Q2 2021 ASGN Inc Earnings Call
Hello, and welcome to the a S. T N incorporated second quarter 2021 earnings call.
And webcast.
At this time all participants are in a listen only mode. If anyone should require operator assistance. Please press star zero on your telephone keypad.
Sure and answer session will follow the formal presentation.
As a reminder, this conference is being recorded its now my pleasure to turn the call over to Kimberley Astrakhan.
Managing director at Idaho Investor Relations. Please go ahead Kimberly.
Thank you operator, good afternoon, and thank you for joining us today for E. S. P. N second quarter 2021conference call with me are Ted Hanson, President and Chief Executive Officer, Rand Blazer President of apex systems.
George Wilson, President of ECS, and Ed Pierce Chief Financial Officer.
Before we get started I would like to remind everyone that our commentary contains forward looking statements on.
Although we believe these statements are reasonable they are subject to risks and uncertainties and as such our actual results could differ materially.
Kim from those teams.
Certain of these risks and uncertainties are described in today's press release and in our SEC filings, we do not assume any obligation to update statements made on this call.
For your convenience our prepared remarks and supplemental materials can be found in the Investor Relations section of.
Really tight at investors that S. G M Dot com.
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.
What the 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 and thank you for joining <unk> second quarter 2021 earnings call.
<unk> reported very strong results for the second.
The GAAP.
She will report that always progressing as planned from based on client demand and company execution standpoint. The market is strong demand for our services is growing and ESPN at capturing our share of the market and more.
For the incredible performance of all our employees.
Second client and contributing to key initiatives and acquisition, we would not be able to post such strong results.
As you recall at the beginning of July we announced that we will now be reporting 2 business segments. The commercial segment, which includes apex systems creative circle, and cyber creditors and the federal government.
Government segment, our ECS business on today's call I will speak to these 2 segments, which represent our continuing operations Ed Pierce, our CFO will discuss Oxford or discontinued operations in conjunction with the overall financial results and Q3 guidance later on today's call.
Net revenues for the second quarter for continuing operations total $974.9 million up 17.2 per cent year over year and above the high end of our revised guidance range set forth in on announcement regarding the divestiture of our Oxford Dizzy.
Adjusted EBITDA of 119.
Pinpoint 3 million also came in above the top of our revised guidance range for the second quarter, improving 25.2% from the prior year period.
The commercial segment accounted for $12.5 million or $73.1 per cent of our consolidated revenues, while the federal government.
This segment accounted for $262.4 million or $26.9 per set of our consolidated revenues for <unk>.
Growth of our consulting business continues to be a big driver of the commercial segment stellar performance.
That's realized consulting revenues and our pipeline of consulting business.
Firing on all cylinders, our federal government business was also up 9.5% in the second quarter performing in line with our expectations and.
In addition to strong revenue and EBITDA, our free cash flow generation remains solid and totaled $72.3 million for the second quarter our.
Free cash flow generation supports investments in our organic growth M&A and share repurchases. We view our current stock price is attractive and with the announcement of the Oxford sale behind US we are back in the market buying stock.
Following the announcement of the Oxford divestiture, we have deployed.
Intimately $35 million to repurchase common shares and have $215 million remaining under our $250 million share repurchase plan.
Share repurchases do not preclude us from being active on the M&A front, our ample cash on hand, along with our borrowing capacity enabled.
US to continue to make acquisitions, while we would consider taking on additional leverage if needed we are well positioned with our current balance sheet to continue to be acquisitive without taking on additional debt.
Best Picture of Oxford will also free up capital.
Our acquisition strategy is succeeding.
The practice at the beginning of 2019, we have acquired 8 companies with an aggregate annual revenue run rate of approximately $375 million as a result of the contribution from acquisitions and the high organic growth of our underlying business we.
We expect we will report record revenues for Q3.2.
Greetings from 'twenty 1.
This is particularly noteworthy considering historical results included revenues from the Oxford business, which is now presented as discontinued operations.
It's not just the intrinsic value of these standalone businesses that contributes to their acquisition multiples. It's also.
2000 affected revenue synergies and higher margin, we can achieve when combining their capabilities with debt of a road.
With that said, let's turn to more detail on our segment performance for the second quarter, beginning with our largest segment commercial which services large enterprises and fortune 500 companies across multiple.
People industry verticals.
For the second quarter of 2021, the commercial segment generated revenue of $712.5 million up 23% year over year and up 19, 3% organically growth across our consulting business cyber coders in creative circle.
<unk> contributed to this increase in revenue the commercial segment grew not just year over year and sequentially, but also grew high single digits as compared to the second quarter of 2019.
Apex systems revenues improved 16, 6% over the prior year period, while creative circle and cyber Critters grew.
Grew 39, 4%.
58, 9% year over year, respectively. Each of these operating units for reported their fourth straight quarter of sequential growth.
From an industry perspective, all 5 commercial industry verticals experienced growth during the quarter with all the government and business service.
Industry accounts, achieving double digit growth on a year over year basis.
Commercial and industrial accounts were up double digits, both year over year and sequentially due to the continued strength of consumer Staples E Commerce and utilities as well as significant improvement in retail energy.
<unk> and transportation.
Our technology and telecommunications for TMT vertical was up double digits year over year within the vertical technology accounts saw significant growth over Q2.2021.
While telecommunications accounts were flat year over year government and business serves.
Services was up mid single digits, with aerospace and defense and government accounts flat over the second quarter of 2020, while business services accounts were up year over year.
Financial services accounts were up double digits with growth in regional banks wealth management and Fintech accounts.
<unk> top accounts and retail and branch accounts achieved double digit growth rates for Q2.
From an industry perspective.
<unk> account revenue at apex systems was up in all 5 industry verticals, we target while creative circle posted positive growth across to their top accounts in Q2.2012.
But.
Gross margin for the commercial segment were 32% up 100 basis points from the prior year due to increased business in creative circle, and cyber cutter units, along with a higher bill rates associated with our commercial consulting business.
EBITDA margins were also up due.
The growth in gross margin as mentioned above.
Along with higher productivity in our workforce.
Importantly, EBITDA margins were up compared to Q2, 2019, which is reflective of a more typical performance here.
We also continued to grow our commercial consulting revenues during the quarter consulting.
Salting revenues totaled $144.4 million for the second quarter, a significant increase of 69, 3% year over year of which 61, 8% represents organic growth.
Our pipeline of consulting business continues to grow at high double digit rates in this.
Is trending positively in the third quarter.
This growth in our consulting business resulted from a combination of factors, including broad based industry demand.
Acquisitions of businesses that have bolstered our technical muscle and domain expertise and the success of our Mexican delivery Center.
Since the onset of the global pandemic client demand for near shore capabilities has resulted in a doubling in size of our Mexican delivery center.
Success of these nearshore capabilities is an excellent example of how we have been able to spread the strength of 1 of our acquisitions in this case enersys.
Across our entire commercial book of business day.
Net of acquisitions at the end of the second quarter, we welcomed and for business unit of a bat a modern enterprise solutions integrator to the commercial segment strengthening our consulting capabilities and offerings in the health care and consumer and industrial sectors.
The <unk> business units, roughly 240 employees add to our growing portfolio of capabilities for our healthcare and manufacturing clients in the U S and in Europe, including new and enhanced advisory.
Service offerings.
<unk> remains at the forefront of digital transformation.
And we expect significant opportunities for the <unk> thousand 14 as legacy users of their enterprise solution, particularly in the health care space upgrade to the cloud.
As we strengthen our consulting capabilities, our revenues continue to accelerate we see an increasing amount of work in digital.
Little innovation in modern enterprise solutions across cloud data and analytics and digital business transformation engagements, enabling us to implement many of the elements of our clients' individual digital roadmap working agile and Dev ops in particular, there's a large component of our support as.
Our clients tied together applications and their cloud environment and strengthen their customer support with real time data updates our ability to build dashboards and software on a basis to propel the customer experience and internal management of the business operations have been key drivers of our revenues.
We are.
Pleased with the recovery, we have seen in our commercial business, which is representative of our commitment to service our accounts.
Build a diversified set of customers and bring value to every piece of work aside.
Now, let's turn to the Federal government segment, which provides mission critical solutions to the department of defense.
<unk> intelligence agencies and other civilian agencies revenues for the federal government segment totaled $262.4 million for the second quarter up 9.5% year over year growth in the federal government segment was primarily due to the continued high demand for artificial intelligence and.
On machine learning services, and the impact of recent acquisitions, including both I S M and scars.
The federal government segment's new business pipeline also remains strong with approximately $304 million in new business awarded during the second quarter and a book to Bill ratio of 1.2 to 1.
Contract backlog totaled $2.7 billion at the end of the second quarter or a healthy coverage ratio of 2.5 times the segment's trailing 12 month revenues.
During the quarter, we were awarded a 3 year award from the Army Research laboratory to work in the development fielding and Sustainment of artifice.
1 on intelligence solutions for the Department of Defense. This award introduces several new mission areas and focuses on enhancing the Dod's development pipelines in data feeds. We were also awarded a contract from the Dod Combatant command to support data and analytics activities and intelligence operations.
Sufficient similar to the commercial segment, we remain acquisitive in the federal government space and will continue to be going forward. Just post the end of the second quarter, we announced the acquisition of Ingersoll, a leading cyber security and digital transformation solutions provider for the federal government.
<unk> team of 220 highly skilled consoles.
Consultants deepens astm's footprint with key customers, including the Air Force Defense Information Systems Agency Army intelligence and other defense agencies.
The acquisition of vendor soft is another example of our long term capital deployment strategy total acquire high growth consulting businesses.
Is that position <unk> as an industry, leading provider of it services and solutions.
But for speaking further about our acquisition strategy I will now turn the call over to Ed Pierce, our CFO to discuss our second quarter financial results and our third quarter guidance Ed.
Thanks, Ted good afternoon.
Afternoon, everyone before commenting on our financial performance for the quarter on.
First make a few comments on the changes on our financial reporting since last quarter.
As most of you are aware, we announced earlier this month that we had entered into an agreement to sell our Oxford business for $525 million.
Which.
2 estimated proceeds net of income taxes of approximately $415 million.
As a result of the decision to divest Oxford results for that business are no longer included in continuing operations, but reported as discontinued operations. This pertains not only to cash.
Quite in future periods, but also to our historical periods. Consequently, we have revised our historical financial results to report Oxford business.
Discontinued operations.
The revised historical results are included in our supplemental earnings materials that can be found on our website.
Currently we also changed our segment reporting to remove Oxford as a separate segment and if we combine the cyber coatings division with apex segment.
Which we have renamed the commercial segment.
E. C. S segment has been renamed the Federal Government segment as Ted commented our financial performance was.
It's well above our initial guidance estimates for the quarter.
And above the high end of our recently updated guidance on.
These results reflected double digit growth of our commercial segment for solid growth in our federal government segment.
For the quarter revenues from continuing operations, which as I mentioned earlier do not include.
On the Oxford business.
$974.9 million up 17, 2% over Q2 of last year and up 7.5% over Q1 of this year.
Net income and adjusted EBITDA for the quarter were both up year over year on sequentially and grew at a higher rates on revenues.
Our adjusted EBITDA margin of 12, 2% was 70 basis points.
Up from Q2 of last year, reflecting among other things the improvement on our business mix and the expansion in gross margin of our commercial segment.
Revenues from our commercial segment were 712.
$12.5 million up 23% year over year for the fourth straight quarter, our commercial divisions were up both year over year and sequentially.
Revenues from our federal governments segment were $262.4 million up 9.5% year over year.
In line with our guidance estimate.
This 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 of 28, 3% was at the high end of our updated guidance estimates and up approximately 1 percentage point year over year driven.
Driven by the double digit growth of our high margin commercial consulting creative marketing and placement services.
SG&A expenses were $176.4 million and slightly above our updated guidance estimates.
Because of acquisition related expenses of $2.6 million.
Consistent with past practice, we do not include acquisition related.
<unk> and our guidance estimates.
The year over year increase in SG&A expenses related to the high year over year growth on the business the increase in head count to support future growth and higher incentive compensation and health care expenses.
Which were both down in 2020 from historic levels historical levels.
Income from continuing operations was 57.3 billion up 31, 7% year over year.
Just said EBITDA was up year over year, and our adjusted EBITDA margin of 12, 2% was above our updated guidance.
It estimates and up 70 basis points over Q2 of last year.
Free cash flow from continuing operations was $72.3 million for the quarter and 179.1 billion for the first half of 2021.
The conversion rate of adjusted EBITDA into free cash.
For the quarter was above 60%, which is in line with historical conversion levels.
At quarter end cash and cash equivalents were $375.4 million there were no outstanding borrowings under our $250 million revolving credit facility and our senior.
Secured debt.
This local leverage ratio was 1.107 to 1.
Our financial estimates for the third quarter are set forth in our earnings release and supplemental materials for the third quarter of 2021, we estimate revenues of $1.35 million to $1 billion and $55 million income from continuing.
Operations at $56.8 million to $60.5 million and adjusted EBITDA of $120 million to $125 million. We're estimating all divisions will be up both year over year sequentially.
At the midpoint of our estimates our implied revenue growth rate is approximately 15, 5% over Q.
Net last year.
We estimate income from discontinued operations will range from $155 million to $165 million.
Virtually all of which relates to the after tax gain on the sale of the Oxford business.
Our SG&A expenses include sequential increases for head count to support.
Expected growth in the commercial business as.
As well as increases in other expenses that were curtailed due to COVID-19. Thank you for your time I'll turn the call back over to Ted for some closing remarks Ted.
That said.
These are exciting times at ESPN, and I do not envision a slowing down anytime.
Q3.2.
Since the start of 2020 more than 2 thirds of which took place during a global pandemic.
Successfully acquired 6 companies and made the strategic decision to sell our Oxford business, bringing up the capital and management bandwidth to focus sharply on building a high growth high margin.
So for our suffice it services and solutions business in the commercial and government markets.
And point, our consulting business, including both commercial consulting and ECS totaled $406.7 million or approximately 41.7 per cent of consolidated revenues for.
Great quarter.
Our acquisition strategy, which has contributed to this evolution of our business toward higher margin high growth high value work is succeeding and we are positioning ourselves to think even bigger still remain measured when it comes to M&A and in doing so follow a 3 pronged approach to acquisitions.
I'd like to discuss this approach today.
The first prong of our 3 part acquisition strategies, making strategic tuck in acquisitions of companies sub $100 million in annual revenues with accretive growth rates and EBITDA margin that provide us with new capabilities and solutions and our new contracts in high demand by our customers.
For the second.
Each of the 6 acquisitions, we completed since the beginning of 2020 are examples of this strategy in action.
As I mentioned earlier, it's not just the intrinsic value of the Standalone businesses, we acquire that add value to our company.
It's also the expected revenue synergies, we can achieve by leveraging.
Average in their capabilities across the breadth of our portfolio.
Tuck in acquisitions, we have made to date are anticipated to generate higher growth rates and higher cash flow and what is now classified as discontinued operations.
In addition, given the strength of our balance sheet and the near completion.
Oxford sale, we're developing strategic tuck in opportunities at a larger scale and greater than $100 billion in revenues like.
The first prong of our strategy acquisitions completed as part of the second prong of our strategy would be accretive to growth rates and margins and also adding new contracts new solutions or new capabilities.
<unk> of our commercial and federal government segment.
Finally taken on our strategy 1 step further the third prong of our approach to M&A is to acquire standalone businesses that fit under the ASTM umbrella with Adjacencies in it services and solutions that are not in conflict with our current offerings and which can generate revenue synergies.
These fees that help fulfill our long term growth strategy.
Sample would be our acquisition of D. C. S in 2018.
Business, which has now grown to over $1 billion for an annual revenues much quicker than our initial expectations.
We continue to make ground on our strategic growth path and everything we have done in the past 90.
Synergies further supports our mission to be a leading provider of it services and solutions to the commercial and government markets with a strong resurgence of our commercial business and the stability and growth of our federal government business. We're confident that we have now taken the appropriate actions to position <unk> for long.
On the day sustainable growth in the markets we serve.
Following the completion of multiple acquisitions, the divestiture of Oxford, and the re segmentation of our business into the commercial and federal government segments. We believe now is the ideal time to reset expectations and share with the investment community an update on our long term.
Term strategy and goals, but that said, we look forward to hosting a virtual analyst day. This September 14th additional details on this analyst day will be announced over the coming weeks.
Thank you again for your time. This afternoon. This concludes our prepared remarks for today on behalf of our entire company and board.
A directors. We appreciate your continued support of <unk>, We will now open up the call to your questions operator.
Thank you, we'll now be conducting a question and answer session if you'd like to be placed from the question queue. Please press star 1 on your telephone keypad, a confirmation tone will indicate your line is.
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You May press Star 2 if you like true move your question from the queue.
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1 moment, please pull for questions.
Our first question today is coming from Maggie Nolan from William Blair Your line.
It's my life.
Thank you congrats on all the strategic.
Ken just here on the good performance this quarter.
At a high level question with the sale of Oxford, you've kind of moved away from some of the kind of high end niche services for the small and mid market accounts.
In.
In the past you've talked about.
This focus on increasing penetration of large accounts on the commercial side. So can you talk us through how you're assessing high potential accounts and then are there any details that you can share with us that illustrate how penetration at key accounts has trended.
Well first.
Thanks for the question and I'll, let Rand kind of jump in with me here.
Really Oxford had become.
While it had an IP competitive business. It also had a lot of other things engineering life Sciences healthcare.
Areas, where we didn't really practice and as you've noted day.
Well certainly we're survey.
The middle market and smaller accounts and providing these services and so.
We believe in large accounts enterprise accounts, especially in commercial auto Gov, because they are the largest vendors on IP.
And so we thought it would be on our best interest to stay more focused on those large accounts and provided.
<unk> higher and IP services.
Would be to invest capital and some of the areas that actually was practicing akshay. It's a great business they'll go often and do really good things, but I think that our comfort level is here, it's kind of staying with this strategy about being more IP focused coming up the pyramid.
Ed and providing more value in doing that with large accounts and by way of example, you have seen that here this quarter with the great growth rates and consulting services, which is really about our commercial fortune 500 accounts.
This end to do higher value work and more because thats, where the bulk of the spend is.
Brad would you add anything to that.
No I think that's good and Maggie are we grow our top accounts are growing at a high high teens rate and our penetration of those top accounts.
Across all 5 industries that we report are increasing as Ted mentioned, so you know we look.
Not only is how many top accounts, we have an expanding portfolio and deepening the relationship but are we growing consulting work with that account base as well on all of those numbers are pointing upwards.
And next what we want.
Okay, Great and then.
You highlighted the delivery center in Mexico again.
Non obviously been at.
That's the area for the company. So I'm curious what are your future plans for your geographic delivery footprint in the consulting business on a go forward basis, and just considering kind of the current I T talent environment.
Great.
Well.
I'll I'll start Maggie I think look we're very focused on on our account base and so when our account base has a requirement we want to step up to it.
What we've seen is as we've mentioned in the remarks, a high degree of Dev ops work, particularly around cloud cloud applications integration of systems dashboards.
We use.
We've seen development center for a lot of that Dev ops work. So it's just been very timely that we acquired that a couple of years ago and was right. There now is we're seeing a crescendo in that kind of work.
We want to continue to expand our footprint in Mexico, we found that to be a good base for us.
But.
But servicing U S accounts okay.
And we are very focused on U S counts if U S counts take us somewhere else geographically based on the strategic importance of that account will step up and support them and we have done that we do some of our work with some of our biggest accounts overseas, but it's it's more.
What I would say, it's specific to the account and specific to their initiatives their global initiatives. We're not trying to I think globalize, our consulting practice at least not at this point.
Okay, Ted you want to add to that.
That was that was well put it on I would just say that you know maybe finish with.
With Maggie I mean, obviously these large accounts have had.
Captive workforces in India in different ways offshore for for a long time, but you know of.
A lot of the benefit they buy it from near shore work here, which is great.
Same time zone.
Good communication good collaboration.
Back and forth real time has been a great winter here and so you know I think <unk> point I think on the prepared remarks, I mean, we'd double double that work force and we're going to continue to invest in it because it was a great labor pool, there and and this is a real winning offering if you will with our client base.
Definitely a very hot market. So good to hear thanks for all the commentary Ted and Rand and congrats.
Okay.
Thank you. Your next question is coming from Gary Bisbee from Bank of America Securities. Your line is that life.
Hey, guys. Good afternoon. So I guess the first 1 I just have to ask help us under.
Understand the consulting growth right. It at a more than 35 percentage points to year over year growth for comp was maybe 10 points easier. So a lot of that had nothing to do with it and I think sequentially. It was up more than 20% like the I don't think there was incrementally a lot more M&A than last quarter because the most recent deal it was more.
Free.
Like what what drove such a big step up and how do we think about trajectory. The next couple of quarters given.
That step up.
So Gary I'll just.
I'll set the table here and then turn it over to ramp but about the same contribution in revenues from acquisitions.
In the second quarter as it was in the first in the commercial segment. If you will and remember the strategy here is not a new service to a new account. This is pulling together this is pulling IRA and consultative services across our existing account portfolio, where we already have.
Years and decades.
Acute client relationships the ability to walk the halls, and do business and we have the client pulling us into these things. So the table is set if you will for this to really work in terms of revenue synergies and then ran where is it coming from.
Randy on mute.
Oh, Yes, I'm sorry, Gary Let me comment also that our performance in 2 in this past quarter is not only strong year over year, but also we've lapped 2022.19, so not many companies report against performance in 2019, but we have lapped it we're doing better we're growing high single digits.
Okay. So it's $2.19 in the commercial sector. So that's a good mark how are we doing it I think Ted key noted it but look I think we have a diversified set of very strong accounts that we have very intimate knowledge and awareness of their operating worlds what their competitive factors are and we've built a strong.
Against your base and some of the key areas like Dev ops cloud.
Data analysis.
Now some enterprise solutions not just organically growing these solution capabilities, but also made some I think pretty good acquisitions over the past couple of years through Enersys to leapfrog and now too.
And for businesses.
Salute.
And then third we have the ability to staff these engagements and that's where the strength of the staffing firm coupled with our consulting business really makes a difference. The fact that we not only have strong accounts and strong solutions, but we have the ability to step up and staff. These engagements I think is all helping us as we grow here.
And it's a good formula is working well as Ted said, we are trying to continue to penetrate this work with our existing staff, but it's those account relationships and insights we have put us in good position and then it's a matter of you know step.
Stepping up and executing the work.
Great and then just a follow up on the.
For more traditional assignment business.
The growth rates.
Gabe for apex creative circle on cyber quarters, they were all faster than the 12% year over year that business grew so what what am I, what am I missing, where those not year over year growth rates or what.
What color can you give us on.
Ed can you address that 1.
On the assignment growth rates.
Yeah.
Well I can't I can't do you want me to make comment real quickly.
Think our overall growth rate in commercial sector is 23% consulting up $69.5 and staffing component.
Low double digit number.
So all of that those 2 coupled together give us a 23% growth rate did that answer your question Gary.
I thought I heard apex up 16, creative circle up 39, and cyber coders up 59, maybe apex, Inc.
The consulting and that so the assignment yeah sure.
<unk>.
Yeah, the apex has been cash isn't it.
Okay, Alright, and so I guess.
What what's going on debt that then I think implies.
There is still a decline are much slower growth in sort of traditional assignment engagements at apex is that is that right and if so is that by design.
On or any color.
There to help think through that traditional I mean, I would say, it's more consistent Gary I mean its debt.
Best on we can track, it's better it's better about viewpoints on the S E published numbers.
We've been getting kind of pre COVID-19 kind of high single digits.
Growth rates, if you will on the staffing part of the business.
Now the way we report this so that you can get a flavor of assignment.
Assignment for creative cyber creditors at apex can still that number like grants at his 12 per cent here. So.
I think I think that's fairly consistent look we're going after the whole market.
Gary So we're we're not pro debating 1 over the other wherein all of the programs from a staffing standpoint of these large enterprise accounts and we're also in their consulting programs right or if they bundle. It. We're obviously have access to both so we're flying at all of this we're not.
We're not cherry picking 1 over the other and its debt that's really what's going to make a difference here because I mean look we've got kind of a favorite spent a spot where the number 2 player in that U S staffing marketplace and it enables what we're doing in consulting and so the 2 kind of work together in harmony like that.
Okay.
Alright fair enough. Thanks.
Okay.
Yeah.
Thanks for the next question today is coming from Tobey Sommer from true with Securities. Your line is that life.
Thanks.
That I was curious about your M&A strategy and I was wondering if you could delve into it a little bit is the.
Third prong sort of the larger opportunities are it could cause those represent on a new reporting segment for the company and then maybe if you could talk to your your comfort level in terms of leverage.
Particularly in light of debt that third prong. Thanks.
Yeah, so they they.
They could be larger they often often are although I would say if there was something that was different that support itself in the marketplace.
And was not in conflict with our federal government or a commercial it could standalone EBITDA that's a smaller.
So it's a little about revenue sides, but not.
Not as much whether it's its own reporting segment I mean, that's a technical question you know that would be you know it appears to US call US. We'll go here I mean, I think the what we're trying to do is find the right acquisitions to serve the market.
And then Toby the last part of your question on.
Comfort on leverage because if you do sometimes sizable.
Oh, yeah, Yeah. So look we are I think 5 times in the past have levered up to about 3.8 times total debt to EBITDA and quickly within kind of 18 to 24 months <unk> been able to.
Bring that back down to 2 and a half or below total leverage.
Because of the great free cash flow characteristics of these businesses. So we again would be comfortable doing that I don't I would tell you I don't think it's required because we've this is a unique position for us in the past we'd never have been sitting here with.
$375 million on the balance sheet and then.
Divestiture, which is going to add net another $400 million.
So we're going to have about 800.
To $900 million on the balance sheet here as we go forward and so I just don't believe it's going to take that kind of leverage in order to get done the things.
We're looking at but if it did we would be totally comfortable with it.
Okay.
On the on the federal side could you talk about what the.
Relevant growth rate.
Might be by your estimation.
Spending on AI and machine learning sort of the relevant day.
<unk> of spending that are sort of pertinent to your federal business, we often find that investors struggle.
Oh, we're looking at on a headline budget and then parsing out of company's revenue mix and exposure to what the spending levels that are sort of most pertinent for.
Yes, I'd tell you Tobey that might be best held for the Investor Day, I mean, we're going to give some more insights on the marketplace as we see it.
George if you.
You had some at the tip of your fingers I mean.
We certainly.
Feel front given that till you Tobey George I mean anything top of mind on that.
Yeah. The only thing. Thank you told me for the question. The only thing I would add is that we really do believe that we are in the fast occurrence of the budget with our cyber particularly.
Cyber solutions and analytics and then also on the AI. So those are areas that we're focusing on with all of our acquisitions as well as with our centers of excellence and that's what we'll continue to focus on we feel very confident about the spend in those areas.
So spend is growing there Ted we will do our best to give you a kind of size of the market.
When we get to the Investor day here in.
Interest in a matter of weeks.
<unk> called out a teaser.
I am curious on the consulting capability on the evolution of <unk>.
ASTM relative to sort of the rest of the market.
Do you feel like you're leading.
The drive.
To add consulting services and then.
Or a lot of players doing this and I'm curious about whether you think <unk>.
Having consulting capability of scale beside traditional assignment capability is just going to kind of be table stakes for the largest it solutions.
In a couple of years.
Right well good question I mean, I would definitely ran I would definitely tell you that we where we believe we are a first mover here.
And.
When we got into this we decided to things don't build a separate business, having an integrated strategy with the it staffing and.
The second part of this was to not do it outside of our desk. So we've built a framework out that included.
People from the consulting world, who knew how to.
Risk manage.
How to how to scope frame bid.
Put together engaged.
<unk> plans to successful completion, we put the systems in place to do that and so we kind of got off on the right foot. If you will and so we do see others trying to do this I would call more off the side of their desk or dress up staffing.
You know service as consulting, but don't really have strong.
<unk> Metro technical muscle capabilities and ability to do all the things that I've said.
Some of the bigger players will be able to do this and and the others will play in the ICU staffing market, which is a good market, but yeah, I think that I mean.
We're gonna benefit Charlie from the way that we've done this in from being a first mover there and ultimately.
It's these accounts I mean, that's what really matters.
Relationships in this area or everything as.
As I mentioned before we've had them for years and decades, and so we have a certain trust there on our clients.
Willing for us to take on this additional responsibility and step up and help them get to certain solutions and that's the real key here.
Thanks last question for me could you give us your outlook for bill rate growth I guess, particularly on the commercial side with all of this.
News and some data around inflation I'm curious what your perspective is.
Yeah, I think it will it's not a new part of this market Tobey, So I mean I wouldn't.
Pointing to a certain number but I would say you know inflation and wage rates and bill rates for.
For our technical resources has been going up for years and years and we will continue to go up and so we typically would see that in our data are on a year to year basis, and so I know, there's a lot of talk.
Talk right now about inflation.
Certainly, we're seeing inflation and wage rates and bill rates.
But it's you know it.
I wouldn't say it's out of the norm.
But I would point you to 1 thing, which is you know 1 of the things that you can see in our margin profile. The way it's reported that not only are we able to raise our bill rates.
Currently, but we're able to widen the spread between the pay on the bill margin and that's kind of been a highlight within the gross margin area.
Over a long period of time for us, but certainly in the last year. Thank.
Thank you very much.
Thank you. Your next question today is coming from Jeff Silber from BMO capital market.
It's a protein in their life.
Thanks, So much just a follow up on the last question you know, we've all been reading and hearing about our labor supply issues beyond just the wage inflation aspect of it are you finding it tougher to find people both in terms of external resources for your clients and also internally.
Rand do you want to take that 1.
Well, Jeff I don't want on the flip that we're number 2 U S staffing business.
This is our profession. This is what we do very well and I think some of it is just it's not that it's it's been tough for a long time on the I T employment levels.
Your line and very very high for a long time and spending in corporate America continues to increase so I think it's a matter of forecasting the demand. It's a matter of building pipeline of candidates. It's building specialized recruiting teams that know those skills and know where to find the people in them, it's having a database.
Database of people that have worked with us in the past and work with US today I mean, there's a lot of elements that go into this building <unk> community of the car.
Employee community, so that we'd have some brand loyalty I mean, theres a lot of things that make this work.
For us and it's not that it's it's easy it's not it just takes diligence.
Jensen and staying with it and staying ahead of it.
Does that answer your question Jeff.
Yeah, that's actually very helpful.
In terms of my second question I want to shift over to the acquisition market. Obviously, you know the company has been acquisitive for awhile, but as he mentioned there's a lot of other companies doing the same thing can you tell us what acquisition.
Acquisition multiples are trending these days and how it compares to before the pandemic.
Yeah. So I mean look we've been very fortunate here, Jeff we've been able to get acquisitions done at or sometimes even below our own multiple but that's you know I don't think that's the ultimate judgment here I mean.
We would be willing to pay more in multiple for the right business. If it were really going to add that.
The economic value that we believe it could because remember these are these are higher growth higher margin businesses with providing higher value services to the customer and so you know.
Even if we were to Australia and to pay a.
Pay more than even our own multiple I mean, there's a real return on that for us.
Multiples for for companies build is digital transformation or certainly stratospheric right now, but where we're getting really good.
Consultative capabilities for reasonable multiples.
Around our own or a little bit below that really are adding value to the work that we're providing for our customer base and that's that's you know that's really the secret sauce here.
All right really appreciate the color. Thanks, so much.
Thank you next question is coming from us for interesting.
<unk> from Jefferies. Your line is that life.
Good afternoon.
Just a follow up question on the tenant the delivery strategy for the commercial segments.
More specifically the consulting part can you talk a little bit about the the mix I guess in terms of the delivery of the use of contract stops.
First just kind of full time employees as I kind of think about youre, bringing on through acquisitions.
Adding to those capabilities.
Does that mix change and where do you see that over time and does it makes more sense to.
You don't get to a ratio, where there's maybe more of a full time staff versus contract stuff.
Oh, that's a good question Randy will take that 1.
Yeah sure on your I would say.
We're going to watch it as we go first of all our consulting leadership, including myself I don't really know, but we have a.
25, 30 year history, and running consulting businesses before we ever got here.
I.
I do believe in the model of blending contingent labor with our own internal team.
Team I would say it will increase a bit as it already has increased over the past couple of years as we've made the acquisitions. We do have more talent now and we can put that talent to work on these engagements. We certainly want the leadership on these engagements to come from internally.
Generally we want our solutions SME used to be.
Tune in and part of our framing and architecture our solutions.
But a lot of the arms and legs can be done on the contingent labor as well as sometimes we bring in people that have had and done the done the work before and are in the same industry. Many.
So I think a blend is the right answer when I was running KPMG consulting I would've done this didn't know enough back in the Ninety's to do this.
Like we're doing today, but it really works and I'd say, it's a blend and it's dependent on the engagement it might be a little heavier internal versus contingent and in some cases.
Contingent certainly as we get into the modern enterprise solution and some of the digital transformation. You know we have to have the leads on this work.
And that requires us to have enough bench to satisfy that and the growing demand.
That's helpful and then.
A question related to.
There was some good color on the demand from some of the larger clients on penetration and stuff.
Is there any meaningful amount of work that you guys do with perhaps the larger consulting firms and our subcontract sub contracting capacity or is that just a really small part of the business for how should we think about some of those relationships that may have existed.
There's more historically.
Cash on a go ahead.
Yeah, we haven't had to become a subcontractor to the big guys.
If you will on our client base for the most part the client the clients are getting smarter and smarter and give them a lot of credit C. I OS today are beginning to apportion work depending.
Spending on the nature of the work and who is best equipped to do it and contracting with the different teams and blending their teams together. So we have not pursued a path of being a subcontractor to the big guys.
Whether we do that in the future you know.
There's always alliance relationships, particularly with software.
For vendors, but.
I don't see that on the near Horizon surrender and I don't think that's exactly what the CIA was looking for anymore. I think they have the ability to blend the teams and build out the work based on the expertise and competence of different different consultants.
Yeah.
That's helpful and then just kind of a.
Final question in terms of a question that I asked early about valuation, but if you kind of think about the the firms that you were looking at that are kind of the below $100 million versus those that are above 100 million in revenues.
Is there is scale an issue in terms of like the valuations and.
How do you think about the balance there that you see or at least what are you guys seeing anybody on the private marketplace.
Well look I think sometimes surrender you could see a lower valuation multiples for businesses that have less scale, because maybe you know.
We've seen this maybe they have great technical jobs, but Joe.
Aren't able to develop the work or have the account portfolio that we do right.
And on the flip side, if you've had if you have a business that has greater scale and has been able to kind of crack that nut on both sides. Then there maybe that command a higher multiple but you.
You know again I would go back and say.
Stuff for us, where we're willing to pay on multiple whatever that multiple is you know as we judge it out to.
Brake business in and deploy it against R. R.
Our strategy here and consulting services in the commercial marketplace and if we are paying a higher multiple were.
I mean, I'm getting something for that which is.
Their own accounts, a greater growth rate.
The larger more comprehensive digital transformation capabilities or industry.
You know expertise not just against a 1 industry, but multiple industries.
That's helpful.
We're gonna be so thank you and congratulations on a great quarter.
Thank you.
Thank you. Our next question today is coming from Mark Mcmahon from Baird. Your line is their life.
Hey, good afternoon.
I'm wondering if you could talk a little bit about.
Cyber coders and on creative circle.
For.
Quarters of growth sequentially, very strong year over year growth, where did those kind of sitting now relative to pre COVID-19 levels.
Randy you want to take that 1.
Yeah. They are.
If you benchmark them against Q2.
<unk> thousand 19, Mark they're both just slightly negative to that date, so they've almost almost caught himself pre COVID-19. Okay.
Both those fabricators and creative circle, I say creative circle, the sequential growth I guess Mark I'll add this is it's really been.
2 acoustic path they have adopted.
Some key mechanics, and the way they do their business and the markets they focus on.
They're following some of the same script that apex systems is in terms of large account portfolio and blending that they broaden their solution base, they've really got a top notch management team that is.
On a heck of a job over the last 2 years you know.
Going through all of this so there are definitely on that path and I say the same for cyber coders.
They definitely have caught themselves and.
And now on a really good path.
That's great to hear I mean, how how big do you think creative circle could get now.
Done it on that path.
Well I don't think we forecast in number but they should certainly get to a stronger position than they were pre COVID-19.
You know they were really focused on a narrower set of solutions mark in a narrower set of accounts.
And particularly heavily.
They're on emphasis the AD agency and creative events events kind of work and a lot of that work shriveled up even before COVID-19, but certainly during COVID-19 and so we've had to broaden things out. So I I expect now we have a better structure on a better management stronger management team that can take.
<unk> on where it was pre COVID-19.
Okay, that's great and how does the gross margin and creative circle compared to where they used to be historically.
Ted should I keep going I think theyre, just a hair below not not much difference you know, but they are a little hair below and most of that's driven because of the large account mixed.
In their portfolio, but not at all like apex apex, I think has a different set of services in the sense of I T services, where their creative team is more creative from creative marketing and digital around the marketing function. So they enjoy I think higher margin you know different kind of treatment and the client environment.
The margins have really gross margins have held.
Really really pretty well on very little deterioration over the years.
Sure.
The commercial.
Average day up they are more yes.
Okay, Great and then on apex systems for 16, 6% growth.
How much of that was organic.
S 15, 3% was organic.
Inc.
That's terrific and then with with regards to the federal government it looks like.
The book to Bill improved.
And then what's the outlook there just in terms of upcoming.
Up coming contracts and renewals and how we should think about that and how.
How confident are you with regards to the pace.
Country accelerating or decelerating.
Yeah, well look Mark I think we were dealing with the tough.
Comps on a just fact basis here you know over 2020 on the great growth rates that are ECS, Ed we don't give for numbers I don't think Ed parsed. His guidance here you gave it for ESG and not for the commercial versus the Gov.
But we're looking for.
Continued growth in new bookings.
Especially as the administration gets all its assets in place who are overseeing the awards for these contracts.
That instead of getting extensions on work, we're beginning to get.
Larger 3 and 5 year awards on some of this work so I think that that all portends.
Well for the future, but I'll kind of stop there without giving.
For any numbers here for the out quarters.
I mean, just given all the press around cyber issues and targeting and federal installations, and then obviously from a Raytheon comment the other day just with regards to.
Strategic shift of how we should think about conflicts.
Wouldn't that portend well in terms of you know the budgets potentially.
Increasing in terms of what you're able to go after.
We would agree with you and I think that was you know speaks to Georges comments around the fast currents of where we are.
Kind of in 1 of those is in cyber security and we have a very robust inside a sizeable offering.
On the.
Federal marketplace around kind of end to end cyber security so.
Would.
Just leave it at we would generally agree with what you said.
Great. Thank you.
Thank you we reached end of our question and answer session I'd like to turn the floor back over to Mr. Hansen for any further or closing comments.
Well I, thank everyone for being here, we've spoken now a twice in the last few weeks and we look forward to speaking with you again September 14th and we hope that you can make our virtual analyst day and.
We'll talk more about the future.
And again, thank you for your support of <unk>.
Thank you that does conclude today's teleconference and webcast you may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.