ASGN Incorporated

Ladies and gentlemen, we do appreciate your patience and welcome to the ASGN second quarter 2019 earnings release conference call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question and answer session. If you should require assistance on today's call, please press star, then zero. As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Kimberly Estakin.

Please go ahead.

Thank you, Operator. Good afternoon and thank you for joining us today for ASGN's second quarter 2019 conference call. With me are Ted Hansen, President and Chief Executive Officer, Rand Blazer, President of APEC 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 certain risks and uncertainties, and as such, our actual results could differ materially from those in the statement. 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. Ted?

Thank you, Kimberly, and thank you all for joining us today. I'm very pleased to report that we delivered solid financial and operational performance for the second quarter. Over the past three months, ASGN generated revenue growth well ahead of market rates, in addition to producing industry-leading profitability and strong free cash flow. Our go-to-market strategy enables us to provide our clients higher-value services via our differentiated delivery model, making us a more agile, effective competitor in the IT services industry. Since our strategic acquisition of ECS, we vastly expanded our cybersecurity, cloud computing, AI machine learning, IT modernization, and advanced science and engineering services. Our government and commercial IT consulting solution services continue to grow at an even faster pace than our traditional staff augmentation work. I would now like to provide a brief overview of ASGN's results for the second quarter of including each of our segments, Apex, ECS, and Oxford. Rand and George will discuss Apex and ECS, respectively, in more detail later during today's call. ASGN delivered strong top-line performance for the second quarter, with revenues totaling $972.3 million, up 10.7% year-over-year, and at the midpoint of our guidance. This growth was driven primarily by strong performance from our Apex and ECS segments, each of which saw double-digit revenue increases year-over-year. Excluding certain one-time adjustments, which Ed will discuss shortly, all of our results for the quarter fell within our guidance ranges. Apex, our largest segment, generated revenues of $628.5 million, up 10.8% year-over-year. This above-industry growth was driven by strong performance in our commercial top account portfolio and a continued high rate of growth in our consultative work. ECS outperformed expectations with revenues of $190.6 million up 22.8% year-over-year and sequential growth in its contract backlog of 9.5%. Excluding the $15.6 million contribution from DHA in the quarter, revenue growth of ECS was 12.7% year-over-year, an acceleration compared with the preceding quarter. ECS continues to successfully bid for contracts to provide unique high-end IT services and solutions to the federal government. During the second quarter, ECS secured $360 million in contract rewards, which translates into a very strong book-to-bill of 1.9 times. Initial indications show bookings trending positively into the third quarter. Today and going forward, we will speak about new wins and services we are now able to offer our clients in our commercial and government IT solutions consulting businesses. The Oxford segment reported revenues totaling $153.2 million, a slight decline of 1.7% over the prior year period. The decrease in revenues was largely the result of a decline in our permanent placement work, the majority of which resides in our cyber coders business. Higher than expected turnover at CyberCoders led to internal execution challenges, which impacted our productivity and drove the decline in the Oxford segment revenues for the second quarter. We are addressing these challenges head-on, and we will continue to keep you updated on our efforts. Our consolidated gross margin for the quarter, although ahead of much of the industry, compressed about 70 basis points year-over-year. This compression primarily related to the lower mix of permanent placement revenues, which was down 7 tenths of a percentage point. As you know, permanent placement revenues gross margins are close to 100%. Our adjusted EBITDA totaled $114.2 million for the second quarter, also within our guidance. This resulted in a corresponding margin of 11.7%. After adjusting for the cash portion of the CEO transition expenses, which was $1.8 million, adjusted EBITDA totaled $116 million, with a corresponding margin of 11.9%. Adjusted net income for the quarter was $63.1 million, or $1.18 per diluted share, which approximated the midpoint of our guidance range for Q2, excluding the one-time effect of the CEO transition expenses. For the second quarter, free cash flow totaled $88.1 million. After paying down $83 million in debt during Q2, our leverage ratio was 2.40 times our trailing 12-month adjusted EBITDA at quarter end. Going forward, we estimate our leverage ratio will be approximately 2.23 times at the end of the third quarter and roughly 2.0 times at the end of 2019, barring any share repurchases or acquisitions. We have consistently stated that once we reduced our leverage ratio to 2.5 times or below, we would evaluate additional ways to return value to our shareholders. With that said, at the end of the second quarter, our board of directors approved a $250 million stock or purchase plan as part of a balanced capital allocation strategy that not only includes debt repayment, but also includes investments in our organic growth and in strategic acquisitions. Now that we have reached and exceeded our target leverage ratio, we have the right plan in place to buy back our shares. These repurchases do not preclude us from making strategic acquisitions. ASGN is an acquirer of choice, and M&A remains a core component of our long-term growth plan. We have an active pipeline of prospective acquisition targets in place that we are currently evaluating to support our ongoing business operations. We are focused on adding high-value IT consulting services and solutions, as well as expanding our capabilities and footprint in the federal government space. Overall, it was a very strong quarter by all measures, and I'm confident that we are headed down the right path to continue to achieve above-industry growth as we position ASTN for today, tomorrow, and the future. I'll now turn the call over to Rand Blazer to speak in further detail about APEX's second quarter performance. Rand?

Great. Thank you, Ted. The APEX segment, which consists of APEX systems and Creative Circle business units, again reported solid results for the quarter. As Ted reported, revenues totaled $628.5 million, up 10.8% over Q2 2018, with margins in line year-over-year, reflecting a steady pricing environment. Let me now provide a bit of color on our quarterly results. For the quarter, the APEC segment's performance was driven by a number of factors, including APEC systems again led the way with double-digit revenue growth in four of the eight industry verticals we serviced, including aerospace defense, financial services, consumer and industrial, and technology industry accounts. Healthcare posted high single-digit growth. The remaining three industry verticals, including life sciences, telecommunications, and business services posted very slight negative year-over-year revenue growth. Apex Systems' top accounts achieved double-digit revenue growth that continues to outpace our overall top-line growth. Retailer branch-centric accounts grew more slowly. Although Creative Circle's revenue growth remained lower than our expectations, we saw growth in our top accounts this past quarter as we leveraged our account relationships with these accounts across the segment. Growth in consulting work across our APEX and Oxford segments also continues to outpace our expectations and overall revenue growth rate. Led by APEX, our growth rate in consulting is more than 2.5 times the growth rate of our other services, and it is approaching low teens as a percentage of our business. I want to highlight one of our engagements with a Fortune 500 transportation company to give you a sense of the consulting opportunities we are seeing with our client accounts. For this client, we are responsible for supporting large-scale software development projects using the Agile method for operation support, fuel management, scheduling, and traveler eligibility systems. We are finding that we can enhance our value for our clients' accounts by stepping into this type of work, providing both domain and IT expertise and methodology, and by taking responsibility for our work. We remain excited about these opportunities, capitalizing on our consulting solution offerings, and we look forward to continuing to service our clients in these areas. In summary, I am pleased with APEC segment's performance in revenue and margins. Given our strong performance in Q2 2018, our Q2 2019 results are particularly impressive. I'll now turn the call over to George Wilson to speak about the ECS segment. George?

Thank you, Rand. ECS achieved strong performance in the second quarter of 2019 as we continue to execute our strategy to provide advanced technical solutions coupled with deep subject matter expertise and address our customers' most pressing needs via large and durable prime contracts. ECS's growth continues to be significantly ahead of industry averages for peer companies operating in the federal technology space. As Ted noted, ECS revenues grew by 22.8 percent on a reported basis and 12.7 percent after adjusting for the $15.6 million contribution from DHA acquired in the first quarter of this year. DHA's post-acquisition performance is exceeding our expectations, and the integration of DHA is progressing ahead of schedule, and as is the expansion of its EBITDA margin. We have seen top-line revenue synergies with recent contract awards, have found opportunities to cross-sell our cloud and cyber capabilities, and with DHA's preferred mix of 100% fixed price and timing materials, we see opportunities for additional EBITDA margin expansion. In the second quarter, we received a total of $360 million in contract awards, of which approximately 85% were attributable to new contract awards and revenue growth under existing contracts. This resulted in a book-to-bill ratio of 1.9 for the quarter, another period of very strong performance on the business development front. Some recent awards contributing to our growth include a Competitive Cybersecurity Award to design and deploy the Next Generation Continuous Diagnostics and Monitoring Dashboard, or CDM 2.0, for federal civilian agencies, and an award to deliver the Next Generation U.S. Marine Corps Aviation Training Management Information System. This award positions ECS as the leader in both ground and aviation training information systems for the Marine Corps. We have also seen an expanded demand for delivery of our innovative AI and cloud solutions and services to defense, federal, state, and commercial customers, as well as continued strong demand for use of the ECS design-built and deployed secure but unclassified network and operational enclaves delivering key technical solutions and services to an expanding list of customers. ECS cyber capabilities and technology partnerships continue to expand along with our list of customer commercial clients as ECS approaches one million endpoints under protection through our advanced cyber threat defense platform, which includes AI-based zero-day threat detection, automated cyber hygiene, continuous risk assessment, and threat sharing across multiple platforms. Our recent successes illustrate how our cyber solutions are addressing the rising volume and velocity of cyber threats. As always, we continue to invest heavily in our technology partnerships, solution architects, and internal capabilities through continuous training and certification of our workforce. We're also tracking several acquisition opportunities to strengthen our technical capabilities and deepen our customer relationships. Looking forward, the number and the size of new business opportunities continue to grow. Proposal activity has remained at record levels the past two quarters and shows no sign of retreating. At the current time, we have backlog of proposals submitted and awaiting award nearing $2 billion, another all-time high. At the end of the second quarter, ECS had $1.9 billion in total contract backlog, which equates to a healthy coverage ratio of 2.7 times our trailing 12-month revenue. I will now turn the call over to Ed Pierce to discuss ASGN's consolidated financial results for the quarter. Ed?

Thanks, George. Revenues, earnings, and adjusted EBITDA for the quarter were generally at the midpoint of our guidance. after adjusting for two one-time charges, which I will discuss momentarily. Revenues for the quarter were up 10.7% year-over-year on the same number of billable days as the second quarter last year, and the effects of changes in foreign currency exchange were not significant. Revenues included a $15.6 million contribution from DHA, which was acquired in the first quarter of this year, and excluding that contribution, revenues were up 8.9%. Gross margin for the quarter was 29.3%, which was at the low end of our guidance and down approximately 70 basis points year over year. The compression was a result of, one, a lower mix of permanent placement revenues, which was 3.8% for the quarter, down from 4.5% in the second quarter of last year, and two, the inclusion of DHA, which carries a lower gross margin than ECS as a whole. Excluding DHA, the gross margin for ECS was up year over year, while our consolidated assignment gross margin was the same as the second quarter of last year. SG&A expenses were $198.8 million for the quarter and included two one-time charges totaling $8.6 million, which were comprised of, one, CEO transition expenses of $5.3 million, which included $3.5 million in stock-based compensation, and two, the write-off of certain foreign trademarks totaling $3.3 million. Excluding these charges, SG&A expenses were $190.2 million, which was at the low end of our guidance. The sum for the quarter was $43.1 million, which included the after-tax effects of The two one-time charges totaling $6.7 million. Excluding these one-time charges, net income was $49.8 million, which approximates the midpoint of our guidance. Adjusted net income was $58.9 million, and excluding the after-tax effects of the one-time CEO transition expenses was $63.1 million and at the midpoint of our guidance. Adjusted EBITDA was $114.2 million or 11.7% of revenues. Excluding the cash portion of the CEO transition expenses of $1.8 million, adjusted EBITDA was $116 million or 11.9% of revenues. Cash flows from operating activities were $96.5 million and pre-cash flow was $88.1 million or 9.1% of revenues. Free cash flows for the quarter reflected the sequential quarterly reduction of 2.8 days in DSOs. During the quarter, we paid down $83 million of our debt, and since the acquisition of ECS, we have paid down debt approximately $350 million and reduced our leverage ratio from 3.75 times to 2.4 times. Now I'd like to make a few comments on our Q3 guidance. We estimate revenues of $993 million to $1.3 billion, which implies year-over-year growth of 9.5% to 10.7% on a reported basis. Estimated billable days are 63, which is one half-day more than the third quarter of last year. We also assume that changes in foreign currency exchange rates during the quarter will not be significant and that there will be a slight increase sequential decline in the mix of permanent placement revenues. We estimate the gross margin will range from 29 to 29.3 percent. This range assumes the gross margin on assignment revenues will be flat sequentially and that the gross margin at ECS will be sequentially lower as a result of a higher mix of revenues from cost plus contracts and the effects on revenues from time and material contracts of the one additional holiday in Q3. We estimate net income will range from 52.5 to 56.1 million, and that our adjusted EBITDA will range from 115 to 120 million, or 11.6 to 12% of revenues. I will now turn the call back over to Ted for some closing remarks. Ted?

Thanks, Ed. As we look to the second half of 2019 and into 2020, We are on the right path to continue to deliver valuable services to our clients and strong results to our shareholders. Our scale, breadth of services, and differentiated delivery model has us positioned well to serve our clients across the government services and commercial markets while continuing to take market share. We have long trusted customer relationships with over 300 of the Fortune 500 companies as well as major defense and federal government agencies. These relationships in our growing government solutions business and commercial IT consulting and managed services business enable us to maintain a sustainable business model and margins that can withstand economic cycles. I'd like to thank you for your time today and for your support of ASGN. In closing, I would also like to thank our employees, our stockholders, and our board of directors for placing their trust in me to lead ASGN. We look forward to continuing to share our progress on future quarterly calls. We will now open the call to your questions. Operator?

Certainly. Ladies and gentlemen, if you wish to ask a question, please press star, then 1 on your phone. You'll hear an acknowledgment tone. If you're using a speakerphone, please pick up the handset before pressing the numbers. Once again, if you wish to ask a question, please press star, then 1 at this time. And our first question will come from the line of Jeff Silver with BMO Capital Markets. Please go ahead.

Thanks so much. Just had a couple quick questions on guidance. If I look at the adjusted EBITDA margin guidance, it looks like you're projecting it to be down, if my math is correct, about 40 to 80 basis points year over year, and flat to slightly down sequentially. Can you just give us some color why that is?

Yeah, thanks for the question. Ed, you want to talk about our guidance for the third quarter?

Yeah, Jeff, year over year, And you may remember this from last year. Q2 or Q3 of last year was our highest adjusted EBITDA margin of all the quarters. And we had a favorable variance that quarter of about 60 basis points in our expense margin. And that's really the big driver for the difference between last year and this year. And as it relates to sequentially, it's mix-related. I mean, we gave commentary as it relates to our SG&A expense margins, and that's only up slightly, and our gross margin is going to be, you know, maybe about as much as 30 basis points down sequentially, and again, it's mixed. ECS will be a bigger part of the business as a result of their high growth, and the other thing is that we're expecting A slight decline in ECS margins sequentially for the reasons I mentioned on the call.

In addition to that, Jeff, you've got perm placement revenues, which although sequentially we expect will grow, that they may be a lower part of the mix that certainly affects the gross margin. Otherwise, we expect our assignment margin work to be consistent from second quarter to third quarter.

Okay, great. That's helpful. And on the perm side, you mentioned in your prepared remarks about higher than expected turnover in cyber coders. Can you just talk a little about what's happening there and how you plan to address that?

Thanks. Well, it's an active market, so I think that they have experienced more turnover than they have in the past. In addition, predominantly most of their business is done in the technology vertical area, That's a pretty difficult space right now because it's so candidate-driven. So we're making a couple modifications or reacting to that, if you will. You can see that we've reallocated some of our team out of California, and we're actually going to be opening up in both Florida and Texas, which we're excited about, and those will be good markets, as well as a few other things internally that we think will help promote more tenure, and therefore help us to continue to grow the firm revenues in that business.

Okay, great. I'll get back to you. Thanks so much. We'll go to the line of Gary Bisbee with Bank of America.

Please go ahead.

Hey, guys. Good afternoon. I guess the first question, you know, Ted, now that you've got a quarter under your belt in the new role, any changes you're looking to make, whether it's to the team or focus areas or anything else that's worth calling out?

Gary, I don't think anything worth calling out. I mean, we talked about this at the end of the second quarter, and I think we've been pretty steady around it here in the third, is that we have the right strategy in place. We're certainly making really good headway in terms of IT services and the business units that serve that marketplace, and we'll stay focused on that. The transition has gone very smoothly. There hasn't been any interruption, if you will, in terms of how our divisions have performed or distractions of any kind. So I don't think you'll see any hard right turns. We're going to stay after it, both in the commercial and the government marketplace, and keep increasing our penetration of the IT services market.

Okay, thanks. And then just, you know, given the increasingly tight labor markets, you know, pockets of skill shortages and all that, I realize that's all beneficial to demand for the business. But can you talk about on the supply of candidates and finding people and the ability to close, you know, close business? I guess how is the tighter labor markets impacting the business? And are there, you know, any of your businesses that are more or less impacted at this point?

Well, I think within the IT spectrum, talent has been tough, if you will, for many, many years. And so I don't think the dynamic of that is new necessarily. You can see in our supplemental information that most of our growth has come not through bill rate increase, although we've had a little bit of that. Most of it has come through volume of new work, which is helpful. We like to have a balance of both of those things, which we do. And I think that just exhibits the fact that we're able to find the talent as we need it in order to work on these projects. Rand, would you add anything else to that?

No, Ted. I think all our indicators, as you said, are kind of up. We've increased the pipeline of candidates that we draw upon. We've increased the number of placements we've made. We've increased the fill ratios, if you will, the metrics we use to measure the flow of candidates

to us and then to the client and we've seen no disruption in that despite what we hear so much is a tight labor market so I think everything you said Ted is steady as we go here and then just one last one if I could just any update on the progress with the changes you've been making at Oxford in recent quarters with the go to market strategy and what not and just where we are in that thank you yeah I think you know Oxford continues to institutionalize its

It's sales methodologies and the things that we've been working over, which we've talked many times about in past quarters. Two bright spots this quarter, although their revenue didn't quite meet our expectation. If you looked at their volume of work and the supplemental information, they were up mid-single digits in terms of billable hours worked. They had a slight decrease in their bill rate, which made their growth kind of 1%-ish year over year, if you look at that. And I think that, you know, we just stick with these things. We're definitely reaching customers, you know, in a methodical way according to the strategies we laid out. We're definitely cross-selling services, so able to do more with one customer than we used to do in the past. And so, you know, we stick with those things and continue to move forward. We're excited about their EBITDA margins this quarter. They actually improved. beyond our expectations, which was a positive.

So, you know, there's some good signs there in terms of productivity. Thank you. Next in queue, we'll go to the line of Edward Caso with Wells Fargo.

Please go ahead.

Great. Thanks. I was wondering if you could talk a little bit about your intent to on repurchasing stock. You talked about getting your leverage down below two and a half to do it. Is that a hard and fast rule? Or, you know, sort of how much could be there in the future? Is there an intent to keep the option dilution down? Is there intent to take advantage of a depressed stock price? Thanks.

So thanks, Ed. You know, we have been, although I don't know if it's a hard and fast rule in those words. It's certainly a commitment that we've made to our investors and to the other people that are interested that we would pay our debt down post-acquisitions until we got to 2.5 or lower. So I think now that we're at that range, we can certainly look to exercise our ability to repurchase shares under this facility. Every capital dollar here competes for its best use. We've said many times that we believe acquisitions are the highest and best use of our capital. So to the extent something is ready to go there, that's our preferred pathway. Should something not be at the lip of the cup, we definitely feel like we're at a place where we can take advantage of reinvesting capital now that we're under two and a half to repurchase our shares. So it's good that we have those options, and I think that our story there remains consistent with how we've handled that in the past.

I guess my other question is related. You talked about acquisitions in the government space. I'm curious what your interest level is on the commercial side, any new areas of focus. And then the M&A on the government side has had a depressive effect on your gross margin and your EBITDA margin. Is that... Should we continue to expect that sort of compression as we work our models into the out-quarters? Thanks.

Yeah, well, Ed, there's a lot to that question, so let me take it in pieces. On the commercial side, we certainly are prospecting for potential acquisitions. We feel like we have a great account portfolio in our commercial segments that we serve that not only want to use us for staff augmentation, but also would like us to step into higher value work so to the extent we can find the right capabilities, if you will, in industry segments that are important to us, then it would be great to make acquisitions there and just raise our capability and enhance our value proposition to the CIO. We've said on the government side that that acquisition is an important part of our strategy there as we move ECS from where it is today to a billion and beyond. I don't believe as we stay on that path that we will make acquisitions that would ultimately hurt our progress towards our five-year plan on our margins. I mean, we've laid out a five-year plan in 2018 for ASTN that we thought we could get to five billion and that we could increase our EBITDA margins. to between 12 and 12 1⁄2, and I think growing ECS both organically and with key acquisitions that support the solution they want to be in, that we can still manage both ends of that. And then was there a third part to that, Ed?

No, you got it. Thank you. Okay, thank you.

Next in queue, we'll go to the line of Mark Marcon with RW Beard. Please go ahead. Good afternoon, everybody.

I was wondering, you know, when we take a look at the customer data, both for Apex and Oxford, there's a decline in terms of the average number of customers. But obviously on Apex, you continue to do really well. So I'm just wondering, is that part of a deliberate strategy with regards to focusing on key accounts, or how should we think about that?

Rand, do you want to take that?

I think, Mark, I wouldn't say it's a deliberate strategy to call out clients, if you will. We certainly are focused on the Fortune 500 and now the Fortune 1000. I think what we've seen in this past quarter a little bit is the smaller branch-centric account. began to slow down their spend in general. So I don't know that we're walking away from anything. It's just that it's not as brisk as some of the other business we're facing. So it ebbs and flows, Mark. I think generally speaking, though, Apex will largely be a, you know, Fortune 500, Fortune 1000 account service provider. Having said that, you know, there will be some ebb and flow in the account base and certainly in the retail account base.

Okay? Okay. And what's, What would you say the primary reason is for those retail accounts potentially curtailing a little bit of their spending? Is it just what we're reading about from a general macro perspective or anything else that you would call out?

I think maybe some of it is, look, it's hard to generalize. I'd say it just depends on the market segment they're in. Some of it is the smaller accounts can't compete for resources in the same way the bigger accounts can. So you've seen bill rate expansion not just with us but with some of our competitors. When it gets a little more expensive to hire these people, the smaller accounts tend to take the back seat. It goes part and parcel, Mark, to what I've said always, that technology ripples through the economy through industries. You know, your big banks, telecommunications, technology companies are first. Government is last. You know, small retail accounts oftentimes are in that ending pool, and mostly it's their ability to compete for the resources, you know, or they're embracing technologies as quickly as the others are. But, no, I think it's just – you know, maybe just kind of where we are in that quarter.

Okay, great. And then with regards to just the guidance that you're giving, can you give a little bit of granularity with regards to what your expectations are for ECS? It looks like you've had a lot of success there. It looks like DHA is performing well. What percentage of revenue would you anticipate coming from government?

Mark, the growth rate that we reported for Q2, for ECS, you can pretty much expect will be about what we do for Q3. Okay.

And how else would you characterize the Apex and Oxford segments?

Well, we don't get growth rates by division, but I think it's pretty similar to what it's been along the same sort of trajectory.

Okay. And then, Rand, can you talk a little bit about Creative Circle and what you're seeing there?

Well, I think Creative Circle, Ted, I'll go ahead if you agree here. Look, I think we've talked about in the past about Creative Circle really had a niche place and supported ad agencies and some of the creative work companies are doing in revenue generation marketing activities. And that world is being turned upside down. You can read about the ad agency work. You can read about digital marketing. And when you get into more digital marketing, you have a different set of competitors that come into it, the other staffing firms, consulting firms. So the world has changed a bit for them over the past two or three years. And with that, we've seen some some dilution in their growth rate, if you will. They have held very steady on margins. We are also focusing on, I think, a more balanced portfolio of accounts, Mark, both big accounts and small accounts, weaning off of ad agencies, if you will, going direct to the client, to the end client. All that's in transition. Having said that, in the quarter, they had a really good, strong year last year, as you know, particularly in quarters two, three, and four. In the first two quarters this year, they've come off of that a little bit. But they're still, if you look at other creative marketing companies, they're performing very well compared to their, if you will, peers here. but not the growth rate we want. But the good news is we want them to hold their margins, and they're doing that. Now, they're going to benefit from some of the cross-selling we're doing between Apex, Oxford, and Creative Circle around large and bigger accounts. We are going to be pushing some things where I think we can help push, but we don't want to dilute the margins at this point. But on the other side, they've had two years now to adjust to this changing market. So I think they're getting through that, and I think things will improve for them.

Perfect. And then just two more on the guidance real quick. Just 53.6 million share count for Q3 in terms of the guidance. We ended up 53.4. You continue to get the debt down, so we could potentially buy back more stock and That could end up being a conservative number as it relates to the 53.6. Is that correct?

I don't know if I'd qualify it as conservative, but the 53.6 assumes that we are not buying back stock. But we most likely will. So you're right. The number could come in lower than what we're forecasting.

Great. And just to absolutely clarify with regards to the Q3 margin guide, It's really just PERM and the ECS as a percentage of the mix that's really driving things. There's nothing else.

If you're talking about the gross margin, yes.

Right. And can you elaborate on the SG&A as well?

Well, I think we're pretty clear in the prepared remarks in terms of sequentially how much of an increase we will have over what we reported in Q2, and it's about a half a million dollars.

Great. Thank you. And next in queue, we'll go to the line of Toby Sommer with SunTrust. Please go ahead.

Thanks, Ted. In the context of your long-term margin goals, as you kind of work past the cyber coders turnover issue, should we look for cyber coders to be rebuilt up to its prior percentage of sales, or Is that going to be a margin headwind over the next couple years? How are you going to manage that?

I don't expect that it will be a margin headwind. I mean, that business has proven over a long period of time that it has good, steady growth prospects and that its EBITDA model has been fairly consistent. So I don't believe that to be a headwind, Toby.

Okay, so you do intend to kind of build it back. Okay. And then... With respect to ECS, could you give a little color about contract durations and the mix of contract type in your submitted bids? What does that convey about the margin outlook for the business?

Thanks. Sure. I'll let George talk to that. George?

Thanks, Ted, and thanks, Toby. So, yeah, let's talk about margins for a second here. You know, we don't give out segment margins, but, you know, I will tell you that the ECS EBITDA margin is second to only one other company in our industry space. In terms of growth rates, pro forma as well as standalone, we're two times the industry average in our peer group. Our book-to-bill, we've reported our contract backlog is increased 9.5%. And our contract mix has moved more and more toward timing materials and fixed price with the DHA acquisition. And over the last year, we've doubled their EBITDA margins from where they were a year ago. So we're seeing a lot of positive movements in terms of our EBITDA margins, our growth, and our contract backlog. The submitted weighting award that I said was close to $2 billion, And the activity that increases, I only see that going up over the next couple quarters. And I do see also that our book-to-bill, which over the last trailing 12 months, you know how the book-to-bill can go quarter by quarter. You can get a little bit of something just one time. But over the last 12 months, it's 1.5. So we're on a pretty good tear in terms of growth and in terms of an increase in our margins in our space. And, you know, the other thing I'll talk about is that, you know, the type of work that we're winning, the recent awards that we've had this one, the recent awards that we'll announce next quarter because we picked them up in the last 30 days, you know, are all very high-end, very long-duration prime contracts. with very mission-focused customers that are benefiting from the positive environment in the space and congressional plus-ups and such like that. So, yeah, we feel pretty bullish about it.

Great. And really, the first part of my question was getting after contract duration, which I understand is being elongated in the industry and for yourselves. It renders from the outside... book-to-bill and contract awards to be a tool of limited utility when we're trying to forecast, because the contract awards could be for a longer term. So could you parse that out? If you were to have apples-to-apples term, would the contract awards over the last 12 months still be a nice positive figure over one?

Yeah, typically what we're doing are three- to five-year contracts is what we're, you know, so, okay.

So, George, I'd say you don't see a meaningful difference in the contract duration. And through DHA and some other awards, we've had a higher move towards time and materials. So, Toby, I think to your question, I don't know that that portrays anything different, if you will, for us in terms of how we expect to play that out in the future.

Yeah. No, it's the same contract, average contract length is what we've got.

Okay. Ted, how do you plan on managing the – headcount growth internally with respect to hitting your revenue growth targets across the different businesses, if you could provide a little bit of color.

Thanks. We're always investing in ourselves. Typically, what you'll see is our headcount growth, and I've said this before, trails slightly the rate of growth of the business. We're always investing in ourselves to grow organically. We're also always striving for, expecting, and getting higher levels of productivity each year. They always need to keep pinching up. So, I think our plan on a constant basis is to continue to invest in, you know, the people aspect of our business in order to help us to grow. You should expect it to be just a little bit less than the rate of growth of the business because we do expect that increase in productivity.

Thank you very much.

Next in queue, we'll go to line of Seth Weber, RBC Capital Markets. Please go ahead.

Hey, guys. Good afternoon. I think on the last quarterly call, you gave some exit rate trends for the first quarter for Apex and Oxford. I was wondering if you'd be willing to do that again here for this quarter.

Sure, Seth. So, you know, in the past, we've given you data on this call for how the first two weeks have been versus the two weeks of the quarter in the prior year. I think as our business evolves, it becomes less meaningful, especially now with ECS being nearly 20% of the business, and they don't have a metric, if you will, of that regard that helps. I will tell you that if we would have published the information, the first two weeks of this year would have been up high single digits over the same period last year. but it's not very predictive in my estimation of where the business is headed. So I would take that with a grain of salt.

Okay, fair enough. And I guess I know you're not giving segment revenue guidance, but just on the Oxford business being down here in the second quarter, do you think that's represented? I mean, directionally, is that representative of how we should think about it as this transition takes a little bit of time to work its way through? Or I'm just trying to think through how long you know, this process might take? I mean, do you think that growth stays negative here through the next couple quarters?

So remember, the Oxford division, if you will, and the Oxford segment are two different things. So slight growth in the Oxford business in the second quarter. In the segment, though, it was offset by a revenue loss, if you will, at CyberCoder. So the Oxford business did slightly grow and expanded its EBITDA margins. And our expectations are that Oxford Business will continue to grow. There are pieces of it that are growing nicely. There are others that are coming up. And we look to do better in the future. So we do expect them to grow. However, I think to Ed's comments earlier, we are, you know, CyberCoders is a mix of the business. And remember, it's plus or minus $25 million out of a billion in revenues for the quarter. You know, we think that that may be a slightly lower mix, if you will, in the third quarter, and our guidance reflects that.

Okay. I appreciate it, guys. Thank you very much.

Next in queue, we'll go to the line of Kevin Maxey with Credit Suisse. Please go ahead.

Hey, guys. This is Palmer. I'm for Kevin. Maybe one for George. Looking at DHA... Can you expand on the revenue synergies you mentioned and the preparative marks and some of the cross-selling that you folks talked about?

Ed, would you like me to take that now? Yeah, please, George.

Yeah, sure. Okay, so they were very, very heavy into the FBI, Department of Justice. We had presence in the Department of Justice as well. We've been doing for the last nine years the combined DNA index system development. So there are some opportunities that we targeted and we won together. in that realm, as well as what we're finding is their deep relationships with a lot of the customers and their length of time that they've been in working with these customers. We're finding that our capabilities in cloud and particularly and then cyber are benefiting these customers as we reach out and talk to them, and so we're being able to do some cross-selling there as well. And then the last thing that we're doing, again, is that we found that their relationships and their program managers and some of their technologists are just outstanding in terms of some of the ways that we can use their skill sets and cross sell back in some of the contracts that we have also had. I remember last quarter, I think we announced that we won the FBI's Red Team, Blue Team contract, which is to run all the Red Team, Blue Teams for the FBI. And so again, we were able to move some of their relationships some of their capabilities and strengthen our ability to serve that customer as well. So it's been a good positive experience on both sides, which is what you want when you go do an acquisition like this.

Thank you very much.

Once again, as a reminder, if you wish to ask a question, please press star, then 1 at this time. We'll go to the line of Sarinda Thin with Jeffries. Please go ahead.

Hi, thank you for taking my questions. I'd like to start with the deal pipeline. Can you maybe provide a little bit of additional color there in terms of when you're looking at deals, what do valuations kind of look at this point in time? And then maybe from an opportunities perspective, the balance of kind of looking at something maybe a little bit more strategic versus maybe I'll say a more financial-oriented acquisition, one that can be rolled right into your existing business. Any thoughts there would be appreciated.

Well, look, I think that a couple things there. So the pipeline is strong. It's active, and we're doing a lot of work there to evaluate opportunities. You know, I would say there is a lot of competition out there for good businesses, but at the same time, that's not necessarily new here in the technology space, and so it's an environment that we're used to working in. evaluating and working through. If you think about acquisitions for us in the future, I think we've been pretty clear that we're very happy with our account portfolio, both in the gov space and in the commercial space, and we continue to grow that and add important clients, but what will continue to make us sticky with those clients is to have the right solution sets for them, and so acquiring businesses that have key solution sets that we see in the marketplace and the customers that we serve is very important. And to the extent we can find those and bring those to bear, integrate them into our businesses and provide those services to the customer, that's going to be positive for our business over the long haul.

That's helpful. And then in terms of just some of the disclosures, it looks like there's been a slight change in One of them is you used to provide like staffing consultant numbers by the different divisions. It looks like you guys have moved to kind of more of a total hours worked component there or a disclosure. And then also in the past it appeared that maybe there was more quantitative disclosures around the organic growth rates within each of the segments or within each of the divisions or the subdivisions. Any thoughts on that at this point?

I think the one change that we made in the supplemental information is to give you number of billable hours worked for the Apex and Oxford segments versus just consultant headcount. That's a true reflection of the volume of work going on. So, you know, that's a minor change. I don't think it's material to anything other than just to try to give you a better metric around that.

Thank you.

Again, as a reminder, if you wish to ask a question, please press tar, then 1 at this time. And speakers, currently we have no additional questions in queue. Please do continue.

Great. Well, I want to thank everyone for being here with us today on the call. We look forward to being with you in 90 days to discuss our third quarter. And as always, we appreciate your interest. in ASTN and look forward to speaking with you soon. Thanks.