Greetings. Welcome to the ASGN Incorporated Third Quarter 2023 Earnings Call. I will now turn the conference over to your host, Kimberly Esterkin, Vice President of Investor Relations. You may begin.

Good afternoon, and thank you for joining us today for ASGN's Third Quarter 2023 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 these 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.

Thank you, Kim, and thank you for joining ASGN's Third Quarter 2023 Earnings Call. ASGN's performance for the third quarter of 2023 was in line with our expectations, with results slightly ahead of or within our guidance ranges. Third quarter 2023 revenues of $1.12 billion were above the midpoint of our guidance, with IT consulting revenues reaching approximately 55% of the total ahead of our 2024 goals. Adjusted EBITDA margin was 12.3% for the third quarter, above the top end of our guidance range. We continue to see opportunities for margin expansion as our consulting revenues grow. With that as a background on our consolidated results, I'd like to turn to our industry performance. As we review our performance, three key things will be consistent throughout the discussion. First, while the market for IT spend remains difficult, these headwinds will reverse, and ASGN's business is better positioned than it's ever been to capture in-demand IT opportunities. Second, the strength of our business lies in our large domestic enterprise account base. Our diversified client base across six critical industry verticals provides stability throughout market cycles. Third, our business continues to evolve toward IT consulting, with more than half of our consolidated revenues now in the higher-end, higher-value project and solution capabilities. This growth in consulting revenues, along with the variable nature of our cost structure, supports our margins. I'll speak more on each of these topics as we review our quarterly performance, but let's begin by discussing the five industry verticals that comprise our Commercial segment. Our Commercial segment predominantly services large enterprises and Fortune 1000 companies. Commercial segment revenues for the quarter declined by low teens on a difficult year-over-year comparison. Revenues for the segment benefited from growth in our consulting business, offset by double-digit declines in the more discretionary areas of our assignment business. For the quarter, commercial consulting revenues increased 2.1% year-over-year. Commercial consulting bookings of $291 million translated to a book-to-bill of 1.1x for the quarter and 1.2x on a trailing 12-month basis. Of the consulting work won during the quarter, bookings were again weighted towards renewals on existing projects, with a large portion of bookings coming in at the end of the third quarter, an indication that our clients remain cautious in their spending. Sales cycles are slow, and project durations continue to be elongated, but our retention rates on existing deals remain strong as our clients continue to recognize the high value of and need for ASGN services. We are seeing anything with an immediate return on investment, specifically projects aimed at cost containment and those generating operational efficiencies, getting the green light from clients. I'll speak more on the work won during the quarter shortly. Turning to our vertical performance. Our Consumer & Industrial and healthcare verticals saw low single-digit revenue declines year-over-year. Within Consumer & Industrial, consumer staples and utilities were bright spots, each experiencing low single-digit growth compared to the third quarter of 2022. In the healthcare vertical, provider accounts maintained their strength, and revenues were up double digits year-over-year. Technology, Media and Telecommunications, Business and Government services, and Financial Services, our three remaining commercial industry verticals, all saw continued revenue declines year-over-year, though each of these verticals displayed some resiliency in certain areas on a sequential basis. Within TMT, for example, media and entertainment account revenues remain relatively consistent with the second quarter of 2023, with the rate of decline slowing. Within our financial vertical, big bank revenues were relatively flat sequentially, with small sequential revenue growth in diversified financials. Even in these more challenging macroeconomic conditions, as previously noted, our commercial bookings remain solid. We continue to make progress on the AI front across the Commercial segment, with generative AI emerging for many of the new opportunities in our pipeline, followed closely by work in machine learning. The vast majority of the generative AI projects for clients are exploratory at this time. We expect larger AI programs to follow once use cases that demonstrate value creation have been identified for our clients. At the same time, this AI exploration work is taking place. We're seeing strong demand for data engineering and data governance in support of AI use cases. These infrastructure needs are being driven by the desire to ensure that data is complete, accurate, and timely for training, testing, and deploying AI models in the future. One example of work is the consulting project we won during the third quarter with a leading North American tech supply company. Our team was brought on to build out an end-to-end freight management system for our client, including the full cloud data platform for managing analytics and future AI and automation capabilities. We are responsible for ensuring the architecture, configuration, reporting, and analytics are properly set up in the new freight management tool. At the same time, we must ensure that the data is extracted correctly from the old tool and ingested into the new tool. We're using technology solutions such as Snowflake, Databricks, and Google Cloud as part of this end-to-end architecture to ensure the best outcome for our clients. We also continue to excel in projects involving engineering robotics and machine learning capabilities. In another consulting project won during the third quarter, we were hired to provide services to a leader in e-grocery technology. Under this contract, we're helping to drive the deployment of our client's robotic grocery fulfillment systems, which are used to stock the warehouses of a major retailer nationwide. We are providing end-to-end provisioning, installation, quality assessment, and support for each warehouse deploying the new e-grocery technology. Let's now turn to our Federal Government segment, our sixth industry vertical, which provides mission-critical solutions to the Department of Defense, the intelligence community, and federal civilian agencies. Federal segment revenues for the quarter were up 12.3% year-over-year on an as-reported basis and up 4% organically. Contract backlog was roughly $3.3 billion at the end of the third quarter or a healthy coverage ratio of 2.6x the segment's trailing 12-month revenue. New awards were approximately $501.2 million, which translates to a book-to-bill of 1.5x for the quarter and 0.9x on a trailing 12-month basis. As we continue to secure work during the third quarter, we recognized the potential for some disruption in the procurement process should the government shutdown occur following the end of Q3. Our government team proactively engaged in discussions with clients for several weeks leading up to October 1 and reconfirmed that the vast majority of our work is mission-critical. We believe that 10% or less of our Federal Government work would be impacted in the case of an extended government shutdown. We're keeping track of budgetary developments. In the meantime, we remain focused on providing leading IT solutions to our government client base. Speaking of supporting our clients in the third quarter, we won a combination of new and recompete contracts. Among the new work secured, we won two new cybersecurity contracts with the U.S. House of Representatives and the Census Bureau. In addition, we've secured a five-year data and AI contract to support the National Geospatial Intelligence Agency, the Chief Digital Artificial Intelligence Office, and the Army Research Laboratory. We also won a smaller contract from the Chief Digital Artificial Intelligence Office to help establish a global AI innovation lab that will support academic research in artificial intelligence worldwide. Similar to the Commercial segment, much of our work in generative AI in the government space remains exploratory at present. But with excellent qualifications in traditional forms of artificial intelligence, our federal and civilian customers continue to look to us to identify use cases that will increase their operational efficiency. In fact, on several DoD AI research and development programs, we are integrating generative AI and large language models into current solutions. With regards to project extensions, we won work with the U.S. Postal Service supporting several key areas, including advanced data management and cybersecurity, and continue to support the Department of Veterans Affairs while adding new work in strategic planning, cloud advisory services, and AI technology implementation. The breadth of work just described is evidence of the countercyclical balance the government industry vertical provides to our overall account portfolio. With that, I'll turn the call over to Marie to discuss the third quarter results and our fourth quarter 2023 guidance.

Thanks, Ted. It's great to speak with everyone this afternoon. As Ted noted, our results for the quarter were in line with or exceeded our expectations. The third quarter revenue of $1.12 billion was down 6.8% year-over-year. Revenues for the Commercial segment were $782.4 million, down 13.1% compared to the prior year quarter. Revenues from commercial consulting, the largest of our high-margin revenue streams, totaled $274.2 million, up 2.1% year-over-year on a tough comparison of 43.2% growth in the third quarter of 2022. Growth in commercial consulting revenue was offset by a 19.5% year-over-year decline in assignment revenues, reflecting the continued softness in more discretionary and cyclical parts of our business. On a same Billable Day basis, adjusting for 1.5 fewer Billable Days in Q3 of 2023 compared to the prior year quarter, assignment revenues declined 17.6%. Revenues from our Federal Government segment were $334.4 million, up 12.3% year-over-year, including a $24.6 million contribution from Iron Vine. The growth in our Federal Government segment speaks directly to the benefits of maintaining a diverse client base across industries. Turning to margins. On a consolidated basis, gross margin was 28.9%, down 110 basis points over the third quarter of last year, and flat sequentially. The year-over-year compression in gross margin was mainly related to business mix, including a lower mix of certain high-margin revenues within our Commercial segment and a higher mix of revenues from our Federal Government segment, which carry a lower gross margin than Commercial segment revenues. Gross margin for the Commercial segment was 32.5%, down 60 basis points year-over-year, primarily due to the lower mix of certain high-margin assignment revenue streams, mainly creative digital marketing and permanent placement revenues, which was partially offset by a higher mix of high-margin IT consulting revenues with a year-over-year expansion in gross margin. Gross margin for the Federal Government segment was 20.4% and down 10 basis points year-over-year. SG&A expenses for the third quarter were $206 million or 18.4% of revenues as compared to $232.6 million or 19.4% of revenue in the prior year period. SG&A expenses included $1.1 million in acquisition, integration, and strategic planning expenses, and a $2.7 million tentative legal settlement, both of which were not included in our guidance estimates. As expected, interest expense increased year-over-year related to rising interest rates and our recent refinancing. At the end of August, we completed a successful transaction that upsized and extended the maturity of our revolving credit facility and Term Loan B. Our revolving credit facility is now $500 million with a five-year maturity extending to 2028, and our Term Loan B is also $500 million and extends seven years maturing in 2030. Post-transaction, our net leverage remains low at 2x adjusted EBITDA. Income from continuing operations was $59.4 million. Adjusted EBITDA was $137.5 million, and adjusted EBITDA margin was 12.3%. At quarter end, cash and cash equivalents were $145.6 million, and we had full availability under our new $500 million Senior Secured revolver. Free cash flow for the quarter was $137.7 million, an increase of 73.2% year-over-year. We deployed $91.3 million in cash on the repurchase of 1.1 million shares during the third quarter at an average price of $79.63 per share. We have roughly $349.1 million remaining under our share repurchase authorization. With strong free cash flow generation and full availability under our revolver, we have ample dry powder to make strategic acquisitions once the M&A market improves. Turning to our guidance. Our financial estimates for the fourth quarter of 2023 are set forth in our earnings release and supplemental materials. These estimates are based on current market conditions and do not take into account any possible revenue declines associated with a potential government shutdown in November. Our estimate assumes 60 Billable Days in the fourth quarter, which is the same as the year-ago period and 2.5 fewer Billable Days than Q3 of 2023. Guidance also takes into account seasonality, with the fourth quarter traditionally the second lowest quarter after the first quarter. We expect macro conditions to remain challenging in the fourth quarter. In our Commercial segment, we anticipate revenues to remain soft across both assignments and consulting. These declines are expected to be partially offset by growth in our Federal Government segment. We are expecting gross margins to decline year-over-year due to business mix, similar to recent trends, including a greater mix of federal government work and continued softness in our more cyclical and discretionary Commercial businesses. This should be partially offset by an improvement in our year-over-year cash SG&A expense margin. With this as background, for the fourth quarter, we are estimating revenues of $1.04 billion to $1.06 billion. We are estimating net income of $46.2 million to $49.1 million. Adjusted EBITDA of $115.5 million to $119.5 million and adjusted EBITDA margin of 11.1% to 11.3%. Thank you. I'll now turn the call back over to Ted for some closing remarks.

Thanks, Marie. ASGN's business is very well positioned as IT market demand and the overall economy improve. Consistent with our peer set and our clients, we remain cautious about the near-term market demand given the uncertain macroeconomic condition. Nevertheless, with great qualifications that are across sought-after IT solutions and skill sets, ASGN is ready to leverage growth in IT spend in the future. As we proactively position our company for the future, as Marie noted, in the third quarter, we successfully completed a transaction to upsize and extend the maturities of our revolving credit facility and Term Loan B. This transaction increased our financial flexibility and provided us with significant dry powder for acquisitions as the M&A market strengthens. We continue to believe M&A is the best use of and highest return on our capital. Both the revolver and Term Loan B were oversubscribed, which we can attribute to the strength of our underlying business. The success of this refinancing was also due to the efforts of our treasury team, led by Jim Brill. Jim has been an integral part of the ASGN family for the past 16 years, but we knew the day would come when Jim would retire. Jim, it has been a pleasure to work alongside you all these years. On behalf of our entire company, I want to thank you for your exceptional leadership and dedication to ASGN. You will be missed, and we wish you the very best in your well-deserved retirement. Transitioning into Jim's role as Treasurer, we welcome Chris Donnini, who has served as Vice President of Finance and Treasury at ASGN since July. Chris has been shadowing Jim since day one. With an extensive background in finance and treasury for publicly traded companies, Chris brings a wealth of experience to ASGN. We're excited to have Chris on board and hope that many of you have the opportunity to meet him in the near future. That concludes our prepared remarks. I'd like to thank our entire ASGN team for your continued efforts this past quarter. Our ability to remain in the fast current of where IT spend is today and in the future is the result of your dedication and unwavering commitment to our clients. Thank you again for joining our third quarter call. Operator, please open the call to questions.

Our first question comes from Tobey Sommer with Truist Securities.

I was wondering if you could give us a little bit more color on what you're seeing in the commercial consulting arena in terms of the elongation of decision-making and maybe the size of the projects? Are they diminishing outright? Or are customers piecemealing them out in modules or phases as opposed to signing up for the whole end-to-end period for you?

Yes. So thanks for the question, Tobey. I'll let Rand kind of jump in here too. But I'll tell you, I think in general, what we're seeing is their solid bookings, a little bit more renewals than new work, but what I would call very solid bookings for this quarter; it was $291 million. We were at a 1.1 book-to-bill, which Q3 is always seasonably a little lighter. So I think we were generally pleased with that. We're definitely seeing clients elongate projects which reduces their spend, if you will, and our revenue. It's not a bill rate or a margin issue. It's mostly embedded in that. And Rand, the size of the project is generally similar, right?

Yes. Except for the AI work, which you noted, Ted, tends to be smaller, but the normal flow of our consulting work is the larger now, seven-figure projects that have a 9 to 12-month duration. And Tobey, to your question of, isthe client piecing it out, if you will, I think it's more of an on-the-go scenario. In other words, as projects mature, they come to different milestones. I think the clients, generally, and some of this is seasonal, are not in a rush to finish, if you will. I'm not suggesting that they don't think it's a priority. But they're just being cautious, which they've been for some time now in the last quarter or two. So it's not so much the way it's contracted. It's more the way it's executed. Did that answer your question?

Sure. That provides helpful color. And then as a follow-up on the same theme, within that rate of bookings, and I understand most of it is renewals, do you think you're holding serve, gaining share? How do you think you're doing relative to the market in the areas that you play?

Rand?

Ted, I'll take a first shot. And we'll wait for our peer group to report, Tobey, over the next days and weeks. But I feel like we're holding our ground, if not expanding just a bit. Most of the work that we're seeing, by the way, is a lot in that data that Ted mentioned in the notes, the data area. Data aggregation, data consolidation, data cleansing, data mapping, these are fundamental steps you take in any kind of systems development, if you will. And I think a lot of clients are recognizing that this data work takes time, has to be pulled together, and has to be meticulous. And guess what? This all sets the stage for AI technology when it comes in. And Tobey, one other thing we watch is the technology that supports data mapping and data cleansing; they are beginning to pop up on the horizon, new pieces of technology to support that effort. But for the most part, it's still methodology and labor-intensive. And it’s important prep work for AI implementation to come.

I would like to ask about mergers and acquisitions. You mentioned in your prepared remarks that when the markets reopen or revive, something along those lines. What do you mean by that? It seems that based on your financing, you have both the capital and the appetite for M&A. Is it an issue of multiples or a lack of available assets in the market? Many might think this could be a good time for you to be more proactive.

Well, I would agree with that. I would say, Tobey, we still see that high-quality assets are not stepping into the market because they still have it in their own mind, maybe reconciling to solve the valuation question. So while we see things flowing through the pipeline and we're prosecuting all of it. It's lesser quality, I would say, more and lesser quality assets than we would typically see. So I think it's more that than anything else.

That makes perfect sense. Last question for me. Could I get you to maybe give us a history lesson in how the government business performed and what the impacts were to top line, contract awards, and book-to-bill as near as you could isolate those in the last shutdown in 2018 that straddled into '19 because that may be informative as we perhaps experience some sort of volatility in government staying open over the next several months?

Yes. Well, Tobey, that's pretty far back. So I couldn't clearly give you an answer on that, but let us follow up with you offline on that, if that's okay.

And our next question comes from the line of Maggie Nolan with William Blair.

My first one is on the commercial consulting side of things. Can you share your initial impressions about the clients' budgeting processes for 2024? And what that might mean for spending potential next year?

Well, we're in the middle of that right now. I will tell you on a macro basis, not client by client, but if you kind of follow Gartner, they're lowering IT spending growth here in this year. They're kind of down to 3% or 4% now, and they're expecting a higher number next year, right? So I think that's an overall market comment. Rand, are we really kind of into that on the client side here enough to make a comment?

There are two levels of clients to consider. First, the technical clients who manage the projects and need to achieve results, and second, the executive teams responsible for financial decisions and future outlooks. At the technical client level, discussions are ongoing about progressing to the next stage. A significant portion of the work is focused on preparatory actions for AI before specific use cases are implemented. There's considerable dialogue at this level. Regarding the executive level, I can't provide specific insights, but if I were an executive in these businesses, I would be optimistic; for providers, it’s full steam ahead, and for large banks, earnings seem to be improving, which could influence a positive outlook. In technology, the advertising revenue and results currently surfacing suggest that earnings are rising. Our belief has consistently been that IT spending correlates with corporate earnings. Executives are likely monitoring developments, including the ongoing resolution processes in the house. There will be expenditures for foreign aid, but it may be premature to draw conclusions. However, we remain optimistic. Our bookings provide some indication; they have been quite solid, and even as Ted mentioned, Q3 bookings were strong, typically our lowest commercial quarter. The government sector also saw impressive bookings in the third quarter.

That's helpful. And then I think it was Ted, in your prepared remarks, you mentioned maybe some opportunities for more margin expansion. Is that anything incremental to some of the opportunities that you've laid out in the past like at your Investor Day? Or was that a comment on expected mix shift over time? Any comments you would have there over a multiyear time frame would be helpful.

Yes. I think it's best, Maggie; we still see in our numbers, and we still believe that as a consultative part of our business becomes bigger, it comes at a better gross margin and EBITDA margin, and that's levering up our margin profile. Even here, where some of our more cyclical businesses that have higher margins are down, we're still doing a good job of generating over 12% EBITDA margin here in the third quarter. So I think it's mostly around that. I mean I've said before, our range that we gave in our three-year plan, which was about 12% to 12.5% is a short-term target. With most quarters, we play within that range. But there's nothing that says in the future it won't continue to grow higher because of the things we laid out in our Investor Day and because of the kind of quarter-to-quarter mix shift that you can see in our consulting business.

Our next question comes from the line of Mark Marcon with Baird.

On the margins, I mean, you've done a really nice job here in terms of protecting the EBITDA margins. Wondering how you're thinking about internal headcount going forward? Over the course of this coming year, how should we think about your priorities with regard to preserving the margin strength relative to building out capabilities that will probably benefit whenever the environment truly improves?

Yes. Well, good question, Mark. I mean that's a great and I believe that we can pace this out. I mean I don't think we have to sabotage margin to invest ahead of something. Right now, our headcounts are coming down, incentives are coming down. Those are some of the stabilizers that are part of our business stabilizers, and it helps us protect the margin. But as incentives come back, and we need to add headcount, either in solution areas or in certain other areas, I think we'll pace those out. We've done it before. We saw this in '08 and '09. So again, I don't think we're cutting our nose off to spite our face here. This is something we feel pretty good about the balance. The attrition that we're seeing is the natural attrition that's built into the business, and we're watching it. There are some areas where we're investing today, frankly. There are other areas where we're letting natural attrition work. So we're monitoring and wary of all that.

And Ted and Mark, if I can add real quickly. You can't talk about headcount without talking about productivity. And quietly, we've been continuing to upgrade, refit some of the technology we use in our areas, in the recruiting area, and certainly in our methodologies and the way we go to work with the engagement. So there's room here also in productivity improvement to absorb some of the growth. So we're watching both of those things, okay? And investing in it, in fact.

That's great. Do you have any additional insight regarding when the AI efforts might shift from exploratory phases to larger projects? When that shift occurs, what scale are you anticipating, and will you be well-positioned to take on some of those primary roles?

The answer is yes. Mark, we've discussed three layers of the road to AI: the processing power and the work occurring not only in chips but also in the software and enterprise software space. The next layer is the cloud and the data, focusing on data preparation and readiness. The third layer consists of the use cases. There's substantial work for companies like us in the data aspect, as the use cases will apply that data. If I were a client, I would expect that after seeing great results from our data efforts, you would extend that to our use cases and what we want to achieve. We are building the data in a way that aligns with the envisioned use cases. So yes, we should be a prime player due to our advancements with data, the cloud, and data infrastructure. We also need to stay informed about emerging technologies, not just in enterprise tech, but also in newer innovations, and we're addressing both through our alliances and experience. I believe we are well-positioned to support our clients moving forward. Gartner has mentioned that they view customer experience as the most promising use case for AI in the future. Our marketing team has been proactive in developing strategies and assisting clients with their use case planning. Therefore, I am optimistic about our standing, and importantly, we are laying the groundwork required to be in that position.

I think one more point is, remember, Mark, we now for several years running have been identified as the number one provider of AI capabilities in the federal government space. So that's an internal solution capability that not only supports our federal customers, but we can leverage that know-how in certain commercial areas.

That's terrific. And then can you talk a little bit about the supply side in terms of obviously these skills are in really high demand? I'm wondering where the contractors with truly the knowledge come from, what level do they have? And how are you thinking about the bill rates and the margins, given the scarcity relative to the demand? It sounds like this should be over who knows whether it's a year from now or three years from now, but a really promising area.

Yeah. Well, remember, we're not just hiring one AI expert, right? There are multiple facets and layers to this, as Rand mentioned. I mean, today in the data world, we have many of these in our organization and are working on other data-type projects that can port to these AI use cases and be effective there. A lot of these players will come from pools of solution capabilities that we already have in our business today, if you will.

Great. And in terms of TMT, you've mentioned that the accounts look like they're a little bit stable, but TMT was down 27% versus 18%. Are you seeing sequential stability, like on a week-to-week basis? Just wondering how you're thinking about that.

Yes. I'd say the answer is yes. But Rand, do you want to comment on that one?

Yes. I think we're watching both, and we're watching what I call micro indicators. So we watch certain things in the marketplace. Things we've mentioned whether companies are having their earnings, are they growing themselves, which products, if you will, in the technology and telecommunications area are growing. Where is that spending being added in media to help those businesses? You're seeing some of that starting to turn around. When we look at stability, obviously, we've declined through the year. Keep in mind, our comps from a year ago were quite high, but definitely, as we exited Q3 and we started in Q4, we see, which to us is a step in the right direction, steadiness in the work and workflow. But I think you look at these other indicators, and you see that there's maybe a light at the end of the tunnel coming.

Great. And then one last, Tobey asked a history question; I've got one as well. Rand said, you've both been involved in this business for multiple cycles. How would you compare what we're seeing on the commercial side in terms of the trends right now relative to prior cycles? What elements feel different from your perspective? My recollection was Apex actually navigated the GFC really well. So I'm just wondering how you think about it.

Yes. Well, it's different for sure, right? Business cycle to business cycle, but no two are based on the same foundation or act in the same way. If you think about the great financial crisis, certainly, that affected the big banks in the financial services industry, things related to the banks, predominantly housing and mortgage, if you will, and the retail and the consumer got caught in some of that stuff. What’s different this time is it's been two years now that we've been watching interest rate increases and in turn been talking about an impending recession. Large enterprise accounts have slowly positioned themselves in a much more cautious way, and that's happened broadly across the board over a long period of time. Instead of seeing kind of a faster ripple through certain industries, you've seen it broad-based over a long period of time in enterprise accounts. That being said, how we manage through this is not too different. We've definitely done this at various times before. So we have an understanding of how that business should operate and what the management actions are that we need to take. We also kind of realize that the things that sometimes leave you into these downturns are the things that leave you out. Our TMT industry was one that really led, I think, for many of us into this cycle. While it's still not there, you may be seeing signs that their businesses are returning to growth and better profitability, and that will be good for us because they'll want to lean into more IT initiatives that they need us to be a part of.

Our next question comes from the line of Jeffrey Silber with BMO Capital Markets.

In your prepared remarks, I'm going to quote it, in our Commercial segment, we anticipate revenues to remain soft across both assignments and consulting, and this is referring to your guidance for the fourth quarter. Should I assume that means that you think both assignment and consulting will be down on a year-over-year basis in the fourth quarter?

So, Jeff, thanks for the question. I think our guidance kind of reflects what I would call flat to very slightly down in the Commercial and up in the Federal, if Marie were talking to you, that's what she would say. Secondarily, I think we're taking a little bit more conservative view of permanent placement and how that could influence the margins. Those are the dynamics on the commercial side. Despite the backdrop, the fourth quarter is always lower than the third quarter. The third quarter is always the strongest. In the fourth quarter, you see a little softening because you've got holidays and fewer Billable Days. You also have various projects come to their natural end, customers working on budgets for things they may not start until next year. Some clients will get into December and say, look, I'm not going to finish this by January 1. Let's just shut the lights off here for a week or ten days, and let's come back at it after the holidays. Those are all natural things that happen here in the fourth quarter. That's what's underneath the guidance. At a macro level in the Commercial market, there's no real change in the operating environment. I think that's one thing that is kind of clear here. We came out of Q3 and into Q4, things are what we would say is fairly steady. Our Q3 was a little bit better than expected, which then translates into how we set Q4 guidance. No turn yet in the commercial market. The Commercial market has still not found an inflection point. We've talked about little things on the call here that we are hopeful as they begin to lead us, as Rand said, to a little bit of life, but there's no turn yet. And the business stabilizers, obviously, are working in our business and continue to work, and we feel good about them maintaining EBITDA margin for us even in the face of a very difficult commercial market.

Okay, I understand. Maybe I could shift gears to the Federal Government business. I know you mentioned in terms of the potential government shutdown. I think it was less than 10% of your business will be impacted. But can we just talk about the mechanics? I mean, what happens if, God forbid, we do get a shutdown? Do all the projects stop? Contract negotiation stop? If you could just help me walk through what we could expect if that does happen.

Well, I think in that, the first thing that could happen is you immediately come together with your clients and you determine what's critical and what's not, right? Thankfully, we've already started that process based on some of what was going on in that market, leading into October. So we've got a foot ahead on that, if you will, and we have a pretty good idea. Once you go through that, you continue to work on the mission-critical stuff. The client will make a determination on the few things that may not appear to be mission-critical, and they'll do that in concert with us, and so we'll know that. Then what happens on new work is it pushes to the right. Awards that are in process get delayed a little bit, the adjudication of those, no matter what stage they are in, and things just slightly slip out into the first quarter or the first half of next year. Jeff, maybe one thing, too, to note here. Who knows? It's been such a crazy turn of events here over the last few weeks in the Federal Government space with what's going on with the House. It's not presumptive to say there will be a shutdown. I mean we mentioned that in our guide as a caveat. But it looks like we could be moving here towards another continued resolution of some sort of a timeframe, whether that's a short wind or a long wind. We're in one right now. So we'll see how things develop on that front as we get a few more weeks down the road.

And our next question comes from the line of Seth Weber with Wells Fargo.

Rand, I appreciate your comments on the stability at the end of the third quarter. I'm curious if you could discuss the business trends throughout the quarter. Were things stable during the third quarter? Did they decline, improve, or worsen at all? It would be helpful to get some insights on the intra-quarter performance on the Commercial side.

You're talking about Q3?

I was talking about Q3, yes. Just the kind of July, August, September trend lines.

I would say there were some fluctuations in different sectors, with some experiencing a slight increase and others a slight decrease, but nothing too significant. It was more like rolling waves throughout the quarter. We are particularly pleased with our more discretionary areas, such as staffing, firm placements, and creative marketing, as these became more stable towards the end of the quarter, allowing for week-to-week predictability. That was a positive sign.

I wanted to revisit the Gartner forecast in relation to your business. They are predicting a significant increase over the next couple of years, and I'm trying to understand how that connects to your current outlook. Are you feeling uncertain and not ready to make a definitive call on this? Do you see any positive signs that might support the idea that their forecast is on track, or is it simply too early for that assessment? Gartner has put that forecast out there.

Right. It's such a broad forecast. I mean, if you start to break it down into areas, the software companies and the big tech companies providing cloud and now generative AI capabilities and other things, they're seeing pretty good growth rates. The consulting services and the IT services behind that are a little bit of a lead-lag. So I guess, Seth, I would probably lay it more on that, right? I think what Gartner is capturing is a big, broad spend in all those categories.

I appreciate Gartner's insights, but we closely monitor the earnings trends across various industries and companies. We were pleased to see that banks performed well in the last quarter, and major technology companies also had a successful quarter. I'm uncertain about the telecommunications sector's performance. However, we're not concerned about service providers as demand from baby boomers is rising, alongside the impact of flu season. Observing earnings in areas like utilities and oil and gas shows that if consumer spending remains strong, they are doing well. If banks can sustain their performance improvements, it bodes well for the economy. Technology companies are reporting better returns on advertising and improved reach. Additionally, enterprise software companies are thriving, largely due to their integration of AI and the accompanying cost increases for clients, even if they won't fully utilize these capabilities immediately. This aligns with the three layers we've discussed: processing power, data, and use cases. We monitor various macro indicators in these industries to gauge client spending tendencies. We're also aware of their concerns and strategic focuses, especially regarding data. Those are the factors we consider. As for whether we can draw any definitive conclusions from this data, with stability in the federal government and interest rates, there may be positive developments ahead, but I don't claim to be an expert economist.

And our next question comes from the line of Josh Chan with UBS.

I guess you mentioned that on the consulting side, there's some elongation of projects, and that's causing some of the softness. So historically, what typically gets the clients more confident that they will, I guess, recompress those project timelines again? What are you looking for there?

Well, look, I think it goes back to what Rand said. When Rand is speaking about, they're watching their bottom line and measuring how much they're willing to burn and spend on projects in order to get to certain outcomes, they have to feel better about their own growth and pick up the pace, if you will, of investments and initiatives in IT. So they're hanging in there with the critical stuff. They're trying to measure it out and watch that. But I think it goes back to again, we've said a few times today, and I think it implies to your question, Josh. They just have to feel better about where they’re headed quarter-to-quarter and into 2024 to really lean in harder and speed up and take on more spend in IT.

That's good color. I guess I got my second question on margins. So it looks like your SG&A is going down more than your revenue is. Is that just a function of mix as some of the businesses that are down more have higher SG&A composition? I guess, could you talk to the SG&A decline there?

So Josh, on SG&A, you're talking about year-over-year?

Correct. Yes.

Yes. We noted that as well. It really is a lower incentive compensation associated with our business stabilizers, right? The change in incentive compensation is really what's different on a year-over-year basis.

I think to maybe just a second piece of detail under Marie's point is if you think about last year, we were at full incentive levels in all kinds of different ways. That in and of itself is a difficult comp on the expense side, right? You were at full kind of max incentives and now incentives are properly coming down to where the performance of the business is.

Josh, it is worth mentioning, we don't have two different workforces, one for staffing, one for consulting. That was sort of embedded in your question. We have one workforce. Our account managers provide support to our clients across the array of services. Our recruiting team supports not just staffing requirements but our consulting team requirements, and our back office certainly does both. Don't think of it as two different workforces. It's one workforce and then what Marie and Ted said is just what's happening across the board.

And our next question comes from Heather Balsky with Bank of America.

I wanted to first quickly ask about permanent staffing, including Creative Circle, just if you can share kind of where you are in terms of, I guess, normalized trend, maybe pre-COVID. That would be helpful.

So for perm placement in Q3, it represents 2.6% of total revenues. If you kind of just look at it from a dollar perspective, we're down 42%. Last year, we were at 4.2% of total revenues. When you look at it, you just one other point. During COVID, the 2.6% is almost kind of close to our COVID levels.

That's really helpful. My other question is about government spending and procurement. Considering the current potential shutdown, how is spending and procurement looking? A year ago, we saw some delays in procurement, and I'm wondering if there's been any improvement. Are they returning to a more normal spending cycle, or is the potential shutdown causing disruptions in their spending?

I don't think the continuing resolutions have caused that we're under right now any kind of disruption, if you will. I think we saw normal as much as we could into the government fiscal year in Q3. Our bookings were higher at $500 million. Our book-to-bill at 1.5 was a good number and a very good number and higher than we've been running, it's about as we anticipated. We'll watch the other peer groups release, but I expect them to have good results as it relates to new bookings. On that front, Heather, even though we've got some wobbliness here and what's going on with the continuing resolution and some of those uncertainties that you saw a pretty healthy and good flow of contract awards in the federal government space during the third quarter at the end of the government fiscal year.

And our next question comes from Surinder Thind with Jefferies.

I would like to seek some clarifications on previous comments. Firstly, regarding clients extending their projects, can you provide any quantifiable insights? Are these projects that originally took 9 to 12 months now extending to 15 months, or how should we understand this situation? Additionally, what context can you provide for interpreting the bookings figures?

Yes. Well, I think that you, for sure, are seeing stuff like that. We've seen that typically; we're around 12 months on these projects on average for the commercial consulting team that now is leaking further out, whether it's 15 months or 16 months or what have you, it's definitely slowing. I think it correlates with the fact that we're still getting solid bookings and book-to-bill numbers, but it's just yielding a lower growth rate, and our bill rates, I will just tell you anecdotally, are slightly up. So it's not a bill rate issue. It's a hours applied or hours billed phenomenon.

And is it also, Surinder, worth mentioning that none of this is new, we reported the same thing in the second quarter. And by the way, as quickly as it could slow down, it could also accelerate.

Got it. So is the elongation process stabilized at this point? Or if we look back a year when this first started, the duration was 13 to 14 months, and then last quarter it was 14 to 15 months, and now it's 15 to 16 months. How should we interpret that? Or is this...

That would take a crystal ball, right? I think that's up to the client. We've seen a similar trend for two quarters now, and I don't expect that to change in the fourth quarter. That will make it three quarters. However, we still need to watch the fourth quarter to see if it aligns with the second and third, but we've had two quarters where we've observed a fairly consistent trend.

Understood. And then just a follow-up on the bill rates. You talked about a lot of renewal projects. It sounds like you're able to hold the line on pricing here, maybe even squeeze out a little bit more. Is that the right way to think about it? What exactly is the conversation there? Is there some CPI? Is there some negotiation here? Is there a lot of pushback? How should we think about that part of the growth algorithm? So is that adding maybe a percentage point of growth at this point? How should we think about that?

So you're seeing very slight increases in bill rate, but very slight increases. You're seeing maintaining to slightly more in margin. And Rand, what would you say to the back and forth with the client?

Well, some of our work, a good portion of the work are set bill rates that have escalators to them as you go out into the future. Some of the escalation could be some change in the mix of the project during the course of the execution of the project, maybe adding somebody with certain expertise or dropping somebody else out. So there's a number of factors that go into it, but it's not really a negotiation at that point. It's a matter of what's the right skill set to finish the job.

Surinder, one thing I would just add at a high level is there for in-demand IT professionals in all these critical skill areas, the client still realizes that they have to pay a market rate in order to get them. There's not a sale going on, if you will. So in those areas, there's a productive understanding between us and the clients that those are to get the best capabilities there, that there is a certain rate for that.

That's helpful. And then kind of the final question here. Just revisiting Commercial consulting. Revenues were down a few percentage points quarter-over-quarter. That was a surprise to me to see that given how strong that business has been and the fact that it showed strong sequential growth last quarter. Just any color there? Is that maybe a few projects that maybe kind of ended near the same time? Or did clients just push out some work? Or is it more broad-based than that? I'm just trying to understand how to interpret that and how we should think about that on a go-forward basis?

Correct. Slightly down. Yes. I think it can almost best be explained by summertime, okay? Q3 has summertime and people take time off, and it's just ending elongation of projects that may be decisions that they make in the summer, just like they're going to make in the fourth quarter around the holiday period. Ted mentioned earlier there that some companies will make a decision here in the next three or four weeks to furlough people for five days or ten days just to kind of put a pause on it, let people enjoy the holiday, and get started again on January 1 or 2. I think it's nothing to read into it other than that.

Yes. I would tell you, once you adjust for days, it's minimal, Surinder; there would be no discerning fact. There'd be no big thing around bill rates or hours or anything like that. I think it's just the vagaries of one quarter to another.

And we have reached the end of the question-and-answer session. I'll now turn the call back over to CEO, Ted Hanson for closing remarks.

Great. Well, I want to thank everyone for their time and attention and questions today, and we look forward to speaking with you about our fourth quarter and full year '23 at the beginning of February. Thank you very much.

And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.