On Assignment (ASGN 1.72%)
Q2 2022 Earnings Call
Jul 27, 2022, 4:30 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Greetings, and welcome to ASGN Inc. second quarter 2022 earnings conference call. [Operator instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Kimberly Esterkin, investor relations.
Thank you. You may begin.
Kimberly Esterkin — Investor Relations
Thank you, operator. Good afternoon, and thank you for joining us today for ASGN’s second quarter 2022 conference call. With me are Ted Hanson, chief executive officer; Rand Blazer, president; Ed Pierce, chief financial officer; and Marie Perry, executive vice president. 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 — President and Chief Executive Officer
Thank you, Kimberly, and thank you for joining ASGN’s second quarter 2022 earnings call. As is evident from our second quarter results, we had a strong first half to the calendar year. Revenues for the second quarter surpassed the high end of our guidance range and totaled $1.1 billion, up 17.1% year over year and up 4.7% sequentially, driven by the continued strength of our commercial segment as well as growth in our federal government segment despite a difficult year-over-year comparable. Our commercial segment accounted for 74.5% of consolidated revenues, while our federal government segment accounted for the remaining 25.5% of revenues.
Adjusted EBITDA also surpassed our estimates for the quarter and was up 20.7% year over year and up 6.8% sequentially to total $144 million. With these strong results, we continue to trend ahead of our three-year targets we laid out at our investor and analyst day conference this past September. This performance brings us closer to our goal of $6 billion in revenues by 2024. An important component to our success and in achieving our three-year revenue goal is our unique deployment model, and it’s a leading provider of IT services and solutions to the commercial and government end markets, our business is U.S.
focused and has a very steady and predictable trends. These trends include not just our history of achieving above-industry revenue growth but also our continued margin expansion and free cash flow growth. For the quarter, adjusted EBITDA margins improved 40 basis points year over year to total 12.6%. Our free cash flow from continuing operations was $79.6 million, an improvement of 10.1% over the prior-year period.
Given our strong free cash flow and the market conditions, we have been actively buying back our shares. During the quarter, we purchased $91.2 million in shares. And in today’s earnings release, we announced our board of directors approved a new, two-year $400 million share repurchase plan which replaces the $350 million plan approved in December 2021. The increased pace of repurchases in the second quarter and new expanded program, just approved, allows us to take advantage of market conditions while maintaining our view that thoughtful M&A yields the best long-term value for stakeholders.
As we discuss our second quarter performance today, three key themes will remain top of mind. These include: one, our consistently strong execution, which is evidenced by the growth of our two business segments; second, the stability and resiliency of our unique deployment model, which positions us to successfully navigate across market cycles; and third, our strong free cash flow generation and balance the flexible capital deployment strategy, which enables us to act in the best interest of all our stakeholders. So let’s review these things and start by discussing our largest segment, commercial, which services large enterprises and Fortune 1000 companies. Our commercial segment had another very strong quarter with revenues of $850.6 million, an increase of 19.4% over Q2 of last year, with strong growth in both IT staffing and consulting services.
Apex Systems, our largest division, accounted for 83.1% of this segment’s revenues for the quarter with top end retail accounts both achieving double-digit growth rates. From an industry perspective, all five of our commercial segment industry verticals achieved double-digit growth for the quarter. Within Apex System specifically, financial services, our largest industry vertical, had strong performance in banking and insurance, with even greater year-over-year increases amid our fintech and wealth management accounts. Growth in our Technology, Media and Telecommunications, or TMT accounts, was again led by technology and telecommunications work.
Progress in our commercial and Industrial accounts reflected strength across all sectors with the exception of material, in particular, we achieved double-digit growth in energy, utilities, consumer discretionary and consumer staples. Improvement in our healthcare vertical revenues continued to be driven by the provider and payer accounts. Finally, growth in our business and government protocol was led by our business services accounts, while aerospace and defense accounts were up mid-single digits versus the prior year. Gross margin for the commercial segment was 33.1%, up 110 basis points from the prior year driven by our growing contribution of high margin commercial consulting, creative digital marketing and permanent placement businesses.
Adjusted EBITDA margins were relatively consistent with Q1. ASGN IT consulting offerings remain an important source of value we provide our clients. For the quarter, commercial consulting revenues totaled $222.2 million, an increase of 53.9% year over year. Revenues derived from our work in web, mobile and application development, data analysis and migration and cloud architecture engagement led our commercial consulting’s quarterly performance.
We had a particularly strong quarter for commercial consulting new bookings, which totaled $340.6 million up 56.5% year over year. This translates into a book-to-bill of 1.5 to 1 for the quarter, consistent with Q1. As a reminder, we calculate commercial consulting’s book-to-bill as the ratio of our bookings, the amount of new work won during any given quarter that will be executed over the ensuing quarters to our commercial consulting revenues for that quarter. Our pipeline of business remains strong, improving double digits sequentially, and we are actively growing our capabilities.
Speaking of expanding our capabilities, at the beginning of July, we officially closed our acquisition of GlideFast, an elite ServiceNow provider. And within their first week as part of ASGN, the GlideFast team participated in more than a dozen client pitches, with Apex Consulting Services. We are not surprised by this new business momentum due to the high demand for ServiceNow. In fact, even prior to acquiring GlideFast, our commercial consulting customers who are asking for ServiceNow implementations.
For those not yet familiar, ServiceNow is a cloud-based workflow platform that has quickly become the go-to operating system of enterprises worldwide. In essence, ServiceNow provides a new digital layer throughout the enterprise operations, automating its workflows and streamlining its business processes quickly and at scale. By aligning our current IT consulting offerings with our GlideFast expertise, we are jump-starting our ServiceNow business and immediately offering GlideFast access to Apex Systems account base. The acquisition of GlideFast ideally fits with our M&A strategy of acquiring in-demand digital solution capabilities that can be strategically pulled across our large account portfolio.
Like that of Apex Systems, GlideFast’s client base spans multiple industries from TMT and financials, to consumer and business services among other verticals. We see significant revenue synergies with GlideFast above its stand-alone anticipated 30% revenue growth in 2023. Ed Pierce will provide further detail on GlideFast’s revenue contributions later in this call. Let’s now turn to the federal government segment, which provides mission-critical solutions to the Department of Defense, the intelligence community and civilian agencies.
Revenues for the quarter totaled $291.2 million, an increase of 11% year over year, driven by a combination of organic growth and the impact of businesses we acquired in 2021. We also experienced better-than-expected spending on a cost reimbursable AIML contract, which was a pull forward from the second half of this year. Ed will speak more on that shortly. Gross and adjusted EBITDA margins were also up for the quarter related to improvements in the federal government segment’s business mix including a smaller contribution of cost reimbursable contracts, which carry lower margin than other contract types as compared to the prior year, and the contribution from the higher-margin businesses we acquired in 2021.
New contract awards for the quarter…
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