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ASGN Incorporated (NYSE:ASGN) Delivers Steady Performance Amidst Macro Headwinds
Published on September 24, 2024 | Ticker: ASGN

ASGN Incorporated (NYSE:ASGN), a leading provider of IT services and solutions to the commercial and government sectors, has reported its financial results for the second quarter of 2024, showcasing a resilient performance despite the ongoing macroeconomic challenges.

Financials

For the full year 2023, ASGN reported annual net income of $219.3 million, annual revenue of $4.45 billion, annual operating cash flow of $456.9 million, and annual free cash flow of $417 million. These robust financial metrics demonstrate the company's ability to navigate the dynamic market environment and deliver consistent results for its shareholders.

In the second quarter of 2024, ASGN reported revenues of $1.035 billion, a decrease of 8.5% compared to the same period in the prior year. This decline was primarily driven by lower revenues in the Commercial segment, which were down 10.6% year-over-year, while the Federal Government segment saw a more modest 3.3% decrease. The company's IT consulting revenues, which accounted for 57.1% of total revenues, were down 1.7% year-over-year, but improved 1.6% sequentially.

Gross margin for the quarter was 29.1%, an increase of 20 basis points from the second quarter of 2023. The Commercial segment's gross margin improved by 50 basis points to 32.7%, while the Federal Government segment's gross margin increased by 10 basis points to 20.6%. This margin expansion was driven by a higher mix of consulting revenues and improved profitability in both the Commercial and Federal Government segments.

Net income for the second quarter of 2024 was $47.2 million, compared to $60.1 million in the same period last year. Adjusted EBITDA, a non-GAAP measure, was $117.1 million, or 11.3% of revenues, compared to $135.2 million, or 12.0% of revenues, in the prior year quarter. The company's adjusted EBITDA margin was at the top end of its guidance range, reflecting the improved business mix and higher gross margins.

Segment Performance

The company's Commercial segment, which serves Fortune 1000 and large mid-market companies, saw revenues decline by 10.6% year-over-year. However, the segment's consulting revenues were essentially flat compared to the prior year quarter and improved 1.6% sequentially. The Commercial segment's book-to-bill ratio on a trailing 12-month basis was 1.2x, indicating a healthy level of new bookings.

The Federal Government segment, which provides advanced IT solutions to the Department of Defense, the intelligence community, and federal civilian agencies, reported a 3.3% year-over-year decline in revenues. This was primarily due to lower-than-expected software license revenues, which carry a lower gross margin. The segment's contract backlog at the end of the second quarter was $2.8 billion, representing a coverage ratio of 2.2x the segment's trailing 12-month revenues.

Outlook

Looking ahead, ASGN provided financial estimates for the third quarter of 2024, expecting revenues in the range of $1.024 billion to $1.044 billion, net income between $45.8 million and $49.4 million, and adjusted EBITDA between $114 million and $119 million. The company's adjusted EBITDA margin is expected to be in the range of 11.1% to 11.4%.

The company's Chief Executive Officer, Ted Hanson, commented, "ASGN's results for the second quarter of 2024 confirmed our expectations that macro conditions in Q2 would be consistent with the first quarter of the year. Revenues were $1.035 billion for the second quarter, while Adjusted EBITDA margin of 11.3% was at the top of our expectations."

Hanson further added, "We are making measured, strategic progress toward our goal of moving into higher-end, higher-value IT consulting solutions. IT consulting revenues totaled 57.1% of consolidated revenues for the second quarter, up from 53.1% a year ago. Our large account portfolio, across six diverse industry verticals, provides first-hand insight into our clients' investments and long-term IT roadmaps."

Liquidity

ASGN's balance sheet remains strong, with cash and cash equivalents of $132.2 million as of June 30, 2024, and full availability under its $500 million senior secured revolving credit facility. The company's net leverage ratio was 1.89x at the end of the quarter.

During the second quarter, ASGN repurchased 1.1 million shares of its common stock for $108 million, reflecting the company's commitment to enhancing shareholder value. Approximately $667 million remained available under the company's $750 million share repurchase authorization at the end of the quarter.

Business Overview

In terms of geographic breakdown, ASGN generates virtually all of its revenues in the United States. The company operates through two main segments: Commercial and Federal Government. The Commercial segment, which accounts for 70.1% of total revenues, serves clients across five industry verticals: (i) Consumer and Industrial, (ii) Financial Services, (iii) Technology, Media, and Telecom (TMT), (iv) Healthcare, and (v) Business Services. The Federal Government segment, which represents 29.9% of total revenues, provides solutions to the Department of Defense, the intelligence community, and federal civilian agencies.

ASGN's strategic focus on expanding its IT consulting business has been evident in the company's financial performance. The IT consulting revenues, which include both the Commercial and Federal Government segments, have grown to account for 57.1% of total revenues, up from 53.1% in the prior year quarter. This shift towards higher-margin, higher-value consulting services has contributed to the company's improved gross margins and profitability.

The company's management team has also been actively enhancing ASGN's capabilities in emerging technologies, such as artificial intelligence (AI) and cloud computing. The company's delivery centers, including its Mexico-based operations, have been instrumental in supporting clients' digital transformation initiatives, leveraging expertise in technologies like Microsoft Fabric, Google Cloud, and AI-powered accelerators.

Risks and Challenges

While the macroeconomic environment remains challenging, with clients continuing to exercise caution in their IT spending, ASGN's diversified industry exposure, strong client relationships, and strategic focus on consulting services have enabled the company to navigate the current landscape effectively. The company's recent contract wins, including a $1.1 billion IDIQ with the National Institutes of Health, demonstrate its ability to capitalize on opportunities in the government sector.

Conclusion

Looking ahead, ASGN remains well-positioned to capture the growing demand for IT consulting services, as clients seek trusted partners to help them navigate the evolving technology landscape and address their most critical IT needs. The company's robust balance sheet, consistent cash flow generation, and disciplined capital allocation strategy provide the necessary resources to invest in strategic initiatives and pursue selective acquisitions that can further strengthen its capabilities and market position.

Overall, ASGN's second-quarter performance showcases the resilience of its business model and the company's ability to adapt to the changing market conditions. With a focus on expanding its IT consulting services, enhancing its technological capabilities, and maintaining a strong financial profile, ASGN is well-equipped to navigate the current challenges and capitalize on future growth opportunities in the dynamic IT services industry.

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