ASGN Incorporated Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Market demand for ASGN's services remained stable in Q3 2024. Q3 2024 revenues of $1.031 billion were similar to the second quarter and within guidance range. Adjusted EBITDA margin of 11.3% was at the midpoint of guidance range, with IT consulting approaching 60% of total revenues.
• Commercial Segment: Commercial consulting revenues grew, with bookings showing good demand. The company is selectively adding new skill sets like solution architects to strengthen consulting practice and improve margins. Services like application development and modernization, cloud migration, etc., are seeing traction.
• Federal Government Segment: Net new contract awards were strong, book-to-bill was favorable, and recompete win rate reached 100% for the quarter. The team was awarded significant contracts, demonstrating strong cybersecurity qualifications and institutional knowledge.

Segment Performance

• Commercial Segment: Revenues were $718.8 million, a decrease of 8.1% year-over-year. Commercial consulting revenues improved 3.9% year-over-year and 1.2% sequentially. Commercial consulting bookings were $282.5 million, putting book-to-bill at 1.1 times on a trailing twelve-month basis. Within commercial verticals, TMT revenues improved 10.9% year-over-year, Consumer & Industrial accounts showed modest growth, Financial Services had slight sequential growth, and Healthcare Payers saw mid-single-digit growth from the second quarter.
• Federal Government Segment: Revenues were $312.2 million, a decrease of 6.6% year-over-year but up 1% sequentially. Net new contract awards were $666.4 million, book-to-bill was 2.1x for the third quarter and 0.9x on a trailing 12-month basis. Contract backlog was over $3.1 billion at the end of the third quarter. The federal team was awarded a $528 million, six-year single-award data services IDIQ with the Department of Homeland Securities, among other contract wins.

Guidance

• For Q4 2024, estimating revenues of $990 million to $1.01 billion, net income of $39.2 million to $42.1 million, Adjusted EBITDA of $103.0 million to $107.0 million, and Adjusted EBITDA margin of 10.4% to 10.6%. The fourth quarter is expected to have a sequential headwind due to fewer billable days, but market conditions and demand are expected to be similar to the third quarter.

Risks

• Global economic uncertainty remains, resulting in no meaningful increase in client IT services spending yet.

Question and Answer

Q: What do you need to see and what trends are you monitoring that would make you more bullish on the IT spending environment and the digital transformation environment ahead?

A: In the near-term, watching for clients to have confidence to begin to invest at more normal levels in their IT needs. This is a balance of economic factors like interest rate cycle, elections, inflation, etc. Once business confidence increases, heavier investment in IT roadmaps will follow.

Q: Do you think the growth trend in commercial consulting has troughed at this point now that you're past kind of the tougher comps from last year? How do you expect that to trend relative to the core assignment over the next couple of quarters?

A: At low single-digit growth rates currently. Bookings are solid, portending growth going forward. If customers open up and invest more fully, can begin to grow at higher rates. Book-to-bill and pipeline indicate good demand.

Q: Can you elaborate on what may be different in terms of your strategy when you emphasize the solution architect additions? Is this representing a shift in go-to-market or how you secure and manage talent for your projects?

A: More of an enhancement. It's an evolution of solution strength to support accounts as technology and client needs change. For example, with AI, solution strength is evolving to support account portfolio. Accounts first, solution second, and need to be good at both.

Q: Can you provide some additional color on just the assignment business maybe any signs of stabilization that you might be seeing there or just the trends there whether it's within the IT business or Creative Circle?

A: Generally, adjusted for billing days, seeing stability quarter-to-quarter. Perm placement part of assignment business has gotten a little weaker in the latter part of the year. Customers use assignment business to control spending levels.

Q: Good quarter for ECS bookings north of 2 times book-to-bill there. And obviously, you get some seasonal benefit in the third quarter, but just kind of hoping, you could expand on what you've done to boost win rates? And then, separately maybe you could clarify how much of the $530 million data services likes, you mentioned was booked in the third quarter?

A: Good spadework and focus on accounts and contract opportunities. Bookings are on net basis, and it's about being conservative in booking. Can't provide exact amount of $530 million data services booked in third quarter as it's on net basis.

Q: The 1 million shares repurchased in the quarter, is that a way to think about kind of what the quarterly cadence should look like? Or just any thoughts on that?

A: Strategy is to use free cash flow generated in the quarter, with M&A opportunities being less. Will keep eyes on it as things develop.

Q: You mentioned this earlier but just to follow-up. The Gen AI opportunity internally kind of where are you through that process, and does it vary on the federal side as opposed to commercial as opposed to more the kind of traditional assignment business?

A: AI deployment is happening in both federal and commercial. For example, cybersecurity AI is shared, new proposal development teams are being used across teams, and AI is used in recruiting. It benefits both sides.

Q: On M&A, how are you -- what sort of opportunities are you seeing? Is the pricing getting a little bit more reasonable?

A: Not enough data points to say pricing is becoming more reasonable. Fewer transactions going on, but seeing a little pickup. Balance sheet is in great shape, and working through opportunities.

Q: On the federal government side, when do you think these wins would convert to revenue? How should we think about that? And what should investors think about how the government business is going to perform over the next year?

A: Most contribution from wins in 2025. Election is a thing to watch, but federal business didn't slow down during the quarter. Expect better confidence among customers to lead to more spending on key initiatives once unknowns are resolved.

Q: On the commercial consulting side on IT, is there any way to quantify like what you're doing on the consulting side that would be either data cleanup, data restructuring in order to take advantage of AI and then how much you're actually doing in actual AI assignments at this point?

A: Break into AI or pure AI and AI extended. AI is still a small percent of total revenues, but data side is larger. Measuring revenue in these areas, and it's slowly moving as it should.