Huron Consulting Group Inc (HURN) 2008 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 2008. At this time all conference 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 Mr. Gary Holdren, Chairman, Chief Executive Officer of Huron Consulting Group. Mr. Holdren, please go ahead.

Good morning and thank you for joining us for today's webcast to discuss Huron Consulting Group's fourth quarter and full year 2008 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 filing 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 and our website for all disclosures required by the SEC, including reconciliation to the most comparable GAAP numbers.

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

This morning I would like Gary Burge to start by covering our 2008 results as well as our 2009 guidance. What you will see in our press release this morning is that our fourth quarter revenues were not in line with our forecast. Gary will share with you where those shortfalls were. However, you will see our net income and EPS for the fourth quarter and 2008 were within the range we previously gave you.

It is very important for Huron as a growth company to deliver consistent growth of revenues, but what is equally if not more important is to deliver consistent and predictable net income and EPS. We're going to share with you this morning how and why we are able to do that and how we will concentrate on delivering a more predictable, consistent growth in net income while, at the same time, growing our top line.

We believe Huron will be able to deliver predictable net income for several reasons. First, Huron provides a balanced portfolio of service offerings, all capable of delivering very solid profit margins at the segment level. Second, we have a pay-for-performance compensation model where our professionals don't receive bonuses without delivering reasonable revenue and profit growth. Third, Huron's variable labor cost model for our V3locity and CFO Solutions business give us bottom line protection if revenues do not meet our forecast. Lastly, we will manage our SG&A cost to be the best of our peer group.

These are the reasons we think our ability to deliver and predict net income and EPS will be easier than predicting revenues in these current economic conditions.

We recognize the critical need to manage the bottom line and deliver superior cash flow from operations during this time of uncertainty to you as shareholders. After Gary's remarks I want to share with you our outlook regarding demand for each business segment and how we are going to be profit zealots in 2009 so we can deliver results that will benefit both our employees and our shareholders.

Gary

Thanks, Gary, and good morning, everyone. I've got a lot to cover with respect to quarter and guidance, so let me get right into it. Some of the financial highlights included -- revenues of $164 million were up 20.6% compared to last year's fourth quarter with consolidated organic growth of 4%. Excluding the Financial Consulting business, the combined organic growth rate for the remaining three segments was approximately 29%.

EBITDA rose to $38.6 million, up about 32% from EBITDA of $29.2 million in Q4 2007, and our adjusted EBITDA excluding share-based compensation rose approximately 29% to $45 million. Year-over-year fourth quarter EBITDA margins improved 200 basis points to 23.5%, and adjusted EBITDA margins improved 180 basis points to 27.4%.

Operating income increased nearly 23% to $28.5 million for the quarter from $23.2 million last year, and fourth quarter operating margin was 17.4% in 2008 compared to last year's 17.1%. Without rapid amortization, operating margins would have been 19.1% in 2008 compared to 18% last year. SG&A expenses for the quarter included a $2.5 million write-off of a specific client account which was deemed to be uncollectible. Write-offs totaled $2.7 million for the quarter, which was unusually high as such write-offs typically average no more than $200,000 in any one quarter.

I also wanted to comment on the $1.9 million loss in other income for the quarter, which is comprised of approximately $1 million in net foreign currency exchange losses and an approximate $900,000 loss due to a decline in the market value of the investments that are used to fund our deferred compensation plan liability. There was, however, an offset to this $900,000 loss that served to reduce our direct expenses in the quarter as our deferred compensation liability to employees also decreased at the same time.

So, net-net, the $1.8 million loss in other income translates into only a $1 million loss at the pre-tax income line pertaining to this foreign currency exchange loss, with the deferred compensation plan items just being noise in our P&L.

Net income increased to $11.8 million in the fourth quarter of 2008, and diluted EPS was $0.59 compared to $0.63 a year ago. Revenue shortfalls and other costs and expenses noted above were somewhat mitigated at the bottom line by our variable labor and compensation cost models as well as SG&A cost management.

Now for some comments regarding each of our businesses. The Health and Education Consulting segment, which represented almost 55% of total revenues for Huron during the quarter, continues to be a bright spot for us as revenues were $90.1 million for the fourth quarter of 2008, increasing better than 80% from $50 million in the fourth quarter of 2007.

Organic revenue growth for this segment excluding Stockamp was in excess of 34%. We remain very pleased with the strength that the healthcare practice has displayed in the hospital market, both Wellspring and Stockamp have performed very well during the quarter. And our higher education and pharma healthcare practices also performed well.

In total, the Health and Education segment operating income was outstanding, increasing more than 95% to $41.6 million from $21.3 million during the same period a year ago even with a $2.7 million increase in rapid amortization costs from a year ago.

Revenues for the Accounting and Financial Consulting segment were $26.5 million for the fourth quarter of 2008, a decline of about 43% from $46.7 million in the fourth quarter of 2007. Revenues for both our disputes and investigations and CFO Solutions practice came in short of our forecast for the quarter as the segment experienced a combination of project delays and deferrals as well as higher provisions for fee adjustments. We do feel that we have been and currently are in a down cycle as it relates to regulatory and litigation matters. This cycle, as well as the economy, has had a meaningful impact on demand as well as some pricing pressure for disputes and investigations and our CFO Solutions project-based services.

Accounting and Financial Consulting operating income of $4.4 million declined significantly from last year's fourth quarter as profitability fell due to a combination of lower revenue yields and utilization shortfalls. We continue to monitor demand for this segment closely and will take steps as necessary to improve the utilization of our full-time professionals. The CFO Solutions variable labor pool provides some bottom-line protection for us, so we are strongly focused on driving better top-line results for that practice.

As Gary will detail in a few minutes, we continue to be optimistic about the future of disputes and investigations, and our CFO Solutions businesses.

Moving on to the Legal Consulting segment, revenues were $27.6 million for the fourth quarter of 2008, increasing nearly 35%, all organic, from $20.4 million in the fourth quarter of 2007. While we expected our V3locity revenues to decline from what was a very strong third quarter, we were disappointed that the revenues fell short of our lowered forecast, due to some unanticipated project delays and slowdowns. Having seen a similar third quarter to fourth quarter downward revenue trend last year, we may perhaps be subject to more fourth quarter seasonality in V3locity than we thought. We do not, however, see that there has been any fundamental change in the demand for our V3locity product.

Despite the sequential decline in fourth quarter 2008 revenues, we cannot forget that fourth quarter 2008 V3locity revenues nearly doubled from the fourth quarter of last year, which would suggest that we remain on target in terms of meeting the discovery needs of the marketplace with the V3locity solution. The fundamental demand drivers and the general counsel's need to lower discovery costs, remain intact for this business.

Demand for our core Legal Consulting services was somewhat weak during the quarter, as we feel that the economy had an impact on discretionary spending by the general counsels. Segment operating income decreased slightly to $5.4 million in Q4 2008 from $5.8 million during the same period a year ago. Operating margins in this segment decreased to approximately 20% from 29% a year ago, reflecting the fact that we can expect some volatility in both revenues and margins as this business matures, particularly when we continue to invest a meaningful amount in sales, marketing and other infrastructure investments.

V3locity's operating margins did meet our expectations on a year-to-date basis, and we feel that this will continue to be a 30% plus margin business on a go-forward basis. We know that there's a very large market for our legal services. However, we need to have some patience with the lumpiness of our revenues due to the event-driven nature of V3locity and our other e-discovery offerings.

Revenues for the Corporate Consulting segment were $19.9 million in the fourth quarter of 2008, increasing about 6% from $18.8 million in the fourth quarter of 2007. Quarterly operating income increased significantly, more than 80%, to $5.1 million from $2.8 million last year. Operating margins for this segment also improved dramatically to nearly 26% from 15% a year ago, reflecting the segment-wide improvement in utilization and improved margin contributions from each of the restructuring and turnaround, utility consulting and Japan practices.

As we have said many times, a balanced portfolio serves us well, giving us the ability to manage through fluctuating markets. This strategy proved its value again this quarter as strong results in our Health and Education and Corporate Consulting businesses helped to mitigate revenue shortfalls that we had in the event-driven Accounting and Financial Consulting and Legal Consulting segments.

I also want to provide you some color on our fourth quarter income tax provision. Our fourth quarter effective tax rate of 46.1% raises our year-to-date effective tax rate to just under 46% this year from 44.5% last year. This provision increase is driven by additional start-up losses that cannot yet be tax benefited on the international side and also reflects some current foreign tax credit limitations.

Now for a few more data points. DSO came in at 57 days at the end of the quarter, improving from 69 days at the end of the third quarter 2008. Despite difficult economic conditions, we were very pleased with our strong fourth quarter collection results.

We're also very pleased by our generation of nearly $57 million in cash flow from operations during the fourth quarter, which brought cash flow from operations for the year to $101 million with $81 million in free cash flow. Finally, our return metrics remain strong with return on assets of approximately 6.9% and a return on equity of 16.7% over the last 12 months.

Now for guidance. For 2009 we have decided to provide you with only annual guidance. The event-driven nature of some our services combined with the timing of contingent fee revenue recognition can make quarterly guidance a challenge. We have a better comfort level with annual guidance at this stage, as we can rely on our ability to assess macro business trends rather than trying to estimate short-term quarter-to-quarter revenue fluctuations.

Guidance for the full year 2009 is projected to be a revenue range of $730 million to $770 million, EBITDA in a range of $162 million to $173 million, operating income in the range of $132 million to $143 million and diluted EPS in the range of $3.10 to $3.40. While a number of companies, including some in our peer group, having foregone giving guidance for 2009, we feel confident that we have a meaningful organic growth in this Company for this year, even in a difficult and somewhat unpredictable economy.

The aforementioned revenue range reflects organic growth in the mid to high teens. Based upon existing backlog and the pipeline of new proposal opportunities we have in front of us, we feel confident at this stage that we have set our revenue range at a reasonable level, despite all the turmoil and uncertainty that is being presented by this economy.

You'll note that we have a tighter EPS range and you might expect for the revenue range that we have given you. The reason for that is that we're focusing a lot of attention on managing our cost during these uncertain times, and our variable labor and comp structures can help us manage to net income margins in the 9% range even with a fairly wide range in revenues.

For modeling purposes, even though we have not given you quarterly guidance, you can assume that revenues will be somewhat back-end loaded again this year, primarily due to the timing of some of our larger health care projects including the recognition of contingent fees on those projects, as well as a forecast of increased demand for V3locity and our other e- discovery services as the year progresses.

As a result, we would suggest that first-quarter revenues will trend up only slightly from the fourth quarter of 2008 and then trend up gradually over the course of the year with somewhere in the neighborhood of 55% of our total revenues for the year coming in the third and fourth quarters. Full year share-based compensation cost is estimated to be approximately $30.5 million, and we are also forecasting that average utilization rates will approach 73% for the full year. And, we expect average hourly bill rates of approximately $275 for the full year.

Assuming the midpoint of our revenue range for the year, full-time billable headcount will approximate 1525 professionals for the year, and average full-time equivalents for the year, FTE's, will be about 975. Weighted-average diluted share counts for 2009 are estimated to be approximately 20.7 million shares for the full year.

Finally, with respect to taxes you should assume an effective tax rate of approximately 45% for the full year.

I will now turn the call back to Gary Holdren for his commentary on 2009.

Thanks, Gary. Now that you've heard about 2008 results and our 2009 guidance, I'm sure you're trying to determine how realistic is it for Huron to hit those 2009 numbers, and can they deliver the net income in these difficult economic conditions. What I want to do now is discuss, with two months under our belt, how we feel about the 2009 market demands for each segment and why we believe we can make these numbers.

Our $730 million to [$770 million] (corrected by company after the call) revenue range assumes organic growth rate in the mid to high teens for 2009, as Gary just said. Based on what we now know at this time, we feel that this revenue range is achievable but balanced with an appropriate level of caution.

Our forecast also targets net income at approximately 9% of revenue. For the reasons that I previously discussed, we believe that we can deliver 9% of net income or 9% net margin over the complete range of revenues we had given you in our annual guidance.

With respect to our revenue outlook, let me start with our Health and Education Consulting segment. This includes our higher education practice, pharma and health plans and our health care provider business, Wellspring and Stockamp. This segment will represent between 50% and 55% of Huron's total revenues for 2009. These combined businesses will have an organic growth rate of approximately 20% for 2009.

Our Health and Education business produces very solid profitability and has more hard backlog than any other segment. We have more visibility with this segment than any other, and therefore we feel very good about them making their forecasted revenues.

Many of you have asked questions about the higher education practice and asked whether it will have a downturn in 2009. This is because of all the press the US universities have gotten about their financial troubles -- loss of endowment income, lack of access to capital markets, cost increases, tuition freezes and cuts in funding at the state universities. While we have seen some universities express a desire to cut back on their spending, I need to remind you that many of the services provided by our higher education practice focus on the billions of dollars of research moneies that universities rely on as well as compliance and risk management associated with clinical research. Both basic and clinical research are critical from a funding perspective, and universities will not cut back on services that help support and protect these key areas of funding, particularly in these current economic conditions.

In addition, more and more universities are asking Huron to help them deal with forecast budget and funding shortfalls. Our higher education practice leader, Jim Roth, is in the Middle East today and is working with our newly acquired resources from Nextmove to pursue the numerous opportunities that we see in that region of the world. Our higher education business is very solid for 2009.

The integration of our Wellspring and Stockamp business couldn't be going better. They are going to market together, and winning very important and large engagements. Some of you have asked whether hospitals will have to stop spending so much money on consulting since financial conditions continue to get worse. We are seeing just the opposite. What we're seeing is large hospital systems, many of whom have been historically very healthy, now calling us as they have begun to see warning lights go off during these difficult economic times. These hospitals would not have called us a year ago. Many of these hospitals are now worried about meeting debt covenants and therefore have a new sense of urgency in terms of improving their cash flow and operating results. Positives for us include the fact that the sales cycle has shortened due to this increased sense of urgency, and the size of the engagements are getting larger.

Bottom line, the number of assessments we have underway combined with a better backlog than we had a year ago at this time makes the general state of our healthcare business is better than it was a year ago. And the addition of Stockamp has made things even better for us in terms of new assessment and strong backlog. Our health care business is in very good hands.

Let me now turn to Corporate Consulting, which includes our strategy business, restructuring and turnaround, utilities and Japan. This will represent 10% to 15% of Huron's 2009 business, and it should produce very solid segment profitability this year because of the strength of our strategy and restructuring businesses. Both are currently very busy and their backlogs are strong.

Our strategy offering is in high demand to help large corporations improve shareholder value, and our restructuring business is winning many mid-sized restructuring jobs in the auto and manufacturing industries. We just recently won an engagement to help a major telco manufacturer.

We expect our Legal Consulting business to represent about [15% to 20%] (corrected by company after the call) of Huron's 2009 business. Our V3locity product should have a 25% organic growth rate in 2009. As we have mentioned, this business can be choppy due to its event-driven nature. But this is a great business with a lot of demand.

We continue to win master service agreements at major companies, and we continue to be told by clients that we have the best review product and at the best price in the industry. We feel confident that the forecasted growth rate for V3locity is achievable, based on existing matter backlog combined with new relationships that we have established with law departments in some of the largest companies in the United States.

In our core Legal Consulting business we're only anticipating modest growth in 2009. We're seeing corporate legal departments not spending as much money on systems and other process improvement work. We are seeing more corporate general counsels wanting help with discovery and cost reduction. Thus our optimism, with respect to our V3locity product. We will manage our core Legal Consulting headcount to ensure that we deliver reasonable profits at the level of revenues we achieve.

Turning now to our Accounting and Financial Consulting business, which represents about 15% to 20% of our 2009 business. As you know, we have asked Dan Broadhurst, who has been our COO, to oversee this business and run it along with Tim Hart, who leads disputes and investigations, and Mike Draa, who leads CFO Solutions. Their 2009 goals are to aggressively attack this market and chart a strategic plan that will let us get this practice growing again and improve its profitability. We believe this practice is positioned to grow, but to be conservative and practical we have forecasted this business to have zero growth in the 2009 guidance we have given you.

We believe that our CFO Solutions business is positioned to win work with federal agencies because we have an experienced contract workforce that we can deploy to address financial services industry needs at very favorable rates. We believe the federal government is going to be a big buyer of our services over the next several years. With the financial services industry in disarray, banking failures, money management fraud, such as Madoff and Stanford, and increased regulation and stricter enforcement from the SEC, we are seeing more opportunities today than we saw three and six months ago.

However, we're not going to forecast an increase in revenues from this segment until we know that the backlog is there and it can be sustained. We will continue to improve segment profitability while we aggressively attack the marketplace with our talented resource. This is a business Huron needs to be in in the long run, and this is the segment that will again make a meaningful contribution to Huron's results.

So let me sum up this morning's conversations. We know this is going to be a very challenging year, and we will have to be in the marketplace every day delivering value solutions to our clients. But we believe we have made a very balanced assessment in giving you 2009 guidance. We are very comfortable that we have good demand and visibility for about 75% of our revenues, with our Health and Education Consulting business, V3locity and our Corporate Consulting business. In our Legal Consulting and Accounting and Financial business, we believe there is revenue upside in both businesses, and we will be aggressively in the marketplace every day, helping clients solve problems. However, we are forecasting no growth for this 25% of our business.

We will also aggressively manage our SG&A cost and other costs as well as to continue and manage our cash flow in order to deliver bottom-line results that will meet the needs of both our shareholders and our employees.

Thank you for your time today, and I can only tell you, all of us at Huron will do everything in our power to deliver 2009 results that are comparable to what you have grown to expect from us. Now we will open it up for questions.

(OPERATOR INSTRUCTIONS) Tim McHugh, William Blair Company.

First I wanted to know if -- you gave a few comments about the first quarter just being up sequentially. I was wondering if you could talk a little bit about what you have been seeing in the Financial Consulting as well as Legal Consulting. And then, I know early in the year it's a big time of year for the assessment piece of health care, and how the backlog is building through January and February here.

Tim, so let's start with your -- right now, if we were to look at our daily run rates for financial consulting, there's no improvement from Q4. And our Legal Consulting business, probably about the same. We are seeing, though, a huge amount of assessments and huge improvement in our health care business, even over Q4.

And did I hear you correctly -- you said Legal Consulting would be 10% to 15% of revenue?

15% to 20%.

Oh, 15% to 20%, okay. Can you talk a little bit more -- you kind of mentioned that Dan would be coming up with a plan to right the ship within financial consulting. Can you give any more detail in terms of what you're thinking there? Are you taking out additional headcount at this point, or is it more on the sales side that you think there's opportunity?

Yes, and yes. We are taking out headcount. We've taken out headcount; Huron has taken out about $5 million of annualized payroll cost in the first quarter with about $1 million of severance, and we have a plan to be in the marketplace every day. And Dan and Tim and Mike are working on a very strategic plan as to where we are going to take this practice.

Lastly, in terms of uses of cash this year, as you think about the cash flow you will generate, will it primarily be to pay down debt, or will you be looking at additional acquisition opportunities?

First and foremost, we want to pay down debt. And if something comes along good, it's likely that we probably would maybe do a stock deal if something came along. So we want to pay our debt down right now.

Tobey Sommer, SunTrust Robinson Humphrey.

I was wondering if you could give us some color on the joint pitches that you were able to make with either Stockamp or Wellspring, together or perhaps the Higher Ed making some introductions for Stockamp?

I don't know how to give you all the detail and I don't know if I can give you all the client names. But what has happened is, all of a sudden A-rated and AA-rated hospitals who have been very healthy in the past, big systems, 12 to 15 hospitals, now are basically asking for help. The fact that we have the Stockamp piece doing the revenue cycle along with the Wellspring bit just makes us have such a better package to get better hospitals, to give them better results.

And at the same time, we are not seeing probably as much in the Higher Ed helping out because academic medical centers probably could potentially defer spending versus the stand-alone hospital that's got their own debt ratings. So right now, more of the demand is coming from what I would say is that big systems that are worried about the debt covenants and S&P downgrades. But we're just seeing huge opportunities.

Some people coming in, shortening the assessment time, maybe no assessments, just bigger jobs. And just higher-quality hospitals than we saw a year ago. Just everything is increasing.

And then I was wondering, from a numerical standpoint, if the guidance that you have enumerated on the call and in the press release includes any kind of severance charges embedded in it, or is that something you would exclude from the numbers you have given us today?

We will cover all severance with any guidance numbers we gave you.

From an accounting standpoint, how should we think about success fee recognition throughout the year? Is that something you are going to accrue for, or will it be back-end loaded along with some of revenues?

In general, our contingent fees we try to put milestones in place during the course of a project so it isn't all back-end loaded. But as a practical matter, these contingent fees, when projects are starting up for the most part in the beginning of the year, will fall in the third and fourth quarters. So you can assume more contingent fee concentration in the back half of the year.

In terms of the Accounting and Financial segment, perhaps eventually being able to see some revenue improvement, what kinds of either cases or business activity do you think could be a leading indicator of that in terms of your business portfolio? Do you look at V3locity seeing an acceleration as something that would anticipate more activity on the Financial Consulting side?

I wish it would, Tobey. That would be nirvana if you got a V3locity job and all of a sudden it was an indicator. We know the banks have got a lot of things going on. Clearly, there's a lot of stuff going through V3locity on banks. We also have got M&A activity, second requests, which really won't help that business.

I think it's just the calls that we are getting in the marketplace, that all the scandals, the Stanford, the financial services -- at some point, people are going to want to know where their money went, and I think at some point, you are going to see more enforcement. And I think, just the kind of calls we are getting from banks, looking at loan portfolios or whether the government might want to hire people like Huron to help them with the things that they are going to do -- I think those, as we start getting calls like that and as we are getting calls, there's just more activity.

I think the one thing that, to me, is pretty obvious, though, and I don't think it should be surprising -- if you are a general counsel and you absolutely don't have to start something today and you have a $400 million budget, if you can just move that a couple of months to make that -- so let's just say it was a $480 million budget that's easy. You have got $40 million a month. You can just move all that a little bit and get your budget down to $400 million, you are going to be a hero with your CEO. I think, unless it's just a your-hair's-on-fire crisis matter, I think we are just going to continue to see a little bit of that deferral.

And I think the other thing we're going to fight this year, for however long, is the law firms. The law firms are short on revenue. So they are going to try their best to keep as much of the fees for themselves, before they give it to us. I think we really just need to see some awarding of work, but not only awarding of it; we need to start and be there and stick and see it's going to be there.

And I just can't -- I've been doing this along time. And I'll just tell you right now, it's -- everybody -- they ask you to come. They say, oh, yes. It's a week. Well, it's two weeks, and it's just a stretching out of the process. I think we have got to be prepared for that and know that it might continue through all of '09.

Jim Janesky, Stifel Nicolaus.

I would like to get an idea of your thoughts on the backlog and the projects within the Health and Education segment. What is the likelihood that, once these projects are started up, that they could be canceled midstream and could lower the visibility and the outlook that you have for 2009?

I guess that's a fairly good question. I think the most likely thing is that, for whatever reason, what our guys do, whether it's weekly or every two weeks, they are showing a progress report to the hospitals that show where the cash flow is coming from and the improvements. And as long as those improvements keep coming, which should come from the assessment, and you can see that you are going to get four times your EBITDA improvement for your fees, we just don't think it's that likely right now that those things would be stopped because, of all the pressure that the bond insurers -- S&P is putting on calls these debt covenants of all these companies, unless all of a sudden the federal government would just give these huge windfalls to the hospitals, the cash would come in and they don't need -- but I guess the question is, we can continue to show them that they can make $4 of cash flow improvements -- why would they stop the projects? That's the way that our leaders think about it.

And have you seen any meaningful change? Historically, you have indicated that about 75% of your assessments turn into fairly large-scale consulting engagements, sometimes on the magnitude of an order of 10 times. Have you seen any change there?

I was with David Shade Saturday, and he talked about the ratio going between 80% and 90%.

Now, on the success fees, I know that you folks have talked about trying to spread out -- I think, Gary Burge, you said setting milestones to try to spread out and smooth the success fees. Yet they're still going to be somewhat back-end loaded.

I have two questions. Will the -- you mentioned that the revenues are going to be back-end loaded to the tune of about 55% in the third and fourth quarter. Will the success fee expectation mean that earnings per share or EBITDA will be even more than 55% back-end loaded?

To the extent there is back-end loading of those contingent fees, those translate right into a higher EPS; there's no question about that. So you should expect probably somewhat higher than 55% of the EPS coming in the second half.

Jim, another thing that you should think about, as well, is that if you think about just the size of the engagements and the assessments, the other reason this thing is back-end loaded -- we do these assessments and it's just barely covering cost. So, once -- and Wellspring doesn't do that much as a -- the jobs now that are combined -- Stockamp, Wellspring, et cetera -- and they are bigger, those would just be getting bigger as we get through the year, not because of contingent fees, but just because we have gone from assessment to implementation, where we go from cost-based rates to our full profit rates.

And is this just something that you'll have to live with over time? Or, do you think that 2010 and beyond you could smooth out the success fees a little bit more? Will this, from an accounting treatment, will always be back-end loaded?

Well, I think that's the way it's working right now, and I don't know whether it will change or not, you think about it. It's when you do your assessments, a lot of it comes. And if you started an assessment in like, say, July, the success fee could be in April and you could be front-end loaded.

But for whatever reason, it seems like most of our assessments get started in the beginning of the year versus in midyear.

In addition to just that timing, you've also got -- these milestones are based on savings identified and generated, and it just takes awhile during the course of an engagement to identify those opportunities and have them translate into savings that then the hospital will pay you a contingent fee on.

Shifting gears to the V3locity product, how much of the weakness would you attribute to delays in start-ups, meaning that all you have done is shifted the expectation for the start-up of the project from 2008 into sometime in 2009? And then, how much of the shortfall would you attribute to a tougher economy or increased competition pulling market share away from V3locity?

I think, at the level that we are talking about, Jim, that we talked about, if you look at it, whether that 25 is somewhere around $95 million or $100 million, I think that's just all shift. We had hoped and I had hoped that we would have a lot bigger business than what we are forecasting.

I think what happens in this business, and as we continue to see, is lawyers -- they start arguing over discovery terms. So all of a sudden, we were doing a project just last week, 150 reviewers. And the attorneys were saying, oh, we are going to argue now about search terms. And the plaintiffs want more search terms than we were doing.

So all of a sudden they say, oh, you've got to stop because if we've got to go back -- and we don't want you to keep doing this and have to redo it all again, if we have got to do more search terms. And then, all of a sudden, sometimes we are waiting for data to come, and it's going to come. And then somebody -- there's a glitch in something or there's a quarter; there's just a lot of sort of, because the two parties are fighting and there's a lot of adversarial nature to discovery, I think it's a lot -- it's all basically because of the starts and stops versus the lack of demand. I think we continue to sign master service agreements. We know these companies have big needs. We know that they were either their number one or two provider. I had just hoped that the business would be a lot bigger than it is. But at the demand -- at the amount that we have given you in guidance, I think, to answer your question, it's just a shift. It's not a pricing condition or lack of demand.

One last question for Gary Burge. What amount of intangible asset amortization do you expect for 2009? I know it's going to be a dramatic decline versus this year.

The rapid amortization will be about zero for 2009, and we'll have some ongoing longer-range amortization that's down in that depreciation line.

Okay, it's almost going to go to -- you are saying that the intangible asset amortization from the acquisitions is going to be very close to zero?

Yes.

With that rapid amortization that's up in the direct cost line, yes.

Andrew Fones, UBS.

I thought it worth spending another moment on V3locity and just asking that question from a different angle. It sounded from the examples you gave that the reasons for the delays haven't been due to pullbacks in discretionary spending, but are just coming from other factors. Would you agree with that?

Yes.

Okay, I just wanted to be clear on that. And so, as we look -- and you mentioned a large project rolling off in the fourth quarter and gave us some visibility into that. But, can you tell us roughly how much of a sequential decline -- I think it was roughly $10 million -- was from the large contract rolling off just to other smaller items?

I'm not sure I completely understand it.

You are referring to the fact in the third quarter we had a large project we talked about. We didn't disclose how big that project was, but I can assure you that was meaningful in terms of the revenues that were not replaced in the fourth quarter because of that project winding down.

But when we gave guidance, we knew that was happening. And what happens, Andrew, is just there was other projects that we were supposed to have started. For whatever reason, and I think there's a lot of various reasons that I could give you -- I've got a list here of 15 reasons of why jobs didn't start when they were supposed to start in V3locity. But the fact is, I think there's a story for all of them. And I think in Gary' comments that he gives, that some of it could be around seasonality, how many people want to actually work between Christmas and New Years and do all this kind of stuff. And maybe we've got to figure that in. And I think a lot of it's just a lot of different factors that really had nothing to do with the demand side of the equation.

Just on Stockamp, I was wondering -- obviously, in Q3 and Q4 I think you had said, when you acquired it, that we could expect that they wouldn't be accruing a full rate on the incentive fees. Were you, in fact, below a full accrual in the fourth quarter? And can you give us any sense of perhaps how far below the run rate you were -- what we might think as a normal run rate?

Stockamp, back in the end of the second quarter, when we gave an overall guidance on Stockamp, I can tell you that they came in right where we thought they would be on both regular fees as well as contingent fees. You did see an increased level of contingent fees in the fourth quarter for Stockamp, as we expected. And we've said that business historically, and probably on the go-forward basis, somewhere in the neighborhood of 40% or so of their total fees are contingent fee related. And that should continue going forward.

So, as we think about kind of the shift here into doing more of the assessment work in the first half and particularly in this first quarter, and so, if you like [fees] being a seasonality slower quarter for incentive fees, how should we think about that relative to you having not accrued Stockamp at the full rate in the fourth quarter?

How should we think about that in terms of the '09 guidance?

Yes. Like, should we expect Stockamp to be up sequentially Q1 versus Q4?

No. I would not expect that would be the case at all. They had meaningful contingent fees in the fourth quarter. They will have some in the first quarter. But as I said in my comments, expect just a very gradual increase in the first-quarter revenues, very small in the first quarter relative to fourth quarter. And then we'll see trending up in the subsequent three quarters.

If you look at it, Andrew, you're going to see about a $90 million quarter in Higher Ed in Q1, and a lot of that is because of just the rate and the growth. And I think, if you go back and look at Q1 of '08, of the Health and Education business and back out Stockamp, you'll see a pretty rapid increase because of that.

So I think what Gary's point of view is, it's harder to make Q1 much better than Q4, but you should continue to see a ramp up of that segment as we go Q2, Q3, Q4.

Got it, thanks, that helps a lot. The cost-cutting -- is that mostly in Financial Consulting that you mentioned?

It's going to be everywhere. We're going to look at every aspect of cost, every practice. We owe it to all of our really good employees to make sure that we have looked at all our employees. We look at all of our functions, we look at all of our SG&A cost, we look at all of our internal departments, Gary and Lisa and a few others -- and we went line by line the other day. So we are going to be zealots on the cost side of the business.

I'm not sure if you have taken any actions yet. But -- so whether or not the current headcount gives us some sense of where you might land?

No. We definitely are going to land -- in certain practices we are going to land probably less than what you would see in Q4. But you could imagine, in the HEC practice, we are going to need a lot more people within our Stockamp and Wellspring and our Higher Education businesses. So it will be a mixture. I would say that you will see -- if things meet our guidance, you're going to see reduced headcount over the year in Accounting and Financial Consulting, and you will see reduced headcount in our core Legal Consulting business if revenues don't pick up.

Can I get the number of days in Q4 and Q1? Thank you.

I think 60 and 63, something like that. I think we use 60 days. Didn't we use 63 in Q1?

Effective business days -- we had 57 in the fourth quarter. That was down from probably 59 or so in the third quarter. First quarter ought to be 60.

You're talking about effective business days, Andrew.

David Gold, Sidoti & Company.

I wanted to follow up a little bit on some of the variability that you spoke about, Gary. For one, can you speak a little bit to whether there was a pretty significant fourth quarter true-up, say, by way of maybe canceled bonuses, given business? And then, two, can you give us some more color on how variable things might be? Is that an exercise that we would go through quarter by quarter, or is that something that really takes until the end of year for true-up?

We look at it quarter by quarter. We look at performance, we look at the segment performance. We look at the profitability. And, clearly, because of our revenues and our results in Q4, clearly there were less bonuses than people would have expected, had we made our guidance.

So we did make a -- as you can see. And we said we had reduction in bonuses, we had reduction in SG&A costs. And so all the (inaudible) -- we had less variable -- our labor cost on our V3locity and CFO Solutions. So it was a combination of all those. And that's the same thing you'll see each quarter as we measure the revenue performance and the margin that we expect from each of our segments. We'll do bonuses the same way each quarter.

But for 2008, was there a significant reversal in the fourth quarter of prior-year accruals?

We did have a reversal in the fourth quarter. But as Gary said, we look at how our plan, how our results look relative to our forecast each quarter and we'll adjust bonus accruals as necessary. Without a doubt, we were disappointed in the Financial Consulting results and V3locity results and Legal Consulting results in the fourth quarter, and so those two segments took bigger hits to their bonus accruals than, for example, Higher Education and Health Care, who did just fine and met expectations.

Can you speak just a little bit more color on presumably, your guidance as we look at legal and financial. A lot of folks, myself included, I guess reason to believe second half that you see a decent ramp up, perhaps, if nothing else, from a regulatory environment. And so, just curious how that jells with the guidance. Presumably, if you look for zero growth say, from financials, is that to say weakness in the first half and maybe a pickup in the second half? Or, is it more we're being conservative until we actually see business pick up?

Well, we've got a -- as you can see, we've got a $40 million range with guidance; right? So we go from $770 million to $730 million. But I think our expectation now is that I think we just don't -- we've got a little bit built in for Q2, 3 and 4. But it's very, very minimal.

I just don't think it would be prudent right now to think that we're going to do substantially better in Q2 or second half of 2009 than we did in the first half. We are just not going to do that. We're not going to fall into the trap again.

Do you agree with the thesis, though, that from a regulatory standpoint things could be much better in the second half? Or, in other words, is it presumably a function of being conservative? Or is it a function of do you think that there's no -- that thesis doesn't work?

I question that thesis. I question whether it will ever come back to the level or be what we think it is, in '09.

When we look at financial, Dan, there presumably part questioning the thesis and if we'll ever go back to it, is that to say that right now we're looking at that business to potentially reposition it?

Reposition it in what way?

Well, reposition it -- you have moved, I guess, Dan there. And you made some earlier comments about potentially some changes. So question being, if we don't think the business comes back, let's say, from some of the regulatory stuff, we have to look at other avenues to grow it. Right?

Well, we either do or downsize, right? So I think both are in play.

Dan Leben, Robert W. Baird.

Just looking at the Health and Education business, on a sequential basis the costs were down pretty significantly. Could you talk about any one-time expenses or rapid amortization or what not that was in the third quarter that helped that out?

You are looking for one-time expenses that may have come in the fourth quarter?

Yes, or actually in the third quarter. I'm just looking at the expense level in that segment going from $55 million down to $48 million and just trying to get a sense of what the deltas were there.

I'm sorry, Dan? What segment? You were breaking up a little bit.

The Health and Education segment.

No. In the third quarter they would have had somewhat higher levels of rapid amortization that affected the direct cost line. And there would not have been anything else that jumps out at me right now that would have significantly affected the operating costs for that segment. I can look into that, though. And if there is something that jumps out at me, I could let you know.

So is the right level to think about that segment kind of in that just under $50 million basis going forward, and then growing that as you grow headcount and so forth?

On the cost side?

Yes.

Well, the one thing that is coming out will be rapid amortization in the first quarter of 2009, and that rapid amortization in the fourth quarter was a little over $1 million -- yes, a little over $1 million. So the run rate on the cost will come down in the first quarter by that amount.

If you look at that whole segment, whether it's $390 million or $400 million, it's going to deliver a 45% gross margin. So 55% of that will go into bonus and other things.

And could you just talk about -- during the quarter you signed this outsourcing deal along with V3locity. Could you just talk about the rationale for doing that and how we should think about how the impacts the model going forward?

Yes. I think what we are looking for is, quite honestly, we are looking for as many possible channels. You may have seen that we entered into something with a company called with EP Dine and you saw the UnitedLex thing in India. And then we had another thing with a company called DSL earlier in the year. We are just looking for as many different marketing channels to help sell the product. And if we need a lower-cost solution to be able to go to India with UnitedLex.

We believe and we are being told that we have the best review product in the world. And so if we've got it, then we've got to get it marketed.

Last, could you just talk about the bill rate within Health and Education if you excluded Stockamp, (inaudible) the metrics you gave last quarter?

First of all, on that rapid amortization I gave you a bad number. Fourth quarter rapid amortization was about $2.7 million. And then, on the average bill rates without Stockamp, they would have been a little bit north of $300 in the fourth quarter versus the $250 that was reported. So as you can see, Stockamp has a pretty significant impact on that. And the primary reason for that is that Stockamp is much more leveraged, uses a lot more junior resources than does our Wellspring practice. And that brings that average bill rate down pretty significantly.

When we look forward into '09 when you get the full realization on contingency fees and so forth, how should we think about that blended rate when we get into the second half next year?

It will be something greater than $250 for Higher Education and Health Care. But I wouldn't suggest that it will stay north of $300 or get there and stay at that level. But, having said that, Stockamp even at those lower average bill rates delivers a 40% plus operating margin. So the leverage is the key in their business model.

Paul Ginocchio, Deutsche Bank.

Just a clarification question on that $2.5 million write-off. Was that taken in a certain division? And what division was that, if I am thinking about it correctly?

Then, second, did you get any looks at some of those forensic accounting investigation cases that sort of broke in December and year-to-date? And if you did, on the debrief, why didn't you win the cases? If you are not getting looks, what do you think it's going to take to get looks at some of those bigger cases?

Let me start with the looks. If you think about Madoff, and I don't know -- we did not -- the trustee had made a decision to hire Deloitte. I will only tell you the one that broke in Houston -- I don't think it's yet determined who is going to win it. But we definitely got a look in that one.

So you think your current forensic and accounting division has the ability to win those big cases?

Yes. I can tell you, we have got the ability to win them. It's not a lack of talent and it's not a lack of credentials. Sometimes, unfortunately, as small as we are, we even run into conflicts when we have got the best resources. So we have had a little bit of streak of bad luck as well in that group.

Paul, your question on the write-off; again, it runs through the SG&A line. The majority of the write-off affected our Corporate Consulting segment, about $2.2 million of it, and the remainder was in Legal Consulting.

Kevane Wong, JMP Securities.

I guess talk about Health Care and Ed. Sort of curious on the Health Care side. Obviously, you're talking about getting larger engagements, which is great. Are you seeing a change as far as in the health care space, the bigger guys becoming, obviously, much more open to looking for help? Are you seeing, in contrast, smaller guys having more issues in not going for the help? Or, is that also still holding up well? I'm curious if there's a bit of a dichotomy in that space or not.

I talked to David Shade and Paul Kohlheim and Gordon Mountford about this last week. It's a question that I -- to me, what I was sort of wondering, all the big guys are coming in and basically taking all of our resources (multiple speakers) more healthy one. And what has happened with all the ones who used to give us business, and where are all they?

And I think what probably is going to happen is we're probably going to just see a huge tsunami in the next 12 to 18 months of these hospitals, all of them, just needing more and more help, and there's probably not enough health care resources out there to do all the work.

So it's really from all segments of the health care space? It's not just large guys?

Yes. Everything is going wrong for them -- no access to capital, visits going down, everything is just -- every curve that you can imagine is going the wrong way for a hospital.

If it weren't for bad luck, they would have no luck at all right now?

Switching over to education, also curious. A lot of those guys, I understand, have June fiscal years. And I was looking at sort of their budgets at this point and obviously saw a difficult environment.

Have you gotten, aside from just knowing where you are positioned, have you also gotten direct feedback from your clients on, hey, here's our plan for next year already, sort of locking you in? Or what is happening as far as what the clients are communicating with their new upcoming fiscal year?

Well, I think the thing is that it's probably hard for you all to -- because we probably haven't done as good a job. But it's almost like -- the higher education business is almost like an internal audit function, in some ways. Right? They need to stay in compliance, they need to get their research dollars and they just need to keep that recurring. So I think that we are pretty comfortable that that isn't going to get cut.

I'll also tell you that there are some universities that have asked us -- I'll give you an example what is something that we know is going to go through 2009 and beyond, these budget -- sort of this June 1 date, is any university that has an endowment, all of them have had substantial reductions in their principal in their endowment and their income from their endowment. What they need to know and what they want to know is -- and what we have been helping them with is, are those endowment funds restricted for specific purposes? Or, could we use them for something else, because we need the cash very -- you know, we need it bad now. But we sure as hell can't do something wrong or illegal.

So let's say a university has 6000 endowment accounts. One university has asked us to go look at all 6000 of those accounts to see whether we can help them determine whether they can free up some of those funds. We think that's a huge service that we can offer almost every university that has a large endowment right now.

Gotcha, okay, everyone looking for resources. On the bill rate also, if I heard you right, I thought you said for '09 you guys were thinking $275 for the average bill rate versus I think it was $265 in '08. One of your peers earlier was really talking about a deflationary sort of environment as far as bill rates. Can you give us a little bit of color of why you think you would be up on the year? Is it just the particular segment that is driving that while others might be down? What is driving that $275 figure?

We did raise rates across all of our practice areas, and we are not naive to think that the economy isn't putting some pricing pressure out there. But we will, on a full year effect, have some improvement in the average bill rates in Higher Education and Health Care, due to Stockamp having a full year effect of being able to enjoy contingent fees for the full year and not having the GAAP revenue recognition issue that they had affecting them in the second quarter.

So we see some lift in Higher Education and Health Care, and we hope we have some modest improvements in our other practices as well.

One other point. Restructuring the turnaround is -- that business is hot right now, and they historically have always had the highest rates of any practice at Huron.

And then one last one for you also, Gary Burge, is easy one -- Nextmove -- what should we be expecting as far as revenues from Nextmove in '09?

Well, the acquisition was small, and we did not disclose any results on Nextmove. But what we do know is that Jim Roth is looking at a business in the Middle East. We had some existing business there. We think Nextmove can help us grow that business, and Jim is looking at something in the neighborhood of total Mideast revenues in the neighborhood of $10 million for calendar year 2009. And we hope it could be bigger than that. He's over there right now, as Gary said, in the Middle East and he's got some very interesting prospects he is looking at right now.

Any of you who have met Jim Roth know he doesn't go to the Middle East four times in the last six months hunting for minnows.

Bill Sutherland, Boenning & Scattergood.

I was wondering about the ability, the cross-sellability from your Health Care practice to the restructuring group in those situations where the hospital is beyond what Wellspring can do.

I think there's a huge opportunity there. The issue right now is there's no resources in either group to do much more. So we've got to continue to try to find them. But there's clearly huge opportunities for synergies there. We've had them in the past. We have had some -- I think we have had two hospitals in the last 18 months that Wellspring has brought our restructuring people into.

And can you move people from the forensic accounting area, where there's less activity, over to either Health Care or restructuring? Is there any fungibility?

There can be, potentially, and we've got some people moving, I'd say, below the manager level. But above that, not nearly as fungible.

I may have missed a couple of things earlier, if you don't mind, on the Legal. What is the growth assumption for '09, Gary Burge, and then what part of that is V3locity?

For Legal Consulting, we are assuming on V3locity that there could be, certainly, a 20% plus, probably closer to 25% growth in V3locity, is what we have put into the guidance. And then we have shown minimal growth for our core Legal Consulting business right now.

And the assumptions on V3locity in terms of seats and utilization?

Well, we have indicated an increase in our FTE number for next year. We gave you 975 for the full year, which is up over where it is currently, and we will add seats as necessary. It doesn't take long to build a doc review center. So if the demand is there, we will move quickly to do that. But right now we have got planned capacity.

So there is no plan at this point?

No. We have got 1000 seats. We've got a lot more capacity than we have got in guidance.

What is the growth number for corporate revenue? I'm sorry; I may have missed that.

We didn't really give it, but if you go and look at -- you take 10% or 15% of what Huron is. So you take 750, and you take somewhere in the middle of that, you can sort of look at what that revenue number is and then compare it to last year. But also remember, we did exit one business that used to be in Corporate Consulting.

Right, that's where I was getting confused.

It's going to be a good growth rate for us.

CapEx, did you give that out, Gary Burge?

No, I did not. For '09 or '08?

'09, please.

'09 will be $25 million, approximately $25 million.

(OPERATOR INSTRUCTIONS) Tim McHugh, William Blair & Company.

My questions have been answered.

Tobey Sommer, SunTrust.

What is the mix of revenue between V3locity and core Legal Consulting? What is the breakdown there?

Currently, that number is two-thirds V3locity, one-third core.

Thanks, and then what is your expectation for bill rate, intrinsic bill rate increases as opposed to mix, whether you hire a lot of new graduates for the different segments? And maybe just an overall sense.

On an overall sense, we raised rates 3% to 5% in January. And then, of course, the mix issue, as you know, can affect that average bill rate for a segment.

Would you consider any other additional incremental rate increase in Health Care and Higher Ed, if these smaller hospitals come to market and need services and you are forced to ration your services to an even greater extent?

I don't think so, Tobey. We price these things basically on dollars of savings, so a lot of what we make is basically on how quick we can get the delivery of services. So clients don't even know what our bill rates are. All they know is how much we can save them versus how much they pay us.

As far as incentive compensation within the organization in 2009, is there a shift in emphasis that would either disproportionately emphasize revenue over net income? Or, have there been any changes to the way that incentive compensation is going to be structured and paid out in '09?

We believe that you can only eat net income. So it's -- everything is around cash flow and net income is how we are compensating.

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

Thank you, and thanks, all, for having so much interest in us and listening to us today.

In closing, I just want to thank all of the employees of Huron for everything that you do every day and everybody in the internal operations, who have given us the best consulting business in the industry. And so we look forward to speaking to all of you in April and reporting our first quarter results. Thanks again.

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day, everyone.