ASGN Incorporated

Thank you for signing by. This is the conference operator. Welcome to the ASGN Incorporated first quarter 2020 earnings call. As a reminder, all participants are in listening mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then one on your telephone keypad. If you need assistance during the conference call, you may fill in the operator by pressing star and zero. I would now like to turn the conference over to Kimberly Estikin, Investor Relations. Please go ahead.

Thank you, Operator. Good afternoon, and thank you for joining us today for ASGN's first quarter 2020 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 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 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, Kim, and thank you for joining ASGN's first quarter 2020 earnings call. We hope that everyone listening today is staying safe and healthy. ASGN had a very solid Q1, with revenues and adjusted EBITDA both falling within our guidance ranges for the quarter. First quarter 2020 revenues of $990.5 million, were up 7.2% year-over-year. Adjusted EBITDA of 103.5 million increased 6.6% over the prior year. This growth was led by continued above-market performance in our ECS segment, which generated industry-leading year-over-year growth and revenues of $212.7 million, up 26.6% over the prior year, and by our APEX segment, where despite the impact in March from COVID-19 crisis, revenues of $629.1 million improved 3.8%, with APEX systems growing 4.4% on tough, double-digit year-over-year comps. Through February, we continued to see growth across our business at or above our expectations for the two months. As we entered March, and the onset of the public health crisis took hold, our businesses serving commercial market accounts leveled off, and in some cases saw slight retractions, while our federal government business continued to see strong growth. During late February and early March, I met, albeit virtually, with ASGN's Board of Directors and our senior leadership to execute our business continuity plans, as well as to deploy the necessary measures to ensure the safety, and well-being of each of our employees. Our teams moved quickly to understand and address the individual safety protocols and service requirements of our clients. Leveraging our strong technology platforms, we shifted our internal workforce to 100% remote. Then, over the month of March and into early April, over 80% of our billable consultants transitioned to remote work, with just a small portion of essential staff still working on site in compliance with the required safety protocols. The past eight weeks have been challenging, but fortunately for us, over this same time period, we've seen the benefits of the strategic initiatives we've undertaken to evolve and strengthen ASGN's business. We've become much more IT-centric, and in doing so, have expanded our large account portfolio, which now includes over 50% of the Fortune 500s, as well as key federal defense and civilian government agencies. We've increased our high-end IT solution capabilities, and as a result, our customers continue to rely on us not only to fulfill existing contracts, but also bring innovative ideas in cloud computing, networking, and mobility to enable their employees to work safely and efficiently off-site. Lastly, but certainly not least, we've gained significant exposure to the federal government marketplace an industry that is often more insulated from economic volatility than commercial industry segments, and we are now the prime contractor on many mission-critical assignments for the federal government. Each of these strategic developments has positioned us not only for stability during the current downturn, but also for strength in the future recovery. Our flexible cost structure and solid free cash flow generation provide further stability to our business. In the first quarter of 2020, we generated $48.8 million in free cash flow, up 33.9% year-over-year. At the end of Q1, we also had modest borrowings under our $250 million revolving credit facility, mainly due to our acquisition of Blackstone Federal in January, along with shareware purchases, which we have since ceased. A moderate amount of debt has always been part of ASTN's balanced capital allocation strategy and supported our ability to make acquisitions. I'm pleased to note, however, that as a result of our strong free cash flow, we paid for our most recent acquisitions, InterSys Consulting and Blackstone Federal, essentially with cash and did not need to take on any additional leverage. Even in the current market condition, our acquisition pipeline is active, and acquisitions remain a part of ASGN's long-term growth strategy. Continuing on with Strong's our strong financial position. As you may recall, in the fourth quarter of 2019, we improved our capital structure, issuing $550 million in senior unsecured notes due 2028 and amending our senior credit facility due 2025. As a result of these actions, we fixed the interest rate on half of our indebtedness, we lengthened our debt tenor by 2.3 years, and we increased our borrowing capacity under our revolving credit facility by 50 million to 250 million. These efforts could not have been timelier as they provided us with increased flexibility to direct funds in the best interest of our employees, our clients, and our stockholders. Importantly, we have no principal payments due on any of these borrowings until they reach maturity. With that as background, let's now talk about our performance in the first quarter. APEX, our largest segment, which includes APEX Systems and Creative Circle, services clients across multiple commercial and markets. For the first quarter of 2020, the APEX segment generated revenues of $629.1 million of 3.8% year-over-year on a very difficult double-digit count. As you may recall, the APEX segment grew 12.5% year-over-year in the first quarter of 2019, with APEX systems leading the way at 14.1% growth over the prior year period. Fair Circle posted very slight growth for the quarter. Early growth levels slowed in March, attributable mostly to the crisis-driven reduction in ad, event, and per-placement revenues. Only digital-related skill placements held steady through the quarter. APEX Systems revenue grew 4.4% year-over-year. Revenue for APEX Systems, while holding steady in March, demonstrated some notable trends for the final month of the quarter. Revenues in financial services, business services, consumer industrial, despite weakness in retail, energy, hospitality, and transportation, specifically airlines. And aerospace, defense, and life sciences were all up in March year over year. Keep in mind that APEX has a limited exposure to the airline oil and gas and hospitality industries. Revenues in healthcare, telecommunications, and technology accounts were down in March year over year. Revenues in skill areas such as cloud, digital, software engineering, project management, software maintenance support, Java, and mobile development performed the best, while electronic health records modernization, information security, scientific, QA, and business intelligence were down in March compared to the prior year. We are seeing some green shoots being created in financial services. As stimulus funding pushes through commercial banks, It is creating a heightened need for our clients to implement new IT measures. APEX systems' large exposure to the financial services industry should provide both growth opportunities and stability to our business going forward. APEX segment top accounts achieved high single-digit growth rates for Q1, while branch-centric accounts declined low single digits. APEX segment gross margin totaled 29.3% for Q1, consistent with our expectations. Importantly, segment margins remained steady throughout March. Consulting work for the Apex and Oxford segments totaled $104.1 million for the first quarter, up 22.2% year-over-year. Margins for our consulting work outperformed overall margin rates for both the Apex and Oxford segments. We expect that our high-end consulting offering will continue to be an important source of the value we provide our clients going forward. As we continue to grow our consulting revenues organically, we also broadened our capabilities through new opportunities presented by Intersys Consulting, which we acquired in the fourth quarter of 2019. With the integration of Intersys, we've been able to bid on an increased amount of work together. Most recently, as a joint effort, Apex Systems and Enersys supported a large consumer production company with their transformation efforts to cloud computing and more modern data capabilities. Apex Systems and Enersys also led a large consumer services provider in their journey to modernize their IT product set and fully integrate the system with the client's CRM. We are also seeing great traction with Intersys Near Shore Mexican Development Center, which is well positioned to serve many of the APEX and Oxfords US clients. Interestingly, under current market conditions, we've witnessed a growing number of clients looking to reshore their capabilities, as outsourcing companies are finding it difficult to transition their offshore staff to remote work. Our Near Shore Mexican Development Center provides a great alternative when traditional outsourcing to offshore may not be feasible or come with newfound risks. Let's now turn to ECS, which provides mission-critical solutions for the federal government, including the Department of Defense, intelligence agencies, and other civilian agencies. ECS continued to achieve industry-leading revenue growth for the first quarter of 2020 and reported revenues of $212.7 million up 26.6% year-over-year, primarily driven by continued high demand from federal government customers for machine learning and artificial intelligence services, an increased volume of cloud services and solutions, and new opportunities presented by strategic M&A. ECF did not see a slowdown in revenue in March. In fact, the segment saw a slight pickup in revenues in the final month of the quarter, as is consistent with ECS's March performance. We are fortunate to have seen no material changes to revenue or backlog in ECS in the first quarter of 2020 as a result of the COVID-19. In an economic downturn, government work tends to be more stable, and thus ECS provides a nice safety net to our business. We also often see the federal government spend more money during recessionary times to stimulate the economy, ECS's new business pipeline remained robust with no slowdown in customer requests for proposal during the first quarter. The segment achieved a strong book-to-bill of 1.4 to 1 and received $294 million in new contract awards. Key contracts won in Q1 include high-end technical solutions for a global public safety network within the Department of Defense, a significant expansion of machine learning services under a new contract also within the Department of Defense, and the significant expansion of professional services provided to the U.S. Postal Service. This strength in the first quarter awards increased contract backlog to $2.7 billion at the end of Q1, or a healthy coverage ratio of three times ECS's trailing 12-month revenues. As it relates to M&A, we've continued to be acquisitive in the government markets. In January, we welcomed Blackstone Federal to ECS, adding new prime contract pathways with the Department of Homeland Security. Blackstone has now been fully integrated into ECS, and both ECS and Blackstone's customers are seeing the benefits of the combined companies. In times of global crisis, the work ECS performs for our federal government becomes even more vital. Towards the end of March, ECS was tasked with aiding the U.S. Navy's COVID-19 relief efforts on the West Coast. Members of the ECS team are now serving as the IT mission lead, as well as the division officer for automated data processing and communication on the U.S. Navy ship Mercy, a ship equipped to provide rapid, flexible, and mobile acute medical and surgical services. We are proud to support our government in meeting critical challenges during such a trying time for our nation. Turning to our last segment, Oxford, Oxford offers on-demand consulting talent for commercial IT, healthcare, life sciences, and engineering clients. Oxford reported revenues of $148.7 million for the first quarter of 2020, down slightly year-over-year, while the segment's permanent placement revenues were up 1.8% over the prior first quarter. Keep in mind, however, the permanent placement work comprises only 3.4% of our consolidated ASGN revenues. As we enter the second quarter of 2020, we know that the effects of COVID-19 will last well beyond the impact ASGN first began to experience in mid-March. Given this uncertainty, we will not be providing our typical quarterly guidance for the second quarter. Instead, we will offer several revenue scenarios in our supplemental materials which you can find on our investor relations website. Ed Pierce, our CFO, will provide additional details on these scenarios. Even without our typical near-term visibility, our scale, high-end service offerings, and large and diverse client base, including a significant portion of business that relates to the stable federal government work, position us well to not only address the immediate challenges related to COVID-19, but also to drive longer-term value, Our flexible cost structure provides further stability to our business. As a reminder, ASGN carries little if no bench. As a result, when our assignment revenues decline, our cost of sales fall proportionately. Our cash SG&A expenses are also variable, with one-third of these expenses comprised of incentive-based compensation tied directly to gross profit or adjusted EBITDA. With that said, when our revenues decline, we see a higher conversion of our free cash flow to adjusted EBITDA due to lower working capital requirements. I will now turn the call over to Ed Pierce to speak more about these revenue scenarios and discuss our first quarter financial performance in further detail. Ed?

Thanks, Ted. Good afternoon, everyone. As Ted mentioned, our financial results for the quarter were in line with our guidance estimates. despite experiencing some softening in the last couple of weeks of March related to the effects of COVID-19. Operating cash flows were also in line with our expectations. As most of you know, operating and pre-cash flow tend to be seasonally lower in the first quarter, mainly related to the payment of annual incentive compensation pertaining to the preceding year. Revenues for the quarter were up 7.2% year-over-year, reflecting double-digit growth at ECS, which included a $9.1 million contribution from Blackstone Federal and single-digit growth at APEX segment. Permanent placement revenues were slightly down year-over-year. Gross margin for the quarter was 28.4% and at the high end of our guidance range, but down approximately 20 basis points year-over-year, mainly related to the high growth of our ECS segment which carries a lower gross margin than our other operating units. Although ECS has a lower gross margin than our other divisions, its gross margin compares favorably with similarly situated federal government contractors, and its adjusted EBITDA margin is only slightly below our consolidated margin. SG&A expenses were slightly above our guidance range because of acquisition and integration expenses of $2.5 million, which were not included in our guidance. Excluding those expenses, SG&A came in below our guidance, mainly as a result of lower than expected branch compensation expense and healthcare costs. Our effective tax rate of 26.5% was slightly lower than guidance as a result of excess tax benefits on stock-based compensation, which we do not include in our guidance estimate. Net income, adjusted net income, and adjusted EBITDA were all within our guidance ranges and benefited from gross margin coming in at the high end of our range and favorable operating expense variances. Cash flows from operating activities were $64.1 million, and pre-cash flow was $48.8 million. Capital expenditures for the quarter were $15.3 million, which included costs related to a major front and back office systems upgrade project. Quarter end, our senior secured debt leverage ratio was 1.14 to 1, and we had $213.1 million available under our $250 million revolving credit facility. Subsequent to the end of the quarter, we repaid all borrowings under the revolver and now have full availability. Because of the uncertainty caused by the COVID-19 pandemic, as Ted mentioned, we're not providing financial guidance For the second quarter of 2020, we plan to resume providing forward guidance once the effects of the pandemic on our business become more predictable. In place of our traditional guidance, we included in our supplemental earnings material certain scenarios that illustrate possible financial outcomes at various revenue levels. While these scenarios consider production trends over the last few weeks, it is not possible with any degree of precision to predict trough-level revenues, when a trough will occur, or what the rate of recovery will be. Having said that, these scenarios do illustrate the benefits of our federal government services business, which we expect will be up year over year, the breadth of our commercial account portfolio, and the benefits of our highly variable cost structure, as well as other actions we are taking to manage our adjusted EBITDA and free cash flow generations. We assume for all the scenarios that our permanent placement revenues would be down more than 50% year-over-year, and that our ECS segment would grow high single digits. As illustrated by these scenarios, as revenues decline, we would see some compression in our gross and adjusted EBITDA margins. Our adjusted SG&A expense margin, which excludes depreciation and stock-based compensation, would improve or flatten relative to the same period of last year. The compression in gross and adjusted EBITDA margins would be mainly attributable to the assumed higher decline in permanent placement and creative marketing revenues, which are our highest margin revenue streams. We would also expect a high conversion rate of adjusted EBITDA into pre-cash flow due to lower working capital requirements and the benefit of the deferral of the employer portion of the FICA tax as allowed by the recently enacted CARES Act. Our pre-cash flow is expected to be sufficient to meet our operating and capital requirements, and we expect to have full availability under our $250 million revolving credit facility. In closing, just a few comments on our recent production data. On a consolidated basis, preliminary revenues for the first three weeks of April are down low single digits year over year. Our largest operating unit, APEX Systems, which accounts for over 54% of revenues, was flat year over year, and ECS, our federal government services business, which accounts for approximately 22% of our revenues, was up low double digits. Our other units, Creative Circle, Oxford, and CyberCoders, which in the aggregate account for approximately 24% of revenues, were down double digit, with the highest declines occurring in permanent placement and creative marketing revenues. These recent production trends were considered in the development of the financial scenarios included in our supplemental earnings materials. I will now turn the call back over to Ted for some closing remarks. Ted?

Thanks, Ed. Although we may not be providing formal guidance at this time, we are confident in our business model and ASGN is now in a better position to manage an economic downturn than at any other time in our company's history. We do not know if we've hit the bottom, but the revenue rate of decline in April as of today has lessened across the affected units of our business. Ultimately, the real rate of return of the economy will be based on how fast the health crisis is resolved. We cannot expect businesses to open their doors on day one, nor can we expect that each of our accounts will be back to pre-COVID-19 levels immediately. Recovery will be gradual, and it will vary from client to client based on local, state, and federal policies for reopening the economy. With over three decades since our founding, ASGN has been through several economic downturns. Y2K, the recession of the early 2000s, the Great Recession of 2008 and 2009, and several government shutdowns and continuing resolutions. Most recently, in the Great Recession of 2008 and 2009, we saw the overall staffing industry pull back more than 25%. APEC Systems, for example, experienced a reduction in demand for their services, though not nearly to the extent of the industry as a whole. Government contracting revenues for ECS grew as their market tends to be counter-cyclical. Permanent placement work saw the largest declines, but as I mentioned earlier, perm work has become a much smaller piece of our revenue mix as we increasingly focus on higher margin IT consulting services and solutions. Today's ASGN is not the on-assignment of the Great Recession. More than 85% of our revenues today, including the mission-critical government business provided by UCS, were not part of our company at the time. we have since evolved to focus even more on higher-end, higher-margin IT services and solutions. In the past year alone, our IT consulting and solutions business grew to be over 30% of our consolidated revenues, with two-thirds of this representing the longer-term projects performed by ECS for the federal government and one-third associated with IT consulting and statement-of-work projects performed by Apex and Oxford for our commercial clients. In the coming weeks and months, we will continue to evolve our business as a foremost provider of IT consulting solutions and services to the commercial and government industries. We will maintain our unique market position by leveraging our longstanding client relationships to grow our IT services business organically, and when the time is right, make additional tuck-in acquisitions that expand our capabilities and add key clients and contracts to our business pipelines. We will continue to serve our clients and execute against our current contracts, safely leveraging our contingent labor force to drive profitability and margin stability for our company. And we will maintain our focus on smart capital deployment, generating strong liquidity and using our free cash flow in the best interest of our company and our stockholders. Over the last few weeks, I've witnessed an enormous sense of community at ASGN. We are fortunate to have one of the largest, most skilled contingent workforces available for remote work today. In addition, each of our business segments, APEX, Oxford, and ECS, is led by deeply experienced and capable individuals who have successfully served clients and managed our business units during positive and negative market cycles. Their experience provides me with great confidence in ASGN's ability to navigate this crisis. I'm thankful for all of our employees who together have gone the extra mile to ensure that our business continues to run smoothly and our clients' critical IT needs remain a top priority. On behalf of our entire company and board of directors, thank you for your continued support of ASGN. We look forward to emerging from today's challenges even stronger than we entered them. We will now open up the call to your questions.

We will now begin the question and answer session. To join the question queue, you may press star then one on your telephone keypad. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any key. To withdraw your question, please press star then two. We'll pause for a moment as callers join the queue. The first question comes from Edward Caso with Wells Fargo.

Please go ahead. Hi. Good evening. Thank you for the great detail here. Can you talk a little bit about what your clients are asking you for as far as price, any price or payment term concessions? Thank you.

Ed, thanks for being on the call. I'm going to let Rand answer that one. Obviously, in the commercial space, our work is excuse me, in the government space, our work is already contracted for a price standpoint. So really not as relevant there. But, Rand, do you want to talk about what you're seeing in the commercial marketplace in large accounts?

Sure. And I think we have had some where our accounts have come to us and asked for price concessions. They recognize that those price concessions may be borne somewhat by us but also passed on to contract employees. who when you see the broader market, the amount of unemployment, they kind of understand and get it and generally are supporting and staying with the account. I would say in our big top accounts, not much of it, Ed, but in other accounts we've had a little bit. I wouldn't say it's overly material at this point.

And my other question is around help us differentiate for the impacts with the Fortune 500 clients versus maybe some of your more middle or branch accounts. How are they behaving as far as turning off business, not turning off business, concession requests, and so forth?

Brad? Well, Ed, I think, look, by our numbers, you can see our top accounts are growing still very positively, and our smaller accounts are not. They're in slight negative territory. So, I think it varies by industry. You know, for example, hospital chains. Hospital chains have big chains, and they have small onesie-twosie hospital accounts. What we've seen is the smaller, most of health care has tried to hunker down and just fight the virus as opposed to doing new IT initiatives. So you have that trend going on. Smaller technology accounts we have definitely seen have pulled back their work, where the larger technology accounts have not. Amazon, Microsoft, you know, you can read the ones in the paper, are still hiring today or looking to expand or pursue certain initiatives. So it varies by industry a little bit. It definitely is hitting the smaller guys more than the bigger guys, who I believe since the beginning of March have, I think, pride to keep the economy flowing. At least that's what our belief is, my belief is.

And the only thing I would add to that, The only thing I would add to that, and I agree with everything Rand said, was there's a difference in how we serve large accounts. We're such an important part of the fabric of how the CIO operates their technology shop. While we're working at home and doing these different things, all of those needs continue. In smaller accounts, we provide very important resources, but they don't play the same role, if you will, for those organizations. I mean, I think that's part of the differentiation here as well.

Great. Thank you. The next question comes from Seth Webber with RBC Capital Markets. Please go ahead.

Hey, good afternoon, everybody. I hope everybody's well. Following up on that last question, is there anything that you're potentially seeing from a collections perspective from your smaller accounts that could potentially derail what should otherwise be a pretty strong free cash flow set up here for this year?

You know, Seth, although we're definitely wary that that could be an issue, we're not seeing anything significant to this point. I think our DSOs continue to perform well and You know, you would expect that maybe in some smaller accounts that could be an issue in the future. Again, I think that's a benefit both of the large account strategy that we have in the business on the commercial side of things and on the government side, it's a non-issue. You know, they continue to operate and execute that part of the world as they always have.

Okay, thanks. Maybe just to follow up for George, Just kind of your confidence in the unfunded backlog portion of the ECS business. I think there were some comments in the prepared remarks about how government can sometimes increase business activity here during slow economies. Is that your feel for what's going on here? Do you feel your level of confidence in that unfunded backlog? Do you just sort of handicap that for us?

Yeah, sure. We feel very confident in our unfunded. Yeah, Ted, we feel very confident in our unfunded backlog, and that's just the way we track it, regardless of what's going on with COVID. But with COVID and the way that the government is moving forward, we feel very strongly about being able to capture our unfunded backlog as well.

Okay. Thank you very much, guys. Appreciate it. Yep. Thank you. Okay.

The next question comes from Toby Sommer with SunTrust. Please go ahead.

Thank you. Ted, in your closing remarks there, you mentioned that the revenue rate of decline in April as of today is lessened. Is that to say sort of this last week of April is not as steep a decline as some earlier week within the month?

Yeah, I would say that that's true, Toby. I mean, we saw our largest rates of decline last beginning in those first two weeks of April. It seems to have lessened here, and in some cases kind of flattened out, but it's week to week, obviously, and something that we'll have to continue to watch, and we'll be dependent on these other factors outside of our control around the health crisis and the economy.

From a strategic perspective, You've had an active pipeline and executed on some small but strategic acquisitions in the consulting space. Is this crisis going to afford the company its balance sheet and cash flow some more interestingly valued opportunities over the next couple of quarters? And can you describe your kind of appetite amid uncertainty to continue to execute on those?

Yeah, I think that's a good question. I mean, we certainly continue to evaluate opportunities, and I think, you know, like you said, the pipeline is, we see it good and robust, and I think in some ways that this could afford certain opportunities, maybe not so much in, you know, obviously in the government space, most of these businesses are less affected. So, You know, things could maybe not, from a valuation standpoint, change as much there, but in the commercial marketplace, they certainly could in some ways. So we'll have to see how all this settles out, but, yeah, we feel really good about where our balance sheet is, our ability to step in and make acquisitions. We certainly feel, and I know that the targets we acquire in the past feel that we're an acquirer of choice, and we have a really good situation here. we think all that stuff, uh, in earnest to our benefit and we'll be well positioned, you know, as opportunities arise or arise. And I think in situations like this, surely things, um, you know, become opportunities that may not otherwise have been, been said. So we'll, we'll stay diligent, you know, working through this.

What's the firm's posture? Last question for me. What's the firm's posture on, uh, sustaining in perhaps growing its, internal sales generating headcount to be able to slingshot out of this a little bit faster than the market? Thanks.

Yeah, well, I think, look, always first and foremost, we need to continue to invest in ourselves. So we'll stay close to our accounts. Our go-to-market approach, both from a geography standpoint, an industry standpoint, top account standpoint, you know, I think positions us well to stick with these clients, to be there in tough times like these, even if they don't need us as much, and to be there as they slingshot forward, use your words, coming out of this. That's, you know, we've certainly been through this a few times, and so in all those ways, we're going to stay close to our clients because they're big opportunities for us, you know, on the other side of this, for sure.

The next question comes from Surinder Thind with Jefferies. Please go ahead.

Thank you for taking my questions. Just one follow-up on the April trends. In terms of the declines that you guys are seeing, is that clients putting projects on hold, or is that simply like new clients or projects not taking off? You did mention that with some of the larger clients, Obviously, there was continued interest in onboarding staff, but can you talk a little bit about that mix of what's causing those trends?

Yeah.

Ray, do you want to take that from a camp perspective?

Yeah.

Yeah, I think there are some natural projects that come to a natural end, and I would say some clients have been a little reticent to start a new project until they see where the bottom is, I presume, in the economy and in their own businesses. So it's a combination of the two things, but it's not an outright shutdown thing. We haven't seen that. What we've seen is projects coming to a natural end, as I said, and some are being delayed to start. But I would expect that a little bit from the clients.

That sounds fair. Can you provide any color on the number of perhaps new projects that are starting at this point or any color there that you can provide?

Well, in terms of numbers. Yeah, we haven't given that. Go ahead, Ted.

I was going to say, we don't give out that information, surrender, on these type of calls. Obviously, that's competitive information. But, you know, we've seen clients, as Rand said, be willing to continue things in this environment. They start some things. They defer some things. You know, and I think it's kind of client by client, industry by industry.

Fair enough, that's helpful. And then in terms of the scenarios that you guys did provide, very helpful. What was the consideration? Was it simply April trends, I guess, for using the range of minus 5% to minus 10% in revenues? Why not stress, let's say, minus 15% in revenues? Can you help me provide some color on the range that was employed?

Ed, do you want to take that?

We wanted to show enough information in these scenarios to where you could kind of get a sense directionally what would happen in the event that these declines in revenues would occur. I mean, we could have stressed it quite a lot, but I think we've given you enough information to where you can take what we've given you, and if you want to take it out another two and a half points or five points, you're able to do it.

Thank you. And then in terms of the overall revenues, what was the contribution from acquisitions in terms of the dollar amount? And then what does that translate into an organic growth rate for Q1?

Well, there's really two main acquisitions. You know, we acquired Blackstone in January, and that contributed, as we said in our presentation, press release that it contributed $9.1 million. And the other was InterSys, and, you know, it's been integrated into APEX, and so we're not going to give specific information on that any longer. But, you know, I'm trying to remember, you know, probably the rule of thumb for them would be, I don't know, maybe $10 million, $11 million. Does that sound right? I mean, given what the contribution was in Q4?

Well, for a quarter. Are you talking about revenue for a quarter? Yeah, I think a little less than that number was their run rate prior. But as Ed said, they provide a great technology base for us, and we've really applied them on our pipeline of opportunities around the business. So they've been pretty much disassembled and farmed out. they were running at slightly below $10 million, so closer to probably $8.5 million, $9 million prior to the end of the last fiscal year.

Understood. And there should still be some benefit from DHA from last year, correct? Because I believe that that didn't close at the beginning of the year, so there should be some contribution from there as well.

Yeah, but not a lot. I mean, you know, we – That was – you had two months in 2019 in Q1. So – Okay. Thank you. It wasn't a significant – January of 2019 would not have been a significant revenue number.

Understood. And then perhaps just a final quick question – you did talk about having some willingness for the pipeline for deals in terms of M&A, obviously focused a bit more on the federal side of the government side of the space. As you've mentioned, that obviously valuations haven't changed there much, but I assume on the commercial side, there would probably be little appetite given more depressed values at this point.

Well, I think it's situational, you know, You know, I think it depends on their offerings, you know, how high or low they are on the digital spectrum, what industries they serve, how big the business is. So I don't know that you could paint a broad brush over it. I would say it's situational.

Okay. Hey, Ted. Ted, excuse me. Ted, can I add something to that? Sure. And, Ted, I think you would agree. Situational also meaning – Where's the bottom? You know, when we feel a little more comfortable that we've seen a bottom and where any particular company we're interested in, whether they have a bottom where they're declining or in their revenue stream. I think that's part of that situational analysis, right?

That's helpful. Thanks for the question.

The next question comes from Gary Bisbee with Bank of America Securities. Please go ahead.

Hey, guys. Good afternoon. So earlier you commented, I think it was about Apex mostly, that some of the projects come to a natural end and may not be renewed. Some are delayed in starting. Others, you know, you get the follow-on business continues to come through. Can you give us some sense, like, You know, how much of the portfolio have you gone through that? And what I'm really trying to get at is, is there some risk that a bunch of projects, due to the duration, haven't yet gone through that, and you could see a step down as more of them hit that sort of end of the engagement? Or is the cadence of that such that you would have already seen a lot of that impact if it's happened in the last, you know, six, eight weeks?

Brad? Yes. So let me respond to that in a slightly different tilt. If we had projects that were in the airlines, hospitality, oil and gas, those came to natural ends or quick ends, mostly because of what those clients are going through. I think Ted pointed out earlier that's a small percentage of our revenue base, but we definitely have seen more brisk movement on those projects in terms of taking them to a natural end. When do they start up again? Depends. When you look at the rest of our business space, I think you have to get away from just projects into there is a certain percentage of our work that's supporting the infrastructure of our client base. And that work doesn't have a natural end. It has ongoing support. We found this in 08 and 09 when we went down, Apex went down very little in those two years, zero in very small negative numbers. because so much of our business was in supporting the infrastructure of our client base. So we have a lot of infrastructure work that gives us a cushion as well on the commercial side of the business, say within Apex. So I think you have to look at it not so much by project mentality, but what's the segment of the industry that we're looking at? How much infrastructure work is it? In terms of new consulting projects like you're probably thinking of, that may vary, but it will vary by the industry. We have not seen a slowdown, as Ted reported to you, you know, in financial institutions or in other parts of consumer industrial aerospace defense or client base or that sort of thing. So does that help give you some insight about that? And definitely the oil and gas, we have seen the hit. We have seen that hit already. Okay?

Okay. That's helpful. The obvious follow-on is, if you could give us some sense how much of the book of business is that, quote-unquote ongoing infrastructure support work, but maybe I'm getting greedy trying to ask that.

Ted, do you want me to keep going here? Yeah, we don't disclose that, Gary. So, yeah, I think the right way to think about it is the way Rand laid it out. I mean, we're – And, again, I think there's several different things in our comments, both in the trend in April, what we saw in industries for March. I mean, that you can kind of piece that together.

Yeah, fair enough. And then just one more for me, I guess, a question on ECS. The growth there, even adjusting for the acquisition, was quite robust. Last quarter, and we've seen occasionally this concept of, technology pass-through, low-margin revenue. Was there any of that of scale that you call out? And I guess what I'm really trying to get at is the high single-digit year-over-year ECS revenue growth in the scenarios you provided, you know, is significant slowdown from Q4, Q1. And so is that the reason or some other reason? Maybe it's just conservatism visibility, but any color. Thank you.

Ed, can you help him unpack the growth rate there?

Yeah, I mean, you recall in Q4 we made mention of a large transaction that happened at the end of the year. It was $34.1 million, I think, in license or early purchase of license that would have otherwise renewed in 2020. In Q1, we had some of that, but not to that degree. I think if you look year over year in terms of those type of transactions, that may have been up $10 million or so. But what's important, I think, about the numbers, and George can comment on that, is that we had a very high growth rate in our direct labor that drives high margins in that business.

Yeah, sure. I'd like to comment. What we saw last Q4 of last year, as Ed pointed out, was $34 million of what was moved forward from licenses we would have procured in this fiscal year. So overcoming that and still seeing a strong growth in Q1 is pretty spectacular. The other thing is, you know, these licenses and the things that we acquire are part of the solution that we're delivering and customer solution as opposed to a simple pass-through. So, you know, they will continue to occur as we continue to advance our solutions. And some of them are lower margins, but others are part of the solution. If it's a fixed price delivery and such like that, then, you know, it's typically a higher margin than government solutions. But thanks for the question.

Thank you. The next question comes from Henry Chen with BMO. Please go ahead.

Hey, guys. Good evening. I wanted to ask about the comment you made about the positioning of ASGN on assignment relative to the last recession and being more on APEX. I was wondering if you could just comment a little bit more about that, you referring to that based on what you're seeing in, say, like the branch business or like the resiliency and just kind of just want to understand how the positioning works here.

Yeah, I think if you think about on assignment in 2008 and 9, right, Henry? That's the time period you're referring to, I think. Yeah. It was a collection of different staffing units, healthcare, scientific, and also Oxford, you know, which was partly IT and partly engineering and some other things. and mostly focused on smaller and mid-market accounts by nature just of those offerings. And, you know, while, you know, that I just think by nature caused that business to pull back with the rest of the industry, if you will, during that 2008 and 2009 recession, and especially with Oxford that was serving big enterprise ERP type of implementations and you had a credit crisis. you know, in that, obviously in that 08 and 09 time period, the CapEx around that really got turned off. You know, I think the difference with who we are today is one, we're fully IT-centric, IT digital-centric. Number two is we're predominantly a large account business, more than 75%, slightly more than 75% of our business is through large accounts or federal government accounts. And so we're just And these are accounts that we've been a part of and have relationships with, not just for months and a year, but for years and decades. And so we're really an important part of how they keep their technology running and get things done. And what we have found through different economic recessions and certainly through 08 and 09 is that's where you want to be because you're that much more important to the client and your business has that much more stability to it. You know, there's a real difference in who we are today versus who we were during that time period.

Hey, Ted, this is Rand. Can I comment real quickly? It may not be clear from the text, but APEX and ECS were not part of on assignment in 08 and 09. So while Ted said everything absolutely right, if you look at it organizationally, 70-some percent of our revenues were not in the business back then. Okay, so just make sure you see that and understand that.

Yeah, actually, yeah, more than 80.

Yeah. Okay. Okay, yeah, that's super helpful. Thank you.

The next question is from Tim Mulroney with William Blair. Please go ahead.

Yeah, good afternoon. Just taking a step back and looking at the long term, do you think – COVID-19 will ultimately spur additional demand as companies scramble to bolster their digital capabilities and shift more towards remote working?

Yeah, Tim, I think, you know, obviously, and this is in all parts of our business, it's not specific to industry or size of account, but digital transformation doesn't become less important because of all this. It's just as important or even more so. And I think coming out of you know, this crisis that we're in and this economic downturn, you know, clients are going to have to continue to develop their systems, even at a faster pace. And as have been opened up in certain ways around the fact that we need to be ready to handle remote or different types of work, that we need to continue to have technology systems where we can engage in an electronic way with all of our constituents, you know, that Having work, you know, done offshore needs to be considered carefully because there are certain risks that come with it. I think that's a learning coming out of this. So I think in a lot of different ways, you know, certainly none of this changes the need for digital transformation. It remains, and it's even enhanced.

Got it. Thanks. And can you also just talk about any difficulties or types of adjustments that you've had to make or are making with regard to onboarding new consultants and temps on assignment recently? I'm curious how your processes have had to change during the quarantine.

Yeah, look, I think I'm really proud of our teams. I mean, we obviously have tested having to go to some amount of remote work, either with our consultants or with our internal staff, but to go nearly 100% like that in two weeks, our teams did great, our systems proved up, and that went very, very well. We've been able to stand up projects and resources in a remote fashion The government, as it relates to I-9s and other kind of administrative issues that need to be done, have been flexible about allowing for that to happen. And then our clients have been really engaged in all of this, and they've been a big help in all of it. So I think, you know, that's not really turned out to be a problem, thankfully so, and it's taken the engagement of everybody in it to make that happen smoothly.

That's helpful. Thank you.

The next question comes from Kevin McVey with Credit Suisse. Please go ahead.

Great. Thanks. Hey, thanks for all the color. Hey, what are you folks doing internally to prepare for kind of COVID-19? And just can you remind us, not only operationally, but also how you're thinking about capital allocation within the context of buyback dividend and things like that?

Yeah, well, maybe two separate things there. So, you know, we've kind of fully gone to work from home staff or work from home status internally. And so, you know, as we begin to get further down the road on the health crisis and the state governments, you know, begin to bring – allow us to come back to work in certain geographies, and we're starting to develop our plans to do that. Frankly, on a positive note, we don't have to rush into that, so we'll be able to be very methodical about how we come back to on-site work within our company, and so it will be an issue for our business, and we'll take our time just so that we don't, you know, have a misstep in all of that. And then on the capital allocation side, I mean, our general thesis around how we think about capital allocation doesn't change, Kevin. You know, we, like many others, stopped our buyback program, you know, when we got into beginning of March only because there was just not good visibility to what was coming down the road over the next few weeks. or longer. So, you know, I think that that was a prudent thing to do. But, you know, as we always say, we're going to invest in ourselves first. We're going to always be developing, you know, acquisitive opportunities that we think advance our business. If there's nothing at the lip of the cup on that front, you know, we're certainly adept and have proven in the past that we're going to buy back our own stock. And, you know, we can now at this size and scale do all those things at one time. It doesn't have to be all or nothing. So, you know, I don't think any of this has changed our view on capital allocation. And we feel good about where we are from a balance sheet strength and a liquidity standpoint, you know, based on where we stand today.

No, great. And then I guess just, you know, given how we're off the you know, the kind of shutdowns, Ben, what are you looking for in terms of, you know, it seems like things are starting to stabilize, but for us to come out of it, you know, you get a lot of internal data. Is it on a client? Like, what are you keying in on, Ted, in terms of, you know, that you feel confident that, you know, we're starting to kind of pre-accelerate a little bit? What would be the metrics you're most focused on?

Yeah, well, look, I mean, we've got internal metrics that give us visibility to where we think the business is going. Obviously, we watch our pipeline, you know, of project and consulting work. We see rec flow from our big accounts. We look at our business from an industry standpoint so we can rack and stack the world from that. But, you know, I think at the end of the day, just, you know, even whether our client's doing a little with us or a lot, we stay close to them. We talk to them about what their needs are. We understand where they are. And we have such good, durable, important relationships with these clients over such a long period of time that that's our best insight. So we have internal metrics. We have great insights for our clients. And we'll watch the business like that. It's too early to tell. We need a little bit of time under our belt here to kind of keep marching forward. But it's... It feels like over the last few weeks that things have lessened in terms of the declines, heavier declines we saw in the first couple, and we'll have to watch it week to week to make sure that that trend continues.

Thank you.

The next question comes from Mark Macon with . Please go ahead.

Good afternoon. Thanks for all the detail. I was wondering, can you just talk a little bit about the opportunities that you're seeing in terms of on-shoring and near-shoring? What's the scope and magnitude of the projects that you're seeing there?

Well, I think it's a developing story, Mark. I mean, anecdotally, you know, I could tell you about a project here or there where a client got surprised by the fact that something important to them was being off-shored and it couldn't be executed. because their operations offshore didn't switch very adeptly to remote work. So we've been able to step into a few things here just on an anecdotal basis early on. I think the bigger wave of that is to come in the future. I believe that there was a little bit of a move for things to be reshored, onshore, rural sourced here in the U.S. that might have been done in an offshore fashion in the past. And I think the experience here over the last couple weeks certainly supports that. And if anything, maybe it gives it a little bit more fire as we go forward. So it's something to watch. I'd say that's a developing opportunity.

When do you think that would actually end up hitting and becoming material?

Yeah, well, I wouldn't go so far as to say when that is. Obviously, those things have to be They have to be scoped, and we have to be able to win those opportunities, and then we have to set them up and be able to execute them. So it's a developing opportunity in the future, like anything else.

Okay. And then with regards to productivity levels, can you talk a little bit about what you're experiencing? Specifically, if we think about your recruiters and the amount of talent that's currently out there, Is it become materially easier to source candidates to place into the open recs, or how are you seeing that?

I wouldn't necessarily say that on the technology side, Mark. I mean, look, I think we'll, you know, the preponderance of unemployment right now is not in the IT space, I don't believe. It's in other places, for sure. And I think IT talent still remains scarce, and so I don't think we'll be dealing with a materially different situation as it relates to all that as we go forward.

Okay, great. I'll follow up offline. Thank you.

Great. This concludes the question and answer session. I would like to turn the conference back over to Ted Henson, CEO, for any closing remarks.

Great. Thank you, Operator, and thank all of you for your time today. Hopefully, the next time we convene for Q2 earnings, the world will be in a much more stable place. Stay safe, healthy, and thank you again for your support of ASGN. This concludes today's conference call. You may disconnect your lines.

Thank you for participating, and have a pleasant day.