Greetings, and welcome to the ASGN Incorporated Fourth Quarter and Full Year 2019 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded.

I will now turn the conference over to your host, Kimberly Esterkin, Investor Relations..

Thank you. Good afternoon and thank you for joining us today for ASGN's Fourth Quarter 2019 Conference Call. With me are Ted Hanson, President and Chief Executive Officer; Rand Blazer, President of Apex Systems; George Wilson, President of ECS; and Ed Pierce, 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 financial 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 the GAAP and non-GAAP measures are included in today's press release.

I will now turn the call over to President and Chief Executive Officer, Ted Hanson..

Thank you, Kimberly. And thank you for joining ASGN's Fourth Quarter and Full Year 2019 Earnings Call. Before we get started, I have a quick housekeeping item to discuss.

In the interest of time and efficiency, beginning on today's earnings call, we've decided to streamline our prepared remarks to include myself along with ASGN's Chief Financial Officer Ed Pierce.

Rand Blazer, President of Apex Systems; and George Wilson President of ECS are also on the line and will be available to answer your questions during the Q&A session. Now, let's turn to the results.

2019 was a year of many accomplishments for ASGN as we continue to pursue our strategy to build an IT services provider of scale in the commercial and government markets via our differentiated resource deployment model.

Our customers including Fortune 1000 corporations and federal defense and civilian government agencies look to us to be more consultative than ever before.

To proactively anticipate their needs and employ advanced workforce management and cutting-edge IT solutions to accomplish each of their business objectives through continued organic growth combined with select strategic tuck-in acquisitions. We successfully respond to our clients with crucial and complex challenges.

ASGN's ability to quickly but effectively act on our customers' evolving needs as evidenced by our solid financial performance. We are very pleased with our fourth quarter and full year 2019 results.

All numbers reported for the quarter were in line with or exceeded our guidance, with revenues for both Q4 and for the full year 2019 improving double-digits year-over-year. Margins also remained solid with EBITDA margins of 11.3% and 11.4% for the quarter and full year respectively.

Consolidated revenues for the fourth quarter totaled just over $1 billion, up 10.3% year-over-year and above the high-end of our guidance range. I am pleased to note that, this is our second consecutive quarter of greater than $1 billion in revenue.

Apex our largest segment, which services clients across multiple commercial end markets generated revenue of $641.3 million for the quarter, up 6.1% year-over-year on very tough comps in the fourth quarter of 2018 in which segment revenues grew by 13.1%. For the full year, Apex segment revenues improved 9.6%.

In terms of end markets for the Apex segment in the fourth quarter Business Services, Financial Services, Healthcare and Consumer/Industrial all posted double-digit revenue growth over the prior period. Aerospace & Defense posted single-digit growth year-over-year for the quarter.

And the Communication, Media, Life Sciences and Technology end markets, each saw a slight revenue decline over the fourth quarter of 2018.

Despite the double-digit revenue growth in Business and Financial Services accounts, there was a slowdown in these end markets in the final two weeks of December, which led to a revenue shortfall of approximately $5 million to $6 million as compared to the same time period a year ago.

This slowdown resulted from higher-than-expected time off by our consultants along with mandatory furloughs during the holiday period enacted by a small number of our key accounts. Top accounts still achieved high single-digit growth rates for the fourth quarter, while retail and branch accounts grew mid-single digits year-over-year.

Fortunately, in January, we saw production return to expected levels and so we believe that this slowdown was isolated to the holiday season. To round out the Apex segment, Creative Circle posted revenue in line with our expectations for the quarter. Gross margins for the Apex segment were 29.7%, consistent with our expectations.

Consulting work for the Apex and Oxford segments continued to grow with consulting revenues across both segments totaling $108.1 million for the fourth quarter, up 31.3% year-over-year. On a full year basis, the Apex and Oxford segments reported consulting revenues of $398.7 million, up 28.7% over 2018.

Margins for our consulting work continued to outperform overall margin rate. As we continue to grow our consulting revenues organically, we also look to broaden our capabilities through strategic M&A. In the fourth quarter, we've made significant progress integrating Intersys Consulting, which we acquired in mid-October 2019.

We expect that the full integration of Intersys' back-office support functions and systems will be completed in Q1 2020. The Intersys acquisition has contributed positively to the overall profitability of the Apex segment and their contribution to our share pipeline and bookings in the fourth quarter, which was above our expectation.

With the integration of Intersys, we've been able to bid on an increased amount of work together, including securing new contracts in cloud strategy and DevOps type engagements for multiple clients by leveraging work with our cloud partners.

There's the scarcity of talent to support newer cloud services, as opposed to talent to support the traditional enterprise resource planning software vendors that have been around for decades. The Apex segment is able to provide consultants to assist with the implementation and upgrades of these new technologies within our clients' embedded systems.

Most recently, Intersys and Apex systems jointly won an engagement with a fast-growing fin-tech account, where we will apply our advanced data analytics solutions team and cloud expertise to develop operating reports and dashboards for our client's customer service team.

For this project, the newly acquired Mexican Development Center will be a critical component of our approach and we believe this center was a contributing factor for winning this work. We are seeing great traction with Intersys' near-shore Mexican Development Center, which will be able to serve many of Apex's U.S. clients.

Some of our clients have even performed site tours of work being performed on behalf of their accounts. Now let's turn to our next largest segment ECS, which provides IT solutions to the federal government including the Department of Defense intelligence agencies and certain civilian agents.

For the fourth quarter, ECS reported revenues of $233.5 million, up 34.3% year-over-year, primarily driven by high demand for machine learning services and solutions from our defense customers. ECS' financial growth continues to be ahead of the industry average.

And while we expected this segment to outperform for the fourth quarter and full year, performance was even stronger than initially anticipated due to a customer-driven early purchase of software licenses under a cost reimbursable contract of $34.4 million that we originally expected would come in 2020.

ECS' new business pipeline remains strong, as we enter 2020. In Q4 2019, ECS received $110.2 million in new contract awards resulting in a book-to-bill ratio of 0.5:1, which ultimately equates to a healthy book-to-bill ratio of 2.1:1 for the full year.

Some of the key contract awards won by ECS in the fourth quarter included new tasking to provide technical and analytical support services to the U.S. Defense Advanced Research Projects Agency and a programmatic support effort for the National Oceanic and Atmospheric Administration or NOAA.

In the fourth quarter, we also saw a significant expansion of two key technology contracts that we hold with the U.S. Postal Service in the areas of cloud deployment and geographic information system used to optimize delivery routes.

At the end of the fourth quarter, ECS had a total contract backlog of $2.6 billion or a coverage ratio of 3.2 times ECS' trailing 12 months revenue.

The Oxford segment which offers on-demand consulting talent for commercial, IT, healthcare, life sciences, and engineering clients reported revenues of $150.4 million for the fourth quarter down slightly from the prior year period as a result of a decrease in permanent placement revenue work.

I'd like to take a moment now to focus on our borrowing capacity and specifically the unsecured notes we issued in the fourth quarter. In November, we announced our intention to offer $500 million in senior notes to the market.

Through the closing of this offering, we paid down a portion of our term loan fees with a variable interest rate and established a new loan with a highly competitive fixed rate. This allowed us to secure a longer term piece of capital while simultaneously lowering our balance sheet risk.

I'm pleased to report that our team's execution of the deal was so successful that was oversubscribed by $50 million for a total of $550 million.

To be able to elongate our debt tenure at favorable fixed rate, while simultaneously paying off our revolving credit facility and a portion of our current term loan, we positioned ASGN to go back to the marketplace in the future to support our strategic needs. Ed Pierce, our CFO will speak further on the specifics of our high-yield bond deal shortly.

Importantly, our strong free cash flow has not only enabled us to pay down our debt, but to also make strategic tuck-in acquisitions that fit with our long-term strategy of providing higher value, higher margin consulting services to our commercial and government clients.

Our goal is not just about businesses for their intrinsic value, but rather to purposefully add companies to ASGN that creates strong revenue synergies with our existing businesses.

To accomplish this goal, we maintain a very strong pipeline of future targets so that we can be ready to make opportunistic purchases in the commercial and government spaces that support our long-term strategy.

While we are not necessarily shying away from transformative M&A, we are focused now on tuck-ins that enable us to leverage our current pipeline of opportunity moving us up the value chain to scale our services, while leveraging our market position and become even more entrenched with our clients.

Case in point, in 2019, we successfully acquired DHA and Intersys as part of our ECS and Apex segments respectively. Then just over three weeks ago we welcomed Blackstone Federal to ECS. It is clear that ASGN is an acquirer of choice in IT services and solutions for the commercial and government markets.

We are pleased to welcome Blackstone Federal to ASGN. Their impressive group of technical and functional consultants deliver some of the most complex IT services from agile application development to cloud modernization and cybersecurity to the federal government. Blackstone Federal will be joining ECS' enterprise solutions group.

Blackstone Federal has an 18-year-old track record supporting the Department of Homeland Security, DHS and its sub-agencies. Through their addition, we deepen our digital transformation capabilities within our government IT solutions business and also add new prime contract pathways for our DHS customer.

This acquisition fits perfectly with our hybrid growth and capital allocation strategy to scale ECS to over $1 billion in revenue through a combination of organic growth and strategic tuck-ins. We anticipate Blackstone Federal will see 10% revenue growth this year and EBITDA margins in the mid-teens for 2020.

With that said, I'll now turn the call over to Ed Pierce to speak in more detail about our fourth quarter financial performance.

Ed?.

Thanks, Ted. And as Ted has highlighted, we reported solid financial results for the quarter.

And for the full year 2019 revenues, net income and adjusted net income were all above the high-end of our guidance estimates, after excluding the onetime write-off of deferred loan costs and acquisition and integration expenses, which were not in our guidance estimates.

Revenue growth for the quarter was 10.3% and included $34.4 million from the purchase of third-party software licenses under a cost reimbursable contract at ECS. These purchases, which were expected to occur at various dates in 2020, were made in December 2019 at the direction of the customer to take advantage of favorable pricing and terms.

Revenues from the other divisions were generally in line with expectations, except as Ted mentioned earlier, revenues at Apex Systems were lower-than-expected in the last two weeks of December as a result of higher-than-expected time off by consultants and mandatory furloughs at a few large accounts.

Gross profit for the quarter was in line with our expectations. Gross margin was however below our guidance estimate mainly as a result of faster growth at Apex Systems and ECS than our higher-margin division and a year-over-year decline in permanent placement revenues.

SG&A expenses were above our guidance estimates and included $3.9 million in acquisition and integration expenses, which were not in our estimate. Excluding those expenses, SG&A was slightly lower than our guidance estimates.

In November, ASGN issued $550 million of senior notes due 2028 and used the proceeds to pay down borrowings on other senior debt.

Concurrent with that issuance, we completed the restructuring of our senior credit facility, our term loan B and revolving credit facilities resulting in a 0.25 point reduction in the interest rate and an increase in the borrowing capacity under the revolving credit facility to $250 million.

In connection with the restructuring, we took a onetime write-off of $18.9 million in deferred loan costs.

Our effective tax rate for the quarter was lower than our guidance estimates due to certain favorable discrete items in the quarter including excess tax benefits from stock-based compensation, a onetime benefit related to state tax planning initiative and the true-up of state tax expense following the completion and filing of the 2018 state tax returns.

Our full year effective tax rate for 2019 was 26.2%. And we expect our effective tax rate for 2020 before any excess tax benefits from stock-based compensation to be approximately 27%.

Net income for the quarter was $39.3 million, which included onetime write-off of deferred loan cost of $18.9 million or $13.9 million after income taxes and acquisition and integration expenses of $3.9 million or $2.9 million after income taxes.

Excluding these two items, net income was approximately $56.1 million and slightly above our guidance estimates. Cash flow from operating activities were $81.4 million and free cash flow was $71.5 million or 6.6% of revenues. For the quarter, accounts receivable DSOs were 57.6 days or 2.5 fewer days than Q4 of last year.

Each DSO day is approximately $11 million. Adjusted EBITDA was $116.2 million and was above the midpoint of our guidance estimates. For the full year 2019, cash flows from operating activities were $313.2 million and free cash flow was $280.5 million.

During 2019, we used $116.4 million of our capital resources for acquisitions, $83.2 million to pay down debt, $20 million to repurchase stock and $53.4 million to increase our cash on hand.

During 2019, our leverage ratio debt to trailing 12 months adjusted EBITDA declined from 2.69 times at the beginning of the year to 2.3 times at the end of the year.

Regarding our financial estimates for the first quarter of 2020, we're estimating revenues of $990 million to $1 billion, net income of $42.3 million to $45.9 million and adjusted EBITDA of $100 million to $105 million. These estimates include the results from Blackstone Federal from the date of this acquisition on January 24, 2020.

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

Ted?.

Thanks, Ed. 2019 was a year of solid financial and operational execution for ASGN. As we enter 2020, I feel confident that this year is also starting off on a positive note with the successful close of yet another strategic acquisition Blackstone Federal.

While it's certainly important to discuss our historical track record, it is also as important to review the go-forward opportunities. In 2020, the IT staffing market is expected to total approximately $33 billion with ASGN the number two player in this space.

The IT services market where we are quickly gaining market share is several times larger than its staffing counterpart at approximately $252 billion in size, with ASGN's total addressable market accounted for roughly $120 billion.

As I mentioned when we began today's call, ASGN continues to differentiate itself through our unique resource deployment model. Unlike others in our industry, we're able to leverage the same candidate pool as staff augmentation, but then tailor our consultant selection to the project's individual needs.

This makes our offering much more customized, competitive and profitable for our clients. It also enables us to provide advanced high-end technical solutions in addition to traditional staffing resources, the original foundation and backbone of our company.

Our continued success on IT solutions engagement has resulted in long-standing relationships with Fortune 1000 companies and federal government and civilian agencies that know they can rely on ASGN to provide the most advanced workforce technologies and consultants available.

Digital transformation is quickly changing company's business processes from finance and procurement to inventory management. Enterprise resource planning or ERP in particular is expected to dramatically change with the introduction and acceptance of cognitive computing, automation, AI, machine learning and blockchain technologies.

To best service our customers in light of these evolving needs, we continue to invest in the training and certification of our workforce as well as in our facilities including Apex's development center in Mexico, Apex's gaming and digital innovation center in Seattle, and ECS' secure operation center in advanced AI systems integration lab in the Virginia area.

Our commitment to investing in areas of growth for our clients is evident in the awards we received. During the fourth quarter, for example, ECS was named an Attivo Networks Platinum Technology Partner in the cybersecurity area or -- and a Top 200 Public Cloud MSP for 2019.

With the strengthening economy and a tighter labor supply, ASGN will continue to find ways to grow and evolve our offerings to meet our commercial and government clients' most critical needs. This will come from a balanced approach of organic growth, combined with strategic tuck-in acquisitions that expand and enhance our IT service solutions.

Thank you all for your time today and for your continued support of ASGN. We look forward to continuing to share our progress on future quarterly calls. We will now open up the call to your questions.

Operator?.

Thank you. At this time, we will be conducting a question-and-answer session [Operator Instructions] Our first set of questions come from the line of Kevin McVeigh of Credit Suisse. Please proceed with your question..

Great. Thanks so much. Hey, it sounds like you folks have kind of given a little bit more context around kind of the transition of the Fortune 500 more federal government procurement things like that.

Any sense of the revenue mix around that longer-term from a contribution perspective? And what that can ultimately mean to the margin profile of business? And then just within the context of that, any sense of the pace of M&A this year given just any thoughts as we kind of remix the business a little bit?.

So Kevin, thanks for being on the call and for the question..

Yes, for sure. Thanks. .

If you think about whether we have a target if you will for our mix of business between commercial and federal government, we really don't. You can see by the numbers that ECS has grown much faster than our other two segments. So naturally that's going to increase there.

But as they now approach $800 million and are basically 25% of the business, you can get a sense of the mix versus the commercial marketplace, but we don't have a specified target if you will.

And then as it relates to the question on acquisitions, to me I mean I think you could see our posture is going to be, what it's been here over the last 12 to 24 months which is opportunistic. I think that we look at capital allocation very carefully. It's one of the most important things that we do.

If there is an acquisition out there that we think really is going to increase our value proposition as it relates to the customer, the contracts that we may obtain with it or the solution set then that's really the marriage that we're looking for. And at that point we're likely to make an opportunistic acquisition.

But we don't have a target for a certain number of acquisitions during the year..

That's helpful.

And then just real quick on kind of the Q4 guidance so if you adjust for that third-party license sale it seems like you may come in a little bit below the low end was that primarily the furloughs coming in there? And then just within the context of that did that pull some of the revenue out of the Q1 guidance as it related to the third-party software license sale?.

No. If you think about -- maybe those are two separate things, Kevin. So definitely the furloughs and the awkward timing of the holidays in the last two weeks of the year where both Christmas and New Year's Day were on a Wednesday, definitely have an impact on these two weeks as we mentioned to the tune of about $5 million to $6 million.

We've seen now the spend from those customers in January come back up to levels that we would expect. So I think that, that's kind of a onetime event, if you will at the end of the year.

On the commercial side of the business specifically with our Apex's Creative Circle and Oxford unit they naturally have a reset coming out of the pre-holiday period and into the first of January. You have budgets that are spent through, they don't restart immediately on January 1.

And so we may typically lose 4% to 5% of volume if you will in those business units as you come from the end of December into the first week of January. So I think those two things are not related, but those are -- that -- the latter that I mentioned is something that happens every year.

As it relates to the ECS software license that is not going to be a problem for us on the pull-through in Q1 because several -- most of those licenses, would have been renewed in the second half of 2020. So it may be a little bit of a headwind then, but not here in the first quarter..

Super, helpful. Thank you..

Our next question comes from the line of Gary Bisbee of Bank of America. Please proceed with your question..

Hey guys, good afternoon. I guess the first question on Apex. And even adjusting for the $5 million to $6 million which sounds like it was basically due to the holiday timing, the growth in the business slowed quite a bit from Q3 and I think total revenue you've guided to slowing a bit more in Q1.

A quarter ago you talked about sort of normal ebb-and-flow of business coming and going and a pause in demand at Apex in some of those end markets.

Is that still how you characterize this? Or are you seeing any impact from just some of the macro uncertainties following growth trade, whatever it is maybe having a more prolonged impact on growth?.

Gary I'll let -- I'm going to let Rand talk to that because a portion of this is industry related if you will, in terms of our Apex business. And a portion of this is just a natural byproduct of the strategy we've got going on..

technology; and telecommunications industry. So the other industries are still holding in double-digit range through fourth quarter. I would say also we're continuing to hire we believe the opportunity is there and our consulting business is doing very well as you can tell from the numbers Ted gave.

So it's a matter of all these moving pieces and see how it shakes out in the quarter..

Okay. Thanks. And then the follow-up on the consulting business. Obviously, that was quite strong as you said.

Is this the right way to think about this that a lot of this is incremental demand because you're offering something new into the customer? Or is it fair to say that a portion of that revenue is just a better fit than sort of a traditional assignment revenue that you have and that some of it is coming out of that? And the reason I ask is if you back that consulting out, the growth in the non-consulting part, I think it slowed even more sharply.

But maybe that's not a fair way to think about it. Thanks..

Rand?.

Well, Ted I'll go ahead and respond, yes. I think the second thing you said is more correct. There is definitely incremental new business coming to us because we're entering into areas where we're providing new solutions, doing different kind of work than we've ever done before.

I think to some extent some of our past staffing work is being reshuffled if you will or redefined into consulting work, whereby we pick up more accountability and responsibility for driving the outcome and the performance for our clients as opposed to just providing the bodies.

So it's a little bit of both but I think definitely we see it as we're moving into a new frontier of new solutions and certainly taking on some accountability while controlling the risk associated with that..

Thank you..

And Gary I was going to add to that. As you see us drive up the value chain, these are natural byproducts of what you're going to see there. So it's a positive thing. The value proposition to the client is higher. Our stickiness with that client will become that much more sticky.

And then ultimately this is a if you will better business in terms of rate, in terms of margin and in terms of Board's prospects for the business. So I think that this is the right strategy if you will and there'll be ebb and flow here as we migrate up the value chain..

Yes. I appreciate that. Thank you..

Our next comes from the line of Edward Caso of Wells Fargo Securities. Please proceed with your question..

Ed?.

Ed, is your phone on mute?.

Yes. Sorry about that. Thank you for taking my questions. This is Justin Donati on for Ed. The first question I had was on your margin outlook for Q1. It looks like not only gross margins are down but also EBITDA margin.

So just wondering if you could walk through some of the drivers and how you're planning to offset some of these mix issues?.

Justin thanks for the question. The one thing that you're going to see here as it relates to gross margin is that ECS becomes a much bigger part of the mix. You're going to see our gross margin profile kind of reacted at from a mix standpoint.

If you look at margins within the business unit, I think we're doing a very good job of maintaining and even increasing gross margin in certain ways. And then naturally and I'll let Ed handle this when you come across the year you lose a certain amount of EBITDA margin in the first quarter.

Ed?.

Yes. If you're talking about a decline sequentially that is mainly due to the payroll tax reset. And historically, that's been in terms of effect on EBITDA margin about 130 to 150 basis points. And as it relates to the effect on gross margin, at least on the assignment business, it's roughly 90 basis points.

If you look at it year-over-year, the margins really haven't moved that much, if you compare it with our midpoint. And Ted is right. I mean movement that you're seeing is going to be mainly the result of sort of mix of business changing. And the other thing is probably a lower mix of permanent placement revenues.

Does that answer your question?.

Yes. I appreciate the color there. And then just one last one.

In your conversations with customers, have you been hearing anything about a slowdown in Healthcare Life Sciences? I know, it's weaker this quarter, but didn't Healthcare leading up to the elections?.

No. I wouldn't characterize it that way. I think what you see from us in Life Sciences is just a refocus if you will of us serving the scientific and clinical market and really drilling down harder on IT, so a little de-emphasis there if you will on our part. And so, I think that's what's underneath that.

I would say in the healthcare market relating to the election that's not too much of what you hear. However, you do naturally see healthcare providers being in the past they were really focused on implementation of EHR systems.

Now that they have these systems, they're really focused on the integration of those systems to their other enterprise systems as well as security and everything else that comes with that. And so that's about most of the color that we hear from our healthcare clients..

All right. Thank you..

Our next question comes from the line of Jeff Silber of BMO Capital Markets. Please proceed with your question..

Thanks, so much. I just wanted to focus on Oxford a little. I know it's a small piece of the business. But excluding the decline in perm that you called out, it looks like the assignment revenues did start to increase year-over-year. I know you're not giving specific annual guidance for next year.

But do you think, you'll be able to grow the Oxford business next year even if perm continues to go down?.

We do. Right? I think that you did see a little bit of growth in the Oxford business. They're doing a really good job on the EBITDA margin side of things and now we've gotten a little bit of growth. We have prospects for it to grow kind of at market rates if you will for the 2020 years. So that would be kind of lower single-digit rates.

And obviously, if we could do a little bit better we will..

Okay. That's helpful. And Ed, is it possible to parse out the impact on 4Q revenues of the DHA acquisition as well as the Intersys acquisition? Just helps us kind of model organic growth in each segment..

Yes. We're not separately disclosing DHA as you know and we did commentary on that earlier in the year. As it relates to Intersys we said last quarter that we expected Intersys to contribute about $7.6 million in revenues at about $1.4 million in adjusted EBITDA and they were pretty much in line with those projections..

Okay. Great.

And then embedded in guidance for the first quarter, can you give us what you're looking for in terms of Blackstone?.

Yes. We also included that in our earnings release. And so we're expecting a contribution of about $8.5 million in revenues and $1.4 million in adjusted EBITDA..

Okay. Thanks so much. I missed that. I appreciate that. Thanks, so much..

Okay. Sure..

Our next question comes from the line of Seth Weber of RBC Capital Markets. Please proceed with your question..

Hey guys, good afternoon. Maybe for George. The book-to-bill in ECS 0.5, just anything you'd call out there? Is there just some timing issues? Do you feel like that your win rate or close rate has changed here? And just any kind of color you could provide around the step down in book-to-bill. Thanks..

George?.

Yes. Sure. Thanks, Seth and I appreciate the question. No nothing to call out that, I'm concerned with in terms of win rates or any of those type of things. It's primarily timing best in the industry. As well as we've got several things that are hanging out on protests and waiting protest awards. So I do expect it to pick up in Q1.

We've already seen several awards that support that forecast..

Okay. And then –.

Hey, Seth, I think too I'll add to that, if we didn't over celebrate 4.5:1 in the third quarter and we don't want to – there's not a problem around 0.5:1 like George said, it's kind of the cyclical nature, if you will seasonal nature, if you will of government contracting. If you look at LTM, it's a really healthy 2.1:1.

So I think we're very pleased there. And like George said, I mean, we've got a lot of great prospects here..

Yeah. No, understood. Thanks. And then just – I just want to make sure, I'm understanding the software license the $34 million of revenue.

Can you just – how does that impact margin in the quarter? Because gross margin came in a little bit light even with the big revenue, so I'm just trying to make sure we're calibrating for the impact on that revenue – on margin? Thanks..

Ed?.

Well, that was lower-margin business..

Okay..

Again, ECS' other revenues. So if you were to normalize or exclude that particular item it – you would see an improvement of about 130 basis points in ECS' Q4 gross margin. And on a consolidated basis our margins would have gone up about – or would have been 66 basis points higher. So it does have – it did have an effect..

Perfect. That's very helpful. Appreciate guys. Thank you..

Our next set of questions comes from the line of Tobey Sommer of SunTrust Robinson Humphrey. Please proceed with your question..

Thank you.

Could you describe the long-term EBITDA margin implications and also on CapEx spending of moving to higher-margin IT services?.

Well, Tobey, I think that this is like – if you go back to our Analyst Day in 2018, where we laid out our five-year strategy in the five-year target, we incorporated the idea that we were going to be moving up the value chain.

Now with ECS, now with Apex system having more consultative capabilities that that would be one of the drivers to help us move to the target we set which was 12% to 12.5% EBITDA margin at the end of the five-year period.

And so while we have a little up and down here in EBITDA margins as we deal with what's going on in the marketplace and the strategic evolution of our business still feel like those are good targets for us over the five-year plan.

And then the CapEx, we've told you many times in the past that we typically set a target and come in right around 1% of revenues. I think we were right at it for the fourth quarter. And I think our stance on that remains the same..

Thanks Ted. I'll get back in the queue. Thank you..

Thanks, Tobey..

Our next questions come from the line of Tim Mulrooney of William Blair. Please proceed with your question..

Good afternoon. Thanks for taking my questions. So it looks like bill rates were up pretty strong in the fourth quarter whereas volumes were down a little bit at Apex and Oxford.

Is this just reflective of an extremely tight labor market? And is this the type of mix that you'd expect for the next several quarters?.

I think Tim like we said, you've got – certainly, the biggest contributor to this was the falloff in the last two weeks from some of our large customers here as they had furloughs, which eventually they worked through and are now back here in January. So that was the number one contributor.

And then second to that, we expect our bill rates will continue to rise as we go after our value higher margin work. And so I think you should expect to see that. I think to – an important distinction I would make is pricing is not necessarily changing in our large account portfolio.

So we're not driving a higher price every day in that work, because those are typically set for a year and then they reset at other times. So the increase in rates that you see within our commercial units is definitely driving higher up the value and doing higher-end more complex work..

All right. Very helpful. And then on ECS this week the White House released their budget proposal.

And I was wondering it's early in the process if you had any thoughts as to how this might impact ECS over the coming year?.

George?.

Yes sure. Actually as I looked at the Washington Post Arc has showed the federal civilian organizations that were being decreased and I was very happy to report to my wife that we had very few customers in that list of customers. I mean we've been very focused on making sure that our customer set is very mission-oriented customer set.

And that's where the budget moneys are going and that's where we're putting our capital investments. And so I'm not too concerned about the way that the budget was proposed. We'll see how it all ends up, but I wasn't very concerned about how it was proposed..

All right. Thank you..

Our final question comes from the line of Mark Marcon of Baird. Please proceed with your question..

Good afternoon. Thanks for taking my question.

With regards to the consulting portion of the business how much of that is in Oxford versus Apex?.

Mark, thanks for the question. We I don't think have separately disclosed that. I mean I will say just by -- just naturally it's a larger chunk in Apex than it is in the Oxford. But I would say that the growth rates and the margin profiles are very similar in both units and the revenue is generally proportional..

Okay.

And from -- I mean this are we saying like 80% 90% of it's in Apex? Just and what's the difference in terms of the go-to-market?.

I would say it's generally proportional and the difference in the go-to-market is I think consistent with what each of one of those businesses focuses on.

If you think about Oxford -- not only as they're serving IT but they're also serving healthcare IT the life sciences and regulatory marketplaces as well as engineering, and so their work in consulting services falls across all of those different offerings where in Apex it's very highly focused IT within Fortune 500 and Fortune 1000 accounts in specific industries the solutions they are more tailored to the profile of those customers..

Got it. And then with regards to the labor market obviously it's quite tight.

What are you seeing just in terms of any sort of elevation with regards to conversions? And then how do we reconcile the tight labor market with the trends in perm?.

So we haven't seen a real change in conversion. I mean I think we spoke to what we saw at the end of the year but didn't necessarily create anything that we saw around conversion.

I will tell you that in the direct hire or permanent placement marketplace because it's so candidate-driven today that it's definitely causing a bottleneck if you will in the ability to grow revenues at a faster rate. And so while our revenues in permanent placement are down year-over-year they did grow sequentially Q1 to Q2 to Q3.

And then in Q4 we saw a we saw the normal slowdown that we saw because candidates are less likely to leave a job at the end of the year when they're waiting out a bonus or something like that at the end of the year. So those are kind of the trends we would say.

But overall I would tell you that definitely because candidate supply is so tight that it is causing a more difficult environment to grow revenues in the permanent placement..

Got it. And then any comments with regards to AB5..

It doesn't really affect our business if you will like it may some others if anything is to help because....

I would think it would be..

Yes it's a help to us. I mean it's the value proposition if you will to our large customers. I mean we're bringing talent in a compliant way. And so that avoids the risk that they have in the gig economy world. So I think in that way. I would say it's a slight help. I would not call it out, as an industry trend in IT.

That's going to make a meaningful difference if you will, in terms of growth rate. But it's certainly not hurting..

Great, and then, in Financial Services, you were up double -digits. That's terrific. How do you think about Fin Services as the year unfolds? And then I have one more..

Rand, do you want to take that one on Financial Services?.

Well, I think we have a broad approach, Mark to it. Meaning, we are not only focused on the big banks, big regional banks fin-tech, and wealth management, insurance. So, we do see some ebb and flow among all of those players. The banks continue to show some pretty good earnings results. So, our anticipation is we'll continue to grow.

We have a big footprint in Financial Services. But if we're not broadening out our portfolio, we're not going to sustain the growth. And we're certainly trying to broaden out the portfolio..

Great and then, Intersys, it sounds like you're seeing some early signs of success there.

Can you just provide a little bit more color in terms of how the cross sales have gone and the introductions into your existing client base?.

Rand?.

Yeah. Mark, I think, we've mentioned before, we have a pretty large pipeline across our Apex and Oxford units and Creative Circle units, with our account base for value services. So, our pipeline is large enough that when we acquired Intersys, while we wanted them to deliver on their legacy accounts if you will, we needed to cross-purpose them.

So, we have -- if I -- we don't report this number. But the amount of pursuits we're doing jointly now is astronomical, considering we've only been at this for 2 months, 2.5 months. We are really leveraging them across our entire client base, to the point we're probably wearing them thin. And so, we have to watch that.

But we're certainly picking and choosing areas. And I think we are focused on trying to get at that larger pipeline, as opposed to just delivering on Intersys' legacy accounts. And this was important obviously.

Okay?.

Absolutely, thanks..

This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation. And have a great night..