All right, everyone, we're gonna keep going here at the 44th Annual Canaccord Growth Conference. I'm Joe Vafi, equity research analyst here, focused on fintech and digital transformation. We are pleased to have with us next, the management team from ASGN. We have, Ted Hanson here and Sean Casey, who— Ted's the CEO, and Sean Casey heads, one of the largest, business units, Apex Systems.
Mm-hmm.
Right?
Correct.
And, so we're really happy to have Sean and Ted with us here today. ASGN's a leader in providing IT services and solutions across commercial and government customers. The company's seen a steady mix shift to the positive in its business, to higher-end consulting and higher value IT services. Over time, the company has a unique operating strategy that allows for more just-in-time, client-tailored project deployments, which helps grow new logos and maintaining expanding share with existing customers. So with that quick intro, Ted and Sean, thanks for being with us here today.
So maybe we just start, and you can introduce ASGN to us in your own words. I know you-- company's been on a transformation of its own over the last 10 or 15 years. So maybe kind of walk us through where you've come and where you're gonna be going.
Great. Well, thanks, Joe, for having us and Canaccord. We're excited to be here. ASGN, at the highest level, IT services, large enterprise accounts, about 70% of our business is in the commercial marketplace, covering industries such as banking, financial services, TMT, healthcare, consumer industrials, and professional and business services. And then, about 30% of our revenue is in the federal government, serving Department of Defense, national intelligence agencies, and fed civilian agencies.
You know, we believe in IT, we believe in large enterprise accounts, and we've been on a push here over the last 8 to 10 years to build off of our legacy IT staffing business and the relationship in these large enterprise accounts, and actually provide higher-end IT solution and consulting capabilities, which give us a higher value proposition with the client because the work is more important. We get a better margin profile, both at the gross margin and EBITDA margin level, and ultimately are entering into work that's of bigger size, more importance, and longer duration.
That's great. But you are kinda differentiated in the market 'cause you do have both a consulting business and a staffing business. So perhaps kinda talk about how they complement each other and how it provides differentiation with customers. And you have staffing relationships with much of the Fortune 500.
That's right.
Right.
So the business was built over these IT staffing relationships, where we have contracts to do business with more than half of the Fortune 500 and 1,000. They've been customers for years and decades. We have a certain amount of trust built up there. And customer has said: "Look, you've been providing me all these great technical resources for all these years. If you could step in and provide more engagement management, help us get to certain outcomes, then, obviously, we can give you bigger pieces of work," and all the other desirables that we talked about before.
You know, I'm not sure the world needs another consulting company, and so we are different. And we're different in the sense that our consulting engagements are delivered through our contingent labor model from our IT staffing capabilities. So we don't carry a very large bench, if a bench at all. On any of the project teams, about 85% of the resources come from our IT staffing capability, and about 15% are our own subject matter experts, either in the technology or industry, where we're providing the solution. So, in that way, we are more productive outcome for the clients, let's say.
We have just as rich solution capabilities, but we can deliver in a way that has a better price point because we're not managing the realization of the bench. And so if we have work, then we're able to find the teams and get them to work very quickly and spin up very quickly. That's the heritage of our IT staffing business. And then when it's over, it's over, you know, if you will, and we're not carrying that group into the, you know, into the bench, if you will, and having issues with the utilization. I guess the other piece is, you have active contract vehicles with so many of these Fortune 1000 customers, so that's a piece of friction you don't necessarily have to go through to start a consulting project 'cause you already have a contract vehicle in place with them.
That's right. I mean, that's the-
That-
... richness of an enterprise account portfolio. You know, your goal is to land in the account, do great work, find other pieces of work that you push into left or right, or work expansion, if you will. And so there's the biggest spenders on technology are large enterprise accounts. They're the first and fastest adopters.
Mm.
A small or middle market account strategy feels like almost every next dollar of revenue has to come from a new customer, and so that's a pretty tough, you know, tough one to execute. So it's not easy to be an enterprise provider, but if you are there and have the status that we do, then it's a preferred situation for sure.
Great. So maybe we'll just stay at a high level for another minute here. You know, the macro has been, it's been a tough environment for everybody. It's been tough in demand for services, kind of broadly. Maybe kind of talk about where we are in this cycle from your perspective, and, you know, is this cycle different in any way or the same as others? And kind of any other comments you may have.
Well, it feels about three times as long, right, Sean?
Yeah.
It's been long, yeah.
That's definitely one. But no, I think, if you go back to when the Fed started to raise interest rates, not just talk about, but really raise interest rates in November of 2022, we could begin to see customers, big enterprise, smart customers, begin to position more cautiously, right? They wanted to reduce their spend across their whole organization, not just on IT, in other areas, but certainly in IT as well. And so we began to see a change in the demand outlook, if you will, with our customers. By the time we got into the third quarter of last year, things got pretty stable, if you will, and third into the fourth, and kind of fourth into the first half of this year, you know, what we've seen is basically the same.
It's been just a steadiness sequentially, month to month, quarter to quarter. You know, Sean will tell you, we see little data points that make us feel better about-
Not consistent.
But not consistent.
Yeah. Anecdotally, maybe more better than worse. Would that be kind of a fair statement?
Yes.
Something like that.
I think it'd be fair to say.
Yeah.
But I would say customers still haven't let go spending. Obviously, their IT needs are as great as ever. You know, there's no issue around the strategic initiatives of technology and how important it is to their business, but a lot of the stuff that they've been able to defer to keep spending down, they've deferred. Other ways they've done that is to elongate projects, right? So they burn less. Other ways they've found to do it is to ramp up slower-
Mm-hmm
... or put off the ramp-up of a new project. And then, otherwise, they have projects that are, you know, on their roadmap, and it becomes a part of our pipeline, but just not ready to award and begin those projects. So it happens in different ways, but you still see that. It's also industry by industry, right? We have some industries that we see improving sequential trends. In the last quarter, we mentioned TMT as one of those, especially telecommunications and media. We mentioned energy as a part of our consumer and industrials.
But we have other really important industry segments, like big banks and financial services, that are hypersensitive to both regulatory environment and the economic environment, and they definitely are restraining at levels we haven't seen since the Great Financial Crisis.
Mm-hmm.
Yeah, technology and financial services were the first two to slow down, when Ted mentions in November of 2022. Technology has started to come back, so we're hoping that would be one of the indicators-
Mm-hmm
... of financial services, especially the big banks, comes next, we'd feel really good.
Great. So what about, kind of staying on customers for a minute here? I mean, you talk to customers a lot. I mean, do they have budget, for this calendar year, still available, and they're holding back on it? Or is the budget not really there, and so that's why, you know, things are a little slow, or, you know, how is this budget year maybe different-
But-
... or the same as others?
Yeah, so companies are still spending on the, like, the mission-critical IT projects. The thing that we are seeing is some of the jobs that we've won, they're telling us to slow down a little bit-
Mm-hmm
... where, you know, take it, you know, let it go a little bit longer. Let's finish out this year instead of finish, you know, in September. But in, in general, there's so many projects that companies still wanna get done.
Yeah.
They're just deciding which are the ones they have to get done right now, and what are ones they can put off to potentially you know, next year.
Mm-hmm.
But it's. There are still, we are still winning some good, new projects. It's just not to the levels that we used to win.
Right
... a couple years ago.
I think customers entered this year with budgets.
Yeah.
They have a strategic roadmap, which is not just about this year, it's about multiple years.
Yeah.
They entered into this year hoping to make progress on that, and they had budget to do so. At a certain point, when you don't see the backdrop, economic backdrop or your business prospects improve, the budget kind of goes out the window, and you're saying, "Okay, we're gonna work towards this spending level." I think that's where clients are right now. Do they have budget? Yes, but budget out the window, and they're saying, "Hey, still be cautious. Let's get through the end of this year," and, you know-
Right
... we hope, we hope for a better backdrop here in 2025.
Right. Fair enough, but it does feel like enterprises are still on their digital transformation journey. They gotta do certain things. Maybe, maybe you could throw out a few for us to kind of understand better, like, where are the priority spends? I would imagine things like certain cloud migrations-
Yeah.
Right? Maybe security is still big.
Security is key.
Yeah.
You know, if you think about it-
Mm
... if you're a third of the way through your cloud migration, you're not gonna not do the other two-thirds. No customers are 100% of the way there, none of them.
Right.
Not even, not us, right? And I think when I wonder what's going on with our customers, I look inside of our own business, because-
Yeah
... we're 60% of the way through our cloud migration, right? But we're not. We have to do the other 40. The question is timing-
Yeah
... right? But cloud still remains critical. With that is application, I'll call it application management, because you have the applications that are on-prem don't just immediately port to-
Yeah
... the cloud, so there's application development work that goes on there, and then the security wrapper changes-
Mm-hmm
... with all that.... Security remains top of mind, for sure. There's less, I would say, across the board, less in a large software implementations going on, although we've been really pleased with our ServiceNow performance. They're one of the ones that has short-term returns to it.
Mm-hmm.
And so both the performance of ServiceNow and our GlideFast business, which is the preferred elite partner of ServiceNow, and their implementation capabilities, hasn't really seen a dip. They're performing very well. Cyber, you mentioned-
Mm
... remains critically important, and I think we're on the front end of a lot of data work as it relates to AI. So, it's not full throttled yet, but I think everybody's realized that, "Hey, if I want to get to any of these use cases around AI, and I peel it back and say, 'Well, where do I start?'" Data is the place where the issue is, right? Data is not federated, it's the quality of it is not there. It may not be in the right place. It may be scattered or on-prem, or what have you. And so everybody's eye is opening and saying, "Hey, there's a lot of data work to go here." We have to have good data, federated.
We need it in the cloud and in the same place, so that we can run it algorithms that are cross-enterprise data, and then we have to have the right security wrapper around all of that. So I think those are some areas that are either productive today or gonna be more productive soon. The future cases of AI are all good and out there, but they're not on the lip of the cup-
Right
... today, if you will.
Mm-hmm. That makes a lot of sense. And then on top of your delivery and consulting, you also have an offshore or nearshore delivery center in Mexico.
Right.
Is it Guadalajara?
Guadalajara-
Guadalajara
... Monterrey and Mexico City.
Monterrey. Maybe kind of add that or maybe drill down into that a bit, and how you're using that, kind of what kind of work goes there, you know, what clients want from there, and, and kind of the strategy on, on Mexico from here.
Yeah. So, think of clients that want a little bit cheaper rate, but don't want to go to India.
India.
Love the time zone, love the, you know, the language piece. But, you know, we've grown that from about 7 years ago from an acquisition we had. They had about 100 people in just Guadalajara, to over 1,500 people now in those three locations.
Mm-hmm.
And again, it just gives our chance when we're bidding out on projects-
Mm-hmm
... here in the US, to kind of give a blended rate that can support it, both at, from Mexico and from the US. Sometimes we're shipping it all to Mexico 'cause that's what they-
Mm-hmm
... prefer. But again, it's for clients that want a little bit cheap, you know, cheaper cost, but don't want to go-
Sure
... to India.
Really rich technical capabilities in that area. I mean, Mexico's done a nice job of kind of implementing a playbook that was similar to what India did over many years, but supercharging it, if you will. For the US-based customer, there's a dramatic win in all kinds of different areas, like Sean mentions, and we've got great utilization and uptake there.
Mm-hmm.
Client doesn't have to fly halfway around the world in order to touch and feel it.
Yep.
You know? And so, it's been a home run for us for sure.
Yeah, Guadalajara is pretty close to the beach.
Yeah.
Yeah.
Puerto Vallarta, things like that, right?
We'll be hosting the World Cup.
Yeah.
Then in Monterrey, we'll have games.
Oh, there you go. You guys got to be a sponsor.
Yeah.
See those logos out there, right? But, maybe kind of compare and contrast that. Do you have operations in India? You must have some operations in India.
Small operations in India.
Yeah.
We use it, primarily to support Europe-based customers-
Yeah
... which we do a little bit of work over there.
Uh-huh.
As well as our ServiceNow, technical capabilities. We have a group there. It's a place we probably need to be a little bigger.
Mm-hmm.
Maybe in a future acquis-- We're, we're definitely working on it organically.
Yeah.
Maybe in a future acquisition, we get a little sleeve of stronger presence-
Okay
... there. But really, the nearshore will be our main focus because that's a real differentiator for us.
Great, and then maybe we'll just shift gears and talk about your government business, some of the dynamics going on there. You've got a, you know, a nice, you know, I guess we call it a federal IT business, like a comp to a CACI or a, or a SAIC, or a Booz, or something like that. Would that be a fair comparison?
I think that's right. In 2018, we acquired a business that is called ECS. ECS competes with all the big federal government IT consulting contractors that you mentioned. We're not a pure play government firm at ASGN, right? It's a sixth industry for us, but an important industry. There's an enormous amount of IT spend that goes on there, and it balances out your portfolio in times like these. If you have the commercial market in a downtrend, the federal business is there to give you a stabilizer. We have one of the better EBITDA margins in the space there at around 11%.
And we not only wanted to enter that space as ASGN on a direct-to-government basis, but we also wanted to enhance our consultative and solution offerings overall. This is a business that has built a reputation as the number one federal contractor for AI machine learning services for the last-
Mm-hmm
... I wanna say, four years. I don't know if we'll be that forever, but it's a pretty good track record. Really great cybersecurity-
Mm-hmm
... quals, which started in the Department of Defense, and we broadened out into Fed civilian with an acquisition of Iron Vine two years ago, which has gone wonderfully great. We have really good cloud, data migration, data, overall data, skills in that business, and then just really good IT modernization, capabilities outside of that. So you're not gonna probably see us perform all the time like the pure plays, because we're again, it's an industry segment for us, but it's gonna bring great stability. We have great solution capabilities that enhance the overall business, and, and cash flow and margins are, are really solid there.
Great. So just a nice complement, nice diversification, solid business. But there's not. And I guess there's synergy at the G&A level, but you don't really. Those people are pretty specialized and not crossing over to the commercial side.
They are. I would tell you there are some places where we were beginning to see some synergies, primarily in cybersecurity.
Okay.
The government...
It's a different market.
It's a different market, and if you just think about IT modernization, it's certainly behind the commercial marketplace, except for maybe in two areas, and I would say AI, machine learning-
Mm-hmm
... and cybersecurity, for all the reasons-
Mm-hmm
... that you can think of. So we're seeing some good crossover right now in cybersecurity-
Yeah
... where enterprise commercial clients are seeing that we have something that's been honed in the government market that's attractive to them. So there's some pretty good cost cross-selling beginning there. A lot of the other areas don't cross over as easily.
They don't. Although they're, you know, we do work in that, you know, in IT modernization in the government some, and it does feel like there is a nice uptake in ServiceNow capability by the federal government.
Definitely, ServiceNow, and again, AI and data is another one of those places. And I think as we go a little bit forward here and really get harder into the services and-
Mm-hmm
... implementations of AI, you're gonna see that cross over a little better. To your point, ServiceNow is definitely one of those as well.
Sure. Maybe we kind of just switch gears in the last few minutes and just talk a little bit about some of the dynamics going on in your assignment or staffing business today. 'Cause I mean, it, your mix shift is clearly going to consulting, but it's still a, it's still a, you know, a material piece of the business.
Right. So, the IT staffing in the US marketplace is about a $35 to $40 billion business. Just to put that in perspective, it's growing about 3% or 4% a year normally, just throw out the wild swings we have going on today. That really hasn't changed over a period of time. The market's gotten bigger, but the growth rate has, has been kind of a mid-single-digit growth rate. For us, we've always gotten much more than that, high single digits, double digits, but it has some limitations. The IT consulting market in the US, way in excess of $300 million, the part we think we can serve is about $300 million.
Much more fragmented, bigger opportunity, faster growth dynamics, better, economics and margin profiles. So it's a natural pivot here, if you will.
Mm.
While we're not trying to exit the IT staffing market, we're trying to serve our customer base, remain a top three player in that marketplace, but it's definitely been the most cyclical part of the portfolio because as clients position themselves more cautiously, the first and fastest places they can go to reduce spend is the transactional work. So and IT staffing is a very transactional business. "Hey, I need one or two resources to do this." Boom! You know? And then when it comes time to say, "I'm gonna lower my spend," they can just stop, you know-
Mm-hmm
... here and there, and so that's definitely what we've seen. I would say right now, Sean, it's stable, right? Kind of month to month and quarter to quarter, which is a good sign. While it's cyclical on the way down, it also is kind of the canary in the coal mine in past downturns on the way out, because the fastest way for clients to really lean in and start to get after and spend more on these pent-up IT projects that they've deferred is to utilize our IT staffing capabilities. 'Cause we can bring resources or teams of resources together within days or a week, and so you know, I think you'll see the same time, the same thing this time.
You'll see that begin to inflect up here as clients get less cautious and are ready to get back at it in a more normal way.
Got it. So a leading indicator potentially on the way up, but we're not really seeing that-
Not seeing it yet.
… at this point.
Not consistent yet.
Not consistent. Okay, but maybe a few anecdotal data points that are kind of more good than bad.
Correct.
Would that be kind of... We're gonna run out of time here, but I just wanted to, you know, you just did report your Q2 results, steady results, you know, anything that we should. You know, I think the bookings were pretty good in consulting.
Well, I think-
Yeah.
Yeah, I think the bookings are pretty good. You know, if you look in the commercial, we're at a 1.2 book- to- bill. We're off to a really strong start here in the final quarter of the government fiscal year, and we reported on the call some strong bookings early in the first few weeks. So that's all positive. The bigger the consulting piece is of our business, the more visibility and durability we have, because those are longer term engagements. So now that's 60% of our business and growing, so those are all great data points. And on the margin side, our stabilizers are working.
We have margins shifting around a little bit, just based on business mix between staffing, commercial consulting, and federal consulting. But inside of each of those units, they're doing a great job of maintaining and even growing margins. Pretty good story on the underlying pieces of that.
Great. I think we're about out of time. So Ted and Sean, thanks for being with us here today, and-
Yeah, thank you, Ted.
... and-
Thank you
... having a nice talk on your business.
Great.
All right.
Thank you.
Thank you. Thank you very much. Thank you.
Thank you.