ASGN Incorporated

Greetings and welcome to the ASGN Incorporated fourth quarter and full year 2019 earnings call. At this time, all participants are in a listen-only mode. The 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 will now turn the conference over to your host, Kimberly Estricant, Investor Relations.

Thank you. Good afternoon, and thank you for joining us today for ASGN's fourth quarter 2019 conference call. With me are Ted Hansen, President and Chief Executive Officer, Fran 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 risks and uncertainties. and as such, our actual results could differ materially from those statements. Certain of these risks and uncertainties are described in today's press release and in our SEC filings. We do not assume any obligation to update statements made on this call. For your convenience, our prepared remarks and supplemental materials can be found in the Investor Relations section of our website at investors.asgn.com. Please also note that on this call, we will be referencing certain non-GAAP financial measures, such as adjusted EBITDA, adjusted net income, and free cash flow. These non-GAAP measures are intended to supplement the comparable GAAP measures. Reconciliations between the GAAP and non-GAAP measures are included in today's press release. I will now turn the call over to President and Chief Executive Officer, Ted Hanson.

Thank you, Kimberly. And thank you for joining ASGN's fourth quarter and full year 2019 earnings call. Before we get started, I have a quick housekeeping item to discuss. In the interest of time and efficiency, beginning on today's earnings call, we've decided to streamline our prepared remarks to include myself, along with ASGN's Chief Financial Officer, Ed Pierce. Fran Blazer, President of Apex Systems, and George Wilson, President of ECS, are also on the line and will be available to answer your questions during the Q&A session. So let's turn to the results. 2019 was the year of many accomplishments for ASGN as we continue to pursue our strategy to build an IT services provider of scale in the commercial and government markets via our differentiated resource deployment model. Our customers, including Fortune 1000 Corporation, federal defense and civilian government agencies, look to us to be more consultative than ever before, to proactively anticipate their needs, and employ advanced workforce management and cutting-edge IT solutions to accomplish each of their business objectives. Through continued organic growth, combined with select strategic tuck-in acquisitions, we successfully respond to our clients' most crucial and complex challenges. ASGN's ability to quickly but effectively act on our customers' evolving needs is evidenced by our solid financial performance. We are very pleased with our fourth quarter and full year 2019 results. All numbers reported for the quarter were in line with or exceeded our guidance, with revenues for both Q4 and for the full year 2019 improving double digits year-over-year. Margins also remain solid, with EBITDA margins of 11.3%, and 11.4% for the quarter and full year, respectively. Consolidated revenues for the fourth quarter totaled just over $1 billion, up 10.3% year-over-year and above the high end of our guidance range. I am pleased to note that this is our second consecutive quarter of greater than $1 billion in revenues. APEX, our largest segment, which services clients across multiple commercial and markets, generated revenue of $641.3 million for the quarter, up 6.1% year-over-year on very tough comps in the fourth quarter of 2018, in which segment revenues grew by 13.1%. For the full year, APEX segment revenues improved 9.6%. In terms of in-markets for the APEX segment, in the fourth quarter, business services, financial services, healthcare, and consumer industrial all posted double-digit revenue growth over the prior period. Aerospace and defense posted single-digit growth year-over-year for the quarter, and the communications, media, life sciences, and technology end markets each saw slight revenue declines over the fourth quarter of 2018. Despite the double-digit revenue growth in business and financial services accounts, There was a slowdown in these end markets in the final two weeks of December, which led to a revenue shortfall of approximately $5 to $6 million as compared to the same time period a year ago. This slowdown resulted from higher than expected time off our consultants, along with mandatory furloughs during the holiday period enacted by a small number of our key accounts. Top accounts still achieved high single digit growth rates for the fourth quarter, while retail and branch accounts grew mid-single digits year-over-year. Fortunately, in January, we saw production return to expected levels, and so we believe that this slowdown was isolated to the holiday season. To round out the Apex segment, Creative Circle posted revenue in line with our expectations for the quarter. Gross margins for the Apex segment were 29.7%, consistent with our expectations. Consulting work for the Apex and Oxford segments continued to grow with consulting revenues across both segments totaling $108.1 million for the fourth quarter, up 31.3% year-over-year. On a full year basis, the Apex and Oxford segments reported consulting revenues of $398.7 million, up 28.7% over 2018. Margins for our consulting work continue to outperform overall margin rates. As we continue to grow our consulting revenues organically, we also look to broaden our capabilities through strategic M&A. In the fourth quarter, we made significant progress integrating InterSys Consulting, which we acquired in mid-October 2019. We expect that the full integration of InterSys back to office support functions and systems will be completed in Q1, 2020. The Intersys acquisition has contributed positively to the overall profitability of the APEX segment and their contribution to our shared pipeline and bookings in the fourth quarter, which was above our expectations. With the integration of Intersys, we've been able to bid on an increased amount of work together, including securing new contracts in cloud strategy and DevOps-type engagements for multiple clients by leveraging work with our cloud partners. There's a scarcity of talent to support newer cloud services, as opposed to talent to support the traditional enterprise resource planning software vendors that have been around for decades. The APEC segment is able to provide consultants to assist with the implementation and upgrades of these new technologies within our clients' embedded systems. Most recently, InterSys and Apex Systems jointly won an engagement with a fast-growing fintech account where we will apply our advanced data analytics solution team and cloud expertise to develop operating reports and dashboards for our client customer service team. For this project, a newly acquired Mexican development center will be a critical component of our approach, and we believe this center was a contributing factor for winning this work. We are seeing great traction with InterSys' Near Shore Mexican Development Center, which will be able to serve many of APEX's U.S. clients. Some of our clients have even performed site tours of work being performed on behalf of their account. Now let's turn to our next largest segment, ECS, which provides IT solutions to the federal government, including the Department of Defense intelligence agencies and certain civilian agencies. fourth quarter, ECS reported revenues of $233.5 million, up 34.3% year-over-year, primarily driven by high demand for machine learning services and solutions from our defense customers. ECS's financial growth continues to be ahead of the industry average, and while we expected the segment to outperform for the fourth quarter and full year, performance was even stronger than initially anticipated due to a customer-driven early purchase of software licenses under a cost-reimbursable contract of $34.4 million that we originally expected would come in 2020. CCS's new business pipeline remains strong as we enter 2020. In Q4 2019, CCS received $110.2 million in new contract awards, resulting in a book-to-bill ratio of 0.5 to 1, which ultimately equates to a healthy book-to-bill ratio of 2.1 to 1 for the full year. Some of the key contract awards won by ECS in the fourth quarter included new tasking to provide technical and analytical support services to the U.S. Defense Advanced Research Projects Agency and a programmatic support effort for the National Oceanic and Atmospheric Administration, or NOAA. In the fourth quarter, we also saw a significant expansion of two key technology contracts that we hold with the U.S. Special Service in the areas of cloud deployment and geographic information systems used to optimize delivery routes. At the end of the fourth quarter, ECS had a total contract backlog of $2.6 billion, or a coverage ratio of 3.2 times ECS's trailing 12-months revenue. The Oxford segment, which offers on-demand consulting talent for commercial, IT, healthcare, life sciences, and engineering clients, reported revenues of $150.4 million for the fourth quarter, down slightly from the prior year period as a result of a decrease in per-placement revenue. I'd like to take a moment now to focus on our borrowing capacity and, specifically, the unsecured notes we issued in the fourth quarter. In November, we announced our intention to offer $500 million in senior notes for the market. Through the closing of this offering, we paid down a portion of our term loan fees with a bearable interest rate and established a new loan with a highly competitive fixed rate. This allowed us to secure a longer-term piece of capital while simultaneously lowering our balance sheet risk. I'm pleased to report that our team's execution of the deal was so successful that it was oversubscribed by $50 million for a total of $550 million. Being able to elongate our debt tenor at favorable fixed rates while simultaneously paying off our revolving credit facility and portions of our current term loans, we positioned ASGN to go back to the marketplace in the future to support our strategic needs. At Pierce, our CFO, We'll speak further on the specifics of our high-yield bond deal shortly. Importantly, our strong free cash flow has not only enabled us to pay down our debt, but to also make strategic tuck-in acquisitions that fit with our long-term strategy of providing higher value, higher margin consulting services to our commercial and government clients. Our goal is not just to buy businesses for their intrinsic value, but rather to purposefully add companies to ASGN that create strong revenue synergies with our existing businesses. To accomplish this goal, we maintain a very strong pipeline of future targets so that we can be ready to make opportunistic purchases in the commercial and government spaces that support our long-term strategy. While we are not necessarily shying away from transformative M&A, we are focused now on tuck-ins that enable us to leverage our current pipeline of opportunity, moving us up the value chain to scale our services while leveraging our market position and become even more entrenched with our clients. Case in point, in 2019, we successfully acquired DHA and InterSys as part of our ECS and APEX segments, respectively. Then, just over three weeks ago, we welcomed Blackstone Federal to ECS. It is clear that ASGN is an acquirer of choice in IT services and solutions for the commercial and government markets. We are pleased to welcome Blackstone Federal to ASTN. Their impressive group of technical and functional consultants deliver some of the most complex IT services from agile application development to cloud modernization and cybersecurity to the federal government. Blackstone Federal will be joining ECS's Enterprise Solutions Group. Blackstone Federal has an 18-year-old track record supporting the Department of Homeland Security, DHS, and its sub-agency. Through their addition, we deepen our digital transformation capabilities within our government IT solutions business and also add new prime contract pathways for our DHS customers. This acquisition fits perfectly with our hybrid growth and capital allocation strategy to scale ECS to over a billion dollars in revenues through a combination of organic growth and strategic tuck-ins. We anticipate Blackstone Federal will see 10% revenue growth this year and EBITDA margins in the mid-teens of 2020. With that said, I'll now turn the call over to Ed Pierce to speak in more detail about our fourth quarter financial performance. Ed?

Thanks, Ted. As Ted has highlighted, we've reported solid financial results for the quarter. And for the full year 2019, revenues, net income, and adjusted net income were all above the high end of our guidance estimates after excluding the one-time write-off of deferred loan costs and acquisition and integration expenses, which were not in our guidance estimates. Revenue growth for the quarter was 10.3% and included $34.4 million from the purchase of third-party software licenses under a cost-reimbursable contract at UCS. These purchases, which were expected to occur at various dates in 2020, were made in December 2019 at the direction of the customer to take advantage of favorable pricing and terms. Revenues from the other divisions were generally in line with expectations, except, as Ted mentioned earlier, revenues at Apex Systems were lower than expected in the last two weeks of December as a result of higher than expected time off by consultants and mandatory furloughs at a few large accounts. Gross profit for the quarter was in line with our expectations. Gross margin was, however, below our guidance estimate, mainly as a result of faster growth at Apex Systems and ECS than our higher margin division and a year-over-year decline in permanent placement revenue. SG&A expenses were above our guidance estimates and included $3.9 million in acquisition and integration expenses, which were not in our estimates. Excluding those expenses, SG&A was slightly lower than our guidance. In November, ASGN issued $550 million of senior notes through 2028 and used the proceeds to pay down borrowings on other senior debt. Concurrent with that issuance, we completed the restructuring of our senior credit facilities, our term loan B and revolving credit facilities, resulting in a one-quarter point reduction in the interest rates and an increase in the borrowing capacity under the revolving credit facility to $250 million. In connection with the restructuring, we took a one-time write-off of $18.9 million in deferred loan costs. Our effective tax rate for the quarter was lower than our guidance estimate due to certain favorable discrete items in the quarter, including excess tax benefits from stock-based compensation, a one-time benefit related to state tax planning initiative, and the true-up of state tax expense following the completion and filing of the 2018 state tax return. Our full-year effective tax rate for 2019 was 26.2%, and we expect our effective tax rate for 2020 before any excess tax benefits from stock-based compensation to be approximately 27%. Net income for the quarter was $39.3 million, which included the one-time write-off of deferred loan costs of $18.9 million or $13.9 million after income taxes, and acquisition and integration expenses of $3.9 million or $2.9 million after income taxes. Excluding these two items, net income was approximately $56.1 million, and slightly above our guidance estimate. Cash flow from operating activities were $81.4 million, and free cash flow was $71.5 million, or 6.6% of revenues. For the quarter, accounts receivable DSOs were 57.6 days, or 2.5 fewer days than Q4 of last year. Each DSO day is approximately $11 million. Adjusted EBITDA was $116.2 million and was above the midpoint of our guidance estimate. For the full year 2019, cash flows from operating activities were $313.2 million and free cash flow was $280.5 million. During 2019, we used $116.4 million of our capital resources for acquisition, $83.2 million to pay down debt, $20 million to repurchase stocks, and $53.4 million to increase our cash on hand. During 2019, our leverage ratio debt to trailing 12 months adjusted EBITDA declined from 2.69 times at the beginning of the year to 2.3 times at the end of the year. Regarding our financial estimates for the first quarter of 2020, we're estimating revenues of $990 million to $1 billion, that income of $42.3 to $45.9 million and adjusted EBITDA of 100 to 105 million. These estimates include the results from Blackstone Federal from the date of its acquisition on January 24, 2020. I will now turn the call back over to Ted for some closing remarks.

Ted? Thanks, Ed. 2019 was the year of solid financial and operational execution for ASTN. As we enter 2020, I feel confident that this year Also starting off on a positive note with the successful close of yet another strategic acquisition, Blackstone Federal. While it's certainly important to discuss our historical track record, it is also as important to review the go-forward opportunity. In 2020, the IT staffing market is expected to total approximately 33 billion, with ASGN the number two player in the space. The IT services market where we are quickly gaining market share, is several times larger than its staffing counterpart, at approximately $252 billion in size, with ASGN's total addressable market accounting for roughly $120 billion. As I mentioned when we began today's call, ASGN continues to differentiate itself through our unique resource deployment model. Unlike others in our industry, we are able to leverage the same candidate pool as staff augmentations, but then tailor our consultant selection to the project's individual needs. This makes our offering much more customized, competitive, and profitable for our clients. It also enables us to provide advanced, high-end technical solutions in addition to traditional staffing resources, the original foundation and backbone of our company. Our continued success on IT solutions engagement has resulted in long-standing relationships with Fortune 1000 companies and federal government and civilian agencies that know they can rely on ASGN to provide the most advanced workforce technologies and consultants available. Digital transformation is quickly changing companies' business processes from finance and procurement to inventory management. Enterprise resource planning, or ERP in particular, is expected to dramatically change with the introduction and acceptance of cognitive computing automation, AI, machine learning, and blockchain technology. To best service our customers in light of these evolving needs, we continue to invest in the training and certification of our workforce as well as in our facilities, including Apex's Development Center in Mexico, Apex's Gaming and Digital Innovation Center in Seattle, and ECS's Secure Operations Center in and advanced AI systems integration labs in the Virginia area. Our commitment to investing in areas of growth for our clients is evident in the awards we receive. During the fourth quarter, for example, ECS was named a TiVo Networks Platinum Technology Partner in cybersecurity area and a top 200 public cloud MSP for 2019. With a strengthening economy and a tighter labor supply, ASTN will continue to find ways to grow and evolve our offerings to meet our commercial and government clients' most critical needs. This will come from a balanced approach of organic growth combined with strategic tuck-in acquisitions that expand and enhance our IT service solutions. Thank you all for your time today and for your continued support of ASTN. We look forward to continuing to share our progress on future quarterly calls. We will now open up the call to your questions. Operator?

Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star 2 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 star key. One moment, please, while we poll for questions. Our first set of questions come from the line of Kevin McPhee of Credit Suite. Please proceed with your question.

Great. Thanks so much. Hey, it sounds like you folks have kind of given a little bit more context around the transition of the Fortune 500, more federal government procurement, things like that. Any sense of the revenue mix around that longer term from a contribution perspective and what that can ultimately mean to the margin profile of the business, and then just within the context of that, any sense of the pace of M&A this year, given, you know, just any thoughts as we kind of remix the business a little bit.

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

Yeah, for sure. Thanks for having us.

If you think about, you know, whether we have a target, if you will, for our mix of business between commercial and federal government, we really don't. You can see by the numbers that ECS has grown much faster than our other two segments. So naturally, that's going to increase there. But as they now approach 800 million and are basically 25% of the business, you can get a sense of the mix versus the commercial marketplace. But we don't have a specified target, if you will. And then as it relates to the question on acquisitions, I mean, I think you could see our posture is going to be what it's been here over the last 12 to 24 months, which is opportunistic. You know, I think that we look at capital allocation very carefully. It's one of the most important things that we do. If there is an acquisition out there that we think really is going to increase our value proposition as it relates to the customer, the contract that we make, with it for the solution set, then that's really the marriage that we're looking for. And at that point, you know, we're likely to make an opportunistic acquisition, but we don't have a target for a certain number of acquisitions during the year.

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

No. If you think about, maybe those are two separate things, Kevin. Okay. Definitely the furloughs and the awkward timing of the holidays in the last two weeks of the year, where both Christmas and New Year's Day are on a Wednesday, definitely have an impact on those two weeks, as we mentioned, to the tune of about $5 to $6 million. We've seen now those spend from those customers in January come back up to levels that we would expect. So I think that that's kind of a one-time event, if you will, at the end of the year. On the commercial side of the business, specifically with our Apex Square Circle and Oxford units, they naturally have a reset coming out of the pre-holiday period and into the 1st of January. You have budgets that are spent through. They don't restart immediately on January 1. And so we may typically lose 4% to 5% of volume, if you will, in those business units. as you come from the end of December into the first week of January. So I think those two things are not related, but the latter that I mentioned is something that happens every year. As it relates to the ECS software license, that is not going to be a problem for us on the pull-through in Q1 because most of those licenses would have been renewed in the second half of 2020. So it may be a little bit of a headwind then, but not here in the first quarter.

Super helpful. Thank you.

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

Hey, guys. Good afternoon. I guess the first question on on Apex and even adjusting for the $5 million to $6 million, which sounds like it was basically due to the holiday timing. The growth in the business slowed quite a bit from Q3, and I think total revenue you've guided to slowing a bit more in Q1. A quarter ago you talked about sort of normal ebb and flow of business coming and going and a pause. in demand at Apex and some of those end markets. Is that still how you characterize this, or are you seeing any impact from just some of the macro uncertainties following growth, trade, whatever it is, maybe having a more prolonged impact on growth?

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

Well, so go back. Gary, you're correct. At the end of the third quarter, we reported that our requisition flow or requirement flow was slowing down, and we reported that to you all at that time. That continued in through the fourth quarter. Having said that, the fourth quarter drop off at the end of the holiday period was probably the biggest surprise to us. The holiday following on Wednesday happened in 2014, and we looked at the numbers way back then when we did our forecast and didn't expect furloughs or some of the other increased pay time off. That's probably a little bit of the nature of American Work Society today. Having said that, we believe that our comps are obviously very tough in Q1 and Q2, from a year ago. If you look at Q1 and Q2 in 2019, we were over 14% and over 12% growth in the APEX systems. So tough comps, the normal reset at the beginning of the year, which Ted mentioned a few minutes ago, are things that we have to make sure we anticipate and overcome. Will RECs begin to pick up as budgets get solidified for the year? I don't know. That will unfold as the quarter goes on. But there's two industries where we definitely saw a slowdown, technology and telecommunications industry. So the other industries are still holding in double-digit range through fourth quarter. I would say also we're continuing to hire. We believe the opportunity is there, and our consulting business is doing very well, as you can tell from the numbers Ted gave. So it's a matter of all these moving pieces and see how it shakes out in the quarter.

Okay, thanks. And then the follow-up on the consulting business, you know, obviously that was quite strong, as you said. Is the right way to think about this that a lot of this is incremental demand because you're offering something new into the customer, or is it fair to say that a portion of that revenue, you know, is just a better fit than sort of a traditional assignment revenue that you have and that some of it's coming out of that? And the reason I ask is if you back that consulting out, the growth, you know, in the non-consulting part, I think it flowed even more sharply. But maybe that's not a fair way to think about it. Thanks.

Well, Ted, I'll go ahead and respond. Yeah. I think the second thing you said is more correct. There is definitely incremental new business coming to us because we're entering into areas where we're providing new solutions, doing different kind of work than we've ever done before. I think to some extent some of our past staffing work is being reintroduced reshuffled, if you will, or redefined into consulting work whereby we pick up more accountability and responsibility for driving the outcome and performance for our client as opposed to just providing the bodies. So it's a little bit of both, but I think definitely we see it as we're moving into a new frontier of new solutions and certainly taking on some accountability while controlling the risk associated with that.

Thank you.

I'll call it.

And Gary, I was going to add to that. You know, as you see us drive up the value chain, these are natural byproducts of what you're going to see there. So it's a positive thing. The value proposition to the client is higher. Our stickiness with that client will become that much more sticky. And then ultimately, you know, this is a, if you will, better business in terms of rate, in terms of margins. and in terms of board prospects for the business. So I think that this is, you know, the right strategy, if you will. And, you know, there will be ebb and flow here as we migrate up the value chain. Yep, I appreciate that. Thank you.

Our next question comes from the line of Edward Catno of Wells Fargo Securities. Please proceed with your question. Ed? Ed, is your phone on mute?

Yeah, sorry about that. Thank you for taking my questions. This is Justin Donati on for Ed. The first question I had was on your margin outlook for Q1. It looks like not only gross margins are down, but also EBITDA margins. So just wondering if you could walk through some of the drivers and, you know, how you're planning to offset some of these mix issues.

Justin, thanks for the question. You know, the one thing that you're going to see here as it relates to gross margins is that ECS becomes a much bigger part of the mix. You're going to see our gross margin profile kind of react to that from a mix standpoint. If you look at margins within the business unit, I think we're doing a very good job of maintaining and even increasing gross margin in certain ways. And then naturally, and I'll let Ed handle this, when you come across the year, you lose a certain amount of EBITDA margin in the first quarter, Ed.

Yeah, if you're talking about a decline sequentially, yes. That is mainly due to the payroll tax reset, and historically that's been, in terms of effect on EBITDA margin, about 130 to 150 basis points. And, you know, as it relates to the effect on gross margin, at least on the assignment business, it's roughly 90 basis points. If you look at it year over year, the margins really haven't moved that much, if you compare it with our midpoints. And Ted's right, I mean, the movement that you're seeing is going to be mainly the result of a sort of mix of business changing. And the other thing is probably a lower mix of permanent placement revenue. Does that answer your question?

Yeah, I appreciate the color there. And then just one last one. in your conversations with customers, have you been hearing anything about a slowdown in healthcare, life sciences? I know it's weaker this quarter, but in healthcare leading up to the elections?

No, I wouldn't characterize it that way. I think what you see from us in life sciences is just a refocus, if you will, of us serving the scientific and clinical market and really drilling down harder on IT. So, a little de-emphasis there, if you will, on our part. And so I think that's what's underneath that. I would say in the healthcare market, you know, relating to the election, that's not too much of what you hear. However, you do, you do naturally see, you know, healthcare providers being, in the past, they were really focused on implementation of EHR systems. Now that they have these systems, they're really focused on the integration of those systems to their other enterprise systems, as well as security and everything else that comes with that. You know, and so that's about most of the color that we hear from our healthcare clients.

All right. Thank you.

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

Thanks so much. Wanted to focus on Oxford a little. I know it's a small piece of the business, but excluding the decline in perm that you called out, it looks like the assignment revenues did start to increase year over year. I know you're not giving specific annual guidance for next year, but do you think you'll be able to grow the Oxford business next year, even if perm continues to go down?

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

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

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

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

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

Okay. Thanks. I must admit that. I appreciate that. Thanks so much. Okay. Sure.

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

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

George? Yeah, sure. Thanks, Dave. And I appreciate the question. No, nothing to call out that I'm concerned with in terms of win rates or any of those type of things. It's primarily timing in the industry, as well as we've got several things that are hanging out on protests and waiting protest awards. So I do expect it to pick up in Q1. We've already seen several awards that support that forecast.

Okay. Hey, Seth, I think, too, I'll add to that is, You know, we didn't over-celebrate 4.5 to 1 in the third quarter. And we don't want to, you know, there's not a problem to 4.5 to 1. Like George said, it's kind of the cyclical nature, if you will, seasonal nature, if you will, of government contracting. If you look at the LPM, it's a really healthy 2.1 to 1. So I think we're very pleased there. And like George said, I mean, we've got a lot of great prospects here.

Yeah, no, I understood. Thanks. Thanks. And then I just want to make sure I'm understanding the software license, the $34 million of revenue. Can you just have that impact margin in the quarter? Because gross margin came in a little bit light, you know, even with the big revenue. So I'm just trying to make sure we're calibrating for the impact on that revenue on margin.

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

Perfect. That's very helpful. I appreciate it, guys. Thank you.

Our next set of questions come from the line of Toby Summer of SunTrust Robinson Humphrey. Please proceed with your question.

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

Well, Toby, I think that this is, like, if you go back to our analyst day in 2018 where we laid out our five-year strategy, in the five-year target, we incorporated the idea that we were going to be moving up the value chain, now with ECS, now with APEC system, having more consultative capabilities, that that would be one of the drivers to help us move to the target we set, which was 12% to 12.5% EBITDA margin at the end of the five-year period. And so while we have a little up and down here in EBITDA margins as we deal with what's going on in the marketplace and the strategic evolution of our business, I still feel like those are good targets for us over the five-year plan. And then to cap back, you know, we've told you many times in the past that We typically set a target and come in right around 1% of revenues. I think we were right at it for the fourth quarter, and I think our stance on that remains the same.

Thanks, Toby.

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

Good afternoon. Thanks for taking my questions. So it looks like bill rates were up pretty strong in the fourth quarter, whereas volumes were down a little bit at Apex and Oxford. Is this just reflective of an extremely tight labor market, and is this the type of mix that you'd expect for the next several quarters?

I think, Tim, like we said, you know, you've got certainly the biggest contributor to this was the fall off in the last two weeks from some of our large customers here as they had furloughs, which eventually they worked through and are now back here in January. So that was the number one contributor. And then, you know, second to that, we expect our bill rates will continue to rise as we go after higher value, higher margin work. And so I think you should expect to see that. I think, too, an important distinction I would make is Pricing is not necessarily changing in our large account portfolio. So, you know, we're not driving a higher price every day in that work because those are typically set for a year and then they reset at other times. So the increase in rates that you see within our commercial units is definitely driving higher up the value and doing higher end, more complex work.

All right. Very helpful. Thank you. And then on ECS, this week the White House released their budget proposal, and I was wondering, it's early in the process, if you had any thoughts as to how this might impact ECS over the coming year. Thank you.

George? Yeah, sure. Actually, I looked at the Washington Post article, and it showed the federal civilian organizations that were being decreased, and I was very happy to report to my wife that we had Very few customers in that list of customers. We've been very focused on making sure that our customer set is very mission-oriented customer set, and that's where the budget monies are going, and that's where we're putting our capital investments. And so, you know, I'm not too concerned about the way that the budget was proposed. We'll see how it all ends up, but I wasn't very concerned about how it was proposed.

All right. Thank you.

Our final questions come from the line of Mark Martin of FAIR. Please proceed with your question.

Good afternoon. Thanks for taking my question. With regards to the consulting portion of the business, how much of that is in Oxford versus Apex?

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

Okay, and from, I mean, are we saying like 80%, 90% of it's in APEX? And what's the difference in terms of the go-to-market ratio?

I would say it's generally proportional, and the difference in the go-to-market is, I think, consistent with what each one of those businesses focuses on. If you think about Oxford, you know, not only are they serving IT, but they're also serving healthcare IT, the life sciences and regulatory marketplaces, as well as engineering. And so their work in consulting services falls across all of those different offerings. Where in APEX, the very highly focused IT within Fortune 500 and Fortune 1000 accounts in specific industries, the solutions there are more tailored to the profile of those customers.

Got it. And then with regards to the labor market, obviously it's quite tight. What are you seeing just in terms of any sort of elevation with regards to conversions and sales? And then how do we reconcile the tight labor market with the trends in perm?

So we haven't seen a real change in conversion. I mean, I think we spoke to what we saw at the end of the year, but didn't necessarily create or create anything that we saw around conversion. I will tell you that in the direct hire permanent placement marketplace, because it's so candidate-driven today, that it's definitely causing a bottleneck, if you will, in the ability to grow revenues at a faster rate. And so while our revenues in permanent placement are down year over year, they did grow sequentially Q1 to Q2 to Q3. And then in Q4, we saw the normal slowdown that we saw because candidates are less likely to leave a job at the end of the year when they're waiting out a bonus or something like that at the end of the year. So those are kind of the trends we would say. But overall, I would tell you that definitely because candidate supply is so tight that it is causing a more difficult environment to grow revenues than the permanent placement.

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

You know, it doesn't really affect our business, if you will, like it may some others. If anything, it's a help because – I would think it would be. Yeah, it's a help to us. I mean, it's a value proposition, if you will, to our large customers. I mean, we're bringing talent in a compliant way, and so that avoids the risk that they have in the gig economy world. So I think in that way – You know, I would say it's a slight help. I would not call it out as an industry trend in IT that's going to make a meaningful difference, if you will, in terms of growth rate, but it's certainly not hurting.

Great. And then in financial services, you were up double digits. That's terrific. How do you think about fin services as the year unfolds? And then I have one more.

Randy, do you want to take that one on financial services?

Well, I think we have a broad approach, Mark, to it, meaning we're not only focused on the big banks but regional banks, fintech, wealth management, insurance. So we do see some ebb and flow among all of those players. The banks continue to show some pretty good earnings results. So our anticipation is we'll continue to grow. You know, we have a big footprint in financial services, but if we're not broadening out our portfolio more, you know, we're not going to sustain the growth. And we're certainly trying to broaden out the portfolio.

Great. And then, InterSys, it sounds like you're seeing some early signs of success there. Can you just provide a little bit more color in terms of how the cross-sales have gone and the introductions into your existing client base?

Yeah, Mark, I think we've mentioned before, we have a pretty large pipeline across our Apex and Oxford units and Creative Circle units. with our account base for value services. So our pipeline is large enough that when we acquired InterSys, while we wanted them to deliver on their legacy accounts, if you will, we needed to cross-purpose them. So we have, we don't report this number, but the amount of pursuits we're doing jointly now is astronomical, considering we've only been at this for two months, two and a half months. We are really leveraging them across our entire client base. to the point we're probably wearing them thin, and so we have to watch that. But we're certainly picking and choosing areas, and I think we are focused on trying to get at that larger pipeline as opposed to just delivering on InterSys' legacy account. They're both important, obviously. Okay? Absolutely. Thanks.

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