Q1 2023 Huron Consulting Group Inc. Earnings Call
Speaker 1: You you, you.
Speaker 1: I.
Speaker 2: Good afternoon and welcome to here on Consulting Group's Webcast to discuss financial results for the first quarter of 2023.
Speaker 2: 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.
Speaker 2: with the followings with the SEC for disclosure of factors that may impact subjects discussed in this afternoon's webcast.
Speaker 2: The company will be discussing one or more non-GAAP financial measures.
Speaker 2: Please look at the earnings release and on Hirond's website for all of the disclosures required by the SEC, including reconciliation to the most comparable gap numbers. And now I would like to turn the call over to Mike Hussie, Chief Executive Officer and President of Hirond Consulting Group. Mr. Hussie, please go ahead.
Speaker 2: Good afternoon and welcome to Huron Consulting Group's first quarter 2023 earnings call. And with me today are John Kelly, our Chief Financial Officer and Ronnie Dale, our Chief Operating Officer.
Speaker 2: Just over a year ago at our investor day, we outlined our strategy to achieve double-digit revenue growth, expand our adjusted EBITDA margins to mid-teen levels, and accelerate adjusted EPS growth. Together with our balanced capital deployment strategy, which prioritizes moderate leverage,
Speaker 3: share repurchases and targeted M&A. These financial objectives are focused on driving greater returns for our shareholders.
Speaker 3: Our first quarter results reflect our steady progress toward achieving these medium-term financial goals.
Speaker 3: driven by strong growth across all three obrite segments and a digital capability. Revenue's grew 22% in the first quarter of 2023 over the prior year quarter. Our strong growth in the first quarter of 2023 was achieved on top of strong growth in the year ago quarter.
Speaker 3: with Q-122 growth of 28% over Q-1 of 2021. Consistent with our goal to expand profitability, adjusted even to our margins increased 80 basis points over the prior year quarter, and adjusted deluded earnings per share of the group 78% over Q-1 2022. Replease that our continued strategic and operational performance have delivered upon enhanced shareholder value. A first quarter results demonstrate the commitment to our growth strategy by-
Speaker 3: The first pillar of our strategy is to continue to focus on accelerating growth in our largest industries, healthcare and education in which we have leading competitive positions.
Speaker 3: In the healthcare segment, first quarter revenues grew 22% over the prior year quarter.
Speaker 3: was driven by strong demand for our performance improvement, revenue cycle-managed services, and financial advisory offerings. As well as continued strong demand for our digital offerings, which grew 24% over Q1 of 2022. The healthcare industry is facing significant financial pressures stemming from increased labor costs.
Speaker 3: shifting sides of care from inpatient settings to outpatient and virtual care.
Speaker 3: entry of non-traditional providers into many highly competitive markets.
Speaker 3: or a new pair of mix, and the ongoing need for digital solutions to drive growth in efficiencies and improve patient outcomes. We're focused on expanding our offerings to meet our clients growing needs as they face these pressures. A good example of this is a revenue cycle managed services offering. We introduced this offering in 2019 and have rapidly grown the business to serve multiple clients. It generated approximately 13% of total healthcare industry revenues in 2022 and in the first quarter of 2023. We also continue to strengthen and expand our performance improvement.
Speaker 3: The education industry is also facing significant pressures, including difficulty achieving enrollment goals, challenges from discounts to tuition. I'm going questions about the value of a college degree, particularly in a strong labor market, increasing labor costs, exceeding revenues, and for our clients with medical schools, decreases in support from the clinical enterprise. Similar to health care, we continue to strengthen and expand our offerings in the education industry to comprehensively address our client's needs as they respond to these issues.
Speaker 3: For example, in research, we've advanced our Huron Research Suite software products to complement our consulting offerings.
Speaker 3: Collectively across our consulting, digital, and managed services offerings, our research business represents over 35% of total education industry revenues. We are confident in our outlook for accelerated growth in both healthcare and education, anchored in our deep client relationships and our leading competitive positions in end markets facing ongoing financial pressure and disruption that has been exacerbated by the current macro environments.
Speaker 3: Our second strategic pillar is focused on growing our presence in the commercial industries. In the first quarter of 2023, commercial segment revenues grew 12 percent over the prior year quarter driven by a strong demand for our digital and financial advisory offerings, especially our restructuring and turnaround offerings.
Speaker 3: partially offset by declines in our strategy and innovation offering.
Speaker 3: The competencies within our digital strategy and financial advisory capabilities span many industries, although currently a primary focuses on financial services and energy and utilities industries.
Speaker 3: data and analytics, and enterprise platform and industry-ed solutions will continue to help us consistently achieve our growth goals. Now let me turn to our third strategic pillar, advancing our integrated digital platform. In the first quarter of 2023, digital capability revenues grew 29% over the first quarter of 2022, driven by growth across the education, healthcare, and commercial segments. Our digital capabilities grew to just under a half billion dollars in 2022, and we continue to innovate to bring new offerings to our clients.
Speaker 3: We were recently recognized by one of our technology partners for market leading innovations that we developed for the financial services industry and the office of the CFO . In addition, our expanded international presence, including in India, where we currently have 28% of our employees, reflects the full power of our global capabilities.
Speaker 3: In addition to its strategic advantages, including serving clients in the Asia-Pacific region, the strong global foundation will also enable us to continue to expand our margins while achieving competitive price points for U.S.-based engagements.
Speaker 3: Expanding digital capabilities will continue to be an important driver of growth across our business in future years as their clients focus on driving growth and productivity in their own highly competitive markets.
Speaker 3: First, we're executing on our primary revenue drivers and margin improvement levers to achieve consistent growth and enhanced profitability. Our confidence in our organic growth strategy is based upon the primary drivers of our historical success, resulting from our deep client relationships in the industries we serve. In 2022, 88% of Huron's revenue was derived from repeat clients. In addition, we grew annual recurring revenues 5% in 2022 over 2021, representing 13% of total company revenues in 2022. Our expanding array of offerings, including those with recurring revenue, increases our pump.
Speaker 3: we repurchased over 120 million dollars or 9% of the company's outstanding shares. And in the first quarter of 2023 we've repurchased another 44 million dollars or 633,000 shares.
Speaker 3: Finally, I'd like to highlight the most critical driver of our growth strategy, our people. We'll continue to invest in our talent and team building on our collaborative culture that is at the heart of what makes here on so effective in serving clients as a unified team. Our strategy reinforces our ability to both attract and retain top diverse talent as accelerated growth creates outstanding career advancement and professional development opportunities in a business in which our people can see their visible impact on our clients and our company.
Speaker 3: Now let me turn to our outlook for the year. Today we affirm our 2023 Revenue and Earnings Guidance.
Speaker 3: We're pleased with our first quarter performance and we expected demand environment we saw in the first quarter of 2023 to continue.
Speaker 3: In summary, I want to reiterate a commitment to our shareholders as we remain focused on advancing our growth strategy and continuing to deliver upon our financial goals. We're excited about our business and our outlook, and while we've made significant progress in advancing our strategy, we have more work to do, but the future is bright for Iran. I look forward to continuing to growing our business in 2023 and beyond. Now let me turn it over to John for a more detailed discussion of our financial results. John ? Thank you, Mark. Good afternoon, everyone. Before I begin, please note that I will be discussing non-gaft financial measures such as EBITDA, adjusted EBITDA, adjusted net income, adjusted EPS.
Speaker 3: free cash flow. Our press release, 10Q, and investor relations page on the Huron website have reconciliations of these non-GAAP measures to 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.
Speaker 3: quarter of 2022, achieving another record quarter for our business.
Speaker 3: Net income was $13.4 million for $68 per deluded share compared to net income of $26.9 million per $1.27 per deluded share in the first quarter of 2022. Net income in the first quarter of 2022 included a non-recurring $19.8 million unrealized gain net of tax related to the increase in fair value of our preferred stock investment in a hospital-owned company. Our effective tax rate in the first quarter of 2023 was 15.3% compared to 29.6% in the same period last year.
Speaker 3: and a tax benefit related to the non-taxable gains on our investments used upon our deferred compensation liability, partially offset by certain non-deductible expense items.
Speaker 3: Adjusted EBITDA was $29.5 million in Q1 2023, or 9.3% of revenues, compared to $22.1 million in Q1 2022, or 8.5% of revenues.
Speaker 3: 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, reflecting solid progress toward our objective of returning to mid-teen adjusted EBITDA margins by 2025.
Speaker 3: Adjusted net income was $17.1 million, or 87 cents per diluted share, compared to $10.3 million, or 49 cents per diluted share in the first quarter of 2022.
Speaker 3: adjusted deluded earnings per share grew 78% over Q1 2022. Now I'll make a few comments about the performance of each of our operating segments. The healthcare segment generated 47% of total company revenues during the first quarter of 2023.
Speaker 3: This segment posted revenues of $149 million off of $27.2 million or 22.3% from the first quarter of 2022. Revenues in the first quarter of 2023 included $300,000 of incremental revenues from our acquisition of customer evolution.
Speaker 3: which closed in December of 2022.
Speaker 3: The increase in revenue in the quarter reflects strong demand across our consulting and managed services and digital capabilities in the segment.
Speaker 3: are consulting and manage services capability in healthcare group 21% year over year during the first quarter.
Speaker 3: to invite a strong demand for our performance improvement, revenue cycle management services, and financial advisory offerings. Our digital capability and healthcare grew 24% year over year.
Speaker 4: Operating income margin for healthcare was 21.6% for Q1, 2023 compared to 23% for the same quarter in 2022. The quarter over quarter decrease in margin was primarily due to an increase in contractor expenses and performance bonus expense for our revenue generating personnel.
Speaker 4: The education segment posted record revenues of $104.1 million, up $23.5 million, or 29.1% from the first quarter of 2022.
Speaker 4: The increase in revenues in the quarter was driven by demand across our portfolio of offerings in the segment.
Speaker 4: Our digital capability and education improved 40%, demonstrating the strength and demand for our data, technology, and analytics offerings. Our consulting and mandatory services capability and education grew 20%, driven by continued demand for our strategy and operations and research offerings.
Speaker 4: recent contractor expenses as well as revenue growth that outpaste an increase in compensation costs for our revenue generating professionals.
Speaker 4: The commercial segment generated 20% of total company revenues during the first quarter of 2023 and posted revenues of $64.7 million, up $7.2 million, or 12.5% from the first quarter of 2022.
Speaker 4: The quarter-over-quarter increase in revenue was primarily attributable to strong demand for our digital and financial advisory offerings, partially offset by declines in our strategy offerings.
Speaker 4: Operating income margin for the commercial segment was 21.7% for Q1 2023, compared to 21.2% for the same quarter in 2022.
Speaker 4: The quarter over quarter increase was primarily due to decreases in compensation costs for our support personnel and restructuring charges, partially offset by an increase in promotion and marketing expenses as a percentage of revenues. Corporate expenses not allocated at the segment level were $46.3 million in Q1 2023.
Speaker 4: compared with $33.5 million in Q1 2022. Unallocated corporate expenses in the first quarter of 2023 includes $1.9 million of expense related to the increase in the liability of our deferred compensation plan, which is offset by the investment gain and the assets used upon that plan.
Speaker 4: plant in both periods, on allocated corporate expenses increased $8.6 million. Primarily due to increased compensation costs for our support personnel, as well as increases in practice, administration, and meeting expenses and restructuring charges.
Speaker 4: through structuring charges incurred in the first quarter of 2023 related to the reduction of office space. Now turning to the balance sheet and cash flows. We finished the quarter with total debt of $447 million, consisting entirely of our senior bank debt.
Speaker 4: with cash or $12 million for net debt of $435 million. This was a $157 million increase compared to Q4 2022 if the first quarter reflects the payment of our annual bonuses.
Speaker 4: The first quarter also included $44.3 million of share repurchases for approximately 633,000 shares.
Speaker 4: compared to 2.2 times adjusted EBITDA at the end of Q1 2022.
Speaker 4: develop software costs.
Speaker 4: resulting in free cashflow of negative $101 million. DSO came in at 83 days for the first quarter of 2023, compared to 77 days for the fourth quarter of 2022, and 75 days for the first quarter of 2022. The increase in DSO is primarily driven by certain large health care and education engagements.
Speaker 4: where our revenue recognized exceeded the amounts billed to clients in accordance with the contractual billing terms.
Speaker 4: We expect to bill and collect for these services in the second half of 2023. Finally, as Mark mentioned, we are affirming the guidance that we provided during our February earnings call. Revenues before reimbursable expenses in a range of $1.22 billion to $1.28 billion, and we expect to bill and collect for these services in the second half of 2023.
Speaker 4: adjusted EBITDA in a range of 12% to 12.5% of revenues, and adjusted EPS in a range of $3.75 to $4.25.
Speaker 2: Thank you everyone. I would now like to open the call to questions. Operator? Thank you. The ladies and gentlemen, if you have a question at this time, please press star 1-1 on your touchtone telephone.
Speaker 2: If your question has been answered or you wish to remove yourself from the queue, you may do so by pressing star 11 again. Again, that's star 11 to ask a question or to remove yourself. One moment for our first question, please.
Speaker 2: Our first question comes on the line of Toby Summer.
Speaker 2: Our first question comes from the line of Toby Summer of Truist Securities.
Speaker 4: Your line is open, Toby. Hey, good afternoon. This is Jack Wilson on for Toby Summer. Can I ask a quick one about sort of the headcount growth and sort of what your experience is with retention levels this quarter and how that's impacting sort of full year margin assumption?
Speaker 4: Sure, Jack, happy to answer that. So, our, we, that's a topic that we've talked about in recent calls was the trend related to attrition, and what we talked about towards the end of last year was our attrition levels really kind of normalizing back to where they had been pre-COVID.
Speaker 4: And we saw that trend continue during the first quarter. In fact, our tradition rates were quite low, relative to even pre-COVID standards. And so from our perspective, that's a great thing in terms of just, I think it's reflective of our culture and the good work that we're doing for our clients. And when we look at our backlog and our pipeline,
Speaker 4: We're confident that we've got the revenue coming through the pipes over the remainder of the year to still increase utilization even with that increased headcount.
Speaker 4: Okay, a little bit of a follow up to that. Does that then impact your hiring plans for the rest of the year, your hiring posture, or should your realized rate increases in the utilization? Even if you go back to our commentary from the last call.
Speaker 4: We built out a lot of our revenue-generated capacity over the course of 2022. So our expectation, even aside from the current nutrition trends, was always that the head count would likely be at a slower pace than it was last year when we were really in resource capacity building mode.
Speaker 4: And so our expectation for the year is that hiring will be last year, but that's not really a change from what we had talked about before, just based on the capacity that we added over the back half of 2022.
Speaker 4: you would be able to cross-sell into those relationships more easily and help those clients with bigger, maybe higher ticket and more profitable projects. So I'm just wondering if you could update us on that cross-sell dynamic to the extent that it's played out to this point. That's a great question, Andrew, and that is a dynamic. You're right that that was part of our thinking with that strategic initiative to build out the managed services business, and that is the way that's been playing out. And I would actually describe it in both directions. I'd say we have seen an increase in performance improvement consulting revenue at our clients where we're performing managed services work, and then we've also...
Speaker 4: seen performance improvement clients where after delivering on results on a performance improvement initiative, David expressed interest in us staying as part of their structure in the managed services capacity. So we've seen it working both ways. And we've also, over the course of 22 and into this year when we look at our pipeline.
Speaker 4: have multiple projects where really we've got managed services, digital and consulting all for one client. And when you start to look at the scope of those projects of those clients, they're really very interrelated and our viewpoint is that having that managed services offering is a nice competitive differentiator for us.
Speaker 3: differentiation in places that we feel like we have a pretty strong right to win in revenue cycle and in research administration, the research management, and then also technology managed services. So really three big areas of focus for us in managed services. We feel like that combination really does work synergistically with the overall results that we have and
Speaker 3: focusing on managed services in those areas in particular as a very intentional strategy.
Speaker 4: That's helpful. Thank you. And then for my follow-up, if you could just spend a little bit more time talking about the pipeline. Okay.
Speaker 4: By segment, it certainly seems like trends are continuing to move in a positive direction, but any additional color on each of the segments and what the visibility looks like over the next couple quarters would be great. Thank you.
Speaker 4: Sure thing, Andrew. Overall, the pipeline continues to look quite robust. And so even when we look at 2023 and with the revenue plan that's obviously significantly higher than the revenue we had in 2022, we still feel really good about the coverage ratio when you look at our pipeline and our backlog and in fact it's quite consistent with last year.
Speaker 4: clients and prospective clients are dealing with unprecedented financial pressures. And then we've also seen continued strong demand for our digital offerings. So we feel really good about across the board there within healthcare, the demand environment. From an education perspective, the story of 2022 was...
Speaker 4: significant amount of broad growth across the entire segment and that's basically what we continue to see in 2023 out of the gate and then from a commercial perspective You know we're seeing strength certainly in the distressed financial advisory area. That's part of the business That's been about as hot as it's been
Speaker 4: Our team continues to do great work there. And then we're also seeing a lot of conversion, a lot of pipeline related to commercial digital. So we feel good across the board looking at the pipeline trends. Great, thank you. Thank you. Again, to ask a question, please press star 11 on your telephone.
Speaker 2: this time again that's star one one on your telephone to ask a question. Our next question comes from the line of Kevin Steinke of Barrington research and associates. Your question please. Kevin. mm mm. Mm.
Speaker 5: Hey, good afternoon. Just following up on that question about the outlook.
Speaker 5: Just in terms of the maintain revenue guidance, certainly a strong quarter, strong start of year. Revenue guidance obviously implies a very solid growth year. But if you look at...
Speaker 4: revenue flatten out sequentially here? Or is there something maybe this built in in terms of conservatism, given that you're still fairly earlier in the year and just the overall macro environment? Kevin, it's John . I would say the first quarter, we're definitely very pleased with, pleased with our execution there, and just heard our commentary about the backlog. So we feel really good about both the quarter and the outlook. I think at this point in the year, just being three months in, our viewpoint is to probably wait until the mid-year to do the full year guidance update. To your point, if you look at the trend line, both in terms of the actuals for Q1 and our backlog.
Speaker 4: I think that would give us a lot more confidence towards getting towards the upper half of that current guidance range that we have out there then certainly then the lower half. So we feel good about that. At this point in the year with you know nine months left to go I think we think it's prudent to wait until mid-year to do any updates, but...
Speaker 4: We're feeling good about the trajectory and the key for us now is just to continue executing on that backlog throughout the rest of the year.
Speaker 3: Yeah Kevin I'll just add that you know the markets that we're seeing are really facing some really significant challenges and so that just creates just a very broad based demand environment for us and if you look at today in healthcare education and across our digital business you're talking in a 90% range of what we do as an organization.
Speaker 3: You know, I would characterize to say let's we don't get ahead of ourselves But we're certainly not seeing many signs of weakness anywhere in the foundation of what we have and feel very good about what the outlook is for the company.
Speaker 5: Okay, great. Yeah, that's helpful commentary.
Speaker 5: So you touched there on the recurring revenues. I think you mentioned up to 13% of total and Mark, you mentioned the emphasis on managed services.
Speaker 5: Is that a focus for the company to try and?
Speaker 5: increase the percentage of revenue from these recurring sources? Or should we think about the fact that the outlook for the other parts of the business is so strong that maybe even though you're growing the recurring side,
Speaker 3: nicely that it'll stay fairly unchanged as a percent of revenue. Kevin, it is the focus of ours because we feel that getting more recurring base into what we do and that comes not only from managed services but so just remind you we have a software development capability as well that is
Speaker 3: roughly 500 people and really becomes additive to the the overall types of services that we can provide and so When we think about the comprehensive needs of clients if we serve them with models that span not only traditional consulting services But things that create ongoing relationships that can support their broader needs
Speaker 3: Just gives us a better stickiness, it really becomes, call it a synergistic way of us of continuing to get more revenue growth at the same time. It really is focused on serving the market needs and I would just say managed services, that's why I talked a little bit about our areas of focus because we're not trying to beat everything to everybody in managed services.
Speaker 3: It's highly focused on things that we feel are highly differentiated for us, where we have lots of runway ahead and a right to carve out space in the market that basically works with the other consulting services that we have.
Speaker 5: Okay, great. And he talked about really the revenue cycle managed services business emerging over the last few years. And he talked about really the revenue cycle managed services business emerging over the last few years.
Speaker 5: within healthcare and like you said, that's up to 13% of segment revenue. Just trying to think about maybe some other emerging businesses that could have some nice growth legs over the next few years. Specifically, I thought of medically home, maybe an update on how that's going and any other.
Speaker 3: enterprises, you know, those are always been financially challenges. They do not make money and they are increasingly complex and there's lots of challenges not only from a compliance point of view but even just getting, you know, the labor to staff, the operations, and so we continue to see opportunities for us to help our clients manage those enterprises and keep their focus on the core of what they do.
Speaker 3: That is an area that we think we have a very strong track or a right to win. So that's one business I would highlight. You know, again, revenue cycle I think is another one that we continue to see lots and lots of opportunities. And I'll add technology managed services because our foundation in India now, which is today, you know, 28% of our employees across everything.
Speaker 3: And so, but that is just one of many other areas of growth that we have within our business areas. John , anything you would highlight that I may not have mentioned? Well, it's a little outside the managed services realm. Most part, but there's also really just the evolution of student within education as well, which is a big.
Speaker 4: growth area if you look out over the next five to ten years. Both the
Speaker 4: Digital components of that where we see a lot of our clients making significant investments in their digital student technology and where our
Speaker 4: industry know-how and business know-how really differentiates us as well as our technology know-how so we think that's going to be a ripe area for us. But then there's also advisory around student to enrollment. It's a big challenge that many of our clients and our expertise, our data, our analytics around enrollment trends and student I think is a high priority item right now for our clients. That would be another one that I'd add to the list.
Speaker 3: And I'll just close with, I have to mention our digital capability because, you know, roughly $500 million is to call it our best kept secret prior to 2022 because we have grown it to be pretty broad comprehensive and there are substantial growth opportunities that we see as well, intentional for additional capabilities.
Speaker 3: as well as bringing increased industry focus, especially in some of the commercial markets.
Speaker 3: bringing increased industry focus, especially in some of the commercial markets. Okay, thank you.
Speaker 5: I think, John , did you mention an acquisition in the healthcare space? I don't know if I heard that correctly or if it was announced before and I just kind of missed it. Was there something more recent?
Speaker 5: that you had talked about before that you were quoted.
Speaker 4: It was a small acquisition at the intersection of digital and healthcare in the fourth quarter of 2022. It's small from a head count and revenue perspective, but significant from a strategic perspective as we continue to...
Speaker 4: further build out our capabilities in the digital space in healthcare. So we're excited about what it's bringing to the broader team and just give a sense of the size of the revenue. I said in my prepared remarks that it was $300,000 during the first quarter. So relatively small in that regard, we think from a strategic perspective, more significant than that.
Speaker 5: Okay, thanks for taking the questions. So I'll turn it over.
Speaker 2: And seeing no more questions in the queue, I'd like to turn the call back to Mr. Hussey.
Speaker 3: Thanks for spending time with us this afternoon and we look forward to speaking with you again in July when we announce our second quarter results. Good evening.
Speaker 2: Well, that concludes today's conference call.
Speaker 6: Thank you everyone for your participation.
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