ASGN Incorporated (EFOR) Earnings

Management highlights

Today marks the final earnings call under the ASGN name, with the company set to become Everforth on Friday. The company is updating commercial segment reporting by industry rather than mode of delivery. Commercial segment revenues were driven by demand in AI and data, cloud and infrastructure and application engineering and modernization. Federal segment new contract awards totaled $151.3 million or a book-to-bill of 0.7x on a trailing 12-month basis. The company announced key leadership appointments across commercial and federal government segments. Successfully closed the acquisition of Quinnox. In industry performance, within Commercial segment, health care, consumer and industrial and TMT industries had growth, while financial services had mid-single digit decline but insurance customers had high single-digit growth. In Federal segment, national security customers had strongest growth and other clients had mid-single-digit growth. Solutions performance: AI and data remain a significant driver, with examples in various industries; cybersecurity is integral; enterprise platforms remain central with co-selling and co-development efforts.

Guidance

For the second quarter of 2026, estimating revenues of $970 million to $1 billion, net income of $8 million to $13.7 million, adjusted EBITDA of $85 million to $95 million and adjusted EBITDA margin of 8.8% to 9.5%. Second quarter estimates include $8 million to $10 million in strategic planning expenses related to the Next Wave Growth Strategy, which are expected to decline over coming quarters. Quinnox contributed less than 1 month to first quarter results and is expected to contribute $100 million with low to mid-teens growth and low 20% EBITDA margin in full year.

Segment performance

Revenues for the first quarter were $968.3 million. Commercial segment revenues were driven by demand in AI and data, cloud and infrastructure and application engineering and modernization. Commercial segment revenues were $675.5 million, an increase of 0.5% compared to the prior year. Federal Government segment revenues were $292.8 million, a decrease of 1.1% year-over-year. Gross margins for the first quarter of '26 were 27.5%, a decrease of 90 basis points from the prior year. Commercial segment gross margins totaled 31%, a decrease of 140 basis points year-over-year. Gross margins for the federal government segment were 19.6%, an increase of 10 basis points year-over-year but slightly lower than expectations due to a higher-than-anticipated contribution of cost plus revenues in the quarter. Adjusted EBITDA was $83.6 million, and adjusted EBITDA margin was 8.6%.

Risks & headwinds

Uncertainty around the macro environment with continued uncertainty around how technologies such as AI and enterprise software will impact the technology landscape and influence IT spending. Funding delays at the Department of Homeland Security navigating shutdown and leadership transition. Enterprise software market undergoing change from evolving go-to-market models and organizational realignments. Negative commentary and play on enterprise software stocks affecting customer reactions.

Analyst Q&A

• Q: A couple of times in your prepared comments, you talked about lower-than-expected contribution from some higher-margin commercial solutions. Can we get a little bit more color on that? And I'm just curious because you typically have really good visibility. I'm just wondering what happened here.

  A: Thanks, Jeff. Yes, I think, look, coming out of the fourth quarter, you naturally have certain projects come to their conclusion and you have a start-up of new work during the first quarter. And I think in this quarter, what we found was -- while that's always a thing, the ramp-up of higher-margin solutions, especially in our enterprise software areas was slower and later into the quarter than what our expectation was when we set the guidance. So really, what we're seeing here in terms of the EBITDA margin mix is a gross margin issue. It's not an expense issue. We were kind of on an adjusted basis, below our expectations on the cash SG&A side. But on the commercial side within our consulting business, we did see a larger change in normal of the profile of the margin of the projects that contributed during the quarter. Second piece of that, Jeff, was in our federal business, we overperformed the revenue expectation. The meat of that was in the cost-plus area. You've heard us say before that cost-plus contracts come in at a lower gross margin. Typically, we run 20% to 20.5% gross margins overall. Those cost-plus contracts can be high single digit to low double-digit kind of gross margins. And so that was certainly an influence. And so while we did a good job on the revenue on the federal side, the gross margin came in lower than what our expectations were to forecast. And then as Marie said, we had a little bit of contribution of negative impact from FX. So it's really the sum of those three things, if you will.

• Q: What should we read into the financial services year-over-year decline as it relates to maybe the balance of the year? And have you seen any change in the first couple of weeks of the second quarter here? And then just given that, that's a segment with typically large spend on IT, any read-throughs to the other segments?

  A: Yes. Maggie, look, as we mentioned in the remarks, what we're seeing is just continued tight management of expenditure in the largest piece of financial services for us, which is the big banks. So if you think about it, they have stabilized, but there is really not an increase in spending that we're seeing at any measurable rate in that segment. That being said, we are seeing some green shoots in insurance and also some green shoots in diversified financials, which we expect will turn into revenue upticks for us in the second quarter. But the continued compression or rather lack of uptick we see in the big banks is why we see the continued decline in -- because they are the largest spender in the financial services industry.

• Q: You alluded to some unanticipated expenses in the quarter in Q4. Can you help us to that a little bit? And then the Q1 and just coming out of Investor Day,我 don't remember them being referenced. Is that something new? Or was that maybe I missed it at Investor Day.

  A: Right. So Kevin, this is Marie. So the $12.8 million that we referenced, those are add-backs to EBITDA. And so when we talked about the $80 million of savings that we are going to achieve over the 3-year period, those dollars that we provided on the call for Q1 relate to the implementation of those. So when you think about the $12.8 million, there's a component that's Quinnox, right? So there's costs associated with the Quinnox transaction. Also our go-to-market, our back office outsourcing and then our ERP. So we gave in our guide for Q2 a range of $8 million to $10 million, and those costs will come down, right, throughout '26.

• Q: I was wondering if you could give us some color on the assignment business and get a sense for the trends there.

  A: Yes. So Tobey, just kind of Q4 to Q1, I would say sequentially, it performed about like we expected. It was down kind of mid-single digits, low to mid-single digits quarter-to-quarter. That's seasonally about what we see every year. So no surprises there. Pay-to-bill margins pretty steady. And contribution of pretty flat. So I don't think any -- no surprises, if you will, on the assignment side.

• Q: We've seen the nonfarm payrolls and extra temporary help has bounced off the bottom a little bit in 1Q. I'm curious if you're seeing any green shoots in your business.

  A: Yes. Honestly, my experience is the IT really tracks IT spending, right? So if our clients are spending on their tech stack, then that's a driver of our business. If they're more muted, then that's a tougher environment. If you -- what you've seen go on broadly in staffing, if you went down to the lower end, like commercial, you would see that that's been resilient, I would say, through all this. But on the white collar piece and especially on the IT piece, it hasn't followed the same trend.

• Q: Just following up on the last point, Shiv or Ted. You mentioned the gross margins are down. It seems like on the consulting side, we clearly had a deceleration and financial services was a weak spot. But coming off of these high bookings, I'm just wondering, aside from -- is there any way to disaggregate the gross margin compression and EBITDA margin compression that we saw in the commercial side between pure mix versus was there any change with regards to the bill rates or how profitable the actual contracts that were actually executed against? Are you seeing any sort of pricing pressure from that perspective? And how do you expect that to flow as these clients become more deliberative, how do you think that's going to shape up as the year unfolds?

  A: Mark, I think if you -- just to give you more color, let me start by saying we're not seeing a material compression in pricing. It is -- the most important thing that drove the gross margins down for us was really timing in many cases. And as some of our higher-margin pieces of the business didn't ramp up at the same rate, you noticed that from a timing perspective, the solutions mix that drives our consulting revenue was different than what we thought it would be. So short answer是 we're not seeing a material compression. That being said, there is volume in a lot of -- as you would expect as a normal ebb and flow, we have higher-margin solutions, lower-margin solutions. So when the mix gets off kilter on some of the higher-margin pieces, it drives this down.