Good afternoon and welcome to Huron Consulting Group's Webcast to Discuss Financial Results for the Second Quarter 2024. At this time, all conference lines are on a listen-only mode. Later, we will conduct a question-and-answer session for our conference call participants and instructions will follow at that. 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 reconciliations to the most comparable GAAP numbers. And now I would like to turn the call over to Mark Hussey, Chief Executive Officer and President of Huron Consulting Group. Mr. Hussey, please go ahead.

Good afternoon and welcome to Huron Consulting Group's second quarter 2024 earnings call. With me today are John Kelly, our Chief Financial Officer; and Ronnie Dale, our Chief Operating Officer. In the second quarter, we achieved record revenues, led by solid growth in our Healthcare and Education segments, and we expanded our adjusted EBITDA margin to 15%. Our adjusted earnings per share also expanded to a record level, 20% higher than the previous high watermark established in the third quarter of last year. We generated record cash flow in the second quarter, enabling us to meaningfully reduce our debt, while returning capital to shareholders through ongoing share repurchases. Our record second quarter results capped a strong first half performance for 2024. In the first half of 2024, revenues grew 9.5%, adjusted EBITDA margins increased 60 basis points, and adjusted diluted earnings per share increased 28% over the same period a year ago. Our results demonstrate strong execution against our strategy as well as the positive impact and the changes we made to our enterprise operating model at the outset of 2022. These changes have broadened the set of offerings we deliver to clients in our core industries and allows us to operate our business at new levels of efficiency. Our strategic focus continues to be on driving sustainable revenue growth, expanding margins, and effectively deploying capital to deliver superior returns for our shareholders. As it relates to improving profitability, despite the difficult comparison, adjusted EBITDA margins grew 100 basis points in the second quarter over the same period a year ago. The scaling of our business over the past three years combined with the build-out of our global delivery capabilities and our team's focus on our key operating levers like pricing and utilization, have meaningfully enhanced Huron's earnings power. We…

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's website have reconciliations of these non-GAAP measures to the most comparable GAAP measures, along with the discussion of why management uses these non-GAAP measures, why management believes they provide useful information to investors regarding our financial condition and operating results. Before discussing our financial results for the quarter, I would like to acknowledge two housekeeping items. First, in the second quarter of 2024, we settled a litigation matter for $15 million, which [indiscernible] pointed. This $15 million settlement gain was recorded as a component of other gains net on our consolidated statement of operations. We have excluded from our non-GAAP measures $11.7 million, which is the value of the settlement gain that exceeds the third-party legal costs incurred during 2024, specific to this litigation matter. Second, I want to make a comment on revenue-generating professional headcount growth. Our year-over-year headcount growth of 13% as of June 30th included the expansion of our India-based Healthcare Managed Services team. Excluding the impact of the India-based Managed Services team, headcount growth was 6%. Now, I'll share some of the key financial results from the second quarter. Revenues for the second quarter of 2024 were a record high, achieving $371.7 million, up 7.2% from $346.8 million in the same quarter of 2023. The increase in revenues for the quarter was driven by solid growth in our healthcare and education segments and included a full quarter contribution of $6.8 million from our GG+A acquisition, which closed during the first quarter of 2024. Net income for the second quarter of 2024…

Thank you. [Operator Instructions] Our first question comes from the line of Andrew Nicholas of William Blair and Company.

Hi everyone. Good afternoon. I wanted to ask on commercial weakness first. Mark, you're pretty confident in this being temporary weakness. Just kind of curious if you could speak to what gives you that confidence? And over what timeframe you would expect this to kind of play itself out? Is it just a matter of getting through some difficult comps in some of these budget restrictions? Or is there any other catalyst you're looking for? And then somewhat relatedly, is the plan to let to off the gas a little bit on the headcount growth side until you start to see evidence of those budgets dying out?

Yes, Andrew, I would start with the reason for our confidence. It's really the pipeline itself. When we look at the kinds of projects that we're bidding on and the clients that are engaging us, we look at the size of that at historical levels, we feel confident that the demand is there and that really what we've got is delays in decision-making that to me, we've seen in other environments where there's some macro environment and got the elections going on. So, we believe that, ultimately, there's -- the tailwinds are going to come back. And we see signs from time-to-time, we're not ready to call that in the second half of the year. We have tapped the brakes on headcount additions. But there's -- we see nothing that really gives us any kind of view of change in trajectory for the longer term.

And Andrew, I'll add. When we look at the guidance update and the lowering of the midpoint of our revenue guidance by $20 million, the majority of that actually relates to some of the softness that we experienced during the first six months of the year. When we look at the back half of the year and our projections in the back half of the year, which is supported by our pipeline and by our backlog, that's actually much more consistent with the expectations that we had in the front half of the year. So, I think we've already digested a significant component of the weakness that Mark was referring to.

And John, maybe to clarify, that's specific to commercial you're saying in terms of growth consistent with, okay. Maybe that's a good segue then to just ask a follow-up on segment level expectations. You had given us or outline that for us on the fourth quarter call, first quarter was a little bit different somewhat with commercial. I think healthcare was a little bit better than you had thought going after just three months. So, if you could just outline maybe where segment level expectations are today relative to the fourth quarter call, I think that would be some helpful additional context for the guidance changes?

Sure Andrew. From a -- I'll start with healthcare. From a healthcare perspective, we're expecting the full year growth rate at this point to be in the upper single-digits to lower double-digit range. So, that's up from the mid to upper single-digit range back from the February call. And we still expect margins for healthcare to be in the 25% to 27% range. From an education perspective, we're expecting revenues now for the full year to be in the low double-digit range and we described it as a low-teen range on the call back in February. And we still expect to be in the low double-digit range. And there, the margins, again, we expect to be in the 24% to 26% range, which is consistent from the February call. And then from a commercial perspective, we're now expecting the full year to be relatively flat with last year. But that was an area where we expected at the outset of the year, low double-digit growth. And the margins for this part of the business also remained unchanged in the 21% to 23% range.

Great. Thank you. And then if I could just squeeze one more in. I mean some movement there at the segment level, but the margin outlook consistent at the segment level and also you were able to raise it for the full year. I mean what gives you the ability to do that? Is it just really, really strong utilization trends? Is it plans to lower headcount growth in the back half of the year? Anything else that you would touch on that would be great?

Yes, Andrew, it's John. Our team has done an excellent job of really managing expenses throughout the first half of the year. For context, attrition, as we've talked about on the past couple of calls, has been much lower than what we anticipated at the beginning of the year, which means that careful stewardship by our teams has been at more important. To your point about utilization as the year does go on, based on our forecast, we do expect utilization to continue to ramp-up in the back half of the year. And so we think that's going to be another margin-accretive item as we get towards the back half of the year. And then finally, we mentioned the litigation settlement gain having those litigation expenses for that settlement fully behind us at this point. That's another positive factor in terms of our full year margin outlook.

Thanks again.

Thank you, Andrew.

Thank you.

Our next question comes from the line of Tobey Sommer of Truist Securities.

Thank you. I wanted to ask sort of a broad question about incremental margins. Can you achieve the mid-teens margin target for next year, the 15%, I guess, at this kind of revenue growth rate? Or do you need revenue growth to accelerate for that to be achievable?

Hey Tobey, it's John. We don't need revenue to accelerate beyond -- really, the revenue growth profile that you're seeing this year, just for the sake of discussion in order to continue the ramp forward that we see with margins for the full year next year, that's an area where -- when we look at the different libraries that we have from a margin perspective, scaling our SG&A, continued deployment using our global delivery model, utilization, some of the pricing initiatives that we have underway, we feel good that those individual levers, in fact, probably oversell the margin targets that we out there, which, of course, gives us some capacity to continue to invest in the business. So, we feel good about our ability to continue to manage towards the margin targets in a variety of different revenue growth rates.

And Tobey, I'll add, I think, what is a very important addition to that, which is in our Managing Director compensation, the targets that we set, we really have built into everybody's objectives, a margin component, which really is very important because many of the decisions that are made are really at the micro level by individual Managing Directors as they manage their engagements have been sold and delivered. And so that really has shifted the nice balance between revenue growth, but making sure that we preserve the profitability in the bottom-line. So, the rate of growth on the top line certainly is very helpful when we look at the components contributed by leveraging SG&A, but there's many other levers that we have that -- so we're not -- certainly not credit around just revenue growth.

Within the education business and what you're seeing from customers there, there's certainly been news over the last -- the first half of the year with protests and potential impacts on fundraising, the delays with and impacts on enrollment and now like having to pay student athletes, is the -- do those factors potentially alter the growth rate for the segment? Or like how does news flow today impact your outlook for the business in 12 months, so to speak?

It's a very fair question, just given the prominence in the headlines that you've seen. But really, when you look at it, it's really centered around the Office of the President. And as I mentioned even in my remarks, so much of our work is done with people within the President's Cabinet, if you will, that -- and they all have responsibilities that are really tied to the improvements they need to make across their own institutions. And so we have not really seen any kind of impact out of that, although we watch it, we monitor it. So, at this point, it is not something that we're terribly concerned about. But just because we've had some degree of time already between now and when some of those initial challenges happen in the IDs.

Right. And then within the healthcare portfolio that you've broadened demand and can have services that can match a wider spectrum of sort of healthy or sick conditions at hospital customers, how are you seeing the spectrum of demand evolve? Several quarters ago, we had mostly performance improvements and the complexion of that seems to be shifting. How would you characterize the balance of the demand and where its strongest currently?

Yes, I'll let John elaborate. But I would just say as a general expectation, I think the areas that are -- first of all, I'd say the comments that we hear from our teams are the margins are pretty razor-thin. They're better, but it's not like there's a big process. But there is definitely a barbell, if you will, of clients that are doing very well and are being aggressive toward their growth. Those are the areas that they're investing in technology, in their digital solutions, some of the strategy areas, and financial advisory, things that are on the proactive growth side. And yes, we still see those systems that are really challenged with just headwinds around their competitive markets, the reimbursement models and the like. And so there's been a pretty healthy mix, but I would say leaning towards digital as the area that you're really seeing people within the systems leading into healthcare.

Yes. From the market overview from -- when you look at our pipeline, Tobey, it continues to be really well-balanced. And so that segment of the market that's going through financial pressures right now, that's still driving significant demand for our performance improvement offerings. And our teams continue to relay back to us that it's a robust market for those types of offerings right now and that's supported by the data that we see in our backlog and our pipeline. Yet at the same time, the digital needs that Mark just referred to also are a big growth area. We also see a number of projects in the pipeline and opportunities related to that part of our business. So, to your -- the way you asked the question about the trajectory of things, you're right, it was a performance improvement weighted pipeline last year. We talked about more balance at the beginning of this year and I'd say we continue to see that balance at this point this year.

Thank you. And then just on your headcount growth, particularly digital, in your offshore operations, is it fair to assume that, that headcount growth is attached to sales already sort of consummated and in the bag as opposed to prospective sales out in future quarters?

Yes, I would say our digital -- what I referred to earlier the call was our managed services team in India or -- global team for managed services. And yes, to answer your question, that team is related to projects that have already been sold, and they're executing on those. To broaden the question to our digital team, which is also based in India, they're largely deployed and have strong utilization on our ongoing digital products as well.

And then last numerical question for me. Well, in the context of improving EBITDA margins and getting up to the mid-teens, does that have any implications or changes to the cash flow conversion? Or should the rules of thumb of the past hold through as the margins expand?

I think the rule of thumb should hold through from our perspective, Tobey.

Thank you very much.

Thank you. Our next question comes from the line Bill Sutherland of The Benchmark Company.

Thanks. Hey everybody. I wanted to maybe, Mark, untangle, not untangle, but take apart the digital demand a little bit. Obviously, particularly interested in how you guys are participating in the AI initiatives that health systems are increasingly taking on? I noticed one just announced ahead of AI projects. I think it was Cleveland. Anyway, just whatever you guys are doing there and kind of how much of it is starting to move the needle?

Yes, I would say it's still in the early innings in general, but there's a tremendous amount of activity, Bill, to your point, and we're definitely seeing many, many organizations are piloting AI ideas before they're scaling them across the organization. And it's really true in education as well. We do see some areas, as an example, in education, on the research side that seem to be accelerating as well. I think for us, it continues to be upside, but we're very active not only in the healthcare, higher education and certainly in the commercial markets as well. We see a lot of activity going on. So, I think we feel like we're well-positioned. We're very aggressive and active in the marketplace and we're getting very good response from clients as we work with them.

And you're able to build up the bench in terms of AI credentials?

Yes, there's -- the issue of -- we're not going out and meeting the higher deep data scientists, but people who have prompt engineering backgrounds and other types of skills, we have not found an issue finding the right numbers of people that we need to scale. And then internally, we're also using AI to at a greater level as we look at our own delivery methodologies as well. And so it's very pervasive, I would say, increasing in scope and scale.

That was my follow-up actually was to what degree are you seeing or hope to see benefit on margin in terms of implementing AI?

Yes, we're not dependent on it in the sense that while there's -- we don't automate things, we're not going to be able to achieve our goals. But feel like it's certainly -- I take AI and expand that to really the whole concept of automation in general because there's a lot more beyond just AI, but we can benefit from collectively. And so we do think that will ultimately become an increasing benefit for us as we look ahead to 2025, as an example.

I missed -- John, I missed what you said, GG+A -- this is a couple of housekeeping. What GG+A contributed?

It was $6.8 million for the quarter, Bill.

$6.8 million.

Yes, correct.

Okay. I couldn't quite hear you. And then did you discuss the interest expense as it's presented to the second quarter? And what I just kind of -- I'm kind of wondering about the size of it and what how to think about the next few quarters?

So, the second quarter from an interest expense perspective is really our high watermark, Bill. If you think about it, we pay out the annual incentives in kind of mid-March. So, you really get the full higher borrowing levels for a full quarter in the second quarter. You can see, based on what we discussed from a free cash flow perspective, we had some really nice paydown of our debt as the quarter progressed. We expect that trend to continue in the third and fourth quarter. And so that really should be the high watermark. I would think of the back half of the year probably being more all-in in kind of the $10 million range.

Okay. That’s helpful. Okay. Thanks. Thanks everybody.

Thank you. [Operator Instructions] Our next question comes from the line of Kevin Steinke of Barrington Research Associates.

Thanks. So, as you mentioned in your prepared remarks, the full year revenue guidance still continues to imply sequential revenue growth in the second half of 2024, looking specifically at commercial. To get to that relatively flat outlook, it looks like you have to have some pretty nice sequential revenue growth in commercial specifically. So, can you comment on that? Is that correct? And if so, what would drive that? Is it some of the pipeline beginning to move that's currently being pushed out? Or what would lead to that?

That's right, Kevin. You named it, it's the pipeline converting to hard backlog now in the back half of the year. I think that's true both from a digital perspective as well as a consulting perspective within the commercial segment. So, our teams have had some really nice conversion on the consulting side as well from a distressed financial advisory perspective. And so we're entering a period of higher run rate on some of those projects during the third and fourth quarter. And then on top of that, some of the delays that we've seen in pipeline and the slower sales cycle on the digital side, our expectation is that we have more conversions there in the back half of the year too that firms up the digital side as well.

Okay, that's helpful. And then looking at healthcare, the increase to the full year 2024 growth expectations for that segment. Can you just maybe comment on what's trended a bit better than you would have expected at the outset of the year that enables you to increase that outlook for healthcare?

It's been broad-based, Kevin, within the healthcare segment, and it goes back to that conversation we had a couple of minutes ago about the pipeline and where we've been seeing demand. So, I think from a performance improvement perspective, we continue to see some really strong demand from our clients there in terms of needing help from a margin improvement perspective. And so that, I think, has been a positive item relative to our beginning of the year expectations. But then also on the digital side of the shop, and that probably relates to the customers at the other end of the spectrum who are feeling like they're in a stronger financial position than they were a year ago. Those clients and their investments in digital has been stronger than we expected as well. So, I'd say it's a story of balance, both in terms of the pipeline, but then also in terms of the improvement in our guidance versus what our beginning of the year expectations were.

Okay. Thanks. That’s helpful. I'll turn it back over.

Thank you. Seeing no more questions in the queue, I'd like to turn the call back to Mr. Hussey.

Well, thanks everyone for spending time with us this afternoon. We look forward to speaking with you again in October when we announce our third quarter results. Have a good evening.

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