Huron Consulting Group Inc. (NASDAQ:HURN) Q4 2022 Earnings Call Transcript February 28, 2023

Operator: Good afternoon and welcome to Huron Consulting Group's webcast to discuss Financial Results for the Fourth Quarter and Full Year 2022. 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 up 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 Group's fourth quarter and full year 2022 earnings call. With me today are John Kelly, our Chief Financial Officer; and Ronnie Dail our Chief Operating Officer. It's a pleasure to be with you for my first earnings call as CEO and it's tremendous honor to lead this great company. I greatly enjoyed working side by side with Jim Roth over the last 11 years. I want to thank him for his leadership and partnership and I look forward to continuing to work with him on our Board and in his role serving our clients. I also look forward to engaging with all of you in the months and years ahead as we continue to build our company to create exceptional shareholder value. Turning to our results.

We achieved record revenues in the fourth quarter and full year 2022, growing revenues 26% and 25%, respectively. Revenue growth for both the fourth quarter and the full year was strong across all three operating segments bolstered by continued growth in our digital capability. Our digital capability grew a record 41% in 2022 and digital revenue reached nearly $0.5 billion. Our full year adjusted EBITDA margins improved 80 basis points over the prior year, reflecting solid progress toward our objective of returning to mid-teen EBITDA margins by 2025. We believe the momentum we established in 2022 provides a solid foundation for continued growth and profitability as well as continued deployment of our cash flow to drive returns for our shareholders.

Market demand remains solid in our healthcare and education businesses, strengthening our leading market positions in these large and challenged sectors of the economy. Our presence in the commercial industries continues to expand led by our digital capability, which represented 44% of our company-wide revenue in 2022. And our solid cash flow enabled us to repurchase two million shares in 2022, while maintaining a strong financial position. Before I provide additional color on the fourth quarter and full year performance, let me highlight the progress we've made on our operating model transformation. When we announced our business realignment at the beginning of 2022, we believe the new operating model would strengthen our go-to-market strategy, better positioned Huron to integrate our deep industry expertise with our strong digital, strategy and financial advisory capabilities and to drive efficiencies across our business.

The financial results we announced today, clearly reflect the benefits of our business realignment and the new incentive plan that accompanied our new operating model, which rewarded and reinforced accelerated growth, increased profitability and enhance the collaborative behaviors of our team as we work in an even more unified platform. Collaboration has always been a hallmark of Huron's culture and in our new operating model that attribute has grown even stronger, helping us achieve our growth goals and further strengthening our competitive position in each of our markets. We routinely go to market in a unified manner across all our businesses, bringing the best teams and expertise together with the full extent of the capabilities needed to innovate and serve the comprehensive needs of our clients.

For Huron, our growth strategy and business realignment are the means through which we have achieved two critical outcomes: improved integration of our industry and capability expertise and more deeply embedding our digital offerings into our client engagements. We believe these outcomes will position us for further success in the market and continued growth and increased profitability for our business, which together will drive enhanced shareholder value. Now, I'll discuss our fourth quarter and full year 2022 performance along with our expectations for 2023. On a full year basis, the Healthcare segment achieved record revenues of $535 million, increasing 20% over 2021. In the fourth quarter of 2022, Healthcare segment revenue grew 18% over the prior year quarter to $153 million, reflecting the strong demand for our offerings across our digital capabilities, revenue cycle managed services and performance improvement consulting.

For the full year in the healthcare industry, digital revenue increased 44% and consulting and managed services revenue increased 12%. Hospitals and health systems continue to face a challenging environment with increasing labor costs, reduced governmental funding and shifts in volume and sites of care. Many healthcare organizations face more limited operating cash flows and weakening financial positions, driven in part by labor and supply chain challenges as well as rising inflation and higher interest rates. These financial pressures come at a time when health systems need to invest more heavily in their business, including in technology and analytics to fuel long-term organizational growth and to respond to competitive pressures. To address these headwinds, healthcare organizations are increasingly interested in pursuing the performance improvement-related initiatives, driving demand for our consulting digital and managed services offerings.

In the second half of 2022, we saw a steady increase in our sales funnel for our performance improvement offerings and we expect that demand will continue into 2023 as our clients seek to address these challenges. In addition, healthcare providers are deploying new technologies to drive greater operational efficiencies while attempting to meet the increasing expectations of their consumers as the healthcare industry relies more heavily on digital interaction with its consumers, including a more comprehensive and simplified digital experience. Health systems are focused on developing enhanced analytic capabilities and the ability to provide innovative care delivery solutions to their patients. The combination of our deep industry expertise, comprehensive consulting, digital and managed services offerings, and a proven track record of delivering results for our clients, positions us well to take advantage of these market challenges, which we believe will drive continued demand for our business.

Turning now to the Education segment. Annual revenues in the segment grew 48% compared to 2021, achieving record revenues of $360 million. In the fourth quarter of 2022, Education segment revenues increased 44% over the prior year quarter to $97 million, driven by the strength in demand for our offerings across the segment. For the full year in the education industry, digital revenue increased 51% and Consulting and Managed Services revenue increased 46%. Our Education business historically achieved consistent strong revenue growth. Demand in 2022 was widespread across all our digital research, student and strategy and operations offerings and we're pleased with how our services are resonating in the market amidst the significant changes taking place in the higher education industry.

Similar to our healthcare clients, higher education institutions face increased financial pressures, driven by rising inflation and higher interest rates, labor pressures, mixed enrollment trends and declining endowment returns. Our clients seek to balance operational and capital spending decisions, particularly as it relates to investments to improve the student experience, the changing needs of facilities and infrastructure, continued financial pressures and more broadly a need to dramatically enhance their digital interaction with their college and university communities. The need to manage costs while investing in areas of growth is further exacerbated by the uncertain macro environment. And we believe that these challenges will persist for the foreseeable future, driving continued demand for our comprehensive set of industry-focused solutions.

Finally, we're encouraged by the continued strong growth of our research business. Huron has a unique market position in helping our clients manage their research enterprises. The federal government provides over $50 billion in research funding annually to US universities and hospitals to conduct research and that's only one source of research funding for our clients. Huron has the most comprehensive set of offerings in the country, helping our clients manage the many complexities and risks associated with research administration. Our comprehensive research-focused consulting, digital and managed services offerings represent over 35% of our Education revenues in 2022 and we anticipate significant growth in the coming years. Turning to the Commercial segment.

On a full year basis, segment revenues grew 9% year-over-year to $238 million. Excluding the life sciences business, which was divested in Q4 of 2021, Commercial segment revenues grew 18% year-over-year. In the fourth quarter of 2022, Commercial segment revenues grew 24% over the prior year quarter to $64 million, primarily attributable to strong demand for our financial advisory and digital offerings. Led by our digital offerings, we continue to expand our presence in the commercial industries, particularly in the financial services and the energy and utility sectors. The growing portfolio of technology and analytics offerings delivered by our highly talented team have gained market share in a competitive landscape. We continue to invest in expanding our offerings to address the rapidly changing needs of a broad client base and those investments have delivered strong returns for Huron.

We will continue to develop our global digital technology and analytics platform in conjunction with our consulting and managed services offerings to address the growing needs of our clients. Let me also briefly touch on our financial advisory and strategy offerings. In the fourth quarter, we saw a resurgence in demand for our restructuring and turnaround offerings, as the uncertain macro environment, turbulent capital markets, high inflation and high interest rates caused disruption for our clients. As we look ahead, we believe that we're well positioned to help both healthy organizations and those in distress navigate the best path forward, whether that be establishing a new growth strategy or more efficiently operating their business. Let me now turn to our expectations and guidance for 2023.

Our revenue guidance for the year is $1.22 billion to $1.28 billion. We also expect adjusted EBITDA in a range of 12% to 12.5% of revenues and adjusted diluted earnings per share of $3.75 to $4.25. Company-wide, we're guiding to 10% organic revenue growth at the midpoint for 2023. We achieved significant growth in 2022, and we believe that the demand that we experienced in 2022 will continue into 2023. In terms of margins, at the midpoint of our 2023 guidance, we expect a 65 basis point improvement over 2022, building off the 80 basis point improvement we achieved in 2022. We remain committed to achieving mid-teen percent adjusted EBITDA margins consistent with our long-term financial objectives. We believe we will continue to drive improved profitability.

And we'll do so while further investing in areas of our business with the greatest growth potential. Finally, let me reiterate, that 2022 is a record year for Huron and the performance that we achieved was only possible because of our incredibly talented team and their commitment to our clients, to our company and to one another. Day-in and day-out they continue to push us to be better, identifying new ways to collaborate and going to market, innovating new offerings for our clients, delivered with the highest quality and supporting the growth and development of our business and our people. In closing, let me remind you of our areas of focus that we believe will help us achieve our strategic and financial objectives, accelerating growth in our core end-markets of health care and education, expanding our growing commercial business, advancing our global digital, technology and analytics platform, broadening our offerings and capabilities and building a more sustainable base of revenue to drive consistent growth.

We're off to a strong start in 2023, building on the momentum that led to such a strong start in 2022. We're excited about our prospects for achieving our revenue and profitability goals for the year, as we strengthen our competitive position and take advantage of the market opportunities that lie ahead. And now let me 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-K 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. Now let me walk you through some of the key financial results for the fourth quarter and full year 2022. Revenues for the fourth quarter of 2022 were a record $313.7 million, up 26.3% from $248.3 million in the same quarter of 2021.

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The increase in revenues in the quarter was driven by strong growth across all three operating segments and across our Digital, Consulting and Managed Services capabilities. For full year 2022 revenue was $1.132 billion, up 25% from $905.6 million in 2021. Similar to the quarter results, we achieved record company-wide revenues in 2022 reflecting the ongoing demand for our portfolio of offerings across segments in our strategically aligned operating model. Net income for the fourth quarter of 2022 was $17.1 million, or $0.85 per diluted share, compared to net income of $31.1 million, or $1.45 per diluted share in the fourth quarter of 2021. As a reminder Q4 2021, net income includes a $23.7 million gain net of tax from the sale of our life sciences business in the fourth quarter of 2021.

For full year 2022, net income was $75.6 million, or $3.64 per diluted share. This compares to net income of $63 million, or $2.89 per diluted share in 2021. As a reminder 2022 net income includes an unrealized gain of $19.8 million net of tax recognized in Q1 2022 on the company's investment in a hospital at home company. And results for full year 2021, include the aforementioned $23.7 million gain net of tax from the sale of the company's life sciences business in the fourth quarter of 2021. Our effective income tax rate in the fourth quarter of 2022 was 26.9%, which approximates our statutory rate inclusive of state income taxes and reflects certain non-deductible expense items largely offset by the impact of non-taxable gains on our investments used to fund our deferred compensation liability.

On a full year basis our effective income tax rate for 2022 was 30.4%, which was less favorable than the statutory rate inclusive of state income taxes primarily due to the impact of non-deductible losses on our investments used to fund our deferred compensation liability and certain non-deductible expense items. Adjusted EBITDA was $39 million in Q4 2022, or 12.4% of revenues compared to $29.3 million in Q4 2021, or 11.8% of revenues. For full year 2022, adjusted EBITDA as a percentage of revenues increased 80 basis points to 11.6%, compared to 10.8% in 2021. The increase in full year adjusted EBITDA reflects higher consultant utilization and a reduction of corporate SG&A expense as a percentage of revenues in 2022 compared to 2021 partially offset by continued investment in the growth of our business.

Adjusted net income for the fourth quarter of 2022 was $22.6 million, or $1.12 per diluted share compared to $17.2 million, or $0.80 per diluted share in the fourth quarter of 2021. For the full year 2022, adjusted net income was $71.1 million, or $3.43 per diluted share compared to $56.9 million, or $2.61 per diluted share in 2021. Now I'll make a few comments about the performance of each of our operating segments. The Healthcare segment generated 49% of total company revenues during the fourth quarter of 2022 and posted revenues of $153.3 million, up $23.9 million, or 18.5% from the fourth quarter of 2021. Revenues for the fourth quarter of 2022 included $3 million from our acquisition of Perception Health, which was completed in December of 2021.

The increase in revenues in the quarter was driven by strong demand for our digital revenue cycle managed services and performance improvement consulting offerings. On a full year basis, Healthcare revenue increased 20.3% to $535 million, also driven by strong demand for our digital offerings, as well as our revenue cycle managed services and performance improvement consulting offerings. Operating income margin for Healthcare was 25.9% for Q4 2022 and compared to 24.6% for the same quarter in 2021. The quarter-over-quarter increase in margin was primarily due to revenue growth that outpaced the increase in compensation costs for our revenue-generating professionals, partially offset by an increase in contractor expense. On a full year basis, operating income margin was 24.5% compared to 26.6% in 2021.

The decrease in operating income margin year-over-year was primarily driven by the exceptionally strong growth and corresponding increased mix of our digital revenue in 2022, which typically generates a lower margin than our health care consulting business. Our digital offerings in the health care industry, represents an opportunity for continued above-average revenue and operating income growth over the long term. The Education segment generated 31% of total company revenues during the fourth quarter of 2022 and posted strong revenues of $96.6 million, up $29.3 million or 43.5% from the fourth quarter of 2021. Revenues for the fourth quarter of 2022 included the inorganic contributions of $1.8 million from our acquisition of Whiteboard, which was completed on December 1, 2021.

The increase in revenues in the quarter was driven by strong demand across our portfolio of digital, consulting and managed services offerings. On a full year basis, Education segment revenues grew 48.5% year-over-year, driven by strong demand for our strategy and operations, research, digital and student offerings. The operating income margin for Education was 20.8% for Q4 2022 compared to 22.6% for the same quarter in 2021. The quarter-over-quarter decrease in margin, primarily reflects our continued investments in the growth capacity of this business during 2022. On a full year basis, operating income margin was 21.9% compared to 21.6% in 2021. The Commercial segment generated 20% of total company revenues during the fourth quarter of 2022 and posted revenues of $63.8 million, up $12.2 million or 23.7% from the fourth quarter of 2021.

Revenues for the fourth quarter of 2022, included $700,000 of inorganic revenue from our acquisition of AIMDATA, which was completed in January of 2022. The quarter-over-quarter increase in revenue was primarily attributable to strong demand for our financial advisory and digital offerings. On a full year basis, Commercial segment revenues were $237.6 million, and grew 8.8% year-over-year, driven by strong demand for our digital and financial advisory offerings, partially offset by the impact of the divestiture of our life sciences business in the fourth quarter of 2021. Excluding the revenue generated by our life sciences business in 2021 and the revenue from the acquisition of AIMDATA in 2022, Commercial revenues increased16.4% in 2022 compared to 2021.

The operating income margin for the Commercial segment was 18.4% for Q4 2022 compared to 10% for the same quarter in 2021. The quarter-over-quarter margin increase was mainly due to the decrease in restructuring charges, which primarily related to the divestiture of the life sciences business in 2021, partially offset by an increase in compensation-related costs for our revenue-generating professionals. On a full year basis, operating income margin was 21.1% compared to 15.7% in 2021, primarily driven by revenue growth that outpaced the increase in compensation-related costs for our revenue-generating professionals and the decrease in restructuring charges. Other corporate expenses not allocated at the segment level were $41 million in Q4 2022 compared with $36.9 million in Q4 2021.

Other corporate expenses in both the fourth quarter of 2022 and the fourth quarter of 2021 included approximately $1.8 million of expense related to the increase in liability of our deferred compensation plan which is offset by the investment gain and the assets used to fund that plan reflected in other income. The increase in corporate expenses in the fourth quarter of 2022 was primarily due to increases in compensation costs for our support personnel, software license expenses and travel-related expenses, partially offset by decreases in legal expenses and restructuring charges. On a full year basis, corporate expenses not allocated at the segment level increased to $140.1 million, which included a $6 million reduction of expense related to the deferred compensation plan compared with $131.5 million in 2021, which included $4.8 million of expense related to the deferred compensation plan.

Excluding the impact of the deferred compensation plan in both periods, unallocated corporate expenses increased $20.3 million, primarily due to increased compensation costs for our support personnel as well as increases in data hosting and software license costs and practice administration and meeting expenses and other travel-related expenses as we return to more in-person events. These increases in costs were partially offset by decreases in legal costs and restructuring charges. Similarly excluding the impact of the deferred compensation plan, unallocated corporate expenses as a percentage of revenue decreased to 13% in 2022 from 14% in 2021. Now turning to the balance sheet and cash flows. Total debt as of December 31, 2022 was $290 million and consisted entirely of our senior bank debt.

We finished the year with cash of $12 million for net debt of $278 million. This was a $54 million decrease in net debt compared to Q3 2022. The fourth quarter included $23.5 million of share repurchases or approximately 331,000 shares. Our leverage ratio as defined in our senior bank agreement was approximately 1.9 times adjusted EBITDA as of December 31, 2022, compared to 1.7 times adjusted EBITDA as of December 31, 2021. Cash flow from operations for 2022 was $85 million and we used $24 million of our cash to invest in capital expenditures inclusive of internally developed software costs, resulting in free cash flow of $61 million. During 2022, we deployed $121 million to repurchase approximately 2 million shares, representing 9.3% of our outstanding shares as of the beginning of the year.

And we used $3 million for strategic tuck-in acquisitions. In the fourth quarter of 2022, our Board of Directors authorized an extension of the 2020 share repurchase program, through December 31, 2023 and increased the authorized share repurchase amount by another $100 million. As of December 31, 2022, $109 million remained available for share repurchases, under our current authorization. DSO came in at 77 days for the fourth quarter of 2022, compared to 85 days for the third quarter of 2022, and 69 days for the fourth quarter of 2021. The decrease in DSO during the fourth quarter, when compared to the third quarter, reflects the increase in cash collections of working capital including, uncertain larger health care and education projects during the quarter, in accordance with contractual payment schedules.

We entered 2023 with a strong balance sheet and cash flows, during a period of uncertainty in the broader macro environment. In the fourth quarter of 2022, we amended and restated our credit facility on favorable terms, to provide additional flexibility to support the anticipated growth in our business, as well as our capital deployment strategy. We remain committed to deploying capital in a balanced way including, returning capital to shareholders and executing strategic tuck-in acquisitions. Finally, let me turn to our expectations and guidance for 2023. For the full year 2023, we anticipate revenues before reimbursable expenses, in a range of $1.22 billion to $1.28 billion, adjusted EBITDA in a range of 12% to 12.5% of revenues and adjusted EPS in a range of $3.75 to $4.25.

We expect cash flows from operations to be in the range of $130 million to $150 million. Capital expenditures are expected to be approximately $30 million to $35 million, inclusive of cost to develop our market-facing products and analytical tools and free cash flows are expected to be in a range of $95 million to $115 million, net of cash taxes and interest and excluding noncash stock compensation. Weighted average diluted share count for 2023, is expected to be in the range of 19.5 million to 20 million. Finally, with respect to taxes, you should assume an effective tax rate in the range of 28% to 30%, which comprises the federal tax rate of 21%, a blended state tax rate of 5% to 6% and incremental tax expense related to certain nondeductible expense items.

Let me add some color to our guidance starting with revenue. The midpoint of the revenue range reflects 10% revenue growth, over 2022 revenue. With regard to our Healthcare industry segment, we expect high single-digit revenue growth for the full year 2023 and we expect operating margins will be in the range of approximately 24% to 26%. In the Education segment, we expect low double-digit percentage revenue growth for the full year 2023, and we expect operating margins will be in a range of approximately 22% to 24%. In the Commercial segment, we expect to see low double-digit percentage revenue growth for 2023 and we expect our operating margins in this segment to be in a range of approximately 21% to 23%. We expect unallocated corporate SG&A, to be in the upper $30 million range on a quarterly basis in 2023, reflecting our continued growth in normalized travel and meeting expenses.

Also in the first quarter, consistent with prior years, we know the following items as it relates to expenses. The reset of wage bases for FICA and our 401(k) match, our annual merit and promotion wage increases go into effect on January 1, and an increase in stock compensation expense for restricted stock awards that will be granted in March to retirement-eligible employees. Based on these factors, we anticipate approximately 15% to 20% of our full year adjusted EBITDA and full year adjusted EPS to be generated during the first quarter. As a closing reminder, with respect to 2023, adjusted EBITDA, adjusted net income, adjusted EPS, there are several items that you will need to consider when reconciling these non-GAAP measures to comparable GAAP measures.

The reconciliation schedules that we included in our press release will help walk you through these reconciliations. Thanks everyone. I would now like to open the call to questions. Operator?

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