Jim Roth - President and CEO Mark Hussey - Chief Operating Officer and CFO.
Timothy McHugh - William Blair Paul Ginocchio - Deutsche Bank Tobey Sommer - SunTrust Jerry Herman - Stifel Randle Reece - Avondale Partners Joseph Foresi - Janney Montgomery Scott.
Good afternoon, ladies and gentlemen. And welcome to the Huron Consulting Group Webcast to discuss Financial Results for the First Quarter 2014. At this time all conference call lines are on a listen-only mode. Later we will conduct a question-and-answer session for the conference call participants and instructions will follow at that time.
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 one or more non-GAAP financial measures.
Please look at the earnings release and on Huron’s website for all 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 and President of Huron Consulting Group. Mr. Roth, please go ahead..
Thank you. Good afternoon. And welcome to Huron Consulting Group's first quarter 2014 earnings call. With me today is Mark Hussey, our Chief Operating Officer and Chief Financial Officer. First quarter of 2014 was our second best quarter in history of the company, achieved primarily by better than expected results in our Healthcare and Legal segments.
I will not -- now provide some color on each of the segments and our core market, and then I will turn over to Mark, so he can walk you through the financials. Huron Healthcare continued its recent stellar performance with Q1 results reflecting strong run rate revenue, as well as a sizable contribution from our performance-based projects.
For the second quarter in row, we generated a significant level of performance-based fees. As a reminder, performance-based fees only occur when the value we provide to our client's meets or exceed their expectations.
Our recent strong results in the Healthcare segment reflects our ability to successfully help our clients navigate some very complex strategic and operational environments.
The market conditions for this segment remained vibrant and reflective of the ongoing challenges for hospitals related to reimbursement, the changing business model associated with movement towards managing for population health, and continuing consolidations among hospitals aiming to achieve clinical and operational efficiencies.
While our three primary healthcare businesses; revenue recycle, performance improvement, and clinical solutions continued to perform very well, the collaboration among those groups in the market is a major differentiator from a competitive perspective and an important attribute for our success.
This collaboration is most notable in our efforts at academic medical centers, most of which are challenged by the high cost associated with pursuing multiple missions in teaching, research, and patient care. We are also having substantial success in the middle market provider space, where financial pressures continue to increase.
Collectively, we are very well-positioned for future growth in the Healthcare segment. Turning to our Huron Legal segment, we had our best revenue quarter ever with solid performance in both the services and consulting practices.
We had strong revenue among some of our financial services clients, and we had additional new clients introduced through our global sales organization.
A key differentiator in the market for Huron Legal has been the scale of our e-discovery operations and our experience in working with large clients over intense periods, particularly in an environment where data security is becoming an increasingly critical factor to our large global clients who are attracted by our ability to securely manage large amounts of sensitive information.
As this market continues to grow in size and sophistication, we believe we are well-positioned to serve the needs of the most complex clients. The consulting practice within Huron Legal also had a strong quarter.
Corporate law departments are facing many of the same pressures seen throughout large companies, and the depth of our experience in creating cost efficiencies with law departments adds to the level of value that we can bring to our clients.
One area of softness that we have seen in the past quarter was in the Education and Life Sciences segment, also known as ELS. This segment is comprised of three individual practice areas; life sciences, technology, and consulting.
It is latter, our education consulting practice that has seen some softness during the past several quarters, and that softness continued in the first quarter of this year.
I want to spend a few minutes providing some background here on each of the three practice areas in ELS to provide a better sense of how we see things are evolving within this segment.
Our life sciences practice went through a period of low utilization in the last half of 2013, but productivity has picked up since the first of the year and it is trending more toward more normalized rates. With the early January edition of the Frankel Group, I believe that this practice area is on pace to meet our expectations for the year.
The Frankel Group, which serves many of our legacy pharma and medical device clients, has brought a complementary set of offerings, including consulting on corporate and commercial strategy, R&D optimization, and business development.
We are very pleased with the talent that came to Huron from the Frankel Group, and I am excited about our ability to take new offerings into the rapidly evolving and increasingly competitive pharma industry. The technology practice in ELS had a strong 2013 and continues to perform well in 2014.
This part of the business has been the steadiest among the three ELS practices. We've had a series of recent wins that give some comfort that this practice will also meet our expectations for the year.
The component of the ELS practice most impacted by market changes has been in the education consulting part of the business, which provide strategy, operations, finance, and research services to research universities and academic medical centers.
Of all the services that Huron provides, this is the one that I know the best as it is where I’ve spent most of my consulting career. As I have mentioned on prior calls, the higher education industry is experiencing significant disruptive and competitive pressures.
Even some of the most prestigious colleges and universities are feeling the need to make substantive, strategic, and financial decisions.
Unlike the hospital environment, which tends to measure financial performance more succinctly , many universities find it difficult to initiate structural and strategic changes, given the cultural complexities of an environment where the key constituents, faculty, alumni, donors, students, and in some cases legislators tend to resist change.
Our consulting practice within the ELS segment is the best in the business. Last year, we provided services to over 150 colleges and universities, and we are on pace to exceed that number this year.
The difference over the past year or so is that we have completed implementations on several large projects, and we've not fully replaced them with new implementations. We continue to do a lot of assessments -- we continue to do a lot of assessment work with the university appetite for full-scale implementations continues to vary.
Our market presence is as strong as ever, and I believe it is only a matter of time before we see a better compliment of utilization and margins in this business. While we are not satisfied at the current levels, I believe we are going to see performance in this practice improve over the next several quarters.
My continual presence in the market, including serving several clients provides me with comfort that our experience personnel and strong reputation will serve us well as the education market continues to react to significant competitive pressures.
During the first quarter of 2014, we realigned the reporting of our enterprise performance management or EPM practice, which was acquired as Blue Stone International last October. At the time of the acquisition, we placed Blue Stone in the ELS segment based on the collaboration that was taking place among Blue Stone and the higher education practice.
During the past six months, as our new EPM practice continued its sales efforts across many industries, it became apparent that the growth of the EPM practice will be best achieved in the segment that serves multiple industries. As of the first quarter, results of EPM will be reported in the Huron business advisory segment.
The EPM practice has performed well during the six months that it had been under the Huron umbrella. This practice is extremely market focused and has continued to bring in new clients to Huron both domestically and internationally.
This is a very solid group of professionals that have already achieved a high degree of collaboration among the various Huron practices. We are excited about where this practice is going and its ability to broaden the range of services offered by Huron.
Our Legacy Huron Business Advisory segment turned in a solid quarter, whereas other firms that have struggled within this segment area, our personnel continue to respond well to a challenging market.
The edition of our recently announced broker-dealer license will enhance the service offerings within this segment and will enable us to participate in transactions in a more meaningful way then we have in the past.
While this is the smallest of Huron segments, we believe that the experience of our personnel and business advisory and the solid value that they bring to clients will enable this segment to meet our growth and performance expectations for the year.
Let me now turn my attention to guidance, which I know will be top of mind for many of you in light of our strong Q1 performance. As you are aware, we issue annual guidance, which we evaluate on a quarterly basis.
When we provided our 2014 revenue guidance about 60 days ago, we expressed confidence in our ability to organically grow this company at a mid-to-upper single-digit pace for the foreseeable future.
The extent of the change taking place in our core markets and our strength and presence in those markets continues to give me comfort that our growth rates are reasonable. We managed this company based on an annual plan.
And given the uncertainties over the timing of certain performance-based projects and the fact that we are only one-third of the way through the year, consistent with our historical practice, we will not modify our annual revenue guidance today. We do expect to evaluate and update guidance when we report second quarter results.
We are pleased with our performance so far in the second quarter and will provide more insight into our revenue and earnings guidance in late July. For similar reasons, our performance-based revenue guidance also will not change at this time.
When we issued year end results in February, we indicated that performance-based revenues would be more front-end loaded in the first half of the year than has been the case during the past several years.
We remain pleased with the flow of assessments in new work and while the timing of revenues stemming from these opportunities is always hard to predict. We continue to become with our plans to organically grow our annual revenues in a mid-to-upper single digit range for the foreseeable future.
Finally, we are excited to have announced last week our agreement to acquire Vonlay. This is an important strategic acquisition for us and will enable us to offer new services to our hospital clients as they attempt to get a return on the sizable investments that many of them have made in new electronic health record systems.
We also believe that the analytics skills provided by Vonlay will enable us to better assist our hospital clients in managing the ongoing transition to population health. We are expecting to close this acquisition in early May. And we look forward to having this very bright team of people onboard with us at Huron.
We continue to have an active M&A pipeline. In the past three quarters, we have made three strategic acquisitions that add value to several of our practice areas. We continue to see attractive M&A opportunities to enhance our business across all of our segments. Now let me turn it over to Mark for more detailed discussion of our first quarter results.
Mark?.
Thank you Jim and good afternoon everyone. Before I begin, let me remind everyone of a few housekeeping items. I'll be discussing non-GAAP financial measures such as EBITDA, adjusted EBITDA, adjusted net income and adjusted EPS.
Our press release, website and 10-Q each have reconciliations of these non-GAAP measures to the most comparable GAAP measures along with a discussion of why management uses these non-GAAP measures. First, let me address a few items regarding our recent acquisitions.
Blue Stone which we acquired in Q4 of last year has been realigned from the Education and Life Sciences segment to the Huron Business Advisory segment as Jim just mentioned. We now referred Blue Stone as our enterprise performance management or EPM practice.
In addition, we acquired The Frankel Group, a leading life sciences consulting firm at the beginning of 2014. So our Q1 results include that acquisition. In contrast, our pending acquisition of Vonlay which was announced last week is expected to close in May and upon closing will be included in our second quarter results.
Now let me walk you through some key financial results for the quarter. We began 2014 with first quarter revenues of $210.7 million, up 28.5% from a $164 million in the same quarter of 2013.
The first quarter of 2014 benefited from higher performance base fees compared to Q1 2013, as well as incremental revenue from our acquisition of Blue Stone and The Frankel Group. I had some additional comments about performance-based fees in just a moment.
Operating income increased almost 96% to $41.8 million in Q1 2014, compared to $21.3 million in Q1 2013. Adjusted EBITDA which excludes a number of items that are listed in our press release was $49.1 million in Q1 2014 or 23.3% of revenues compared to $25.6 million in Q1 of 2013 or 15.6% of revenues.
Net income from continuing operations was $34.1 million or $1.48 per diluted share in the first quarter of 2014 compared to $11.4 million or $0.51 per diluted share in the same quarter last year. Q1 2014 was favorably impacted by one-time tax benefit of $10.2 million or $0.44 per diluted share.
This tax benefit resulted from the company's check-the-box election to treat one of its wholly-owned U.K. subsidiaries as a disregarded entity for U.S. federal income tax purposes. Let me pause for just a moment to discuss the tax benefit in a bit more detail. Huron has operated in U.K. since 2006 and made a few small acquisitions through 2012.
Many of you that have filed the company for sometime, know that one of the drivers of our higher effective tax rate compared to the statutory rate has been foreign losses with no tax benefit. Following 2013, we evaluated our investments and/or tax structure, which let to us make the check-the-box election in Q1, 2014.
Looking ahead we continue to see the U.K. is an attractive market and remain optimistic about its long-term growth prospects.
Adjusted non-GAAP net income from continuing operations, which excludes one-time tax benefit was $25.5 million or $1.10 per diluted share in the first quarter of 2014, compared to $11.6 million or $0.51 per diluted share in the same period in 2013. Our effective income tax rate in the first quarter of 2014 was 16% compared to 41.7% a year ago.
The low effective tax rate in Q1 2014 was primarily due to the check-the-box election that we previously discussed. Excluding the impact of the one-time tax benefit, our effective income tax rate was 41.2% in Q1 of 2014.
The effective tax rate for Q1 2013 was higher than the statutory rate due primarily to the impact of foreign losses with no tax benefit and certain nondeductible business expenses. On a full year basis, we anticipate our effective tax rate to be approximately 32% for 2014 inclusive of the one-time tax benefit.
On a normalized basis excluding the nonrecurring tax benefit, we expect our effective tax rate to be approximately 41.5%. Going forward, we continue to seek ways to lower our effective tax rate overtime. Now, let’s look at how each of the operating segments performed during the quarter.
The Huron Healthcare segment posted revenues of $107.5 million the first quarter of 2014, up $28.8 million or nearly 37% over the first quarter of 2013. Performance-based fees in Q1 of 2014 were $31.1 million compared to $18.4 million in the same quarter last year. Excluding performance-based fees, revenues increased nearly 27%.
While we’re pleased that our Huron Healthcare segment had another strong quarter, we expect some moderation in the second half of 2014 as performance-based fees are likely to be greater in the first half than in the second half of 2014. As we’ve said on many occasions, the timing of performance-based fees can vary dramatically.
They are not driven by our seasonal pattern but rather the mix of engagements at anyone point in time. The operating income margin for Huron Healthcare was 47.6% for Q1 2014 compared to 39.6% for the same quarter in 2013.
The increase in margin was largely driven by the higher level of performance-based fees, as well as lower salaries and related expenses as a percentage of revenues. As many of you know, in the interim quarters we record bonus expense to the midpoint of the annual guidance range, which were in -- which we are maintaining.
Consequently much of the incremental performance-based fees in the quarter fell to the bottomline. Our Huron Legal segment continued its momentum from Q4 posting record revenues of $55 million compared to $51.1 million in Q4. Compared to the same quarter in 2013, revenues increased over 34%.
The increase in revenue was attributable to an increase in demand for our discovery services, resulting in higher utilization of our document review centers. Utilization within our consulting practice also saw an increase from 52% in Q1 of last year to 64% in Q1 of 2014.
The operating income margin for Huron Legal segment was 22.7% in the first quarter of 2014, compared to 7.2% in the same quarter of 2013. The increase in this segments margin was primarily due to lower salaries and related expenses as a percentage of revenues as well as lower technology rent and marketing expenses.
Huron’s Education and Life Sciences segment posted revenues of $33.6 million for the first quarter of 2014 and as noted earlier include the Frankel Group. Revenues for the first quarter of 2013 were $35.7 million. The operating income margin for Huron Education and Life Sciences was 19.2% for Q1 of 2014, compared to 26.2% for the same quarter in 2013.
The decrease in this segment’s operating margin was mainly due to increases in contractor expense, marketing expense, and technology investments as a percentage of revenues.
The Huron Business Advisory segment posted revenues of $13.4 million for the first quarter of 2014 and includes $6.6 million from our EPM practice which we acquired in Q4 of last year.
Excluding the EPM practice, revenues for the first quarter of 2014 were $6.8 million compared to $8.6 million for the same period last year, a decline of about 21%, primarily reflecting the timing of engagements in our financial advisory practice.
The operating income margin for the Huron Business Advisory segment was 19.1% for Q1 of 2014, compared to 39.4% for the same quarter in 2013. The decrease in this segment’s operating margin was mainly due to the decline in revenues and our financial advisory practice previously mentioned.
Now turning to the balance sheet and cash flows, we ended the quarter with over $21 million in cash despite our annual bonus payments and the Q1 acquisition of The Frankel Group. We begin to repurchase shares on the $50 million open market share repurchase program that was authorized by our Board in Q1.
Through the filing date of our 10-Q, which we expect to be tomorrow, we will have purchased 157,850 shares at a total cost of approximately $9.5 million, representing an average price of $60.40 per share. DSO came in at 69 days for the first quarter of 2014.
Performance-based fees that were recognized during Q1, but have not been built or collected had about a seven day unfavorable impact on our DSO this quarter.
We expect that the strength of the balance sheet and cash flows will continue to support both our active M&A pipeline and our ability to return value to our shareholders through share repurchases. Now let me make a few comments about guidance, which was originally issued when we released our full year 2013 results in late February.
We maintained our revenue guidance in Q1, as we have typically done in the past at this stage in the year. We expect to update our guidance when we release Q2 results, at which point we will have more visibility into the remainder of the year.
However, you will know that we did update our GAAP guidance in connection with Q1 earnings due to the one-time tax benefit that was recognized in Q1. Specifically, we updated our GAAP earnings guidance for GAAP net income taxes and GAAP earnings per share for the impact of the one-time tax benefit.
So with that said for full year 2014, we anticipate revenues before reimbursable expenses in a range of $765 million to $795 million.
Embedded in our guidance range, our expected performance-based fees in a range of $90 million to $100 million, adjusted EBITDA in a range of $141.5 million to $150 million, net income in a range of $74 million to $78.5 million and adjusted non-GAAP net income in a range of $69.5 million to $74 million, GAAP EPS between $3.20 to $3.40 per share and adjusted non-GAAP EPS in a range of $3 to $3.20 per share.
And finally with respect to taxes, you should assume an effective tax rate of approximately 32% for 2014 or approximately 41.5%, excluding the one-time tax benefit.
With respect to adjusted EBITDA, adjusted net income and adjusted EPS, there are several items that you need to reconsider when reconciling these non-GAAP measures to comparable GAAP measures. Reconciliation schedules that we included in our press release will help you walk through these reconciliations.
With that, I’d now like to open up the call to questions.
Operator?.
Thank you. (Operator Instructions) Our first question comes from the line of Timothy McHugh with William Blair. Please proceed..
Hello. Thank you. I guess first just on Healthcare, you talked about how in the second half of the year you expect a moderation in the performance-based fees.
Is there any reason you expect the non-performance based fees, I guess, to moderate from current levels and I know sometimes fees continued to be higher towards the tail end of projects, so is that factored into the outlook here at all?.
Yes, Tim. This is Mark.
I would say that the ongoing market continues to be very attractive, but I would say that just aside from tougher comparisons, as you know the second half of last tear was pretty good both from an underlying growth as well as from a performance-based fee perspective, so really aside from just tougher comparisons, I don’t think there's anything else that would alter our outlook..
Yeah. I would agree that. And I think the healthcare businesses, I mean what’s really driving it still is the market still is very strong, and I really don't -- in fact to some extent, the market’s been more challenging from our clients’ perspective.
So, I think we continue to be very pleased with the way things are developing in the healthcare segment.
As I said, we kind of look at the healthcare business, and we don't always get to make the calls on whether the jobs are going to be performance-based or fixed fee, but we see ongoing strength in the business, and I think that the second half will be probably as strong from a run rate perspective.
It’s not exactly the way we look at it here, but I don’t see any deterioration in the overall scope of the business. And lastly, I would just add that. Go ahead, Tim..
I was just going to say, maybe even more broadly across the business, is there anything, not just healthcare I guess, but besides performance-based fees, is there any specific factors you know of at this point that would caution you about projects ending or stuff like that in terms of the second half of the year versus the first half of the year? And again, kind of acknowledging the performance fees, okay..
Nothing else. They are the normal course of business..
All right. And then in the legal segment, that’s always been choppy, but obviously a nice step-up there mid quarter.
Are these new sizable client relationships or new sizeable, I guess, kind of market share at existing clients that you are recognizing the volatility, you feel is sustainable or was there an unusual large project or something like that that popped up on the discovery side this quarter?.
Tim, it is Jim. I think it was little bit of both. We had a couple large projects that were there. That was certainly part of it, but we also had some new clients come in that added to it as well, so it’s kind of a combination. I think the new clients ones will stay with the ones that gave us a real big pickup from some of the legacy clients.
It's really hard to project how far they are going to progress quarter-by-quarter. But it was -- we were pleasantly surprised in this past quarter..
Okay. Great. Thank you..
And our next question comes from the line of Paul Ginocchio with Deutsche Bank. Please proceed..
Thanks. Just back to Legal real quick, maybe you hinted at i. You typically signed master service agreements with large corporates.
Was that -- you talked about that helping, can you just talk about where you are on that and how many signed in the quarter and was that roughly -- and how much of that contributed to the uptick? Typically, your first quarter is your smallest quarter of the year.
Would you expect in 2014 your first quarter in Legal, or at least in e-discovery to be your biggest quarter this year, is that? Thanks..
Yeah, Paul. This is Mark. I think first of all, it really is hard to say what the MSAs translate into just because the revenue is really driven by the individual size of the matter, which can vary dramatically across the numbers in clients.
What I will say is that our GSO is out there doing a really nice job of securing new clients and also opportunistically getting after the market-based transaction that can help drive that through the relationship, so once you have the relationship, you are positioned to gain the ability to get to transaction.
We've also seen some additional work through some of the law firm clients, again in collaboration with our end market clients as well.
So, I would say that this year looking at the quarters to answer your question, I don’t think the run rate, growth rate is going to be sustained at 30 some odd percent, fair to say, but I do think that we are going to see mid-to-upper single digit growth for the year..
Great. And can you just remind us when you hired those GSOs, and are we seeing this quarter, are we seeing some of the benefit? And just a follow-up, I thought that your new adoptive analytics, if I’m saying that correctly, was going to actually hurt revenue.
Are we seeing impact from that? It was going to be sort of negative to your revenue but positive to your margin. Thanks..
In that really, Paul, I think we are seeing increasing number of clients who are just choosing that because it's a very cost-effective alternative for them, but it really is not having any kind of negative revenue impact that would be discernible at all.
The GSOs, to answer your other question is really, it’s been out there, coming up on two years when we initially started building this organization out, and I would say largely, it’s in place and been in place, and now trying to just run as a normal sales organization and having some success in the marketplace..
Thanks very much..
Our next question comes from the line of Tobey Sommer with SunTrust. Please proceed, sir..
Thank you.
On the legal front, what kind of cost savings does the new offering generate to a customer versus, either the prior methodology or I should say existing methodology or what you see out there among competitors, I just want to get a sense for the differential of what you are putting out in the market now?.
Tobey, it is Jim. I don't know that we know -- the second part of the question, I’m not sure that we know how it compares to the competitors. I know that it ends up -- I mean, the objective is really to minimize the number of documents that ultimately need to be reviewed. And so it's going to be the amount of savings.
This really translates into more of a cost efficiency issue and that is you are going to end up having to review last -- I’ve seen estimates anywhere from 10% to 25%.
But it’s going to vary dramatically again and I think in theory if you look at one isolated case, you might find that we would have lower revenue than we might otherwise have, had we done it the legacy route.
But the part that kind of [rucksack] (ph) is that you, as the market gets more comfortable with this service offerings that you end up getting more revenue and that was really our bet that over the long haul we’ll have more revenue because we would be more attractive in the marketplace because of its cost efficiency and with the yields thus better margins.
That’s playing out right now. I can’t say that’s played out because integrated analytics is still reasonably new, but I think it’s increasingly getting accepted in the market and that’s the trend that we expect to see..
Great.
Are there any other competitive marketplace of how much of a lead on just competitive products do you think you have?.
I don’t know. It is competitive. It’s a fast moving market. The only way we can really know the answer to that is to go back and kind of try to figure out why we’re winning certain jobs and losing others.
I think there are -- when we win work in the legal area, it’s a combination of, firstly, typically pretty complicated situations and so the client wants to know where have you done something similar before? So there is only certain number of firms that can pass that hurdle.
I think the next question then is how, what is the -- what kind of the cost estimate would we have for this particular engagement, and so we can provide them a variety of options for them to choose from.
And then third is something we tried to point out during the earlier part of my discussion was that increasingly we are seeing these issues of data security become very key. And when we -- some of the clients actually come, they were audit for processes to find out how well we are capable of ensuring their -- the security of their data.
And I think that really begins to separate the men from boys in that one and the sense that we really have a chance to put together a package of controls and cost efficiency and experience that I think is unparallel in the market. I think that’s why we are doing all right now.
And I think that’s going to continue to be our market differentiator in the future..
Thank you. Jim, in the education consulting practice, I understand that the cultural change that you described in the rallying the constituencies to some sort of consensus could take time.
Do you have an example of kind of early success at rallying those constituencies in the field like your learning how to more effectively do it to expedite the process of kind of green lighting projects?.
Yes. We do, we pay, I mean in a university environment when most important things that we do and we talk about it all the time is we’ve got to communicate with the constituents.
So even if senior leadership wants to go down a path because of the unique nature of higher education, if you don’t really have an ability to go and talk to the client, talk to the constituents and explain what’s been done to put it into some kind of perspective, you are likely to run into some problems.
There were some notable problems that are become very public in the last month that were fortunately not our work, but they were work of a -- some of our competitors in two very public situations one is Michigan, one in Texas where the faculty and the administrators railed up against the change that was being proposed.
And I won’t get into the merits of those situations other than to say, it’s just -- it really highlights the need for how sensitive these environments are and how difficult it sometimes be to make change.
And again the merits of the change, the need for it, all those things, the extent of the change, all are on a case by case basis, but it’s a tough issue, but it’s one that I think the industry is beginning to come around to, the question is how quickly and how aggressively you want to make change and that’s why this just takes a little bit of time..
Thanks. Just two quickly medical questions and then I will get back in the queue.
One in the healthcare segment, how many either customers or hospitals do you think you touched last year or do you expect to touch this year, just trying to get a reference point for how much of the market you come into contact with in a given year? And Mark, what kind of long-term goal could you have for the tax rate? Thanks..
Well, I will take the first one. I think we said we had some thing like a 150 college university clients, something like that in the first quarter -- for 2013, I think it was, yes. So that gives you some sense as to how many we’ve touched and probably a little bit more than that and just, but numbers were small.
But I would say 150 are so reasonably decent, some clients, some very large, some much smaller, but that gives you some sense there. In terms of hospitals my guess is this is probably the 50 to 60 range, I mean so in both pieces there is actually still a lot of room out there.
There is a lot more than 150 colleges and universities, and certainly a lot more than 50 to 60 hospitals and that voice given us comfort that there is room to move in terms of our market..
Tobey then to your second question on the effective tax rate over time, I think we are primarily U.S.-based company, and that’s going to have a starting at 35% and then everything else really is an adjustment off of that. The increase on top of that is largely driven by the net state tax rate, state rate net of tax federal benefit.
If we can get our rate around 40% over time, I think we’re going to be doing pretty well. And I think that there is ways to lower that even beyond that, but I think we will take a different mix of our U.S. versus international businesses to achieve it materially..
Thank you very much..
And our next question comes from the line of Jerry Herman with Stifel. Please proceed..
I got a new last name. It’s Jerry Herman from Stifel. Hey, guys, I was wondering if you could give us a help on the organic growth rate in the quarter.
You helped a little bit with the Blue Stone contribution, but how about Frankel in terms of what contribution that made?.
Yes, Jerry, directly Frankel, because it closed in January and we didn’t talk about weather having any impact on our business, but that one probably had a little bit slower start with the transition and the like. So it’s in the neighborhood of about $3 million in the quarter.
And so selectively with the Blue Stone, you are looking at about just under $10 million but 9.5..
Great. Very good. Helpful.
And then (indiscernible) you help us size that business, is it fair to assume that the number of professionals time the existing revenue for FTE in that business or should it vary from that sort of training?.
You know it’s a very different business than our existing healthcare practice. So their revenue per employee is probably in the mid 50% of what our averages in healthcare. So if you kind of look at it from that perspective, it will probably reach to about the approximate run rate for what that business is expected to do..
So a little bit more than half the annual production increase that’s the….
Yes. So as an example last year we averaged, about 346 was the average revenue per employee in healthcare. They are probably in the 55%, mid 50% range as an average..
Great. That’s very helpful.
I know you guys didn’t update your guidance on performance based fees, but is the pool of opportunity grown in that business this year?.
When you say pool of opportunity, Jerry, you mean specific performance based fees or…?.
Well, the assumption here is that you had some pool of business up for grabs and that you applied a success rate or probability to that pool to come up with your guidance.
So I guess the question is, has the pool enlarged?.
We actually don’t think about our performance-based fees really in that context. It’s really more looking at the pipeline and the mix of engagements and having some set of expectations at how much of that will end up resulting in there.
We said over time it tends to vary in a certain range, but we’ve examples where we’ve had large engagements where we’ve had complete [tax] (ph) fee and we’ve had other engagements that are large and have been primarily performance-based fees. It just really is dependent on the risk profile that the client wants..
Gary, this is Jim.
I guess one thing I would add would be that I don’t know that the pool has changed I think the way you are looking at it, because there is -- at the beginning of the year, there is set of engagements we have at that time and ones that we project we might get during the course of the year and that gives us some sense in terms of how to begin to project performance-based fees and so that pool was formed the basis for our initial guidance for performance-based fees.
What’s happened in the first quarter which is similar to what happened in the fourth quarter is that for a number of the engagements that pool and that building more than we had originally thought.
And so that gives us a bump that we saw in the fourth quarter, we saw it again in the first quarter, but I think it largely is still reflective of the same pool.
The part that we don’t pull now is we’ve got some projections for work that we haven’t sold yet or looked at still you have the comment that’s the timing and size of those that gives us some pause about making a call and additional guidance at this stage of the year..
Great. That’s helpful. And Jim the question on how you are at, I mean your comments about your expectations that it should get better.
I wonder about the notion that state budgets have gotten better and endowment funds performed well, and in essence have to taken the pressure off in any way that would potentially delay the opportunity in that business?.
No, I actually don’t think. I think the pressure, I mean, we are seeing pressure at even some of the most prestigious places right now. I think the overall environment is increasingly difficult, then it’s increasingly difficult for a broader range of clients and we’ve typically served as well.
And so the issues, the solutions for the strategies for addressing those issues are complicated. And that’s the term I used before are increasingly invasive and that combination just picks some time to get the right environment with which to start to enact those things and that’s really what we are up against right now.
I just think that there are some real challenges out there. I’ve been involve with some of them. So I know exactly what’s going on and if you look at the nature of potential solutions are there, they are hard to enact, not just going to go back and look at that and say, okay, fine, lets go ahead and do it.
It take some time and I think that just we’re seeing right now. But I don’t think the budget cuts and everything else are probably going to lead to more work, not less would be my sense..
Great. Helpful. Thanks. I’ll turn it over..
(Operator Instructions) And then next question comes from the line of Randle Reece with Avondale Partners. Please proceed..
Hi. This is Randy. I just was wondering to understand, looking at the underlying billing rate in Healthcare. In past years, if you just extract the success-based fees, in past years that would have looked relatively weak in the first quarter because of the, the amount of assessments you did at relatively low rate and this year looked really good.
And I was wondering if there is anything I should understand about that?.
Randy, this is Jim. I think the only thing to understand is that, I think, there really is not any seasonality to our Healthcare results.
What really over the last three years appeared to be kind of what appeared to be some seasonal patterns developing, we always said, we’re just the way that the engagements were rolling out and that we now just happen to have a portfolio of engagements that have contributed strong third, fourth and in this case now first quarter results.
So it really is not at all seasonal and so that’s why it’s hard first to think about any kind of pattern in any quarter. Frankly, it's just a reflection of the engagements that we have at the time and the way those project rollout.
And we now are, as we said, when we issued year end results, we knew that the pattern was going to yield stronger performance-based fees in the first half of the year and that’s exactly what we are seeing. But I think there's no pattern to this at all and anything that looks like a pattern in the past, I think just really random..
Okay.
The -- with the increase in headcount in Healthcare in the first quarter, does that have any effect on what you’ll do the rest of the year?.
Well, the way we, Randy, the way we look at the headcount is we are always kind of trying to build up in contemplation of events that can occur in the rest of the year and beyond. And so I think, there is never a full match of headcount increases to growth rate, other than say that over a period of time they should be reasonably matched.
But you’re going to see at times sometimes that our run rate, our growth rate is higher than our hiring and other times, you’ll see the reverse. And I think it’s just again a pattern of where we’re at and kind of the way we begin to see things unfolding.
So, I think the growth rates that we’ve described this practice in the longer term, we still feel pretty comfortable in terms of mid to upper single digits..
All right. Very good. Thank you very much..
Our next question comes from the line of Joseph Foresi with Janney Montgomery Scott. Please proceed..
Hi. I was wondering if you could talk a little bit about and we’ve kind of ask this question in a number of different ways today.
What’s the pipeline in healthcare look like? In other words, you work through a little bit of it here quite earlier in the year, has it replenished, is it increasing and how do we think about the pipeline versus some of success fees and the obvious revenues in this quarter?.
Well, Joe, the pipeline remains strong. We don't quote the number of assessments that we’re doing.
But if you wind back to a year ago and you ask us, what did the pipeline look like in April of 2013? We would have told you it looks pretty strong and we look like we were probably angering towards some decent performance fees in the latter part of the year. And this year when we look at it, we feel pretty good about the pipeline.
We’ve got a strong number of assessments. We know that the opportunities that’s driving our market and driving our position in the market remains just as strong as it ever been. In fact, my opinion this is actually more acute up there right now in terms of the need for our services. So, I think, things are going.
You’re going to see an ebb and flow as we go through assessments and we've seen, there is a never a straight line and this year is not going to be an exception. But I think in general, we feel very good about the way the market shaping up. We feel very good about the growth and the kind of services that we have across our whole healthcare spectrum.
And probably most important, I think, we continue to provide a lot of very demonstrable value to our clients, which is driving our demand right now. So that’s probably the best I can say..
And without giving guidance because I know you’re updating it at the end of next quarter. But as we look at the performance-based fee trajectory going-forward, obviously it ticks down in the back half of the year.
But is it safe to say that as opposed to kind of a couple years ago, we don't see a dramatic shift because I remember, if we go back, what maybe one or two years ago, we saw -- has the lumpiness in that business at least smooth out and we won’t be expecting any kind of major drop-off in those fees?.
Yeah, Joe, the answer is no. They are completely lumpy. They’re going to continue to be lumpy and so really again it goes back to the mix of engagements that we have at any point in time. And so, I just want to be clear that’s likely to continue and just as Jim indicated there is really no pattern for it.
Our belief is that, at least as we look for the year, our $90 million to $100 million guidance range is pretty good. We think that more than likely it’s going to be front-end loaded by really the nature and timing of the engagements that we have this year compared to what it’s been in the last three years really.
And we don’t think that there are other -- any other long-term implications other than these engagements happen to fall in these two quarters and versus the second half of the prior two years..
And we’re at the point right now. There are so many variables that impact the amount of and timing of the performance-based fees. We even in 2013, I remember, we’re sitting there at the middle of December and we could add up $10 million or $15 million swinging either way in the fourth quarter or the first quarter.
And so we just don't want to get into the game of trying to project when they are coming because we have no control over them. So the way we respond to that is we just -- we get as much work as we can. And we’re trying to do best we can and what the cards fall would enable in terms of timing.
And we've been fortunate that the timing -- we’re less concerned about the timing and more concern as just meeting the standards that are we’re suppose to be doing. And there we’ve actually had some really good results. And I think that's what continues to strive our value and our repetition in the market..
Got it. In the Life Science business, I think you talked about a pickup in maybe the core business exiting the first quarter.
Is that sustainable at this point, I know obviously there’s an acquisition that’s going to help result but will cause their pickup and how sustainable do you think that is in the core business of course?.
Its really, Joe, as -- it really is just that we came up somewhat of a weaker second half and sort of pickup is really in relation to the lower run rate that we had at the back half of the year.
Really when you look at our Life Sciences business what we’re -- we are very bullish on it because we now have with The Frankel Group, a focus on really the C-Suite suite that we were not otherwise present in and so from the sales and marketing, and corporate strategy from business development whether it’s licensing.
We now have a complementary offering to already being in there from a compliance standpoint and some of the other sunshine Law reviews, other services that we continue to offer to more of the general counsel's office. So that combination just gives us a much more powerful alignment.
And again we’re delighted with the team that we picked up from the Frankel Group and think that combination just were well positioning with a hand for the year. .
Thank you..
Mr. Roth, we have concluded the allotted time for this call. I’d like to turn the conference back over to you sir..
Thank you very much for spending time with us this afternoon. We look forward to speaking with you again in July when we announce our second quarter results. Good evening..
That concludes today’s conference call. Thank you everyone for your participation..