Earnings Call Transcript
Huron Consulting Group Inc. (HURN)
Earnings Call Transcript - HURN Q3 2023
Operator, Operator
Good afternoon, and welcome to Huron Consulting Group's webcast to discuss financial results for the third quarter of 2023. As a reminder, this conference call is being recorded. Before we begin, I would like to direct your attention 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 available on Huron's website. Please review that information along with the filings with the SEC for details on factors that may affect topics discussed in this afternoon's webcast. The company will be addressing one or more non-GAAP financial measures. Please refer to the earnings release and Huron's website for all disclosures required by the SEC, including reconciliations to the most comparable GAAP figures. Now, I would like to turn the call over to Mark Hussey, Chief Executive Officer and President of Huron Consulting Group. Mr. Hussey, please proceed.
Mark Hussey, CEO
Good afternoon, and welcome to Huron Consulting Group's third quarter 2023 earnings call. With me today are John Kelly, our Chief Financial Officer; and Ronnie Dail, our Chief Operating Officer. Huron's strong performance continued in the third quarter, with revenues growing 26% over the prior year quarter and a 9th consecutive quarter of year-over-year margin expansion. Compared to the same period two years ago, the third quarter of 2021, our revenues have grown 60%, reflecting sustained strength across our industry segments and capabilities. In the first nine months of 2023, revenues grew organically across all three operating segments, led by 32% growth in the Healthcare segment, our largest business. Our financial results and increased guidance reflect ongoing solid demand for a broad portfolio of offerings, our deep industry and capability expertise, our highly talented team, and our strong collaborative culture. Our third quarter results continue our solid momentum toward our investor goals of achieving double-digit revenue growth, expanding our adjusted EBITDA margins to mid-teen levels, and accelerating adjusted EPS growth. I'll now share some additional insights into our third quarter performance. In the Healthcare segment, third quarter revenues grew 36% over the prior year quarter, achieving record quarterly revenues. Market demand was strongest for our performance improvement and financial advisory offerings, reflective of ongoing challenges among our provider clients. Our strategy and innovation and our digital offerings also continued to perform very well. While the operating environment for healthcare providers has improved slightly in 2023, the healthcare industry continues to be challenged by reimbursement rates that are not keeping pace with inflation-driven labor and supply costs. Competitive market dynamics and a less favorable payer mix are challenging the financial and operating models of many providers. The financial headwinds created by these market conditions are significant and continue to challenge the efforts of hospitals and health systems to sustainably close the gaps without degrading the quality of care. Our comprehensive set of strategy, operations, and financial-focused offerings makes Huron a unique and trusted partner throughout the healthcare industry. We help our clients solve issues such as driving higher yield in the revenue cycle, expanding access to care, transforming their cost structures and clinical operations, and deploying digital solutions to improve care and the patient experience. We are also uniquely positioned to address their highly complex challenges, including situations that require integrating our strategy, performance improvement, digital, and financial advisory offerings. We're proud of our broad and deep capabilities to help our clients redefine their strategies and transform their businesses for long-term growth and financial stability. We believe the persistent market headwinds facing our clients, coupled with our distinct and broad offerings, positions our Healthcare segment very well for continued growth. Education segment revenues grew 18% in the third quarter of 2023 over the prior year quarter, driven by strong demand for our digital offerings, which grew 23%, as well as our strategy and operations and research offerings within our consulting and managed services capability. The education industry also faces significant financial challenges as costs are increasing faster than revenue for many institutions. The demographic cliff reflecting a declining population of college-age students has been well anticipated and studied for many years. Since the pandemic, the enrollment challenges have worsened. An increasing number of college-age students are electing not to pursue a college degree due in part to a lack of affordability. Enrollment challenges are increasing the competition for students, while rising costs and the need to streamline administrative operations and rationalize academic portfolios are pressuring the higher education business model. We believe these market trends will create tailwinds for all the offerings in our Education segment for the foreseeable future. Our ability to help an institution deliver on its academic and research missions is unmatched in the industry, and we'll continue to deepen our industry expertise, broaden our portfolio of offerings and strengthen our competitive advantage to remain the leading partner in the higher education industry. In the third quarter of 2023, Commercial segment revenues grew 14% over the prior year quarter, driven by strong demand for our distressed financial advisory offerings, partially offset by declines in our strategy and innovation and digital offerings in the commercial industries. Higher interest rates, challenging capital markets, and economic headwinds have created a solid demand environment for our distressed financial advisory offerings. Our strategy and innovation and digital offerings have seen solid growth within healthcare and education, but we have seen some delayed project starts for our commercial clients as we continue to manage through the uncertainties in the broader economic environment. We continue to believe the commercial industries create new avenues of growth for Huron and as part of our strategy, we'll continue to invest in growing our industry expertise across certain industries while continuing to mature and align our advisory and digital capabilities across the segment. Now let me turn to our outlook for the year. The press release indicates we're increasing and narrowing our annual revenue guidance to $1.35 billion to $1.37 billion, an increase of $40 million at the midpoint. We continue to expect our adjusted EBITDA margin to be in the range of 12% to 12.5% of revenues, and we're raising and narrowing our full-year adjusted diluted earnings per share to a range of $4.70 to $4.90, an increase of $0.30 per share at the midpoint. Our performance through the first nine months of 2023 reflects the market tailwinds for our offerings and the benefits of our operating model changes and our ability to deliver greater value to our clients. When we outlined the realignment of our businesses under a new operating model in our Q4 2021 earnings call, we believed these changes would accelerate our growth by strengthening our go-to-market strategy and competitive advantage, driving greater efficiencies across our business, and enhancing transparency for investors into the core drivers of our business. We're pleased with the progress we've made in the execution of our operating model and its demonstrated benefits. Since making the initial changes at the beginning of 2022, we've achieved quarterly revenue growth ranging from high-teens to mid-20% growth, which exceeds our expectations for our stated medium-term revenue target. We've benefited from strong demand for our offerings in the market, and the changes we made to our operating model have created a more enduring and sustainable business. Our ability to deliver revenue growth and margin expansion, including the solid increase in utilization in the first nine months of 2023 over the same prior year period, is only possible because of our outstanding team, which is now better aligned to serve the comprehensive needs of our clients in their markets. I'm pleased with our progress to deliver strong growth, drive greater efficiencies across our business, and advance our competitive advantage. And while we're pleased with our 2023 performance to date, we remain focused on advancing our growth strategy and delivering upon our long-term financial goals in 2024 and beyond. And with that, let me now turn it over to John for a more detailed discussion of our financial results.
John Kelly, CFO
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, 10-Q, 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. Now I will share some of the key financial results for the quarter. Revenues for the third quarter of 2023 were $358.2 million, up 25.5% from $285.4 million in the same quarter of 2022, highlighted by 36.4% growth in the Healthcare segment, along with continued strong growth in the Education and Commercial segments. From a capability perspective, consulting and managed services revenues grew 37.7% and digital revenues grew 10.8% when compared to the same quarter in 2022. Net income for the third quarter of 2023 was $21.5 million or $1.10 per diluted share compared to net income of $17.7 million or $0.86 per diluted share in the third quarter of 2022. Our effective income tax rate in the third quarter of 2023 was 31.2% compared to 30.2% in the same prior year period. Our effective tax rate for Q3 of 2023 was less favorable than the statutory rate, inclusive of state income taxes, primarily due to tax expense related to nondeductible losses on our investments used to fund our deferred compensation liability and certain nondeductible expense items. Adjusted EBITDA was $48 million in Q3 2023 or 13.4% of revenues compared to $36.5 million in Q3 2022 or 12.8% of revenues. The increase in adjusted EBITDA in the quarter was primarily attributable to the increase in segment operating income, excluding the impact of segment restructuring charges, partially offset by an increase in corporate expenses. As Mark noted, with our performance in the third quarter of 2023, we've achieved nine consecutive quarters of year-over-year margin expansion, reflecting progress toward our stated financial goal of achieving mid-teen adjusted EBITDA margins by 2025. Adjusted net income was $27.2 million or $1.39 per diluted share compared to $20.7 million or $1.01 per diluted share in the third quarter of 2022. Adjusted diluted earnings per share grew 37.6% over Q3 2022. Now I'll make a few comments about the performance of each of our operating segments. The Healthcare segment generated 50% of total company revenues during the third quarter of 2023. This segment posted record quarterly revenues of $179.2 million, up $47.9 million or 36.4% from the third quarter of 2022. The increase in revenues in the quarter reflects strong demand for our performance improvement, strategy and innovation, and financial advisory offerings within our consulting and managed services capability, as well as continued strong demand for our digital offerings. Our Healthcare segment is on track to achieve record full-year revenue growth in 2023, driven by the strong demand for our broad portfolio of offerings across the industry, in particular, the consulting and managed services capability, which has grown nearly 40% through the first nine months of 2023 compared to the same prior year period. Operating income margin for Healthcare was 26.2% for Q3 2023 compared to 25.2% for the same quarter in 2022. The quarter-over-quarter increase in margin was primarily due to a decrease in practice administration and meeting expense and revenue growth outpacing an increase in salaries and related expenses for our revenue-generating professionals, partially offset by increases in performance bonus expense for our revenue-generating professionals and contractor expenses, both as percentages of revenues. The Education segment generated 31% of total company revenues during the third quarter of 2023. The Education segment posted revenues of $111 million, up $16.7 million or 17.7% from the third quarter of 2022. The increase in revenues in the quarter was driven by broad-based demand across the segment, including for our digital offerings as well as our strategy and operations and research offerings within our consulting and managed services capability. Operating income margin for Education was 23.9% for Q3 2023 compared to 24.2% for the same quarter in 2022. The quarter-over-quarter decrease in margin was primarily due to increases in compensation costs for our revenue-generating professionals and technology expenses as percentages of revenue, partially offset by a decrease in contractor expenses. The Commercial segment generated 19% of total company revenues during the third quarter of 2023 and posted revenues of $68 million, up $8.3 million or 13.8% from the third quarter of 2022. The quarter-over-quarter increase in revenue was primarily attributable to strong demand for our distressed-focused financial advisory offerings, partially offset by declines in our strategy and innovation and digital offerings. With regard to our strategy and digital offerings, we experienced some project delays and a longer sales cycle for some of our commercial clients during the quarter, reflecting the uncertainty in the broader macro environment. Operating income margin for the Commercial segment was 22.7% for Q3 2023 compared to 23.7% for the same quarter in 2022. The quarter-over-quarter decrease was primarily driven by increases in compensation costs for our revenue-generating professionals and support personnel as percentages of revenues, partially offset by a decrease in contractor expenses. Corporate expenses not allocated at the segment level and excluding restructuring charges were $43.1 million in Q3 2023 compared to $34.9 million in Q3 2022. The $8.2 million increase in unallocated corporate expenses was primarily driven by increases in salaries and related expenses, performance bonus expense, and performance-based stock compensation expense for our support personnel. Corporate restructuring charges were $4.1 million for the third quarter of 2023 compared to $800,000 for the same quarter last year. The corporate restructuring charge in Q3 2023 primarily consisted of a non-cash charge related to office space that we exited during the quarter. Now turning to the balance sheet and cash flows. We finished the quarter with total debt of $358 million, consisting entirely of our senior bank debt and cash of $9.4 million from net debt of $348.6 million. Our leverage ratio, as defined in our senior bank agreement, was 1.8x adjusted EBITDA as of September 30, 2023, compared to 2.1x adjusted EBITDA at the end of Q3 2022. Cash flow generated from operations in the third quarter of 2023 was $68.8 million. We used $8 million of our cash to invest in capital expenditures, inclusive of internally developed software costs and purchases of property and equipment, resulting in free cash flow of $60.7 million. DSO came in at 83 days for the second quarter of 2023 compared to 77 days for the second quarter of 2023 and 85 days for the third quarter of 2022. The increase in DSO over the second quarter of 2023 is primarily driven by certain large healthcare and education industry projects with extending billing and payment terms. During the third quarter, we repurchased approximately 290,000 shares for $28.8 million under our share repurchase program. In October, our Board of Directors increased the authorized amount under the share repurchase program by an additional $100 million for a total authorization since 2020 of $400 million, which expires in December 2024. Since November 2020 and through September 30, 2023, we purchased 4.5 million shares at a total purchase price of $279.6 million at an average share price of $61.70. The shares repurchased since 2020 represent an approximate 20% reduction in our shares outstanding. Consistent with the capital allocation strategy communicated at our 2022 Investor Day, we remain committed to balancing growth, flexibility, and the return of capital to shareholders through strategic tuck-in acquisitions, debt paydown, and continued share repurchases. Finally, let me turn to our expectations and guidance for 2023. As Mark noted, we are raising our full-year 2023 revenue guidance to be in the range of $1.35 billion to $1.37 billion. In addition, we are maintaining our adjusted EBITDA guidance range of 12% to 12.5% of revenues and raising and narrowing our full-year adjusted non-GAAP diluted earnings per share guidance to be in a range of $4.70 to $4.90. Finally, we continue to expect our full-year effective tax rate to be in a range of 28% to 30%. Thanks, everyone.
Jack Wilson, Analyst
This is Jack Wilson on for Tobey. So my first question, can you talk a little bit about sort of demand by capability across segments?
John Kelly, CFO
Overall, the pipeline remains strong. Even with the 2023 guidance we provided, we are seeing similar pipeline and backlog coverage ratios as in recent quarters, which gives us confidence in our guidance range. In healthcare, demand for our services has continued to be robust and broad-based. Specifically, there has been strong performance improvement in financial advisory demand as many of our healthcare provider clients are facing significant financial pressures. Demand for our healthcare digital offerings has also been strong as clients seek to achieve returns on technology investments and drive efficiencies in a high labor cost environment, improve care outcomes, and enhance access and consumer experience. We are seeing increased demand for our revenue cycle managed services and strategy offerings, with clients increasingly looking for help across multiple capabilities within a single project. The education industry is also experiencing broad-based demand, including our digital offerings, similar to healthcare, reflecting a financially strained environment in higher education characterized by pressures on student enrollment, tuition pricing, and escalating costs. Our distressed advisory business in the commercial segment is seeing a strong pipeline and sales conversion. Our commercial digital business has a solid pipeline, but we have experienced some project deferrals and longer sales cycles, which isn't surprising given the current macro conditions. Our strategy business has seen some softness in demand within the commercial industry, likely due to reasons similar to the commercial digital pipeline, although demand has been increasing in the healthcare sector, which we find encouraging for growth moving forward.
Jack Wilson, Analyst
So as a follow-up, how would you describe sort of the hiring environment across both consulting and digital? It seems like you made impressive gains in the headcount in both of those capabilities.
John Kelly, CFO
From a hiring perspective, I’ll begin with the attrition side. We continue to see very low attrition compared to historical levels. Currently, across the business, we are experiencing a full-year attrition rate that is likely in the low-double digits on an annualized basis. This is positive news for us considering the growth and demand we are experiencing and the pipeline we discussed. Given the pace of growth and the pipeline as we move into next year, we have been consistently hiring. I believe it has been a favorable environment for finding talent, and we have not encountered any significant challenges in sourcing the talent we need. Our hiring efforts have been well distributed across different segments of the business, with a particular focus on areas currently seeing the most demand.
Operator, Operator
Our next question comes from Andrew Nicholas of William Blair and Company.
Andrew Nicholas, Analyst
I appreciate all the commentary on the pipeline, but regarding the outlook for 2024, I know it's early and that you'll provide official guidance next year. However, over the past two years, you have achieved growth well above medium-term targets. I'm curious if you're still operating under the assumption that you can meet those targets next year. I want to ensure we remain grounded after experiencing 20% plus growth for 7 or 8 quarters.
John Kelly, CFO
I think the positive aspect from our viewpoint, as we discussed at our Investor Day at the start of last year, was our expectation for low double-digit growth annually. We are pleased to have surpassed that growth rate in both 2022 and 2023. Even with a larger revenue base, the growth we've achieved over the past two years that has exceeded our targets gives us confidence in our ability to maintain double-digit growth going forward. Our teams will be striving to achieve this and exploring ways to maximize growth. However, we are still in the planning process and will provide guidance at the end of February. Referring back to the targets from our Investor Day based on our updated figures for 2023 is a sensible approach.
Mark Hussey, CEO
Andrew, this is Mark. I'll add a couple of comments. One is, the end markets that we have in healthcare and education, we have very strong market positions, which in the Healthcare segment has been obviously great momentum this year. And coming into next year, we feel good about the early part of the year. But over time, the other thing we've been very active working on over the last several years has been adding capabilities that will be in demand in the positive cycle when hospitals and health systems are going to be investing more, whether it's in digital capabilities, getting back to more in their people and patient experience in the areas of financial advisory and then strategy as well. So we've balanced out some of the variability that we knew was kind of inherent in some of the cycles. I don't think we feel that we're through the cycle. As I said, we have seen signs of softening demand, but it's something we watch carefully but with an eye toward making sure that we have less cyclicality around that particular business. Education is one also that I think you've got just very strong tailwinds across the needs of the industry, and we're very well positioned in the base. And underlying both of those in tying into our commercial markets is really the ongoing transformation to the cloud and the ability to use technology to deliver whether it's on the growth side of the business or whether it's more efficient operations. It's a nice combination of that industry expertise and capability that's working well together. As we look in the commercial markets as well, we think we certainly have capital to continue to put to work where we think we can strengthen our businesses even outside of healthcare and education. So we feel like we've made great progress, as we said, ahead of where we expected to be in our medium-term financial targets. But by no means do we see ourselves shrinking away from changes in the environment; our model, we think, is robust enough and our business continues to evolve in ways that we feel attaining those targets is quite reasonable for us.
Andrew Nicholas, Analyst
And then I wanted to ask on restructuring or distressed financial advisory in commercial. I think it's a hard environment to maybe manage headcount in that space, a long overdue restructuring cycle at least in my opinion, I'm just kind of wondering how much you're leaning into headcount growth there because it's been a couple of quarters now of that being what I think is an outperformer. So if you could just kind of speak to momentum there and hiring plans? And then also from a profitability perspective, and I realize any single quarter can be lumpy. But over any kind of longer-term time frame, is restructuring going to be a positive kind of mix component of margin expansion there? Is that higher margins than the strategy and digital businesses there? Or how should we think about that evolving mix impacting margins?
Mark Hussey, CEO
Andrew, it's Mark. In terms of the hiring environment, you're absolutely right. The cycle right now is hot. You see that across all the competitors in the space. And so there is a strong demand for headcount that is qualified in those skill sets across the industry. Having said that, the size and scale of our business, and really, I would characterize the kind of culture that we have and the kind of people that are attracted to work in our environment is a differentiator for us. So we've been able to continue to add people at the levels that have enabled us to sustain what is a right now, very hot sales cycle. And so we feel good about what that trajectory looks like over time just because it's a smaller part of our business, but it's done really, really well. And I would just add in terms of your question to margins, I'll let John add commentary, but just in general, it is definitely a contributor to profitability. And for us, obviously, the kind of rates that you realize in this part of the cycle and the environment when things are really troubled and there's a need for very rapid actions puts us in a very strong position within the marketplace. And the range of capabilities we have in that business, which is not just consulting and advisory, but the investment banking capabilities that we have in special situations also positions us very well to be able to capitalize on the full range of opportunities in the market. But John, why don't you speak to mix and its contribution as well.
John Kelly, CFO
Yes. No, Mark, I agree with what you said. It's definitely one of our stronger margin businesses in the entire portfolio across segments. So when that business is performing well, that's a positive contributor from a margin perspective. So as Mark said, we'll continue to see robust demand there, and continue to kind of lean into that demand with headcount growth. So we're excited about the prospects for that part of the business.
Andrew Nicholas, Analyst
And maybe just one quick follow-up if I could squeeze in. I think last quarter, you called out a favorable adjustment of I think it was $16 million in healthcare. Was there anything kind of lumpy or one-time in results that is worth calling out or that I might have missed in the prepared remarks?
Mark Hussey, CEO
There wasn't anything significant to note this quarter. There was a mid-single digit million dollar performance-based fee adjustment in healthcare, but at our current scale, I would consider that to be more of a regular occurrence. Other than that, there was nothing worth mentioning.
Operator, Operator
Our next question comes from Kevin Steinke of Barrington Research Associates. Seeing no more questions in queue, I'd like to turn the call back to Mr. Hussey.
Mark Hussey, CEO
Thank you so much for spending time with us this afternoon. We look forward to speaking with you again in February when we announce our fourth quarter results and announce our 2024 earnings guidance. Have a good afternoon.
Operator, Operator
That concludes today's conference call. Thank you, everyone, for your participation.