ASGN Incorporated

the ASGN Incorporated Second Quarter 2020 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow a 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 Eshlekin, Congressional Relations. You may begin.

Thank you, Operator. Good afternoon, and thank you for joining us today for ASGN's second 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 risk 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 Ted Hansen, President and Chief Executive Officer.

Thank you, Kimberly, and thank you for joining ASGN's second quarter 2020 earnings call. ASGN's business demonstrated solid resiliency in the second quarter. Our scale, high-end IT service offerings, and large and diverse client base, including over 60% of the Fortune 500, as well as key federal defense and civilian government agencies, provided stability and positioned us well to serve our clients despite the challenges of COVID-19. For the quarter, revenues totaled $936.8 million, down 3.6% from the prior year. Our commercial business, which includes our Apex and Oxford segments, accounted for 74.4% or $697.1 million of consolidated revenues, while our government business, our ECS segment, accounted for 25.6% or $239.7 million of consolidated revenues. Adjusted EBITDA totaled $106.2 million for the second quarter and represented a solid margin of 11.3%. Although we did not provide formal guidance for the second quarter, our results came in well ahead of the midpoint of the illustrative scenarios we provided. Revenues were 4.1% higher and adjusted EBITDA margins 110 basis points higher. Looking at the cadence of revenue during the second quarter, April proved to be a challenging four weeks for the commercial market, while our government business remained strong and continued to perform above expectations. Declines in our commercial business continued through the first half of the quarter, flattened in the second half, and have remained stable through the first three weeks of the third quarter. Our government business remained resilient throughout Q2. Strength in the second quarter was driven largely by industry-leading performance of the ECS segment, which was up 25.8% over the prior year, and the strength of APEX Systems, which only declined 3.4% year-over-year. ECS and APEX Systems together comprise roughly 80% of our consolidated revenues. As I emphasized last quarter, ASGN continues to see the benefits of the strategic initiatives we have undertaken to evolve and strengthen our business model. We've become much more IT-centric, and in doing so, expanded and increased market share in our large account portfolio. Through the ECS segment, we also have significant exposure to the federal government marketplace, a sector that is typically more insulated from economic volatility than commercial industry verticals. Last but not least, we've continued to increase our high-end IT solutions capabilities. Each of these strategic developments has positioned ASGN not only for stability during the current downturn, but also for strength in the future recovery. In terms of bidding activity, our pipeline of new business remains solid. We are witnessing an accelerating trend toward digital transformation as our clients push forward strategic initiatives to deepen their customer experience and engagement, increase their businesses' agility, and decrease the time needed to get their products to market. Services related to project management, data analytics, web development, artificial intelligence, machine learning, cloud, and cybersecurity are increasingly in demand. our clients' IT challenges are also becoming much more complex. We are finding customers awarding more work to firms with multidisciplinary skill sets and broad ranges of IT expertise, but characteristics that differentiate ASGN from our competitors. Government contracting remains steady, with bids and process continuing to flow. Like the commercial end markets, IT modernization remains important for our government clients. the federal government is about five to seven years behind the commercial market in IT modernization, including cloud adoption, with only a portion of federal agencies having migrated to the cloud. The increased desire to transition to the cloud, along with the mission-critical, sensitive nature of the information held by the government, is creating a strong demand for SDN-sophisticated cybersecurity capabilities and managed services. Importantly, given the market conditions, our clients are as open as ever to remote work. ASGN is fortunate to have one of the largest, most skilled contingent labor forces available for teleworking today. We shifted our internal workforce to 100% remote in mid-March, and over 80% of our billable consultants also continued to work remotely with just a small portion of essential staff still onsite with required safety protocols. Along with our solid business pipeline and diverse client base, our flexible cost structure and robust free cash flow continue to provide stability to our business. Our free cash flow generation is our principal source of liquidity and underpins our strong borrowing capacity. In the second quarter, we generated $178.8 million in free cash flow, up 102.7% year-over-year. We also had $207.9 million in cash on the balance sheet as of June 30th. As of quarter end, we had no outstanding borrowings under our $250 million revolving credit facility and had full availability under that facility. Nevertheless, a moderate amount of debt has always been part of our balanced capital structure and supports our ability to make strategic acquisitions. Our acquisition pipeline is active and acquisitions remain an important part of our long-term growth strategy. With the cash we have on hand, what we expect to generate in the second half of the year, and our borrowing capacity, we have significant capital resources to deploy on M&A or stock repurchases, depending on what makes the most strategic sense for our business at the time. With that as background, let's talk about our segment performance for the second quarter. Apex, our largest segment, which includes Apex Systems and Creative Circle, services clients across multiple commercial and markets. For the second quarter of 2020, the segment generated revenue of $576.9 million, down 8.2% year-over-year. As I noted earlier, Apex Systems declined only 3.4% year-over-year. Creative Circle saw double-digit declines with the deepest decline amongst ad, event, and permanent placement services. Digital-related skill placements, however, held up during the quarter. Fortunately, both APEX Systems and Creative Circle revenues appeared to level mid-second quarter. In June, APEX Systems revenues started to improve, while Creative Circle revenues held steady without further weekly declines. Before speaking to industry trends for the quarter, a quick housekeeping note. Beginning in the second quarter, we are now classifying APEX Systems revenue into five industry verticals as compared to the eight verticals previously provided. These consolidated verticals offer a better indication of how we internally view our business. Life sciences is now categorized in the healthcare industry verticals. Telecom is included in the technology, media, and telecom, or TMT, vertical, and aerospace and defense is part of business and government services. Additional information on these verticals can be found in our earnings supplemental presentation for the second quarter, which has been posted on our investor website. Now back to vertical performance for the quarter. Two out of the five industry verticals for APEX Systems including financial services and business and government services, saw revenue growth during the quarter. The remaining three verticals, healthcare, consumer and industrials, and TMT, declined year over year, though each of these verticals did see some acceleration of business in June. In the consumer and industrial space, as anticipated, retail, energy, hospitality, and transportation, including airlines, were all down in the second quarter. Top accounts achieved low single-digit growth rates for Q2, while retail and branch accounts declined low double digits. Gross margins for the Apex segment were 29.6%, down slightly year-over-year, due primarily to the lower permanent placement mix in Creative Circle. Contract gross margins across the segment held steady. EBITDA margins for the APEX segment were flat from a year ago, while APEX systems EBITDA margins increased significantly year-over-year, highlighting the resiliency of its variable cost structure. Importantly, we also continue to grow our commercial consulting business. Consulting work for the APEX and Oxford segments combines a total of $96.4 million for the second quarter, up 2.8% year-over-year. Although the growth rate in consulting revenue for the quarter was single digits, bookings increased each month throughout the quarter, with June being the strongest month. Additionally, our pipeline of consulting work continued to increase for the quarter at double-digit rates year over year. We expect that our high-end consulting offering will remain an important source of value we provide our clients going forward. We are finding more consulting market share being garnered by firms that are positioned around new technologies, or next-gen processes for the cloud, fast applications, and data analytics in particular. So we continue to ensure that our consulting teams are well-versed in these offerings. Throughout the quarter, the APEX segment sought new clients and provided added solutions to existing clients. As I noted previously, digitization projects remain in high demand. For a Fortune 500 business services account, for example, We updated their e-commerce platform, improving user experience, and moving their online payment and invoicing features to the cloud. These types of services are part of our digital roadmap approach in which we support the streamlining and integration of our client systems. Our work for this project was very cost-effective as we used both onshore and nearshore resources by capitalizing on the capabilities of our Mexican Development Center. As I mentioned on our Q1 call, as a result of current market conditions, we are having more discussions with our clients about reshoring their capabilities. Our near-shore Mexican Development Center provides a great alternative to many of APEX and Oxford's U.S. clients when traditional outsourcing to offshore may not be feasible or comes with newfound challenges. Let's now turn to ECS. which provides mission-critical solutions to the federal government, including the Department of Defense, intelligence agencies, and other civilian agencies. ECS continued to achieve industry-leading growth for the second quarter of 2020 and reported revenues of $239.7 million, up 25.8% year-over-year, driven by the continued high demand from federal government customers for machine learning and artificial intelligence services, a higher volume of cloud services and solutions, new opportunities presented by our acquisitions in the government space, and the contribution from Blackstone Federal, which was acquired in the first quarter. Consistent with the first quarter, in Q2 2020, ECS did not see any material changes in revenue or backlog as a result of COVID-19, due in large part to the stability of the government sector. Business in the ECS segment progressed as usual, with the exception of an increased number of professionals teleworking. Less than 1% of ECS employees are working on-site. ECS's new business pipeline remains robust, with no slowdown in customer requests for proposals during the second quarter. Though we have seen some of the work we anticipated would be put up for re-compete, pushback, or simply extended. The segment was awarded $175.7 million in new business and achieved a book-to-bill of 0.7 to one for the second quarter. On a trailing 12-month basis, ECS's book-to-bill was a healthy 1.7 to one, or contract backlog coverage ratio of 2.9 times. Key contracts one and Q2 included a significant expansion of machine learning services under a new contract within the Department of Defense along with three contracts awarded by the Department of Homeland Security, one for specialized architecture and engineering services, another for high-end design, development, and cloud migration of business applications, and a third for data modeling, business architecture, and policy reengineering expertise. In addition to contracts won, in the second quarter, ECS was named first among the top 100 vertical market managed service providers for the second year in a row and recognized as part of an elite group of Amazon Web Services managed service providers for the sixth consecutive year. Turning to our last segment, Oxford. Oxford offers on-demand consulting talent for commercial IT, healthcare, life sciences, and engineering clients. as well as permanent placement talent through our CyberCoders division. The segment reported revenues of $120.2 million for the second quarter of 2020, down 21.5% year-over-year. This decline includes an over 40% reduction in permanent placement services, which on a consolidated basis now only comprise 2.2% of revenues. As we enter the third quarter of 2020, it is clear that the COVID-19 pandemic will continue to impact our economy. Nevertheless, based on the trends we are currently seeing, along with the staggered reopening of the U.S. economy, we believe that we now have enough visibility to reinstate quarterly guidance for the third quarter. Ed Pierce, our CFO, will speak to our expectations shortly. I remain confident in ASGN's long-term growth capabilities. We're in the right industry IT services at the right time. We have a large and diverse client base bolstered by the stability of government sector work and large commercial clients. Our contract deployment model combined with a flexible cost structure provides further stability to our business. With that said, I'd now like to turn the call over to Ed Pierce, our CFO, to discuss our second quarter performance and third quarter guidance in further detail. Ed?

Thanks, Ted. Good afternoon, everyone. Revenues, margins, profitability, and operating cash flows for the quarter were much better than our internal expectations and better than the potential outcomes we outlined in our illustrative financial scenarios that we provided in lieu of financial guidance for the second quarter. Revenues for the quarter were down 3.6% year-over-year. Revenues from our commercial divisions were generally in line with our internal expectations and were higher than expected for ECS. Revenues from APEC systems, our largest division, which accounted for 54.3% of total revenues, were down only 3.4%. Revenues from ECS, our second largest division, which accounted for 25.6% of total revenues, were up 25.8%. driven by, among other things, high growth in its artificial intelligence, machine learning solutions, new contract awards, and the contribution from Blackstone Federal that was acquired in Q1. Revenues from our other divisions, which in the aggregate accounted for 20.1% of total revenues, were down 26.2%. Gross margin for the quarter was 27.8% down year-over-year due to the decline in permanent placement revenues and the high revenue growth of ECS. Permanent placement revenues are essentially 100% gross profit, and the gross margin at ECS is lower than our commercial divisions. Although lower, ECS's gross margin compares favorably with other government services contractors, and its EBITDA margin is only slightly lower than our consolidated margin. Our contract gross margin, which excludes permanent placement, was 26.2% for the quarter, down approximately 30 basis points year-over-year. The contract gross margin for our commercial divisions was up 40 basis points to 29%, and the gross margin for ECS was 18.3%, same as Q2 of last year. SE&A expenses for the quarter were 172.2 million, or 18.4% of revenues, a year-over-year improvement of approximately 200 basis points in the expense margin. This improvement resulted from, among other things, lower incentive compensation, mainly those incentives tied to growth in revenues or adjusted EBITDA, and lower travel and entertainment, healthcare, and stock-based compensation expenses. Net income was $48.8 million, up 13.3% year-over-year on lower revenues and gross profit. The increase in net income primarily related to lower FCNA and interest expenses. Adjusted EBITDA for the quarter totaled $106.2 million, and the adjusted EBITDA margin was 11.3%, or 110 basis points above the midpoint of our illustrative scenarios. This favorable variance was mainly the result of lower-than-expected SG&A expenses and a higher-than-expected contract gross margin for our commercial divisions. Cash flows from operating activities were $186.1 million, Cash flows benefited from lower working capital requirements commensurate with the decline in revenues and gross profit, a reduction in accounts receivable of 3.2 days, and a deferral in the payment of $31.1 million of FICA taxes as provided by the CARES Act. At quarter end, cash and cash equivalents were $207.9 million. and there were no outstanding borrowings under our $250 million revolving credit facility. Our senior secured debt leverage ratio was 1.1 to 1, well below the maximum allowable ratio of 4.25 to 1. A few comments on recent production data. As we mentioned on last quarter's call, we began seeing as a result of the pandemic weekly revenue declines in our commercial divisions in mid-March, continued through the first half of the second quarter. In the second half of Q2, weekly revenues flattened and have remained stable through the first three weeks of July. Over the same period, revenues at ECS have continued to grow double digits. As Ted mentioned, we're providing formal financial guidance for the third quarter. These financial estimates, which are set forth in our earnings release and supplemental materials, are based on current production trends and assume no significant deterioration in the markets we serve. The estimates are as of the date of the earnings release. Consequently, any worsening of the COVID-19 pandemic should adversely affect our results over the remainder of the quarter. The midpoint of our estimates assumes continuation of the current production trends for our commercial divisions and assumes ECS will achieve double-digit year-over-year growth in the quarter. We estimate total revenues for the third quarter will be flat to down sequentially and down 6.5, 8.9% year-over-year because of the effects of COVID-19 and the difficult prior year comps due to the high single-digit growth of our commercial business in the third quarter of last year. Thank you for your time. I will now turn the call back over to Ted for some closing remarks. Ted?

Thanks, Ed. ASGN is now in a better position to manage an economic downturn than at any other time in our company's history. Despite some uncertainty remaining, our visibility has improved, and we now have a better sense of how our business is trending as we enter the second half of the year. We continue to evolve our business as a foremost provider of IT consulting solutions and services to the commercial and government industries. Our business model remains resilient. Going forward, we will work to maintain our unique market position, leveraging our longstanding commercial and government client relationships, and deploying our in-demand IT services such as cybersecurity cloud, computing and mobility through the organic growth of our business. We also remain acquisition ready. You may have heard me speak about our M&A strategy before, but ASGN does not look for distressed assets. We seek to add high quality industry specific IT solutions in the commercial and government spaces to our service offerings. We will maintain our smart capital allocation generating strong liquidity and using our free cash flow for M&A or stock repurchases, depending on what is in the best interest of our company and our stockholders at any given time. Speaking of doing what is in the best interest of our company and our clients, we have officially changed our corporate headquarters address from Calabasas, California to Richmond, Virginia. With two of our largest divisions, Apex Systems and ECS, based in Virginia, it made strategic sense to have our headquarters located in the Commonwealth. This change in address allows us to remain close to our key customers, brands, and their respective management teams. Ultimately, as we look forward to the second half of the year, it is still my belief that the real rate of return of the economy will be based on how fast this healthcare crisis is resolved. Even with the President's certainty, we continue to execute against our current contracts, safely leveraging our contingent labor force to drive profitability and margin stability for our company. As it relates to inorganic growth, we will continue to push forward developing M&A opportunities that expand our capabilities and add key clients and contracts to our business pipeline. We have an exceptional team in place who has gone the extra mile to ensure that our business continues to run smoothly and our clients' critical IT needs remain our top priority. I know that we are positioned to emerge from the current situation even stronger than before, and I'd like to thank all of our employees for your dedication to ASGN this past quarter and always. On behalf of our entire company and our board of directors, we thank you for your continued support. We hope you are all safe and staying healthy. We will now open up the call to your questions. Operator?

At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation 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 start key. One moment, please, while we poll for questions. And our first question is from Edward Caso from Wells Fargo. Please proceed with your question.

Hi, this is Justin Bonatti on for Ed. Thanks for taking my questions. Really good performance here this quarter with revenue and margin in particular. I was wondering if you give a little bit more color around the margin in Q3. It looks like it may be a little bit weaker. What areas are you seeing that might be a little bit weaker relative to the other segments?

Hello, can you hear me? Ted and Ed, you've got on?

Did we lose Ted?

No, I'm here. Okay, there we go. Can you hear us now?

Yes, I would say you heard the question. I did hear the question. Yes, so Justin, I think we've got two things going on I'm going to let Ed elaborate on, but you certainly have a an evolution going on here with us as it relates to our business mix. And so if you look at it, you know, relative to past quarters or last year, you're going to see the business mix certainly affect the margin. And on a secondary basis, you know, we really had a surprisingly strong quarter in EBITDA margins from APEX related to just the base of their business flow versus some of the lower costs that we had in the second quarter that we think may not continue all the way through the third. Ed, you want to follow up on that?

Yeah, Justin, if you focus on the sort of the midpoint of the range that we gave for gross margin, I mean, it's showing that about a 10 basis point difference between that and where we actually came out for Q2. So, you know, a lot of that is going to be mixed driven because our expectation is that ECS is going to grow faster than our other units and become a bigger piece of the mix. So that's the big driver for that. And, you know, as it relates to the bottom line margin, you have that, or the EBITDA margin, you have that. Coupled with, we did have, we did benefit from lower healthcare expenses in Q2, and we're anticipating slightly higher healthcare expenses in Q3. So those are the principal reasons as to why you're seeing a sort of differential in margin.

Great. That's really helpful. And then just as a follow-up question, given the strong bookings that you had in your consulting business, when do you see that potentially returning to double-digit growth or maybe even better where it was, you know, pre-COVID? Yeah, Rand, do you want to talk about that?

Yeah. Well, look, I think there's two parts to this. The first is, and you were talking about in the commercial units here, Justin, I assume, I would say in the Apex side, we're close to double digits, and we should be able to get back to double digits, certainly in the second half of this year. In our other units within the commercial sector, the Oxford segment and Creative Circle, it's a little bit more of a guess. So, you know, it depends on the marketing function and how it begins to respond. While we're seeing stability in our business flow in the Creative Circle side, you know, hasn't translated out to consulting yet, similar with Oxford and some of the niches that they're in. So I would say, you know, I certainly hope by the second half of the year we're back, and I suspect APEX part of it will be there. It's the other parts we're still having to watch.

All right. Really appreciate it, and congrats again.

Our next question is from Kevin McVeigh from Credit Suisse. Please proceed with your question.

Great, thanks. Hey, congratulations on the results. Hey, Ted, you mentioned M&A a couple times, and then the buyback. You know, you folks have really done a nice job over the course of time in transformative deals, you know, appreciating that you're not looking for anything necessarily distressed, but can you help us frame out what, you know, kind of, the parameters would be depending upon the size and the appetite given, you know, how strong the balance sheet is to do buyback and M&A. Just any thoughts around that would be real helpful, particularly given how strong the results have been coming in. Thanks, Kevin.

Well, look, I don't think that acquisitions and share repurchase necessarily have to be mutually exclusive. I think it depends on, you know, the moment in time, if you will. For this quarter, we allow cash to build on the balance sheet versus going further into our buyback plan. We hope, as always, that we have acquisitions that are developing, opportunities that are developing, because that's where we show the highest return. We've proved that out over a period of time. Just based on our current strategy around acquisition, looking for these opportunities where we have a the ability to add industry-specific solution capabilities that we may not have inside of our organic business today, but we have clients and pipeline of business that require these kind of solutions. Naturally, those may be a little smaller and, you know, not platform acquisitions, but support APEX in the commercial space and ECS in the government space. So, you know, that's kind of where our focus is today and, we're working as hard as we can on pipeline. We're certainly acquisition ready and feel like we have some holes that we could fill that are going to fill existing opportunities in our current account portfolio and pipeline.

That helps. And then I guess you talked about an accelerating trend towards digital transformation amongst your clients. Maybe just flush that out a little bit and then just If you could maybe reconcile it. It sounds like Creative Circle is still, you know, maybe not where you need it to be. Maybe just help reconcile maybe what some of the gaps are in Creative Circle relative to, you know, the strength you're seeing on the digital transformation side.

Yeah, well, look, I mean, I think it goes without saying that the current situation we're all in because of COVID and the shutdown, you know, of the economy has pushed our large customers, both in the commercial marketplace – and the government marketplace into remote work scenarios. And, you know, that has accelerated, if you will, the need to be able to have remote capability for security around that. It's enhanced opportunities to utilize the cloud, and it's also stirred conversations around reshoring certain work that was done offshore. So, you know, I would say that You know, none of those were new trends, if you will, coming into COVID, but I would say just mostly those things have been, you know, accentuated. If you think about Creative Circle individually, I mean, they basically in their business, you know, have traditionally served, you know, kind of bread and butter marketing and events and, you know, also digital skill sets. And what they're seeing in their business today are, You know, digital skill sets around UI, UX, and other like things are, you know, in high demand with their clients. But, you know, the other two buckets of their business have been more slow as you go. You know, it's something easily turned off by clients when they're worried about their own business. So that will flush itself all the way out here as we go. And the small and mid-market accounts of Creative will come back and, you know, begin to spend on their services. In the meantime, it gives them a chance to focus on, you know, their large account portfolio and develop that further and, you know, really hone in on opportunities around digital skill sets and digital work that relate to the creative marketing space.

Super helpful.

And our next question is from Gary Bisbee from Bank of America Securities. Please proceed with your question.

Hey, good afternoon. I guess the first question on the you know, really impressive strength at ECS. You called out several things that are driving that. Obviously, there was the acquisition in the first quarter that helps. But any other caller you can give, and I guess sometimes when you've had these outsized growth in the past, you've called out some of the hardware and software, you know, that supports the contracts but may be somewhat more lumpy. Was there anything – meaningful there, or is it really just, you know, broad acceleration in the business plus the M&A? Thank you.

Yeah, Gary, thanks for the question. I'm going to let George speak to this. Although on the top of it, I'll say we're really excited about, you know, how ECS is performing. And while we set your long-term view of kind of high single-digit growth and then a complement of M&A to go with that, you know, we'll get higher growth rates when we can, and ECS certainly has been doing that. George, you want to talk a little bit about just the components of growth for the quarter?

Yeah, sure. Thank you, Ted. And thank you, Gary, for the question. Yeah, I would characterize it as more broad and not anything in particular or anything specific. We have and we do continue to have a strong component of software and hardware and subcontractors in our solutions. the way we approach the customer, helping them solve their difficult problems, we're always reaching out and using subcontractors and the best technology that we can provide. But overall, it's been across the board and a broader execution of our mission. So that provides a little bit more cover for you. Is that what you're looking for?

Yeah, thanks. And maybe one follow-on on ECS. I know that your contracts are durable and happen sort of no matter what's going on, but as you think about the election this fall, is there anything that you think could sort of change how you approach the business, demand? There's a couple outcomes there, but is there anything we should be thinking about as it relates to potential change in, you know, in administration?

Thanks. Yeah, sure. And this is something I'm sure everybody will talk about a lot over the next several quarters. But, you know, I like the position that we're in. I mean, we're varied. We're spread between defense and federal civilian. And in the areas that we're in defense, we're in IT modernization, cyber cloud. These things are not going away. We're not doing overseas operations. We're not providing a whole bunch of bodies on things. It's the technical solutions, which I think both sides of the aisle can agree on are very important. And then, again, on the federal civilian side, which depending on the administration, typically some things would slide the other way if it changes. We feel very, very comfortable where we are in terms of some of the federal civilian areas. And, again, it's in the areas of using a very high-end solution, solving our customers' most difficult problems. So, you know, I think you probably read that the authorization is passed. Both folks, I don't think we're going to see a lot of change in the defense spending, at least in the next several years. So, okay?

Great. Thank you. And if I could just sneak one quick one in for Ed. The SG&A, given how much better the revenue was, the SG&A was, you know, quite well controlled, I guess. How do you think about some of those costs coming back in as we look forward. I think I heard someone say maybe at apex you wouldn't have quite that much benefit to the margin in Q3. But any color on how we think about phasing, I realize how revenue goes obviously is a key component, but that would be helpful. Thanks.

Gary, I think as it relates to phasing, I don't think you're going to see much sort of change that will occur in the second half of the year. But clearly, as we continue to add to our headcount as we see demand in the marketplace, you're going to see headcount costs go up. But we've spoken many times about the variable nature of our cost base, so you have a pretty good sense of that. You know, in terms of fixed costs, I think headcount would be the big driver.

Yeah, the only thing I would add to that is, Gary, it's just that, you know, we've got capacity here in terms of productivity, I feel like, to push forward. And so, Ed's right, you know, we'll add in on a moderate basis in places where we need to allocate resources to certain accounts or certain opportunities. But, you know, But, you know, I don't want to leave you with the impression that we have some big hiring going, you know, before some kind of surge. That's not where we are.

Thank you.

Our next question is from Seth Weber from RBC Capital Markets. Please proceed with your question.

Hi, this is Emily McLaughlin on for Seth tonight. My first question is, In the prepared remarks, Ted talked about top accounts growing low single digits and retail and branch accounts down low double digits. I'm wondering if there's any notable divergence in recent production trends between these two groups.

No, I think that's what you've seen from us, you know, for a couple quarters here. You know, and certainly if you, I mean, if you just think about the parts of the economy that have been most effective, obviously, small and mid-market accounts or what we call retail accounts have been affected more than large accounts. And so, you know, while the rates of growth are, you know, are different, I think relatively it's not too much different than what we've seen.

Okay, thanks. And are you seeing anything in terms of price concessions on the commercial side. I think last quarter it sounded like some of the smaller accounts were asking for concessions. Just wondering if that's continued or lessened relative to a few months ago.

Overall, our contract margins have remained very stable. We've even seen a little tick up. But, Rand, do you want to talk about client account concessions on the commercial side specifically?

Well, no, I think you hit it, Ted. Our In Apex, the account margins are ticking up. So we always have accounts here and there that are looking for one thing or another, and they're generally short, you know, for a specific target in a certain period of time. And we, you know, we will adjust depending on the strategic importance of the account and what we can do. But at the end of the day, our margins have held very solidly, even ticking up a bit.

Okay. Thanks a lot, guys.

Our next question is from Toby Sumner from SunTrust Robinson Humphrey. Please proceed with your question.

Thanks. I was wondering if you could give us some color on why the Oxford and Apex businesses are performing differently and if you see them kind of converging at all over the near term.

Thanks, Toby. Well, I would tell you the two biggest differences between the Apex and the Oxford business relate to size of account. So, you know, Apex serving mostly Fortune 500, 1,000. Oxford serving mostly, not exclusively, but mostly middle market and smaller retail accounts. And so, obviously, that's part and parcel to this. The second biggest thing is Apex is serving every need in the IT world of the CIO in order to help them get their work done. And Oxford is serving individual, hard-to-find niche, you know, technical talent. And so there's a difference in that as well. So I'd really say those are two of the biggest drivers.

Thanks. And on the consulting side, you know, the rate of growth did slow down. Was the single-digit rate of growth, is that an organic number, or does that include some acquisition contribution? And then what drove that? Was that kind of a slowdown of existing projects, cancellations? Could you speak to the reasons for the slowdown? Thanks. Grant, do you want to take that?

Yeah, well, let me start. Toby, first of all, that number is all in. So the InterSys acquisition is part of that, and we don't separate it out, mostly because InterSys, we've taken them and reconfigured them in support of most of the pipeline and opportunities we've had. So while there is still some InterSys revenue that they brought with them as a business, it's not the main driver. We've been very successful at driving new business in consulting businesses you know, with them, but it's been pipeline that Apex generated. So we look at it as one total. The other thing I would say to you, Toby, is if you remember back in the end of last year, Q4 particularly, our bookings growth was not as strong. I mean, it was still there, but it wasn't growing year over year. And remember, the comps are astronomical, right, for us in this consulting business. So I think that slowdown at the end of last year has affected us in the growth rate this year. in quarter one and quarter two, along with obviously COVID-19. But I think as Ted pointed out in his remarks, our bookings now are starting to accelerate back up, and the growth in the bookings, particularly as we ended Q2, were very strong. So now the question is, why did our bookings slow down at the end of last year? Well, some of that is normal year. When you end a year, companies are finishing out their budgets and planning to restart budgets in the beginning of the new year. When we got to the beginning of the new year, they were a little slow. By February, where they're putting those budgets in place, I think they began to see the tea leaves around the COVID-19 scenario and began to slow down a little bit on just what their priorities were. I think they've sorted through that over the period of February through May, and we're now beginning to see an acceleration of bookings and and things with our client base. So there are a couple of factors at play here that, you know, I don't want to overplay one factor or another, but I think, you know, clients were prudent about where they're going to spend their money and redirecting some of the money. And, and, um, I think we're, I feel better about it today than I did three months ago for sure. But I knew, Ted and I knew in the fourth quarter that booking slowdown had occurred and, and, um, that would affect us somewhere along the line.

Thank you very much. Okay.

And our next question is from Jeff Zuber from BMO Capital Markets. Please proceed with your question.

Thanks so much. I wanted to ask more of a philosophical kind of question that clients have been asking me, but let me ask you this question. So you talk about the shift to remote work. Everybody's doing it. Everybody's seeing it. Do you think if this is a more profound change that we might see clients use their own workforce remotely as opposed to outsourcing to firms like you?

Do we see a shift there? You know, well, look, I mean, certainly they're going to be more open with their own internal workforce to allow them to work remotely. I'm sure we all will, you know, in certain circumstances. But I think that really the driver behind using firms like us is, you know, you never have the right talent at the right time when you need it. So I think that most of this, if you will, is a supporter of demand for our services. And I think that, you know, in many different ways, clients are going to be as open or more open to use us either for talent or to get certain solutions. And they're going to be more open-minded to look beyond, you know, having someone sitting within their four walls, which will allow us in turn to look in different geographies of the country for the right skill set, you know, even at better price points at some time, you know, which helps them and helps us. And, again, we'll kind of support the demand equation of all this. So I don't really believe that working remotely necessarily as it relates to their internal staff is really going to have an impact, if you will, on the demand equation for the services we provide. Okay, that's helpful. I appreciate that.

You mentioned pricing, and I know a lot of times it has to do with mix, but I'm specifically focused on your assignment business. Are you seeing any less pressure from a wage inflation perspective, given what's going on in the labor markets?

Yeah, look, I think that for high-end IT skill sets, I mean, they're still they're in demand and they were in demand. And so that's not necessarily the group that was furloughed. And I think going forward, you know, that the pricing, not only the wage scenario, but the pricing scenario around all that will have good stability to it. Okay, great. Thanks so much.

And our next question is from Mark Markin from Bayard. Please proceed with your question. Good afternoon.

Let me add my congrats. Good performance here. Can you talk a little bit about what you're seeing with regards to the Apex Systems consulting, just kind of how those bookings are going specifically and whether or not for this coming quarter and as we look out towards even the back half of this or the back end of this year, whether you would expect that to grow sequentially or how we should think about that.

Sure. So, Mark, you know, we don't give out that information underneath the segment quantitatively, but I'll let Rand speak qualitatively about it and give you a sense of where it is.

Okay. Well, Mark, listen, I guess I have to respond two ways. Now, first of all, consulting revenue flow and bookings are a function first by the accounts. So in accounts like transportation and some retail and oil and gas, airlines, we're definitely not seeing consulting business, okay, the same as we're not seeing it in the staffing world. So there is an industry-specific impact here in terms of where we're seeing consulting. Now, there are areas where consulting is starting to pick up even more on the government side, business services side, picking up a little bit in health care, a little bit more in banks, particularly in wealth management and in fintech and in the regional bank initiatives that we have going on. So when you look at it by industry segment, it's a little bit reflective of what's happening in our bookings and revenue, a little bit reflective of that industry push. In terms of I think you're really asking the question about what kind of work are we getting involved in, it's really similar to what Ted showed in the remarks. It's more around what I call the digital roadmap. It's digitization of businesses, whether linking web development or linking the web into, you know, order processing, billing and paying, logistics queuing, logistics mandates that are put out to linking your logistics systems with your web. It's all of that work all in the cloud. So I think on the marketing side yet to come is, is learning how to use that information to better talk and excite demand from your customer base, which everybody talks about, but I think we're still in the early innings of that kind of work. So it's really around the digitization of the business and linking customers with the suppliers with your own workforce to do things better, faster, more efficiently. Terrific. I appreciate that, Rand.

Can you talk also a little bit about the trends that you're seeing, both in terms of industry verticals? You mentioned that across the commercial side, things stabilized in the second half of the quarter, and then that stabilization continued through July. Is that relatively uniform across the various industry verticals, or are there some that you know, are actually just continuing to grow sequentially, and then, you know, some like consumer and industrials that might even be softening a little bit further. And if there is a change along those lines, what are the longer-term implications, or how should we think about that?

Well, Ted, do you want me to go ahead and respond? Yeah, there's a lot there, Mark. I mean, I We're not reporting against five industries. Of course, we're managing inside of our commercial business units to really 26 segments that roll into these five industries. So I think you're asking a question. I would say we saw some strength across our five industries in different segments. As I was just mentioning, financial services, it's with insurance, fintech, wealth management, a little less in the big banks, okay? In Gov, it's with state and local small business higher ed, a little less in work we're doing with maybe the large integrators. That ebbs and flows a bit. In consumer industrials, it's not so much in chemicals, gas and energy, airlines, hospitality, but it is in specialty retail, e-commerce, tobacco, believe it or not, and logistics are stronger. Our telco business is a little bit weaker. Right now, diversified telco is good, but the wireless and media, not so strong. In technology, our small business technology footprint and some of the big players like big clients that we have are still relatively strong and hanging in there. On health care, providers coming back a little bit, payers coming back a little bit. but it's been down for sure over the last few quarters as they've been busy fighting the virus. So, you know, I could go through this in more detail, but we're seeing shifts, not so much shifts, it's just certain industries are still up and running, and when we talk about stability in our consulting, now we're in our assignment revenue, it's really coming from these different industries that still have some strength, and there are definitely some industry or segments of the industry that that are not quite back up yet. Did that help, Mark?

It does. I appreciate that color. And then with regards to just, you know, the recent resurgence in the virus, are you hearing any tone from clients where they're – I know things have been stable for the last three weeks, but in terms of, like, looking out towards the back half of this year, are there any sort of sounds of, like – we're going to be a little bit more conservative towards the back end, or because of the strategic imperative towards digital transformation, that's more than overriding any sort of doubts around that.

Rand, why don't you comment and then George? I would say we're not hearing – I think we're hearing steady. Steady as we go, but the digital side is the emphasis, okay? Okay. And if we're positioned on that side with them, then we're going to continue to be steady or continue to inch up. Okay? George?

George, outside.

Yeah, no, we're not seeing any impact to us on the upsurge in things. Our customers continue to focus on having us do things remotely. And as Rand said, the digital modernization on the technologies we provide are solutions to being able to do that. So, yeah. We continue to hire really great people and provide good solutions to customers.

Great. And then what are you seeing in terms of acquisition multiples among the, you know, the good select types of companies that you would typically look at?

So, Mark, I think on the dev side, you know, acquisition, pace of acquisition has not slowed down. So I've really seen, you know, no change there. On the commercial side... mostly because of things around credit and, you know, the stall of private equity and what have you. They just haven't been in a lot of transactions, so difficult to really discern that. But that will flesh itself out here as we go. Okay, great. Thanks a lot and congrats.

We have reached the end of your question and answer session, and I will now turn the call over to Timothy. to Ted Hanson, CEO for Closing Marks.

Great. Well, we thank you for being with us this afternoon, this evening, and we wish that you stay safe, stay healthy, and look forward to speaking with you on our third quarter call. Thank you.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.