ASGN Incorporated

Good afternoon and welcome to the ASGN Incorporated third quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Kimberly Astekin, from Investor Relations. Please go ahead.

Thank you, Operator. Good afternoon, and thank you for joining us today for ASGN's third quarter 2022 conference call. With me are Ted Hansen, Chief Executive Officer, Rand Lazor, President, and Marie Perry, 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. Certainties 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 GAAP and non-GAAP measures are included in today's press release. I will now turn the call over to Ted Hansen, Chief Executive Officer.

Thank you, Kimberly, and thank you for joining ASGN's third quarter 2022 earnings call. Before we begin, on behalf of the entire ASGN team, I would like to welcome Marie Perry to her first earnings call as our CFO. We're excited for Marie to participate in today's discussion. With that said, let's now turn to our third quarter results. As is evident from our Q3 financials, growth continued to build quarter over quarter. and demand for our services and solutions remained strong. Revenues, which were a record for the third quarter, came in above the midpoint of our guidance range for Q3 and totaled $1.2 billion, up 11.6% year-over-year. This growth was largely driven by our commercial segment and specifically our consulting business. This record top-line performance would not have been possible were it not for the incredible efforts of all of our professionals in service of our clients. as the ASGN team collectively strives to meet and exceed their expectations. Consequently, these results bring us closer to our goal of $6 billion in revenues by 2024. I'll provide some comments on our three-year plan later in today's call. Our commercial segment accounted for 75.1% of consolidated revenues, while our federal government segment accounted for the remaining 24.9% of revenues. The strength and breadth of our account portfolio contributes to our success with virtually almost all of our revenues derived in the U.S. and largely from Fortune 1000 accounts. Moving down the income statement, adjusted EBITDA of $148.7 million was also above the midpoint of our guidance range, improving 8.9% year-over-year. Adjusted EBITDA margin was 12.4% for the quarter. Free cash flow from continuing operations totaled $79.5 million, an improvement of 18.8% over the prior year. Quarter making the best use of this cash is our balanced, flexible, and disciplined approach to capital allocation, which includes investing organically in our business, making strategic acquisitions of profitable, high-growth companies in relevant solution areas, and returning value to our shareholders through our stock buyback program. Before speaking further on our recent acquisitions and segment performance, I'd like to provide the following three highlights that continue to drive our performance. First, ASGM maintains a large and diverse enterprise account portfolio, representing the most significant portion of the revenue base. Second, the IT services market remains favorable, And with the support of our large account portfolio, ASGN is successfully executing against these opportunities. And third, favorable bookings in both the commercial and government segments provide us with visibility and position ASGN well for 2023. Now let's review the segment performance. Our commercial segment, which services large enterprises and Fortune 1000 companies, had another solid quarter with growth in both IT staffing and consulting services. Revenues of $900 million increased 16.1% over Q3 of last year, as well as improved 12.9% organically year-over-year on a difficult comparison. Apex Systems, our largest division, accounted for 84.1% of the segment's revenues for the quarter, with top and retail accounts both achieving double-digit growth rates. Creative digital marketing experienced a lower growth rate compared with Q3 2021 due in part to the high growth rate in the prior period. From an industry perspective, four out of our five commercial segment industry verticals achieved double-digit growth for the quarter, while business and government services was up low single digits versus the prior year. Within APEX systems specifically, Financial services had solid performance in banking with even greater year-over-year growth amongst our FinTech and wealth management accounts. Growth in technology, media, and telecommunications, or TMT industry, was again led by double-digit growth in technology and telecommunications accounts. Progress in our commercial and industrial accounts reflected strength across all sectors as compared to the third quarter of 2021, with the exception of materials. In particular, we achieved double-digit growth year-over-year in energy, utilities, consumer discretionary, and consumer staples. Healthcare industry revenues also grew double digits, driven by both provider and payer accounts. Finally, growth in our business and government services vertical was led by mid-single-digit growth in our business services accounts, while aerospace and defense accounts were up low single digits versus the prior year. Gross margin for the commercial segment was 33.1%, up 70 basis points for the prior year, driven by our growing contribution of high-margin commercial consulting and permit placement business. Commercial consulting revenues totaled $268.6 million for the third quarter, an increase of 43.2% year-over-year and up 29.8% organically. Revenues derived from our work in web, mobile, and application development, data analysis, cloud architecture, and migration engagements, along with work for our new ServiceNow solutions, led our commercial consultings quarterly performance. We also had a solid quarter for commercial consulting new bookings, which totaled $254.3 million, up 36.9% year-over-year. This translates into a book-to-bill of roughly .9 to 1 for the quarter and 1.3 to 1 on a trailing 12-month basis. Keep in mind, seasonally, the third quarter is typically our lowest book-to-bill quarter. Our early October performance supports a healthy bookings outlook. In addition to our bookings, our pipeline of new business opportunities also remains strong. ASGN continues to be favored by our clients in the consulting space due to our intimate relationships, which span decades, our solutions portfolio, which continues to expand, and our solutions delivery model, which enables us to meet our clients' demands with the necessary skilled workforce at economical price points. As I mentioned, we continue to enhance our solution capabilities. And at the beginning of July, we officially closed our acquisition of GlideFast. The addition of GlideFast puts ASGN on the map as a key ServiceNow player. In a fast-growing technology market, it's important that we offer services that promote our clients' digitization pathways. GlideFast does just that, extending our value proposition through its ServiceNow capabilities, while at the same time, being an important source of revenue and margin expansion. After one quarter with AHDN, GlideFast is performing ahead of our expectations for both its revenue run rate and new business security. For example, during the quarter, Apex Systems and GlideFast jointly won a contract with a client who is currently in the process of modernizing its asset management system by moving this capability from a legacy system to ServiceNow. Once this capability has been transferred over to ServiceNow, our client can now conduct an initial audit for deployed hardware and software assets. This particular asset management capability has become important in the past few years as remote teams put stress on their existing asset systems and processes, resulting in a lack of precision on what applications have been deployed and on which devices. ASTN's underlying objective with this particular client was to improve the visibility and security of its asset management capability and to reduce costs. This contract is a great example of work won and now delivered as a result of our new ServiceNow solutions capabilities. Let's now turn to the federal government segment, which provides mission-critical solutions to the Department of Defense, the intelligence community, and federal civilian agencies. Revenues for the quarter totaled $297.9 million, down slightly year-over-year, but up 2.3% sequentially. As we discussed in recent calls, this year-over-year decline resulted from our strategic decision not to re-compete a low-margin web services resale program in the third quarter of last year. which was partially offset by the impact of businesses we acquired in 2021. Federal government segment gross margins were up 120 basis points compared to the prior year due to favorable business mix. New contract awards for the quarter were approximately $560 million, which translates to a book to bill of 1.9 to 1 for the quarter, and 1.0 to 1 on a trailing 12-month basis. This significant quarterly award activity demonstrates that the government continues to drive its spending in areas in which ASDN is focused, including that of cybersecurity, cloud, AIML, and IT modernization. Our strong book to build for the third quarter supports the government's segments' continued growth. Contract backlog improved from $2.9 billion at the end of the second quarter to total $3.1 billion at the end of the third quarter, or a healthy coverage ratio of 2.8 times the segment's trailing 12-month revenues. Beyond our backlog, which extends for multiple years, our pipeline of opportunities is at an all-time high, providing great visibility into 2023. The strength of our pipeline is an indication that our government segment is in the right markets, homeland and justice, defense and intelligence, and federal civilian, and providing the right solutions. During the quarter, we won a number of key contract awards, including a new contract with the FBI to provide enterprise IT operations, a re-compete supporting U.S. Transportation Command software development, help desk, and engineering, for its Global Air Transportation Execution System, or GATE, an important re-compete with the Defense Advanced Research Project Agency, or DARPA, whom we maintain a longstanding history, and a strategic re-compete to expand and advance cybersecurity and zero-trust solution to the United States Army and other defense agencies. On the topic of cybersecurity, At the beginning of October, we acquired IronVine Security, a leading cybersecurity company that designs, implements, and executes cybersecurity programs for federal customers. As with all of our acquisitions, IronVine represents a high growth business whose contributions will be accretive to both our gross and EBITDA margins. IronVine adds key new accounts to our portfolio, such as the Security and Exchange Commission, the Centers for Medicare and Medicaid Services, the Department of State, and the National Institutes of Health. IronVine also significantly strengthens ECS's cybersecurity offerings to government accounts while making us more competitive for future work. IronVine is off to a strong start, and we are excited to welcome their talented team to ASTN. With that, I will turn the call over to Marie Perry, our CFO, to discuss the third quarter financial results and our fourth quarter and full year 2022 guidance. Marie?