Huron Consulting Group Inc (HURN) 2007 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Huron Consulting Group's webcast to discuss results for the first quarter 2007.

(OPERATOR INSTRUCTIONS)

And now, I would 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. I want to thank all of you for joining us for today's webcast to discuss Huron Consulting Group's first quarter 2007 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 statements that may 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 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 reconciliations to the most comparable GAAP numbers.

Joining me on the 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.

Before I get started with my prepared remarks, I want to thank all of our employees, clients, and shareholders for making the first five years of Huron very memorable and a great success story.

We have a very strong management team in place -- over 140 billable managing directors, and 1,200 employees who are committed to making the next five years even better.

What I would like to share with you this morning is the market demand for each of our segments and how well we are doing at winning work in the vast majority of our businesses. Business is very strong for Huron.

You have seen our revenue growth for the first quarter, and you know we have made several acquisitions over the last 12 months, but I want to share with you that the organic growth for Q1 was 30% with several of our practices performing substantially better than that growth rate.

Our corporate advisory service business continues to experience a challenging market, and I will cover more about that later.

We had 25 clients pay us more than $1 million for the first three months of 2007 and another 36 clients pay us more than $500,000, and each our segments had contributed to this client list. Our balanced portfolio was working and we feel we are becoming market leaders in several of our service offerings.

Let me start this morning with the market for legal financial consulting. You can see the impressive growth and profit of legal financial consulting and that growth is all organic.

The number of calls we get each day is amazing and the variety of matters is very broad. Having our practice leader, Joe Floyd, live and be based in New York is very helpful and a competitive advantage to Huron.

We continue to be hired for new investigations on a wide range of matters from, and including, company's revenue recognition, option backdating, providing advice on technical accounting matters. We are working on disputes for transfer pricings, statistical analysis of employee matters, and antitrust matters.

We're also being asked to help clients carve out the company's financial statements, monitor settlements and accounting issues, analyze fraudulent loan activity, investigate money laundering, and to defend accounting firms, and on and on and on. We have very talented people who help investigate and resolve business problems.

Look at any day in the second column of The Wall Street Journal and there is a potential Huron assignment there. I can't see demand slowing any time soon. I have personally been working on issues like this for 23 years. There's always been something to help clients resolve.

Turning to legal operational consulting, we provide services to law departments of Fortune 1000 companies and the law firms. The business drivers are reducing costs and information management.

Companies in the pharmaceutical, oil and gas, and financial service industries face substantial regulation and oversight and pay considerable costs related to compliance and discovery.

The cost of managing information is the greatest for these types of companies. Every general counsel is under pressure to reduce costs and manage compliance and discovery. They could only accomplish this by managing their law departments with better processes and systems.

Just this week, there was a study released by AIM, Association for Image Management, that over 1,200 companies responding.

54% of those companies said, and I quote, "They have little or no confidence in the organization's ability to retrieve e-mail messages, and 47% had little or no faith in their firm's electronic information management processes procedures."

Many feel meeting the new federal rules of civil procedure will be very difficult. This has put our records management service offering in great demand.

We have recently added three managing directors to our records management business, giving us a total of four now. We continue to help the office of general counsel with internal resource optimization, outside counsel management, and technology integration. In particular, discovery management, matter management, and e-billing.

During the first four months of 2007, legal operations consulting added 15 new Fortune 1000 companies to its client list with very substantial assignments. The list includes two large telecommunication companies, three global pharmaceutical companies, and another oil field service client.

Our integrated discovery solution is also bearing fruit. Discovery is the single largest cost category of most legal departments, and document review is 70% of that cost. Our integrated offerings of collecting, processing, and document review is working.

Clients like having one company accountable versus multiple vendors. We currently have 500 seats doing document review in the U.S. and we currently have a private document review project underway in India.

Just this week, a law firm called to ask us for assistance in helping their clients with a government investigation to collect data from 38 custodians' hard drives and email servers.

In this case, our job is to collect the data, process it, post it, and then review the documents in order to help the ultimate client meet a 60-day government-imposed deadline.

We believe we have substantial future growth with legal operations consulting because of our dominant market position, Fortune 500 general counsel.

Now turning the health and education consulting -- the drivers for our higher education service offerings are the clients managing basic and clinical research. The U.S. government distributes $50 billion annually to perform research on our clients.

Colleges, universities, and teaching hospitals continue to face operational, technology, and compliance challenges around research. Huron is being hired to help our clients improve the management of these challenges.

We're also hired more and more by these same clients to branch out and help them improve their business operation as colleges and universities continue to face pressures from decreased revenues and increased costs. Just to show you how broad based our higher education reaches, we have worked with at over 60 colleges, universities, and teaching hospitals during the first three months of 2007.

Let me now tell you about the activities in the pharmaceutical industry. We are seeing pharmaceutical and medical device companies receiving more pressure and oversight directed at their marketing and pricing practices.

We are helping these clients to identify the risk inherent in their business practices and then providing solutions to help them mitigate the risk.

Our clients in the health plans or payor industry have many challenges. We recently won an engagement to help a consortium of companies bid on a $15-billion claims processing contract with the federal government.

Just ask yourself -- who's to pay, how much to pay are significant issues in this industry. Who knows which direction healthcare is going to head in the United States?

What we do know is that we are going to be in the middle, helping our clients adapt to these changes. Our higher education, pharmaceutical, and health plan services offerings grew more than 15% organically in Q1.

Next, our healthcare service offering has plenty of market demand. There are more than 5,000 hospitals in the U.S., the majority of them facing declining operational performance. There are too many hospital beds in the U.S. with more and more procedures being done on an outpatient basis.

Revenues are declined from increased competition and hospitals are getting less from insurance companies, Medicare, and Medicaid. Costs are also going up for labor, shortage of nurses and supplies, including updated equipment to deliver modern medical procedures. We are doing quite well in this marketplace.

Now that we have consolidated our hospital services under Wellspring, we are very well positioned to offer enterprise-wide value transformations, improved revenues, we increase labor and non-labor operating efficiencies.

The way we go to market is to sell a four-to-12 week enterprise-wide assessment through the hospital and then give them recommendations of how to do their operations.

Assessments almost always end up with an eight-to-12 month job to implement the assessment. We currently have seven assessments we are working on -- these range from $200,000 to $800,000.

These assessments will be completed in the next 30 to 60 days. And if we win the implementation jobs, these will range from $4 million to $8 million each, over the next 12 to 18 months.

Examples of implementation projects that we have or we've had over the last 12 months include a $5-million job in Montana, a $10-million job in the panhandle of Florida, a new engagement of $5 million in northern California, with the largest one being a $16-million engagement in New Jersey.

With 5,000 hospitals in the U.S. and our relationship with teaching hospitals, we believe the future growth of this practice will be substantial.

Now to corporate consulting -- just a reminder of what is in corporate consulting. In the corporate consulting segment, we have the Galt, the shareholder value transformation group, our corporate advisory services, which includes Glass acquisition, and operational consulting, which was formerly our performance improvement with strategic sourcing practice.

The major corporations and their CEOs are under pressure to increase shareholder return. We are targeting companies who want a blueprint on how to increase shareholder return and help them implement the suggestions for improving share price.

We then follow up with sales of operation consulting services. Galt continues to win major assignments for Fortune 500 companies. We continue to see a challenging market for corporate advisory services.

Both our Glass acquisition and our historical Huron corporate advisory services business revenues decreased from Q1 of '06. We are in the marketplace everyday, traveling to clients with our MDs and our feet-on-the-street business developers.

The auto sector continues to face major challenges. We are spending substantial time trying to position ourselves with the OAMs and their Tier I suppliers. We need to be in the turnaround and restructuring business long term, and we will be there when the cycle turns.

We will also incubate and start new service offerings in corporate consulting, such as our new utility consulting offering and the start of our Japanese practice.

We are also looking to enter the transaction advisory business in an industry vertical such as oil and gas and financial services consulting. We will work on improving the margins of corporate consulting, but we will continue to invest in this segment and profit margins will come as the top line grows.

The beauty of our balanced portfolio is that we can afford to make these investments in corporate consulting.

I know my prepared remarks are a bit longer than normal, but I thought it was important to share with you how great market demand is for Huron services, how well we are positioned, and why we are so excited about the future.

We will continue to target at least 20% organic growth for the next three to five years for each of our segments and we'll look at another 5% to 10% to the top line each year through group hires and tucked-in acquisitions.

Now, we will turn it over to Gary Burge, our Chief Financial Officer, for our financial results.

Thanks, Gary, and good morning, everyone. We had a great quarter. Some of the financial highlights included revenues of $116 million, were up nearly 87%, year over year. And as Gary mentioned, strong organic growth of approximately 30%.

Customer concentration also continues to be less of a factor for us as no one customer represented 10% or more of revenues, and our top ten customers represented 32% of our total revenue for the quarter compared to 40% a year ago.

EBITDA increased 124% to $25.2 million for the quarter compared to $11.3 million a year ago, and our EBITDA margin improved to 21.7% from a little over 18% a year ago, and our adjusted EBITDA margin increased to 25.3% from 22.7% as we continued to take advantage of economies of scale and leverage our SG&A.

Operating income nearly doubled to $18.9 million for the quarter, up from $9.7 million last year, and diluted EPS came in at $0.55 compared to $0.33 a year ago.

As you know, we've reorganized our practices and we are now reporting results for the four segments of our business.

Revenues for legal financial consulting segment were $36.6 million for the first quarter of 2007, up 41% from $26 million in the first quarter of 2006.

This reflects strong demand and impressive organic growth. Segment operating income, excluding non-allocated corporate SG&A, increased 38% to $16.2 million from $11.7 million in the same quarter a year ago. And utilization for this segment remained very strong at 85%.

Revenues for the legal operational consulting segment were $23.3 million for the first quarter, more than tripling from $7.6 million in the first quarter of 2006.

These results reflect strong organic growth and very impressive demand for the document processing and review services that have proven to be a natural cross-sell to our legal financial and legal operational clients.

Operating income for this segment also increased better than three times to $7.9 million from $2.2 million in the same quarter a year ago.

Now for higher education consulting, this segment, revenues were up to $38.9 million for the first quarter of 2007, up more than 110% from $18.4 million last year.

Organic growth for our higher ed and payor health plan businesses remain very strong, and we are very pleased with the early results from our Wellspring acquisition, as Gary noted.

Operating income for this segment increased more than 130% to $12.2 million from $5.3 million during the same period a year ago.

Revenues for corporate consulting were $17.3 million for the first quarter of 2007, increasing 70% from $10.2 million in the first quarter of 2006. Segment operating income increased 16% to $4.2 million from $3.6 million in the same quarter a year ago.

As Gary said, while we wait out a sluggish bankruptcy market, we are hitting the street hard, marketing our corporate consulting services and at the same time making investments in this segment by building a utility consulting practice and opening a new office in Tokyo.

As we said before, a balanced portfolio gives us the ability to manage through soft markets and to make investments that will benefit the future.

Now for a few more stats, our DSO came in at a very solid 59 days at the end of the quarter, up slightly from the 55 days we reported in the fourth quarter of 2006.

Cash used for operations was $15 million during the quarter, reflecting nearly $29 million in bonus payments that were made in February.

Finally, our return metrics for Huron remain strong with return on assets of approximately 16% and return on equity of approximately 29% over the last 12 months.

Now for guidance for Q2 and full year 2007 -- based on currently available information, for Q2 we expect revenues in the range of $117 million to $121 million, EBITDA of $25 million to $26.5 million, operating income of $18.5 million to $20 million, and $0.53 to $0.57 in diluted EPS.

Second quarter results will include a little over $2 million, or $0.07 per share, in rapid amortization cost associated with the Glass and Wellspring acquisitions. The second quarter will also include approximately $5 million in share-based comp costs.

For full year 2007, we expect revenue in the range of $482 million to $495 million, EBITDA in the range of $101 million to $106 million, operating income of $77 million to $82 million, and diluted EPS in the range of $2.24 to $2.37.

Full year results are also going to include approximately $6 million, or $0.20 per share, in rapid amortization cost associated with the Glass and Wellspring acquisitions. This rapid amortization will lapse at the end of the third quarter.

Full year share-based comp cost is estimated between $19 million and $20 million.

We expect the cash flow from operations will approximately be $60 million for the year with $20 million in estimated CapEx.

As you review your models for 2007 and compare the model's results with our reported results, you should note that approximately 20% of our $116 million in reported revenues for the quarter were generated by independent subcontractors and business services' revenues such as e-discovery and document review services.

For modeling purposes for the balance of 2007, we expect that these same revenue sources, subcontractors and business services, will remain at approximately 20% of total revenues.

In addition, assuming no additional acquisitions this year, we are targeting to have approximately 1,200 billable consultants on board by the end of 2007, average utilization rates of 75%, and a 5% lift in our average hourly bill rates compared to 2006.

Weighted average diluted share counts for 2007 are estimated to be approximately 18 million for Q2 and 18.1 million shares for the full year 2007.

Lastly, you should continue to assume an effective tax rate of 44% for the year.

To recap, we are very pleased with our strong results for the first quarter of 2007 and we also remain pleased with the strength of our balanced portfolio that continues to drive our results. Let's now open it up for questions.

Thank you. (OPERATOR INSTRUCTIONS)

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

Yes, good morning. Congratulations.

Thank you, Matt.

My question is on turnover. How did that fair in Q1? And what have you seen in the weeks since you paid the yearend bonuses?

I'll let Mary Sawall cover that.

We were pleased to see that our first quarter turnover this year is more than a full percentage point lower than it was in Q1 of 2006, also lower than in Q4 in 2006. So our overall voluntary turnover was 3.7%.

As you know, we always expect a blip up after we pay bonuses in March and we've seen that, but we have not seen an acceleration. And I think we feel pretty comfortable that our continued efforts, which we will always continue to retain our best people, are bearing proof. So we feel really good.

One other comment, Matt, which is a little surprising to us is that 63% of the turnover was of people less than one year of experience. So we need to examine that a little but. And I don't know what you think about that, Mary. Less than one year with Huron, I mean.

Less than one year with Huron, we were talking about that yesterday and we did have a similar experience in 2004.

In 2003, we really ramped up hiring, and in 2004, some of the people who decided that consulting wasn't for them left and I think we're seeing some of that this year, but we do plan to take a look at it and make sure that our assimilation programs are working.

Some of the turnover was also among people who were acquiring, including people acquired in our January acquisitions, and I think that is also something that is not surprising.

A long-winded answer but we are making, we made it an effort and we're seeing improvement in our retention.

Thanks. And while I've got Mary on the line, the flip side of turnover would be hiring. I wonder do you track the ration of job offers to acceptances? Can you talk about trends there? And if you don't track it quantitatively, just comment on it, qualitatively? Thanks.

We don't track it quantitatively but we ballpark it, and our ballpark is about 50% is the ratio we look for for acceptance.

On campus, I think we talked about on our last call that our acceptance rate was close to 80% this year which is significantly higher than it had been in prior years and we're looking to capitalize on that this year.

So we're seeing an improvement as we become better known as our story gets out to people in terms of acceptance. And because we're doing quite a bit of our hiring of experienced people from referrals, we find that we have a much higher acceptance rate among referrals.

I would just add one last comment, which maybe I always have to add something at the end, but as we become more known, more older, and we keep having good results, more people want to join Huron, Matt.

Okay, great. The last question I have is for you, Gary, and that is what capability does Huron currently have in the transaction advisory business? Will you expand that with an anchor acquisition or is that going to be something that, you know, you strictly do from organic hiring?

We'd like to, we haven't been able to find that acquisition. I don't know if there is one. But I think right now, what we'll probably have to do is hire a fairly substantial senior rainmaker and build around the map with some of our skills within legal financial consulting in [CS]. We are doing some due diligence now but not at the scale we'd like to do.

Thanks. Congratulations on yet another strong quarter.

Thanks.

And the next question comes from the line of Tobey Sommer with SunTrust Robinson Humphrey. Please proceed.

Thank you. I had a question about your summer hires for this year, new graduates. Roughly, could you refresh us on how many you plan to bring onboard?

And you went in some real good detail about the strong demand environment but the extent to which you feel at this point the demand is in place to put them to work and ramp up their utilization relatively quickly? Thank you.

Dan?

Yes, this is Dan Broadhurst. We still feel pretty strongly about -- we're bringing about 200 people in, Tobey, over the summer months, starting in July. And we feel like, you know, the utilization will probably dip a little bit because that's a little bit of lumpy capacity coming in in these four chunks, I guess, coming in in over the three months there.

But we're going to obviously give them some training and make them job ready as quickly as possible. But with the demands we're seeing in the marketplace that you heard Gary Holdren talk about earlier in his comments, we feel like we could put them to work relatively quickly.

As a follow up maybe, when you put them to work, do you put them to work on kind of new projects at that time? Or are you in a position to maybe take off some of the consultants you're using and substitute your own new hires in those project?

Yes, the answer to that is yes. And, you know, it's probably most formalized in our legal financial consulting practice, but Joe Floyd, the leader of that practice, is always very conscious of what he calls cycling people on and off so that we can get better experience for our folks along the way.

So we'll be very active in looking at opportunities where we can bring our new people in, give them some training to make them job ready, as I said earlier, and then start putting them on both existing engagements and new engagements as they come along.

Thanks. And then shifting to the P&L, you've got an awful lot of G&A leverage in the quarter and I was wondering if you could let us know what you think about how that'll proceed over the balance of the year, and then maybe refresh me on what your ultimate goals are for the business, longer term?

Hey, Tobey. This is Gary Burge. We did have a great first quarter as our G&A as a percent of revenue certainly. I would expect we could maintain that kind of SG&A leverage for this current year. I wouldn't expect great improvements, quarter to quarter.

It's more of a step improvement, so I think continuing, assuming the top line can grow 20% organically, you know, we should be able to leverage the SG&A a little more next year and maybe get it under 20%.

But we clearly feel it's important to continue to invest in our future and spend money on marketing and business development, and that's growing that top line as our most important objective and we're not going to try to continue to skinny down the SG&A and have it hamper our top line growth at all.

I would also say, Tobey, being a salesman, I mean, I basically push to keep it -- I would never model below 20% because I'm going to basically push for sales and events and customer relationships and branding, and so we just believe that that's -- as long as we can grow our business, as Gary said, we don't model below 20%.

Okay, and one last question then I'll back in the queue. You expanded into international just recently.

I was wondering if you could comment about your thought process on international expansion, kind of how you isolated the most recent opportunity as the one to pull the trigger on first and maybe what your thoughts are on continuing that trend? Thanks.

I think we've said before, what you do is you look for opportunities. Number one, what we always look for is where do clients want us to be and where to clients think we should be.

In Japan, it was a little bit different. We had three former Arthur Andersen partners who we knew wanted to try to start something which wasn't a big investment.

And with the changes in Japan and the large economy it is and them going to a comparable J-SOX, which is our Sarbanes, we thought this was a pretty good investment and it wasn't a big investment for us. But we weren't being driven there by clients.

If you go to Europe or the UK, we've now got some people that we've hired there and we've got clients that are really wanting us to go there, so we will look at that over the next 12 months.

And it's not secret that we have clients that want us to go to India. So those will be things that we're looking at but they'll be client-driven, they'll be very, very well thought out, and we will not take huge financial risk on the international.

Thank you very much.

And the next question comes from the line of Unidentified Participant with UBS. Please proceed.

Yes, hi. It's Andrew for Kelly. I had a question on the gross margins. I guess your gross margins were just a little bit lower in Q1 than they were last year. You know, what should we expect as we move through the year?

I think Andrew, we pretty well said we target 45% gross margin. We've got with our document review business, we put the red up there. But you shouldn't look at much improvement. I think we've told you that we're going to target 45% gross margin.

As long as we grow 20%, we're going to give that residual to our employees, and we're going to have 3% or 4% stock-based comp. So you're going to get between, after stock-based comp, somewhere between 42% and 41%. You shouldn't expect any higher than that, and you're going to get more dollars by the revenues growing.

Okay, thanks.

Andrew, Gary Burge. Just another factor affecting that gross profit margin, we've got some short-term rapid amortization associated with the Glass and Wellspring acquisitions that are affecting the gross profits for the year. And so if you take that out, the gross profit margins are just about equal with what they were a year ago.

Okay. Can you give us an update on how you expect that to trend off with it, about $2 million in Q1 in the gross margin, in the gross profit line?

Yes, about $2 million in the gross profit line, there will be another $2 million in the second quarter. It'll tweak down a little bit in the third quarter to maybe $1.5 million, and then it drops off the scale in the fourth quarter.

Okay, thanks. And then, the amortization within G&A, your new G&A line, could you walk me through how that should trend as well?

That is a longer term amortization and that will stay as it is right now for the next, on average, the next four or five years. So you won't see that number change dramatically, quarter to quarter or year to year.

Okay. Thanks. Great job, guys.

Thank you.

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

Yes, good morning, Gary. Congratulations on a great quarter. A couple sort of big picture questions. I guess, first, Gary Holdren, can you talk about the potential impact of an IFRS over the next couple of years? I mean, is that potentially a big area of work going forward?

I couldn't hear. You broke up a little bit, Brandt.

Sorry, Gary. I was asking if you think potentially the impact of moving from GAAP to IFRS over the next couple of years is potentially a big revenue source in the accounting and finance area for you?

I would think it is. I mean, we have not yet had a lot of people approach us, but if you think about our skill level and what we do, it should be.

Okay, great. And then, in terms of an update on the integration of Wells and Glass, can you talk about the attrition sort of at the MD level and also sort of at the analyst level and how that's going? Also the cross-sell?

The cross-sell is going very well. I'll talk about that first. We're really seeing some real good integration between what was our Speltz & Weis business and our Wellspring business. Both ways, them selling in our management and then our management selling Wellspring. I mean, it has just been fabulous.

And also, our total healthcare services business, and I would also say in the Glass business with, you know, Glass helping sell some operational consulting, we've just seen, I mean, we are very blessed with the acquisitions we made and the people wanting to be teammates and the whole integration process is very, very smooth.

And I think we tell you that we really look hard at the culture and the people before we do an acquisition and it makes it pretty easy for us. And we tell people right away this is the way it needs to be so I think we're getting, you know -- and do we, have we had any, Mary, whether the turnovers for Glass and Wellspring?

There's been no managing directors have left. The turnover we saw with people in the acquisition was a few people, and neither of the acquisitions were huge, but a few people who may have made the decision early on that they didn't want to be part of a larger organization.

I didn't mean with my earlier comment to say we had some turnover with the acquisitions to imply that we felt there was a problematic level. There's just always a little bit of churn at the beginning, and we're working hard on the integration.

Wellspring was 60-some people. Glass was bordering on 1,200. And we're public, they were private. So there's just some people who didn't want the same environment.

Yes, that's great. And, Gary Burge, a couple quick housekeeping items. Do you have the organic growth for the four segments?

That's not something I think, Brandt, we were prepared to give on a detailed basis but let me say this, that the, if you look at our numbers, as you can see or can guess, that the organic growth in the corporate consulting practice was not as good as we expect.

It can be in the future, but the other three segments all had organic growth rates that were at or above the 30% we had overall for the whole company.

But, Brandt, you can see on the face of the financials because I told you it was all organic. I told you PHP was over 50, and you sort of look at, I mean, you can pretty well figure it out.

Okay. And then, are you going to disclose the '06 breakouts in the Q based on the four segments for the second, third, and fourth quarter of '06?

Well, ultimately, we will. But we've broken it out for first quarter of '06 versus first quarter of '07 in the Q.

Okay, and so each subsequent Q will have the prior '06 quarter?

Yes.

Okay, and one last question, I promise. On the deferred revenue, I noticed that's up. Which practice group is driving deferred revenue? And, you know, could you talk to the backlog that that sort of creates and the visibility that that segment does create? Thanks.

Right. The deferred revenues relate primarily to our strategic sourcing business as well as Wellspring has some deferred revenues as well.

And so, that will benefit future quarters when those investments and those contingent or success fees turn around but they'll still remain a pretty small percentage of our total revenues, which here in the first quarter was the 1% range.

Okay, great. Great job.

Thanks.

(OPERATOR INSTRUCTIONS)

And the next question comes from the line of Sandra Notardonato with Robert W. Baird. Please proceed.

Thank you. First question is on the guidance, the new guidance that you've give for this year. What does that assume in terms of organic growth? Is it going to be better than the 30% that you reported here in Q1?

I think about the same, Sandy.

Okay, okay. And then, could you give me the number of MDs that you now have on staff? I'm trying to get the leverage of junior to senior people.

I think we have right about 145.

Okay. What percentage of those, Gary, would you say are still in the process of building their practices versus established producers?

It's a real good question. It's an issue and I mean, Huron is like, what I would say, any other consulting firm. People rotate back and forth in years and stuff, but 25% of the MDs are producing a huge amount of the revenues.

We still got people who need to grow into it and improve. If we ever got all of our MDs performing at, what I would say, at the 75 percentile level, we wouldn't know how to basically account for all the revenues.

Okay, so are you, is that, what's the goal then? You've got the 25% that are "huge producers." What's the goal? Where do you want to be?

Well, the goal is we want 20% organic growth, and what you have to do is you keep trying to get those to come up.

And those that don't and can't make it, leave, and we deal with it then. And so the goal is, you know, the reason we have a balanced portfolio is that when you have goals for everyone, they have base pay and they have bonus.

So what you do is you reflect if they can't perform at the level, you basically pay them less and you try to promote them to do better and stuff, but I don't know if we'll ever get everybody humming.

I've been doing this now for 35 years and I've been in charge of running a business like this for over 25, and I've never really ever had more than about 30% or 40% of partners every humming at one time.

Okay. Are there any of your senior level managing directors, any of them that are on employment agreements that are coming up for renewal any time in the near term that we need to know about?

I mean, everyone is on an SMA that has -- they're not, they're sort of evergreen. There's nothing here that keeps someone to stay here other than, if you think about it, a contractual -- we do have contracts with everyone.

We have non-solicit and things of that nature, and they're all one year. I have a two-year non-compete, and I'm the only one that has two years.

But the thing that, really, you should think about from hereon is the substantial amount of value that they have in the three-year unvested restricted stock and the fact that we try to treat all our people with respect in our results.

The best way to think about people staying here and your risk, and I'm just not a believer that contracts are coming up or down are going to be that much (inaudible).

Okay, okay. And the turnover level at the MD, or the attrition at the MD level, was low in the quarter. I should assume that's from the comments --?

There was not in Q1.

Okay, okay. Gary Burge, can you give us specifically what Wellspring and Glass contributed in the quarter?

No, our practice has always been not to give specific disclosure on them, but I guess, we did say though their organic growth rates are strong in each of those segments. They're, certainly, Wellspring performed very well. Glass is looking for the market to turn, but we're happy with both acquisitions. No question about that.

Okay. And Galt and Access, those two also met your expectations?

Yes. I mean, Galt had a little bit of a delay because of one client, but Galt's numbers, for what the size of the business they have, and they're humming. They're just a business that generates unusually high revenue for consulting. They're the flagship of revenue for consulting we have within Huron.

Okay.

And Access, indeed, CRCS, you know, we couldn't be happier with those two practices and our ability to cross-sell those services, and you can see the results in legal operational consulting that they are significant contributors right now.

You'll see when you read the 10-Q, which is going to be filed later today, so I mean, you're going to see $14 million from processing and document review on two businesses we only paid about $20 million for.

So we've got $14 million in one quarter on the two businesses we paid about $20 million for.

Okay.

They're doing extremely well.

Great. And I think you mentioned $20 million in CapEx. Could you breakout what your plans are in terms of how much of that money is going to be invested in U.S. growth versus getting into new areas, internationally?

Sandy, at this stage, it's virtually all domestic spending. We're not putting a big investment in terms of office space in either the UK or Japan, at this point and time.

Okay. Great. Thank you very much. Very nice quarter.

Thanks.

Thanks.

And our next question is a follow up from the line of Matt Litfin with William Blair & Co. Please proceed.

Yes, hi. Gary Burge, a question for you. Your target is 45% gross margin that you talked about before and Gary Holdren was saying that he would like to keep the SG&A level at about 20% of revenue to invest in the business and the brand.

Are there other hidden sources of margin leverage? Or have you kind of now reached your goals there on margins and future growth will be driven solely by revenue?

Yes, I think, ultimately, we said we'd hopefully get to a pre-tax operating margin in the neighborhood of 20%, and so we've got a little room to go there.

Some of that's going to come from leveraging our depreciation as a percent of revenues, absent future acquisitions. That can help that pre-tax operating margin.

And, you know, quite frankly, I'd say maybe we've got that down to the 20% level on SG&A a little quicker than we thought.

But as Gary said, I'm not certain we're in the mindset right now to try to drive that down into the mid-teens, and we'll continue to manager, grow the top line, and have a good EPS as a result.

I think one of the things, Matt, I'd also say if you look at the press release, back on page eight, you see where we get 25% of adjusted EBITDA as a percentage of revenue, which means you take out depreciation, amortization, and stock-based comp.

I mean, that's pretty efficient. I mean, we're doing damn well there. I don't know how much higher that can go.

Because we've got, the thing is really working for Huron and I think the thing that's really going to work for us long run is continuing to give out those 500,000 shares at some, whatever the price is. And even though that number will go up, you know, the EPS number, it's a huge retention tool.

That gives us such a competitive advantage with that much value that people give us to move. Plus, I think it's a good place to work.

That's the key. Thank you.

And our next question is a follow up from the line of Tobey Sommer with SunTrust Robinson Humphrey. Please proceed.

Thank you. Two questions. One, I was wondering if you could comment on your thoughts regarding kind of owning a technology in the e-discovery area, a software tool versus not, and maybe the pluses and minuses of both strategies?

And then, secondly, I was wondering what the gross margin and implications would be if either reducing or increasing the proportion of your revenue that is currently being performed by outside consultants? Thanks.

We're not going to -- we made a decision. I guess you should never say never, but we don't believe our clients want us to own software. We don't know a lot about it, you know, keeping it updated, managing it, maybe it becoming obsolete.

I mean, it can be a short-term good profit generator, but I think our clients want us to be software agnostic. That's what our GCs like about us, so I don't think you should look for us ever to own. That's not to say somebody else shouldn't own it, but it just doesn't fit right for our client base, what we want to do.

And on the gross margins, I think that now you shouldn't -- we shoot that we should see very comparable gross margins on all of our businesses. And if not gross margin, clearly on operating income.

After their contribution, after SG&A, you will get about the same. The beauty though of what we're seeing now with the document review and processing business is having four managing directors have potentially a $60-million business. I mean, that's leverage.

Right. Thank you very much. Very helpful.

And our next question is a follow up from the line of Sandra Notardonato with Robert W. Baird. Please proceed.

Hi, thanks. I think you mentioned 200 hires this summer, starting in July. Is that going to have a negative impact on gross margins in the quarter? Should we expect the September gross margin to come below the 45%?

No. If we can't take care and absorb the things of the business decisions we make, that affects our bonus.

Okay. And then, my last question is the 20% of the business that is not headcount-growth driven or consultant-utilization-billable-hours driven, how should we be forecasting that part of the business? Or, Gary Burge, how are you forecasting that part of the business?

Yes, well, I think in terms of the annual guidance we've given, you know, for the year, assuming 20% of that is going to subcontractor-driven and also the business services driven in terms of processing and document review, I'd say it's difficult to model because, you know, a lot of the activity is event-driven and feeds off of our LSC practice and other services we're selling.

But at this stage, you know, we're monitoring it, we're investing in it, and if that 20% is going to change, we'll tell you in future quarters.

And out of that 20%, what percent comes from subcontractors versus what's coming from document-type work that you're doing, document-review type work that you're doing?

Sandy, when you read the Q, you can see each of it by segment.

Okay, okay. Thank you.

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

Okay. Thanks to all of you for your time today and your questions, and we continue to be very appreciative of all of our shareholders and you having the confidence that you have in Huron. We'll promise to continue to give you what we think will be very good results.

I'd just like to make sure that all of you know that we have our annual shareholder meeting next Tuesday, May 8th, in our New York office.

And if any of you are in New York and would like to come, you're welcome. The meeting won't be very long but it would be, again, a chance for you to meet all of our management team, all our practiced leaders in the Board.

So in closing, I would just like to really thank the 1,200 employees of Huron, and we look forward to seeing you again in August when we do our second quarter earnings. Thanks, and good morning.

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