Huron Consulting Group Management Discusses Preliminary 2013 Results (Transcript)

Jan.22.14 | About: Huron Consulting (HURN)

Huron Consulting Group Inc. (NASDAQ:HURN)

Preliminary 2013 Results Conference Call

January 22, 2014 8:00 am ET

Executives

James H. Roth - Chief Executive Officer, President and Director

C. Mark Hussey - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Treasurer

Analysts

Timothy McHugh - William Blair & Company L.L.C., Research Division

Paul Ginocchio - Deutsche Bank AG, Research Division

Jason P. Anderson - Stifel, Nicolaus & Co., Inc., Research Division

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

Tobey Sommer - SunTrust Robinson Humphrey, Inc., Research Division

Randle G. Reece - Avondale Partners, LLC, Research Division

Kevin M. Steinke - Barrington Research Associates, Inc., Research Division

Operator

Good morning, ladies and gentlemen, and welcome to Huron Consulting Group's Webcast. [Operator Instructions] As a reminder, this 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 statement 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 morning's webcast. The company will be discussing 1 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 reconciliation to the most comparable GAAP numbers.

And now I would like to turn the call over to Jim Roth, Chief Executive Officer and President of Huron Consulting Group. Mr. Roth, please go ahead.

James H. Roth

Thank you for joining us this morning. Mark Hussey, our Chief Financial Officer, is with me here as well.

I will keep my remarks very brief, but I would like to provide some color around yesterday's pre-released announcement. I'm very pleased with our preliminary 2013 full year results. Huron had solid organic growth throughout the year, and I'm encouraged by the strength of the core business, combined with better-than-expected performance-based fees. The remainder of my discussion this morning will focus on certain aspects of the preliminary, unaudited results.

During our annual financial closing process, it became apparent that the performance-based fees stemming from certain of our health care engagements were going to exceed our estimates. As we have said consistently in the past, performance-based fees are hard to predict. While the timing of performance-based fees has historically been a challenge by their very nature, occasionally the amount of the performance-based fees can be equally hard to predict. The reason for yesterday's pre-release has less to do with timing and more to do with our generating value for our clients, well in excess of our initial estimates.

Put more clearly, we were very successful in delivering greater-than-expected results for our clients and we were compensated for delivering that excess value.

Historically, our internal process for estimating the timing and amount of performance-based revenue had been fairly accurate. As we've indicated in the past, the largest challenge in predicting performance-based fees is when we will receive them, not if we will receive them. Due to that assessment process that we performed prior to starting most of our health care engagements, it is infrequent that we ultimately receive less than our expected performance-based fees when a project concludes.

Typically, our performance-based fees are slightly greater than our initial estimates. On occasion, such as the case in the fourth quarter, the value we deliver far exceeds our initial estimates. Although these kinds of results don't occur frequently, during the fourth quarter of 2013, we had a number of clients where we delivered value in excess of our initial estimates. While there may have been a small amount of performance-based fees that were realized quicker than expected, a majority of the additional performance-based revenue recognized in the fourth quarter reflected our execution of favorable results for our clients in excess of what was anticipated.

We are not prepared today to provide guidance for 2014 nor will we be discussing 2013 segment performance. Our release yesterday afternoon provided our general thoughts about the direction of revenue guidance for 2014. We will provide more commentary when we release our fourth quarter and year end results on February 25.

In the interim, I am pleased with our ongoing performance. I feel good about the way each of our practices has started the new year, and I am confident that we are well positioned to continue to provide value to all of our clients.

I will now open it up to questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Tim McHugh of William Blair & Company.

Timothy McHugh - William Blair & Company L.L.C., Research Division

I guess, the first question is just can you give us a sense of -- I think you said it was mainly performance-based fees, I guess. But how did -- I guess, how did the non-performance-based fees for health care and, I guess, I don't know how much details -- but you said you don't want to talk segments. But broadly speaking, were the other businesses performing about what you expected? And I guess, it would be helpful just to have at least a directional sense of how those shook out relative to your expectations.

James H. Roth

Tim, this is Jim. Yes, the other businesses were performing about as we had expected, and we were certainly trending toward the high end of our guidance as the quarter progressed. So I think in general, our businesses were doing all pretty well. And majority of the reason for the additional amount here were related to stronger-than-expected performance-based fees, but the rest of the businesses were performing pretty much as we had expected.

C. Mark Hussey

Tim, this is Mark. Just said another way, the additional performance was not exclusively due to the performance-based fees, there was definitely some additional non-performance-based fees that helped contribute to that performance. Yes, so the run rate revenue for health care was going well and the other practices were performing about as we have been expecting.

Timothy McHugh - William Blair & Company L.L.C., Research Division

Okay. And then I guess the -- from a margin perspective, there's good flow-through, I imagine, from the success fees you set [ph] plus the additional bonuses that you have to accrue. But as we think forward to next year, it looks like you're roughly at 19.2% EBITDA margin for this year. What -- I guess, how should -- how can we think about the trade-offs? I know there's probably opportunities in other segments to improve margins, but that's also a very healthy margin for health care. I mean, can you talk about where, I guess, you view that margin, I guess, overall as it shook out for the year?

C. Mark Hussey

Tim, this is Mark. I'll start with this one, and then I'll let Jim add any color commentary that he would like to add as well. 2013, we really had a favorable mix within our individual segments just in terms of what the revenue growth was from our higher-margin segments. And so clearly, as we were going through the year, we were increasing our expectations around the EBITDA margin, partially driven by that. And then really at the end of the year, as you just indicated, the fall-through from the incremental performance-based fees really pushed this to a little bit higher level than we would have otherwise expected. As we think about these levels going forward, this is not necessarily in our mind where we would start in 20 -- in the coming year. Obviously, we'll look for a little bit more normalized mix within the practices. Jim, I don't know if you have anything else that you would add to that.

James H. Roth

No, I think that covers it, Mark.

Timothy McHugh - William Blair & Company L.L.C., Research Division

Okay. And then last one on the contingent fees. They tend to be generated towards the latter part of engagements. Is this any sort of risk around you being towards the latter part of some large engagements that -- then there'll be a lull-ish as you have to get started up on newer projects, and so we should see significant lower contingent fees for a while or just a slowdown in health care revenue for a couple of quarters.

James H. Roth

Tim, this is Jim. I don't think you're going to see a lull. I think we're -- this is, as the practice has grown, we've got a lot of clients, and I think that's taken some of the burden off of the impact on a quarterly basis from any 1 job starting or stopping. So I don't expect there to be a lull as we continue into 2014.

C. Mark Hussey

The only thing I'd add to that, and we've said this in the past, that over time we think that the mix of the business coming from performance-based fees will decline somewhat, as we continue to grow the clinical solutions part of the practice, which tends to have a little bit less mix of performance-based fees. Jim?

James H. Roth

And I guess, the last part I would indicate is that as we've always said, the -- we think of contingent revenues on an annual basis. It's hard enough for us to place them into a year, let alone a quarter. So we kind of look at 2014 and, as Mark is indicating, I think we expect the contingent revenue to increasingly play a slightly lower role in the overall health care revenues as time goes on.

Operator

The next question comes from Paul Ginocchio of Deutsche Bank.

Paul Ginocchio - Deutsche Bank AG, Research Division

I don't know if you want to answer this first one, but is a $50 million the right estimate for contingent fees in the fourth quarter? Is that too high? Or you're not willing to speak to it at this point in time, and then I've got 1 follow-up.

C. Mark Hussey

Yes, Paul, we didn't quantify it. But I guess, what I could tell you is that based on my earlier comment about some of the run rate revenue coming through, probably a good way to think about it is perhaps about 3/4 of that performance in excess of the high end of our guidance range was attributable to the performance-based fees in rough terms.

Paul Ginocchio - Deutsche Bank AG, Research Division

And then second, can you just tell us where you ended the headcount on the year, either the absolute number, whether it was up year-on-year at year end?

C. Mark Hussey

Yes. Paul, we're not at the point where we can release that information since we're -- we just are not quite there from a filing standpoint.

Paul Ginocchio - Deutsche Bank AG, Research Division

I think you -- okay, then let me ask another way, you had growth of 14% at the end of the third quarter, is it -- is that about where you think you'll end the year? Or is it...

James H. Roth

At this point I don't want to make any comments because I haven't -- again, we haven't gotten to those numbers at this point.

Operator

The next question comes from Jason Anderson of Stifel.

Jason P. Anderson - Stifel, Nicolaus & Co., Inc., Research Division

Just the last -- well, last year, the second half was strong with the performance-based fees. This year, obviously a strong 4Q. Should we think about the pattern -- thinking of this as a pattern maybe where 4Q is going to be strong seasonally year in and year out?

James H. Roth

Jason, this is Jim. We've -- it's funny, this question often comes up. And as far as we can tell, there's no basis for any seasonality in our revenue flow, and I continue to hold that to be the case. We've had probably at least 3 years in a row where we've had pretty strong fourth quarter from a contingent revenue perspective, but I think that's just the way the cards are falling. I just don't see the seasonality, and I wouldn't go so far as to predict that, that's going to be a regular occurrence.

Jason P. Anderson - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then I know you don't want to talk too much on the '14, but you attributed some of lower tax rate here in 4Q is helping out with some outperformance. How sustainable is that? Or is that a onetime deal? How should we think -- is there any way you could give us color, how we should think about the '14 tax rate?

C. Mark Hussey

Sure, Jason. I think the way that -- first of all, it's not a onetime issue. We had -- toward the end of the year, we go through truing up all of our filings and looking at really where our state income tax is, which is essentially the main driver of that. And so that mix can change a little bit at any point in time based on where we're actually doing work. But going forward, we would expect that, that should be largely sustainable, that 42%, or maybe slightly a little bit better than that going forward.

James H. Roth

And Jason, this is Jim. I want to go back and just add a little bit more color on your first question just around the seasonality. I think for there to become seasonality, there would have to be a pattern of clients desiring to start a project at a certain time in order to end it at a certain time, as though it was kind of in their interest to achieve some objective by, let's just say, by year end in the fourth quarter. And that's just not the way our jobs tend to initiate nor is it the way the jobs that we work on with our clients are sold. There's just -- there's a need and it's kind of we get hired irrespective of the timing typically. And that's why I wanted to go back and say I just don't think there's any seasonality despite the fact that for 3 years in a row, we've had that strong performance. But I have no basis for saying that, that's going to continue.

Operator

The next question comes from Joseph Foresi of Janney Montgomery Scott.

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

I was wondering if you could explain sort of what surprised you in the quarter. Obviously, we sometimes see surprises on the negative side and went through that a couple of years ago. Maybe you can just talk initially about what the surprise was. I know you talked about the fees, but were you completing a set of contracts or a particular contract that came through that you weren't expecting? If you could just talk a little bit about the exact surprises and if they're contract-specific.

James H. Roth

Joe, this is Jim. So there's a couple of ways, I guess, to respond to that. The first one is that when we start working through an engagement, and we'll talk primarily about health care here. As we're working through an engagement, as we've said a thousand times, the timing of the realization of contingent revenues and our ability to hit the benchmarks that we've contractually agreed to is uncertain. There's a lot of things that have to happen at the client. We typically don't get paid until the results hit the P&L for our clients. And so there's a variety of things that will affect the ability of our efforts to have that financial impact on our client. And then once all of those things occur, so that can be personnel-related, that could be systems-related, and then eventually, it becomes a question of sign-off. We have management sign-offs -- senior management sign-off and sometimes board level sign-off, so there's a whole sequence of events that have to take place. And it's hard to figure out how and when that's going to happen. There are issues, for example, with the way -- if it's revenue cycle-driven, you could have billing issues and system issues that would either accelerate or defer our ability to demonstrate the value that we've tried to achieve. And so that's one example of something that's a little bit out of our control. And what happened was on a number of engagements just we had kind of all these things come together. The personnel issues, the systems issues, the sign-off issues, the realization of our efforts hitting the P&L, they all came together in ways that we typically haven't seen before, and it happened on multiple projects. And that's why we're -- it was a very unusual event, it's a very fortunate event for our clients, it was a fortunate event for us, but it's also something that was extremely hard to predict and it's pretty rare in terms of the way that all those things came together, not just for 1 client but for multiple clients.

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

What's the flow of engagements on the large size? I mean, has it changed at all? Is it larger now than it was before? And how do you think about that as far as pipeline's considered?

James H. Roth

Well, we have large and small engagements. And some of these things -- some of the items that happened in the fourth quarter were attributable to larger-than-average engagements. But as our practice has grown, our portfolio of clients has expanded, and we've got some middle market hospitals that we work with that are smaller and more easily contained. We've got some large academic medical centers that are far more complex and a whole bunch of things in between. So our portfolio of clients on any given day in our health care business is varied and it gives us -- that's why it gives us a little bit of that -- it kind of takes some of the risk out of having a large upswing or a large downswing. It's just we've got a much more balanced portfolio right now. We continue to do a lot of work with large academic medical centers, which tend to be more complex and larger assignments, and that will certainly be our hope that we continue to have that type of effort in the future as well.

Joseph D. Foresi - Janney Montgomery Scott LLC, Research Division

Okay. And then last one for me, maybe you could just talk about any differences between what you saw in '13 and what you're seeing in '14 because clearly you've talked about how success fees are going to be a smaller portion of revenue, which kind of implies that services are expanding. But maybe you could talk a little bit about any change or uptick you're seeing in between the 2 years.

James H. Roth

Well, so I'll start by saying a couple of things. First of all, I think the broader trend in health care remains strong. I mean, the business, the health care industry, the providers, in particular, are still under a tremendous amount of pressure. And there's parts of me that believe that, that pressure is going to continue to accelerate for them. How that translates into work for us will depend, but there certainly continues to be a huge amount of pressure for cost reduction and clinical operational efficiency among our entire provider base. So that's the broader issue that's driving our health care business, and that's probably the best way to look at it. I don't know that our mix of clients is going to be any different between '13 and '14. And so what we're really left with is just an industry that still is very challenged, and we happen to be -- have demonstrated over and over again that we can provide real value.

C. Mark Hussey

And Joe, let me add 1 thing on the mix. And the thing that we really don't know as of the beginning of the year is what percentage of contingent is really going to come out because as we've said before, the clients are the ones who determine how much of our revenue stream is going to be contingent based on their risk -- their own risk preferences. And so at this point, we would not otherwise have a full year expectations that's based on a completely robust pipeline just based on the sales cycle. So that will develop over time. And so that comment on contingent really is more reflective of what we think the overall market trend is relative to the mix of our business, but it can vary to some degree.

James H. Roth

Yes. And as we've been -- this is Jim. As we've been saying for a couple of years, the -- I mean, if you look at the 3 primary components of our health care practices, it's revenue cycle, it's the performance improvement and it's the clinical solutions. And the clinical solutions piece is growing the fastest of those 3, and there tends to be fewer contingent revenue projects within that solution. So by nature, that's going to cause the swing to be a little bit less focused on contingent revenues. But a lot of our clinical solutions business is still very much integrated with broader revenue cycle and performance-based projects. So they don't just -- some clients would just ask for clinical solutions, some will ask for our complete diversified set of services. And so overall, we expect the mix to be declining over time, as our performance-based fees as a percentage of total health care revenue.

Operator

And the next question comes from Tobey Sommer of SunTrust.

Tobey Sommer - SunTrust Robinson Humphrey, Inc., Research Division

My first question has to do with the increasingly invasive nature of the projects that you described on the third quarter call on your education practice. Has that trend continued or changed in any way since that last update?

James H. Roth

Tobey, it's Jim. I think it's continued. It's just it's a very challenging time in the higher education environment right now. The barriers to entry to, I think, a lot of our traditional 4-year college solution are really -- the barriers to entry are coming down. It's making it a lot more challenging. You've got all kinds of factors that are hurting the revenue side in terms of the universities' and colleges' ability to generate revenue in the future. Certainly, it's not going to come from tuition or necessarily won't come from additional public spending. It's not coming from research. And so there's a heavy reliance on gifts and endowment. And it's just a tough way to run a business and manage it so that you can strategically achieve your objectives. So it's tough and I think it's going to continue to be tough. So as our clients begin to look more strategically at kind of what their solutions are going to be, they're increasingly looking to us to help with some of those solutions.

Tobey Sommer - SunTrust Robinson Humphrey, Inc., Research Division

I'm curious if -- what the traction looks like for the legal offering that you, I think, unveiled last year that relied a little bit more heavily on using more predictive coding [ph]. What has activity been like in that regard?

C. Mark Hussey

Tobey, it's Mark. So this --- it has been definitely increased from where we were a year ago. So we're pleased with the trends and starting to see more and more trial in various projects within the legal segment.

Tobey Sommer - SunTrust Robinson Humphrey, Inc., Research Division

And then my last question, it's kind of a broader one, you've been able to consummate a couple of small acquisitions in recent months. What is it that you think is attracting sellers to you as an eventual owner of the business and place to work?

James H. Roth

Tobey, this is Jim. I think it's pretty clear. I think we've got a very collaborative culture. We've mentioned this before, and it always sounds as though it's one of those soft items. But I think that's a major factor and what attracts potential sellers to Huron. We don't do a lot of things, but we do, do a few things, we do them very well. And I think they look at us as an opportunity. We have a very good reputation, a very collaborative environment. And they're looking to grow, they're looking to expand as are we. And I think they see this as a very fertile environment to enable them to continue to pursue the kind of objectives that they had as a stand-alone company. So we consider that to be a major asset for us. And certainly, it's something that we pay a lot of attention to.

Operator

The next question comes from Randle Reece of Avondale.

Randle G. Reece - Avondale Partners, LLC, Research Division

Now that you have 2013 booked and looking at 2014, what do you expect within health care to lead the growth mix? And has clinical gotten big enough to where it can make a visible effect on the P&L?

James H. Roth

Randy, this is Jim. I think clinical's already having an impact on the P&L within health care, and I expect it to continue to grow. We've got -- we expect 2014 will probably be strong across the board in our major service offerings and health care. And as we've said, I expect the clinical piece to be -- having an increased percentage of the overall health care revenues. The demand for those types of services are very strong. And we've been saying this for a couple of years, I think it's -- we're well positioned in terms of the kinds of services we offer in the marketplace. So the need is acute, I think, in marketplace and our ability to deliver is very strong, and that's what gives us comfort about the future for this business.

Randle G. Reece - Avondale Partners, LLC, Research Division

Among key metrics, such as the percentage of assessments that convert into full engagements, scope and engagements, bill rate mix, duration of engagements, the percentage -- time that you win follow-on engagements, those sorts of things, how did you perform in 2013 across the business?

C. Mark Hussey

Randy, at this point, given that we haven't disclosed any of the metrics, we're going to have to wait to answer that question in more detail.

Randle G. Reece - Avondale Partners, LLC, Research Division

But was there any 1 particular area that -- where you made significant improvement?

C. Mark Hussey

Again, we're just not going to be able to comment at this point. We're still pulling together our year end. Obviously, this is early. And in fact, we had a number of people that have asked us, are there thoughts as to -- what our thoughts were in terms of why we issued a pre-release. And I think it was really just our nature as a management team that we are trying to be as transparent and open and conservative as we can with the information that we have. And we felt that this was sufficiently important that we felt it would be a much more transparent opportunity for us to get information out there that we thought would be useful. We'll obviously have a lot more information to just talk about when we release year end results in February.

Randle G. Reece - Avondale Partners, LLC, Research Division

Jim, you said you didn't expect a lull to be caused even though you had big success fees that would suggest big project in. I presumed you were talking about exclusive as success fees, this underlying revenue.

James H. Roth

Our success fees are very lumpy. We don't think about them on a quarterly basis. We think about them on an annual basis and -- but I don't see any inherent lumpiness that's going to occur because of the information we released yesterday.

Operator

Your next question comes from the line of Kevin Steinke of Barrington Research.

Kevin M. Steinke - Barrington Research Associates, Inc., Research Division

Kevin Steinke here with Barrington. I just had a question about comment you made in the press release where you stated the strength of your business and underlining -- underlying financial performance reflect an increasing sense of urgency among the client base. So I'm wondering if that word increasing refers to actually something you've seen over the last few months and going into 2014 or if that's just a continuation of the trends that you've been talking about for the last couple of years.

James H. Roth

Kevin, this is Jim. It's probably a little bit of both. We certainly have been seeing -- in our core markets, we've been seeing the need for the kinds of services we provide. I think in some cases, in particular health and education, the -- I mean, the kind of public pressure that we read about on the papers all the time is increasing. I don't think it's stable. I think it's actually increasing, and that's what gives us the sense that the need for our kinds of services will remain strong.

Operator

[Operator Instructions] We have a question from the line of Tim McHugh of William Blair & Company.

Timothy McHugh - William Blair & Company L.L.C., Research Division

Just 1 clarifying question. I want to make sure I understood it. The -- you talked about contingent revenue being roughly 3/4 of the upside relative to the high end of the guidance. The other part of the upside, I wasn't clear, it sounded like you're saying most of that other upside, if you will, was within health care or -- and the other parts of the business if you add them together were roughly in line. Is that fair? Or was there -- was the upside spread, I guess, across the other segments as well?

C. Mark Hussey

Tim, this is Mark. So it was -- if you look at the rest of the segments, again, without giving into any -- getting into any detail, they generally performed as we expected with a little bit of more strength out of health care.

Operator

Mr. Roth, we have no further questions. I would like to turn the conference back over to you.

James H. Roth

Okay. Thank you for your time today. We look forward to speaking with you again on February 25 when we announce our final fourth quarter and full year results. Have a good day.

Operator

Ladies and gentlemen, that concludes today's conference call. Thank you, everyone, for your participation.

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