ASGN Incorporated Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Revenues for the second quarter were $1.02 billion, above the high-end of guidance, with an adjusted EBITDA margin of 10.6% at the top end of expectations. IT consulting revenues accounted for approximately 63% of total revenues, up from 57% in the year-ago period.
• In the commercial segment, consumer & industrial accounts grew mid-double digits YOY, healthcare was flat, and financial services, business services, and TMT declined. Sequentially, four of five commercial verticals grew, with consumer & industrial leading.
• The federal business had defense, intelligence, and national security accounting for ~72% of government revenues. Civilian business was impacted by DOGE, while national security accounts, especially for DHS, grew. Defense and intelligence revenues were up sequentially but down YOY due to budget constraints.
• Solutions capabilities focused on cloud/data infrastructure, cybersecurity, enterprise platform advisory/implementation, and AI services. Examples include cloud assessments for a global financial services company, cybersecurity work for DHS, TopBloc's Workday implementations, and AI services for various clients.
• Launched the ASGN AI Innovation Center, which includes solution accelerators, an AI University for upskilling, and initiatives like financial services agents and rapid code discovery tools.

Segment Performance

• Commercial Segment: Revenues were $708.1 million, a decrease of 2.4% year-over-year. Assignment revenues totaled $382.4 million, down 13.9% YOY. Commercial consulting revenues were $325.7 million, up 15.7% YOY. Consumer & industrial accounts grew mid-double digits YOY; healthcare was flat; financial services, business services, and TMT declined. Gross margin was 33%, up 30 basis points YOY.
• Federal Government Segment: Revenues were $312.5 million, up 1.1% YOY, including ~$10 million of higher-than-expected license revenues. Defense and intelligence revenues were down YOY due to budget constraints, while national security accounts grew. Gross margin was 19.2%, down 140 basis points YOY due to low-margin software licenses and DOGE impact.

Guidance

• Third Quarter 2025: Estimates for Q3 2025 include revenues of $992 million to $1.012 billion, net income of $35.8 million to $39.4 million, adjusted EBITDA of $108.5 million to $113.5 million, and an adjusted EBITDA margin of 10.9% to 11.2%. The estimates assume 63.5 billable days (same as year-ago, 0.25 more than Q2) and no acquisition, integration, or strategic planning expenses.

Risks

• Macroeconomic Uncertainty: Impacts discretionary spending, affecting segments like the assignment business.
• DOGE Impact: Affected civilian federal business, leading to lower margins and revenue in that segment.
• Government Contracting Delays: Slowness in award velocity and procurement/approval processes impacted federal contract awards in Q2.

Question and Answer

• Q: How is TopBloc performing relative to expectations? A: TopBloc is tracking just ahead of revenue and bookings expectations, with EBITDA in the range initially projected.
• Q: Cyclicality of assignment business and AI impact? A: The assignment business is cyclical, and AI impact on it is minimal; largely due to macroeconomic and cyclical factors at present.
• Q: Long-term margin profile of federal government segment? A: Federal gross margin is expected to be in the 20%-21% range, with opportunities to increase direct labor and reduce the impact of low-margin license revenues over time.
• Q: AI investments and IP building? A: ASGN is investing in account/deal-specific IP, open-source tools, and advisory work on AI architecture. AI is being used to improve productivity in areas like recruiting and bid proposals without degrading margin profiles.
• Q: Baseline revenues for federal segment? A: The baseline for federal segment revenues is estimated to be in the mid $290 million to mid $295 million range, with a 1.1 book-to-bill indicating potential growth in backlog.
• Q: Internal use of AI and cost? **A: AI is used internally in recruiting, bid proposals, and cybersecurity; investments in AI are not degrading margin profiles and are contributing to growth.