Earnings Call Transcript
Everforth Inc (EFOR)
Earnings Call Transcript - EFOR Q1 2026
Operator, Operator
Greetings, and welcome to the ASGN Inc. First Quarter 2026 Earnings Call. It is now my pleasure to introduce your host, Kimberly Esterkin, Vice President of Investor Relations. Thank you. You may begin.
Kimberly Esterkin, Vice President, Investor Relations
Good afternoon. Thank you for joining us today for ASGN's, soon to be Everforth's First Quarter 2026 Conference Call. With me are Ted Hanson, Chief Executive Officer; Shiv Iyer, President; and Marie Perry, Chief Financial Officer. Before we get started, I would like to remind everyone that our commentary contains forward-looking statements. Although we believe these statements are reasonable, they are subject to risks and uncertainties, and as such, our actual results could differ materially from those statements. Certain of these risks and uncertainties are described in today's press release and in our SEC filings. We do not assume any obligation to update statements made on this call. For your convenience, our prepared remarks and supplemental materials can be found in the Investor Relations section of our website at investors.asgn.com. Please also note that on this call, we will be referencing certain non-GAAP measures, such as adjusted EBITDA, adjusted net income and free cash flow. These non-GAAP measures are intended to supplement the comparable GAAP measures. Reconciliations between GAAP and non-GAAP measures are included in today's press release. I will now turn the call over to Ted Hanson, Chief Executive Officer.
Theodore Hanson, Chief Executive Officer
Thank you, Kim, and thank you for joining our first quarter 2026 earnings call. Today marks an important milestone for our company. This will be our final earnings call under the ASGN name. And on Friday, we will officially begin operating as Everforth, and trading under our new stock ticker EFOR. This transition reflects the continued transformation of our business, bringing our capabilities together under the Everforth brand to support a more integrated operating model focused on higher-value solutions and deeper client relationships. By pursuing this path, we will unlock further scale and increase our cross-selling opportunities. As part of this evolution, we are also updating our commercial segment reporting to more clearly reflect how we are evolving the business, which is by industry rather than mode of delivery. This change is intentional and aligns with our Next Wave Growth Strategy and industry-led approach, which we previewed at our Investor Day this past November. Ultimately, the delivery structure of our engagement is much less meaningful than the outcomes we drive and the strong value we create for our clients. We will, therefore, provide color through the lenses that matter most to how we compete in the commercial space, our five industries and our six solution capabilities. In addition, to help track demand for our higher-value work and our ability to win in the marketplace, we will disclose our commercial consulting book-to-bill, consistent with what we've shared in prior quarters. With that background, let's discuss our first quarter results. Revenues for the first quarter were $968.3 million, in line with the prior year and our guidance. Commercial segment revenues were driven by demand in AI and data, cloud and infrastructure and application engineering and modernization. Our AI and data and cloud and infrastructure pipelines continue to build, reinforcing momentum in these areas of our business. Commercial consulting book-to-bill was 1.1x on a trailing 12-month basis. Federal segment, new contract awards totaled $151.3 million or a book-to-bill of 0.7x on a trailing 12-month basis. Federal contract backlog was approximately $2.8 billion at quarter end or a coverage ratio of 2.4x the segment's trailing 12-month revenues. Similar to the Commercial segment, AI and data work was a solid contributor to revenues, bookings and pipeline within our federal business. Cybersecurity contracts also contributed to revenue and bookings in the quarter. We are beginning to see award activity at many government agencies pick up following the passage of the federal budget in early February. That said, we experienced some funding delays at the Department of Homeland Security, which is navigating both a shutdown and a leadership transition. Importantly, we have not seen any disruption to award funding related to the conflict in Iran. Instead, we are seeing evolving requirements around partner collaboration, particularly around cyber threat analysis and data management and analytics as agencies seek to strengthen decision-making expertise. While our revenues were within guidance, adjusted EBITDA margin of 8.6% was below our expectations for the quarter. This miss was driven largely by business mix related to lower-than-expected contribution of some of our higher-margin solutions within the Commercial segment. Nevertheless, we continue to closely manage our expenses. As discussed during our Investor Day, we are making strategic pivots in our business that will position us well for the long term. Those changes are being shaped by how our clients themselves are evolving and the expectations they have for partners that can support them during that change. Our clients are navigating a very volatile macro environment with continued uncertainty around how technologies such as AI and enterprise software will ultimately impact the technology landscape and influence their IT spending. While this dynamic can create some near-term variability, we are focused on strengthening our foundation by building a more unified brand, enhancing our go-to-market approach and maintaining disciplined expense management and capital allocation. These actions give us conviction that we are building a stronger, more resilient platform aligned with client demand and positioned to drive top line growth and margin expansion. Against this backdrop, I want to step back and revisit our Next Wave Growth Strategy. We continue to make progress executing our long-term initiatives. And during the first quarter, we took several important actions that reinforce our strategic priorities. First, we announced key leadership appointments across both our commercial and federal government segments to support our next phase of growth. We welcome Ashish Jandial as President of Commercial North America; Sangita Singh as President of India and International; and Donnie Scott as President of our Federal Government segment. Each leader brings deep experience scaling global services organizations, driving AI-enabled digital transformation and building delivery platforms designed for long-term value creation. Collectively, this team enhances our ability to execute our strategy while building on the solid foundation already in place. We also successfully closed the acquisition of Quinnox, marking another important milestone in advancing our strategy toward enhancing our solutions capabilities and margins. Quinnox meaningfully expands our ability to deliver technical end-to-end application engineering and modernization solutions for our commercial clients while establishing a strong foundation for our offshore delivery platform in India. Although still early, integration is progressing well, and we are already co-selling their services. Ultimately, these actions enhance our ability to support growing client demand for AI-led transformation, scalable delivery and outcomes-based solutions across industries. We remain focused on executing with discipline and building a higher value, more integrated Everforth. With that, I'll turn the call over to Shiv.
Sadasivam Iyer, President
Thanks, Ted, and good afternoon, everyone. As Ted noted, we go to market through a combination of industry and solutions expertise. We believe industry is the most meaningful lens for understanding where client demand is emerging and how our customers are prioritizing their IT investments. With that in mind, I will begin with our industry performance for the first quarter. Within our Commercial segment, we delivered year-over-year growth in the health care, consumer and industrial and TMT industries, reflecting broad-based demand for AI and data, cloud and infrastructure, application engineering and modernization and enterprise platforms. Health care grew at a high single-digit rate, driven by increased engagement from health care payers while the consumer and industrial and TMT industries achieved mid-single-digit growth supported by software, utilities and industrial customers, leveraging our capabilities across AI and data, cloud, experience and cybersecurity. Though the financial services industry, one of the biggest vendors in IT, declined mid-single digits year-over-year, we saw high single-digit growth amongst insurance customers where application engineering and AI engagements continued to gain traction. Consistent with the typical first quarter seasonality in which certain projects conclude at year-end, most industries softened sequentially with TMT relatively flat. That said, we saw pockets of strength within several industries. In Consumer and Industrial, for example, utilities delivered low single-digit growth, supported by demand in application engineering, cloud and infrastructure and AI and data. Turning to our Federal segment, we track our Federal revenues across four customer types, including defense and intelligence, national security, civilian and other clients. Defense, intelligence and national security customers continue to comprise approximately 70% of our total Federal revenues, with the remaining balance coming from civilian agencies, government-sponsored entities, state and local agencies and select commercial customers. National security customers delivered the strongest growth for the segment, both year-over-year and sequentially. This was primarily driven by cybersecurity work supporting the Continuous Diagnostics and Mitigation, or CDM, service program within DHS. We also saw mid-single-digit growth in our other clients year-over-year led by the USPS where we deployed a purpose-built AI application designed to significantly reduce undeliverable mail and improve operational efficiency. Building on the industry discussion, I'd like to transition to our solutions performance, which provides a clear view of where the client demand is strongest today and how it is evolving. AI and data remain a significant driver of demand across our portfolio. Our clients are increasingly focused on modernizing data foundations to support analytics, AI-enabled decision-making and operational agility. Let me provide a few examples. In the consumer industry, we partnered with a leading global athletic apparel and footwear company to design and deploy a unified analytics platform powered by Databricks Genie agentic AI interface that enables secure access to governed data. By consolidating product assortment planning, demand, bookings and sales into a single governed experience, our client improved product creation decisioning and speed to market while also establishing a reusable foundation to scale across broader demand planning and supply chain use cases. Databricks is one of our core strategic partners, and during the quarter, our commercial business was recognized as a Databricks silver tier partner. Leveraging that partnership, our industrial team supported a Fortune 100 energy and utilities company in migrating from legacy architectures to a Databricks-based integration. This effort aligned the client with enterprise data strategy while also reducing long-term risk and strengthening governance. Following the success of this project, our client is engaging our teams to support legacy migrations into Databricks across other areas of the organization. We're also helping customers unlock the full value of modern hyperscaler AI services in the cloud. In the TMT vertical, for example, our AI and cloud teams partnered with AWS to support a Fortune 50 media company in building a digital twin of its streaming platform. This solution combines advanced cloud engineering with AI cloud simulations to help our clients proactively identify performance risks ahead of some of the largest global streaming sporting events that commonly draw over 100 million viewers. A successful project, we now have a repeatable use case that can be extended across TMT clients with similar streaming and gaming environments. As AI adoption and data volumes accelerate, cybersecurity has become an increasingly integral component of nearly every client engagement. In the health care industry, we secured an extension with a large national insurance payer to modernize their identity governance using SailPoint. This work established a central identity framework that supports regulatory compliance while safeguarding sensitive patient and member data. Alongside this modernization work, we continue to provide ongoing SailPoint platform support, reinforcing our long-term client relationship. In the federal market, we're supporting the Cybersecurity and Infrastructure Security Agency, or CISA, through the aforementioned CDM program by delivering security information and event management as a service. This capability standardizes security data collection across federal agencies and enables real-time threat detection and rapid response. We also delivered a first-of-its-kind ATO-accredited development environment for the U.S. Navy, a secure government-approved workspace where teams can safely build, test and manage software and data. By combining our DevLabs and software factory with Elastic's cloud infrastructure and AI-enabled automation, we created a development environment that aligns with the DoD Zero Trust requirements. Enterprise platforms also remain central to our clients' digital transformation, particularly as organizations look to embed AI into their systems of record. We continue to advance co-selling and co-development efforts across our partner ecosystem with a focus on accelerating time to value through automation, data readiness and agent-enabled workflows. In our commercial business, we're helping clients embed agentic capabilities across core data platforms, hyperscaler cloud environments and enterprise systems of record. During the quarter, we became a Snowflake Cortex core preferred partner working closely with Snowflake to build hands-on labs, develop AI readiness case studies and create customer-facing applications leveraging Cortex, Snowflake's native agentic engineering capability. Similarly with AWS, we're partnering to build a Workday data learning agent that combines AWS' agentic technology with TopBlock's proprietary smart loader tools. With Salesforce, we're investing in Agentforce to enable AI-driven digital work that supports faster delivery cycles and improved testing outcomes. And with ServiceNow, we were one of the top 10 global partners selected for the launch of Employee Works, a new offering that integrates AI assistance with workflow automation. Although we're seeing progress in our enterprise platforms work, we're operating in a more deliberate buying environment. Decision cycles have lengthened as customers take a more measured approach to large long-term initiatives while they assess how AI fits into their broader technology road maps. The enterprise software market is also undergoing change from evolving go-to-market models focused on consumption rather than per seat to organizational realignments with changes in sales and executive leadership. That said, we view this as a moment in time. While customers are being more deliberate about how, when and where they invest, we do not see them stepping away from enterprise platforms nor do we see AI displacing these systems of record. In fact, AI is increasing their relevance. Enterprise platforms remain where data workflows and governance reside, and without that foundation, AI lacks context and scale. Our role is to help clients modernize, integrate and optimize these platforms while enabling practical AI applications that drive measurable business outcomes. As spending normalizes and IT programs move forward, we're well positioned to support our clients across this ecosystem. With that, I'll turn the call over to our CFO, Marie Perry, to discuss our first quarter 2026 performance and second quarter guidance.
Marie Perry, Chief Financial Officer
Thanks, Shiv. For the first quarter, revenues totaled $968.3 million, within our guidance range and consistent with the prior year period. Given the timing of the acquisition close, Quinnox contributed less than one month to the quarterly results. Revenues from our Commercial segment were $675.5 million, an increase of 0.5% compared to the prior year. Revenues from our Federal Government segment were $292.8 million, a decrease of 1.1% year-over-year. Turning to margins, gross margins for the first quarter of '26 were 27.5%, a decrease of 90 basis points from the prior year. Commercial segment gross margins totaled 31%, a decrease of 140 basis points year-over-year. Gross margins for the Federal Government segment were 19.6%, an increase of 10 basis points year-over-year but slightly lower than our expectations due to a higher-than-anticipated contribution of cost-plus revenues in the quarter. As Ted mentioned, this decline in margin was primarily driven by business mix related to a lower-than-expected contribution from some of our higher-margin solutions within the Commercial segment. We also experienced headwinds from changes in our foreign exchange rate related to our delivery center in Mexico. SG&A for the quarter was $224.4 million compared to $214.5 million in the first quarter of 2025. SG&A expenses included $12.8 million in acquisition, integration and strategic planning expenses that were not included in our previously announced guidance estimates. Excluding these expenses, SG&A expenses were relatively consistent with prior year. For the first quarter, net income was $5.5 million, adjusted EBITDA was $83.6 million, and adjusted EBITDA margin was 8.6%. Adjusted EBITDA margin was below our guidance range due to the lower gross margin just discussed. In addition, our estimates assume an effective tax rate of 28%. For the quarter, the effective tax rate was 48.1%, reflecting the one-time discrete items not included in our guidance. As previously noted in March, we completed our acquisition of Quinnox for $290 million. We also deployed $39 million in cash to repurchase 0.8 million shares at an average share price of $47.69. At quarter end, we had approximately $934 million remaining under our $1 billion share repurchase authorization. Cash and cash equivalents were $143.6 million at quarter end. We had approximately $160 million available on our $500 million senior secured revolver. Our net leverage ratio was 3.1x at the end of the quarter. We are committed to reducing our debt over time in order to bring our net leverage ratio closer to a 2.5x target. We will continue to opportunistically balance capital deployment with organic investment and share repurchase, and have remained active in buying back our shares in the second quarter. Free cash flow was $9.1 million. While free cash flow is generally seasonally softer in the first quarter, it was lower than we typically see in past quarters, primarily due to an increase in DSOs. Turning to guidance, our financial estimates for the second quarter of 2026 are set forth in our earnings release and supplemental materials. These estimates are based on current market conditions and assume no further deterioration in the markets that we serve. As we execute against our strategic plan, we expect some continued upfront investments. Our second quarter estimates include $8 million to $10 million in strategic planning expenses related to the execution of our Next Wave Growth Strategy, which we expect will decline over the coming quarters. Alongside these investments, as we highlighted at Investor Day, we are implementing targeted initiatives that will generate meaningful structural cost savings for the business. These efforts are progressing as planned. As that is background, for the second quarter of 2026, we are estimating revenues of $970 million to $1 billion, net income of $8 million to $13.7 million, adjusted EBITDA of $85 million to $95 million and adjusted EBITDA margin of 8.8% to 9.5%. Thank you. I'll now turn the call back over to Ted.
Theodore Hanson, Chief Executive Officer
Thanks, Marie. As we step back from the quarter, the most important takeaway is the consistency between our strategy and our actions. The projects Shiv walked through today illustrate how our industry depth and solution capabilities are translating into meaningful outcomes for clients navigating increasingly complex environments. The acquisition of Quinnox strengthens our ability to deliver end-to-end application engineering and modernization at scale while the leadership additions we made earlier this year further align our company to execute our Next Wave Growth Strategy. These are deliberate actions focused on building a higher value, more unified company, positioned for durable long-term growth and expanded margins. This long-term orientation is a central theme in our annual shareholder letter, which will be released later this week. This letter discusses the evolution of enterprise technology and how those shifts are shaping our strategic priorities. As AI moves from experimentation towards broader enterprise adoption, it is driving greater integration and modernization across the IT environment and increasing the need for sophisticated services to support that transition. Solution providers that can modernize data and infrastructure and embed AI into real-life business processes and workflows are best positioned to succeed. And these are the areas where we have a clear position and right to win. Our diversified client base, differentiated delivery models, deep industry relationships and portfolio of in-demand solutions collectively create structural advantages in an AI-driven world. Before we open the call for questions, I want to thank our employees for their dedication this past quarter. Your adaptability and commitment to our clients is the foundation of our progress and our future. As I noted at the start of today's discussion, this call marks an important transition as we prepare to operate and report as Everforth. I look forward to continuing the conversation with you next quarter under our new name. With that, let's open the call to questions.
Operator, Operator
Our first question comes from the line of Jeff Silber with BMO Capital Markets.
Jeffrey Silber, Analyst
A couple of times in your prepared comments, you talked about lower-than-expected contribution from some higher-margin commercial solutions. Can we get a little bit more color on that? And I'm just curious because you typically have really good visibility. I'm just wondering what happened here.
Theodore Hanson, Chief Executive Officer
Thanks, Jeff. Yes, I think, coming out of the fourth quarter, you naturally have certain projects come to their conclusion and you have a start-up of new work during the first quarter. And I think in this quarter what we found was — while that's always a thing — the ramp-up of higher-margin solutions, especially in our enterprise software areas, was slower and later into the quarter than what our expectation was when we set the guidance. So really, what we're seeing here in terms of the EBITDA margin mix is a gross margin issue. It's not an expense issue. We were kind of, on an adjusted basis, below our expectations on the cash SG&A side. But on the commercial side within our consulting business, we did see a larger change in the profile of the margin of the projects that contributed during the quarter. Second piece of that, Jeff, was in our federal business we overperformed the revenue expectation. The meat of that was in the cost-plus area. You've heard us say before that cost-plus contracts come in at a lower gross margin. Typically, we run 20% to 20.5% gross margins overall. Those cost-plus contracts can be high single digit to low double-digit kind of gross margins. And so that was certainly an influence. And so while we did a good job on the revenue on the federal side, the gross margin came in lower than our expectations to forecast. And then as Marie said, we had a little bit of contribution of negative impact from FX. So it's really the sum of those three things, if you will.
Jeffrey Silber, Analyst
Okay. That's helpful. Let me play devil's advocate here. You mentioned in your prepared remarks — or excuse me in answering this past question — about some softness in the enterprise software area. And I know the market seems to be saying there's a lot of AI disruption risk there. How do we know that that's not a structural issue rather than anything else?
Theodore Hanson, Chief Executive Officer
Well, look, I think our customers — I mean, we came out of the fourth quarter with really what I would call record bookings, especially in the Workday area and solid bookings in ServiceNow and Salesforce — and our Salesforce practice, which are our three primary enterprise software practices. And we just didn't see the conversion to revenue at historical rates. So those are our highest margin solution areas. And the delta between what we expected through the quarter and what actually happened was that ramp-up of those was a lot slower from the bookings that we came out of the fourth quarter. I do think that customers are watching very closely the AI story and making sure that if they're doing a new implementation or a significant upgrade or taking on new SKUs, that that's money well invested. I think what we saw at the end of the quarter and exiting into the first part of April is a little bit more normal patterns in terms of both getting bookings and beginning to see the conversion of that. And so I think it was temporary, Jeff, because there was a lot of negative commentary and obviously, a lot of negative play on those enterprise software stocks. And I think the customers kind of reacted accordingly. But we're seeing better contribution here in the first few weeks of the quarter; April is telling us that will be the case. I don't think it's going to be a rubber band, but I think it will build, and we'll see a better margin profile. Obviously, we gave you a better margin profile in our Q2 guidance, which is solely on the back of improving gross margins in both commercial consulting and federal consulting in the second quarter.
Operator, Operator
Our next question comes from the line of Maggie Nolan with William Blair.
Margaret Nolan, Analyst
What should we read into the financial services year-over-year decline as it relates to maybe the balance of the year? And have you seen any change in the first couple of weeks of the second quarter here? And then just given that that's a segment with typically large spend on IT, any read-throughs to the other segments?
Sadasivam Iyer, President
Yes, Maggie, look, as we mentioned in the remarks, what we're seeing is continued tight management of expenditure in the largest piece of financial services for us, which is the big banks. If you think about it, they have stabilized, but there is really not an increase in spending that we're seeing at any measurable rate in that segment. That being said, we are seeing some green shoots in insurance and also some green shoots in diversified financials, which we expect will turn into revenue upticks for us in the second quarter. But the continued compression, or rather lack of uptick we see in the big banks, is why we see the continued decline — because they are the largest spender in the financial services industry.
Theodore Hanson, Chief Executive Officer
And I think, Maggie, if you look at the sequential growth in the supplemental for that industry, it's kind of negative 3.5% Q4 to Q1. We always have a kind of 3% to 5% decline coming out of Q4 to Q1 for all the seasonal reasons that we talk about all the time. So I'd say Shiv's right on. There's a lot of caution there on behalf of those customers, but also it's kind of in line with what we would see seasonally. So I think the real message is you're not seeing a surge or a pickup there; it's less about a sequential decline.
Margaret Nolan, Analyst
And then on the commercial IT book-to-bill of 1.1, I thought was encouraging. Can you give a little bit more color on that, maybe the quality and duration of recent wins? Are you seeing shorter-cycle projects versus a mix of longer-term solution-led work and then just how that translates into your visibility for the remainder of the year?
Sadasivam Iyer, President
So Maggie, I think if you think about the strength that we're seeing from a bookings perspective, it's relatively broad-based across several areas other than some of the enterprise platform dynamics that Ted alluded to. We're seeing a pretty big uptick in some of our cloud and infrastructure type work in the technology verticals, especially around the services we provide to our software companies. Those are generally longer-term bookings. So that's healthy from a mix perspective. We're also seeing longer-term bookings in cybersecurity and continued strength in our application modernization and application engineering capability. I don't believe that durations of those have materially shifted, but overall durations are shifting rightwards and lengthening because of some of the cloud and infrastructure work and the volumes we see associated with that with our software providers.
Operator, Operator
Our next question comes from the line of Kevin McVeigh with UBS.
Kevin McVeigh, Analyst
You alluded to some unanticipated expenses in the quarter in Q1. Can you help us to that a little bit? And then the Q1 and just coming out of Investor Day, I don't remember them being referenced. Is that something new? Or was that maybe I missed it at Investor Day?
Marie Perry, Chief Financial Officer
Right. So Kevin, the $12.8 million that we referenced are add-backs to EBITDA. And when we talked about the $80 million of savings that we are going to achieve over the three-year period, those dollars that we provided on the call for Q1 relate to the implementation of those. So when you think about the $12.8 million, there's a component that's Quinnox, right? So there's costs associated with the Quinnox transaction. Also our go-to-market, our back office outsourcing and then our ERP. So we gave in our guide for Q2 a range of $8 million to $10 million, and those costs will come down throughout 2026.
Theodore Hanson, Chief Executive Officer
So typically, Kevin, those strategic integration and acquisition expenses are immaterial. Since they're a little higher now for a few quarters and because we have better visibility, they're more known. Marie has been able to call them out and also give you a range for the guide for the next quarter.
Kevin McVeigh, Analyst
Okay. And then I guess, Marie, can you remind us how much did Quinnox contribute to the Q2 guidance on the revenue and EBITDA?
Theodore Hanson, Chief Executive Officer
We only had them for a couple of weeks, so just a few million.
Kevin McVeigh, Analyst
No, no, for the next quarter, Ted?
Marie Perry, Chief Financial Officer
Yes. Similar to how we treated TopBlock, Kevin, we gave the full year revenue contribution. So for Quinnox, it's approximately $100 million with growth of low to mid-teens and then EBITDA margin of low 20s.
Theodore Hanson, Chief Executive Officer
Yes. So roughly $100 million, and we're expecting a low double-digit growth rate in 2026.
Kevin McVeigh, Analyst
You figure about $25 million in Q2, is that fair?
Theodore Hanson, Chief Executive Officer
That's about the math.
Operator, Operator
Our next question comes from the line of Tobey Sommer with Truist Securities.
Tobey Sommer, Analyst
I was wondering if you could give us some color on the assignment business and get a sense for the trends there. I'll just start with that.
Theodore Hanson, Chief Executive Officer
So Tobey, Q4 to Q1, I would say sequentially it performed about like we expected. It was down kind of low to mid-single digits quarter-to-quarter. That's seasonally about what we see every year. So no surprises there. Pay-to-bill margins pretty steady and contribution pretty flat. So I don't think any surprises on the assignment side.
Tobey Sommer, Analyst
Okay. And then on the government consulting side with the presidential budget request, what are the implications for the business, if you could? Maybe think about it from a defense and intel and then also a civil perspective where there are some agencies with cuts?
Theodore Hanson, Chief Executive Officer
I think we're pretty well positioned with where the budget money is flowing. Obviously, there's a watch item for us with DHS, although all our contracts are being supported, but I don't think there's going to be a net increase there commensurate with what's going on in defense. On the defense side, there's a big new chunk coming; AI is going to be a big part of that, data is going to be a big part of that, and cybersecurity will continue to be a big part of that. In those areas where we play, we're well positioned. I would say the money has been slow to roll out. In the first quarter, for at least the first two months, there was not a lot of activity because it really didn't happen until the middle of the quarter. But I think now you're seeing a better release; we're seeing the cycle on new award activity pick up. So in our projected pipeline of bookings, we expect a better second quarter than first quarter in that area.
Tobey Sommer, Analyst
And then last question, if I could, on your transition towards consulting more broadly throughout the organization, you've had several executive hires announced recently. How is the sales force absorbing that? Are there any changes that you're making internally to better align incentives and compensation to drive that change throughout the organization going forward?
Theodore Hanson, Chief Executive Officer
I think we have a normal amount of change going on. Certainly, we are bringing more to bear for all these accounts. So the sales team is adapting to that. We're doing a lot more than just bringing IT staffing to bear for these big clients. Our sales teams are getting used to bringing everything that's in the toolbox. Incentives change every year based on what we're trying to attack to a large degree, how we allocate businesses to certain objectives, what commission schemes may be, how we resource against account opportunities. If you have certain industries with really good growth prospects and you are feeding resources into that, you'll allocate differently. So at the beginning of the year that activity is always going on. You would talk to people and they see the normal ebb and flow of all that.
Tobey Sommer, Analyst
Okay. But nothing fundamental where, for example, producers who are typically paid on weekly GP dollars for assignment work are seeing a fundamental change in compensation structure?
Sadasivam Iyer, President
No, no. As Ted said, you're always looking to make tweaks and adjustments to incent the right behaviors and align to your strategy. But a core tenet of that plan hasn't shifted.
Operator, Operator
Our next question comes from the line of Jason Haas with Wells Fargo.
Jason Haas, Analyst
We've seen nonfarm payrolls and temporary help bounce off the bottom a little bit in 1Q. I'm curious if you're seeing any green shoots in your business.
Theodore Hanson, Chief Executive Officer
Honestly, my experience is that IT really tracks IT spending. If our clients are spending on their tech stack, then that's a driver of our business. If they're more muted, then it's a tougher environment. What you've seen broadly in staffing, if you look at the lower end of the market, that has been resilient through all this. But on the white-collar piece and especially on the IT piece, it hasn't followed the same trend.
Jason Haas, Analyst
Okay. Got it. That's helpful. And then as a follow-up, you mentioned earlier that some of the sales of these higher-margin solutions were slower and later in the quarter. Did any of that push into Q2 here?
Sadasivam Iyer, President
To clarify, we had record bookings in Q4, and our guide for Q1 assumed historical conversion of those. There are two dynamics: the ramp-up time for those projects was slower than anticipated, so conversion to revenue wasn't at the expected rate, which you saw in Q1. From a sales perspective in Q1, sales cycles are getting slightly longer as clients deliberate longer before pulling the trigger on projects. We're not seeing a material impact and some of that has been factored into the guide for Q2. But we see the recovery happening throughout the year. As Ted said, it's not a rubber band because there's still uncertainty around macro topics, and that's what we're seeing both in buying cycles and conversion cycles.
Operator, Operator
Our next question comes from the line of Mark Marcon with Baird.
Mark Marcon, Analyst
Just following up on the last point, Shiv or Ted: you mentioned the gross margins are down. It seems like on the consulting side we had a deceleration and financial services was a weak spot. But coming off of these high bookings, aside from mix, is there any way to disaggregate the gross margin compression we saw in the commercial side between pure mix versus any change with regards to bill rates or how profitable the actual contracts executed were? Are you seeing any pricing pressure? And how do you expect that to flow as customers become more deliberative?
Sadasivam Iyer, President
Mark, to give you more color, we're not seeing a material compression in pricing. The most important thing that drove the gross margins down for us was timing in many cases. As some of our higher-margin pieces didn't ramp up at the same rate, the solutions mix that drives our consulting revenue was different than what we thought it would be. So short answer is we're not seeing material compression. That being said, as you'd expect there's an ebb and flow of higher-margin and lower-margin solutions. When the mix gets off kilter on some of the higher-margin pieces, it drives the gross margin down.
Mark Marcon, Analyst
And if we're looking at GlideFast or your Workday practice, in terms of your actual pricing for those projects that are in place, those are not changing?
Sadasivam Iyer, President
No, they're not. Which is why we said we will see recovery in margin gradually throughout the year; it won't rubber band, but the unit pricing on those things isn't deteriorating.
Mark Marcon, Analyst
Okay. And then can you explain a little bit about what's going on with the DSO? And Marie, how should we think about free cash flow conversion relative to EBITDA over the course of this year?
Marie Perry, Chief Financial Officer
Mark, a good rule of thumb is about 60% of our adjusted EBITDA converting to free cash flow. If you think about last year, Q1 of 2025, our free cash flow was actually slightly lower than what we're reporting this quarter. There is absolutely seasonality around free cash flow and DSO. As we ended the year 2025, we ended the full year at about a 68% conversion. So it's not 60% every quarter; it gradually gets there for the full year.
Mark Marcon, Analyst
Okay. So the DSO is just a normal seasonal thing and you're not seeing any change in behavior with regards to how quickly clients are paying?
Theodore Hanson, Chief Executive Officer
No change in behavior. No increase in bad debt.
Marie Perry, Chief Financial Officer
That's correct.
Operator, Operator
We have reached the end of the question-and-answer session. I would like to turn the floor back over to CEO, Ted Hanson, for closing remarks.
Theodore Hanson, Chief Executive Officer
Great. Well, I want to thank everyone for being here with us today and for your questions, and we look forward to speaking to you next quarter as Everforth for our second quarter earnings release. Have a great evening.
Operator, Operator
And thank you. This concludes today's conference, and you may disconnect your lines at this time. We thank you for your participation.