Huron Consulting Group Inc.
Q4 2007 Earnings Call Transcript

Published: 20 Feb 2008

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Huron Consulting Group’s webcast to discuss results for the Fourth Quarter and Full Year 2007. (Operator Instructions) Now, I would like to turn the call over to Gary Holdren, Chairman and Chief Executive Officer of Huron Consulting Group. Mr. Holdren, please go ahead.

[Gary Holdren:]

Good morning, and thank you for joining us for today’s webcast to discuss Huron Consulting Group’s Fourth Quarter and Full Year 2007 results. Before we begin, I would like to point all of you to the disclosure at the end of our news release for information about any forward-looking statements that’ll 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 a disclosure of factors that may impact subjects discussed in this morning’s webcast. Also on this call we will be discussing one or more non-GAAP financial measures. Please look at our earnings release and our website for all the disclosures required be the SEC, including reconciliation to the most comparable GAAP numbers. Joining me on the call today in Chicago are Gary Burge, our Chief Financial Officer; Dan Broadhurst, our Chief Operating Officer; and Mary Sawall, our Vice President of Human Resources. Today, I would like to spend the majority of my time talking about 2008 and the market demands and opportunities that exist for each of our businesses. I know that many of you have questions about the macroeconomic environment and whether this well help, will this hurt or help Huron in 2008. I will address this for each businesses as I discuss the market demands. Before beginning on market demands, I want to just say a few words about 2007

[Gary Burge:]

Thanks, Gary; and good morning, everyone. I’d like to start off by saying that we had a very good quarter which met our top line and bottom line expectations. Some of the financial highlights included revenues of $136 million were up 63% year-over-year with consolidated organic growth of 11% for the quarter, which I’ll talk about more as I address each of the segments. I would like to point out that while the organic growth did moderate for the quarter, it was 22% for the full year. Our customer diversification continues to improve as our top ten customers represented 29% of total revenue for the quarter compared to almost 37% a year ago. EBITDA increased more than 65% to $29.2 million for the fourth quarter compared to $17.6 million a year ago, and our adjusted EBITDA rose more than 71% to $34.8 million. Also, our adjusted EBITDA margins increased 130 basis points to 25.6% as we continue to leverage our SG&A costs. Operating income increased 61% to $23.2 million for the quarter, up from $14.4 million last year. Operating margins remained about the same, 17.1% compared to 17.3% a year ago, due to the impact of rapid amortization on intangible assets. However, excluding $1.2 million of rapid amortization in the fourth quarter 2007, our adjusted operating margin would’ve been 18%. The fourth quarter of 2006 had no rapid amortization. Finally, diluted EPS improved 37% coming in at $0.63 compared to $0.46 a year ago. Now for some comments regarding each of our businesses

[Operator:]

Thank you. (Operator Instructions) Our first question comes from the line of Mr. Tim McHugh of William Blair & Company. Please proceed, sir.

[Timothy McHugh:]

Yes, I just wanted to touch on the guidance. You mentioned there’s a few things that can impact the quarter and that’s why perhaps your Q1 guidance for organic growth is probably a little lower than it’s implied for the full year. Specifically you mentioned Wellspring might be backend loaded for the year, and I think you suggested that perhaps Galt and some of the corporate consulting could be backend loaded, I was wondering if you could just elaborate on that.

[Gary Holdren:]

Yeah, Tim, Wellspring, what happens with Wellspring is that they start the year and they do assessments and the assessments don’t get the same rates and then they start the implementation which are 8 to 12 months and those implementations are at higher rates; and if they complete them, every one of them if they meet certain standards, then they have write-ups in them which increase the profitability and sort of backend load the results, so they start beginning of the year, get assessments and build up. Galt’s just not as much backend loaded; they just got a lot of demand. Right now what’s probably affecting Q1 more than anything is just we’re not having the same level of success with our core Legal Financial Consulting business that we had in the six quarters went it ran 85% hot. We just believe that how good we are at that and how much we know about the marketplace and how big the market is that that just has to come back in the second half just because of how aggressive we are out in the marketplace and what we know about the market space.

[Timothy McHugh:]

Then on restructuring, you mentioned that the demand trends there looking out seem fair for both, but in the fourth quarter it didn’t quite meet your expectations. Can you give and elaborate on that?

[Gary Holdren:]

The business wasn’t as good and the margins weren’t as good and all of sudden we started getting work and we’ve got… But we’ve only got 70-some people there and most of them are utilized, so they just won jobs. They won jobs in quarter one and they didn’t have them in quarter four.

[Timothy McHugh:]

Then just one last one here

[Gary Holdren:]

I think the thing that, the comments we keep getting is what a lot of people just can’t believe, and we’ll have to some education on it, is people believe the product is too good at the price and they just keep wondering how you can deliver all you say you can deliver and are you tricking us on the price and can you really do that. So right now what we’ve got continue to do is have our existing clients tell prior clients that we can do it and get people to try us because they believe it’s so game changing at such a favorable price that we just got keep working the marketplace.

[Timothy McHugh:]

Thank you.

[Operator:]

Your next question comes from the line of Mr. Andrew Fones of UBS. Please proceed, sir.

[Andrew Fones:]

Yes, thank you. First of all, on the Corporate division, I was wondering if you could explain what drove the lower utilization. You mentioned that ramping up in Japan perhaps weighed on the utilization there. You also mentioned restructuring and operational consulting perhaps coming in a little bit below your own expectations. Can you kind of perhaps just give us some flavor as to what drove most of the declining utilization?

[Gary Holdren:]

You answered yourself, Andrew. We had added 20 some people or we had 20 some people at the end of the year. Japan which was a building process, our operational consulting business and our RT business was slow and all those together, Galt was doing very well, but it’s only, there’s only 40 people and so the combination and so what’s happened and what’s happening in the first quarter is RT restructuring it busy. We’ve got some better favorable results in Japan and Galt’s still busy and we’re continuing to work on corporate. So Q4 wasn’t very good, but Q1’s going to be better.

[Andrew Fones:]

Thanks. Then regarding Q1, can you give us the number of days that you expect in the period, what the impact could be through Easter and perhaps also if you could perhaps give us the number of days that were in Q4 and what you’re expecting for the full year ’08? Thanks.

[Gary Holdren:]

We’ve got 64 days in Q1 and you got 61 days in Q, and I think we used about 250 for the year, is that right, 253 for the year. Total business days available doesn’t take effective days for vacation, but we use, that’s the way we run our business. We look at revenues per day and so we divide by revenues per day in Q1 is going to have 64; revenues per day is going to have 253 for the year.

[Andrew Fones:]

Thanks. Then just kind of finally, and I guess king of Tim also touched on this, but it seems as though the guidance for Q1, the organic growth implied by that versus for the full year, you’re expecting some acceleration as you move through the year. Should I understand most of that could come from Financial Consulting as you look at it?

[Gary Holdren:]

I think it’s a combination of factors. One, we hope to have an increase in Financial Consulting. We also think that we should see some improvement in our V3locity business. We also think that Wellspring will be backend loaded. We also hope that we’re going to grow headcount. So it’s a combination of everything.

[Andrew Fones:]

Kind of in terms of the comps as well, you mentioned that the comps certainly are easier for Financial Consulting in the second half of the year.

[Gary Holdren:]

Restate your question again.

[Andrew Fones:]

Sorry. Just looking at the comps, I think you also mentioned for Financial Consulting that the comps get easier as you work through the year.

[Gary Holdren:]

Yeah, I mean if I you start looking, you can go back and look, I’m looking at it myself, we had $36 million in Q1 of last year and it just kept working its way down Q2 and then we made the Callaway acquisition in Q3 and Q4, but the business just kept coming down during the year that where it came down under $30 million. So it’s going to make the comps easier as we go. With what Joe Floyd and Tim Hart are doing and what we’re seeing in the marketplace and what we think will happen just from being more active is that that business that we just have to get, we have to get more business. We know the law firms are busy; we know there’s business out there. We’re not going wait for the big whales like subprime, we’re just going to go one brick at a time. We’re just going to add to this business each day with a new assignment.

[Andrew Fones:]

Thanks. Then just finally on that point, it looks like we saw a sharp pickup in securities litigation during the fourth quarter, are you seeing any impact from that on your business in terms of particularly on I guess the Financial Consulting division?

[Gary Holdren:]

No, we haven’t yet. We’ve got a few proposals out, but to be honest with you, we haven’t. We hope that’s upside. But we’re not guiding to it or putting it in our guidance yet.

[Andrew Fones:]

Thanks.

[Operator:]

Your next question comes from the line of Mr. Mark Bacurin of Robert W. Baird. Please proceed, sir.

[Mark Bacurin:]

Good morning. Couple questions. Gary Burge, last quarter you gave us kind of a breakdown of the number of foundation clients and what the revenue contribution was. I was hoping maybe we could get that again for Q4.

[Gary Burge:]

Yes, Mark, with respect to those foundation clients, we did have some rebound in activity in the fourth quarter of 2007. We had six of those foundation clients up from I believe three in the third quarter, the revenues of course were up as well in the fourth quarter, as I mentioned earlier, because the revenues were up sequentially in the Financial Consulting Segment third quarter versus fourth quarter; and the revenues in total relative to those six foundation jobs was about $14 million versus $8 million that we had from foundation jobs in the third quarter, so improved. We’re still out there in the marketplace looking for more of those foundation jobs as well as smaller jobs and time will tell. We expect we’ll be able to see improvement as the year goes on here in 2008.

[Mark Bacurin:]

Thank you. Then looking within Legal, the non-billable consultancies, you saw a decline in FTEs as well as continuing sequential erosion of the revenue stream there. Can you comment just generally about

[Gary Holdren:]

I think what happened, Mark, is we were focused and Chris Getner and his team, processing team, were basically beta testing and trying to get V3locity ready. The fact is I think that we had some slippage in jobs and so we continue to see the revenues from processing and document review continue to slide in the results in Q4. But I can tell you, they’re back at a pretty nice way in Q1. You’ll be pleased with the Q1 results.

[Mark Bacurin:]

That’s good to hear. Any reason to think the sales cycle for the V3locity product offering, I mean I know this is over the initial learning phase, but you’re just seeing the sale cycle for that new integrated product is going to be different than what you experienced in the past?

[Gary Holdren:]

I mean I think the thing is that you wouldn’t think it would be and I don’t want it to be, but I don’t think I can tell you with 100% accuracy which way it’s going to turn. That’s why we’re going to have… I had the whole sales team in here Monday of this week meeting with them on this product and we sure have a lot of inquiries and a lot of demand and we have a lot of big companies asking us to do a lot of big things and they just continue to question

[Mark Bacurin:]

You’re comfortable with now going direct to the corporate side as opposed to getting these referrals through the law channel or the legal channel (inaudible)…

[Gary Holdren:]

Yeah, the majority of our business, if you wanted our strategy, will be build your core business with corporates, do one-off events with law firms, but the majority of the business will be with just continual master service agreements with very large corporations where we’ll do all their discovery.

[Mark Bacurin:]

Great. Then if I could on the Financial side, obviously very good results out of the Callaway side of business, could you just comment generally about, I know you’re doing everything but the audit, but can you talk about specific demand drivers where you’re seeing, where you’re putting most of the resources?

[Gary Holdren:]

I mean we’re pushing our people to go talk to lawyers. We’re pushing our people to go talk to, there’s a chance to outsource an internal audit function. There’s tax things to be done. There’s people who are thinking about car routes. I mean we’re pushing both in the traditional channels of lawyers, but we’re also pushing more and more into corporations and the internal audit head, the tax head, the chief accounting officer trying to just get more feet on the street and make more sales and people aware of what we can do at the price points. I mean the biggest thing right now is people are somewhat leery that they’ve never heard of Huron; they never heard of this new offering and you come in and tell us you can do it with these resources that are this experienced, on-demand at this price, again, some of the stuff seems to be too good to be true. So we just have to continue being there, getting our message out, being persistent and convincing clients that it is as good as we say it is.

[Mark Bacurin:]

Great. One final one, Gary Burge, there’s $32 million accrual for business acquisition, is that just an earn out or can you tell us what that’s related to and does that get paid off Q1?

[Gary Burge:]

Yes, that’s an earn out for acquisitions completed in 2007 and prior years, and it will get paid in Q1.

[Mark Bacurin:]

Great. Thank you.

[Operator:]

Your next question comes from the line of Tobey Sommer of Suntrust Robinson. Please proceed, sir.

[Tobey Sommer:]

Thank you. Wanted to ask a question about what your acquisition pipeline looks like. Others have touched on the quarter and guidance and wondering if you could comment about what your expectation would be for contribution in 2008 from acquisition. Thanks.

[Gary Holdren:]

Yeah, Tobey, right now we don’t have anything really very close; and at this point, I can’t tell you whether we’re going to go have something. There might be some small stuff, but it normally takes us three to five months to do something from the start of nothing’s really very close. So I’m not sure we’re going to have a lot of acquired revenues in ’08, but you know things can change. But my guess it would be, clearly it would be in the second half of the year anything happens of any significance.

[Tobey Sommer:]

Relative to your uses of cash and your sort of view on the capital structure of the firm or any changes relative to how much leverage you think the business should comfortably support.

[Gary Burge:]

Tobey, Gary Burge here. Plans for cash generated from operations this coming year would be absent new acquisitions would be to continue to pay down our debt. However, should we good acquisition opportunities, we can certainly increase our leverage and would be comfortable doing that.

[Tobey Sommer:]

Then, Gary Burge, I was wondering if you could, I think you mentioned some of the organic growth rates by segment, if you wouldn’t mind repeating those and what the overall organic growth rate was in the quarter. Thank you.

[Gary Burge:]

Yes, overall organic growth rate for the quarter, Tobey, was 11% for the Company, 22% for the full year, and so revenues in 2007 were more frontend loaded as opposed to backend loaded the way the year turned out. But in terms of those organic growth rates for the Corporate Consulting practice, we had 32% organic growth rate. The organic growth rate for Financial Consulting, which includes Callaway and the financial and Economic Consulting itself, you strip out Callaway, it was 5% decline in revenues for the reasons we’ve talked about. Overall for organic growth rates for Legal Consulting for the full quarter, for the quarter and fourth quarter was 13%, 27% for the full year; and that organic growth rate declined relative to the full year was entirely related to the document review business. Our core Legal Consulting business had approximately a 36% organic growth rate year-over-year. Then lastly, our Higher Education and Healthcare Segment had an overall 20% organic growth rate, and that’s primarily do the results from our higher education practice as well as our pharma and health plans business had outstanding years.

[Tobey Sommer:]

Thank you very much.

[Operator:]

Your next question comes from the line of Mr. Jim Janesky of Stifel Nicolaus. Please proceed, sir.

[James Janesky:]

Yes, thank you. Gary, I have a question on the I guess way of looking at is the lack of business coming out of the credit market so far. If you could just give us an idea why you think there isn’t much business. Is it because possibly the business is going elsewhere? Are companies just sitting on their hands and/or crossing their fingers and hoping that the regulators just go away or what are your thoughts? Is this generally what happens in a crisis? I guess the subprime crisis really came to a head in the October timeframe of last year and may take a good six to eight months before we get a substantial amount of revenues out of that area.

[Gary Holdren:]

This is Gary Holdren’s opinion, some based on my opinion and some based on facts

[James Janesky:]

You do believe that based on the current pipeline of business and looking at your backlog and your experience with being able to turn that back or to convert that backlog into business that you can do the range of numbers that you gave in ’08 and that any subprime work could be incremental. Is that a correct way of looking at it here?

[Gary Holdren:]

Well I think right now we have not given… When you say backlog, we consider backlog to be signed arrangements that is actual work. What we’re now working on is we’ve got backlog, but the backlog is not the level it needs to be to get back to where we were. So what we need to do is we need to create new work and we need to create new opportunities; and I think what we’re saying is that having been in this so long and knowing how much work is out there and knowing what our people need to do that it has, we have to get work. We just never… I’ve been doing this since 1983, if you’re out in the marketplace, the law firms have $70 billion worth of billings. There’s plenty of work; there’s plenty of disputes. We know from our corporate clients the number of cases being filed, their cost is not going down. So we know there’s no change in the market conditions. There may have been a change in how many investigations are going on from stock options, but there’s plenty of litigations; they’re plenty of disputes; there’s plenty of work to do. We just need to go get refocused, get it booked and start working. When we do that, then our numbers will come back. Some of that could be subprime, some of it could be credit crisis, some of it could be investigations. We could get hired to do maybe an investigation with this thing that Cuomo did on United Healthcare. They’re could be a lot of different things. What we have to do is be in the marketplace every day knocking on doors, talking to attorneys, talking to our corporate clients and getting work. When that happens, it’s not an if, it’s when it happens, then you’ll see the business come back and we’ll have better results than what we’re even forecasting.

[James Janesky:]

Thank you.

[Operator:]

Your next question comes from the line of Abhishek Gami of Bank of America. Please proceed.

[Sugio on behalf of Abhiskek Gami:]

Hello. This is Sugio calling on behalf of Abhiskek Gami. I have another question. One is on the utilization front, is this project down this quarter, I would like to know how fast you expect to (inaudible)… level. Secondly, the utilization’s down for the second consecutive quarters, are you seeing any strength (inaudible)… new engagements?

[Gary Burge:]

This is Gary Burge. I heard the second part of the question which was asking whether utilization being down was that related to a delay in the startup of engagements, and I’d say at this stage no. We’re still out there in the marketplace, as Gary said, obtaining and seeking new work and we’re positive and encouraged that that will certainly happen. Then you were breaking up a little bit with your question; we didn’t hear the first part of it.

[Sugio on behalf of Abhiskek Gami:]

The first part was like how fast are you expecting to ramp up to the (inaudible) levels?

[Gary Burge:]

Oh back up to what it was a 70% to 75% level?

[Abhiskek Gami:]

Yes.

[Gary Burge:]

Certainly that’s in our business plans for 2008 that we’ll get back to those levels and we’ll… The key is selling the work, then the utilization takes care of itself.

[Sugio on behalf of Abhiskek Gami:]

Just a couple of questions on your guidance. Looking at your guidance, it seems the group is a little backend loaded. I would like to know what has given you the confidence to offer (inaudible) backended guidance with the growth being backended? Is it

[Gary Holdren:]

We’re having a real difficult hearing you, but let me… I mean I think you’re asking a lot about why guidance is backend loaded.

[Sugio on behalf of Abhiskek Gami:]

My question is what is giving you the kind of confidence or the (inaudible). Are you banking upon your backlog or pipeline or are you counting upon something latter in the year?

[Gary Holdren:]

I think we’re counting a lot on our experience in the market demands. Like we believe and we’ve had consistent growth in our higher education practice, and the more people we hire, the more we do and so we’re going to continue to hire. So you would continue to see higher education and the pharmaceutical and health plans just grow because they have more people and there’s enough demand and they’re doing very well. So that would be traditional that you just see that go up and be backend loaded. The Wellspring business, the healthcare Wellspring business is definitely backend loaded because they get implementations, they get higher rates and they typically get some write-ups from those. Our Legal Consulting business is growing fast. We are planning on that continuing to grow with headcount, that continues to grow throughout the year. We’ve got about 130-some college students coming in between, in the summer months to the fall. We believe that we’re going to have more volume and growth in the V3locity business as it gets launched, so that will have a little bit more backend loaded; and we have not at this point put anything in our guidance that assumes the Financial Consulting business will come back. If that comes back, that would even be more backend loading.

[Sugio on behalf of Abhiskek Gami:]

Just one more thing

[Gary:]

How much V3locity revenue is in guidance?

[Sugio on behalf of Abhiskek Gami:]

Yeah.

[Gary:]

We don’t give that level of detail.

[Sugio on behalf of Abhiskek Gami:]

Thanks a lot.

[Operator:]

(Operator Instructions) Your next question comes from the line of Kevane Wong of JMP Securities. Please proceed.

[Kevane Wong:]

Hey guys, how you doing? Few things

[Gary Burge:]

Kevane, Gary Burge here. Minimal 2% or less of total revenues.

[Kevane Wong:]

Gotcha. Good. Then just to clarify, on the Legal Consulting, as far as the quarter, it sounded like what I pulled out is it was really sort of taking your eye off the ball during the quarter as you were launching V3locity up that was to the main factor. Was there really anything else or is it really to say the matter of focus for diverted at the time which is now back on target?

[Gary Holdren:]

I think it’s a little bit of that we needed to get the V3locity launched and it hurt our processing revenues and we continue to have some job slip that we had a big job, a second request job that we thought that was going to start like in November that didn’t really start until like the 20th of December. So it was a combination of a big job that slipped that’s now completed and we completed it in 60 days and it was a great job. There was some slippage in when we thought jobs were going to start and basically getting V3locity ready.

[Kevane Wong:]

It was big enough to sort of move the needle for the quarter it sounds like?

[Kevane Wong:]

Gotcha. Looking at March quarter, are there any particular big jobs in that grouping that could have a similar effect or that you would expect to or is everything right now so far running pretty much on track in Legal Consulting?

[Gary:]

Well we’ve had some big jobs in V3locity and our processing in Q1, but we also think we’ve got some good ones starting in Q2. Right now what we don’t is we don’t have any visibility right now in Q3 and Q4 with those big jobs, but we’ve got our sales engine and our hype going with V3locity that we think that we can fill in. So Q1 had some big jobs that are over; Q2’s got some starting that we know of and so that’s a little bit about what I tried to say in my opening remarks is that it’s a little bit of experience of managing this whole portfolio of businesses and keeping them all going and not over promising and having these stops and starts. So the way we could basically get a little bit of lumpiness out of it is just continue to have more sales and have more corporate clients so we don’t have any lumpiness in V3locity because big jobs… I mean we had a real big job in Q1 that had 60 million pages that had to be reviewed in two months and so you can just imagine what that does to your revenues.

[Kevane Wong:]

Gotcha. It’s also nice that you’re able to actually be able to handle those kind of jobs, so it’s a marketplace positioning obviously.

[Gary Holdren:]

One of our big selling points is we’ve got a client now that we did 60 million pages at a price at a per page price that’s a great reference for us, so it was a great job for a lot of reasons.

[Kevane Wong:]

Gotcha. Also, lastly here, Corporate Consulting, you mentioned as far as your structuring practice didn’t hit what you were expecting. Could you give a little insight as far as what’s happening in the marketplace? Was it a marketplace issue? Was it a Huron issue? Was it a bit of both? What happened as far as that sort of missing on the restructuring business?

[Gary Holdren:]

Well I think it could’ve been a little bit of both. I think you never know. We weren’t winning jobs in ’07 and whether the markets more vibrant or not, I think I’m not positive but we are winning jobs now. So whether we were at the wrong place or we had the wrong resources going after the wrong jobs, I’m not positive. But I know right now that we’re hitting more on eight cylinders versus four.

[Kevane Wong:]

Gotcha. As far as like RFP flow, etcetera, that’s sort of what you’re looking at for what you’re seeing now? Did that start picking up at a certain point in 4Q as far as sort of RFPs and the like that you were receiving?

[Gary Holdren:]

We don’t give RFPs but we get calls from credit hedge funds or creditors or debtors or whatever and we just started getting more calls in the Auto sector and we started having to write skills to meet what the market wanted.

[Kevane Wong:]

Gotcha. Perfect. All right, thank you.

[Operator:]

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

[Gary Holdren:]

I want to thank all of you for your time today, and I want to just continue to try to make sure you understand that we don’t talk about stuff that we don’t believe we can deliver and I think we’ve got a pretty good solid reputation of when we say something, we can do it. We really… We’ve been doing this a long time; we know this business. So if you’re concerned about that we don’t have a good handle on the backend of this business or we’re backending it hoping it happens, I just want to assure that’s not what we’re here talking about. We’re big shareholders and we’re going to deliver the results and we know how to run this business. So in closing, I just want to thank all the people from here on in, all the hard work they did in 2007 and for them helping us build this great Company. So we look forward to speaking to all of you in May when we have our first quarter 2008 earnings. Thanks.

[Operator:]

That concludes today’s conference call. Thank you, everyone, for your participation. You may now disconnect. Have a wonderful day.