ASGN Incorporated (NYSE:ASGN) Q1 2023 Earnings Call Transcript
ASGN Incorporated (NYSE:ASGN) Q1 2023 Earnings Call Transcript April 26, 2023
ASGN Incorporated misses on earnings expectations. Reported EPS is $1.38 EPS, expectations were $1.43.
Operator: Greetings, and welcome to the ASGN Incorporated First Quarter 2023 Earnings Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kimberly Esterkin, Investor Relations. Thank you, Kimberly. You may begin.
Kimberly Esterkin: Thank you, operator. Good afternoon and thank you for joining us today for ASGN's first quarter conference call. With me are Ted Hanson, Chief Executive Officer; Rand Blazer, President; and Marie Perry, Chief Financial Officer. Before we get started, I would like to remind everyone that our commentary contains forward-looking statements. Although we believe these statements are reasonable, they are subject to risks and uncertainties, and as such, our actual results could differ materially from those statements. Certain of these risks and uncertainties are described in today's press release and in our SEC filings. We do not assume any obligation to update statements made on this call. For your convenience, our prepared remarks and supplemental materials can be found in the Investor Relations section of our website at investors.asgn.com.
Please also note that on this call, we will be referencing certain non-GAAP measures, such as adjusted EBITDA, adjusted net income and free cash flow. These non-GAAP measures are intended to supplement the comparable GAAP measures. Reconciliations between GAAP and non-GAAP measures are included in today's press release. I will now turn the call over to Ted Hanson, Chief Executive Officer.
Theodore Hanson: Thank you, Kimberly, and thank you for joining ASGN's first quarter 2023 earnings call. Continuing to execute solidly in the core strategic areas of our business, ASGN's revenues for the first quarter of 2023 improved 3.5% as compared to the prior year period. IT consulting revenues, including both commercial and federal government work, surpassed the 50% mark at $568.4 million or 50.4% of the first quarter revenues compared to 42.4% of revenues in the prior year quarter. The strong growth of this business, particularly in light of macro conditions, reconfirms our strategic decision to double down on high-end, higher-value consulting work for Fortune 1000 and federal government clients. We have the right group of professionals in place to successfully execute against this long-term plan.
And I want to thank all of the ASGN team for your efforts this past quarter in pushing our growth strategy forward. In contrast to commercial consulting and federal government work, the areas of our business that are more discretionary and cyclical in nature, namely assignment revenue declined. We programmed for some of this in our guidance. However, the decline toward the end of the quarter was greater than we had initially anticipated, and this negatively impacted our adjusted EBITDA margin. Nevertheless, at 10.9% for the first quarter, which is seasonally the lowest, adjusted EBITDA margins remained solidly in the double digits. Importantly, the long-term adjusted EBITDA margin profile of our business has not changed and is expected to further improve over time based on our move toward a more consultative model.
In addition, while a leading indicator on the downside; permanent placement and creative digital marketing have historically seen an uptick in revenue as macro conditions improve followed by sustained rallies once the economy exits a recessionary period. In the meantime, given market conditions, we are leveraging our variable cost structure and proactively taking down expenses in certain areas of the business while investing in others. Those actions are protecting our adjusted EBITDA margins today and into the future. Also, our free cash flow benefited from a reduction in accounts receivable DSO by 1.2 days. ASGN's capital allocation strategy has not changed. We still believe that M&A remains the best use of and highest return on capital. Having said that, with limited deals in the pipeline at present, we expect to be more active in repurchasing ASGN shares given our view of the rather compelling share price.
Our Board of Directors has recently approved a new 2-year $500 million share repurchase authorization. With that as the background, let us discuss our segment performance for the quarter. Our Commercial segment, which predominantly serves large enterprises and Fortune 1000 companies reported first quarter 2023 revenue is relatively consistent with the prior year period on a tough double-digit year-over-year comparison. Apex Systems, our largest division, accounted for 85.4% of the Commercial segment revenues. Revenues for the division improved 3.1% for the quarter, with top accounts achieving low single-digit growth and retail accounts achieving high single-digit growth year-over-year. Creative digital marketing and permanent placement revenues, which represent 14.6% of Commercial segment revenues declined double digits year-over-year.
Our large enterprise industry diversified commercial client base provides balance and protection to the side. As such, even with the pullback in more of our discretionary businesses, we continue to see solid progress in 3 out of our 5 commercial segment industry verticals in the quarter. Financial services and health care verticals saw single-digit revenue growth year-over-year, while consumer and industrial vertical revenues improved high single digits compared to the first quarter of 2022. The Technology, Media and Telecom or TMT and business and government services verticals both declined mid-single digits. In Financial Services growth was driven principally by wealth management. Improvement in our health care vertical revenues was largely driven by growth in provider accounts, while consumer and industrial strength was led by growth in energy, utility and consumer staples.
In the TMT vertical, telecommunications and technology accounts saw a pullback with delays in work and the impact of layoffs. In business and government services, aerospace and defense accounts saw solid growth during the quarter, while we saw a double-digit revenue pullback in business services. Turning to our consulting business. Our consulting offerings remain an important source of the value we provide clients and a core part of our strategic growth strategy. For the first quarter, Commercial Consulting revenues increased 32.7% year-over-year and were up 20% organically. Bookings were a record for the quarter and totaled approximately $392 million, up 31.7% year-over-year. This translates into a book-to-bill of roughly 1.3:1 on a trailing 12-month basis.
With such strong bookings, it is evident that our clients continue to invest in IT consulting projects. In fact, while we have seen some of our clients deemphasize smaller discretionary projects, they are reprioritizing their focus to other areas such as work aimed at modernizing our systems and improving customer experiences. ASGN has been able to leverage these trends and remain favored by our clients in the consulting space as a result of our long-standing relationship our expansive solutions portfolio and our unique delivery model. So let me provide some examples of our Commercial Consulting wins for the quarter. In Q1, Apex Systems in partnership with our GlideFast unit was awarded a new contract to provide development services on the ServiceNow platform to a global automotive company.
This same client also tasked our team with digitizing, automating and optimizing its supply chain and trip processes. This is just 1 of the 13 new client wins during the first quarter in which Apex brought the client relationship to the table and GlideFast, the ServiceNow capabilities in order to jointly secure the contract. Also during the first quarter, we won a contract with a leading U.S. health care provider to help them deploy the application that uses artificial intelligence to detect when patients are performing an action that puts the patient at risk of falling and then send an alert to the health care provider to review and take the appropriate reaction. The goal of the project is to increase the number of rooms the application can safely monitor remotely by leveraging AI and an Apex Systems developed application.
Let's now turn to our federal government segment, which provides mission-critical solutions to the Department of Defense, the intelligence community and federal civilian agencies. Federal segment revenues for the quarter were up 15% compared to the first quarter of 2022, driven by a combination of organic growth and the impact of our recent Irvine acquisition. Contract backlog was over $3 billion at the end of the first quarter or a healthy coverage ratio of 2.6x the segment's trailing 12-month revenues. New contract awards for the quarter were approximately $75.2 million, which translates to a book-to-bill of 0.9:1 on a trailing 12 months basis. We are seeing delays in project on funding largely due to new multiphase procurement cycles and an increase in award protest.
Q1 is also often seasonally low for our federal government segment as the government acquisition cycle tends to lag behind the budget cycle. That said, our pipeline of opportunities remains robust and the number of projects submitted awaiting award is as high as it's ever been. So let's turn to some examples of projects won during the first quarter. In the quarter, our team secured a number of recompetes and won new contract awards. In terms of recompete, ECS again secured the Department of Homeland Security, Web Content Management as a Service contract in which we are supporting the DHS with enterprise content delivery, DevSecOps and cloud platform enhancements. With regards to new awards during the quarter, ECS won a prime contract to support the modernization and agile transformation of the Army's Integrated Pay and Personnel system, which is the Army's number 1 IT priority at present is also making great progress, and ECS has leveraged our cybersecurity capabilities to pursue new opportunities across its entire client base.
For example, in the first quarter, ECS won a new contract under Ironvine to support the Millennium Challenge Corporation with designing, building and installing in-country solutions to track infrastructure investments in. This momentum has continued, and I'm pleased to report that ECS has already seen several bookings in early Q2. For example, we recently won a recompete of over $100 million to perform advanced addressing in geospatial technology solutions for our long-standing global mail delivery and shipping customer. With that, I'll now turn the call over to Marie, our CFO, to discuss the first quarter results and our second quarter 2023 guidance.
Marie Perry: Thanks, Ted. It's great to speak with everyone again today. Revenues for the first quarter were $1.1 billion, up 3.5% year-over-year on an as-reported basis. Excluding $50.4 million from businesses acquired in the past 12 months, revenues were down 1.2% compared to the prior year quarter. I'd like to put the first quarter revenue results into perspective. From a seasonality standpoint, revenues in the first quarter of each calendar year tend to be lighter as many clients finalize the funding of their calendar year project budgets. Also, on a consolidated basis, we achieved over 20% year-over-year revenue growth in the first quarter of 2022, creating a tough year-over-year comparison. While we anticipate some softness in our Q1 guidance due to macroeconomic conditions, as Ted noted, we fell below our guidance range, mainly due to further revenue declines towards the end of the quarter and our more discretionary and cyclical assignment work.
Revenues from our Commercial segment were $832.1 million, essentially flat year-over-year on an as-reported basis and down 3.2% organically. Revenues from Commercial Consulting, the largest of our high-margin revenue streams, totaled $271.7 million, up 32.7% year-over-year. Excluding the $25.9 million contribution from GlideFast, Consulting Services revenue improved 20% year-over-year. Revenues from our federal government segment were $296.7 million, up 15% year-over-year. Excluding the contribution from Ironvine of $24.5 million, revenues for the segment increased 5.5%. Moving on to margins. On a consolidated basis, gross margin was 28.9%, down 100 basis points over the first quarter of last year. The compression in gross margin was mainly related to business mix, including a slightly higher mix of revenues from our federal government segment, which carry a lower gross margin than commercial revenues and a lower mix of creative digital marketing and perm placement revenues, which have higher gross margins.
Photo by Austin Distel on Unsplash
Gross margin for the Commercial segment was 31.5%, down 120 basis points year-over-year, primarily due to a smaller contribution from our discretionary and cyclical assignment revenues as noted. By contrast, gross margin for the federal government segment was 21.6%, up 70 basis points year-over-year due to a smaller amount of cost reimbursable contracts and the contribution from Ironvine. SG&A expenses for the first quarter were $224.1 million, up 5.7% year-over-year due to investments in workforce and technology made in 2022. SG&A expenses were favorable to guidance due to the highly herbal nature of our cost structure, which benefited from fluctuations in our incentive compensation and from attrition in our business. SG&A expenses also included $2.3 million in acquisition, integration and strategic planning expenses that we do not include in our guidance estimates.
As expected, interest expense increased year-over-year related to rising interest rates, which impact only a portion of our debt. As a reminder, over half of our debt is fixed at below market rates. Amortization of intangible assets was higher due to recent acquisitions. Income from continuing operations was $49.5 million. Adjusted EBITDA was $123.5 million, and adjusted EBITDA margin was 10.9%. Our 2 highest margin contributors, permanent placement and creative digital marketing revenues pressure our adjusted EBITDA margin compared to what we had originally guided for the quarter. At the end of the quarter, cash and cash equivalents were $65 million, and we had full availability under our $460 million senior secured revolver. Free cash flow for the quarter totaled $68.8 million, an improvement of 48.3% over the first quarter of 2022.
As Ted mentioned, cash flows benefited from a reduction in accounts receivable, thereby improving DSO by 1.2 days. With strong free cash flow generation and full availability under the revolver, we have ample dry powder to make strategic acquisitions. Given the limited acquisition opportunities at present, and our stock trading at such attractive levels, we deployed $48.8 million in cash on the repurchase of 563,200 shares of the company's common stock during the first quarter. This week, our Board of Directors approved a new 2-year $500 million share repurchase plan replacing the prior authorization. Turning to our guidance. Our financial estimates for the second quarter of 2023 are set forth in our earnings release and supplemental materials.
These estimates are based on trends in March and April; assumes 63.25 billable days in the second quarter, which is essentially the same as the year-ago period and sequentially and include the estimated revenue contribution of $52.8 million from acquisitions made in the last 12 months. We are providing wider ranges this quarter than in prior quarters to account for uncertain macro conditions at present. With that in mind, we expect macro conditions in the second quarter to be similar to that of the first with continued softness in assignment revenues. Given the seasonality of our business in Q1 being the lowest from a revenue standpoint, revenue should increase sequentially. We expect second quarter revenues to be driven by commercial consulting and federal revenue growth, offset by continued softness in IT staffing, consistent with our peer set and to a lower extent, decline in permanent placement and creative digital marketing.
We also faced another difficult year-over-year comparison that had over 17% growth in the second quarter of 2022. In our guidance numbers, we have assumed leverage from our variable cost structure and certain cost containment efforts as well as lapping of the payroll tax reset in Q1. We -- these assumptions limit the downward pressure on margins without hampering our long-term growth drivers. With that background, for the second quarter, we are estimating revenues at $1.11 billion to $1.145 billion on roughly the same number of billable days and against a difficult year-over-year comparable. This translates to a year-over-year growth rate of minus 2.8% to plus 0.3% compared to the prior year quarter's results. We are estimating net income of $52.8 million to $60 million and adjusted EBITDA of $125 million to $135 million.
We are expecting gross margin will decline year-over-year, primarily due to business mix, similar to the more recent trends, including a greater mix of federal government work and the continued softness in assignment work. Adjusted EBITDA margins are also anticipated to decline year-over-year, but should benefit from our variable cost structure commensurate with revenue. Along with other cost control measures, such as headcount attrition and limitations in discretionary spending. Thank you. Now, I'll turn the call over to Ted for some closing remarks.
Theodore Hanson: Thanks, Marie. Like our peers, the difficult macroeconomic conditions are impacting our performance in the more discretionary cyclical areas of our business. These conditions are outside of our control, which is in our control is our ability to execute and strategically position our business to succeed throughout economic cycles. In the first quarter, we did just that. We continue to evolve our business towards a more consultative model. While clients are scrutinizing spend, they're continuing to invest in IT projects that are critical for their businesses. With over 50% of our revenues in higher end, higher value IT consulting work we are shaping and evolving our operations for success in both the short and the long term.
Importantly, we have a number of key business stabilizers in place to support our business on the downside. We remain committed to providing leading services and solutions to the commercial and government end markets we serve. Thank you all for joining our first quarter call. We will now open it up to your questions. Operator?
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