ASGN Incorporated

Greetings, and welcome to the ASGN Incorporated third quarter 2019 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. I would now like to turn the conference over to your host, Kimberly Esselstyn, Investor Relations. Thank you. You may begin.

Thank you, Operator. Good afternoon, and thank you for joining us today for ASGN's third 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 statements. Certain of these risks and uncertainties are described in today's test release and in our SEC filing. 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.asgf.com. Please also note that on this call, we will be referencing certain non-GAAP financial measures, such as adjust the EBITDA, adjust the 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 third quarter conference call. It's been an exciting time for ASGN as we accelerate into the next phases of our five-year strategic plan. As we initially outlined at our analyst day in May of 2018, by 2022, we anticipate reaching $5 billion in top-line revenue, which includes $500 million to $700 million in acquired revenue and adjusted EBITDA margins of 12 to 12.5%. I'm pleased to report that we remain on track to reach each of these targets. Our ability to attain these targets derives from a combination of ASGN's deep industry expertise, expanded consultative and solutions capabilities, and a vast talent pool of accomplished professionals who deliver productive and effective solutions to our commercial and government clients. Our unique deployment model differentiates ASGN from other IT service providers. We are very pleased with our quarterly performance, with all numbers either in line or exceeding our Q3 guidance ranges. Ed Pierce, our CFO, will provide further details on our results later during today's call, so I will focus on a few key highlights for the quarter, including revenues and free cash flows. Consolidated revenues for the third quarter totaled just over $1 billion, an increase of 10.6% year-over-year, and at the high end of our guidance range for the quarter. This growth was mainly driven by strength in our APEX and ECS segments and represents a significant milestone for our company by reaching a billion in quarterly revenues for the very first time. APEX, our largest segment, which services clients across multiple commercial and markets, generated revenue of $644.1 million, up 9.2% year-over-year. Growth in the APEX segment was driven by strong performance in our top account portfolios. Graham Blazer will provide more color on Apex's success later on today's call. ECS, which provides IT solutions to the federal government, including the Department of Defense, intelligence agencies, and certain civilian agencies, generated revenue of $206.1 million, up 25.7% year-over-year. George Wilson will speak more on ECS shortly. Oxford, which offers on-demand consulting talent for commercial IT, healthcare, life sciences, and engineering clients reported revenues of $152.5 million for the third quarter, roughly consistent with the prior year period when adjusted for both billable days and currency fluctuations. We also continued to generate strong free cash flow for the quarter, enabling us to pay down $42 million of our long-term debt and repurchase $20 million in common stock. Even after paying down our long-term debt, buying back shares, we saw a decline in our average leverage ratio to 2.26 times our trailing 12-month adjusted EBITDA at quarter end. We anticipate a leverage ratio of approximately 2.19 by the end of 2019. As I noted last quarter, neither the repayment of our debt nor the repurchase of our shares precludes the ASDN from making strategic acquisitions. In fact, just this past week, we announced the acquisition of InterSys Consulting, a leading IT services and solutions provider, for $67 million in cash. InterSys Consulting is now part of Apex Systems, and we welcome their team to ASGN. The acquisition of InterSys Consulting is an important step in our strategic growth plan to deliver increased value to both our customers and our shareholders. InterSys Consulting anticipates generating approximately $31 million in revenues for full year 2019, followed by double-digit revenue growth in 2020. Their addition deepens and expands our capabilities in digital innovation and systems modernization. We expect to realize revenue synergies by leveraging their robust capabilities within our current APEC systems and Oxford customer bases to capture an increased portion of our existing pipeline of higher-end consulting opportunities. While Rand will further discuss InterSys Consulting's capabilities shortly, I'd like to briefly address our strategy behind this acquisition. When making acquisitions, ASTN looks to acquire companies that continue to evolve our business as a preeminent and differentiated IT services and solutions provider and attractive market. Increasing our consultative capabilities and leveraging our existing account relationships and pipelines continues to be our focus. Target acquisitions must fulfill the strategic needs, be accretive to growth rates and margin profiles, and possess in-demand consultative and solutions capabilities. InterSys Consulting checks the box on each of these attributes. Their industry expertise, combined with a deep focus on developing long-standing customer relationships, fits well within ASDN's own mission to provide high-end technology services across each of the end markets we serve. Through the acquisition of InterSys Consulting, our most recent prior acquisitions of ECS and DHA, we are scaling our consultative and solutions capabilities and expanding into key industry segments across the commercial and government sectors. We are strengthening our vision of merging industry expertise and technology solutions with unparalleled account relationships. Ultimately, our strategy to execute our long-term business plan to expand our presence in commercial and government IT services and solutions, and to acquire assets which complement our industry expertise and solution capabilities, will further position ASGN to achieve strong growth today, tomorrow, and into the future. I'll now turn the call over to Rand Blazer to speak further about the APEC segment's third quarter performance.

Rand? Great. Thank you, Ted. The APEX segment, which consists of APEX Systems and Creative Circle, again reported solid results for the quarter. As Ted noted, third quarter revenues totaled $644.1 million of 9.2% year over year on a difficult prior year comparable. In the third quarter of 2018, we grew 14%, the highest growth quarter of last year. Our margins this past quarter were down slightly on lower firm placement work, compared to the third quarter of 2018, but remained stable on a sequential basis. During the third quarter, the APEC segment's performance was driven by a number of factors, including first double-digit overall revenue growth in APEC systems, as well as double-digit revenue growth in five of the eight industry verticals we served, including aerospace defense, business services, financial services, healthcare, and consumer industrial, industry accounts. Our technology vertical posted mid-single-digit revenue growth for the quarter, while life sciences and telecommunications saw revenue decline year-over-year. Top accounts again achieved double-digit revenue growth, outpacing our overall top-line growth, while retail or branch-centric accounts saw flat revenues year-over-year. Creative Circle's revenue improved sequentially, with a revenue growth rate in line with our internal expectations for the third quarter. Lastly, growth in consulting work across both our Apex and Oxford segments also continued to outpace our internal revenue estimates for the quarter. Led by Apex Systems, total consulting revenue was $100.5 million for the third quarter of 2019, up 30.5% year-over-year, and now accounts for mid-teens as a percentage of our combined Apex and Oxford segment business. We remain excited about the opportunity to grow our consulting business as we continue to provide solutions that create added value for our clients. While achieving strong organic growth is certainly key to our success, as Ted discussed, we also continue to keep an eye out for ways to enhance ASDN's growth through strategic acquisitions. Subsequent to the quarter end, we did just that, welcoming InterSys Consulting to APEX Systems. The APEX segment provides a full complement of IT and technology consulting services in workforce mobilization, modern enterprise, and digital innovation solutions for the commercial sector. InterSys Consulting enhances our current capabilities in digital innovation and enterprise solutions with capabilities in data strategy and transformation, machine learning, data analytics, cloud, agile, and full-stack development and DevOps. The ability to provide these high-end services to our growing client base will assist in our mission to continue to differentiate ASGN from other IT service providers. With the acquisition closing less than one week ago, the Intersys Consulting team is already in the process of fully integrating within APEX Systems. We are excited to begin leveraging Intersys Consulting's experience to serve our growing pipeline of business opportunities across APEX Systems, Oxford, and Creative Circle accounts. In summary, I am pleased with the APEC segment's revenue and margin performance this past quarter. Given our strong performance in Q3 of 2018, our third quarter 2019 results are all the more noteworthy. As solid as Q3 results were, we did see a slowdown in client IT spend in August and September and in the initial week of October. It's hard to determine if this trend will continue through the fourth quarter. However, the additional actions we are taking to better serve our clients with IT staffing and expanded digital innovation and enterprise solutions will be important to continuing our strong growth record. I'll now turn the call over to George Wilson to speak about our ECS segment. George?

Thank you, Rand. ECS's third quarter performance from the standpoint of financial execution, business operations, and new business development was outstanding. We continue to execute our strategy to provide advanced technical solutions coupled with subject matter expertise to address our customers' most pressing needs. Several key contract awards provided additional large and durable contract vehicles so our customers can expand the use of our technologies, solutions, and services. Awards included both re-competes of past contracts, contract expansion, and net new contract awards. These awards reflect positively on our strategy and the quality of our execution. Our financial growth continues to be significantly ahead of the industry average for peer companies in the federal technology space. Third quarter revenues grew on a reported basis by 25.7% over the prior year, along with similar growth in adjusted EBITDA. Included in this impressive third quarter growth were contributions from our prior acquisition, some one-time technology purchases, and several license renewals that are critical to our advanced solutions, primarily in the defense and the intelligence market. We anticipate revenues from technology purchases and license renewals will be lower in the fourth quarter. In Q3, we received a total of 954.5 million in contract awards, which resulted in a book-to-bill ratio of 4.6 times to one for the third quarter, another period of very strong performance on the business development front. Our book-to-bill ratio for the trailing 12 months ended September 30, 2019, was 2.4 times to 1. ECS won several key awards during the third quarter, which contributed to this extraordinary book-to-bill. I'd like to review a few examples, beginning with two significantly expanded contracts to continue the development, deployment, and maintenance of a secure, unclassified network used by the U.S. and U.S. partners worldwide. as well as an expanded award to develop and deploy software systems and tools on that network. We were also awarded additional tasks to deliver innovative AI solutions and services to an important defense customer and a contract to support computer network defense of the DOD's Defense Health Agency Network. We also received an award for the modernization of human resource management applications for the U.S. Marine Corps, including cloud migration, application of AI to improve processes, and deliver maximum value to the end customer. Lastly, we are awarded a multi-year contract to lead IT modernization efforts for the US Mint Office of the CIO, including operations, applications, management, cloud migration, and service delivery optimization. All of these contracts were competitively awarded, and all were single awards. Our cyber capabilities and technology partnerships continue to expand as we continue to invest heavily in partnerships, training and certification of our workforce, and in facilities to include our secure operations center and our advanced AI system integration lab. Our recent proposal activity has remained strong, and we believe ECS is positioned well within the advanced solutions and services market, which is currently in high demand. At the end of the third quarter, ECS had $2.7 billion in total contract backlogs which was an increase of over $700 million sequentially. This contract backlog equates to a very healthy coverage ratio of 3.6 times our trailing 12-month revenue. I will now turn the call over to Ed Pierce to discuss ASTN's consolidated financial results for the quarter. Ed?

Thanks, George. As Ted has highlighted, we reported impressive financial results for the quarter. Revenues for the first time exceeded $1 billion and were at the high end of our guidance range. Earnings and adjusted EBITDA were both above the high end of our guidance range, driven by high revenue growth and lower than expected SG&A expenses. Revenue growth of the quarter was 10.6% on a reported basis and 10.1% on the same billable day and constant currency basis. Revenues from our ECF segment were above expectations as a result of higher revenues from license renewals and some one-time technology purchases. We anticipate lower revenues from these type purchases in the fourth quarter. Gross margin was within our guidance range, but down approximately 70 basis points year-over-year. About half of the compression in margin related to a lower mix of permanent placement revenues and the remainder to lower contract margin. which are mainly the results of a higher mix of revenues from ECS and from high-volume, low-margin customers. Although ECS's gross margins are lower than our other segments, it generates double-digit adjusted EBITDA margins as a result of its low SG&A expense base. Its margins are at the higher end of its industry peer group. SG&A expenses were $3.4 million below our guidance range, mainly related to favorable variances in compensation and health care expenses. Our effective tax rate for the quarter was slightly lower than guidance and 9 percentage points higher than Q3 of last year, which had benefited from a number of discrete items, including reductions to certain provisional tax estimates made under the Tax Reform Act. Net income, adjusted net income, and adjusted EBITDA were all above our guidance range, mainly related to favorable expense variances. Cash flows from operating activities were $91.3 million, and free cash flow was $84.4 million, or 8.4% of revenues. During the quarter, as Ted mentioned, we paid down $42 million of our long-term debt and used $20 million to repurchase 324,000 shares of our common stock. Regarding our financial estimates for the fourth quarter, we're estimating revenues of $995 million to $1.5 billion, net income of $51.9 to $55.6 million, and adjusted EBITDA of $113.2 to $118.2 million. These estimates include results for Enersys Consulting from the date of its acquisitions. Our estimates are based on estimated billable days of 60.5, which is the same as the fourth quarter of last year. Each billable day is approximately $12.1 billion in assignment revenue. On a sequential basis, there are 2.5 fewer billable days than Q3, and the effect on Q4 revenues is approximately $30.2 million. We're also estimating a sequential increase of approximately 4% in assignment revenues per billable day. Our estimates consider the effect of sequentially fewer billable days and two additional holidays on ECS's revenues from time and material contracts. As previously mentioned, we're also assuming lower revenues from third-party technology purchases than Q3. I will now turn the call back over to Ted for some closing remarks.

Ted. Thanks, Ed. I'm very pleased with ASPM's 2019 financial performance to date. The size, scale, and breadth of our services continues to position us well for success. Through our unique industry insights and sophisticated project delivery, we've developed long, trusted customer relationships with over 300 of the Fortune 500 companies, as well as major defense, intelligence, and civilian government agencies. These relationships enable us to maintain a sustainable business model and margins that can withstand economic cycles. I'd like to thank you again for your time today and for your support of ASTN. These are exciting times for our company, and we look forward to continuing to share our progress on future quarterly calls. We will now open the call to your questions. Operator.

Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation cell will indicate your line is in the question queue. You may press Start to if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the Start key. One moment, please, while we poll for questions. Our first question comes from the line of Ed Casso with Wells Fargo Securities. Please, do with your question.

Hi. Good evening. Congratulations. Just trying to get a sense if there's any cultural issues here as you start the migration from a staffing company towards a more consultative solutions company.

Thanks, Ed. You know, I think our people in the marketplace feel like this is a natural move. Remember, as we've talked about this part of our business, It's really a client-driven activity. We're not pushing our way in, if you will, to work. The client is inviting us in based on our past quals and our capabilities, not just to provide resources but also to provide certain solutions. And so it's just been a natural evolution, if you will, for our people who are serving the customer. So I think they feel great about not only performing well, you know, the activity of providing resources, but also having the opportunity to add more value to the relationship by providing solutions on top of that. And so I think from a cultural standpoint, it's an upper for all of our teams.

My other question is on Creative Circle, if you could just give us an update there.

Rand, do you want to talk about Creative Circle?

Yeah, I think... Credit Circle is doing fine. Their growth rate in the third quarter was higher than their growth rate in the second quarter on a year-over-year basis. You know, we've talked a lot about not just credit marketing, but digital marketing. And as you, the marketing world yearns for digital marketing, so they're competing with a broader set of people now in that marketplace. They have very good account relationships. They have very good internal processes. So, But they're facing the transition to facing a broader set of competition, competition that comes from the normal IT players in that marketplace. So they're performing well. They typically picked up toward the end of the quarter, and, you know, I think they're doing the things we think they should be doing. And there's good synergy between the Apex and creative team around some of our larger accounts, which is getting healthier and healthier as we go. Great. Thank you.

Our next question comes from the line of Toby Silver with SunTrust. Please do with your question.

Thanks. I was wondering if you could elaborate a little bit, Rand, on your remarks that said IP spending slowed within the quarter and kind of early October. Any kind of color you could give us on that would be helpful. Thanks. Okay. Ted, do you want me to go ahead?

Sure. So, Toby, yeah, I think, first of all, I think, again, for the IT services we provide, we've seen a little bit of a slowdown in that business flow. We measure that by the amount of assignments or requisitions and openings that we are presented with. So I think I said in Q3 we had two of our industries together. perform in single-digit to negative three of our industries, single-digit to negative or flat growth year over year, technology, telecommunications, and our mid-market accounts or branch-centric accounts. So those three are not keeping up with the other four, if you will, which is, I think, where we've seen most of the slowdown occur. You know, we've gone through this before, Toby, where you have little what I call pauses in spend, by the clients as they reset their projects or they turn left or turn right in their own strategies. So it's not new to us. But I think Ted and I and Ed all felt it was fair to say, look, we did see a little bit of a slowdown in the spend. You see that reflected. I mean, normally we've had seven or eight of our industries all in double-digit growth. So that's what we're seeing.

So would you describe this as a typical oscillation in growth rates and not a significant change?

Well, as I said, I think it is an oscillation that occurs. I call it ebb and flow. We've used those words before on the earnings calls. I think there's a little bit of ebb and flow in spending. If you think about technology, they're dealing with their manufacturing base in China and have other investment priorities. I'm just conjecturing this. I don't want to speak for that industry. But I imagine that's going on in telecommunications. There's a continuation of looking for ways to provide more content and different ways of streaming content out there. So there's good things to do, and I think at some point every so often, if you look at our history over the last three or four years, you do see some oscillation in the pattern of business that's presented to us. I think that's what I said, and in my remark, I said, you know, we just think this is a normal ebb and flow, and we'll see how it goes in the quarter.

Okay. Within the ECS segment, the growth rate, obviously, very strong, in part, by you said, driven by some pass-through revenues. Could you kind of maybe break that out in a little bit more detail and try to tell us maybe what the services growth was versus... these product-related things, or however you'd like to do it. You can tell us what size of contributor the pass-through revenues might have been. George, do you want to take that? Yeah, sure.

Thanks for the question. I want to kind of make sure we're differentiating between two things. The important difference between one-time purchases would be non-recurring. And what we have in recurring purchases are licenses, hardware, specialized services that are needed to deliver our end solution. As long as we're delivering those end solutions, those technology purchases and licenses such occur, and it will provide some lumpiness in our quarterly revenues. But over the course of the year, typically these things are semi-annual or annual licenses or hardware refresh and stuff like that. So on an annual basis, those will recur and it will be smoothed out. But on a quarterly basis, they'll provide a little bit of lumpiness. As far as simple one-time, Those are very small relative to the rest of the revenue. So there's been a growth in both our solutions as well as our services delivery, which on an annual basis has been, as far as direct labor, has been a strong growth.

Thank you. That's helpful. And then, Ted, maybe a question for you, and I'll get back in the queue. Your recent acquisition, is this an example of kind of, what an acquisition may look like in the future as opposed to the kind of step-out platform acquisitions that we've seen ASGN consummate in the past?

Well, maybe I'll answer that two ways, Toby. I mean, I think we're in the end markets we want to be in as it relates to IT services. So, thinking about making platform acquisitions that get us outside of IT is probably not on our roadmap or not on our roadmap. You know, it's difficult for me to say in the future what we would or wouldn't acquire because those are, as you know, opportunistic things. But if you go back to our analyst day in April of 2018, you heard us talk about how we wanted to expand our platform our businesses of Apex and ECS through key acquisitions that give us either, you know, expanded capabilities or bring us into a customer set that we may not be in or otherwise enhance the value that we're providing to the customer. So I think this is in line with that. And, you know, between that and being placed in the markets that we are now, where we are, where we like, I think you'll see us stick to our knitting there. Thank you very much.

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

Hey, this is Jay Hanna on for Gary today. So I guess my first question really is just with regard to your perm business. We've seen some data recently just suggesting that job openings have come down a bit in recent months. Just wanted to get your thoughts on what the current market is now and maybe your expectations going forward.

Well, look, our PERM revenues were basically flat from the second quarter to the third. You know, it's going to – we expect it to grow as a percent of our total business because the other units are growing faster. Just a mix of that, it's naturally going to become a smaller and smaller part. I think it's maybe $35 million on a billion in revenues this quarter. So – it's an important part of our business, but not something that we're going to overemphasize. What you see in the market today, I think, in that piece of the business, it's really a candidate-driven marketplace. It's not difficult to find clients with opportunities, but the candidate side of it is very difficult, so I think that's the major headwind in that market. I can't comment too much on you know, whether the number of openings is down or not, you know, on a macro basis. But, you know, that's a little bit of color what we see inside of our firm business.

Okay. And then just shifting to Apex, I mean, obviously the growth continues to be nice despite difficult comps. I mean, is there anything company-specific or macro-driven that's changed here? What's generally behind this performance change?

Look, I think you're seeing strong uptake by our clients on our consultative capabilities inside of APEX. Obviously, they see a great value in using us on certain solutions in addition to just providing resources. So, you know, I think that most of what you're seeing there in terms of their continued strong performance is, you know, a testament to their account portfolio and the continued expansion of that, you know, both in new clients and in terms of share of wallet. And that's really the path that we're on inside of Apex, and, you know, you should look for that to continue.

Okay, then lastly, really quickly, are you willing to comment on the InterSys margin profile?

You know, we didn't give information on margins for InterSys. We did give you a sense of what the revenue was. expected for 2019, what we included in our estimates for the quarter, you can assume that both their gross margin profile and their – even our margin profile is higher than, you know, the rest of our business just based on their business, but I think we'll probably stop there.

Okay. Thank you. Our next question comes from the line on Sturm & Nissen with Jeffrey. Please see what the question is.

Hi. Just wanted to follow up on kind of APEX. For a couple of quarters now, you've discussed the divergence in growth between, like, top accounts where you're seeing some really good growth and then the retail branch-centric accounts where maybe not as much strength. Can you talk about the relative contribution to revenues of each?

Brian, do you want to take that? Sure. We have commented before that the top accounts represent about mid- 70% of our total revenues and branch-centric accounts are the remaining 27% of our accounts. So it's pretty weighted toward the top accounts for sure. Understood.

And what is the growth profile of the branch accounts at this point?

Well, I think we reported in Q3 they were flat year over year for the third quarter.

Understood. And then can you provide a little bit more color maybe on the Oxford segment? If I was to take a step back, is it fair to say that most or all of the weakness is coming from cyber coders? Or how should we think about the Oxford business itself? Last quarter, I think you guys talked about it. It was showing a little bit of growth. Maybe any color at this point?

You know, the growth profile was similar for the third. I think adjusted for currency. Other effects, they're slightly above even. The CyberCoder's business is performing a little bit better through the quarter, so they're making some progress on the initiatives that we have discussed with you before and laid out. A difficult marketplace for them, but they are making some headway there.

Understood. And as you make headway through those initiatives, is that something that It's kind of a six-month project, a year-long project to kind of see some sort of, I'll call it new normal, all else equal, meaning that the way that you guys are kind of pushing some office stuff to California and some of those other kinds of things.

Yeah, I think those are longer-term initiatives to render. I mean, both the adding of staff and getting them up to productivity as well as diversifying our business geographically is a long-term proposition. So... You know, those are quarters out, not next month, if you will, or next quarter. But we're pleased with the progress they're making.

Understood. And then one final question. Your SG&A, the variance there was lower than I think, or it was positive. Can you talk a little bit about more color there? Was that maybe lower variable compensation costs associated with maybe the different mix in revenues you guys had this quarter? Sure. Or is there something maybe a little bit more sustainable that we might be able to see on a go-forward basis? How should we think about that delta that you guys saw?

One thing is there was a one-time benefit that we picked up, about $1.2 billion that we set out in the earnings relief. You know, the other favorable variances we indicated was related mainly to compensation and to healthcare expenses. Those are going to have a fair amount of variability. And we saw the same thing or almost the same thing in Q4 of last year. We gave estimates for Q4, as you know, and, you know, we're expecting an uptick sequentially in SG&A of about 2.6 to 3.5 million. And when you consider that that also includes the SG&A related to NRSIS, it's pretty much in line with what we would expect. I think the interest rate piece in Q4 is about $1.6 million. Okay, thank you.

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

Hey, good afternoon, guys. I noticed, and maybe if I missed it, it looks like the disclosure doesn't have bill rates. Just curious, you know, if you can, just, you know, comment on, I guess, for what reason that's taken away. And if you could, just comment on the bill rate trend in this quarter.

No, it's not taken away. If you go to the supplemental, we have that disclosed. And we're not calling it bill rate. We're calling it average revenue per hour worked, which we think is a better metric because it includes all the factors. They go into, you know, calls to the customer. And there's not really – there's not a lot of difference between what we reported in the past and what we're reporting today. This is just a better way of looking at it. Yeah.

And as we did for everybody on the call, we did go back and disclose prior quarters on that so that there was a roadmap there.

Yeah. If you flip back through the supplemental, you'll see that we went back to Q1 of 18 by quarters.

Okay, got it. All right. I will check that. Okay, great. Thank you. And I guess just a question on ECS with, I guess, with the sort of elections coming up, what, you know, what kind of impact does like an election cycle have on the business specifically? George?

Yeah, sure. Thanks. Two things to really consider. the budget and the acquisition process in terms of we're going to go back to having continuous, continuing resolutions versus a budget, government shutdowns, those type of things. The other thing to look at is whether, you know, one party or the other party is going to remain in the White House. Both of those things will have less effect on ECF than other companies that may provide not and solutions supporting critical mission. Our customer set, even in the federal civilian space, is in the Department of Homeland Security, Department of Justice, the Marshals. These are areas that, even though there might be some funding shifts from one part to the other in some of the other federal civilian organizations, like EPA and such like that, the funding streams for the mission-critical customers that are pretty even, whether it's a Democrat or Republican. So I really don't expect to see a big change or a big impact to ECS, whoever takes the White House.

Got it. Okay, great. Thanks so much, guys.

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

Good afternoon. I wanted to go back to your comments about the Apex business, kind of the cadence that you saw through the quarter, you know, August, September, early October. Can you just tell us what your assumptions are for that trajectory here into the fourth quarter? Do you expect it to kind of continue to slow down? Do you expect it to stabilize? Any comments there on sort of what's embedded in your fourth quarter guide? Thanks.

I think if you look at that guide, it pretty much implies that we expect to continue to move forward. You know, the guidance rates is roughly the same revenue levels that we did in the third, and it's on less billable days. So we're expecting to grow. We see opportunities where we can grow. And I think Rand did a good job of just saying, look, in the quarter, whether it was the summer or it was a few weeks that kind of, you know, was a lull here and there that we saw a certain trend in a quarter, and we're just letting you know what we see and how we see it by industry.

Okay, thanks. And then just your fourth quarter gross margin guidance is pretty strong. You know, it sort of suggests you could get close to par year over year for total company. So do you think next, do you think 2020 you could be flat to up on an aggregate gross margin basis?

Well, we're not going to comment on 2020 just yet. And frankly, as it relates to goods margin and what happens, this could be good mainly by businessmen. And so we'll have more to say when we report on Q4.

Okay. I appreciate it, guys. Thank you.

Our next question comes from the line of Kevin McVeigh with Credit Suisse. Please, he has a question.

Great. Thank you so much. Hey, I wonder if you could just – Give a little bit of, you know, the context of InterSys relative to the core digital business itself, I guess. Just where does that fit and what's the incremental opportunity as you leverage that asset?

Well, look, I mean, the incremental opportunity, and I'll let Rand comment, is really to come in, integrate, and engage on a pipeline of work that we already have developed within our business units under the Apex and Oxford segment. So this is not bringing something to new customers, if you will. These are existing customers' needs that we understand have qualified or are in our pipeline. And so we believe that there's going to be a pretty immediate uptake, if you will, on their ability to help us win more work. Rand, would you add anything to that?

Yeah, I guess I agree with Ted, obviously, having said the first wave is they just deliver the revenues that they have projected for themselves and their own client base. But the real wave is just what Ted said, our ability to muscle up on more of the pipeline that's pretty strong inside of Apex and Oxford. In addition to that, you know, Intersys not only brings solution capability in those areas, but they also have a near shore development center in Mexico, which we believe is a gold nugget. And it really will, I think, give us a nice push to providing the kind of services and the scale of services we want to provide to some of our larger accounts. So there's a real revenue opportunity here with this, which is why we did the acquisition.

in terms of the $31 million in revenue, is that all new customers or is there any existing overlap with your current customer footprint? Yeah, Ted, I'll go ahead.

There's very few overlap. There are a couple of accounts that they had that we have, one in financial services, one in the technologies sector, but most of their accounts are more Smaller accounts, I would say, I mean, by scale, they're different scale business, but not very much customer overlap, I guess, is the end point to you. Thank you.

Our final question comes from the line of Mark Holm with Baird. Please, deal with the question.

Good afternoon, everybody. I was wondering if you could talk a little bit more about, you know, both statement of work in terms of, you know, hitting – roughly $100 million this quarter and growing 30% plus. Then we take intersys. And think about that a little bit longer term, just in terms of, you know, how big could that be in a couple years, assuming we have normal economic growth? And what are the constraints to continuing that growth rate that you're currently seeing?

Well, look, Mark, I mean, we can't give you future numbers on it, but, you know.

No, just how you're thinking about it strategically and how you're envisioning it.

Well, look, I think that this business inside of Apex and Oxford has been growing, you know, at 20% plus rates for many years now organically. We don't see any headwinds to that and, you know, save for anything in the economy that we don't see today. I think that obviously as the business gets larger, you know, it's kind of on a run rate to do about $400 million there. You could – law of large numbers could affect growth rates, but otherwise I don't see anything, you know, in the marketplace. Matter of fact, I would say the wind is in our sail.

That's great. And then can you talk a little bit about, you know, the nearshore facility and – how big that can be, and what the key attraction is. We went through the, you know, the Intersys website, and they had a couple of really cool case studies, but they didn't go through, like, specifically what attracted, you know, certain clients to wanting to, you know, interact with that particular group and what the actual value add was to the extent that I would like.

Well, I'll say this and then I'll turn it over to Rand. The customer doesn't decide to work with the nearshore facility or not. That's a delivery mechanism, if you will, in the solution. So if the solution calls for capabilities that they have in this nearshore facility, then they deliver it through there because obviously there's a cost advantage to that. Rand, do you want to say anything else about the nearshore?

Well, yeah, I mean, I agree with what you said, Ted. And so, Mark, I'd say, first of all, it's in Guadalajara, Mexico, which is a business center. A lot of universities there as well as a business point of reflection in terms of the workforce and the availability of talent and the technical skills that that talent has. It's in central time in the U.S., very strong English speaking. So there's a lot of attributes to that. versus, you know, in China or India or some of the Philippines or some of the other areas. And I think companies, we've seen, you know, more of an interest by companies to think about building capabilities like this or using capabilities like this in different places. I agree with Ted. It's mostly a decision that they accept our work in support of them, and we leverage that capability. But it's a, as I said, a gold nugget leverage, and there's a lot of attributes to it that we see.

Mark, the other thing I would add to that, Mark, is this was, that facet of their business was very attractive. All the big consulting companies that you would think of here in the U.S. were involved in this competitive process that InterSys won. And so, you know, I think that, and if you think about some of the consulting firms that have nearshore capabilities down there, everyone, that seems to be the hot spot, if you will, for all the reasons that Rand laid out. And so we're We're very pleased to have that as a component of our offering now.

It sounded like it, and I was just wondering if you could dimensionalize maybe the cost advantage, the price value relative to onshore, and then also what's the available supply? How quickly can you scale it? Because it does sound like you have a lot of opportunities resident within the APEX client base that you could, you know, lay over to InterSys and just wondering, like, how much of a constraint do they have in terms of the growth, in terms of resources, et cetera?

That facility, Mark, has been spun up in the last two years for that business. And so, although we don't give out numbers on headcounts between the U.S. and there, it just gives you a sense of how scalable it is, if you will. We view that that center could be much larger in the future, serving our U.S.-based clients than it is today. And there's a pretty significant cost advantage to that, although we don't give that out for competitive reasons. But, you know, it's a very nice part of that business. We're very excited to be able to bring that to our clients, and we think it's really going to help in the value proposition.

That's great. And then one other question, just with regards to the guidances. To what extent did where the holidays fall this year relative to prior years, did that impact your thoughts in terms of number of billable days and what the potential impact could be as we take a look at this current quarter?

Well, Mark, we disclosed it on a year-over-year basis that there's no change in billable days. It's 60.5. You know, sequentially, in terms of holidays, there are two fewer or two more holidays in Q3 or Q4 than Q3. And that probably is going to have more of an effect on ECS and their time and material assistance. But anyway, that's also included, by the way, the billable days is included in the supplemental information.

Yeah. No, I was just thinking about just the variance in terms of having a billable day follow on a Wednesday. Yeah. Yeah, there's no variance. Okay, great. Thank you.

Ladies and gentlemen, this is the end of our question and answer session as well as today's call. You may now disconnect your lines at this time. We thank you for your participation and have a wonderful day.