Q3 2023 Huron Consulting Group Inc Earnings Call
Okay.
Okay.
Good afternoon, and welcome to Huron consulting group's webcast to discuss financial results for the third quarter of 2023.
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 Hurons 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.
Company will be discussing one or more non-GAAP financial measures. Please look at the earnings release and on Hurons website for all the disclosures required by the SEC, including reconciliations to the most comparable GAAP numbers and now I would like to turn the call over to Mark Hussey, Chief Executive Officer, and President up here.
Ron Consulting group Mr. Husky. Please go ahead.
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 Dale Our Chief operating officer.
<unk> strong performance continued in the third quarter with revenues growing 26% over the prior year quarter, and a ninth consecutive quarter of year over year margin expansion compared.
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.
In the first nine months of 2023 revenues grew organically across all three operating segments led by 32% growth in the health care segment, our largest business.
Our financial results and increased guidance reflect ongoing solid demand for our broad portfolio of offerings, our deep industry and capability expertise, our highly talented team and a strong collaborative culture.
Our third quarter results continue our solid momentum towards 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.
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 continue 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 are not keeping pace with inflation, driven labor and supply costs.
<unk> 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 continued 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 make sure on a unique and trusted partner throughout the health care industry, we help our clients solve issues such as driving higher yield in our revenue cycle expanding access to care transforming their cost structures clinical operations and deploying did.
Little 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.
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 health care 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 democratic 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 is pressuring the higher education business model.
We believe these market trends will create tailwind for all of the offerings in our education segment for the foreseeable future.
Our ability to help an institution deliver and its academic and research missions is unmatched in the industry and we will continue to deepen our industry expertise broadened our portfolio of offerings and strengthening 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 and the commercial industries.
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 health care and education, we have seen some delayed project starts for our commercial clients as they 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 will 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. So press release indicates we are 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 a range of 12 to 12, 5% of revenues and we are raising and narrowing our full year adjusted diluted earnings per share to a range of $4 72.
<unk> to $4 90.
An increase of 30 per share at the midpoint.
Our performance through the first nine months of 2023 reflects the market tailwind 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 and our Q4 2021 earnings call. We believed these changes would accelerate our growth by strengthening our go to market strategy and competitive advantage drive greater efficiencies across our business and enhance 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 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.
Our outstanding team, which is now better aligned to serve the comprehensive needs of our clients in their markets and.
I am 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.
Thank you Mark and good afternoon, everyone before I begin. Please note that I'll be discussing non-GAAP financial measures such as EBITDA adjusted EBITDA adjusted net income adjusted EPS and free cash flow or.
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 <unk>.
Revenues for the third quarter of 2023 to $358 2 million up 25, 5% from $285 4 million in the same quarter of 2022.
Highlighted by 36, 4% growth in the health care 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 <unk> 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 32% 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.
Our 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.
We offset by an increase in corporate expenses.
As Mark noted with our performance in the third quarter of 2023, you've achieved nine consecutive quarters of year over year margin expansion, reflecting progress toward our stated financial goal of achieving mid teens adjusted EBITDA margins by 2025.
Adjusted net income was $27 $2 million or $1 39 per diluted share compared to $20 $7 million for $1 <unk> 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 in financial advisory our 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.
Quarter over quarter increase in margin was primarily due to a decrease in practice administration and meeting expense in.
And revenue growth to outpace the increase in salaries and related expenses for our revenue generating professionals.
We 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 cost 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 cost 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 is 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 $800000 for the same quarter last year.
The corporate restructuring charge in Q3 2023, primarily consisted of a noncash 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 for net debt of $348 6 million.
Our leverage ratio as defined in our senior Bank agreement was one eight times adjusted EBITDA as of September 32023, compared to two one times adjusted EBITDA at the end of Q3 2022.
Cash flow generated from operations in the third quarter of 2023 was $68 $8 million.
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 in the second quarter of 2023 compared to 77 days in the second quarter of 2023, and 85 days for the third quarter of 2022 the.
The increase in DSO over the second quarter of 2023 is primarily driven by certain large health care and education industry projects with extended billing and payment terms.
During the third quarter, we repurchased approximately 290000 shares for $28 $8 million under our share repurchase program and.
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 or $400 million, which expires in December 2024.
Since November 2020, and through September 32023, we purchased four 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 return of capital to shareholders through strategic tuck in acquisitions debt pay down 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 a range of 135 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 I would now like to open the call to questions operator.
Thank you ladies and gentlemen, if you have a question. Please press star one on your Touchtone telephone.
To remove yourself from the queue you May press star one again.
Our first question.
Comes from the line of Tobey Sommer of <unk> Securities.
Hey, This is Jack Wilson on for Tobey.
My first question can you talk about sort of demand by capability across segments.
Sure sure thing Jack.
So.
Overall, the pipeline remains robust and even with the 2023 guidance that we provided we're seeing similar pipeline of backlog coverage ratios as in recent quarters, which gives us a lot of confidence in our guidance range and.
In healthcare we can.
We have seen continued robust broad based demand for our services.
In particular performance improvement in financial Advisory demand has been strong as many of our healthcare provider clients continue to face significant financial pressures.
Demand for our health care digital offerings as our clients try to capture returns on the investments in technology and drive operating efficiencies in a high labor cost environment improve care outcomes and enhance access and consumer experience.
And we've also seen increased demand for our revenue cycle managed services strategy offerings.
Increasingly we're seeing situations, where our clients are looking for help across multiple of these capabilities within the scope of a single project.
We're seeing continued broad based demand in the education industry inclusive of our digital offerings and similar to healthcare. This demand is reflective of a financially strained environment and higher Ed characterized by student enrollment volume and mix pressures tuition pricing pressure and escalating costs.
We're also seeing strong pipeline and sales conversion in our distressed advisory business in the commercial segment or.
Our commercial digital business is an area, where we as mark and I both alluded to in our prepared remarks, that's an area, where we have overall solid pipeline, but we've seen some project deferrals and longer sales cycles.
Which I don't think it's a surprise just given some of the macro conditions.
That we see going on in the environment right now and our strategy business experienced some softness in demand in the commercial industry, which is due to similar reasons probably to the commercial digital pipeline, but they've seen increasing demand in the healthcare industry.
And so that's actually an area that we're pretty excited about the growth prospects moving forward.
Great. Thanks for that color, that's very helpful. As a follow up.
How would you describe some of the hiring environment across both consulting and digital it seems like you made impressive gains in the head count in both of those both of those capabilities.
So we're.
From a hiring perspective, I guess, maybe I'll start actually with the attrition side of the equation and we continue to experience very low attrition compared to historical periods.
I would say at this point across the business and its fairly consistent across the different parts of the business. We're looking at full year attrition rate of cognitive into low double digits from an annualized perspective.
And so that is good news for us given the growth that we've seen in the demand that we're seeing across the business in the pipeline that we just talked about with all that said given the pace of the growth and given the.
The pipeline that we see as we head into next year, we have been continuing to hire and I think in terms of finding talent I think it's been a good environment for us I don't think we have any challenges finding the talent that we need and it's been pretty well balanced across different parts of the portfolio really focusing on the areas, where we see the most the most <unk>.
And right now.
Thank you I'll turn it over.
Thank you.
Our next question.
Comes from the line of Andrew Nicholas of William Blair <unk> Company. Please go ahead Andrew.
Hi, good afternoon, thanks for taking my questions.
Wanted to ask I appreciate all the commentary on the pipeline, but maybe specific to kind of 24 outlook.
No. It's early I know, you'll give the official guidance.
Next year, but.
Obviously the last two.
Two years now you've posted growth.
Well in excess of.
Those medium term targets. So just kind of wanted to get your sense for that Thats something certainly maybe not 23 rates are 22 rates, but if you are still kind of operating under the assumption that you can run out of those of.
That target next year I, just don't want us to get ahead of ourselves after.
Seven or eight quarters of.
20% plus type growth.
Right now thanks. Thanks for the question Andrew I think the good news from our perspective and the way we framed it at our Investor day.
Towards the beginning of last year was that we anticipated.
Double low double digit growth on an annual basis and to your point.
We're really pleased that we've been able to exceed that rate of growth in 2022, and 2023 and I think the good news from our perspective is even with the bigger base of revenue that implies based on the growth that we've had in the past two years has exceeded those targets, we still feel good about our ability to grow at a double digit pace moving forward to your.
<unk>.
To the extent that our teams will be working to beat that and we'll be looking for.
For ways to drive growth as high as we can.
And to your other point, we're not through our planning cycle, yet and we're still.
We will give guidance again in February, but I think going back to those investor day targets off of kind of the revised base that we have here at 2020. There is a good way of looking at it that Andrew It's Mark I'll add a couple of comments. One is the end markets that we have in health care and education, we have very strong market positions.
<unk>.
In the healthcare segment Theres been obviously, great momentum this year and coming into next year, we feel 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 and the positive cycle.
Hospitals and health systems are going to be investing more whether it's in digital capabilities getting back to more and more 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 cycle I don't think we feel that we're through the cycle as I said, we have seen some signs of softening demand but.
Something we watch carefully, but with an eye towards making sure that we have less cyclicality around that particular business education is one also that I think <unk> got just.
Very strong tailwind across the needs of the industry and we're very well positioned in the base and.
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 our 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 at 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 health care and education. So we.
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.
Shrinking away from changes in the environment. Our model, we think is robust enough.
Business continues to evolve in ways that we feel attaining those those targets is quite reasonable for us.
That's helpful. Thank you very much and then.
I wanted to ask on on restructuring or disrupt financial advisory and commercial.
I think it's a hard environment to maybe manage head count in that space along.
The long overdue restructuring cycle.
At least in my opinion I'm, just kind of wondering how much you are leaning into head count growth there because it's been a couple of quarters now of that being.
I think it's an outperformer.
So if you could just kind of speak to the 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 timeframe as restructuring going to be a positive.
Kind of mix component of margin expansion. There is at higher margins and then the strategy and digital businesses, there or how should we think about it.
That evolving mix impacting margins.
Andrew It's mark out in terms of the hiring environment Youre absolutely right. The cycle right. Now is how do you see that across all of the competitors in the space and so there is a strong demand for head count that is qualified and those skill sets across the industry having.
Having said that the.
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.
As a differentiator for us so we've been able to continue to add people at the levels that have enabled us to sustain.
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 has 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.
Kind of rates that you realized in this part of the cycle and the environment when things are really troubled and theres a need for very rapid actions puts us.
<unk> strong position within the marketplace.
And the range of capabilities, we have in that business, which is not just consulting and advisory book.
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 Chad I'll, let you speak to mix and its contribution as well, yes, no Mark I agree with what you said, it's definitely one of our stronger margin businesses in the entire port.
Folio across segments. So when that business is performing while thats a positive.
Contributor from a margin perspective so.
<unk>.
As Mark said, we're continuing to see robust demand there continuing to kind of lean into that demand with with head count growth. So we're excited about the prospects for that part of the business.
Thank you and maybe just one one quick follow up to that could squeeze in I think last quarter you called out.
A favorable adjustment I think it was $16 million in healthcare was there anything kind of lumpy or one time and results.
It is worth calling out or that I might've missed in the prepared remarks.
No Andrew there really wasn't this quarter anything significant to note in that regard there was.
Mid single digit million dollars of performance based fee adjustments in health care, but I'd, probably now, particularly at the scale that we're at now I would probably consider that to be more of a normal course thing, but other than that there really wasn't anything anything notable to call out.
Perfect. Thanks again.
Thank you once again to ask a question. Please press star one on your Touchtone telephone again Thats Star one one on your Touchtone telephone to ask your question.
Our next question.
It comes from the line of Kevin Stankey.
Barrington Research associates.
Please go ahead Kevin.
Kevin Please make sure your line is on mute.
Speaker phone lift your handset.
Again, ladies and gentlemen to ask a question. Please press star one at this time.
Okay.
Alright.
Kevin. Thank you your line is open.
Okay.
Seeing no more questions in queue I'd like to turn the call back to Mr. <unk>.
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.
And that concludes today's conference call. Thank you everyone for your participation.
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