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Edited Transcript of ASGN earnings conference call or presentation 23-Oct-19 9:00pm GMT

Q3 2019 ASGN Inc Earnings Call

CALABASAS Oct 26, 2019 (Thomson StreetEvents) -- Edited Transcript of ASGN Inc earnings conference call or presentation Wednesday, October 23, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Edward Lee Pierce

ASGN Incorporated - Executive VP and CFO

* George H. Wilson

ASGN Incorporated - President of ECS

* Randolph C. Blazer

ASGN Incorporated - President of Apex Systems, LLC

* Theodore S. Hanson

ASGN Incorporated - CEO, President & DIrector

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Conference Call Participants

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* Edward Stephen Caso

Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst

* John Henry Hanna

BofA Merrill Lynch, Research Division - Associate in Equity Research

* Kevin Damien McVeigh

Crédit Suisse AG, Research Division - MD

* Mark Steven Marcon

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Seth Robert Weber

RBC Capital Markets, LLC, Research Division - Analyst

* Sou Chien

BMO Capital Markets Equity Research - Senior Associate

* Surinder Singh Thind

Jefferies LLC, Research Division - Equity Analyst

* Tobey O'Brien Sommer

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Kimberly Esterkin

ADDO Investor Relations - Director

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Presentation

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Operator [1]

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Greetings, and welcome to the ASGN Incorporated Third Quarter 2019 Earnings Call. (Operator Instructions) Please note, this conference is being recorded. I would now like to turn the conference over to your host, Kimberly Esterkin, Investor Relations. Thank you, you may begin.

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Kimberly Esterkin, ADDO Investor Relations - Director [2]

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Thank you, operator. Good afternoon, and thank you for joining us today for ASGN Third Quarter 2019 Conference Call. With me are Ted Hanson, President and Chief Executive Officer; Rand Blazer, President of Apex Systems; George Wilson, President of ECS; and Ed Pierce, 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 certain 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 financial 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 the GAAP and non-GAAP measures are included in today's press release.

I will now turn the call over to President and Chief Executive Officer, Ted Hanson. Ted?

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Theodore S. Hanson, ASGN Incorporated - CEO, President & DIrector [3]

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Thank you, Kimberly, and thank you for joining ASGN's third quarter conference call. It's been an exciting time for ASGN as we accelerate into the next phases of our 5-year strategic plan. As we initially outlined at our Analyst Day in May of 2018, by 2022 we anticipate reaching $5 billion in top line revenue, which includes $500 million to $700 million in acquired revenue and adjusted EBITDA margins of 12% to 12.5%.

I'm pleased to report that we remain on track to reach each of these targets. Our ability to attain these targets derives from a combination of ASGN's deep industry expertise, expanded consultative and solutions capabilities and a vast talent pool of accomplished professionals who deliver productive and effective solutions to our commercial and government clients. Our unique deployment model differentiates ASGN from other IT service providers.

We are very pleased with our quarterly performance, with all numbers either in line or exceeding our Q3 guidance ranges. Ed Pierce, our CFO, will provide further details on our results later during today's call.

So I will focus on a few key highlights for the quarter, including revenues and free cash flow. Consolidated revenues for the third quarter totaled just over $1 billion, an increase of 10.6% year-over-year and at the high end of our guidance range for the quarter.

This growth was mainly driven by strength in our Apex and ECS segments and represents a significant milestone for our company by reaching $1 billion in quarterly revenues for the very first time.

Apex, our largest segment, which services clients across multiple commercial end markets, generated revenue of $644.1 million, up 9.2% year-over-year. Growth in the Apex segment was driven by strong performance in our top accounts portfolio. Rand Blazer will provide more color on Apex's success later on today's call.

ECS, which provides IT solutions to the federal government, including the Department of Defense, intelligence agencies and certain civilian agencies, generated revenue of $206.1 million, up 25.7% year-over-year. George Wilson will speak more on ECS shortly.

Oxford, which offers on-demand consulting talent for commercial IT, healthcare, Life Sciences and engineering clients, reported revenues of $152.5 million for the third quarter, roughly consistent with the prior year period when adjusted for both billable days and currency fluctuations.

We also continued to generate strong free cash flow for the quarter, enabling us to pay down $42 million of our long-term debt and repurchase $20 million in common stock. Even after paying down our long-term debt and buying back shares, we saw a decline in our average leverage ratio to 2.26x our trailing 12 months adjusted EBITDA at quarter end. We anticipate a leverage ratio of approximately 2.19 by the end of 2019.

As I noted last quarter, neither the repayment of our debt nor the repurchase of our shares precludes ASGN from making strategic acquisitions.

In fact, just this past week, we announced the acquisition of Intersys Consulting, a leading IT services and solutions provider, for $67 million in cash. Intersys Consulting is now part of Apex Systems, and we welcome their team to ASGN. The acquisition of Intersys Consulting is an important step in our strategic growth plan to deliver increased value to both our customers and our shareholders. Intersys consulting anticipates generating approximately $31 million in revenues for full year 2019, followed by double-digit revenue growth in 2020.

Their addition deepens and expands our capabilities in digital innovation and systems modernization. We expect to realize revenue synergies by leveraging their robust capabilities within our current Apex Systems and Oxford customer bases to capture an increased portion of our existing pipeline of higher-end consulting opportunities.

While Rand will further discuss Intersys Consulting capabilities shortly, I'd like to briefly address our strategy behind this acquisition. When making acquisitions, ASGN looks to acquire companies that continue to evolve our business as a preeminent and differentiated IT services and solutions provider in attractive markets. Increasing our consultative capabilities and leveraging our existing account relationships and pipeline continues to be our focus. Targeted acquisitions must fulfill this strategic need, be accretive to growth rates and margin profiles, and possess in-demand consultative and solutions capabilities.

Intersys Consulting checks the box on each of these attributes. Their industry expertise, combined with a deep focus on developing long-standing customer relationships, fits well within ASGN's own mission to provide high-end technology services across each of the end markets we serve.

Through the acquisition of Intersys Consulting, our most recent prior acquisitions of ECS and DHA, we are scaling our consultative and solutions capabilities and expanding into key industry segments across the commercial and government sectors.

We're strengthening our vision of merging industry expertise and technology solutions with unparalleled account relationships.

Ultimately, our strategy to execute our long-term business plan to expand our presence in commercial and government IT services and solutions, and to acquire assets which complement our industry expertise and solution capabilities will further position ASGN to achieve strong growth today, tomorrow and into the future.

I'll now turn the call over to Rand Blazer to speak further about the Apex segment's third quarter performance. Rand?

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Randolph C. Blazer, ASGN Incorporated - President of Apex Systems, LLC [4]

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Great. Thank you, Ted. The Apex segment, which consists of Apex Systems and Creative Circle, again reported solid results for the quarter. As Ted noted, third quarter revenues totaled $644.1 million, up 9.2% year-over-year on a difficult prior year comparable.

In the third quarter of 2018, we grew 14%, the highest growth quarter of last year. Our margins this past quarter were down slightly on lower permanent placement work compared to the third quarter of 2018 but remained stable on a sequential basis.

During this third quarter, the Apex segment's performance was driven by a number of factors including, first, double-digit overall revenue growth in Apex Systems as well as double-digit revenue growth in 5 of the 8 industry verticals we serve, including: Aerospace & Defense, Business Services, Financial Services, Healthcare and Consumer & Industrial industry accounts.

Our technology vertical posted mid-single-digit revenue growth for the quarter, while Life Sciences and telecommunications saw revenues decline year-over-year.

Top accounts again achieved double-digit revenue growth, outpacing our overall top line growth, while retail or branch-centric accounts saw flat revenues year-over-year. Creative Circle's revenue improved sequentially, with a revenue growth rate in line with our internal expectations for the third quarter.

Lastly, growth in consulting work across both our Apex and Oxford segments also continued to outpace our internal revenue estimates for the quarter.

Led by Apex Systems, total consulting revenue was $100.5 million for the third quarter 2019, up 30.5% year-over-year and now accounts for mid-teens as a percentage of our combined Apex and Oxford segments' business.

We remain excited about the opportunity to grow our consulting business as we continue to provide solutions that create added value for our clients. While achieving strong organic growth is certainly key to our success, as Ted discussed, we also continue to keep an eye out for ways to enhance ASGN's growth through strategic acquisitions. Subsequent to the quarter end we did just that, welcoming Intersys Consulting to Apex Systems. The Apex segment provides a full complement of IT and technology consulting services in workforce mobilization, modern enterprise and digital innovation solutions for the commercial sector.

Intersys Consulting enhances our current capabilities in digital innovation and enterprise solutions with capabilities in data strategy and transformation, machine learning, data analytics, cloud, agile, and full stack development and DevOps. The ability to provide these high-end services to our growing client base will assist in our mission to continue to differentiate ASGN from other IT service providers.

With the acquisition closing less than 1 week ago, the Intersys Consulting team is already in the process of fully integrating within Apex Systems. We are excited to begin leveraging Intersys Consulting's experience to serve our growing pipeline of business opportunities across Apex Systems, Oxford and Creative Circle accounts.

In summary, I am pleased with the Apex segments revenue and margin performance this past quarter. Given our strong performance in Q3 of 2018, our third quarter 2019 results were all the more noteworthy. As solid as the Q3 results were, we did see a slowdown in client IT spend in August and September and in the initial week of October. It's hard to determine if this trend will continue through the fourth quarter. However, the additional actions we are taking to better serve our clients with IT staffing and expanded digital innovation and enterprise solutions will be important to continuing our strong growth record.

I'll now turn the call over to George Wilson to speak about our ECS segment. George?

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George H. Wilson, ASGN Incorporated - President of ECS [5]

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Thank you, Rand. ECS's third quarter performance, from the standpoint of financial execution, business operations and new business development, was outstanding. We continued to execute our strategy to provide advanced technical solutions, coupled with subject matter expertise, to address our customers' most pressing needs. Several key contract awards provided additional large and durable contract vehicles so our customers can expand the use of our technologies, solutions and services. Awards included both re-competes of past contracts, contract expansions, and net new contract awards. These awards reflect positively on our strategy and the quality of our execution.

Our financial growth continues to be significantly ahead of the industry average for peer companies in the federal technology space. Third quarter revenues grew on a reported basis by 25.7% over the prior year, along with similar growth in adjusted EBITDA.

Included in this impressive third quarter growth were contributions from our prior acquisition, some onetime technology purchases, and several license renewals that are critical to our advanced solutions, primarily in the defense and the intelligence market.

We anticipate revenues from technology purchases and license renewals will be lower in the fourth quarter.

In Q3, we received a total of $954.5 million in contract awards, which resulted in a book-to-bill ratio of 4.6x:1 for the third quarter, another period of very strong performance on the business development front.

Our book-to-bill ratio for the trailing 12 months ended September 30, 2019, was 2.4x:1. ECS won several key awards during the third quarter, which contributed to this extraordinary book-to-bill. I'd like to review a few examples, beginning with 2 significantly expanded contracts to continue the development, deployment, and maintenance of a secure, unclassified network used by the U.S. and U.S. partners worldwide, as well as an expanded award to develop and deploy software systems and tools on that network.

We were also awarded additional tasks to deliver innovative AI solutions and services to an important defense customer and a contract to support computer network defense of the DoD's Defense Health Agency network. We also received an award for the modernization of human resource management applications for the U.S. Marine Corp, including cloud migration, application of AI to improve processes and deliver maximum value to the end customer.

Lastly, we were awarded a multi-year contract to lead IT modernization efforts for the U.S. Mint's Office of the CIO, including operations applications management, cloud migration and service delivery optimization.

All of these contracts were competitively awarded and all were single awards. Our cyber capabilities and technology partnerships continue to expand as we continue to invest heavily in partnerships, training and certification of our workforce, and in facilities to include our secure operations center and our advanced AI system integration lab.

Our recent proposal activity has remained strong, and we believe ECS is positioned well within the advanced solutions and services market, which is currently in high demand. At the end of the third quarter, ECS had $2.7 billion in total contract backlog, which was an increase of over $700 million sequentially. This contract backlog equates to a very healthy coverage ratio of 3.6x our trailing 12-month revenue.

I will now turn the call over to Ed Pierce to discuss ASGN's consolidated financial results for the quarter. Ed?

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Edward Lee Pierce, ASGN Incorporated - Executive VP and CFO [6]

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Thanks, George. As Ted has highlighted, we reported impressive financial results for the quarter. Revenues for the first time exceeded $1 billion and were at the high end of our guidance range. Earnings and adjusted EBITDA were both above the high end of our guidance range, driven by high revenue growth and lower-than-expected SG&A expenses.

Revenue growth for the quarter was 10.6% on a reported basis and 10.1% on a same billable day constant currency basis. Revenues from our ECS segment were above expectations as a result of higher revenues from license renewals and some onetime technology purchases. We anticipate lower revenues from these type purchases in the fourth quarter.

Gross margin was within our guidance range but down approximately 70 basis points year-over-year. About half of the compression in margin related to a lower mix of permanent placement revenues and the remainder to lower contract margins, which were mainly the result of a higher mix of revenues from ECS and from high volume, low margin customers.

Although ECS' gross margins are lower than our other segments, it generates double-digits adjusted EBITDA margins as a result of its low SG&A expense base. Its margins are at the higher end of its industry peer group. SG&A expenses were $3.4 million, below our guidance range, mainly related to favorable variances in compensation and health care expenses.

Our effective tax rate for the quarter was slightly lower than guidance and 9 percentage points higher than Q3 of last year, which had benefited from a number of discrete items, including reductions to certain provisional tax estimates made under the Tax Reform Act.

Net income, adjusted net income and adjusted EBITDA were all above our guidance range, mainly related to favorable expense variances.

Cash flows from operating activities were $91.3 million and free cash flow was $84.4 million, or 8.4% of revenues.

During the quarter, as Ted mentioned, we paid down $42 million of our long-term debt and used $20 million to repurchase 324,000 shares of our common stock.

Regarding our financial estimates for the fourth quarter, we're estimating revenues of $995 million to $1.005 billion net income of $51.9 million to $55.6 million, and adjusted EBITDA of $113.2 million to $118.2 million.

These estimates include results for Intersys Consulting from the date of its acquisition. Our estimates are based on estimated billable days of 60.5, which is the same as the fourth quarter of last year.

Each billable day is approximately $12.1 billion in assignment revenues. On a sequential basis, there are 2.5 fewer billable days than Q3 and the effect on Q4 revenues is approximately $30.2 million.

We're also estimating a sequential increase of approximately 4% in assignment revenues per billable day. Our estimates considered the effect of sequentially fewer billable days and 2 additional holidays on ECS' revenues from time and materials contracts. As previously mentioned, we are also assuming lower revenues from third-party technology purchases than Q3.

I will now turn the call back over to Ted for some closing remarks. Ted?

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Theodore S. Hanson, ASGN Incorporated - CEO, President & DIrector [7]

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Thanks, Ed. I'm very pleased with ASGN's 2019 financial performance to-date. The size, scale and breadth of our services continues to position us well for success. Through our unique industry insights and sophisticated project delivery, we've developed long, trusted customer relationships with over 300 of the Fortune 500 companies as well as major defense, intelligence and civilian government agencies. These relationships enable us to maintain a sustainable business model and margins that can withstand economic cycles.

I'd like to thank you again for your time today and for your support of ASGN. These are exciting times for our company, and we look forward to continuing to share our progress on future quarterly calls. We will now open the call to your questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Ed Caso with Wells Fargo Securities.

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Edward Stephen Caso, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [2]

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The -- just trying to get a sense if there's any cultural issues here as you start the migration from a staffing company towards a more consultive solutions company.

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Theodore S. Hanson, ASGN Incorporated - CEO, President & DIrector [3]

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Thanks, Ed. I think our people in the marketplace feel like this is a natural move. Remember, as we've talked about this part of our business, it's really a client-driven activity. We're not pushing our way in, if you will, to work. The client is inviting us in based on our past [quals] and our capabilities, not just to provide resources but also to provide certain solutions. And so it's just been a natural evolution, if you will, for our people who are serving the customer. So I think they feel great about not only performing the activity of providing resources but also having the opportunity to add more value to the relationship, by providing solutions on top of that. And so I think from a cultural standpoint, it's an upper for all of our team.

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Edward Stephen Caso, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [4]

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My other question is on Creative Circle. If you could just give us an update there?

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Theodore S. Hanson, ASGN Incorporated - CEO, President & DIrector [5]

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Rand, you want to talk about Creative Circle?

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Randolph C. Blazer, ASGN Incorporated - President of Apex Systems, LLC [6]

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Yes. I think Creative Circle's doing fine. Their growth rate in the third quarter was higher than their growth rate in the second quarter on a year-over-year basis. We've talked a lot about the not just creative marketing but digital marketing. And as you -- the [modeling] world yearns for digital marketing, so they're competing with a broader set of people now in that marketplace. They have very good account relationships. They have very good internal processes. So -- but they're facing the transition to facing a broader set of competition, competition that comes from the normal IT players in that marketplace. So they're performing well. There are -- they typically picked up toward the end of the quarter, and I think they're doing the things we think they should be doing. And there's good synergy between the Apex and Creative team around some of our larger accounts, which is getting healthier and healthier as we grow.

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Operator [7]

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Our next question comes from the line of Tobey Sommer with SunTrust.

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Tobey O'Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division - MD [8]

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I was wondering if you could elaborate a little bit, Rand, on your remarks that said IT spending slowed within the quarter and kind of early October. Any kind of color you could give us on that would be helpful.

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Randolph C. Blazer, ASGN Incorporated - President of Apex Systems, LLC [9]

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Okay, Ted, you want me to go ahead? So Tobey, yes, I think -- first of all, I think again for the IT services we provide, we've seen a little bit of a slowdown in that business flow. We measure that by the amount of assignments or requisitions and openings that we are presented with.

So I think I said in Q3, we had 2 of our industries performing single-digit to negative -- 3 of our industries, single-digit to negative or flat growth year-over-year: Technology, telecommunications and our mid-market accounts or branch-centric accounts. So those 3 are not keeping up with the other 4, if you will, which is I think where we've seen most of the slowdown occur.

We've gone through this before, Tobey, where you have a little what I call pauses in spend by the client as they reset their projects or they turn left or turn right in their own strategies. So it's not new to us. But we -- I think Ted and I and Ed all felt it was fair to say, look, we did see a little bit of a slowdown in the spend. You see that reflected -- I mean normally we had 7 or 8 of our industries all in double-digit growth. So that's the -- that's what we're seeing,

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Tobey O'Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division - MD [10]

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So would you describe this as a typical oscillation in growth rates and not a significant change?

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Randolph C. Blazer, ASGN Incorporated - President of Apex Systems, LLC [11]

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No. I think it is -- as I said, I think it is an oscillation that occurs. I call it ebb and flow. We've used those words before on the earnings calls. I think there's a little bit of ebb and flow in spending. If you think about technology, they're dealing with their manufacturing base in China and have other investment priorities.

I'm just conjecturing this. I don't want to speak for that industry. But I imagine that's going on in telecommunications. There is a continuation of looking for ways to provide more content and different ways of streaming content out there. So there's good things to do. And I think at some point every so often they look at our history over the last 3 or 4 years, you do see some oscillation in the pattern of business that's presented to us. So I think that's what I said in my remarks, I said we're -- we just think this is a normal ebb and flow and we'll see how it goes in the quarter.

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Tobey O'Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division - MD [12]

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Okay. Within the ECS segment, the growth rate is obviously very strong, in part by, you said, some -- driven by some pass-through revenues. Can you kind of maybe break that out in a little bit more detail that try to tell us maybe what the services growth was versus these product-related things or how are you'd like to do it yourself, what size of a contributor the pass-through revenues might have been.

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Theodore S. Hanson, ASGN Incorporated - CEO, President & DIrector [13]

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George, do you want to take that?

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George H. Wilson, ASGN Incorporated - President of ECS [14]

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Yes. Sure. And thanks for the question. I want to kind of make sure we're differentiating between 2 things. It's important to differentiate between onetime purchases, it would be nonrecurring, and what we have in recurring purchases, license, hardware, specialized services that are needed to deliver our end solutions. As long as we're delivering those end solutions, those technology purchases are [licenses that occur] and will provide some lumpiness in our quarterly revenues. But over the course of the year, typically these things are semi-annual or annual licenses or hardware refresh and stuff like that. So on an annual basis those will recur and it will be smoothed out. But on a quarterly basis, it'll provide a little bit of lumpiness. As far as simple onetime purchases, those are very small relative to the rest of the revenue. So there's been a growth in both our solutions as well as our services delivery, which on an annual basis, there's been -- as far as direct labor, has been a strong growth.

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Tobey O'Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division - MD [15]

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That's helpful. And then, Ted, maybe a question for you. And I'll get back in the queue. The -- your recent acquisition, is this an example of what an acquisition may look like in the future as opposed to the kind of step-out platform acquisitions that we've seen ASGN consummate in the past?

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Theodore S. Hanson, ASGN Incorporated - CEO, President & DIrector [16]

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Well, maybe I'll answer that 2 ways, Tobey. I mean I think we're in the end markets we want to be in as it relates to IT services. So thinking about making platform acquisitions that get us outside of IT is probably not on our roadmap or not on our roadmap.

It's difficult for me to say in the future what we would or wouldn't acquire because those are, as you know, opportunistic things. But if you go back to our Analyst Day in April of 2018, you heard us talk about how we wanted to expand our businesses of Apex and ECS through key acquisitions that give us either expanded capabilities or bring us into a customer set that we may not be in, or otherwise enhance the value that we're providing to the customer. So I think this is in line with that, and between that and being placed in the markets that we are now where we are where we like, I think you'll see us stick to our knitting there.

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Operator [17]

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Our next question comes from the line of Gary Bisbee with Bank of America.

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John Henry Hanna, BofA Merrill Lynch, Research Division - Associate in Equity Research [18]

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This is Jay Hanna on for Gary today. So I guess my first question really is just with regard to your perm business. We've seen some data recently just suggesting that job openings have come down a bit in recent months. Just wanted to get your thoughts on with the current market is now and maybe your expectations going forward.

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Theodore S. Hanson, ASGN Incorporated - CEO, President & DIrector [19]

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Well, look, our perm revenues were basically flat from the second quarter to the third. It's going to -- we expect it to grow both as a percent of our total business, because the other units are growing faster, just the mix of that it's naturally become a smaller and smaller part. I think it's maybe $35 million on $1 billion of revenues this quarter.

So I'd -- it's an important part of our business but not something that we're going to overemphasize. The -- what you see in the market today I think in that piece of the business, that's really a candidate-driven marketplace. Not difficult to find clients with opportunities, but the candidate side of it is very difficult. So I think that's the major headwind in that market. I can't comment too much on whether the number of openings is down or not on a macro basis. But that's a little bit of color what we see inside of our business.

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John Henry Hanna, BofA Merrill Lynch, Research Division - Associate in Equity Research [20]

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Okay. And then just shifting to Apex. And obviously, the growth continues to be nice despite difficult comps. I mean is there anything company specific or macro driven that's changed here? What's generally behind this performance?

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Theodore S. Hanson, ASGN Incorporated - CEO, President & DIrector [21]

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Look I don't think -- I think you're seeing strong uptake by our client on our consultative capabilities inside of Apex. Obviously, they see a great value in using us on certain solutions in addition to just providing resources. So I think that most of what you're seeing there in terms of their continued strong performance is a testament to their account portfolio, and it continued expansion of that, both in new clients and in terms of share of wallet. And that's really the path that we're on inside of Apex and you should look for that to continue.

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John Henry Hanna, BofA Merrill Lynch, Research Division - Associate in Equity Research [22]

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Okay. Then lastly, really quickly, are you willing to comment on the Intersys margin profile?

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Theodore S. Hanson, ASGN Incorporated - CEO, President & DIrector [23]

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We didn't give information on margins for Intersys. We did give you a sense of what the revenue was expected for 2019. What we included in our estimates for the quarter, you can assume that both their gross margin profile and their EBITDA margin profile is higher than the rest of our business just based on their business, but I think we'll probably stop there.

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Operator [24]

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Our next question comes from the line of Surinder Thind with Jefferies.

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Surinder Singh Thind, Jefferies LLC, Research Division - Equity Analyst [25]

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Just wanted to follow up on kind of Apex. For a couple of quarters now you've discussed the divergence in growth between like top accounts where you're seeing some really good growth, and then the retail branch-centric accounts where maybe not as much strength. Can you talk about the relative contribution to revenues of each?

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Theodore S. Hanson, ASGN Incorporated - CEO, President & DIrector [26]

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Rand, you want to take that?

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Randolph C. Blazer, ASGN Incorporated - President of Apex Systems, LLC [27]

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Sure. We have commented before that the top accounts represent about mid-70% of our total revenues and branch-centric accounts are the remaining 20-some percent of our accounts. So it's pretty weighted towards the top accounts, for sure.

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Surinder Singh Thind, Jefferies LLC, Research Division - Equity Analyst [28]

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Understood. And what is the growth profile of the branch accounts at this point?

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Randolph C. Blazer, ASGN Incorporated - President of Apex Systems, LLC [29]

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Well, I think we reported in Q3, they were flat year-over-year for the third quarter.

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Surinder Singh Thind, Jefferies LLC, Research Division - Equity Analyst [30]

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Understood. And then can you provide a little bit more color maybe on the Oxford segment? If I was to take a step back, is it fair to say that most or all the weakness is coming from CyberCoders? Or how should we think about the Oxford business itself? Last quarter I think you guys talked about it was showing a little bit of growth. Maybe any color at this point.

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Theodore S. Hanson, ASGN Incorporated - CEO, President & DIrector [31]

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The growth profile was similar for the third, I think, adjusted for currency and other effects. They're slightly above even. The CyberCoders business is performing a little bit better through the quarter. So they're making some progress on the initiatives that we have discussed with you before and laid out, difficult marketplace for them, but they are making some headway there.

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Surinder Singh Thind, Jefferies LLC, Research Division - Equity Analyst [32]

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Understood. And as you make headway through those initiatives, is that something that's kind of a 6-month project, a year-long project, kind of be some sort of, I'll call it, new normal, all else equal, meaning that the way that you guys are kind of pushing small stuff like [California] and some of those other kinds of things that you said.

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Theodore S. Hanson, ASGN Incorporated - CEO, President & DIrector [33]

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Yes. I think those are longer term initiatives, Surinder. I mean both the adding of staff and getting them up to productivity as well as diversifying our business geographically is a long-term kind of proposition. So those are quarters out, not next month, if you will, or next quarter, but we're pleased with the progress they're making.

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Surinder Singh Thind, Jefferies LLC, Research Division - Equity Analyst [34]

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Understood. And then one final question, your SG&A, the variance there was lower than I think -- it was positive. Can you talk a little bit about more color there? Was that maybe more variable compensation cost associated with maybe the different mix in revenues you guys had this quarter? Or is there something maybe a little bit more sustainable that we might be able to see on a go-forward basis? How should we think about that delta that you guys saw?

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Edward Lee Pierce, ASGN Incorporated - Executive VP and CFO [35]

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One thing is there was a onetime benefit that we picked up about [$1.2 million] that we set out in our release.

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Theodore S. Hanson, ASGN Incorporated - CEO, President & DIrector [36]

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The other favorable variances we indicated was related mainly to compensation and to healthcare expenses. Those are going to have a fair amount of variability. And we saw the same thing or almost the same thing in Q4 of last year. We gave estimates for Q4, as you know, and we're expecting an uptick and sequentially in SG&A of about $2.6 million to $3.5 million. And when you consider that, that also includes the SG&A related to Intersys, it's pretty much in line with what we would expect. And I think the Intersys piece to Q4 is about $1.6 million.

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Operator [37]

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Our next question comes from the line of Henry Chien with BMO Capital Markets.

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Sou Chien, BMO Capital Markets Equity Research - Senior Associate [38]

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I'd noticed and maybe if I missed it, it looks like your disclosure doesn't have bill rates anymore. Just curious if you can, I guess, for what reason that's taken away and if you could just comment on your bill rates trend this quarter?

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Edward Lee Pierce, ASGN Incorporated - Executive VP and CFO [39]

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No. It's not taken away. If you go to the supplemental we have that disclosed, and we're not calling it bill rate, we're calling it average revenue per hour worked, which we think is a better metric because it includes all the factors that go into cost to the customer.

And it's not really -- it's not a lot of difference between how -- what we reported in the past and what we're reporting today. This is just a better way of looking at it.

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Theodore S. Hanson, ASGN Incorporated - CEO, President & DIrector [40]

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And as we did for everybody on the call, we did go back and disclose prior quarters on that so that there was a road map there.

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Edward Lee Pierce, ASGN Incorporated - Executive VP and CFO [41]

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If you flip back through the supplemental, you'll see that we went back to Q1 of '18 by a quarter.

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Sou Chien, BMO Capital Markets Equity Research - Senior Associate [42]

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Okay. Got it. I will take that. Okay. Great. And then I guess just a question on ECS. With -- I guess with sort of elections coming up, what kind of impact does like an election cycle have on the business typically....

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Theodore S. Hanson, ASGN Incorporated - CEO, President & DIrector [43]

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George?

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George H. Wilson, ASGN Incorporated - President of ECS [44]

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Yes, sure thing. Some -- 2 things to really consider. One is the budget and the acquisition process in terms of are we going to go back to having continuing resolutions versus a budget government shutdown, those type of thing. The other thing to look at is whether one party or the other party is going to remain in the White House. Both of those things will have less effect on ECS than other companies that may provide not end solutions supporting critical missions. Our customer set, even in the federal civilian space, is in the Department of Homeland Security, Department of Justice, with marshals, these are areas that even though there might be some funding shifts from one party to the other and in some of the other federal and civilian organizations like EPA and such like that, the funding streams for the mission-critical customer sets are pretty, pretty even whether it's a Democrat or Republican. So I really don't expect to see a big change or a big impact to ECS, whoever takes the White House.

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Operator [45]

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Our next question comes from the line of Seth Weber with RBC Capital Markets.

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Seth Robert Weber, RBC Capital Markets, LLC, Research Division - Analyst [46]

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Wanted to go back to your comments about the Apex business, the kind of the cadence that you saw through the quarter, August, September, early October. And can you just tell us what's your kind of -- what your assumptions are for that trajectory here into the fourth quarter? Do you expect it to kind of continue to slow down? Do you expect it to stabilize? Any comments there on sort of what's embedded in your fourth quarter guide?

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Theodore S. Hanson, ASGN Incorporated - CEO, President & DIrector [47]

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Well, I think if you look at that guide, it pretty much implies that we expect to continue to move forward. The guidance range is roughly the same revenue levels that we did in the third and it's on less billable days so we're expecting to grow. We see opportunities where we can grow, and I think Rand did a good job of just saying, look, in the quarter whether it was the summer or it was a few weeks of kind of -- was a lull here and there that we saw a certain trend in the quarter and we're just letting you know what we see and how we see it by industry.

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Seth Robert Weber, RBC Capital Markets, LLC, Research Division - Analyst [48]

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Okay. And then just -- your fourth quarter gross margin guidance is pretty strong. It sort of suggests you could get it close to par year-over-year for total company. So do you think next -- do you think 2020 you could be flat to up on an aggregate gross margin basis?

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Edward Lee Pierce, ASGN Incorporated - Executive VP and CFO [49]

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We're not going to comment on 2020 just yet. And frankly, what -- as it relates to gross margin of what happened this could be mainly by businessman. And so we'll have more to say when we report on Q4.

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Operator [50]

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Our next question comes from the line of Kevin McVeigh with Crédit Suisse.

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Kevin Damien McVeigh, Crédit Suisse AG, Research Division - MD [51]

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I wonder if you can just give a little bit of the context of Intersys relative to the core digital business itself. I guess just where does that sit? And what's the incremental opportunity as you leverage that asset?

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Theodore S. Hanson, ASGN Incorporated - CEO, President & DIrector [52]

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Well, look, I mean the incremental opportunity and then I'll let Rand comment, is really to come in, integrate and engage on a pipeline of work that we already have developed within our business units under the Apex and Oxford segments.

So this is not bringing something to new customers, if you will. These are existing customers' needs that we understand, have qualified, are in our pipeline, and so we believe that there is going to be a pretty immediate uptake, if you will, on their ability to help us win more work. Rand, would you add anything to that?

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Randolph C. Blazer, ASGN Incorporated - President of Apex Systems, LLC [53]

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Yes. I guess I agree with Ted, obviously. Having said their first wave is they just deliver the revenues that they have projected for themselves and their own client base. But the real wave is, just what Ted said, our ability to muscle up on more of the pipeline that's pretty strong inside of Apex and Oxford. In addition to that, Intersys not only brings solution capability in those areas but they also have a nearshore development center in Mexico, which we believe is a gold nugget and it really will, I think, give us a nice push to providing the kind of services and the scale of services we want to provide to some of our larger accounts. So there's a real revenue opportunity here with this, which is why we did the acquisition.

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Kevin Damien McVeigh, Crédit Suisse AG, Research Division - MD [54]

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And Rand or Ed, in terms of the $31 million in revenue, is that all new customers? Or is there any existing overlap with your current customer footprint?

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Randolph C. Blazer, ASGN Incorporated - President of Apex Systems, LLC [55]

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Ted, I'll go ahead. There is very few overlap. There are a couple accounts that they had that we have, one in financial services, one in the technology sector, but most of their accounts are more smaller accounts, I would say. I mean by scale they're a different scale business. But not very much customer overlap, I guess is the end point to you.

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Operator [56]

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Our final question comes from the line of Mark Marcon with Baird.

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Mark Steven Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [57]

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I was wondering if you could talk a little bit more about both the statement of work in terms of hitting roughly $100 million this quarter and growing 30% plus, then we take Intersys and think about that a little bit longer term just in terms of how big could that be and in a couple years -- assuming we have normal economic growth and what are the constraints to continuing that growth rate that you're currently seeing?

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Theodore S. Hanson, ASGN Incorporated - CEO, President & DIrector [58]

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Well, look, Mark, we can't can give you future numbers on it, but...

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Mark Steven Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [59]

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Just how you're thinking about it strategically? And how you're envisioning it?

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Theodore S. Hanson, ASGN Incorporated - CEO, President & DIrector [60]

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Look, I think -- this business our -- inside of Apex and Oxford has been growing at 20%-plus rates for many years now organically. We don't see any headwinds to that. And save for anything in the economy that we don't see today. And I think that obviously as the business gets larger, it's kind of on a run rate to do about $400 million there. You could -- law of large numbers could affect growth rate but otherwise, I don't see anything in the marketplace. Matter of fact, I would say the wind is in our sail.

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Mark Steven Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [61]

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That's great. And then can you talk a little bit about the nearshore facility and how big that can be? And what is the -- what the key attraction is? Went through the Intersys website and they had a couple of really cool case studies, but they didn't go through like specifically what attracted certain clients to wanting to interact with that particular group and what the actual value-add was to the extent that I would like.

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Theodore S. Hanson, ASGN Incorporated - CEO, President & DIrector [62]

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Well, I will say this, and I'll turn it over to Rand, the customer doesn't decide to work with the nearshore facility or not; that's a delivery mechanism, if you will. And the solution, so if the solution calls for capabilities that they have in this nearshore facility then they deliver it through there because, obviously, there's a cost advantage to that. Rand, do you want to say anything else about the nearshore?

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Randolph C. Blazer, ASGN Incorporated - President of Apex Systems, LLC [63]

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Yes, I mean I agree with what you said Ted. And so, Mark, I say first of all they're in -- it's in Guadalajara, Mexico, which is a business center. A lot of universities there as well as a business point of reflection in terms of the work force and the availability of talent and the technical skills that that talent has. It's in Central time in the U.S. Very strong English-speaking, so there's a lot of attributes to that versus far in China or India or some of the Philippines, some of the other areas, and I think companies we've seen them -- more of an interest by companies to think about building capabilities like this or using capabilities like this in different places. I agree with Ted, it's mostly a decision that they accept our work in support of them and we leverage that capability, I would say, is a set of Golden Nugget leverage, and there's a lot of attributes to it that we see.

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Theodore S. Hanson, ASGN Incorporated - CEO, President & DIrector [64]

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The other thing I would add to that, Mark, is this was -- that facet of their business was very attractive all the big consulting companies that you would think of here in the U.S. were involved in this competitive process that Intersys won. And so I think that -- and if you think about some of the consulting firms that have nearshore capabilities down there, everyone that seems to be the hotspot, if you will, for all the reasons that Rand laid out, and so we're very pleased to have that as a component of our offering now.

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Mark Steven Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [65]

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It sounded like it, and I was just wondering if you could dimensionalize maybe the cost advantage, the price value relative to onshore? And then also like what is the available supply? How quickly can you scale it? Because it does sound like you have a lot of opportunities resident within the Apex client base that you could lay over to Intersys. I'm just wondering like how much of a constraint do they have in terms of the growth, in terms of resources, et cetera.

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Theodore S. Hanson, ASGN Incorporated - CEO, President & DIrector [66]

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That facility, Mark, has been spun up in the last 2 years for that business and so although we don't give out numbers on head counts between the U.S. and there, it just gives you a sense of how scalable it is, if you will. We view that, that center could be much larger in the future, serving our U.S.-based clients, than it is today. And there is a pretty significant cost advantage to that, although we don't get that out for competitive reasons. But it's a very nice part of that business. We're very excited to be able to bring that to our clients, and we think it's really going to help in the value proposition.

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Mark Steven Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [67]

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That's great. And then one other question, just with regard to the guidance. To what extent did where the holidays fall this year relative to prior years, did that impact your thoughts in terms of number of billable days and what the potential impact could be as we take a look at this current quarter?

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Edward Lee Pierce, ASGN Incorporated - Executive VP and CFO [68]

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So Mark, you may -- we disclosed it on a year-over-year basis that there is no change to billable days. It's 60.5. Now sequentially, in terms of holidays, there are 2 fewer -- or 2 more holidays in Q3 or Q4 than Q3. And that probably is going to have more of an effect on EPS and their time and material. Anyway, that's also included. By the way, the billable days is included in the supplemental information.

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Mark Steven Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [69]

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Yes. No. I was just thinking about the variance in terms of having a holiday fall on a Wednesday.

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Theodore S. Hanson, ASGN Incorporated - CEO, President & DIrector [70]

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Yes, there's no variance.

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Operator [71]

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Ladies and gentlemen, this is the end of our question-and-answer session as well as today's call. You may now disconnect your lines at this time. We thank you for your participation and have a wonderful day.