Huron Consulting's (HURN) CEO Jim Roth on Q1 2016 Results - Earnings Call Transcript

| About: Huron Consulting (HURN)

Huron Consulting Group (NASDAQ:HURN)

Q1 2016 Earnings Conference Call

April 28, 2016, 5:00 PM ET

Executives

Jim Roth - President, Chief Executive Officer

Mark Hussey - Chief Financial Officer, Chief Operating Officer, Executive Vice President, Treasurer, IR Contact Officer

Analysts

Tim McHugh - William Blair

Kwan Kim - SunTrust Robinson Humphrey

Randy Reece - Avondale Partners

Operator

Good afternoon, ladies and gentlemen, and welcome to Huron Consulting Group's webcast to discuss financial results for the first quarter 2016. At this time, all conference call lines are in a listen-only mode. Later, we will conduct our question-and-answer session for conference call participants and instructions will follow at that time. As a reminder, this conference call is being recorded.

Before we begin, I would like to point all of you to the disclosure at the end of the Company's news release for the 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 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 first quarter 2016 earnings call. With me today is Mark Hussey, our Chief Operating Officer and Chief Financial Officer.

Revenue from continuing operations grew 17% over the prior year quarter and our first quarter results were in line with our expectations and consistent with our full year guidance. The Education and Life Sciences and Business Advisory segments both achieved strong results in the first quarter. Our Healthcare business also grew albeit at a more modest level as expected.

I will now provide a brief overview of performance for each segment and then Mark will add color to the financials. On our earnings call in February, we commented that we were cautiously optimistic about the overall growth of the Healthcare segment in 2016.

During the first quarter, our Healthcare segment revenue grew 16% compared to the prior year quarter. This included in an incremental $11 million of revenue from Studer Group, which we acquired in mid-February 2015. On an organic basis, growth in our cost and clinical solutions enabled Healthcare segment revenue to increase modestly over easier Q1 2015 comparison.

Within our Healthcare business, we have seen some softness in the pipeline and what we call fully integrated projects, those that require our collective set of solutions to be deployed in one comprehensive project. We have also seen a shift in our clients’ buying patterns toward the procurement of more solution-specific engagements. But in many instances, these solution-specific engagements have positioned us well for additional follow-on projects.

As the market continues to evolve, a portfolio of solution-specific engagements while limiting some of the visibility to which we have grown a custom creates opportunities to be working with our clients over a longer period of time.

We consider partnering with clients on a series of related engagements to be an important contributor to the long-term growth and future success of our Healthcare business and we are comfortable with the market-driven evolution in buying patterns that we have witnessed over the past year.

While we have not seen a discernible change in our market position, we have made and we will continue to make changes within our Healthcare business to respond to the demand for services in the market. Like any business that sees a change in its market, we will continue to improve and adjust our go to market strategy and resources to address our clients’ needs and maintain our expected profitability.

Our revenue cycle offering remains premier solutions for delivering sustainable revenue cycle improvements and we expect to see continued demand for this part of the business. We anticipate our Studer Group solutions will meet full year expectations and we believe with the repositioning of our cost and clinical solutions will result in a stronger business.

We continue to be somewhat cautious about the growth rate of our overall Healthcare segment, but the many factors we have discussed on prior calls that are driving the need for change among healthcare providers remain and we believe we have the strongest set of credentials, reputation for delivering value and depth of experience personnel to position us for growth as the provider market continues its evolution.

Moving to our Education and Life Sciences or ELS segment, the segment turned in another quarter of solid performance. Our education practice continued to see strong demand in the first quarter across each of its service lines. The higher education industry faces tremendous pressure to reduce cost while improving quality, particularly student outcomes and our services are well aligned to help our clients as they face these issues driving demand and growth in the practice.

In addition to our current offerings, we continue to make progress in building new solutions including our cloud-based ERP initiatives where we obtained several key wins during the quarter. Having been close to the higher education sector for much of my career, it is both interesting and difficult to witness the ray of changes taking place in this industry.

Economic pressures play a major role including the fact that most institutions are significantly challenged to grow revenues where their cost base continues to increase. But the pressures are not just economic. Technology continues to play a substantial role in changing the way education is delivered and administered.

The need to efficiently and effectively manage a complicated decentralized educational institution, while facing extensive financial strain is driving demand across our full spectrum of administrative, research and academic offerings.

Our highly experienced team is well prepared to help our clients address the challenges that are endemic in the higher education industry, especially in the management of complex research universities and academic medical centers.

Turning to our Life Sciences business, the practice turns the corner into 2016 at a slower pace than was seen at the end of 2015, but gained momentum throughout the quarter. Within the practice our strategy offerings have been highly successful in helping clients optimize the value of their existing product portfolio including through strategic acquisitions.

Our compliance and operation solutions continue to address our clients’ government pricing and prospects management needs to ensure sales, marketing, R&D, and clinical activities are aligned to the appropriate reimbursement and regulatory requirements.

Our Business Advisory segment continues to perform well. Both our legacy business advisory and enterprise performance management and analytics or EPM&A practices achieved strong performance in the quarter. The legacy business advisory practice had a solid first quarter.

The uneven economic recovery that we are seeing across multiple industries has contributed to the strength of this business. Most of our success has been with middle-market companies across an array of industries where we have strong operational knowledge and a deep set of relationships including industries such as healthcare, life sciences, oil and gas and manufacturing.

The EPM&A practice continue its high growth from 2015 into the first quarter. Our deep Oracle sales force and business knowledge and analytics expertise coupled with our team’s diverse financial and operational background, uniquely position us to assist clients in optimizing their technologies and processes for the using and on-premise cloud or hybrid approach.

While this practice has achieved strong organic growth over the past several years, acquisition opportunities have helped solidify our leading positions in the market including this week’s announcement of Huron’s intent to acquire ADI Strategies.

ADI is an enterprise management, risk management and business intelligence firm focused on implementing the Oracle enterprise application suite. The acquisition will enhance and broaden our Oracle solutions and industry expertise while strengthening the depth of our domestic and international offerings.

As an Oracle Platinum partner ADI has developed a market-leading position in the most heavily regulated and data dependent industries including financial services, engineering, construction and technologies. We look forward to bringing our businesses together as we will be uniquely positioned to capitalize on the market opportunities presented by the rapidly evolving technology landscape.

Turning now to our thoughts on the rest of the year, given our solid first quarter performance and the ongoing demand for our services. Today we affirm our company-wide guidance for revenue, performance-based revenue and earnings.

Huron is differentiated among our competitors by our highly collaborative culture and a unique portfolio of industry-specific expertise and complementary business advisory services.

Our corporate objective is to create an environment where our businesses and our employees driving innovation and growth in and across our practice boundaries to increase shareholder value. While we remain cautiously optimistic about our near-term healthcare growth rate, we believe we have fostered an environment where company-wide growth will continue at our mid to upper single-digit growth targets.

Now let me turn it over to Mark for a more detailed discussion of our financial results. Mark?

Mark Hussey

Thank you, Jim 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 and adjusted EPS. Our press release, website and 10-Q each have reconciliations of these non-GAAP measures to the most comparable GAAP measures along with a discussion of why management uses these non-GAAP measures.

Also, our acquisition of My Rounding which closed on February 1 is included in our first quarter financial results within our Healthcare segment. In addition, our recently announced acquisition of ADI Strategies which has not closed is not included in our first quarter financial results or in our 2016 full year guidance. ADI Strategies will be included within our Business Advisory segment upon closing, which we anticipate will occur during the second quarter of 2016.

Now let me walk you through some of the key financial results for the quarter. Revenues from continuing operations for the first quarter of 2016 were $180.5 million, up 16.9% from $154.4 million in the same quarter of 2015.

Revenues for the first quarter of 2016 reflect our acquisitions of Rittman Mead India, Cloud 62 and My Rounding, all of which closed after the first quarter of 2015 and in the aggregate generated $2.8 million of revenues during the quarter. The quarter also included $10.7 million of incremental revenues due to the full quarter impact of our acquisition of Studer Group which we completed mid-first quarter of 2015.

The year-over-year increase in revenue is primarily attributable to the acquisition of Studer Group and strong performances in our Education and Life Sciences, and Business Advisory segments. Operating income from continuing operations increased $6.4 million or 81% to $14.4 million in Q1 2016 from $7.9 million in Q1 2015.

Operating income margin was 8% in Q1 2016 compared to $5.1% in Q1 of 2015. The increase in operating income margin was primarily due to lower salaries and related expenses as a percentage of revenues. Adjusted EBITDA from continuing operations was $26.5 million in Q1 2016 or 14.7% of revenues compared to $16.1 million in Q1 of 2015 or 10.4% of revenues.

Net income from continuing operations was $6.9 million or $0.32 per diluted share in the first quarter of 2016, compared to $1 million or $0.04 per diluted share in the same quarter last year. Adjusted non-GAAP net income from continuing operations was $13.3 million or $0.62 per diluted share in the first quarter of 2016, compared to $5.1 million or $0.23 per diluted share in the same period of 2015.

Our effective income tax rate in the first quarter of 2016 was 36.9% compared to 66.2% a year ago. Our effective tax rate for Q1 of this year was lower than the statutory rate primarily due to tax credits and certain tax incentives. The prior year tax rate was higher than the statutory rate primarily due to losses in foreign jurisdictions with no tax benefits and certain non-deductible expenses.

Now I will make a few comments about the performance of each of our operating segments. The Healthcare segment generated 63% of total company revenues during the first quarter of 2016.

The segment posted revenues of $114 million for the first quarter of 2016, up $16 million or 16.3% from the first quarter of 2015. Revenues for the first quarter of 2016 included $11 million from our acquisition of My Rounding and the incremental revenue associated with the full quarter impact of our acquisition of Studer Group.

Excluding these incremental amounts, revenue organically increased 5.2% compared to the year ago quarter primarily driven by our cost and clinical solutions which faced easier comparisons over weak Q1 2015 results.

Performance-based fees were $13.9 million compared to $13.5 million in the same quarter last year. Operating income margin for Huron Healthcare was 34.2% in Q1 2016, compared to 29.6% for the same quarter in 2015. The increase in operating income margin is primarily due to increased consultant utilization.

The Education and Life Sciences segment generated 24% of total company revenues during the first quarter of 2016. The segment posted revenues of $43.2 million in Q1 2016, an increase of 8.4% compared to revenues for Q1 2015 of $39.9 million. As Jim noted, the increase in revenue during the quarter was driven by strong demand in our higher education practice.

The operating income margin for Huron Education and Life Sciences was 23.6% for Q1 2016 compared to 29.5% for the same quarter in 2015. The decline in margin is primarily attributable to our cloud-based ERP investment and lower consultant utilization which was particularly strong in the year ago quarter.

The Business Advisory segment generated revenues of $23.2 million for the first quarter of 2016, an increase of 47.6%, compared to $15.7 million in Q1 of 2015. Our legacy Business Advisory Practice delivered solid growth while the EPM&A Practice experienced very strong growth in the quarter.

The operating income margin for Huron Business Advisory was 11.6% in Q1 2016, compared to 10.2% for the same quarter in 2015. The improvement in margin is primarily due to revenue growth that outpaced increases in salary expenses. Other corporate expenses not allocated at the segment level were $30.1 million in Q1 2016, compared with $28.1million in Q1 2015.

The increased expenses was primarily driven a full quarter of corporate SG&A expenses related to Studer Group along with restructuring expenses and higher bonus funding for our corporate resources. Included in corporate expenses were $2.4 million of Studer Group’s costs as these activities are consistent with other corporate activities.

In Q1, we incurred a restructuring charge of $1.3 million, primarily related to workforce reductions to align our corporate infrastructure following the divestiture of the Huron Legal segment.

Now, turning to the balance sheet and cash flows, DSO came in at 58 days for the first quarter of 2016, an increase of two days compared to 56 days for the fourth quarter of 2015. Total debt includes both the $250 million face value of convertible notes and $132.5 million in senior bank debt or total debt of $382.5 million.

We finished the quarter with cash of $13.5 million or net debt of $369 million compared to $284 million at the end of last year. The increase in net debt reflects payments of our annual bonuses, share repurchases of $55 million, and the acquisition of My Rounding. We ended the quarter with a leverage ratio defined as total debt net of cash of approximately 2.4 times adjusted EBITDA.

Cash used in operations for the quarter was $9.9 million as we funded approximately $46 million in bonus payments. We continue to expect free cash flow for the year of approximately $125 million.

Finally, as Jim mentioned, we are affirming the annual revenue and earnings guidance provided during our February earnings call.

With that, I would now like to open up the call to questions. Operator?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from Tim McHugh from William Blair. Please proceed.

Tim McHugh

Thanks guys. Just on healthcare, just to start with I guess, the commentary about the soft pipeline, I guess, for essentially where you account large engagements. Is it getting – is the comment that has gotten worse I guess as you’ve gone into 2016? Or is this a continuation I guess, of what you talked about last fall?

Jim Roth

Tim, I am sorry, I missed that, what’s gotten worse?

Tim McHugh

You talked about the pipeline for healthcare.

Jim Roth

Oh, yes.

Tim McHugh

In particular the large engagements.

Jim Roth

No, I think the pipeline is with the same nature of the pipeline is what’s changed, this is really a continuation of what we had before and what we’ve been talking about for a while is that we have not had these fully integrated projects that we’re providing a lot more visibility in the past. I think in terms of the total number of opportunities that we see, I think they are relatively similar to what we’ve seen in the past, Tim.

I think the difference is that the size of some of them has come down and as we said, that’s something we’ve anticipated for a while. We believe that the opportunity – that our ability to have more opportunities in the marketplace perhaps having smaller projects, perhaps having less visibility, but it certainly gives us an opportunity to be working with our clients for a longer period of time. So as we indicated in the call, we are actually comfortable with that trade-off even though it does come with little bit less visibility.

Tim McHugh

But, so you made a commentary that you have the same number of projects in the pipeline, but they are smaller, so I guess, the value of the pipeline would be smaller in that case or and am I cutting your words too closely there?

Jim Roth

No, I think that’s probably accurate, Tim. I think, Tim, the other aspect of it that we are seeing is just the way the clients are buying as opposed to upfront, we are seeing them buy more transformationally where they’ll start in phases and so, the value of the pipeline is a little bit of apples and orange for that reason where we’ve seen some extensions into other phases of the project.

So, what we are saying is that the value has if you look strictly at a snapshot, but we are seeing those follow-on engagements as another part of the – just the change in the buying patterns of customers.

Mark Hussey

Yes or maybe putting more simply, what I think used to be fully integrated projects are now coming to us in smaller chunks and they are going to find individual projects as opposed to anymore comprehensive projects and that’s actually reasonably similar to the way we have had experience things in the education practice for a long period of time where we have a margin number of smaller engagements and we tend to work with clients over a long period of time.

Whether this is going to be a pattern that evolves forever in healthcare, we don’t know. We are comfortable with the pipeline; it just has different set of characteristic than it typically has.

Tim McHugh

And is that a – I think you had some large projects for last year, the integrated projects I guess, what’s the timing risk around those rolling off and given the change you described I guess, in the future work?

Jim Roth

I think that’s all factored into our guidance, Tim. Those projects are evolving just fine and I think it’s important to say also that, that I think the thing that drove the need for those projects, I think we’ll continue to evolve. We just don’t want to predict when, but I think if you look at the nature of those larger or the fully integrated projects, I think you are really going to see the rationale for the clients wanting those projects.

That same rationale exists at a lot of other, particularly the AMCs and some larger systems where there is a lot of more recently consolidated hospitals. So, I don’t want to say that, we don’t think those fully integrated projects are never going to come back I think they will and they haven’t really disappeared.

They are just not coming at the pace that we want to start what’s coming and we said is our clients are simply taking a more concise view of which projects they want to do within a sequence as opposed to doing them altogether. And as I said, we are totally fine with that cadence and that’s something that we think we can certainly factor into the way we are approaching the market.

So, we are comfortable with where we are at right now. It’s just going to have different characteristics than we’ve been experiencing in the past, say over the past three or four years.

Tim McHugh

Okay, and then, Mark, just two numbers, one was Studer, if I just add the revenue to what the organic contribution was, last year you said the incremental. Is it, I guess, it implies it didn’t grow a lot year-over-year, I guess, or the $10.7 million is that just not including growth I guess, on a year-over-year basis for Studer?

Mark Hussey

Yes.

Tim McHugh

Long way of asking what’s Studer’s revenue was.

Mark Hussey

Yes, so Studer actually, we expected their sequential revenue to be – I don’t have the year-ago number, it’s not in my head, but I think the sequential growth is flattish as we expected, what happens at Studer as they get through the end of their contract, any unrecognized revenue tends to come in and it’s going to pop up the numbers.

So, I would say, going back to the comments that we made in the script to you, I think we are comfortable on a full year basis with them meeting their expectations. And I guess, looking now at a year-on-year basis, I think, Tim, they probably would have grown somewhere in the high single-digits for the quarter year-on-year.

Tim McHugh

Okay. And one last one, then on the ADI, can you give us any sense of what’s the size, purchase price and revenue contribution?

Mark Hussey

Yes, absolutely. So, with ADI, again, which we – I said about because of the complementary aspects, when you look at it from an economic standpoint, if you back into their revenue per head, the number of consultants we ultimately expect to come over, you are looking at roughly $230,000 to $250,000 per 150.

So, roughly speaking, it’s a mid $30 million, $36 million, roughly US business as an example. Probably a little bit more once the international piece of it would close and in terms of economics, the purchase price is just under one times revenue and from a margin standpoint, you are looking at probably low teens, but lots of efficiencies as we bring these practices together. So, multiple-wise you are looking at something in the mid-7 range of EBITDA multiple.

Tim McHugh

Okay. And with international, is it approaching $50 million then?

Mark Hussey

No, the international piece is quite a bit smaller. It’s probably, I would say, between 10% and 15% of the US business. We had moved more quickly on the US piece of this transaction because of Oracle’s year end at the end of May, just the timing is very important and we just have a little bit more work to get done on the international side.

Tim McHugh

Okay, thanks.

Operator

Our next question comes from Tobey Sommer from SunTrust. Please go ahead sir.

Kwan Kim

This is Kwan Kim on for Tobey. Thank you for taking the questions. I’ve got a follow-up question on ADI Strategies. After the acquisition, would there be opportunities to cross-sell ADI Strategies services to the Education and Life Sciences segment to higher ed institutions? What is your thinking on that?

Jim Roth

Well, we are actually – we’ve been doing that quite nicely since prior to ADI within the EPM&A practice already, I would say, close to 30% of the revenue within that part of our business has actually been done in our health and education area. So there – with our health and education clients and I think what’s happened is really the purchase of ADI enables us to broaden our capabilities to do this.

So, I think those kind of statistics are going to probably continue to be the case. We have had huge amount of success of taking the competencies around budgeting and planning and business intelligence, and applying them into our education and healthcare and life sciences clients. So we expect that to continue. So those revenue have all been in EPM&A even though we’ve been very successful at cross-selling into our industry areas.

Kwan Kim

Got it. And I’ve got a question on work day implementation. Has the progress been better than your clarifications once again, how would you characterize in making the momentum in that business?

Jim Roth

We are very pleased with the way that that’s progressing. We’ve had some nice wins and our focus is probably in terms of hiring people and getting people to the market that are trained and working with clients is probably ahead of where we thought we would be at this point in time.

Mark Hussey

We are very pleased with the way it’s going and we are pleased with what we believe it’s going to be a very strong future for really for all of our cloud-based technologies within - across all of our practices.

Kwan Kim

Got it. Thank you.

Operator

[Operator Instructions] Your next question comes from Randy Reece from Avondale. Please proceed sir.

Randy Reece

Afternoon. First of all, I was wondering how you evaluate end-market conditions for the group of companies in your Business Advisory segment. How does demand and the competitive dynamics, how do they feel now versus the last time you forged guidance?

Jim Roth

Randy, I don’t know that there has been any material change in the end-market conditions. We continue to see more pressure than we’ve seen in the last couple of years. Seen opportunities, again, as we described it, certainly oil and gas has been one that we see increasing opportunities, but we’ve also seen them in other manufacturing-related industrials and commodities and so you’ve got just any place that there is a little bit of dislocation pressure where there might have been more leverage is creating good opportunities for us.

Randy Reece

And on the, just the recruiting side of the healthcare business, is there any change in your – let’s say in a capital acquisition strategy this year compared with the past couple of years, in terms talent mix or seniority mix or anything like that?

Jim Roth

Nothing has really changed in terms of our views of the leverage model. I think that there is always just some evolution as we talked about our cost, clinical and looking at really how that business is evolving. But it’s really largely not had any impact on the talent acquisition process.

Mark Hussey

The only thing I would add to that would be that, as we – as our clients continue go and take on risk in this value-based environment, having some added skills in that area is certainly is something that we’ve already been – for additional people on. So some new competencies that accompany the transition that’s taking place in healthcare and we’ve been fortunate to be able to get some really talented people to help us to add to our competencies in that area.

Randy Reece

Is there a customer segment in the healthcare market that you would characterize as a typically stronger or weaker than the rest of the mix?

Jim Roth

Are you saying in terms of financially, from what perspective?

Randy Reece

I mean, in terms of demand.

Jim Roth

AMCs versus integrated systems, is that what you are getting at Randy?

Randy Reece

Yes, and standalones.

Jim Roth

The reality, I think we are seeing, we are still seeing demand across the more than just– different economic pressures. The whole market is changing quite a bit and it’s still many of the providers tend to still be influenced heavily by geographic concerns rather than national concerns from a financial perspective.

But we’ve had success really across the board everywhere from the large health system even into the community, smaller hospital community markets. We continue to believe that the academic medical centers are going to be very stressed for some long – for a long period of time and we fully expect a fair amount of our work in that area to continue as well.

Randy Reece

Thank you very much.

Operator

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 very much for spending time with us this afternoon. We look forward to speaking with you again in July when we announce our second quarter results. Good evening.

Operator

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

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