Q2 2023 ASGN Incorporated Earnings Call

Greetings and welcome to the E F E N incorporated.

Second 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.

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During the conference. Please press Star zero on your telephone keypad.

As a reminder, this conference is being recorded.

It's now my pleasure.

To turn to introduce your host Kimberly S. Ticking VP Investor Relations. Thank you you may begin thank.

Thank you operator, good afternoon, and thank you for joining us today for <unk> second quarter Conference call with me are Ted Hanson, Chief Executive Officer, Rand 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 that a 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, Tim and thank you for joining <unk> second quarter 2023 earnings call.

Well, we begin our discussion today I want to note that we are excited to officially welcome Kim <unk> as our new Vice President of Investor Relations. We're happy to have her on board to work closely with our investors and analysts.

So, let's turn to the quarter.

<unk> performance for the second quarter 2023 was in line with our expectations with results above the midpoint or slightly ahead of our guidance ranges.

Performance, we saw in April continued throughout the quarter, particularly in relation to the more discretionary and cyclical portions of our business while our commercial.

Consulting and counter cyclical federal government revenues continued to grow as anticipated.

Second quarter 2023 revenues of $1 1 billion were above the midpoint of our guidance range during.

During the quarter based on growth of our high end higher value consulting work consulting revenues reached a total of 53% of consolidated revenues.

From 45% in the prior year period, adjusted EBITDA margin for the quarter improved sequentially to 12% above the top end of our guidance range.

Dissipated we benefited from typical seasonality in the second quarter growth in our high margin commercial consulting revenues, our variable cost structure and effective expense management.

This margin growth was partially offset by declining revenues in our more discretionary services. Nevertheless, the long term margin profile of our business remains intact as we continue moving forward toward a more consultative model.

With that as a background on our consolidated results I'd like to turn to our operating segments. As we review our quarterly segment performance three themes will be consistent throughout first macro conditions remain difficult for our more cyclical and discretionary services.

Our commercial and federal consulting businesses continue to grow and solid bookings were a highlight of the quarter.

Third our business stabilizers, including our strong and diversified U S focused customer base and our variable cost structure provides support throughout market cycles.

Discuss our segment performance I'll begin with our largest segment commercial with predominantly services large enterprise and Fortune 1000 companies commercial segment revenues declined by four 6% for the quarter on a tough year over year comparison as anticipated revenues for the segment benefited from.

The strength of our consulting business, which was offset by declines in the more discretionary areas of our services, including creative digital marketing and permanent placement along with certain portions of Ice's that.

For the quarter commercial consulting revenues increased approximately 26% year over year.

14% organically book.

Bookings of roughly $357 million translated to a book to Bill of one three times for the quarter and one two times on a trailing 12 months basis.

Of the consulting work one during the quarter, we saw a nice contribution of new wins and project extension with bookings weighted more heavily towards renewals of existing projects.

Our Mexican delivery center remains an important part of our consulting growth, providing strong technical capabilities at competitive rates.

We've been seeing increased usage of our Mexican delivery center, which now has a significantly larger workforce than when we first acquired it through our interest this acquisition in 2019.

Our Mexican delivery center supports the execution of our work and helps us respond to our clients' cost reduction goals, while at the same time to support the expansion of our commercial segment margin turning to our vertical performance in times of challenging macro conditions, our industry diversified commercial client base.

Provides balanced and protection on the downside.

We saw growth in two of our five commercial segment industry verticals in the second quarter.

Consumer and industrial was our fastest growing vertical with strong year over year growth in the consumer staple industrial and utility sectors.

Health care also improved and was up low single digits driven by growth in provider accounts.

In terms of declines business and government services was down low double digits with growth in aerospace and defense offset by a pullback in business services.

Financial services was down mid single digits year over year, but grew in certain sectors, including wealth management and big banks.

Technology media and telecommunications or TMT accounts were down double digits.

Due to a decline in both technology and telecommunications.

Even with these decreases in revenues are strong commercial consulting bookings showed that our clients continue to invest in 19 project.

Hey, I work in particular has become one of our fastest growing service areas across our commercial sector or generate revenues are still very small, but there is an expectation of revenue growth as these technologies mature and more use cases are adopted in the near term are supporting salute.

<unk> and cloud cyber security and data and analytics, we will service the foundation that ultimately youll AI usage by our clients. So we are taking to market our multi layer enterprise roadmap that will make new AI technologies possible for instance in the second quarter, we won an AI ml contract.

To support a fortune 500 communications company looking to drive product innovation and enhance their customer experience.

Our team conducted a baseline analysis of this client's customer data and then built a predictive model to direct its online sales actions by designing testing and training suite of models on this predictive framework HTM was able to improve our client system responsiveness.

Maintaining its data security.

We were also engaged by a fortune 500 media company to provide a roadmap and plan to facilitate the company's journey towards automation by developing a plan of action to automate repetitive employee tasks.

As copying data and pre fill in for him.

Client will save time and money by enabling its employees to <unk>.

It's a more strategic path.

At the same time, we are automating our clients' processes, we're using AI to help with the SDN project management in June our own glad that once agile genius and integration with services that help that automate key aspects of agile project setup and work allocation, we anticipate agile genius.

Will significantly increase our speed to manage our internal IP project and give us added insight to service clients with this new technology.

Let's turn now 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 nine 8% year over year, primarily driven by the contribution of iron by an acquisition.

And were up seven 7% sequentially.

Contract backlog was over $3 1 billion at the end of the second quarter or healthy coverage ratio of two six times the segment's trailing 12 month revenues.

New contract awards were approximately $390 million, which translates to a book to Bill of one two times for the quarter and <unk> nine times on a trailing 12 months basis.

While protest activity remains high and it's causing delays in the startup of new projects. We are not experiencing any pullback on active contract due to the mission critical nature of our federal government work.

In the second quarter, we saw considerable wins and increased demand for our managed cyber security cloud and services now solution.

For instance, we won a recompete digital modernization contract to provide advanced geospatial analytics to the United States Postal service as part of this contract ECS will be introducing AI tools that improve operational efficiency and effectiveness, while reducing cost.

We also secured two enterprise IP contract with the U S Navy to support its public safety network and another project with the FBI to provide data center services.

Our federal government segment was awarded several new task orders under our department of Homeland Security adapts vehicle to expand digital modernization architecture, and cloud and Chief technology officers services.

Further we won an AI ml contract for a classified customer to support this customer's open source intelligence goals.

Speaking specifically about.

<unk> has been an active player in providing artificial intelligence capabilities to the federal government for many years from 2019 2022 Etfs was the number one contractor for a spend according to the federal procurement data system.

We built in house procurement development and testing capabilities to bring the latest commercial AI technologies and solutions online for sensitive government, Michigan. These.

These efforts will provide us with the key qualifications needed to secure new AI work in the future.

With that I'll turn the call over to Marie to discuss the second quarter results and our third quarter 2023 guidance.

Thanks, Ted it's great to speak with everyone. This afternoon.

Ted noted our results for the quarter were in line with our expectations.

Second quarter revenues of $1 1 billion were down 1% year over year on the heels of another difficult comparison of more than 17% growth in Q2 of 2020 to.

That was standing with April performance, serving as a basis for our Q2 estimates revenues were towards the high end of our guidance range.

Revenues from our commercial segment were $811 3 million down four 6% year over year.

Revenues for commercial consulting the largest of our high margin revenue stream totaled $281 1 million up 26, 5% year over year excluding.

Excluding the $27 7 million contribution from our glide path acquisition consulting revenues grew 14, 1% year over year.

As expected offsetting this growth in consulting with year over year decline in assignment revenues predominantly are more discretionary permanent placement and creative digital marketing services as well as a portion of our it staffing with that said our assignment revenues declined 15, 6%.

As compared to prior year period.

Revenues from our federal government segment were $319 6 million up nine 8% year over year.

<unk> $25 2 million contribution from our iron by acquisition.

Turning to margin on a consolidated basis gross margin was 28, 9% down 120 basis points over the second quarter of last year the.

The year over year compression in gross margin was mainly related to business mix, including a slightly higher mix of revenues from our federal government segment, which carry lower gross margin in commercial revenues and a lower mix of creative digital marketing and permanent placement revenues, which had higher gross margin.

Gross margin for the commercial segment was 32, 2% down 90 basis points year over year, primarily due to a smaller contribution from our more discretionary and cyclical permanent placement and creative digital marketing revenues as noted gross.

Gross margin for the Federal government segment was 25% also down 90 basis points year over year last year benefited from certain higher margin firm fixed price programs SG&A expenses for the second quarter were $210 5 million down four 5% year over.

Year due to effective expense management and lower incentive compensation expense SG&A expenses also included $1 1 million in acquisition integration and strategic planning expenses that we do not include in our guidance estimates 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 our recent acquisition.

Income from continuing operations was $60 1 million adjusted EBITDA was $135 2 million and adjusted EBITA margin was 12%.

Adjusted EBITDA margin surpassed the top end of our guidance range for the quarter and improved 110 basis points sequentially due to typical second quarter seasonality effective expense management and lower incentive compensation and continued growth in our commercial consulting business.

At quarter end cash and cash equivalent with $93 8 million and we had full availability under our $460 million senior secured revolver.

Free cash flow for the quarter totaled $101 3 million up 27, 3% from the second quarter of 2022.

With strong free cash flow generation and full availability under our revolver, we have ample dry powder to make strategic acquisitions, given the limited acquisition opportunities at present, we deployed 57 6 million in cash on the repurchases at 836.

And 257 shares on an average price of $68 95 per share turning to our guidance our financial estimates for the third quarter of 2023 are set forth in our earnings release and supplemental materials.

These estimates assume 62.5 billable days in the third quarter, which is 1.5 fewer days than the prior year period.

Seven five days less than Q2 of 2023 estimates also include $25 2 million in anticipated revenues from iron.

We expect macro conditions to again be challenging in Q3 for the commercial segment, which includes both assignment and consulting services, partially offset by growth in federal government segment.

In addition to the difficult year over year comparison, and commercial consulting we do face changes and the pace of work stretching project duration.

This is background for the third quarter, we are estimating revenues of 110 billion to $1. One 2 billion. We are estimating net income of $56 4 million to $60 4 million and adjusted EBITDA of $130 million to $135.

$5 million, we are expecting gross margin will decline year over year due to business mix similar to more recent trends, including a greater mix of federal work and continued softness in our assignment work.

It's important to keep in mind that while a leading indicator on the downside permanent placement and creative digital marketing have historically seen more sustained rallies.

Once the economy improves in the meantime, while the economy remains challenged we will continue to leverage our variable cost structure and proactively manage our expenses to support our adjusted EBITDA margin.

With these efforts we believe we can sustain the adjusted EBITDA margin achieved in Q2.

Thank you I will now turn the call back to Ted for some closing remarks.

Thanks Marie.

To conclude I wanted to bring it full circle to where our discussion to gas macro conditions remain challenging, but our business is performing to expectation with our strategic decision to increasingly focus our efforts on high end higher value consulting services and solutions, we are shaping it evolve.

Being our operations for success.

Our business stabilized or support a resilient operating model and those stabilizers combined with our ability to adapt and evolve with our clients' needs will drive our performance going forward.

As we weather the current environment ESPN remains committed to achieving further growth and development.

Our ongoing progress will not only be demonstrated by our solid financial performance is also will be gauged by the impact we have on the communities in which we live and work with that in mind I am pleased to note that in June we published our fourth annual ESG report as.

As a people business environmental social and governance initiatives are part of <unk> core DNA.

We have made great headway since embarking on our ESG reporting journey I wanted to thank our entire team for your continued commitment towards creating a more sustainable future for all of our stakeholders.

Also wanted to thank all of our employees for your efforts. This past quarter you continue to put our clients' needs first and this is evident in our results.

Thank you again for joining our second quarter call. We will now open the call to your questions operator.

Thank you Steven.

We will now be conducting a question and answer session.

You would like to ask a question. Please press star one on your telephone keypad.

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You May press Star then two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.

One moment, while we poll for the questions.

Okay.

Yeah.

Thank you.

First question is from Maggie Nolan.

With William Blair.

Please proceed.

Hi Marie.

In your prepared remarks, he said the macro remain difficult, particularly for discretionary services can you compare the current.

State of the environment when you last reported earnings.

Yes, well good question Maggie I think.

Results would tell you and we said in our prepared remarks that.

Following kind of the Mat March downturn, what we saw during.

April when we reported last quarter and what we saw play after that in June .

May and June was a pretty steady marketplace for us if you look at our revenues per billable day.

So I think what we're expecting in Q2 is in our guidance and as Murray mentioned.

More of the same there was a slight.

Slight weakness in commercial offset by growth in federal.

I, just don't and I'll, let Brian jump in here, but I think clients remain very cautious.

And I think you can even tell.

If you look at our bookings for the quarter. When we one of the things that we saw were especially in commercial more bookings in the last month of the quarter.

Then.

In the first two months of the quarter and again I think that's clients just worry if you will about their business and how it's performing and protecting their bottom line and being very careful about when they signed up for new work or extended work Randy So you need to add to that.

I think you hit it all Ted Maggie I would just say, we we see the client is cautious in their spend.

And that started in that second dip in the first quarter that tend to referring to in March and we've seen it throughout second quarter and expect it to be the third and the bookings coming late in the quarters indicative of they're very thoughtful about what theyre going to do in terms of new work and current work, where they can stretch it out or more just due.

Doing a little slower pace, I think we're seeing that and and we support that.

We get where they're coming from so.

Cautious is the best word I think we can put to it.

Yeah, maybe one other data point Maggie just to support that as we are seeing a really high utilization of our Mexican delivery et cetera, and you mentioned that in our prepared remarks.

Part of that is we have great technical skills and muscle.

That operation, but it comes at a lower price point and I think you can see clients thinking about how do I continue this work, but do it in a more cost effective way so.

That's not totally unlike where we were in the SEC in the coming out of the first quarter, but you've seen it you've seen it very clearly here in the second and into the third.

Okay. Thanks, Kevin random.

My follow up would be.

Understood on the on the macro and.

You know I I also heard without you throughout your prepared remarks that there are some catalyst here and some interesting developments in AI is obviously at a notable one in that respect so within that context do you think that that could become a catalyst for the M&A pipeline to Tau are you looking at any interesting.

Assets to.

To help you build out capabilities in that area given that you are already seeing some traction with clients.

Randy you want to take that.

Well I think to answer your question is yes.

We definitely have AI on our radar screen technologies like Snowflake service now.

Microsoft and Amazon cloud capabilities.

They are all key technologies and Maggie only I would say is you.

You hear a lot today from the tech companies don't discount the work in cloud.

You can't have AI, unless you have good set of data and so the cloud and the ability to harness data put it in one place is still as we've said for a number of quarters still in the middle <unk> and then your analysis of that data the pure fine that data.

It's not just having data is having good data otherwise you're a is making trend predictions and other predictions based on.

What I call Crappy data. So it's a combination between the foundation piece, which we said in our remarks as well as real use cases for AI and is it a propellant for our future. We expect so and if you look at our bookings I think Ted mentioned, we had more AI bookings in the second quarter than we've had previous three quarters.

So, but the cloud work the data work still goes on and it's probably the strength of our service at this point.

Thank you.

Thank you. Our next question is from Jeff Silber.

<unk> capital markets.

Please proceed.

Thank you so much in your prepared remarks, you mentioned something about the change in the pace of work stretching project durations.

Typically on the consulting business can we just get a little bit more color is that something that you didn't see last quarter that youre seeing now.

I think look I think we've seen a little and we're seeing a little bit more Jeff is maybe the best way to say it is a way.

The way for clients to stick with things, but lower their burn rate.

And said they'll say look it's this doesn't have to get done in the next three months. It can be done in the next six months right and so that allows them to stick with it spend less obviously that affects our revenues in the short run that in the long run but in the short run.

As.

Our burn rates are slightly slower so again I think it goes back to the things that we spoke about in a second ago, which is just clients are looking at a way to go.

Optimize their spend when theres different ways for them to do that where do they have work done what deployment model do they access.

When do they start do they wait a little bit longer to start something maybe.

Do they burn a little.

Slower if you will and I think all of that ends up being tools for them to try to manage expense.

Okay, that's really helpful. Mike.

Follow up just has to do with your own internal head count I'm. Just curious on a net basis are you, adding or subtracting and if so where are you aware of the changes.

Yes, so we don't release, our head count number if I can just tell you to give you color around it we're letting natural attrition work, which is a part of our model. We always discussed that as a part of the business stabilized sort of sit inside of our business.

So our head counts are naturally a trading down just based on when our natural attrition rates are.

In some areas, where there's opportunity where coming back behind that and investing in another areas, where we think its further out until we get a return on that we're letting that attrition works. So.

On a net basis, we're trading down.

But there are some areas that require investment and we're addressing this.

Okay. Thanks, so much.

Yes.

Thank you. Our next question is from Tobey Sommer with <unk>.

<unk> Securities.

Please proceed.

Thanks.

Wanted to ask a question about ECS, which is kind of.

I know, we've talked about protests and maybe bids submitted and not getting adjudicated quickly.

The book to Bill is stubbornly pinned below one for a while.

Do you feel like Youre at a point, yet where you need to take some.

Measures to do something differently.

To try to spur that into a more positive direction.

Yeah, well look <unk>.

We would agree with you I mean, not where our target was established a book to bill above one dot O and it's been kind of stubbornly low here.

We're making investments for sure and our business development and capture activities I think thats definitely an area thats going to help us in the future.

We're getting more bids out on the street, we have more work out for bid than we've ever had.

<unk> is a positive and we hope that we are on the front end here with this quarter of seeing better conversions of those bids into one work we've got a quarter now that's above one pretty substantially at 1.2.

We need to build on that so we would.

See it the same way we're shooting for a book to Bill is above one.

Could you put any put some more flesh around the the added investments in AR.

The.

The increased number of bids in any way to.

Quantify that to give us a sense for the order of magnitude of changes across those dimensions.

I mean, probably told me what I would say is the bigger business today, I mean, ECS was the 500 and <unk>.

The $1 billion business when we bought it in 2018 has had great organic growth. We've added some acquisitions today at over 1 billion in revenues, we have to bid on bigger pieces of work.

And to do that it takes.

A more sophisticated bid and capture mechanism and so that's where our investment in that business is growing it's our number one priority. If you will and so that starts with putting more qualified and bigger bids to work in the marketplace and then being able to close those.

Okay.

And then.

Within the commercial consulting.

Space, what's you're hearing from customers.

How would you characterize demand.

In your book to Bill if you think of project sizes is there any difference.

And what Youre seeing.

If you bifurcate and sort of pick up maybe a dollar value.

Mid single digit million are low low single digit millions and think about it as smaller projects versus larger ones.

Randy I'll take that one.

Yes.

There's no question if you look at over time and even in the recent quarters.

The things we book are now well into the seven figures.

Yeah.

Every quarter, they move up a bit and clients getting more confident and comfortable with our work and where we can contribute in and extending that work out for a longer period of time, but.

I think most of the work we do book is still about a 12 month duration work so some of it.

Is the expansion a lot of the existing work in this past quarter I think Ted featured we had a lot of existing work move forward Carryforward, if you will in our bookings.

A little less in new work, which is not like the previous quarters, but when you have that existing work turning over it generally gets a little larger as we go.

And just a question last one for me on the new work.

Being a little smaller and more renewals was that does that represent a surprise and a change and would you say that is reflective of something.

<unk>.

Reticence at the customer or is that just bounce around quarter to quarter.

Not much more to glean from the change.

With that I'll take a first shot at that and then you can come in.

I say tobey it does bounce around a little bit quarter to quarter relative around a 50 50 split between existing and new but I think it reflects the cautiousness of our clients.

Keeping some work going stretching it out as part of their playbook.

New work Youre being very judicious about it it.

It has to move we've always said it spend moves with earnings Okay knowledge employment data with earnings and when that happens, we're going to take steps to protect their earnings as well and if they can stretch out where there are some work youre going to have to start new.

We're going to be cautious about that so I don't think it's an anticipated by us in this most recent quarter.

If it went to 80 21 way or another but tobey that would be a surprise, but when it.

Most proximity to each other.

Not as alarming more reflective.

Nature of client spending.

Commenting on.

Thank you.

Thank you. Our next question is from Heather <unk> with bank of <unk>.

Please proceed.

Hi, Thank you for taking my question I guess I first wanted to ask about the consulting business and he spoke earlier about the extending burn rate I'm curious if you're seeing any other change in behavior and their consulting business, whether it is reflecting.

Shifting in demand for the type of projects.

And are you seeing any trade down from some of the bigger consulting firms to do your business. Thanks.

Graham do you want to take that.

Well I'll start I think we've commented on this a little bit Heather.

This does stretch out of where current work that's ongoing.

Just a matter of being prudent from a client point of view and protecting their own business and their own earnings I believe we believe.

We're seeing a little bit more now bookings around and work around existing work an extension of that work and slight modification to that work.

Not as much new work, but still a nice amount of new work being added in most of the new work is around the data.

The data foundation and structures and some AI so as we pointed out.

Hi.

I don't know that Theres any anything other than what you would anticipate a company doing and supporting their own business.

Even look at ourselves, we're still dealing with new technologies and trying to modernize their IP.

Framework to support our business and where we have not cut back on spending, but we haven't gone out and tried something new right away.

Until we know that we've got we've got our path forward going so I don't think theyre behaving any different than we would or we expect did that answer your question or helpful. Yeah. Yeah that was really helpful. Thank you.

And as a follow up question can you talk about sort of new opportunities and changes in technology and other AI question, which is I'm curious I know, it's very early days, but when you think of AI in January with AI and the opportunity at hand.

And I think we're all been trying to get a sense of how much spending could happen.

And that type of technology.

Do you have some perspective on the Tam or the relative size of the Tam compared to some of your other end markets.

And within that you talked about that you need the cloud capabilities do you see that expanding the Tam for our cloud.

Ted I'll start I'll start.

Yes, yes.

We think first of all there will be more spend in the data Foundation World, That's cloud data analytics business.

Business intelligence that sort of thing.

Definitely going to be more spend into AI because the use cases are growing in fact, some of the use cases, we've mentioned or talking about the customer experience that seems to be what we've seen the first it's kind of counterintuitive.

A little bit to us.

Maybe there are some other use cases that are getting what I call a priority, but and by the way we talk to Gardner about this I think they would highlight the same thing use cases tend to be focused around the customer experience as well as management operational control of the business. So do we think this is the beginning of a major step.

And there's a lot of talk out there about it there's a lot of investments in AI and the big technology companies.

Even the existing technology companies are re ramping their platforms for.

Supporting AI and better <unk>.

<unk> and archiving and processing data.

Do I think Theres a lot more spend in this area, yes have we taken a moment to just say that total addressable market has gone up X billions of dollars, we have not done that yet, but there is no question that it's a major opportunity for all of us in the business community to harness.

The power of our existing data and use it proactively to support customers our supply chains.

And our ability to manage our businesses. So there is a return on investment there thats much more measurable then back in the Ninety's when it was a year or two K boom, right and where there's more preservation than the return on investment so.

I think you're probably reading the same articles we are Ted yes.

Yes, I was just kind of echo what you said right upfront, which saves a lot of foundational work here to get ready to really dipped.

Deploy and get a.

Return on all these AI capabilities and I think that that is the spending.

It would be a factor for sure in terms of growth in spending in it.

And I think also pent up demand here as clients get ready for this but maybe you are.

Holding off just a bit before they really invest in it.

You know until we get a little further ahead of whatever the economic.

Yes.

Situation that we're in here.

Okay can I mentioned, one we're seeing Heather.

Ted we we've developed what we call AI Roadmaps, we used to have digital roadmaps, they've now been modified to reflect the AI and really helping our clients think through what the use cases potentially or how they would go about it what technologies are emerging to support that.

And there is good discussion around that.

With our clients.

The fact that the clients are also trying to think through this and remember some of the technology tools are now just been revamped coming out sometimes they don't even have price tags on on that technology on how to use it but.

There's a lot of action in a lot of discussion going on in our road maps at least help us and our team talk to our clients about it.

Yeah.

I Wouldnt say, we are hearing is some of the companies we cover talk about.

Increasing spend on AI.

That budget.

In less.

Interesting to get some perspective on how big of an opportunity.

Thank you.

Thank you.

Next question is from Josh Chan with U B S. Please proceed.

Hi, good afternoon, thanks for taking my questions.

I wanted to ask one on SG&A it looks like SG&A declined more than revenue this quarter, which really helped your margin and it looks like that may continue into Q3. So just wondering if you can give some color on what's helping you push push the SG&A line a bit lower here.

Yeah, Hi, Josh so from an SG&A perspective, it's really our business stabilizers at work. So for Q2, we're ending on a cash SG&A at 16, 9%.

Really a combination of expense management and lower incentive comp and so we talk about the different stabilizer as that as our revenue stop and that variable component of our model also flex it as well.

Okay. Thanks for the color there and then I guess on the consulting bookings.

It's still up this this quarter I know that glass passage in there, but could you kind of contrast, what seems like a pretty healthy booking.

For you with sort of the macro narrative that it is very cautious I guess I'm just trying to.

Reconcile those those two things.

Yes.

I'd say you know nothing dramatically different Josh I mean, we've said a few things here that we're just incremental around the edges, a little bit more renewals and extensions.

Ed and do work, but like Ryan said, it kind of moves around every quarter.

More bookings came in June and it didn't come ratably through the quarter, if maybe they do sometimes again that can vary but I think that's just a signal of cautiousness.

Claudia.

And.

Look I think we're a great.

Well for a client who wants to continue to.

We're not stop IP projects continue to get things done were great option right.

Come at it from a little bit different perspective than the big traditional consulting firms, we use our contract deployment of our it staffing model. So those people are not coming off our pitch, we can very quickly put together.

<unk> teams with the right industry experience in.

In the right technologies and.

Mix with at our Mexican delivery center capability and that ends up being a great.

The outcome for the client because it's cost effective and because we've got the technical strength to get the job done so.

In times like these where we're a great option for them.

<unk> and <unk> in the ICU directors, who are having to worry about expense, but also knows that they need to stick with the things they have in motion.

Okay, great yeah, thanks for the color Ted and Maria Thanks for your time.

Okay.

Thank you.

Next question is from Kevin Mcveigh with credit Suisse. Please.

Please proceed.

Great. Thanks, so much.

<unk> did a couple of calls so if you.

Answered this I apologize in advance but.

Maybe.

Yeah.

If we could start with the guidance a little bit the Q3, it looks like the revenue.

And the EBITDA it looks like your EPS looks a little bit better than where the revenue and EBITDA was relative to the street.

Is that maybe some of that expense leverage and then the acquisition the $25 million or so can you help us was that in the guidance already or is that additive to it and then maybe can you help us understand what the EBITDA impact is from that $25 million as well.

So I'll take the first so the what Youre seeing Kevin is.

On the revenue side of things.

Continued softness in commercial offset by growth in federal right and if you carry that through on a billable day basis sequentially, we're somewhere to slightly up in the third quarter to slightly down within what percentage kind of both ways.

It ranges would give you.

Our stabilizers business stabilizers are working and so our expense profile is down and so we think that 12% EBITDA margin.

No.

Range here that we saw in the second and it kind of carries into our Q3 guidance is a good target sustainable here as we go forward at these levels based on the top line guide that we gave you of what we expected the gross margin level.

On.

Re on the acquisitions, we get the acquisition contribution every quarter right correct.

So that's not a new deal that that's not.

Not a big deal that's built in the guidance we have.

We have lapped the glide path.

Acquisitions, so that was done at the first of July in the prior year. So we've now lapped that we're not reporting that here in the third quarter, it's in our organic numbers.

And we still have a quarter to go on the iron Bond, which was the cyber security capability that we bought in the federal space in October of last year.

Our position number you get there from last quarter.

Terrific.

Any sense of like client conversations how they've been trending around.

This is something that I don't know if cautions right word but is that kind of.

Trying to manage internal utilization and then maybe to your point they come back to the market or you know how should we think about that in terms of phasing I guess.

Chronic care conversations mostly consistent.

Yes, I am not sure Kevin Your question more about is that we.

We have ongoing conversations and that's one of our strengths is we have a 25 year history I mean, we're not as well as many other consulting or services businesses, but we're been around long enough and had a very significant footprint in the it staffing world, which helps us build intimacy with our client base and we continue those conversations.

And we keep our account managers national account directors out in the marketplace talking to them.

Part of the investment we're not willing to let deteriorate.

And yes, I mean conversations are always there.

Compensation now moving toward what we call this new roadmaps.

My roadmap and use cases, and what potentially can be done with it.

A lot about the foundational pieces that you have to put in place remember also fortune 500 companies are.

Not that they're not early adopters of technology and some of the sectors. They are not going to be quick to get at it.

We were early adopters tend to be technology companies and the banks. The later adopters are consumer industrial and health care and essentially nothing that's where we're growing right now with those two sectors.

<unk>.

Conversation varies depending on the.

The client's aptitude to spend more.

Or whether they have to protect their own earnings or theyre cautious or not most clients are cautious.

Called prudently cautious.

Was there a second part of that question, though that.

You were worried about our internal team.

No not necessarily rent internal just.

As the clients kind of manage their internal capacity are they at a point, where they start to use consultants again or are they still kind of managing some of that internal capacity, just given where the macro environment is.

But I.

I'll make a comment and then you can jump in but I mean, we're getting the same reports you are getting as the quarter get your earnings reports come out and I would say it staffing is definitely in negative territory.

The good news is our Perm placement.

Some companies staffing companies, you've gotten really hit with that where our perm placement as a percent of revenue is relatively small, but our perm placement business is definitely down.

And the it staffing business is down because some of it is a little more discretionary but most of it is stretch out and they're not going to add new people.

Consulting is now kind of getting into the territory of well, let's stress. Some of these projects out just a little bit here without losing momentum in and see where we are in another quarter.

And so we've assumed that.

I think in our guidance and what we've given you.

Very helpful. Thanks, Ryan.

Thank you. Our next question is from Mark Marcon with Baird. Please proceed.

Hey, good afternoon, thanks for taking my questions.

Bill rates and Bill pay spreads how would you characterize those both in terms of.

Consulting as well as it staffing on the commercial side.

I would say very steady Mark I mean, we're seeing very small incremental.

<unk>.

And bill rate pay rates, we're preserving the margin there and the clients willing to do that for all the reasons you can imagine.

Really good labor.

And tough demand skill sets are still.

You know, it's still at a premium so I think you've seen some of the.

Spikes, obviously now come out of all of that but we're seeing really good margin.

Steadiness is if you will and all that.

We continue to see our rate creep up mostly because of our commercial consulting business.

And that higher value higher margin higher bill rate work right. So the mix of that with our other business.

<unk> continues to slightly lift our bill rate, which you would expect.

Great and then you mentioned the Mexicans.

Nearshore capabilities acquired through Enersys.

How big is that and how much bigger could.

Come.

Given that it sounds like it's.

A really good price value for clients.

Yes so.

When we bought <unk> in 2019.

Approximately a 100 resources.

We've grown that significantly.

And we continue to do it because there's such a.

Pull on demand there so it's a.

A big investment area for US Mark again, we go back and say clients are looking to leverage that because they want their total cost of ownership of some of these projects that they continue to stick with that at the.

Most.

Productive price point that it could happen so.

So it makes sense that they would be pulling on that.

Right.

Do you have excess capacity there or are you at capacity and you just need to continue to add capacity.

I mean, we're all we always have a little capacity computerization rates are never 100%, but if we could have.

If we could have another another big group of capabilities there in the right skill sets, we could put it to work. So again, it's an it's an investment area. It's one of the areas that I called out where while we made a trade in certain places because demand is not going to be there in the near term. This is one of those areas where.

We're investing because theres, a big opportunity and demand.

Hey, Ted.

And I add to that real quickly the Mexican development Center has grown just terrifically and really stepped up we also have some Indian offshore, which there are certain technologies, we're moving towards them and theyre starting to be more productive part of our overall offshore strategy.

Just wanted to mention the Indian side, just not to ignore them smaller compared to Mexico, but still important and growing a little bit okay.

Terrific and then in the in the release you mentioned that.

<unk>.

Creative and Perm placement were down 14%.

We were down 21% almost 14% of revenue.

How much was was perm down versus how much was creative down.

Yes.

Okay.

Telecom Perm for second quarter.

As a percent of total revenue in the numbers that you gave are really at the percent of.

Commercial.

And so you know we kind of give that as a percent of total revenues, though in Q2 of 2023.

Two 8%.

That's relative to what a year ago Murray.

So last year 2022 with that four 6%.

Okay, Great and then does that imply when I go through the math it seems to imply that it staffing down around 14% is that correct.

Let's say low double digits that is about right maybe.

Maybe not quite that much but low double digits.

Okay.

And Rand and Ted you both gone through multiple cycles.

Apex ended up growing during the GSC, how would you how would you characterize what youre seeing today in terms of the macro caution relative.

Two two other.

Periods.

What inning do you think we're in in terms of that.

That that potential softening and related to that.

Like when we take a look at TMT and business and government services.

Have they fallen to the point, where they should be basing and.

Should stabilize on a go forward basis or is there still further room for contraction how are you thinking about that.

We'll look at our third quarter guidance, we've kind of noticed that we programmed a little softness if you will any of that.

For the quarter so to the last part of your question.

It could remain the same or get a little weaker.

And for the first part of your question Mark No. Two downturns are created to say you know if you go back to the great financial crisis. It was a major event in banking obviously.

Credit and other things around that but there were some industries.

You know that we're pretty healthy right and it was.

And is that kind of happened there it didn't have the long runway of visibility.

Downturn has had.

One is different in this way if we've had a long visibility we've had to watch it all the way through its allowed all of us our clients and us to prepare our business for more austere times and so we bought that and so you've seen the enterprise client air react differently than maybe in past.

The downturn in the cycle because of all of those reasons.

I think the other thing that is different today is that the way.

The customer procures.

Staffing is more controllable and transactional.

Have there been they can immediately because of the control they have over these programs when.

They really want a gift protective they can immediately hit the button.

I am going to get protective here I'm going to turn down the transaction part of the business, which is the <unk>.

It staffing part of the business and so.

They've been able to.

Come to us for our consulting offering and get around.

Some of those.

Obstacles to keep work going but they've also had to turn down the transactional piece and they can do it very effectively because of the controls laid out within these procurement systems. So I'd just say, it's a different market if you will.

You know and they're all different.

Randy anything you'd add to that.

Well Mark if you let me I'll add one thing I would say.

And the great financial crisis, It was chaos and nobody knew what was going on exactly how we're going to come out of it today I think people are cautious not chaotic.

And the spend is cautious not chaotic.

And the rebound.

The rebound this time versus then or backing for where some other downturns we've seen.

I like the fact that I think there is a rebound coming somewhere and Theres also propellants.

AI and the cloud infrastructure and the foundational tools and the use of technology to propel companies, both with the customer and their logistics space and their internal operations I think is more acute today than ever before and so I look forward to the rebound because it's I know, it's going to be great.

It's a question of getting there right and so the fed I think help today or may be heard I don't know, but you know a lot of this is tied up into that.

And everybody is looking for signals that everybody thinks way, okay, but we're still growing revenue consumer still spending right. So not quite the chaos, we had an 809.

And Mark you've seen this for a while you know that where the clients best opportunity to ramp up quickly into investments that they want to make when they are ready to return to heavier investment levels right around this stuff. They have pent up demand building the longer we go through this the moorefield and did their opportunity to get.

Accurate as quickly as possible they cant do that internally, where they are where they are most key and strategic mechanism to do that so I think brand is 100% right obviously all of that.

I appreciate that and in the meantime, you are generating strong free cash flow and preserving the margins, which is a testament to the management skill.

With regards to capital allocation.

Can you talk a little bit about your preference in terms of acquisitions relative to continuing to buy back stock.

Sure.

Yeah, it's really kind of a similar story that we've been sharing and so obviously, our desire and our first and best use is M&A.

That's really given what we just talked about with the fed continuing to raise rates.

Theres really no.

Targets out there are opportunities and so share repurchase.

And you saw kind of that $58 million I'm rounding slightly up in share repurchase for Q2.

Think we signaled on some of the conversations that we had that we actually ended up buying more shares earlier on lower prices until you see the average share price that we bought those that and so we will continue to utilize our free cash flow for share repurchase and continue to look for opportunities for them.

Okay.

You know on the M&A front, Mark there are attractive future opportunities and now is the time to plow those and so where we are.

Our thinking on our own and make sure we understand what the menu is target live we're identifying those opportunities in the market, we're building relationships and doing all the spade work that needs to be done, but Maria is right.

At these levels our share price has never been more accretive.

To purchase shares and so you can see that FDA interactions during last quarter.

Absolutely. Thank you.

Thank you.

As there are no further questions at this time I would like to turn the floor back over to Mr. Ted Hanson CEO for closing comments.

Thank you operator.

Thank you operator, and thank everyone for being a part of our quarterly earnings release and your questions and we look forward to speaking with you.

In the next quarter.

Okay.

Okay.

This concludes today's teleconference. Thank you for your participation you may now disconnect your lines.

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