Huron Consulting Group Inc (HURN) 2006 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 of 2006. At this time, all conference call lines are on 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. And I would now like to turn the call over to Gary Holdren, Chairman and Chief-Executive Officer of Huron Consulting Group. Mr. Holdren, please go ahead.

Thank you, and good morning. Thank you for joining us for today's webcast to discuss Huron Consulting Group's fourth quarter and full year 2006 results. I also want to give a special thanks to all of our investors who have had confidence in Huron since our IPO.

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 statements that be made or discussed on this call. We have posted a news release on our website. Please review that information, along with our filings 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 disclosures required by the SEC, including reconciliation in those comparable GAAP numbers.

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

You can only imagine how proud we are of the consulting firm we are building at Huron. I would like to take a few minutes to talk about and congratulate Huron's people, who have been the real engine behind our growth and evolution since our inception almost five years ago. 2006 was a great year for Huron and we are proud of what we have accomplished in our first five years. All of our managing directors will be meeting in Orlando on March 2 and 3 to talk about our growth and opportunities for the next five years. I think you will be excited about where Huron is headed and what we will accomplish.

We have made major changes in our business during the past 12 to 24 months, and those changes have also meant professional and personal growth and opportunities for many of our people. As you have seen from our recent announcements, we have aligned our services into four business segments; legal financial consulting, legal operational consulting, health and education consulting, and corporate consulting. As Huron continues to grow, we feel this will allow us to better meet market demands and serve our clients. In addition, Huron's board of directors and I have executed a new five-year employment contract. I plan to be around for a good long time, and I am looking forward to the next five years.

As I've said before, building bench strength is an important factor in Huron's growth. Since the end of 2005, we have promoted 25 new managing directors, hired 20 managing directors, and acquired another 34. This brings this total to a total of 143 managing directors as of today. We welcome the new MD's to Huron and congratulate those that we have promoted from within. These new leaders will help us drive growth for the next five years. In all, Huron has added approximately 500 people, consultants, and other revenue-generating professionals since the beginning of last year through an active recruiting program and through acquisitions.

It is really gratifying to see how well our new colleagues and our veterans have meshed from day one. Mary Sawall and her team have done an excellent job of identifying the characteristics of people who will fit in from a cultural perspective and finding the top consulting talent as well. By the way, their excellent work extends to the colleague recruiting level, too. We will be welcoming approximately 200 new graduates from campus this summer.

In a few minutes, Gary Burge will provide our financial outlook for 2007. I will just say that I am very excited about what lies ahead for Huron. Though market remains very robust for Huron Services, we are continually in the marketplace trying to add MDs in experienced resources. We hope to hire between 15 to 20 new MDs in 2007. And we are always looking for strategic acquisitions that fit our criteria -- team-oriented, reasonably priced, and accretive to EPS.

One thing I want to make clear to all of you is that our core businesses, those that we started with at Huron and were our foundation, are growing very well, organically. Legal financial consulting is a business that has only grown organically since we started. 100% of its growth is organic. We currently have 42 managing directors in that practice. We have three more who will join us shortly. We expect that legal financial consulting will grow more than 30% this year, organically. You will also see very strong organic growth out of our legal operational consulting and help in the education consulting practices in 2007. Both of these practices will be north of 30% organic growth as well.

We continue to benefit from our brand building, and at [Crosson], we are doing in major clients. Huron is getting better every day. The acquisitions of Glass brand glass are a good bit with our business. Our new colleagues from Wellspring have added capabilities and expertise, and are already a strong health and education consulting practice. The professionals who have joined us from Glass are well known in the restructuring world, and we will continue to expand our presence in that space as the auto, health care, manufacturing, and retail industries face credit challenges, which will drive demand for services in the upcoming years.

If we look at Huron today versus where we were a year ago at this time, we are a much different company. Our portfolio service offerings continue to broaden. We have much larger-sized jobs on average, and we are cross-selling more services. Golf, Doctorate Review, and Wellspring would each have multiple jobs in our 20 largest jobs each month. We are very well positioned for future growth at Huron.

What should you expect from Huron over the next five years regarding growth and what will we focus on? We will continue to add MDs in each of our core service offerings in the U.S. We will continue to increase our geographic presence in New York, the oil patch, and the West Coast of the United States. We think there are opportunities to build our corporate consulting practice as well, and we will consider investing in the following new business areas -- transaction advisory services, utility, oil and gas consulting, consulting the financial institutions. You can see we plan to increase our industry focus with corporate consulting very significantly.

We will also look to potentially expand in public business services and meet client needs. The next 12 to 24 months, our clients will want us to expand internationally. We will start small and they will be client-driven. In closing, I would like to thank all of the employees at Huron for a great 2002 and continue to build the foundation of a great consulting firm. Now, I'll turn it over to Gary Burge.

Thanks, Gary, and good morning, everyone. As Gary commented, we are very pleased with how we wrapped up the year with our strong fourth-quarter results. Some of the financial highlights for the quarter included revenues of $83 million. We're up 50% year over year with strong organic growth of 31%. EBITDA increased nearly 83% to $17.6 million for the fourth quarter, compared to $9.7 million a year ago. And our EBITDA margins increased 370 basis points to 21% from a little over 17% a year ago. And our adjusted EBITDA margins increased 330 basis points to better than 24% from about 21% a year ago. Operating income increased 80% to $14.4 million for the quarter, up from $8 million last year. And diluted EPS came in at $0.46 compared to $0.27 a year ago.

Other quarterly highlights include the following -- our financial consulting segment posted solid revenues of $37 million, which was up 22% from a year ago. Operating income for this segment increased 63% to $17.7 million with utilization in excess of 83%. We continue to see great returns on the investments we have made in our operational consulting segment. For example, we have seen strong early success in cross selling to our existing client base, the E-discovery hosting and document review services that we acquired last summer. Operational consulting posted revenues of $46 million, an 84% increase over the same quarter last year, including acquisitions. The organic growth rate for this segment without acquisitions was 33%. Operating income increased $14.6 million for this segment while we increased our consultant head count 38% to 450 over the past year. At the same time, we maintained utilization at nearly 74%.

We think we are well positioned for strong growth in these practices during 2007. Now, for a few more stats, PSO came in at a record 55 days at the end of the quarter, which quite frankly exceeded our expectations, as we had $110 million in cash collections during the quarter. Cash flow from operations for the quarter was nearly $33 million, up from $14 million last year.

Now, a few financial highlights for the full year 2006. Revenues increased 39% to nearly $289 million from $207 million in 2005, and we are very pleased that our overall organic revenue growth rate for the year was better than 27%. EBITDA increased 54% to $59 million from $38 million a year ago while our EBITDA and adjusted EBITDA margins each improved 200 basis points over the last year. Diluted EPS came in at $1.54 compared to $1.05 last year. Cash flow from operations for the year increased to about $43 million from $26 million last year, and overall utilization remains strong at nearly 78%. And lastly, we continue to have strong return metrics with nearly a 17% return on assets and a 28% return on equity for the year.

Now, guidance for Q1 and the full year 2007. Based on currently available information, for Q1, we expect revenues in the range of $111 million to $115 million, EBITDA of $23 million to $25 million, operating income of $16 million to $18 million, and $0.49 to $0.53 in diluted EPS. First quarter results will include approximately $2 million, or $0.07 per share, in rapid amortization costs associated with the Glass and Wellspring acquisitions. The first quarter will also include approximately $4 million in stock-based comp.

For the full year 2007, we expect a revenue range of $470 million to $485 million, EBITDA in the range of $97 million to $102 million, and operating income of $73 million to $78 million. Diluted EPS will be in the range of $2.10 to $2.25 for the year. Full-year results will include approximately $6 million, or $0.18 per share, in rapid amortization costs associated with Glass and Wellspring. This rapid amortization will elapse at the end of the third quarter. Full-year stock-based comp will be approximately $19 million, and cash flow operations will be in the range of $60 million to $70 million for the year, with $20 million in estimated capital expenditures.

As you review your models for 2006 and compare the modeled results with our reported results, you should note that approximately 8% of our $289 million in reported revenues for the year, and approximately 15% of our $83 million in reported Q4 revenues were generated by independent subcontractors and what we would call non-traditional consulting revenues, such as E-discovery and document review services.

For modeling purposes in '07, we expect that these same revenue sources, the subcontractors, E-discovery, document review services will again represent about 15% of total revenues. In addition, assuming no additional acquisitions this year, we are targeting to have approximately 1,200 consultants on board by the end of 2007, about a 5% lift in our average hourly bill rates, and average utilization of around 75%.

So what we're saying is one way to model our results for 2007 would be to take your number of average consultants times an hourly rate times 1,865 hours times 75% utilization, and that calculation should represent about 85% of your revenue total for the year. The remaining 15% of your annual revenue estimate should then be represented by subcontractor, E-discovery, and document review revenues. I hope that math exercise is helpful to you.

Next, diluted share count for 2007 are estimated to be approximately 17.8 million shares for Q1 and 18.1 million shares for the full year 2007. And finally, you should assume an effective tax rate of 44% for the year. Forecasted 1% rise in the effective tax rate is primarily attributable to estimates of non-deductible executive comp relating to code section 162-M.

Okay, enough talk about modeling. To recap, we are very pleased with our strong results for the fourth quarter and full year 2006. As Gary said, demand continues to be very strong, and we feel that we are well positioned, heading into 2007 and beyond, with continued strong organic growth rates and the addition of our newly acquired businesses. Let's now open it up for questions.

Thank you.

[OPERATOR INSTRUCTIONS].

One moment for your first question. And your first question comes from the line of Matt Litfin of William Blair & Co. Please proceed.

Hi. Good morning and congratulations.

Thank you, Matt.

I wondered what type of pay rate increases do you plan for 2007? And also, are you giving equity to a greater number of people or is that staying about the same?

I'll start back with the number of people who are getting equity is not increasing. We still continue only to give equity to mostly the managing directors at Huron. I think you do know though, Matt, that we do allow our employees to buy some shares, which they can buy out of their bonus, and I believe that we've had 180 people sign up for that, which -- I'm sorry. Mary Sawall tells me more than 200 people below the MD level have signed up to be able to buy shares, and then we match it with 25% of this day to year.

The pay rate increases, it's a really broad range, Matt, as you can imagine, as we continue to broaden our portfolio. I think the thing for you and to modeling and things is that if we can't cover a pay raise in revenues, it will just come out of bonuses, because we force our margin at 45% like I think we shared with you before.

Okay, great. And then, I also had a question on the operating margins. What do you view as optimal, or peak margins, either operating or EBITDA?

Well, I think what we have told people is "Don't ever". Our optimum EBIT is 20%, which we're not going to get there this year because of the rapid amortization, but I think that we would hope that we would get that in the mid-teens. Once the rapid amortization optimal, it would be 20%, Matt.

Thanks, and congratulations again.

Thanks.

And your next question comes from the line of Brandt Sakakeeny of Deutsche Bank. Please proceed.

Thanks. Congratulations. Great quarter and good guidance. Just a question on the acquisition pipelines. What is the likelihood that you'll see more deals sort of similar to the ones you've executed so far? And also, can you update us on the integration with some of the latest acquisitions?

The integration has been really good. We've got -- I think we've told you guys before, we've got a great infrastructure here at Huron. We're very prepared with all of those citizens, all of the people. We've got world-class people working in accounting, legal, HR, marketing, IT, every function. And the people we're acquiring, we acquire because of their cultural [inaudible]. But the integrations go very, very smooth for us.

The acquisition pipeline, our issue is what we want to pay for someone. And finding companies at the price we want to pay is becoming more and more difficult. So right now, probably what you'll see more from us in the short run is probably more group hires versus acquisitions unless something comes to the table that's reasonably priced. And right now, we don't have a lot of reasonably priced deals in the pipeline.

Okay, Gary. Thanks. Thanks, that's helpful. And just one other question on the document management business. That's obviously a decent percentage of '07 revenues as Gary highlighted. Can you just give us an update on that business and also sort of a strategy to build that out? Any more thoughts about expanding the capabilities offshore and things like that?

Well, right now we're not offshore. We're looking at it. We've got some clients who would like to do that. We were just about, and we will announce shortly that we're opening a new center in Houston. We'll have up to 100 and some seats. So when we open -- when we started the business, we had about 250 seats. We'll have about 450 seats by the end of the first quarter. That business is far exceeding our expectation of the demands and just the whole -- what I would say, the utilization [technical difficulty] for that place far exceeded our expectations. Clients are asking us to look for offshore opportunities. We will look at them, and as clients, get their -- but right now we don't have anything planned immediately for offshore with that, Brandt.

Okay, great. Thank you.

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

Hi, this is Andrew Fones for Kelly.

Good morning, Andrew.

Good morning. I was wondering, first of all, if I could ask a question on margins. Just to clarify, are you assuming a 45% gross margin in your guidance this year?

Yes.

Okay. And how much of the $19 million in stock-based comp will flow through the cost of services line? Do you have an estimate on that?

About -- Andrew, this is Gary Burge. About 50% of that number goes through direct versus indirect.

Okay, thanks. And then, just in Q4, I saw that the operating margins of the operational consulting group was a little bit lower. Can you kind of walk us through what was in the expenses there and what we should expect going forward?

The question, Andrew, is the fourth quarter for operational consulting?

That's right.

Right. In the fourth quarter, in operational consulting, we had perhaps a higher level of business development activity related to getting things jumpstarted for 2007, so nothing per say that had impacted that number. We did adjust some bonus accruals in the fourth quarter as a result of them having a strong fourth quarter on revenues, and so I had to bump their bonus accruals somewhat. And so that had an effect on the operating margins as well.

Okay, thanks. And then, did you give CapEx for Q4? Did I get that?

I did not give it for Q4, but I can get you a number in a second. I think it was about $3 million or so.

Okay, thanks. Good job, guys.

Thank you.

Thanks.

Your next question comes from the line of Sandra Notardonato of Robert Baird. Please proceed.

Thank you. Did you give the turnover number for the quarter?

No. Mary, do you have that?

For the year, our turnover was 20% voluntary turnover among billable professionals. We were really pleased for that, with that. It was about 1.5 percentage points below the prior year. I think it's more relevant to look at the full year. Our fourth quarter turnover was very low, but we have real seasonal turnover.

Sure.

We expect it to be high. It's usually in the March to June timeframe after we pay bonuses.

Okay. And if you include the involuntary, Mary, can you give what the total turnover was?

If I include involuntary, it was closer to 23%.

Okay. And looking out to 2007 with the guidance that you've given, are you assuming that voluntary turnover remains around 20%?

Yes. We'll always work to improve it, but we feel we've made some real great progress the last couple years.

But we're not --

We're hiring a lot of young people. We have high leverage. There's a certain amount of turnover that goes with that. I'm sorry, Gary.

And just to protect our business, Sandy, we would not want to assume things would get better. So we need to hire with that. That's built in to all of our hiring assumptions.

Okay, great. The -- I was wondering if you could give the percentage of revenue that comes from the way that you're segmenting business in 2007 just to give us a sense of what we can expect. Do you have that with you by any change, Gary Burge?

The -- I guess we'll, the multi-pay, wait until we report first quarter. But the -- our two biggest segments going forward will be legal financial consulting and the higher education and health consulting segments. They will both be 30% to 35% of total Huron revenues, and then legal operational consulting and corporate consulting groups will both be 15% to 20% of revenues.

Okay, great. And you mentioned what the plans are for '07 on the three segments, legal, financial, higher ed, healthcare. But you didn't mention the organic growth for the operational consulting segment. Can you give that number?

Well, right now, we're being very conservative. It doesn't have a lot of organic growth built into it because we still don't know what's going to happen with the corporate advisory business.

Right.

And we've split our strategic sourcing business among the various segments.

Okay.

So it's pretty hard right now for us to know exactly what that's going to look like. But when we get our segments recapped and everything and see Q1, you should get a better sense of that, Sandy.

Okay, great. And then, I was wondering, Gary Burge, you mentioned that the breakout between stock-based comp, direct and indirect, is 50/50. I believe it was 75/25 in the past. Is there -- can you talk about why the change?

Yes. Sandy, yes. I probably gave Andrew, earlier, not as a precise estimate on that but it's about 55/45 is what we would expect. 55% going into direct in 2007 and then 45% hitting SG&A. And Gary Holdren's contract is one influence on that number. It's swinging a little bit as we enter '07.

Okay. Good for you, Gary Holdren. What about if I can get the -- I know you've talked about this at a recent conference but if you could give an update on some of the larger engagements that are coming to a close and the probability of those resources getting redeployed readily. I think the two customers are Navastar and Northwest.

Northwest is not that big a job for us, Sandy.

Okay.

I don't know that it's -- it's not that big a job. Right now, I think the -- I don't think that there's a known definitive date on Navastar. I was out there Monday for an audit committee meeting. So we're not, at this point, we're not projecting that it will slow down from calendar '07.

Okay.

If it does though, Sandy, we still don't have enough people to meet all of our demands.

Okay, so those resources will be redeployed pretty readily?

Very readily, and I don't think you'll see the Fanny Mae kind of situation this year in any of our segments.

Okay. Do you have statistics, by any chance, such as number of engagements over $1 million? Or maybe some client concentration numbers? For example, your top ten or top five.

Yes, Sandy. Just to give you a rough idea, we've had, in 2006, we had about 63 clients, precisely 63 clients, actually, that had $1 million or more of revenue. That's up from about 40 in 2005. Our top ten clients for the year 2006 represented about 30% of total Huron revenues and that's down from about 38% in 2005. So I guess you'd expect that the bigger we get, the less concentration we'd have.

Sure. And then, my last question. The guidance that you've given, $2.10 to $2.25, I'm wondering if you could handicap the low end versus the high end. I know that visibility is tough, but I'm just trying to get a sense of where you see yourself coming out by the end of the year.

Sandy, you pretty well know what our history has been, right?

Yes.

I don't think we need to say more than that.

Okay, so there is a level of conservatism in your guidance.

Those are your words.

Fair, Okay, great. Great quarter. I appreciate it.

Your next question comes from the line of Tobey Sommer of SunTrust Robinson and Humphrey. Please proceed.

Good morning. This is actually [Mike], in for Tobey, this morning. First question is looking at the utilization rate and financial consulting group, it looks like you came in pretty strong in the quarter. Just wondering was that driven by some large projects or is that kind of a new sustainable level in those?

We're just so busy. Demand's coming from everywhere, Tobey.

Okay, great. So kind of trending, going into 2007, a kind of a new higher level? Or do you expect --

We'd like to hire more people and bring it down.

Okay, fair enough. And then, could you comment on what you may see as some major catalysts in the market? I know the sub-prime issues that have kind of been in the news lately. I just want to get your sense on what could be some major catalysts in the future.

We haven't seen. I was in New York, this week, and I was with some major financial institutions and I was with [inaudible]. We have not seen any really activity at all in that area.

Okay. And then, just on the international expansion, I know you said it's going to be client driven. Is it your sense, currently, that you'd be able to continue service with that with U.S. based personnel? Or do you think you'll maybe have to open an office in the future?

Ultimately, we'll have to have offices there because at some point we'll just have too many clients there and it'll get too rough on our people to travel that much.

Great. Thank you very much.

And your next question comes from the line of [Mark Bolta] of [Blueson] Investment Management. Please proceed.

Good morning. Thank you. Gary, I wonder if you could go back a little bit for us and remind us how many consultants and what kind of junior-senior leverage you had at your former firm just to kind of get a feel for how big you've scaled before?

Well, I think, Mark, the issue right now is our prior firm, Anderson, it was a firm that was -- did a lot of, primarily, we did legal issue consulting, and we had very large assignments and we used a lot of junior people. Our mix now, businesses within Huron are so different that we are going to really have to sort of rethink our leverage model and start really rethinking how we give it to you guys because right now, if you look at our acquisition of Wellspring Partners, it's a really great business. I mean, they've got 19 managing directors. And clearly, don't have 190 employees. I mean, they've got less than 100. Our Glass acquisition had seven managing directors and they haven't traditionally used young people.

What we're going to try to do, what we need to do over the next year is sort of see whether -- what that model looks like and what it should look like going forward. And so, my former firm and what I ran at Anderson is a much different practice than what we've really got now. If you take the document review business, if you take processing, if you take more of those business service models where we're using contract people, I mean, that's great leverage. We haven't given you a way to measure that yet because we're looking at output pricing, but you don't really look at what the inputs are.

So it's a much different business and we're going to have to help you guys better understand that going forward because it's not like the Huron when we started with when we went with an IPO, and we told you we're going to have 10-to-1 leverage. And that's what my comments I meant. We're a much different business now, and I think we will be a much different business going forward to meet our client demands. Not only will we do consulting services, we'll own the solutions for our clients.

Great. Do you see, to what extent, feeding into those new business that you've gotten into, the visibility of them or the recurring nature of them? Is there some kind of mix of business that's really you know it's coming, but you just don't know who the client is versus some of those contract review where you just know that certain law firms are going to call on you, or companies are going to [inaudible]?

If you look at where our new business is, particularly, if you look at [Guld]. Guld business and the type of contracts they have, normally, have 12 or 18 months visibility, which is much different than the traditional Huron businesses. If you look at the Wellspring business, as well, and you look at what they typically are doing with their contracts. Their contracts are large. When they're doing the sort of diagnostic, it's eight to 12 weeks, but then their jobs are more like 12 to 18 months. So the Guld and the Wellspring businesses have a lot more further visibility and really bigger jobs than our core businesses.

So in some ways, those new businesses are going to get us a lot more visibility. And if you think about what we told people since we've been here is what Huron wanted to do is we wanted to have a business that had transaction business, that had short timeframes, high margins, and we wanted to give you a business that sort of balanced that with operational consulting, maybe more visibility, maybe not quite the same [inaudible] rates, but both of those could get 45% gross margins just to give you a better balanced portfolio.

Great. I guess my last question then is -- and that's what I was getting at with Anderson was I'm trying to get a feel. You mentioned five years in your contract. Do you see this as a business that could grow 20% plus over that five-year timeframe, given the growth areas here?

I wouldn't have stayed here if it couldn't.

Great. Sounds good to me. Thanks a lot, Gary. Bye.

[OPERATOR INSTRUCTIONS].

And you have no further questions at this time. I would like to turn the call back over to Mr. Holdren for closing remarks.

Okay. I want to thank all of you for participating today. And again, I want to thank all of you who are investors of Huron for having the confidence in us. 2006 was a great year and all of our people need to be congratulated. I think you will continue to see what a great company Huron Consulting as we move forward, and we look forward to talking to all of you in May from our New York office when we're going to hold our annual meeting and we'll be celebrating our fifth year anniversary. So, again, thank you.

This concludes today's conference call. Thank you for your participation. You may now disconnect.