Earnings Call Transcript
Huron Consulting Group Inc. (HURN)
Earnings Call Transcript - HURN Q4 2020
Operator, Operator
Good afternoon, ladies and gentlemen and welcome to the Huron Consulting Group's webcast to discuss financial results for the Fourth Quarter and Full Year 2020. At this time all conference call lines are in 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 Jim Roth, Chief Executive Officer of Huron Consulting Group. Mr. Roth, please go ahead.
Jim Roth, CEO
Good afternoon and welcome to Huron Consulting Group's fourth quarter and full year 2020 earnings call. With me today are John Kelly, our Chief Financial Officer and Mark Hussey, our President and Chief Operating Officer. Before I begin, I would like to highlight that we have placed supplemental materials on our website at IR.huronconsultinggroup.com to provide additional detail about the range of our views and how the COVID-19 pandemic might influence our outlook for 2021. These supplemental materials should be reviewed in conjunction with our earnings call and not on a standalone basis. Company-wide revenues declined 4% in 2020 compared to 2019 reflecting the challenges that the pandemic presented to our two largest industry verticals healthcare and education. These challenges were partially offset by strong growth in the Business Advisory segment, which achieved record revenues during the year and now represents 32% of total company revenues. Our strategic focus on expanding our offerings into commercial industries within the Business Advisory segment proved to be beneficial in 2020 highlighting the benefits of increased diversification in our portfolio and then in markets. I want to spend a few minutes talking about 2020 to provide perspective on how the year evolved for Huron. Our primary focus has been and continues to be on profitable revenue growth. And while we didn't achieve our objectives set prior to the pandemic Huron’s response during the pandemic was strengthened by our collective resiliency, creativity and market relevancy amidst the many challenges that faced our client base. We were proactive and took critical actions during the year that we believe positioned this company for growth in 2021 and beyond. In 2020, when many of our clients were experiencing substantial losses, we worked closely with them to develop solutions which helped them manage through this period of significant disruption. In 2020, we generated over $30 million in revenue from offerings that were directly responsive to COVID-19 pressures faced by our clients. These critical efforts demonstrated the extent to which we can be nimble and innovative and quickly create new revenue opportunities. We also successfully recruited senior leaders into multiple businesses including several experienced personnel that will help us further execute on our commercial strategy as we establish service lines that we believe will generate new avenues of collaborative growth beginning in 2021. We also took proactive measures to manage our cost base throughout the year including tightly managing our discretionary spending, modestly adjusting our workforce and reducing our real estate footprint to achieve a level of operating efficiency that we believe will create a foundation from which we can grow and expand margins in 2021. In addition to our cost management efforts, we effectively managed our cash position increasing cash flows from operating activities to $137 million for the full year. Our strong cash flows enabled us to reduce our net debt by $60 million, while also initiating and successfully completing the implementation of a new cloud ERP system, which went live on January 1, 2021. We continue to strengthen our advanced technology offerings across all of our segments. While the term digital transformation has many meanings, the importance of technology and helping our clients survive and thrive in environments of disruption is very apparent as evidenced by the strong demand we saw for our digital, technology and analytics offerings in 2020. Revenue from technology services throughout the company has had a compound annual growth rate of nearly 20% since 2015 and has grown to over 30% of total company revenues in 2020. We believe this trend will continue based on the demand we anticipate for these services across all of our end markets. The pandemic has highlighted the need for many organizations to adopt cloud technologies, automation and analytics to strengthen their competitive position and be responsive to this rapidly changing environment. Some professional services firms have strong technical competencies while others have deep industry experience. Huron has both and these competencies are integrated across all of our businesses enabling us to provide digital, technology and analytics offerings across multiple industries. Lastly, we continue to support our people professionally and personally as they manage through an incredibly taxing environment. Our efforts in 2020 increased our already high employee engagement scores clearly demonstrating that our nearly 4,000 person team is supportive of how we managed through the pandemic. And equally important, they continue to be excited about being a part of our growth strategy. I will now share some additional insight into our fourth quarter and full year 2020 performance along with our expectations for 2021. On a full year basis, Healthcare segment revenues declined 12% over 2019. In the fourth quarter of 2020, the Healthcare segment declined 18% over the prior year quarter consistent with our expectations. The resurgence in COVID-19 patients while not as disruptive as it was at the onset of the pandemic and the well-justified distraction caused by the vaccine rollout during the fourth quarter took a toll on our healthcare clients which resulted in some project deferrals. We remain cautiously optimistic about performance in this segment as our sales pipeline continues to develop driven by the increased pressures facing the healthcare industry. When the ongoing impact of the pandemic eases, we expect there will be a resurgence of demand for healthcare services across the portfolio including our performance improvement offerings. We expect our clients will continue evolving their care delivery models and operations to accommodate the ongoing transformation taking place across the industry. Efforts to improve cash collections and create better access to care will also be important ongoing priorities for healthcare clients with margin challenges. Finally, and consistent with my prior comments, we expect to see an increase in technology spend among health systems, particularly in support of telehealth and the application of Intelligent Automation and Analytics. Turning to the Business Advisory segment, on a full year basis, segment revenues grew 6% year-over-year, driven by strong demand in our digital technology and analytics and distressed advisory offerings offset by softer performance in our strategy-related offerings. In the fourth quarter of 2020, Business Advisory segment revenues declined 4% over the prior year quarter. The Business Advisory segment faced tough comparisons following solid growth in the fourth quarter of 2019. The quarter-over-quarter decline in revenue was primarily attributable to our distressed advisory and strategy offerings partially offset by continued growth in our digital, technology and analytics offerings. Our technology and distressed advisory offerings both achieved record revenues in 2020. Each of the four businesses in the segment are well positioned for growth in 2021. Driving that growth will be the need for companies across all industries to reevaluate their market position and future strategy to accommodate the disruptions and opportunities that have resulted from the pandemic. I want to highlight our continuing investment in expanding our commercial sector expertise and capabilities. We believe that our investments, all of which are contemplated within our guidance estimates, will accelerate new growth areas and position Huron to take advantage of the significant market opportunities that exist across the commercial industries we serve in addition to the collaborative opportunities within healthcare and education. Turning now to the Education segment, revenues in this segment were generally flat in 2020 as compared to 2019. In the fourth quarter of 2020, Education segment revenues declined 21% over the prior year quarter. Coming off of a very strong first half of the year, this segment saw several engagements get deferred until 2021. The lack of growth in 2020, which stands in stark contrast to consistent growth in the segment over the past five years reflects the dramatic impact of the pandemic on the operations and finances of our higher education clients. Since the beginning of 2021, we have seen positive momentum and demand for our research, strategy, business operations and student-related offerings. While our clients remain cautious about starting significant technology-related engagements given the size of these investments, we believe that as the market stabilizes, previously deferred opportunities will begin to restart. Many educational institutions found that their digital platforms were insufficient to address the surge in remote learning and are equally deficient in terms of introducing cloud technology to the administrative, research, and student aspects of their business. While many of our higher education clients were focused entirely on transitioning to remote learning during the fall semester, most colleges and universities have brought students back to campus in early 2021. While there is some hope that this year will be less disruptive, educational institutions will face a dramatically different world in the future. In many cases, current business models will not suffice in the future environment creating numerous opportunities for our services. Let me turn to our expectations and guidance for 2021. Our revenue guidance for the year is $830 million to $890 million. We also expect adjusted EBITDA in a range of 10.75% to 11.75% of revenues and adjusted diluted earnings per share of $2.25 to $2.75. I will now provide a few thoughts regarding expectations for each segment as well as overall company profitability. With the pandemic and its corresponding uncertainties still evolving, we believe we will have modest sequential revenue growth in the first half of the year as compared to the second half of 2020 followed by stronger growth in the second half of 2021, which translates into approximately 2% growth for the full year at the midpoint of our 2021 guidance. Several factors are in play in arriving at this estimate. First, while we have seen some positive and more sizeable conversions recently in our pipeline, we believe it is appropriate to be conservative in our estimates until we get better visibility as to how and when the pandemic will ease particularly in the healthcare and education industries. Second, this guidance reflects a tough comparison over the first half of 2020. Although our healthcare business felt its biggest impact in the March through June timeframe last year, the Education and Business Advisory segments had a strong first six months last year. Third, we believe that the second half of 2021 will be better than the first half of this year, particularly for healthcare and education. It is our hope that our fourth quarter run rate will be closer to our pre-pandemic run rate in the fourth quarter of 2019. At the midpoint of our guidance, we anticipate Healthcare segment revenues will grow in the low single-digit range for 2021 as compared to 2020. Our guidance also reflects mid single-digit revenue growth in the Business Advisory segment. In the Education segment, we anticipate a low single-digit decline in revenue growth for the year, reflective of the difficult first half comparisons driven by the strong growth we experienced in this segment at the beginning of 2020. In terms of margins in 2021, our guidance reflects our commitment to expanding margins and is inclusive of the proactive cost savings measures taken in the fourth quarter as well as strategic and operational investments that we believe will enhance our revenue growth trajectory, drive deeper operational efficiencies and create opportunities to better leverage our G&A. My management team and I firmly believe that we have positioned this company for solid growth in the coming years. Our growth in the commercial markets remained strong in 2020. And there's no question in my mind that we are well positioned to address the significant challenges that the pandemic has had on healthcare and education industries. Our cautiousness at this time at the end of February is indicative of our desire to be conservative as to the timing of increased conversion and our healthcare and education pipelines. Although in both cases, we have already seen some reflection of that taking place. We are firmly committed to our financial strategy of achieving sustainable organic revenue growth and expanding margins over time. In summary, our clients are facing significant disruption in mounting financial and operational pressures that we believe will drive strong demand for our services as the economy stabilizes. And we believe we are well positioned to take advantage of these opportunities as they arise. While we believe we have navigated the near-term disruption, our focus has consistently remained on positioning Huron for the longer term. We are committed to executing on priorities to drive shareholder value which include achieving sustainable organic growth, driving margin expansion, strategically deploying capital and investing in our people. Amidst the turmoil of 2020, we continue to execute on our five-year strategy that will strengthen our competitive advantage across markets. Now, let me turn it over to John for a more detailed discussion of our financial results.
John Kelly, CFO
Thank you, Jim, 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, 10-K and Investor Relations page on the Huron 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. Also, unless otherwise stated, my comments today are all on a continuing operations basis. Also, our acquisition of ForceIQ, which closed in November, is included in our fourth quarter financial results in the Business Advisory segment. Our recent acquisition of Unico Solutions, which closed in February, is not included in our fourth quarter financial results. Unico Solutions will be included in the Business Advisory segment beginning in the first quarter of 2021. The Unico Solutions acquisition strengthens our data management and governance capabilities as we help clients better manage their data and optimize their operations. Now, let me walk you through some of the key financial results for the quarter. Revenues for the fourth quarter of 2020 were $198.3 million, down 14.6% from $232.3 million in the same quarter of 2019. The decline in revenues in the quarter was primarily driven by the Healthcare and Education segments as the impact of the pandemic continued. For full year 2020 revenue was $844.1 million, down 3.7% from $876.8 million in 2019. As Jim mentioned, that decline in revenue over the prior year was driven by the Healthcare and Education segments which was partially offset by solid organic growth in the Business Advisory segment. The performance of the Business Advisory segment, which achieved record revenues in 2020, emphasizes the benefits of a more balanced portfolio across our services in end markets. Net loss was $6.1 million or $0.28 per diluted share in the fourth quarter of 2020 and includes the pre-tax impact of restructuring and lease impairment charges of $18.7 million. This compares to net income of $14.4 million or $0.63 per diluted share in the same quarter in the prior year. Full year 2020 net loss was $23.7 million or $1.08 per diluted share and includes the previously mentioned fourth quarter pre-tax restructuring charges as well as the first quarter pre-tax goodwill impairment charge of $59.8 million. This compares to net income of $42 million or $1.87 per diluted share in 2019. Effective income tax rate in the fourth quarter of 2020 was a benefit of 43.7% and a pre-tax loss of $10.8 million compared to 18.5% and pre-tax income of $17.6 million a year ago. Our effective tax rate for Q4 of 2020 was more favorable than the statutory rate inclusive of state income taxes, primarily due to the impact of our net operating loss that will be carried back to prior year income at a higher prior year tax rate as provided for under the CARES Act and Federal Tax credits recognized during the quarter. On a full year basis, our effective income tax rate for 2020 was 30%, which is more favorable than the statutory rate inclusive of state income taxes, primarily due to year-to-date pre-tax losses. Tax benefits related to Federal Tax credits, a discrete tax benefit for vested share-based compensation awards, and tax benefits related to non-taxable gains on our investments used to fund our deferred compensation liability were favorable. The favorable items were partially offset by increases in our valuation allowance primarily due to increases in deferred tax assets recorded for foreign tax credits, certain non-deductible business expenses and the non-deductible portion of the goodwill impairment charges recorded during the first quarter of 2020. Adjusted EBITDA was $17.1 million in Q4, 2020 or 8.6% of revenues compared to $29.4 million in Q4, 2019 or 12.6% of revenues. For full year 2020, adjusted EBITDA as a percentage of revenues declined to 10.3% compared to 12.0% in 2019. Adjusted non-GAAP net income was $10.2 million or $0.45 per diluted share in the fourth quarter of 2020 compared to $18 million or $0.79 per diluted share in the fourth quarter of 2019. For the full year 2020, adjusted non-GAAP net income was $47.9 million or $2.15 per share compared with $61.6 million or $2.74 per share in 2019. Now, I'll make a few comments about the performance of each of our operating segments. The Healthcare segment generated 43% of total company revenues during the fourth quarter of 2020 and posted revenues of $85.1 million, down $18.5 million or 17.9% in the fourth quarter of 2019. The decline in revenue reflects the impact of the ongoing COVID-19 pandemic on our new business pipeline and related slower conversion of soft backlog during the quarter. On a full year basis, healthcare revenue declined 11.5%. Performance-based fees for the full year 2020 were $69.3 million compared to $71.1 million in 2019. Operating income margin for healthcare was 28.3% for Q4, 2020 compared to 30.6% for the same quarter in 2019. The quarter-over-quarter decline in margin was primarily due to a decrease in billable consultant utilization, partially offset by a higher average consultant bill rates and lower indirect costs. On a full year basis, operating margin was 26.9% compared to 31.5% in 2019. The Business Advisory segment generated 33% of total company revenues during the fourth quarter of 2020 and posted revenues of $65.9 million, down $3 million or 4.3% in the fourth quarter of 2019. Revenues for the fourth quarter of 2020 included $1.3 million from our acquisition of ForceIQ. The quarter-over-quarter decline in revenue is primarily attributable to our distressed advisory and strategy offerings, partially offset by continued growth in our digital, technology and analytics offerings. The Business Advisory segment faced a tough comparison relative to the fourth quarter of 2019, which benefited from higher success fees and the recognition of revenue that had been previously deferred upon receipt on a signed contract. On a full year basis, the Business Advisory segment revenues grew 5.9% year-over-year driven by strong demand for digital, technology, analytics and distressed advisory offerings. The operating income margin for the Business Advisory segment was 16.3% for Q4, 2020 compared to 24.2% for the same quarter in 2019. The quarter-over-quarter decline in margin was primarily due to increases in performance bonus expense based on full year results for our revenue-generating professionals, increased contractor expenses, and increased restructuring charges. On a full year basis, operating margin was 18% compared to 19.7% in 2019. The decrease in operating margin year-over-year is primarily attributable to the shift in revenue mix towards digital, technology and analytics offerings, which have a relatively lower margin and away from our strategy offerings which traditionally have a relatively higher margin. Our strategy offerings were impacted by the effects of the pandemic during 2020. The Education segment generated 24% of total company revenues during the fourth quarter of 2020 and posted revenues of $47.3 million, down $12.5 million or 20.8% in the fourth quarter of 2019. This decrease in revenue reflects the impact of the ongoing COVID-19 pandemic and our new business pipeline and related slower conversion of soft backlog during the quarter. On a full year basis, Education segment revenues were largely flat versus the prior year. Our education business had a strong start to the year driven by the momentum we had built in 2019 before our clients were severely disrupted by the pandemic. The operating income margin for Education was 12.1% for Q4, 2020 compared to 20.9% for the same quarter in 2019. The quarter-over-quarter decline in margin was primarily due to a decrease in billable consultant utilization and restructuring charges related to the headcount reductions during the quarter. On a full year basis, operating margin was 21.3% compared to 24.8% in 2019. Other corporate expenses not allocated at the segment level were $47.4 million in Q4, 2020 compared with $34.9 million in Q4, 2019. The quarter-over-quarter increase in corporate expenses is primarily attributable to $14.5 million of restructuring charges taken in the quarter to reduce our operating costs to address the impact of the COVID-19 pandemic on our business, including the workforce reduction announced on our last earnings call as well as certain office exit costs. Fourth quarter corporate expenses also included $3.1 million in expense related to the increase in liability for our deferred compensation plan, which is fully offset by a corresponding gain and other income related to the increased value of the assets used to fund that obligation. Now turning to the balance sheet and cash flows, DSO came in at 52 days for the fourth quarter of 2020 compared to 62 days for the third quarter of 2020. This record low DSO reflects the efforts of our project and corporate teams to work closely with our clients during 2020 to ensure collections while supporting the needs of our clients. Total debt includes the $200 million in senior bank debt and a $3 million promissory note for total debt of $203 million. We finished the year with cash of $67 million for net debt of $136 million. This was a $40 million decrease compared to Q3, 2020 and a decrease of $60 million compared to the end of 2019. Our leverage ratio is defined in our senior bank agreement was approximately 1.9 times adjusted EBITDA as of December 31, 2020 compared to 1.6 times adjusted EBITDA as of December 31, 2019. Our net leverage ratio was 1.3 times trailing-12 months EBITDA as of December 31, 2020, when the bank definition calculation is adjusted for cash on hand. This compares to 1.6 times trailing 12 months of EBITDA as of December 31, 2019, when calculating in the same manner. Cash flow from operations for 2020 was $137 million. We used $16 million of our cash to invest in capital expenditures resulting in free cash flow of $121 million. We also used $27.1 million of our cash to repurchase approximately 425,000 shares in 2020 to partially offset the dilution created by our share-based compensation programs. Finally, let me turn to our expectations and guidance for 2021. For the full year 2021, we anticipate revenues before reimbursable expenses in a range of $830 million to $890 million. Adjusted EBITDA at range of 10.75% to 11.75% of revenues and adjusted non-GAAP EPS in the range of $2.25 to $2.75. We expect cash flows from operations to be in the range of $70 million to $90 million. Capital expenditures are expected to be approximately $15 million to $20 million. And free cash flows are expected to be in a range of $55 million to $75 million, net of cash taxes and interest excluding non-cash stock compensation. Weighted average diluted share count for 2021 is expected to be 22.5 million. Finally, with respect to taxes, you should assume an effective tax rate in the range of 28% to 30%, which comprises the Federal Tax rate of 21%. A blended state tax rate of 5% to 6%, an incremental tax expense related to certain non-deductible expense items. Let me add some color to our guidance starting with revenue. Given the ongoing uncertainty created by the COVID-19 pandemic, we are issuing a wider revenue range than we typically would at the outset of the year. The midpoint of the guidance range reflects just under 2% revenue growth over 2020 revenue of $844 million. The midpoint of guidance assumes that we will report a year-over-year decline in revenue in the low double-digit range in the first quarter as the first quarter of 2020 was relatively un-impacted by the pandemic. Our guidance assumes that we'll see sequential growth in the second and third quarters and that the back half of 2021 will reflect strong year-over-year growth when compared to 2020. With regard to the Healthcare segment, we expect low single-digit revenue growth for the full year 2021. We expect operating margins to be in a range of approximately 26% to 30%, reflecting lower utilization in the first quarter that improves sequentially as the year progresses. In the Business Advisory segment, we expect to see mid single-digit revenue growth for 2021. And we expect our operating margin in this segment to be in the range of approximately 19% to 21%. In the Education segment, we expect revenues to decline in the mid single-digit range in 2021 reflecting a very tough first half comparison to 2020 prior to the impact of the pandemic on this segment. We expect operating margins to be in a range of approximately 23% to 25%, reflecting lower utilization in the first quarter that improves sequentially as the year progresses. We expected unallocated corporate SG&A to be relatively flat on a full-year basis in 2021 compared to 2020, while excluding the fourth-quarter restructuring charges incurred during 2020 and the corporate expense impact of our deferred comp plan. Turning to the total company, Huron’s adjusted EBITDA margin is expected to be in a range of 10.75% to 11.75% of revenues, an increase of 95 basis points at the midpoint of guidance compared to 2020. We anticipate that the first quarter of 2021 will be our lowest revenue-producing quarter of the year. Also in the first quarter to reset a fringe rates at the beginning of the year, including FICA and our 401(k) match will have an impact on our first quarter expenses as this reset is fairly significant given our people-driven business. Lastly in the quarter, we expect an increase in stock compensation expense for restricted stock awards that will be granted in March to retirement-eligible employees. Based on these factors, we anticipate approximately 15% of our full year adjusted EBITDA and full year adjusted EPS to be generated during the first quarter. As a closer reminder with respect to 2020 adjusted EBITDA, adjusted net income, adjusted EPS, there are several items that you will need to consider when reconciling these non-GAAP measures to comparable GAAP measures. The reconciliation schedules that we included in our press release will help walk you through these reconciliations.
Operator, Operator
Thank you. One moment for our first question, please. Our first question comes from Tobey Sommer with Truist Securities. Please proceed, sir.
Tobey Sommer, Analyst
Thank you. As you envision the year unfolding with things more subdued in the first half and then improving in the second, as you start to add headcount and grow again from that perspective, do you think you'll be able to continue to generate leverage or will it take a little bit of time to absorb that acceleration process and still expand margins?
John Kelly, CFO
Hey, Tobey. It's John. I can start and then Jim and Mark can jump in if any color. I think that given particularly in healthcare and education where the utilization levels at the segments, segment level right now are lower, they are in the mid-60s of the fourth quarter. I think that as we do start to see growth and acceleration, I think that we'll be able to first ramp up utilization. We're hiring across the business right now. And that includes in healthcare and education. I'd say the hiring that we're doing and build those segments right now tends to be more strategic and more investments in areas where we think we're going to see a lot of growth in the near-term as opposed to really kind of adding capacity. But I think that as the year progresses step one will be to utilize some of the capacity that's there right now due to the lower utilization. And then once we get into the back half of the year, I do expect us to transition to hiring more aggressively, including adding capacity at that point based on what our expectations for revenue are going to be in the back half of the year.
Jim Roth, CEO
And Tobey, this is Jim. I would only add that I think we have a good pipeline right now. For us it's just a question of converting the pipeline. And so I think, as John indicated, I think our sense would be that as the pipeline begins to open up and we've already seen signs of that happening across the board including healthcare and education, I think the first focus as John indicated would be that we would use the existing capacity. But we also feel pretty confident about our ability to hire in on a pretty timely basis if that pipeline picks up quickly.
Tobey Sommer, Analyst
Okay. And another kind of numerical thing, but also strategic, the balance sheet and leverage that you outline here does show leverage going down? Could you update us on your thoughts of the ranges of leverage that you would like to manage the business to intermittently sort of between acquisitions of size? Thanks.
John Kelly, CFO
Hey Tobey, John again. I would say that from a leverage perspective, our target leverage at this point is probably somewhere in the mid-one range, I'd say. I think our viewpoint is that that gives us flexibility to the extent that there's opportunities either as it relates to buybacks or as it might relate to strategic tuck-in acquisitions to be able to execute on those things, as well as to maintain a balanced approach in general we're able to take advantage of those opportunities, but still give us plenty of room from a debt covenant perspective. So I think that kind of the resting rate, if you will is probably around the mid ones. And we're comfortable flexing all the way up to the mid-twos. I'd say anything above that just given the current economic environment we tend to want to have a little more cushion in our balance sheet than to go much above the mid-twos. But that's generally how we think about it.
Tobey Sommer, Analyst
Thank you. And then I have one question on the pipeline, I’ll get back in the queue. You did describe an active pipeline. Is there any sort of comment you can give us on the size of projects and the nature of projects that might differ to the extent there's a focus in the pipeline that is something that's maybe different or new than you have been working on the last year or so? Thank you.
Jim Roth, CEO
Tobey, this is Jim. The composition of the pipeline in terms of size seems to be consistent with what we've observed previously. From our perspective, we've indicated that there have been significant changes, especially in healthcare and education, but across all our markets as well. Our pipeline shows that many of our clients are encountering a very different situation as the pandemic starts to ease. It reflects the seriousness of the changes likely to occur. That's why we feel very confident about the demand for our services. The challenge now is getting the timing right. As John and I mentioned earlier, we faced disruptions last June and anticipated a quieter fall, but that has not been the case. Things seem to be settling down again, and our clients appear to be considering the same situation. I am optimistic about the pipeline and the range of opportunities before us. At this point, it's primarily a matter of timing and seeing those opportunities materialize.
Tobey Sommer, Analyst
Thank you.
Operator, Operator
Our next question comes from Andrew Nicholas with William Blair. Your line is now open.
Andrew Nicholas, Analyst
Hi, good afternoon. I wanted to follow up on Tobey's questions regarding margins. I'm curious about what the guidance assumes concerning the return of some of the temporary cost savings realized during the pandemic, particularly regarding discretionary expenses like travel, entertainment, and marketing meetings, and how that impacts long-term considerations for the cost structure.
John Kelly, CFO
I'll start on that one. Andrew, I’d say the guidance generally suggests that we are likely to continue in a predominantly remote work environment through the first half of the year. By the time we reach the second half of the year, we expect to see some of those business development expenses returning. Additionally, based on our revenue growth trajectory, we anticipate more aggressive hiring at that time as well. Therefore, if you compare year-over-year, it's clear that expense levels in the first half of 2021 will be lower than those in the first half of 2020. However, by the second half of the year, we expect some of those expenses to rise, though they will increase in line with the revenue growth we anticipate. In fact, we believe this will be a time of expanding margins, with revenue growth outpacing expense growth, while we begin to incur more expenses to support that growth in the latter half of the year.
Andrew Nicholas, Analyst
Great, thank you. That's helpful. And then, for my follow up, I just wanted to touch on healthcare hiring specifically, I think on last quarter's call you touched on or estimated about 60 employees or 60 staff members potentially leaving as a result of the restructuring, but it looks like headcount actually came in quite strong. So I'm just wondering if there's anywhere in particular that we should be thinking about in terms of where that hiring is focused on and what that says about demand for specific sub sectors within that business?
John Kelly, CFO
I think I can take the first and crack it, Andrew. I think that even as we talked about during the call, last quarter on the actions that we had to take in the fourth quarter and we were really around some of those areas of the business that we thought were to be a little bit of a longer lasting impact to the pandemic, but in the areas where based on the conditions we see in the market, for example, the performance improvement solutions within healthcare there we do expect a rebound during 2021. So we're much more cautious there as far as reducing any heads. I think, as far as the hiring goes, we do continue to make strategic hires. And that's really at all levels bringing in key leadership in certain areas and people that we think are really going to drive our growth to accelerate in the recovery that we're expecting as the year goes on. So let's see what I think what you see there is a little bit of a mix where you've got some reductions in areas and they are likely to be a little bit slower to return the growth offset partially by some headcount increases in areas that we expect to grow more aggressively during 2021.
Andrew Nicholas, Analyst
Got it. Thank you I’ll get back in the queue.
Operator, Operator
Our next question comes from Bill Sutherland with Benchmark. Your line is open.
Bill Sutherland, Analyst
Thank you. Good evening, everyone. I noticed that the hourly bill rate for healthcare has increased in the fourth quarter. Is that related to the nature of the projects or something else?
John Kelly, CFO
Yes, Bill. During the fourth quarter, we experienced strong performance on several key projects as we achieved some contingent fee milestones. As you know, the accounting rules for contingent fees are now generally based on a percent complete basis, similar to our fixed fee jobs. However, reaching certain milestones can yield benefits that impact our profit and loss. We saw some of that in the fourth quarter, along with our team operating with excellent efficiency, which led to additional efficiency gains. All of this contributed to the bill rate for the fourth quarter. Looking ahead, I wouldn’t take the fourth quarter healthcare bill rate as a projection for next year. Instead, it’s reasonable to consider the full year bill rate we achieved in healthcare this year, which was significantly higher than in 2019, as a more accurate indicator for the future.
Bill Sutherland, Analyst
Okay. Just to revisit the M&A topic for a moment, we have made a couple of successful acquisitions in Business Advisory. As you consider new opportunities in the pipeline, does that reflect what you're seeing? Are there any opportunities that could be more significant or strategic? Thank you.
Jim Roth, CEO
Bill this is Jim. I think what you saw is going to be pretty much reflective of the things that we're looking at right now. When there's an opportunity for us to really take on a really important strategic addition to our competencies, we'll look at it, we were fortunate to get two really good companies to become a part of us. But I think that will probably be reasonably reflective of any M&A that would take place in the future. Obviously, we look at all kinds of opportunities. But I think my sense is that this time, it would be mostly in line with what you've seen so far.
John Kelly, CFO
And you would expect...
Jim Roth, CEO
I'm sorry, go ahead John.
John Kelly, CFO
Yes. I wanted to add to Jim's comments. When we consider mergers and acquisitions, it's almost never about increasing our existing capacity; it's typically about adding new capabilities. The technology sector is one area where we notice that the capabilities available in the market are continuously evolving. Therefore, smaller acquisitions are often a faster way to integrate these capabilities into our portfolio. We always assess these opportunities in relation to our strategy and focus on what will truly enhance our organic growth in the long term.
Jim Roth, CEO
And then we make decisions about which capabilities to develop internally versus where we might have opportunities to acquire and accelerate advancements. The most recent acquisitions are clear examples of our conclusion that these areas are critical as the technology continues to evolve and will be essential for our clients. The quickest path for us to enter that space was through acquisition rather than building from scratch. We are optimistic about this approach in the coming years, as it will drive organic growth by introducing new capabilities. And that we also have a chance to kind of gauge their culture as well. So it's been a very good strategy for us to follow. And I feel I think we'll probably see more of that in the future as well.
Mark Hussey, COO
And maybe Bill, this is Mark. I just want to add one more comment. One of the reasons we can focus on smaller acquisitions is that, unbeknownst to many, we've built four enterprise platform practices within our technology capability over the last three years: ERP, CRM, EPM, and Data Analytics. With this scale and now having 20 partners, we can be much more targeted and selective. That's why you probably won't see us make a larger strategic acquisition in that area unless there is a very clear and compelling reason to do so.
Bill Sutherland, Analyst
Great. Make sense. Thanks, guys.
Operator, Operator
Our next question comes from Kevin Steinke with Barrington Research. Your line is now open.
Kevin Steinke, Analyst
Hi, I wanted to ask about the Education segment. You mentioned some positive demand momentum in several areas, but it seems that the larger technology projects are still being postponed. What do you think will encourage higher education institutions to move forward with those larger technology projects? Also, does whether or not they proceed with those projects influence where they might fall in the guidance range for the year?
Jim Roth, CEO
Kevin, this is Jim. I'll start-off by saying that I think what it's going to take, I think for them to get more confident about their ability to take on increasing projects particularly bigger projects is probably just stability. I think back in the late spring and early summer there was virtually zero stability on their campuses. In the fall, there was some but not a lot of stability. I think there's a little bit more right now. And so unless there's some other major blip, I think you're beginning to see kind of an increasingly stable environment. And that's what they're looking for. And I think once they get confidence if that's going to be the case. I know they're hoping, I know we're hoping that that comes relatively soon, then I think you're going to start seeing things open up pretty quickly. The pandemic has really emphasized the need for our services, especially in technology and strategic areas within education. Many larger research universities were significantly lagging in integrating advanced technology into their operations, a challenge that became evident during the pandemic. Once they experience some stability regarding the pandemic and gain confidence that students can return safely to campus, I anticipate that things will begin to open up.
John Kelly, CFO
I would like to clarify that we are observing some of these larger technology projects reaching the market. It's not the case that all universities have halted these initiatives; we have seen several projects moving forward and we anticipate closing more of them in the first half of this year. The projects are present, but we are focusing on returning to the growth trajectory we experienced in 2018 and 2019. While some projects are advancing, there are others that have faced delays, and we are waiting to return to the level we saw in 2019. Ironically, as much as in the short-term, this is the area of the business where on the education side, where there's some reduced visibility compared to what we had in 2018 and 2019. The flip side, this is an area of the business where the needs of our clients are pretty well defined and the market is pretty well defined. It's a big market. And we think in the long run, it's going to be perhaps the greatest market opportunity for this business, once that stability that Jim referred to comes back into the system. But it is a bit of timing right now and just kind of reduced visibility from what we're used to when it given the impact of the pandemic.
Kevin Steinke, Analyst
Great. Yes, that's helpful. Okay, thanks. I want to also ask about within Business Advisory, your strategy offerings, you mentioned that all full year, businesses within that segment are positioned for growth in 2021. So what is the pipeline look like and the strategy piece of the business, is that a case to where clients are still kind of holding off until they get some more comfort or is that pipeline moving forward at all?
Jim Roth, CEO
Yes, I believe the pipeline for the strategy business is progressing very well. The most significant impact on that business probably occurred at the very start of the pandemic, particularly in the first half of the year and extending into the summer, as companies were trying to understand the situation. We have observed a notable increase in the pipeline for that business, and I am quite confident that they will perform significantly better in 2021 compared to 2020.
John Kelly, CFO
Earlier this year, Kevin mentioned that some companies had to focus more on short-term strategies immediately after the pandemic, which impacted their priorities. However, we anticipated that demand would increase as clients needed to rethink their strategies moving forward in the new environment. I echo Jim's sentiments and believe we are now seeing that optimism reflected in the pipeline. We expect growth from this part of the business in 2021.
Kevin Steinke, Analyst
Okay, good. I want to ask about you mentioned that you internally had a new cloud based ERP system go-live January 1, should we think about that providing a longer term opportunity to generate cost savings or what other sort of benefits might be able to derive from that?
Jim Roth, CEO
In the long run, we view this as an opportunity to support improved margins for the business as we expand. The real advantage from our standpoint is the enhanced visibility the new system will offer for our projects, particularly in terms of alerting us to any overruns or delays, providing us with better real-time information. Additionally, we are enthusiastic about the tool's capacity to help us identify the best talent across various projects and different segments. This will enable us to allocate the right resources to the right projects at the right time. So from our perspective those are two things when you think about running a professional services business that should enable a lot more efficiency as we move forward. And there's automation that's part of the tool to that when we think about growing the business, as we plan to do over the course of time. We expect to be able to use that efficiency that comes with the tool to be able to grow more efficiently without having to lay around a bunch of new or incremental SG&A costs. As we grow, so I think those are probably the facets of it, where we see the opportunity to expand margins over time.
Kevin Steinke, Analyst
Okay, good. Just two last quick ones here. So how are you thinking about capital allocation in 2021? You still want to continue to pay down debt? Are you kind of more at your comfort leverage ratio now? So that they will open up the opportunity for share repurchases? It sounds like you still want to pursue the tuck-in M&A. But how you thinking about capital allocation this year?
John Kelly, CFO
I believe that we will maintain a balanced approach moving forward. As you mentioned, there are tuck-in M&A opportunities that we believe could enhance our capabilities and drive organic growth in the future. We are actively pursuing those. Regarding share buybacks, we currently have a $50 million authorization from our board, of which $45 million remains. Depending on the opportunities available, we may also use that cash for share repurchases. Additionally, we are managing dilution from our share-based compensation programs, and we are committed to using share buybacks to offset that dilution. From a debt management perspective, it is essential for us to maintain flexibility and ensure our balance sheet stays healthy. Therefore, our default position when not engaging in M&A or share buybacks will be to reduce our net debt balance.
Kevin Steinke, Analyst
Okay, great. And then just the last one, have you included any performance fee number in the 2021 guidance?
John Kelly, CFO
I think, Kevin, if you look at the past two years, it's been pretty consistent around $70 million. And while we don't have perfect visibility as to exactly how the mix is going to evolve over the course of the year. I think that that run rate when we think about 2021, based on what we can see right now is probably a reasonable way to look at it.
Kevin Steinke, Analyst
Okay, thanks a lot. Appreciate it.
Operator, Operator
Our next question comes from Josh Vogel with Sidoti and Company. Your line is now open.
Josh Vogel, Analyst
Thank you. Good afternoon, guys. I'm thinking about the current bench and just kind of going back to one of the earlier questions, but thinking about the current bench and potential hiring as the year progresses. What is your target utilization rate? And do you think you can get there by late ‘21 within the existing base, if you're optimistic scenario plays out?
Jim Roth, CEO
I believe we can achieve our goals. Our internal plans suggest that we should reach our target utilization rates by the end of the year. The target utilization varies across segments due to different leverage models, project sizes, and other unique factors. For the healthcare business, our target is in the upper 70s, while in the education segment, it is typically in the mid to upper 70s. In the Business Advisory segment, the target tends to be in the low to mid 70s. This reflects our strategy with distressed businesses, which generally have less leverage and result in lower utilization rates. However, I anticipate a steady increase throughout the year. In the first quarter, I expect utilization to be in the mid to high 60s for healthcare and education, progressing to the low to mid 70s by the second quarter. By the second half of the year, we should reach utilization rates more aligned with our targets.
Josh Vogel, Analyst
Thank you for the insights there. A comment around the incremental $30 million in revenue that came from those offerings that were in direct response to COVID. What exactly did that work entail and has any of that carried into 2021 and baked into your guidance?
John Kelly, CFO
So there are elements of that work. I mean, it really falls into a few different categories. And Mark or Jim feel free to jump in if I leave any components of it out. But we did a lot of work as it relates to testing treatment and tracing from a COVID perspective helping healthcare and higher institutions as well as laboratories manage their flow of testing volume, manage their capacity make sure that we're finding the right routes to be able to manage that flow so that the process could work as efficiently as possible. There are definitely technology projects included in there and where we helped our clients on the fly, update their technology to better support remote activities, whether it was telemedicine support or supporting remote education. Another area that came up was hospitals wanting to build up virtual capacity for hospital patients given initially the surge of COVID cases, but then eventually also just wanting to have an option for patients that was outside the four walls of a hospital so people that weren't comfortable going in for elective procedures. And so we help clients with some of those activities as well. So I'd say that that was probably the bulk of the $30 million during the year. And indeed some of those projects are expected to continue on into 2021. Another one would be stimulus funding management. We kind of built out a gateway at the beginning of the pandemic when the stimulus packages came out there that really laid out on our core industry areas where there are opportunities for that stimulus funding. And we had a number of just kind of strategic projects going through those stimulus opportunities and figuring out the best way to manage from a client perspective.
Jim Roth, CEO
Yes, Jim, I think John, that was a good summary. At one point I would reiterate those that kind of the creating additional capacity for the hospitals by having hospital-at-home type of environments. We had started doing some of that work before the pandemic hit and the intent at that point in time was really for hospitals that were interested in trying to take out lower acuity patients and getting them out of hospital if it was feasible and so that started kind of pre-pandemic. And then when the pandemic hit, I mean the timing was made it even that much more critical to get those patients out whenever you could. So I think that combination is still going to see we're going to still see a lot of that continue well into the future, I think what the last year has proven was that there are a lot of opportunities for patients to be treated more efficiently and in some cases more effectively outside the hospital. And so in an odd way, the last year really gave us an opportunity. And the partners that we work with gave us an opportunity to really kind of take advantage of that. I think you're going to continue to see that increased demand as time goes on.
Josh Vogel, Analyst
All right, great. Just one more for me, maybe a little bit higher level, but you talked about in the past how healthcare clients, they were impacted by the drop in elective and non-urgent surgeries. And I was just curious what are you seeing around activity levels there with regard to those procedures? And what your healthcare clients are saying and is it carrying into an improving thus far this year especially as the vaccine is getting rolled out?
Jim Roth, CEO
Well, Josh, it's actually there's a couple of things that have occurred? First of all, to answer your question directly, I mean, I think obviously it varies, but I think in most cases, I think most hospitals have not yet got back to 100%. I think some of them are hovering between 85% and 95%. In part, because you've had this kind of couple blips with a lot of COVID patients coming in. And then you still have a fair number of people that are just reluctant to get treatment right now, which is a problem, it's going to cause a problem later on. So I think a lot of them have seen that the elective surgeries come back relatively strongly, but not too often to the level that they were at pre-pandemic. So that creates some revenue pressure on that end as well. But at the same time, I think they're beginning to find that there's new avenues for treating some of those patients as both good and bad. Hospitals are learning that but others are us obviously other entrants into the market are also learning that there's some opportunities here to take some of those clients to those patients rather and treat them in a different fashion. So I think the net result of what the pandemic does if the pandemic were to miraculously disappear tomorrow. I think the big question for a lot of our healthcare clients is what does the future look like? And that's where we're doing a lot of our work right now is helping them trying to figure out what did change? What's going to change? And how do we respond to that in a way that enables us to be efficient and make the kind of margins we're looking for? And that is where I think you're going to see a lot of opportunity for us both on the strategy side, the operational side and also the technology side.
Josh Vogel, Analyst
Thanks, I appreciate the insights.
Jim Roth, CEO
Thank you. Mr. Roth, we have concluded a lot of time for this call. I'd like to turn the conference back over to you. Thank you all for spending time with us this afternoon. We look forward to speaking with you again in May when we announce our first quarter results. Have a nice evening.
Operator, Operator
That concludes today's conference call. Thank you everyone for your participation.