Q2 2024 ICF International Inc Earnings Call
Operator: Welcome to the second quarter 2024 ICF Earnings Conference Call. My name is Stephen, and I will be your operator for today's call. At this time, all participants are in a listen only mode.
Stephen: Welcome to the second quarter 2024 ICF earnings conference call. My name is Stephen and I will be your operator for today's call. At this time all participants are in a listen-only mode.
Stephen: Afterwards, you'll be invited to participate in the question and answer session. During the question and answer session, if you have a question, please press star 11 on your touchtone phone.
Stephen: I will now turn the call over to David Gold of Advisory Partners. David, you may begin.
David Gold: Thank you, Stephen. Good afternoon, everyone, and thank you for joining us to review ICF's second quarter 2024 performance.
Barry Broadus: Barry Broadus, CFO. Joining them is James Morgan, Chief Operating Officer. These statements are subject to a number of risks that could cause actual events and results to differ materially, and I refer you to our August 1st, 2024 press release and our SEC filings for discussions of those risks. Please consider the information presented in that light. We may at some point elect to update the forward-looking statements made today, but we specifically disclaim any obligation to do so.
Speaker Change: With us today from ICF are John Wasson, Chair and CEO , and Barry Broadus, CFO . Joining them is James Morgan, Chief Operating Officer.
Speaker Change: During this conference call, we'll make forward-looking statements to assist you in understanding ICF management's expectations about our future performance.
Speaker Change: These statements are subject to a number of risks that could cause actual events and results to differ materially, and I refer you to our August 1, 2024 press release and our SEC filings for discussions of those risks.
Speaker Change: In addition, our statements during this goal are based on our views as of today. We anticipate that future developments will cause our views to change.
Speaker Change: Please consider the information presented in that light. We may at some point elect to update the forward-looking statements made today, but specifically disclaim any obligation to do so.
John Wasson: I'll now turn the call over to ICF CEO, John Wasson, to discuss second quarter 2024 performance. As you can see from our release, this was another excellent quarter for ICF in which we executed well on existing contracts and continued to lay the foundation for future growth. With respect to key takeaways from the quarter, first, our energy, environment, infrastructure, and disaster recovery client market continues to be a standout performer, reflecting an array of very strong sector growth trends in these areas.
Speaker Change: I'll now turn the call over to ICF CEO John Wasson to discuss second quarter 2024 performance.
John Watson: Thank you, David, and thank you all for participating in today's call to review our second quarter results and discuss our business outlook. As you've seen from our release, this was another excellent quarter for ICF in which we executed well on existing contracts and continue to lay the foundation for future growth.
John Watson: With respect to key takeaways from the quarter, first, our energy, environment, infrastructure, and disaster recovery client market continues to be a standout performer, reflecting an array of very strong secular growth trends in these areas.
John Wasson: Second, our profitability metrics increased considerably again this quarter, leading us to increase our EPS and EBITDA guidance for the full year. Furthermore, all areas of ICF's commercial energy work posted substantial revenue growth in both the second quarter and the first half of 2024, again reflecting positive secular trends in our market. We continue to see strong demand for energy efficiency programs, which remain the most cost-effective means for utilities to increase their capacity.
John Watson: Second, our profitability metrics increased considerably again this quarter, leading us to increase our EPS and EBITDA guidance for the full year.
John Watson: Third, this was an outstanding quarter for new contract wins, bringing our trailing 12-month book-to-bill ratio to 1.4.
John Watson: And lastly, our new business development pipeline increased sequentially by 8.3% to a record $10.5 billion, even after record Q2 sales, providing us with substantial growth opportunities across our government and commercial client sets.
John Watson: Taking a closer look at second quarter performance, our work in the energy, environment, infrastructure, and disaster recovery client market,
John Watson: continue to increase significantly with revenue growing by 14% to account for 45% of our total second quarter revenues up from 41% in last year's second quarter.
John Watson: All areas of ICF's commercial energy work posted substantial revenue growth in both the second quarter and first half of 2024, again reflecting positive secular trends in our markets.
John Watson: We continue to see strong demand for energy efficiency programs, which remain the most cost-effective means for utilities to increase their capacity.
John Watson: ICF has built an excellent track record in this arena, consistently reaching and exceeding proven goals, and we continue to win new clients.
John Watson: At the same time, the size and scope of our programs have increased as our utility clients expand their energy efficiency, electrification, and consumer marketing programs.
John Wasson: Also, we are very pleased with the performance and revenue synergies associated with last year's CMY acquisition. Their great engineering and analytics capabilities are a natural extension of ICF's work in electrification, utility planning, and renewables, enabling us to provide a broader set of services to utility and developer clients. Increasing load growth from new data centers and transportation electrification is forcing utilities and regulators to quickly assess and deploy additions to the utility resource mix.
John Watson: Also, we are very pleased with the performance and revenue synergies associated with last year's CMY acquisition.
John Watson: Their great engineering and analytics capabilities are a natural extension of ICF's work in electrification, utility planning, and renewables, enabling us to provide a broader set of services to utility and developer clients.
John Watson: Additionally, there are important synergies with our climate and resilience advisory work as we build in more detailed climate analytics into our grid engineering studies.
John Watson: Similarly, our energy advisory work continues to show strong growth, particularly in the area of power and technical advisory, reflecting increasing demand from developers of renewable energy resources.
John Watson: and growth in our environment and planning business. LION is benefiting from increasing resilience work for utilities, undergrounding power lines for wildfire restoration, work for renewable developers, as well as providing ongoing licensing, permitting, and compliance services.
John Watson: As you know, we perform our climate services across all our climate categories.
John Watson: This area continues to achieve significant growth in the second quarter, reflecting the expansion of climate programs at DOE and EPA, as well as an increasing number of utilities, state agencies, and additional federal entities.
John Watson: We're also seeing an uptick in RFPs for state and local climate planning to be funded independently of the IIJA and IRA, and we're benefiting from client demand for ICF's Coastside System, a proprietary strategic planning platform that helps utilities and government agencies
John Watson: Achieve your Clean Energy and Greenhouse Gas Emission Goals.
John Watson: Our Disaster Management Area also continues to do well. The Government of Puerto Rico's Public-Private Partnership Authority recently awarded ICF an $84 million REC&P contract to provide professional grant management services over the next three years and we're waiting for the word on other opportunities in the territory.
John Watson: ICF is currently executing nearly 50 disaster recovery programs in 16 states and two territories and we're supporting over 30 clients mitigation efforts in 10 states and one territory.
John Watson: As a whole, we see double-digit growth ahead for our energy, environment, infrastructure, and disaster recovery client market over the next several years.
John Watson: Increasing physical impacts, improving economic fundamentals.
John Watson: public commitments by corporations and legislative and regulatory actions regarding clean energy are driving policy and funding support for decarbonization programs, including energy efficiency, flexible load management, and electrification.
John Watson: The increasing load growth from new data centers and transportation electrification is forcing utilities and regulators to quickly assess and deploy additions to the utility resource mix, including supply, demand management, and resilience options.
John Watson: Renewable development is proceeding at a rapid pace.
Speaker Change: And we continue to see electric utility clients increase spending.
John Watson: to replace aging infrastructure, the underground power lines, to improve resilience.
John Watson: and to expand the power grid, creating demand for ICF's grid engineering, environmental, and disaster management teams.
Speaker Change: In our judgment, there is no company better positioned to benefit from these trends than ICF.
John Watson: We have longstanding relationships with utility, developer, and government clients.
John Watson: multidisciplinary expertise across energy, climate, transportation, and health.
John Watson: plus industry-leading analytical tools that support our advisory services, as well as technology platform solutions that underpin our implementation work.
John Watson: And we continue to see IIJA and IRA grant funding being released to applicants for a variety of approved infrastructure needs.
John Wasson: Examples include formula grants to states, territories, and tribes for energy infrastructure and grid reliability upgrades, and award of competitive grants for clean energy manufacturing infrastructure. ICF's IIJ and IRA-related wins to date have reached almost $140 million. The interactive pipeline of IIJ-IRA opportunities is now at $275 million. As you may recall, Biosense was front and center during the pandemic as it tracks data for more than 75% of hospital emergency room visits nationwide, providing CDC and public health officials with insights into factors impacting the health of Americans at both a national and local level.
John Watson: Examples include formula grants to states, territories and tribes for energy infrastructure and grid reliability upgrades, and award of competitive grants for clean energy manufacturing infrastructure.
Speaker Change: ICF's IIJ and IRA-related wins to date have reached almost $140 million, and our active pipeline of IIJ-IRA opportunities is now at $275 million.
John Watson: These metrics represent work primarily for government clients, as it's difficult to tie commercial projects to specific legislation.
John Watson: Moving to our health and social programs client market. As expected, this market had lower year-on-year gross revenue comparisons.
John Watson: primarily reflecting three factors, the impact of last year's divestitures, anticipated fall off in small business contracts that were held by the acquisitions we made over the last couple of years in IT modernization, and lower pass-through revenues, primarily in public health.
John Watson: The reduction in past revenues alone in this client market was approximately $7.5 million in the second quarter. You should see improved gross revenue comparisons from federal government clients in the second half of the year.
John Watson: but the increase will not be of the magnitude we had originally anticipated. We are confident that the strong growth in our energy, environment, infrastructure, and disaster management climate market will continue to more than offset the impact of lower-than-expected revenue growth in health and social programs.
John Watson: We continue to execute effectively across our federal government climate, client base, and remain well positioned and have a healthy pipeline of opportunities in our two key areas, public health and IT modernization.
Speaker Change: In public health, we expanded our support for CDC's BioSense program in the second quarter, and we'll begin developing additional functionality to include hospital admission data and hospital discharge and transfer data to the platform.
John Watson: As you may recall, biosensors...
Speaker Change: front and center during the pandemic as it tracks data for more than 75% of hospital emergency room visits nationwide, providing CDC and public health officials with insights into factors impacting the health of Americans at both a national and local level.
Speaker Change: And, we won our $237 million dollar REC&P contract with the U.S. Agency for International Development, Bureau for Global Health, to continue to deliver the Demographic and Health Surveys Program.
John Wasson: ICF has longstanding relationships at six key agencies within the Department of Health and Human Services, and we have deep subject matter expertise in areas that have bipartisan support, including cancer research, mental health, diabetes prevention, overdose prevention, and education on the impact of prescription opioids. IT modernization also remains a bipartisan priority, and ICF is now a recognized leader in the most widely used low-code, no-code, and open-source platforms in the federal government The U.S. federal IT services market is growing at a rate of 8.5% and is expected to reach $95 billion by 2027.
John Watson: ICF has longstanding relationships at six key agencies within the Department of Health and Human Services.
John Watson: And we have deep subject matter expertise in areas that have bipartisan support.
John Watson: including cancer research, mental health, diabetes prevention, overdose prevention, and education on the impact of prescription opioids.
John Watson: IT modernization also remains a bipartisan priority, and ICF is now a recognized leader in the most widely used low-code, no-code, and open-source platforms in the federal government. The U.S. federal IT services market is growing at a category of 8.5 percent and is expected to reach $95 billion by 2027.
John Watson: And ICF's targeted areas, consulting and application services, are growing at categories of 14% and 9% respectively.
Speaker Change: We had two important contract wins in the second quarter at the Centers for Medicare and Medicaid Services, and are seeing increased traction on opportunities where we'll be able to combine our technology and domain expertise, particularly when the scope includes a data or AI focus.
John Wasson: We recently completed work with a federal agency client to leverage Gen-AI solutions for regulatory development support and public comment analysis. This was a very exciting project for our teams, as within three months from inception to delivery, we proved the viability of using Gen-AI to produce faster insights into numerous regulatory comments. Thank you, John, and good afternoon, everyone.
Speaker Change: We recently completed work with a federal agency client to leverage Gen-AI solutions for regulatory development support and public comment analysis.
Speaker Change: This was a very exciting project for our teams, as within three months from inception to delivery, we proved the viability of using GenAI to produce faster insights into numerous regulatory comments.
Speaker Change: Also FEMA awarded us a new $17 million contract to build a cloud-based data exchange platform to improve the efficiency and cost-effectiveness of their disaster recovery and response efforts.
Speaker Change: It will leverage our leading disaster management expertise, along with cloud computing, generative AI, and other forms of AI and advanced analytic capabilities, an excellent example of how ICF's multidisciplinary approach is winning new business.
Speaker Change: On the topic of new business, as I mentioned earlier, this was a record second quarter for us in terms of contract awards.
Speaker Change: which reached $810 million, representing a book-to-bill ratio of 1.58 in the quarter.
Speaker Change: New business wins accounted for approximately 55% of our first half awards, demonstrating how well ICF's capabilities are aligned with client spending priorities.
Speaker Change: Additionally, an increased percentage of the value of our Year-to-Date Awards represent a contract that included an AI component, a good indication of our recognized expertise in this high-demand area.
Barry Broadus: In summary, this is a very strong quarter for ICF in terms of execution, profitability, and metrics that set us up for future growth. I'll now turn over the call to our CFO , Barry Broadus, for a finance review. Barry?
Barry Broadus: I'm pleased to provide you with additional details on our 2024 second quarter financial performance. Our second quarter revenue growth reflected many of the same business drivers as this year's first quarter and was led by revenue growth of 24.8% from our commercial energy clients and by a combined 5.9% growth in revenues from our state and local and international government clients, while revenues from our federal government clients were flat in the second quarter.
Barry Broadus: Thank you, John , and good afternoon, everyone. I'm pleased to provide you with additional details on our 2024 second quarter financial performance.
Barry Broadus: Total revenues increased 2.4% to $512 million or 6.2% compared to the second quarter of 2023 after adjusting for the divestiture of our commercial marketing business last year.
Barry Broadus: Our second quarter revenue growth reflected many of the same business drivers as this year's first quarter and was led by revenue growth of 24.8% from our commercial energy clients and by a combined 5.9% growth in revenues from our state and local and international government clients.
Barry Broadus: This was mainly due to a reduction in pass-through revenues of approximately $9 million, which unfavorably impacted our year-on-year revenue growth by approximately 450 basis. As we look towards the future of our federal government business, the increases in our federal contract awards, along with an expanding new business pipeline, bodes well for future sustained growth in our federal business. In addition, our federal new business pipeline has grown to over $7.5 billion, which is a 13% increase since the start of 2024. Subcontractor and other direct costs declined in the second quarter to $132.8 million, representing 25.9% of total revenues, down from 27.5% in the prior year. Adjusted EBITDA grew 9.9% to $56 million, substantially outpacing our revenue growth.
Barry Broadus: Gross revenues from our federal government clients were flat in the second quarter. This was mainly due to a reduction in pass-through revenues of approximately $9 million, which unfavorably impacted our year-on-year revenue growth by approximately 450 basis points.
Barry Broadus: As we look towards the future of our federal government business, the increases in our federal contract awards, along with an expanding new business pipeline, bodes well for future sustained growth in our federal business.
Barry Broadus: ICF had 625 million in contract wins in this client category year-to-date. Far outpacing our 2023 and 2022 first half awards which averaged about 350 million.
Barry Broadus: In addition, our federal new business pipeline has grown to over $7.5 billion, which is a 13% increase since the start of 2024.
Barry Broadus: Subcontractor and other direct costs declined in the second quarter to $132.8 million, representing 25.9% of total revenues, down from 27.5% in the prior year.
Barry Broadus: Second quarter gross margin was 35.7% of total revenues, up 80 basis points year over year.
Barry Broadus: This improvement was primarily driven due to a favorable revenue and direct cost mix as we saw strong revenue growth from our higher margin commercial marketing, commercial energy clients and less subcontractor revenues.
Barry Broadus: Indirect and selling expenses increased 0.4% year-over-year to $127.1 million, considerably less than our year-over-year revenue growth.
Barry Broadus: As a percentage of total revenue, indirect and selling expenses were 24.8 percent, 50 basis points lower than the 25.3 percent reported in the prior year.
Barry Broadus: We remain focused on driving efficiencies throughout the organization and continue to realize benefits from higher utilization, managing our indirect costs, and our increased scale.
Barry Broadus: The favorable revenue mix I mentioned earlier, combined with these factors, drove EBITDA growth of 17.2% year-over-year to $55.6 million.
Barry Broadus: Adjusted EBITDA grew 9.9% to $56 million, substantially outpacing our revenue growth. Additionally, our adjusted EBITDA margins expanded 10.9% of total revenue, an increase of 80 basis points as compared to the second quarter of last year.
Barry Broadus: Additionally, our adjusted EBITDA margins expanded 10.9% of total revenue, an increase of 80 basis points as compared to the second quarter of last year. Additionally, our tax rate was 26.3% compared to 4.4% in the prior year period.
Barry Broadus: Interest expense of $7.7 million decreased $2.4 million from the same period last year due to a lower average debt balance.
Barry Broadus: Our tax rate was 26.3% compared to 4.4% in the prior year period.
Barry Broadus: The lower tax rate in the prior year's second quarter reflected tax optimization strategies we were able to employ at that time. Our tax rate in the second quarter of 2024 was in line with our expectations, and we continue to expect a full year tax rate of 23.5 percent.
John Wasson: Net income was $25.6 million, and diluted EPS, our non-GAAP EPS, grew 7.6% year over year to $1.69 per share. Year-to-date capital expenditures were $10.4 million, down from $13.1 million last year due to timing and the divestiture of our commercial marketing business. Our adjusted net leverage ratio was 2.01 times at quarter end compared to 3.11 times at the end of last year's second quarter, demonstrating the company's ability to utilize our favorable cash flow from operations to quickly de-leverage.
Barry Broadus: Net income was $25.6 million and diluted EPS
Barry Broadus: of a $1.36 per diluted share increased 26.1% and 27.1%, respectively, versus the comparable period last year. Last year's second quarter net income included $3.5 million or $0.13 per share of tax-affected special charges.
Barry Broadus: Our non-GAAP EPS grew 7.6% year-over-year to $1.69 per share.
Barry Broadus: Now turning to our cash flow.
Barry Broadus: Our operating cash flow in the first half of this year was $50.6 million, more than double the $19.9 million reported in the first half of 2023, reflecting higher net income and the execution of our cash management initiatives. Our day sales outstanding were 72 days compared to 73 days last year.
Barry Broadus: Year-to-date capital expenditures were $10.4 million, down from $13.1 million last year due to timing and the divestiture of our commercial marketing business.
Barry Broadus: At the end of June , our debt was $433.9 million, compared to $601.8 million at the end of June 2023, which reflects
Barry Broadus: 168 million of debt reduction. Approximately 63% of our debt is currently set at a fixed rate.
Barry Broadus: Our adjusted net leverage ratio was 2.01 times at quarter end compared to 3.11 times at the end of last year's second quarter, demonstrating the company's ability to utilize our favorable cash flow from operations to quickly delever.
Barry Broadus: As for our capital allocation priorities, our strong financial position enables us to fund organic growth initiatives, consider strategic acquisitions,
Speaker Change: Paying down debt, repurchasing shares to avoid pollution from our employee incentive plan, and paying quarterly dividends.
John Wasson: Today, we announce a quarterly cash dividend of 14 cents per share payable on October 11, 2024 to shareholders of record on September 6, 2024. We're pleased to increase our guidance for GAP EPS to 560 to 590 and for non-GAAP EPS to 695 to 725, up 35 cents from prior guidance and representing year-on-year growth of 32.2% and 9.2%, respectively, at the mid. You know, with that said, I think in the quarter, and I think we talked about this last quarter, you know, I think we're our federal business.
Barry Broadus: Today, we announce a quarterly cash dividend of $0.14 per share payable on October 11, 2024 to shareholders of record on September 6, 2024.
Speaker Change: Now, to help you with your financial models, please note the following. We are reducing our guidance for depreciation and amortization expense, interest expense, and CapEx. Our depreciation and amortization guidance has been reduced and is now expected to range from $22 to $24 million.
Speaker Change: Guidance for our interest expense has been lowered and we now expect a range from 30 to 32 million.
Barry Broadus: Our capital expenditures are anticipated between $22 and $25 million.
Barry Broadus: We are maintaining our guidance for all other metrics. As a reminder, amortization of intangible guidance will remain at approximately $32 to $33 million. Our full year tax rate expectations remain at approximately 23.5%.
Speaker Change: We continue to expect a fully diluted weighted average share count of approximately 19 million shares. And we continue to expect a full year operating cash flow of $155 million.
Speaker Change: And with that, I'll turn the call back over to John for his closing remarks.
John Watson: Thank you, Barry. Our first half results have put us on track to achieve our full year revenue guidance for 2024 and have enabled us to substantially increase our EPS and EBITDA guidance.
Speaker Change: We're pleased to increase our guidance for GAAP EPS to $5.60 to $5.90, and for non-GAAP EPS to $6.95 to $7.25, up $0.35 from prior guidance, and representing year-on-year growth of 32.2% and 9.2% respectively at the midpoints.
Speaker Change: Adjusted EBITDA is now expected to range between $225 million and $235 million up from our prior guidance of $220 million to $230 million.
Speaker Change: Further, we're also very pleased to note that reaching the midpoint of our increased numbers. Thank you. Thank you.
Speaker Change: EBITDA guidance range will result in ICF achieving the 3-year EBITDA objective we provided at our 2022 Investor Day adjusted for the 2023 divestitures, and we expect to accomplish this with substantially fewer acquisitions than originally contemplated.
Speaker Change: A growing multi-year backlog and our record business development pipeline of $10.5 billion at the end of the second quarter support our expectations for continued strong growth in 2024 and give us confidence in ICF's ability to continue to grow at a high single-digit rate over the next several years.
Speaker Change: We are experiencing strong demand from commercial clients for energy and environment expertise and implementation skills.
Speaker Change: We have excellent credentials to assist state and local government clients in meeting their planning, resilience, and mitigation objectives, and have expanded our capabilities in areas in the federal government that have bipartisan support, particularly IT modernization, which remains an area of priority spending.
Speaker Change: And, we have a secret sauce, the passion and commitment of our people, which supports our confidence in ICF's future success.
Speaker Change: With that operator, I would like to open the call for questions.
Speaker Change: Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again.
Speaker Change: Please stand by while we compile the Q&A roster.
Speaker Change: Our first question comes from the line of Joseph Vafi of Canaccord Genuity. Your line is now open.
Joseph Voffey: Hey guys, good afternoon and nice to see the EPS revision higher, so congrats on that.
Speaker Change: I thought we'd just maybe just drill down first into, you know, maybe the federal business I know in your commentary.
Speaker Change: John , you were talking about, you know, some of the health sectors being a bit weaker and, you know, for right now, just wondering how you're expecting to see maybe some of those
Speaker Change: you know, some of that health business.
John Watson: over the next year or so in terms of what you're seeing in terms of
Speaker Change: your bids submitted and stuff that's in the pipeline. And then if you could compare and contrast that.
Speaker Change: to, you know, maybe some of your other areas. I would imagine IT modernization is doing pretty well, and so it'd be useful to get, you know, a flavor of...
Speaker Change: You know, maybe, you know, how they're doing relative to, you know, some of your other parts of the federal business. And then I'll follow up.
Speaker Change: Sure, no. Well, thanks for the question, Joe. You know, I'll start at the highest level. I mean, I think if you, if you look at the, you know, the forward focus metrics, our sales, our trailing 12-month book-to-bill ratio of the pipeline,
Speaker Change: Those were obviously very strong in the quarter and have been very strong for this year. Certainly the federal component of that pipeline and those sales.
Speaker Change: has been very strong. I think Barry mentioned some of the specifics on the federal market. And so when we look at those results, they give us confidence that we'll see, you know, strong growth in federal over the
Speaker Change: You know, over the next year and beyond, we continue to see significant proposal activity and significant opportunities in the federal arena.
Speaker Change: We continue to see awards occurring.
Speaker Change: And so I wouldn't say we've seen any change there. And obviously, as you know, the two peak growth drivers there are public health and IT modernization. And the proposal, the wins, and the book to bill are strong, and we're obviously strong in the quarter.
John Wasson: Let me just review the numbers again. Our federal business was essentially flat for the quarter, or the prior contract we've run; we compete for the new contract. There are always a couple quarters when we make a transition with that contract where pass-throughs and the work slows down a bit. So we're seeing that. We have another contract with USAID that ended at the end of the year where we've been awaiting award of that. We thought we'd have it in the first half of the year.
Speaker Change: You know, and I think that, um, and as we said, I think a big part of that was pass-throughs in the federal, you know, we're down material year-on-year, a $9.1 million. If you look at our revenue, if you look at our total revenue, less the pass-throughs,
Speaker Change: You know, the growth was about 5%. And, you know, so total revenue is less past, or is that subcontractors, other drug costs, is the work done by ICF. And so on that metric, you know, we're at mid-single-digit growth.
Speaker Change: for Q2 and I think for the first quarter and for the first half of the year.
Speaker Change: There's a few things that are specifically impacting our federal business here, certainly in the first half of the year. I think it will continue into the second half of the year, but I don't think they're long-term issues. These are contract-specific.
Speaker Change: issues you know we've been the ramp of work under
Speaker Change: RECONPETE contract we won this quarter one of the largest contracts of our large USAID demographic health survey we're rolling off
Speaker Change: or the prior contract, we've won the re-compete for the new contract. There's always a couple quarters when we make a transition with that contract where pass-throughs and the work slows down a bit. So we're seeing that.
Speaker Change: We have another contract with USAID that ended at the end of the year, we've been awaiting award on that.
John Wasson: It looks like we're not going to have it. We won't have a decision on it until Q3. So that's impacting us. And then we also have talked about ruling out some small business contracts from our Applications and Data Services Modernization, BPA, both on the gap and non-gap basis, and are just going to dip it up. And, you know, as they do that, I think they'll need support with that. And so, you know, I think our regulatory support practice is actually.
Speaker Change: We thought we'd have it in the first half of the year. It looks like we're not going to have it. We'll have a decision on it until Q3. So that's impacting us. Then we also have talked about we're ruling off some small business contracts from our.
Speaker Change: acquisitions on the IT modernization front in 2022 again which we we anticipated in
Speaker Change: We're part of our guidance and explanation when we did those deals. And so those three issues are really what's impacting our federal business here for a few quarters. I think, you know, I think as we look at the longer term and look down the road, given the opportunity, given the lens, given the book to build, given the sales, we feel
Speaker Change: I'm quite confident in it. And to your point, I think, you know, we're, certainly the IT modernization will continue to be a significant opportunity. As you know, that's been a bipartisan issue across, for some time.
Speaker Change: I think that remains a bi-partisan issue. It's one of the few things that the Trump administration put a real emphasis on, and the Biden administration has continued it. And so I think certainly that will continue to be a significant source of growth for us as we look forward.
Speaker Change: Great. Thanks for all that extra color, John . That's helpful. And then, I guess, you know, just on that IT modernization front, again, I just, I did see you win a pretty large
Speaker Change: contract recently with DoD in IT modernization. I was wondering if you could kind of drill down into that a little bit and if there's any kind of appetite to kind of continue to try to grow.
Speaker Change: The DoD business and IT modernization given the massive size of the budgets that there are over there. Thanks a lot, guys.
Speaker Change: Sure, no, so I think we, um, we did, uh, you know, just recently announced that we've won a large DOD
Speaker Change: Applications and Data Services Modernization, BPA, a $1.4 billion BPA, one of ten award winners to support DOD on IT modernization, specifically with an HR
Speaker Change: and Data Analytics a focus and so you know certainly we have
Speaker Change: significant HR and human capital capabilities that we'll look to marry with our IT modernization capabilities. And so we're excited about this. I think there's there's opportunity for us down the road. We expect that you know the task orders will start to flow later this year.
Speaker Change: I think there was, I think it was 10 winners, 10 companies won, you know, a position on this BFA. And so I think there'll be opportunity for us there, and you know, I think it's, it certainly will.
Speaker Change: and look to grow the business as we look forward.
Speaker Change: Great. All right. Thanks very much, John . Nice, nice results.
Speaker Change: Thanks, Joe. You take care.
Joe Biden: Thank you.
Speaker Change: Our next question comes from the line of Tim Mulrooney of William and Blair. Please go ahead.
Tim Mulroney: Yeah, good afternoon. Nice quarter, guys. I think this question is probably for Barry. Can you just give a little more detail on the primary factors behind the EPS guidance raised on a consolidated basis? Is this primarily...
Joe Biden: Due to a higher profitability outlook or is it also related to higher top-line expectations?
Speaker Change: relative to your prior expectations.
Barry Broadus: Hey Tim, thanks for the question. Yeah, if you look at the guidance, you know, increase on the EPS and the Delta-Divida, that really has, you know, all to do with the mix that we have. We talked about that during the remarks.
Barry Broadus: especially in our commercial energy marketplace and, you know, the next...
Speaker Change: not just from a standpoint of margins, which are significant in that market sector.
Barry Broadus: It's the cost mix as well, so we're more reliant on our direct labor versus subcontractor. And so that's boosting, so we can keep our revenues.
John Wasson: [inaudible] It's really a small percentage of our work. We really only do that work at EPA. And ultimately, I think it has as much likelihood to create opportunity for us as, Yes, good afternoon. Thank you. You talked there about. Is that the... Yeah, thanks for the question, Kevin.
John Wasson: Yeah, so, with that particular, the services that we provide, you know, in the commercial energy business, that are more related to, you know, our staff, as well as the contract, not just the mix of costs but also, you know, it's more fixed price work than some of our other, you know, other clients, especially like the government client. So, you know, that enables us to manage the cost and improve margins.
John Wasson: So, you know, not only is the type of work that we're doing more conducive to having more direct labor, less contracts, subcontractors, but also the type of contracts that we deploy help, you know, with being able to manage the higher margins and, you know, what seems to be. Yeah, I mean, I guess what I'd say, Kevin is, We're seeing, and you know, it's multi-pronged I mean, in that arena, we're seeing, and the load from data centers supporting AI is just unprecedented.
John Wasson: And so I think it's a unique time in the energy industry. I think the challenges around how we're going to meet electric demand and we're going to address and make progress on clean energy. And, You know, we're going to see strong double-digit growth here for some time, and there's just tremendous opportunity. [inaudible] You know, I think we're finding that out with our programmatic clients as they carry out the work.
John Wasson: Plus, we have a deep technology bench that can bring the technology capability around AI. We're finding that with many of these opportunities, you know, we need to have both sides of the house. We need to have the domain people and the technology people working side by side with our clients on AI to really maximize its benefit and figure out the most innovative solution. And so a lot of these opportunities are coming from the federal agencies and the programmatic people.
John Wasson: So the energy policy people or the public health experts, the epidemiologists, the toxicologists, or the public health experts who are talking to our domain experts want to figure out how to leverage AI, and then we can bring our technology people to bear on it.
John Wasson: So, and I think that's something we can do particularly well. And so. You know, we have a tiger team of AI experts in corporate that can work with our domain people to take advantage of these opportunities quickly. Training and Technical Assistance, Research, and Evaluation.
Operator: Lucky P.M., content for our marketing. You know, and I think it's also you're really trying to figure out what are the use cases that could be the most impactful for our clients and impactful for our business. Our next question comes from the line of Marc Riddick of Sidoti. Your line is now open. What are the disaster recovery clients we have and, you know, the number of mitigation clients? I mean, it's an impressive number and an impressive list. Um, yeah, no, a good question.
John Wasson: Um, well, I would say that, uh, you know, let's bury it. Let me start. First of all, Barry's noted that our balance sheet is in a strong, strong position. I mean, our leverage ratio is down to two. We're generating significant gas on digital engagement levered up. The breadth of that opportunity in terms of the wide array of skills and capabilities required to support it, you know, we're certainly, you know, looking carefully at opportunities in that market.
John Wasson: So I would say the deal flow is improving. We're seeing more potential opportunities. I think the valuations are improving a bit. And you know, I think that's a positive sign. We have a very clear set of criteria, and we'll stick to that. Our next question comes from the line of Tobey Sommer of True Securities. Your line is now open.
John Wasson: Thanks. I was wondering if you could talk about your billable employee headcount growth and maybe comment on what attrition has been like year to date. A lot of the companies that have reported before you have talked about it rebounding to pre-pandemic levels or maybe even better than that. Do you see continued opportunity for even better retention? Thanks, where it basically is. And certainly, as Barry mentioned, retention is significantly down a little bit under 12% from an attrition perspective, which is the lowest it's been in years.
John Wasson: I appreciate that. From a contract award and pipeline perspective, are there any discernible trends that you could call out in terms of the margin of the bids that you're submitting or plan to win, and or any sort of mix shift that may be implied by the composition of those bids? firm fixed price, etc.
John Wasson: Thanks, we continue to see fixed price contracts. Yeah, I would say that if you look at our percentage, if you look at our fixed price contract, percentage of all of our contracts, it's going up significantly. And, you know, that's replacing our cost-reimbursable contracts, which is certainly helping with the margins. So, you know, that's good. I would say that, you know, as far as the mix of our direct labor versus subcontractor labor, that that really hasn't changed significantly.
John Wasson: And, you know, we haven't seen, you know, big shifts in any of that, given the opportunities and focus in IT modernization and, honestly, in the energy area, particularly the energy implementation side with energy efficiency and some of the that we're bidding is certainly on the uptick.
Operator: Okay, well, thanks for participating in today's call. We look forward to connecting at upcoming conferences and events. Have a good rest of the summer. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Thanks for watching!