ASGN Incorporated

Greetings. Welcome to the ASGN Incorporated Fourth Quarter 2023 Earnings 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. I will now turn the conference over to your host, Kimberly Estrikin, Vice President of Investor Relations. You may begin.

Good afternoon. Thank you for joining us today for ASGN's fourth quarter and full year 2023 conference call. With me are Ted Hanson, Chief Executive Officer, Ram Blazer, 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. 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 measure. 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 fourth quarter and full year 2023 earnings call. ASGN achieved solid results in the fourth quarter with revenues, gross margin, and adjusted EBITDA margin all at the top end of or above our guidance ranges. During 2023, revenues totaled approximately $4.5 billion, of which $2.4 billion was in commercial and government IT consulting work. A highlight of our annual performance, commercial consulting revenues reached a new high watermark, surpassing $1 billion. From a profitability perspective, ongoing expense management, along with our business stabilizers, contributed to an adjusted EBITDA margin of 11.6% for the year. With that as background on our results, I'd like to highlight a few key themes to keep in mind as we review our segment performance. To start, 2023 was the first time we tested our current revenue mix and operating model in a difficult economy. Today's business is not the same as during the great financial crisis or the pandemic. Therefore, we had yet to witness our current operations in an economic slowdown. However, as evidenced by our full year results, I can confidently say that ASGM made solid progress despite macro challenges. Our unique go-to-market strategy and variable cost structure supported the business and our margins throughout the year. Second, not only do we demonstrate that our operating model works, but we also showed that we have the right mix of businesses. Our federal government services provided counter-cyclical support. to balance out our five diverse commercial industry verticals. Third, our longstanding, trusted client relationships for the growth of our IT consulting revenues. And in the fourth quarter, we officially surpassed 55% of consolidated revenues in IT consulting, a full year ahead of our targets. These achievements resulted from proactive efforts to strategically shape and purposefully build a business that could perform well throughout market cycles. Our federal government services offer counter-cyclical balance to our more cyclical commercial businesses. These cyclical commercial businesses, while leaving indicators on the downside, have historically seen more sustained rallies as the economy improves. Importantly, we are evolving our revenue mix. moving our way up the pyramid to provide higher-end, higher-value IT consulting work that is typically longer in duration and provides us with greater visibility and margin potential. I am certain that our operating model is well-positioned as IT services demand recovers. With these themes in mind, let's turn to our segment performance, beginning with our largest segment, our revenue, commercial. Our commercial segment services large enterprises and Fortune 1000 companies across five diverse industry verticals. Commercial segment revenues for the quarter declined by low teens year over year. Revenues for the segment benefited from growth in our consulting business, offset by double-digit declines in the more cyclical areas of our assignment business. Commercial consulting revenues increased roughly 2% for the quarter compared to the year-ago period. solid growth given the macro challenges, and a difficult year-over-year comparison. Favorable commercial consulting bookings of approximately $312 million translated to a book-to-bill of 1.2 times on a trailing 12-month basis. Another positive, we continue to add new Fortune 1000 clients to our consulting roster. Beyond new work, client retention rates on existing contracts remain strong, and customers are engaging our teams on longer consulting projects. Similar to the third quarter, we saw bookings weighted slightly more towards renewals than new work opportunities. As we enter the first quarter of 2024, many of our clients remain deliberate in their IT investments for the year, but their spending on certain consulting contracts remains extended. Nevertheless, the growth in our bookings during the fourth quarter clearly indicates that our clients continue to recognize the value of ASGN services. Our teams and operating model are well-positioned to support our clients' IT roadmaps as they ramp up their spend. Turning to our vertical performance, all five commercial industry verticals declined year-over-year. That said, we saw sequential growth on a billable day-adjusted basis in two verticals, consumer and industrial, and TMT, and relatively flat sequential performance on a billable day adjusted basis in the healthcare vertical. Sequential improvements in sub-verticals included utilities, consumer discretionary, healthcare providers, telecom, media, e-commerce, and software and services accounts. Our commercial bookings remain solid with work going across multiple service areas. Our pipeline of AI work continues to grow as our clients focus on data preparation, developing use cases, and implementing their AI platforms. As such, we continue to hire subject matter experts, train our current teams, and develop AI accelerator programs, each with our customer needs in mind. For example, APEX Systems' application development team is leveraging our partnership with Microsoft to upscale our developers to become even more productive for our clients. Microsoft technology, in another example, enabled us to significantly shorten new code generation timelines for an automotive and aerospace parts manufacturer. In another instance, with the help of Microsoft Copilot, our team substantially reduced data review time provider. In addition to Microsoft, Apex Systems is collaborating with several other companies' generative AI technologies. Leveraging both Salesforce and ServiceNow's generative AI technologies, we've been able to gain a holistic view of our customers' IT journeys to refine their AI roadmaps, automate solutions, and build personalized, data-driven marketing campaigns and IT schedules with improved productivity. Our team of data scientists, engineers, developers, and technical project managers have also used a combination of Microsoft Azure, Databricks, and Snowflake to help a Fortune 50 telecom company with personalization, predictive modeling, and increased revenue generation for its mass marketing campaign. With AI gaining traction, Cybersecurity needs are also increasing. In the fourth quarter, we worked with a Fortune 25 healthcare insurer to mitigate cybersecurity risks associated with its newly acquired entities. We partnered closely with our client's IT integration team to rapidly assess and remediate over 1,000 vulnerabilities in cloud platforms ahead of their planned integration timeline. By leveraging our deep expertise in Amazon Web Services, Microsoft Azure, and hybrid cloud environments, we've meaningfully reduced our clients' regulatory compliance and data breach risk during this critical transaction period. We've also integrated our public sector cybersecurity DNA to help grow our commercial work. Our professionals at ECS have developed proprietary methods for intelligence gathering, security instrumentation, and incident response, each of which has been battle-tested by the Department of Defense and is now being leveraged by our commercial clients. We believe that our combined credentials, expertise, and past qualifications will continue to drive our cybersecurity efforts across our Fortune 1000 client list. Speaking of our public sector services, let's now turn to our federal government segment, our sixth industry vertical, which provides mission critical solutions to the Department of Defense, the intelligence community, and federal civilian agencies. Federal segment revenues for the fourth quarter were up 9.2% year-over-year. Contract backlog was $3 billion at the end of the quarter, or a healthy coverage ratio of 2.4 times the segment's trailing 12-month revenues. The awards were approximately $56 million, translating to a book-to-bill of 0.8 times on a trailing 12-month basis. Bookings this past quarter were soft due to a combination of traditional seasonality and greater-than-anticipated award deferrals, into the first half of 2024. Our pipeline, as well as the bid submitted and awaiting award, are each near the highest levels they have ever been. The lower bookings in Q4 resulted from a timing issue rather than lost work opportunities, and we already see a pickup in contract activity in the new year. We expect stronger bookings in the first half of 2024. In the fourth quarter, bookings were led by work with the U.S. intelligence community and several civilian agencies. For example, we continue to manage the FBI's cybersecurity red and blue program, and in Q4, we won additional work under this contract. This mission-based work is designed to secure and monitor the FBI networks from external threats and internal vulnerabilities. In addition to work booked in the fourth quarter, ECS also announced two large multiple award IDIQ contracts this past November that allow our government team to bid on new work in the future. With the Veterans Affairs Office of Information and Technology, we won a $60.7 billion prime IDIQ contract. ECS has partnered with the VA since 2009, but this is the first time we won a prime contract with this office. Under this contract, ECS will provide a full range of IT services, including technical support, project management, strategy planning, systems software engineering, enterprise networking, and cybersecurity, amongst other services. Task orders under this IDIQ are expected to come out in the third quarter this year and be awarded in the fourth quarter. We also won a $1.25 billion prime IDIQ contract with the Defense Advanced Research Projects Agency, DARPA, to provide technical, analytical, and program support An agency of the U.S. Department of Defense, DARPA's mission is to develop breakthrough technologies for national security by working with partners inside and outside the federal government. ECS has been a well-respected partner of DARPA for more than 30 years, and in 2018 was one of seven awardees on an $850 million IDIQ. Success under this previous contract helped lead to our award under this new large prime contract. With that, I'll now turn the call over to Marie to discuss the fourth quarter results and our first quarter 2024 guidance.