Q3 2022 ASGN Inc Earnings Call
Good afternoon, and welcome to the a S. G N incorporated third quarter 2022 earnings conference call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
Now like to turn the conference over to your host Kimberly is chicken.
Investor Relations. Please go ahead.
Thank you operator, good afternoon, and thank you for joining us today for ESG and third quarter 2022 Conference call with me are Cat Hampton, Chief Executive Officer ran Blazer, President and Marie Perry Chief Financial Officer.
Before we get started I would like to remind everyone that our commentary contains forward looking statements. Although you can read these statements are reasonable they.
Are subject to risks and uncertainties and as such our actual results could differ materially from those statements.
Certain of these risks and uncertainties are described in today's press release 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 Investor <unk> Com.
Please also note that on this call we will be referencing certain non-GAAP measure.
<unk> adjusted EBITDA.
Adjusted net income and free cash flow.
These non-GAAP measures are intended to supplement the comparable GAAP measure.
Reconciliations between GAAP and non-GAAP measure are included in today's press release.
I will now turn the call over to Todd Hanson, Chief Executive Officer.
Thank you Kimberly Thank you for joining <unk> third quarter 2022 earnings call.
Before we begin on behalf of the entire Asia TMT I would like to welcome Marie Perry to her first earnings call as our CFO .
Excited for marine to participate in today's discussion with that said lets now turn to our third quarter results.
As is evident from our Q3 financials grid continue to build quarter over quarter and demand for our services and solutions remained strong revenues, which were a record for the third quarter.
Came in above the midpoint of our guidance range for Q3 and totaled $1 2 billion up 11, 6% year over year.
This growth was largely driven by our commercial segment and specifically our consulting business.
This record topline performance would not have been possible were it not for the incredible efforts of all of our professionals and service of our clients.
As the <unk> team collectively strives to meet and exceed their expectations. Consequently, these results bring us closer to our goal of $6 billion in revenues by 2024 I'll provide some comments on a three year plan later in today's call.
Our commercial segment accounted for 75, 1% of consolidated revenues, while our federal government segment accounted for the remaining 24, 9% of revenues the strength and breadth of our account portfolio contributes to our success with virtually almost all of our revenues.
In the U S and largely from Fortune 1000 accounts.
Moving down the income statement adjusted EBITDA of $148 7 million was also above the midpoint of our guidance range, improving eight 9% year over year adjusted EBITDA margin was 12, 4% for the quarter.
Free cash flow from continuing operations totaled $79 5 million an improvement of 18, 8% over the prior year.
Quarter, making the best use of this cash is our balanced flexible and disciplined approach to capital allocation, which includes investing organically in our business, making strategic acquisitions of profitable high growth companies and relevant solution areas and returning value to our shareholders.
Through our stock buyback program.
Before speaking further on our recent acquisition and segment performance I'd like to provide the following three highlights the continued to drive our performance.
ASTM maintains a large and diverse enterprise account portfolio, representing the most significant portion of the revenue base.
The it services market remains favorable and with the support of our large cap portfolio.
<unk> is successfully executing against these opportunities.
And third favorable bookings in both the commercial and government segments provide us with visibility and position <unk> well for 2023 now.
Now, let's review the segment performance.
Our commercial segment, which services large enterprises fortune 1000 companies had another solid quarter with growth in both staffing and consulting services revenues of $900 million increased 16, 1% over Q3 of last year as well as improved 12.
9% organically year over year on a difficult comparison.
<unk> systems, our largest division accounted for 84, 1% of this segment's revenue for the quarter with top and retail accounts, both achieving double digit growth rates create.
Creative digital marketing experienced a lower growth rate compared with Q3 2021 due in part to the high growth rate in the prior period.
From an industry perspective, four out of our five commercial segment industry verticals achieved double digit growth for the quarter, while business and government services was up low single digits versus the prior year.
Within apex systems, specifically financial services had solid performance of banking with even greater year over year growth amongst our fintech that wealth management accounts.
Growth in technology media telecommunications for TMT industry was again led by double digit growth in technology and telecommunications accounts.
Progress in our commercial and industrial accounts reflected strength across all sectors as compared to the third quarter of 2021 with the exception of materials.
In particular, we achieved double digit growth year over year in energy utilities, consumer discretionary and consumer staples.
Healthcare industry revenues also grew double digits, driven by the provider and payer accounts.
Finally growth in our business and government services vertical was led by mid single digit growth in our business services accounts, while aerospace and defense accounts were up low single digits versus the prior year.
Gross margin for the commercial segment was 33, 1% up 70 basis points for the prior year driven by our growing contribution of high margin commercial consulting and permanent placement business.
Commercial consulting revenues totaled $268 6 million for the third quarter, an increase of 43, 2% year over year and up 29, 8% organically.
Revenues derived from our work in web Biddable in application development data analysis cloud architecture migration engagement, along with work for our New service now solutions led our commercial consulting quarterly performance.
Yes.
We also had a solid quarter for commercial consulting new bookings, which totaled $254 3 million up 36, 9% year over year.
This translates into a book to bill of roughly <unk> nine to one for the quarter and one three to one on a trailing 12 months basis.
Keep in mind seasonally the third quarter is typically our lowest book to bill quarter.
Our early October performance supports a healthy bookings outlook.
In addition to our bookings our pipeline of new business opportunities also remains strong and continues to be favored by our clients in the consulting space due to our intimate relationships, which spanned decades, our solutions portfolio, which continues to expand and our solutions delivery.
Model, which enables us to meet our clients' demand with the necessary skilled workforce at economical price points.
As I mentioned, we continue to enhance our solution capabilities.
And at the beginning of July we officially closed our acquisition of glide path.
The addition of glad fast puts ASC and on the map as a key service now player.
And a fast growing technology market, it's important that we offer services that promote our clients to choose ACM pathways glad that does just that extending our value proposition.
Service now capabilities swap at the same time being important source of revenue and margin expansion.
After one quarter with asked again glad fastest performing ahead of our expectations for both its revenue run rate.
And new business secured for example, during the quarter apex systems and glad fast jointly won a contract with a client who is currently in the process of modernizing its asset management system.
Moving this capability from a legacy system to service now once this capability has been transferred over to service now our clients can now conduct an initial audit for deployed hardware and software assets.
This particular asset management capability has become important in the past three years is for mid teens put stress on their existing assets systems and processes.
<unk> and a lack of precision what applications have been deployed and on which devices.
Astm's underlying objective with this particular client was to improve the visibility and security of its asset management capability and to reduce costs. This contract is a great example of work won and now delivered as a result of our new service now solutions capabilities.
Let's now turn to the Federal government segment, which provides mission critical solutions to the department of defense, the intelligence community and federal civilian agencies.
Revenues for the quarter totaled $297 9 million down slightly year over year, but up two 3% sequentially as we've discussed in recent calls this year over year decline resulted from our strategic decision not to re compete at low margin web services resale program.
In the third quarter of last year, which was partially offset by the impact of businesses, we acquired in 2021.
Federal government segment gross margins were up 120 basis points compared to the prior year due to favorable business mix.
New contract awards for the quarter were approximately $560 million, which translates to a book to bill of one 9% to one for the quarter.
One point to one on a trailing 12 months basis.
This significant quarterly award activity demonstrates that the government continues to drive it spending in areas in which <unk> focus including that of cyber security cloud AI ml and it modernization.
Our strong book to Bill for the third quarter supports the government segment continued growth.
Contract backlog improved from $2 9 billion at the end of the second quarter totaled $3 1 billion at the end of the third quarter or a healthy coverage ratio of two eight times. This segment's trailing 12 month revenues.
Beyond our backlog.
Which extends for multiple years, our pipeline of opportunities is at an all time high providing great visibility into 2023.
The strength of our pipeline, it's an indication that our government segment is in the right market Homeland is justice defense intelligence and federal civilian and providing the right solutions.
During the quarter, we won a number of key contract awards, including a new contract with the FBI to provide enterprise operations.
Recompete.
Supporting U S Transportation command software development, Helpdesk and engineering for its global Air transportation execution system or <unk>.
<unk> and.
An important recompete with the defense advanced research projects agency, or DARPA, whom we maintain a long standing history and a strategic recompete to expand an advanced cyber security and zero Trust solution to the United States Army and other defense agencies.
On the topic of cyber security at the beginning of October we acquired Ironside and secured a leading cyber security company that design implement and execute.
I wish security programs for federal customers.
As with all of our acquisitions Ironside and represents a high growth business, whose contributions will be accretive to both our gross and EBITDA margins.
<unk> adds key new accounts to our portfolio such as the security and Exchange Commission the centers for Medicare and Medicaid services, the department of state and the National Institutes of health.
I'm fine also significantly strengthened ECS is cyber security offerings to government accounts, while making us more competitive for future work are inviting us off to a strong start and we're excited to welcome their talented team to ASTM.
With that I will turn the call over to Marie Perry, our CFO to discuss the third quarter financial results and our fourth quarter and full year 2022 guidance Laurie.
Thanks, Tim it's great to speak with everyone today as Ted mentioned earlier, our revenues for Q3 exceeded the midpoint of our guidance estimates and a record for the third quarter revenues were $1 2 billion.
11, 6% year over year on an as reported basis and up eight 4% organically.
Which adjusts for $34 2 million contribution from acquired businesses.
Revenues from our commercial segment were 900 million.
16, 1% on a difficult year over year comparison, all commercial divisions grew with the highest growth coming from the commercial consulting services, which carry higher gross margins than our it staffing services.
Revenues for commercial consulting the largest of our high margin revenue streams with $268 6 million.
At 43, 2% year over year.
<unk> services, including approximately $25 1 million of revenues some glide path.
Revenues from our federal government segment were $297 nine.
Down slightly year over year on a difficult compare.
Two 3% sequentially.
Revenues for the third quarter of 2021 included $13 4 million at a low margin wet surface resale program that the federal government segment chose not to renew in Q3 of last year.
Revenues for the third quarter of 2022 included $9 1 million from acquired businesses.
Gross margin was 30% up 130 basis points over Q3 of last year, both business segments, and all operating divisions reported year over year expansion in gross margin driven by improvement in business.
Gross margin for the commercial segment was 33, 1% up 70 basis points year over year expansion was the result of double digit growth of our high margin commercial consulting and permanent placement services.
Gross margin for the federal government segment was 25%.
120 basis points year over year as a result of changes in interest rates.
Thanks.
This improvement resulted from a smaller contribution of cost reimbursable contracts, which carry a lower margin other contract type.
The contribution of higher margin businesses, we acquired in the third quarter of last year.
And the decision not to renew a low margin web service resale program in the third quarter of last year.
SG&A expenses were $232 6 million.
At 27% year over year. This increase in expense is commensurate with the growth in the business.
And also reflects increased investment in our head count to support future growth.
SG&A expenses also included $3 3 million in acquisition and integration expenses that we do not include in our guidance estimate.
Excluding these acquisitions and integration expenses SG&A was slightly above our guidance.
Primarily as a result of greater than expected incentive compensation from higher growth in revenues and gross profit.
Income from continuing operations was $71 1 billion.
Seven 2% year over year.
EBITDA was up eight 9% year over year.
<unk> EBITDA margin was 12, 4% for the quarter.
30 basis point decline year over year due to the incremental investments in SG&A previously discussed.
At quarter end cash and cash equivalents were $211 2 million.
And we had $204 million available under our 250 million sponsor free cash flow from continuing operations totaled $79 five.
An improvement of 18, 8% over the prior year.
Our senior secured debt leverage ratio for the quarter was <unk> 96 to one we deployed $59 5 million.
On the repurchase of approximately 624000 shares of <unk>.
Company's common stock during the quarter and year to date have repurchased two 2 million shares for a total of $227 6 million.
Turning to our guidance our financial estimates for the fourth quarter are set forth in our earnings release and supplemental materials.
These estimates are based on the current production trends that seen 16 billable days in the fourth quarter.
Which is four days fewer than Q3 of 2022, and one day fewer than Q4 of 2021.
And include an estimated revenue contribution at $48 million from the recent acquisition applied fast.
For the fourth quarter, we are estimating revenues of $1 123 million.
To $1 billion 143 million.
Implied revenue growth rate of six 6% to eight 5% on one fewer billable day.
Im difficult comparable.
As the fourth quarter of 2021 benefited from highest revenue growth.
On a sequential basis implied revenue growth rate for the fourth quarter of 2022 is expected to be up on the same number of billable days.
We are estimating net income of $54 2 million to $57 8 million and adjusted EBITDA of 128 five.
$233 five.
We expect gross margin to remain relatively consistent year over year and sequentially.
The estimated sequential decline in adjusted EBITDA and adjusted EBITDA margin, primarily relates to sequential decline in revenues and gross profit attributable to fewer billable days in the quarter.
The midpoint of our fourth quarter guidance range anticipates full year revenue growth for 2022, a 13, 8% net income growth of 15, 3% and adjusted EBITDA growth of 15, 6% compared to 2021.
Thank you I'll now turn the call back over to Ted just some closing remarks.
Thanks Marie.
It has been just over a year since we introduced our three year plan in September 2021, while many things have changed in the past 12 months demand in our end markets remains favorable and we are successfully executing against these opportunities our ability to succeed quarter after quarter comes down to our resilient opera.
Model ESPN maintains a large diverse enterprise account portfolio with strong commercial and government bookings that position us favorably for the future.
Our balanced flexible capital deployment strategy enables us to act in the best interest of all of our stakeholders.
<unk> successfully completing acquisitions that provide us with new solution capabilities that are in high demand by our customer base.
With that as background I'd like to provide some commentary on where we are tracking versus the three year plan, we laid out last September .
A reference you can find the full three year plan and anticipated growth rates in the investor and analyst day presentation.
Our Investor Relations website.
Starting with revenue given the outperformance of the business in the first half of the year and continued strong topline growth in the third quarter. We continued to track ahead of our baseline revenue growth expectations taking.
Taking into account acquisitions revenue growth rates remain within the previously projected range.
As a reminder, we plan to deploy 125 billion to $2 1 billion in acquisitions from 2021% to 2024.
And based on our acquisition pace to date, we sit squarely within this range.
Lastly in terms of adjusted EBITDA. We are currently tracking toward the high end of our guidance range on both the dollars and a percentage of revenue basis.
Overall, we are pleased with the growth we've seen across the business and are tracking in line, if not better than our initial expectations. While the types of contracts and work requested may be evolving in line with market and client needs the demand for ESG and it services and solutions remains.
We are confident that this demand in combination with our strong pipeline of four will carry us solidly in the fourth quarter and into future years.
That said, it's not just the types of services, we offer that sets our business apart.
It's also the quality of the service we provide our clients project. After project that continues to differentiate <unk> from the competition.
As we conclude our remarks I'd like to again sincerely. Thank our entire team for your hard work and dedication this past quarter.
Our success is certainly a reflection of your efforts with that let's open the call to questions operator.
Thank you.
At this time, we will be conducting a question and answer session.
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One moment, please while we poll for questions.
We have our first question from the line up Tim Mulrooney William.
William Blair. Please go ahead.
Hey, this is Sam customer account for Tim Thanks for taking our questions here.
We asked this question last quarter, but given the times. We're in I think it makes sense to check in on this again, if we breakdown it down into three broad buckets, those being workforce management digital transformation and modern enterprise you mentioned that modern enterprise would be the one area, where you would likely see softness first so can you talk about that if youre seeing any cracks in spending there.
Then also maybe any other high level thoughts you have around the other two buckets.
Thanks, Greg.
Yes.
A trend we've been on as trash and digital transformation bucket is growing the most and bigger share of the pie.
The workforce mobilization management is is still a big part in growing but a smaller piece of the pie and the modern enterprise. We suggest we'll start growing a little bit more particularly with service now capabilities. So.
I think we're seeing about what we thought we just as you said wed like to continue to see the digital transformation in the modern enterprise, where particularly around service now continued to grow.
Great I appreciate the color.
And then one more for us.
Can you comment on the pace of your internal headcount increases I know you've been pretty aggressive here kind of capitalizing on the strong demand that you've been seeing but curious if that is slowing down at all given the more macro uncertainty we're attitude right now.
Well look we'll have to monitor that as we go through in the third quarter.
Continue to invest in head count to meet opportunities in market.
I think we have an approach where we're over a period of time, our head count growth will grow a little bit less than our growth in revenue and that's just kind of the.
Pace of business that we follow here. So if we see something develop in the marketplace, we can react to that pretty quickly.
<unk> growing head count at a slower pace or not growing it.
We also have a natural attrition rates rely on which we understand well and have.
Pulled that lever watched that lever work in the past so.
I would just say as of the third quarter, we have opportunity in the market. We continued to invest in the for what what we see going forward, we'll have to address that as we get.
Thanks I appreciate it.
Thank you we have next question from the line of Tobey Sommer with tourists Securities. Please go ahead.
Thank you.
Consulting business, you talked about seasonally lower booking activity in <unk>, but you're already seeing something better than <unk> could you give us a sense for what.
The differences in seasonality between those quarters since we don't have sort of.
Our own explicit.
Data series over number of years to understand what it's like ourselves.
For the blast.
Three years, so that data will be out there, but rand anything on why Q3 and commercial is typically.
Yes first of all Tony when you look at $2 20, there was a COVID-19 quarter quarter, two but if you looked at the other three quarters quarter three was the smallest and bookings, although very healthy staying with 'twenty, one and now again in 'twenty two we believed.
Honestly I don't think we necessarily have an answer for you Toby why it's seasonal.
To the commercial marketplace, I mean, a lot of them set their budgets at the beginning of the year. Some of them are on cap not calendar years, but years that began in April one. So it probably has more to do with their budget cycle than it does anything else, but it seems to work out that way.
And then the only thing I'll add Tobey and you know this.
But just for the larger groups.
Great.
Dependably seasonal patterns would shine through there.
Yes, you segue to into the government. So I was going to ask a question about that.
Contract Awards.
Pointed out were healthy in the quarter, but I think.
Decent amount of that was recompete.
That was either new or.
So.
Okay.
Inform our expectations for growth in the federal business.
So a little more than half of that number was recompete, a little less than half.
New work won that we didn't have before or contract growth on existing work.
Yeah.
Thank you.
Two.
They sort of inform us about over the next.
As you look at 2023.
Or so kind of two questions.
Does the can is.
Elution.
Get in the way.
Contract pursuits that youre aiming at here in calendar <unk> and maybe the early part of next year, if the CR extends that far.
Okay. So I heard most of what you asked you blip down a little bit.
Usually calendar Q4, which is the first quarter of the government fiscal year is a light very light from a new bookings standpoint, because of the wave in Q3.
Covid.
Situation in the new budget from March.
I think we'll have to watch the election and play out and see.
How that affects this if any it may not I can tell you. It feels like the administration is is working hard to try to get everything out on the street and bid and awarded that they can we see a lot of activity.
Difficult for me to comment on anything in 2023 and beyond.
Thanks last question for me could you quantify the impact of the acquisition that closed in October .
Fourth quarter revenue guidance.
And profit guidance.
I think the press release quantified.
The contribution from acquisitions plural, but not that discrete one which I don't think was already incorporated in consensus.
And then on the EBITDA margin side Tobey.
As we say generically and this is true in this case as well expect middle to high teens EBITDA margin rates.
From the contribution of these acquisitions.
Thank you very much.
Thank you we have next question from the line of Jeff Silber with BMO capital markets. Please go ahead.
Thanks, so much.
This quarter some of the other IP services firms had been talking about sales cycles lengthening a bit some had mentioned projects.
Projects potentially ending early or having a little bit more difficulty selling add on work are you guys seeing any of that at all.
Great.
I would say nothing more than a normal dose.
Okay.
Sweet Thanks.
And just switching over to the federal government segment.
It looks like you and forgive me if I'm misreading it but it looks like adjusted EBITDA margins in that segment were down both sequentially and year over year.
Was there something specific to point out there.
It's.
That's going to drive our margins there.
The mix of business and so I don't think there's anything to call out specifically.
Maria you can add anything in there you want.
Otherwise.
Yes, sorry, yes, so nothing to call out yet.
Okay, Great and just one more I had a few people asked me to ask this.
Cyber closures I know, it's small but can we talk about how large it is and what the trends are in that in that line of business.
Well, we can't talk about fabricators individually, but we could talk about perm placement overall.
Okay.
Told you.
Second quarter and the third that we expected it to be a slightly lower contribution to the overall revenue mix, which is true because we have other units that are growing faster like commercial consulting plus you've got the addition of acquisitions here. So naturally that's going to continue to come down.
It was just a little over 4%.
In the third quarter, and it's got to be somewhere.
Between three and 4% in the fourth quarter.
I think that in kind of the same.
With.
It appears Gabe.
In the second and third in the second quarter.
Okay. That's very helpful. Ann Marie welcomed Paul looking forward to working with you.
Thank you.
Thank you we have next question from the line of Heather <unk> with Bank of America. Please go ahead.
Hi, Thank you for taking my question.
Okay.
Speakers does this sound better.
I wanted to piggyback off the last question with regards to Perm placement.
That line of business in general for the staffing industry tends to be hyper cyclical.
And I'm just curious if you could help provide some perspective in terms of what you saw during COVID-19 in terms of how that business performed and then your thoughts on the margin side in terms of your ability to drive margins. If we go into a downturn and.
That business does soften.
Well look that is true Perm placement is the most cyclical part of the staffing business in general.
That's why we manage it the way we do.
As a percentage of the total revenues.
Together with creative circle was down.
Over 20% together is what we said during the Covid period.
Today, it's performing very nicely.
And we're expecting it to.
Has to have a similar market in the fourth quarter, although it would break that out specifically, but.
They're going to perform as we expect I believe this will just looking one month into the fourth quarter and like we said earlier, it's going to be a lower percent of the revenue mix.
Just on what we said before so I think that that probably Heather it's the best way to look at it as a very small piece of a $1 billion to dollar revenue mix.
Thank you and is there any color you can share to help us think through even though it's a small part of revenue the impact.
On EBITDA or has your thoughts on EBITDA, if that business 14th cycled out.
Well look I think you can kind of do your own downside scenario I mean, if you think that that part of the business is going to be down you can pick a number 20% again, which is what we said before between those two business units.
And then the effect on gross margin is.
You know is more because it's a.
Hi contribution to gross margin, but again I mean, I think around the edges based on what we're seeing.
I don't think that its the big.
It will be the ones that soft first but it won't be.
Crusher, if you will to gross margin and bottom line at least that's not what we've seen in the past certainly has an effect on it but.
But it won't be the biggest contributor to it thank.
Thank you very much.
Thank you.
We have next question from the line of Surinder <unk> with Jefferies. Please go ahead.
Thank you.
I'd like to start.
A question around the guidance Murray can you maybe provide a bit more color on.
The sequential decline and.
And what I mean by that is when I do the math.
I don't see any sequential growth adjusted for day, count and any color there.
On the revenue side on the revenue side, yes.
Great.
Because of day count is 60 days versus 64.
So when I adjust for that I get to kind of 11 22 number and then.
<unk>.
And finally get to like an 11 40 type number.
Within your guidance for that.
Says that it's I'm.
Theres not revenue growth.
Sequentially.
So there is slight revenue growth, yes, we can.
Call it about 1% sequentially.
Once you adjust for those four billing days coming from Q3 into Q4 correct.
Got it and any color in terms of where in.
Amongst the segments.
In terms of the individual business units surrender.
Yes that is correct yes.
<unk> for the total enterprise at the ASTM level so.
We're not going to break it down, but we'd say both businesses are good.
Half.
Performance here in the fourth quarter I, just would leave it at that.
Okay.
Federal unit, you have to adjust right youre adjusting for acquisition and it now, but just call it up slightly adjusted for billing days in the fourth quarter from the third and commercial slight positive yes, yes.
Got it.
That's helpful and then in terms of just.
The bigger macro trends.
That you're seeing can you maybe talk about.
The visibility that you have in the consulting side of the business maybe versus the visibility on the staffing side.
Maybe compare and contrast, those two in terms of where we are in the cycle.
And how comfortable you are when we think about other it services firms.
We were able to guide or they tend to provide guidance figure out and you guys are now about 50 50 in terms of your revenue mix.
Well I'll start.
Andrew I think.
We've always said our staffing we have somewhere a little north of six months or half of the year visibility and consulting we have more than that it would approach a year nine months to a year visibility because they're discrete contracts that are longer term and they are signed.
And funded so in staffing and of course, the client can make a decision today to change their posture with us at any moment, so, but I think given our account base.
We're pretty comfortable that we have visibility out for somewhere between six to 12 months for sure between staffing and consulting and southeast definitely more disability and the government side similar it's much more I'd say, Ted predictable because of contracts.
That are set usually for the fiscal year the government and funded so we have relatively good visibility there, which is consulting type business right.
Yes.
Understood and then one related question to that in terms of the visibility component are there are also differences in behavior that we should maybe be thinking about in a down cycle in the sense that.
Would the staffing part of the business or do clients tend to focus on that more whereas with your consulting maybe that's I would call. It safer revenues or how should how should we think about that component in terms of the the reactivity of clients.
Ted I'll start I think Ted mentioned already current placement is the most cyclical but it's a very small percentage of our total portfolio right staffing is appears to be the most cyclical because clients can quickly making decision to cut resources or to add resources in surge in our search.
Matter anywhere along the line so it tends to be a little bit more.
Incentive to client decision, making consulting usually are well thought out projects by our clients that they are on a path on a roadmap that budget for year and they're often running that doesn't mean, they won't change your mind somewhere along the line of redirect to work, but it's definitely the one that's probably more.
More consistent now having said that surrender, you know very well following us many years for the most part we've had in our staffing side a lot of our staffing work as an infrastructure keep the lights on kind of where certain percentages. There. That's why we were Cushing, so well in <unk> and in the Covid period and the commercial business.
So.
There are a lot of different components that go into it the more infrastructure work, you're doing us a little more you see it as an annuity if you will or maura.
Consistent revenue path.
But definitely for inflation would be the most most uncertain, but it's small small part of our business as Ted said staffing next although we're cushioned by the size of our accounts and by the infrastructure spend and consulting last because those who are generally well thought out projects that are on a pathway to achieve some objective for the client.
Got it.
Thank you guys that's it for me.
Surrender, if you want to follow up on the billable day question. Please do after the call and again up slightly and commercial up mid single digits in federal slide.
Slightly up for ASTM sequentially, when you make your adjustments alright got it I appreciate that and I will follow up thank you.
Thank you we have next question from the line of Kevin Mcveigh with Credit Suisse. Please go ahead.
Great. Thanks, so much thanks for fitting me in and Maria welcome.
Just to follow up on the guidance.
I don't know if I picked it up wrong, but it looks like the EPS relative to revenue a little bit of a delta and it looks like a lot of the incremental expenses in SG&A and <unk>.
I didn't have.
And Brian in there, but if my math is right and I don't know if it is it looks like it was an incremental $15 million of SG&A.
Is that right and if it is what is that.
So coming from the third quarter, the fourth Kevin is that what Youre, saying.
That's right Ed.
Yes, so I don't think the SG&A is up $15 million.
I think that and I would tell you the biggest factor.
Is the four less billing days because youre your fully loaded for costs. So when you and.
Norm in normal years. So if we went back before COVID-19 coming out of the third quarter and into the fourth quarter, you would see a decline in EBITDA margin from third to fourth you didn't see that in 2020 because of the Covid ramp and you didn't see it in 2021, because we had a very abnormal.
Full quarter of acceleration from third to fourth that was for both unit. It was above 5%, which is not normal. So you really I mean this is not something.
This is normal for us we're used to seeing from the third to the fourth so you'd have to go back to 19 and prior to see that.
Yes.
Great and then.
The lower margin web contract how much did that help in the quarter right because it sounds like it was obviously a little Morgan, but the revenue wasn't there any sense of what the margin benefit from it was.
Well I mean, I think in the past, we've said each quarter the contribution is plus or minus $15 million and it had virtually no margin associated with it.
Awesome, Okay. Thanks, so much.
Thank you we have next question from the lineup Mark Marcon with Baird. Please go ahead.
Hey, good afternoon.
Welcome to the call.
Yes.
I Didnt Randy I was wondering can you talk a little bit about the.
Those sort of joint wins.
Well first of all I'd like to never to talk about.
Anything other than it's one when its apex systems wind in the commercial account and when we win the service now it's a basically we do it on an apex paper, if you will but its glide SaaS rates by SaaS capability.
<unk> is bringing the client to the bench, if you will or to the trough and then working to make sure that the glide pass team understands the client environment Mark we expect.
A healthy growth in this area because apex has an account base that is second to none and if you've ever listened to bill Mcdermott in service now.
They have a huge penetration in the fortune 1000, and fortune 500 with their licenses now I will also tell you I think bill would say most of these fortune 500 companies are using.
Service now in a very small way not in a large enterprise way, so theres a lot of room and opportunity here for them as a company and for US as a service agent of their their products. So.
We said when we made the acquisition, which we talked about last quarter.
Or I guess in July 1st publication.
We expect that there's a lot of great synergy between us.
Didn't price it based on the synergy we price it based on <unk> own performance, which was stellar.
That's great and then.
There've been a lot of questions.
Around.
Visibility obviously the reason for that is because there is some concern with regards to macro slowing given the increase in terms of interest rates you've been through multiple cycles.
First of all are you with your clients, Ted and Rand or are you hearing anything.
Among those fortune 1000 clients in terms of concerns or.
Thoughts about hey, we might slow down.
Secondly, you've done a great job in terms of navigating through prior cycles.
Just for people, who aren't as familiar with you. If you can just kind of remind people in terms of some of the variable cost components that you have.
And your ability to adjust as need be.
Right. So let me start and rig cannot been here so lots of headlines.
And the news right now about slowing rates of hiring or maybe even layoffs. What we're finding is clients are doing that but in areas that are not.
So I think grant said earlier that we're not seeing any disruption other than the normal specific accounting here or there around.
Signing up for a piece of work or maybe changing sentiment on hiring so I think that were.
Cant call anything in that regards was just a normal or abnormal conversations right now.
And a lot of the.
Reason to clients are using us to ditch.
Digital transformation or.
Cost optimization or otherwise, what I'll, just call improved data and analytics and move to the cloud all of these other things continue they haven't gone away.
Just because we're all watching what's going on in the news. So I wouldn't say any any overreaction to clients right now and I think when you hear the headlines.
Mark and you know this you have to kind of bifurcated between our some of these big companies, saying they had too many people in the warehouse or logistics or administrative or what have you and kind of separate that from really what's going on in it.
So that would probably be the first thing.
When the business now to your second question when the business grows more slowly or it may not grow at all.
We find that our P&L naturally adjust to that as we take the actions that we know we need to take so if revenue is lower.
Margins gross margins are pretty well intact, and so gross profit moves together with that.
G&A is highly variable like in terms of the fact that it's mostly compensation is modest fixed.
Cost and it's highly incentive and those incentives to adjust with changes in.
Revenue and gross profit so in that way, we maintain pretty stable margins. When you come to the bottom line and you can go back and see that during the Covid period is the best example of that.
And then Randall obviously apex is a private company went through this benign saw similar things. So our clients. We're such an important part of the fabric around how they get things done not just new things, but just to operate their shop everyday.
That and.
And it's a it's a better tool for them the big fixed internal workforce and we've seen that secular change play out here for years and so in that way they need us to stand by them and help them operate there.
Their technology operations and accomplish the projects that are important to the business.
Got it.
Appreciate that and then lastly.
We obviously have an election coming along.
You did announce a number of really nice.
Contract signings on the government space do you think the pace of the.
The decisions is going to actually increase here and what what would happen during a lame duck session, particularly if there's kind of a.
Split from a party perspective.
Well look I think that we've evidence.
Evidence of our numbers and Youll see our peers report, but the pace quickened in Q3 right. So I think there was a build during the first two quarters. After the budget became effective and then you know you've seen it begin.
To happen here in Q3, and we think there'll be maybe a little bit more strength.
In new bookings for the sector overall in Q4, what happens if we get into.
A different situation as it relates to the parties and who's empowered again I can't really comment on that I will tell you.
The threat is not getting any less or or easier. It's out there and it continues to grow and its cyber security.
Our solutions around AI and machine learning and for the government continue to modernize that system. So that it can do the work that it needs to do those things are not going away and I think whatever party as empower theyre going to support those things.
Makes sense. Thank you.
Thank you.
Ladies and gentlemen, we have reached the end of the question and answer session and I'd like to turn the call back over to Ted Hanson CEO for closing remarks.
To your right.
Well, thank you operator, and I appreciate everyone being on our Q3 earnings release call and we look forward to speaking with you in February and discussing the fourth quarter and our outlook for the first quarter of 2023.
Thank you ladies and gentlemen. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.
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