Huron Consulting Group Inc. (NASDAQ:HURN) Q1 2024 Earnings Call Transcript April 30, 2024
Huron Consulting Group Inc. beats earnings expectations. Reported EPS is $0.951, expectations were $0.88. HURN isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon, and welcome to Huron Consulting Group’s Webcast to Discuss Financial Results for the First Quarter 2024. [Operator Instructions] 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 reconciliations to the most comparable GAAP numbers.
And now I would like to turn the call over to Mark Hussey, Chief Executive Officer and President of Huron Consulting Group. Mr. Hussey, please go ahead.
Mark Hussey: Good afternoon, and welcome to Huron Consulting Groups first quarter 2024 earnings call. With me today are John Kelly, our Chief Financial Officer; and Ronnie Dale, our Chief Operating Officer. Our first quarter revenue – I’m sorry, our first quarter results reflect our ongoing focus on achieving consistent revenue growth and margin expansion. Revenues grew 12% over the first quarter of 2023, driven by strong growth in our healthcare segment as well as continued growth in our education segment, which furthers the segment’s multiyear growth trajectory. Our strong growth in the first quarter of 2023 was achieved on top of strong growth in the year-ago quarter, with Q1 of 2023 growth of 22% over the first quarter of 2022.
Our first quarter results also demonstrate our commitment to delivering on the growth strategy and financial goals shared at our 2022 Investor Day, consisting of low double-digit annual revenue growth and expanding our adjusted EBITDA margins to mid-teen levels, leading to annual high teen percentage adjusted EPS growth. We believe achieving our financial goals together with a balanced capital deployment strategy that prioritizes moderate leverage, share repurchase, and targeted M&A will drive strong returns for our shareholders over time. I’ll now share some additional insight into the progress we’ve made on our strategy while providing color into our first quarter performance. As a reminder, to achieve our goals, we’re committed to executing against five strategic pillars.
The first pillar of our strategy is to continue accelerating growth in our largest industries, healthcare and education, where we’re focused on building upon our leading competitive positions. In the healthcare segment, first quarter revenues grew 21% over the prior year quarter. The increase in revenues in Q1 of 2024 was driven by strong broad-based demand across our performance improvement, digital strategy and innovation, and financial advisory offerings. The operating environments for many healthcare organizations are mixed in recent months. Some health systems continue to face strained financial positions, driving continued demand for our performance improvement and distress-focused financial advisory offerings. Other healthcare providers have seen margins improve, and they’re now seeking opportunities to evolve their strategies and advance their competitive positions by making strategic and operational investments.
These organizations are creating demand for our digital strategy and innovation and non-distressed financial advisory offerings. As part of the Huron’s growth strategy, we continue to diversify our healthcare service portfolio over time to meet the broader needs of the market, which has yielded greater consistency in this segment’s financial performance. We’ve expanded the offerings within our performance improvement business while growing our healthcare-focused strategy and innovation, digital and financial advisory offerings. If you look back to 2014, 10-years ago, our performance improvement offerings represented virtually 100% of segment revenues. If you fast forward to 2023, we’ve diversified our portfolio so that performance improvement offerings represent only 46% of healthcare segment revenues.
We’re confident that these investments we’re making to expand our healthcare offerings are paying off, and we believe we’re well-positioned to address the wide array of opportunities and challenges facing our hospital and health system clients. Education segment revenues grew 7% in the first quarter of 2024 over the prior year quarter, driven by strong demand for our digital services and products. The education industry continues to face wide-ranging pressures, from top-line challenges, including difficulty meeting enrollment and fundraising goals, more challenging research funding sources, to cost and regulatory pressures, including increased governmental scrutiny, workforce disruptions, and a need to make significant technology investments.
Our clients require a broad array of services and products to help them address these issues. We continue to strengthen and expand our offerings in the education industry to comprehensively address our clients’ needs. We’re the leading firm in industry-serving research institutions. The challenges of managing the highly complex research enterprise are increasing due to declines in funding for federal and commercial research and increased costs to conduct research. Research mission is critical to our client base, and our research businesses continue to be a strong source of growth for our education segment and a differentiator for our services among the most prominent research institutions. We continue to invest in strengthening our offerings in this area, including our Huron Research Suite software, which is the preeminent product in the market with over 600,000 users at over 500 institutions.
The strength of our offering has yielded a client retention rate of over 99% across our suite of products. We also continue to expand our offerings to serve the broader needs of our mission-driven clients, particularly in education. For example, a recent acquisition of GG&A, one of the top philanthropy consulting firms, is creating new opportunities, not only in education, but also across healthcare and other not-for-profit clients. Another example of our expanded offerings is our athletics practice. We began to focus on university athletics in 2020, and today we have worked with over 50 institutions, ranging from the top Division 1 conferences to FCS and smaller institutions, many of which are facing increasingly complicated operating environments stemming from the dramatic changes taking place in intercollegiate athletics.
We help these organizations evaluate and execute upon the conference and athletic department strategies, which often have an outsized impact on the financials, enrollment, and branding of our large academic clients. Our healthcare and education businesses have marked tailwinds, which continue to propel their growth. Our leading competitive physicians, deep client relationships, high-quality delivery, and wide array of offerings position us well to be the partner of choice for our health system, university, and research-focused clients. Our second strategic pillar is focused on growing our commercial industry presence. In the first quarter of 2024, commercial segment revenues were largely flat, driven by increases in revenue for our financial advisory offerings, partially offset by declines in our strategy and innovation in digital offerings.
We continue to see our commercial clients taking a more cautious approach to executing large-scale initiatives and strategy-related engagements as uncertainties in the macroeconomic environment persist. Our distressed financial advisory business continues to have a solid outlook, although at a more moderate level than the strong record results achieved in 2023. With our focused strategy, we believe the commercial industries will create new avenues of growth for Huron. The mix of our digital strategy and financial advisory offerings has created a more balanced portfolio from which we can continue to grow our presence in financial services, industrials and manufacturing, and energy and utilities, while providing more consistency in our financial performance in different market cycles.
Now let me turn to our third strategic pillar, advancing our integrated digital platform. In the first quarter of 2024, digital capability revenues grew 10% over the first quarter of 2023, driven by growth across the healthcare and education segments. In 2023, our digital capability grew to over $0.5 million, a key milestone for that business and a testament to the collective investments we’ve made in technology, data and analytics across all industries. We continue to be a market leader in our digital offerings. We were named best-in-class in healthcare for ERP business transformation and implementation leadership, as well as IT consulting services in the payer market. We’ve also been awarded recognitions for driving innovation by other technology partners.
And we’re incredibly proud of the work we’re doing and how we continue to expand our offerings to meet the rapidly evolving technology, data and analytics needs of our clients. Intelligent automation, including the use of generative AI, is one area that is of great prominence and exploration in the market today. Our automation, analytics and AI services revenues grew to over $50 million in 2023, demonstrating the value we bring to our clients and the growing significance of these advanced technologies in the market. Our work today spans advising clients on their intelligent automation strategies and roadmaps, including the data foundation needed to be successful, through to the implementation of distinct use cases in comprehensive intelligent automation programs.
Let me provide two brief examples of how we’re working with clients to apply AI. First, we’re working with a commercial client to establish a centralized AI capability center that will provide a platform to responsibly govern their AI program, while also incubating high impact solutions across their business. Second, we’re working with a health system to leverage generative AI to expedite the clinical appeals process as part of their revenue cycle to reduce the administrative burden of inefficient reimbursements. These are only two examples of many where we’re leaning in to enable our clients’ businesses through the use of AI. Expanding our digital capabilities, including our intelligent automation offerings, through organic and inorganic investments, will continue to be an important driver of growth across our business for many years to come, as our clients focus on driving growth and productivity in their own highly competitive markets through the use of technology, data and analytics.
Now let me turn to our last two strategic pillars, which are more financially focused. First, we’re executing our margin improvement levers to achieve enhanced profitability. As it relates to margin expansion, our company-wide focus on improving profitability has yielded solid results. In 2020 to 2023, our full year adjusted EBITDA margin has increased 200 basis points, and full year adjusted diluted earnings per share has increased 128%. We continue to feel confident in our ability to improve our margins across our robust global platform, which will drive further efficiency as we scale, while continuing our focus in areas such as driving improved utilization, pricing utilization and SG&A leverage. Our final pillar focuses on deploying capital to accelerate our strategy and return capital to our shareholders.
Since our Investor Day in March of 2022, which through the quarter just ended, we’ve repurchased 3.6 million shares at a weighted average price of $78.36, representing 16.5% of our common stock outstanding as of December 31, 2021. In 2024, we expect to execute our balanced capital allocation strategy across share repurchases, debt repayment and tuck-in acquisitions. We believe that combining the capabilities and talent from acquisitions to enhance our competitive position, such as a recent GG&A acquisition, will drive strong growth and returns for our shareholders. And finally, let me acknowledge the heart of our strategy, our people. We have and will continue to invest in our incredibly talented team and strong collaborative culture. Our competitive advantage is driven by the strength and depth of our team and our company culture, which drives how we work together and to deliver on the most complex challenges on our clients, creates an environment where we’re constantly innovating new offerings and advancing our business collectively as a unified team.
Our ability to attract and retain top talent is demonstrated by our headcount growth of 41% from the end of 2021 to the end of 2023, coupled with consistently low attrition and high engagement scores. Our distinct culture, coupled with strong career advancement and development opportunities, provides a stable platform for ongoing growth, not only for our people, but also for our business. And now let me turn to our outlook for the year. Today we confirm our 2024 revenue and adjusted EBITDA margin guidance, and we’re raising our adjusted earnings per share guidance to a range of $5.60 to $6.10. We continue to believe our growth trajectory is strong, given the expected demand in our end markets across healthcare, education, and commercial, our strong competitive positions, and our deep client relationships.
Given our focus, we have a unique breadth in our offerings, depth in our talent, and relevance in our subject matter expertise that allows us to be nimble and innovative, yet have the credentials and experience to compete and win against much larger competitors. Let me close by saying that our commitment to our growth strategy is evident in our recent performance, including our first quarter results. Our progress would not be possible without the focus and dedication of our entire team, and I want to thank all of them for supporting each other, our clients, and our business, as we strive to make a lasting impact in the work that we do each and every day. Now I’m going to turn it over to John for a more detailed discussion of our financial results.
John?
John Kelly: 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, 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. Before discussing our financial results for the quarter, I’d like to acknowledge two housekeeping items. First, our first quarter results reflect the acquisition of GG&A, which closed on March 1, and as such, one month of GG&A’s operating results are included within the education segment.
Second, in conjunction with the continued refinement of our operating model, we reclassified certain revenue-generating professionals within our digital capability from our healthcare and education segments to our commercial segments, reflecting the flexibility of these professionals to provide services across all of our industries, inclusive of healthcare and education. We have provided supplemental materials to provide additional details to this reclassification, which are posted on the Investor Relations section of our website. Now I will share some of the key financial results for the first quarter. Revenues for the first quarter of 2024 were $356 million, up 12% from $317.9 million in the same quarter of 2023. The increase in revenues for the quarter was driven by strong growth in our healthcare segment and continued growth in our education segment.
Net income for the first quarter of 2024 was $18 million, or $0.95 per diluted share, compared to net income of $13.4 million, or $0.68 per diluted share in the first quarter of 2023. Our effective income tax rate in the first quarter of 2024 was negative 2.5%, as we recognized an income tax benefit on our income before taxes, driven primarily by discrete tax benefits for share-based compensation awards that invested during the quarter and non-taxable gains on the investments used to fund our deferred compensation liability. Adjusted EBITDA was $33.8 million in Q1 2024, or 9.5% of revenues, compared to $29.5 million, or 9.3% of revenues in Q1 2023. The increase in adjusted EBITDA for the quarter was primarily due to the increase in segment operating income, partially offset by an increase in corporate expenses, which included certain third-party legal expenses that are not expected to continue at the same level in future quarters.
Adjusted net income was $23.3 million or $1.23 per diluted share, in Q1 2024, compared to $17.1 million, or $0.87 per diluted share in the first quarter of 2023, resulting in a 41% increase in adjusted diluted earnings per share over Q1 2023. Now I’ll discuss the performance of each of our operating segments. The healthcare segment generated 51% of total company revenues during the first quarter of 2024. The segment posted revenues of $180.7 million, up $31.7 million, or 21.3% in the first quarter of 2023. The increase in revenues in the quarter reflects strong demand for our performance improvement, digital, strategy and innovation, and financial advisory offerings. Consulting and managed services and digital capabilities grew 22% and 19% respectively in the first quarter, reflecting the continued broad-based demand for our offerings.
Operating income margin for healthcare was 23.6% in Q1 2024, compared to 21.6% in Q1 2023. The increase in margin is primarily due to revenue growth and outpaced compensation costs for our revenue-generating professionals, partially offset by an increase in practice administration and meetings expenses as a percentage of revenues. The education segment generated 31% of total company revenues during the first quarter of 2024. The education segment posted revenues of $111.6 million, up $7.4 million, or 7.1% from the first quarter of 2023, and was achieved on top of strong growth in the year-ago quarter with Q1 2023 growth of 29% over Q1 2022. Revenues in the first quarter of 2024 included $1.3 million from our acquisition of GG&A. The increase in revenues in the quarter was driven by strong demand for our technology and analytics services and software products within our digital capabilities.
The operating income margin for education was 19.7% for Q1 2024, compared to 22.2% for the same quarter in 2023. The decrease in operating income margin in the quarter was primarily driven by increased compensation costs for our revenue-generating professionals as a percentage of revenue, partially offset by a reduction in contractor expenses. The commercial segment generated 18% of total company revenues during the first quarter of 2024, and posted revenues of $63.6 million, compared to $64.7 million in the first quarter of 2023. Revenues were largely flat in the quarter, with increases in demand for our financial advisory offerings offset by declines in revenue within our strategy and innovation in digital offerings. Operating income margin for the commercial segment was 22.1% for Q1 2024, compared to 21.7% for the same quarter in 2023.
The increase in operating income margin in the quarter was primarily driven by decreases in compensation costs for our revenue-generating professionals. Corporate expenses not allocated at the segment level, and excluding restructuring charges, were $52.5 million in Q1 2024, compared to $44.1 million in Q1 2023. Unallocated corporate expenses in the first quarter of 2024 and 2023 included $2.4 million and $1.9 million, respectively, of expense related to the increase in the liability of our deferred compensation plan, which is offset by the investment gain on the assets used to fund that plan reflected in other income. Excluding the impact of the deferred compensation plan in both periods, unallocated corporate expenses increased $8 million, primarily due to increases in legal expenses, compensation expense for our support personnel, and other losses.
The legal expenses, which are not expected to continue at the same level in future quarters, primarily relate to professional fees for a legal matter, or hereon as a plaintiff, M&A related expenses. Now turning to the balance sheet and cash flows. Total debt as of March 31, 2024 was $574 million, consisting of our $275 million term loan and $299 million of borrowings on our revolver. We finished the quarter with cash of $19 million for net debt of $555 million. This was a $243 million increase in net debt compared to Q4 2023, primarily due to the payment of our annual cash bonuses, share repurchases, and the acquisition of GG&A all during the quarter. Regarding share repurchases, during the quarter we used $62.3 million to repurchase approximately 625,000 shares, representing 3.4% of our common stock outstanding as of December 31, 2023.
As of March 31, 2024, $24 million remained available for share repurchases under our current share repurchase program. We expect the pace of share repurchase activity to moderate through the remainder of the year. Our leverage ratio, as defined in our senior bank agreement, was 2.7 times adjusted EBITDA as of March 31, 2024, compared to 2.8 times adjusted EBITDA as of March 31, 2023. As a reminder, our first quarter typically represents a seasonal high leverage ratio given the payout of our annual bonuses in March. Cash flow used in operations in the first quarter of 2024 was $130.7 million. We used $8.8 million to invest in capital expenditures, inclusive of internally developed software costs and purchases of property and equipment, resulting in negative free cash flow of $139.5 million.
We continue to expect full year free cash flow to be in a range of positive $115 million to $145 million. DSO came in at 91 days for the first quarter of 2024, compared to 87 days for the fourth quarter of 2023 and 83 days for the first quarter of 2023. DSO was elevated during the first quarter of 2024 relative to the other periods due to certain larger healthcare and education industry projects with contractual payment terms that will result in cash payments in the second and third quarters of 2024. We expect DSO to normalize in the 75 to 85 day range by the end of the year. Finally, let me turn to our guidance for the full year 2024. As Mark mentioned, we are affirming our revenue and adjusted EBITDA guidance. With revenues before reimbursable expenses in a range of $1.46 billion to $1.54 billion and adjusted EBITDA in a range of 12.8% to 13.3% of revenues.
Today we are raising our adjusted non-GAAP EPS to a range of $5.60, $6.10, reflective of a now lower anticipated full year effective tax rate in the range of 26% to 28% and a lower weighted average diluted share base for the year based on the accelerated pace of share repurchases during the first quarter. Thanks everyone. I would now like to open the call to questions. Operator?
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Q&A Session
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Operator: [Operator Instructions] One moment for our first question, which comes from the line of Andrew Nicholas of William Blair and Company. Your question please, Andrew.
Andrew Nicholas: Thank you. Good afternoon, everybody. I wanted to start on the healthcare segment’s growth, a really strong quarter on that front. Mark, you alluded to kind of broad-based demand across that segment, but I was hoping you could unpack where the growth rates sit across PI, digital, strategy and innovation, financial advisory, just kind of getting a sense for under the hood, kind of where the strength is, if there is a rotation between the different segments, as the end market seems to get a bit healthier with time. That would be really helpful to kind of understand?
Mark Hussey: Yes, John, why don’t you give some color into some of the trends by area?
John Kelly: Yes, I’m happy to do that. I’ll start there and then Mark, you can give the color commentary. From a breakout within the healthcare business, continue to see a lot of strength, Andrew, within our consulting part of the business and particularly our performance improvement part of the business. Year-over-year, that was up north of 20% between the two years. So consistent with Mark’s comments, that’s a part of the business where even though year-over-year, we’ve seen some improvement in the industry in terms of average profit margins and things like that, there’s still a number of clients that are facing financial strain right now and we see continued demand for those types of projects. From a digital perspective, we continue to see really good growth overall.
High teen growth from a digital perspective. I think that’s reflective of really the other part of the market where we see clients that have reached more financial stability now turning around and really starting to execute on some of their investment plans, which oftentimes includes improving their digital infrastructure. So, we’ve seen good growth there. And then you referenced as well strategy and financial advisory. Those are two smaller bases of revenue within the business, but areas that are really performing well. And so from a percentage perspective, they’re up north of 25% year-over-year, but they’re starting from a smaller base. But I think those are both areas where we see a lot of demand with our clients right now, in terms of working on their strategies as well as starting to think about balance sheet considerations where our financial advisory team plays really well with those clients.
So hopefully that gives some color.
Mark Hussey: And I would say, Andrew, to my comment on the mixed view of margins within the sector, it really depends a little bit on market specific situations. But I would tell you that collectively – in those systems that are having performance improvement issues, there are also aspects that address every one of the businesses. So it’s not as if performance improvement is only on one side and not on the other. So it really is just maybe leaning more heavily on one side of that mix. And I’d say, our power in the market right now, is really our ability to bring that team together very collectively in coordination, and seamlessly across each client situation, which has really enabled us to differentiate and have a very strong offering for clients in terms of driving value.
John Kelly: And maybe, Andrew, I’ll jump in with one last point as it relates to the strategy business, and as it relates to our healthy financial advisory business. The percentages probably aren’t as helpful to think of, but if you look at a year ago this time, those were low single-digit $1 million businesses for us that, now are operating more at the mid-team $1 million level. And we continue to see, we’re investing in that growth that we’ve seen and continue to see demand of a trajectory like that. So that’s an area within the portfolio that we’re pretty excited about in terms of adding growth, to the healthcare business.
Andrew Nicholas: Now, that’s really helpful. I guess I would have thought maybe a little bit more of a rotation, but it sounds like everything is still very much hitting on all cylinders. Appreciate that. And then maybe for my follow-up on the margin front, I’m pretty encouraged by the margin expansion, even with a little bit lower utilization in the quarter, and some really strong headcount growth. So can you talk about the ability, to expand margins despite lower utilization? And then somewhat relatedly, I think it’s up about 20 basis points year-over-year in the first quarter. You stuck to the full year margin expansion guidance. So what dynamics allow you to expect maybe more margin expansion on year-over-year basis through the rest of the year, and the second half as opposed to the start of the year? Thank you.
John Kelly: Sure, Andrew. I can start there. We had a few items during the quarter that were not expected to repeat, as the year goes on that added some extra expense. So, we’re actually very pleased with the 20 basis points of margin expansion in the quarter, given that we had some of those expenses. And one such item was one of our larger teams had a practice meeting during the quarter. We typically do one of those a year, not necessarily the same team every year. But the corresponding large event like that was during the fourth quarter this year. It was during the first quarter this year. So that was a little bit of an unfavorable comparison. That alone had about a 70 basis point impact on margins during the quarter. We also, as I referenced in my remarks, had some deal related expenses that, came through during the quarter.
You’re aware of the closing of the GG&A acquisition. We had some one-time items related to earn out valuations that, also came through during the quarter. And then, one final item that we referenced, was we did have an uptick in legal expenses during the quarter that, we’re not expecting to repeat at that level as the year goes on. So, there were some headwinds during the quarter related to some of those factors that are either things that have been adjusted out like the fair value. Or the, earn out fair value adjustments and then one-time type items that we don’t expect to repeat later in the quarter. So despite the 20 basis points of improvement during the first quarter, that’s what gives us confidence that we’ll be able to accelerate that margin expansion, as the year goes on.
Operator: Thank you. Our next question comes from the line of Tobey Sommer of Truist Securities. Your question please, Toby.
Jasper Bibb: Hi, good afternoon. This is Jasper Bibb on for Tobey. Can you maybe frame for us, let’s assume for healthcare performance improvement growth in your ’24 guidance? And maybe I missed it in the earlier discussion about different practices within healthcare, but how is a student group, doing right now?
