Huron Reports Strong 1Q Reflecting Strong Trend in the Business

Huron Consulting reported strong first-quarter results on Tuesday that reflected continued strong trends in the business. Revenue of $211 million exceeded our estimate by $23 million and adjusted EPS of $1.10 were almost double the consensus estimate of $0.60 (and our estimate of $0.65). We attribute the upside to three main factors: 1) contingent fees that were $9.4 million higher than expected (assuming an 90% flow-through for the quarter, this might have added $0.22 to EPS); 2) strong noncontingent fee growth in healthcare (revenue grew 27%, well above our estimate of 12%); and 3) 34% growth in legal, which was much better than our projection for 15% growth, due to strong growth in electronic discovery.

These factors were offset somewhat by a little weaker-than-expected performance in the education segment, which we estimate declined 10%-15% organically. Despite the significant outperformance in the first quarter, management maintained its revenue and adjusted EPS guidance of $3.00-$3.20 for 2014. Other than not expecting contingent fees to stay at current levels and normal volatility in the business, management said that there is no reason to expect its performance to fall off from here. Management also acknowledged that it will re-evaluate its guidance after its secondquarter results. This guidance naturally looks quite conservative, particularly given the acquisition of Vonlay, which was announced last week and is expected to close in mid- May (so it is not yet factored into guidance or our estimates).

We have said previously that we saw the potential for $0.15-$0.20 of upside relative to the midpoint of management’s guidance for this. Following these results, we see at least that much upside potential, if not a little more. We are increasing our 2014 adjusted EPS estimate to $3.20 ($3.15 previously) and our 2015 EPS estimate to $3.52 ($3.42 previously), both of which we believe remain conservative. Shares of Huron trade at 19.6 times our 2014 non-GAAP EPS estimate, which is roughly in line with the peer-group average of about 20 times (17 times excluding Exponent [EXPO $69.15; Market Perform]).

The company continues to generate strong free cash flow and trades at a trailing-12-months’ free cash flow yield of 8%. We expect continued strong earnings growth and upside to estimates at the company, so we continue to like to stock and reiterate our Outperform rating.