Huron Consulting Group Inc (HURN) 2005 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Huron consulting group webcast to discuss results for the fourth quarter and full year, ended December 31st 2005.

[Operator instructions]

I would now like to turn the conference over to Gary Holdren, Chairman and Chief Executive Officer of Huron Consulting Group. Mr. Holdren, you may proceed.

Good morning, and thank you for joining us for today's webcast to discuss Huron Consulting Group's Fourth Quarter and Full Year 2005 Results.

Before we begin, I would like to point all of you to the disclosure at the end of our news release for information about any forward-looking statement that may be made or discussed on this call.

We have posted the news release on our website. Please review that information along with our filing with the SEC for disclosure of factors that may impact subjects discussed in this morning's webcast.

Also on this call, we will be discussing one or more non-GAAP financial measures. Please look at our earnings release for all the disclosures required by the SEC, including reconciliation's to the most comparable GAAP numbers.

Joining me on the call today are Gary Burge, our Chief Financial Officer, and Mary Sawall, our Vice President of Human Resources.

We talked to a lot of you on the secondary road show recently, and we want to personally thank each of you for having confidence in Huron and continuing to invest in our company. We appreciate that.

As I mentioned on the road show, the demands of the services that Huron offers is extremely strong, and we are off to a great start in 2006. I want to talk about some of those markets [I mentioned] this morning. After that, I will turn it over to Gary Burge, he will provide the financial highlights for the fourth quarter and full year 2005, and he will recap our previously disclosed guidance for 2006.

The two biggest market channels for Huron are the legal channel and the combined higher education/healthcare channels. The legal channel [represents] 50% of Huron's business for 2006, and this channel will have our highest growth rates this year.

Our financial investigations expertise is in great demand, and our work for the office of the corporate GC continues to grow. We are called daily for new opportunities, and we are winning more than our fair share of assignments.

Navistar just announced they are using us on a matter to help get their 2005 financial statements filed. We also will begin a work next week for a Fortune 100 company that has a major matter with the SEC.

You may have read that the 17-month effort at Fannie Mae resulted in a major report issued this morning. Many more companies are under increased regulatory pressure from the SEC, Attorney General, and other regulatory bodies.

Huron was just retained by an international company that is one of the 5 largest companies in the world to help them revamp their legal function. This will be a major multi year assignment for Huron.

Just last night, a major oil company hired us for a 1-year discovery project that will need 10 people immediately. Since the beginning of the year, we have also started assisting 3 of the major oil companies and 3 oil field service companies in making their law departments more efficient. We are now working with 7 oil companies in our GC office, and we will expand other services into our Houston office in 2006.

Turning to the higher education/healthcare channel, we continue to see high market demand. Our higher education practice continues to dominate this market. We are currently working with 5 of the 8 Ivy League schools and many other top universities.

What are the market factors at work in these sectors? First, many of our clients, academic medical centers, hospitals and research universities, the business of managing increasingly complex research programs is a significant challenge. The competition for research dollars has been intense. There are a tremendous number of regulatory and compliance issues once research grants are obtained.

Secondly, these clients are also faced with the need to assess and manage various financial and operational risks. That represents an opportunity for Huron. We help clients address technology issues and operational solutions related to research grants, and we assist institutions where there is strategic financial and operational plans.

In the health care channel, our full service of offerings are assisting clients ranging from distress hospitals to healthy academic medical centers. We recently have been retained in 3 new interim management assignments at hospitals in different parts of the country.

In addition, we assisted a the leading health plan provider with a major federal contracting, helping replace a long term incumbent. There is also solid growth opportunity for Huron in the farm industry. We recently won an engagement to lead a merger integration assignment for a major pharmaceutical company.

As we've said before, the engine for our growth is our people, and we have a very strong team. As you know, we want to continually build the bench strength at all levels. As we mentioned on the road show, we have gone from 56 managing directors at 12/31/04 to 84 managing directors as of 1/1/06.

Since our last earnings call, we have promoted 9 managing directors, and we have added 4 managing directors in the high growth areas-- Mike [Danske] in our Disputes and Investigation Practice, Mike specializes intellectual property, related transactions, valuation and litigation disputes. Jeff [McClaren] in our strategic sourcing practice. Jeff's expertise is in healthcare supply chain management. Susan [Hawkins] in our legal business consulting practice. Susan has more than 20 years experience leading, advising and practicing major corporate law departments and law firms. Scott [Wolloby] in our healthcare practice. Scott has more than 20 years experience in pharmaceutical industry advisement and compliance and regulatory issues.

We will continue to aggressively add new MDs in these growth areas this year. We have a very active pipeline of MDs we will hire in 2006.

As you can see, 2006 is off to a great start. We are excited about Huron's opportunities to succeed and grow in this very vibrant marketplace. But before I turn the call over to Huron's Chief Financial Officer, Gary Burge, I would just like to personally thank all 806 employees of Huron for everything they do every day to help us build this great consulting firm. Gary?

Thanks, Gary, and good morning, everyone. We are very pleased with our strong results for the fourth quarter and full year 2005. Some of the financial highlights for the fourth quarter-included revenues of 55.6 million were up 36% year over year and our organic revenue growth was 28%.

Adjusted EBITDA, before stock based comp, secondary offering expenses, and non-recurring charges recorded in 2004 was 11.7 million in this year's quarter compared to 6.2 million in the fourth quarter a year ago.

Margin expansion was good, as our adjusted EBITDA margin for the quarter was approximately 21% this year compared to about 15% a year ago. Operating income totaled nearly 8 million for the quarter, up nearly 75% from 4.6 million last year.

Other quarterly highlights include the following: Demand for our services remains very strong as our financial consulting segment posted revenue growth of 32% when compared to the same quarter last year. Organic revenue growth was nearly 19%, excluding [Spouse and Weiss] revenues. Our operational consulting segment posted revenue growth of 41%, which was all organic. Overall, our utilization was 77.4% with financial consulting coming in at 81.4%, reflecting high activity levels on several major investigations. Also, our DSO came in at 65 days for the quarter, continuing our strong performance with respect to managing our working capital.

Now some financial highlights for the full year, 2005. Revenues of 207.2 million, nearly a 30% increase from 2004. Our organic revenue growth was approximately 24%. Adjusted EBITDA was 45.6 million for the full year 2005 compared to 28.7 million a year ago.

[Argent] expansion was good for our first full year as a public company, as our adjusted EBITDA margin was 22% for the year compared to 18% a year ago. Operating income was 31.6 million for the year, up 60% from 19.7 million last year.

They had an outstanding year on the recruiting front, as our number of consultants increased nearly 31% to 632 compared to 483 a year ago. This included the hiring of 14 new managing directors to drive continued growth in our service lines.

Utilization ran strong at 76.5% for the year, up from 72.2% last year, reflecting, again, strong demand for our services. This included successfully integrating a large number of new hires in the operational consulting segment in 2005, where head count grew more than 50%.

In summary, we had a great quarter and a great year. Revenues exceeded expectations, as client demand was very strong across the majority of our practices. Utilization of resources ran at strong levels resulting in good margins, and we had a tremendous year on the recruiting front.

Before we get to guidance, I'd also like to highlight the following. Using our trailing 12-month GAAP net income, we are pleased to report that we had a better than a 17% return on assets and a better than a 28% return on equity over the past year. These returns include approximately 7 million of pre-tax and non-cash stock based compensation expense. We think these returns are very good for a young company and also look very good when compared tour peer group.

I'll also remind you again the implementation of FAS 123R is going to have a minimal impact on our 2006 results while that's not the case necessarily for all of our peer companies.

Now, recapping our guidance for 2006. As previously announced, we expect results for the first quarter of 59 million to 61 million in revenues, 8 million to 10 million in operating income and $0.29 to $0.32 in diluted earnings per share.

We anticipate full year 2006 outlook ranges of 247 to 252 million in revenues. 38 million to 42 million in operating income and $1.27 to $1.32 in diluted EPS. Stock based compensation expense of approximately 2 million and 10 million are included in the Q1 2006 and full year 2006 estimates respectively.

Operating income and diluted earnings per share guidance reflects the effects of the adoption of FAS 123R and excludes the cost of our recently completed secondary offering. These secondary costs are estimated to be approximately $525,000 and will have an approximate $0.03 per share impact on both the Q1 of 2006 and the full year 2006, estimates that I previously mentioned.

Weighted average diluted share counts for 2006 are estimated to be 17.1 million and 17.5 million for Q1 and the full year 2006, respectively. For modeling purposes, you should now assume an effective tax rate of 43.5% for the full year 2006, compared to the 44.5% rate we used in 2005. We can now open it up for questions.

Thank you.

[Operator Instructions]

Our first question comes from the line of Nat Liston of William Blaire and Company. Please proceed.

Yes, hi, good morning and congratulations.

Thank you Nat.

What are you guys assuming in your 2006 revenue guidance for utilization and can you explain why?

Nat, I think we're using probably the mid point of between 72 and 73%. One of the things we want to do is we want to continue to add to our headcount so we can position ourselves for '07 growth and I think the other thing, it just gives us a little bit more dried powder to do assignments which we've been very tight on resources at the lower level for the last 12 months just because our utilization been running so high.

Okay, just a follow-up on that. I've noticed a number of press releases. I know you've done some early year hiring here. Is it safe for us to assume that so far this quarter utilization has been tracking down in those 72, 73 levels as you mentioned or is this more an expectation for something that might happen off in the future, say in the back half?

It's an expectation Nat. One of the things that happens in the first quarter is the year our people or other people are really willing to leave somewhere because of bonuses, so I think you will continue to see the much higher utilization than we're forecasting and we hope that as we add our new college grads and we add substantial amount of work force to the rest of the year that that utilization will come down but its clearly running much ahead of that so far this year.

Okay, can I follow up with one other issue, or question? You mentioned in your prepared comments a couple of new engagements where it sounds like the time frame is 1 year plus in a couple of these cases and I guess that's a little more visibility than I'm used to seeing in this business, so are you ready and willing to declare any new trends in the business or were these just unique situations or can you just give some color there?

Well, I think the - I don't think we're ready to declare yet because once you declare then something changes so, but I would say that one of the things, if you look at the - as I mentioned in the Fanny Mae engagement, that's been 17 months and it will probably go another couple of months and when we started that Nat we thought that might be 3 or 4 months. So I think one of the things of these investigations are becoming bigger and there is more to them, I think that you're seeing that.

I think the other thing, if you take a - and I think I mentioned this several times, if you take Pfizer, we've been there for 3 years working with their legal department well this is - the assignment that I mentioned for this [inaudible - audio drops out] company to revamp their whole legal function, worldwide, is a multi year assignment. We're getting - as our brand is becoming more aware - people are aware of it, they think we can handle bigger assignments, that will lengthen the nature of the assignments as we go forward. But I don't want to declare anything yet.

Okay. Great. Thank you.

Our next question comes from the line of Kelly Flynn of UBS. Please proceed.

Yes, hi, this is Andrew [Flowns] for Kelly. I just wanted to ask, on your campus recruiting plans, I was wondering if you could kind of give us a sense of what we're looking at there for this year and the timing, whether we should expect some of those people to come in in Q2 or whether it will be mostly in Q3.

Mary, why don't you handle that?

Okay, this year we are planning to have approximately 85 campus hires come in. they'll start during the summer but another thing we're doing this year is implementing a more robust internship program, so we're really working with the start numbers now because we feel its important to make sure our interns have a great experience as well.

We had a few people start off campus in the January/February time frame but not anticipating any in Q2. Does that answer your question?

Yes, thanks. So it sounds like most the campus hires will come in kind of early in Q3.

Oh, I think it will all through Q3 Andrew. Probably somewhere - some might come in late June at the earliest; go some in July, some in September. So you'll sort of stagger them.

Yes.

So it will be sort of even throughout Q3.

Okay, so as we think about kind of hiring and obviously you're hiring from other places as well, how should we expect kind of the utilization to trend this year. Should we - do you think it may end up remaining kind of a little bit higher in the first half of the year and then perhaps drop down as you do some of these campus hirings?

Yes, I think that's the way you should think of it.

Okay. And then I was wondering if you could kind of walk us through some of your assumptions for kind of investment and so forth in G&A. I know that you've kind of, you have a couple of extra offices that - in the first quarter that you can add into your G&A costs.

Andrew this is Gary Burge. Yes, we've had a - we're opening 2 new offices right now, in fact we just moved into a new Boston office last week, that's about 22,000 square feet so the good news was we ran out of space in our old office and had to expand. We're also in the process of opening a new office in New York City, it will have 57,000 square feet, we think that's important for us in terms of big demands in that marketplace and we want to have a significant presence and so in terms of hiring over the balance of the year we're going to be looking at New York City as a place to put a significant number of people in New York.

So as it related to first quarter of '05, the first quarter of '06 will have, roughly $1 million more of SG&A costs related to higher rents, but we've included that in our forecast and we'll grow into that additional investment as the quarters go on over the balance of the year.

And based on kind of the hiring times that you have currently for this year, are they any other offices that you feel like you're kind of running out of space or do you think this will kind of across your network of offices give you plenty of room to grow?

Yes, we're fine in our other remaining offices, the Houston, san Francisco, LA, etc. so our issue is just on the east coast at this point in time.

Okay, and then on gross margin, that kind of came down just a little bit in Q4, obviously I guess the trend through the year was down slightly. I know that the number of days and the seasonality can have an issue there, can you kind of walk us through what you think kind of impacted utilization through the year - oh, sorry your gross margin through the year?

As it relates to 2006?

To 2005.

2005, yes, well certainly the fact that you have fewer effective business days in the fourth quarter, that number was 56 for us in the fourth quarter of '05 versus 59 days in the third quarter and about 60 days in the first 2 quarters. So you lose a business day or 2 or 3 business days in the case of the fourth quarter, that clearly affects your gross profit margins.

Okay thanks. And then on the cash flow and balance sheet. I was wondering if you could give us an estimate for cap ex for '06?

Yes, right now, given those 2 major investments, we're looking at a net cap ex number of about $12 million for calendar year 2006 and the - and that's after tenant improvement allowances, a GAAP number that we'll actually see on our financial statements might be closer to 16 million when we're all said and done, but net of the tenant improvement allowance, that will be 12 million. So that's what you should plan on in '06 for us.

Okay. And the - in Q4 here, can you tell us what your cash flow operations and cap ex was?

Yes, cash flow from operations was nearly $14 million in the fourth quarter. We had a great cash quarter in terms of collections, our DSOs came down as we mentioned. Cap ex number was about 2.2 million for the fourth quarter and just back to 2006 for a minute, the cap ex number we gave in '06 of 12 million, we would expect at this stage that that number will go down in 2007.

Okay back to kind of a more normal level versus percentage of revenue?

Right we're not expecting any major office investments in 2007 at this stage.

Okay thank you.

Sure.

Our next question comes from Brent [Sakikini] of Duetshe Bank. Please proceed.

Hi guys, its Christo Money for Brent. Congratulations on the quarter. Just wondering were there any performance based [sees] deferred during the fourth quarter?

The - yes Brent, or Chris sorry, this is Gary Burge. Yes, we did have some performance-based fees in the fourth quarter as we typically do in most quarters. On an overall basis that number was about $5 million in the fourth quarter.

Okay. You just talked to your turn over and retention in the fourth quarter?

In the fourth quarter our overall turn over was about 4.5%. But to give you just a flavor of the year, our high growth practices did a great job of retaining people and if you were on the call during 2005 you know that was a key focus for Gary Holdren and all of us on the executive team.

In our 3 highest growth practices, 2 of the practices had turn over well under 20%, one was under 20%. Every quarter in 2005 we improved our retention compared with the year before. So we feel good about our retention in 2005, we had one practice that did have very high turn over but that was a conscious decision the management group made early in the year, that we were going to have to refocus that group and so taking that company - or that practice out, our turn over for the year voluntary was 17.5%. So we feel really good about it but we're going to continue to focus this year. -- Keeping our best people.

I would - I would just say, this is Gary Holdren, this is the number 1 item on my agenda is we, I think we have one of the best DSO management of any of our peers. We are going to make this the number 1 focus of Huron again in '06. Is our people agenda? We're having an all managing director meeting on Saturday of all managing directors and the retaining and attracting the best people will be the number 1 score card for all of us to be measured on as management in '06.

Okay, thanks. Another question, has united - the team working on united, have they been redeployed to other engagement?

Yes if they're - most of them are still there so they really - even though they've emerged, there's a period of time post emergence so they - most of the team is still there. Its not a big team, its probably only 10 people but we've got valuation people there, we've got sourcing people there, we've got other people working at United now. So if and when they come available there's plenty of demand for them.

Okay, thanks guys.

Thanks Chris.

Our next question comes from the line of Sandra [Noturninado] of Robert W. Baird. Please proceed.

Hi thank you. First question is on [Speltz] and Weiss, just wondering what the guidance for 2006 includes for revenue from those folks?

I think we've got about $18 million in for them Sandy.

Okay, and are they still operating pretty much at cost or is there, has there been some room to perhaps increase their bill rates?

Well, they can't - they have to at the St Vincent's job they have to do a cost. But as I mentioned, there's 3 new engagements that we won and there is other engagements that they're doing their normal margin on so its not the full margin that we thought because of half their practices is at cost, but David and Tim are attracting new people and we're building that practice every day.

Okay and that 18 million, is that revenue that you expect for the entire year or do you think that you can get some of the folks off of St Vincent and redeployed on other engagements?

We might be able to but we're not forecasting that in what we gave you.

Okay. The head count assumption for 2006, what does that assume in terms of leverage MD to junior?

I think about 7.5 to 8 and we'll, I think Gary's told people before that we should average about 700 professionals for the year.

Okay, your forensic accounting practice - I know you typically don't give out specifics but I was wondering if, since its such a hot area, if you can say how big that practice is and what you're doing this year to add the skill sets necessary to grow that business segment.

Well the only thing we passed that is that our forensic accounting business along with our legal business consulting is 50% of Huron. We are aggressively looking everyday in the market place. We've got numerous requisitions out for CPAs and audit partners, people, so we've got a very aggressive hiring plan in place for that practice to grow it substantially in '06.

Okay. The performance based fees in Q4, I believe it was 5 million, is that the number for the fourth quarter?

No, it was approximately a million.

Oh, sorry. That's what I thought, it seemed pretty high. Okay, so approximately a million.

Yes, so roughly 2% of revenues.

Okay and are there any other - I know since the middle of October bankruptcies are - the way bankruptcies are handled has changed but wondering if there are any other large bankruptcies that you see in the pipeline right now, some prominent Fortune 50, Fortune 100 type companies.

Not that I'm aware of Sandy.

Okay, great thank you very much.

Our next question comes from the line of Kelly Flynn of UBS.

Yes, I had a follow up question related to the other gross margin question. I was wondering if you could just help me understand, I know that we saw lower bill rate growth in the operational consulting group this year than perhaps we might have expected. I think you'd said you put in something like a 5% bill rate increase at the beginning of '05. I was just wondering if you could explain what the impact of the Speltz and Weiss, the kind of the changes that were made under their contract, if something since and perhaps give us a sense of what they impact could be should they be redeployed.

The - well the Speltz and Weiss in the fourth quarter, Andrew, we had about a $2 million impact on fees for the fourth quarter so I don't have the number calculated in terms of what that meant to the average rate per hour. But you can probably back into that number yourself. We've assumed about the same level of revenue impact in the 2006 time frame, as Gary mentioned. And so, I think the other factor effecting the operational consulting side, though because remember the Speltz and Weiss is in our financial consulting segment, not the operational consulting segment. You look at operational consulting I think the other impact there is we added nearly - or actually more than 50% to their head count over the last year and that was building out Webber's model underneath all of these, all the MDs and so that kind of has the impact of lowering your average rate. But really doesn't have an impact on the margins overall, in fact it can be positive to margin so -

Okay. Thanks. And if you put in another 5% bill rate increase for this year?

Yes, we - effective February 1st, we put in, on average, 5 to 7% rate increases at each of the levels that the director and below level in the organization. We didn't touch our MD rates but the manage - or director and below level rates all went up 5 or 7%.

Okay. Thank you.

Sure.

[Operator instructions] Our next question comes from the line of Cynthia Ruben of JMP Securities. Please proceed.

Morning. I was just hoping you could talk a little about your customer concentration in the fourth quarters.

I think the - we're typically and I think since our history, 10% of our top 10 clients make up between 35 and 40% of our revenues and that's been pretty consistent ever since we've been in business.

Okay. Thank you.

Ladies and gentlemen this concludes the question answer portion of today's conference I will turn it back to Mr. Holdren for any closing remarks.

Okay. Thank you - thank all of you for your questions, your time and your interest and again thank all of you for having the confidence to invest in Huron. We look forward to speaking to all of you again, probably sometime in May when we complete our first quarter. Thanks.

Thank you for your participation in today's conference. This does conclude the presentation and you may now disconnect. Have a wonderful day.