ASGN Inc (ASGN) 2018 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2018 Earnings Conference Call. (Operator Instructions) And as a reminder, today's call will be recorded.

I would now like to turn the conference over to our hostess and facilitator, Laura Bainbridge of ADDO Investor Relations. Please go ahead, ma'am.

Thank you. Good afternoon, and thank you for joining us today. With me today are Peter Dameris, Chief Executive Officer; Ted Hanson, President; Rand Blazer, President of Apex Systems; George Wilson, President of ECS; and Ed Pierce, Chief Financial Officer.

Before we get started, I would like to remind everyone that our presentation contains forward-looking statements. Although we believe these statements are reasonable, they are subject to risks and uncertainties, and 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 the 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.

Please 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 the GAAP and non-GAAP measures are included in today's press release.

I will now turn the call over to Peter Dameris. Peter?

Thank you, Laura. Welcome to the ASGN 2018 Third Quarter Earnings Conference Call.

During our call today, I will comment on the markets we serve and our financial highlights. Ted, Rand and George will then discuss the performance of our operating segments in greater detail before turning the call over to Ed for a detailed review of our third quarter results and our estimates for the fourth quarter of 2018.

Now on to the third quarter results. Across all of our guided metrics, our results for the third quarter were above our previously announced estimates. Revenues for the quarter were $906.4 million, up 35.9% year-over-year on a reported basis or 10.5% on a pro forma basis. Our growth rate for the third quarter was up over the second quarter and reflected, among other things, the deepening of many large customer relationships established over the last 5 years, the healthy U.S. economy and federal marketplace, and the continuing increase in the rate of adoption of our delivery model.

Our size and service offerings allowed us to grow faster than published IT service industry growth rates, and we believe that we are well positioned to generate solid above-market revenue growth in the future. During the quarter, we saw strong double-digit revenue growth at Apex Systems and Creative Circle and a return to year-over-year growth at Oxford Core and our Oxford Segment. Our Federal IT services and solutions business, ECS, grew revenues at roughly twice the projected annual growth rate of its peer group for 2018. ECS has grown above its peer group's organic growth rate in the last 2 quarters since it was acquired by ASGN. Customer demand was strong across our federal, local and mid-market and large national accounts.

Adjusted EBITDA was 35.3% (sic) [up 35.3%] year-over-year to $112.9 million, and cash generation continues to be at or above our expectations. Free cash flow was $84.6 million, and our leverage ratio was 2.89x trailing 12-month adjusted EBITDA at quarter-end. Year-to-date, we have paid down $231 million in debt and expect to pay down at least an additional $60 million before the end of the year, resulting in a leverage ratio at year-end of approximately 2.7x.

With respect to recent production at our Apex and Oxford segments, our weekly assignment revenues, which excludes conversion, billable expenses and direct placement revenues, averaged $56.3 million for the last 2 weeks, up 13.8% over the same period in 2017. As for ECS, we estimate revenues will range between $160 million and $165 million for the fourth quarter.

Our IT business continues to see high demand from its customers, driven in part by greater adoption of staff augmentation as a viable alternative to outsourcing, offshoring and consulting. We believe that we are well positioned to continue to service our customers' IT needs as technology rapidly evolves and is adopted.

We also continue to see signs that the ongoing debate regarding the on-demand workforce or gig economy is accelerating the usage of contract labor. Fractionalization of human capital by using the staffing industry services is truly the only way to avoid the risk of misclassification of employees as independent contractors. Our customers have and are realizing this, creating attractive secular growth opportunities for the entire industry.

Our Federal IT services and solutions business continues to see new long-term contract awards, robust spending against existing contracts and the forward positive benefits of increased funding and visibility of defense, intelligence and federal civilian agency budgets, particularly in the areas of artificial intelligence and machine learning. During the quarter, ECS secured $306.4 million in new awards. George will speak in more detail regarding these recent awards.

Would like to now turn over the call to Ted Hanson, who will review the operations of the segments. Ted?

Thanks, Peter. For the third quarter, all 3 segments contributed to ASGN's growth. The Apex segment, which Rand will review, grew 14% year-over-year, which is an increase from the growth rate in Q2 of 2018, and the Oxford Segment grew 2.1% for the third quarter. The Apex and Oxford end markets we serve in IT, digital/creative marketing, life sciences and engineering all remained stable and productive throughout the quarter. Secular changes remain in our favor in regards to how our customers approach solutions to supporting their business and getting projects completed. While our staffing services continue to grow and we're taking share, our value-added service offerings or consultative work are growing at a much faster pace.

Now on to the Oxford Segment results. The Oxford Segment is comprised of Oxford Core, CyberCoders, our permanent placement business and Life Sciences Europe. For the third quarter of 2018, Oxford segment revenues were up -- were $152.8 million, up 2.1% year-over-year. Adjusted for constant currency and same number of billable days, the third quarter revenues grew 3.7% year-over-year.

Oxford Core revenues, which account for approximately 75.1% of the segment revenues, were up approximately 2.5% year-over-year or 3.6% on an adjusted per billable day basis, in line with our expectations. CyberCoders, our permanent placement service offering, which accounts for 96.2% of the segment's permanent placement revenues, had 3.9% growth year-over-year or 5.6% on an adjusted per billable day basis, meeting our initial expectations.

Gross margin for the segment was 41.1%, performing in line with expectations but down 70 basis points year-over-year due in large part to business mix within the segment.

As we typically do, let me give some color on the progress in Oxford Core. We have seen moderate year-over-year revenue growth year-to-date through Q3. Growth was driven by momentum in our domestic IT and engineering disciplines and strong performance in our European business.

It is a longer road to fully institutionalize our sales strategies and build upon the productivity we have created over the last few quarters. However, our results provide us the confidence that our actions have and will lead to better growth and bottom line results in the future.

I will now turn the call over to Rand Blazer. Rand?

Great. Thank you, Ted. The Apex segment, which consists of Apex Segments, Apex Life Sciences and Creative Circle business units, again reported solid results for the quarter. Revenues for the segment in the third quarter were $589.6 million, up 14% year-over-year.

Apex Systems, which accounts for 75.5% of the segment's revenues in the quarter, continues to lead the way with 15.1% year-over-year revenue growth. Our Creative Circle unit again posted double-digit year-over-year growth at 11.3%. And our Life Sciences unit was up 8.9%.

Gross margin for the segment was slightly up compared to the previous quarters, again reflecting stable pricing in our end markets. Our segment's EBITDA also grew double digits in the quarter and once again outpaced top line growth.

Our EBITDA performance and conversion of gross profit to EBITDA was driven by revenue growth and continued strong productivity of our sales, delivery and infrastructure teams.

As we usually do on these calls, we give you insights with respect to factors driving Apex Systems performance. Apex Systems revenue growth again was driven by broad-based growth across accounts in all of our industries. Double-digit revenue growth in 4 of the 7 industry verticals we service, including, financial services, health care, consumer/industrial and technology industry accounts. Of the remaining 3 industry verticals, aerospace defense and business services accounts grew high single digits, while telecommunications accounts exhibited lower single-digit growth year-over-year.

Growth was achieved in both our top accounts in retail or brand-centric accounts with top accounts again growing double digits and outpacing our overall revenue growth rates. Retail accounts also experienced high single-digit growth rates. Growth in SOW- or consulting-type work remained strong in the quarter and continues to outpace our expectations and our overall revenue growth rate. Finally, as mentioned, field and back-office teams exhibited exceptional productivity during the quarter while supporting Apex Systems' EBITDA performance.

Creative Circle grew revenue double digits in the quarter, as I mentioned, and continues to exceed our expectations for overall profitability. Generally, the digital marketing end markets remained favorable, and we continue to see growth in corporate business as our accounts are shifting more work internally and to us versus using ad agencies for support.

Our Life Sciences business revenue growth was also up, again driven by strength in our top accounts and in our clinical skill areas. Overall, the Apex segment had yet another solid quarter and continues to significantly outpace the published growth rate of the overall staffing industry.

Now I'll turn the call over to George Wilson. George?

Thanks, Rand. ECS had very good performance in the third quarter, both from a revenue and profitability standpoint. ECS reported revenues of $164 million, an increase of 7.1% year-over-year and 5.7% sequentially. This growth was ahead of the industry average for peer companies operating in the federal IT services space.

We have seen continued strong demand for services and solutions in areas of cybersecurity, cloud and artificial intelligence, key business areas for ECS. We have also seen increased funding and customer interest in IT modernization, where ECS is well positioned to support our clients with deep customer knowledge, the required IT skills and the relevant contract vehicles.

In the third quarter, we received a total of $306.4 million in contract awards across a variety of customers, and we continue to see a high level of proposal activity into our fourth quarter. Included in our awards this quarter were new task orders in AI and machine learning work for defense and intelligence customers and a new award to support the Army's integrated pay and personnel system, referred to as IPPS-A. With a Q3 book-to-bill ratio of 1.7:1, ECS' end of third quarter contract backlog of $1.5 billion equates to a healthy coverage ratio of 2.5x our trailing 12-month revenue.

In the third quarter, ECS continued to strengthen its technical skills and business partnerships with commercial providers in cloud, cyber, risk

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and artificial intelligence. During the third quarter, we were awarded a contract with U.S. Transportation Command, known as TRANSCOM, to manage commercial cloud services. More recently, we were awarded a contract with the United States Marine Corps to plan and support cloud migrations.

In addition to our premier status with AWS and Microsoft, we were recently designated as a Premier Partner for Google's Cloud Platform. We were also awarded the Machine Learning Competency Status from Amazon Web Services and continue to deliver critical AI solutions to customers in defense and intelligence communities.

From a profitability standpoint, ECS' adjusted EBITDA grew faster than our revenues in the quarter. We largely attribute the growth in adjusted EBITDA to higher top line revenues, which allow us to leverage our fixed indirect costs over a wider contract base.

I will now turn the call over to Ed Pierce to discuss ASGN's overall financial results. Ed?

Thanks, George. As Peter mentioned, revenues for the quarter were up 10.5% year-over-year on a pro forma basis and exceeded our previously announced estimates. Our pro forma growth rate was approximately 40 basis points higher than last quarter's growth rate at 10.1%. On a constant-currency and same billable day basis, our pro forma growth rate was approximately 10.9%.

Gross margin for the quarter was 29.8%, which was in line with our previously announced estimates. SG&A for the quarter totaled $177.3 million and were lower than our previously announced estimates. Despite sequential growth in revenue and gross profit, SG&A expenses, excluding acquisition and integration-related expenses, were flat from the second quarter as a result of favorable variances in compensation and health-care expenses.

Interest expense for the quarter was $14.6 million, down $6 million from the second quarter. The sequential decrease was mainly attributable to onetime expenses of $5.8 million in the second quarter related to the amendment of our credit facility on April 2. Interest expense on our credit facility was also down sequentially as a result of principal repayments of $221 million over the last 2 quarters, partially offset by increases in LIBOR.

Our effective tax rate for the quarter was 17.5% or 9 percentage points lower than our previously announced estimate of 26.5%. The lower rate was a result of, one, changes based on recently issued IRS guidelines to our provisional estimates for the transitional tax on deemed foreign dividends and the tax treatment of executive compensation; two, excess tax benefits from stock-based compensation of approximately $1.1 million, which we do not include in our guidance estimates; three, higher employment tax credits; and four, a onetime cash and earnings benefit of approximately $1.8 million related to the acceleration of tax deductions for deferred loan costs into 2017. On a prospective basis, we expect our effective tax rate will range between 26% and 27% before any excess tax benefits from stock-based compensation.

Net income for the quarter was 20 -- $49.2 million, up from $34.9 million in the third quarter of last year. Adjusted net income was $68.7 million, up from $44.1 million in the third quarter of 2017. Adjusted EBITDA for the quarter was $112.9 million, up 12.7% from $100.2 million in the third quarter of last year on a pro forma basis.

Cash flows from operating activities were $92.1 million, and free cash flow was $84.6 million or 9.3% of revenues. Cash flows benefited from a lower cash tax rate for the quarter related to the items previously mentioned as well as the benefit of various tax attributes related to the ECS acquisition. During the quarter, we repaid $88 million of our long-term debt.

For the fourth quarter of 2018, revenues are estimated to range from $905 million to $915 million, which implies growth of 8.8% to 10% on a pro forma basis. Billable days, as defined in today's release, are estimated to be 60.2 days, up 0.2 days year-over-year and down 2.2 days sequentially. Revenues per billable day for the fourth quarter are estimated to be 3.5% to 4.6% higher than the preceding quarter.

Net income is expected to range from $40.9 million to $44.6 million, adjusted net income to range from $59.2 million to $62.9 million and adjusted EBITDA to range from $107 million to $112 million. Our adjusted net income estimates do not include the cash tax savings related to the amortization deduction for goodwill and trademarks with savings that are approximately $6.8 million quarterly.

I will now turn the call back over to Peter for some closing remarks. Peter?

Thank you, Ed. As our quarterly results continue to prove out, our scale, size and breadth of services has us well positioned to benefit during a period of historic secular growth for the services industry. Without a doubt, the world of work is changing. Accelerating digital transformation coupled with favorable labor and immigration legislation and an improving U.S. government market are all market forces occurring in our space. We're optimistic that ASGN is well situated to continue experiencing strong results into the foreseeable future.

The entire ASGN team is pleased with our third quarter performance. We look forward to carrying this momentum into the last quarter of 2018. Our focus remains on growing the business profitably along with maintaining our healthy rate of growth. We would like to once again acknowledge and congratulate our many loyal, dedicated and talented employees whose efforts have enabled ASGN to progress to where we are today.

Thank you for time. I would like to now open the call up to participants for questions. Operator?

(Operator Instructions) Our first question comes from the line of Kevin McVeigh with Credit Suisse.

And Peter and team, congrats on the results. You just continue to really put up tremendous numbers. Peter, just any thoughts, number one, on what drove the upside to the estimates because, obviously, it came at above the high end of the range? Just -- let's start with that. And then just what conversions were in the quarter, if we could?

Okay. Well I'll start and then I'll turn it over to Ted and Rand. First, just on a high-level basis, our growth in revenue was driven by hours -- increasing the hours billed and increase in number of billable consultants. And the least -- the smallest contributor was increase in bill rate. Our bill rate, I think, in our largest segment, Apex, only grew like 1.6%. The real growth was in the number of billable consultants and the hours that they billed. As it relates to specific demands and things that we saw, Rand and Ted, Rand, why don't you go first and Ted follow up with your segment. Rand, are you on mute?

Yes, I'm sorry. So I guess, as you said, Peter, I think the growth is coming across the board in every industry and every account. Kevin, you recall, we -- an investment in our segment is really an investment in a client base and a portfolio of clients that themselves are healthy and are spending money on technology. So if you look at our skills that we're providing, it's across the board, both the application, the high end, the growth skills as well as the infrastructure. If you look by industry, you can see pretty much growth across the board. Telecommunication is the only one that's a little slower than the others. But it's just our consulting business is growing. Everything I just said, it's kind of across the board, and I think it's a lot of bread-and-butter work that the clients are doing to themselves continue to achieve efficiency and cost effectiveness in their internal operations.

Ted, do you want to add something?

Yes, I would just add maybe that 5 division, if you look at it, Apex Systems and Apex Life Sciences and ECS all came in above where they were. So in that way, it was pretty broad based and the rest of our units came in basically in line with where we expected.

Got it. And then, Peter, this is more just to picture this, obviously, what the stock's done relative to the market. I mean, it seems pretty clear there's no recessionary clouds on the horizon. But can you just kind of take us through the process like what client conversations are like here versus heading into the last cycle. This way we can frame a more realistic case for investors?

Yes, I mean, all I can do is give you an insight into how we view our business. Our business has never had a larger backlog or visibility than it does today because of ECS and also the SOW and work that we're doing at Apex on top of -- as you know, Apex's business, it tends to be more mission critical than it is CapEx driven. The second thing is, our business really with greater adoption really can exist and perform satisfactory in any environment except job destruction because more and more work is being performed with contract labor, outsourced labor, offshore labor, project consulting labor versus internal labor. So as long as there's not job destruction, work has to be performed, and our model can take market share from other models. And finally, as you see from our results, our profit margin is very durable because we have a very, very small contribution of profit drive from permanent placement. That's just not our model. I mean, we do, do permanent placement at the request of our customers and to stay close to our customers and not to invite competitors into our meaningful accounts. But if you look at our contribution from permanent conversion fees, it's less than 4%. It's about 4% of revenue. So we feel equally confident with regard to our ability to generate attractive margins -- profit margins in the event of an economic slowdown. So I don't -- everything is cyclical. GDP growth drives certain decisions, but so much of the money that's being spent with us is must-have where customers are digitizing their business and automating their businesses, and it's not replenishing inventories. And then, George, why don't you give him a little bit of insight into the government space in your backlog and spending today versus 2, 3 years ago because of budgets, et cetera?

Yes. Sure, Peter. What we said in the call, so what we're really seeing is a lot more money flowing into the AIML projects that we're doing and also our cloud services. Also, IT modernization all tying back to our customers feeling, a, more comfortable with the technologies; and b, more comfortable with the budgets and such. So all the IT modernizations include cloud and cyber components, and as I mentioned, our AIML, which is really targeted at this point in time in defense areas, but we look forward to providing AIML solutions in things like document management, document review and business analytics down in the future. And again, it all ties back to, like Peter said, feeling a lot -- our customers are feeling much more comfortable with the current budget environment.

Now we'll go to the line of Gary Bisbee with Bank of America Merrill Lynch.

My congrats as well on the quarter. I guess, a couple of questions. The consulting or SOW work at Apex, you talked a lot about it the Investor Day. I guess, the question for me is, is this getting you deeper into customers? Is that really the driving force behind doing it? You've got a relationship and this allows you to get more share, if you will? Or is it that there's a shift in what they want from, and that's more of what you're seeing in some places?

So I'll let Rand address that. But it's really not something that we've come up with that we're selling into the customer. It's really the customer who's driving us in a collaborative fashion to work with them. Rand?

You said it right, Peter. It's just -- Gary, it's about serving the accounts, serving the client. And what they've found is our efficiency in the relationship we already had with them and with high-performance support, they've said, hey, how about this. How about that? Can you help us here? And we've stepped into that and served and provided that support, and it just builds on itself. Does it in fact end up strengthening the relationship after the fact? Of course, it does. But we had to have it first. And just as Peter said, it's just about focusing on providing real value to the client.

And should we think that there's any real meaningful difference in the economics of those relative to how your Apex business has performed? Or is it -- are you able to do that at a level that's not much better, not much worse?

Rand?

Yes, the economics of the consulting work are a little stronger than the traditional staffing work. But I'll emphasize again, Gary, if it's hand and foot, they go together. You have to be excellent in both sides of that and strengthen the relationship. But you can get a little better -- look, you're taking on more value creation for the client and you're taking on some risk, although, it's manageable risk given the way we've set this up. So by virtue of that, you're going to get better economics as long as you can execute correctly.

I would just add, Gary, that the sales cycle is a little bit longer and the length of the assignments tend to be -- the projects tend to be a little bit longer.

Okay. That's helpful. And then maybe one for Ed. I think all of your debt at this point is floating rate. Given that you've taken debt up and down but maintained the balance for a while, is there any desire, given the way rates are trending, to locking any of that in? Or are you comfortable with the balance sheet the way it is?

Well, we're considering a lot of things. What I'll share with you, because we're in the midst of considering it right now, is that the CLO market is relatively attractive where there might be an opportunity to reprice our bid downward again. And so we don't look to fix the rate at this point mostly because we're deleveraging so quickly. Our absolute cost of dollars out the door to service our, interest expense is down year-over-year because we're paying down debt so rapidly. So I don't think you'll see us fixing that rate, Gary, and I don't think it's going to create a lot of volatility to the P&L.

Yes -- no, I guess, I was more thinking you want to buy back some stock, given what's happened lately. And it's -- since that led to keep -- not paying debt down so quickly at some point, but maybe it might make sense. But fair enough. That's a good answer.

Now we'll go to the line of Jeff Silber with BMO Capital Markets.

I noticed in your supplementary material, excuse me, when you talk about the number of staffing consultants via a ramp-up in the number of staffing consultants hired at Apex. I know you typically do that in 3Q. But I'm just curious, was there anything driving that specifically. And what are your internal hiring plans going forward?

So Ted?

Thanks. Up a little bit in third quarter, but in response to business opportunity. And I think going forward, we won't be hiring ahead or behind. We'll be matching it up with the opportunity in the market. You typically see us add headcount but not, at the -- as fast a rate as we grow the business. And that's really what we're shooting for over a long window of time.

And will that hold true in your other divisions as well?

That's how we treat the other divisions as well.

Okay, great. And then, Peter, when you answered the question about the upside, you had mentioned that billing rates were only up, I think, about 1% in Apex, if I remember correctly. Was there any specific reason? Was it a mixed shift issue? Are you seeing pushbacks on increases? Any color would be great?

Well, I'll go first and I'll pass it on to Rand. Our business model is such that we have deep, meaningful ongoing relationships with Fortune 400 companies, Jeff. And I can't tell you precisely how much we're going to do each year with them, but I know we're going to do a meaningful amount of work with them each year. So our pricing model is not as dynamic as someone who's putting 1 or 2 people in a retail account and their customer has 50 internal employees. We're just taking advantage of the supply-demand imbalance. We're building a relationship that's durable through tight labor market and otherwise. So I don't think you would ever expect the -- the bill rate increase you see at other smaller retail type IT service businesses translating to what we're seeing in our market. Rand, would you add or subtract to that please?

Yes. Well, Peter, again, you said most of it right on. Jeff, listen, I don't think -- given our client base and the nature of our contracts with the clients, we're not negotiating bill rates every day. We're usually setting bill rates a day -- a year or 2 ahead in these master service agreements, and then we're executing against those. We will get relief in bill rates if it's a tough skill set or tough geography or if it's a consulting piece of work, and we can mix together a different team. But those are the times where we'll get some change in the bill rate composition. And our bill rates are increasing this past year close to 2%. Pay rates, by the way, are not -- are a little below that number, which is allowing us to add to our margin. But Jeff, it's not -- don't think of this as a day-to-day auction. This is, I think, longer term, as Peter implied, contracts and relationships in bill rates. And so we have to find labor that fits the bill rates for the client and/or get relief, which we do on occasion.

Now we'll go to the line of Edward Caso from Wells Fargo.

Could you talk a little bit about the noise out of Washington with the Trump administration squeezing tighter on professional visas, particularly H1Bs if that has had any indirect impact on your business. Are you hearing any concerns from your clients?

So Ed, we're pretty well versed on this for a number of reasons. There was an enormous amount of abuse of the H1B visa system with regard to whether people were truly advertising and offering a prevailing wage, who was the true employer of record and the lottery system where true Indian body shops where outsourcers were overwhelming the visa lottery system, whereas, an offshore may put in 39 visa lotteries and someone like a Google or an Apple or Facebook -- and this is all public data, might put in 1,000 applications. And if you look at the data, the visa applications that were awarded to the same stock names, the big tech names, they're paying these people on average $110,000 a year. And the visas that were awarded to the body -- the offshore body shops, the average was about $71,000. So the true talent was getting squeezed out just because of the lottery system and the gaming of the situation. So what the Trump administration really has done is tightened up on really requiring strict adherence to the rules about prevailing wage, publication, amendments, et cetera. And that has forced a greater attention and focus on domestic labor. We're fortunate in our business that, out of 23,000 people -- I'm going by memory, but less than 1,000 of them are really on H1B visas. These are truly green carded or domestic labor people. So it makes our model a lot more credible and reliable that the people are going to be available to perform the work because there's not a threat of a visa not being timely awarded. So it's actually helped our business. It hasn't hurt it. And it actually has helped the American tech worker. And so where there was a wage arbitrage, that's being eliminated by the adherence to prevailing wage. And the other thing that's also willing to be changing how these visas are awarded is for lower-end stuff, it's getting automated. So some of the lower-end stuff that was being done with cheap offshore labor is getting automated, and those visas just aren't going to be applied for.

A question on the government side. Of the $306 million, how much is sort of new, new work and how much is sort of repeat -- recompete or extensions?

George?

Yes. It's new work -- new task orders coming from our customers and then competitive awards it has gotten.

There's none of it that is just sort of ongoing work that you've sustained?

No. No.

And my last request is that Ed Pierce repeats the tax reasons more times fast?

And now we'll go to the line of Tobey Sommer with SunTrust.

With respect to consultative services and SOW, what do you feel like the differentiators are? And if you are taking share, why?

Well, the differentiator that it's -- we're not envisioning or architecting the solution, but the customer is making a conscious decision that they're going to retain a little more of the responsibility of the project on the envisioning, the architecture and some of the project consulting and then giving some to us. And by having that blended project development, they can avoid the complete higher-end project consultants. So to the extent that the project's optimization or it's the carry-on in the system embedded software, they feel comfortable in doing that and they're using a more cost-effective control and visibility delivery model than just the old project consulting. So vis-à-vis taking market share from a particular competitor, I don't think that's what we're really trying to focus on. We're just saying that our delivery model of shared resources or shared responsibility is taking market share from other deployment models.

How would you describe.

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from these platforms?

I'm sorry, you broke up a little bit. Could you repeat it?

Yes. How would you describe the competitive threat or lack thereof from new online platform?

Yes. So it varies by company. But if you really look at some of the noise in the marketplace right now for things like tackle, pass, grab at Upworks, if you really dive into their revenue streams, we're not competitors at all. I mean, first of all, one of them just went public, and they got $250 million of revenue, and 83% of the revenue comes from North American. And they call a poor customer somebody that paid $100 in fees to them over the past 12 months. And the vast majority of the business is non-IT. So it's -- those models, I think, are durable on a business-to-consumer basis. If you need someone to clean your gutters, walk your dog, give you a massage, maybe even do a static webpage, and you're not a Fortune 400 company that has to worry about labor department audits and HR and legal department reviewing what you're doing, and you're not worried about cyber and personal security, you may use one of those kind of marketplaces. But you see what our growth rate is, and it continues to grow. And so those really are on the IT space, the clinical research and especially in the government space meaningful threats. And they've been around forever. Look, if you were able to go back in history and look at the job postings on Craigslist, Craigslist has been putting graphic designers and content writers on their postings forever. So this isn't -- these businesses have been around for some time, and they're still relatively small vis-à-vis the total spend in IT. And so I don't see on a true commercial basis that they're threat. Now with that said, I think they have an application. If you're working with day laborers and there's been a rock concert in Central Park and you need people to come pick up trash or break down the event facilities and you only need them for 2 or 3 days. But SunTrust is not finding somebody off of Upworks to go help them with a mobile banking app. We're just not seeing that.

What's your strategy for internal investments and consultant headcount growth?

Well, I'm going to let Ted speak to that again. Just -- I'll reiterate what he says. It's steady state. We have the privilege that we have never held back on our investment. So there's no deferred maintenance here. And you've not once heard through this whole period from us that things are so strong, we're adding ahead of the curve and it's going to affect our profits. We're exactly the opposite. Ted, why don't you give them more granularity to where you see maybe bigger spend?

I think that's it, Peter. I mean, I don't think I have too much to add. It's a steady state. We'll keep adding where there's both our business opportunity. We'll keep working internally on different things that we think make us more productive or efficient from an automation and tool set standpoint. But it's steady as we go there.

Last one, just a numbers question. What was the leverage ratio at the close of ECS?

Yes, it was 3.7 on April 2, 2018.

Now we'll go to the line of Tim McHugh from William Blair.

Most of my questions have been asked but just on ECS. The backlog number, I know given the acquisition and there's some noise, but can you give us a sense of the backlog growth rate that you're seeing on a year-over-year basis?

So George, I want you to answer that more on a historic qualitative basis, but we have not published your historical quarterly backlog. So just kind of compare it form of what you're seeing in prior cycles and historically, if you could?

Yes, sure. I have been with the company for almost 7 years now, and this is a very, very healthy pipeline that we have as well as this bid-winning award. And I will say last quarter reported that 2.3x was our coverage ratio. So that's going up at 2.3 or 2.4. Some of it's accelerated. We've nabbed over 2.5 in terms of the backlog. Okay?

And now from the line of Mark Marcon from Robert W. Baird.

I was wondering if you could give us a little bit more color with regards to the guidance outside of ECS, specifically within Apex? Would you assume that Apex Systems will continue to lead the way in terms of the growth followed by Creative and that maybe Life Sciences ends up being the slow scorer so that's still solid?

One, Mark, I tell you, we gave you the 2-week revenues exiting the quarter. We exited the quarter with good momentum. Fortunate for us, our largest division grew the fastest, and we kind of continue to expect that. Our next-largest division outside of ECS grew 11.3%, and the Apex Life Sciences grew, but it's the smallest division, and it was -- it has no -- I think, 8.9% growth this year, but it's on a much smaller base of revenue. So I think what you should take away from my kind of wandering comments is that momentum was good exiting the quarter.

Great. I was just thinking about Apex Systems specifically. With regards to the statement of work business, can you talk a little bit about how much that has grown or what percentage of the revenue it is at this point?

Rand, give him some qualitative comments. We're not prepared to break that out on a specific revenue basis yet, but give him some qualitative comments, if you would, please.

Yes. So Mark, first of all, it's growing faster than the numbers we posted for Apex Systems overall. So Apex Systems in the quarter was 15.1%. Consulting is growing faster than that. That's the first data point. Does that answer your question or do we...?

I was wondering magnitude or how...?

The magnitude of consulting. Well, it's certainly double-digit percent of our revenues. I think we haven't given that number -- we spent the last X number of years jumping into providing more value to the clients, and it's becoming material, and it's an important part of how we serve the clients. So -- but it's definitely into the double-digit range now and as a percent of our revenues overall in Apex Systems. And by the way, Creative, Life Sciences and the Oxford team also, also have consulting revenues in their client and account base.

Great. And then with regards to the bill rate increases and the wage rate increases. What are you anticipating, particularly on the wage rates? And how's that impacting recruiting trends in terms of trying to sell bill rates just when we think about the tightness in the labor market?

Rand?

Well, I think we've launched our pay rates. Our pay rates are migrating not as fast as the bill rates in general. But I would say it's obviously different, marked by different skill types. So there's some skills that are in higher demand, may have less availability in certain regions around the country. But for the most part, the IT world, I think we've talked about this before, has been in a very high employment status for years. And so while the overall economies now have 3.7% unemployment rate, IT has already been at a very low unemployment rate. So it's nothing new from what we've seen over the years. And I think, remember, people are rotating off the jobs constantly. And we've built a certain brand awareness and loyalty with a candidate base, if you will, that knows that not just what the pay rate is but certain benefits in health care, medical, insurance and take time off and 401(k) opportunities, so -- as well as technical training and continued support and almost a concierge service to help them through some of their issues. So it's a combination of things that I think keep that factor there. But we haven't -- look, I'm knocking on wood. We haven't run into a situation where we found a big disconnect between what we need and what we can provide our clients.

That's great. And then with regards to the SG&A this past quarter, it was actually a little bit lower than what we were looking for, even though there were headcount additions. What was the key driver for that?

Mark, as we said in our prepared remarks, we had some favorable variances in certain expenses. And we're also giving guidance, obviously, for Q4, and we expect it to be on a cash basis before acquisition-related expenses, about 18% of revenues on a go-forward basis, at least in the near term.

(Operator Instructions) And there are no more questions at this time. Please go ahead.

Right. Well, thank you for your attention, and we look forward to reporting our fourth quarter results. Everyone, have a good evening. Thank you.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and using AT&T TeleConference. You may now disconnect.