Hello, everyone. Thank you for joining. I'm Maggie Nolan. I'm the research analyst here at William Blair, who covers IT services, and that includes ASGN, along with my colleague, Trevor Romeo. I'm required to inform you that for a complete list of research disclosures or potential conflicts of interest, please visit our website at williamblair.com. We are very excited to have ASGN here with us today: Ted Hanson, the CEO; Shiv, the President; Marie, the CFO; and Chris from their TopBloc acquisition. Thank you all for joining us. We'll go through some of the near-term opportunities and a quick overview of the company, and then we'll jump into a little bit of a fireside chat.
Great. Maggie, thanks for having us, and Trevor. Maybe just a couple of minutes on ASGN. About $4 billion in revenues, all concentrated here in the U.S. If you think about ASGN, it's IT services at scale, large enterprise accounts, both in the commercial and the federal government industries. About 70% of the revenue, Fortune 500 and 1,000 accounts serving IT needs of big enterprise clients across financials, consumer and industrials, TMT, business services, and then about 30% healthcare, and then about 30% of the revenues in the federal government, mostly serving Department of Defense, National Intelligence, and Department of Homeland Security and Justice with solutions of AI, machine learning, data, cyber, application development, software engineering, cloud, and other what I'll call digital transformation capabilities.
You know, obviously, we're an IT business that prides itself on a diverse account portfolio, those large enterprise accounts into the diverse industries that I've mentioned. I think one of the unique differentiators of our business is our flexible cost structure inside of the business allows us to have resiliency as a firm, both in good times and in more difficult times. I'll leave that for Marie to talk about in a second. We are so fortunate to have a business that has tremendous free cash flow attributes to it, as well as a healthy balance sheet. At the right times, we can make strategic acquisitions and find partners like we found in Chris and his firm at TopBloc serving the Workday ecosystem, which enhances the solution capability of our overall firm. I mentioned these end markets. You can see that the industry vertical mix here is fairly diversified.
I think that's really important. You know, if you think about large enterprise customers, they're the largest and most consistent spenders on IT. Obviously, that's a place that you want to be. I think you also want those enterprise customers to be diversified by industry and market, which gives you stability in the business over the course of time. We've been moving up the IT services pyramid over a period of years. The history of our business is in IT staffing. We've developed these Fortune 1000 relationships with clients over years and decades that led for them to pull us into higher-end, what I'll call consulting opportunities to provide solutions with some type of deliverable, which is more important to them ultimately as an end outcome and also for us, provides us with better economics because it's a higher value proposition to the client.
This, while our IT staffing heritage kind of, you know, kind of gives us these relationships and have put us in this market, the real strategic growth driver of the firm over the coming years is going to be moving up the pyramid and doing higher value, higher margin work for our customers. Marie?
Ted already mentioned the variable model that we have. We do have ASGN has a unique and a differentiated business model that demonstrates resilience in economic environments. We have two levers in our model. The first one, under gross margin, we have a contingent labor structure. Basically, from a contingent labor structure, we have a very thin base, and then we use our staffing arm to actually build and support a very talented, qualified team at a competitive price. That really helps us support our gross margin. From a gross margin change or compression or expansion, that is really driven by business mix. What I mean by that is, from each business line, the margins basically are consistent. They're stable.
What we're seeing now, even in the second quarter guidance, is that as our government segment, which has typically a slightly lower margin than our commercial, as that is slightly higher on a year-over-year basis, we're actually seeing some compression. On the other side, our commercial consulting that actually has a slightly higher, not a slightly, but a higher margin profile than some of our other lines of business, we're seeing expansion. Really, when you see changes in our gross margin, it is attributable to our business mix. The other lever that we have as it relates to our business model is in SG&A. 70% of our SG&A is variable or semi-variable. That is modest base, and then we have a variable incentive structure. So commission bonus that's tied directly to our gross profit and our revenues.
It moderates with our results. You actually see from a gross margin perspective directly tied to our revenue. From an SG&A, we have our variable compensation that moderates with our results. The one thing to highlight is in a given quarter, when we will see either expansion or softness in our revenues, we like to talk about our automatic stabilizers. Not everything is automatic. We will see kind of maybe a quarter later, whether that be attrition or other areas of our business, that will catch up to the business results. Last on the list, Ted mentioned this, our free cash flow. Our free cash flow continues to be strong and solid. We actually have a track record, and we have a measurement, if you will, that says 60%-65% of EBITDA conversion into free cash flow.
How do we use that free cash flow? When you look at our capital allocation, our focus is to allocate capital to the best use of our shareholders. We actually use a balanced strategy. We will invest organically, share repurchase, and then use capital for M&A. M&A is by far the best and most effective use of our capital. As Ted mentioned, just more recently, our acquisition of TopBloc in the first quarter. After that acquisition, our net leverage ratio was 2.6x . Our target is about 2.5x . Our intent over probably the next quarter is to delever. Back to the idea of the strong free cash flow, we still have the opportunity to opportunistic buyback shares. The focus really for us is a balanced capital allocation structure, and we have the resources to do that.
With that, I'll hand it over to Maggie.
Great. Thank you. Maybe Ted, we'll kick it off with you. A lot has changed in the macro since we were here last June, but there's been a continued progression in your business in terms of the evolution further into consulting. Can you talk about that a little bit, where you are in the journey and what you see in the future for ASGN?
Yeah, I think, you know, even though we've got some headwinds out here in some of the end markets that we serve, the strategic positioning of the business today is as strong as it's ever been. You know, I believe that our clients are being more and more thoughtful about what partners they go to to choose to execute work. And more and more, as it relates to newer technologies, we're going to be looked at very favorably here because of a couple of reasons. Number one is we have deep technical domain expertise and talent in all these critical areas like data, like AI, like security, application development, software engineering, and modernization move to the cloud that we can bring teams together that are more custom fit through our contingent labor model and actually execute these projects for our clients at a better, more productive price point.
I think that's a winning outcome, if you will, for our customers. I think even though we've been, you know, maybe not seeing the revenue growth here that we would typically see as a business, we haven't lost any time on the positioning of the firm around these opportunities.
Very good. Shiv, you're a newer face as the President. You came from Accenture, which is obviously a larger scale business in the industry. What did you find compelling about ASGN as you made the switch over and their strategy and their go-to-market?
Thanks, Maggie. It's great to be here. You know, one of the things, you know, as we've spoken about, ASGN is on a journey and in its own evolution, right, as a consulting organization. But when you combine that with what you see in the market around the pace of technological change, right, gone are the days when you would implement enterprise systems and then you could figure out how to add on some things on top of it to run your business. Today, if you have to drive competitive advantages in enterprise, there is a myriad of technologies out there that you have to be part of your architecture.
What that is doing is it's putting a strain on the talent side of the house in the sense of the pace of change is so fast that it's hard for organizations to create a bench to support that need for that talent at the rate at which our clients want that talent. To me, you know, that's the natural evolution in the services model where clients want access to a breadth of talent. They want access to the breadth of talent at a competitive price point, and they want that to be supported by an organization that can put the pieces together in a very, very agile manner. I think that is a very, very big structural advantage for ASGN.
I believe, you know, given where we are in the journey and some of the market dynamics that you see, which is not reversible, this is a trend that is only going to accelerate. There is an opportunity to create a very unique technology services business.
Very good. You have always had a legacy of being able to take that talent, that access to talent, and then kind of craft the right team for your clients.
Correct.
You're always looking for new capabilities. You do a lot of M&A. Maybe Chris, if you could kind of comment a little bit on the journey integrating TopBloc into ASGN, kind of the strategic imperative there, and then what are you most excited about?
Yeah, and thank you, Maggie. Hello, everyone. I think that where we've found success over the last 10 years is certainly establishing ourselves as a technology leader within the Workday ecosystem. What we're most excited about here is we've historically been very successful in the medium enterprise space, and it's been more or less an uphill battle going up against the strategics. What we're excited about is ASGN's existing customer base, where we've historically only been a Workday company, obviously, but now we have access to their commercial sales and account team. I think that that'll be obviously our first priority from an integration standpoint, and no complaints thus far.
Maybe Marie, while we're on the topic of TopBloc and kind of that shift in general towards higher value IT consulting, can you talk about what that's done in terms of the margin trajectory and growth profile?
Absolutely. To your point, I mean, when we look at commercial consulting, it just has a higher margin profile. As we continue to grow, last quarter we grew 4.7% in commercial consulting, and it has a positive impact on both our gross margin and EBITDA margin. When I think about it, Maggie, when we put our, when you look at where our margins are today, and when we put our three-year targets out in 2021 that ended in 2024, we talked about having an EBITDA margin of 12%-12.5%. We actually got there within 18 months.
Really, a lot of that had to do with our strategic move to commercial consulting, but it was also from a macro perspective and basically the rest of the business, whether it be the perm, the commercial consult, or the creative digital, even an assignment, you know, kind of all the flywheel working. As we continue to look whether organic drive commercial consulting or through acquisition, there is really no ceiling as it relates to the margin.
Good continued runway for the margins over time. Very good. Maybe switching back to Ted and talking about the clients for a moment, can you talk about how they're positioning themselves to achieve these important IT priorities, particularly in light of the current environment where there's a lot of uncertainty, there's budget constraint, the macro is not necessarily working in many industries' favor?
I think that, I mean, if you look at our clients, industry by industry, they all have their own unique challenges, but they're all embedded somehow in concern for what's going on in the macro and making sure that they're positioned if we were going to have a further deterioration in the backdrop. Really critical work continues, and you can see that within our commercial consulting unit as we continue to get 1.2 book to bills and see even though more modest growth than maybe we saw in the past, still having growth in that area. If it's discretionary, if it can be deferred, you know, I think there's more and more evidence that says clients are holding back on that discretionary spend until they have a certain amount of business confidence in what we're going to get here in the future.
I think an interesting data point was coming out of the third quarter and into the fourth, there was definitely an improvement in business confidence post the election. You could begin to see all the metrics, forward metrics in our business slope up. Our bookings in commercial consulting sloped up, our bookings in the federal space sloped up, and even our metrics in IT staffing began to percolate. I would not say they were inflecting hard, but they were definitely improving as we crossed into the first quarter and as the new administration took on and they began to deal with trade and tariff talk in the commercial marketplace, where was the economy headed in the commercial marketplace, and then the DoD activities in the federal marketplace. I think a lot of those things kind of dissipated. The bookings that we want are still good. They are being worked on.
We have not seen project cancellations or changes. I think if you just, though, if you kind of trace back through that and look forward, you can see how, you know, kind of uncertain macro can influence how clients think about pushing harder on new investment, you know, as it relates to IT spending.
Certainly an important factor, but there's also, you know, the competitive urgency that your clients face around being savvy with AI and using that to drive revenue or cut costs or whatever their objectives may be. Maybe can you talk about that a little bit? You know, you've said AI is a driver for the business. Why is that the case for ASGN?
Sure. Look, I think you got it right. Like nobody wants to be left behind, right, in the AI race, so to speak. Companies are out there experimenting, trying to do a lot of proofs of concepts. What that is driving is a myriad of different reach-outs to us. There are some clients who come to us and say, "Help us think about use cases to solve some issues in our customer service." There are other clients who come in and say, "Help us think about how can we automate some part of coding," right? Where this, why this is good for us overall is these things have not hit the point of scaling.
The reason they have not hit the point of scaling is because a lot of these companies, contrary to popular belief, still carry a whole bunch of technical debt around their data and their infrastructure, which is not allowing them to monetize this and scale this. When that happens, that is a wide and large swath of work to get rid of that, modernize, improve their data infrastructure. Along with it comes a lot of security that needs to be in place around responsible AI. It just opens up a whole new world of opportunities in that space. It is going to be a driver, but not AI as a standalone, but everything that comes with it.
Very good. As you think about making sure ASGN is prepared to capture that technology wave, how are you all thinking about balancing those investments in AI and data and cloud services with the fact that the revenue might not materialize quite yet because of some of the caution on the macro?
I think it's a good question. I mean, I think that we're definitely drilling in in the areas to Shiv's points that we think are going to be critical in these new technologies, make sure we have the right technical muscle and capabilities and insights, and then not try to be everything to everyone, right? In all of that, we see areas of the business we may not think are going to be as productive next quarter or the quarter after, we'll redirect investment out of there. There are places where we're deploying AI to reduce our internal costs that gives us investment freed up to invest in some of these areas.
Ultimately leverage our account relationships and our deep domain expertise in these places where we think are going to be critical to AI in the future and put those together so that we have the right opportunity to do this work and be a solution partner for our client.
Very good. I mean, you're probably somewhat early days in some of those things like injecting AI into your own business. From the client perspective, how far along do you think clients are in embracing this and injecting it into their business? Maybe talk about how you actually monetize it.
Yeah, I think I'll let Shiv handle the last part of that, but I think he hit it right. Like our clients are coming to us to have conversations about use cases for sure. They have a laundry list of use cases, and they want to think through how do you get to those use cases, what's the return opportunity and all that. They are picking one or two to pilot and see what happens. As it relates to enterprise systems, like in Chris's world, they're calling them saying, "Hey, you're my expert in Workday. I know Workday is implementing agentic AI capabilities within the product.
Where are those and how could they help me?" We are doing customer meetings and webinars and other things in order to educate the customer. That is happening in Workday, that is happening in ServiceNow, and then some of the other enterprise systems like Salesforce and others that we serve. Ultimately, for customers to monetize these things, they have to get to scale, to Shiv's point. You know, and I think what that takes is a better, one, seeing successful pilots where they actually get to productive use cases, and then two, being in an investment environment where they feel ready to go and not only deal with the new opportunities in those technologies, but to Shiv's point, also deal with some of the past sins of either their technology stack or their data situation or what have you.
Very good. Maybe talking a little more specifically about the business and performance, starting first with the commercial consulting growth. Can you talk about what drove that growth? What's really in demand now? Is it early days of AI? Is it cost containment types of projects?
Yeah, it's two or three major areas, right, that I could talk about. Obviously, data and AI is a big part of it, right? I would say there's a lot of demand, a lot of continued interest in that space. The second area I would say is what I would call a combination of application development, software engineering, modernization, because companies are still trying to figure out how to integrate those technologies into their architecture, which requires us to come in and help them think about how to build all of that and integrate all of that. There is a lot of continued demand in the enterprise platform space, which is, you know, whether it's ServiceNow, whether it's Workday in different segments of the market. I would say cybersecurity. There's a lot of active interest in cybersecurity as well in terms of a demand profile.
I would say those are probably some of the bigger areas where you see demand for on the commercial consulting side.
Very good. If we could hit on the government segment, I think it's important for people to understand what's going on there and what makes up your business. Can you kind of talk about the civilian exposure, the breakdown between defense and civilian agencies, any concentrations that you have?
Federal overall is about 30% of our revenue mix. If you looked inside of that 30%, you would see that nearly 70% of our revenues are in customers in Department of Defense, National Intelligence, Homeland Security, and Justice. If you're kind of looking at the landscape of DoD and government efficiency and all that, most of the attention has been in the Fed civilian marketplace and specifically in regulatory accounts or areas that the administration would say are less critical to the nation's mission. If you look at the services we're providing, which I mentioned earlier, those are critical to the nation's protection, and so they continue to get support.
You can see that both in where the government spends money today and even in the conversation around the new legislation that went from the House to the Senate, there is less money allocated or appropriated to Fed civilian, more to defense and inside of defense into these new technology areas that are going to be critical for the nation and its security as we go forward. The DoD conversation has changed a little bit. I would say I would call it phase II, right? Phase I was come in, slash and burn, look for less critical Fed civilian agencies where you can cut management consulting and other, I would say, broad-based consulting arrangements. You saw that happen.
Now phase II is the GSA, the government's flag contracting agency is taking this responsibility on now and is working with each major federal contractor, including us, to say, "How can you help us be more efficient? Where can you point to that maybe we have some waste, fraud, or abuse that we could deal with? Would it be a better outcome for the government and for you if we modified a contract from cost plus to more outcome-based?" I would say there are very normal and business-like conversations now going on between the GSA office and our team in the federal government around those issues. I think, you know, mostly we view that as positive based on where we were in phase I and also positive in terms of where we play and what we do for the government.
Very good. Maybe Marie, could you comment a little bit on what you saw in Q1 in terms of bookings versus revenue in the government space as well?
Absolutely. I mean, that's kind of the great news that you said versus government.
Within government, but yeah.
Yeah. So I mean, really, I mean, honestly, for government, it has probably been the last three quarters where government has been over one time's book to bill. And so, you know, continue to see that and that just portends, you know, future revenue growth. What we have seen, and I'll be honest, in terms of government and the commercial, is just a slightly slower conversion from the bookings into revenue. And, right, you think about everything that is going on in the government world, you would just kind of expect a little bit of that. But having those strong bookings is definitely a benefit for the future.
There's a lot of other different kind of parts of your business as well to keep track of. Maybe we'll end with you, Ted, on kind of the overall demand environment, what you're looking for in terms of the recovery, any indicators you're watching for for a signal that clients will really start spending.
As clients decide to invest heavily, more aggressively in all these new technologies that we mentioned, we are the first and fastest way for them to ramp up into those investments. I think that thesis has always been a part of the business and still kind of rings true today. I think in the commercial side, easing of the macro, which would consist of more clarity on the tariff picture, a view that the rate picture is going to be in a regime that is lower rates, not higher rates for longer, is going to be important. I think to Shiv's point, that's going to unshackle our corporate enterprise clients to go out there and adopt some of these technologies so they do not become uncompetitive within their industry.
Very good. That's a great place to leave it. We are going to continue in a breakout room for more Q&A. That would be in room Jenny B, and we'll be heading there right now. Thank you all, and thank you to the ASGN team.
Thank you.