Huron Consulting Group (NASDAQ:HURN) Q3 2026 Earnings Call

0:00 Good afternoon and welcome to Huron Consulting Group's webcast to discuss financial results for the third quarter of 2026. Currently, all conference call lines are in listen-only mode. Later, we will conduct our question and answer session for 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.

0:55 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 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.

1:24 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 RVR, 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 three of our operating segments, and double digit percentage growth in both our consulting advantage services and our digital capabilities. AI continues to drive demand for our digital services. In the trailing six months of 2026, greater than 65% of our digital capability bookings involved direct AI scope or delivery that was significantly enabled by our AI tools.

2:17 And that was up from approximately 50% in the same period in 2025. Our third quarter results continue our strong multi-year 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 four-year RVR 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, while establishing a solid base for continued growth in 2027.

3:03 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, which was on top of 20% growth in Q3 2025 over Q3 of 2024. The increase in RVR in the quarter was driven by strong demand for our managed services, performance improvement, financial advisory, and digital offerings, as well as incremental RVR from our acquisitions. Excluding the impact of the acquisitions, organic RVR 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 costs and workforce pressures, evolving reimbursement models, and increasing expectations to improve access, outcomes, and the patient experience.

4:11 The healthcare industry is also preparing for the next phase of the OBDBA, which takes effect in 2027. and include 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 multi-year 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 as our clients build a more sustainable future for their organizations.

5:00 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. and hands through our acquisition of RelateCare earlier this year.

5:46 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.

6:32 Institutions are also grappling with the risks and opportunities resulting from rapid advances in AI across their workflows and their learning environments. Increasingly, these challenges require institutions to simultaneously rethink 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-enabled operations, 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 over decades provide Huron with a strong competitive advantage.

7:21 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 RVR grew 6% over the prior year quarter. The increase in RVR was driven by our Q3 2025 acquisition of Wilson Parable, 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.

8:14 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 segments. 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. Wilson Parable acquisition completed just over a year ago is a great example. Wilson Parable's expertise in driving performance improvement through managing the strategic and operational impact of complexity on businesses complements our strategy, financial advisory, and digital offerings.

9:01 Together, we're creating a strategy to execute value proposition to help our clients understand and reduce complexity that erodes value in their businesses. We've seen the benefits of this 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 a broader 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.

10:22 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?

10:36 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, 10Q, 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 nine gap measures and 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 one housekeeping item. Our healthcare segment results do include a full quarter of operating results from our acquisition of RelayCare, which closed in June of this year.

11:27 Now I'll share some of the key financial results from the third quarter. The 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 three operating segments, a double-digit percentage growth in both our consulting and managed services and our digital capabilities. That income for the third quarter of 2026 was $28.4 million, or $1.75 per diluted share, compared to net income of $30.4 million, or $1.71 per diluted share in the third quarter of 2025. As percentage of total revenues, net income decreased to 5.8% in the third quarter of 2026, compared to 6.9% in the third quarter of 2025.

12:28 Deluded earnings per share in the third quarter of 2026 reflects the non-cash credit loss recognized on our convertible debt investment in the third party, which had a $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 non-deductible 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 for 16% of RBR compared to $67.4 million in Q3, 2025 for 15.6% of RBR.

13:29 The 16% adjusted EBITDA margin is our highest quarterly adjusted EBITDA margin in the last eight years. The 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% 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 third quarter of 2025.

14:27 growing adjusted diluted earnings per share 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 from our acquisitions. RBR in the third quarter of 2026 included $16.7 million from our acquisitions of RelayCare and Axiom.

15:16 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 is primarily driven by an increase in total compensation expense as a percentage of RBR and includes the impact of the integration of RelayCare into our business. We have maintained strong margin performance in 2025 and into the first nine months of 2026, reflective of the highly disciplined execution delivered by our healthcare 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 for 6.6% compared to the third quarter of 2025.

16:11 The increase in RBR was entirely organic and driven by strong demand for our digital and managed services offering. The operating income margin for education increased to 29.1% for Q3 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. The 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.

17:03 The increase in RBR reflects $4.3 million of incremental RBR, primarily from our acquisition of Wilson Paramel, as well as strong demand for our strategy offering. Operating income margin for the commercial segment was 13.9% for Q3 of 2026, compared to 16.4% in the same quarter in 2025. The decrease was primarily driven by increases in performance bonus expense, 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.

17:53 These growth-oriented investments total $2.2 million or 2.5% of segment RBR per quarter. 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. Unallocated corporate expenses in the third quarter of 2026 included income of $200,000 compared to expense of $2.7 million in Q3 2025 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.

18:41 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 for 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 healthcare 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.

19:34 During the third quarter of 2026, we used $7.9 million to invest in capital expenditures inclusive of internally developed 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 excluding non-cash stock compensation. This update primarily reflects the timing of collections, including a revised payment schedule on a specific multi-year 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.

20:24 Our leverage ratio is defined in our senior bank agreement was 2.6 times adjusted EBITDA as of September 30th, 2026, compared to 2.8 times as of June 30th, 2026. We remain confident that we are on track to achieving a leverage ratio between 2 and 2.5 times by the end of 2026 in alignment with the capital allocation strategy outlined at our most recent investor day. Total debt as of September 30th, 2026 was $815 million, consisting entirely of our senior bank debt. We finished the quarter 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 of repurchases made during the quarter.

21:18 In the third quarter of 2026, we used $26.3 billion 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. The year-to-date repurchases represent 10% of our common stock outstanding as of December 31st, 2025. As of October 31st, 2026, $265.9 million remained available for share repurchases, inclusive of the $200 million increase authorized by our Board of Directors in October 2026.

22:05 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? Thank you. Ladies and gentlemen, if you have a question at this time, please press star 11 on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, you may do so by pressing star 11 again. One moment for our first question, please.

23:05 Our first question comes from the line of Andrew Nicholas of William Blair. Please go ahead, Andrew.

23:11 Hi, good afternoon. Appreciate you taking my questions. To start with the commercial, a little bit of a weaker quarter on an organic basis.

23:23 Could you unpack what the 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? Andrew, I can start with just the question about the growth rate per quarter. So from an organic perspective, consulting overall was up about 11%. We talked on the last call about 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 had a couple of large assignments 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.

24:31 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.

25:19 Yeah, let me add on your second part of your question, Andrew. I think these were not at all in response to anything in the quarter. In fact, you know, you turn the clock back a couple years at least, for the multi-year journey we've been building our commercial business into a much more, call it, industry-focused enablement on an end-to-end basis. And so, I mean, even turning back the clock to like Axia we did, which was more of the digital area, but more recently, to answer your question specifically, we have now gotten to the time where the capability across the businesses are 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. And so 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.

26:16 Very helpful. Thank you. And then you touched on 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 in general bookings are good, but any color there would be great. Yeah, Andrew, maybe I'll just start from an overall perspective, from an overall company-wide bookings perspective. for the trailing six-month period ended September 30th. 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 helps set the table for the next leg of growth as we start to think about 2027.

27:14 In terms of the areas, I would say that The majority of the booking 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 of 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 six months ended 930 versus a year ago.

28:06 And within there, I'd say it was pretty well balanced between the

28:13 Thank you very much. Thank you. Our next question comes from the line of Toby Sommer of Truist Securities. Your line is open, Toby.

28:32 Thank you.

28:33 I wanted to ask a question about healthcare. and PI specifically.

28:40 The order of the magnitude of change in terms of enrollment in insurance roles, the Affordable Care Act this year, that change 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

29:06 get a sense for what you may hear from them in the coming months when we turn the calendar to 27?

29:16 Toby, I think you could say next year we expect it to be harder because what you're going to see is a lot of that Medicaid work is going to come back in the form of unreimbursed care and you've got compounded by some of the ACA pressures that you've seen in terms of enrollment. I think it's been well I think until you really get into it and see the 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, you know, January 1. On managed services.

30:03 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 and rebadge their people and then execute under, call it, outcomes-based, performance-based contracts. But I would say an increasing number is on more 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 areas. and so I think there's quite a bit of adjacency that's still left 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 triage management are definitely areas that we see really good opportunities.

31:27 Last one 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 in broad strokes, please.

31:44 Yeah, Toby, this is John. I would say from our perspective, this has been one of the really great parts of our managed 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 above the digital offerings, which tend to blend a little bit lower. And when we first got into the managed services business at this point seven years ago, that wasn't the expectation. We actually, at that point, were thinking that the managed services business would be high growth, which it's proven to be, but that it would blend in at a lower margin rate. So it's been a really positive change for us. In terms of what has unlocked that margin growth, I think it's a few things. First and foremost, it's the outcomes-based approach that our teams take with our clients.

32:55 We're very focused on delivering key financial and operation metrics for our clients. And to the extent that we're successful in doing that, that creates opportunities 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've 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.

33:42 And of course we love the recurring nature. Yeah. Thank you very much. Thank you. Our next question comes from the line of Bill Sutherland of Stonex Financial. Please go ahead, Bill. Thank you.

34:01 Evening, guys. I can't help but notice the sequential trend in headcount, professional headcount in education down a bit in the nine months, and then a nice expansion in margin over the same three quarters. And I'm just wondering, about that relationship, or whether there's other factors, and also how you're thinking about headcount planning for education going forward.

34:37 Yeah, so this is, I'll touch on education. I think it's a broader comment, though, really, across the company, too. You're right, the education headcount was down. I think, generally speaking, you're looking sequentially excluding managed services Our headcount was roughly flat across the entire business. And, you know, 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.

35:18 but some of that is increased productivity from our teams too.

35:22 And I'd highlight a couple of different areas where we've seen that increased productivity on delivery of digital projects. I think that's a place where we've seen some fairly rapid advancement in terms of our efficiency on 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 two ingredients that drove our ability to both grow and to improve margins without necessarily adding the same amount of headcount.

36:09 I do think you'll see us continue to add headcount as we grow, but our expectation is We should be able to grow the top line if we start to think about our plans into next year at a faster pace than we're necessarily growing the headcount. Primarily due to some of these initiatives we have around driving increased productivity.

36:30 Got it. Let's go back to commercial for a second, thinking about what you said about the investments you're making that you expect will take commercial's 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 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 case that you're making for faster growth in 27.

37:20 Is that about the right way to think about it?

37:23 And I'd say, Bill, adding new pipeline as these leaders 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 and the other folks around understand the breadth of what our capabilities are. So there's always a slight delay between hitting the door on day one 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, industrial manufacturing, Each of these have lots of good, compelling opportunities, some in various parts of the business versus others.

38:16 To me, I think you may not see it as the end of Q3, but I certainly think coming into 2027, that's our expectation.

38:24 Okay. That makes sense. And then, if I could sneak one more in, I'm thinking about what your clients are kind of grappling with with adoption of different levels of AI for whatever projects they're putting out there or trying to move into. 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?

39:02 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 everyone was becoming aware of the rapid pace change with the technology and some clients just wanted to make sure that whatever path they were going down made sense in light of how the technology was evolving. I think as the year has progressed, a lot of the and all of those challenges that 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 of an approach of let's now start to chart the path forward.

39:56 They have increasing confidence about how some of these tools can be used to help drive outcomes. There's a greater repository 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 that our clients implement to take advantage of that AI, or whether it's working with some of the frontier firms to do more bestowed building out of bespoke building out of tools that sit on top of some of those platforms. We see it in both ways, depending on the client's preferences, but I think we see a shift towards more proactivity at this point versus maybe where we were a year ago.

40:47 Mm-hmm. Good. Okay. I'll go ahead, Phil.

40:51 Yeah, no, no, go ahead. I was going to just say, listen, I think the other thing we're seeing here is interesting traditional delivery of price where we've had strength is an example in the past, bringing in an AI component into what you're doing. And it really is, in many respects, automating and accelerating speed to value for clients in important areas of their business. And so you can imagine we've done a lot in enterprise performance management over the years. It's been a very important area that we have very good strength across the commercial businesses and the Thanks, guys. Appreciate it. Thank you. Once again, to ask a question, please press star 1-1 on your touchtone telephone.

42:01 Again, that's star 1-1 on your touchtone telephone to ask a question. Our next question comes from the line of Kevin Steinke of Barrington Research and Associates. Please go ahead, Kevin.

42:17 Great. Thank you. Just following up on the AI discussion, I'm wondering if You could possibly just give us a flavor as to some of the e-themes or use cases that your clients are looking to deploy AI for, maybe touching on each of the segments.

42:46 Yeah, absolutely. Let me start, again, just filling in what I just talked about from a commercial standpoint. certainly from the range of AI governance and just the oversight, just management of the strategy work is one that we see. But also then I would say when you look at it as an example, a specific application like one is building out a digital twin as an example to replicate a client's environment and being able to kind of model around various scenarios within their environment. Some of it's around the data and setting up The integration of how you, you know, kind of get your data in shape to take advantage of that as well. I'd say in education, it tends to be a little bit more operational focused right now.

43:33 And so, if you think about the implementation of ERP as an example, how do we bring either native capabilities or outside foundational elements to help them, you know, reduce costs and increase their effectiveness. And healthcare is a little bit all over the map. I mean, there's very strong demand in healthcare. you know ranging from strategy to use cases across both the you know the clinical and the administrative areas that can drive generally the themes around trying to generate returns. Okay, got it. Thank you.

44:12 And with regard to the 40% plus organic growth you've seen with healthcare managed services over the last few quarters here. I was just wondering how broad-based that's been from a client perspective. Are there a couple larger deployments that have been driving that, or is it broader than that? And also the same with regard to what you're seeing in the pipeline.

44:43 Kevin, it's broader than that. We certainly have had our fair share of significant new logos that we've been able to add with larger scope that we've been able to take care of. But when I look at the growth we've seen this year, I wouldn't characterize it at all as highly concentrated to any specific new client relationships. We've had some of those, but we've also had and a lot of our clients that we partner with are growing as well. And as they grow, we're helping them with larger and larger volumes. So you kind of put all those different dynamics together, growth at existing clients via adding new modules as well as just Partnering along with them is Agro, plus the adding of those new client relationships.

45:48 And I think increasingly, we're going to see the opportunity to, after our acquisition of RelayCare, to capture some synergies there as well in terms of clients that were RelayCare clients where we're now able to also help them with revenue cycle managed services or vice versa. Some of our managed services and consulting clients from a performance improvement perspective are very interested in the offerings of relay care. So I think that's another vector of growth that we're really just scratching the surface on right now.

46:22 Okay, that's helpful. Just lastly, with the midterm elections here, any particular themes that you're watching or your clients are watching? from a policy perspective. And if not, I mean, that's okay too. Just curious if there's anything on that front.

46:47 I would say, Kevin, there's an anticipation that even if there's a change in the party that's in charge of Congress, that the policies that have been put out there are largely kind of baked for where we are right now. So I think at least in the short term, there's nothing that really is going to you know, Beva Calvary coming to the rescue from where some of the clients are facing their challenges right now. No, certainly over time, I think it will depend on how things go, but you take a step back and effectively, you know, with the size of healthcare spending and the rate of increase, it is far beyond a political issue. It is really one that is, you know, kind of spans both sides of the political spectrum. And so in some respects, it doesn't matter because the ultimate drivers are More so just what are the real costs of delivering health care and all the access that goes along with it.

47:46 Right. Okay. Yeah, that makes sense. Well, thanks for taking the questions. Thank you. Our next question comes from the line of Steven Varhavtik of Wedbus Securities. Your line is open, Steven.

48:04 All right. Thanks, guys. Thanks for taking the time and appreciate you taking the questions. I kind of have a few topics that I want to talk on. So specifically for the demand drivers across all three segments, it seems like everything is sustainable and it's very durable, but they're kind of the same demand drivers that we've seen across the business over the past couple of quarters. Are you starting to see The demand accelerate for your services as we start to head into fiscal year 27 and as clients start to rethink their budgets or is it kind of the same demand profile across each business?

48:38 You know, Steven, if you go back, I mean, a really long time. So, I mean, if I just said in summary what's driving the business, it's constrained revenue in health care and education, whether it's from reimbursements that are under pressure or and other kind of funding that has been through the government through pressure on research funding. And at the same time, you've seen high cost inflation in general, both in many areas within healthcare, but also the investments that have been made by higher education over the years and their administrative programs and other things that have just driven an upside down relationship that is hard on profitability.

49:26 And so those are long-term kind of static trends. And that's why we feel like when we talk about our long-term growth outlook with 80% of our business being in health and education, those are very long-term kind of established drivers. It don't vary with the broader economic environment either. I think on the commercial side, it really depends on what area of the business, because it ranges from restructuring and turnaround capabilities, which have, you know, kind of a counter cyclical area, but then we also have more increasingly performance improvement, investing in digital technology, and that may be a little bit more industry specific over time. But yeah, I think 27 for that reason, you know, we feel like the outlook for a projection consistent with the financial objectives that we've outlined, you know, is very much our expectation.

50:18 It may be the couple of things I would add in agreement with what Mark's commentary would be. One, those same pressures that Mark talked about, that is a big catalyst for managed services offerings. That's another way that our clients engage with us to achieve some of those same objectives to help to offset some of that pressure that they're under. And then the other one would be within the digital side of our business. I think our clients are very eager to capture some of the returns on their investments from an AI perspective. And I think whether that's in the form of operating efficiencies, whether that's how do you use those tools to help drive growth in our clients' value propositions, I think that's another area where we see a lot of demand that's probably a new theme this year and then certainly in the next year versus You know, maybe a theme going back a couple of years.

51:19 So that's just an extra color there.

51:23 All right, got it. I appreciate that. And I kind of want to talk a little bit more about utilization because when we're looking at some of the utilization metrics across both the managed services and the consulting businesses, both of them are up pretty materially year over year. We're looking at the consulting businesses at 76% and digital at 81%. Do you think that that's going to be a sustainable cliff that you can continue to execute against or do you think that this was more so one time in nature and then it's going to start to return to the high 70s for digital and then closer to the mid to low 70s for consulting?

51:58 I think it is sustainable where it's at there, Steven. I wouldn't call in expectations that from those levels they saw in the third quarter that there's a lot of upward movement from there. But I think we've always said, look, that high 70s is a sweet spot. So I think there's a little bit of room on the consulting side. From a digital perspective, it was a little bit higher than that this quarter. But I mean, if you look at the trend now at this point, we've been able to sustain that for really the better part of the last two quarters. So I think the team is doing a great job kind of optimizing how they're delivering on projects. to really get us into that low 80% range. So I think we feel good about where we're at.

52:44 I wouldn't describe it as a one-time surge by any means, but it also is probably approaching the upper end of what we expect versus something that I would describe as having a lot of upward movement from that spot.

53:00 Okay, understood. And then last question from me, specifically on the cash flow guidance, because it was kind of a material downtick in the cash flow guidance to the $150 to $170 million for fiscal year 26. and then you also attributed to the collection specifically for some of the healthcare projects that are longer term. So do you expect this to just be a short-term impact or do you think that that's going to carry forward into fiscal year 27 where there might be some pressure on free cash flow going into next year?

53:32 No, I think it's just a timing impact. Everything that we described is all aligned with contractual terms. So it's not like seeing delinquency in payments or anything like that. I think when our healthcare business, particularly the performance improvement side of our healthcare business is performing strong, they tend to have a heavier weight towards performance-based fees. And those are great projects for us. They're great opportunities for us to partner with our clients to drive great outcomes. But you do make a working capital investment in those projects sometimes. I think the weighting of performance, all of those projects that have performance-based fee is towards the higher end for us this year.

54:20 So that's creating a little bit of a timing gap in terms of cash flow into next year. But I think we've seen this cycle before. So it's not something that gives us pause. It's just a dynamic that shifts cash from 2026 into 2027. All right. Understood.

54:40 Thank you so much. Thank you. Our next question comes from the line of Andrew Nicholas of William Blair. Your line is open, Andrew.

54:55 Hey, thanks for letting me get back in the queue here. Just one quick one, John. Just curious if you have any changes to segment level outlooks with just one quarter left. Wanted to make sure I asked that on the public call.

55:11 Thank you.

55:13 Andrew, no. No big changes. I'd say a little bit of extra color that I can give. I think, you know, guided to mid-teen percent full-year growth from a healthcare perspective, I think we're probably trending a little bit higher there in terms of the higher mid-teens. And I think our margin objectives that we put out there, that 30 to 32 percent, I think we feel comfortable that we're landing within that range. from an education perspective, the mid to upper single digit guide that we put, I think we're on track for that. From a margin perspective, I'd say if anything, we're up towards the upper end of that now, if not higher than that from a margin perspective. Commercial for the full year, we described as low teen.

55:59 That may end up being more in the low double digit percent range. And then from a margin perspective, it's probably trending to the low end of the guidance that we put out there, the 19 to 21%. but the net all that keeps us on track with our consolidated guidance.

56:19 Very helpful. Thank you. Thank you. Our next question comes from the line of Toby Sommer of Truist Securities. Please go ahead, Toby. Thank you.

56:36 Business focused on or exposed to performance fees. Does your commentary suggest that there's an outlook for an increased percentage of performance fees as we look at the 27? If you could frame that a little bit, that'd be helpful.

56:56 Yes, Toby. I would say I would expect it to be continued. The way we framed it before is oftentimes if you look back over history, about 20% of the healthcare segments revenue has been under performance-based fee contracts. An example year would be 2024. We saw that shift up pretty significantly to like the mid-20s percent range. and then it came back down in 2025 back towards the 20%. This year, it's another year we're shifting up towards the mid 20% range and I would say the indication as we now think about 2027, I don't know if I would call it higher than that at this point, but I think it feels to us that we would expect it to be consistently high like it was in 2026.

57:50 That's helpful.

57:53 Thank you. Thank you. Seeing no more questions in queue, I'd like to turn the call back to Mr. Hussey. Sir?

58:06 Well, thank you very much for spending time with us this afternoon. We look forward to speaking with you again in February when we announce our fourth quarter results. Have a good evening. That concludes today's conference call. Thank you, everyone, for your participation.