Everforth, Inc. (ASGN) Earnings Call Transcript & Summary

Hi, good afternoon. This is Heather Balsky, BofA's business and information services analyst. I want to welcome you all to our fireside chat with ASGN's CEO, Ted Hanson; and CFO, Marie Perry. It's really great to have you both at our conference. We appreciate it. Before we start, if anyone has a question, we'll check in. But otherwise, we've got plenty to cover. And so let's get started. I want to kick off by asking you to walk us through your key verticals and the type of work you do, and how your business is different than your typical staffing company.

Okay. So first of all, thanks for having us. We're happy to be here and talk about ASGN. ASGN is an IT services player at scale in both the commercial and federal government markets, about 80% of our revenues are in the commercial market and about 25 -- excuse me, 75% in the commercial, about 25% in the federal market. Our customers are typically large enterprise accounts, really good, solid industry diversification in those large accounts. Natural services, TMT, health care, consumer, industrials and business services and aerospace defense, which I'll break out into about 50 sub segments. No one industry is more than another, but I think providing technology services, doing it to large enterprise accounts who are the biggest and most stable spenders on IT is a good place to be. And our business -- our legacy business grew up as an IT staffing company, but we've evolved into IT solutions and consulting. And so there are those components as well. About 50% of our business is IT consulting in federal and commercial and about 50% is our legacy IT staffing business.

That's helpful. And so on the consulting side, you work alongside some very large players. Can you help us understand where ASGN fits into the competitive landscape?

Sure. Well, if you think about the pyramid of technology, their strategy, architecture and design at the top, there's what I call technical support or technical resources at the bottom, which is where we grew up, and now we're being pulled up into the middle of the pyramid. So often, some of our consulting competitors, whether it's The Big Four firms or someone like Accenture or others are helping clients with their digital road map and the strategy architecture and design. The client is in pulling us up into the pyramid to help execute the work. So there'll be projects and steps along the way to accomplish that road map. Customer is making decisions on who they want to use based on capability and price points and other things. And so we're getting access to that, which is a lot bigger marketplace than our traditional business in IT staffing.

That's helpful. And then in your commercial business, what are the types of projects that are fueling your sales right now?

So on the IT staffing side, we provide technical resources of every skill set to large Fortune 500 or 1,000 accounts. And so it's really everything, if you will, there. If you think about the commercial consulting side, we have a practice in what I call workforce mobilization or we call that, which is bringing project teams together to accomplish a certain piece of work, think about service centers, software development centers, that kind of thing. We have practice in modern enterprise, which is working on enterprise applications. Could be upgrades, playing a part in implementation, optimizing those type of things. And then we have practices in digital transformation. So think about ServiceNow. We're one of the largest elite partners of ServiceNow in the U.S., cybersecurity, right? Mobile applications, moving things to the cloud, those are all about today's kind of evolving digital transformation marketplace, customers trying to automate workflows and build systems that help them be more efficient, but also reach their customer.

Okay. And there's been a lot of disruption in the tech industry recently, including layoffs. Is that relevant to what you do? Does that impact demand from your customers?

Well, look, it can. I think a lot of what's been in the news around the layoffs in the tech sector have been about tech accounts, not necessarily in-demand technical skill sets that they need in their organization. So the tech company is clearly overbuilt. That's all you hear from them these days. A lot of that was in sales and marketing, corporate and administration, recruiters, all kinds of different things. Our view is that's most of what's falling out in these layoffs. There could be some technical workers who were focused on legacy or less important areas of the business, and they could be coming out as well, but it's more the former than the latter at this point. It has made that industry difficult because they're going through a transition here. So as a piece of our business, there's a little softness in the TMT vertical. And we'll just have to see how that develops from here.

Got it. And what about loosening of the job market. Are you seeing less labor tightness for tech workers? If so, is that a positive or negative for you guys? And what's the general environment for labor availability?

So kind of related to the last question, as we do see some technical talent coming out sectors like TMT, they're quickly being absorbed into other places, right? Financial services kind of take the news about 1 or 2 banks this week has been a strong place to be and still is a productive part of our business. If you think about health care, that's certainly a good industry to be in. The government is on a much better footing this year than they were last year. That's a good thing. So you're seeing these various other industry verticals suck up any talent that may be out there. So I would say there's some loosening, but it's a transition, if you will, maybe of workers from one industry to another. Whether that's good for our business, I mean, that's just part of the business. We would always say the industry view is the best way to think about the business and economic times, good times and bad ripple through industries at different rates, right? The financial services sector is always the biggest, fastest, most consistent spender in IT, right? Followed by TMT, followed by health care and consumer industrials. And the last, obviously, is the government, hopefully behind, right, in IT modernization. So I think we're seeing that kind of pattern play out today within the industry perspective of our business.

That makes sense. And you talked about softness on the TMT side. Within your Commercial segment, there's been some deceleration in sales. Where are customers pulling back? Why? And on the flip side, where is demand still strong?

Yes. So maybe a couple of dynamics at play here. First of all, in our Commercial segment, right now, we're fighting incredible comps. We grew over 20% in the first quarter of last year in commercial. In certain parts of that business, we're in excess of 25. So that's -- I think that's a thing here. I think also here in the first quarter, everybody is kind of wary, all businesses. I know in our business, we're wary, right? So we're watching spend, seeing how the year is going to develop. Is there going to be a major event here that we need to deal with and not get ahead of ourselves. And I think our clients, by and large, have some of that same posture on new work, right? On existing work, they continue on, if you will. Some of the customers that we have in our portfolio that you read about in the news, in the tech sector that you would think would be down. They're still there spending. They're just doing different things. They're transitioning from legacy areas to more important areas. So I think it's a mix of all those things, if you will. If you think about our business, to get away from the industry piece for a second and think about the services or solutions we offer to the client -- we have high-end IT solutions to the federal government. That is very strong. There's good budget there. We practice in cyber, AI, machine learning, cloud, IT modernization, which are all in high demand in the government. So that's 50% of our consulting business. The other 50% of our consulting business is commercial IT consulting, demand there remains good. It's across sectors. It's in areas that we talked about earlier, but bookings and revenue flow there. This quarter have been as we expected. The piece of our business that's more likely to have a softness to it in the service offerings, is our legacy staffing business. And that's because it's a little bit more transactional, right? The customer has more discretion to just say, I'm going to slow this down and there's a more immediate impact of that. And so they have a chance here to pick and choose what do they continue and what do they slow down on, and that's kind of how we see it ripple through the business.

And that kind of bridges to my next question, which is if the environment stays difficult, and if it worsens, like there's still talk about recession, hard landing, all that stuff. Where is the resiliency in your business?

Well, go back to the order I just went through, the most resiliency in the federal part of the business. When you have a disruption in the commercial market, right? A dip in the economy or business cycle, then naturally, the government continues to spend and even spends more to try to spur the rest of the economy. So you're seeing that kind of play out right now. Next would be commercial consulting. Those are projects that are under contract, funded and we're working them over a period of 12 to 18 months after we win. So when you see our bookings number in commercial consulting, every quarter, you can kind of use that as a forward indicator of what the next 12 to 18 months look like for that piece of the business. And then the other piece of the business, which is the legacy staffing piece, IT is going to be a little bit more stable, but it is expected to be softer and down and then creative and our permanent placement business, both are going to be more discretionary to the clients. So there could to be more pressure on those pieces of the business. The good thing is they are only about 15% of our commercial segment. And so it's a thing, but it's not a big thing, if you will.

Yes. And so just on the consulting side, I think we've talked about this in the past. Just your confidence that your consulting business can grow even in a recession. And how -- what we saw in 2020 and even going back as far as the financial crisis before HCN bought, the consulting business, like how does that inform your view?

Yes. So good question. One thing I try to remind investors and you as you look backwards, there's not $1 of revenue in ASG and today that was there in '08, '09, right? So when Apex came into the business, which is how I got here in 2012, we totally pivoted the business away from its historic business and more focused on technology. So my 2 data points, if you will, are being with Apex during '08 and '09 during the great recession -- or financial crisis, we had a flat 2 years there. And then in 2010, grew 40% coming out of that. All right? And in COVID with -- as another data point, we saw something play out similar to what we're seeing today. Softness in created and permanent placement, better stability in IT staffing, but strong contribution from consulting, both commercial and gov. And we basically were slightly up for the year and maintained a flat EBITDA margin profile, right? So I know that's not -- what we went through in 2020 is not what we're going through today. But I think it's a data point, if you will, that kind of informs how we think the business will perform through the next few quarters.

That's helpful. And I wanted -- you brought up permanent staffing. It is generally the most cyclical part of staffing business. How should we think about that risk from a sales perspective? And then also, how do we think about it from a margin perspective?

Right. So we're very careful here with that part of the business because it's very bottled both ways. So our path here has been -- it's a service offering the client wants at times, we need to be able to deliver it. It's about 3.5% of the business right now. That's a pretty good spot to be. If it goes down as it did during COVID and during the great financial recession, then so be it, you may have a little bit of a business mix issue on the margin, but it works itself out over a period of time.

Okay. In November, you talked about getting to $6 billion in revenue, and adjusted EBITDA margins of 12.1% to 12.4% by 2024. You're almost there. Exiting 2022, you're at 12.2%. What are the key drivers for revenue and margin expansion through 2024 to get to your 3-year goal, right?

So overall, it's driving our consulting strategy forward and leveraging our IT staffing capability to fulfill that, which differentiates us from the big traditional consulting firms. We -- when we have the similar capability to bid and win work, we have great sets of quals like the big traditional staffing consulting firms, but we deliver our project teams on a contingent basis, not permanent. So we don't have to deal with big issues around the utilization and other things that allows us to be more price competitive and also bring resources that are a more perfect fit to each project, right? So that's how we differentiate ourselves. If we continue to drive today, we -- when we started this plan, I think 40% of our business was in consulting between commercial and Fed. Today, it's 50%, right? Tomorrow, we're on our way in this plan to something like 55% or closer to 60% consulting versus staffing. As that happens, those are higher value, higher-margin services that we're providing to the customer. They come at better gross margins and EBITDA margins, and they have the fastest growth rates, if you will. So I think that, that not only is going to -- obviously, this is important to the customer and raises our profile with them, but also as it relates to our growth and margin story and our targets allows us to kind of continue to lever into those ranges and then above.

That's helpful. So I want to touch on your government business, which you -- you talked about a little bit today. But it seems like that line of business is starting to pick up as RFPs ramp. There is press release, I think, this week. I think it was this week, we had a long week. Your -- what does your pipeline look like? And how do you feel about growth over the next few years?

Yes. So if you go back into 2020 was a big year for the government because, again, this dynamic was playing out where you had the commercial marketplace down in some industry sectors, the government was spending heavily in certain IT areas and to support kind of pandemic retracking and response and what have you. But coming out of that, there weren't favorable budget trends in the federal government. And so it was a pretty tough '21 and '22. In '22, we got a new federal budget in place. It was up 7% to 10%, depending on what area of the government you're looking at, defense to Fed civilian, et cetera. And those awards began to hit the street in the middle of '22 and a big award at the end of the government fiscal year, at the end of Q3 -- calendar Q3. So we, like some of our peer group had really good bookings. New bookings numbers for that quarter. It was about a 2.1% book-to-bill for us. And so what you've seen in the fourth quarter of last year and now in the first quarter is a ramping up of that work. And so we got organic growth rates going in our federal business and our guidance implied the same going into the first quarter. So it's -- there's a much better marketplace because of the budget that's in place. We're in the right spot. We call it the fast currents of where IT is going to be invested in by the government. And so we look for a good growth year this year and beyond.

Helpful. And then recently, it feels less recently. Again, it's been a very long year, but -- or '22 to '23 has been -- you recently acquired GlideFast, which provided you exposure to ServiceNow offerings -- can you talk about first what attracted you to GlideFast?

Sure. Well, I mean, this is a great example of, I think, acquisitions that you see us will follow in the future. We had ServiceNow as an enterprise application on our shopping list for M&A, and we had it on the list because we see all of our clients' needs in these large enterprise accounts, and we can make decisions about what hot -- what's hot, what has legs for the future, what can we add to the portfolio by building it organically and what do we need to go out and acquire, right? And a ServiceNow elite partner status was something we knew we needed to acquire. It took about 2 years, but we met GlideFast at a mutual customer sitting side by side. So it was a proprietary deal, and we're able to close that last July, and they are now 2 years running the North America Elite partner of the year for ServiceNow. So it's a very high-end business and an application that's being used by every one of our customers, and it's still on the front end of customers using this particular piece of technology to really provide the digital layer in front of all their other enterprise applications in a -- to automate workflows, to tie applications together, to get single sign-on into environments to use so that you have better workflow automation. And we think that this business has a lot of legs for the future. And they're now 3 quarters in, integrated, doing great, hitting numbers. So I think that's going very well.