Q1 2021 ASGN Inc Earnings Call
Okay.
Greetings and welcome to U S G and incorporated first quarter 2021 earnings call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Kimberly Extricate Investor Relations. Thank you you may begin. Thank you operator, good afternoon, and thank you for joining us today for a S. Jan first quarter 2021 conference call with me are Ted Hanson, President and Chief Executive Officer, Rand Blazer, President of apex systems George ball.
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 risks and uncertainties and as such our actual results could differ materially from those statements.
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 don't ask Jan Dotcom.
Please also note that on this call we will be referencing certain non-GAAP measures such as adjusted EBITDA adjusted net income on 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 Ted Hanson, President and Chief Executive Officer.
Thank you Kimberly.
Thank you for joining <unk> first quarter 2021 earnings call.
S. T N reported very strong results for the first quarter with revenues adjusted EBITDA and adjusted EPS all exceeding the high end of our guidance ranges I want to thank all of our incredible employees for making the first quarter such a success, especially as we continue to navigate the challenges of the pandemic revenues.
At $1 $26 million for the quarter were well ahead of our guidance range, representing the highest quarterly revenues <unk> achieved to date.
Our prior revenue record was set in the fourth quarter of 2019, adjusted EBITDA of one O $8 6 million also topped expectations and improved four 9% from the prior year quarter.
With revenue topping 1 billion for the third consecutive quarter. There is no question that demand is returning to our business since the lows of last year and I'm very pleased to report that we saw consistent month to month growth across all of our operating segments.
Our commercial business, which includes the apex and Oxford segments accounted for $767 9 million or roughly 75% of consolidated revenues, while our government business the ECS segment.
Counted for $257 8 million.
Or approximately 25% of consolidated revenues.
Commercial bookings in particular on a very strong trajectory with the growth rate of bookings as we enter the second quarter higher than that of which we saw going into Q1 of this year, our significant exposure to mission critical government work combined with our ability to provide high end digital transformation services.
As to the commercial marketplace.
Has continued to support our growth at the same time, our unique deployment model combined with the increased penetration of our large accounts has helped to propel the business for our.
Our cash position also remains strong with free cash flow totaling $110 5 million for the first quarter, an increase of 126, 4% year over year, our strong free cash flow generation supports investments in both our company's organic growth as well since strategic tuck in acquisition as I know.
You did on our Q4 2020 call ESPN remains acquisition ready in 2021.
Each of the companies, we acquired last year, including Blackstone Federal Leapfrog systems scars and <unk>.
Had been fully integrated and are performing in line with our expectations, if not better with that said lets now turn to our segment performance for the quarter, beginning with our commercial business.
Apex, our largest segment, which includes apex systems and creative Circle's services clients across multiple commercial end markets for the first quarter. The apex segment generated revenues of $630 4 million or 61, 5% of revenues up 0.2% year over year.
Or one 8% on a day adjusted basis.
Our results for Q1 were higher than we had anticipated.
<unk> systems improved five 1% on a day adjusted basis, well creative circle was down from the first quarter of 2020.
Importantly, both apex systems and creative circle continue to grow off trough level revenues in mid second quarter of 2020 reporting the third straight quarter of sequential growth.
Creative Circle's weekly volumes, while down year over year exited the quarter well above expectations.
Digital related skill placements continue to drive creative circle sequential growth.
Pac systems and the overall APAC segment have shown positive growth not just on a year over year and sequential basis, but on a two year comparison as well.
News for apex systems demonstrated some notable trends in the first quarter.
Day adjusted revenues in two of our five reported industries, including financial services and health care.
Liberty had positive growth year over year, leading to the aforementioned 5.1% day adjusted growth rate.
Consumer and industrial industry accounts, though down from the first quarter of 2020.
We're up sequentially due to the strength of consumer Staples E Commerce, and utilities, and while retail energy hospitality and transportation remain down from prior year quarter. It is important to note that each vertical continued to experience positive growth on a sequential basis.
Our technology and telecommunications or TMT vertical was flat year over year on a day adjusted basis within the vertical technology accounts saw growth over Q1, 'twenty or 'twenty.
While telecommunications accounts declined year over year.
Finally government and business services, which was down low single digits soft growth in aerospace and defense and government accounts over the first quarter of 2020, while business services accounts were down year over year.
Overall revenues in applications and project management skill areas like agile digital ERP in cloud continued to perform well, while infrastructure and scientific skill areas remains soft.
Looking at the top accounts top accounts achieved high single digit growth rates for Q1, while retail and branch accounts remain down low single digits as compared to the prior year.
From an industry perspective top accounts revenue on a day adjusted basis at apex systems was up in three of the five industry verticals, we target while creative circle posted positive growth across all of their top accounts in Q1 2021.
Gross margin for the apex segment were 28, 9% down roughly 40 basis points from Q1 2020 due to lower permanent placement business attributable to COVID-19 gross margins at apex systems were flat with the prior year period, largely benefiting from higher margin consulting work.
EBITDA margins were up year over year in the apex segment based on higher productivity in our work force.
We also continue to grow our commercial consulting revenues, which totaled $137 7 million for the quarter up 34% year over year.
Additionally, our pipeline of consulting work grew again at high double digit rates over the prior period and is trending very positively in the second quarter as previously mentioned.
S T and tie in consulting offering remains an important source of value we provide our clients.
So we continue to identify acquisition opportunities that expand our consulting capabilities.
As we grow our consulting revenues, we see an increasing amount of work in digital innovation and modern enterprise solutions across cloud data and analytics and digital business transformation engagement, enabling us to implement many of the elements of our clients individual roadmaps for the digitization of their businesses.
Work in agile and Dev ops in particular.
Is a large component of our support as our clients tied together applications and customer interface capabilities.
This is especially true with applications such as sales force and service now.
Let's now turn to ECS.
Which provides mission critical solutions to the federal government, including the department of Defense intelligence agencies and other civilian agencies.
ECS recorded another quarter of strong revenue growth with Q1, 2021 revenues of $257 8 million up 21, 2% year over year.
Ecs's year over year improvement is primarily due to the government's continued high demand for artificial intelligence and machine learning services are.
The high volume of cloud services and solutions and new opportunities presented through strategic M&A, such as through our recent acquisition of ISO.
Ecs's new business pipeline remains strong with approximately $291 5 million in new business awarded in the first quarter and a book to Bill of one one to one for the quarter.
Contract backlog totaled $2 7 billion at the end of the first quarter.
Or a healthy coverage ratio of two five times Ecs's trailing 12 month revenues are.
Our high end solutions in cyber security digital transformation.
I M L data science and analytics remain areas of focus for the federal government during.
During the quarter some of our new contract awards, including the expansion of AI ml activities across the Dod.
And intelligence community, including AI integration with intelligence surveillance.
And reconnaissance system.
We also continue to win programs that expand our service now modernization efforts as well as the winner of a recompete classified program.
Last but not least ECS expanded its reach at department of energy and the National Labs with three new contracts, most notably a contract that Cynthia National labs to provide comprehensive enterprise ambition embedded it support.
Turning to our last segment, Oxford, Oxford offers on demand consulting talent for commercial it healthcare life Sciences, and engineering clients as well as permanent placement talent through our cyber Coders division the.
The Oxford segment reported revenues of $137 5 billion for the first quarter of 2021.
And while down year over year. This segment was up six 5% sequentially.
Both Oxford and cyber creditors, who are seeing a very solid recovery from the low in the first half of 2020.
I am very pleased with <unk> first quarter performance.
The organic growth of our commercial and government end markets and the strong performance of our strategic acquisitions. Our business continues to be positioned for success. It is clear that the marketplace is strengthening with growth in bookings and sort of our commercial industry is accelerating even faster than that of revenue.
To discuss this performance in further detail I'll now turn the call over to Ed Pierce, our CFO Ed.
Thanks, Ted good afternoon, everyone.
As Ted mentioned, our financial performance for the quarter was above guidance estimates.
Reflecting better than anticipated sequential growth of our commercial business and double digit year over year growth of our federal government business revenues for the quarter exceeded 1 billion for the third consecutive quarter and were up three 6% year over year.
This was achieved despite one fewer billable day in the quarter and the difficult prior year comp as the first quarter of last year was only minimally affected by COVID-19.
Sequentially commercial revenues were up one 4%, reflecting continuation continuation of the strong momentum at the business.
Exiting Q4 of last year.
Net income and adjusted EBITDA for the quarter were up year over year and grew at a higher rate than revenues. Our adjusted EBITDA margin of 10, 6% was up slightly from Q1 of last year and above the high end of our guidance estimates tomorrow.
Commercial revenues for the quarter were $767 9 million and were slightly up year over year. After adjusting for one fewer billable day in the quarters sequentially commercial revenues were up for the third consecutive quarter across all divisions.
Federal government revenues for the quarter were $257 8 million, an increase of 21, 2% year over year. This strong double digit year over year growth was driven by a number of factors, including increased volume on certain existing programs and new contract awards and the contribution from acquired businesses.
Gross margin for the quarter was at the high end of our guidance estimate.
On a year over year basis, gross margin was down due to business mix and higher state unemployment tax rates.
Makes changes included lower revenues from our high margin creative marketing and permanent placement services and <unk>.
Higher mix of revenue from our federal government business, which carries a lower gross margin than our commercial business.
The effect on these changes and was partially offset by the high growth commercial consulting revenues, which grew 34% year over year and totaled $137 7 billion for the quarter.
SG&A expenses were 18, 9% of revenues down approximately 100 basis points year over year and up approximately 100 basis points sequentially. The year over year reduction in SG&A expense margin reflected among other things lower travel and entertainment health care and headcount expenses.
Quentin will increase on the expense margin reflected the effects of the payroll tax reset higher compensation expenses related to head count additions to support the growth of the business.
And higher incentive based compensation related to improved growth and profitability.
Anticipate our expense margin will gradually increase over the course of the year as COVID-19 related restrictions are relaxed and we continue to make the necessary investments in our operating divisions to support higher growth in our business.
Net income for the quarter was $48 7 million up 11, 2% year over year.
Our adjusted EBITDA for the quarter was up year over year on our adjusted EBITDA margin was above our guidance estimates and up 10 basis points over Q1 on last year.
Free cash flow for the quarter was $110 5 million.
Virgin rate of adjusted EBITDA, and free cash flow exceeded 100% and was well above our historical conversion rates are higher than normal conversion rate mainly related to a reduction in the number of accounts receivable day sales outstanding over the course of the year, we expect the conversion rate will return to historic.
On the arms.
And cash on cash equivalents were $386 5 million there were no outstanding borrowings under our $250 million revolving credit facility and our senior secured debt leverage ratio was 1.13 to one.
Our financial guidance estimates for the second quarter as set forth in our earnings release and supplemental materials.
These estimates are based on current production trends and assuming no significant deterioration in the markets that we serve.
For the second quarter of 2021, we estimate revenues of $1.058 billion to 1.078 billion net income up 56, 4% to $60 1 million and adjusted EBITDA of $119 million to $124 million. We expect all operating divisions will be up both year over year.
And sequentially.
Our SG&A expense estimates include sequential increases for additional head count investments to support the expected growth in our commercial business.
As well as increases in other expenses, it where can tell due to COVID-19.
Certain of these expenses such as travel and entertainment will be gradually reintroduced back into the business.
And will be weighted more to the second half of the year.
For the full year 2021, we expect our cash SG&A expense margin won't be slightly above our expense margin for 2020, but below our expense margin for 2019. We also expect our gross and adjusted EBITDA margins for the full year 2021 will be in line with to slightly below our margin for 2012.
Thank you for your time and I'll turn the call back over to Ted for some closing remarks Ted.
Thanks, Ed.
Following the unprecedented year endured by our company our employees and people around the globe, there's no doubt that <unk> commitment to environmental social and governance or ESG causes has never been more important to ensuring the financial health and stability of our business.
Assuring the health and wellbeing of our people, while also being mindful of our environmental footprint will contribute to <unk> profit the triple bottom line.
At the end of March Thanks to an exceptional companywide commitment we debuted our second annual ESG report, which significantly progressed, our tracking efforts to develop a more robust analysis for our stakeholders I believe that our 2020 ESG report more closely reflects <unk> identity as <unk>.
<unk>, leading IP services and solutions provider.
While we certainly accomplished many achievements in 2020 for more than doubling our volunteer efforts from the prior year to significantly advancing our diversity equity and inclusion efforts across all levels of our organization.
We recognize that excellence is not an act, but a habit.
Thus there is a solid runway ahead of us for continued ESG progress.
In terms of responsibly, managing our environmental impact our advancement as a company will be gradual on strategic beginning in 2021, we are committed to effectively measuring on establishing a baseline for <unk> carbon usage. We've also established a green leasing policy and sustainable off.
Its guidelines to further promote these efforts.
To improve our social impact we've created a corporate social responsibility committee to unite company best practices. We're also pledging to become a member of the United Nations Global compact aligning our corporate goals with that of the U N 17 sustainable development goals.
Accountable corporate governance, including policies that comply with all debt laws regulations and ethics principles has been core to <unk> business since our founding.
Much of these principles and practices come down to the strength of our management team and our board of directors. As you may have seen we recently announced several changes to our board, including the upcoming retirement of Chairman Jerry Jones at the end of his current term Jerry has served on our board since 1995.
And has been our chairman since 2003.
I want to thank Jerry for his incredible service to our company, while the shoes will be tough to fill we are fortunate to have our shot mid teen who has led a very successful career across the software security and IP industries, and who has been a director on our board since 2014 to step in to Jerry's place as our new Chairman. This June.
We also recently welcomed two new directors, Vice Admiral Joseph Dire and Carol Lindstrom to our board both Joe and Carol previously served on advisory capacity to our board and we are glad that they have taken on full time director roles with E. S. P. N. Ultimately as we continue to evolve and enhance our board membership.
2022, we're committing to advancing gender equity by having at least three female directors.
While there is no doubt that the world of work has changed ESPN remains committed to supporting our clients digital transformation efforts, while also engaging and mobilizing Tomorrow's work force responsibly and sustainably part of that client support will come from our current set of advanced solutions and capabilities.
While additional support will be developed over time through new and expanded services and contracts brought to ASTM through strategic tuck in acquisitions with a strong balance sheet and ample cash flow. We will continue to look to make acquisitions in both the commercial and government end markets that provide us with new capabilities new customers on new.
Vehicle.
Our pipeline of acquisition opportunities remains solid and there are several interesting opportunities. We are currently exploring throughout the process, we will remain thoughtful and measured in our M&A strategy.
As important as it is to identify acquisition targets. So two is ensuring that each of the companies. We acquire is successfully integrated into SDN as I mentioned earlier all of the acquisitions. We completed in 2020 have now been fully integrated on are performing in line or in some cases better than anticipated with that said.
This concludes our prepared remarks today on behalf of our entire company and board of directors. We thank you for your continued support of 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. If you'd like to ask a question you May press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star team.
Our first question comes from the line of Maggie Nolan with William Blair. Please proceed with your question.
I think you can you hear me okay.
Okay, great. Thank you.
Great and congrats on the strong results.
I wanted to talk a little bit more about E D recovery.
And when you think about some of the softer industries within apex systems. It seems like there are those positive trends in the verticals that are growing on a sequential basis do you have any updated thoughts on the timeline after recovery for some of these segments and when they may return to year over year growth.
Now I'll, let Rand talk about the individual industries I will tell you Maggie that while the government business has been very strong and steady through all of this obviously some of the commercial industries had have.
<unk> been up and down over the last few quarters.
The commercial business as a whole has been on a really steady March forward back to kind of mid may of <unk>.
Last year, So Q2 of 2020 and I would say that's accelerated if you will coming out of Q4 and now into Q1, where.
Where we saw really strong progression of revenue growth.
Through the quarter.
And that's at a high level for all of the commercial industries and then Randy on the individual industries that remain down are you seeing anything there.
Yeah, I think Maggie you were referring to the parts that we're still a little soft on our business services.
Also the parts of consumer industrial they were COVID-19 hit, particularly transportation.
On the Airlines for example, retail and hospitality and then lastly, the telecommunication.
Taco side of our business I would tell you that all three if you looked at bookings that we've had over the past two quarters.
I think we're seeing a surge in those areas of our business opportunity and and and certainly some business that we're starting to book.
And I would suspect theyre, all going to get into more positive growth pretty quickly.
Okay.
Oh, great. Thanks.
And then when you think about you know theres such unique demand patterns right now when you think about the three different segments of the business and then you kind of layer in you know the acquisition strategy that you have on top of that and recognizing that you know the mix of the business has changed so on.
You know significantly over the last several years, how do you envision that mix.
Towards the end of this year and on a couple of years out from that.
In terms of the segments as a percentage of revenue.
So.
I think that we're in a pretty good place here approximately 75% of the revenues are in the commercial market.
In the federal government market with these to guess it's about 25%.
Obviously look to see both of them grow.
On our long term expectation or the federal government market is kind of high single digits and then we'll layer in acquisitions here as we go and that's always been our target.
Do you see as being within that marketplace in the near term just because of the step down last time.
For this time last year, I think you guys see stronger growth most likely.
The commercial industries, we serve and our guidance generally reflects that.
But how dramatic will that affect the mix I don't I don't think it will dramatically affect the current mix of revenues.
Got it thanks for taking my question.
Okay.
Our next question comes from the line of Gary Bisbee with Bank of America Securities. Please proceed with your question.
Hey, guys good afternoon.
I guess first first question for me.
The consulting businesses had another terrific quarter.
When you think about that over the next few years I mean, how are you thinking about the growth potential in and maybe as part of that.
Given how well you know clients seem to be responding to those offerings what are the gating factors to growing this business.
No.
Really rapid rate for a long time.
So Gary I think if you you know if you think about the IP staffing.
Marketplace here in the U S. Pre COVID-19 it was like a $30 billion market and surely it's down a few points. Since then but it consulting in the U S is about $300 billion market. So the total addressable market opportunity is a lot bigger than we have behind that secular trends going on.
Which are causing our clients to think differently about how they.
Purchased certain services within their it spend right.
We're definitely getting a favorable wind in our sales here around the changes that are going on in terms of have the CIO thinks about getting done things done that's not new that's been going on for several years, but it's evolving here and then gating factors you know Ryan you may have a few things on your mind, but.
You know I think Gary you want to take I would say before and takes it. It's just that we think this is.
An enormous market opportunity for us and it's a part of our business that will be as large as our it staffing business just based on these growth rates and that's a good thing right for us and also we'd like our it staffing business. It enables well do in the consulting space for our clients.
Randy anything you'd add to that.
Yeah, I think Gary when you talk about the things we have to do well to continue to grow both in consulting and staffing on I guess I'd go back to my 30 years at KPMG can southeast chairman and CEO of that business as well as apex. It's three things it's number one having a strong reputation and delivering excellence to our clients and the services we provide.
Its the deep deep dish.
<unk> relationship that we built over the decades and third it's bringing real value to our clients, particularly in the key skill areas like digital transformation modern enterprise some of the applications that were talked about in the script.
That we build strength and have what I call technical muscle in that area that delivers value to the client.
We're on a path, where we have all three when you look at the combined our relationship with our accounts. We have a strong reputation we have great account relationships that have been there for a long time built by the staffing side of our business and now adding technical muscle in value in the kind of work, we're doing in muscling up and the key solution areas that are important.
On to them. So I think we've got those things in the works.
It's working.
We just have to stay with it.
Does that help that answer your question, yes, definitely that is good and and then.
Ted you said twice.
In your prepared remarks that debt debt book.
Bookings are sort of demand as you enter Q2 is stronger than how it was how it was a quarter ago entering Q1, I guess is part of that easier comp or really are you thinking in sequential terms in sort of absolute dollar terms not year over year that you are seeing seeing things improve and I well I'm really trying to get at is sort of.
Mentum versus the fact that we're facing really easy comps and the numbers look.
A lot better.
Yeah, almost irrespective of how well theyre doing sure yeah. It was more about momentum Gary so definitely coming into the quarter, we had good momentum.
We are pretty far outperformed our guidance that tells you there was momentum building throughout the quarter and continued into the beginning of Q2.
And then one last quick one just you cited youre going to start spending more on head count to support the commercial staffing growth in I guess, the SG&A guidance.
The case that.
Is should we think that that debt.
That that kind of sequential growth Q1 to Q2 continues if you continue to deliver the kind of revenue growth youre doing now or.
Is it sort of smooth the growth from here or anything about how you think it would phase during the year, that's worth calling out. Thank you Ed and anything you can say to that.
No Gary we did mentioned that we talked some about the sequential increase.
And we talked about where we thought we would be for the full year and so well.
We're really not getting into the individual quarters, Q3, and Q4, but I think we given you end up on the full year in sequentially that you can.
Probably drove some good conclusion to draw.
Fair enough. Thanks I appreciate it.
Okay.
Our next question comes from the line of Kevin Mcveigh with Credit Suisse. Please proceed with your question.
Great. Thanks, so much and let me add my congratulations as well.
Ted.
I wanted to start with more of a higher level in terms of.
How are you thinking about where we are in the cycle I mean, it's been such a kind of a.
Volatile time over the last kind of 12 to 18 months and I'm just trying to figure out where you think we are from a cycle perspective.
And is that maybe based on client conversations or demand just any.
You can call out one way or the other I just wanted to start there if possible.
Well I mean, I guess, the economists would tell you that we've been through a bad.
By definition, an economic or a bit right in a downturn and that we're at the beginning of a new business cycle I don't pay as much attention to that as I do the trends of our clients.
And others.
Lending trends conversations.
And what are kind of themes going on and Theres definitely.
Here, a launch and a renewed push around digital transformation. It didn't just start this quarter.
It started in the second half of last year, and it's been said a steady and building if you will.
Here as we go so you know adult you know I guess, you could say, there's a business cycle, but I think more importantly, there's a there's been a leap forward in terms of where all of our clients expect to be and by the way us internally a day S T and as it relates to our technology platforms that are digitizing of our own.
Right.
And then Ted debt that was part of my second question was post COVID-19, obviously theres been accelerated shift online.
Maybe help us understand the scope of work Youre doing on the consulting side versus the staff on the and then.
Are you using the staff augurs, a theater for the consulting and if so does that revenue said and the consulting or would it be reflected on our staff work.
So Randy you want to take that one.
I'm, sorry, I didn't catch the last part of that the revenue for what is in either consulting and staff on.
Alright, so if you're if you're using.
On the staff augmentation as a theater for consulting projects does that revenue. If you are in does that revenue get reflected on the consulting side of the ledger on the.
On that side.
Yes staff on his staff log revenue and it's based on the client staff on programs. So that's a separate program than most fortune 500 accounts. The consulting program has also run by them and we're in that side of the program as well and that's different work. That's worked its packages of work with real accountability.
For performance and outcomes so no.
We separate the two very cleanly and distinctly did that answer your question Kevin.
It did but I guess part of my question was do you source some of the labor from your staff.
On the consulting work.
At least on a different way, Kevin Yeah, I would say it a different way we source labor for our some of our labor and consulting is contingent labor that we take from our database of qualified people. So I wouldn't call. It staff on its not taking away from staff log. It's just we have access to $18 million it professionals.
Out there and we will assemble teams with our own internal team and capability and leadership, who methodologies along with some contingent labor with the right skills at the right time. So we are using some contingent labor in our consulting work, yes, that's our deployment model.
That's very helpful. And then just kind of guess average.
Right I'm, sorry, and in a minute.
No go ahead.
I was just going to say what does that kind of average length of engagement on the consulting side versus.
Staffing.
Ted I'll go ahead.
Longer okay. So if you've noticed we don't report the two separately, but our length of assignment in general within apex systems, and creative Circle, and Oxford are lengthening from 26 weeks to now 30, some weeks and some of that is the influence of consulting which tend to be longer term projects.
Okay.
Very helpful. Thank you very much.
Okay.
Our next question comes from the line of Tobey Sommer with Joyce. Please proceed with your question.
Thank you.
In our ECS I was wondering if you might be interested in expanding more into civil work given the.
Substantially faster spending outlook per Bidens initial budget request as well as.
Potential other spending initiatives infrastructure et cetera that are more geared that direction.
So tobey I would.
I'll say, one high level thing and I'll, let George comment on that we're very.
Very happy about where we're positioned in that marketplace with the with the solutions that we provide to the D O D.
And intelligence those things are going to be fun and the funding is going to growth for those you know when you think about the kind of work, we're doing which is cyber security.
Our machine learning it modernization cloud and data migration. So at a high level I mean, we remain really pleased with where we're positioned there, but obviously as you note.
You know the winds are blowing different ways as it relates to you.
The D O D versus the civilian agencies and George you can comment on that.
Yes sure. Thanks for the question Tobey and I agree with everything you can stay in there as well as the point out debt.
Proposed FY 'twenty budget. It does tilt as you say towards civilian agencies. We are in some sub assembly and agencies and we will continue to expand there, but the defense. Although it's flat is still from a historical context very high and it's in the areas that will on doing very very well so.
As Ted put it very well.
We're happy where we are right now, but it's wins continue to borrow on more federal civilian agencies get.
The technology modernization fund and some of the eyes set on HCI.
HCI it initiatives, we will be chasing us.
Okay and do you have the.
Contracts vehicles to be able to compete effectively on.
You know kind of short notice with the civil agencies are going to see big budget increases.
We do one thing that we're very fortunate about and so we have several of the best in class contracting vehicles and there's many articles out there to talk about how the government is using those more. So we are we are in good position with with respect to our contract vehicles.
If possible could I get a little bit more color on the mix of the contract awards that you announced in the quarter.
I'm thinking of what proportion of them might have been.
What percentage might have been new work versus.
Existing or or Recompete kind of work. So we can get a sense for what.
What this book to Bill means for future growth.
Yes.
Sure.
The San Diego, We mentioned, that's a brand new job brand new work for us.
On several of the others I would put in more of the category of continuations.
And.
And some of those are what we call contract growth.
So that's an expansion of existing work, which and this is not just a one off so the majority of the work do we reported this time is long term long term Newark.
Okay.
And then.
I guess it since I've got you got one more sort of ECS question, the book to Bill well over one in the quarter on.
On a trailing basis has been has been trending down now for a longer period of time on.
Or are there any changes afoot.
Stepping on the accelerator and bid and proposal investments or something that you're planning on changing to kick start what has for a period of time been sluggish contract awards.
Hum.
So I mean, even though as you.
Pointed out <unk> been less than what we've had in the past we still have a very healthy $2 five.
Backlog, which you know very good middleware for this field regarding business development and we're constantly looking at adding business development resources. The one thing we cannot control and thats the timing on on when the governor.
These things and then when they award things. So you will have this up and down and you know these troughs.
In book to Bill, but I would not say in any way whatsoever is that due to a fundamental shift in how we're approaching business development or anything that I'd say is just simply timing.
Okay, and if I could ask one sort of broader corporate question from a balance sheet perspective, you you know kind of quote your your debt leverage on a secured debt basis, where do we sit on an overall debt basis.
You know because I think I recall the historical two five times being an area that was if you fell below that considered suboptimal and we could maybe look for you to buy back more stock and those kind of situations.
We've been kind of steady at $2 three ish Tobey I think this quarter was $2 35. So yeah net our feeling is still the same kind of when we're sub two and a half where kind of suboptimal and.
We're looking to deploy capital obviously.
I would say this and I say this every call I think the highest return on the next dollar deployed as an M&A, but obviously, we're ready to buy our stock back.
We don't think we have the kind of pipeline.
<unk> separately at the moment that we may be able to execute on.
You saw it on the we mentioned on the script, probably and you saw it in the materials that we just basically renewed our existing 250 million repurchase authorization that was going to expire here in another few weeks said that is fall.
Poland ready and so remains on the shelf. So we can access it.
Thank you very much.
Our next question comes from the line of Surinder, then with Jefferies. Please proceed with your question.
Thank you congratulations on the quarter.
Ted any additional color you can provide on the M&A front. It sounds like you may be close on a few deals are the targets maybe within the federal consulting space are also youre looking at something within the commercial segment.
And then maybe the size of the targets continued tuck in acquisitions or is there maybe an opportunity to think about doing something bigger.
So thanks for the question surrender, we are pursuing opportunities in both marketplaces.
On the federal side, we have opportunities to either add to or augment our current capabilities are.
New clients and contract vehicles in key parts of the market, where we may enter more efficiently by acquisition versus trying to get there organically and then obviously on the commercial consulting marketplace. We have a a a blue ribbon account portfolio of large fortune 500 of cash.
And if we can bring in.
You know ex consulting expertise with you know industry, quarles and knowledge and deploy that across our current accounts, that's really the strategy and we've got good momentum there. So obviously, we're trying to build on that so.
Looking at both marketplaces, I'd say no we're not.
About strategic tuck ins or kind of sub 100 million dollar in revenue.
Target and that's really you know.
On the things that we're pursuing although we're open to things have more scale and so as those become available.
You know, we're obviously thinking about those as well.
That's helpful. And then a question on on expenses, obviously, a good guidance on kind of the SG&A side of equation.
In terms of thinking about the I'll call. It the COVID-19 related savings in terms of that some of that expense coming back.
How should we think about it structurally over the long term and should we expect most of those expenses back or are you guys going to be able to realize some.
Level of efficiencies at this point, where you kind of see the firm evolving to the point where not.
Not all of those expenses will come back.
Well look I don't know.
Ed talked about it in detail, but we're always on in March for better productivity surrender. So.
While we expect you know while we expect that some of these expenses are going to kind of matriculate back into the business over a long period of time.
Where we're on a march to be more productive so that our revenue growth and gross profit growth is greater than our expense SG&A growth and that's the way we're going to get our EBITA margin from where they are today and kind of March them forward towards our long term targets.
But ed in the near term around SG&A.
Yeah.
Yeah, I think in the near term you're going to see.
SG&A and our.
You know probably tick up as we said over the course of the year, but we expect our expense margins to be below what they were in 2019.
So you know on the near term that's what you can expect I think longer term, we're going to benefit from the things Ted talking about I think the other thing that's pretty important as we're going to benefit from improved economies of scale of the business continues to.
To grow and outperform so.
It's all of those things together.
Understood and then one question on kind of the.
It sounds like the business is where you guys are seeing strength obviously.
Demand is very robust as clients are healthy you also outlined some areas where demand has been quite recovered yet kind of talking about whether it's business services or consumer industrial.
Is there any additional color you can provide on kind of the conversations that you're having with those folks are there is it are they kind of truly in a hold position or are they.
Do you sense that there may be close to pulling the trigger where we may see a <unk>.
Meaningful rebound in demand, perhaps in the second half at this point I mean, it seems clearly that.
Demand across the board not just for you guys, but just it's recovered a lot faster than everybody else has and I'm just trying to understand that part of the equation the.
The one where you're seeing a little bit of zone.
Yeah, I'll, let Randy comment I mean, I guess on Ram if you agree with this I mean, there's green shoots in places in those industries for sure right Ryan.
Yeah, and I think I commented earlier that in our if you look at the bookings our pipeline and bookings there is certainly growth in these what you call COVID-19 hard hit COVID-19 sectors on the economy. So I expect to see positive things to come in the future.
Okay.
Thank you that's it for me.
Our next question comes from the line of Mark Mark Marcon with Robert W. Baird. Please proceed with your question.
Good afternoon, gentlemen, congratulations I was wondering if you could talk a little bit about you know some of the dynamics that we're seeing.
First of all you know given the tightness in the labor market. What do you what are you seeing in terms of bill rate increases.
You know across the board because it seems like that should be a need coming to you should be building over the course of the cycle.
So we're definitely seeing volume increases primarily we are seeing bill rate increases I would say part of that is because we're doing higher level work right. So you're seeing that push up.
But rand just on an apples to apples basis.
What would you say.
<unk>.
I think we've been on a for about over a year, we've been on bill rate increases slight steady bill rate increases.
So that's been happening for some time Mark not just now yeah I'm just wondering if it's going to accelerate.
Well I hope, so I guess I would say yeah.
Okay I'm sorry.
Can you talk a little bit about.
Ratios on the staffing side, what are you seeing here I'm. Just you know there are all sorts of stories about on.
The tightness of talent.
Hum.
How is that impacting you.
But the first part of your question you flipped out he said I'm, sorry, you said it sounds sort of ratios.
Just a fill ratios and how they are how they're trying to oh, okay. Yeah.
Very positively.
Fill ratios are up.
And as Ted has said many times in the past Mark we've been in a tight labor market in the world for a long time and it's not just in general you know, it's really around certain applications certain skills.
So we understand that and unfortunate part of our job with our clients is to think forward.
So we know where the trends are in some of these skill areas and we're trying to use R. R.
Capex talent University to help develop skills or to create a pipeline of people that are going to school or training can be ready to take these positions and some of our clients that are capable thinking 40 year or two so there's a combination of things at work here.
It's been going on for some time I mean, you know on clients I can assure you marker is concerned about.
The availability of talent a year from now two years from now and we're quick to two council with them about proper planning proper by skill area and by location and the fact that we can use remote workers now has actually helped or enhanced our ability to meet some of these skill requirements and in harder to fill places like New Jersey.
Where you can now have people sitting in Wyoming doing the work in New Jersey. So there's a combination of things at work, including training using our talent University.
And building the work force for the future and all of that's been going on with many many of our clients and give them credit for that.
Great.
And so when we think about like you know bill.
Bill pay spread.
On an apples to apples basis within apex systems, I mean, with the demand levels that you're seeing and particularly things picking up should that be should that be on the aid.
Well touch on go ahead.
Mark I think you know this over the years Theres a lot of things that affect bill pay spread the skill level on the worker the different kinds of clients and accounts. So for example in one industry. The bill pay spread may be higher or at least a higher gross margin than another industry. So depending on the flow of our.
Work in different industries for different skill types, our margins will will float if you will if you've looked at our margins just for apex systems, let's say over the past years, you'll see pretty good steadiness to slight increases in that now, obviously consulting helping a bit giving us some boost.
But depending on which industries or are hard and are buying on what skills you can affect the.
Infrastructure skills carry a different gross margin than the higher end application skills, where the where some of the artificial intelligence skills. So I think it's more flow of work, it's not art and negotiations around bill pay spread it's around different parts of our business growing at different times.
So I guess I would first point that out and then just say generally speaking we've seen good bill pay.
Increases over the past year and a half we've had bill increases we've had some pay rate increases and overall, it's been a net positive for us for some time now.
Great I mean, my senses with consulting picking up and growing at a faster rate and then I would imagine firms also going to pick up.
And come off the trough and easy comps I'm, just trying to reconcile the the kind of rapid growth on the commercial side that we should end up having relative to the easy comps with a commentary in terms of gross margins potentially being slightly lower over the balance of the year.
On that.
No go.
Yes.
I wouldn't say that that was I would agree with what you said now remember permanent placement is a very small part of our business. So that's not really going to be.
As much of an influencer, but you know I would expect that you know you.
See pretty consistent margins here.
And that you kind of see the same trends that you've been seeing on the commercial side of things that you've seen on our numbers now.
And.
But I just wouldnt call out Perm placement has a big influence on all of this on our side of the ledger.
Okay, Great and then one last one.
On the Sandia contract I mean, congrats on mop up seems really large.
How much of that will you end up getting with them with a net split and.
How many more opportunities are there that could be like.
Over the next couple of years.
George you want to take that one.
Yes sure.
So the the numbers we reported on our book that's the amount that we're getting okay. That's not the total contract or subcontract work towards joint venture.
So that's our that's already we expect that there'll be some expansion on we're very excited about the opportunity on the whole area out there in terms of new customer market force.
Yeah.
Okay.
Thanks again.
Okay.
There are no further questions in the queue I'd like to hand, the call back over to Ted Hanson CEO for closing remarks.
Great well I want to thank everyone for being on the call again, our great team for their performance this quarter.
I look forward to being with all of you here in another 90 days to talk about the performance for Q2.
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.
Yeah.
Yes.