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

Thank you, everybody, for joining us. My name is Ryan Fenske. I cover high-yield services here at BofA. Here with me today, we've got ASGN and from the company, thrilled to have Ted Hanson, Chief Executive Officer; and Chris Donnini, Vice President and Treasurer. Guys, thanks for taking the time and being with us.

Thank you, Ryan, for having us.

Thank you.

All right. Great. So to kick us off, can you just provide a quick overview of the ASGN for anyone less familiar with the story?

Sure. So the best way to think about ASGN is IT services to large enterprise accounts. About 70% of our business is in the commercial marketplace serving clients that are in the Fortune 500 and 1,000. 30% of the business is in the federal government space. There, we provide high-end IT solutions to Department of Defense, Intel and a few key Fed civilian agencies. We grew up as an IT staffing business, which is the heritage of by our service offering, but we have been on a pivot to build off of that and serve the customer at a higher level with more consultative capabilities. And so now that consulting -- total consulting part of our business is about 6% revenues and our traditional legacy IT staffing is about 40% of revenues.

Okay. Great. And as you just mentioned, the business has evolved quite a bit over time to really focus on that long-term higher-margin consulting work. the majority of your revenues are now in IT consulting. I guess can you speak to how this transition has taken place over the years and where you're at in the journey today?

Sure. So one of the things that we saw through these customer relationships that we've had for years and decades is that the customer we had built [ Pascual's ] trust and through our capabilities to provide technical resources through the IT staffing program. But our end customer who is the CIO, CTO or IT directors across large enterprise organizations began to pull on us to do more and said, you've got really rich technical capabilities and resources. Could you step in, put bigger teams together, wrap it with some project management and engagement management and help me get to certain deliverables? And so it was an organic pull from the customer. So 7, 8 years ago, we began to do that. We built a business in commercial that was organically upwards of $500 million in revenues. We began to make a few key small strategic tuck-in acquisitions to put certain solution capabilities in the mix that were better bought versus built over a long period of time. And today, we do about $1.2 billion in revenues in commercial. And along that journey, we also made our entry into the federal government space with our acquisition of ECS in 2018. And so that's really how our consultative capability here has come together.

Okay. Excellent. And then sticking with IT consulting, I guess, can you explain how ASGN's go-to-market strategy differs from the traditional consulting players? And what advantages does the strategy have to both ASGN's operations as well as to your customers?

Yes, I think that's the key. I mean, obviously, there's a lot of traditional consulting firms that have been out there a long time. They run a bench model where all their resources sit on their bench. And as they win work, they begin to unload that bench, if you will, on to the projects that they're performing for the customer. We're differentiated from them and the fact that we really don't carry a bench to speak of. It's very thin. All of our 80% or more of the players on every project team comes from our IT staffing capability, and that means we're building a just-in-time team and we can get started very quickly. The resources on that team are much more custom bit to what the need is because we're not just deploying who's on the bench. We're actually purposely building a custom fit team. And then last, because we're not carrying a bench and the cost of that bench and underutilization, we're not having to charge a customer for that. So our price points come in at an advantage, if you will, be the big traditional consulting firm.

All right. That's excellent. Getting a bit more granular on the go-to-market. I mean, you have customers across 5 key commercial verticals and the sixth vertical being the federal government, I guess, Ted, you often say that your customer base is one of the gold nuggets of the ASGN business model. I guess, can you speak to that topic a bit further and maybe provide a brief update on some of the positive industry vertical trends that you guys saw in the most recent quarter?

Yes. So look, I mean, I think our belief is and the data supports it, that much IT dollars are spent by large enterprise accounts. So they're the biggest spenders. They are the most consistent spenders over time and adopter of new technologies. And so when you have a customer that's a large enterprise, Fortune 500 or 1,000 accounts, that's not just a customer for this project. That's a customer for life. If you build the right relationship and perform at a high level on all the various work that you do. So that's been critical, if you will, to the critical pillar, if you will, here inside of the company. And I think importantly, if you think about accounts, large enterprise accounts, you want to have them be diverse and spread across multiple industry segments because it gives a portfolio balance. Typically, financial services and big banks are the first and fastest adopters of new technology followed by TMT certain consumer, industrial, health care and then eventually get to the federal government, but it goes in a wave like that. And so again, when one industry or 2 are down, the others are up and so having a balanced portfolio of large enterprise accounts, I think, is a key way to build the business over a period of time. Today, in the commercial marketplace, we're still in a place where the customer has been restraining spending that's not critical. So if it's discretionary, they've been pulling back because they've been worried about the macro. Are we going to have a recession? Is it going to be a harder soft landing? How might the election play in all of this as it relates to the macro for each one of these customers? So there's been a lower level of spend on the IT services part of being here for the last 18 to 24 months. I think now that we have the election behind us, I think customers also see that the macro is probably more stable than how they felt over previous few quarters that as we get into '25 and into '26, we're going to see more normal levels of spending. And we're starting to see certain industry segments emerge back to growth, starting with TMT. That was a double-digit grower for us in the last quarter, and our consumer industrial business was slightly up. So instead of having no industries in commercial growing year-over-year, we now have 2 in the third quarter. And then I think very importantly, we saw our banking industry -- but I'll say, find stability. So for the first time, quarter-over-quarter, it was stable, and we didn't see a further sequential decline. So that was a positive thing. And I think here, as we go forward, we'll see some of these other industries begin to emerge back towards growth year-over-year sequentially.

Okay. Great. And you mentioned some of the industries and verticals where you're seeing growth, I guess, in terms of specific capabilities that you're offering, AI has been very topical this year. I guess what does that opportunity set look like today for ASGN? And how do you see that evolving over time?

Yes. So certainly, AI is the top of a conversation, but it's not an area of big spend yet for the end client. I think most of the spend that you're seeing in the AI area is the explosion of the data center to get compute power and the requirement around chips from NVIDIA and others in order to harness that processing power. And so that's the first part of the cycle, if you will. Now emerging, you're starting to see large software enterprises begin to enable some AI features like virtual assistance into their software. So some native AI capabilities. But none of this has gotten to the customer and the point where they begin to implement any of these either software packages or services with us to really begin to put AI into play inside their organization. That will definitely happen here, but it's -- typically, this technology investment cycle goes in stages, not too dissimilar to this.

Okay. Makes perfect sense. And what are some of the other areas that have been most in demand by your client base? I mean you spoke a lot about data and analytics as well as cybersecurity projects on the most recent earnings call, as you've mentioned a number of key federal government task orders in Q3 that are progressing nicely as well.

I think -- I mean, I think those are the areas. I mean, customers are on the front end of doing data and data modernization activities in order to get ready for AI. It's a growing piece of spend. It's not full throttle yet, but it's definitely starting. Cyber has been very strong for us, both in the government and commercial to areas of application development have been strong. Migration to the cloud has been good and consistent. Our work in ServiceNow, where an elite partner to ServiceNow in North America. That continues to be a growth area for us off of an acquisition that we made in July of 2022. And I think that those -- I would say, both in the commercial marketplace and the federal marketplace or areas where we're kind of gaining strength in growth and traction.

Okay. Great. And you briefly mentioned kind of some post-election activity in one of your prior comments. I guess, do you feel like now that we have election results and that's not an overhang anymore? Are you seeing some customers get the ball rolling on pent-up IT spend? Have you seen that kind of come through yet?

I wouldn't say that we're seeing that come through yet. I think it will kind of manifest itself in 2025 customer budgets. And then we'll begin to see them release those budgets and get into what I call a more normal spending habits here as we go forward. I think in Q4, it's difficult to have an upward trend because it's seasonably the time of the year where customers are wrapping things up, they're thinking about budgets for next year. So what we're seeing is kind of stable demand environment from Q3 to Q4. But I don't think we'll really see a ramp-up until we get into new budgets and understand what customers want to do and when they're ready with the right confidence around their own business to step on the gas pedal harder.

Okay. Got it. Another area of topical lately investors have been focused on has been the impact of the new Department of government efficiency on government contractors. What can you say about the potential impact of this agency on ASGN?

Yes. So it's been quite a conversation, and I think it's the unknown of what those really will be or could be. And there's been a lot of arm waving around well, what will this do to budgets and spending. And I think, look, we -- from what we can hear from our customer and what we see, there'll be a top-down view of where across the federal budgets and agencies, are there opportunities to attack broad and waste and abuse and maybe spending that there's not a real return for. So I think there'll be that top-down view. And then they'll come at it from the bottom up and say, well, where can we reduce head count, where we can reduce spending from the ground up. As it relates to us, most of our services in the federal government are around cybersecurity, AI, machine learning, digital transformation and modernization around data and other things. So I think we're honestly the answer to some of the questions with those because the government is definitely going to have to modernize its systems in order to be more efficient and productive, and we play a critical role there. And the agencies that we serve I think, are less in the crosshairs maybe of the dose effort. I mean most of our work is in Department of Defense, Intel, and Department of Homeland Security, which are all agencies that are serving kind of mission incredible things in the national interest. But there'll be some of the regulatory agencies on the federal civilian side, where I think there'll be an effort to find some savings. And so I think for us, we're in a pretty good place in all this. So that's our take.

Okay. Great. We'll see how it evolves. You've done a great job of protecting margins over the past year in the face of a tougher sales environment. I guess, can you walk us through the variable nature of your cost structure. And I guess what has allowed you guys to flex the cost base so effectively?

Yes. I think, look, the one of the most attractive attributes of this business or it's free cash flow characteristics and the way the P&L will kind of reset itself if we're growing slower or not growing at all, most of our SG&A is variable or variable like. And so if we have less revenue, it kind of resets itself to the gross profit line, so we don't really have some margin there. And that's what we've seen here. Actually, our gross margins have been improving over the last 24 months. And then on the unit by unit. And then on the SG&A side, our model is less fixed compensation, high incentive compensation. And so that regulates itself, if you will. So we do a pretty good job of maintaining EBITDA margin through times like this. And we do a great job on the cash flow side because obviously, when you're financing less receivables in advance, you have a wave of cash that comes in. And so we've been generating 100% free cash flow here. And so again, another attractive attribute of the business model.

Okay. Great. And maybe we can kind of shift kind of some capital allocation and financial policy questions what you guys are going to do with that free cash flow, I guess, maybe starting with, I guess, the balance sheet specifically, just to kind of set the stage. I mean you've done a really strong job maintaining a conservative leverage profile. I guess is there a target that you're managing to or a range in which I guess you guys are comfortable operating the business?

Do you want to take that one?