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Greetings, and welcome to the ASGN 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. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kimberly Esterkin, VP, Investor Relations. Thank you. You may begin.

Thank you, operator. Good afternoon and thank you for joining us today for ASGN's 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.asgn.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 Kim, and thank you for joining ASGN's second quarter 2023 earnings call. Before we begin our discussion today, I want to note that we are excited to officially welcome Kim to the ASGN team. As our new Vice President of Investor Relations, we are happy to have her on board to work closely with our investors and analysts. So, let's turn to the quarter. ASGN’s performance for the second quarter 2023 was in-line with our expectations, with results above the midpoint or slightly ahead of our guidance ranges. The 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 countercyclical 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 the quarter, based on growth of our high-end, higher-value consulting work, consulting revenues reached a total of 53% of consolidated revenues, up 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. As anticipated, 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 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 remained difficult for our more cyclical and discretionary services. Second, 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, provide support throughout market cycles. So, let's discuss our segment performance. I’ll begin with our largest segment, Commercial, which predominantly services large enterprises and Fortune 1000 companies. Commercial Segment revenues declined by 4.6% for the quarter on a tough year-over-year comparison. As anticipated, revenues for the segment benefited from strength in 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 IT staffing. For the quarter, commercial consulting revenues increased approximately 26% year-over-year and were up 14% organically. Bookings of roughly $357 million translated to a book-to-bill of 1.3x for the quarter and 1.2x on a trailing 12 months basis. Of the consulting work won during the quarter, we saw a nice contribution of new wins and project extensions, with bookings weighted more heavily toward 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 Intersys 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 supports the expansion of our Commercial Segment margins. Turning to our vertical performance. In times of challenging macro conditions, our industry-diversified commercial client base provides balance and protection on the downside. We saw growth in two of our five Commercial Segment industry verticals in the second quarter. Consumer & Industrial was our fastest growing vertical, with strong year-over-year growth in the Consumer Staple, Industrial, and Utility sectors. Healthcare also improved and was up low single digits driven by growth in Provider accounts. In terms of declines, Business & Government Services was down low double digits, with growth in Aerospace & 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, our strong commercial consulting bookings show that our clients continue to invest in IT projects. AI work, in particular, has become one of our fastest growing service areas across our Commercial Segment. Our generative AI 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, our supporting solutions in cloud, cybersecurity, and data & analytics will serve as the foundations that ultimately fuel AI usage by our clients, so we are taking to market our multi-layer enterprise roadmaps 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 the client's customer data and then built a predictive model to direct its online sales actions. By designing, testing, and training a suite of models on this predictive framework, ASGN was able to improve our client's system responsiveness while 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, such as copying data and prefilling forms, our client will save time and money by enabling its employees to focus on more strategic tasks. At the same time we are automating our clients' processes, we are using AI to help with ASGN's project management. In June, our own GlideFast launched AgileGenius, an integration with ServiceNow that automates key aspects of Agile project setup and work allocation. We anticipate AgileGenius will significantly increase our speed to manage our internal IT projects 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 9.8% year-over-year, primarily driven by the contribution of our Iron Vine acquisition, and were up 7.7% sequentially. Contract backlog was over $3.1 billion at the end of the second quarter, or a healthy coverage ratio of 2.6x the segment's trailing 12-month revenues. New contract awards were approximately $390 million, which translates to a book-to-bill of 1.2x for the quarter and 0.9x on a trailing 12-months' basis. While protest activity remains high and is causing delays in the start of new projects, we are not experiencing any pullback on active contracts 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 cybersecurity, cloud and ServiceNow solutions. For instance, we won a re-compete 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 costs. We also secured two enterprise IT contracts, one 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 & cloud, and Chief Technology Officer services. Further, we won an AI/ML contract for a classified customer to support this customer’s open-source intelligence goals. Speaking specifically about AI, ASGN has been an active player in providing artificial intelligence capabilities to the Federal Government for many years. From 2019 to 2022, ECS was the number-one contractor for AI spend according to the Federal Procurement Data System. We've built in-house procurement, development, and testing capabilities to bring the latest commercial AI technologies and solutions online for sensitive government missions. 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. As 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 2022. That withstanding, with April performance serving as a basis for our Q2 estimates, revenues were toward the high end of our guidance range. Revenues from our Commercial Segment were $811.3 million, down 4.6% year-over-year. Revenues from commercial consulting, the largest of our high-margin revenue streams, totaled $281.1 million, up 26.5% year-over-year. Excluding the $27.7 million contribution from our GlideFast acquisition, consulting revenues grew 14.1% year-over-year. As expected, offsetting this growth in consulting, was a year-over-year decline in assignment revenues, predominantly our more discretionary permanent placement and creative digital marketing services, as well as a portion of our IT staffing. With that said, assignment revenues declined 15.6% as compared to the prior-year period. Revenues from our Federal Government Segment were $319.6 million, up 9.8% year-over-year, including a $25.2 million contribution from our Iron Vine acquisition. Turning to margins. On a consolidated basis, gross margin was 28.9%, down 120 basis points over the second quarter of last year. 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 than commercial revenues, and a lower mix of creative digital marketing and permanent placement revenues, which have higher gross margins. 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 margin for the Federal Government Segment was 20.5%, also down 90 basis points year-over-year. Last year benefited from certain higher margin firm fixed priced programs. SG&A expenses for the second quarter were $210.5 million, down 4.5% year-over-year due 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 acquisitions. Income from continuing operations was $60.1 million, adjusted EBITDA was $135.2 million and adjusted EBITDA 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, lower incentive compensation, and continued growth in our commercial consulting business. At quarter end, cash and cash equivalents were $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 repurchase of 836,257 shares on an average price of $68.95 per share. 6 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 and 0.75 days less than Q2 of 2023. Estimates also include $25.2 million in anticipated revenues from Iron Vine. 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 the Federal Government Segment. In addition to the difficult year-over-year comparison, in commercial consulting we do face changes in the pace of work stretching project durations. With this as background, for the third quarter we are estimating revenues of $1.10 billion to $1.12 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 margins will decline year-over-year due to business mix similar to more recent trends, including a greater mix of federal government 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'll now turn the call back to Ted for some closing remarks.

Thanks, Marie. As we conclude, I want to bring us full circle to where our discussion began. Macro conditions remain challenging, but our business is performing to expectations. With our strategic decision to increasingly focus our efforts on high-end, higher-value IT consulting services and solutions, we are shaping and evolving our operations for success. Our business stabilizers support our resilient operating model, and those stabilizers, combined with our ability to adapt to and evolve with our clients’ needs, will drive our performance going forward. As we weather the current environment, ASGN remains committed to achieving further growth and development. Our ongoing progress will not only be demonstrated by our solid financial performance; it will also 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 a people business, environmental, social and governance initiatives are part of ASGN's core DNA. We have made great headway since embarking on our ESG reporting journey. I want to thank our entire team for your continued commitment toward creating a more sustainable future for all of our stakeholders. I also want to thank all of our employees for your efforts this past quarter. You continued 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. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question is from Maggie Nolan with William Blair. Please proceed.

Hi, Ted and Marie. In your prepared remarks, you said the macro remains difficult, particularly for discretionary services. Can you compare the current state of the environment to 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 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 Marie mentioned, more of the same there with a slight weakness in commercial, offset by growth in federal. I just don't – and I'll let Rand 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, I mean, one of the things that we saw were, especially in commercial, more bookings in the last month of the quarter than in the first two months of the quarter. And again, I think that clients just wary, if you will, about their business and how it's performing and protecting their bottom line and being very careful about when they sign up for new work or extended work. Rand, anything you'd add to that?

I think you hit it all, Ted. Maggie, I would just say, we see the client as cautious in their spend. And that started in that second dip in the first quarter that Ted referring to in March. And we've seen it throughout the second quarter and expect it to be the third. And the bookings coming late in the quarter is indicative of they're very thoughtful about what they're going to do in terms of new work and current work where they can stretch it out or just do it a little slower pace. I think, we're seeing that, and we support that. I mean, we get where they're coming from. So cautious is the best word I think we can put to it.

Yes. Maybe one other data point, Maggie, just to support that is we're seeing a really high utilization of our Mexican Delivery Center. And we mentioned that in our prepared remarks. And part of that is we have great technical skills and muscle in 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 – coming out of the first quarter, but you've seen it very clearly here in the second and into the third.

Okay. Thanks, Ted and Rand. My follow-up would be understood on the macro. And I also heard it throughout your prepared remarks that there are some catalysts here and some interesting developments, and AI is obviously a notable one in that respect. So within that context, do you think that, that could become a catalyst for the M&A pipeline at all? Are you looking at any interesting assets to help you build out capabilities in that area given that you are already seeing some traction with clients?

Yes. Rand, do you want to take that?

Well, I think the answer to your question is yes. We definitely have AI on our radar screen technologies like Snowflake, ServiceNow, and Microsoft and Amazon cloud capabilities. They're all key technologies. And Maggie, the only thing I would say is you hear a lot today from the tech companies, don't discount the work in cloud. You can't have AI unless you have a 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 innings and then the analysis of that data, the purifying of that data, it's not just having data, having good data. Otherwise, your AI 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 the previous three quarters. 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 with BMO 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, specifically on the consulting business. Can we just get a little bit more color? Is that something that you didn't see last quarter that you're seeing now?

I think – look, I think we've seen it a little, and we're seeing a little bit more, Jeff, is maybe the best way to say it. It's a way for clients to stick with things, but lower their burn rate. And said they'll say, look, 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, not 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 optimize their spend when there's 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 it a little slower, if you will? And I think all that ends up being tools for them to try to manage their expense.

Okay. That's really helpful. My follow-up just has to do with your own internal headcount. I'm just curious on a net basis, are you adding? Are you subtracting? And if so, where are the changes?

Yes. So we don't release our headcount numbers, but 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 discuss that as a part of the business stabilizers inside of our business. So our headcounts are naturally trending down just based on what our natural attrition rates are. In some areas where there's opportunity, we're coming back behind that and investing and in other areas where we think it's further out until we get a return on that, we're letting that attrition work. So on a net basis, we're trending down, but there are some areas that require investment, and we're addressing this.

Okay. Thanks so much.

Thank you. Our next question is from Tobey Sommer with Truist Securities. Please proceed.

Thanks. I 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. But the book-to-bill is stubbornly pinned below one for a while. Do you feel like you're 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?

Yes. Well, look, Tobey, I think we would agree with you. I mean our target is just to have a book-to-bill that's above 1.0, and it's been kind of stubbornly low here. We're making investments, for sure, in our business development and capture activities. I think that's definitely an area where it's 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, which I think is a positive. And we hope that we're on the front end here with this quarter of seeing better conversion of those bids into one work. We've got a quarter now that's above one pretty substantially at 1.2, and we need to build on that. So we would – we see it the same way. We're shooting for a book-to-bill that's above one.

Could you put some more flesh around the added investments in the increased number of bids? Any way to quantify that to give us a sense for the order of magnitude of changes across those dimensions?

Well, I mean, probably, Tobey, what I would say is a bigger business today. I mean, ECS was a $570 million business when we bought it in 2018. It's 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 going. 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 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 in what you're seeing if you bifurcate and sort of pick up maybe a dollar value of mid-single-digit million or low-single-digit million and think about it as smaller projects versus larger ones?

Rand, do you want to 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. And every quarter, they move up a bit. I think clients getting more confident and comfortable with our work and where we can contribute 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 expansion. A lot of the existing work in this past quarter, I think Ted featured, we had a lot of existing work move forward, carry-forward, 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, Tobey.

And just a question, last one for me. On the new work being a little smaller and more renewals. Was that a – did that represent a surprise in a change? And would you say that is reflective of something a reticence at the customer? Or is that just bounce around quarter-to-quarter and not much more to glean from the change?

Well, Ted, 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 is part of their playbook. New work, they're being very judicious about it. It has to move. We've always said IT spend moves with earnings, okay? Not with employment data, with earnings. And when that happens, they're going to take steps to protect their earnings as well. And if they can stretch out or there is some work, they're going to have to start new, they're going to be cautious about that. So I don't think it's unanticipated by us in this most recent quarter. If it went to 80-20 one way or another, Tobey, that would be a surprise. But when it's in a close proximity to each other, not as alarming, more reflective of the cautious nature of client spending as Ted commented on.

Thank you.

Thank you. Our next question is from Heather Balsky with Bank of America. Please proceed.

Hi. Thank you for taking my question. I guess I first wanted to ask about the consulting business. You spoke earlier about the extending burn rate. I'm curious if you're seeing any other change in behavior in your consulting business, whether it's reflecting, shifting in demand for the type of projects? And are you seeing any trade down from some of the bigger consulting firms to your business? Thanks.

Rand, do you want to take that?

Well, I'll start. I think we've commented on this a little bit, Heather. The stretch out of where current work that's ongoing is 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 and extension of that work and a 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 foundations and structures and some AIs, which we've pointed out. I don't know that there's anything other than what you'd anticipate a company doing in support of their own business. I mean, even look at ourselves, we're still dealing with new technologies and trying to modernize our IT framework to support our business. And we're – we've not cut back on IT spending, but we haven't gone out and tried something new right away until we know that we've got our path forward going. So I don't think they're behaving any different than we would or that we expect. Did that answer your question or help respond?

Yes. Yes, that was really helpful. Thank you. And the follow-up question, and you talked about sort of new opportunities and changes in technology, another AI question, which is I'm curious, I know it's very early days. But when you think of AI and generative AI and the opportunity at hand. I think we've all been trying to get a sense of how much spending could happen to invest in 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 cloud?

Ted, I'll start we start. You want me to start?

Yes. Go ahead. Yes, yes and yes.

We think, first of all, there'll be more spend in the data foundation world, that's cloud, data analytics, that's business intelligence, that sort of thing. There's definitely going to be more spend in AI because the use cases are growing. In fact, some of the use cases we've mentioned are talking about the customer experience. That seems to be what we've seen in the first. It's kind of counterintuitive a little bit to us that maybe there aren't some other use cases that are getting what I call a priority. But – and by the way, we talked to Gartner 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 spend? There's a lot of talk out there about it. There's a lot of investments in AI in the big technology companies. Even the existing technology companies are reramping their platforms for supporting AI and better retrieving and archiving and processing data. So do I think there's a lot more spend in these areas, have we taken a moment to say the total addressable market has gone up x billions of dollars. We have not done that yet. But there's 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's a return on investment there that's much more measurable than back in the '90s when it was a year 2K boom, right? And it was more preservation than a return on investment. So I think you're probably reading the same articles we are. Ted, do you have?

I would just kind of echo what you said right upfront, which there's a lot of foundational work here to get ready to really deploy and get a return on all these AI capabilities. And I think that is the spending going to 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 are holding off just a bit before they really invest in it until we get a little further into whatever this economic situation that we're in here.

Can I mention one more thing Heather and Ted?

Yes.

We've developed what we call AI road maps. We used to have digital road maps. They've now been modified to reflect AI and really helping the client think through what the use cases potentially are, how they would go about it and what technologies are emerging to support that. And there's good discussion around that with our clients. And I think the fact that the clients are also trying to think through this. And remember, some of the technology tools are now just being 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 and a lot of discussion going on and our road maps at least help us and our team talk to our clients about it.

Yes. I was going to say, we're hearing some of the companies we cover talk about the increasing spend on AI. Some have set budget, some have been less specific. So it's just interesting to get some perspective on how big of an opportunity this could be. Thank you.

Thank you. Our next question is from Josh Chan with UBS. 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 the SG&A line a bit lower here?

Yes. 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 talked about the business stabilizers that as our revenue softens, that variable component of our model also flexes as well.

Okay. Thanks for the color there. And then I guess on the consulting bookings, it's still up this quarter. I know that GlideFast is in there, but could you kind of contrast what seems like a pretty healthy booking for you with sort of the macro narrative that is very cautious? I guess I was just trying to reconcile those two things.

Yes. I would say nothing dramatically different, Josh. I mean we've said a few things here that were just incremental around the edges, a little bit more renewals and extensions than new work. But like Rand 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 some time. Again, that can vary. But I think that's just a signal of cautiousness from clients. And look, I think we're a great – for a client who wants to continue to work, not stop IT projects, continue to get things done, we're a great option, right? We come at it from a little bit different perspective than the big traditional consulting firms. We use our contract deployment, our IT staffing model. So those people are not coming off our bench. We can very quickly put together custom fit teams with the right industry experience in the right technologies and mixed with it, our Mexican delivery center capability, and that ends up being a great outcome for the client because it's cost effective and because we've got the technical strength to get the job done. So I think in times like these, we're a great option for the CIOs and CTOs and IT directors who are having to worry about expense, but also know that they need to stick with the things they have in motion.

Okay. Great. Yes. Thanks for the color, Ted and Marie. Thanks for your time.

Thank you. Our next question is from Kevin McVeigh with Credit Suisse. Please proceed.

Great. Thanks so much. And I had a couple of calls. So if you answered this, I apologize in advance. But maybe if we could start with the guidance a little bit, the Q3, it looks like the revenue and the EBITDA, it looks like the 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 you're 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 were somewhere to slightly up in the third quarter to slightly down within 1% kind of both ways is what our 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 range here that we saw in the second and kind of carries into our Q3 guidance is a good target and it's sustainable here as we go forward at these levels based on the topline guide that we gave you and what we expected the gross margin level. Marie, on the acquisitions, we give the acquisition contribution every quarter, right?

Correct.

So that's not a new deal. That’s…

That's not a new deal that's built in the guidance. We have lapped the GlideFast acquisition. So that was done at the 1st of July in the prior year. So we 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 Iron Vine, which was the cybersecurity capability that we bought in the federal space in October of last year. And so the acquisition number you get there is from the last quarter of Iron Vine.

Terrific. Any sense of like client conversations, how they've been trending around? Is this some of the – I don't know if the caution is the 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 how should we think about that in terms of phasing, I guess?

Rand, client conversations mostly consistent.

Yes. I'm not sure, Kevin, your question more about is that we've – I mean, 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've been around long enough and had very significant footprint in the IT staffing world, which helped us build in with our client base. And we continue those conversations and we keep our account managers and national account directors out in the marketplace talking to them. That's part of the investment we're not willing to let deteriorate. And yes, I mean, conversations are always there. Some of the conversations now are moving towards what we call this new road map, the AI road map and the use cases and what potentially can be done with it. And it's a lot about the foundational pieces that you have to put in place. Remember also, Fortune 500 companies are – it's not that they're not early adopters of technology. In some of the sectors, they're not going to be quick to get at it. So early adopters tend to be technology companies in the banks. The later adopters are consumer industrial and health care. And it's interesting enough that that's where we're growing right now with those two sectors. So the conversation varies depending on the clients aptitude to spend more or whether they have to protect their own earnings or they're cautious or not. Most clients are cautious or what I would call prudently cautious. Was there a second part of that question, though, that you were worried about our internal team?

No, not necessarily, Rand, internal, just is 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?

I don't know, Ted, I'll make a comment, and then you can jump in, Ted. But I mean, we're getting the same reports you're getting as the quarter gets the earnings reports come out. And I would say IT staffing is definitely in negative territory. And – the good news is our perm placement, some companies – staffing companies have 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. The IT staffing business is down because it's – some of it is a little more discretionary, but most of it is stretched out and they're not going to add new people. Consulting is now kind of getting into the territory of, well, let's stretch some of these projects out just a little bit here without losing momentum and see where we are in another quarter. And so we've assumed some of that, I think, in our guidance and what we've given you.

Very helpful. Thanks, Rand.

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

Hey. Good afternoon and thanks for taking my questions. On 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 up movement in bill rates and in pay rates. We're preserving the margin there and the client's willing to do that for all the reasons you can imagine in a really good IT labor and tough demand skill sets are 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, if you will, in all of that. We continue to see our rate creep up mostly because of our commercial consulting business and that's higher value, higher margin, higher bill rate worked, right? So the mix of that with our other business continues to slightly lift our bill rate, which you would expect.

Right. And then you mentioned the Mexican nearshore capabilities that you acquired through Intersys. How big is that? And how much bigger could it become given that it sounds like it's a really good price value for clients.

Yes. So when we bought Intersys in 2019, they had approximately 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 big investment area for us, Mark. And 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 to have the most productive price point that it can happen. So it makes sense that they would be pulling on that.

Great. I mean do you have excess capacity there? Or are you at capacity and you just needed continue to add capacity?

I mean, we're all – we always have a little capacity because utilization rates are never 100%. But if we could have – if we could have another big group of capabilities there and the right skill sets, we could put it to work. So again, it's an investment area. It's one of the areas I called out where while we may have tried 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 there's a big opportunity in demand.

Right. Hey, Ted, can 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 they're starting to be more productive part of our overall offshore strategy. So I 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.

That's terrific. And then in the release, you mentioned that creative and perm placement were down 14% were down 21% and were 14% of revenue. How much was perm down versus how much was creative down?

Marie, do you want to take that.

So from perm for second quarter. As a percent of total revenue, I mean, the numbers that you gave are really as a percent of commercial. And so as you know, we kind of give it as a percent of total revenues. So in Q2 of 2023, 2.8%.

That's relative to what a year ago, Marie?

So last year, 2022, it was 4.6%.

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

I'd say low double-digit is about right Mark. Maybe not quite that much, but low double-digit.

Okay. And Rand and Ted, you've both gone through multiple cycles. Apex ended up growing during the GFC. How would you characterize what you're seeing today in terms of the macro caution relative to other periods? And what inning do you think we're in, in terms of that potential softening? And related to that is 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?

Well, look, in our third quarter guidance, we've kind of noted that we've programmed a little softness, if you will, into 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 the same. 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 that were pretty healthy, right? And it was an event that kind of happened there didn't have the long runway of visibility that this downturn has had. And so this one is different in those ways. We've had a long visibility. We've had to watch it all the way through. It's allowed all of us, our clients and us to prepare our businesses for more austere times. And so we've all done that. And so you've seen the enterprise client here react differently than maybe in past downturns in the cycle because of all those reasons. I think the other thing that is different today is that the way the customer procures staffing is more controllable and transactional than it's ever been. They can immediately – because of the control they have over these programs when they really want to get protective, they can immediately hit the button and say, I'm going to get protected here. I'm going to turn down the transaction part of the business, which is the 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 that keep work going, but they've also had to turn down the transactional piece and they can do it very effectively because of the control they have within these procurement systems. So I'd just say it's a different market, if you will, and they're all different. Rand, anything you'd add to that?

Well, Mark, if you'll let me, I'll add one thing. I would say in the great financial crisis, it was chaos and nobody knew what was going on exactly and 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 when I got to rebound this time versus then or back in 2004 or some other downturns we've seen. I like the fact that I think there's a rebound coming somewhere, and there's also propellant. 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 I know it's going to be great. It's a question of getting there, right? And so the Fed, I think, helped today or maybe heard, I don't know. But 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 in 2008, 2009.

And Mark, you've seen this for a while. You know that we're the clients' best opportunity to ramp up quickly into investments that they want to make when they're ready to return to heavy investment levels, right, around the stuff. They have pin-up demand building, the longer we get through this, the more fill and then their opportunity to get after it as quickly as possible. They can't do that internally where their most key and strategic mechanism to do that. So I think Rand is 100% right, obviously, on that.

I appreciate that. And in the meantime, you're 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. Marie?

Yes. It's really kind of the similar story that we've been sharing. And so obviously, our desire and our first and best use is M&A. But really, given what we just talked about with the Fed continuing to raise rates, there's really no targets out there or opportunities. And so share repurchase, and you saw kind of the $58 million rounding slightly up in share repurchase for Q2. I think we signaled on some of the conversations that we had that we actually ended up buying more shares earlier on at lower prices. And so you see the average share price that we bought those at. And so we will continue to utilize our free cash flow for share repurchase and continue to look for opportunities for M&A.

And on the M&A front, Mark, there are attractive future opportunities and now it's the time to plow those. And so we're thinking on our own to make sure we understand what the menu is the target list, we’re identifying those opportunities in the market. We're building relationships and doing all the spade work that needs to be done. But Marie is right. And at these levels, our share price has never been more accretive to purchase shares. And so you can see that evidence in our actions during the 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, 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.