Good afternoon, and welcome to Huron Consulting Group's webcast to discuss Financial Results for the Third Quarter of 2023. [Operator Instructions] As a reminder, this conference call is being recorded. Before we begin, I would like to point all of you to the disclosure at the end of the company's news release for information about any forward-looking statements that may be made or discussed on this call. The news release is posted on Huron's website. Please review that information along with the filings with the SEC for a disclosure of factors that may impact subjects discussed in this afternoon's webcast. The company will be discussing one or more non-GAAP financial measures. Please look at the earnings release and on Huron's website for all of the disclosures required by the SEC, including reconciliation to the most comparable GAAP numbers. And now I would like to turn the call over to Mark Hussey, Chief Executive Officer and President of Huron Consulting Group. Mr. Hussey, please go ahead.

Good afternoon, and welcome to Huron Consulting Group's third quarter 2023 earnings call. With me today are John Kelly, our Chief Financial Officer; and Ronnie Dail, our Chief Operating Officer. Huron's strong performance continued in the third quarter, with revenues growing 26% over the prior year quarter and a 9th consecutive quarter of year-over-year margin expansion. Compared to the same period two years ago, the third quarter of 2021, our revenues have grown 60%, reflecting sustained strength across our industry segments and capabilities. In the first nine months of 2023, revenues grew organically across all three operating segments, led by 32% growth in the Healthcare segment, our largest business. Our financial results and increased guidance reflect ongoing solid demand for a broad portfolio of offerings, our deep industry and capability expertise, our highly talented team and our strong collaborative culture. Our third quarter results continue our solid momentum toward our investor goals of achieving double-digit revenue growth, expanding our adjusted EBITDA margins to mid-teen levels and accelerating adjusted EPS growth. I'll now share some additional insights into our third quarter performance. In the Healthcare segment, third quarter revenues grew 36% over the prior year quarter, achieving record quarterly revenues. Market demand was strongest for our performance improvement and financial advisory offerings, reflective of ongoing challenges among our provider clients. Our strategy and innovation and our digital offerings also continued to perform very well. While the operating environment for healthcare providers has improved slightly in 2023, the healthcare industry continues to be challenged by reimbursement rates that are not keeping pace with inflation-driven labor and supply costs, competitive market dynamics and a less favorable payer mix are challenging the financial and operating models of many providers. The financial headwinds created by these market conditions are significant and continue to challenge the…

Thank you, Mark, and good afternoon, everyone. Before I begin, please note that I will be discussing non-GAAP financial measures, such as EBITDA, adjusted EBITDA, adjusted net income, adjusted EPS and free cash flow. Our press release, 10-Q and Investor Relations page on the Huron website have reconciliations of these non-GAAP measures to the most comparable GAAP measures, along with a discussion of why management uses these non-GAAP measures and why management believes they provide useful information to investors regarding our financial condition and operating results. Now I will share some of the key financial results for the quarter. Revenues for the third quarter of 2023 were $358.2 million, up 25.5% from $285.4 million in the same quarter of 2022, highlighted by 36.4% growth in the Healthcare segment, along with continued strong growth in the Education and Commercial segments. From a capability perspective, consulting and managed services revenues grew 37.7% and digital revenues grew 10.8% when compared to the same quarter in 2022. Net income for the third quarter of 2023 was $21.5 million or $1.10 per diluted share compared to net income of $17.7 million or $0.86 per diluted share in the third quarter of 2022. Our effective income tax rate in the third quarter of 2023 was 31.2% compared to 30.2% in the same prior year period. Our effective tax rate for Q3 of 2023 was less favorable than the statutory rate, inclusive of state income taxes, primarily due to tax expense related to nondeductible losses on our investments used to fund our deferred compensation liability and certain nondeductible expense items. Adjusted EBITDA was $48 million in Q3 2023 or 13.4% of revenues compared to $36.5 million in Q3 2022 or 12.8% of revenues. The increase in adjusted EBITDA in the quarter was primarily attributable to the increase…

[Operator Instructions] Our first question comes from the line of Tobey Sommer of Truist Securities.

This is Jack Wilson on for Tobey. So my first question, can you talk a little bit about sort of demand by capability across segments?

So overall, the pipeline remains robust. And even with the 2023 guidance that we provided, we're seeing similar pipeline and backlog coverage ratios as in recent quarters, which gives us a lot of confidence in our guidance range. In healthcare, we have seen continued robust broad-based demand for our services. In particular, performance improvement in financial advisory demand has been strong as many of our healthcare provider clients continue to face significant financial pressures. There's been strong demand for our healthcare digital offerings as our clients try to capture returns on the investments in technology and drive operating efficiencies in a high labor cost environment, improved care outcomes and enhanced access and consumer experience. We've also seen increased demand for our revenue cycle managed services and strategy offerings. Increasingly, we're seeing situations where our clients are looking for help across multiple of these capabilities within the scope of a single project. We're seeing continued broad-based demand in the education industry, inclusive of our digital offerings. And similar to healthcare, this demand is reflective of a financially strained environment and higher Ed characterized by student enrollment volume and mix pressures, tuition pricing pressure and escalating costs. We're also seeing strong pipeline and sales conversion in our distressed advisory business in the Commercial segment. Our Commercial digital business is an area where we -- as Mark and I both alluded to in our prepared remarks, that's an area where we have overall solid pipeline, but we've seen some project deferrals in longer sales cycles, which I don't think is a surprise just given some of the macro conditions that we see going on in the environment right now. And our strategy business has experienced some softness in demand in the commercial industry, which is due to similar reasons probably to the commercial digital pipeline, but they've seen increasing demand in the healthcare industry. And so that's actually an area that we're pretty excited about the growth prospects moving forward.

So as a follow-up, how would you describe sort of the hiring environment across both consulting and digital? It seems like you made impressive gains in the headcount in both of those capabilities.

So we're -- from a hiring perspective, I guess, maybe I'll start actually with the attrition side of the equation and we continue to experience very low attrition compared to historical periods. I'd say at this point, across the business, and it's fairly consistent across the different parts of the business. We're looking at full-year attrition rate, it's probably going to be the low-double digits from an annualized perspective. And so that is good news for us given the growth that we've seen and the demand that we're seeing across the business and the pipeline that we just talked about. With all that said, given the pace of the growth and given the pipeline that we see as we head into next year, we've been continuing to hire. And I think in terms of finding talent, I think it's been a good environment for us. I don't think we've had any challenges finding the talent that we need and it's been pretty well balanced across different parts of the portfolio, really focusing, though, on the areas where we see the most demand right now.

Our next question comes from the line of Andrew Nicholas of William Blair and Company.

Wanted to ask -- I appreciate all the commentary on the pipeline, but maybe specific to kind of '24 outlook, I know it's early, I know you'll give the official guidance next year. But obviously, the last two years now, you posted growth that well in excess of those medium-term targets. So I just kind of want to get your sense for -- that's something certainly maybe not '23 rates or '22 rates, but if you're still kind of operating under the assumption that you can run out of those -- of that target next year? Or I just don't want us to get out of ourselves after 7 or 8 quarters of 20% plus type growth?

I think the good news from our perspective and the way we framed it at our Investor Day towards the beginning of last year was that we anticipated double -- low double-digit growth on an annual basis. And to your point, we're really pleased that we've been able to exceed that rate of growth in 2022 and 2023. And I think the good news from our perspective is even with the bigger base of revenue, that implies based on the growth that we've had in the past two years that's exceeded those targets, we still feel good about our ability to grow at a double-digit pace moving forward. To your point, to the extent that our teams will be working to beat that, and we'll be looking for ways to drive growth as high as we can. But -- and to your other point, we're not through our planning cycle yet, and we're still -- we'll give guidance at the end of February. But I think going back to those Investor Day targets off of kind of the revised base that we have here at 2023 is a good way of looking at it.

Andrew, this is Mark. I'll add a couple of comments. One is, the end markets that we have in healthcare and education, we have very strong market positions, which in the Healthcare segment has been obviously great momentum this year. And coming into next year, we feel good about the early part of the year. But over time, the other thing we've been very active working on over the last several years has been adding capabilities that will be in demand in the positive cycle when hospitals and health systems are going to be investing more, whether it's in digital capabilities, getting back to more in their people and patient experience in the areas of financial advisory and then strategy as well. So we've balanced out some of the variability that we knew was kind of inherent in some of the cycle. I don't think we feel that we're through the cycle. As I said, we have seen signs of softening demand, but it's something we watch carefully but with an eye toward making sure that we have less cyclicality around that particular business. Education is one also that I think you've got just very strong tailwinds across the needs of the industry and we're very well positioned in the base. And underlying both of those in tying into our commercial markets is really the ongoing transformation to the cloud and the ability to use technology to deliver whether it's on the growth side of the business or whether it's more efficient operations. It's a nice combination of that industry expertise and capability that's working well together. As we look in the commercial markets as well, we think we certainly have capital to continue to put to work where we think we can strengthen our businesses even outside of healthcare and education. So we feel like we've made great progress, as we said, ahead of where we expected to be in our medium-term financial targets. But by no means do we see ourselves shrinking away from changes in the environment, our model, we think is robust enough and our business continues to evolve in ways that we feel attaining those targets is quite reasonable for us.

And then I wanted to ask on restructuring or distressed financial advisory in commercial. I think it's a hard environment to maybe manage headcount in that space, a long overdue restructuring cycle at least in my opinion, I'm just kind of wondering how much you're leaning into headcount growth there because it's been a couple of quarters now of that being what I think is an outperformer. So if you could just kind of speak to momentum there and hiring plans? And then also from a profitability perspective, and I realize any single quarter can be lumpy. But over any kind of longer-term time frame, is restructuring going to be a positive kind of mix component of margin expansion there? Is that higher margins than the strategy and digital businesses there? Or how should we think about that evolving mix impacting margins?

Andrew, it's Mark. In terms of the hiring environment, you're absolutely right. The cycle right now is hot. You see that across all the competitors in the space. And so there is a strong demand for headcount that is qualified in those skill sets across the industry. Having said that, the size and scale of our business, and really, I would characterize the kind of culture that we have and the kind of people that are attracted to work in our environment is a differentiator for us. So we've been able to continue to add people at the levels that have enabled us to sustain what is a right now, very hot sales cycle. And so we feel good about what that trajectory looks like over time just because it's a smaller part of our business, but it's done really, really well. And I would just add in terms of your question to margins, I'll let John add commentary, but just in general, it is definitely a contributor to profitability. And for us, obviously, the kind of rates that you realize in this part of the cycle and the environment when things are really troubled and there's need for very rapid actions puts us in a very strong position within the marketplace. And the range of capabilities we have in that business, which is not just consulting and advisory, but the investment banking capabilities that we have in special situations also positions us very well to be able to capitalize on the full range of opportunities in the market. But John, why don't you speak to mix and its contribution as well.

Yes. No, Mark, I agree with what you said. It's definitely one of our stronger margin businesses in the entire portfolio across segments. So when that business is performing well, that's a positive contributor from a margin perspective. So as Mark said, we'll continue to see robust demand there, continue to kind of lean into that demand with headcount growth. So we're excited about the prospects for that part of the business.

And maybe just one quick follow-up if I could squeeze in. I think last quarter, you called out a favorable adjustment of I think it was $16 million in healthcare. Was there anything kind of lumpy or one-time in results that is worth calling out or that I might have missed in the prepared remarks?

No, Andrew. There really wasn't this quarter anything significant to note in that regard. There was mid-single digit million dollars of performance-based fee adjustments in healthcare, but I probably -- particularly at the scale that we're at now, I'd probably consider that to be more of a normal course thing. But other than that, there really wasn't anything [ we'd be ] able to call out.

[Operator Instructions] Our next question comes from the line of Kevin Steinke of Barrington Research Associates. [Operator Instructions] Seeing no more questions in queue, I'd like to turn the call back to Mr. Hussey.

Thank you so much for spending time with us this afternoon. We look forward to speaking with you again in February when we announce our fourth quarter results and announce our 2024 earnings guidance. Have a good afternoon.

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