Release Date: July 30, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Record revenues achieved in Q2 2024, driven by strong growth in healthcare and education segments.
- Adjusted EBITDA margin expanded to 15%, with adjusted EPS increasing by 20% over the previous high.
- Record cash flow generation in Q2 2024, enabling significant debt reduction and ongoing share repurchases.
- Healthcare segment revenues grew 9% year-over-year, driven by strong demand for digital performance improvement and strategy offerings.
- Education segment revenues increased by 11% year-over-year, with strong demand for strategy and operations and digital product offerings.
Negative Points
- Commercial segment revenues declined by 6% year-over-year due to softer demand for digital offerings.
- Healthcare organizations face mixed and highly competitive operating environments, with ongoing reimbursement challenges.
- Higher education institutions are dealing with complex challenges, including declining affordability and rising costs.
- Temporary softening of demand for digital offerings in the commercial segment due to macroeconomic and political uncertainties.
- Unallocated corporate expenses increased by $3.2 million, primarily due to higher software and data hosting expenses and compensation costs.
Q & A Highlights
Q: Mark, you're confident that the commercial weakness is temporary. What gives you that confidence, and over what timeframe do you expect this to play out? Also, will you slow headcount growth until budgets stabilize?
A: (C. Mark Hussey, CEO) The confidence comes from our pipeline. The size and engagement level of projects we're bidding on are at historic levels, indicating demand is there, but decision-making is delayed due to macroeconomic factors. We have tapped the brakes on headcount additions but see no long-term trajectory change.
Q: Can you outline segment-level expectations relative to the fourth-quarter call?
A: (John Kelly, CFO) For Healthcare, we expect full-year growth in the upper-single-digit to lower-double-digit range, with margins in the 25% to 27% range. Education is expected to grow in the low-double-digit range with margins of 24% to 26%. Commercial is now expected to be relatively flat year-over-year, with margins in the 21% to 23% range.
Q: What gives you the ability to raise the full-year margin outlook despite segment-level changes?
A: (John Kelly, CFO) Our team has managed expenses well, and lower-than-expected attrition has helped. We expect utilization to ramp up in the second half, which will be margin accretive. Additionally, the litigation settlement gain has positively impacted our full-year margin outlook.
Q: Can you achieve the mid-teens margin target for next year at the current revenue growth rate, or do you need revenue growth to accelerate?
A: (John Kelly, CFO) We don't need revenue to accelerate beyond this year's growth profile to achieve our margin targets. We have multiple levers, such as scaling SG&A, global delivery models, utilization, and pricing initiatives, which collectively support our margin goals.
Q: How are you seeing the spectrum of demand evolve in the healthcare portfolio?
A: (C. Mark Hussey, CEO) There's a mix of clients doing well and investing in growth areas like digital solutions and strategy, while others face financial challenges. Digital demand is particularly strong, and we see a balanced pipeline across performance improvement and digital offerings.
Q: Is headcount growth in digital and offshore operations tied to already secured sales or future prospects?
A: (John Kelly, CFO) Headcount growth, particularly in our managed services team in India, is tied to projects already sold. Our digital team also has strong utilization on ongoing projects.
Q: Can you discuss the interest expense for the second quarter and expectations for the next few quarters?
A: (John Kelly, CFO) The second quarter is our high watermark for interest expense due to annual incentive payouts. We expect debt paydown to continue, reducing interest expense to around $10 million per quarter in the second half of the year.
Q: What drives the expected sequential revenue growth in the commercial segment for the second half of 2024?
A: (John Kelly, CFO) The growth will be driven by pipeline conversions to backlog, both in digital and consulting services. We expect higher run rates on consulting projects and more digital sales conversions in the second half.
Q: What has trended better than expected in healthcare to increase the full-year growth outlook?
A: (John Kelly, CFO) Demand for performance improvement and digital services has been stronger than expected. Clients in stronger financial positions are investing more in digital, contributing to the improved outlook.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
