ASGN Incorporated

Greetings. Welcome to the ASGN Incorporated Third Quarter 2023 Earnings Call. At this time, all participants are on a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. I will now turn the conference over to your host, Kimberly Esterkin, Vice President of Investor Relations. You may begin.

Good afternoon, and thank you for joining us today for ASGN's third quarter 2023 conference call. With me are Ted Hanson, Chief Executive Officer, Rand Blazer, President, and Murray 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. 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 these 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, Kim. And thank you for joining ASGN's third quarter 2023 earnings call. ASGN's performance for the third quarter 2023 was in line with our expectations, with results slightly ahead of or within our guidance ranges. Third quarter 2023 revenues of $1.12 billion were above the midpoint of our guidance, with IT consulting revenues reaching approximately 55% of the total ahead of our 2024 goal. Adjusted EBITDA margin was 12.3% for the third quarter, above the top end of our guidance range. We continue to see opportunities for margin expansion as our consulting revenues grow. With that as a background on our consolidated results, I'd like to turn to our industry performance. As we review our performance, three key things will be consistent throughout the discussion. While the market for IT spend remains difficult, these headwinds will reverse, and ASGN's business is better positioned than it's ever been to capture in-demand IT opportunities. Second, the strength of our business lies in our large domestic enterprise account base. Our diversified client base across six critical industry verticals provides stability throughout market cycles. Third, our business continues to evolve toward IT consulting, with more than half of our consolidated revenues now in the higher end, higher value project and solution capabilities. This growth in consulting revenues, along with the variable nature of our cost structure, supports our margins. I'll speak more about each of these topics as we review our quarterly performance, but let's begin by discussing the five industry verticals that comprise our commercial segment. Our commercial segment predominantly services large enterprise and Fortune 1000 companies. Commercial segment revenues for the quarter declined by low teens on a difficult year-over-year comparison. Revenues for the segment benefited from growth in our consulting business, offset by double-digit declines in the more discretionary areas of our assignment business. For the quarter, commercial consulting revenues increased 2.1% year-over-year, Commercial consulting bookings of $291 million translated to a booked bill of 1.1 times for the quarter and 1.2 times on a trailing 12-month basis. Of the consulting work won during the quarter, bookings were again weighted toward renewals on existing projects with a large portion of bookings coming in at the end of the third quarter, an indication that our clients remain cautious in their spend. Sale cycles are slow. and project durations continue to be elongated, but our retention rates on existing deals remain strong as our clients continue to recognize the high value of and need for ASGN services. We are seeing anything with an immediate return on investment, specifically projects aimed at cost containment and those generating operational efficiency, getting the green light from clients. I'll speak more on the work one during the quarter shortly. Turning to our vertical performance, our consumer and industrial and healthcare verticals saw low single-digit revenue declines year-over-year. Within consumer and industrial, consumer staples and utilities were bright spots, each experiencing low single-digit growth as compared to the third quarter of 2022. In the healthcare vertical, provider accounts maintained their strength and revenues were up double digits year-over-year. technology, media, and telecommunications, or TMT, business and government services, and financial services, our three remaining commercial industry verticals, all saw continued revenue declines year over year, though each of these verticals displayed some resiliency in certain areas on a sequential basis. Within TMT, for example, media and entertainment account revenues remained relatively consistent with the second quarter of 2023 with the rate of decline slowing. Within our financials vertical, big bank revenues were relatively flat sequentially with small sequential revenue growth in diversified financials. Even in these more challenging macroeconomic conditions, as previously noted, our commercial bookings remained solid. We continue to make progress on the AI front across the commercial segment, with generative AI accounting for many of the new opportunities in our pipeline, followed closely by work in machine learning. The vast majority of the generative AI projects for clients are exploratory at this time. We expect larger AI programs to follow once use cases that demonstrate value creation have been identified for our clients. At the same time this AI exploration work is taking place, we're seeing strong demand for data engineering and data governance in support of AI use cases. These infrastructure needs are being driven by the desire to ensure that data is complete, accurate, and timely for training, testing, and deploying AI models in the future. One example of work is a consulting project we won during the third quarter with a leading North American pet supply company. Our team was brought on to build out an end-to-end freight management system for our clients, including the full cloud data platform for managing analytics and future AI and automation capabilities. We are responsible for ensuring the architecture, configuration, reporting, and analytics are properly set up in the new freight management tool. At the same time, we must ensure that the data is extracted correctly from the old tool and ingested into the new tool. We're using technology solutions such as Snowblade, Databricks, and Google Cloud as part of this end-to-end architecture to ensure the best outcome for our clients. We also continue to excel in projects involving engineering, robotics, and machine learning capabilities. In another consulting project, one during the third quarter, we were hired to provide services to a leader in e-grocery technologies. Under this contract, we're helping to drive the deployment of our clients' robotic grocery fulfillment systems, which are used to stock the warehouses of a major retailer nationwide. We are providing end-to-end provisioning, installation, quality assessment, and support for each warehouse deploying the new e-grocery technology. Let's now turn to our federal government segment, our six critical solutions to the Department of Defense, the intelligence community, and fed civilian agencies. Federal segment revenues for the quarter were up 12.3% year-over-year on an as reported basis and up 4% organically. Contract backlog was roughly $3.3 billion at the end of the third quarter, or a healthy coverage ratio of 2.6 times the segment's trailing 12-month revenue. New awards were approximately $501.2 million, which translates to a book to bill of 1.5 times for the quarter and 0.9 times on a trailing 12-month basis. As we continue to secure work during the third quarter, we recognize the potential for some disruption in the procurement process should a government shutdown occur following the end of Q3. Our government team proactively engaged in discussions with clients for several weeks leading up to October 1st and reconfirmed that the vast majority of our work is mission critical. We believe that 10% or less of our federal government work could be impacted in the case of an extended government shutdown. We're keeping track of budgetary developments. In the meantime, we remain heads down on providing leading IT solutions to our government client base. Speaking of supporting our clients, in the third quarter, we want a combination of new and re-compete contracts. Amongst the new work secured, we want two new cybersecurity contracts with that U.S. House of Representatives and the Census Bureau. In addition, we secured a five-year data and AI contract to support the National Geospatial Intelligence Agency the Chief Digital Artificial Intelligence Office, or CDAO, and the Army Research Laboratory. We also won a smaller contract from the CDAO to help establish a global AI innovation lab that will support academic research in artificial intelligence worldwide. Similar to the commercial segment, much of our work in generative AI in the government space remains exploratory at present. But with excellent qualifications and traditional forms of artificial intelligence, our federal and civilian customers continue to look to us to identify use cases that will increase their operational efficiency. In fact, on several DOD AI research and development programs, we are integrating generative AI and large language models into current solutions. With regards to project extensions, we want to work with the U.S. Postal Service, supporting several key areas, including advanced data management and cybersecurity, and continue to support the Department of Veteran Affairs while adding new work in strategic planning, cloud advisory services, and AI technology implementation. The breadth of work just described is evidence of the counter-cyclical balance the government industry vertical provides for our overall account portfolio. With that, I'll turn the call over to Marie to discuss the third quarter results in our fourth quarter 2023 guidance. Thanks, Ted.