ASGN - Q3 2024

Transcript

Operator (participant)

It is now my pleasure to introduce you all, Kimberly Esterkin, of Investor Relations. Thank you. You may begin.

Kimberly Esterkin (VP of Investor Relations)

Good afternoon. Thank you for joining us today for ASGN's Q3 2024 conference call. With me are Ted Hanson, Chief Executive Officer, Rand 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 measures. Reconciliations between GAAP and non-GAAP measures are included in today's press release. I will now turn the call over to Ted Hanson, Chief Executive Officer.

Ted Hanson (CEO)

Thank you, Kim, and thank you for joining ASGN's Q3 2024 earnings call. Market demand for ASGN services remained stable in the Q3. Q3 2024 revenues of $1.031 billion were similar to the Q2 and within our guidance range. In terms of profitability, adjusted EBITDA margin of 11.3% was at the midpoint of our guidance range and reflects the continued evolution of our business toward higher-end, high-value consulting solutions. IT consulting is now approaching 60% of total revenues, with 57.9% of Q3 2024 revenues in commercial and government consulting, up from 54.5% of revenues in the year-ago period. Despite relatively consistent top-line results, global economic uncertainty remains. As a result, we have yet to see a meaningful increase in client IT services spending.

This caution, however, is not meant to imply that our commercial enterprise and federal government customers have deviated from their long-term digital transformation paths. Rather, our clients know that advancing their IT roadmap is crucial to maintaining their competitive advantage. Strong commercial and government bookings in the Q3 demonstrate the continued need for ASGN's IT services and are a sign of the pent-up demand within our customer base. As we progress through the final quarter of the year and prepare for an improved IT spending environment, we continue to develop our solutions, capabilities in core areas of interest to our Fortune 1000 and federal government clients, including data and analytics, cloud, cybersecurity, and early on AI applications. We are differentiating our business by bringing to bear unique solution capabilities across industry verticals, while at the same time being fast adopters of new technologies.

I will provide some examples of these efforts as we review ASGN's Q3 segment performance, so let's begin with our largest segment by revenue, commercial. Our commercial segment services Fortune 1000 and large mid-market companies. Commercial segment revenues for the quarter were driven by growth in our commercial consulting business. Commercial consulting revenues improved 3.9% year-over-year and were also up 1.2% sequentially. Commercial consulting bookings of $282.5 million are book-to-bill at 1.1 times on a trailing twelve-month basis. Although consulting bookings remain more weighted toward renewals than new work, our new work is growing each quarter. Looking at the total commercial segment from an industry perspective, we saw year-over-year growth in two of our five commercial verticals.

TMT revenues improved 10.9% compared with the Q3 of 2023, led by double-digit growth in software and services and e-commerce. Consumer and industrial accounts are returning to modest growth year over year, driven by double-digit growth in utilities and materials. On a sequential basis, we also saw growth in two commercial industry verticals. Consumer and industrial accounts improved low single digits, driven by growth in consumer staples and materials, which improved mid-single digits sequentially, as well as energy and utilities, which were up high single digits from the prior quarter. The financial services vertical also saw slight growth sequentially. This modest quarter-over-quarter improvement was driven by regional banks, which improved mid-single digits in insurance services, which improved high single digits from the Q2. Notably, within financial services, big banks were flat quarter over quarter after four consecutive quarters of decline.

Although the healthcare industry vertical remained down year over year and sequentially within the vertical, healthcare payers were up mid-single digits from the Q2. As we continue to mature our consulting practice, we are selectively adding new skill sets to our project teams, including select solution architects. Adding these high-end solution capabilities provides us with the opportunity to strengthen our work and thereby improve our margins, expand our contract sizes and length, and enhance the industry vertical performance I just described. We are aligning our solutions architects with services of greatest interest to our clients. Solutions that are seeing the most traction of late include application development and modernization, cloud migration and modernization, data platforms and products, and cybersecurity advisory and support. These services are all foundational to realizing the value of generative AI.

While there's still much data readiness and infrastructure work that needs to be completed before our clients can deploy enterprise-wide applications of GenAI, they are, however, beginning to implement specific AI models in portions of their organizations by leveraging ASGN's core data and analytics capabilities. Let me provide a few examples. During the Q3, one of our clients, a Fortune 500 multinational department store, came to our data and AI team looking for a way to improve staff utilization at its global distribution centers. Leveraging machine learning and AI to analyze historical and real-time data, our team built a time series model that can produce a 26-week labor forecast compared to the client's legacy manual staffing model. This new model significantly reduces our client's cost by more accurately forecasting labor demands using internal and industry-wide data.

For another client, a Midwest public utility, our data and AI team was brought in to develop an automated solution to verify customer addresses. The new system would need to process large data sets with limited manual intervention. With a focus on automation and scalability, our team built a predictive analytics solution that automated the entire address validation process, thereby reducing manual intervention by 50% and enabling better decision-making, smoother logistics, and enhanced customer satisfaction. Achieving customer satisfaction is always top of mind. One key way we are earning accolades from our clients is by providing them with a one-stop shop, onshore and nearshore, for their technical needs.

For a large financial advisory client facing data integrity complications, we brought together a team of commercial and government consultants in the U.S., along with engineers out of our Mexico delivery center, to assess our client's data system security and accuracy, as well as to provide gap reporting and other strategies to improve their system's integrity. This cross-border, cross-segment engagement team combined expertise from our application development, data analytics, and cybersecurity solutions. This opportunity offers multiple years of expansion work that will deepen our saturation within the client, all while increasing our technical qualification. Speaking of technical qualifications, we've strengthened our commercial governance, risk, and compliance practice, or GRC practice, by joining the strengths of our commercial and government cybersecurity resources to support our commercial industry clients. In a recent GRC engagement, we offered strategic advisory and engineering talent to help a major financial institution fortify its data security defenses.

We also renewed a multi-year partnership with a key healthcare client, working closely to enhance its cybersecurity framework to comply with industry regulations. Also, in the healthcare industry, one of the largest public hospital systems in the country turned to our consultants at GlideFast to re-implement their entire instance of ServiceNow. Our team won this highly competitive pursuit by understanding the challenges and restraints of the system's prior installation and offering the client a shared vision for how to deliver value across every phase of the project. This win reinforces GlideFast position as an elite ServiceNow provider, and our team now has the opportunity for continued client partnership by implementing additional ServiceNow modules as the project matures and progresses. Each of these aforementioned consulting projects illustrates ASGN's unique ability to integrate comprehensive solutions to address our clients' IT needs.

We complement our internal capabilities by partnering with technology industry leaders such as ServiceNow, Salesforce, Snowflake, Databricks, Microsoft Azure, and AWS, amongst others, knowing that being a fast adopter of the latest technological advancements is vital to our success, and as we move with the fast currents of IT, we're strategically positioning ourselves within our clients' organization, enabling us to grow and expand our relationships over years and decades to come. Let's now turn to our federal government segment, which provides advanced IT solutions to the Department of Defense, the intelligence community, and federal civilian agencies. The federal segment revenues for the quarter improved 1% sequentially. Net new contract awards were $666.4 million, putting our book-to-bill at 2.1 times for the Q3 and 0.9 times on a trailing-twelve-month basis.

Contract backlog was over $3.1 billion at the end of the Q3, for a coverage ratio of 2.5 times the segment's trailing-twelve-month revenue. As is evident from our quarterly book-to-bill, the pace of task orders has increased. We began to see this trend in July, at the same time of our Q2 earnings call, and this continued throughout Q3 as we were awarded work under previously won contracts, including several IDIQs. At the same time, task order volume increased, so too did our recompete win rate, which reached 100% for the quarter. By increasing our market focus and rigor, we boosted our win rate and expanded our average deal size.

For example, in September, our federal government team was awarded a $528 million, six-year single award data services IDIQ with the Department of Homeland Security's Cybersecurity and Infrastructure Security Agency, or CISA. Under this new award, a portion of which is included in our Q3 bookings, our team will design, develop, and deliver solutions that will standardize the integration of cybersecurity data across dozens of federal civilian executive branch agencies. This award is a true testament to our team's exceptional cybersecurity qualifications, as well as our long-standing relationship with and institutional knowledge of CISA. Given our partnership with CISA, and having passed other prerequisite steps, our team was asked to compete against other companies to deliver CISA a prototype of cybersecurity threat intelligence platform.

This platform will allow civilian agencies, along with state and local governments and critical infrastructure entities, to streamline the generation, use, and sharing of cybersecurity threat intelligence to increase the resiliency of U.S. national security. By being a part of this important prototype, ECS has the opportunity to assume a key advantage on a large future contract with CISA's Threat Intelligence Enterprise Service program. During the Q3, we also won task orders on a number of previously secured contracts and IDIQs. For a premier law enforcement agency, we were awarded our first two task orders, which expanded our current work providing advanced architecture, engineering, and operation for the agency's important cybersecurity domain.

For the National Institutes of Health, we won several task orders to support patient-centric solutions, and for Veterans Affairs, we won multiple task orders to provide enhanced veterans experience, including supporting key application used for accessing veterans' healthcare information. While it took some time to see task orders flow through, as we predicted, we are gaining traction, and our pipeline of new work and recompetes continues to grow. Importantly, our diversified government portfolio of critical customer accounts with national priority, along with our focus on mission-enabling IT solutions, mitigates the potential impact to our business that risk from macroeconomic conditions, geopolitical conditions, or the upcoming presidential election may pose. Before Marie discusses our Q3 results in more detail, I'd be remiss if I did not speak about our growing AI/ML work for the defense and intelligence community.

As one example, in the Q3, the National Security and Intelligence Division provided us with funding for work related to AI-enabled operations and exercises, autonomous systems deployment, AI algorithm and software deployment, and AI-enabled publicly available information toolkits and training programs. ASGN has been a top AI/ML contractor for the government for many years, and in August, ECS was named a top five federal AI/ML provider by Deltek for the third year in a row. While our talented professionals and qualifications are certainly being recognized by the industry, to ensure that we stay ahead of the latest developments in AI and GenAI, we continue to expand our core team of practitioners who provide solution architecture, engineering, and business growth support. With that, I'll now turn the call over to Marie to discuss the Q3 results and our Q4 guidance.

Marie Perry (EVP and CFO)

Thanks, Ted. It's great to speak with everyone this afternoon. Q3 revenues were $1.031 billion, a decrease of 7.7% year over year, but essentially flat to the Q2. Revenues from the commercial segment were $718.8 million, a decrease of 8.1% as compared to the prior year. As Ted noted, revenues from commercial consulting, the largest of our high-margin revenue streams, totaled $285 million, up 3.9% year over year and up 1.2% sequentially. Revenues from our federal government segment were $312.2 million, a decrease of 6.6% year over year, but up 1% sequentially.

As we noted in our Q2 call, the year-over-year decline in federal segment revenues can largely be attributed to fewer licensed revenues compared to the prior year. Excluding these licenses, federal segment revenues improved low single digits year over year. Turning to margins, gross margin for the Q3 of 2024 was 29.1%, an increase of 20 basis points from the Q3 of last year, and at the top end of our guidance range for the quarter. Gross margin for the commercial segment was 32.8%, up 30 basis points year-over-year, reflecting a higher mix of consulting revenues as well as margin expansion in these revenues.

Gross margin for the federal government segment was 20.7%, also up 30 basis points year-over-year, primarily due to a higher mix of direct labor, which is higher margin work, along with lower license revenues mentioned previously. SG&A expense for the quarter was $207.5 million, compared to $206 million in the Q3 of 2023. SG&A expense also included $1.1 million in acquisition, integration, and strategic planning expenses, and a $3.6 million legal settlement accrual, both of which were not included in our guidance estimates. For the quarter, net income was $47.5 million, Adjusted EBITDA was $116.9 million, and Adjusted EBITDA margin was 11.3%. Turning to free cash flow.

Free cash flow for the quarter was $127.9 million, or a conversion rate of approximately 109% of Adjusted EBITDA. At quarter end, cash and cash equivalents were $166.6 million, and we had full availability under our $500 million senior secured revolver, and our net leverage ratio was 1.9 times. Our robust free cash flow provides a strategic advantage that enables ASGN to fund key growth initiatives and opportunistically repurchase shares to return value to stockholders while maintaining a healthy and resilient balance sheet. By following a disciplined and balanced approach to capital allocation, we can invest in high return opportunities and prudently manage our leverage, driving sustainable long-term value to our stockholders.

Given the market opportunity, we deployed $95.6 million for the repurchase of roughly 1 million shares at an average price of $92.26. We have approximately $573 million remaining under our $750 million share repurchase authorization. With solid free cash flow generation and full availability under our revolver, we have ample dry powder to make strategic acquisitions when opportunities become more readily available. Turning to guidance. Our financial estimates for the Q4 of 2024 are set forth in our earnings release and supplemental materials. These estimates are based on current market conditions and assumes 61 billable days in the Q4, which is one more day than the year ago period and 2.5 days fewer than the Q3.

The fewer billable days in the Q4 generates a sequential headwind that equates to about 4% of revenues. We expect market conditions and demand for our services in the Q4 to be similar to that of the Q3. While Q3 bookings indicate a solid pipeline of work, we do not anticipate an uptick in our clients' IT spend in the Q4. With regards to EBITDA margin, the Q4 typically sees a decrease in margin sequentially due to client furloughs and fewer billable days, along with traditional seasonal softness in perm placement revenues.

With this background, for Q4 2024, we are estimating revenues of $990 million-$1.01 billion, net income of $39.2 million-$42.1 million, Adjusted EBITDA of $103 million-$107 million, and Adjusted EBITDA margin of 10.4%-10.6%. Thank you. I'll now turn the call back to Ted for some closing remarks.

Ted Hanson (CEO)

Thanks, Marie. Last quarter, I ended our discussion by reviewing ASGN's core values, including our belief in the IT services sector, our move to become more consultative, and our focus on supporting large, industry-diverse, commercial enterprise, and federal government clients. Another core value to include on that same list that I hinted at at the start of today's call is being a fast adopter of new technologies to bring to our clients. A differentiator of our business model, ASGN strategically pivots as technology advances so that we can drive our clients' IT roadmaps while competitively positioning our own business. AI is undoubtedly a central focus of the IT roadmaps of corporate enterprises and federal agencies alike, making the investment and integration of GenAI a top priority for our clients.

The Global ISG Index, one of the leading sources of market intelligence on the IT and business services sector, anticipates that global spending on GenAI will increase by 50% in 2025 and represent upwards of 7% of companies' total IT spend by year-end. While leveraging data and AI will enable companies to unlock increased value, before that value can be realized, company tech stacks need to be improved. Businesses must enhance their data management capabilities, as well as their cloud and cybersecurity infrastructures, in order to fully leverage the benefits of GenAI across their enterprises. With that in mind, there remains a lot of foundational work that needs to be completed, from modernizing and cleaning up data lakes and enhancing cybersecurity frameworks to driving automation and ensuring regulatory compliance.

All of these areas are core to ASGN's differentiated service offerings, and with strong bookings and a diverse client base across six key industry verticals, ASGN is positioned to take advantage of the opportunities to support our clients' IT roadmaps now and for many years to come. That concludes our prepared remarks. I want to extend my heartfelt gratitude to everyone at ASGN for your support this past quarter. Your dedication to fostering deep, long-standing client relationships is truly commendable and no doubt places us at the forefront of the IT industry. Thank you again for joining our Q3 2024 call. Operator, please open the call to questions.

Operator (participant)

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star key. One moment, please, while we poll for questions, and our first question comes from the line of Jeff Silber with BMO Capital Markets. Please proceed with your question.

Ryan Griffin (VP of Equity Research and Financial Analyst)

Hey, thanks so much. This is Ryan on for Jeff. Just curious what you need to see and what trends you are monitoring that would make you more bullish on the IT spending environment and the digital transformation environment ahead? Thank you.

Ted Hanson (CEO)

Ryan, thanks for the question. I mean, look, I think in the long term, we're bullish. There's a lot of underpinnings here that are gonna be drivers of our business as we help our clients, you know, back to the end of the remarks there, to drive their IT roadmaps over a period of time. You know, I think in the near term, what we're watching here is just again, business confidence, so that our clients have confidence to begin to invest at more normal levels in their IT needs. And so, you know, that's a balance of two things here. I think there's. I think we're making progress.

You know, there are some things in the economy overall, like the interest rate cycle, like the elections, some of the other things going on in inflation and otherwise, that have clients remaining cautious. But, you know, we're beginning to move through and past some of those things, hopefully, and that's gonna create business confidence. And with business confidence will come heavier investment in their IT roadmaps, and we'll be right there to serve them.

Ryan Griffin (VP of Equity Research and Financial Analyst)

Great, thank you. And then just for the follow-up, do you think the growth trend in commercial consulting has troughed out at this point, now that you're past kind of the tougher comps from last year? I was just curious how you expect that to trend relative to the core ASGN over the next couple of quarters. Thank you.

Ted Hanson (CEO)

Well, I think we're at, you know, we're kind of at low single-digit growth rates here. It seems over the past few quarters that we are in a stable place, quarter to quarter, if you adjust for billing days and those other things. So, bookings also remain very solid. We were at a 1.1, I think, here in the last quarter, and that portends growth going forward. So I think if you look at the metrics around book-to-bill, and you look at the past performance here over several quarters, where we've kind of consistently put up single, low single-digit growth, that, you know, we're at a place where we can begin to grow at higher rates.

But that, again, goes back to what we just discussed around our customers and for them to be able to open up and invest more fully in all the things they want to accomplish. So the book-to-bill tells us there's good demand, and our pipeline tells us good demand. So I think it's not if, it's more of a when.

Ryan Griffin (VP of Equity Research and Financial Analyst)

Understood. Thank you very much.

Operator (participant)

Thank you. Our next question comes from the line of Maggie Nolan with William Blair. Please proceed with your question.

Maggie Nolan (Equity Research Analyst)

Hi, thank you. Can you elaborate on what may be different in terms of your strategy when you emphasized the solution architect additions? Is this representing a shift in go-to-market or how you secure managed talent for your projects?

Ted Hanson (CEO)

I'll let Rand take that. I would call it more of an enhancement, Maggie, than anything else. Right, Rand?

Rand Blazer (President)

Yeah, there's absolutely our go-to-market features, the accounts we focus on, the portfolio and the growth in the accounts and the intimacy with the accounts. Supporting that is an evolution of our solution strength, and that evolves as technology and the needs of our clients change, Maggie. So, you know, so for example, AI work, you know, in past quarters was more around governance requirements. And today, as you saw featured in Ted's remarks, we're getting more into actually building algorithms for forecasting, searches and updates, better security and security algorithms. So, you know, that just requires continued solution strength in support of that account portfolio. But it's definitely accounts first, solutions second, and we have to be good at both.

Maggie Nolan (Equity Research Analyst)

Thank you. That's helpful. And then to build on the first set of questions, you kind of alluded to some of this, but maybe I'll just explicitly ask about anything that you can share with us about your expectations for 2025 in terms of that IT spending environment and maybe how you perceive the current client sentiment on 2025 budgets?

Ted Hanson (CEO)

... Yeah, well, I can't really comment on, you know, IT spending rates in 2025, but I can tell you that, you know, go back to what, the first set of questions was. There is good demand both in our pipeline and in our bookings, so it would portend stronger growth in the future. I think the question is when and how does that develop? And it's a little early to tell that, but I think the positive news here is that we like what we see, in our bookings, and we like what we see in pipeline, and we'll have to keep monitoring this, to just begin to see when we can really expect, well, what I'll call spending at more normal or higher rates.

Maggie Nolan (Equity Research Analyst)

Fair enough. Thanks, Ted. Thanks, Rand.

Operator (participant)

Thank you. Our next question comes from the line of, Surinder Thind with Jefferies. Please proceed with your question.

Surinder Thind (Equity Research Analyst and SVP)

Thank you. Can you maybe provide some additional color on just the ASGN business, maybe any signs of stabilization that you might be seeing there, or just the trends there, within the IT business or Creative Circle? Any color would be helpful.

Ted Hanson (CEO)

Yeah, I mean, I would say generally, adjusted for billing days, Surinder, we're seeing stability quarter to quarter. That's not new. You know, we saw it develop here in the first part of the year. It's kind of carried through. Perm placement has gotten a little bit weaker, so that part of the assignment business, as we've gotten deeper into the year, has gotten a little bit weaker. We expect it to be the same in the fourth, just because that's not a strong quarter for that part of the business. But look, I think what we're seeing in the assignment business for customers is, again, that's the primary place where they go to control their spending levels, and so they've continued to keep their foot on the brake there for a bit here.

And while we're seeing some stability, you know, we're looking for signs that, you know, they wanna open up spending. Again, this is about IT spending more than anything else, both in the consulting part of the business and in the assignment piece.

That's helpful. And then following up on the idea that this is, the assignment business is an area where, I guess, clients look for efficiencies. How are you thinking about the staffing model going forward in the context of GenAI, productivity improvements? Is there a risk that maybe clients more aggressively look for solutions there to offset some of the costs, meaning less need for headcount from a support perspective relative to historical levels?

I mean, I think always, Surinder, as technologies change, you'll see, the clients, the skill sets that they need, change and evolve. Some things will go to legacy, other things will become more modern and, in demand, if you will, but I think the clients' need for talent is still gonna be there. Opportunity for us is to deploy some of these, next generation AI opportunities inside of our own business, which we're already doing today, in order to make ourselves more productive, and so I think we'll be doing that on behalf of our customers, but our customers are still gonna need, both, great solutions, to their business needs, and they're also gonna need great, technical talent to address all of those opportunities.

Surinder Thind (Equity Research Analyst and SVP)

Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Joseph Vafi with Canaccord Genuity. Please proceed with your question.

Joseph Vafi (Analyst)

Good afternoon. Nice to see you today, results. I just thought we'd drill down a little bit more on the financial services vertical and maybe, you know, sort of look like incrementally better there. You know, was that- is there anything to, in terms of consulting, or assignment, or, any demand drivers or, you know, is it also, you know, just...

Ted Hanson (CEO)

Yeah. So, Joe, you're - I'm gonna let Rand take this one. Rand, Joe's asking about financial services and puts and takes or color on performance there, both in, both consulting and in the assignment part of the business.

Rand Blazer (President)

Yeah, Joe. Yeah, and you were breaking up there a little bit, but notwithstanding, as you know, this is a big and important sector, not just for us, but for IT spend. So we're buoyed by the fact that the big banks have reported recently some pretty good results. We're happy that the regional bank segment, which Ted featured, was improving. I think we're penetrating these accounts with our consulting, and that's the, if you will, the tip of the spear. The staffing thing, I think, is a function of just that our thesis is as they feel like they can start spending more money, we'll see higher staffing opportunities, which I think we're at the doorstep to. I mean, we like the sequential numbers we have in some of these segments.

We're still year over year down. Ted said in the comments, except for in regional banking, but I you know we want to capture it on both ends, the staffing side and the consulting, and the fact that many of these accounts we've now cracked into the consulting side of the business is important to us, and we're watching that very carefully.

Joseph Vafi (Analyst)

... Great. Thanks for that call, Rand. Hopefully, you can hear me a little better. But and then also on, you know, it does feel like enterprises do have some budget left over for the year, just based on your discussions with them. You know, do you think they just kind of kick the can down the road with that budget for next year? Or do you think there's any, you know, kind of chance of, you know, any year-end flush here, or anything, or, you know, how they're kind of thinking about the, you know, what's remaining in the budget for this year? Thanks a lot, guys.

Ted Hanson (CEO)

Yeah. Rand, do you want to finish up that one?

Rand Blazer (President)

Well, well, listen, in the government, we're seeing some spending, and hence our bookings and our some emergence of growth. On the commercial side, listen, I think it's. I don't know what to tell you, Joe. Maybe, Ted, you have some other thoughts, but we don't hear anything from our clients that feel like I have to press now in this last month and a half of the year, or two months of the year. I think everybody's kind of assuming there's some things going on in the election. January first turns a new page, and off we go. I think they're doing. If you look at our AI spend, Joe, for example, the character of the work has changed a little bit, which I featured and we featured in Ted's comments.

I think they're getting themselves in a position where they getting a better feel for what they want to do, not just what I call desktop productivity using GenAI, but rather big-ticket AI. Kind of coming up with the ROI associated with that is also part of the drill that they're going through now. So they're doing the prep work. That's not to mention the data side, which is a tremendous. That's where all of us are still seeing the bulk of our work, you know, in data, data preparation, data validity, data quality, accessibility of data, faster processing of data, mixing internal data with public data, and benchmark information is also on their mind. So I think there's a lot on their mind. I don't think the spigot to spend is necessarily been turned on. Ted, would you add to that?

Ted Hanson (CEO)

No, I think that's perfect.

Joseph Vafi (Analyst)

Great. Thanks for that call, Rand. Thanks, everyone.

Operator (participant)

Thank you. Our next question comes from the line of Toby Sommer with Truist Securities. Please proceed with your question.

Jasper Bibb (Managing Director and Senior Equity Research Analyst)

Hey, good afternoon. This is Jasper Bibb for Toby. Good quarter for ECS bookings, north of two times book-to-bill there. Obviously, you get some seasonal benefit in the Q3, but just kind of hoping you could expand on what you've done to boost win rates. And then separately, maybe you could clarify how much of the $350 million, uh, data services IDIQ you mentioned, was booked in the Q3.

Ted Hanson (CEO)

Yeah. So, I think this has just been really good, hard spade work and focus, on the accounts and the contract opportunities, Jasper, that we've been working on here. We had some nice wins on IDIQ contracts, where we had good client intimacy at the end of 2023. Those were slower to pick up, but we knew task orders would be coming out on that. Finally, those began to drop, and we're winning our share of that, which is good to see. It was maybe took a little longer, to develop, you know, all the way into the Q3 here of this year, but that was our expectation. You know, we don't talk about gross to net on contracts.

Obviously, you book on a net basis, which you think you have a high probability of working through over the life of the contract, and we're, you know, middle of the road or conservative on that. And so there's always a certain amount of the total contract value that doesn't get booked. And then in certain situations, if you have a contract that might be a small part of that that's falling off or something that didn't get spent all the way through, you have to realize the net of that as well. So we've done all that. Our bookings presented here are on a net basis, and so that's about all I can say on that.

Jasper Bibb (Managing Director and Senior Equity Research Analyst)

Okay, that makes sense. Just kind of curious how you've been managing capacity levels in your consulting businesses, growth has moderated there. I guess as a mix of personnel, whether full-time or versus temp or maybe based out of your offshore delivery centers, changed materially in the last couple of quarters?

Ted Hanson (CEO)

Yeah. Rand, you want to take that? I mean, the one thing I'll say, Jasper, this is the highlight of our model here, that, most all of our resources on this consulting work do come on the back of our IT staffing capabilities, and so that gives us an advantage, as our business either slopes up or slopes down in order to deal with, maintaining productivity and profitability in that unit. Rand, you want to talk about that?

Rand Blazer (President)

I think, Ted, that's, Jasper, that says it all. Remember, we're using contingent labor for our arms and legs on consulting work, so we don't have an overblown bench that we have to mix and match and reallocate in our professional teams and our leadership teams and our SMEs, if you will. The people that are the architects, developers of our methodology are pretty much intact. On the Mexican side, we've been growing throughout all these quarters. So, and now, as you know, we've also started some Indian offshore, pointed directly towards ServiceNow, which is a capability that we've come into, and it's been, you know, it's been more in a growth mode than not. So I think you said it right. When you have contingent this model, this is a hallmark of our model.

We use contingent labor, and it's, you know, from our point of view, it's working very well.

Jasper Bibb (Managing Director and Senior Equity Research Analyst)

... Thanks, Kevin. If I could slip one more in here at the end, maybe following up on a prior question, just hoping you could stratify what you're seeing for demand in Temp IT, relative to Creative Circle and Apex. Thanks.

Ted Hanson (CEO)

Yeah. Again, Jasper, I'll just go back and say that this has been fairly consistent. Although our creative digital marketing unit, if you go back into 2023, was the first to kind of fall, because it's the most sensitive to discretionary spend. It's been as stable as the rest of our assignment business here over the previous few quarters.

Jasper Bibb (Managing Director and Senior Equity Research Analyst)

Okay. Thanks for taking the question.

Operator (participant)

Thank you. Our next question comes from the line of Kevin McVeigh with UBS. Please proceed with your question.

Kevin McVeigh (Equity Research Analyst and Managing Director)

Great. Thanks so much. Hey, the one million shares you purchased in the quarter, is that a way to think about kind of what the quarterly cadence should look like? Or just any thoughts on that, or just, you know, congratulations on that, by the way.

Ted Hanson (CEO)

Go ahead.

Marie Perry (EVP and CFO)

Yeah. So, to think about our share repurchase, our strategy is really to use the free cash flow we generate in the quarter to share repurchase. In lieu, we think about M&A, so that's probably the right way to think about it.

Ted Hanson (CEO)

Yeah, and look, I think, Kevin, it's we kinda call that as we go. M&A opportunities have been less, so obviously, we've been kind of working diligently through Free Cash Flow each quarter in our authorization. We'll just have to keep our eyes, you know, on that as things develop and see if our posture changes at all, but that's obviously our approach. You know that. It's been that for a long time here.

Kevin McVeigh (Equity Research Analyst and Managing Director)

Yeah. No, it's helpful. And then, just Ted, you mentioned this earlier, but just to follow up. On, you know, the GenAI opportunity internally, kind of, where are you through that process, and does it vary on the federal side as opposed to commercial, as opposed to, you know, more the kind of traditional assignment business? Just any thoughts around that?

Ted Hanson (CEO)

Yeah, Rand, you wanna take that one?

Rand Blazer (President)

Well, Kevin, are you asking our internal deployment of AI inside our business, or are you talking about just generally providing an AI solution to our client base?

Kevin McVeigh (Equity Research Analyst and Managing Director)

Internal, Rand.

Rand Blazer (President)

Well, internal, the AI deployment is happening in both our federal and commercial, and where we can, it'll benefit both sides. So for example, our cybersecurity AI, which continues to be enhanced internally, is provided by ECS for the entire ASGN, so it, it supports both the commercial and the government business. We have new proposal development teams and qualification creation capability, which is being spearheaded by our government team, which will be used and is being used by our commercial teams. In the recruiting area, we use AI to support mixing and matching our searches for the right candidates and building pipeline of different skill bases. That's being used more predominantly on our commercial side, but being benefited to as a side. So those are just examples.

Our employee center is, again, shared technology across government and commercial, and where we can use AI to help respond or anticipate questions and respond to them, whether it's about benefits or other things, is being shared. So does that give you a sense?

Kevin McVeigh (Equity Research Analyst and Managing Director)

Very helpful. And then I guess, just philosophically, you know, the expense savings, does that go to reinvestment back in the business or to shareholders? I mean, that may be a little bit early, but just any thoughts around that?

Ted Hanson (CEO)

Yeah, this is part, Kevin, of just being more productive as a business, right? I mean, I think as we, our strategy as a business, as we evolve, our business to be more consultative, obviously, we're trying to drive both a higher growth rate, a higher gross margin profile, and a higher EBITDA margin profile. And some of that will come in the value proposition of the work we do down to the EBITDA lines, and others has to come from being more productive. And so, you know, I think these things in AI both contribute to providing better services, to whoever our constituent is internally in these areas, to having a foundation of AI learning that we can then translate to our customer.

And then, yes, being able to translate, you know, some of those savings and productivity to the bottom line to go together with all the rest of it. So, you know, there's a lot of ends to meet here, but, you know, we are where our customers are with these things. We're piloting, we're trying things. Some things are going into production. Other things, we're having to work through further. We're having to think about our own data and security and all the different things they are. So I would say in many ways, we're right where they are.

Kevin McVeigh (Equity Research Analyst and Managing Director)

Very helpful. Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Mark Marcon with Baird. Please proceed with your question.

Mark Marcon (Analyst)

Hey, good afternoon, everybody. On M&A, what sort of opportunities are you seeing? Is the pricing getting a little bit more reasonable? I mean, we take a look at your balance sheet, leverage is well controlled, free cash flow continues to be really strong. Have the prices become more reasonable at this point, or how are you thinking about that?

Ted Hanson (CEO)

Well, Mark, there's probably not enough data points out there to say that pricing is becoming more reasonable. There's enough data points to say there's fewer transactions going on. Look, we know there are some, there's a little pickup here in, you know, things going on in the M&A market. Most of what we're seeing are small things. They may be more about delivery, they may be non-U.S. focused, but there's some small things getting done. I don't think generally there's enough things going on to say there's a new data point on valuations, and that sellers are really willing to come off of, you know, the type of assets that we would be looking for. But we're seeing a little bit more flow through the pipeline, and so we'll, you know, we continue to work through those. We agree with you.

The balance sheet is in great shape, where we've got some cash on the balance sheet, in addition to being modestly leveraged on a net basis. And so we also know exactly what we're looking for. So we're in the market, culling through opportunities for those things. But you know, it's a little bit of a process here, for lack of a better word.

Mark Marcon (Analyst)

I appreciate that. And then on the federal government side, I mean, congratulations on the wins and the 100% on the recompetes. When do you think these wins would convert to revenue? How should we think about that? And what should investors think about just in terms of you know, the election? Obviously, nobody knows exactly who's gonna win, but how would you you know, advise investors to think about how the government business is gonna perform over the next year?

Ted Hanson (CEO)

So, two good questions, Mark. I think on the first one, these wins are slowly contributing to revenue here in the fourth, but I wouldn't say materially. So I expect most of the contribution from the various wins that we announced in the Q3 to have a bigger impact on 2025 than they will on the Q4. As it relates to the election, I mean, I think it's a thing that everybody is watching, especially enterprise customers in federal and in commercial. But you can see in federal, it didn't slow anything down during the quarter. I think the industry overall is gonna have a strong Q3 in bookings leading up to the election.

I think in the commercial enterprise space, while customers are focused on things like the regulatory environment and, you know, the M&A environment and, you know, where policies are going to be, there's definitely a pent-up demand around IT spending. And I don't think one party or the other, we don't think, is really gonna change customer posture on spending on key IT initiatives. So while, you know, it's a little bit slow as we go here through the end of this year, I expect when there's better confidence among our customers and some of these things that are unknowns are water under the bridge, you'll see them off of that confidence, begin to spend more on a lot of these key initiatives.

Mark Marcon (Analyst)

That's great. And then with regards to the commercial consulting side on IT, I know it's still relatively early days, but you have talked a lot about, you know, how much you're doing in terms of helping clients, you know, clean up the data in preparation for bigger AI initiatives. Is there any way to quantify, like, what you're doing on the consulting side that would be either data cleanup, data restructuring, in order to take advantage of AI, and then how much you're actually doing in actual AI assignments at this point?

Ted Hanson (CEO)

Yeah. So I'll let Rand take that. We're not releasing bookings or revenue in the AI or AI-enabled category, but Rand can give it some color and speak to data specifically. Rand?

Rand Blazer (President)

Yeah, Mark, I'm kind of smiling. It's a good question. We definitely we break it into two categories, what we call AI or pure AI and AI extended. So we know when we're doing work that supports AI implementation in the future, if you will, and we know the difference between that and what we call pure AI application today. We, you know, I think as Ted featured in the opening remarks, we're seeing AI is still a small % of our total revenues. The data side and the work we're doing on the data side is a much larger part of our revenues.

But we definitely watch both, and we need to tool ourselves to make sure that we can not just prepare data, qualify data, bridge data, but actually get it in effective use for the client as AI applications come in. So we're very mindful of the question you asked. We have a way of measuring that in terms of revenue, but, and we're, you know, it's slowly moving the way it should.

Mark Marcon (Analyst)

That's great. Thank you.

Operator (participant)

Thank you. And we have reached the end of the Q&A session. I would now like to turn the floor back to Ted Hanson for closing remarks.

Ted Hanson (CEO)

Great. Well, thank you, operator, and thank everyone for participating today. We look forward to being with you in the Q1 of 2025 to talk about our Q4 results. Have a great day.

Operator (participant)

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.