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Edited Transcript of NCI earnings conference call or presentation 20-Feb-18 3:00pm GMT

Q4 2017 Navigant Consulting Inc Earnings Call

CHICAGO Feb 28, 2018 (Thomson StreetEvents) -- Edited Transcript of Navigant Consulting Inc earnings conference call or presentation Tuesday, February 20, 2018 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Julie M. Howard

Navigant Consulting, Inc. - Chairman & CEO

* Kyle Bland

* Lee A. Spirer

Navigant Consulting, Inc. - Chief Growth & Transformation Officer and Executive VP

* Stephen R. Lieberman

Navigant Consulting, Inc. - Executive VP, CFO & Member of Executive Advisory Board

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Conference Call Participants

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* Kevin Mark Steinke

Barrington Research Associates, Inc., Research Division - MD

* Marc Frye Riddick

Sidoti & Company, LLC - Research Analyst

* Timothy John McHugh

William Blair & Company L.L.C., Research Division - Partner & Global Services Analyst

* Tobey O'Brien Sommer

SunTrust Robinson Humphrey, Inc., Research Division - MD

* William J. Dezellem

Tieton Capital Management, LLC - President, CIO, and Chief Compliance Officer

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Presentation

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Operator [1]

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Good morning, and welcome to Navigant's Fourth Quarter and Full Year 2017 Earnings Call. (Operator Instructions) This call is being recorded. If you have any objections, you may disconnect at this time.

I would like to introduce Kyle Bland, Director of Investor Relations. Mr. Bland, you may now begin.

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Kyle Bland, [2]

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Good morning, and thank you for joining us to discuss Navigant's fourth quarter and full year 2017 earnings results. We have posted our earnings release as well as supplemental information about the quarter on the Investor Relations section of our website. With me on the call is morning is Julie Howard, our Chairman and Chief Executive Officer; Stephen Lieberman, our Chief Financial Officer; and Lee Spirer, our Chief Growth and Transformation Officer.

Before I turn the call over to Julie, I would like to highlight the disclosure at the end of our earnings release for information about any forward-looking statements that may be made or discussed on this call. Please review this information and the reconciliations in the schedules attached to the press release, along with the risk factors included in our annual report for items which could affect the company's financial results and cause our actual results to differ materially from those contained in or implied by any forward-looking statements.

With that, I'll turn the call over to Julie.

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Julie M. Howard, Navigant Consulting, Inc. - Chairman & CEO [3]

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Thank you, Kyle. Good morning, and thank you for joining the call this morning.

We've got a full agenda of items to discuss with you this morning, including reflections on 2017 performance; a brief discussion on our long-term strategy, including providing increased visibility into the performance and expectations for our consulting versus non-consulting businesses; as well as a review of our outlook for 2018. At the conclusion of my remarks, Stephen's going to walk you through the details of our Q4 and full year performance by segment and provide even more color on our outlook for '18. We do look forward to our dialogue with all of you at the end of this call.

Let me start by acknowledging that 2017 was clearly a challenging year for Navigant. We didn't achieve either the revenue or profitability targets that we set out for the year. And while our results were largely a reflection of significant market challenges, we are certainly very disappointed with our outcomes nonetheless.

Throughout the year, the broad-based impact resulting from the change in administration in the U.S. as we've previously talked about and the related decline or delay in consulting spend as a result of policy changes, regulatory and compliance softening and general indecision on key policy issues impacting our industry sector, clients was really more pervasive and more profound than we anticipated. In some cases, we experienced a direct impact such as the lower spending from certain government clients that we saw in our Energy segment and, in other cases, it was more of an indirect impact such as the uncertainty facing major health systems related to indecision on the Affordable Care Act, which delayed decision-making on the timing and start-up of some large transformational engagements.

As we faced these market challenges, we were also executing on some major projects in 2017, including the ramp-up of the UAB engagement, which was our first comprehensive revenue cycle managed service client of significant scale; and the integration of Ecofys, which was our first major European-based acquisition. And while we are confident in the long-term value of both of these projects, the investment and internal resources that these projects required at the outset further impacted our ability to meet expectations.

In response to these challenges, we took several actions during the course of 2017 to improve our performance and will continue to do so. We aligned our cost base with revenue shortfalls, including eliminating over $20 million in annualized costs in the second half of 2017 versus the first half of '17 while also aggressively shifting resources from areas of lower to higher demand. At the same time, we also deliberately maintained a core base of expertise in anticipation of improving conditions for our services during 2018. We improved our working capital position by implementing new enhancements to our collections process and working through the growing pains of system enhancements. We have begun to see progress as our DSO decreased meaningfully by 9 days in fourth quarter of 2017 compared to the third quarter of 2017. Our most important goal, however, is to drive meaningful and sustainable improvement in our overall margin performance for the firm, but with specific focus on our non-consulting services, which has put a meaningful drag on our overall margins recently.

I'd like to provide some additional visibility on our performance in consulting versus non-consulting services. As you know, in recent years, we have begun reporting non-consulting RBR and headcount as supplemental information in a category called Technology, Data & Process or TD&P. This has allowed us to really highlight revenues that have non-people-based business drivers versus consulting and many of these revenues are more recurring in nature via longer-term contracts and subscriptions. We strongly believe that these offerings provide important value to our clients and added stability to our revenue base. There are a number of different services within the TD&P categorization, but it is predominantly our health care revenue cycle managed services business as well as legal technology services, notably including processing and hosting e-discovery engagements.

Overall, we do not expect the profitability of the services within the category, the TD&P category, to be of the same level as the consulting businesses, but rather consistent with market norm. However, there is certainly room for improvement from our current position. We do have margin improvement actions underway, including pivoting away from lower-margin processing and hosting e-discovery engagements, renegotiating nonprofitable contracts and pursuing scale within our managed services business.

Over the past 5 years, our consulting businesses have, on average, delivered a segment operating profit margin of around 35% to 36%, which we expect to continue. At the same time, our TD&P services have delivered in a range of 11% to 28%, with recent margin contributions in 2017 under significant pressure due in part to the slow market for our processing and hosting e-discovery services.

The market for e-discovery services, as many of you may know, predominantly in the processing and hosting space, has experienced significant changes in structure and technology, which have materially impacted the economics of operating in this market. In that context, our business as well as others has contracted and profitability for these services has declined [65%] over the last 3 years. In response, we are shifting our focus back to our roots in legal technology by focusing on strategic advisory and analytic services to our clients and partnering with high-quality third parties to meet the needs for the less profitable and commoditized processing and hosting e-discovery while still maintaining the capabilities to manage discovery workflow and complex data analysis. We are confident that this is the right strategy for our business going forward and will address our performance challenges in this area of the business.

Another major component within TD&P services, as I mentioned, is revenue cycle managed services. The strategic rationale for revenue cycle, which is connecting managed services to our health care consulting business, remains solid. Our clients are increasingly demanding advice that extends into solutions. This business provides for longer-term contracts and stability to our revenue stream and has potential to be a significant organic growth driver over time.

Today, however, we are not operating at the profitability level we aspire to. In some cases, that's as a result of the timing and sequencing in bringing on new clients and the related investment phase that we go through in doing so. In some cases, it's because we need to realize more scale and, in other cases, because we need to improve on our contracting and execution.

We do believe we can enjoy and achieve industry norm-like profitability in this business, but this will require both better execution and further scaling, which our team is critically focused on this year. Going forward, we will continue to provide more clarity on the operating margins of our consulting businesses versus the non-consulting services that we categorize as Technology, Data & Process so that you can better compare and assess our performance and actions over time.

Regardless, however, of the challenging market conditions we faced in 2017, we do remain enthusiastic and committed to the core strengths of our business and the success of our strategy, a strategy that's built on 3 core industry sectors, all of which are experiencing significant business risk and/or transformation, which is going to continue to drive demand for our highly technical and experience-based consulting services. We couple our expertise with investments in capabilities or solutions that help extend the depth and breadth of our relationships with client and are complementary to our core consulting offerings. These solution-based non-consulting offerings provide for more recurring-like revenue attributes, which will help smooth volatility. By continuing to execute this strategy, we believe we can leverage the strong relevancy of our service offerings across the end markets we serve and the positive employment brand we enjoy as we work to drive improved margins in those businesses that have fallen short of expectations to-date to deliver on our performance commitments to all of you on a more sustainable basis.

Finally, I want to take a moment to acknowledge the accomplishments and contributions of our people in 2017. Not only have they worked extremely hard to execute our strategy, address the headwinds facing our business and providing the highest level of quality service to our clients, but they have also dedicated time, talent and resources to make a positive impact on the communities in which we live and work.

During the year, we continued to advance our 1M x 2020 campaign, which is our mission to positively impact the lives of more than 1 million youth by 2020. Since its inception in 2011, we have reached over 500,000 children and young adults and we look forward to accelerating our contributions to our communities in 2018.

On that note, I'd like to turn to our 2018 outlook from a high level knowing that Stephen will cover more detail for all of you in a few moments. In short, our outlook for the year reflects very modest top line growth as we anticipate some of the demand headwinds from 2017 will linger into and through the first half of the year. We do expect to deliver improving margins as the year progresses as well as improved profitability and free cash flow resulting from the benefit of a lower corporate tax rate.

From a capital allocation standpoint, we continue to believe that a balanced capital allocation framework is the right approach for Navigant. This enables us to invest and expand our capabilities in areas where there is significant client demand, but also while allocating capital to return to our shareholders. Consistent with that approach, for 2018, we expect to return a significant amount of our free cash flow back to shareholders and are currently targeting at or above $50 million in share repurchases in 2018.

Beyond our specific financial targets, our plan to drive long-term shareholder value is simple. We're going to continue to deliver consulting services aligned with the growth drivers of the industry sectors we serve with margins meeting or exceeding our long-term targets and that of many peers. We're going to continue to pursue recurring revenue opportunities in end market adjacencies and focus on driving our TD&P margins to industry standard through greater scale and execution delivery. We're going to further develop our digital road map to better enable ourselves and our clients and we're going to execute and remain executing on our balanced capital allocation strategy, meeting the needs of both the business while also returning cash to shareholders. And finally, we're going to continue to utilize our platform and the generosity of the people at Navigant to make a difference in the communities where we work and live.

We remain confident in the long-term strategy and growth potential of our business and believe our capabilities are uniquely aligned with the significant paradigm shifts occurring in our key end markets. 2018 is clearly an important year as we focus on leveraging our existing capabilities and relationships to drive value for clients while also strategically focusing on improving profitability and delivering on our commitment to shareholders.

Before I turn the call over to Stephen, I do want to take a moment to address the recent comments and actions by Engine Capital. We have been in dialogue with the principals of Engine Capital over the last few months and have appreciated their feedback. Many of the actions that they have called for are initiatives that are not new to us, as we have previously identified and shared on other calls and discussed publicly and certainly communicated to Engine Capital.

Given our attempt to engage in a constructive dialogue, we are disappointed they chose to nominate their own slate of directors. We believe our board has a proven track record and commitment to attracting and retaining highly qualified directors. The fact that we have appointed 4 new very qualified directors in the past 5 years is a clear reflection of that effort.

As previously disclosed, the board will, however, evaluate Engine's nominees and make a recommendation to shareholders in due course. In the meantime, our focus is really on executing against the initiatives we've outlined today to deliver improved performance and shareholder value.

And with that, I'm going to turn the call over to Stephen to discuss the fourth quarter and full year in more detail as well as our 2018 outlook. And I look forward to our continued dialogue in Q&A. Stephen?

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Stephen R. Lieberman, Navigant Consulting, Inc. - Executive VP, CFO & Member of Executive Advisory Board [4]

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Thank you, Julie, and good morning, everyone.

As Julie mentioned, our financial results for the fourth quarter and full year 2017 missed our expectations as demand-side headwinds impacted our performance throughout the year. For the fourth quarter of 2017, total revenue and RBR of $255.4 million and $230.7 million, respectively, were both down 4% when compared to the fourth quarter of 2016.

The quarter was significantly impacted by performance in our Healthcare segment, which finished below our expectations due to unanticipated delays in the timing of a couple of large engagements as well as smaller-than-expected scope of new project work. To be clear, while discussions of potential changes to the Affordable Care Act continue to elongate client purchasing decisions, this does not shift our long-term demand expectations in the health care markets we serve. For the remainder of the portfolio, we generally performed close to our revenue expectations for the quarter.

Segment operating profit for the fourth quarter of 2017 of $73.3 million was down 7% from a strong prior year period as lower cost of services helped partially offset the decreased revenue. Fourth quarter 2017 general and administrative expense of $39.5 million was down 7% compared to the same prior year period driven by lower incentive compensation and the cost management actions taken earlier in 2017. Fourth quarter 2017 adjusted EBITDA was $32.3 million, down from $34.8 million during the same period of 2016, reflecting the lower revenue just mentioned.

Moving down the income statement. GAAP net income for the fourth quarter of 2017 increased to $43.1 million or $0.91 per share, up $29.6 million compared to the same prior year period. The increase was driven by a onetime $29.7 million benefit in 2017 to reflect the impact of the Tax Cut and Jobs Act, which lowered deferred tax liability on our balance sheet. Important to note that as a full tax payer, the lower federal rate going forward will contribute to our cash flow and help fund strategic investments while also providing incremental capital available to return to shareholders, bolstering our investor value proposition going forward. I will touch on this more when we go through our 2018 guidance. On adjusted EPS basis, our fourth quarter 2017 results of $0.29 per share were down $0.01 from the fourth quarter of 2016.

Turning to our full year 2017, full revenue of $1,032,300,000 and RBR of $939.6 million were both comparable to full year 2016. On the positive side and despite the weaker fourth quarter, we saw full year growth in our Healthcare segment driven by solid growth in our revenue cycle managed services business as well as our life sciences practice, which benefited from a 21-year high in drug approvals from the FDA. Additionally, revenue benefit from the full year contribution of our November 2016 Ecofys acquisition helping drive higher revenue within our Energy segment.

On the flip side, RBR for our Financial Services Advisory and Compliance segment, after a very strong 2016, declined 8% in 2017. The year started slowly as certain large engagements ended in late 2016 and we were further impacted by regulatory uncertainty of clients that utilized our consumer financial services expertise. Stepping back and looking at 2016 and 2017 combined, we have achieved mid-single-digit annualized RBR growth in this segment over the 2-year period, which is consistent with our long-term growth expectations.

Our Disputes, Forensic & Legal Technology or DFLT segment was impacted by lower processing and hosting volumes and an ongoing challenging pricing environment in our legal technology solutions business. This weaker performance in our LTS practice more than offset modest growth from the balance of the segment. Additionally, decreased activity from our U.S. Federal Government engagements impacted the results of our Energy segment.

From a segment operating profit perspective, our full year 2017 results of $296.3 million was down 7%, primarily driven by increased headcount in our health care revenue cycle's managed services business as well as additional costs absorbed from our Ecofys acquisition.

General and administrative costs of $166.9 million was down $2 million from full year 2016 as higher facilities costs and assumptions to Ecofys G&A were offset by lower compensation expenses and other cost management initiatives. G&A as a percentage of RBR was 17.8%, representing a 20 basis point improvement compared to 2016.

Adjusted EBITDA for full year 2017 was $125.8 million, which was down 12% compared to full year 2016 due to lower segment operating profit.

On a full year basis, net income increased $16.9 million to $75 million or $1.55 per share as lower operating profitability was more than offset by the previously mentioned impact of Tax Reform. Full year 2017 adjusted EPS was $1.09 per share, which excludes the Tax Reform benefit.

Turning to our balance sheet. Our focus and efforts on reducing days sales outstanding or DSO are paying off as our DSO of 85 days for the fourth quarter of 2017 decreased 9 days compared to the third quarter of 2017. Some of this improvement is normal seasonality, but we feel we have made progress in the quarter as we've completed the integration of our new ERP billing system and we continue our efforts in 2018.

Our leverage ratio finished 2017 at 1.06x trailing 12-month adjusted EBITDA compared to 1.38x at the end of the third quarter of 2017 and 0.95x at the end of 2016.

Turning to cash flow. We generated free cash flow of $65.7 million in 2017, which is $13.1 million lower than full year 2016, driven primarily by higher capital expenditures in the current year period. We spent $38.7 million on CapEx in full year 2017, which was $10 million higher than 2016, primarily driven by the relocation of 2 of our largest offices, Chicago and San Francisco. We anticipate CapEx will return to more normalized levels in 2018.

From a capital return perspective, we continue to execute our balanced approach to capital allocation and repurchased 838,000 shares of our common stock for $15 million in the fourth quarter of 2017. This pushed our total repurchases for the full year to 2.3 million shares or $43 million of capital return to shareholders, a 72% increase compared to full year 2016.

Turning to our guidance for 2018. As Julie mentioned, our long-term growth outlook remains unchanged. Our near-term outlook for 2018 anticipates that headwinds from 2017 will continue to impact results in certain areas of our business.

With that, we anticipate modest top line growth for full year 2018 with RBR guidance range between $940 million to $975 million. Like most years, we anticipate sequential improvement in the performance as the year progresses with first quarter generally comparable to fourth quarter of 2017 as our health care backlog rebuilds.

Our guidance for adjusted EBITDA is between $125 million and $137 million. The midpoint of our RBR and adjusted EBITDA range equates to an adjusted EBITDA margin improvement of approximately 30 basis points versus 2017, reflecting ongoing cost management actions. We anticipate that this adjusted EBITDA improvement, coupled with the benefit of lower corporate tax rates, will improve our profitability in 2018 and beyond.

For 2018 specifically, our outlook for adjusted EPS is the range of $1.26 and $1.44 per share, a 24% improvement over 2017 at the midpoint.

From a cash flow perspective, we expect lower CapEx in 2018 as our real estate investments are closer to historical levels. We are guiding to approximately $25 million of CapEx or 2.6% of RBR at the midpoint. With a lower CapEx and improved profitability, we anticipate free cash flow for 2018 in the range of $75 million to $90 million, a 26% improvement over 2017 at the midpoint.

Regarding the impact of U.S. Tax Reform, there are significant benefits to Navigant and our shareholders. As a profitable business with the majority of our earnings in the United States, we have historically been a full rate taxpayer. Going forward, we anticipate an effective tax rate of around 30%, down from our historical rate of around 39%. The new lower tax rate will support our ability to fund strategic investments and return capital to shareholders. As Julie mentioned for 2018 specifically, we are currently targeting to be at or above $50 million of share repurchases for the year, representing the majority of our free cash flow.

From a balance sheet perspective, I do want to point out that our leverage, as in years in the past, will increase during the first quarter from our year-end level due to normal seasonality.

Focusing in on the demand outlook for each of our segments. In Healthcare, we anticipate low single-digit growth for 2018, with the first quarter being the most challenged. While the need for hospitals and health systems to make substantive strategic shifts has never been stronger, we anticipate that prolonged sales cycle for large transformational engagements we experienced in 2017 will continue to dampen revenue growth in this segment through the first half of the year. The need is there. It's a matter of timing and we remain confident in our ability to capture growth over the long term. We continue to see strong demand for our expertise and product commercialization and reimbursement strategies underpinned by a robust biotech development pipeline from our pharmaceutical and medical device clients. The recent addition of San Francisco-based Quorum Consulting has furthered our expertise in this growing practice.

On the Healthcare BPMS side, we expect to improve margins in 2018 as we gain consistency, modify or discontinue nonprofitable contracts and optimize the performance on the UAB engagement. We do expect slower growth in this area as we overcome the loss of 2 customers, one driven by a bankruptcy which occurred late in the third quarter of 2017 and the other where we decided not to renew our contract as we couldn't agree on profitable renewal terms. I will note that although we continue active discussions, our outlook does not assume any new transformational BPMS engagements for 2018.

Switching to our Energy segment. In general, the energy sector continues to have significant opportunities that are aligned with our deep expertise in energy efficiency, alternative generation strategies and good modernization. For 2018, we anticipate that growth from our U.S. commercial clients and increased sales penetration with utility customers in Europe will help drive segment performance. However, given continued uncertainty surrounding government engagements in the U.S. and Europe, we have assumed low single-digit growth for this segment in 2018.

In our Financial Services Advisory and Compliance segment, after contracting in 2017, we anticipate returning to our long-term growth expectations in 2018. We entered the year with good momentum and solid pipeline of opportunities, particularly in anti-money laundering and sanctions engagements for our core long-standing customers. With the change in regulatory focus shifting priorities for our financial services customers, we continue to pivot our personnel where there is demand and feel good about our pipeline of opportunities in 2018.

Lastly, in our DFLT segment, we expect our 2017 hires will help drive growth in key service lines, including continued growth and expansion in our global construction and cybersecurity practices. As Julie mentioned, in our legal technology solutions practice, while we are confident we have the right strategy in place to meet our clients' needs and improve performance by shifting away from commoditized processing and hosting engagements, it will take some time to execute. While we have healthy growth in many areas of this segment, our guidance assumes modest RBR growth in DFLT for 2018 as we shift our focus on legal technology solutions.

So to wrap up, we remain confident in our long-term growth opportunities. In the short term, we'll focus on managing our cost base in line with our revenue expectations to improve profitability and cash flow and position the enterprise for long-term success.

With that, I will open up the call to Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will be from Mr. Tim McHugh of William Blair.

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Timothy John McHugh, William Blair & Company L.L.C., Research Division - Partner & Global Services Analyst [2]

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Start off on health care. Can you, I guess, elaborate on how the fourth quarter and the markets developed here? Just -- I think in the last call you were emphasizing a very strong pipeline that you expected to close, but then obviously some things got pushed out then -- but you also made a comment about having to rebuild the pipeline now. So are you -- are things being pushed out? Or are they going away? Are you -- you talk about win rates. I guess, just maybe elaborate on what you're seeing.

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Julie M. Howard, Navigant Consulting, Inc. - Chairman & CEO [3]

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Yes. I mean, it's just a combination of probably all of the above. Certainly, our big surprise in the fourth quarter was the performance of health care. Some of that is the extension of engagements in our pipeline; some of it is winning work, but it becoming smaller in nature; and some of it is rebuilding our backlog. So it's a combination of all 3, which is why we have taken a conservative position as we entered the year on this business. So what more I can say about it. It was as much a surprise to us as it is to you, but we know that we're well positioned in health care. We've got really strong expertise, strong positioning with all of our clients. We think the market remains robust and the issues that are facing, particularly provider environment, are substantial. So we have a lot of confidence in the business, but clearly, we have to work our way through this period of time.

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Stephen R. Lieberman, Navigant Consulting, Inc. - Executive VP, CFO & Member of Executive Advisory Board [4]

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Yes, but the only thing I would add, Tim, is I don't think it's a pipeline issue. I think it was a backlog issue and we still feel very good about the longer term prospects on the pipeline. It's just a matter of getting those converted into backlog.

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Timothy John McHugh, William Blair & Company L.L.C., Research Division - Partner & Global Services Analyst [5]

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I guess, that kind of belies the question, so the difference between pipeline and backlog. I guess, so there's opportunities there, but they're not converting the way you would have thought. I guess, that's just kind of the underlying question here. Are you confident? You said you were confident in the positioning and so forth that there's nothing -- basically, this is just a demand -- market demand issue and nothing about how you're positioned or how the market needs are evolving, anything like that.

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Julie M. Howard, Navigant Consulting, Inc. - Chairman & CEO [6]

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We do not. We do not believe this is about our capabilities, our expertise or our strategy of how we go to market with our clients. We really believe this is a market demand issue. Like we said, some of the work has not materialized to the scope -- operate off the bat that we would have anticipated. So at this point and looking forward, we are confident that our Healthcare business remains one of the top health care consultancies certainly domestically and that we have plenty of opportunity going forward, Tim.

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Timothy John McHugh, William Blair & Company L.L.C., Research Division - Partner & Global Services Analyst [7]

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Okay. And just to follow-up on the comment about the profitability of the Technology, Data & Processing revenue. The math -- the quick math I ran implied you were basically -- in 2016, you were probably towards the upper end of that range that you gave. In 2017, you were at the lower end of the range. I know you said that's a 3-year numbers, but if I do the quick math, is that right in thinking?

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Julie M. Howard, Navigant Consulting, Inc. - Chairman & CEO [8]

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You're generally -- yes, you're generally in the right direction. And as we've said, it's a combination of -- a majority of 2 components, managed services and hosting and processing. And we had significant declines in profitability of hosting and processing projects because that's becoming a very commoditized business and something we're going to pivot away from as a result of that. And then, managed services is a combination of eliminating some unprofitable contracts, onboarding of UAB. I mean, we're -- we clearly are not performing at the level of margin contribution we want to be in the non-consulting services side of the business. On the consulting side of the services business, I think if you do the math as well, you'll know that we're at or above many of our peers from a profitability standpoint.

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Timothy John McHugh, William Blair & Company L.L.C., Research Division - Partner & Global Services Analyst [9]

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So what is a reasonable profit outlook then for that Technology, Data & Processing? I know you said the most recent run rates are not where you want to be, but what is the target?

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Stephen R. Lieberman, Navigant Consulting, Inc. - Executive VP, CFO & Member of Executive Advisory Board [10]

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Yes. So it's -- let me make a couple of comments, which I would characterize more as observations relative to the industry because we've talked a little bit about that in particular in our managed services business. If you look at businesses that are scale of kind of below $500 million out there, you'll see adjusted EBITDA margins in the high single-digits to low double-digit type of a range. And so I would kind of point you in that direction as being what we kind of serve in the marketplace.

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Timothy John McHugh, William Blair & Company L.L.C., Research Division - Partner & Global Services Analyst [11]

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So are you trying to say -- obviously that's, I guess, technically lower even then you're at now. Are you -- is that post-corporate expense?

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Stephen R. Lieberman, Navigant Consulting, Inc. - Executive VP, CFO & Member of Executive Advisory Board [12]

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No, that's an EBIT. Those are adjusted EBIT numbers, not the segment operating profit numbers that we mentioned before, and that's on the managed services side of the business. I would say the other part of the business as we pivot to more higher-end type services, more consulting-oriented services, you would expect kind of we want to get that back more towards our -- I guess, just some of our general consulting business (inaudible).

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Timothy John McHugh, William Blair & Company L.L.C., Research Division - Partner & Global Services Analyst [13]

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Okay. And I guess, Julie, just from a strategy perspective, I know this has been a big part of kind of -- the focus the last few years is growing this revenue. I mean -- and I understand the value of broadening relationships and the recurring type of nature of the revenue. But when you think about the returns that you're getting from this, do you start to question at all whether it's, I guess, meeting the threshold that you want, I guess, after you fully burdened it with corporate and everything? Just talk about how you're thinking about that from a long-term perspective.

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Julie M. Howard, Navigant Consulting, Inc. - Chairman & CEO [14]

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So one of the ways that we've thought about this, the comparison between consulting and non-consulting, is we have anticipated a much higher organic growth rate out of the non-consulting services side of the business. We do think that it's a great adjacency to consulting. It extends our relationships and builds deeper relationships with our clients. And clients are increasingly asking for solutions and demanding solutions as opposed to just simply advisory services. So we think we're also meeting the need. Are we happy with the returns where we're at yet? No, clearly not. And as we're talking about in this quarter and into 2017, we've had some margin performance challenges. And so we are laser-like focused on that here for 2018 in putting those businesses on the right course to realize let's get to market norm to start, but I don't want to -- people not realize that our consulting businesses have been performing at or above. I think the margins are expected in the marketplace, so that's not our issue at the moment. And so we'll see how we do here. In 2018, I think it's going to be a real watershed pivotal year for us, Jim, as it relates to getting that business to perform at the margin contribution we would anticipate.

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Operator [15]

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Our next question will be from Mr. Kevin Steinke of Barrington Research.

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Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [16]

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So following up on the health care. Yes, just following up on the health care discussion a little bit more here. You had mentioned in your press release unanticipated delays in the timing of certain engagements in health care. It sounds like from your outlook for the first half of '18 in health care that maybe you don't necessarily expect those projects to start up anytime soon, the ones that were delayed. Is that fair to say?

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Julie M. Howard, Navigant Consulting, Inc. - Chairman & CEO [17]

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I think that's a fair representation. Yes.

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Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [18]

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Okay. Also following up on the business process revenue cycle side of things in health care, so the contracts, I guess, that aren't up to your profitability standards, are those mostly legacy deals that you inherited? And how many of those are out there that aren't meeting your standards?

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Stephen R. Lieberman, Navigant Consulting, Inc. - Executive VP, CFO & Member of Executive Advisory Board [19]

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Yes. I would say that some of them were certainly legacy-oriented, but there's a little bit of a mix there, but we're closely looking at those contracts. And as those contracts come up for renewal, we're looking at the profitability that we believe we can achieve. And as I indicated in my prepared remarks, we're willing to walk away from contracts that don't meet our profitability thresholds.

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Julie M. Howard, Navigant Consulting, Inc. - Chairman & CEO [20]

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The other piece, Kevin, and I don't want people to lose sight of it is onboarding a large CRCM last year. We've talked repeatedly about how you make the investments first as you're onboarding. In that investment phase, very little profitability. So that was another drag, if you will, on the margins for 2017.

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Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [21]

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Okay. On those contracts that are underperforming, do you have any expectation or -- that you might be able to renegotiate some of those favorably and hopefully keep the business around?

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Stephen R. Lieberman, Navigant Consulting, Inc. - Executive VP, CFO & Member of Executive Advisory Board [22]

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Yes. In many cases, we do. I mean, when we're providing good service and quality to the client and they value what we're providing, we feel that we are in a position to have that type of dialogue. Yes.

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Lee A. Spirer, Navigant Consulting, Inc. - Chief Growth & Transformation Officer and Executive VP [23]

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Kevin, this is Lee. I think in the context of renegotiating, (inaudible) outsourcing deals as partnerships in a lot of ways and renegotiating often lands us in a place where we get better outcome both for the client and for us. So that is something that we've actively been doing in that business.

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Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [24]

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Okay. That's helpful. And also you mentioned that there's going to be a really strong focus on improving the scale of the revenue cycle management business in health care in 2018. Is achieving that scale just simply a matter of signing more deals and more revenue? Or what else can you do there to get that scale?

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Julie M. Howard, Navigant Consulting, Inc. - Chairman & CEO [25]

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That would be the most important thing is to undertake other large CRCM engagements on behalf of large health systems. And as we've always said that we are in pursuit. You just have -- we've talked about a very, very, very long sales cycle, a number of hoops and senior approvals to undertake -- senior level approvals, board level.

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Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [26]

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Okay. Okay. That's helpful. Just switching gears to energy here. You continue to mention the depressed demand from the federal government. Is that lower demand kind of staying at the same levels you've seen? Has it gotten worse? A little better? What's the outlook at least on the federal government side of things and energy?

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Stephen R. Lieberman, Navigant Consulting, Inc. - Executive VP, CFO & Member of Executive Advisory Board [27]

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Yes. Let's say, for right now, it's consistent. I think it's a variable that's out there if there are future changes in the future, but I think the lower levels that we were seeing for the later part of last year are continuing at those levels.

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Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [28]

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Okay. In financial services, the short-term delays with certain projects, are those projects that you expect to start up relatively quickly? Or are those kind of may be indefinitely postponed?

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Julie M. Howard, Navigant Consulting, Inc. - Chairman & CEO [29]

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I think the short-term delays you might have been referring to reflect here in 2017. I'm not exactly sure, but we -- in the early part of last year, the regulatory and compliance environment kind of suddenly shifted, particularly in consumer finance and related to clients matters. We've pivoted our team. One of the things we pride ourselves on is determining when it's time to be nimble and pivot and think about new services that we want to provide to our clients, but that's what that team has done. And that, in addition to a robust AML sanctions environment, leads us to have good perspectives on return to long-term growth rates for that segment in '18.

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Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [30]

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Okay. Yes. I was specifically referring to there was a specific comment in the press release in the Financial Services segment write-up that RBR was driven by short-term delays of certain engagements, but -- and then it said, more than offset by improving demand from non-regular to -- for non-regulatory-related engagements. But anyway, just my second question on that segment was about the non-regulatory-related engagements and what specifically that is and where you're seeing demand in that area?

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Julie M. Howard, Navigant Consulting, Inc. - Chairman & CEO [31]

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So this is doing more work for financial services clients as it relates to their technology and operational challenges as opposed to just regulatory and compliance, which is, to some degree, going back to some of the bread and butter of our financial services work many years ago before the credit crisis and then the significant focus on regulatory enforcement and tightening within financial services. So it would be more operational and technology strategy types of engagements.

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Operator [32]

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Our next question will be from Mr. Bill Dezellem of Tieton Capital.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO, and Chief Compliance Officer [33]

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A group of questions. First of all, relative to the Healthcare segment, are you feeling at all as though there is a lack of execution within the ranks that's leading to some of these -- either wins not happening or -- at a smaller scope than what you had originally anticipated or is there something else?

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Julie M. Howard, Navigant Consulting, Inc. - Chairman & CEO [34]

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You mean or market execution within our own internal ranks, Bill?

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO, and Chief Compliance Officer [35]

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Yes.

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Julie M. Howard, Navigant Consulting, Inc. - Chairman & CEO [36]

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No. That would be a resounding no. I think, as I mentioned on our call previously, if you think back over the last 3 years of performance in this business, we've had extraordinary goals, double digit, 20%. We've had a lot of major significant strategic assignments for clients, so we grew fast. And people worked incredibly hard and it's hard to sell and deliver perfectly all the time. So I think this is a combination of, like I said, elongated starting of pipeline that we have. I don't think it's an execution issue at all, but it's a matter of keeping up. And that's hard to do year after year after year with those growth rates. And I think the business needs the opportunity to catch up to hirer -- make sure that we have all the appropriate skills and capabilities and ensure that we have kind of the right pipeline for continued growth going forward.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO, and Chief Compliance Officer [37]

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And then, would you please discuss in some more detail the -- some of your wins that did not start at the scope that you had anticipated and just what led to that phenomenon?

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Julie M. Howard, Navigant Consulting, Inc. - Chairman & CEO [38]

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Sometimes, Bill, if we're talking about within health care, sometimes you anticipate assessments of health systems to be of a certain size and nature and that there will be different scope and stages to those engagements and some of that didn't occur. M&A-related matters might change the scope and breadth of engagements and there's a variety of things that cause clients to either expand or control the work that we do. And the one thing we think we always have to remember is client's in charge and they set and determine the scope of our engagements. We try to stay as closely aligned with them and communicating often to understand when and where we have those challenges. And clearly, that has been a situation that we've dealt with all year in our Healthcare business.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO, and Chief Compliance Officer [39]

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And then, the University in Alabama...

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Julie M. Howard, Navigant Consulting, Inc. - Chairman & CEO [40]

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UAB? Yes, UAB.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO, and Chief Compliance Officer [41]

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Is that (inaudible) process now fully complete?

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Julie M. Howard, Navigant Consulting, Inc. - Chairman & CEO [42]

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It is, yes.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO, and Chief Compliance Officer [43]

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And then, lastly, G&A was down, gosh, almost $5 million sequentially in Q4 versus Q3. Would you discuss that reduction in G&A, please?

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Stephen R. Lieberman, Navigant Consulting, Inc. - Executive VP, CFO & Member of Executive Advisory Board [44]

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Yes, I'd be happy to. So it's -- we were really focused on our cost management and we talked about it through the course of the year. So if you look at really every quarter from the beginning of the year, you'll see G&A continue to step down and this is really about cost management and trying to get our costs aligned with -- as efficient as we can as a company, but also in line with our outlook that we had on revenue, trying to make sure that we're trying to improve the profitability of the company.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO, and Chief Compliance Officer [45]

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So were there any aberrations in the fourth quarter? Or is that a real solid number for us to be thinking about on a go-forward basis, understanding the first quarter there's a bump-up for payroll taxes?

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Stephen R. Lieberman, Navigant Consulting, Inc. - Executive VP, CFO & Member of Executive Advisory Board [46]

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Yes. Let me also just mention that what I mentioned as sequential moving down, that's G&A excluding bad debt because that's a kind of a unique number that moves around. I would say the other item that changes is compensation and incentive compensation. So I think that that's another variable that played into it. But I would characterize the year as very good cost management and trying to improve our efficiency and delivery of internal services.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO, and Chief Compliance Officer [47]

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And you then hit on the very last thing which is bad debt, given that there was a reference to a health care customer that went bankrupt. What happened with bad debt either in Q3 or Q4 to affect the sequential comparison?

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Stephen R. Lieberman, Navigant Consulting, Inc. - Executive VP, CFO & Member of Executive Advisory Board [48]

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Yes. It was really -- we saw some spike in our bad debt in the third quarter relative to that particular issue.

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Operator [49]

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Our next question will be from Mr. Tobey Sommer of SunTrust.

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Tobey O'Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division - MD [50]

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Given your regulator-driven or federal government-driven businesses, where do you think the company is in the timing of any administration change that you might consider normal from one presidential administration to another versus this particular administration, which may exercise a lighter regulatory touch? So I'm trying to get a sense between timing and kind of positioning of the administration.

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Julie M. Howard, Navigant Consulting, Inc. - Chairman & CEO [51]

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That's a tough one, Tobey, because it's different in all the different industry sectors. It is a lighter regulatory touch. We have often positioned ourselves and articulated Navigant has been, for 30 years, a business that has -- had great consulting opportunity driven off of the regulatory shift. Whether that's regulation, reregulation, deregulation and the impact of disintermediation that, that creates for our client industries, and that has always driven consistent consulting opportunity, number one. I think, number two, we as an organization have demonstrated time after time after time that we can pivot and be nimble. And if it's not this particular regulatory opportunity, we have the skill and expertise for strategic matters, for operational matters. And I think on the -- if you think about the federal government, we see a lot of the states stepping in to self-avoid on some of that tightening of regulatory focus or just taking away some of the -- excuse me -- reversing some of the legislation and policy decisions from the prior administration. The states have been stepping in, in that regard. So I think all of those things combined give us confidence that we'll continue to still be and we as an organization will continue to have great opportunity in consulting. We just need to focus on a few of our own performance issues.

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Tobey O'Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division - MD [52]

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Okay. With respect to the UAB contract, now that it's fully ramped, did it ramp according to your expectations that you may have had a couple of years ago when you first signed the deal? And how does profitability compare to, not only your expectations, but the Healthcare segment as a whole?

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Julie M. Howard, Navigant Consulting, Inc. - Chairman & CEO [53]

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So I'll let Stephen also jump in here, but I think this has been a new business for us and so we've had to learn along the way. We've learned that contracts -- we've learned that the sales cycle is radically different in the services arena, the solution than it is than consulting and advisory. And as I mentioned before, some of that has to do with the fact that it is a significant shift for an organization and it's a board decision. So you're no longer on a client making a particular decision on a random Tuesday. You're waiting for the quarterly board meeting for these reviews and this approval. So we've learned about the long sales cycle. We've learned about all of the significant onboarding opportunities and challenges and have pretty good sense. I mean, we've said 6 to 12 months and I think we probably were more towards the 12 months with respect to onboarding UAB and we've learned a lot from that experience. And we've also learned throughout the course of the year as we onboard, it's the profitability was up and down depending on our comfort and capability in realizing some of the incentives and deliverables. So I think we've learned a lot and we'll use that in going forward with other opportunities. Stephen, you want to add?

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Stephen R. Lieberman, Navigant Consulting, Inc. - Executive VP, CFO & Member of Executive Advisory Board [54]

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Yes, I'd just add to it. I think we've got a very good foundation at UAB. We've got a excellent team focusing on delivering a great quality product for UAB. That all said, I think there's continued opportunity for us to deliver even more value. And with that, it should continue to improve our results that we see out of that engagement as well because we're providing way more value to the client.

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Tobey O'Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division - MD [55]

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So I guess, does the profitability match your expectations? Or is it below -- now that we've got a relatively large contract of scale?

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Julie M. Howard, Navigant Consulting, Inc. - Chairman & CEO [56]

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Well, we are -- we have been up and down, as I said, in the year and we clearly have room for improvement, not only on that contract, but in the business overall and in our, as we said in the opening, in our non-consulting services. That is our area of focus for margin improvement. Our consulting businesses, which [PS] is now 80% of the overall revenue stream of Navigant are performing extremely well.

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Tobey O'Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division - MD [57]

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And then, I had 2 numbers questions, if I could, and I'll get back in the queue. The share repurchase that you cite, I think $50 million, is that expected to kind of be relatively evenly spread throughout the year? And then, I was curious if you have an expectation for DSO in 2018 that you could share with us.

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Stephen R. Lieberman, Navigant Consulting, Inc. - Executive VP, CFO & Member of Executive Advisory Board [58]

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Yes. On the share repurchase, we don't disclose what we're going to be purchasing in any particular quarter, but I think we're giving you a number there that we anticipate being able to achieve over the course of the year being at or above $50 million, which is the majority of our free cash flow.

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Julie M. Howard, Navigant Consulting, Inc. - Chairman & CEO [59]

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Stephen, I think everybody knows we have a grid.

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Stephen R. Lieberman, Navigant Consulting, Inc. - Executive VP, CFO & Member of Executive Advisory Board [60]

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Yes. We have a grid. It's a grid, it's in place. It adjusts to market conditions. So that's really all I can kind of say about the program in detail -- as far as how it's set up. Now regarding DSO, yes, we do have -- we do internally have targets to try and improve. I mean, we made some really good progress moving from the third quarter where we're 94 days to 85 days at the end of the year. There's some seasonality impact that occurs if you look at our DSO over time between the different quarters, but our objective is to improve over the course of this year. I mean, we've put in a new ERP billing system, which is a tremendous amount of effort both for the collective, my teams and the practitioners that are out there. We think we're using that system and continue to look to kind of optimize both our billing -- use of the billing system, but also our collection activities. So our goal is to improve over the course of 2018.

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Tobey O'Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division - MD [61]

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Great. And just to clarify in the share repurchase. The $50 million that you cite in the press release, I guess, that's not assumed in the EPS guidance?

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Stephen R. Lieberman, Navigant Consulting, Inc. - Executive VP, CFO & Member of Executive Advisory Board [62]

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It is.

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Tobey O'Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division - MD [63]

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Okay. Well, then the timing's (inaudible). Okay.

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Operator [64]

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(Operator Instructions) Our next question will be from Mr. Marc Riddick of Sidoti.

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Marc Frye Riddick, Sidoti & Company, LLC - Research Analyst [65]

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I wanted to touch -- you had a chance to go -- you've really covered a lot of things already, but one thing I wanted to go over and circle back on the cost reduction. With about $20 million annualized in 2017, I was wondering if you could sort of dig a little deeper on sort of where you are in that overall process as you look out to 2018 and maybe some pockets that you might see opportunities there. And if there's sort of a general target that you might have to mine during the course of 2018?

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Stephen R. Lieberman, Navigant Consulting, Inc. - Executive VP, CFO & Member of Executive Advisory Board [66]

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Yes. What I would say on that is we certainly adjust also to our market expectation. So as we see opportunity, well, we want to make sure that we go ahead and live up to that revenue potential in our different areas. However, when we see areas where we may not be performing where we want to be, we want to make sure that we get our costs in alignment with that revenue situation without impacting our long-term capability of delivering our services. So we do see opportunities when we've gone strengths, weaknesses, and we're always focused on continuous improvement. So I guess, I want to leave you with is. We do see opportunity for further cost management. And with that, we -- is one of the elements of our focus on margin improvement.

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Marc Frye Riddick, Sidoti & Company, LLC - Research Analyst [67]

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Okay. And then, when you go over the -- making commentary around marketplaces like e-discovery where you're trying to make the numbers work going forward to be more profitable for you and have that be part of the pricing discussion going forward, I was wondering where are you sort of in the -- I guess, maybe what inning you are in the process of beginning that negotiation? And how long do you think that will sort of play itself through?

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Stephen R. Lieberman, Navigant Consulting, Inc. - Executive VP, CFO & Member of Executive Advisory Board [68]

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Yes. What I'd say for legal technology solutions is this isn't an abrupt, immediate change. This is something that takes some time to evolve, but our focus is then to move to the higher-end advisory services and deemphasize some of the more commoditized hosting and processing. That's going to take some time so I'll characterize it as over the course of the year.

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Lee A. Spirer, Navigant Consulting, Inc. - Chief Growth & Transformation Officer and Executive VP [69]

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Marc, this is Lee. I wanted to just add to that. Totally agree with Stephen. This is not an abrupt pivot. I mean, the roots of this business for us are in advisory. That is why clients always hired us was to provide them counsel on how to deal with complex cases, multi-custodians, multi-geography and then we deliver processing and hosting. I think our clients' needs have changed in processing and hosting of wanting to see low-cost options as well as potentially cloud-based options. And so this is a natural pivot to help deliver those services to clients, leveraging third parties as well. So I think that this is going to evolve over time, but the market is moving aggressively here and we're just trying to meet our clients' needs while focusing on the high value-added we always have had.

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Operator [70]

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At this time, speakers, we don't have any questions on queue. You may proceed.

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Julie M. Howard, Navigant Consulting, Inc. - Chairman & CEO [71]

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Thank you, everybody, for spending all of this time with us and the good questions and looking forward to coming back with good conversations here in 2018. Thank you.

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Stephen R. Lieberman, Navigant Consulting, Inc. - Executive VP, CFO & Member of Executive Advisory Board [72]

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Thank you.

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Operator [73]

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And that does conclude the conference. Thank you all for participating. You may now disconnect and have a great day.