Huron Consulting Group Inc.

Good afternoon and welcome to Huron Consulting Group's webcast to discuss financial results for the first quarter 2025. 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 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 FCC, 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 first quarter 2025 earnings call with me today are john kelly our chief financial officer and ryan dale our chief operating officer driven by strong growth across all three operating segments revenues before reimbursable expenses or rvr grew 11 over the first quarter of 2024 while we continue to expand our margins Our first quarter results reflect our continued progress in executing our growth strategy, which we refreshed and shared at our investor day in March. We're encouraged by our performance in the first quarter in the face of a dynamic external environment. Today, we reaffirm our annual guidance. As we stated on our year-end earnings call and reiterated at our investor day last month, we believe the challenges and opportunities of the external environment are contemplated within our guidance range. Our strong client relationships, incredibly talented team, industry expertise, and breadth of capabilities, including our performance improvement offerings, collectively position us well to serve our clients as they navigate an evolving and complex regulatory landscape and continued market disruption. I'll now share some additional insights into our first quarter performance. In the healthcare segment, First quarter, RBR grew 10% over the prior year quarter. The increase in RBR in the first quarter of 2025 was primarily driven by continued strong demand for performance improvement and financial advisory offerings. Our healthcare business continues to perform exceptionally well as our clients respond to increasing financial pressures and potential regulatory changes. By increased patient volumes, many of our large health system clients continue to face operating expenses that are outpacing reimbursements. We believe this is a trend that will continue for the foreseeable future. In addition, potential changes to Medicaid funding, reductions in research funding, changes to the 340B drug pricing program, and increases in the cost of imported drugs and medical devices. are forcing health systems to evolve their clinical and administrative functions as they manage declining margins. Providers are positioning their businesses to stay ahead of the evolving external environment while operating in an increasingly competitive landscape. In some cases, our clients are responding to near-term financial pressures, while others are executing strategic, operational, and digital initiatives to sustain or advance their market position while preparing for a more challenging financial environment in the future. To execute these initiatives, providers are turning to Huron as their trusted advisor, given our long track record of delivering significant tangible results. The pipeline continues to grow, and demand for our healthcare offerings remains strong, which is a testament to the investments we've made to diversify our portfolio. Our offerings today meet the broad needs of the market, focus on both accelerating growth in their clients' markets and driving efficiency across their administrative and clinical operations. Across the full range of market conditions, we're well-positioned to address the wide array of opportunities and challenges facing our hospital, physician group, and health system clients. Education segment RBR grew 10% in the first quarter of 2025 over the prior year quarter, driven by strong demand for our strategy and operations and advancement offerings, and increased demand for our software product offerings. Let me share some context on our education business. While we have successfully diversified our client base over time, large public and private research universities have been and continue to be at the core of our business. Nearly every day, new headlines hit the press about potential regulatory impacts affecting the higher education industry It's important to note that these recent regulatory initiatives and federal directives do not impact colleges and universities uniformly. While nearly all research universities are experiencing some impact related to the evolving regulatory environment, magnitude, timing, and strategic implications of these impacts vary significantly depending on the unique attributes of the institution. The most significant and publicized policy changes have largely impacted relatively small number of private universities where incidentally we have and continue to provide services in the uncertainty that exists today many of our clients are turning to huron to understand potential scenarios evaluate their options and take creative actions and position their organizations for the best possible outcome during this period for example helping clients understand the financial impacts of the federal directives potential options and mitigation strategies. More specifically, we're helping them identify opportunities to improve liquidity, redesign their long-range planning and budget models, and accelerate transformation of their operating models. We're also analyzing clients' funding mechanisms and expenses to determine how best to close potential operating deficits or future funding gaps. Similar to healthcare, the needs of our large and small public and private clients are wide-ranging. The breadth of our diverse portfolio and the deep understanding of the industry as well as our clients and institutions is unmatched by our competition and positions as well to be their trusted partner as they navigate the current disruption. Now let me turn to the commercial segment. In the first quarter of 2025, commercial segment RBR grew 17% over the prior year quarter and grew 11% sequentially compared to the fourth quarter of 2024. The year-over-year increase in RVR was driven by the incremental RVR from our acquisition of Axia and strong demand for our digital offerings, partially offset by decreases in RVR from our strategy and innovation and financial advisory offerings. Excluding the incremental RVR from our acquisition of Axia, our commercial digital capability grew 12% over the prior year quarter. Our commercial clients are also facing increased pressure from the dynamic external environment, stemming from the uncertainty related to tariffs and a more volatile macroeconomic environment. Similar to healthcare and education, commercial clients are also turning to Huron as their partner of choice to navigate the market disruptions. For example, leveraging our supply chain offerings, we're building analytic models to simulate the impact of global tariffs on their financial position over time and the ripple effects that may arise. Despite this volatile environment, clients continue to advance their digital transformation imperatives, which in turn advance their competitive positions, drive operational efficiency, and leverage data to make better, faster decisions. As I mentioned at our investor day in March, we believe we have a strong foundation to continue to grow this segment. Building on the scale we've achieved to date, their digital capability while selectively adding advisory capabilities both organically and through programmatic M&A. And now let me turn to our outlook for the year. Today we reaffirm our guidance for 2025, and that includes RBR, adjusted use by margin, and adjusted diluted earnings per share. Let me close by saying that we're confident in a refreshed strategy and their ability to deliver upon the financial goals outlined at our investor day last month. We're encouraged by our performance in the first quarter to face a dynamic external environment. For markets that we serve continue to be under increased pressure, and we believe we're well-positioned to help clients navigate through the complex challenges. Their deep industry expertise, the breadth of our portfolio, are strong, competitive positions, and are highly talented. 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 Huron website have reconciliations of these non-GAAP measures, 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. Before discussing our financial results for the quarter, I would like to discuss several housekeeping items. First, our first quarter results exclude the operating results from the student education business, which was divested on December 31st, 2024. Second, our first quarter results do reflect a full quarter of operating results from the acquisition of Axia Consulting, primarily in the commercial segment, which closed effective December 1st, 2024. And finally, our acquisitions of Advancement Resources and Halpin closed on March 1st and 17th, respectively, and as such, a partial period of their operating results are included within the education segment. The operating results of Advancement Resources and Halpin were not material to our first quarter results. Now I will share some of the key financial results for the first quarter. RVR for the first quarter of 2025 was $395.7 million, up 11.2% from $356 million in the same quarter of 2024. The increase in RVR for the quarter was driven by strong growth across all three operating segments. Net income for the first quarter of 2025 increased 36.3% to $24.5 million, to $1.33 per diluted share, compared to net income of $18 million to $0.95 per diluted share in the first quarter of 2024. As a result, or as a percentage of total revenues, net income increased to 6.1% in the first quarter of 2025, compared to 5% in the first quarter of 2024. The increase in net income was driven by revenues that outpaced expenses, and an increase in the discrete tax benefit for share-based compensation awards that tested during the quarter. As a result of this discrete tax benefit, our effective income tax rate in the first quarter of 2025 was negative 14.4% as we recognized the income tax benefit on our pre-tax income. Adjusted EBITDA was $41.5 million in Q1 2025 for 10.5% of RVR compared to $33.8 million 9.5% of RBR in the first quarter of 2024. The increase in adjusted EBITDA for the quarter is primarily due to increases in segment operating income in our healthcare and education segments, excluding the impact of segment depreciation and amortization in segment restructuring charges, partially offset by a decrease in segment operating income in the commercial segment, and increased unallocated corporate expenses to support the growth of our business. Adjusted net income was $31.1 million for $1.68 per diluted share in Q1 2025, or $23.3 million for $1.23 per diluted share in the first quarter of 2024, resulting in a 36.6% increase in adjusted diluted earnings per share over Q1 2024. Now I'll discuss the performance of each of our operating segments. The healthcare segment generated 50% of total company RBR during the first quarter of 2025. This segment posted RBR of $198.5 million, up $17.7 million, or 9.8% from the first quarter of 2024. The first quarter of 2024 included $3.4 million of RBR from the student education business, which was divested in the fourth quarter of 2024. Excluding the results for student education, healthcare segment Q1 revenues grew 12% over the first quarter of 2024. The increase in the segment's RBR in the quarter reflects continued strong demand for our performance improvement and financial advisory offerings. Operating income margin for healthcare was 28.4% in Q1 2025 compared to 23.6% in Q1 2024. The increase in margin was primarily due to revenue growth that outpaced the increase in salaries and related expenses for our revenue-generating professionals, the decreases in contractor expenses, practice administration and meeting expenses, salaries and related expenses for our support personnel. The education segment generated 31% of total company RVR during the first quarter of 2025. The education segment posted RBR $122.7 million, up $11.2 million, 10% from the first quarter of 2024. The increase in RBR in the quarter was driven by strong demand for our strategy and operations advancement offering, increased demand for our software product offerings within our digital capabilities. The inorganic RBR contributions from our acquisitions, including GG&A, closed on March 1, 2024, as well as AXIA, Advancement Resources, and Halpin for $3.9 million in the first quarter of 2025. The operating income margin for education was 18.8% for Q1 2025, or 19.7% for the same quarter in 2024. The decrease in operating income margin in the quarter primarily driven by expenses related to a team-wide leadership meeting during the quarter, performance bonus expenses for our revenue-generating professionals, salaries and related expenses for our support personnel, and amortization of our internally developed software, all as percentages of RBR, partially offset by revenue growth that outpaced the increase in salaries and related expenses for our revenue-generating professionals. Commercial segment generated 19% of total company RVR during the first quarter of 2025 and posted RVR of $74.5 million, up $10.8 million, 17% from the first quarter of 2024. The increase in RVR was driven by $11.2 million of incremental RVR from our acquisition of Axia, which we closed in December of 2024. The strong demand for our digital offerings partially offset by decreases in RBR from our strategy and innovation and financial advisory offerings. Operating income margin for the commercial segment was 15.2% for Q1 2025, compared to 22.1% for the same quarter in 2024. The decrease in operating income margin reflects the mix of RBR during the quarter, which is driven by increases in compensation costs for our revenue-generating professionals, and support personnel and contractor expenses as percentages of RBR. We continue to expect full-year operating income margin in the range of 21 to 23 percent for the commercial segment. Corporate expenses not allocated at the segment level, excluding corporate restructuring charges, were $52.4 million in Q1 2025 compared to $50.9 million in Q1 2024. Unallocated corporate expenses in the first quarter of 2025 included $900,000 of income related to the decrease in the liability of our deferred compensation plan compared to expense of $2.4 million in the first quarter of 2024. These amounts are offset by the change in market value of the investment assets used to fund the plan reflected in other income. Excluding the impact of the deferred compensation plan in both periods, unallocated corporate expenses increased $4.8 million in the first quarter of 2025, primarily driven by increases in compensation costs for our support personnel, software and data hosting expenses, partially offset by a decrease in legal expenses. Now turning to the balance sheet and cash flows. Cash flow used in operations in the first quarter of 2025 was $106.8 million reflecting our annual incentive payments during the quarter. Cash flow used in operations during the first quarter of 2024 was $130.7 million. During the quarter, we used $8.5 million to invest in capital expenditures, inclusive of internally developed software costs, resulting in negative free cash flow of $115.4 million. Continue to expect full-year free cash flow to be in a range of positive $160 million $190 million debt of cash taxes and interest and excluding the non-cash stock compensation. DSO came in at 79 days for the first quarter of 2025 compared to 91 days for the first quarter of 2024. The decrease in DSO reflects the impact of collection on certain larger health care and education projects in alignment with the contractual payment schedule. Total debt as of March 31st, 2025 was $576.3 million, consisting entirely of our senior bank debt. We finished the quarter with cash of $23.4 million for net debt of $552.9 million. This was a $217.1 million increase in net debt compared to Q4 2024, primarily due to the payment of our annual cash bonuses and share of the purchases during the quarter. In the quarter, we used $72.9 million to repurchase approximately 509,000 shares, representing 2.9% of our count of stock outstanding as of December 31st, 2024. As of March 31st, 2025, $191.7 million remained available for share repurchases under the current share repurchase authorization from our Board of Directors. Our leverage ratio is defined in our Senior Bank Agreement was 2.2 times adjusted EBITDA as of March 31st, 2025, compared to 2.7 times adjusted EBITDA as of March 31st, 2024. As a reminder, our first quarter typically represents a seasonal high leverage ratio given the payout of our annual bonuses in March. Finally, let me turn to our guidance for full year 2025. As Mark mentioned, today we reaffirm our annual RBR margin and adjusted EPS guidance, which includes RVR in a range of $1.58 billion to $1.66 billion, adjusted EBITDA in a range of 14.14% to 14.5% of RVR, and adjusted non-GAAP EPS in a range of $6.80 to $7.60. Thanks, everyone. I'd now like to open the call to questions. Operator?