Huron Consulting Group Inc. (HURN) Earnings Call Transcript

Good afternoon, and welcome to Huron Consulting Group's webcast to discuss financial results for the third quarter of 2026. [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 afternoon's webcast. The company will be discussing 1 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 Mark Hussey, Chief Executive Officer and President of Huron Consulting Group. Mr. Hussey, please go ahead.

Good afternoon, and welcome to Huron Consulting Group's Third Quarter 2026 Earnings Call. With me today are John Kelly, our Chief Financial Officer; and Ronnie Dail, our Chief Operating Officer. We achieved record revenues before reimbursable expenses or RBR in the third quarter of 2026, reflecting 12% growth over the third quarter of 2025. Our third quarter performance was driven by organic growth across all 3 of our operating segments and double-digit percentage growth in both our consulting and managed services and our digital capabilities. AI continues to drive demand for our digital services. In the trailing 6 months of 2026, greater than 65% of our digital capability bookings involve direct AI scope, we're delivering that was significantly enabled by our AI tools, and that was up from approximately 50% in the same period in 2025. Our third quarter results continue our strong multiyear performance and further demonstrate the consistent execution by our highly talented global team as well as the differentiation of our industry-focused proprietary offerings. Combined with our year-to-date performance, our strong backlog and pipeline give us confidence to narrow our full year RBR guidance range and raise our earnings guidance. At the midpoint, our updated guidance continues to reflect year-over-year double-digit RBR growth and continued margin expansion, establishing a solid base for continued growth in 2027. Now I'll share some additional insights into our third quarter performance. In the Healthcare segment, we achieved record RBR in the third quarter. RBR grew 16% for the third quarter of 2025 and which was on top of 20% growth in Q3 2025 over Q3 of 2024. The increase in RBR in the quarter was driven by strong demand for our managed services performance improvement, financial advisory and digital offerings as well as incremental RBR from our acquisitions. Excluding the impact of the acquisitions, organic RBR growth for the Healthcare segment was 9% in Q3 2026 compared to Q3 2025. Underlying market conditions remain favorable for driving strong demand for our Healthcare business. Healthcare systems and hospitals continue to operate in a challenging environment characterized by persistent cost and workforce pressures, evolving reimbursement models and increasing expectations to improve access outcomes and the patient experience. Healthcare industry is also preparing for the next phase of the [ OPDBA ], which takes effect in 2027 and includes stricter requirements related to Medicaid eligibility and reimbursement. We believe the impending regulatory changes together with the broader structural challenges facing Healthcare providers will drive continued demand for our Healthcare business. Our comprehensive portfolio of offerings across consulting, digital and managed services positions us well to address each client's distinct challenges. We believe our multiyear track record of proven results, coupled with our proprietary data and methodologies and delivered by our highly experienced team provides a strong competitive advantage for Huron our clients build a more sustainable future for their organizations. I'd also like to highlight the performance of our Healthcare managed services business, for which RBR nearly doubled the third quarter of 2026 compared to the third quarter of 2025. Q3 2026 marked the third consecutive quarter of 40% plus organic year-over-year revenue growth for this team. The strong steady growth is reflective of the recurring nature of this offering and our outcomes-based approach that consistently delivers meaningful, positive financial and operational results for our clients. Beyond the impressive growth in financial performance, we're pleased with how this business has organically expanded into a broader scope of functional areas, enhanced through our acquisition of RelateCare earlier this year. Our Healthcare managed services team has also delivered with the highest quality, achieving a Net Promoter Score of 92, which far exceeds the industry benchmark and states the clear value that we're delivering for our clients. Next turning to the Education segment. In the third quarter of 2026, Education RBR grew nearly 7% compared to the third quarter of 2025, driven by strong demand for our digital and managed services offerings. Higher education institutions continue to navigate a broad array of pressures, including demographic headwinds, enrollment challenges and cost and revenue pressures. Uncertainty also remains around research funding in the midst of growing regulatory complexity. Institutions are also grappling with the risks and opportunities resulting from rapid advances in across their workflows and their learning environments. Increasingly, these challenges require institutions to simultaneously retain their strategies and business models while preserving a clear focus on achieving their missions. We continue to see robust demand for digital transformation engagements as clients seek to modernize their data and technology foundations, build AI at elaborations and create a more sustainable operating model. As institutions make increasingly consequential decisions about their future, we believe the depth of our expertise, the breadth of our capabilities and the deep relationships built forward decades provide Huron with a strong competitive advantage. We remain confident in our ability to help clients navigate this period of transformation, while continuing to build upon our competitive position in the Education market. Now moving to the Commercial segment. Third quarter commercial RBR grew 6% over the prior year quarter. The increase in RBR was driven by our Q3 2025 acquisition of Wilson Perumal as well as continued organic growth from our strategy offerings. Commercial organizations are navigating an increasingly complex operating environment marked by cost and productivity pressures, rapid advances in technology and AI, evolving customer expectations, and continued economic and regulatory uncertainty. These challenges are increasingly interconnected, requiring partners that can bring together deep industry expertise across a wide array of capabilities. Similar to our Healthcare and Education businesses, we believe the growing breadth of our capabilities, along with an increasing depth of industry expertise, positions us well to help clients address these challenges with end-to-end solutions across our Commercial segment. Over the past several years, we've strategically strengthened our commercial business by investing in the expansion of our capabilities and industry expertise, and importantly, creating greater connectivity across our businesses. Most in Para acquisition completed just over a year ago is a great example. Comparables expertise in driving performance improvement through managing the strategic and operational impact of complexity on businesses complements our strategy, financial advisory and digital offerings. Together, we're creating a strategy to execution, value proposition to help our clients understand and reduce complexity that erodes value in their businesses. We've seen the benefits of the strategy in the market, greater collaboration across our teams is expanding how we engage with clients, strengthening our competitive differentiation and creating new opportunities to serve them across people at a range of needs. We believe this combination of deep industry expertise broader capabilities and a collaborative go-to-market approach provides a strong platform for continued growth in our Commercial segment. Now let me turn to our outlook for the year. Today, we're updating our annual guidance by narrowing our RBR guidance range to a $30 million range of $1.855 billion to $1.885 billion, affirming our adjusted EBITDA guidance range of 14.5% to 15% and increasing and narrowing our adjusted non-GAAP EPS to a range of $9.20 to $9.40. We're pleased with our performance to date in 2026 and the midpoint of our RBR guidance reflects our expectation of continued strong growth in the fourth quarter, consistent with our backlog and pipeline. We remain focused on advancing our growth strategy and executing with discipline to deliver strong financial performance for our business and for our shareholders. And now let me turn it over to John for a more detailed discussion of our financial results. John?

Thank you, Mark, and good afternoon, everyone. Before I begin, please note that I will be discussing non-GAAP financial measures, such as EBITDA, adjusted EBITDA, adjusted net income, adjusted EPS and free cash flow. Our press release, 10-Q and Investor Relations page on the Huron website have reconciliations of these non-GAAP measures to the most comparable GAAP measures, along with the discussion of why management uses these non-GAAP measures is why management believes they provide useful information to investors regarding our financial condition and operating results. Before discussing our financial results for the quarter, I would like to discuss 1 housekeeping item. Our Healthcare segment results do include a full quarter of operating results from our acquisition of RelateCare, which closed in June of this year. Now I share some of the key financial results for the third quarter. Third quarter of 2026 produced record RBR of $482.5 million, up 11.6% from $432.4 million in the same quarter of 2025. The increase in RBR for the quarter was driven by growth across all 3 operating segments, a double-digit percentage growth in both our consulting and managed services and our digital capabilities. Net income for the third quarter of 2026 was $28.4 million or $1.75 per diluted share returned to net income of $30.4 million or $1.71 per diluted share in the third quarter of 2025. As a percentage of total revenues, net income decreased to 5.8% in the third quarter of 2026, and compared to 6.9% in the third quarter of 2025. Diluted earnings per share in the third quarter of 2026 reflects noncash credit loss recognized on our convertible debt investment in a third party, which had $0.36 unfavorable impact on diluted earnings per share for the quarter. Our effective tax rate in the third quarter of 2026 was 32.9%, which is less favorable than the statutory rate, inclusive of state income taxes, primarily due to certain nondeductible expense items and the inability to recognize tax benefits related to the credit loss recognized on our convertible debt investment in the third party. We now expect a full year effective tax rate between 27% and 29%. Adjusted EBITDA was $77.3 million in Q3 2026 or 16% of RBR compared to $67.4 million in Q3 2025, or 15.6% of RBR. The 16% adjusted EBITDA margin is our highest quarterly adjusted EBITDA margin in the last 8 years. Increase in adjusted EBITDA was primarily attributable to increases in Healthcare and Education segment operating income, excluding the impact of segment depreciation and amortization and segment restructuring charges, partially offset by an increase in certain unallocated corporate expenses. The increase in adjusted EBITDA margin to 16% from 15.6% and in the prior year period is reflective of an increase in Education segment operating income margin, scaling of our unallocated SG&A expenses. Adjusted net income was $42.6 million or $2.62 per diluted share in Q3 2026 compared to $37.4 million or $2.10 per diluted share in the third quarter of 2025. The growing adjusted diluted earnings per share of 24.8% year-over-year. Now I'll discuss the performance of each of our operating segments. The Healthcare segment generated 53% of total company RBR during the third quarter of 2026. Segment posted record RBR of $255.8 million, up $36.2 million or 16.5% from the third quarter of 2025, driven by strong demand for our managed services, performance improvement, financial advisory and digital offerings as well as incremental RBR on our acquisitions. RBR in the third quarter of 2026 included $16.7 million from our acquisitions of RelateCare and AXIA. Operating income margin for the Healthcare segment was 30.5% in Q3 2026 compared to 30.9% in Q3 2025. Slight decrease in segment operating income margin was primarily driven by an increase in total compensation expense as a percentage of RBR and includes the impact of the integration of related came into our business. We have maintained strong margin performance in 2025 and to the first 9 months of 2026, reflective of the highly disciplined execution delivered by our health care team. The Education segment generated 29% of total company RBR during the third quarter of 2026. Education segment RBR in the third quarter of 2026 was $138 million, up $8.6 million or 6.6% compared to the third quarter of 2025. The increase in RBR was entirely organic and driven by strong demand for our digital and managed services offerings. The operating income margin for Education increased to 29.1% for Q2 2026 compared to 25.7% for the third quarter of 2025. The Increase was primarily driven by revenue growth that outpaced the increase in salaries and related expenses for our revenue-generating professionals and decreases in salaries and related expenses for our support personnel and technology costs. Commercial segment generated 18% of total company RBR during the third quarter of 2026. Commercial segment RBR was $88.8 million in Q3 2026, up $5.4 million or 6.4% from the third quarter of 2025. The increase in RBR reflects $4.3 million of incremental RBR primarily from our acquisition of Wilson Perumal, as well as strong demand for our strategy offerings. Operating income margin for the Commercial segment was 13.9% for Q3 2026 compared to 16.4% in the same quarter in 2025. The decrease was primarily driven by increases in performance bonus expenses, reflecting increased full year performance expectations for certain teams within the segment. In addition to the increase in performance bonus expense, the decline in margin also reflects continued investment in key business development, leadership and delivery talent that we expect to drive above company average growth in 2027. These gross rents and investments totaled $2.2 million or 2.5% of segment RBR for Q4. Corporate expenses not allocated at the segment level, excluding restructuring charges, were $58.7 million in Q3 2026 compared to $56.5 million in Q3 2025. The unallocated corporate expenses in the third quarter of 2026, included income of $200,000 compared to expense of $2.7 million in Q3 2025 and related to the changes in the liability of our deferred compensation plan, which are offset by the change in fair value of the investment assets used to fund that plan reflected in other income. Excluding the impact of the deferred compensation plan in both periods, unallocated corporate expenses increased approximately $5.1 million, primarily driven by increases in compensation costs for our support personnel, software and data hosting expenses, partially offset by a decrease in legal expenses. Now turning to the balance sheet and cash flows. DSO came in at 83 days for the third quarter of 2026 compared to 79 days in the second quarter of 2026. The increase when compared to the second quarter of 2026, is primarily attributable to the impact of collections on certain health care projects in alignment with the contractual payment schedules. Cash flow from operations in the third quarter of 2026 was $57 million compared to $93.8 million in the prior year period. During the third quarter of 2026, we used $7.9 million to invested capital expenditures, inclusive of internally held software costs, resulting in free cash flow of $49.1 million. We now expect full year free cash flow to be in a range of $150 million to $170 million. Net cash taxes and interest and excluding noncash stock compensation. This update primarily reflects the timing of collections, including a revised payment schedule on a specific multiyear engagement and a higher mix of performance improvement projects with performance-based fee elements within our Healthcare segment during 2026. We expect to collect working capital related to such projects in 2027 in accordance with our contractual terms. Our leverage ratio as defined in our senior bank agreement, was 2.6x adjusted EBITDA as of September 30, 2026 compared to 2.8x as of June 30, 2026. We remain confident that we are on track to achieving a leverage ratio between 2x and 2.5x by the end of 2026, in alignment with the capital allocation strategy outlined in our most recent Investor Day. Total debt as of September 30, 2026, was $815 million, consisting entirely of our senior bank debt. We finished the order with cash of $25.6 million for net debt of $789.4 million. This was a $13.4 billion decrease in net debt compared to Q2 2026, which incorporates the share repurchases made during the quarter. In the third quarter of 2026, we used $26.3 million to repurchase approximately 173,000 shares bringing our total year-to-date repurchases to $234.9 million or approximately 1.7 million shares, reflecting an average repurchase price of $136 per share. Year-to-date repurchases represent 10% of our common stock outstanding as of December 31, 2025. As of October 31, 2026, $255.9 million remained available for share repurchases, inclusive of the $200 million increase authorized by our Board of Directors in October 2026. We Finally, let me turn to our guidance for full year 2026. As Mark mentioned, today, we are updating our annual guidance by narrowing our RBR guidance to a range of $1.855 billion to $1.885 billion, affirming our adjusted EBITDA guidance range of 14.5% to 15%, and increasing and narrowing our adjusted non-GAAP EPS to a range of $9.20 to $9.40. Thanks, everyone. I would now like to open the call to questions. Operator?

[Operator Instructions] Our first question comes from the line of Andrew Nicholas of William Blair.

To start with commercial, a little bit of a weaker quarter on an organic basis. Could you unpack what kind of businesses within that segment did during the quarter? And then maybe speak a little bit more to the investments that you described. Are there specific areas that you're focused on with those investments? And I guess, relatedly, are those investments in response to recent results or kind of proactive to spurring growth next year?

Yes. Andrew, I can start with just the question about the growth rate for the quarter. So from an organic perspective, consulting overall was up about 11%. And we talked on the last call, expecting the growth rate within consulting to moderate from where it was earlier in the year. And that moderation primarily came from the restructuring and turnaround business where they add a couple of large segments in the first half of the year that really drove above-average growth that normalized during the third quarter and landed more in this low double-digit percent range. From a digital perspective, it was down 1%, so roughly flat during the quarter. Our commentary there is, from a pipeline perspective, we see significant growth in terms of pipeline. We see good opportunities. We see continued opportunities as it relates to AI enablement projects or helping clients with AI use case projects just the execution on closing out some of those projects and getting them started was a little bit behind what our expectations were for the quarter, which led to the roughly flat results in the third quarter. The digital part of the business is a bigger mix within commercial. So the net of all that was the low single-digit organic growth rate.

Yes. Let me add on the second part of your question, Andrew. I think the -- these are not at all in response to anything in the quarter. In fact, if you turn the clock back a couple of years at least for the multiyear journey we've been building our commercial business into a much more, call it, industry focused to enable on an end-to-end basis. And so I mean, even turning back to [indiscernible] AXIA, we did, which was more in the digital area. But more recently, if I answer your question specifically, we have now gotten to the time where the capability across the businesses for reaching the scale that the addition of deeper industry expertise in a number of the verticals makes a lot of sense for us because now we can leverage across the full set of capabilities we have what you're seeing is some of the anticipation of growth in 2027, some of the investments where we're bringing in leaders to help us scale from an industry perspective.

Very helpful. And then you touched on it at various points during the prepared remarks also in response to my last question. But just broadly on pipeline development, any areas that are especially strong or accelerating or on the other side of the coin, softening a little bit relative to what you described last quarter. It sounds like general bookings are good. But any color there would be great.

Yes, Andrew, from a -- maybe just start from an overall perspective, from an overall company-wide bookings perspective for the trailing 6-month period ended September 30. Bookings were up 20% year-over-year, over 20% year-over-year. I think the strength of those bookings, that's not only helpful in terms of delivering the fourth quarter guidance, but we also feel good that, that really offset the table for the next leg of growth as we start to think about 2027. In terms of the areas, I would say the majority of the bookings strength there was within the Healthcare and Education segment. And importantly, digital within both of those segments was a key part of that. Within Healthcare, it was also broader in terms of performance improvement and the managed services offerings. And then on the Education side of the shop. I think the strength was really digital and managed services. There was growth in terms of bookings for the consulting part of the business, but we continue to see a little bit of a slower than we expected sales conversion rate within consulting and Education. And then from a Commercial perspective, that was more in the mid-single-digit range percent in terms of increase in bookings during the 6 months ended 9/30 versus a year ago. And what's in there, I'd say it was pretty well balanced between the different lines of business within the Commercial segment.

Our next question comes from the line of Tobey Sommer of Truist Securities.

I wanted to ask a question about Healthcare and PI specifically. The order of the magnitude of change in terms of enrollment in insurance rules, the Affordable Care Act this year, that changed compared to the another leg down that is forecast in the Medicaid and the 340B drug pricing? Which year between this year and next is harder on your clients? Just trying to get a sense for what you may hear from them in the coming months or if we turn the calendar to '27?

Tobey, I think you could say next, we expect to be harder because what you're going to see is a lot of that Medicaid works to come back in the form of unreimbursed care. And you've got compounded by some of the ACA pressures that you've seen on enrollment. So I think it's been well expected for some period of time. But I think until you really get into it and see magnitude. So we expect '27 should be a very strong year from a Healthcare perspective, especially because now we will be into the new parts of the regulation that will take effect January 1.

On managed services, maybe -- are there new services within there that you're expecting to offer your customers, perhaps I'm kind of curious what the next modules of revenue cycle that you think the company is getting more receptivity and adoption from your customers to drive growth in '27 and '28?

Well, I think the first thing to understand is that we have both end-to-end revenue cycle where we kind of lift and shift in rebase their people and then execute under, call it, outcome space, performance-based contracts. But I would say an increasing number is on our point solutions that are on various parts of the revenue cycle. And then I would say with businesses like we just acquired with RelateCare, what you're seeing is an extension into some of the access periods. And so I think there is quite a bit of adjacency that's still left to be -- love to be executed there. So I think really within, call it, both the traditional revenue cycle as well as getting into some of the access related clinical operations and just some of the trials management are definitely areas that we see really good opportunities.

Last 1 for me. Margins in managed services going forward. Could you give us your outlook there kind of not just for the fourth quarter, but a little bit longer term and broad strokes, please?

Yes. Tobey, this is John. I would say, from our perspective, this has been 1 of the really great parts of our and services business story over the past few years. We've seen steady margin improvement in that business. And when you think about our Healthcare managed services, the margin profile segment level for our managed services offering are generally in line with the overall segment average. They tend to be a little bit below the performance improvement consulting, which has its performance-based fee opportunities and evolve the digital offerings, which tend to lend a little bit lower. And when we first got into the managed services business, at this point, 7 years ago, that wasn't the expectation. We actually, at that point, we're thinking that demand services business would be high growth, which has proven to be, but that would blend in at a lower margin rate. So it's been a really positive change for us. In terms of what is unlocked that margin growth, I think it's a few things. But first and foremost, it's the outcomes-based approach that our teams take with our clients. So we're very focused on delivering key financial and operational metrics for our clients and to the extent that we're successful in doing that. That creates opportunity for us to expand our revenue on those projects. But as well, our team has done a great job of taking advantage of our global resources. And then this is an area where I think across the entire company, when we look at the advancements we made in automation using AI. The team has also shown great leadership in those areas too. So you put all those things together and plus just some nice scaling now of the fixed components of the SG&A for that business. It's proven to be really margin accretive to us, coupled with the strong growth rates that Mark highlighted in his remarks.

And of course, you're low the recurring nature.

Yes.

Our next question comes from the line of Bill Sutherland of Stonex Financial.

I can't help but notice the sequential trend in headcount, professional head count and education down a bit in the 9 months and then a nice expansion in margin over the same 3 quarters. And just wondering about that relationship or whether there's other factors? And also how you're thinking about head count planning for education going forward.

Yes. So this is -- I'll touch on Education. I think it's a broader comment that really cross company to you, right? The Education head count was down. I think generally speaking, if you're looking sequentially, excluding managed services, our head count was roughly flat across the entire business. And I think the story behind that is, during the quarter, we were able to hit our growth objectives for the quarter as well as keeping an eye on our fourth quarter expectations, really with the scale of the current team that we have. And so some of that is utilization, and you see that in the increased utilization metrics in our report. But some of that is increased productivity from our teams, too. And I'd highlight a couple of different areas where we've seen that increased productivity delivery of digital projects. I think that's a place where we've seen some fairly rapid advancement in terms of our efficiency, and delivering those projects. But then also the support teams that enable some of the revenue that we have through our proprietary tools and products, of which that's a key component of our education business. We've also seen increased productivity in that area, too. So I think that the combination of increased utilization plus higher per consultant productivity are really the 2 ingredients that drove our ability to both grow and to improve margins without necessarily adding the same amount of head count. I do think you'll see us continue to add head count as we grow. But our expectation is we should be able to grow the top line as we start to think about our plans into next year at a faster pace than we're necessarily growing the head count, primarily due to some of these initiatives we have around driving increased productivity.

Got it. The -- I want to just go back to commercial for a second, thinking about what you said about the investments you're making that you expect will take commercials growth above the company's average growth rate next year. And then also kind of like footing that to the situation with the pipeline. So is it -- I guess I'm sort of expecting this to be a case of some pipeline conversion that's been held up and then you'll have bookings that definitely support the cases that you're making for faster growth in '27. Is that about the right way to think about it?

And I'd say, Bill, adding new pipeline as these layers come up to speed and are effectively getting into the market, and that normally takes some amount of time just to onboard kind of reacclimate with the other folks around understand the breadth of what our capabilities are. So there's always a slight delay between getting the door on day 1 and when you're actually highly effective in the market. So based on the quality of the people that we're hiring, I feel highly confident that you'll see that acceleration. The areas that we're building into are inherently good industry areas we've talked about in the past, services, energy utilities, industrials and manufacturing. Each of these have lots of good compelling opportunities, some in various parts of the business versus others. But yes, that's to me, I think you may not see it as of the end of Q3, but I certainly -- I think coming in at '27, that's our footage.

Okay. That makes sense. And then if I could sneak 1 more in. I'm thinking about what your clients are kind of grappling with adoption of different levels of AI for their whatever projects are putting out there or trying to move into? And is it -- to what degree is it having an impact on the sales cycle, decision-making process or maybe the project implementation pace. Is there anything that you're noticing?

I think, Bill, we're I think we felt a little bit of maybe what was some hesitation on the part of clients towards the end of last year, early part of this year when that everyone was becoming aware of the rapid pace change with the technology and some clients wanting to make sure that whatever path, they were going down a sense in light of how the technology was evolving. I think as the year has progressed, a lot of the challenges that we've -- our clients are going through in their different industries, none of those are going away. And our clients continue to be under pressure there. And so I think many of our clients at this point have taken more an approach of let's now start to chart the path forward, increasing confidence about how some of these tools can be used to help drive outcomes. There's a greater repository of use cases now and kind of proof of how you can use some of these tools to go and achieve some of those objectives. And I think at this point, you're seeing a little bit more assertiveness for many of our clients about now wanting to launch and wanting to -- whether that's taking advantage of some of the AI that's native to some of the big platforms on our volumes implement to take advantage of that AI or whether it's working with some of the frontier firms to do more the stope building out bespoke building out of tools that sit on top of some of those platforms. We see it in both ways, depending on the clients' preferences. But I think we see a shift towards more productivity at this point versus maybe where we were a year ago.