Huron Consulting Group's (HURN) CEO Jim Roth on Q2 2014 Results - Earnings Call Transcript

| About: Huron Consulting (HURN)

Huron Consulting Group Inc. (NASDAQ:HURN)

Q2 2014 Earnings Call

July 29, 2014 5:00 PM ET

Executives

Jim Roth – President and CEO

Mark Hussey – COO and CFO

Analysts

Timothy McHugh – William Blair

Paul Ginocchio – Deutsche Bank

Frank Atkins – SunTrust Robinson Humphrey

Jerry Herman – Stifel Nicolaus & Company

Randle Reece – Avondale Partners

Kevin Spanky – Barrington Research

Operator

Good afternoon, ladies and gentlemen. And welcome to the Huron Consulting Group's Webcast to discuss Financial Results for the Second Quarter 2014. At this time, all conference call lines are on a listen-only mode. Later we will conduct our question-and-answer session for the 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 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 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.

Jim Roth

Good afternoon. And welcome to Huron Consulting Group's second quarter 2014 earnings call. With me today is Mark Hussey, our Chief Operating Officer and Chief Financial Officer.

The second quarter of 2014 was another strong quarter for our company. Huron's revenue grew nearly 23% compared to the same quarter last year and 13% organically. Year-to-date our revenue has grown over 25% and nearly 18% organically. A combination of vibrant markets and very talented collaborative people has enabled this performance and we remained well positioned for future success during the remainder of the year.

I will now provide some color on each of the segments and the primary drivers in our core markets and then I will turn it over to Mark, so he can walk you through the financials. Huron Healthcare turned in another solid quarter with strong growth resulting from ongoing changes in the healthcare provider market.

As we've indicated in the past the ebb and flow of quarterly revenues in this segment are impacted by the timing and nature of some of the larger engagements, we have underway. Over the past three years to four years, the portfolio of engagements in the Healthcare segment have tended to result in strong second half performance. Primarily due to the timing of the start at eventual completion of the array of client engagements that we had at that particular time.

Consistent with our comments earlier this year, that pattern is somewhat reversed in 2014. We had a number of larger engagements that were started in late 2012 and early 2013, that yielded strong results upon their completion in the first half of 2014. As we look into the second half of this year, we have a solid pipeline of projects in progress.

We also have a healthy inventory of assessments underway, which should enable us to achieve our goal of mid to upper single-digit organic revenue growth in 2015. After a number of quarters, where we have delivered solid results in this segment. The primary drivers in the healthcare market remain the same, yet the intensity of the pressure among our client base is increasing.

Specifically, the major drivers of our healthcare business are one; well documented needs for hospitals to improve billing and collection. Two; market and competitive pressure to reduce cost and increase quality. Three; post merger situation coming from industry consolidation, where clinical and cost efficiencies have not yet been satisfactorily achieved and four; ongoing complexities associated with the evolving transition from fee-for-service, to management to population health.

We feel confident about the increasing demand for our services, particularly among the academic medical centers, integrated networks and mid-sized hospitals. Our acquisition of Vonlay during the second quarter, added to the competencies that we provide to our provider clients.

The Vonlay team performed well during its first two months under the Huron umbrella and we have high hopes for continued growth in the future. Our integrated healthcare teams have consistently delivered value to our clients and our reputation for exceeding client commitments, a major differentiator from a competitive perspective.

Looking to the future, we believe that current industry pressures will lead to increasing demand for our services and we are very well positioned for future growth in the healthcare segment. Turning to our Huron legal segment. The second quarter resulted in our third consecutive quarter with revenue in excess of $50 million.

We continue to have solid demand from our financial services clients and we also benefited from M&A related activity among our client base. The continued success of our global sales organization has provided us with increasing exposure to new clients. Our expanding presence among large multi-national corporations is attributable to four primary factors.

First the after mentioned proliferation of electronic information. Second; the ability to help clients navigate through regulatory or litigation discovery related needs in a cost effective manner based on our innovative market offerings including our integrator analytics offering. Third; a reputation for managing large amounts of data with a high degree of accuracy and under extreme time pressures and finally, an ability to meet stringent industry data security requirements, which is a critical factor to our large global clients.

The consulting practice within Huron Legal, as had another strong quarter. Our consulting services are helping corporate law departments with large legal spend to improve their efficiency and effectiveness. The complexity of the corporate law department environment continues to grow and we believe that our e-discovery and consulting and consulting services are well positioned for growth in an expanding market.

The education in Life Sciences segment also known as ELS reported relatively flat quarter. The technology practice within ELS had another strong quarter with a number of large wins and clients that are looking for transformational change by implementing new technology into their administrative and operational units.

The part of ELS practice has been the best performer for the past year within this segment and we expect that it will continue its solid performance throughout the rest of the year. In our Life Sciences practice, the Frankel Group turned in a solid performance in the quarter and continues to integrate well with our legacy compliance focus practice.

The pharmaceutical and medical device manufacturer markets are going through a significant change including some well publicized mergers. This consolidation activity will provide some new opportunities for the life sciences practice and we are hopeful that the second half of the year, will show improvement as the industry goes through some major changes.

Our strategy and operations practice with ELS segment continued to be soft, due primarily to lack of large projects that have historically occurred within this practice. Our pipeline of opportunities in this practice is strong and we will remain patient given the complexity of change taking place within the higher education industry.

We have learnt that change comes more slowly within this industry, but we expect the market to become more active in the second half of the year and we will be well prepared with a team of experienced and incredibly competent individuals. As I indicated last quarter, I believe it is only a matter of time before we see a better compliment of utilization and margins in this business.

There's no question that the challenges among our client base continue to grow more acute and we are well positioned from the leadership and talent perspective giving me confidence that this practice will perform better during the coming quarters.

Finally, our Business Advisory segment had a strong quarter with solid contributions from our legacy advisory practice and the Enterprise Performance Management or EPM practice, which was acquired as Blue Stone International last October.

Our legacy Huron Business Advisory practice which provides operational and turnaround services to troubled companies turned in solid quarter, particularly in light of a challenging comparison to second quarter to last year.

The opportunities for our services in the middle market are expanding given the difficult economic environment in some industries and the uneven recovery in the broader economy. The addition of our recently announced broker-dealer license should enhance our service offerings within this segment, enabling us to participate in financing transactions in a more meaningful way, than we have in the past.

Our EPM practice continue to perform well exposing Huron to domestic and international clients that we have historically not served. As I mentioned last quarter, this team's collaboration among the various Huron practices bodes well for continued growth in our EPM business.

Let me now turn my attention to our 2014 guidance. As our press release indicates, we are increasing our annual revenue guidance to $805 million to $825 million. This increase in guidance reflects the strong momentum that we built in the first half of the year and our expectations for favorable market conditions for the remainder of the year.

Strength in our healthcare practices certainly contributing to our increased guidance. Our mix of engagements in healthcare is slightly more skewed towards fixed pricing agreements this year, than we had originally anticipated and given our current estimates of timing for performance based fees from our contingent revenue clients.

We are lowering our performance based fee guidance to $85 million to $95 million, while anticipating higher run rate revenue from our current healthcare clients.

While we won't be providing 2015 guidance until February. It is my expectation that we will continue to achieve mid-to-upper single-digit revenue growth in 2015 consistent with our previously disclosed expectation for this company.

Now let me turn it over to Mark for a more detailed discussion of our first quarter results including a revised EPS guidance. Mark?

Mark Hussey

Thanks, Jim and good afternoon everyone. Before I begin, please note I'll be discussing non-GAAP financial measures such as EBITDA, adjusted EBITDA, adjusted net income and adjusted EPS. Our press release website and 10-Q each have reconciliations of the non-GAAP measures to the most comparable GAAP measures and a discussion, of why management uses these non-GAAP measures.

Also as previously announced, during the second quarter, 2014 we completed our acquisition of Vonlay, a healthcare technology firm that implements and optimizes clinical, administrative and financial systems. The transaction closed effective May 5, and its financial results since that date are included in our Huron Healthcare segment.

Now, I'll walk through some of the key financial results for the quarter. Revenues for the second quarter, 2014 were $209.4 million up almost 23% from $170.4 million in the same quarter, 2013. Revenues for the second quarter, 2014 reflect our acquisitions of Blue Stone, the Frankel Group and Vonlay, which in the aggregated generated $16.5 million of revenues.

Operating income increased more than 11% to $34 million in Q2, 2014 compared to $30.5 million in Q2, 2013. Adjusted EBITDA which excludes a number of items that are listed in our press release was $42.2 million in Q2, 2014 or 20.1% of revenues compared to $36.7 million in Q2, 2013 or 21.5% of revenues.

Net income from continuing operating was $19.9 million or $0.86 per diluted share in the second quarter, 2014 compared to $15.8 million or $0.69 per diluted share in the same quarter, 2013. Adjusted non-GAAP net income from continuing operation was $22 million or $0.95 per diluted share in the second quarter, 2014 compared to $17 million or $0.75 per diluted share in the same period, 2013.

Our effective income tax rate in the second quarter, 2014 was 38.9% compared to 44.9% a year ago. The effective tax rate for Q2, 2013 was higher than the statutory rate due primarily to the impact of foreign losses with no tax benefit. Foreign losses in Q2, 2014 had no impact on the Company's effective tax rate primarily due to, check-the-box election, we made in the first quarter, 2014.

On a full year basis, we anticipate our 2014 effective tax rate to be approximately 32% inclusive of the one-time tax benefit resulting from the check-the-box election. On a normalized basis, excluding the non-recurring tax benefit. We expect our effective tax rate to be approximately 41.5%. Now let's look at how each of our operating segments perform during the quarter.

The Huron Healthcare segment posted revenues of $101 million for the second quarter, 2014 up $22 million or nearly 28% over the second quarter, 2013. Revenues for the second quarter, 2014 included $5.1 million from our recent acquisition of Vonlay. Performance based fees in Q2, 2014 were $19.8 million compared with $18 million in the same quarter last year.

On a year-to-date basis, performance based fees totaled $51 million in 2014 compared to $36 million in 2013. While we are pleased that our Huron Healthcare segment had another strong quarter. We expect some moderation in the second half, 2014 as performance based fees are likely to be greater in the first half of 2014 and than in the second half.

And as Jim mentioned, we are lowering our 2014 performance based fee guidance for a range of $85 million to $95 million, but expect higher non-performance based revenue. As we've said on many occasions, the timing of performance based fees can vary significantly. They are not driven by seasonal pattern, but rather the mix of engagements at any point in time.

The operating income margin for Huron Healthcare was 38.1% for Q2, 2014 compared to 37.4% for the same quarter in 2013. The increase in margin was due to lower salaries and related expenses as a percentage of revenues, partially offset by an increase in bonus, technology and contract expense as well as intangible assets, amortization resulting from our acquisition of Vonlay.

As many of you know in the interim quarters, we record bonus expense corresponding to the midpoint of the annual guidance range. Since, we are raising our guidance range this quarter, we are also increasing our bonus accruals.

Our Huron Legal segment continued its momentum from recent quarters and posted revenues of $53.3 million in Q2, 2014 up $8.2 million for over 18% from the second quarter, 2013. The increase in revenue was attributable to an increase in demand for our discovery services resulting in higher utilization of our discovery centers.

Utilization within our consulting practice also saw an increase from 60% in Q2, 2013 to 68% in Q2, 2014. The operating income margin for Huron Legal segment was 29.6% in the second quarter, 2014 compared to 23.9% in the same quarter, 2013. The increase in this segments margin was primarily due to a favorable mix of engagements where our salaries and related expenses as a percentage of revenues as well as lower technology and rent expenses. Again this was partially offset by an increase in bonus accruals.

The Huron Education and Life Sciences segment posted revenues of $37.7 million for the second quarter, 2014 and includes $4.2 million from the Frankel Group which was acquired at the beginning of 2014. Revenues for the second quarter, 2013 were $37.1 million. Sequentially revenues improve 12.4% compared with $33.6 million in Q1, 2014.

The operating income margin for Huron Education and Life Sciences was 30.8% for Q2, 2014 compared to 31.1% for the same quarter in 2013.

The Huron Business Advisory segment posted revenues of $16.6 million for the second quarter, 2014 and includes $7.2 million from our EPM practice, which we acquired in Q4, 2013. Excluding EPM revenues for the second quarter, 2014 were $9.4 million compared to $9.3 million for the same period last year.

The operating income margin for the Huron Business Advisory segment was 30.9% for Q2, 2014 compared to 42.7% for the same quarter in 2013. The decrease in this segment's operating margin is reflected with a combination of our EPM business which has a lower margin profile into our legacy financial advisory business.

On a combined basis, the decrease was attributable to an increase in salaries, bonuses and related expenses as well as increases in contractor expense, market expense and intangible asset amortization.

Other corporate expenses not allocated at the segment level were $30.2 million in Q2, 2014 compared with $20.1 million in Q2, 2013. The increase in primarily attributable to higher bonus expense related to higher projected funding levels associated with the increase in the guidance range.

In addition, salaries and related expenses increased along with other general corporate expenses and the $1 million restricting charge related to the consolidation of office space at three locations.

Now turning to the balance sheet and cash flows. Cash flow from operations for the second quarter $21.4 million and our net debt position increased $29 million compared to the end of the first quarter. For the first time, since Q1, 2013 we ended the quarter with borrowings under our revolver.

We experienced lower cash collections temporarily as DSO came in at 84 days. Also during the second quarter, we spent over $43 million to fund our acquisition of Vonlay and to repurchase shares.

Now turning to guidance, with the first half of the year behind us and more visibility into the second half, we are raising and narrowing our guidance range, which includes our recent acquisition of Vonlay. Before year 2014, we now anticipate revenues before reimbursable expenses in the range of $805 million to $825 million embedded in our guidance range, our expected performance based fees in the range of $85 million to $95 million.

Adjusted EBITDA in the range of $152.5 million to $158.5 million. Net income in the range of $79 million to $82.5 million and adjusted non-GAAP net income in the range of $75.5 million to $ 79 million.

GAAP EPS between $3.40 to $3.55 and adjusted non-GAAP EPS in a range of $3.25 to $3.40. And finally with respect to tax as I mentioned earlier, we should assume an effective tax rate of approximately 32% for 2014 or approximately 41.5% excluding the one-time tax benefit.

With respect to adjusted EBITDA, adjusted net income and adjusted EPS, there are several items you'll need to consider when reconciling these non-GAAP measures to the comparable GAAP measures. The reconciliation schedules that we included in our press release will help walk you through these reconciliations and with that now, we'd like to open up the call for questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from Timothy McHugh with William Blair. Please proceed sir.

Timothy McHugh – William Blair

Excuse me. Thank you. This first question just, I guess relative to the 2Q results here, which I guess already reflects a little bit lower run rate for the contingent fees in the healthcare business. The guidance for the second half of the year assumes a lower run rate and revenue, even at the high end of the guidance range.

So I guess, can you talk it all about what, as you look to the second half of the year. I guess, you're not expecting to kind of continue or part of the business that wouldn't expect to perform quite as high as you saw in the first half of the year?

Jim Roth

Tim, this is Jim. I guess, I would answer that in a couple of ways. We grew at a pretty quick pace in the first half of the year, way more so than we had anticipated and we have seen, as I've said earlier in my call. We've seen a pattern of, -- our healthcare practice still has a relatively small number of large engagement. Since you're going to see this ebb and flow, we've typically have that in the second.

We've had a stronger second half historically. This is really for us, just a reflection of the pattern of engagements in terms of when they were started and when they're ending and I think, if you evened it out, you'd find a much more natural pattern that must be well above, still what we are expecting.

The fact, that the second half will be less than the first half, does it all in our mind reflect or any anticipation that we are going to see a drop off in activity. In fact, things are looking good for the future. It's just really the pattern of the jobs we have right now, in terms of when they're coming through.

And the other part is that, we still have, as I said we did bring down a little bit by $5 million or so, our guidance for the performance based fees. We are still – yes, those are things that could occur in the fourth quarter, that couldn't occur in the first quarter were being just cautious in terms of, how we project those things.

So I'm not sure, if that I answered your question. Other than to say, there's really no pattern here to be followed other than the fact, that it's right now, it's just kind of sense at where we are right now and the projects that we have.

Timothy McHugh – William Blair

Okay and then I guess on the shift towards more fixed fees on the healthcare side, what do you attribute that too and I guess, I mean in any ways, the success you've had on prior engagements make people afraid to enter in to, more the fix or the contingent arrangements or I guess, what's behind that?

Jim Roth

No, Tim again I don't think there's any behind at all. We've seen that fluctuate also over the years and we are probably at a slightly low point, the only thing I will say is that, we have mentioned on a number of occasions that over time, we expect our contingent revenue as a percentage of our total healthcare revenue to begin to drop as our clinical practice continues to grow and so that certainly is part of that, but I think there is really nothing more, there is no pattern or no sense that we are getting any less contingent or performance based fee projects in the future.

It's just the pattern of the projects, we have right now and their preference.

Timothy McHugh – William Blair

Okay and then, lastly from a margin perspective, what kind of really surprise relative to my model, this quarter was the margins outside of healthcare, the other segments which are all were pretty close on a segment margin basis towards 30%, which I think is where you've talked about wanting to get towards, with each of those other segments and it doesn't assume you're assuming, you're going to stay there in the second half, I guess but can you talk, I guess how sustainable that sort of improvement is, in these segments or other factors that are going to kind of take back some of that margin improvement from Q2?

Mark Hussey

Tim, this is Mark. I think generally speaking you had some things that helped Q2 a little bit in terms of just favorable mix. We mentioned that a little bit in the legal segment. I think, that largely speaking the margins are going to continue to trend on a positive buoys [ph] from where we have been in the last couple of quarters, that we have talked about the areas that we wanted to see some improvement namely in legal, also in the ELS practice.

So we saw some uptick in utilization in both of those segments and then also just in terms of the our discovery center utilization, so I think to the extent that – we're aiming toward the 30% range as an aspiration. We'd love to be able to sustain them there, but I think we are going to continue to see improvement, but perhaps not exactly at the same level.

Timothy McHugh – William Blair

Okay. Thank you.

Operator

Our next question comes from Paul Ginocchio with Deutsche Bank

Paul Ginocchio – Deutsche Bank

Thanks and just looking at the headcount reductions Q1 in education, is that now the right level and could you talk about maybe the types of people that, either departed or the headcount, catch me with a senior, junior and is the level that you can get utilization back up to more normal levels. Thanks.

Jim Roth

Paul, this is Jim. We're always in all of our practices we're always balancing even when the practices are strong. We've always made it habit, when the practices are strong or when the practices are a little bit less than strong. We're always making some adjustments. There was no specific pattern or any major program, it was really just across the boards' people believe for various reasons.

So there's really nothing special there and I think, there is nothing in terms of being all senior, all junior it's just a mix.

Paul Ginocchio – Deutsche Bank

Okay, I seem to, I think you said earlier in the call that it's going to get back to, it's normal growth. There's nothing, it may be just the timing issue, but taking kind of head outs, would make me think, maybe it's going to last longer than that, is that the wrong read?

Jim Roth

I think, so the way, I respond to that is that being in the market as I am quite a bit, there is nothing about what's happened in the market that would tell me, that we should be doing anything but growing into the future. I think that's kind of where our heads at right now. You're always going to make mid course adjustments.

We do that in every one of our practices all the time. There's still a lot going on and I think, it's going to be a lot going in this practice – in the industry for a long period of time. So we have expectations for growth and that I'm very confident, that's where we are going to be.

Paul Ginocchio – Deutsche Bank

And then just, a final follow-up. I think you said for 2015 mid single-digit growth looking and maybe I missed it, but looking at your contingent fees. Is the outlook, that they would grow from your revised guidance this year or in line with revenue or is it will there be something, I know it's difficult to look at so far in the future, but is it anything unusual about contingent fees next year that you can see?

Mark Hussey

No, Paul I would say it's too early to really give you any kind of indication one way or the other. I would say, it will be something that we will talk about, when we see what is best we can and as at the time, we give guidance what the mix of engagements looks like, but in the market. We are not seeing anything that is a shifting presence one way or the other, that's outside of ranges that we have not seen in the past, we've seen definitely seen this kind of movement between fixed and contingent. It's really not indicative and anything that's to come.

Paul Ginocchio – Deutsche Bank

Great. Thanks.

Operator

Our next question comes from Tobey Sommer from SunTrust

Frank Atkins – SunTrust Robinson Humphrey

Hi, this is Frank in for Tobey. Wanted to ask about the healthcare segment? Can you give us a sense for the impact of Vonlay on headcount bill rate and utilization and would it may have been on more organic basis?

Mark Hussey

Frank, this is Mark. So, we are not really breaking out from a bill rate and some of the other metrics, but I think from a headcount perspective, I think it's fair to say that, if you looked, if you took Vonlay out of our Q2 numbers. The headcount in the quarter would have been more flattish in healthcare and I think just a follow-up to that.

Let me just say, our expectation is still to end the year somewhere, high single digits 10% type headcount growth rate excluding the impact of Vonlay.

Frank Atkins – SunTrust Robinson Humphrey

Okay and utilization was strong in the quarter. Any particular reason there and what is your visibility going forward in that metrics?

Mark Hussey

Jim, you want to go ahead?

Jim Roth

In the utilization as always is kind of ebbs and flows a little bit, this is little bit stronger than the first quarter. Again, it's just largely just reflection of the projects that we have in the pace that they are going at right now. I think, we have operated the healthcare utilization certainly in the last 12 – for the last four quarter, maybe the last five quarters, a bit higher than we would like.

I think we still aim to have, our optimal utilization company wide, is likely going to be in the mid upper 70s and we certainly have demonstrated that we can run healthcare in the low 80s, but we get pretty hesitant, when it goes much upon that. I think, where is that right now is about right for we would like to be in longer term.

Frank Atkins – SunTrust Robinson Humphrey

Okay and in your prepared remarks, with regards to the legal segment. You called out the impact of M&A, can you give us a little bit color on either the growth rate or the size and kind of how that funnels through that segment?

Mark Hussey

So Frank, this is Mark. In the M&A activity this is clearly you know second request type activity which is pretty common in this particular market and we participate in a meaningful percentage of the transaction that happen within the market place. So it's really just as those larger deals come up, they're somewhat hard to predict when they tend to be fairly intense during that period of time, but there have been an increasing number of event, this year than we have seen in the past several quarters.

Frank Atkins – SunTrust Robinson Humphrey

Okay and last one from me. Could you touch a little bit on the hiring environment and attrition?

Mark Hussey

Yes, our turnover continues to be close to historical levels, picked up just a little bit but nothing outside of norms, going to post bonus that we wouldn't have expect to see. Our hiring will be, we've got our campus analyst starting between now and into the third quarter or the rest of the third quarter, at various points, so we continue to be able to attract people within Huron at competitive salaries and getting talent in the door is not, been a problem, whatsoever for us.

Frank Atkins – SunTrust Robinson Humphrey

All right, great. Thank you very much.

Operator

Our next question comes from Jerry Herman – Stifel

Jerry Herman – Stifel Nicolaus & Company

Thanks. Jim, I just wanted to stop with a follow-up an a clarification on your commentary about 2015. Did you say mid-to-single-digit growth in 2015, is that how you're referring that?

Jim Roth

Yes, our mid-to-upper single-digit organic growth. Yes.

Jerry Herman – Stifel Nicolaus & Company

Okay, great.

Jim Roth

That's our current estimate right now, we are obviously not giving 2015 guidance yet, but as we kind of looked in the future in terms of what the market, where our markets are looking like, we believe that something that we can accomplish.

Jerry Herman – Stifel Nicolaus & Company

Okay and then with, I want to follow-up on some questions about the second half of the year. Clearly the contingency fee business, distorts they have comp, put pressure on the comp if you will, could you maybe give us some sort of rank order in terms of where you see, the year-over-year changes in the business because it obviously suggest down EPS in the second half of the year, at the bottom line and I think your contingent fee guidance is something like $40 million versus $68 million if you will, but maybe just pick through some of the key factors that lead to that second half, negative comp?

Mark Hussey

Well, the first thing I think, I'd remind Jerry you and everyone else is that, last year in Q4 we had $45 million of contingent fees. So and clearly, we had said at that time that it was about $15 million of positive surprise so that's one thing, I think that you probably need to take into consideration in the comparison that obviously is going to varied within the reported numbers.

And I think, you just noted the second factor which is, at the midpoint of the range that we just estimated, you've got a pretty meaningful decline $51 million year-to-date, if $90 million would be $39 million at the midpoint of that range and so those things basically provide a challenge in terms of the comps.

Again, when you look at how we run the company. We really run the company on a full year basis and we do, we don't really try to have sequential, we'd love to have sequential growth as nice and even over time, but we do have a little bit of up and down in the business in terms of trends, but as we said there is nothing in the market place to give us to any pause or concern at this point.

Jim Roth

And this is Jim, I will just reiterate that, we I can't emphasize that enough. We really do run this company at an annual basis. All of our planning, all of our hiring, all of it is done with kind of annual goals and mind, that's where people get compensated and so we don't necessarily. We – as year goes on, we begin to see more clearly the ebbs and flows that are going to happen quarter-to-quarter, but our entire thought process is around the annual results, which is entirely, what we commit to and a very important part of our people's compensation.

So that's – these types of things are going to happen there's nothing we can do about them. As we have seen many times before, there are circumstances off and beyond our control that can have a material swing in the performance based fees both in terms of timing and sometimes in terms of amount and we just can't predict them.

So we run the business, the way we think we need to for an annual basis and are always pleased when we lay out annual guidance at the beginning of the year and we end up exceeding that's certainly is our goal.

Jerry Herman – Stifel Nicolaus & Company

This is one last question, I'll turn it over. Can you help to quantify, Mark the impact of the bonus accruals in the quarter and perhaps on a year-over-year basis?

Mark Hussey

Sure, Jerry. So the way to think about and again, I'm going to tell you things that you could probably glean off the balance sheet in terms of the accrued payroll and just looking at our cash flow statement, but in a cut to the answer here. It was about $10 million of additional bonus expense in the quarter year-on-year and sequentially, let me just double check my numbers here.

I think it was about, you know Jerry I'll come back to you in just a moment. We'll go to the next question.

Jerry Herman – Stifel Nicolaus & Company

Okay, that's great. Thanks very much guys. I'll turn it over.

Operator

Our next question comes from Randle Reece with Avondale Partners

Randle Reece – Avondale Partners

Hi, I wondered first of all to clarify of the contingent fee revenue number you gave with that 100% healthcare?

Mark Hussey

Yes, that was all healthcare.

Randle Reece – Avondale Partners

So the underlying, consulting billing rate in healthcare is running well ahead of historical norm and if I'm to assume that's going to persist, number one that's a significant change in modeling assumptions, but number two I'm wondering if you're expecting this fixed fee shift to last more than a couple of quarters?

Jim Roth

Why don't you take the first one, I'll take the second one, Mark.

Mark Hussey

Yes, so you know I think, again I think Randy when you look at the bill rate. There's a couple things that go into that one is, clearly the contingent mix affects the bill rate in the quarter. We have seen some additional efficiency, when you look at the really the productivity of the solutions that we are working on, obviously one of the things we are trying to do is drive efficiency into our business, so that we can gain the same revenue on fewer hours and that would show up as a little bit of an improvement in the bill rate as well.

And then I would just say, those are – you've got Vonlay, which is coming into the mix as well, which is going to have some impact on that, going to go on the other way, but it was not material really in terms of its impact on the quarter just based on the size of the revenue in relation to the whole.

So, I would say getting we'd certainly love to see improvement in our bill rates over time, all of that said we are not really looking to drive higher margins in the business by improving our pricing, but if we get a little bit more flexibility in pricing from having more efficiency to be more competitive and remain competitive that's what we are going to continue to do.

Jim Roth

All right and then I think Randy just in terms of the percentage, revenues coming from or the number of the projects that are coming with performance based fees. I think, we feel reasonably good about the way, 2014 is going run out in terms of predictions and we've shown out. I think, many of the projects that are just getting started now and many of the assessments we have underway right now will give us over the next quarter or so, a much better sense in terms of 2015, in terms of whether there's going to be a mix, more towards fixed fee or a contingent revenue.

At this point, it's just to our tell, but as we said earlier this is entirely up to the clients. We offer both and it's up to the clients and they will make their own decisions, as they always do based on all of their internal factors. So it's really hard to for us to predict. I think overall, it's been roughly 33% or so, but I do think, we are going to continue to see performance based revenues as a percentage of total revenue continue to decline over time.

Randle Reece – Avondale Partners

You've made a number of these IT acquisitions in the last few quarters, have they – in aggregate shifted any of your fundamental metrics in a meaningful way and should we, is there any way we should understand how that is in fact, in comparison?

Mark Hussey

Randy, this is Mark again. So first of all, on the IT acquisitions I would say that really Vonlay's is really the only pure IT acquisition. Blue Stone is really a consulting from it's really has billable consultant hours. So it's and its profile really looked very much like the ELS averages in terms of bill rates per hour, that now had been moved into Business Advisory is going to kind of blend that.

We have kind of given you the relative percentages of what the revenues is from the legacy practice versus Blue Stone. So you can pretty much back into that from you know in terms of the math and the impact, with respect to Vonlay, that again it's roughly $5 million. A $100 million is just not going to be all that meaningful in the quarter and it would take, quite a bit of glow for that to really start to show up and have and kind of meaningful impact at this point.

Randle Reece – Avondale Partners

Thanks.

Mark Hussey

And before we go to the next question, let me come back to the bonus question and just clarify that, the sequential increase in bonus expense was about $10 million and the year-on-year comparison is an incremental of about $13 million. And operator, why don't we go to the next question then.

Operator

Our next question comes from Kevin Spanky with Barrington Research

Kevin Spanky – Barrington Research

Good afternoon, Kevin Spanky, Barrington Research. The mix shift towards fix fee projects is there an indication of strong growth and clinical solutions this year and that becoming a larger percentage of the healthcare segment revenue at all?

Jim Roth

Kevin, this is Jim. It is a part of that, but I think another part of this is just still the core business that we have, the non-clinical solution piece still had a bit more fixed fee this year, than we had last year. So it's a little bit of a combination.

Kevin Spanky – Barrington Research

Okay and within legal, just an update on your integrated analytics offering and how that's catching among the client base?

Mark Hussey

Kevin, this is Mark. It continues to be evolutionary, I mean it's certainly something that continues to be out there and increased gradually and pretty much as we thought, it continues a gain a popularity once we have trial, normally we have people sticking with it in various ways, but at this point it's not a meaningful percentage of the total revenue of the legal discovery business.

Kevin Spanky – Barrington Research

Okay and also Mark, you mentioned DSO up a little bit, what would you attribute that to and do you see that, coming back or getting collected over the remainder of the year?

Mark Hussey

Yes, absolutely Kevin. I think it was just a slowdown in payments at the end of the quarter that we typically have not seen because actually right after the 1 July, we saw a substantial increase in collection. So I'm highly confident that we are going to have a more normalized period after that, so I don't think there is anything unusual about what's going on other than just slowdown and given what we've experienced, I would confirm it's temporary.

Kevin Spanky – Barrington Research

Okay and lastly, just want to circle back on an announcement you had earlier in the month an investment and Shorelight Education. How material was that investment and what prompted you to make that and where do you see the benefit of that being going forward?

Jim Roth

Kevin, this is Jim. We didn't disclose the terms on that, but more importantly strategically when you look at our higher education clients. One of the fundamental challenges that they're having right now, is that they're having difficulty growing the top line, it's not really going to come from tuition increases. It's not going to generally come from public funding and it's not going to come from research and so your only real option is to have, revenue growth come from gifts or endowment return.

And while those may surface, I think it's a hard way to kind a plan a business and so what Shorelight does, it gives our clients an opportunity to have access to international students and which typically will be full pay and it provides them with an opportunity to increase their top line in a consistent manner with their expectations also achieving more diversity on the campus.

So for us, it was the long way of saying for us, it's just an opportunity to provide a solution through Shorelight to our clients that are struggling otherwise in terms of growing the top line.

Kevin Spanky – Barrington Research

Okay. Thanks for taking my questions.

Operator

(Operator Instructions). Mr. Roth, we have concluded the allotted time for this call. I would like to turn the conference back over to you.

Jim Roth

Thank you all for spending time with us this afternoon. We look forward to speaking with you again in October, when we announce our third quarter results. Good evening.

Operator

That concludes today's conference call. Thank you everyone for your participation.

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