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spk13: 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.
spk01: 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.
spk16: 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.
spk11: Thanks, Ted. It's great to speak with everyone this afternoon. As Ted noted, revenue exceeded our expectations for the quarter. Fourth quarter revenues of $1.1 billion were above the top end of our guidance range due to continued commercial contract engagement during the holiday season. growth in our commercial consulting business, and continued strength in our federal government segment. Revenues from the commercial segment were $748.6 million, down 12.2% compared to the prior year quarter. Revenues for commercial consulting, the largest of our high-margin revenue streams, totaled $268.5 million, up 1.7% year-over-year despite difficult market conditions and a tough comparison of 37.8% growth in the fourth quarter of 2022. For the full year, commercial consulting revenues improved 14.2% on an as-reported basis and improved 8.6% organically. With the solid growth in our commercial consulting revenues for the year, we reached over $1 billion in commercial consulting revenues in 2023, as Ted previously noted. Growth in commercial consulting revenues was offset by an 18.4% year-over-year decline in assignment revenues, reflecting continued softness in the more cyclical parts of our businesses. For the full year, assignment revenues declined 16% compared to 2022. Revenues from our federal government segment were $325.5 million, up 9.2% year-over-year. For the full year, federal government segment revenue improved by 11.4% on an as-reported basis and 4.9% organically. Turning to margins. On a consolidated basis, growth margin was 28.4%, down 120 basis points over the fourth quarter of last year. The year-over-year compression in growth margin was largely related to business mix, including a lower mix of certain high-margin revenues within our commercial segment and a higher mix of lower-margin revenues from our federal government segment. Growth margin for the commercial segment was 32.1%, down 10 basis points year-over-year, primarily due to the lower mix of certain high-margin assignment revenue streams, namely creative digital marketing and permanent placement revenue, mostly offset by a higher mix of high-margin IT consulting revenues. Growth margin for the federal government segment was 19.9%, down 220 basis points year-over-year due to a higher mix of lower margin licensing revenues. SGMA expenses for the fourth quarter were 203.6 million, or 19% of revenues, compared to 229.9 million, or 20% of revenues, in the prior year. This improvement was mainly due to lower incentive compensation expenses. SGMA expenses also included $1.6 million in acquisition, integration, and strategic planning expenses that were not included in our guidance estimates. As expected, interest expense increased year-over-year related to rising interest rates and our refinancing this past August. Net income was $50.3 million, adjusted EBITDA was $121 million, and adjusted EBITDA margin was 11.3%. At quarter end, cash and cash equivalents were $175.9 million, and we had full availability under our new $500 million Senior Secured Revolver. Free cash flow for the quarter was $109.2 million, an increase of 68.5% year-over-year. We deployed $75.4 million in cash on the repurchase of approximately 872,000 shares during the fourth quarter at an attractive price of $86.37. For the full year, free cash flow totaled $417 million, an increase of 54.3% year-over-year. We deployed 273.1 million in cash in 2023 on the repurchase of 3.4 million shares at an average price of $79.89. We have roughly 273.7 million remaining under our share repurchase authorization. With strong free cash flow generation and full availability under our revolver, We have apple dry powder to make strategic acquisitions once the M&A market improves. Turning to guidance. Our financial estimates for the first quarter of 2024 are set forth in our earnings release and supplemental materials. These estimates are based on current market conditions. Our estimates assume 62.75 billable days in the first quarter, .25 billable days fewer than a year ago period, and 2.75 billable days more than Q4 of 2023. Guidance also considers seasonality, with the first quarter traditionally the lowest of the year. It is also important to remember that the payroll tax reset occurs at the beginning of every calendar year, having approximately 100 basis points of downward impact on adjusted EBITDA margins as we move from the fourth to the first quarter. We expect market conditions to remain challenging in the first quarter. In our commercial segment, we anticipate revenues will remain soft across assignment and consulting. Declines in commercial revenues are expected to be partially offset by continued growth in our federal government segment. We expect growth margins to decline year over year due to a business mix similar to current trends, including a greater mix of federal government revenues and continued Our cash SG&A margin will remain relatively consistent year over year. In lieu of M&A, we expect to continue to allocate our free cash flow towards share repurchase. With this background, we are estimating revenues of $1.032 billion to $1.052 billion for the first quarter. We are estimating net income of $37.7 million to $41.3 million. A Jeopardy Vida of 104.5 million to 109.5 million. And a Jeopardy Vida margin of 10.1% to 10.4%. Thank you. I'll now turn the call back to Ted for some closing remarks.
spk16: Thanks, Marie. While we are positive about the future, all signs indicate continued softness in the near term. However, a difficult market does not mean we've taken a backseat to our client relationships. Rather, as is evident in our resilient financial performance this past year, we've worked ever harder, proactively staying close to each of our clients and continuing to hold regular strategic discussions about their IT roadmap. I cannot thank our teams enough for your hard work these past 12 months. Each and every one of you has helped position ASGN as an IT industry leader. continuing to develop yourselves and our service offerings so that we are primed to support our clients' ongoing digital transformation needs. And while certain IT projects have naturally been pushed to the right, they are not completely off the table. The need for IT services will be strong, and ASDN is one of the fastest ways for our clients to ramp up their investments and reengage more fully in their IT roadmap. Our domestic footprint is as solid as it has ever been, and now with our nearshore capabilities in Mexico also of scale, we are able to provide a deep talent pool that is highly skilled and competitively priced across multiple geographies. As I highlighted at the start of today's call, ASCM's business today is the result of several years of thoughtful and proactive planning. We've shaped our service offerings in business segments to reflect increasing IT demand and our competitive industry position and differentiated go-to-market strategy are aligned with our clients' needs. We will focus our efforts in 2024 on further strengthening our IT consulting capabilities, taking advantage of opportunities as we pursue higher-end, higher-value projects that drive our clients' IT efforts and position ASGN for success. Thank you again for joining our fourth quarter and full year 2023 call. Operator, please open the call to questions.
spk13: Thank you. And 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 star key. And our first question comes from the line of Maggie Nolan with William Blair. Please proceed with your question.
spk10: Hi, thank you. I'm wondering if you can give us any additional information on how demand and revenue, the cadence of that from October through January here and what you've seen.
spk16: Hey, Maggie. It's Ted. Thanks for the question. I would say demand throughout the fourth quarter, you said October through January, was pretty steady. We had programmed maybe for a little softer last couple weeks in the firm of furloughs or slowing and spending. And I would say that, for the most part, it hung together better than we thought. And therefore, we were a little bit ahead of our number. You know, not a whole lot other than that. I think the quarter was a similar demand quarter to the third quarter. And as you can see in our guidance, although seasonally it's a little slower start always in the first quarter, we're predicting about the same based on what we can see right now.
spk10: Got it. Thank you. And then, Maria, I think in your prepared remarks, you mentioned some of the gross margin impacts from COVID. the mix within the commercial segment in particular. What surprised you about that mix, and what is your outlook for how mix may impact margins over the coming quarters here?
spk12: Hey, Maggie. A couple things as it relates to mix, and so there's some things that we'll definitely kind of carry forward from what we saw in the fourth quarter to the first quarter. The first is really the higher government segment. which has a lower mix than the commercial. And so with the counter-cyclical aspect of the government, you know, we are just seeing that. And then on the commercial side, you know, we've just highlighted, especially those discretionary areas, just softer from a margin perspective.
spk16: Market demand is softer in some of those areas than the creative digital marketing and the perm. But, yeah, I would highlight what Marie said. It's mostly being driven by... higher than expected growth in the federal segment, and you'll see that in the first quarter.
spk10: Yeah. Thank you. Thank you.
spk13: Thank you. Our next question comes from the line of Jeff Silber with BMO Capital Markets. Please proceed with your question.
spk04: Thanks so much. You cited a couple of verticals. I think it was commercial, industrial, and industrial. PMT segments. I might have gotten those wrong, but forgive me. That soft sequential growth on a billable day basis, billable day adjusted basis. What's going on in those markets that are different from some of the other verticals that you're seeing?
spk14: Yeah. Rand, you want to take that one?
spk07: Yeah. Well, I think, first of all, if you look within those sectors, Jeff, and you see what comprises them, for example, utilities and energies, remained strong and grew sequentially in that quarter. We actually had 12 of our sectors growing, mostly in the consumer industrial and the TMT area. Healthcare also kind of held its own, particularly in the provider space. So I think when you look further below just the general industry and you look at specific areas, which we've enumerated some in the text, you can see that those sectors are fairly healthy and continuing to move along. And it was nice to see more of them grow in the fourth quarter, sequentially over the third quarter than we saw in the previous quarter.
spk04: Okay, that's helpful. And if I can move on to the federal government sector, you talked about some projects or some timings that start being deferred, and hopefully you're going to catch up on those. But I'm just curious, as we go through the rest of the year, considering it is an election year, with all the uncertainty going down in Washington, do you think that kind of mindset will continue? Should we expect those kind of deferrals and delays the rest of the year?
spk16: Well, I think on the one hand, the administration would like to get as much out on the street as they possibly could, Jeff. On the other hand, they're dealing with a continuing resolution. And to the extent they continue to deal with that, we'll continue to perform on the work that we have. But some of the bigger decisions on new work may be delayed. And I think we saw the start of that here in the fourth quarter. As we said in our remarks, it wasn't an issue of lost work. Our submitted weighting awards as a part of our pipeline is as high as it's ever been. But we're going to see most of those things adjudicated, we hope, in the first two quarters here, some of those that did not get decided on in the fourth.
spk14: Okay. Really appreciate the call. Thanks so much.
spk13: Thank you. Our next question comes from the line of Toby Sommer with Truist Securities. Please proceed with your question.
spk03: Thanks. Within the commercial consulting area, you did say that renewals running better, more than 50% of new business, but is that the same as the recent quarter or two, or is the mix closer to parity there with new business doing a little bit better than it had three or six months ago?
spk16: Rand, it's pretty much the same as the previous quarter, right?
spk07: That's correct. It was a little bit more. It's always been in balance between 60-40 and 40-60. And maybe earlier in the year, 23, there was a little bit of new work, which probably is typical of the beginning of a business cycle, but for the year. But yes, it was consistent with Q3.
spk03: Project sizes, having any variance in there? You know, a year, 18 months ago, you saw project size coming down. Maybe it's just a little piece-mealing out project rather than doling it out all at once. Any changes that you've perceived?
spk15: Brian?
spk07: I would say project size is still on a slight upward trend. How much elongating the spend that is stretching out the project a bit had started the end of last year, the last couple quarters, and continued through the fourth quarter. So, yes, the project size, they're certainly fine. In fact, I think Ted mentioned in the AI side, we've won some work in the third quarter. We won some work in the fourth quarter, and we're looking at some larger projects in AI. It's what I call the, you move up the totem pole from looking at we have now processing power with chip technology. We have the apps embedding AI into their apps. You have a lot of data migration and cloud building infrastructure going on. So now we see more data prep use cases and building algorithms. So we're getting closer to closer to real insertion of AI into our clients' business areas. And the more work in the data prep area and use cases, in the execution of use cases, the more we're going to see work.
spk03: Okay, and I want to kind of double click on the government ECS business. Your treasury outlays have actually been good and several of the larger focused companies on the trade publicly have had potentially better book to bills and underlying contracting trends than you're seeing. How do I square the discrepancy between the performance here and what we've seen from a broader lens?
spk16: Toby, I think we haven't seen all the government peers released, but for some of the ones that we track, they are seasonably below one, like we are for Q4. I think it's the vagary of what are we bidding on versus what are they bidding on and where are our relationships versus theirs, but I take a lot of confidence in the size of our submitted waiting award number and in places where we have real relationships. And so while we might have been a little closer to one in a typical quarter, we still would have been below it in a fourth quarter. So we're positive about the things that we have out there and that we're waiting to be adjudicated, and we'll have to see how they go here in the first quarter and into the second.
spk15: Thank you. Thank you.
spk13: Thank you. Our next question comes from the line of Joseph Vaffey with Canaccord Genuity. Please proceed with your question.
spk02: Hey, everyone. Thanks for taking my call and taking my questions here this afternoon. Maybe we just start on the assignment side and looking at maybe green shoots or if it's a little early for that, you know, on a sequential basis. I know it's a leading indicator. Maybe, you know, some more commentary there of what you're seeing on assignment, you know, across verticals and the like. And then I'll have some follow-ups.
spk16: So, Joe, I think that I'll start and then Ray can chip in here. I wouldn't say there are green shoots there. I'd say there's steadiness, if you will. So, we can see that in a couple ways. One, we see our our order flow, and then we can index that against industry performance. As Rand mentioned earlier, you know, we now have two industries that are growing sequentially on an adjusted basis, and one that's flat, so that's an improvement from none out of five, but we need more than just two. So I would say steady, not green shoots, and you know, we'll have to see how this quarter develops. I mean, typically in the assignment part of the business, you come across seasonably at a slightly lower level coming out of Q4 and into Q1, and that's what we saw. And it's about what we saw in the prior year, so I'd say really no difference there. And then you spend the first quarter kind of reclaiming ground, if you will, as clients release budgets and begin to spend. And so that's kind of what we're monitoring here as we go. Ram, would you add anything else to that?
spk07: Well, Ted and Joe, let me just comment. In consulting, we see green shoots because there's discussion with clients about their roadmaps, about what the next projects are. There's some process leading up to release of an RFP, if you will, or a piece of work that we can bid on and go ahead and potentially win. In the staffing, the assignment side of the business, it's a very quick transaction type environment. So clients are sitting there with requirements that they will, once budgets are approved and once they get the green light from corporate, if you will, they'll release requirements and boom, we'll see a rec flow much different than we've seen for the past year. So it's more transactional and more quick based. Green shoots really come from where we can see a buildup of thought and proactive working toward an end, if that helps at all, Joe, in your question. Certainly per emplacement part of climate revenue is going to be nobody's going to do anything until corporate gives the go-ahead, right, and says we can hire internal people.
spk02: Sure. That's great color. Thank you. And then maybe we'll just drill down a little bit on the Mexico Delivery Center and you know, obviously digital transformation can't stand still because the world is not standing still and enterprises need to move forward and, you know, maybe, you know, some, some more, you know, any evolution in the business model and, you know, you know, we're seeing, you know, others in, in services lead with lower cost geos and how that is maybe helping keeping consulting, moving forward on an upward trajectory.
spk16: I think, well, look, I think that's right, Joe. I mean, our clients are looking for things to either continue that are critical or things that haven't started that are critical, a way to get them done, even in the face of tight budgets. I mean, they're very wary here. They haven't kind of fully released things. And so they've turned to delivery opportunities like our Mexico Delivery Center. We've seen full utilization plus in that center. And even here over a short time in the last few years, I mean, our headcounts there have grown by 10x. So I think it's a really good example. Here in the U.S., you can see clients much more willing to look broadly across the U.S. to other lower cost markets. They're willing to get project teams that are in lower cost areas. They don't have to have Certain developers sitting right in Jersey City at a certain exorbitant price per hour, they're just thinking differently about all that stuff. So there's movement going on around that for sure. But I would just reinforce here that clients are taking longer here to fully adjudicate their budgets and their plans for this year and then to begin to release that. But I think it's only a matter of time.
spk07: Hey, Ted. Ted, can I add something to that, if you wouldn't mind? Joe?
spk02: Yeah, sure. Absolutely, Rand.
spk07: There is AI insertion in our clients' enterprise architecture. And then there is AI insertion in our own services that we have to do to stay competitive, cost competitive for our clients. And everything Ted said is correct. We made a big investment in Mexico. He talked about all that we've seen since we've done that and the growth of our Mexican Development Center. But we're now implementing better techniques, AI techniques, with which to code in the new languages, the modern language and the large languages. So the fact that our Mexican Center is moving out in these AI adoption and these AI techniques makes us even more competitive in Mexico. And it's interesting. Our clients are asking about that. They want to talk about that and understand that. which I think is a good sign for us that we're on the right path, not just because we have the center, but we're keeping the center up to date with the latest technologies, which makes them more efficient for our clients.
spk02: That's helpful. Thank you. And then maybe I'll just sneak one more in on capital allocation. The free cash flow is really great here, and it's great to see the share buybacks. Just wondering, you know, You know, it feels like, and I know I heard Marie say that the market wasn't that good for M&A right now. Is it just, are you seeing targets not really wanting to kind of sell down here, or what is the dynamic there? Because it, you know, it feels like it might be a nice time to do some bolt-ons. Thanks a lot, guys.
spk16: I'll take it. Want me to take it? So, hey, Joe, so I think that... You're right. I mean, we would love to be allocating capital right now to strategic acquisition opportunities. I think it's the dearth of opportunities and the real quality opportunities in the market right now. But we have a very defined shopping list, if you will. We know what we can fulfill and invest in organically. We know what we would like to invest in inorganically. to support all the things that Rand was mentioning here earlier around what our clients are thinking about. And it's going to take just a better flow, which means a little bit more time. And there's all kinds of underlying reasons, whether it's private equity still holding on tight and not quite ready to trade assets because of valuations, where the debt markets are, and a whole bunch of other things. But we kind of remain committed here. We're just going to be ready, and in the meantime, we're going to stay focused on share repurchases, which you've seen us do, and our board is supporting wholeheartedly, and we'll kind of watch and measure this out.
spk14: Great. Thanks a lot, guys. Much appreciated.
spk13: Thank you. Our next question comes from the line of Andre Childress with Baird. Please proceed with your question.
spk06: Hey, this is Andre. I'm from Mark Markon. Thank you for taking our questions. So my first question is just to follow up to something Rand said earlier about some of the green shoots on the consulting side. It sounds like your clients in general have, you know, roadmaps that they want to execute on, but based on your conversations with those clients, What needs to change in the environment for them to actually unleash some of those RFPs and execute on those roadmaps?
spk16: Ray, do you want to follow up on that?
spk07: Well, yeah. I mean, our thesis has been ever since we've been a public company that IT spends a function of corporate earnings. So I think when companies feel like their corporate earnings are secure and that they have the runway ahead, they're going to spend more on IT. Ted, I think we would say our hope is that what we saw from the consumer industrial side of our sectors and the healthcare providers, as well as the TMB segment, that they're feeling more secure and they're going to start spending more. We saw that sequentially. That's a small data point. It's not conclusive, but I think it all goes back to corporate earnings and the security they feel about that.
spk14: Ted, you want to add to that? That's great.
spk06: Makes a lot of sense. Thank you for that. And then I guess switching over to margins, you guys did a fantastic job at preserving your margins, even considering, you know, the mixed shifts and, you know, you guys talk about your natural or automatic stabilizers, but how should we think about margins for 2024? Should we expect them to be relatively steady as the stabilizers continue to kick in or Is there anything to call out for the full year? Thank you. Marie?
spk12: Yeah, so kind of implied in our guidance for Q1, our cash SG&A margin is about 18%. And so as we think about the full year of 2024, that's probably a pretty good run rate, if you will, from a margin perspective.
spk16: You do in the first quarter have the payroll tax reset, right? That's going to influence it. uh a little higher um but look i mean our our um our sgna margins here have been fairly consistent outside of the first quarter so you know i would look to this year i think they were kind of right at you know adjusted for bloodline stuff just over 17 and you should expect about the same thing andre perfect thank you so much and thank you for answering the questions
spk13: Thank you. Our next question comes from the line of Seth Weber with Wells Fargo. Please proceed with your question.
spk09: Hi, this is John. I'm for Seth. Thanks for taking my question. Maybe if we could just talk a little bit more about TMT. It sounds like the cyber efforts have been bearing fruit, and maybe if you could just give us some more information about kind of the cross-pollination between kind of the federal side and the commercial side with cyber and maybe what clients are looking for as we enter the new year. Thanks. Randy, do you want to talk about that?
spk07: Well, I'll start. You know, I think the man on the street would say the federal government is probably stronger at cybersecurity and protection of our systems and our data than more in the commercial segment. If you look at the past years, you know, there have been breaches of commercial, big commercial companies. So I guess I'm laying the groundwork here for the federal government has great quals. and great track record on cybersecurity. Our ECS team has had great quals and a great track record in cybersecurity for some very important agencies in the federal government. That's transferable to the commercial sector. And I think when we take our technologies over and our center over to them, it's resonating with them because of that backdrop that I just mentioned. So I would say it's as simple as that, okay?
spk09: Great, thanks. And then maybe a quick follow-up on Creative Circle. Could you just comment on any trends you're seeing in the digital marketing space and potentially any views on the outlook in terms of 24 given the election year? Anything we should be cognizant of? Thanks.
spk07: It's funny. I just got off a call with a CMO of a company, a Fortune 1000 company, a couple hours ago. And it was interesting to talk to him. I think, first of all, CMOs are also being held tight in their spend as a function of corporate earnings and also depending on what their market position is. But I think that talks to the marketplace that our creative circle plays in. It is clear that some of the bread and butter kinds of things, like creating or being creative, is still a part of our great service. Translating that through AI, AI allows you to mass produce it or to personalize it. And I think there are technologies there that we're well aware of that we're talking to our clients about imposing. There's also the whole question of which channels do I use to get my message out there and to make it personal? And do I have to give it to multiple mediums for that one client? So there's a lot of opportunity out there. I think they're all trying to work their way through it and understand it and figure out the best path. I think you can see that in some of the reporting from technology companies. In some cases, the ad dollars are up. In some cases, they're not. You know, the whole streaming world is changing and how they're charging for whether you want streaming with advertisement or without advertisement. So there is a lot going on in the marketing world that has to be digested and recalculated, if you will. And I think we're going to see, you know, a plethora of opportunity once we get past when companies feel that they're on a good solid footing and they can move forward. As I said before, in consumer and utilities and in certain media companies, they're starting to get there.
spk14: Great call. Thank you again. Thank you.
spk13: Our next question comes from the line of Surinder Thind with Jefferies. Please proceed with your question.
spk05: Thank you. Ted, just a big picture question here in terms of the delivery model as you continue to build up the commercial consulting part of the business. Can you maybe talk about how you're thinking about headcount growth versus the use of temporary resources in terms of delivering those projects. And the reason I ask that is just from a competitive positioning perspective, in the sense that you talked earlier about, you know, investing in kind of building out your talent pool, but if a large percentage of your delivery is, is, is not owned by you guys, how do you, how do you guys manage that?
spk16: Well, look, surrender, first of all, we've got, um, you know, uh, today, 600 plus feet on the street with relationships directly into these Fortune 1000 enterprises. And it's that group that have had these client relationships from the traditional IT staffing business all the way through all of the customers' IT business, including consulting. So that doesn't change. We don't need to build that up, if you will. We just need to address client opportunities. And so if it takes a little more, we can obviously scale into that and always have. On the consulting side, as we put project teams together, and again, you note our delivery model is a little different. I mean, we have about 80% to 85% of our team members on these projects come from our contingent workforce or our IT staffing capabilities. And then we've got a very smart solution-oriented with industry expertise team on the top, which are helping architect the solutions to meet the industry needs of the customer. And that's working just great. And so we will continue to build, but I think our model is going to be here that we're definitely on project teams going to bring our contingent labor to bear on it because they are a more... perfect fit. You know, they're in the right place at the right price point with the more perfect skill set, the right industry experience, and so we can craft that in every team as we go here. So, you know, that's been a winning proposition for our customer, and the all-in cost of that is really competitive, you know, and you can see that we win work, you know, not only because of, you know, our price point, but also the expertise we bring to bear. So, we're going to stay the course there.
spk05: Excellent. And then in terms of just, I guess, following up on the price point question here, how much of a difference is there between what you're able to bill for your consulting services versus the staffing services? I assume, is it material at this point? How should we think about the difference? And then maybe just some commentary on kind of bill rate trends, I guess, at this point in terms of how that may be trended over 23 and what your outlook for 24 is?
spk16: Well, for sure the bill rate is better and it's evidenced by the fact we can get a better margin, right? So we tell you that our margin in consulting is three or 400 basis points better than what we get in IT staffing. And it is because we're taking on some some, you know, responsibility here for a certain amount of life or deliverables or milestones. And so from that, we're able to get a better bill rate. I mean, there's no question about that. What was the second part of your question?
spk05: Just in terms of the outlook for 24 pricing in the conversations that you're having with clients, I mean, are clients asking for better rates or are you able to kind of hold rates steady or, you know, as you talk about wanting to do more AI projects that you can maybe use that to your advantage to, you know, maybe get a little bit better rate because those are harder skill sets to find.
spk16: Well, look, I think anytime it's a harder skill set to find, we can get a better rate and it doesn't matter whether it's in, you know, it's really in the solution orientation, right? If it's a higher end solution orientation, we can get a better rate. So all that stands, Pat. Our margins, our markups, if you will, have been pretty steady here and our bill rates are slightly rising. And I think that is part and parcel with the mix of more consultative work that we're doing. And yes, the more work we do in AI here, that will only support and improve those.
spk05: So I apologize if I didn't ask the question. I wasn't referring to the mix. I was actually referring to the actual apples to apples comparison of what you could charge for a certain level of engineer in 23 versus what you think you may be able to charge them in 24.
spk16: Yeah, we're not seeing a trend that is down. I mean, I expect that typically, you know, we'll get a slight increase in our bill rates year to year. I would expect it in 24 versus 23. We don't see anything underlying that would tell us any different right now.
spk07: Hey, Ted, can I add one thing, Brenda? Sure. Keep in mind as our consulting business grows and grows, it's cost per job, not cost per hour. In staffing, it's cost per hour. And there are built-in escalators to bill rates, and there are exceptions to the bill rates depending on skill types, the status of availability of skills, importance of projects. But, you know, a lot of what you're asking applies more to staffing where bill rates for an individual hour are highly discussed. And it's consulting as that grows with us. It's discussing what the cost of the job is and what are the benefits associated with that.
spk05: But I just, I guess maybe to help me clarify, I just want to make sure I don't misinterpret that comment. Is that implying that you're doing a lot more fixed price projects then? Because generally most consulting firms do not want to do fixed price projects. They want to build by the hour. So you have engineers. Yeah.
spk07: It does not imply that, but the conversations with a client start around what's the total cost of taking on this job. You can build it by looking at time and material type work. You can build it by time and material, but the ultimate conversation and decision around a competitive choice is around the cost and the risk associated with delivering that work and or the benefit of that work.
spk14: Got it. Thank you. Thank you. And our next question comes from the line of Heather Balsky with Bank of America.
spk13: Please proceed with your question.
spk00: Hi, this is Emily Marzo on for Heather Balsky. I was wondering if you could talk to us about what you're seeing in permanent staffing and what was the percentage of sales you saw for staffing this quarter? Thank you.
spk12: Yes, absolutely. Hello, hello. So, yes, for the fourth quarter, we actually, PERM as a percent of total revenue was 2.4%.
spk14: And I think what you're seeing there, Heather, again, is it's very steady.
spk16: I mean, I would say it's at a historic low percent of the mix, and there's really no change, if you will, from the third to the fourth or our expectation here for the first quarter is in similar ranges.
spk00: Thank you.
spk13: Thank you. And we have reached the end of our question and answer session. I'll now turn the call back over to Ted Hanson for close remarks.
spk16: Great. Well, I appreciate everyone's attention here today for the release of our fourth quarter and the Q&A that followed. And we look forward to being with you very soon to discuss our first quarter 2024 results.
spk13: Thank you. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
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