Huron Consulting Group Inc (HURN) 2006 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Huron Consulting Group Broadcast to discuss results for the first quarter ended March 31, 2006. At this time, all conference call lines are on 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, ladies and Gentlemen. This conference is being recorded. And now, I'd like to turn the call over to Gary Holdren, Chairman and Chief Executive Officer for Huron Consulting Group. Mr. Holdren, please go ahead.

Thank you and good morning to all of you on the phone. Thank you for joining us for today's Webcast to discuss Huron Consulting Group's 1st Quarter 2006 results.

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

We have posted a new release on our website. Please review that information along with our filings with the FCC for disclosure 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 of the disclosures required by the FCC including reconciliation, the most comparable GAAP numbers.

Joining me on the call today, here in Chicago, are Gary Burge, our Chief Financial Officer, Mary Sawall, Vice President of Human Resources, and Dan Broadhurst, our Vice President of Operations.

We are very pleased with our 1st Quarter results. The market demand for our service [offerings] is very strong in Q1, and we anticipate that market demand will remain strong for the rest of 2006.

Not only are the market demand for our services strong; but the Huron brand, and our relationship with major customers continues to grow as we approach our 4th anniversary. Huron strategy of brining multiple service offerings to our major customers continues to work.

And, it is improving as we continue to build our base of many new directors and add more products to our service offerings. In a moment, I will discuss the service offerings we have added to Huron.

Growth in the 1st Quarter was driven by strong demand in our Disputes & Investigations, Legal Business consulting, Higher Education, and Health Care practices. Just in the last three weeks we have won several new investigations that are high profile. [Inaudible] competitive situations, which we feel good about winning in this marketplace.

The demand for this business currently out-strips the people we have to serve the market. We continue to aggressively look to add resources in the marketplace to meet that demand. Our market presence and growth in our Legal Business Consulting practice is tied to our continued presence in outstanding product offerings to the legal channel.

The records management business, that we added last year, is really benefiting our other service offerings and Legal Business Consulting. We continue to add Fortune 500 law departments to our roster of clients. Our Disputes & Investigations and Legal Business Consulting practices are very closely linked in our legal channel strategy.

The Higher Education practice continues to gain market share in advising major research institutions in the United States. The three MD's that we added last year are really adding to our market presence in 2006.

We're offering more and more solutions to these institutions. Additionally, we are seeing increased interest from overseas investors, on how to establish for-profit higher education institutions and their countries. The healthcare channel continues to present great opportunities for our services as well.

First, one of the biggest growth opportunities is in the pharmaceutical segment. With the [Pharma] facing increased regulation, compliance challenges, and the threat of complex and costly litigation, Huron can assist these companies on many fronts. We have been ramping up with three new senior MD's to serve this industry needs. I'll talk about that more in a moment.

Secondly, we continue to build the Huron brand with healthcare executives. Next month, Huron and Northwestern University's [Kellogg] School of Management will be hosting the Perspectives in Healthcare Forum.

We expect more that 200 healthcare executives to attend; and the topics will address many of the industry's pressing issues. The distinguished speakers include senior officers from the Cleveland Clinic, University Health System, Abbot Laboratories, and Ovations--a United Health Group company.

The keynote speaker will be former President Bill Clinton; and it is an honor to have someone of President Clinton's stature to share his perspective on the challenges facing the healthcare industry at our forum.

I'm sure all of you saw the news of our acquisition of the Assets of Galt & Company earlier this month. We are pleased to welcome Scott Gillis, Joe Shalleck, Lee Mergy, and Larry Jones, and the rest of the experienced numbers of Galt & Company.

The partners of Galt & Company have been associated with some of the more high profile corporate revitalizations, including those at Gillette and Alcan. Galt is a great addition to Huron's balanced portfolio service offerings.

They add to our offering by increasing our reach at healthy companies, raising our profile at the [C-level suite], providing additional opportunities for our other operation consulting practices, and expanding the Huron brand.

Galt provides a unique set of capabilities that connect the dots to our other client offerings. They are also very much a performance based organization like Huron. By combining forces we will expand our value to the office of the [CEO] and the boards of Fortune 500 companies.

Our pipeline of new managing directors also remains very strong. We recently added three new managing directors. Gary Long will be joining our performance Improvement practice; and Mark DeWyngaert and Paul Silver will be joining our Pharma and Health Plans practice.

Gary has extensive experience in supply chain and performance improvement solutions with major corporations. Paul specializes in healthcare compliance and regulatory matters in the Pharma and medical device industries; and Mark specializes in assisting Pharma manufacturers, biotech, and medical device companies. These individuals have extensive experience in their fields, and they're great additions to Huron. We look forward to their leadership in their respective practices.

As you can see with the Galt acquisition and the three new MD's that I just mentioned, we have added an abundance of talent to Huron in our operational consulting segment. We are continuing to try to build a business at Huron which is based on a balanced portfolio of service offerings, so we are never too dependent on a "hot market" or individual service offering.

In the coming months, you will see us adding MD talent to all of our service offerings. We also have a national search underway for the new head of our Corporate Advisory practices. As I said before, and will say over and over, our number one business priority will be to continue to retain and attract the best people across all of Huron's service offerings.

In closing, I would like to thank all the employees of Huron for truly making us a great company. I will now turn it over to Huron's Chief Financial Officer, Gary Burge.

Thanks, Gary. And, good morning, everyone. As Gary said, we're very pleased with our strong results for the 1st Quarter of 2006. Some of the financial highlights for the quarter included revenues of $62.2 million -- we're up 33% year-over-year.

Adjusted EBITDA, before share-based comp and secondary offering expenses was up 34% to $14.1 million in the quarter, compared to $10.5 million in the 1st Quarter a year ago. Adjusted EBITDA margin for the quarter remains strong at 22.7%.

Operating income totaled nearly $9.7 million for the quarter, up from $8.2 million in the 1st Quarter of 2005. Earning per share, including secondary offering expenses, was $0.33. Comp secondary offering expenses EPS would have been up 24% to $0.36 compared to $0.29 a year ago.

Other quarter highlights include the following: Demand for our services remained very strong as our Financial Consulting segment posted revenue growth of 43% compared to the same quarter last year.

Our operational consulting segment posted revenue growth of 21%. Overall, utilization was 77 1/2%, with Financial Consulting coming in at 83.6%, reflecting high activity levels on several major investigations.

[Inaudible] came in at 69 days for the quarter, continuing our strong performance with respect to managing our working capital. Also, our top ten clients continue to represent about 40% of total revenues. We think it's interesting to note that our top ten have five new clients when compared to the 4th Quarter of 2005.

We think it's a positive sign that our top ten continue to change, and that there's a high demand for our services when it comes to major matters across all of our practices. Before we get to guidance, I would also like to highlight the following.

Using our trailing 12-month GAAP net income, we are please to report that we had nearly a 17% return on assets, and nearly a 27% return on equity in the 1st Quarter. These returns include approximately $8 million in pre-tax and non-cash share-based compensation expense and $1 million in secondary offering costs over the last 12 months.

Now, for the 2nd Quarter and full-year 2006 guidance. These guidance numbers include the Galt acquisition as well as preliminary estimate of the rapid amortization of the intangibles related to this acquisition.

[Inaudible] preliminary estimates felt rather limited, but positive impact on our EPS and Q2; and will be more accretive as the amortization lapses in future quarters. The second quarter, we expect revenues of $66 million to $68 million, operating income of $9 million to $11 million, and $0.29 to $0.34 in diluted earnings per share.

Our forecast for the second quarter include an estimated $1 million increase in SG&A costs relating to our upcoming general counsel and healthcare forums -- Gary mentioned the healthcare forum a moment ago, as well as increased recruiting costs, including the recruitment of the next -- of the new head of the Corporate Advisory services, that Gary also mentioned.

The full-year, we expect revenues of $263 million to $268 million, operating income of $41 million to $43 million, and $1.33 to $1.40 in diluted earning per share. Full-year EPS, without our 1st Quarter secondary offering costs of $0.03, would be in the $1.36 to $1.43 range. These estimates include approximately $3 million and $11 million of share-based comp expense in Q2 and the full-year respectively.

The operating income in diluted EPS guidance reflects the effects of the adoption of SFAS No. 123R. And, our weighted average diluted share counts for 2006 are estimated to be 17.4 million shares for both Q2 and full-year 2006. For modeling purposes, you should continue to assume an effective tax rate of 431/2% for the full-year. Let's now open it up to questions.

Thank you. [OPERATOR INSTRUCTIONS]

Our first question comes from Matt Litfin with William Blair. Please proceed.

Hi. Good morning, and congratulations on a very strong quarter.

Thank you, Matt.

I wondered, what are the assumptions around utilization that are imbedded in this new guidance for the next few quarters?

Yes, Matt. I think that [inaudible] said we're [inaudible] hot now for six quarters in a row being utilization north of 75%. Our target range is to have that between 70% and 75%, and that what we're forecasting over the remaining three quarters this year.

O.k.. And, if you could go back and redecide how many new grads to hire from campuses to start this summer, would you have hired more at that time, looking back now; or, do you think you've got it about right?

I think, Matt--whether we got it right or not, I think we got--there's plenty of ability to get new campus people. I think what we would say is, what we're having the most difficulty with, and what we'd like more of is people between 3 and 10 years of experience.

So, we could hire more and we can still get those, but you can't get too leveraged down at the low level without starting to have some quality issues.

O.k.. And, a final one for Gary Burge; what tax rate are you expecting for this fiscal year?

For fiscal year, we're sticking to a 431/2% rate for the balance of the year.

O.k., great. Thank you.

The next question comes from the line of Brandt Sakakeeny with Deutsche Bank. Please proceed.

Thanks. It's Brandt Sakakeeny, congratulations to you on a nice quarter. Gary, can you give us an update of talent metrics in terms of retention or turnover; and also, give us a sense of how the hiring market is? I don't need the MD level.

I'll let Mary Sawall give you the retention statistic in just a minute; but, Brandt, I think that anybody who is in this room would tell [them/you]--Dan, Mary, Gary, and all the rest of them can speak up--but, we're in a war for talent; both, getting people to move--good people to move. And the price that they want to move is really--Right now I would say--I think I said to our leadership--I think it's our number one business issue right now at Huron.

O.k,--

I would concur with that. I think what we're seeing, compared even with a year ago, and definitely with two years ago, is we continue to feel that we have a good pipeline of candidates, but the companies people work for are very willing to counter at really unheard of levels. And so, it's just becoming more challenging for us, and we're putting more resources into recruiting and I think all of our practice leaders have this as a primary goal.

That said, our 1st quarter turnover was a little bit under 5% for voluntary resignations and that is an improvement of about 1% from about a year ago, so, we feel good about that. And, in our hottest practices we have the lowest turnovers; so again, another good story on that. We're in the second quarter; we've paid bonuses the first and second quarters, and into the beginning of the third tend to be our highest turnover period since people decide to go back to school and things like that.

Ok, that's great. And, I guess the second is a question on [inaudible] market. Gary, I think it's your hope that you're seeing some stabilization, perhaps somewhat improving pipeline. Can you give us an update on the outlook for that business?

We're not seeing right now, Brandt-we're not seeing a lot of new opportunities. I don't know whether we're, being a small player or not, that we [won] a creditor assignment this week; but, we're not seeing a lot of [debtor pitches]. I don't think that [default] rates--my understanding talking to my banker friends--is going up. So, we're not seeing the Bankruptcy practice--the market very strong right now, Brandt.

O.k.. I'm sorry, a final question for Gary Burge. On the integration of Galt, how is that progressing and is all the back-office integrated?

Yes. Basically, it's done. At this stage, we've brought their organization in for orientation week before last. They're up on our systems, reporting time through our time and materials reporting system; and we'll be [billing] revenues through it; and got them all on our IT systems, so it's pretty much a non-event from a transition point of view.

Right, perfect. Thank you.

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

Thanks. Back on the issue of recruiting and what difficulties you're having there? Can you speak more specifically-wage inflation. You mentioned some outrageous counter-bids from competitors when you tried to take people. And, what are the implications there, for what you're going to have to pay your people. Are you baking in a higher wage-inflation in your guidance then you did last year?

If we have to pay more, Kelly-if we have to pay our young people more, and we can't pass it on in either higher utilization or higher revenues, then it's going to impact the bonus of our managing directors. So, we're not upgrading our compensation yet, but it may be that we have to have some more signing bonuses for some of the people. We would prefer to deal with these things in signing bonuses verses making the [base] count go up and still try to be performance based. But, you shouldn't think about there being any dilution in our margins. We gave our people really good raises and really good bonuses in '05.

O.k., great. And then, related to the new business [inaudible], and you mentioned that you've been victorious in a number of very competitive situations. Can you shed a little bit more light on that? I mean, who are you principally competing with? Does it get to publicly traded comps, or are you seeing any more incremental interest in practice areas from the big four. And, I guess on that issue, how much are you really benefiting from the conflict of interest issues that the big four faces-that an incrementally more positive [driver] or is that overblown at this point as a driver.

I think the competitive situation that I talked about, we've seen big four, we see [Protivity]; we see [Navigant]; we see pretty much all the competitors in the ones that we're talking about. So, I think [giving] a lot of benefits of the conflicts to the big fours are a little bit overstated right now. I think this is a pretty competitive marketplace, right now; and, you have to win with talent.

O.k.. And, is it fair to say that the big four are being particularly aggressive in trying to keep people, or is it pretty much across the board. I'm wondering if they're realizing that you guys are doing so well in these areas that they need to step it up. Is there any of that going on?

Absolutely. I think all the big four are seeing the results of us and all the comps that you know about, and I think that they're saying this may be growth areas that the need to refocus back on with the decline of [Sarbanes-Ashley]

O.k. great. Thank you very much.

Your next question comes from the line of Sandra Notardonato with Robert W. Baird. Please proceed, Ma'am.

Thanks. A question first on the Galt acquisition; it looks like what you paid on a revenue per consultant basis was a little bit higher than your internal revenue per consultant. Can you talk about their bill rates and what kind of utilization you expect to get out of that and could that be a positive impact to your margins--I guess in 2007?

Sandy, one of the things is they're not a input based business, they're an output based business.

--Right.

And so, they don't basically price on input times time and material. The one thing, sort of a metric you should think about, is that they will-- you're going to see their audited financial statements in sixty or seventy-five days, but their average per consultant revenue is probably close to 75% more--

--Right.

--be almost double our consultants.

O.k.. So, you paid a little bit more than one times revenue per consultant for those guys? Is that a good way to look at it, Gary?

Yes. I think that's probably fair.

O.k.. I hate to get granular; but, Gary Burge, you mentioned a million dollars in extra costs for SG&A in the next quarter. How much of that, do you think, goes to recruiting verses the general counsel and healthcare forum?

I'd say we'd be prepared to say one-third of that might be a recruiting cost--combination of retained searches and contingent searches.

O.k.. And then, gross margins for the quarter was down a little bit; is that a function of mix or is there something going on with profit per professional that we should be aware of?

I'd say it's more of a mix issue. If you look overall verses 1st Quarter last year, we've added a lot of people; and in general, we've been building out the pyramids at the lower level. So, it a mix issue on the average rate. We've been-we're comfortable that we're sustaining the profit margins at each level in our business. We've been able to raise rates earlier this year; and so, I think it's more of a mix issue.

--Don't worry about our gross margin profit--

[Laughter] O.k.. I was looking at that because you're obviously not a capital intensive business. I think that might be a better way to value what's going on there as opposed to the return on equity.

My last question has to do with the proxy vote. Do you have any sense of how that's going to turn out regarding the increase in shares associated with the stock compensation plan?

I don't think we do, right now, Sandy.

O.k.. I'm sorry. When is that vote taking place?

Well, our meeting is next Tuesday, and we're still waiting for some votes to come in; but, it isn't absolutely confirmed that we're going to win, right now.

O.k..

[ISS] voted against us--I think you might know that.

I did know that. Right. O.k., thank you very much. Great quarter.

Thanks.

Thanks, Sandy.

Ladies and Gentlemen, if you have a question please press the *1 keys on your touchtone telephone. Thank you.

Your next question is a follow-up question from Matt Litfin with William Blair. Please proceed.

Yes. We've talked a lot on this call about talent and how important that is in a competitive marketplace, and that the big four may step up their efforts, or maybe are already doing that. So, at the risk of throwing you a softball on a question here, I guess I'd ask you, Gary Holdren--tell us, what do you tell an MD that's working at a big four firm or a competitor of yours--what do you tell that person as to why they should join Huron at this time?

Well, first and foremost, one of the great things about Huron-I mean, one of the things that the big four [still] have-they're great organizations, they still have a lot of [silos]; they don't have very good team work; and there's not a lot of [sharing] to get into their clients. So, one of the things we tell MD's is, if you come here, it's all of our job to make you successful and integrate you, and to basically take you to our existing client base.

The other thing I tell them is, why do you want to put capital in organizations that have a lot of capital at risk by having audit businesses? And here, we give you capital, but we don't make you have to put it in; and, we pay you a comparable comp. So, if you think about-you still can be part of-you know this company is only four years old-you can still be part of the legacy-this can be your firm.

That's the speech, Matt. Dan, do you want to add anything to that?

: Well, the only thing I'd add is that I still think we offer a big advantage over the accounting firms, in that we have a very little or no conflicts still; which allows people in our businesses to do the work they want to do without a big overhang of an [attached] or a tax practice.

And, that's a helpful refresher. Thank you.

Mr. Holdren, we have concluded the allotted time for this call. I would like to turn the call, the conference back over to you.

Well, thank you all for taking the time and listening to us. We look forward to seeing you-talking to you again in August when we complete our 2nd Quarter. Have a great day.

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