Q1 2023 ASGN Incorporated Earnings Call
Greetings and welcome to the a S. G N incorporated first quarter 2023 earnings call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference. Please press <unk>.
<unk> zero on your telephone keypad as a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Kimberly Oscar Kid Investor Relations. Thank you Kimberly you may begin.
Thank you operator, good afternoon, and thank you for joining us today for <unk> first quarter conference call.
With me are Ted Hanson, 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 we believe these statements are reasonable they are subject to risks and uncertainties and as such our actual results could differ materially from those statements.
Certain of these risks and uncertainties are described in today's press release and in our SEC filings.
We do not assume any obligation to update statements made on this call.
For your convenience our prepared remarks and supplemental materials can be found in the Investor Relations section of our website at investors day 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 GAAP and non-GAAP measures are included in today's press release.
I will now turn the call over to Ted Hanson, Chief Executive Officer.
Thank you Kimberly and thank you for joining <unk> first quarter 2023 earnings call.
Continuing to execute solidly in our core strategic areas of our business.
<unk> revenues for the first quarter of 2023 improved three 5% as compared to the prior year period.
Consulting revenues, including both commercial and federal government work surpassed the 50% Mark at $568 4 million or 54% of the first quarter revenues compared to 42, 4% of revenues in the prior year quarter.
The strong growth of this business, particularly in light of macro conditions Reconfirms, our strategic decision to double down on high end higher value consulting work for Fortune 1000, and federal government clients.
We have the right group of professionals in place to successfully execute against this long term plan.
I wanted to thank all of the ASTM team for your efforts this past quarter and pushing our growth strategy forward.
In contrast to commercial consulting and federal government work the areas of our business that are more discretionary and cyclical in nature, namely assignment revenue declined we program for some of this in our guidance. However, the decline towards the end of the quarter was greater than we had initially anticipated.
And this negatively impacted our adjusted EBITDA margin.
Nevertheless at 10, 9% for the first quarter, which is seasonally the lowest adjusted EBITDA margins remained solidly in the double digits importantly, the long term adjusted EBITDA margin profile of our business has not changed and it is expected to further improve over time based on a mood tour.
A more consultative model.
In addition, while our leading indicator on the downside permanent placement and creative digital marketing have historically seen an uptick in revenue as macro conditions improve followed by a more sustained rally. It's once the economy exits a recessionary period.
Okay.
In the meantime, given market condition, we are leveraging our variable cost structure and proactively taking down expenses in certain areas of the business.
While investing in others those actions are protecting our adjusted EBITDA margins today and into the future.
Also our free cash flow benefited from a reduction in accounts receivable DSO by one two days.
<unk> capital allocation strategy has not changed we still believe that M&A remains the best use of it.
Highest return on capital, having said that with limited deals into the pipeline at present, we expect to be more active in repurchasing <unk> shares given our view of the rather compelling share price.
Our board of directors, such recently approved a new two year $500 billion share repurchase authorization.
Yeah.
With that as a background, let's discuss our segment performance for the quarter.
Our commercial segment, which predominantly serves large enterprises and fortune 1000 companies reported first quarter 2020 revenues relatively consistent with the prior year period on a tough double digit year over year comparison.
Apex systems, our largest division accounted for 85, 4% of the commercial segment revenues.
Revenues for the division improved three 1% for the quarter with top accounts, achieving low single digit growth in retail accounts, achieving high single digit growth year over year.
Creative digital marketing and permanent placement revenues, which represented 14, 6% of commercial segment revenues declined double digits year over year.
Our large enterprise industry diversified commercial client base provides balanced and protection to the downside as such even with the pullback in more of our discretionary business as we continue to see solid progress in three of our five commercial segment industry verticals in the quarter.
Financial services and healthcare vertical saw single digit revenue growth year over year, while consumer and industrial vertical revenues improved high single digits compared to the first quarter of 2022.
Technology media and telecom, our TMT and business and government services verticals, both declined mid single digits.
In financial services growth was driven principally by wealth management improvement in our healthcare vertical revenues was largely driven by growth in provider accounts, while consumer and industrial strength was led by growth in energy utilities and consumer staples.
In the TMT vertical telecommunications and technology accounts saw pullback with delays in work and the impact of layoffs.
Business and government services Aerospace and defense accounts saw solid growth during the quarter, while we saw a double digit revenue pulled back in business services.
Turning to our consulting business consulting offerings remain an important source of the value we provide clients and a core part of our strategic growth strategy for the first quarter commercial consulting revenues increased 32, 7% year over year and were.
Up 20% organically bookings were a record for the quarter and totaled approximately $392 million up 31, 7% year over year. This translates into a book to bill of roughly one three to one on a trailing 12 months basis.
With such strong bookings.
It is evident that our clients continue to invest in it consulting projects in fact, while we have seen some of our clients to emphasize smaller discretionary projects. They are re prioritizing their focus to other areas such as work aimed at modernizing their systems and improving customer experiences.
<unk> has been able to leverage these trends and remain favored by our clients in the consulting space as a result of our long standing relationships.
Our expansive solutions portfolio.
Our unique delivery model.
So let me provide some examples of our commercial consulting wins for the quarter.
In Q1 apex systems in partnership with that glide past unit was awarded a new contract to provide development services on the service now platform to a global automotive company.
Same client also tasked our team with digitizing automating and optimizing our supply chain management processes.
This is just one of the 13, new client wins during the first quarter in which apex brought the client relationship to the table and glad that this service to our capabilities in order to jointly secure the contract.
Also during the first quarter, we won a contract with a leading U S health care provider to help them deploy the application that uses artificial intelligence to detect when patients are performing an action that puts the patient at risk of falling and then send an alert to the health care provider to <unk>.
<unk> and take the appropriate action the goal of the project is to increase the number of rooms. The application can safely monitor remotely by leveraging AI and then apex systems developed application.
Let's now turn to our federal government segment, which provides mission critical solutions to the department of defense, The intelligence community and federal civilian agencies Federal segment revenues for the quarter were up 15% compared to the first quarter of 2022, driven by a combination of organic growth.
And the impact of our recent <unk> acquisition.
Contract backlog was over $3 billion at the end of the first quarter or a healthy coverage ratio of two six times the segment's trailing 12 month revenues.
New contract awards for the quarter were approximately $75 2 million, which translates to a book to bill of <unk> nine to one on a trailing 12 months basis.
We're seeing delays in projects.
Largely due to new multi phased procurement cycles and an increase in award protest.
Q1 is also often seasonally low for our federal government segment.
The government acquisition cycle tends to lag behind the budget cycle.
That said our pipeline of opportunities remains robust and the number of projects submitted awaiting award is as high as it's ever been.
So, let's turn to some examples of projects won during the first quarter.
In the quarter, our team secured a number of Recompete and one new contract awards in terms of Recompete ECS again secured the department of Homeland security.
Web content management as a service contract in which we are supporting the DHS with enterprise content delivery Dev Tech ops, a cloud platform enhances with regards to new awards during the quarter ECS won a prime contract to support the modernization and agile transformation.
The Army's integrated pay and personnel system, which is the army's number one priority at present.
<unk> is also making great progress in ECS has leveraged our advanced cyber security capabilities to pursue new opportunities across its entire client base. For example, in the first quarter ECS, what a new contract under iron.
To support the Millennium Challenge Corporation, with designing building and installing in country solutions to.
Track infrastructure investments in Kosovo and Malawi.
This momentum has continued and I am pleased to report that ECS has already seen several bookings in early Q2. For example, we recently won a recompete.
$100 million to perform advanced addressing and geospatial technology solutions for our long standing global mail delivery and shipping customer.
With that I'll now turn the call over to Murray, our CFO to discuss our first quarter results and our second quarter 2023 guidance.
Yeah.
Thanks, Ted it's great to speak with everyone again today.
Revenues for the first quarter were $1 1 billion up three 5% year over year on an as reported basis.
Excluding $54 million from businesses acquired in the past 12 months revenues were down one 2% compared to the prior year quarter.
I'd like to put the first quarter revenue results perspective.
From a seasonality standpoint revenues in the first quarter of each calendar year tend to be lighter as many clients finalize spending at their calendar year project budgets.
So on a consolidated basis.
We achieved over 20% year over year revenue growth in the first quarter of 2022, creating a tough year over year comparison while.
While we anticipate some softness in our Q1 guidance due to macroeconomic conditions as Ted noted.
We fell below our guidance range, mainly due to further revenue declines towards the end of the quarter and are more discretionary and cyclical assignment work.
Revenues from our commercial segment were $832 1 million essentially flat year over year on an as reported basis and down three 2% organically revenues from commercial consulting the largest of our high margin revenue streams totaled $271 7 million.
Up 32, 7% year over year.
Excluding the 25 9 million contribution from <unk> consulting services revenue improved 20% year over year.
Revenue from our federal government with $296 7 million up 15% year over year, excluding the contribution from <unk> of $24 5 million revenues for this segment increased five 5%.
Moving onto margins on a consolidated basis.
Gross margin was 28, 9% down 100 basis points over the first quarter of last year.
Compression in gross margin was mainly related to business mix.
<unk>, a slightly higher mix of revenues from our federal government segment, which carry a lower gross margin than commercial revenues.
And a lower mix of creative digital marketing and Perm placement revenues, which have higher gross margins.
Gross margin for the commercial segment was 31, 5% down 120 basis points year over year, primarily due to a smaller contribution from our discretionary and cyclical assignment revenues as noted by contract gross margin for the federal government.
With 21, 6% up 70 basis points year over year due to a smaller amount of cost reimbursable contracts and the contribution from iron.
SG&A expenses for the first quarter were $224 1 million up five 7% year over year due.
Due to investments in workforce and technology made in 'twenty two.
SG&A expenses were favorable to guidance due to the highly variable nature of our cost structure, which benefited from fluctuations in our incentive compensation and from attrition in our business.
SG&A expenses also included $2 3 million in acquisition integration and strategic planning expenses that we do not include in our guidance.
As expected interest expense increased year over year related to rising interest rates, which impact only a portion of our debt as a reminder, over half of our debt is fixed at below market rates.
Amortization of intangible assets was higher due to recent acquisitions.
Income from continuing operations was $49 5 million adjusted EBITDA was $123 5 million and adjusted EBITDA margin was 10, 9%.
Our two highest margin contributors permanent placement and creative digital marketing revenues.
Pressured our adjusted EBITDA margin compared to what we had originally guided for the quarter.
At the end of the quarter cash and cash equivalents were $65 million and we had full availability under our $460 million senior secured revolver.
Free cash flow for the quarter totaled $68 8 million an improvement of 48, 3% over the first quarter of 2022.
As Ted mentioned cash flow benefited from a reduction in accounts receivable, thereby improving DSO by one two days.
With strong free cash flow generation and full availability under the revolver, we have ample dry powder to make strategic acquisitions, given the limited acquisition opportunities at present.
And our stock trading at such attractive levels, we deployed $48 8 million in cash on the repurchase of 563200 shares at the Companys common stock during the first quarter.
This week, our board of directors approved a new two year 500 million share repurchase plan, replacing the prior authorization.
Turning to our guidance our financial estimates for the second quarter of 2023 are set forth in our earnings release and supplemental materials.
These estimates are based on trends in March and April It seems 63 to five billable days in the second quarter, which is essentially the same as a year ago period and sequentially.
And includes the estimated revenue contribution of $52 8 million for acquisitions made in the last 12 months.
We are providing wider ranges this quarter and in prior quarters to account for uncertain macro conditions at present.
With that in mind, we expect macro conditions in the second quarter be similar to that of the <unk>.
With continued softness in assignment revenues.
Given the seasonality of our business in Q1 being the lowest from a revenue standpoint revenue should increase sequentially.
We expect second quarter revenues to be driven by commercial consulting and federal revenue growth.
By continued softness in it staffing consistent with our peer set and to lower its Dan.
Clients and permanent placement and creative digital marketing.
We also face another difficult year over year comparison, it had over 17% growth in the second quarter of 2022.
And our guidance numbers, we haven't seen leverage from our variable cost structure and certain cost containment efforts as well as lapping of the payroll tax reset in Q1.
These assumptions limit the downward pressure on margins without hampering our long term growth drivers.
With that background for the second quarter, we are estimating revenues at $1 1 billion to 114 5 billion on roughly the same number of billable days and against a difficult year over year comparable this translates to a year over year growth rate of minus two 8% to plus.
3% compared to the prior year quarter's results.
We are estimating net income of $52 8 million to $60 million and adjusted EBITDA of 125 million to $135 million. We are expecting gross margin will decline year over year, primarily due to business mix similar to the more recent trends, including a <unk>.
Greater mix of federal government work and the continued softness in assignment adjusted EBITDA margins are also anticipated to decline year over year, but should benefit from our variable cost structure commensurate with revenue.
Along with other cost control measures, such as head count attrition and limitations and discretionary spending.
Now I'll turn the call over to Ted for some closing remarks.
Thanks, Laurie like our peers the difficult macroeconomic conditions are impacting our performance in the more discretionary cyclical areas of our business. These conditions are outside of our control what is in our control is our ability to execute and strategically position our business to succeed throughout.
<unk> economic cycles in the first quarter, we did just that we continue to evolve our business toward a more consultative model. While clients are scrutinizing spend they are continuing to invest in it projects that are critical for their businesses with over 50% of our revenues now in higher.
And higher value consulting work, we are shaping and evolving our operations for success in both the short and the long term.
Importantly, we have a number of key business stabilizers in place to support our business on the downside and we remain committed to providing leading it services and solutions to the commercial and government end markets we serve.
Thank you all for joining our first quarter call. We will now open it up to your questions operator.
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One moment, please while we poll for questions.
Okay.
Okay.
Thank you.
Our next question is from Maggie Nolan with William Blair. Please proceed with your question.
Hi, Thank you.
Really interesting to see you guys cross that 50% of revenue Mark I'd, just consulting work so congratulations on that.
My first question is.
Rounds kind of client sentiment I know you've mentioned that your clients tend to kind of finalize their budgets in the first quarter, what kind of feedback we're getting from clients has been finalized that process as it relates to your kind of a full year spend projections.
Yes, I'll start and I'll, let Bryan kind of hop in with me here on this one but I think.
Look clients are posturing overall as cautious.
The staffing programs and the staffing part of the business.
They can put their finger on their first and moderate spend and get.
Protective if you will.
Based on future uncertainty at the same time, you can see just based on the data points that our consulting business.
They continue to stay invested in projects that are going on in IP that are key strategic business drivers.
And not only do they continue with projects that are going on but there are also adding to that with new work.
So I think the clients are just being.
Theyre very wary.
They are saving money in places of the business, where they can and they are also continuing to invest in areas of the business that are critical for it now underneath of that there is an industry by industry story, which we can get into but I think overall at a high level.
There's a certain cautiousness for sure within the client base ramp would you add anything to that.
No I think you hit everything Maggie obviously, we're watching the bookings numbers consulting numbers.
We're watching what's going on in their staffing programs, which Ted said her.
Or easier to put your finger on and pull back on if you will but in the consulting world. We're very pleased with I think the progress we've made and the clients still thinking forward and Ted is absolutely right industries are obviously being more aggressive than others on their it spend.
But cautiousness is probably.
The operative word here.
Got it thank you.
And then I think it was Murray talking about evaluating some of your expenses and balancing that with your investment areas given the market conditions.
What are some of those key areas, where you think you can cut back versus where where you continue to invest for future growth.
Hi, Maggie some of those areas is really the discretionary component of it.
Some of our spend and so items like travel, making sure we're tight on that and we also have attrition just built into our modeling. So we see that coming to play as well and so and we believe that in addition to the combination of the attrition that's happening.
Then the right sizing with that.
The variable cost structure that we have along with the control over some of those discretionary spend.
Are those three categories and if you think Matthew if you think about our business in three buckets. If you will obviously in the staffing piece, which encompasses creative digital.
And.
Permanent placement, that's where we're seeing most of our natural attrition.
In commercial consulting there's a there's a good and productive marketplace and so we're investing staying invested there and attacking that.
You can tell from our wins there but.
That's working and then on the federal side also a productive area right now we're growing we're staying invested around that and so I think at a high level Murray kind of captured all the areas and just inside the segments of our business those are the pluses and minuses.
That's helpful. Ted Maggie can I, just add real quick.
As you remember in the last quarter, we talked about banks being a good vendor in the first quarter around it.
Proved out not to be quite so much but the amount of activity picking up because of compliance and other information needs in that sector, both regional and big banks. So we're hopeful that we'll see maybe a resurgence and therefore, we are deploying to that.
Got it thanks, Brian .
Thank you. Our next question is from Tobey Sommer with <unk> Securities. Please proceed with your question.
Thanks.
Commercial consulting area, what what is the.
The sales cycle look like.
How has it evolved year to date, you obviously had.
Over the course of the first four months of the year.
Brian do you want to take that.
Yes.
Didn't really say theres much changes I mean.
Most.
Most fortune 1000 companies like ourselves they have a.
Pat.
Amortization path introduction of some technologies.
And improved productivity of the workforce and the customer experience in that past Hasnt changed.
I think there so the discussions we have with the client are still around those pass and what projects can we take on to help them get there and be efficient give them quality at the right price point. If you will so now we are back our pipeline is also growing and so.
Again, there are some industries no question Tobey I think Ted pointed this out already where we alluded to this that there are definitely a little bit more cautious and they just want to be slow little slower. So the sales process made elongate by some weeks or they may get something started but not go full bore right away, but for the most.
Part.
We've seen pretty good success, some pretty good discussions across the board.
Some areas like I, just mentioned and Maggie and the financial services and Theres New discussions now is theirs.
New compliance requirements do things to monitor new things that they have to get their arms around along with your cloud migrations and the other things that are ongoing.
And for me.
From a staffing perspective.
Where would you say.
The bill rate growth is now and how does that compare to either.
Folks you have out on assignment or.
Another volumetric weekly hours, which whichever one you want to choose.
Yeah, well I would say.
Bill rate growth is naturally happening in the business as we.
Have a higher mix of consultative type engagements right. We're just.
It's a higher value proposition to the customer, we're getting better rates higher rates and we're also getting higher gross and EBITDA margins. So naturally across the business. We continue to see the bill rate go up that's probably the number one factor the number two factor underneath that is pay bill spreads are remaining pretty steady.
We're not seeing any degradation of that.
And I think that speaks to kind of the continued.
Tightness of the labor pull around.
Mission critical skill.
Skill sets.
That they are still in demand.
No.
Those are two data points around that.
So I guess based based on that kind of commentary is it fair to assume that bill rate growth still exists in the in the staffing business and it is just being.
Sort of overwhelmed by volume declines.
So bill rate growth is still there for sure it's not as steep as it was wage inflation not as steep as it was so those are going up but at a lesser level to what we saw in the past and certainly we're having volume declines in the staffing part of the business.
Okay and could you give us a sense for where perm is now and compare and contrast.
Where it is in the range historically.
And.
Maybe also describe the margins in creative digital I know they've come down, but contextualize that too if you could.
Sure well permanent placement is around 3% right now.
It was close to five.
I would say three five to four is kind of a normal level for us.
If you will.
And creative circle EBITDA margins are higher than our.
Overall company margins they range from the mid to high teens.
And that business and have been.
Pretty consistent well managed.
Matt Riley at creative circle over a number of years.
Thank you. Our next question comes from Heather <unk> with Bank of America. Please proceed with your question.
Hi, Thanks for taking my question I guess first off can you dig in a little bit more to the slowdown that you saw towards the end of the quarter.
In terms of kind of all the level of deceleration what areas of your staffing business, where were most impacted and and when you think about the guide for the second quarter.
Are you assuming kind of a steady state from what you saw in March and April or are you kind of factoring in further deceleration.
Yes.
So maybe a couple of things here I think coming across the new year. If you think about come in from the end of December into January we would typically see.
Slight notch down and Thats, just natural end of projects and new projects are starting and I think Marie mentioned in our commentary that that's a pretty normal thing in the business and we saw that.
And this year.
What was unique is about.
Two thirds of the way into the quarter certainly end of February instead of seeing us begin to track back up we took another notch down and that was.
Unexpected.
That's really the difference now what we've seen in the last what I'll say four to six weeks.
Pretty good steadiness, so youre still down a little bit.
In the staffing part of the business and obviously you're up on the consulting side of the business and so.
Pretty much kind of continued that offsetting trend here for the last four to six weeks. So that's the first quarter.
Think about the second quarter I'd take Murray's comments were that the guidance that we gave really predicated a similar.
Trend to what we've seen in March and April and Thats, the flattish net flat flat ish units that I mentioned.
A few seconds ago, and so that's really where the guidance is predicated.
We'll get we'll have to watch and see but that's what we see here.
Just three weeks ended the quarter.
That's helpful. Thank you.
And then switching gears.
Gotten some questions just with.
AI being in the news and very topical.
And just curious your thoughts on kind of how the rise of AI right now.
Potentially helps or.
Couldn't hurt your business I think we've heard turbo case theres opportunities for AI type roles and then on the flip side.
Is there risk that turf.
The number of tech jobs out there shrink I'm just curious to get your thought.
Yes, so I'll start and then they ramp has something to say here I'll turn it over to him but.
This is a new business driver if you will I mean, so often things come along that kind of push push the next wave of Digitization automation and it work forward and this is certainly going to be one of those it's too early to really get your arms all the way around what the opportunity is but there's no question.
This is one of these <unk>.
Inside of our business I see it as a productivity driver.
A lot of the things that we do for clients in terms of helping them solve problems either on the talent side or providing a certain solution.
Is it going to remain there, but in terms of how we operate and execute our business.
Early on you can already see that there will be opportunities for AI to make a real difference in us continuing to increase.
<unk> and the way we serve our clients Rand what else would you add to that.
Well listen everything.
Great.
<unk> is a key driver of spend going forward, along with machine learning, but lets remember and by the way. We featured some of that in this earnings call with our healthcare client and we have in the past featured it with some of the work we're doing with the department of defense and the federal side.
But let's remember that what you need is a good data structure you need a good cloud and data structure in order to do AI and so what you see from some of the other Big Tech Giants is cloud work is still moving forward because that's you got to harness data you've got to be able to assimilate you've got to be able to track it.
And the trends in data, which is both a cloud and a and a data analysis and if things to do so there's a lot of groundwork to be doing to make AI really work not to mention just the technology of AI and machine learning. So I think that's why you see a lot of it is still growing in those areas.
I appreciate it thank you very much.
Thank you. Our next question comes from Jeff <unk> with BMO capital markets. Please proceed with your question.
Hey, good afternoon, Ryan on for Jeff Just a quick question, we've seen some headlines surrounding declines in it spend.
Just wondering how those factors impact your business and are those impacting the digital transformation initiatives.
We've spoken about previously.
Randy you want to take that yes.
Yes, let me start first of all Jeff I would say there is a decline in staffing expenditures for sure.
And that's because as Ted pointed out earlier.
<unk> Fortune 1000 clients, specifically can put their finger on it and leverage it or stop it or started in hours not even in days, okay and consulting we have not seen a slowdown in consulting spend.
And the projects that make that up so.
I guess I would clarify that and Perm placement is also in that it staffing piece why would you hire somebody on your corporate staff at this point in time in the economic cycle, but that will eventually come back and as you said, Jeff. The second part of your question was not.
Not just whether theyre spending but go ahead the second part was what.
It was just on the digital how that relates to digital transformation.
Yes.
Digital transformation look AI and machine learning is on everybody's mind is in the press, but the.
Cloud work and the data analysis I, just mentioned is what I call infrastructure and building for that.
Digital transformation is embedded and still a big part of what we're doing for clients.
We just recently signed a new piece of work with the Telecommunications Company Media company using service now technology, our glide path business is growing I think Ted mentioned that earlier.
And your backlog and bookings are growing so theres still a lot of interest in some of the digital transformation initiatives. Our clients are involved which I think it goes to the comment Ted made earlier those are things that have already started.
They may.
They may if you will go a little slower at some of them for a small period, but there is still going.
Yes, so Bryan I'm just.
Hey, Ryan.
And one more thing I would add to that I think our clients view their it initiatives strategic just like we do right and so as we look at the things that we're doing in the business.
We can't really take our foot off the gas I mean, all of these are about reaching our customers be more productive having better data and analysis being in the cloud having better security and so while we may let some discretionary spend fall in certain areas.
Inside of our own business, whether it's marketing or travel or some levels of head count of what have you what we're going to do our best to stick with our investments and all the IP projects that are helping us move down the pathway and our digital roadmap.
I feel like in our clients look at same fact.
In fact, they do because when we talk to them. That's most of what we get guests are being cautious to ramp point.
But I think.
Spend now is so.
So much strategic initiatives than it used to be a cost center right and so there's just a little bit different view of this and yes. Some it spending will ebb and flow that none of us need laptops, we bought so many over the last couple of three years, we don't need more laptops, but we do need to keep moving on all of these things that are initiatives.
To get the right applications in our business to get them into the cloud to keep them secure and make them productive for us to reach our customers and serve them or services. So.
Anyway, that's kind of how we see it.
Thanks for that and then just a follow up.
If there were to be some weakness in some of the top of the pyramid areas.
Such as architecture implementation and consulting work.
If you see those when you see trends coincidentally in your consulting business.
The system's deployment or service centers there is there.
Maybe some lag between.
Those two areas and the consulting market.
Well Rand certainly management consulting is an area that's may be softer.
This weighed on longer with spend around our design and architecture be pro debated.
Likely but the execution of the work, which is where we play for the most part should still be pretty strong.
Yeah.
Yes, I agree.
Thank you. Our next question comes from Surinder <unk> with Jefferies. Please proceed with your question.
Thank you.
Just to follow up on the earlier color about kind of the.
The transition that's occurring in <unk> in terms of.
The weakness that we saw in the staffing business.
Can you talk about it in terms of.
Was this company's kind of pulling back on staffing in the sense that they are delaying projects in there.
Having people come off of those projects or is it the projects are tending to be pushed were in the pipeline. Maybe there was positions that were open.
And that you had anticipated filling but at that point they remove those positions.
How should we think about that mix at this point.
Ultimately what.
What the longer term risk here is over the next six to 12 months in terms of what kind of a pullback.
In terms of trying to kind of put ends on.
The way to think about this.
Andy you want to take that.
Well, Ted let me start and then you can jump in surrender. The first thing I would say to you. Though is when you are on the staffing side you don't always know what the project is it's an electronic world where they have requisitions. They published the requisitions, Duke BMS is and you respond to them do our account managers have a sense of.
Where they're deploying these people the answer is we have a sense, but it's not a project.
We're not hiring people for projects Youre hiring people, where the company puts them is is to some extent through the electronic media means.
Invisible to US now having said that I think it's just a question of when they're rotating people or.
<unk>.
That they just were taking a pause and when they start a new person back up and I think they do that because it's a cost control measure that's why companies have staffing programs that they and with the full visibility from the top down in the organization remember 15 years ago. They didn't 20 years ago, they didn't really.
Have all of these programs there was a lot of independent one off hiring people they've really put great program in place they've made electronic.
Which all of US have responded to and we benefited from in the sense of transactional flow, but but having said that I think what they see as they know that this is a way that they can control costs at least in the short term not a long term answer. It's a short term answer just to bridge the gap until they decide.
We continue to move forward.
Can't run your service centers for example, which is where some of that staffing does.
Unless you up the productivity of that team.
Or are you just limp along for a while because there were some general lower level up.
Action going on in that service center I'm using that as an example.
If it's project oriented it's more coming to the consulting program and I think our backlog and consulting revenues talk for themselves.
Okay.
That's helpful and then as a follow on.
For Murray can you maybe talk about M&A at this stage given the color around the limited deal pipeline.
Is that.
By design here is it a valuation issue.
Should we think about.
That part of the commentary.
Well I mean from an M&A perspective, I mean, it's really around trying to find that right deal to your point.
<unk> meets our value proposition so.
We've said that our.
Our use of capital that M&A is the first and best use.
But where we are.
Sorry.
Let me just let me add one more thing I think it's opportunistic right and so we've always said if there wasn't the next.
Bright opportunity in front of us that we would.
Then turn to share repurchases, which obviously we've done here during the last quarter and intend to continue with the with the new share offers repurchase authorization and continued free cash flow here as we go forward. So look we still would love to find certain properties that fit our shopping list.
We have defined both in commercial and Gov, We continued to talk to.
Given various targets and that doesn't stop it's a slower now and kind of nothing at the lip of the Cup.
To your point I think one of your last part of your question was about valuation and Theres still not a discovery of evaluation today because.
They're a seller is not willing to sell a really good business into a marketplace, where the buyer is willing to pay what he perceives our she perceives.
The multiple to be in so you've got a little bit of a stalemate going on still.
Until the financing markets.
Equity capital markets are working in a way that it supports a normal amount of deal flow in that discovery can be made where it a little bit of a lager had I would say.
Okay.
Thank you that's helpful.
Okay.
Yes.
Thank you. Our next question comes from Mark Mcclellan with Baird.
Please proceed with your question.
This is Andre Childress on for Mark Thanks for taking our question. So my first question would just follow up on the last one.
Can you speak about how you feel about your current debt levels and what are your thoughts on increasing leverage if the right opportunity you did.
Sure. So great question Andre I mean, we're still very modestly leveraged so take on a senior basis secured were less than one about <unk> nine.
Total leverage basis, it's under 219, we've always said that when we're below two and a half where kind of under Levered. If you will if they're good M&A opportunities in the marketplace.
In normal times, we have leveraged up to about three eight times about.
And we've done that on five different occasions, I believe to make a larger acquisition in the.
Margin and free cash flow characteristics of the business certainly support that but these aren't normal times, so obviously, where we're wary about leverage and how.
How do we think about that with so much uncertainty in the market.
But we have dry powder, we have free cash flow we have.
$460 million revolver that doesn't have anything outstanding on it we purposefully increased it.
About two quarters ago, so that if the right M&A opportunity came along we could take advantage of it. So I would say we're willing to take on a little bit of leverage for the right thing, but you won't see us up at three and three eight times.
Leverage metrics until we have some certainty in the market.
Great. Thank you that's very helpful color and then my follow up would be you spoke a little bit about the new multi based procurement cycles on the federal side could you provide some more color on that and any initial thoughts on how that could impact our strategy or go to market operations on the federal side.
Yes, Theres just a lot of gyrations going on in the whole procurement world within the federal government still has hung over from Covid is still lap quite cyclical and working like it should.
The government is going to big multi layered.
Rfps and awards.
Where they can to be more efficient.
On another level of Cray.
Craziness Theres just a lot more protests going on it used to be you were very careful about making a protest because you were basically telling your customer they were wrong.
Terms of how they looked at certain situation and adjudicated down to a final award, but today nobody's afraid to adjudicated.
To protest it seems like Thats. The first response the minute an award is made.
So.
Now not only are you seeing protests on the backend. After awards are made youre seeing them on the front end.
When firms don't agree with how the government customers putting together the.
Criteria when they put a contract out for bids.
It's just.
It's a different level of.
Stuff going on in that whole procurement world in its core.
Honestly kind of just bringing complexity and slowing down the machine. If you will beyond the effects lingering effect from Covid.
Great. Thank you so much.
Yes.
There are no further questions at this time I would like to turn the floor back over to Ted Hanson CEO for closing comments.
Great well, thank you for being with US today and we appreciate all your questions and your time and we look forward to announcing our second quarter results.
Later in July .
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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