Huron Consulting Group Inc (HURN) 2010 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 2010. (OPERATOR INSTRUCTIONS.) As a reminder, this conference call is being recorded.

Before we begin, I would like to point all of you to the disclosure at the end of the Company's news release for information about any forward-looking statements that may be made or discussed on this call. The news release is posted on Huron's website.

Please review that information along with the filings with the SEC for a disclosure of factors that may impact subjects discussed in this morning's webcast. The Company will be discussing one or more non-GAAP financial measures. Please look at the earnings release and on Huron's website for all of the disclosures required by the SEC, including reconciliation to the most comparable GAAP numbers.

And now I would like to turn the call over to Jim Roth, Chief Executive Officer of Huron Consulting Group. Mr. Roth, please go ahead.

Good morning and welcome to Huron Consulting Group's first quarter 2010 earnings call. With me today are David Shade, our President and COO, and Jim Rojas, our CFO. Mary Sawall, our Vice President of Human Resources, is joining on the phone.

When we issued our 2010 guidance in February, we indicated that the first quarter would be challenging for us; it was. As we expected, our revenue, particularly in the health and education consulting segment, was below our 2009 fourth quarter results. The fundamental reasons that we provided during our last call as to why we anticipated revenue to be soft in the first quarter were consistent with what eventually evolved.

Specifically, several large projects had their start date deferred, and we saw softness in discretionary spend across our segments. With respect to some of the larger projects that we had anticipated to start earlier in the year, one has started, and the other will start later this quarter.

We have seen a pickup in demand in the past month that provides increased comfort that revenues will begin to ramp up in the second quarter, with even better performance anticipated in the second half of the year.

We've recently completed our April forecast for annual revenues and earnings. This comprehensive review has led us to believe that the remainder of the year will evolve consistent with our initial guidance for 2010 revenue and EPS. I will provide more details regarding each of our segments after Jim Rojas goes over the first quarter results.

Now let me turn it over to Jim.

Thank you, Jim. Good morning, everyone. Before I begin, I wanted to call your attention to a few housekeeping matters. First, I will be discussing our financial results primarily in the context of continuing operations. As a reminder, we sold our strategy practice at the end of 2009, and we are in the process of divesting our Japanese operations. The financial results of these two groups are classified as discontinued operations.

Secondly, during my financial discussion, all comparisons will refer to our restated financial results and the adjustments that were made to net income, earnings per share, and EBITDA for the affected periods.

Lastly, I will also be discussing non-GAAP financial measures such as EBITDA, adjusted EBITDA, adjusted net income, and adjusted EPS. Our press release and website have reconciliations of these non-GAAP measures to the most comparable GAAP measures, as well as a discussion of why management uses these non-GAAP measures. I will be happy to clarify how those factors impact our results and answer any questions you may have during the Q&A session.

Before I dive into our discussion of first quarter results, I will reiterate some of what Jim Roth said in his introduction. When we spoke with you at the end of February, we said that we expected the first quarter to be challenging for us. That has turned out to be the case. Huron's results in Q1 reflect the previously discussed lower levels of contingent fees in the first quarter of 2010, the strategic actions taken in Q4 of 2009, delays in client decisions on making certain large engagements, and a continued weakened economy.

I will discuss our outlook in detail in a couple of moments, but for now I will say that we remain cautiously optimistic about the development of business and results over the balance of 2010. As we discussed on the Q4 call, our 2010 outlook envisioned improvements during the course of the year. So with that as a backdrop, I will walk you through some key financial results for the quarter.

Revenues for the first quarter of 2010 were $138.9 million compared to $151.1 million in the same quarter of 2009. The decline in our revenues reflects the continued softness in the economy that has resulted in a decrease in discretionary spending by our clients, as well as delayed decisions by clients on actual and potential new engagements. This impacted our health and education and financial consulting segments, each of which I will discuss in more details later.

EBITDA for the first quarter of 2010 was $13.4 million compared to $21.6 million a year ago. Adjusted EBITDA, which excludes noncash compensation during 2009 and restatement-related expenses in 2010, came in at $14.1 million in Q1 of 2010, or 10.2% of revenues, compared to $25 million in Q1 of 2009, or 16.5%. I would like to highlight this calculation includes share-based compensation in both years.

Operating income of $7.8 million, or 5.6% of revenue in Q1 of 2010, compared to $14.3 million, or 9.5% in Q1 of 2009. Again, our profitability in 2010 was negatively impacted by lower revenues in our health and education and financial consulting segments.

Net income from continuing operations of $2.9 million, or $0.14 per diluted share, in the first quarter of 2010 compared to $5.6 million, or $0.28 per share, in the same period of 2009. Our effective income tax rate for Q1 of 2010 came in at 43% compared to 49% in Q1 of 2009. The higher tax rate in 2009 was due to noncash compensation expense of $3.4 million, which is not tax deductible. We have not recorded any noncash compensation expense since Q3 of last year.

Total Company net income was $2.5 million, or $0.12 per diluted share, in the 2010 quarter compared to $7.1 million, or $0.35 per diluted share, in Q1 of 2009. Included in this total is a loss from our discontinued operations of $400,000 in Q1 of 2010 compared to income of $1.5 million in Q1 of 2009.

Now let's look at how each of our business segments did in the quarter. The health and education consulting segment, our largest segment, generated 55% of total Company revenues during the first quarter of 2010. This segment posted revenues of $76.9 million for the first quarter of 2010 compared to $92 million in the first quarter of 2009 and $90.7 million in the fourth quarter of 2009. This decline in the segment's revenues was due to a more prolonged decision-making process and the impact of several large healthcare engagements that ended in Q4 of 2009.

The winding down of these engagements contributed to healthy levels of contingent fees in Q4 that we did not experience in this quarter. You will recall that we pointed out that our health and education consulting segment had $25 million of contingency revenues in Q4 of last year. This compares to $13 million in Q1 of 2010. So, excluding these contingent fees, Q1 of 2010 revenues were flat compared to Q4 of 2009.

The operating income margin for health and education consulting decreased to 27.4% for Q1 of 2010 from 36.6% for the comparable quarter in '09. Margins in Q1 of 2010 were negatively impacted by lower revenues and the deferred start of projects, as we've previously discussed.

Our legal consulting segment generated 24% of total Company revenues during the first quarter of 2010. This segment posted revenues of $33.1 million in the first quarter of 2010, up nearly 45% from $22.9 million in the comparable quarter in 2009. This significant increase in revenues was primarily driven by soft results in Q1 of last year. However, since that time, we have seen consistent performance for this segment, with continued growth in our V3locity solution replacing softness in the operational consulting group within that segment.

The operating income margin for our legal consulting segment also improved significantly to 22.4% from 14.2%. This was the result of more full-time equivalents at a higher rate and lower business development costs.

During the first quarter of 2009, our financial consulting segment generated 21% of total Company revenues. This segment posted revenues of $28.9 million in Q1 of 2010 compared with $36.2 million in the same quarter of 2009, mainly due to a temporary slowdown in our restructuring and turnaround practice and the turnaround plan and resulting headcount reductions for our disputes and investigation practice that were implemented in Q3 of last year. This was partly offset by improvements in our accounting and advisory practice, which continues to benefit from a large assignment with a US government agency.

The operating income margin for financial consulting increased to 16.4% in Q1 of 2010 from 15.4% in the same quarter of 2009. Excluding the impact of noncash compensation expense, the operating income margin for Q1 of 2009 would have been 17.7%. The decline in profitability in 2010 reflects an increased level of bonus accrual.

So, to recap our segments' results, healthcare, higher ed, restructuring and turnaround, and disputes and investigations consulting practices started the year soft, but we expect steady improvement over the course of the year. And our legal consulting segment and accounting advisory practice are continuing to meet expectations.

Jim Roth will provide you with more color and his perspective on the outlook for each of our segments in a moment.

Now, turning to the balance sheet and cash flows. During the first quarter, we continued to be more proactive and focused on collection, and DSO came in at 64 days. With respect to cash flows, we had negative cash flows from operations of $22 million, which is typical for us in Q1 due to bonus payouts, which amounted to approximately $50 million this quarter.

Lastly, before turning to guidance, I want to take a moment to reiterate a change we discussed last quarter which is now in effect this year. We are no longer adjusting or adding back cost for share-based compensation when we calculate our adjusted EBITDA and adjusted net income non-GAAP measures. So when you're looking at the current period results, please remember to adjust your models for our historical results to ensure comparability.

Our outlook on full-year guidance has not changed since our Q4 comments, and, to reiterate, we expect revenues from continuing operations before reimbursable expenses in the range of $600 million to $640 million, adjusted EBITDA in the range of $107 million to $114.5 million, adjusted non-GAAP net income in the range of $42.5 million to $46.5 million, and between $2.00 and $2.20 in adjusted non-GAAP earnings per share, all on a continuing operations basis.

Our guidance on operating metrics, share counts and et cetera, has not changed since our last call. However, you should assume an annualized effective tax rate of 44%.

I will now turn it back to Jim Roth for his thoughts on the quarter and the balance of the year ahead of us.

Thanks, Jim. I'd like to provide some color on the performance of our segments during the first quarter and our prospects for the remainder of the year.

I'll start with the healthcare and education segment. This segment, which was 55% of our total revenue in the first quarter, contains three practices--our two healthcare practices, Wellspring and Stockamp, and our higher education and life sciences practice.

Revenues for this segment were down from the prior quarter due to three primary reasons. First, there was the expected reduction in contingent payments as compared to those recorded in the fourth quarter of last year. Second, some projects within the healthcare practices had delayed starts. And third, there was only marginal pickup of demand in the higher education segment. Based on our recent assessment of each practice, we are expecting these factors to be less of an issue in the second quarter.

In healthcare, some of the deferred projects have started, and the backlog of sold and anticipated work is as strong as it has been within the last 12 months. We are also seeing some return to growth within the higher education practice. A pickup to more normalized growth rates in healthcare and education will take time to play out, but we are expecting the second quarter to be better than the first and the second half of the year to be stronger than the first six months.

There's been a lot of press regarding the impact that healthcare reform will have on hospitals. While I don't intend to dissect the many implications stemming from this legislation, we remain confident that the need for our services will increase over the next five years, irrespective of the ultimate impact of reform.

The most prominent concern among our hospital clients relates to reimbursement rates for an increasing number of Medicare and Medicaid patients. Given that many of the reforms don't take effect for an additional four years and the fact that healthcare reform is unlikely to enhance the margins for the provider market, we don't see anything now that indicates more stable financial conditions for hospitals in the near future. Given these conditions, we believe that our healthcare practice will be able to maintain solid growth for the foreseeable future.

This week we announced the integration of our two healthcare practices, Wellspring and Stockamp, under a single, unified brand. While each of these brands are well known and highly respected in the market, we felt that combining the brands with the Wellspring+Stockamp Huron Healthcare logo would help build awareness in the market of the full extent of our healthcare services and reflect the success we've had in integrating these practices.

Now let me turn our attention to higher education, which also includes our life sciences practice. Revenues for our higher education practice showed some signs of returning to growth. Endowment values have recovered along with the general market, providing a boost to university finances. But many universities are still going through some major cost-cutting efforts and are beginning to realize that operational and infrastructure needs that have been deferred over the past 18 months can no longer be deferred.

One part of the university environment that has not suffered in the last two years is the research enterprise. Federally funded research remains a vibrant part of the university economic equation, and we are seeing renewed interest among our clients in enhancing the infrastructure to support research. In particular, our technology practice, which provides administrative system support to our clients' research base, has been providing stellar results, which we expect to continue through the rest of the year.

Our backlog of higher education is building, and I'm confident that, similar to our healthcare practices, the second quarter and second half will show improved results.

Our life sciences advisory services practice continues to see increased demand in the pharmaceutical and medical device industries. This practice is involved in some rapidly emerging areas, including assisting clients with new state reporting and disclosure requirements for healthcare professionals and organizations and compliance monitoring of sales and marketing activities. Healthcare reform is also expected to drive demand, as Congress and regulatory agencies increasingly focus on issues relating to waste, fraud, and abuse in the pharmaceutical and medical device industries.

Next I'll talk about the legal consulting segment. Our legal consulting segment had a very solid first quarter, primarily driven by our velocity in e-discovery and document review services. Our strategy of focusing on clients within the pharmaceutical, financial services, energy, and technology industries continues to bear fruit. Our client base in legal consulting consists primarily of Fortune 100 corporations, testimony to the value that our end-to-end services provide to some very sophisticated clients.

The consulting part of the legal consulting segment, where we help corporate law departments and law firms reduce costs, continues to be soft. The primary competition remains our clients, either postponing projects or opting to attempt necessary cost-cutting using internal resources.

Let me now turn to the financial consulting segment, which consists of three practice areas--restructuring and turnaround, disputes and investigations, and accounting advisory.

The restructuring and turnaround practice got off to a slower start in the first quarter than we had anticipated. This practice, which focuses on the middle market, is less reliant on mega-bankruptcies to fuel its growth. Nevertheless, as can often happen in the consulting business, there are valleys among the peaks of demand, and we were in a valley for the first two months of the year. Our backlog began building in the latter part of the first quarter, and we believe that we are now back on pace to meet our expectations for the year.

The disputes and investigation practice performed according to plan in the first quarter. Despite the many distractions that this practice has had in the past year, the personnel in this group maintained focus and delivered results fully in line with our expectations. We have recently seen a nice pickup in demand, and I am hopeful that this increase will enable us to continue to operate at plan for the rest of the year.

Finally, the accounting advisory practice had a very strong first quarter, primarily related to a large ongoing assignment with a US government agency and a significant engagement assisting a client with their IFRS conversion. The flexible and scalable workforce that is used by this practice enables us to respond to resource demands quickly using relatively few fixed resources. We believe that accounting advisory will perform very strongly throughout the remainder of the year.

In summary, we are conscious of the pickup in revenue over the last three quarters that will be necessary for us to achieve guidance. Having gone through detailed assessments with each segment and given recent increases in backlog in certain practices, we remain confident with our guidance. There remains substantial uncertainty in the market, but we believe our practices are well positioned to return to levels of growth consistent with our long-term plans.

I would now like to open up the call to questions. Operator?

Thank you. (OPERATOR INSTRUCTIONS.) Our first question comes from the line of Mr. Tim McHugh with William Blair. Please proceed.

Yes. I just wanted to touch on, first, your comments about the large projects in the Stockamp business. Those were encouraging. I was wondering if you could just comment if those came back as you had expected. Was there any change in the environments, good or bad, relative to what you had hoped for?

Tim, this is Jim Roth. We had talked about there being some large projects that were deferred in the first quarter. They have come through at levels that we had anticipated and are consistent with our guidance. And so we feel comfortable with what we had anticipated for the year on those.

In general, as we've mentioned before, we're reluctant to talk about specific clients, really for two reasons. Number one is the fact that the more we talk about an individual client, particularly a large one, the more we've got to follow through the ebbs and flows of an individual client project, and that gets very hard to do. But probably the more pressing reason why we don't like to talk about clients is I actually don't think they like us talking about them, and that combination just gets us to be a little bit sensitive of talking specifically.

But in general, we had anticipated some large projects coming through. They came through, and we're satisfied that they fit into the guidance as we had discussed.

Okay. And then, Jim Rojas, can you talk a little bit about the direct costs during the quarter? It was higher than I would have thought with the revenue off. Just maybe how you approach that and if you're accruing that based on the full year performance or how we should think about that expense as revenue picks up during the rest of the year.

You know what they all say, Tim, is that just to focus on that we did reiterate what our guidance was at an EPS level as well. So we felt like the results and the costs that were incurred in the quarter were reflective of what we thought we'd see throughout the year. So that's the first overall comment.

One thing I'll mention that we didn't talk about in the prepared remarks, but you'll see in terms of our SG&A cost, that we have done a good job of following through with our $30 million cost plan. And we do see costs, especially highlighted in SG&A, stand out in terms of what we've done.

In the direct cost line, it's harder to see because of the fact of these projects, certain projects that we had were delayed and started later than we had anticipated, as we previously talked about,. But the one thing to remember, too, is that bonus does play a big part of our direct cost, and we don't have a bonus plan that's for the quarter; it's for the year. And those costs play out over the year. So that's why you'll see some ebbs and flows in our direct cost line.

Okay. And then lastly, can you just update us on turnover metrics for the quarter, both voluntary and involuntary, at the managing director and then junior levels, if you have all that?

Tim, with the exception of disputes and investigations, where we know that's been a difficult environment for us, we've certainly seen some turnover there, as expected. Throughout the Company, I think pretty much at all levels, we have not seen turnover that is materially different than anything that we've really been experiencing over the last two to three years. And over the last two or three years, our turnover rates have been really better than most of our peers, if not all of our peers.

So we actually feel very comfortable with where things are at. I think our efforts that we put into place to retain our key employees have worked very well, and we don't see anything material happening on a turnover side that would be anything materially different than what we've experienced before.

Okay, great. Thank you.

Your next question comes from the line of Jim Janesky with Stifel Nicolaus.

Yes. Good morning, Jim and Jim. A couple of questions. Can you go through what your definition of backlog is? What do you, when you say your backlog has increased, is that sold and getting ready to start, or is this the pipeline of business building, like you said, according to your expectations for the rest of the year?

So there's two ways that we look at them. When we look at how things are proceeding during the course of the year, hard backlog to us is sold work, where you've got a signed engagement letter. That's clearly sold.

The soft backlog is backlog that we look at that has a very strong chance of happening. It's not certain, but it's likely. And so that, obviously, that is reflective of projects that you have been pursuing, presumably for some period of time. But we have to probability adjust those.

And then the remainder of the gap is what we use in terms of management judgment, and that's essentially our sense as to market conditions, projects that we don't really include in what we call soft backlog yet but we think are likely to begin to materialize during the course of the year. So it's hard backlog, soft backlog, management judgment. Collectively, you add those up. The latter two are certainly probability adjusted, and that's what gives us comfort or lack of comfort as to what's going to happen with respect to guidance and where we're going to end up the year.

Okay. And could you give us an idea for the second quarter and for the rest of the year? Will the revenue mix, both in the second quarter and for the rest of the year, approximate what you reported on a percentage basis in the first quarter, or do you see that mix changing over time?

Do you mean in terms of how it lays out in the second?

I mean health and education being 55%, et cetera. That's what I referred to.

Yes, I think health and education will probably wander back up closer to 60%, would be my guess. We've looked at this as being about 60-20-20, roughly, and I think that's probably where we'll end up the year.

And I think one thing to highlight, and Jim had this in his comments, that we said that the second quarter will be better than the first, and the second half will be better than the first. So that plays out without us, because we don't give quarterly guidance, but it gives you some direction of what we're thinking in terms of revenue and how the rest of the year will play out.

And I think, again, as I indicated in our prepared remarks, we are cognizant of what pattern that plays out and that we need to deliver increasingly as the year goes on. And given the fact that we've reiterated our guidance, it is reflective of the fact that we've done through and done a pretty deep dive as part of our normal April forecast and have comfort that we're in the right spot at this point in time.

Okay, great. And then a final question for Jim Rojas. Any change to the annual cash flow metrics for this year and next year? You had talked about primarily due to earnouts that backlog cash flow would be roughly flat. Is that still your expectation, Jim?

That's our expectation, Jim.

Okay, great. Thank you.

Your next question comes from the line of Dan Leben with Robert W. Baird. Please proceed.

Thank you, and I apologize if you already answered this. I had to miss the beginning of the call. But when you look at the pipeline in the healthcare business, how does that look on a year-over-year basis as well as help us understand how much that building did you see sequentially?

I'm sorry, I missed that last part, Dan.

Just quarter over quarter, how much building did you see in the healthcare pipeline? And I guess the follow-on, did that accelerate after the legislation passed?

In terms of legislation, it's too early to tell. We really didn't anticipate, nor have we seen, anything significant impacted directly as a result of reform. We continue to believe, as we indicated in the prepared remarks, that we think that the reform is not only going to have, going to continue to provide challenges to hospitals, but that it's also not likely to come through, anything material, over the next three or four years as reform begins to take shape.

So there's nothing about reform that we expected, nor did we see, that either had an immediate increase or decrease in our revenues. We've been very comfortable with the build-up of our pipeline in healthcare practice, and I think it's going to be, as we've indicated, our second quarter will be better than the first, and the second half of the year is shaping up to be very strong as well. Is that answering your question?

Yes, yes. That's getting to it. Now, there's been quite a bit of local media articles about some of the levels of contingencies. Have you seen any pushback from hospital systems wanting to go to larger fixed fees versus contingencies or any changes in the mix there for clients?

Yes. It actually tends to be a little bit of the opposite. I think part of the rationale for that, Dan, is that I think in what starts a project is obviously a client's need to improve their revenues or decrease their costs. And when we offer services, they can either be fixed fee or they can be contingent. And it's been our experience that in this economy, it's hard for our clients to justify a large fixed fee engagement without having the consultant having some skin in the game. So there's actually a tendency towards them to want to go towards a contingent arrangement, and that's what we've seen, probably more so than we've seen in the past.

Great. And then within health and ed, how did the growth compare for healthcare versus education? And I apologize if I missed that earlier.

I think, my guess is they're about--you mean quarter to quarter or year over year?

Year over year.

I think they're reasonably comparable. Things have been reasonably flat. I think we've gone through, certainly, a period of time in--I think, really, if you go back and look at the last two or three years, the healthcare has grown quite a bit. Healthcare has grown year over year, certainly higher ed has been flat. I think both of the practices, healthcare and higher ed, over the last two to three years have had very remarkable increases. I think for the large part, 2009, we saw a continued increase in healthcare. Higher ed was flat. And I think we were, the first quarter was a little flattish compared to where we've been, but we're expecting that growth rate to pick up for both higher ed and healthcare as the year goes on.

And Dan, maybe you had missed this. We talked about contingent fees, which plays a large part in our healthcare revenues. Our Q4 contingent fees were $25 million. Q1 was $13 million. So you had a $12 million swing quarter over quarter, which really explains the change in health and education revenue on sequential quarters. So that always plays a big part in terms of what the growth rates over periods of time.

And then just for my records, what were the contingent fees in the first quarter of '09?

They were, I think it was like $14.8 million.

Okay. And then the last one for me, just given what we've seen from some of the law firms, going out and issuing debt and doing a little bit more hiring, are they starting to get proactive with their engagements? Or just where are you seeing the improvements on the litigation side?

I think we are--there's a lot of others, including some of our competitors, that have reported increased activity in the litigation environment that would affect our D&I and legal consulting businesses. And admittedly, we're seeing some of that as well. What's hard for us to predict is how quickly that's going to pick up. But I think, certainly things look better now than they have, say, three to six months ago.

We hear the same reports that others hear, that there's been in some cases, a pretty decent pickup in terms of litigation activity, that the law firms are ramping back up again and they're hiring and they're accelerating some of the people that they've deferred or laid off. So we've seen or heard all that. We've seen some of that activity in the marketplace. We're beginning to see some of that reflected in our results as well. It's too early to tell how much it's going to be and how quickly it's all going to ramp up. But I would say the trends in these areas are positive as it relates to our business.

And, Dan, what we've seen specifically in our own e-discovery and velocity business is that the industries that we've been focusing on, we have seen pockets of improvement in terms of litigation. So the strategy that we've implemented in terms of the industries at this point seems to be playing off fairly well for us.

Great. Thanks, guys.

Your next question comes from the line of Sean Jackson with Avondale Partners. Please proceed.

Yes, thanks, good morning. Regarding, again, just the contingency fee issue, what are your expectations for contingency fees for this year? In other words, in the guidance, what is assumed the contingency fees? Is it similar to last year when you had a big ramp at the end, or is something different?

Sean, we haven't changed what we said from our last call. We said that for the first two quarters, it would be between $10 million and $15 million. This quarter was $13 million. What we said for quarters three and four, we'd be between $18 million and $20 million.

Okay.

And so we haven't changed. We still feel like that's the appropriate guidance for the year.

Okay, thanks. And with, again, with healthcare reform and even just the talk of it, has the type of work that you're doing for hospitals changed in any way? Is it more of the big type of restructurings, or is revenue cycle management becoming a little hotter? What's the tone of work there?

Sean, it's Dave Shade. There's another factor in the healthcare reform equation I think we need to comment on, and it's part of what influenced Q1. There's a great deal of uncertainty as to what was going to happen with healthcare reform in Q1, and I think some of that impacted the timeliness of our clients' decisions about going ahead with the projects. So it was significant uncertainty which caused them to hold back until the healthcare reform picture was clear.

So I think, as you look forward over the next three quarters, the fact that some of the mystery, at least, of healthcare reform has now kind of been solved, there's going to be a positive impact on our prospective clients' willingness to make decisions and to proceed.

I think as far as the basic licks of business that we're doing, operations improvement, revenue enhancement, cost improvement, cost restructuring, things of that nature, the mix itself is pretty much the same. We haven't seen any significant changes in that to this point, and we're not expecting for the rest of the year.

Okay, And lastly, you said you made efforts, obviously, to retain your key employees the last couple of quarters. Is that one of the reasons for the higher direct costs this quarter? And does that level of direct costs something which we should assume would happen the rest of the year?

No, Sean, I would say that's more reflective of our level of revenues. As our revenues increase, as we anticipate throughout the year, the direct cost level will decrease as well, and we will get back to the levels of profitability that we provided in our guidance.

Okay, all right. Thank you.

Your next question comes from the line of Joe Foresi with Janney Montgomery Scott. Please proceed.

Hi, Jims. My first question here is just a little clear. I think you talked about--and you don't have to give specifics of the client--but I think you talked about earlier, when you were talking about guidance in general, that you were expecting, or you were counting some level of a large project went into that guidance. Is it safe to assume that that one's taking place?

Yes. As we put together guidance at the beginning of the year, we weren't certain whether certain large projects would come along. And as we indicated, some of them were deferred. As we do with any project that's not fully signed, it really becomes what we consider to be part of soft backlog. And as a result, we've got it probability adjusted as we put together our estimates. That's what we did, and those projects that we had expected to come through, in fact, came through, and they came through consistent with levels that we anticipated in terms of our guidance. So this is a process that we go through in terms of--you know, at the beginning of the year we do it for the April forecast, and that is, we look at the hard, soft, and management judgment. That gives us the basis for making our estimates. And we had expected certain projects to come through; they did. They just came through a little bit later than we thought.

Okay. And you talked about the decision process. I know we talked last quarter that it was slow. And then now it seems to have improved. Maybe you could just give us some color on what has changed, and are we back to normal levels now?

We're not back to normal levels. I think there's still a lot of uncertainty in the economy that's going to impact a lot of the different businesses, and I think there's still some strains in the business. But it's those uncertainties and those strains that end up, I think, helping us, particularly the kind of services that we provide into the marketplace, which is largely around health, education, and law.

And as we go through and look at the strains, I think we're comfortable that we're going to continue to see a return to growth rates across our segments that we think are going to likely be in the 10% to 15% range on a go-forward basis. So we feel well positioned in the market, we feel that the market demand for our services is going to be there, and we're pretty confident on a go-forward basis that we're going to be getting that.

Now that a lot of the, I think the worst of the economic challenges are over with, I think some of the uncertainty that had been hitting our client base is decreasing. And as a result, we expect to be getting back to growth rates that are more consistent with our long-term objectives.

As we look at the range given for guidance, maybe you could just talk about the scenarios--past, present, and future--that get us either to the low end, the middle, or the high end of that guidance range. And maybe you could just talk about on a percentage basis, what type of visibility do you have at this point?

Joe, it's a difficult question. One thing to highlight, when we talked last, two months ago, we had won assignments that we didn't even know existed at that point, and fairly large and sizable assignments. It's really--as much as people would like to think it's a science, it's more of an art, and it's more about understanding the pace of business that's going on. And we feel like the detailed discussions that we had with our practice leaders, that we feel like we have a good pulse as to what that availability of business is out in the marketplace.

It's really hard to say. We said when we talked last that there's more factors than just he winning of large assignments that we thought we would or wouldn't do. There's still question marks in the economy. We talked about our legal consulting practice having decision-making issues. We also talked about in higher ed. So there are still aspects of the business that we feel fairly confident about, but we're still cautious in terms of our guidance. So we feel like that the range of what we're saying is, it's still the appropriate range.

I guess if we felt more confident, we would have narrowed that range, and we still think that there's nine more months left to report in the year, and as the year goes down, we will narrow that as our confidence grows.

Okay, and then just one last one. On the contingency fees, obviously, you have them at $11 million to $15 million in the first two quarters and $18 million to $20 million. Maybe you could just walk us through how you get visibility on contingent fees and why you would think that they would be larger in the back half of the year as opposed to the front half, and maybe what the swing factor is on that.

Joe, what I can say is that we have assignments already sold that have a contingent aspect to the project. So what we're doing is we're basing it on two factors. One is the jobs that we've already sold and what we feel like the opportunity is. Because any time we get into a contingent fee assignment, we do an assessment. And part of that assessment is completely understanding the results of the financial operations of our clients and understanding what the opportunities for them are in terms of savings and the opportunities for us in terms of contingent fees.

So some of it is the work that we know that we have sold already. Some of those, though, we still have nine months to go. We're going to get contingent fees on projects that we haven't even sold yet. So why do we believe that it's back-ended? Back-ended, for one, because we know we have sold work. The second thing is, is we know that there's other opportunities to sell additional work.

That we could end up having a larger mix of fixed fee assignments, that's possible, probably not likely. But that's what the variability is in the range that we give.

And this is Jim Roth. One last comment I'll make, just to reiterate some parts of what Jim said. The hardest part for us in terms of projecting contingent fees is if you go back and say, "How does one come about?" well, a, we've got to have the ability to deliver, so the results have to be there, first and foremost; and what makes it difficult about predicting that is both the timing of when it's going to come through and the size.

And as we saw last year, we had certain contingent fees that came in in larger amounts and came in quicker than we had actually anticipated. And that was what drove us towards higher fourth quarter results, and that actually had an impact on the first quarter, as we had said last time around, where there's things that we thought would have fallen in the first quarter of this year that actually went into the fourth quarter of last year.

So it is a little bit of an art rather than a science, but we've got confidence that they're going to be there--reasonable confidence that they're going to be there--based on what we see as our building backlog and the specific jobs that we have right now.

Okay, thank you.

Your next question comes from the line of Scott Schneeberger with Oppenheimer. Please proceed.

Hi. This is Jim Giannakouros for Scott. A question on how much Wellspring and Stockamp are leveraging each other's existing relationships, client base, for your growth assumptions in 2010, or your just overall outlook for that segment for the coming quarters?

Jim, we bought Wellspring in January of 2007, Stockamp in July of 2008. And since July of 2008, we have been working to integrate those two practices. First of all, as we have said before, they both have very strong brand images already, very good reputations in the marketplace. But we also recognize that our clients want different things. Sometimes they really just want revenue cycle work; sometimes they want more operational and cost reduction work. And sometimes they've got a more comprehensive demand for services, and they're looking for somebody that can provide all the services together.

So we have focused very strongly on integrating those practices, because we think, number one, it's better in the marketplace, it's better for our clients. And number two, an integration of those practices actually gives us an ability to deliver those services, our healthcare services, in a much more efficient and effective way.

So we have been very focused on getting integrated. The brand changes that we made in terms of the unification that we announced this week are partly a reflection of the integration that's already been taking place. And we've seen it, we've heard from our clients, heard from the market that they appreciate and want that integration. And so we're doing what we think is best for our clients and for us as well.

Okay, thanks. And switching gears, just maintenance work here. 152 MDs at the end of 4Q? Do you have an update to that at the end of 1Q '10?

I think about 140.

140. Okay, and the last question--.

Jim, just to clarify that, that's 143, or 140 billable MDs. I don't know if your metric, and I can't remember off the top of my head if the one that you gave was billable to billable. But it's 157 if we include all MDs.

Got it, okay. Thank you. The last question, you mentioned that you have one client engagement related to an IFRS conversion. Is that a one-off, or is that telling us that maybe this is potentially a demand driver for the coming quarters? Or is it more we should expect that maybe in 2011 and 2012?

I think, Jim, I think this is going to be a demand driver. I think we're expecting this part of our business to grow. We've got some good resources in this area. It's a nice, high-profile client, and we expect this type of business to be growing.

Even this year from current levels?

Yes.

Okay. Thank you very much.

Your final question comes from Tobey Sommer with SunTrust. Please proceed.

Hi. This is Frank in for Tobey. In your prepared remarks, you mentioned that restructuring had a little bit of a dip but picked up a little bit. Can you give me a little more color on that and what you're forecasting for the end of the year, or what's invested in the guidance?

The dip, I think, was just a reflection of the fact that they ended the year pretty strong. And as we occasionally see, it's when you're pretty busy, it's sometimes harder to get out in the marketplace and sell new work. And they went through a pretty busy fourth quarter. And so I think, there was certainly nothing from our perspective in the market that would lead us to believe that there's anything significant going on.

Our middle market focus, I think, has sheltered us a little bit from the high swings that we might see for some of the mega restructuring and bankruptcies. But I think that what we saw in the first two months of this year was really nothing more than the fact that we were probably all out at the end of the fourth quarter and that we just weren't as much in the market. That sometimes happens across all practices. But we've seen a pickup, and I think that the challenges in the economy, particularly for a lot of the middle market ones, give us comfort based on what we're seeing in as backlog, that the rest of the year is going to hold out according to our plans in that practice.

Thanks so much.

We have one more question from Bill Sutherland with Boenning and Scattergood. Please proceed.

Oh, thanks for sneaking me in there. Hi, Jim and Jim. A couple of just maintenance questions. The restructuring and restatement expense you expected for the year, Jim, that was going to be in the neighborhood of $8 million, I think? Or is that still what you're looking towards?

Yes. And that's a combination, as you said, of restatement-related expenses and restructuring costs. I think the exact number's $8.5 million. But yes, $8 million to $8.5 million is right in the range.

And that is embedded in the guidance for the GAAP earnings, correct?

Yes, it is.

Yes. Interest expense? Just some color on what that might be for the year, and also D&A?

$13.5 million is our estimate on interest expense. And then depreciation and amortization, you'll have to give me a second here to pull that.

It was $4.6 million in the quarter.

It's right around $23 million.

Oh, it is? Okay. All right. And then just a couple of quarterly phasing questions. Based on how the backlog's looking at this point, at least, in the health and ed area, should we think of that being fairly linear? Or is it going to be really heavy in the back half, in your mind?

I think it's going to be steadily building throughout the year. As we said, I think the second quarter will be better than the first, and I think the second half will probably be much better than the first half. That's our hope right now.

Okay.

Based on what we're seeing.

And then in legal, how should we think about that in terms of the quarterly phasing? Is it going to be more just steady from Q1?

Yes, I think it's going to be steady from Q1.

Okay.

We don't want to get too far ahead of ourselves in projecting increases in that area. We're hopeful that it will keep growing, but I think it will be relatively steady quarter to quarter.

Okay, great. And then last, Jim Roth, I got pulled away while you were talking about some of the emerging improvements in the ed area, some of the color you gave in terms of where you see opportunity. Would you--not to have you repeat it--but maybe there's a little more color you can provide there? Thanks.

The comments that I made were really twofold. Number one was that there was the endowment pickup for our client base over the past year has improved the mood, I think, on campuses in terms of spending and their ability to do it. The stuff that really happened in late 2008 and early 2009 was, frankly, pretty devastating to a lot of campuses. That's picked up to a large extent. And even though they have three-year moving averages on their payouts from endowments, it still, I think, has created a mood where they believe they can go back and begin to have a little bit more discretionary spend. So we've seen that.

And in addition to that, I think there was just a lot of things that got deferred over the past 18 months at many universities, and I think some of those things are just in pretty dire need of being addressed right now.

That combination gives us--we've seen it in the market already, that there's renewed spending and renewed desire to go forward with some consulting practice, some consulting spend that we know was deferred in the past.

Okay. Thanks again.

This is Jim Rojas. I just wanted to clarify one question, because I know a lot of people focus on this. And the metrics could be skewed, based on if you're looking at it on a continued or a total company basis. On a continuing basis, our MD count at the end of Q4 was 141. The number that I quoted may have included our strategy business in Japan. If you compare that to Q1 continuing basis, it's 140 MDs. So I just wanted to clarify those numbers since I know a lot of people follow them.

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

I want to thank you for taking time out this morning to discuss our first quarter results and outlook for the remainder of the year. I'd also like to thank all of our employees who have done such a tremendous job of staying focused on our business as we have navigated this challenging economy.

We look forward to speaking with you again when we announce our second quarter results. Have a good day.

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