Good afternoon and welcome to Huron Consulting Group's webcast to discuss Financial Results for the First Quarter of 2023. At this time, all conference call lines are on a listen-only mode. Later, we will conduct a 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 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 First Quarter 2023 Earnings Call. And with me today are John Kelly, our Chief Financial Officer; and Ronnie Dail, our Chief Operating Officer. Just over a year ago at our Investor Day, we outlined our strategy to achieve double-digit revenue growth, expand our adjusted EBITDA margins to mid-teen levels and accelerate adjusted EPS growth. Together, with our balanced capital deployment strategy, which prioritizes moderate leverage, share repurchases and targeted M&A, these financial objectives are focused on driving greater returns for our shareholders. Our first quarter results reflect our steady progress, towards achieving these medium-term financial goals, driven by strong growth across all three operating segments and our digital capability, revenues grew 22% in the first quarter of 2023 over the prior year quarter. Our strong growth in the first quarter of 2023 was achieved on top of strong growth in the year-ago quarter, with Q1 '22 growth of 28% over Q1 of 2021. Consistent with our goal to expand profitability, adjusted EBITDA margins increased 80 basis points over the prior year quarter and adjusted diluted earnings per share grew 78% over Q1 2022. We're pleased that our continued strategic and operational performance have delivered upon enhanced shareholder value. Our first quarter results demonstrate the commitment to our growth strategy by the entire Huron team. I'm incredibly proud of the progress we've made and I'm excited to share more about it today on our call and in the updated investor presentation on our website. I'll now share some additional insight into the progress we've made since last year's Investor Day, while providing color into our first quarter performance. To achieve our growth goals, we are committed to five strategic pillars. The first pillar of our strategy is to continue to focus on accelerating…

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 the 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 let me walk you through some of the key financial results for the quarter. Revenues for the first quarter of 2023 were $317.9 million, up 22.2% from $260 million in the same quarter of 2022, achieving another record quarter for our business. The increase in revenues in the quarter was driven by growth across all three operating segments, reflective of the continued strong demand for our digital offerings across segments Healthcare and Education Consulting and Managed Services offerings and distressed financial advisory offerings. Net income was $13.4 million or $0.68 per diluted share compared to net income of $26.9 million or $1.27 per diluted share in the first quarter of 2022. Net income in the first quarter of 2022 included a non-recurring $19.8 million unrealized gain net of tax related to the increase in fair value of our preferred stock investment in a hospital-at-home company. Our effective tax rate in the first quarter of 2023 was 15.3% compared to 29.6% in the same period last year. Our effective tax rate for Q1 of 2023 was more favorable than the statutory rate, inclusive of state income taxes primarily due to a discrete tax benefit for share-based compensation awards that vested during the quarter and a tax benefit related to the non-taxable gains on our…

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

Hey, good afternoon. This is Jack Wilson on for Tobey Sommer. Kind of a quick one about sort of the head count growth and sort of what your experience is with retention levels this quarter and how that's impacting sort of full year margin assumptions?

Sure, Jack, happy to answer that. So that's a topic that we've talked about in recent calls was the trend related to attrition. And what we talked about towards the end of last year was our attrition levels were really kind of normalizing back to where they had been pre-COVID. And we saw that trend continue during the first quarter. In fact our attrition rates were quite low relative to even pre-COVID standards. And so from our perspective that's a great thing in terms of just – I think it's reflective of our culture and the good work that we're doing for our clients. And when we look at our backlog and our pipeline, we're confident that we've got the revenue coming through the pipes over the remainder of the year to still increase utilization even with that increased headcount.

Okay. Okay. So a little bit of a follow-up to that. Does that then impacted your hiring plans for the rest of the year? You're hiring costs or sort of your realized rate increases at least in utilization?

What we – even if you go back to kind of our commentary from the last call, we built out a lot of our revenue-generating capacity over the course of 2022. So our expectation even aside from the current attrition trends was always that the head count would likely be at a slower pace than it was last year when we were really in resource capacity building mode. And so our expectation for the year is that, hiring will be less than it was last year but that's not really a change from what we had talked about before just based on the capacity that we added over the back half of 2022.

Okay. Thank you. And then just maybe one quick one. Can we go down a little bit in sort of the increase in operating income in the Education segment in terms of margin improvement there?

Sure. So that's an area where we made a lot of investments last year in terms of adding capacity across that team. And we continue to see really strong revenue growth. And I think as we entered this quarter, we've really been now able to increased utilization for that team which has been driving better margin results for that segment.

Thank you so much. I'll turn it over.

Thank you. Our next question comes from the line of Andrew Nicholas of William Blair & Company. Your question, please, Andrew.

Hi. Good afternoon. Thanks for taking my questions. I wanted to first ask on Managed Services revenue growth. I think really strong growth across both Education and Healthcare, but particularly Healthcare given its size. Just wondering if -- let me start over. I think Managed Services growth part of the investment there was the belief that you would be able to cross-sell into those relationships more easily and help those clients with bigger maybe higher ticket and more profitable projects. So I'm just wondering, if you could update us on that cross-sell dynamic to the extent that it's played out to this point.

That's a great question, Andrew. And that is the dynamic. You're right that that was part of our thinking with that strategic initiative to build out the Managed Services business and that is the way that's been playing out. And I would actually describe it in both directions. I'd say, we have seen an increase in performance improvement Consulting revenue at our clients where we're performing managed services work. And then we've also seen performance improvement clients where after delivering on results on a performance improvement initiative they've expressed interest in us staying as part of their structure and the managed services capacity. So we've seen it working both ways. And we've also over the course of 2022 and into this year when we look at our pipeline have multiple projects where really we've got managed services, digital and consulting all for one client. And when you start to look at the scope of those projects at those clients, they're really very interrelated. And our viewpoint is that, having that managed services offering is a nice competitive differentiator for us.

Yeah, Andrew, it's Mark. I'll add just a couple of color -- comments John described which is spot on. The ability to have differentiation in places that we feel like we have a pretty strong right to win in revenue cycle and in research administration the research management, and then also technology managed services. So really three big areas of focus for us in managed services, we feel like that combination really does work synergistically with the overall results that we have. And the added value of having much more recurring revenue in nature. So you'll continue to hear us focusing on managed services in those areas in particular is a very intentional strategy.

That's helpful. Thank you. And then for my follow-up, if you could just spend a little bit more time talking about the pipeline by segment it certainly seems like trends are continuing to move in a positive direction but any additional color on each of the segments and what the visibility looks like over the next couple of quarters would be great. Thank you.

Sure thing, Andrew. Overall, the pipeline continues to look quite robust. And so even when we look at 2023 and with the revenue plan that's obviously significantly higher than the revenue we had in 2022. And still feel really good about the coverage ratio when you look at our pipeline and our backlog and in fact it's quite consistent with last year, which for us is a very good indicator about our ability to continue to drive revenue growth throughout the year. If I take it down to levels at the business unit level health care, we continue to see robust demand for performance improvement. That's a trend that we really started talking about in the third quarter last year, and that's just continued as a number of our clients and prospective clients are dealing with unprecedented financial pressures. And then we've also seen continued strong demand for our digital offerings. So, we feel really good about across the board there within health care the demand environment. From an education perspective, the story of 2022 was a significant amount of broad growth across the entire segment and that's basically what we continue to see in 2023 out of the gate. And then from a commercial perspective, we're seeing strength certainly in the distressed financial advisory area. That's a part of the business, that's been about as hot as it's been and our team continues to do great work there. And then we're also seeing a lot of conversion a lot of pipeline related to commercial digital. So we feel good across the board looking at the pipeline trends.

Great. Thank you.

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

Hi, good afternoon. Just following up on that question about the outlook. Just in terms of the maintained revenue guidance certainly a strong quarter strong start to the year. Revenue guidance, obviously, implies a very solid growth year. But if you look at -- just the first quarter revenue about $318 million, if you annualize that across the next three quarters, you get pretty close to the high end of your full year guidance range. So just wondering if there's anything we should think about that would kind of make revenue flatten out sequentially here, or is there something maybe this built in in terms of conservatism given that you're still fairly early in the year and just the overall macro environment?

Kevin, it's John. I would say, the first quarter, we're definitely very pleased with pleased with our execution there and just had our commentary about the backlog. So we feel really good about both the quarter and the outlook. I think at this point in the year just being three months in our viewpoint is to probably wait until the midyear to do the full year guidance update. To your point, if you look at the trend line both in terms of the actuals for Q1 and our backlog, I think that would give us a lot more confidence towards getting towards the upper half of that current guidance range that we have out there then certainly than the lower half. So we feel good about that. At this point in the year with nine months left to go, I think, we think it's prudent to wait until midyear to do any updates, but we're feeling good about the trajectory. And the key for us now is just to continue executing on that backlog throughout the rest of the year.

Yes. Kevin, I'll just add that the markets that we're seeing are really facing some really significant challenges. And so that just creates just a very broad-based demand environment for us. And if you look at today in health care education and across our digital business, you're talking in the 90% range of what we do as an organization. So I would characterize to say, let's -- we don't want to get ahead of ourselves, but we're certainly not seeing many signs of weakness anywhere in the foundation of what we have, and feel very good about what the outlook is for the company.

Okay. Great. Yes, that's helpful commentary. So, you touched there on the recurring revenues. I think you mentioned up to 13% of total. And Mark you mentioned, the emphasis on managed services. Is that a focus for the company to try and increase the percentage of revenue from these recurring sources, or should we think about the fact that, the outlook for the other parts of the business is so strong, that maybe that even though you're growing the recurring side nicely that it will stay fairly unchanged, as a percent of revenue?

Kevin, it is a focus of ours because we feel that getting more recurring base into, what we do and that comes not only from managed services, but so just to remind you, we have a software development capability as well that is roughly 500 people and really becomes additive to the overall types of services that we can provide. And so, when we think about the comprehensive needs of clients, if we serve them with models that span not only traditional consulting services, but things that create ongoing relationships that can support their broader needs, just gives us a better stickiness. It really becomes, call it just a synergistic way of us of continuing to get more revenue growth. At the same time, it really is focused on serving the market needs and I would just say, managed services that's why I talked a little bit about our areas of focus, because we're not trying to be everything to everybody in managed services. It's highly focused on things that we feel, are highly differentiated for us where we have lots of runway ahead and a right to carve out space in the market, that basically works with the other consulting services that we have.

Okay. Great. And you talked about really the revenue cycle managed services business emerging over the last few years, within health care and I think you said this up to 13% of segment revenue. Just trying to think about, maybe some other emerging businesses that could have some nice growth legs over the next few years. And specifically, I thought of Medically Home, maybe an update on how that's going? And any other perhaps emerging businesses or practices that you would want to highlight across the company?

Well, Kevin, I will come back to research as a wonderful opportunity for us because universities that have research enterprises those have always been financially challenges. They do not make money and they are increasing really complex, and there's lots of challenges not only from a compliance point of view, but even just getting the labor to staff the operations. And so we continue to see, opportunities for us to help our clients manage those enterprises and keep their focus on the core of what they do. That is an area that we think, we have a very strong track record a right to win. So, that's one business, I would highlight. Again revenue cycle, I think is another one that we continue to see lots and lots of opportunities. And I'll add technology managed services, because our foundation in India now, which is today 28% of our employees across everything we do, continues to be another area that we think we have again opportunities to serve our clients pretty comprehensively. You asked, specifically about Medically Home. I would say, Medically Home continues to evolve in their business and we're very happy with the relationship we have there. And so -- but that is just one of many other areas of growth that we have within our business areas. John anything you would highlight that I may not have mentioned?

Well, it's a little outside the managed services realm for the most part, but there's also really just the evolution of student within education as well which is a big growth area. If you look out over the next five to 10 years, there's the -- both the digital components of that where we see a lot of our clients making significant investments in their digital student technology and where our industry know-how and business know-how really differentiates us as well as our technology know-how. So, we think that's going to be a ripe area for us. But then there's also advisory around student too. Enrollment is a big challenge at many of our clients and our expertise our data our analytics around enrollment trends and student I think is a high-priority item right now for our clients. That would be another one that I'd add to the list.

And I'll just close with -- I have to mention our digital capability because roughly $500 million, I used to call it our best kept secret probably into 2022 because we have grown it to be pretty broad comprehensive and there are substantial growth opportunities that we see at as well in digital for additional capabilities as well as bringing increased industry focus especially in some of the commercial markets.

Okay. Thank you. I think John did you mention an acquisition in the health care space? I don't know if I heard that correctly. It was announced before and I just kind of missed it, but any -- was there something more recent that you hadn't talked about before that you acquired?

It was a small acquisition at the intersection of digital and health care in the fourth quarter of 2022, small from a headcount and revenue perspective, but significant from a strategic perspective as we continue to further build out our capabilities in the digital space and health care. So, we're excited about what it's bringing to the broader team and the -- just to give a sense of the size of the revenue I said in my prepared remarks that it was $300,000 during the first quarter. So, relatively small in that regard we think from a strategic perspective more significant than that.

Okay. Thanks for taking the questions. I'll turn it over.

And seeing no more questions in the queue. I'd like to turn the call back to Mr. Hussey.

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

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