Earnings Call Transcript
Everforth Inc (EFOR)
Earnings Call Transcript - ASGN Q3 2022
Operator, Operator
Good afternoon and welcome to ASGN Incorporated Third Quarter 2022 Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Kimberly Esterkin, from Investor Relations. Please go ahead.
Kimberly Esterkin, Investor Relations
Thank you, operator. Good afternoon, and thank you for joining us today for ASGN’s Third Quarter 2022 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. 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. 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 Third Quarter 2022 Earnings Call. Before we begin, on behalf of the entire ASGN team, I’d like to welcome Marie Perry to her first earnings call as our CFO. We’re excited for Marie to participate in today’s discussion. With that said, let’s now turn to our third quarter results. As is evident from our Q3 financials, growth continued to build quarter-over-quarter and demand for our services and solutions remains strong. Revenues, which were a record for the third quarter, came in above the midpoint of our guidance range for Q3 and totaled $1.2 billion, up 11.6% year-over-year. This growth was largely driven by our commercial segment, and specifically our consulting business. This record top-line performance would not have been possible were it not for the incredible efforts of all of our professionals in service of our clients as the ASGN team collectively strives to meet and exceed their expectations. Consequently, these results bring us closer to our goal of $6 billion in revenues by 2024. I’ll provide some comments on our three-year plan later in today’s call. Our commercial segment accounted for 75.1% of consolidated revenues, while our federal government segment accounted for the remaining 24.9% of revenues. The strength and breadth of our account portfolio contribute to our success with virtually all of our revenues derived in the U.S. and largely from Fortune 1,000 accounts. Moving down the income statement, adjusted EBITDA of $148.7 million was also above the midpoint of our guidance range, improving 8.9% year-over-year. Adjusted EBITDA margin was 12.4% for the quarter. Free cash flow from continuing operations totaled $79.5 million, an improvement of 18.8% over the prior year. Our balanced, flexible, and disciplined approach to capital allocation includes investing organically in our business, making strategic acquisitions of profitable high-growth companies in relevant solution areas, and returning value to our shareholders through our stock buyback program. Before speaking further on our recent acquisitions and segment performance, I’d like to provide the following three highlights that continued to drive our performance. First, ASGN maintains a large and diverse enterprise account portfolio representing the most significant portion of the revenue base. Second, the IT services market remains favorable, and with the support of our larger-cap portfolio, ASGN is successfully executing against these opportunities. And third, favorable bookings in both the commercial and government segments provide us with visibility and position ASGN well for 2023. Now let’s review the segment performance. Our commercial segment, which services large enterprises in Fortune 1,000 companies, had another solid quarter with growth in both IT staffing and consulting services. Revenues of $900 million increased 16.1% over Q3 of last year and improved 12.9% organically year-over-year on a difficult comparison. Impact systems, our largest division, accounted for 84.1% of the segment’s revenues for the quarter, with top and retail accounts both achieving double-digit growth rates. Creative digital marketing experienced a lower growth rate compared with Q3 2021, due in part to the high growth rates in the prior period. From an industry perspective, four out of our five commercial segment industry verticals achieved double-digit growth for the quarter while business and government services was up low single digits versus the prior year. Within Apex systems specifically, financial services had solid performance and banking, with even greater year-over-year growth among our FinTech and wealth management accounts. Growth in technology, media, and telecommunications, or TMT industry was again led by double-digit growth in technology and telecommunications accounts. Progress in our commercial and industrial accounts reflected strength across all sectors compared to the third quarter of 2021 with the exception of materials. In particular, we achieved double-digit growth year-over-year in energy, utilities, consumer discretionary, and consumer staples. Healthcare industry revenues also grew double digits driven by the provider and payer accounts. Finally, growth in our business and government services segment was led by mid-single digit growth in our business services accounts while aerospace and defense accounts were up low single digits versus the prior year. Gross margin for the commercial segment was 33.1%, up 70 basis points from the prior year, driven by our growing contribution of high-margin commercial consulting and permanent placement business. Commercial consulting revenues totaled $268.6 million for the third quarter, an increase of 43.2% year-over-year and up 29.8% organically. Revenues derived from our work in web, mobile, and application development, data analysis, cloud architecture and migration engagements, along with our new ServiceNow solutions led our commercial consulting quarterly performance. We also had a solid quarter for commercial consulting new bookings, which totaled $254.3 million, up 36.9% year-over-year. This translates into a bill-to-bill ratio of roughly 0.9 to 1 for the quarter, and 1.3 to 1 on a trailing 12-month basis. Keep in mind seasonally, the third quarter is typically our lowest book-to-bill quarter. Our early October performance supports a healthy bookings outlook. In addition to our bookings, our pipeline of new business opportunities remains strong. ASGN continues to be favored by our clients in the consulting space due to our intimate relationships, which span decades, our solutions portfolio, which continues to expand, and our solutions delivery model, which enables us to meet our clients' demand with the necessary skilled workforce at economical price points. As I mentioned, we continue to enhance our solution capabilities, and at the beginning of July, we officially closed our acquisition of GlideFast. The addition of GlideFast puts ASGN on the map as a key ServiceNow player. In a fast-growing technology market, it’s important that we offer services that promote our clients' journeys and pathways. GlideFast does just that, extending our value proposition through its ServiceNow capabilities while at the same time being an important source of revenue and margin expansion. After one quarter with ASGN, GlideFast is performing ahead of our expectations for revenue run rate and new business secured. For example, during the quarter Apex systems and GlideFast jointly won a contract with a client who is currently modernizing its asset management system by moving this capability from a legacy system to ServiceNow. Once this capability has been transferred over to ServiceNow, our client can conduct an initial audit of deployed hardware and software assets. This particular asset management capability has become important in the past three years, as remote teams put stress on their existing assets, systems, and processes, resulting in a lack of precision on what applications have been deployed and on which devices. ASGN’s underlying objective with this particular client was to improve the visibility and security of its asset management capabilities and to reduce costs. This contract is a great example of the work we deliver as a result of our new ServiceNow solutions capabilities. Let’s now turn to the federal government segment, which provides mission-critical solutions to the Department of Defense, the intelligence community, and federal civilian agencies. Revenues for the quarter totaled $297.9 million, down slightly year-over-year but up 2.3% sequentially. As we discussed in recent calls, this year-over-year decline resulted from our strategic decision not to re-compete a low-margin web services retail program in the third quarter of last year, which was partially offset by the impact of distances we acquired in 2021. Federal government segment gross margins were up 120 basis points compared to the prior year due to favorable business. New contract awards for the quarter were approximately $560 million, which translates to a book-to-bill of 1.9 to 1 for the quarter, and 1.0 to 1 on a trailing 12-month basis. This significant quarterly award activity demonstrates that the government continues to drive spending in areas in which ASGN is focused, including cyber security, cloud, AI, ML, and IT modernization. Our strong book-to-bill for the third quarter supports the government segment's continued growth. Contract backlog improved from $2.9 billion at the end of the second quarter to total $3.1 billion at the end of the third quarter, providing a healthy coverage ratio of 2.8 times the segment's trailing 12-month revenues. Beyond our backlog, which extends for multiple years, our pipeline of opportunities is at an all-time high, providing great visibility into 2023. The strength of our pipeline is an indication that our government segment is in the right markets, including justice, defense, intelligence, and federal civilian, and providing the right solutions. During the quarter, we won a number of key contract awards, including a new contract with the FBI to provide enterprise IT operations, a re-compete supporting U.S. Transportation Command software development Help Desk and engineering for its global air transportation execution system, and a strategic re-compete to expand advanced cyber security and zero trust solutions to the United States Army and other defense agencies. On the topic of cyber security, at the beginning of October, we acquired Iron Vine Security, a leading cyber security company that designs, implements, and executes cyber security programs for federal customers. As with all of our acquisitions, Iron Vine represents a high-growth business whose contributions will be accretive to both our gross and EBITDA margins. Iron Vine adds key new accounts to our portfolio, such as the Security and Exchange Commission, the Centers for Medicare and Medicaid Services, the Department of State, and the National Institutes of Health. Iron Vine also significantly strengthened ECS’s cyber security offerings to government accounts while making us more competitive for future work. Iron Vine is off to a strong start, and we are excited to welcome their talented team to ASGN. With that, I will turn the call over to Marie Perry, our CFO, to discuss the third quarter financial results and our fourth quarter and full year 2022 guidance.
Marie Perry, CFO
Thanks, Ted. It’s great to speak with everyone today. As Ted mentioned earlier, our revenues for Q3 exceeded the midpoint of our guidance estimate and set a record for the third quarter. Revenues were $1.2 billion, up 11.6% year-over-year on an as-reported basis and up 8.4% organically, which adjusts for $34.2 million contributions from acquired businesses. Revenue from our commercial segment was $900 million, up 16.1% on a difficult year-over-year comparison. All commercial divisions grew, with the highest growth coming from the commercial consulting services, which carry higher gross margins than our IT staffing services. Revenues for commercial consulting, the largest of our high-margin revenue streams, were $268.6 million, up 43.2% year-over-year. Consulting services included approximately $25.1 million in revenue from GlideFast. Revenues from our federal government segments were $297.9 million, down slightly year-over-year on a difficult comparison but up 2.3% sequentially. Revenues for the third quarter of 2021 included $13.4 million from a low-margin web service resale program that the federal government segment chose not to renew in Q3 of last year. Revenues for the third quarter of 2022 included $9.1 million from acquired businesses. Gross margin was 30%, up 130 basis points over Q3 of last year. Both business segments and all operating divisions reported year-over-year expansion in gross margin driven by improvements in business. Gross margin for the commercial segment was 33.1%, up 70 basis points year-over-year, driven by double-digit growth of our high-margin commercial consulting and permanent placement services. Gross margin for the federal government segment was 20.5%, up 120 basis points year-over-year as a result of changes in businesses. This improvement resulted from a smaller contribution of cost-reimbursable contracts, which carry a lower margin than other contract types, the contribution of higher margin businesses we acquired in the third quarter of last year, and the decision not to renew a low-margin web service resale program in the third quarter of last year. SG&A expenses were $232.6 million, up 20.7% year-over-year. This increase in expense is commensurate with the growth in the business and also reflects increased investment in our headcount to support future growth. SG&A expenses also included $3.3 million in acquisition and integration expenses that we do not include in our guidance estimates. Excluding these acquisitions and integration expenses, SG&A was slightly above our guidance estimates, primarily as a result of greater than expected incentive compensation from higher growth in revenues and gross profit. Income from continuing operations was $71.1 million, up 7.2% year-over-year. Adjusted EBITDA was $148.7 million, an improvement of 8.9% year-over-year. Adjusted EBITDA margin was 12.4% for the quarter, a 30 basis point decline year-over-year due to the incremental investments in SG&A previously discussed. At quarter-end, cash and cash equivalents were $211.2 million, and we had $204 million available under our $250 million revolver. Free cash flow from continuing operations totaled $79.5 million, an improvement of 18.8% over the prior year. Our senior secured debt leverage ratio for the quarter was 0.96 to 1. We deployed $59.5 million on the repurchase of approximately 624,000 shares of the company’s common stock during the quarter and year-to-date have repurchased 2.2 million shares for a total of $227.6 million. Turning to our guidance, our financial estimates for the fourth quarter are set forth in our earnings release and supplemental materials. These estimates are based on the current production trends, assume 60 billable days in the fourth quarter, which is four days fewer than Q3 of 2022 and one day fewer than Q4 of 2021, and include an estimated revenue contribution of $48 million from the recent acquisitions of GlideFast and Iron Vine. For the fourth quarter, we are estimating revenues of $1.123 billion to $1.143 billion, implying a revenue growth rate of 6.6% to 8.5% on one fewer billable day and on a difficult comparison. As the fourth quarter of 2021 benefited from high revenue growth on a sequential basis, the implied revenue growth rate for the fourth quarter of 2022 is expected to be positive on the same number of billable days. We are estimating net income of $54.2 million to $57.8 million and adjusted EBITDA of $128.5 million to $133.5 million. We expect gross margins to remain relatively consistent year-over-year and sequentially. The estimated sequential decline in adjusted EBITDA and adjusted EBITDA margin primarily relates to the sequential decline in revenues and gross profit attributable to fewer billable days in the quarter. The midpoint of our fourth quarter guidance range anticipates full-year revenue growth for 2022 of 13.8%, net income growth of 15.3%, and adjusted EBITDA growth of 15.6% compared to 2021. Thank you. I’ll now turn the call back over to Ted for closing remarks.
Ted Hanson, CEO
Thanks, Marie. It has been just over a year since we introduced our three-year plan in September 2021. While many things have changed in the past 12 months, demand in our end markets remains favorable, and we are successfully executing against these opportunities. Our ability to succeed quarter-after-quarter comes down to our resilient operating model. ASGN maintains a large, diverse enterprise account portfolio with strong commercial and government bookings that position us favorably for the future. Our balanced but flexible capital deployment strategy enables us to act in the best interest of all our stakeholders, including successfully completing acquisitions that provide us with new solution capabilities that are in high demand by our customer base. With that as a background, I’d like to provide some commentary on where we are tracking versus the three-year plan we laid out last September. For reference, you can find the full three-year plan and anticipated growth rates in the Investor and Analyst presentation posted on our Investor Relations website. Starting with revenue, given the outperformance of the business in the first half of the year and continued strong top-line growth in the third quarter, we continued to track ahead of our baseline revenue growth expectations. Taking into account acquisitions, revenue growth rates remain within the previously projected range. As a reminder, we plan to deploy $1.25 billion to $2.1 billion in acquisitions from 2021 to 2024, and based on our acquisition pace to date, we sit squarely within this range. Lastly, in terms of adjusted EBITDA, we are currently tracking toward the high end of our guidance range on both a dollars and a percentage of revenue basis. Overall, we are pleased with the growth we’ve seen across the business and are tracking in line, if not better than our initial expectations. While the types of contracts and work requested may be evolving in line with market and client needs, the demand for ASGN’s IT services and solutions remains strong. We’re confident that this demand, in combination with our strong pipeline, will carry us solidly into the fourth quarter and into future years. That said, it’s not just the type of services we offer that sets our business apart; it is also the quality of the service we provide our clients project after project that continues to differentiate ASGN from the competition. As we conclude our remarks, I’d like to again sincerely thank our entire team for your hard work and dedication this past quarter. Our success is certainly a reflection of your efforts. With that, let’s open the call to questions.
Operator, Operator
Thank you. At this time, we will be conducting our question and answer session. We have a first question from the line of Tim Mulrooney with William Blair. Please go ahead.
Unidentified Analyst, Analyst
Hey, this is Sam on for Tim, thanks for taking our questions here. We asked this question last quarter, but given the times we’re in, I think it makes sense to check in on this again. If we break down IT spend into three broad buckets—those being workforce management, digital transformation, and modern enterprise—you mentioned that modern enterprise would be the one area where you would likely see softness first. So can you talk about that if you’re seeing any cracks in spending there? And then also, maybe any other high-level thoughts that you have around the other two buckets?
Ted Hanson, CEO
Yes. Well, as the trend we’ve been on is that the digital transformation bucket is growing the most and taking a bigger share of the pie. The workforce mobilization management is still a big part, and it's growing, but a smaller piece of the pie. And we suggest that modern enterprise is starting to grow a little bit more, particularly with ServiceNow capabilities. So I think we’re seeing about what we thought we would just as you said, we’d like to continue to see the digital transformation and the modern enterprise, where typically around ServiceNow, continue to grow.
Unidentified Analyst, Analyst
Then one more for us. Can you comment on the pace of your internal headcount increases? I know you’ve been pretty aggressive here, kind of capitalizing on the strong demand that you’ve been seeing. But curious if that is slowing down at all, given the more macro uncertainty we’re headed to right now?
Ted Hanson, CEO
Yes, well, look, we’ll have to monitor that as we go. So through the third quarter, we’ve continued to invest in headcount to meet opportunities in the market. I think we have an approach where, over a period of time, our headcount growth will grow a little bit less than our growth in revenue, and that’s just the pace of business that we follow here. If we see something develop in the marketplace, we can react quickly by slowing down headcount growth or not growing it. We also have natural attrition rates to rely on which we understand well and have seen work in the past. I’d just say, as of the third quarter, we have opportunities in the market. We’ve continued to invest in that for what we see going forward, and we’ll have to address that as we get.
Operator, Operator
Thank you. We have the next question from the line of Tobey Sommer with Truist Securities. Please go ahead.
Tobey Sommer, Analyst
Thank you. In the consulting business, you talked about seasonally lower booking activity in Q3, but you’re already seeing something better in Q4. Could you give us a sense of what the differences are in seasonality between those quarters since we don’t have a data series over a number of years to understand what it’s like ourselves?
Ted Hanson, CEO
So I’ll let Rand talk about the seasonality. Tobey, I’ll remind everybody that if you go to the supplemental data, we provide quarterly book-to-bill for both commercial and federal separately for the last three years. So that data will be out there. But Rand, anything on why Q3 for commercial is typically slower?
Rand Blazer, President
Yes. First of all, Tobey, when you look at 2020, there was a COVID-related impact in quarter two. But if you looked at the other three quarters, quarter three typically sees the smallest bookings, although very healthy. This has also been the case in 2021. Now again in 2022, we believe this trend continues. I honestly, I don’t think we have a definitive answer for you as to why it’s seasonal in the commercial marketplace. I mean, a lot of them set their budgets at the beginning of the year, and some of them are on accounting years that don’t align with calendar years, but rather start in April. So it probably has more to do with their budget cycle than anything else, but it seems to work out that way.
Ted Hanson, CEO
And then the only thing I will add, Tobey, just for the larger group, is that there’s a big difference here between commercial and the federal market. Typically, as was this year, in the federal market, Q3, which is the calendar Q3, is also the end of the government fiscal year, and is almost always the strongest new bookings and book-to-bill quarter. You can see that in our federal numbers here for our calendar Q3.
Rand Blazer, President
Yes, and I understand we have the supplemental data, but you’ve been quite acquisitive in the consulting area over the last few years. I wasn’t sure how dependably seasonal patterns would shine through that. You segued into the government, so I was going to ask a question about that. Contract awards, you pointed out were healthy in the quarter, but I think a decent amount of that was re-compete. How much of that was either new or to inform our expectations for growth in the federal business?
Ted Hanson, CEO
A little more than half of that number was re-compete, while a little less than half was new work that we didn’t have before or growth on existing contracts.
Tobey Sommer, Analyst
It competes to inform us about over the next as you look into 2023 and/or two questions: does the resolution get in the way of contract pursuits that you’re aiming at here in calendar 4Q and maybe the early part of next year?
Ted Hanson, CEO
Okay, so I heard most of what you asked. You blipped out a little bit. I think typically, calendar Q4, which is the first quarter of the government fiscal year, is very light from a new booking standpoint, because of the wave in Q3. This year, we think that might be a little different. There may be a little more strength in the Q4 number. That’s just more about the cycle of the government contracting agencies coming off the COVID situation and the new budget from March. I think we’ll have to watch the election play out and see how that affects this, if at all. It may not. I can tell you it feels like the administration is working hard to get everything out on the street and bid and awarded that they can. We see a lot of activity. But it would be difficult for me to comment on anything in 2023 and beyond.
Tobey Sommer, Analyst
Thanks. Last question for me. Could you quantify the impact of the acquisition that closed in October on the fourth quarter revenue guidance and profit guidance? I think the press release quantified the contribution from acquisitions, but not that discrete one, which I don’t think was already incorporated in consensus. Thank you.
Marie Perry, CFO
Hi, Tobey. So yes, for the fourth quarter, we talked about $48 million from acquisitions, and so about half of that is for Iron Vine and the rest is from GlideFast.
Ted Hanson, CEO
Then on the EBITDA margin side, Tobey, as we say generically, and it’s true in this case as well, expect middle to high teens EBITDA margin rates from the contribution of these acquisitions.
Operator, Operator
Thank you. We have the next question from the line of Jeffrey M. Silber with BMO Capital Markets. Please go ahead.
Jeffrey M. Silber, Analyst
Thanks so much. This quarter, some of the other IT services firms have been talking about sales cycles lengthening a bit. Some have mentioned projects potentially ending early or being a little bit more difficulty selling add-on work. Are you guys seeing any of that at all?
Rand Blazer, President
I would say nothing more than the normal dose of it.
Jeffrey M. Silber, Analyst
And just switching over to the federal government segment. It looks like, and forgive me if I’m just misreading it, but it looks like adjusted EBITDA margins in that segment were down both sequentially and year-over-year. Was there something specific to point out there?
Ted Hanson, CEO
The thing that’s going to drive our margins there are the mix of contracts. I don’t think there’s anything specific to call out. Marie, you can add anything in there if you want; otherwise, yes, so nothing to call out this week.
Jeffrey M. Silber, Analyst
Okay, great. And just one more, I’ve had a few people ask me to ask this about cybercoders. I know it’s small, but can we talk about how large it is and what the trends are in that sector, in that line of business? Thanks.
Ted Hanson, CEO
Well, we can’t talk about cybercoders individually, but we can talk about perm placement overall. We told you in the second quarter and the third that we expected it to be a slightly lower contribution to the overall revenue mix, which is true because we have other units that are growing faster like commercial consulting. Plus, you’ve got the addition of acquisitions here. So naturally, that’s going to continue to come down. It was just a little over 4% in the third quarter, and it’s going to be somewhere between 3% and 4% in the fourth quarter. I think that aligns well with what our peers indicated in the second quarter.
Operator, Operator
Thank you. We have the next question from the line of Heather Balsky with Bank of America. Please go ahead.
Heather Balsky, Analyst
Hi, thank you for taking my question. I wanted to piggyback off the last question regarding perm placement. That line of business in general for the staffing industry tends to be hyper-cyclical. I’m curious if you could help provide some perspective in terms of how that business performed during COVID and your thoughts on margin side in terms of your ability to try margin if we go into a downturn?
Ted Hanson, CEO
Well, that is true. Perm placement is the most cyclical part of the staffing business in general. That’s why we manage it the way we do. As a percentage of the total revenues, it together with Creative Circle was down over 20% during the COVID period. Today, it’s performing very nicely, and we expect it to have a similar market in the fourth quarter, although we’ll break that out specifically, but they’re going to perform as we expect. If we’re just looking one month into the fourth quarter, it’s going to be a lower percent of the revenue mix based on what we said before. So I think that probably is the best way to look at it as a very small piece of the total revenue mix.
Heather Balsky, Analyst
Thank you. And is there any color you can help us think through, even though it’s a small part of revenues, the impact on EBITDA or just your thoughts on EBITDA if that business were to cycle down?
Ted Hanson, CEO
Well, look, I think you can kind of do your own downside scenario. If you think that part of the business is going to be down, you could pick a number, say 20%, which is what we said before between those two business units. The effect on gross margin is more because it carries a higher contribution to gross margin. But again, I mean, I think around the edges based on what we’re seeing, it’s not going to be the one that stops first, but it won’t be a significant reducer to our gross margin and bottom line. At least that’s not what we’ve seen in the past. Certainly, it has an effect, but it won’t be the biggest contributor to it.
Operator, Operator
Thank you. We have the next question from the line of Surinder Thind with Jefferies. Please go ahead.
Surinder Thind, Analyst
Thank you. I’d like to start with a question around guidance. Marie, can you maybe provide a bit more color on the sequential decline and what I mean by that is, when I do the math, I don’t see any sequential growth adjusted for day count?
Ted Hanson, CEO
On the revenue side?
Surinder Thind, Analyst
On the revenue side, yes.
Ted Hanson, CEO
Yes, there’s slight revenue growth. We’d call it about 1% sequentially once you adjust for those four billing days coming from Q3 into Q4.
Surinder Thind, Analyst
Got it. And any color in terms of where among the segments?
Ted Hanson, CEO
In terms of the individual business units, Surinder?
Surinder Thind, Analyst
Yes, that is correct.
Ted Hanson, CEO
Yes, our guidance is for the enterprise at the ASGN level, so we’re not going to break it down. We say both businesses are going to have performance here in the fourth quarter. I’ll just leave it at that. The federal unit will be adjusting, right? You’re adjusting for acquiring in and out, but you can call it slightly up, adjusted for billing days in the fourth quarter from the third.
Rand Blazer, President
And commercials, slight positive.
Surinder Thind, Analyst
And then in terms of just the bigger macro trends that you’re seeing, can you maybe talk about the visibility that you have in the consulting side of the business versus the visibility in the staffing side? Maybe compare and contrast those two in terms of where we are in the cycle and how comfortable you are?
Rand Blazer, President
Well, I’ll start, Surinder. I think we’ve always said our staffing visibility is somewhere a little north of six months, while consulting approaches a year, because their discreet contracts are longer term and they’re signed and funded. In staffing, clients can make a decision at any moment to change their posture with us. But we’re pretty comfortable we have visibility out for somewhere between 6 to 12 months for sure, between staffing and consulting. Consulting is definitely more predictable. On the government side, it’s similar; it's much more predictable because of contracts set up for the fiscal year and funded. So we have relatively good visibility there, which is a consulting-type business.
Surinder Thind, Analyst
And then one related question to that, in terms of the visibility component, are there also differences in behavior that we should maybe be thinking about in a down cycle in the sense that would the staffing part of the business or do clients tend to focus on that more, whereas with consulting maybe that’s seen as safer revenues? Or how should we think about that component in terms of the reactivity of clients?
Rand Blazer, President
Ted, I’ll start. I think Ted’s mentioned already that perm placement is the most cyclical, but it’s a very small percentage of our total portfolio. Staffing appears to be the most cyclical because clients can quickly make a decision to cut or add resources. So it tends to be a little more sensitive to client decision-making. Consulting projects are generally well thought out when clients have budgets set for the year that they’re on, and they’re off and running. That doesn’t mean they won’t change their mind somewhere along the line or redirect the work. But it’s definitely the one that’s probably more consistent. Now, having said that, Surinder, following us for many years, you’ll see that we’ve had a lot of our staffing work tied to infrastructure and keeping the lights on, which is a certain percentage. That’s why we were faring well in 2008-2009 and during the COVID period in the commercial business. There are different components at play. The more infrastructure work you’re doing, the more you see it as an annuity or a more consistent revenue path. But definitely, perm placement is the most uncertain, but a small part of our business, as Ted said. Staffing next, although we’re pushing by the size of our accounts, and by infrastructure spend, and consulting last, which is generally well thought out projects that are on a pathway to achieve objectives for the client.
Surinder Thind, Analyst
Got it. Thank you guys. That’s it for me.
Ted Hanson, CEO
And Surinder, if you want to follow up on the billable day question, please do after the call. And again, it’s up slightly in commercial and mid-single digits in federal, slightly up for ASGN sequentially when you make your adjustments.
Operator, Operator
Thank you. We have the next question from the line of Kevin McVeigh with Credit Suisse. Please go ahead.
Kevin McVeigh, Analyst
Thanks for fitting me in, and Marie, welcome. Just to follow up on the guidance, I don’t know if I picked it up wrong, but it looks like the EPS relative to revenue is a little bit dull, and it looks like a lot of the incremental expenses in SG&A. It didn’t have Iron Vine in there, but if I’m correct, it looks like an incremental $15 million to SG&A. Is that right? And if it is, what is that?
Ted Hanson, CEO
So coming from the third quarter to the fourth, Kevin? Is that what you’re saying?
Kevin McVeigh, Analyst
Yes, right.
Ted Hanson, CEO
Yes, I don’t think SG&A is up $15 million. I would tell you the biggest factor is the four last billing days because you’re fully loaded for costs. So in normal years, if we went back before COVID, coming out of the third quarter into the fourth, you would see a decline in EBITDA margin from the third to the fourth. You didn’t see that in 2020 because of the COVID ramp, and you didn’t see it in 2021 because we had a very abnormal quarter of acceleration from third to fourth that was above 5%, which is not normal. So really this is something we’re used to seeing from the third to the fourth. But you’d have to go back to 2019 and prior to see that.
Kevin McVeigh, Analyst
And then the lower margin web contract—how much did that help in the quarter? Right? Because it sounds like it was obviously little margin, but the revenue wasn’t there. Could you give any sense of what the margin benefit from it was?
Ted Hanson, CEO
Well, I think in the past, we said each quarter the contribution is plus or minus $15 million, and it had virtually no margin associated with it.
Operator, Operator
Thank you. We have the next question from the line of Mark Marcon with Baird. Please go ahead.
Mark Marcon, Analyst
Good afternoon, Marie, welcome to the call. I was wondering, can you talk a little bit about the joint contract between Apex systems and GlideFast? How’s the profitability of a contract like that compared to a single contract, and based on what you’re seeing now, how quickly could you expand those sorts of joint wins?
Ted Hanson, CEO
Well, first of all, I’d like to note we never talk about anything other than it’s one win and its Apex systems win in the commercial account. We win the ServiceNow contract on Apex paper, if you will, but it’s GlideFast rates and GlideFast capability. Apex is bringing the client to the table, and then ensuring that the GlideFast team understands the applying environment. Mark, we expect healthy growth in this area because Apex has an account base that’s second to none. If you ever listen to Bill McDermott and ServiceNow, they have huge penetration in the Fortune 1000 and Fortune 500 companies. Their licenses are widespread but I will also add, I think Bill would say most of these Fortune 500 companies are using ServiceNow in a very small way, not in a large enterprise view. There’s significant opportunity here for them as a company and for us as a service agent for their products. When we made the acquisition, we discussed last quarter in the GlideFast publication; we expect that there’s a lot of great synergy between us. We didn’t price it based on the synergy; we based it on GlideFast’s performance, which was stellar.
Mark Marcon, Analyst
And then there have been a lot of questions around visibility. The reason for that is there’s some concern with regards to macro slowing given the increase in interest rates. You’ve been through multiple cycles. First of all, are you, with your clients, Ted and Rand, hearing anything among those Fortune 1000 clients in terms of concerns or thoughts about, 'Hey, we might slow down'? Secondly, you’ve done a great job navigating prior cycles. Could you remind people in terms of some of the variable cost components that you have and your ability to adjust as needed?
Ted Hanson, CEO
Right. So let me start, and Rand can hop in here. There are lots of headlines in the news right now about slowing rates of hiring, or even layoffs. What we’re finding is clients are doing that, but in areas that are not IT. I think Rand said earlier that we’re not seeing any disruption other than the normal specifics, not signing up for pieces of work, or maybe changing sentiment on hiring. I think where we can’t call anything in that regard was just normal conversations occurring right now. A lot of the reasons that clients are using us revolve around digital transformation or cost optimization or otherwise, improvements in data analytics and moving to the cloud— none of these have disappeared just because we’re all watching what’s occurring in the news. Therefore, I wouldn’t say there’s any overreaction from clients right now. When you hear the headlines, you have to kind of bifurcate between our large companies saying they have too many people in warehousing or logistics, or administrative roles, and separate this from what’s occurring in IT. So that’s probably the first thing. When the business grows more slowly—or may not grow at all—we find that our P&L naturally adjust to that as we take the actions we need to. If revenue lowers, gross margins remain generally intact. Our SG&A is highly variable, as the majority is compensation, and it’s modestly fixed costs. The variable portion is highly incentive-based, and changes with shifts in revenue and gross profit. As a result, we maintain fairly stable margins when considering the bottom line. You can review this during the COVID period, it serves as the best example of that. Ran, obviously, in APEX as a private company, went through this during previous cycles and saw similar outcomes. Our clients rely on us as an essential part of the fabric around how they get things done—not just for new tasks but also for daily operations—this is much more effective for them compared to maintaining a large fixed internal workforce. We’ve observed this secular change unfold for years, and they continue to need us to assist in their IT operations and achieve significant projects.
Mark Marcon, Analyst
Got it, and I appreciate that. Lastly, we have an election coming. You announced some impressive contract signings in the government space. Do you think the pace of the decisions will increase? What could happen during the lame duck session, particularly if there’s a split between party perspectives?
Ted Hanson, CEO
Well, look, I think that our numbers reflect the rising pace of bookings in Q3. There was a build during the first two quarters after the budget took effect, and now you’ve seen activity pick up in Q3. We suspect there may be a little more strength in the Q4 number for new bookings. That’s simply due to the cycle of government contracting agencies coming off the COVID situation and the new budget starting in March. We’ll have to see how the election unfolds and whether it impacts this, if at all. It may not. I’ll tell you that the threats we face are not diminishing; they are only increasing. This includes cyber security, solutions around AI and Machine Learning, and the government’s need to modernize systems to perform essential functions. These priorities won’t just disappear, and regardless of which party is in power, they will likely support these initiatives.
Operator, Operator
Thank you. Ladies and gentlemen, we have reached the conclusion of the question and answer session. I’d like to turn the call back over to Ted Hanson for closing remarks. Over to you.
Ted Hanson, CEO
Right. Well, thank you, operator, and I appreciate everyone being on our Q3 earnings release call. We look forward to speaking with you in February and discussing the fourth quarter and our expectations for the first quarter of 2023.
Operator, Operator
Thank you. Ladies and gentlemen, this concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.