accelerating the long-term rate of decline. Although these demographics have been widely anticipated for many years, the industry has been further challenged by the more recent decline in the perceived value of a four-year college degree, as well as the perceived lack of affordability of obtaining a degree. Since the beginning of the pandemic in 2020, the percentage of high school graduates considering a four-year degree has meaningfully declined from roughly two-thirds of high school graduates to just over half, which further pressures future enrollment trends. Last week, higher education institutions reported their steepest decline in first-year enrollments since the pandemic. Similar to the healthcare provider industry, the higher education market has also emerged, with many smaller tuition-dependent institutions struggling financially as they fail to achieve their enrollment goals. Although the large public institutions and elite private universities are largely achieving their enrollment goals, They face a myriad of other issues related to their high cost structures, data technology capabilities, and complex research enterprises. Research is a critical yet costly priority for higher education institutions as it represents well over 25% of the revenues for the majority of the top 100 research universities. As universities grapple with how to optimize their research revenue, the efficiency of their research operations, Huron is the market leader consulting, and managed services and digital solutions for the risk, compliance, and research administration needs. As an example, our Huron Research Suite is the leading software solution in the market for research administration software. Our Huron Research Suite clients who use or are in the process of implementing our grants module receive approximately one-third of all federal funding from the NIH. Digital transformation also remains a key priority for our higher education clients. Many leading institutions are leveraging data technology to make faster and better decisions while investing in digital solutions to streamline and modernize their administrative and research operations and to differentiate the student experience. We expect the complex challenges facing the industry will continue to create a favorable demand environment for a deep industry expertise and strong consulting managed services and digital capabilities for many years to come. Now let me turn to the commercial segment. In the third quarter of 2024, commercial segment RBR declined 3% over the prior year quarter and grew 12% sequentially compared to the second quarter of this year. The decline in commercial RBR was driven by our financial advisory and strategy and innovation offerings, harshly offset by an increase in demand for our digital offerings. The third quarter of 2023 was the high watermark for our distressed financial advisory business and included $5.5 million of contingent fees. Excluding the impact of the distressed financial advisory success fees, the commercial segment grew approximately 5%. In the third quarter, our commercial digital offerings rebounded from the softer demand we experienced in the second quarter, with RVR growing 9% sequentially. We see signs of continued solid demand for IT services in 2025, including Gartner's recent increase to its 2025 projections for IT services spending, which is now anticipated to grow 9% in 2025. Our sales pipeline strengthened in the third quarter, as we continue to see clients investing in technology solutions to drive growth and efficiency in their businesses, and we believe we're well-positioned for stronger growth in this business in 2025. While the commercial segment is the smallest of our three segments today, it represents a significant growth opportunity for our business in the coming years, with our digital capabilities currently representing about two-thirds of the segment's revenues. Within the commercial segment, our teams have increased the level of collaboration across our digital and advisory capabilities to enhance our competitive advantage and strengthen the foundation from which we can grow in the future. For example, our distressed financial advisory team recently partnered with our digital team, bringing together skills needed to preserve all the technology-related IP for a client in bankruptcy. Our strategy and innovation and digital teams are collaborating to reshape how our clients are going to market, deliver their products and services to accelerate growth, as they transform their operations to lower costs and increase speed and agility. At one client, we're implementing generative AI and intelligent document processing to drive efficiency and create more capacity for the client teams to deliver on higher value initiatives. We see continued opportunities for organic growth and talking acquisitions that will enhance the solid foundation we've already built. And as we further build the commercial segment, we expect our collaborative operating model, which helps us accelerate growth in our healthcare and education segments, will also help us unlock greater value across the industries and capabilities within our commercial segment. Now let me turn to our outlook for the year. As our press release indicates, we're narrowing our annual RVR guidance to $1.47 billion to $1.49 billion, maintaining the midpoint of $1.48 billion. We continue to expect our adjusted EBITDA margin to be in a range of 13% to 13.5% of RVR, and we are narrowing and raising our full-year adjusted diluted earnings per share to a range of $6 to $6.20, an increase of $0.10 per share at the midpoint. pleased with our performance today in 2024. And I'm fortunate to work with such a talented team of people that share our passion for helping clients successfully growing this company. Without their efforts, none of this would be possible. And collectively, we remain focused on advancing our growth strategy and delivering upon our long-term financial goals in 2025 and beyond. And now let me turn it over to John for a more detailed discussion of our financial statements. John?

Thank you, Mark, and good afternoon, everyone. Before I begin, please note that I'll be discussing non-GAAP financial measures such as EBITDA, adjusted EBITDA, adjusted net income, adjusted EPS, and free cash flow. Our press release, 10Q, the investor relations page on the U.S. 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. My management believes they provide useful information to investors regarding our financial condition and operating results. Before discussing our financial results for the quarter, I'd like to discuss two housekeeping items. First, we have historically and will continue to discuss our revenue in terms of revenue before reimbursable expenses, which excludes reimbursable expenses that are passed through items to our clients. In order to ensure that this distinction is clear in our remarks, We'll now refer to our revenue as either revenue before reimbursable expenses or RBR, as you heard referenced by Mark. Second, I want to make a comment on revenue-generating professional headcount growth. Our year-over-year headcount growth of 10% as of September 30th included the expansion of our India-based healthcare managed services team. Excluding the impact of the India-based managed services team growth, headcount grew 2%. Now I'll share some of the key financial results from the third quarter. RBR for the third quarter of 2024 was $370 million, up 3.3% from $358.2 million in the same quarter of 2023. The increase in RBR for the quarter was driven by solid growth in our education and healthcare segments, partially offset by our commercial segment, which was down year over year, but posted solid growth compared to the second quarter of 2024. Net income for the third quarter of 2024 was $27.1 million, or $1.47 per diluted share, compared to net income of $21.5 million, or $1.10 per diluted share in the third quarter of 2023. As a percentage of total revenues, net income increased to 7.2% in the third quarter of 2024, compared to 5.9% in the third quarter of 2023. The increase in net income was driven by revenues that outpaced expenses. Our effective income tax rate in the third quarter of 2024 was 27.8%, which is less favorable than the statutory rate inclusive of state income taxes, primarily due to certain non-deductible expense items, partially offset by a discrete tax benefit related to non-taxable gains on the investments used to fund our deferred compensation liabilities. Adjusted EBITDA was $54.9 million in Q3 2024, or 14.8% of RBR, compared to $48 million, or 13.4% of RBR, in Q3 2023. The increase in adjusted EBITDA for the quarter was primarily due to increases in education, health care, and commercial segment operating income, excluding the impact of segment depreciation and amortization in segment restructuring charges. Adjusted net income was $31.1 million, or $1.68 per diluted share in Q3 2024, compared to $27.2 million, or $1.39 per diluted share in the third quarter of 2023, resulting in a 21% increase in adjusted diluted earnings per share over Q3 2023. In the first nine months of 2024, adjusted diluted earnings per share grew 26%, over the same period in the prior year. Now I'll discuss the performance of each of our operating segments. The healthcare segment generated 49% of total company RBR during the third quarter of 2024. This segment posted RBR of $183.1 million, up $4 million, or 2.2% from the third quarter of 2023. The increase in RBR in the quarter reflects continued strong demand for our managed services and digital offerings, which grew 16% to 11%, respectively, over the prior year quarter. Operating income margin for health care was 27.1% in Q3 2024, compared to 26.2% in Q3 2023. The increase in margin was primarily due to a decrease in contractor expenses, partially offset by increases in compensation costs for our revenue-generating professionals as a percentage of RBR. The education segment generated 33% of total company RBR during the third quarter of 2024. The education segment posted RBR of $121 million, up to $10 million, or 9% from the third quarter of 2023. RBR in the third quarter of 2024 included $5.7 million from our acquisition of GG&A. The increase in RBR in the quarter was driven by the GG&A acquisition, as well as increased demand for our technology services and software product offerings within our digital capability. The operating income margin for education was 24.1% for Q3 2024, compared to 23.9% for the same quarter in 2023. The increase in operating income margin in the quarter was primarily driven by a decrease in contractor expenses revenue growth that outpaced the increase in compensation costs for our revenue-generating professionals. The commercial segment generated 18% of total company RBR during the third quarter of 2024 and posted RBR at $65.9 million compared to $68 million in the third quarter of 2023. The decrease in RBR was driven by our financial advisory and strategy and innovation offerings, partially offset by an increase in demand for our digital offering. The third quarter of 2023 included $5.6 million of contingent fees for our financial advisory team compared to only $600,000 of such fees in 2024. Operating income margin for the commercial segment was 24.5% for Q3 2024 compared to 22.7% for the same quarter in 2023. The increase in operating income margin was driven by decreases in contractor expenses compensation costs for our revenue-generating professionals as percentages of RBR. Corporate expenses not allocated at the segment level and excluding corporate restructuring charges were $46.8 million in Q3 2024 compared to $43.1 million in Q3 2023. Unallocated corporate expenses in the third quarter of 2024 included $2.3 million of expense related to the increase in the liability of our deferred compensation plan compared to income of $1 million in the third quarter of 2023. These amounts are offset by the change in market value of the investment assets used to fund that plan reflected in other income. Excluding the impact of the deferred compensation plan in both periods, unallocated corporate expenses were $44.6 million in the third quarter of 2024 compared to $44.1 million in the third quarter of 2023. The slight increase was primarily driven by an increase in software and data hosting expenses, largely offset by a decrease in legal expenses. Now turning to the balance sheet and cash flows. Cash flow from operations in the third quarter of 2024 was $85.2 million. In the quarter, we used $7.6 million to invest in capital expenditures inclusive of internally developed software costs, resulting in a free cash flow of $77.6 million in Q3 2024. DSL came in at 86 days for the third quarter of 2024, compared to 81 days for the second quarter of 2024 and 83 days for the third quarter of 2023. Total debt as of September 30th, 2024 was $443.1 million consisting entirely of our senior bank debt. We finished the quarter with cash of $18.5 million for net debt of $424.6 million. This was a $69.4 million decrease in net debt compared to Q2 of 2024. In addition, in the third quarter, we used $7.3 million to repurchase approximately 66,000 shares. In the first nine months of 2024, we used $100,000 in $4 million to repurchase approximately 1.1 million shares, representing 5.8% of our common stock outstanding as of December 31, 2023. As of September 30, 2024, $83 million remained available for share repurchases under our current share repurchase authorization. Our leverage ratio, as defined in our Senior Bank Agreement, was 1.9 times adjusted EBITDA as of September 30th, 2024, compared to 1.8 times adjusted EBITDA as of September 30th, 2023. Finally, let me turn to our guidance for the full year of 2024. We're narrowing our revenues before reimbursable expenses guidance to a range of $1.47 billion to $1.49 billion, maintaining the midpoint of $1.48 billion. We are maintaining our adjusted EBITDA as a percentage of the RBR range of 13% to 13.5% of revenues. And we are narrowing and increasing our adjusted diluted earnings per share guidance to a range of $6 to $6.20. Thanks, everyone. I would now like to open the call to questions. Operator?