This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk06: Welcome to the third quarter 2020 ICF earnings conference call. My name is Vanessa and I will be your operator for today's call. During the presentation, all participants will be in a listen-only mode. Afterwards, you'll be invited to participate in a question and answer session. At that time, if you have a question, please press star 1 on your touch-tone phone to register for a question. Please note this conference is being recorded on Thursday, November 5th, 2020, and cannot be reproduced or rebroadcast without permission from the company. And now I would like to turn the program over to Lynn Morgan of Advisory Partners.
spk05: Thank you, Vanessa. Good afternoon, everyone, and thank you for joining us to review ICF's third quarter 2020 performance. With us today from ICF are John Watson, President and Chief Executive Officer of Bettina Welsh, Chief Financial Officer, and joining them are Sadaka Keshavan, Executive Chairman, and James Morgan, Chief of Business Operations. During this conference call, we will make forward-looking statements to assist you in understanding ICF management's expectations about our future performance. These statements are subject to a number of risks that could cause actual events and results to differ materially. And I refer you to our November 5th, 2020 press release and our FCC filings for discussions of those risks. In addition, our statements during this call are based on our views as of today. We anticipate that future developments will cause our views to change. Please consider the information presented in that light. We may at some point elect to update the forward-looking statements made today, but specifically declaim any obligation to do so. I will now turn the call over to ICF CEO, John Watson, to discuss third quarter 2020 performance. John.
spk01: Thank you, Lynn, and thank you all for joining us this afternoon to review our third quarter performance and discuss our business outlook. There are several key takeaways from our third quarter results that I would like to highlight. First, our diversified business model continues to provide ICF with substantial resilience, enabling us to benefit from broad trends across our government and commercial clients. Second, we continue to see considerable year-on-year growth in service revenue, which represents the work performed by ICF employees. In the third quarter, service revenue increased 3% and is up 4.1% year to date, reflecting increased demand for our services and excellent execution on client programs by our professional staff. Third, the growth catalyst that we have identified across our markets are driving these higher service revenue comparisons and our exceptional business development momentum. ICF had record third quarter contract awards of $792 million for a book to bill of 2.2. Our trailing 12 month book to bill ratio improved to 1.2 at the end of the quarter, which has set the stage for our continued growth in 2021. Fourth, we succeeded in generating record year to date operating cash flow which enabled us to pay down debt and reduce our leverage ratio to a level that we had not expected to achieve until the end of the fourth quarter. This performance is aligned with our historical track record of levering up to make strategic acquisitions and then utilizing our strong cash flow to pay down debt in short order. Year-on-year increase in service revenue we achieved in the third quarter was led by programs for federal government clients, and our energy advisory and implementation work for commercial clients, primarily utilities. The decline in total revenue for the period was primarily attributable to a $21 million reduction in pass-through revenues, on which we generally earn little or no margin. We were pleased to report even higher growth in adjusted EBITDA, thanks to a combination of favorable business mix, higher utilization, and lower SG&A costs. And while SG&A costs will increase once we emerge from this pandemic, a portion of the cost savings that we have achieved in the last two quarters will become permanent. We continue to work toward optimizing our facility costs. This will help us return to expanding our adjusted EBITDA to service revenue margins in 2021 and beyond. Our third quarter revenue performance was led by strong growth in our federal government business, which was up 18% year on year. reflecting both organic growth and the ITG acquisition. ITG is proving to be an excellent fit, and the combination of their broad IT modernization capabilities with our deep domain expertise and client relationships has provided significant growth opportunities to us. In the third quarter, we were awarded approximately $100 million in IT modernization work, including a $35 million plus up on our recompete with the Department of Health and Human Services Children's Bureau that expands the scope of our work to include operating and modernizing its child welfare IT systems. Additionally, we received a new single award blanket purchase agreement with a $49 million ceiling from the U.S. Food and Drug Administration to provide IT platform advisory and development services for its digital services center. And the new $24.4 million contract with HHS's Children's Bureau for engineering and architecture services to develop a new cloud-based national child welfare data management system. At the end of the third quarter, our business development pipeline in IT modernization alone was a robust $1.5 billion. The Department of Health and Human Services is ICF's largest client, and including the IT modernization contracts I just mentioned, represented almost 60% of our 792 million in third quarter contract wins. The large re-compete contracts, new contracts, and BPAs that we rewarded in the third quarter are noted in today's release. Additionally, ICF was chosen for another 12 million in COVID-related work by several government agencies. As we have mentioned on past calls, we see significant growth opportunities for ICF in the public health arena. We are still in the response phase with respect to COVID-19 and are active in information dissemination and surveillance and analytics work to better understand how the virus spreads. The recovery phase, which will come next, is expected to require modernization of disease surveillance systems and associated analytics. And our expanded IT modernization capabilities, together with our public health expertise, will be very relevant to these programs. Revenues from state and local clients were consistent with our expectations. The great majority of the work we do for state and local clients is either federally funded or funded by municipal bonds that support infrastructure projects, which makes our work more resilient to the vagaries of state budgets. Disaster management represents approximately one half of the revenues in this client category and remains on track to contribute approximately 110 million revenues this year. Since the beginning of this year, We have won small but strategic mitigation contracts in four states, Missouri, West Virginia, Florida, and South Carolina, which represent many of the mitigation contracts that have been met to date. And we are awaiting award decisions on larger contracts in other jurisdictions. ICF is very competitive when it comes to HUD-funded mitigation opportunities. The combination of our 30-plus years of climate resilience work, our 30-plus years of HUD technical assistance, and experience with large-scale mitigation projects has given us key qualifications in this emerging market. Also, we've already been very active in the very early stages of the response to the weather events of 2020. We have contracts in the Gulf states that have been expanded recently to incorporate initial response and recovery activities for hurricanes Laura and Delta, for which our innovative drone technology and data management tools have been in high demand. Revenue from international government clients came in as expected and consistent with the prior quarter. Approximately two-thirds of the negative year-on-year comparison reflected the fall-off and pass-through revenues on which we earned minimal profit. Our strategy is to keep costs in check and pivot towards those areas of the business that remain resilient in these challenging times. For example, in the third quarter, we secured a significant contract to support the implementation of the European government energy efficiency program. Our commercial energy business, which mainly serves utility clients, performed well in the third quarter, led by the continued strength of our energy markets advisory business. This was largely due to strong demand for ICS financial and technical advisory services to support considerable transaction activity driven by renewables, storage, and gas asset development. Work on energy efficiency programs for utilities continue to pace, and we are awaiting decisions on multiple submitted proposals in California, with contracts awards expected by early in 2021 and start up in 2021 or 2022. We are also awaiting additional RFPs for which we have been down selected. Our distributed energy resources consulting practice also performed well in the third quarter, as we advised utility clients on how to address the impact of distributed resources on the grid and develop and implement pilot testing programs related to distributed energy technology. Lastly, our commercial marketing services clients are experiencing the pandemic in different ways. Clients in certain verticals are expecting the recovery curve to be longer and deep into 2021, while others are executing on their budgets. We are effectively managing costs in our commercial marketing services business and continue to deploy our resources in growth areas, while ensuring that we are ready to scale programs when business conditions improve. After a record third quarter of contract awards, I am pleased to report that our business development pipeline was over about $6.8 billion at the end of the third quarter, representing a diversified set of opportunities across our client set. This pipeline, together with a very strong backlog of $2.9 billion, support our confidence in ICS future prospects. I also would like to highlight the strong improvement in cash flow that we achieved in the third quarter. Our ability to generate substantial operating cash helps us fund acquisitions to support our growth strategy. Now I'll turn the call over to our CFO, Bettina Wells, for a review of our third quarter results. Bettina?
spk04: Thank you, John. Good afternoon, everyone. I'm pleased to provide additional color on the company's strong financial performance and cash flow in the third quarter of 2020, which led to an increase in our full-year guidance for both earnings and operating cash flow. Total revenue for the third quarter of 2020 was $360.3 million, 3.6% below last year's level, primarily as a result of lower pass-through revenues, which accounted for 26.5% of total revenue this quarter compared to 31.2% in last year's third quarter. Like the prior sequential quarter, we saw an increase in service revenue, which was up 2.9% in the third quarter to 264.7 million. On a year-to-date basis, it was up 4.1% compared to last year. Our gross profit was 137 million, an increase of 0.9% from 135.8 million in the year-ago quarter. Gross profit margin on total revenue expanded by 170 basis points to 38% due to lower pass-through revenues year-to-year, on which we earned lower margins. Indirect and selling expenses of 100 million were flat year-to-year, inclusive of the ITG acquisition. As a percentage of service revenue, indirect and selling expenses declined to 37.8%, from 38.9% in last year's third quarter, which is due to lower SG&A expenses such as travel. EBITDA increased 3.6% to $36.9 million from $35.6 million last year. Adjusted EBITDA, which includes special charges related to severance for staff alignment as well as acquisition-related charges, was up 4.9%. to $37.8 million during the third quarter of this year compared to $36 million last year. Adjusted EBITDA margin on service revenue was 14.3% compared to 14% last year. Operating income was $28.3 million compared to $28.7 million reported in the third quarter of 2019 and includes an increase of $1.6 million in amortization of intangibles primarily related to the ITG acquisition, which was completed on January 31st of this year. Our tax rate was 27.2% compared to 23.6% in the third quarter of 2019, primarily reflecting a benefit last year due to higher deductibility of employee compensation program. Net income for the quarter was 17.9 million, or 94 cents per diluted share. This compares to $19.6 million, or $1.02 per diluted share, in the third quarter of 2019. This year's third quarter results reflected increased interest in amortization expense related to the ITG acquisition and the higher tax rate. Non-GAAP diluted EPS, which excludes the impact of amortization of intangibles and special charges related to severance for staff career alignment, was $1.10 compared to $1.12 reported in the third quarter of 2019. We were very pleased with our cash flow generation in the third quarter, primarily as a result of continued strong collection activity. Year-to-date operating cash flow was 95.2 million compared to 6.4 million for the comparable period a year ago. Consequently, we now expect full-year 2020 operating cash flow of approximately 120 million, 31% ahead of 2019, and ahead of the 110 million we originally anticipated. Day sales outstanding were 83 days, or 71 days excluding the slower paying Puerto Rico contract, compared to 94 days and 77 days respectively in the third quarter of 2019. By year-end, we anticipate DSOs to be in the range of 78 to 83 days. Our net leverage ratio at the end of September was 2.88 compared to 3.52 at the end of June 2020, reflecting our use of cash flow to pay down $79 million of our long-term debt associated with the January acquisition of ITG. We expect our net leverage ratio to be approximately 2.6 at year-end 2020. Year-to-date capital expenditures were 14.6 million compared to 22.3 million a year ago. As we continue to manage our costs due to the ongoing COVID-19 health crisis, we now anticipate our full-year capital expenditures to range from 21 to 23 million, down 2 million from our previous guidance. As for our capital allocation strategy, our priorities remain the same. Grow our business organically, fund acquisitions, and pay down debt. And we will continue to pay our dividend and will repurchase shares under our current authorization to minimize dilution from our employee incentive program. Today, we declared a quarterly cash dividend of 14 cents per share payable on January 12th of 2021 to shareholders of record on December 11th of 2020. For modeling purposes, our expectations for full year 2020 are as follows. Depreciation in amortization expense in the range of $20.5 million to $21.5 million. Amortization of intangibles of $13.3 million. Interest expense between $14 million to $14.5 million, $1 million below our previous guidance given debt reduction. Tax rate of no more than 27%. And fully diluted weighted average shares of approximately $19.1 million. With that, I will turn the call back to John for his closing remarks.
spk01: Thanks, Bettina. Thanks to better-than-anticipated year-to-date performance, we are raising our guidance for full-year 2020 EPS and cash flow. Specifically, we now expect GAAP-diluted EPS to range from 315 to 330 exclusive special charges, up from the previous guidance midpoint of $3, and non-GAAP-diluted EPS of 390 to 405 up from the previous guidance midpoint of 365. Revenues are now expected to range from 1.46 billion to 1.5 billion. Additionally, we are now guiding to operating cash flow of approximately 120 million for 2020, up from our previous guidance of 110 million and representing a 31 percent increase from 2019 levels. Looking ahead, we are confident in ICF's growth prospects heading into 2021. We have managed well through the COVID-19 health crisis, driving considerable service revenue growth, winning substantial contract awards, and building a robust business development pipeline. These metrics, which reflect the underlying growth catalyst in our market, position ICF for mid-single-digit organic growth and service revenue in the coming years. In the third quarter, our personal turnover rate was 11.2%, remaining below the industry average. I would like to take a moment to commend ICF employees who have pivoted so well to address the needs of our clients while working remotely. They have been and will continue to be a key driver of our success. Finally, ICF has prioritized being a good corporate citizen. In addition to the mission-related work we do for our clients, we have been focused on managing to the highest standards with respect to environmental and social issues, including being the first professional services firm to go carbon neutral, and embracing social justice, diversity, and equal pay. We are proud of these accomplishments, which have had a positive impact on society. Operator, I'd now like to open the call to questions.
spk06: And thank you. We will now begin our question and answer session. If you have a question, please press star then one on your touchtone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you're using a speakerphone, please pick up the handset first before pressing the numbers. Once again, with your question, please press star then 1 on your touchtone phone. And we have our first question from Toby Sommer with Tris Securities. Please go ahead.
spk09: Thanks. Wondering if you could maybe characterize the contract awards as sort of the proportion that was new. If you mentioned that, I didn't catch it. I apologize. Just trying to see it. It is a big number, but we want to see how it may flow through into organic growth sort of next year and the year after. Thanks.
spk01: Sure, Toby. I think in round numbers, about 45% was re-competes and 55% was new contract awards. in terms of the awards in the third quarter.
spk09: Okay. And it looks like you had some fairly sizable recent awards for IT modernization. Were those a function of ITG being resident within the firm, or would you say that those bids and ultimate contract awards are... still maybe a function of independent ITG prior to ICF's ownership?
spk01: You know, I think as we talked about last quarter, Toby, you know, we have fully integrated ITG into with the legacy IT modernization skills. And so I think certainly a portion of it was, you know, synergies associated with IT's capabilities and our client relationships and and domain expertise. And a portion of it was opportunities that ITG had in its pipeline prior to joining ICF and really based on their capabilities. So I would say it's a mix, although I would say that we're having more and more success and seeing more and more synergies associated with our efforts on IT modernization from leveraging both ITG's capabilities and our client relationships and our domain expertise. So there were several examples in the The remarks I made, you know, we had the Child Welfare Information Gateway, which has been a long-term contract for us, where we, you know, plus that contract up as part of a re-competing added significant revenues from on IT modernization. That's an example where, you know, we would not have plus that contract up without ITG and their capabilities.
spk09: Perfect. And then, it still may be early, but with respect to the fiscal and federal response to the pandemic over the more medium and long term, do you have any more refined way to think about the size of what that could look like early in the pandemic? There were some funds, but, you know, over the longer term, those may look more like down payments than the net effort on the part of Congress to really address the issue.
spk01: Yeah, I think it's hard for me to, I think, put a dollar bound on that, Toby. As you note, there was significant funding for the public health agency in the stimulus bill, you know, as I recall, you know, $500 billion for CDC and close to, I think, $900 billion for NIH. You know, and so certainly a part of that has gone to the immediate response. Some of that will be for the longer recovery. I think those funds are still there and can potentially drive future contract awards. I talked about some of those opportunities in my remarks, potential types of opportunities. Frankly, I think these public health agencies are still in the immediate response phase and totally focused on that. And so how those larger, longer-term opportunities play out, I think it's still to be seen, and it's hard to put a dollar value on them. You can rest assured while watching it carefully, and in those discussions with our clients constantly, but they're still focused on the immediate COVID response for obvious reasons.
spk09: Okay. I will get back to you. Thank you.
spk06: And thank you. We have our next question from Sam England with Birnberg.
spk07: Hi, guys. Thanks for taking the questions. The first one was just could you talk a bit about what you're seeing in terms of RFP volumes at the moment on the government side of the business, and have you seen any slowdowns? particularly on the state and local side in terms of the number of RFPs you're seeing?
spk01: You know, I would say on the RFP front, we really haven't seen any slowdown on the federal or state and local side. I mean, I think, you know, we're seeing, you know, a typical flow of opportunities. You know, our pipeline remains quite robust. We're writing a lot of proposals. You know, we were quite pleased to see the awards here in the third quarter. which was important for us to get our book-to-bill ratio back to 1.2 for the trailing 12 months. And so the award and proposed activity in the federal arena, I think, continues apace. In state and local, we continue to be busy on opportunities on the disaster recovery front. We continue to see new opportunities and are waiting on several awards there. As I said, our pipeline is quite robust, six and a half, $6.5 billion. And so across both those markets, I think the proposal activity and business development opportunities continue at pace.
spk07: Great, thanks. And then the second one, you talked about some permanent cost savings that you've made. Can you just give a bit more detail around that? And is there anything else you can do on the marketing services side of the business around cost?
spk01: No, I think as we've discussed in prior calls, I think obviously Given the COVID crisis, our spend on indirect travel and indirect consultants is down significantly. Obviously, as the pandemic lifts, our consultants will have to begin to travel again. We won't be at this level of reduced travel expenditure, but we do think that we can save, that we can lock in a portion of those savings for the long run and structurally you know, improve our margins and improve our ability to invest further in business, both on the travel and, you know, indirect consultant front. And then we're obviously looking hard at our facilities and the potential savings there. Obviously, we've moved to working 100% remote. You know, I think, again, we'll, with time, want folks to return to the office, but I think we'll be able to also reduce our office footprint and lock in long-term savings there. I'm going to look at James Morgan here, our chief of business operations. I don't know if there's anything else you would add on that front, James.
spk00: I think you've covered the key points. I mean, at the end of the day, I think we've learned quite well how to work in this virtual environment, and I think that we will continue to do that to some degree as we move forward, and that will drive savings in the areas that you talked about from a travel perspective as well as from a facility perspective. So those are the two key areas.
spk07: Okay, great. Thanks. And then maybe just one more. I just wondered what you're seeing on the commercial side of the business in terms of actual project cancellations versus just lower levels of revenues on existing sort of contracts that you're working on.
spk01: Yeah. So, I mean, again, on the commercial energy side, I mean, our business continues as a pace. We haven't seen any cancellations. You know, we're growing there. And so, you know, that business really does continue at pace. You know, on the commercial marketing services, I would say that, You know, the market remains consistent with how we've described it in the past. We've seen no further deterioration or no additional challenges in that business, you know, from where we've been in the last quarter. You know, we obviously saw reductions at the end of Q1 into Q2. You know, I think we've addressed that by properly sizing the business, and we're managing it to the backlog we have. And so I think it's... I think we've got our arms around that. And, you know, to be honest, you know, the utilization and the profit of that business is generally where we'd like it. So I think we have done a good job of managing through this. And as I said, we aren't seeing any further deterioration. I think really the issue now going forward, given where we are, is just when will those businesses improve and when will they, you know, we see them ramp back up. And, you know, I think that depends on the vertical. But in terms of how we're managing the business, I think we're where we need to be.
spk07: Great. Thanks very much, guys. I'll look at that.
spk06: And thank you. We have our next question from Joseph Vossi with Canaccord.
spk02: Hey, guys. Good afternoon. Just a couple quick ones on the bookings number being pretty strong here this quarter. You know, is there – I think I've asked this in the past, John, but I think it's, you know, something that I think is important on deal sizes and deal pipeline and IT mix. I may be a little bit late to the call today. I apologize if some of that was covered. But, you know, as ICF gets bigger, you know, I'd love to see bigger size deals and, you know, pursuits of larger deals. So an update there would be appreciated and then a quick follow-up after that.
spk01: Sure, Joe. So, you know, I think obviously on the IT modernization front, as you could see in our third quarter, you know, sales results described in our press release, I mean, we've, you know, we're winning sizable contracts that are $50 to $100 million contracts, which as we've discussed in the past, one of the great attractions of the IT modernization area is that, you know, these are larger, longer-term contracts that, you know, really have the potential to move the needle for us. And so, you know, I think The sales in the third quarter and some of those larger contracts described certainly show that there are larger opportunities and we can win these larger contracts. And that's certainly, you know, IT modernization and the opportunities we see there are certainly driving our pipeline and driving our sales. In addition to the significant opportunities we're seeing across HHS, as I said in my remarks over, you know, the majority of our contract wins in the quarter were in HHS. And so, you know, So, yes, Joe, we are seeing those larger opportunities, and we are winning them, and it is driving up our pipeline. And some of these contracts are also a longer period. I mean, they can be five to seven, eight years, and so that obviously drives up the sales of the contract period. It becomes longer.
spk02: Sure. And then, you know, sometimes – you know, on, on change of administration, you know, I mean, I, I think, you know, ICF has always kind of been seen more as kind of a, you know, a social, you know, you know, more favorable under Democrats. Although I don't think the financial results really ever play out like that, but you know, when you do have a change of administration, there's, you know, there's some, you know, transitions relative to initiatives and things, no matter what's going on. Do you, is there, you know, if, um, If there is a change in the White House, are there any things that we maybe want to look at or flag at this point as positives or negatives in terms of policy shifts that could maybe beneficial long term, but short term could kind of put the brakes on work?
spk01: Yeah, I guess first of all, welcome back to your original part. I mean, as you said, I think at times we've been, you know, given the nature of our social work, that it would be stronger under, you know, one party than another. And I guess I would just emphasize, I think, the point you were making, which is that really has not been the case. You know, I think, as you know, Saka and I have been here at ICF for quite some time, 30 plus years. I think we've been through seven or eight changes in administrations in that time. So I guess I would just, you know, emphasize a few high-level points. First, the you know, changes in administrations tend to have less impact on our business than, you know, one might think. I just would remind folks the U.S. government, you know, is like a huge aircraft carrier. It doesn't change direction quickly. You know, and we've generally been able to grow our business and find opportunities in both Republican and Democratic administrations. You know, obviously the policy focus changes, you know, whether that's in energy or public health from one administration to another, but You know, we have diverse capabilities, so we can shift and support changing policies in our areas of expertise. And so I really think we've shown ourselves to be resilient and just fine, you know, in both Democratic and Republican administrations. I'd also say it's our experience that, you know, budgets tend to hold up and don't change radically when there's divided government. And, you know, I think with this election, it's pretty clear we're going to continue to have divided government I just would also note that the growth catalysts we have, I think, right now have generally proved to be bipartisan. IT modernization has been a significant priority in the Obama administration. It's remained that way in the Trump administration. Public health and health and human services has generally been a bipartisan agency. I think that's generally held up well. Obviously, our commercial energy business is driven by by factors outside of the federal budget, you know, disaster recovery. I mean, I think we could all agree that storms are becoming more severe and more frequent. And, you know, again, I'd say it's been bipartisan that, you know, when significant damage occurs in communities, that the federal government will help people. And so I do see our growth catalyst as pretty bipartisan here. I mean, to your point, you know, what could be stronger? What could be You know, weaker administration, I mean, you know, obviously, you know, some of the environment, climate type opportunities would be, you know, more robust in a democratic administration. And so, you know, that's an example of, you know, an area that, you know, I think could be an upside for us if we end up with a democratic president. You know, and so, but generally, I see the growth drivers as, you know, you know, pretty robust and I think we'll be in good shape regardless of which Democrat or Republican.
spk02: Great. Thanks for that caller, John. Much appreciated.
spk06: And thank you. We have our next question from Andrew Nicholas with William Blair.
spk08: Hi, good afternoon. Thanks for taking my questions. If we see a return to more stringent business restrictions in the winter, alongside higher COVID case counts, how would you expect the business to react differently a second time through compared to how it performed and reacted in March and April? Just trying to get a sense or think through the puts and takes to a second wave, both in terms of your ability to convert on the pipeline and also generate new business.
spk01: Yeah, I mean, I would generally, you know, come back to – You know, 90% of our business has seen, you know, seen no impact and has continued to pace, you know, with COVID. And, you know, and so I wouldn't expect, you know, to see material impacts with additional lockdowns. I mean, I think we continue to pace. We worked, you know, we worked through the prior lockdowns. You know, in the areas that have been impacted, I mean, I think we've, I think it's difficult to predict. I mean, I think it really, you know, it's difficult to predict, you know, how that would play out. I think we have managed what we've seen to date well. The business is aligned with the backlog we have. We're not expecting new awards and new opportunities. But it's very difficult for me to predict, you know, what the future will be, depending on the nature and extent of the lockdowns.
spk08: Got it. That's fair. And then just a housekeeping item for me. Given the decline in pass-through revenue you've experienced of late, I was wondering if you could speak to how the amount of pass-through revenue typically varies across the segments. I'm just trying to get a better sense of growth rates at the net service level, net service revenue level, given the gross revenue growth metrics are being negatively impacted by pass-through. Thanks.
spk01: You know, I think in general, our pass-through ratio across the entire company has been in the 25% to 30% range on average. I would say that, you know, given that there are certain components of the business where there's a higher pass-through ratio, you know, disaster recovery can be, you know, as much as 40%, 45% pass-throughs. We haven't experienced any material, you know, impacts from COVID in the disaster recovery business. I think the other part of the business that – you know, has a higher pass-through ratio is our, you know, our marketing and communications business in Europe, which does a lot of face-to-face events. And, you know, so the, you know, the pass-through ratio there can be, again, 40, 45 percent. And that is an area where, given the impacts of COVID, you know, we've seen a disproportionate, as our revenues have come down, you know, two-thirds of those revenues have been due to pass-throughs. And so, I think that is an area where there's a much higher pass-through ratio. Bettina, do you want to add anything on that?
spk04: Sure, John. I think the other part of the business that might have been impacted was certainly on our loyalty program arena where the programs that we support with regard to hospitality and the travel industry has had some of the pass-through activity as well. But other than that, I think it's largely been represented by the Europe and Asia events type of business.
spk08: Got it. Thank you.
spk06: And thank you. As a reminder, if you have a question, you can enter the queue by pressing star, then 1. And we have our next question from Mark Riddick with Sidoti.
spk03: Hi. Good evening. Hey, Mark. So I wanted to touch a little bit on a couple of questions, one on the energy efficiency side. I was wondering if you could sort of give an update as to maybe what you're seeing as to market opportunities there, particularly sort of where things stand with California, then I have a follow-up on the IT side of the house.
spk01: Sure. So I think, you know, as I said in my remarks, I think California, we remain busy on proposals. I think we've discussed in the past there's a two-step process in California. First, round one, you bid your ideas and they do a cut down. And if they like your ideas, then you submit a round two proposal, which is a down select to a formal proposal. And so we've been active in both those phases. We are awaiting awards on several proposals that we've submitted through round two, and we expect awards as we go into next year. And so we've been active on that front. I think we're also expecting to continue to, as we go into next year, continue to see additional opportunities released that we'll be at the front end of that two-step process. So California is very busy. We're very busy writing proposals. Again, we expect to see awards beginning in 2021, and I think we'll be busy on proposals throughout the year. As we've talked about, California has historically outsourced 20% of their energy efficiency spend. Their goal is to get to 60% by 2022, and so I think over the next So in 2021 and 2022, we'll certainly be busy on proposals and expect to see awards in that period.
spk03: Okay, great. And then shifting gears over to IGG, so we're closing in on close to a year now, and it was great that you feel very comfortable as far as the integration there. and clearly new business ones have been announced there, so certainly things look pretty good. I was wondering if you could give a bit of an update as to how you feel about that overall marketplace now relative to when you made the acquisition initially at the beginning of the year, maybe what that specific pipeline, does it look about the same as you expected, better or worse? And then maybe with a long-term growth look, is it about similar to what you initially thought or how your views maybe evolved since you've had ITG in-house? Thank you.
spk01: Yeah, you know, I think that, I mean, I don't think we could be happier with how the ITG acquisition has played out. You know, I think we saw this as an important market for our civilian clients with, you know, there was a significant focus for the federal government with very large opportunities. Our thesis going in was that if we could marry first-rate IT modernization skills from ITG and their past performance with our civilian client relationships and the domain expertise, that we could uniquely position ourselves and help accelerate their pipeline and accelerate growth and achieve significant synergistic And I think our feeling is that, you know, we're executing quite well on that. You know, we've, as we've reported over the, you know, since that acquisition closed at the end of January, we've won north of $200 million of IT modernization contracts. We have a robust pipeline, 1.5 billion. I think we're highly confident we can grow this business, you know, north of 15%. In the long run, and given its priority and how early the federal government is in, you know, In modernizing these systems, this is going to be a growth fiber for the next many years. And so, you know, Frank, I don't think it could have gone better, and I don't think we could be any happier about where we are with ITG and what the opportunities are there.
spk03: It's great to hear. Thank you very much for the call.
spk06: And thank you. We have no further questions. I will now turn the call over to management for closing remarks.
spk01: Well, thank you for participating with us today. We look forward to seeing you virtually at upcoming conferences and meetings. Thanks for attending and stay safe.
spk06: And thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.
Disclaimer