Q3 2020 ASGN Inc Earnings Call
Greetings and welcome to <unk> third quarter 2020 earnings call.
At this time, all participants are in listen only mode.
The question and answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
It is now my pleasure confuse your host Kimberly Esterkin Investor Relations. Thank you you may begin. Thank you operator, good afternoon, and thank you for joining us today for <unk> third quarter 2020.
With me are Ted Hanson, President and Chief Executive Officer.
I'm blazer president of apex systems, George Wilson, President <unk>, yes.
<unk> 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.
Our FCC filing.
We do not assume any obligation to update these statements made on today's call for your convenience our prepared remarks and supplemental materials can be found in the Investor Relations section of our website at investors got asked <unk> Dot com. Please.
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 the GAAP and non-GAAP measures are included in today's press release.
I will now turn the call over to <unk>, President and Chief Executive Officer.
Thank you Kimberly and thank you for joining <unk> third quarter 2020 earnings call.
Ftn reported strong results for the third quarter with both revenue and adjusted EBITDA exceeding our expectations for the quarter revenue.
<unk> totaled 1.1 billion up 8.9% from the prior year and ahead of our guidance of 913 million to 938 million for the quarter.
Adjusted EBITDA totaled 113 point threemillion or margin of 11.2% for the third quarter well ahead of our guidance.
Performance was broad based with each segment outperforming our initial expectations.
Yes in particular saw better than expected results for the third quarter with revenue is up 40% over the prior year.
Pet segment revenues, the lower than Q3 of 2019 and tough year over year comps were up sequentially by 3.3% yeah.
The improvement was mainly the result of a turnaround at our apex systems commercial business.
The quarter clients continue to request based on the work in both the commercial and federal government market.
Actually witnessed very balanced growth in Q3 with week over week revenue improvements across all segments. We.
We believe the steady revenue growth during Q3 as evidence that our commercial but that's at trough levels in the second quarter and is now on a solid upward trajectory Ed Pierce, our CFO will discuss more on this recovery in the fourth quarter guidance later in todays call.
It's I'd say that the Todd previously asked yet scale high end IP service offerings at large and diverse client base provides us with stability throughout market cycles. These.
These aspects of our business model also provide us with the ability to accelerate as our clients pursue their IP modernization digital transformation initiatives M&A continues to be a great way for us to build our capabilities in key solution areas, while simultaneously moving higher up in the value chain in September we acquired.
We broke systems, which is now part of the impact.
Then just post quarter end, we acquired Skyworth as part of you see us.
Both companies were purchased with cash on hand.
Our free cash flow is our principal source of liquidity and has enabled us to make acquisitions and important part of our capital allocation strategy without the need to take on additional leverage before getting into the specifics of the leap frog and Skyworks acquisition, Let's first turn to our segment performance for the third quarter.
Hey, pets, our largest segment, which includes apex systems and creative circle services clients across multiple commercial end markets.
For the third quarter of 2020, <unk> segment generated revenue of 596.1 billion down 7% year over year, but up 3.3% sequentially.
For the third quarter apex systems revenues declined 2.7% year over year, while creative circle revenues declined double digits compare.
Compared to Q3, 2019 importantly, both it tech systems and creative Circle continue to rebound from the code midnight team related slow down experience in the second quarter with sequential revenue improvement up 3.3% and 3.6% respectively.
Apex systems exited the third quarter, a weekly revenue levels above the pre 'cause it 19 levels crave circles weekly revenue its while down double digits for the prior year.
Can you to move higher with bad debt and permanent placement revenues thing steepest decline in digital related skills in service is holding steady.
Revenues for apex systems demonstrated some notable trends for the third quarter first pop accounts achieved low single digit growth rate for Q3, while retail in branch accounts for Daniel.
Second three of our five industry verticals saw revenue improvement.
Leading financial services health care business and government services.
Consumer industrials and technology media and telecom vertical revenue declined year over year.
Revenues in financial services accounts, our largest vertical continued to experience solid double digit growth across all sectors, including big banks retail bank wealth management insurance and then kept quiet.
Our consumer it industry up article was still showing declines year over year experienced growth within E commerce consumer staples and utility accounts, while retail energy hospitality and transportation, including Airlines for Dallas.
Gross margins for the apex segment were 29% down 80 basis points year over year due primarily to the lower permanent placement mix and creative circle as a result of covenant light team of.
Gross margins at apex systems, However were up over the prior year period, and but the apex systems and creative circle maintain strong EBITDA margin.
Importantly, we continue to grow our commercial consulting revenues consulting work for the apex, and Oxford segments combined total 110.7 million for the third quarter up 10.6% year over year, returning to double digit growth rate.
Our pipeline for consulting work also remains strong and was up double digits over the prior year period.
We expect that our high end consulting offering will remain an important source of value we provide for our clients and so we continue to make acquisitions that bolster our consulting capabilities as noted previously during the third quarter, we acquired leap frog.
Specialized consultancy headquartered in Boston, Massachusetts Leap frog focuses on providing enterprise scale digital business transformation services to fortune 500 client and expands the apex segment proficiency in digital innovation and enterprise solution for the financial services insurance and.
Health care industries with an accelerating trend toward digital transformation now is an ideal time to welcome leap frog to apex and asked yet.
Under the apex umbrella leap <unk> benefit from greater access to industry, leading methodologies at a broader talent pool at the same time leap frog provides atex subject matter expertise and longstanding client relationships as well.
While we are just beginning our joint work with leap Frog October marks our one year anniversary of our acquisition that our sales with the addition of Enersis, we've been able to bid on an increasing amount of work, including securing new contracts and cloud strategy data and analytics agile and Dev ops engagement from multiple apex.
Hi, it's leveraging at our CES and their work with our cloud partners. We're also seeing great traction with that our system is near shore Mexican development Center.
Well, one new client this past quarter, the combined enersis in apex team was engaged to provide expertise in cloud data engineering architecture, and enterprise data governance to expand the clients' customer service Digitization initiative, we provided a digital roadmap for work execution, using but U.S. and.
Second resources to expand our clients cloud data warehouse.
We also launched a near shore engagement with a very large global oil and gas company to develop a mobile viewing at as part of this customers go to market strategy.
Our work included design and implementation.
As for Dev ops platform consistent with the clients digital architecture.
Let's now turn to E. C S, which provides mission critical solutions to the federal government, including the department of Defense intelligence agencies and other civilian agencies.
Yes experienced an exceptional quarter of industry, leading revenue growth with revenues of 288.6 million up 40% year over year.
This growth was primarily driven by the increased demand for artificial intelligence and machine learning or AI M.L. services.
The federal government is rapidly increasing its AI and they'll spend Bloomberg government is anticipating 2 billion and government wide contract spending.
On artificial intelligence and machine learning projects for the current physical gear up 500 million from 2019.
Yes supports customers across a wide range of domains in the A.M.L. space, including imagery and video now sits supply chain and logistics and sentiment analysis.
Yes revenues in the third quarter also benefited from the development expansion of unclassified network as well as opportunities present entered previous strategic M&A.
Tcs is new business pipeline remains strong.
Segment was awarded approximately 383.2 million in new business and.
And achieved a book to Bill of 1.3 to one for the third quarter.
Backlog improved sequentially to total 2.7 billion at the end of the third quarter or a healthy coverage ratio of 2.7 times you see us is trailing 12 month revenue.
Key contracts won in Q3 include an award to provide the FBI with a full spectrum of cyber and information assurance support across all of their technology system and.
Another award to provide data analytics and software development support to the up yeah.
Several contracts to support cloud Devops.
Yes intelligence and data analytics to the department of Homeland Security and eight <unk> ml support to the government's COVID-19 response in management efforts.
Similar to our commercial end markets, we continue to acquire in the government space just post quarter end on October 1st we announced the acquisition of Skybus.
Scott. This is joint you see us his mission solutions business unit, which is focused on a range of cutting edge and technically complex the intelligence community and other federal civilian programs submission.
Scott This is why the largest providers of or most sensing and data science expertise to the National DS Batesville Intelligence agency and as the prime contractor on several significant LNG a contract vehicles.
Adding Scott with his unique capabilities to these yet further advances the mission critical solutions, we offer a customer and expand these yes its relationship with the guidance yet.
We expect to leverage you see us this past performances and Skyworks is capabilities to execute on existing task orders as well as when new geospatial contract.
Turning to our last segment, Oxford, Oxford offers on demand consulting talent for commercial I T healthcare life Sciences, and engineering client as well as permanent placements Hallador Cybercoders Division.
The Oxford segment reported revenues of 127.2 million for the third quarter up 2020 down 16.6% from the prior year, but up 5.8% sequentially.
But Oxford and Cybercoders, they're seeing a solid recovery from their second quarter lows across the U.S. in Europe Oxfords offerings that I T life Sciences, and engineering are trending up as our midmarket accounts getting more confidence in their own business recovery although.
Although a small part of the business Cybercoders permanent placement services also showed strong sequential rebound.
Yes, the ins business continues to evolve to meet the critical I need I T needs of our customers the government market, even with overall market volatility spurred by then pending election remains insulated from the COVID-19 induce commercial market recession, the commercial market, that's making a turn.
In our high end consulting services and solutions are seeing positive booking as clients continue to express confidence in our ability to support their me.
I remain bullish on the existing and emerging opportunities for U.S., yet we had the right capabilities with the REIT industry expertise ready to meet the needs of our large and diverse customer accounts.
With that said I'd now like to turn the call over to Ed Pierce, our CFO to discuss our third quarter performance and fourth quarter guidance and future in further detail Ed.
Thanks, Ted good afternoon, everyone.
As mentioned our financial performance for the quarter was well above our guidance estimates driven by the high growth of our federal government business in.
And the solid growth of our commercial division from the trough level revenues experienced in late may of last quarter.
Revenues for the quarter were just about 1 billion, which is the highest quarterly revenue level since Q4 last year.
Q3 revenues were up slightly year over year and up 8% sequentially.
Net income and adjusted EBITDA were both up sequentially. Our adjusted EBITDA margin was 11.2%, which was in line with the preceding quarter and higher than our guidance estimates.
Commercial revenues for the quarter accounted for 71.5% of the total revenues and because of the pin danek were down year over year on one additional billable day. However on a sequential basis commercial revenues were up 3.7% and all commercial division generated higher revenues per billable day than the preceding quarter.
[music].
Federal government revenues accounted for 28.5% of total revenue was up 40% year over year and up 20.4% sequentially. A high growth was driven by a number of factors, including increased volume on certain existing programs New contract awards and the contribution from Blackstone Federal.
What does the comp which was acquired in January of this year.
Gross margin for the quarter was down year over year due to changes in business mix stemming from the decline in permanent placement revenues and the high revenue growth of our federal government business.
Carries lower gross margins than our commercial business.
Gross margin on federal government revenues was lower than Q3 of last year due to high volume.
Certain programs under cost Reimbursable contracts, which typically have lower margins than other contract types.
Contract gross margin for the commercial business, which is which excludes the effects of permanent placement revenues was up slightly year over year. This improvement reflected among other things higher contribution of consulting revenue is low.
Lower billable consultant expenses, which are generally pass through to the customer with no markup.
That's your <unk> expenses were 17.5% of revenues.
Year over year reduction of approximately 130 basis points in the expense margin.
This improvement reflected effective expense management by our operating units and lower incentive compensation expense.
Net income was 52.3 billion down 8.9% year over year on lower gross profit partially offset by the.
Decrease and as she had a in essence expenses as.
As mentioned earlier adjusted EBITDA was 113.3 million and the related margin was 11.2%, which was 40 basis points above the midpoint of our guidance estimate.
Free cash flow was 81.9 million and the conversion rate of adjusted EBITDA into free cash flow was 72.3%.
Cash used for investing activities included capital expenditures at 5.7 million and the acquisition of elite product for 66 million.
Quarter end cash and cash equivalents were 229.7 million up 10.5% sequentially.
There were also no outstanding borrowings under our 250 million revolving credit facility and our senior secured debt leverage ratio was 1.13 to one.
Well below the maximum while allowable ratio of 4.25.
We are providing formal financial guidance for the fourth quarter 2020. These estimates which are set forth in our earnings release and supplemental materials are based on current production trend doesn't assume no deterioration in the markets that we serve.
Furthermore, these estimates are as of the date of our earnings release. Consequently, any worse thing up the 10 data could adversely affect our results for the quarter.
Regarding our financial estimates for the fourth quarter. We estimate revenue was up 968 million to 980 million that income of 44.4 million to 48.1 billion and adjusted EBITDA of 101 2 million $206.
He's asking about the same revenues will be down thing a low single digit sequentially due in part to the big 3.5 fewer billable days in Q3, and we estimate revenue per billable day well.
It will be up low single digits over Q3.
For our commercial business, we estimate revenues will be flat to down sequentially because of the 3.5 fewer billable days and revenue per billable day will be up four to four and a half or so sequentially although.
Although we're not providing specific details on recent weekly production. The weekly production trends that outlook experienced in Q3 have continued into the first three weeks of Q4.
And were considered in our financial estimates.
For our federal government business, we expect year over year revenue growth will be slightly above 10%. Despite the very high Q4 2019 comparable.
As we have previously reported revenue growth for the fourth quarter last year was over 30% and.
Benefited from 34.4 million net revenues from the early renewal software licenses.
Relative to the third quarter of this year, we estimate revenues will be down because of 3.5 fewer billable days.
And the lower expected government spending on certain cost reimbursable contracts in which there was a high level of spending in the third quarter.
Thank you very time I'll now turn the call back over to test for some closing remarks Ted.
Thanks, Ed.
As we enter the fourth and final quarter of the year I can positively say that actually it has established a solid foothold at scale in the commercial and federal government marketplaces for IP services our.
Our customers are feeling more confident that a month path.
They are seeing the need to continue moving forward on their strategic technology, roadmaps more clearly than ever before.
This favorable dynamic creates consistent and growing demand for ASV as high end consulting services.
From an M&A perspective, we will continue to look to acquire companies in the commercial and government markets that provide us the capabilities and customers or new contract vehicles.
Jay which we acquired in January 2019 expanded our relationship with the FBI and strengthened our cyber security offering.
Enersis, which we acquired in October 2019 expanded our consulting capabilities in big data and business intelligence, while also providing a near shore Mexican development Center, Blackstone Federal which we acquired at the beginning of 2020 provides us with a much stronger footprint with the department of Homeland Security.
Turning to our most recent acquisitions leap frog offers us new capabilities in digital innovation, while Skyworth broadens, our geo spatial expertise and strengthens our position with the Ngs.
I'm very pleased to see that our business is on a solid upward trajectory and is meeting or in many cases exceeding our internal expectations.
Through both organic growth and acquisitions, we have position asked again for continued success in this new remote working environment. We will continue to look for ways to strengthen and advance the IP services, we provide each of our commercial and government clients throughout the fourth quarter.
That concludes our prepared remarks for today.
Thank our management team and all of our employees for a fabulous third quarter on behalf of our entire company and the board of directors. We appreciate your continued support they asked yet we will now open up the call to your questions operator.
Thank you ladies and gentlemen at this time, we will be conducting a question and answer session.
We'd like to ask a question you May press star one on your telephone keypad, a confirmation tone will indicate your line is there any question queue. You May press star two if you would like to remove your question from the Q.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.
Our first question comes from the line of Gary Bisbee with Bank of America. Please proceed with your question.
Hey, guys good afternoon, and Oh, another another very strong quarter I I guess, maybe if I could just start with.
You gave the guidance said it assumes no deterioration. It's I guess, how are you thinking about the recent spike in virus activity and any impact that could have on your commercial staffing businesses at this point.
Well Gary Thanks for the question I think that you know if we look at what's going on in Europe, We haven't seen it impact yet on this new wave of cases or business remains fairly steady there we haven't seen clients change your behavior, there and I expect since there are a few weeks ahead of us here.
No that hopefully, we'll see kind of that same trend I don't know where this is going to obviously weve carved that out in our guidance that we we didn't know how yet or if that may affect our performance, but I can tell you in I.
I can tell you just in terms of what we're seeing in every weekend the business. Our trend continues here and some of the things that we've seen a whether its code that affected industries or small accounts. They obviously are still are still struggling to some degree and so [noise] performance in those areas, although it's a small.
Percentage of our business is still difficult, but in large accounts non cobot affected areas federal government. Our business is still on a good floods.
Okay. Thanks, and then in your discussion of the <unk>, Yes, gross I think Ed may be attributed to the growth in the quarter to several things growth in existing contracts new wins, and obviously, there's been some M&A as well.
Can you talk a little bit about that concept of growth in existing contracts is that is that a meaningful driver over time and how significant is that you know today or <unk> or <unk> as a as a truck driver of growth of the business.
Sure well look I'll, let Ed break the numbers down for you and then let George comment as well, but it definitely did the.
The extra growth if you want to call. It that that we saw in the quarter was driven by some heavy spending on a couple of existing contracts.
I'm here at the end of the government's fiscal year coming into the end of the yard calendar third quarter, Ed you want to break down the numbers for Gary.
Yes, Gary we mentioned in our earnings release as you know about yeah. We made the comment that the existing programs the sort of higher spend there were a couple in particular that we saw a surge in spending in Q3 over Q2.
And that increase was about.
Let's say $30.5 million.
As Ted mentioned it sort of coincided with the end of the government's fiscal year.
Well look I think on a go forward basis, you're going to expire over you shouldn't expect that yeah, largely that yeah in terms of sort of where our growth is coming from is going to be coming from existing programs now as it relates to that surge. If you were to exclude the surge from the revenue growth that we saw in the quarter, we still have.
20% revenue growth right.
For the quarter, so you're kind of thinking about it in those terms and then.
As it relates to Q4, Oh, we don't expect to see a similar surge from those contracts are those programs and so that's all contemplated in our numbers.
Great. Thank you.
Okay.
Our next question comes from the line of Jeff Silber with BMO capital markets. Please proceed with your question.
Thanks, so much.
Some time in your prepared comments, giving us a little bit color on the acquisitions and I do appreciate it seems like the pace of acquisitions since that ramped up a bit is that something that we should expect to continue and then I'm also curious what you're seeing in terms of deal multiples, how they're trending as well.
Yeah. Thanks for the question John I mean, obviously this this these acquisitions are important part of building capabilities. I mean, we have a where were in the right spot with the right account portfolio across a diversified set of industry segment and so we have access to a lot of work opportunity.
Ladies and the more capabilities that we can bring into our business, whether we build them organically, where we acquire them through M&A is going to give us a real chance for better or worse or better a better growth and to move up the value chain. If you will with these customers. So you know.
Well the pace continues like it is I don't know obviously were always work in our pipeline you know, it's kind of we have a high bar in terms of you know the type of companies and the things that we're looking for as we've kind of laid out for you in the past so I can't quite talk to the pace, but you know it's been a good marketplace for M&A here.
As of lately and both in the commercial in the government sector and we've had a lot of good things to look at you know as it relates to multiples. It's it's a it we've gotten some things done here at some pretty what I think are pretty good reasonable multiples, whether it's high single digits on adjusted EBITDA or low double digits.
Total adjusted EBITDA, you know, we've been able to make acquisitions that we believe to be accretive here right off the bat and again, what's most important is not the revenues and EBITDA they bring into our business because in the Grand scheme of things, that's a little smaller, but the the revenue synergy opportunities of having that keep it.
Ability and having those there's new partners that our go to market approach is really paying off and you know we mentioned that if you will in the prepared remarks.
Okay. Great. That's helpful. My follow up can you give us a little bit of color on how bill pay spreads are trending and I'm. Just curious from a supply perspective is the talent is it easier to find talent is the supply constraints loosening up in this environment.
So I would tell you that up this in this unemployment picture and this recession has not been about IP talent being out of work. So I don't see that I think that we've seen a great. A change if you will in that way Randy wanted to talk a little bit about what you see there and also.
How about bill pay spreads.
I think you said it correctly. This this.
What we're going through is not a recession for I T workers. So it's been steady as we've had for the past years Bill pay spread data has continued to inch up inside of a commercial units and.
I think that's more around the discipline that we have and the fact that we have valued clients that we put these people to work with and.
You know when your number at one or two in the industry you get some preference I think to some extent so I think it's steady as we go.
Okay. Appreciate the color. Thanks, so much.
Our next question comes from the line of Tobey Sommer with Trust. Please proceed with your question.
Thank you.
I was wondering if you could comment about.
What you're seeing from Im hearing from customers with respect to.
Re shoring or near shoring work is supply.
Supply change and delivery capabilities are.
Retooled and we thought.
And in the context of that could you.
Let us know what your medium or long term goals, maybe for either gross or percentage of sales and profit from the consulting area.
Randy you want to talk about that.
Well first of all I would say we have commented all along that when we're in a business. We wanted to be a billion dollar business. So our first goal in consulting is to get it to $1 billion and continue to grow double digits. So we're on that path. So we've made great great gains on that path in the last couple of years.
That's on the commercial side on the government side, you can see how fabulously tea essence doing.
As far as offshore and near shore.
Tell me I'm not going to say, there's a mega trend here going on there are certainly the virus, creating a scenario where you.
You know to have better direct control line of sight with some of the things you we put over overseas.
To bring it back on shore was definitely a trend early back in March April timeframe, we reported on that I think in the second quarter. There are still some of those discussions.
But it's a case by case basis I am not I don't think were that big in that market to say, there's a mega trend going on but as you continue to put scrutiny on building the U.S. workforce American workers limiting the H. one b.'s.
Getting customer personalized customer assistance getting direct response in line of sight around these teams.
There are some influencers that would say closer to the better.
Because I can see it control it and react to it better and it's in the right time zone.
Does that answer your question Tobey.
It does thanks and as a follow up.
Is there a point at which the consulting business approaches such a scale if you're able.
Able to put yourself on the trajectory for a billion in sales.
Which.
Existing consulting customers up your staffing lines of business.
You know <unk> see you as a competitor and choose to direct their demand to alternative staffing providers.
[laughter] Ted do you want me to say take that Brad <unk>.
I'll start and then Ted will jump on.
Tobey I don't think so you know fortune 500 companies that you use them as a population spend X amount of money on staffing and X amount of money on consulting that consulting number is much bigger than the staffing number I think they're looking for value I don't think they're trying to mix and match you work to use one or the other where there's good value that is tied to.
Competence quality work and particularly these new Digitization technologies, and Roadmaps and good price points around it.
You're gonna win and I think what we're seeing is our clients are willing because of our excellence in the staffing world and having a valued account relationship and have brought value to them, they're pulling us into the consulting side, saying I think you can do more let's talk about this and once you get going we you know, we certainly win our share of those.
So we need to continue to add as Ted said earlier add technical capability in muscle and make sure that we're able to deal with the requirements and the solutions that they're looking for but we definitely have a reputation.
And a value Oh.
Offering to these clients and we have deep account relationships, which are extremely valuable.
And that I think all should be you know the big customers asking is Rand said for these big traditional consulting firms to step up in strategy architecture and design and they don't want to pay you know their mark up and the fees to to execute the work in most instances that I really think it the.
As of the day as Randy said to clients tracking that.
The other thing you have going on here is that do that the I.T. staffing market was EUR 30 billion dollar market and it's probably not too far off of that but that's where it was here in the U.S. and that I T. U S. Consulting market is more like 300 billion and then growing faster. So I just think there.
Plenty of room here to play in the market.
And I don't see I don't see you know there'd be it a conflict. If you will they are around the services, we provide versus that of the big traditional staffing I mean, a big traditional consulting firms.
Thank you very much.
Our next question comes from the line of surrender Thind with Jefferies. Please proceed with your question.
Good afternoon, and congratulations on a fabulous quarter.
I guess first question here is just on the commercial side of the business.
It's a follow up to the last question can we talk a little bit about how you're thinking about the outlook for demand on the consulting side versus the staffing side and the way that I'm trying to think about this is maybe a little bit of color on the conversations you're having with clients. There in terms of the current environment and how there may be thinking about.
When we look at the unemployment numbers, obviously that the the topline numbers are coming down, but the structural unemployment numbers seem to be growing so maybe some color around how businesses and their confidence and if there's a preference for one model over the other if the structural unemployment was to increase.
Continued increasing.
Right.
Yeah, well, thanks, Ted the.
There's a number of questions in there.
Well first of all let me go back and say.
When a client talk to it he talks about they talk about their business problem and their technology needs and so that's where the dialogue is taking place and apex terms and a lot of our Oxford and commercial units, where we're doing some consulting work now and creative circle. The conversation goes from you you've always prefer.
Yes, the staff. They can you do more and they see us as an expert in workforce management and productivity workforces and the ability to quickly surge or pull back and to get productivity out of a smaller team then their traditional using so we quickly got dragged into that side of our solution set what we.
Oh workforce management and you can see that's a natural extension of our staffing.
And I think what's happened is as we built more insight into the clients technology architectures and business needs. We've seen the need to put together, what we called digital Roadmaps and we have them for the 26 segments of the industry. We work in because that roadmaps different from a hospital and a retail company from the bank and so we get engaged now around the digital.
The road map and there's a lot of good work to be done as Ted was saying no that sensor may be the architect of those roadmaps, but there's a lot of data <unk>.
Data movement door housing or even constructing cloud or hybrid clouds or distributed clouds to support different aspects of the business looking at movement of of.
Harnessing and putting business <unk> business data into dashboards for the client I mean, we're very capable of those things quality assurance in the health care world him coding and re coating and re coating, which they've recognized they need to stay up on in order to get their revenue flow.
Going consistently so there's always a set of business needs. Some of them are not as sexy, but they are definitely more in the what I call a modern enterprise or digital transformation area and as we bumped up our technical skill. We're now engaging in those kinda dialogues and we're actually winning some work.
[noise].
In terms of structural employment, I guess I'm not sure.
Sender, where you're headed there or what's your thinking.
Yeah, I mean, the true are you, referring to any sort of stating but definitely.
I guess, what I was thinking about is in terms of if.
You know, we're hearing about things like Boeing increasing layoffs, obviously more permanent layoffs of Disney's I guess that was the Genesis of the question is maybe for heading into more of a recessionary type environment versus.
What seems to be you know initially was a lot of temporary layoffs and now what we're beginning to see is more.
Permanent layoffs and you know we are we potentially.
I guess the question is how does demand for you guys on a go forward basis look.
If we were to enter into a more traditional.
Recessionary environment, I mean should we expect.
One business over the other and maybe within the commercial side hold up better or are they just they are closely tied here I mean, obviously, there's different growth rates for different reasons, but it's just more about how the clients view those those two businesses those to.
Services, well well, Ted if I could.
And that's why we provide you information around the eight industries and 26 segments. We work and we have said repeatedly over the last couple of quarters. There's a couple of sectors of the economy like our airline clients our transportation clients, our some of our oil and gas clients, there and hospitality clients that are definitely on their back and this.
Spending in the amount of business there is a negative growth for us in service to those clients okay.
Disney is probably not so much the I.T. factor, it's land, California shutdown Disneyland you've got a lot of people that were working there that cant go to work. So I mean, its belly, it's a little different animals, because it's tied into the overall air travel and transportation.
Scenario that the world is facing not just the U.S. So on the other side regional banks banks wealth management E Commerce, our Amazon Microsoft.
Apple our technology clients, they're continuing to do very well and in fact in some of these industries for example, banks they have cut back their staff, if not close to their <unk> their branch backs. Thanks, well they have to replace that with automation and better personalize automation that supports their customer base.
You know those of us that are using.
The bank for financial transactions. So if you looked at it 31% of financial transactions into 19 took place digitally today that number will be 80, some percent, whether using gel or paypower venmo or whatever and all of that requires you know technology to get it up and running make it easy.
Easy for the customer to use and to maintain those capabilities not even to mention massaging. The data that you see there and how you can provide better customer service. So as you just see from the remarks that Ted made in some of our industries, we're clearly growing and.
Financial services healthcare on the technology side of technology and communications.
Government side, where we're working with the big integrators and you can certainly hear from George all the easy interest in modernization and Digitization of the federal businesses. So there's a lot of positives are these are these industries that are a little bit down gonna be structurally down forever.
You know I don't I'm, not a predictor of that but I think they're going to have to find ways to it's hard to change air travel until the world gets passed Cove it.
But.
I'm not sure that they are long term and when we talk to oil and gas or hospitality I mean, they're still trying to do things to automate the more productive inside digitize their business and digitize their relationship with their customer base, which is where we fit in.
Ted and yen Sterling I always say I would add to what Randy said, which I agree with is you know the the value of this firm is its long large account portfolio.
With a third of it then the government services.
After almost and the rest of the commercial sector all of that wrapped around large accounts with the REIT industry.
Diversification and so I really believe in that those are the clients that are going to need IP services from us we're growing our capabilities to meet that and I don't I don't see a structural issue with that going forward.
Okay. That's very helpful. Thank you.
Our next question comes from the line of Seth Weber with RBC capital markets. Please proceed with your question.
Hey, guys good afternoon.
I appreciate all the all the commentary around the the Dcs business I, just I'm trying to understand and that sort of the implications around margin.
Is there any color on the contrary you know the contract type that's in the backlog.
You know I see the disclosure by the revenue by contract, but is there any way to think about the backlog composition I concur type.
Hi, George you want to take that one.
Yeah sure. Thanks for question. So you know we.
Slide you break down and as you mentioned there in terms of the types of contracts that we have.
We really don't provide you know I'm sort of backlog break.
Break out by the backlog or we can look at doing that but I would say that in general what you see there in terms of what our percent of freedom touched contracts it probably generally reflected in our backlog as well.
Okay. So.
The current the current margin dynamic is a sort of a fair representation of how we should be thinking about it going forward than it was a is that accurate yeah. That's something only now that's out there in the quarter. The surge definitely caused a spike up in the cost plus area and so I don't.
So that this order reflects that I think if you looked at our mix in the second quarter and what we expect it to be in the fourth is a more equal contribution of fixed price, Tom material and a cost plus and so obviously that would that would delay a different gross a little bit better.
Our gross margin profile that fair right.
Yeah, Yeah, Yeah, you don't want to pick one quarter and say that's it and I will I will say also that several of the contracts that Weve won recently books that the FDI and homeland security are all in the teeth on time and materials are not in a cost plus areas.
And those are just starting to ramp up.
Okay. That's helpful. Thank you and then just to follow up on on apex.
I appreciate the color around a retail branch versus top accounts can you just talk to whether you're seeing.
I guess the same degree of sequential improvement cross across the two or it was is our top accounts performing better.
Sequentially [noise].
And Randy you want to take that.
Yeah, there is sequential improvement in our top accounts, yes, there is not in our branch accounts remember top accounts represent about 70, 475% of the apex.
Business.
We've now put a top accounts program and creative circle, and Oxford as well so.
Well all of them are different stages of this in apex case, it's the most mature but there is sequential growth in the top accounts.
But not so in the smaller and branch counts breast cancer typically more midmarket smaller accounts that are not national in scope don't don't hit two or three of our offices. So we can service them in one office by themselves and given that they're smaller accounts you know weve seen some just like the general economy.
Some deterioration in that sector of the economy.
Right. Okay. That's very helpful. I appreciate it guys and have a good night.
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Our next question comes from the line of Kevin Mcveigh with Credit Suisse. Please proceed with your question.
Great Thanks and.
Nice results for sure Hey is there any kind that extended holiday impact we should think about it in the guidance as it relates to kinda.
With the holiday falls or anything you'd call out Ted one way or the other just as we're thinking about the guidance, which obviously looked looked pretty good here regardless.
Thanks, Kevin So I, obviously sequentially come in from the third to the fourth you always have fewer days Ed can you talk about just the frame.
Framework of that and how how we thought about it when we put the guidance together.
Yeah, I mean, we obviously consider that and like you say sequentially, it's they're going to have fewer billable days.
When you compare with Q4 of last year. So same number of days and so you know Kevin it's not really.
It it's already reflected and we did consider it.
And if you look at it on a billable day basis, Kevin You've got you know solid sequential growth there third to fourth quarter.
So so anyway for what it's worth.
No I know I guess I was thinking more along the lines with kinda you know the new years on a Thursday and.
No the the Christmas holiday and the 25th week do you think it will be no Kevin we considered all that.
Okay, Okay, and then just I guess.
Any other kind of thoughts on you know just some structural cost benefit post coded whether it's even.
Even less real estate occupancy teeny anything like that that you are thinking about the you can use to kinda there you know.
Let me kind of flow through into the margin or maybe reinvest in the business anything that you are thinking about along those lines.
Well, you're seeing a little bit of that right now right. So on the gross margin side, obviously with less our consultants have left less travel and billable expenses, which we don't pass through.
With a markup so there's a small you know almost inconsequential kind of picked up right there within Irish DNA, obviously, we're benefiting a little bit from west travel.
Lower health care, but same time, we're investing in the business. So each one of our businesses have invested in a modest amount of headcount where its appropriate in order to support current account opportunities or even you know beyond that prepare ourselves for 2021, and so you know there's there are some.
Saving saying, there's also some pick up so I'm sure that will not travel the way we used to all that will be it will be some travel expenses that come into the business health care expenses will kind of come into the business, but will you know where I think overall, if I step back from all that cabin, we're still on a march year to try to move.
Our EBITDA margins from where they are kind of in the 11 11, a half ranged up to the 12 range, which is our long term.
You know objective here and so I still feel confident we're going to get there. Some of these little things are going to contribute but also we're going to do a better job of Ah you know leveraging our our s. DNA structure through automation and other things. So that's really what we're focused on here is just the move to those margin profiles that we had in our long term.
Plan.
Super helpful. Thank you.
Our next question comes from the line of Tim Mulrooney with William Blair. Please proceed with your question.
Yeah. Good afternoon, <unk> two questions here, but as consulting work continues to grow as a piece of your business I'm wondering if you could share some additional details around the services provided outside of Vcs are there certain project types account types are industries that are grabbing a a larger share of the commercial.
All consulting type of work.
Sure Randy you want to talk to that.
Yes, I would say most Americans tell well.
Remember we operate in eight industries, we report on five in our financial services sector, our government integrator side of the business.
And health care tend to be our stronger consulting.
Sectors. If you will consumer industrial was strong and these past six months, it's fallen off a bit but.
But I suspect it will come back so I'm. The only one that has been done and we got a little bit in technology, but telecommunications in tech probably little less so than the other areas what kind of work, we do and I think I described earlier workforce management is a certain base, which is a natural extension of what were doing.
Where the client saying this is your confidence not mind you take over this responsibility build it for me run it manage it and hit hit different productivity levels.
They've also turned to us for developing agile teams, who are different teams to deal with specific technologies.
Whether that's for in the auto industry or Jan.
Space defense or other areas, we felt a lot of centers of excellence for clients in certain technologies and then manage the throughput.
Through those centers of excellence now, we're getting into what we call. The digital roadmap a digital transformation kinds of services, where we've developed a road map we have some insight based on best practices in different sectors of the economy, where they think they can digitize their business, whether that's harnessing and capturing more.
Data for <unk> or correlating, the data and translating that into personalized customer service.
It's it's manifesting itself in mobile apps.
In different areas [noise].
Some cases, it's a matter of helping them redistribute the cloud for key key areas that they need to have either certain security on where certain visibility around.
So it it varies what I think we're moving into his dashboards more dashboards using data that is harnessed in the cloud to help them operate their businesses, even more effectively than they're doing today, but I mean, that's a lot of different things, but we are not is the architects of that structure necessarily you know some of.
I'd like Accenture I.B.M. can do that but there's a lot of areas here, where we can help.
Right Okay.
Thank you ran for all for all that detail I've got another one for you a kind of along the same lines, but more focused on.
Your consultants <unk> has the current environment.
Created an opportunity for you to provide additional training to consultants and new technologies or offerings, and if so which areas are they focused on.
Well first of all if you look at our.
Okay attached go respond I'm, sorry, but you know kids well versed in this as well I mean, our deployment model is to use contingent labor to build many of our consulting teams. So while we may have the leadership in the structure and the methodology and the experience.
We do rely on pulling in contingent labor that had specialized industry experience in specialized technologies, whether it be service now sales force workday or a specific operational requirement around the cloud war and and dashboards. So we don't have to overly train.
Our team because we're bringing in using a workforce that's generally very experienced and very industry specialized now to that extent, we do have ongoing technical training and technology training for our national account leaders and for our salespeople as well as for our consulting people and.
We do that around certain technologies, we certainly done at around cloud, we certainly done at around cyber security was certainly down around sales force service now and some of the other you know very hot areas dashboards or something and by the way. We ourselves are a digital business highly digital business kind of alluded to this in a minute ago.
All about continuing our investment in that you know, we also have our own experience around building dashboards and and doing things that consolidating in our cloud a information that can support across the SGN networks. So you know we do have expertise we are relying on a contingent labor pool that is trained and specialized.
And when we do have to go out we'll pick certain select areas and are well work with our talent University network, which we have which will help us put that training in place.
Did that give you a feel.
Yeah, Yeah, I'm, it's worth that.
Worth, adding there remember our clients never come to us for an experienced workforce I mean, they always want a workforce experienced a technology with industry expertise, we gonna based on their own. So that's their lead to us and really our model around providing talent and consulting services in a commercial pay.
Out of our business the apex at our other units is really around not carrying a bench and bringing that talent on a just in time basis that wave word where 100% utilized and we're not worried about all the time about utilization and we can charge you know a rate in a fee for that kind of work that's very compelling.
So that really is a differentiated part of our business model there.
Understood. Thank you gentlemen.
Our next question comes from the line of Mark Mark Cohn with Robert W. Baird. Please proceed with your question.
Hey, good afternoon, everybody and let me add my.
Hi, Congratulations just wondering what are you thinking with regards to your current capacity and what sort of internal head count additions you're thinking about from a short term perspective, and I've got some follow ups for George on government, but.
Okay. So mark I mean, like I mentioned earlier, we're we feel like we have capacity right now to do more and so you're seeing that in our performance.
We are modestly adding to headcount, maybe a little less than we would typically do.
But we don't have a freeze on if you will show up their account opportunities that we can serve if there are you know typically if there are other work opportunities, where we need to deploy talent that we don't have that obviously we're out of that.
So a little bit of that investment in headcount I'm not only for today, but getting ready for 2021, but a little less than our regular pace.
Right and then I mean, how much excess capacity would you say you have I'm just trying to think through like what the incremental margins might look like on the commercial side when we get on the other when we truly get on the other side of coated.
Yeah, well I think mark that's difficult to say I mean, I would just guide you back to we've been performing kind of in the mid I'll call. It the 11th half percent range kind of pre cove. It in that part of their business and obviously there are times that we've performed at 12% EBITDA margins and we're kind of moving there on a sustainable basis. So you know I kind of keep.
You're right there if you will.
I had a question George but.
Yeah can you talk George can you talk a little bit about you know the implications from the election, you know assumed that the polls are right out how does that.
Impact you what what have you seen in prior changes.
You know when we tried and we kind of suites.
Hi, Yes. Thank you my question Marc shore.
Good.
We have seen some chefs and if we do get a sweep here, obviously, we're going to get some changes in policies and such what Weve tried to focus on Dcs is to stay focus on mission central.
Customers and product.
Product lines that have broad support across the political aisle. So we're really not specialized in something that you could classify as dumb more or Republican more and and we're going to stay focused that way because that's where we chased the R&D dollars, that's where we chased the high end.
[music].
Applications for high end technologies and so we.
Either way. It goes we don't think there is going to be any significant impact to our our programs.
Great and then from a short term Mark Mark one thing too if you think about the areas, where we traffic in specialized <unk> cyber security AI machine learning cloud and data migration I mean, those are things that are going to be at a long term.
You know have long term budget support if you will across across the government. So I think George is right and we feel really confident that those those are going to be things areas that we want to be and we're going to be fairly disciplined about staying there.
Great and then from a very short term perspective would you expect the same sort of mix in terms of pass through software revenue as we had a year ago or so how should we think about the seasonality from my perspective, just a really short term question.
George.
Yeah. So we we had continued pass through to accomplish on missions. That's formed a license as well as also technology. Other technology purchases, we do not expect a huge slug in Q4 like we did last last year in Q4.
Just got a pick up in this Q3 and I expected moving forward, we will have continued pick ups, but it's not necessarily seasonal.
But it will just like it is in Q3.
By the supplemental surge into our revenue.
Great. Thank you very much.
There are no further questions in the queue I'd like to hand, the call back to Mr. Hansen for closing remarks.
Great well I want to thank everyone for being on the call today, and we look forward to talking to you about our fourth quarter results in the in the first parts of 2021, everyone stay safe and healthy.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.
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