Earnings Call Transcript - ASGN Q1 2022

Operator, Operator

Greetings. Welcome to the ASGN Incorporated First Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host, Kimberly Esterkin. You may begin.

Kimberly Esterkin, Host

Thank you, operator. Good afternoon, and thank you for joining us today for ASGN's first quarter 2022 conference call. With me are Ted Hanson, Chief Executive Officer; Rand Blazer, President; and Ed Pierce, Chief Financial Officer. Before we get started, I would like to remind everyone that our commentary contains forward-looking statements. Although we believe these statements are reasonable, they are subject to risks and uncertainties and as such, our actual results could differ materially from those statements. Certain of these risks and uncertainties are described in today's press release and in our SEC filings. We do not assume any obligation to update statements made on this call. For your convenience, our prepared remarks and supplemental materials can be found in the Investor Relations section of our website at investors.asgn.com. Please also note that on this call, we will be referencing certain non-GAAP measures, such as adjusted EBITDA, adjusted net income, and free cash flow. These non-GAAP measures are intended to supplement the comparable GAAP measures. Reconciliations between GAAP and non-GAAP measures are included in today's press release. I will now turn the call over to Ted Hanson, Chief Executive Officer.

Ted Hanson, CEO

Thank you, Kimberly, and thank you for joining ASGN's first quarter 2022 earnings call. I am very pleased to report that the momentum we experienced in the fourth quarter of 2021 continued into the first quarter of 2022. Revenues for the first quarter totaled $1.1 billion, up 20.3% year-over-year and surpassing the high end of our guidance range. Our Commercial segment accounted for 76.3% of consolidated revenues, with strength across all business units driving the segment's growth. Our Federal Government segment accounted for the remaining 23.7% of revenues and performed in line with our expectations for the quarter, achieving consistent revenues year-over-year despite the difficult quarterly comparison. Adjusted EBITDA also improved significantly and was up 39.1% year-over-year to total $134.8 million, a record for the first quarter. With such strong quarterly results, we continue to trend ahead of the three-year targets we laid out at our Investor & Analyst Day conference this past September. This performance brings us closer to our goal of $6 billion in revenues by 2024, $4.9 billion of which will come from the organic growth of our existing business. It is clear from these aforementioned results and the segment-level detail that I will provide shortly, that ASGN's business model supports the future of work, and that our company continues to be a winner in providing IT services and solutions to the commercial and government end markets. ASGN’s unique delivery model provides not only critical IT resources but also consultative solutions with custom-fit teams. We are better positioned than any other company to solve for gaps in IT talent while preparing the future technology workforce for tomorrow’s digital needs. I'd like to thank our entire team for your exceptional efforts this past quarter. Together, we have enabled ASGN to not only surpass our internal financial targets but to also reach new company records. Our Commercial segment had a very strong quarter with revenues of $832.9 million, an increase of 28.3% over Q1 of last year. Apex Systems, our largest division, accounting for 82.7% of the segment's revenues for the quarter, reported solid double-digit growth in both IT staffing and consulting services. We also saw a strong uptick in creative digital marketing and permanent placement services for the quarter. From an industry perspective, all of our five Commercial segment industry verticals achieved double-digit growth for the quarter. Financial Services, our largest industry vertical, had particularly strong performance across insurance, FinTech, and wealth management accounts. Growth in our Technology, Media, and Telecommunications or TMT accounts was led by our Technology and Telecommunications accounts. Growth in our commercial and industrial accounts reflected strength across all sectors with particular strength in energy, industrials, and consumer discretionary accounts. Growth in our healthcare vertical continued to be driven by both provider and payer accounts. Finally, growth in our government and business services vertical was led by our business services accounts while aerospace and defense and government accounts were up mid-single digits versus Q1 of 2021. Apex Systems' top accounts across all five of the industry verticals we target, along with the unit's retail and branch accounts, all achieved double-digit growth rates for the quarter. Creative Circle also posted positive growth across their top accounts, while permanent placements at CyberCoders exceeded our expectations, enabling the unit to achieve solid double-digit growth for the quarter. Gross margin for the Commercial segment was 32.7%, up 210 basis points from Q1 of last year, due to growth across our high-margin commercial consulting, creative digital marketing, and permanent placement businesses. This growth in gross margin contributed to a corresponding increase in adjusted EBITDA margin of 140 basis points compared with Q1 2021. We also continued to expand our commercial consulting revenues during the quarter. Commercial consulting revenues totaled $204.7 million, an increase of 74.2% over Q1 of last year. Revenues derived from our work in digital transformation, workforce management, and modern enterprise projects led to the segment's strong performance. ASGN's consulting offerings remain an important source of value we provide our clients, so we continue to build out our solution strength and identify acquisition opportunities that expand our consulting capabilities and bring value to our diversified set of clients. Our digital transformation projects, in particular, which help our clients develop new digital tools and pathways to enhance their customer support, financial transactions, and supply chain are in great demand. In order to provide additional color on our consulting business and for industry comparative purposes, starting this quarter, we will also provide our quarterly commercial consulting bookings and book-to-bill results. ASGN defines bookings as the amount of funded work won during any given quarter that will be executed over the ensuing quarters. Our book-to-bill is a ratio of our total bookings to the commercial consulting revenues for the quarter. Commercial consulting bookings for the quarter totaled $297.5 million, up 63.5% over Q1 of last year. This translates into a book-to-bill of 1.5 to 1 for the quarter. While this ratio continues to trend positively and the outlook for our consulting business remains strong, it is important to keep in mind that as we head into the second quarter, our commercial consulting business and overall Commercial segment face tougher year-over-year comparisons through the remainder of 2022. Now let's turn to our Federal Government segment, which provides mission-critical solutions to the Department of Defense, intelligence agencies, and other civilian agencies. Revenues for the quarter totaled $258.1 million, consistent with Q1 of last year and in line with our expectations. Gross and adjusted EBITDA margins were up significantly from Q1 of last year related to improvements in business mix, which included a lower mix of revenues from cost-reimbursable contracts which carry lower margins than other contract types and the contribution from the higher-margin businesses we acquired in 2021. New contract awards for the quarter were approximately $128 million. At quarter-end, contract backlog totaled $2.9 billion, a healthy coverage ratio of 2.6 times the segment's trailing 12-month revenues. Examples of contracts awarded to our Federal Government segment during the quarter included a contract to support cybersecurity efforts for the U.S. Army's Network Enterprise Technology command, the expansion of a contract with the Army Research Lab, and a flagship contract with the Defense Information Systems Agency or DISA to provide the DoD and other federal agency IT services and solutions.

Ed Pierce, CFO

Thanks, Ted. Good afternoon, everyone. As Ted mentioned earlier, our financial performance for the first quarter exceeded our guidance estimates. This performance reflected double-digit growth of our Commercial segment, consistent performance of our Federal Government segment, the contribution from acquisitions, and the expansion in gross and adjusted EBITDA margins in both segments. For the quarter, revenues were $1.1 billion, up 20.3% year-over-year or 18.4% after adjusting for the one additional billable day in the quarter as compared with Q1 of last year. Revenues for the quarter included $40.2 million from acquisitions completed during 2021. Adjusting for the effects of the additional billable day and the revenue contribution from acquisitions, the organic growth rate for the quarter was 14.4%. Gross profit, operating income, and adjusted EBITDA were all up year-over-year and grew at higher rates than revenues. Revenues from our Commercial segment were $832.9 million, up 28.3% year-over-year. The commercial divisions and revenue streams grew double-digits with the highest growth coming from our commercial consulting, creative digital marketing, and permanent placement services, which carry higher gross margins than our IT staffing services. Commercial consulting revenues were $204.7 million, up 74.2% over the first quarter last year and accounted for approximately 25% of the segment's revenues. Revenues for our Federal Government segment were $258.1 million, in line with the first quarter of last year in our guidance estimates. The revenue consistency for the quarter was achieved despite a difficult prior year comparable. The first quarter last year benefited from higher revenues from certain cost-reimbursable contracts, including a low-margin web services project that the segment chose not to renew in Q3 of last year. Revenues for the current quarter included $28.3 million from acquisitions made in 2021, partially offsetting the effects of the difficult prior-year comparable. Gross margin of 29.9% exceeded the high end of our guidance estimates and was up 300 basis points over Q1 of last year. Both business segments reported year-over-year expansion in gross margin driven by improvements in business mix. Gross margin for the Commercial segment was 32.7%, up 210 basis points year-over-year. The expansion was the result of double-digit growth of our high-margin commercial consulting, creative digital marketing, and permanent placement services. Gross margin for the Federal Government segment was 20.9%, up 340 basis points year-over-year as a result of changes in business mix. This improvement resulted from a lower level of revenues from certain cost-reimbursable contracts, including a low-margin web services project that was not renewed in Q3 of last year, and the contribution of high-margin businesses acquired in 2021. SG&A expenses were $212.1 million, up 29.1% year-over-year. The increase was commensurate with the growth in the business, changes in business mix, and investments to support the high growth of the business. These investments were mainly in headcount, employee compensation, and IT applications and systems. Income from continuing operations was $67.6 million, up 57.9% year-over-year. Adjusted EBITDA was up 39.1% year-over-year, reflecting a 170 basis point expansion in our adjusted EBITDA margin to 12.4%. At quarter-end, cash and cash equivalents were $502.4 million and there were no outstanding borrowings under our $250 million revolving credit facility. Our senior secured debt leverage ratio was 0.96:1. During the quarter, we spent $76.9 million on the repurchase of approximately 684,000 shares of the company's common stock. Our financial estimates for the quarter are set forth in our earnings release and supplemental earnings materials. These estimates are based on current production trends, assume 63.5 billable days in the quarter, which is the same number of days as Q2 of last year, and include a revenue contribution of $42.1 million from acquisitions made in 2021. For the second quarter of 2022, we're estimating revenues of $1.108 billion to $1.128 billion, an implied growth rate of 13.7% to 15.7% on a difficult prior-year comparable due to the high sequential growth in Q2 of last year of 7.5%. We're estimating net income of $68.3 million to $71.9 million and adjusted EBITDA of $135 million to $140 million, which reflects year-over-year expansion in gross and adjusted EBITDA margins. On a sequential basis, we estimate our adjusted EBITDA margin will be flat to slightly down as a result of a lower mix of permanent placement revenues and slightly higher consultant employment expenses. With respect to the full year 2022, we are updating our high-level comments made on our last earnings call. We project revenues for the year will be up over 12% year-over-year. We are also projecting year-over-year expansion in our gross and adjusted EBITDA margins. We expect our adjusted EBITDA margin will range from 12.1% to 12.3%, up from 12% for last year. This is driven by a higher mix of commercial consulting and creative digital marketing revenues, partially offset by a lower mix of permanent placement revenues and investments in our operating platform to support high, sustainable growth in the business.

Ted Hanson, CEO

Thanks, Ed. Over the past several months, we've announced a number of changes to our executive leadership, as we continue to develop our team as part of our company's long-term succession planning. With that said, I'd like to formally announce today that our long-time and well-respected CFO, Ed Pierce, will be stepping down as CFO this coming August and will remain in a strategic role with ASGN through the first quarter of 2023. Ed has been an integral part of ASGN since 2007, first serving as a member of our Board of Directors and then officially becoming our Executive Vice President and Chief Financial Officer in 2012. On behalf of our entire company, I would like to thank Ed for his outstanding service and leadership. Ed has been an invaluable partner to me since I assumed the role of CEO four years ago, and I wish him the very best in his well-deserved retirement. Ed's orderly and planned retirement provided us with ample opportunity to be very selective in finding the ideal candidate to fill his shoes. Along those lines, I'm pleased to announce that we have recently welcomed Marie Perry as an Executive Vice President on our team. Marie will assume the role of ASGN's CFO in August. Marie is an accomplished CFO and proven leader. She joins us from Brink's, where she served as Chief Financial Officer of the company's U.S. division. Prior to Brink's, Marie was Chief Financial Officer, Executive Vice President, and Chief Administrative Officer at Jamba Juice and held multiple financial roles including Controller, Treasurer, and Interim CFO for Brinker International. She also spent nearly 14 years in roles of increasing responsibility within the finance team at American Airlines. Marie began her career in public accounting at KPMG. We are very excited to have Marie on board and hope that many of you have the opportunity to meet her over the coming months. Marie has hit the ground running and will have a great opportunity to shadow Ed for several months before transitioning into her new role. In addition, Marie has the backing of our deep and talented finance team to support her as we continue to execute on our strategic and financial priorities. I anticipate that her transition into the CFO role will be seamless. Speaking of our strategic and financial priorities, I'm pleased to announce that just last week, ASGN issued its third annual environmental, social and governance report. We made significant progress against our ESG objectives this past year, adhering to the priorities we've laid out in our 2020 report as well as introducing new efforts that push forward our commitment to corporate social responsibility. In May of this past year, ASGN became a corporate participant in the United Nations Global Compact, joining 13,000 companies in aligning our strategies and operations with universal principles on human rights, labor, environment, and anti-corruption. We also augmented our disclosures by leveraging several new reporting frameworks, conducted a baseline greenhouse gas report ahead of the SEC proposals and put in place a robust cybersecurity response plan. These are just a few of our many accomplishments, and I hope that you will take the opportunity to read our full 2021 ESG report, which we have posted to our website. Our ESG report would not be possible were it not for our incredible team of employees. I'd like to thank all of ASGN for your commitment to the highest sustainability and corporate purpose standards. We have accomplished a lot and together we remain committed to continually advancing our progress. With that, this concludes our prepared remarks for the first quarter. On behalf of our Board of Directors and the entire ASGN team, we thank you for your continued support of our company. We will now open up the call to your questions.

Operator, Operator

At this time, we will be conducting a question-and-answer session. And our first question comes from the line of Maggie Nolan with William Blair. Please proceed with your question.

Maggie Nolan, Analyst

Thank you. Congrats to Ed on your retirement, and welcome, Marie. My first question is on the commercial consulting side. What are you hearing from clients about budgeting considerations given the current environment? And is there any change in tone from what you were hearing three months ago?

Ted Hanson, CEO

Hey, Maggie, it's Ted. I'll let Rand take that one.

Rand Blazer, President

Maggie, I don't think we've seen a change in tone. I think most of our clients are committed to a certain IT improvement path, if you will, both around digitization of their business as well as other initiatives. And as we transition the year from the end of last fiscal year to this fiscal year, we actually saw less drop-off than we normally see as we transition that year and have a quicker pickup, as you can see in our numbers, in the work in the first quarter. So I don't think you can claim anything other than all of that seems very positive and pretty much still moving forward.

Ted Hanson, CEO

Pipeline growth is still accelerating, and demand appears to be strong based on discussions with clients. That's our observation.

Maggie Nolan, Analyst

Okay. Thanks. And then there's been a couple of quarters here and your guidance commentary as well, where the mix has favorably impacted margins. So should we start to view these levels as more normalized adjusted EBITDA levels for the business? And then also, what level of kind of impact from wage inflation are you contemplating in that guide?

Ted Hanson, CEO

Sure. Let me share my thoughts before handing it over to Ed. In our three-year plan presented last September, we outlined a projected improvement in margins, as we anticipated a shift in our business mix leading to accelerated growth in the higher-margin segments. This change will influence both our growth and EBITDA margins.

Ed Pierce, CFO

Yes. We're fortunate to see significant growth in our high-margin services on the Commercial side. As for our expectations, we anticipate our EBITDA margin to range between 12.1 and 12.3 for the full year, which is higher than what we initially projected in our three-year plan for the first year. Clearly, things are improving. We will provide more updates in future quarters as the situation evolves. For now, everything looks very promising, and we are certainly benefiting from growth in the right areas.

Maggie Nolan, Analyst

That's helpful. Thanks. And then on the wage inflation? And that's all for me. Thank you.

Ted Hanson, CEO

I think this is something we discuss every quarter. You can see in our gross margins that they are expanding, which is where we need to focus the most. While there is definitely wage inflation, we are managing this with our clients in relation to the bill rate. For our internal workforce, we also face increased costs like everyone else, but we have been able to manage this thanks to increased productivity. I believe these factors are reflected in our numbers, and we are confident in our ability to continue addressing the client side regarding bill rates while maintaining our productivity, which has always been a part of our identity.

Maggie Nolan, Analyst

Thanks.

Operator, Operator

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

Tobey Sommer, Analyst

Thanks. I was wondering if you could start by giving us a little bit of color on your margin guidance for lower perm and higher sort of labor expense. What are the drivers there? Are you seeing a difference in perm or stepping up hiring? A little bit of context would be helpful. Thanks.

Ted Hanson, CEO

Ed, do you want to take that one?

Ed Pierce, CFO

Yeah. Look, Tobey, as it relates to perm, we're not going to give specifics in terms of mix, but I will say that we did see a sequential improvement in the mix of about 80 basis points from Q4 to Q1, and Q1 is an outlier. I mean, what we saw in Q1 is pretty phenomenal in terms of perm and firm growth. And we expect that in Q2, it's going to return back to more sort of historic norms. And so, that's why we're thinking we had a pop of about 80 basis points sequentially in Q1, and then it's going to dip back down to where it was probably in Q3, Q4 last year. And labor costs, it's our headcount increase.

Ted Hanson, CEO

Yes, Tobey, the demand is certainly present in the market, and we are making investments to meet it. Therefore, we will continue to increase headcount to take advantage of these opportunities, in addition to enhancing our internal IT systems to boost productivity. I believe this is what Ed highlighted regarding the increased SG&A expenses from a margin perspective.

Ed Pierce, CFO

Yes.

Tobey Sommer, Analyst

Thanks. I'm trying to sneak in another one before we run out of time. How are you thinking about the momentum in consulting and the market opportunity as well as your ability and position to process unit? You've had some really heavy high double-digit rates of growth; can this continue?

Ted Hanson, CEO

Rand?

Rand Blazer, President

Of course. Listen, I think there's a couple of elements to make it work. First of all, we have a great account base that has their own plans for expansion of their own digital footprint. So that's number one requirement. Number two, we're continuing to add to our strength in the kinds of solution offerings we can bring to those accounts. We're doing that every quarter as we get stronger, not just in cloud implementation, our digital transformation, data analysis work, and now even some application work. So we have a great account base, we have increasing array of services with strength, and we have access to IT talent like nobody else has as the number two U.S. IT staffing firm. And we've built that relationship with the contingent employee workforce over lots of years of building what we call contract employee communities. So we have rich databases, we have access to the talent, we have shown to the clients we can bring that talent to bear with the right industry experience and application and solution experience. And when you have great accounts, increasing services that you can offer, and access to the talent base, it's all kind of working.

Ted Hanson, CEO

Tobey, I would like to add that we have challenging comparisons ahead in the second quarter and for the remainder of 2022. I don't want anyone to misconstrue this as a sign of lower demand or a slowdown in our business. Our pipeline and the booking numbers we shared with you this quarter indicate that we will continue to experience strong growth. While the growth may appear less significant due to these more challenging comparisons, it should not be confused with a decline in demand.

Tobey Sommer, Analyst

Thank you. That's helpful.

Operator, Operator

Our next question comes from the line of Heather Balsky with Bank of America. Please proceed with your question.

Heather Balsky, Analyst

Hi. Thank you for taking my question. The first one is a little bit sort of the macro and I guess leveraging what Maggie asked. But how much of your business on the Commercial side do you think is discretionary and in sort of a tighter economic environment? You could see companies pull back versus how much is kind of, I guess, necessary work that companies are in the middle of a project may be or just need to accomplish in their markets? And how are you thinking about sort of the back half and even into next year in a rising rate environment?

Ted Hanson, CEO

I'm going to let Rand answer this one, but I want to emphasize that our business is driven by our clients' need to accomplish their IT initiatives. This situation is less about employment and more about the IT spending by our clients and our ability to assist them. We believe that this spending is less discretionary than it has ever been, and there is considerable potential for growth. We are still in the early stages of digital transformation, which is very important to our clients.

Rand Blazer, President

We understand your concern about the potential impact of an economic downturn on spending, particularly since some expenses are viewed as discretionary. However, there are several reasons why we believe we can endure economic pressures. Looking back at the recessions of 2008 and 2009, as well as the COVID years, our commercial units, especially Apex, remained stable or even grew during challenging times. Much of our work is related to infrastructure, which is essential and not discretionary. While some of our efforts are focused on consulting around cloud implementations and digital transformation, we do not consider that work discretionary for many industries. Certain sectors, like airlines during COVID, may halt spending, but many others remained strong, enabling us to weather the storm. Our diverse portfolio is a key strength. We believe our clients do not view digital transformation as a discretionary expense; it's become essential. For instance, in 2019, 30% of all transactions were electronic, and by 2021, this figure had surged to 80%. Companies need to pursue digital transformation to enhance their digital presence, capture new revenue opportunities, and improve their workforce productivity alongside supply chain and logistics challenges that have gained emphasis in the past year. Thus, I want to emphasize that digital transformation is not as discretionary as it may seem.

Ted Hanson, CEO

And I would say that large-cap portfolio with industry diversification, like you said, with a 25% of our revenue mix in the Federal Government, which is countercyclical most all times during commercial economic downturn, I mean we saw it play out in the second quarter of 2020. And so, I don't think we're going to make predictions on the economy, but we think we'll weather whatever is out there very well. And again, our business is driven by IT spending of these Fortune 500 and big federal government agencies.

Rand Blazer, President

Accenture mentioned in their earnings calls that they are experiencing similar growth. Additionally, companies like Microsoft and Amazon, along with other technology firms, are indicating continued growth in their cloud revenues and digital transformation software, which are crucial for corporate America today. This sentiment is not exclusive to us; the broader community seems to be acknowledging this trend as well.

Ted Hanson, CEO

Now Heather, back to where you started, I mean if the economy were to turn down and would perm placement be a little less than it is today. Well sure, but that's a very small part of our business. That's not really the economic driver of the business.

Heather Balsky, Analyst

Great. I appreciate the thorough answer. I'm going to sneak another one in, though. Can I just ask, with regards to the perm placement in the quarter, you said it was exceptionally strong. Was there anything going on in the environment that you think drove that? Just curious why this quarter was so unique.

Ted Hanson, CEO

I think it was quite unusual that the first quarter demonstrated such strength, which I believe was the most distinctive aspect. The demand from clients to expand their workforce and the activity in that segment of the market has been robust since the second half of last year and continues now. However, typically, we wouldn’t expect to see that level of strength in the first quarter. So, it likely had more to do with the timing than anything else.

Heather Balsky, Analyst

Okay. That's really helpful. Thank you so much.

Operator, Operator

Our next question comes from the line of Jeff Silber with BMO Capital Markets. Please proceed with your question.

Jeff Silber, Analyst

Thanks so much. First of all, Ed, I just wanted to wish you best of luck and thank you for all the help over the years. It's been many years and I really do appreciate it.

Edward Pierce, CFO

Thank you.

Jeff Silber, Analyst

Sure. In terms of my question, I'm sorry to go back to the macro environment, but that seems to be on investors' minds these days. I know you said you're really not seeing a change of tone or slowdown, et cetera. Some of the other companies in the space though have been citing some projects ending a bit earlier than they expected, I know that happens all the time, but are you seeing that pick up any more than you have been over the past few months or so?

Ted Hanson, CEO

Rand?

Rand Blazer, President

No. If I go back again, look at our bookings number that we've given you this time. These are pretty large numbers with significant growth in bookings, and we haven't observed a reduction in existing projects or a quick completion. We also see new projects coming in right behind them. So no, we haven't experienced what some others may have noticed.

Jeff Silber, Analyst

Okay. That's great to hear. And my follow-up question, Ted, has to do with your internal staff in terms of your recruiters. I know we've talked about this in the past in terms of how difficult the market is in terms of both finding and keeping recruiters. Has that let up at all or is it still difficult that it has been?

Rand Blazer, President

I can't say that the situation has improved much. We're a leading recruiting and staffing business, and our team deserves recognition for their efforts. The important thing for us is to retain our core team and enhance our systems for better productivity. This way, if we experience any reduction in our workforce, such as with recruiters, our productivity can compensate for that since we are seeing significant volumes of work that we are managing. So, the demand is still present. We continue to hire, as Ted mentioned earlier, and we have ongoing plans to increase our headcount. Over the past year, we have also adjusted our compensation systems proactively to retain our top talent. It's crucial to note that we operate with a high variable compensation model, where our employees earn significantly when they perform well, which has helped us maintain our core team and keep progressing.

Jeff Silber, Analyst

Okay. Really appreciate the color. Thank you so much.

Operator, Operator

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

Mark Marcon, Analyst

Good afternoon, everyone. I want to express my gratitude to Ed and extend my best wishes to him. We've collaborated for many years, and I truly appreciate all that you've accomplished.

Edward Pierce, CFO

Thanks, Mark. I don't know if it's more telling about my age or yours.

Mark Marcon, Analyst

I think both. But I remember back in the '90s when it’s been a while. With regards to the consulting business, Ted or Rand, can you talk a little about the penetration of your 300-plus Fortune 500 accounts that you're dealing with Apex Systems? How many of them are utilizing your consulting services? What are we seeing in terms of the penetration rate and adoption, and who are you typically replacing?

Rand Blazer, President

We've increased our presence among the Fortune 500 accounts we serve, with about a third now utilizing our consulting services. Many of these clients may engage us for both staffing and consulting based on their internal needs. We've seen growth in this area each year, and we're also expanding our reach to the Fortune 1000, where we've had significant success. As we demonstrate our capabilities, our business has been growing. In terms of competition, we're not specifically replacing anyone; rather, we are competing for projects. Consulting differs from staffing since it's more project-based. Our competitors vary depending on the task at hand, and success often hinges on our familiarity with the client's IT environment and frameworks, along with our ability to demonstrate our talent and effectiveness. A key advantage we have is our contingent deployment model, which enables us to source talent quickly, unlike other firms that may need to adjust their personnel. We excel in areas such as data migration and workforce management, and we've improved our digital transformation offerings through our industry roadmaps. Additionally, we've enhanced our application capabilities through an acquisition, and as we continue to build our solutions, we're securing more opportunities.

Mark Marcon, Analyst

That's great. It appears that in your Commercial sector, you are experiencing strong growth, suggesting that this is not negatively impacting the existing business. While you aim to shift focus due to the higher margins, what is the current demand like for IT staffing on a time and materials basis?

Rand Blazer, President

Well, I think one of you announced our staffing side is growing double-digits as well as our consulting side is growing double-digits. And we're growing in not just the top accounts but also the retail branch-centric accounts double-digits. So it's pretty much across the board growth and in everything we're facing off against.

Ted Hanson, CEO

I think about it in terms of service offerings. Historically, we've been focused on IT staffing services, and we continue to invest in that area. We're now ranked second and aim to keep progressing. Additionally, we offer a higher-value service that is gaining traction with clients. Therefore, we're successfully operating in both areas. Yes. So I would say we have new budgets, so that is good. It's matriculating if you will, to the contracting officers. It's a little slow as you go in terms of seeing that hit the streets that they are, and we're going after awards here in the second quarter. I think activity is going to probably pick up and it's going to be a really busy late second, third quarter as we get to the end of the government fiscal year. But I'd say right now, the good thing is we have a budget and we're beginning to see a little bit of movement.

Operator, Operator

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

Ted Hanson, CEO

Great. Well, we want to thank everybody for being here today and we look forward to talking to you about our second quarter results in July.

Operator, Operator

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