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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you for standing by and welcome to the ASGN Fourth Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to turn the conference over to Jason Terry, Investor Relations. Please go ahead.
Thank you, operator. Good afternoon, and thank you for joining us today. With me today are Peter Dameris, Chief Executive Officer; Ted Hanson, President; Rand Blazer, President of Apex Systems; George Wilson, President of ECS; and Edward Pierce, Chief Financial Officer.
Before we get started, I would like to remind everyone that our presentation contains forward-looking statements. Although we believe these statements are reasonable, they are subject to risks and uncertainties, and 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 the 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 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 the GAAP and non-GAAP measures are included in today’s press release.
I will now turn the call over to Peter Dameris. Peter?
Thank you, Jason. During our call today, I will comment on the markets we serve and our financial highlights. Ted, Rand and George will then discuss the performance of our operating segments in greater detail before turning the call over to Ed for a detailed review of our fourth quarter results and our estimates for the first quarter of 2019.
Now on to the fourth quarter results. Revenues for the quarter were $929.7 million, up 36.9% year-over-year on a reported basis or 11.8% on a pro forma basis. Our growth rate for the fourth quarter was not only higher than the third quarter, it was the fastest quarterly year-over-year growth rate for any quarter in 2018.
Our strong performance is indicative of the overall strength of the U.S. economy and labor market and the health of the federal market.
Our IT business continues to see high demand from its customers, driven in part by greater adoption of staff augmentation as a viable alternative to outsourcing, offshoring and consulting. We believe that we are well positioned to continue to service our customers' IT needs as technology rapidly evolves and is adopted.
Our size and service offerings allowed us to grow faster than the published IT services industry growth rates and we believe that we are well positioned to generate solid above-market revenue growth in the future.
During the quarter, we saw strong double-digit revenue growth at Apex Systems, strong performance from Creative Circle and continued year-over-year growth at Oxford Core and our Oxford segment. Our Federal IT services and solutions business, ECS, grew revenues at roughly twice the projected annual growth rate of its peer group for 2018.
ECS has grown above its peer group's organic growth rate in each of the last three quarters following the acquisition by ASGN. Customer demand was strong across our federal, local, mid-market, and large national accounts.
Adjusted EBITDA was up 31.5% year-over-year to $109 million and cash generation continues to be at or above our expectations. Our Adjusted EBITDA margin was slightly below the mid-point of our guidance due to $7.1 million in software sales under one of ECS’ government contracts which carries a lower gross margin and higher than expected flow of revenues from certain of Apex's larger customers which also carry a lower gross margin.
Free cash flow was $57.3 million and our leverage ratio was 2.69 times trailing twelve months adjusted EBITDA at the end of the quarter. For the full year we paid down $286 million in debt, including $276 million since the closing of the ECS acquisition.
Despite normal quarterly seasonality and the payment of the cash for the DHA acquisition and the annual cash bonuses in the first quarter, the company anticipates that its leverage ratio at the end of the first quarter will be 2.65 times, down from 2.69 times at the end of the fourth quarter.
As we look ahead to the remainder of 2019, we anticipate our leverage ratio will be below two times by the end of the year assuming no further acquisitions.
With respect to recent production at our Apex and Oxford segments, our weekly assignment revenues, which exclude conversion, billable expenses and direct placement revenues averaged $48.8 million for the last two weeks of the quarter, up 11.2% over the same period in 2017.
Our Federal IT services and solutions business continues to see new long-term contract awards, robust spending against existing contracts, and the forward positive benefits of increased funding and visibility of defense, intelligence, and federal civil agency budgets, particularly in the areas of artificial intelligence and machine learning.
During the quarter, ECS secured $196.6 million in new awards. George will speak in more detail regarding these recent awards.
On January 28th, we announced the acquisition of DHA for our ECS segment. DHA is a provider of mobility, cybersecurity, cloud and IT services to the Federal Bureau of Investigation and other federal customers.
DHA’s services are delivered primarily through prime, full and open contracts. Its performance reputation in delivering technical support will strengthen ECS’ rapidly growing presence across cybersecurity and other operational domains in the national security and intelligence community.
I would like to now turn the call over to Ted Hanson, who will review the operations of the segments. Ted?
Thank you, Peter. For the fourth quarter, all three segments contributed to ASGN's growth. The Apex Segment, which Rand will review in a few moments, grew 13.1% year-over-year and the Oxford segment grew 4.8% from the fourth quarter of last year.
The Apex and Oxford markets we serve in IT, Digital/Creative Marketing, Life Sciences and Engineering, all remained stable and productive during and exiting the quarter. Secular changes remain in our favor with regards to how our customers are evolving their approach to supporting business needs and getting projects completed.
While our staffing services continue to grow, and we take share with greater than market growth rates, our value-added service offerings or consultative work are growing at a much faster pace. The Oxford Segment is comprised of Oxford Core, CyberCoders, our permanent placement business, and Life Sciences Europe.
For the fourth quarter of 2018, Oxford Segment revenues were $151.2 million up 4.8% year-over-year, or 5.5% on a constant currency basis. For the full 2018 year, the Oxford segment generated $606.5 million in revenues and was up 3% year-over-year with all units positively contributing to growth.
Oxford Core revenues, which account for approximately 75.5% of the segment revenues, were up approximately 5.6% year-over-year, or 6.1% on a constant currency basis and in line with our expectations.
CyberCoders, our permanent placement service offering, which accounts for 97.4% of the segment's permanent placement revenues, had 4.1% growth year-over-year, meeting our initial expectations. Gross margin for the segment was 40.7% coming in slightly ahead of initial expectations for the quarter, but down 110 basis points year-over-year due in large part to business mix within the segment.
As we typically do, let me give some color to the progress in Oxford Core. In 2018, Oxford Core returned to a position of year-over-year growth, ending the year with the highest quarterly year-over-year growth rate.
Q4 showed varying degrees of performance in each of our four disciplines in the U.S. and Europe with strong growth in our domestic IT and Engineering offerings, along with strong growth in our European business.
It is a longer road to truly institutionalize our sales strategies and build upon the productivity we have created over the last few quarters. However, we are pleased with the progress we have shown during the course of 2018 and our results provide us confidence that our actions will lead to continued growth, increased productivity and consistently improving bottom-line results.
In 2019, the results of our Life Sciences Europe division, the smallest division within the Oxford Segment and ASGN, will be incorporated within the overall Oxford Core results and we will continue to provide commentary on the performance of that business unit both in the United States and in Europe.
I will now turn the call over to Rand Blazer. Rand?
All right. Well, thank you, Ted. The Apex segment, which consists of Apex Systems, Apex Life Sciences and Creative Circle business units, again reported solid results for the quarter and finished a very strong year.
Revenues for the segment in the fourth quarter were $604.6 million up 13.1% year-over-year. Revenue for the year was $2.3 billion, up 12.9% for the full year versus 2017. Apex Systems, which consists of 76.2% of the segment’s revenues in the quarter, continued to lead the way with 14% year-over-year revenue growth in the fourth quarter and ended the year with 13.8% growth over 2017.
Our Creative Circle unit posted solid year-over-year revenue growth for the fourth quarter at 9.8%, and our Life Sciences’ unit was up 10.9%. Gross margin for the Segment was slightly up year-over-year reflecting stable pricing in our end-markets.
Our segment's EBITDA also grew double-digits in the fourth quarter and once again outpaced top-line growth both in the quarter and on a full year basis. Our EBITDA performance and conversion of gross profit to EBITDA was driven by revenue growth and continued strong productivity of our sales, delivery and infrastructure teams.
To give a little more color, Apex Systems’ revenue growth and performance was broadly driven by the following factors: Apex achieved double-digit revenue growth in four of the seven industry verticals we service including: Financial Services, Healthcare, Consumer Industrial, and Technology industry accounts.
Of the remaining three industry verticals: Aerospace & Defense and Telecommunications accounts grew mid-single digits while Business Services accounts exhibited low-single digit growth year-over-year.
Growth was achieved in both our top accounts and retail or branch-centric accounts with top accounts and retail accounts growing double-digits. Growth in our consultative type work remained strong in the quarter and continues to outpace our expectations and our overall revenue growth rate.
Finally, as mentioned, our field and back office operations exhibited exceptional productivity during the quarter while supporting Apex Systems’ EBITDA performance.
Creative Circle’s revenue grew just shy of double-digits in the quarter on an as reported basis with growth being driven by Creative Circle’s Top Accounts Program and digital marketing skill sets. With this latest quarter’s performance, the Creative Circle unit continues to exceed our expectations for overall profitability. Our Life Sciences business revenue growth was also up, again driven by strength in our Life Sciences top accounts and in our clinical skill sets.
Over the past year, we have worked hard to move our Apex Systems and Apex Life Sciences units closer together. These units share the same back office, many same top accounts and today have common field leadership. These past actions have allowed us to achieve certain synergies in our business and strengthen client service as we have built critical mass in our sales and delivery teams and provided our client accounts our full capability across both IT and Life Sciences skill sets.
Because of the success of these past actions, beginning in Q1 of 2019, the performance of our Apex Systems and Apex Life Sciences units will be reported as one singular unit, Apex Systems. We will still provide visibility of our Life Sciences performance as the 8th industry within Apex Systems.
In conclusion, the Apex segment continues to outpace the performance of the overall IT staffing and services industry and yet another solid quarter, wrapping up a successful 2018.
George, turn the call over to you.
Thank you, Rand. ECS had very strong performance in the fourth quarter of 2018, both from a financial and operational standpoint. ECS reported revenues of $173.9 million, an increase of 14% year-over-year and 6% sequentially against the third quarter of 2018. This growth continues to be ahead of the industry average for peer companies operating in the federal technology space.
We have seen continued strong demand for services and solutions in areas of cybersecurity, cloud, artificial intelligence and digital transformation, key business areas for ECS. Also, we continue to see increasing customer interest in IT modernization. These are areas where ECS is well positioned to support our clients with deep customer knowledge, the required IT skills, relevant technology partnerships, and the needed contract vehicles.
In the fourth quarter, we received a total of $196.6 million in contract awards for a 1.1 book-to-bill during a seasonally slow quarter. New awards include cybersecurity work supporting the U.S. Federal Bureau of Investigation, cloud managed services for a commercial client, cloud and software development solutions for the U.S. Marine Corps, and digital modernization efforts for the Defense Health Agency.
Subsequent to year-end, we secured a yet to be announced large cyber award and are looking forward to an even larger book-to-bill ratio in the first quarter of 2019. We see continued strong proposal activity and have a significant backlog of proposals submitted and awaiting award.
At year-end, ECS had $1.4 billion in total contract backlog which equates to a healthy coverage ratio of 2.3 times our trailing twelve-month revenues. During the fourth quarter, ECS continued to strengthen its technical skills and business partnerships with commercial providers in cloud, cyber, risk management and artificial intelligence. From a profitability standpoint, ECS’ adjusted EBITDA grew 3.5% compared to the last quarter of 2017.
I will now turn the call over to Ed Pierce to discuss ASGN’s overall financial results. Ed?
Thanks, George. As Peter mentioned, revenues for the quarter were up 11.8% year-over-year on a pro forma basis and exceeded our previously-announced estimates by $14.7 million, or 1.6%. The favorable variance mainly related to higher revenues from large accounts at Apex and higher revenues at ECS, which included $7.1 million in software sales that had been expected to occur in the first quarter of 2019.
The combined effects of changes in foreign exchange rates and differences in billable days did not have a significant impact on our year-over-year growth rate. Gross margin for the quarter of 29.2% was slightly lower than our previously announced estimates.
The variance was mainly the result of a higher mix of revenues from Apex and ECS, which have a lower margin than our Oxford segment and a higher mix of revenues from large volume, low margin accounts at Apex.
SG&A expenses for the quarter were higher than our previously-announced estimates mainly because of acquisition and integration expenses of $1.8 million, which we do not include in our guidance estimates.
Amortization of intangibles was $13.8 million, up year-over-year as a result of the acquisition of ECS and $4.8 million lower than our guidance estimate. Now the favorable variance related to a change in the estimated useful life of ECS' backlog intangible asset, which now more closely matches the estimated cash flows of the underlying funded contract awards.
As mentioned in today's release, we have finalized the purchase accounting for ECS and there were no significant changes in asset values from their initial determination. As part of this finalization, we revised the contract backlog estimate as of the acquisition date and re-calculated the book-to-bill ratios for the second and third quarters of 2018 and these revisions are included in today's press release.
Interest expense for the quarter was $14.2 million, compared with $6 million in the fourth quarter of 2017. Interest expense for the quarter was comprised of $12.7 million of interest on the credit facility and $1.5 million of amortization of deferred loan costs.
Sequentially, interest expense was down approximately $0.4 million due to lower average outstanding borrowings, partially offset by a 22 basis point increase in the average interest rate. Our effective tax rate for the quarter was 23.7%, compared with our guidance estimate of 26%.
The lower rate reflected, among other things, excess tax benefits on stock-based compensation which we do not include in our guidance estimate and lower estimated book-to-tax differences for the full year. Our provision for income taxes for the fourth quarter of 2017 included a one-time, non-cash benefit of $31.4 million related to the remeasurement of our net deferred income tax liabilities as a result of income tax reform.
This one-time adjustment was the reason net income for the fourth quarter of 2017 exceeded that of the current quarter.
Net income and adjusted net income were both were above our guidance estimates, but below the fourth quarter of last year because of the one-time tax benefit of $31.4 million. Adjusted EBITDA for the quarter was $109 million, up 31.5% year-over-year on a reported basis.
Cash flows from operating activities were $63.9 million and free cash flow was $57.3 million, or 6.2% of revenues. During the quarter, we repaid $55 million of our long-term debt. Our accounts receivable days sales outstanding were 60.1 or 2.6 days more than the end of the preceding quarter. Each day is approximately $10 million.
The increase in DSO’s was mainly related to the government shutdown and have since returned to more normal levels.
For the first quarter of 2019, revenues are estimated to range from $916.6 to $926.6 million, which includes approximately $11 million in revenues from DHA. Excluding DHA, our estimates imply year-over-year pro-forma growth of 8.5% to 9.7% on one fewer billable day. On a same billable day and constant currency basis, our estimated growth rate ranges from 10.6% to 11.8%.
Our sequential growth rate reflects normal seasonal spending patterns of our commercial and government customers, such as lower spending in the first quarter on software and hardware sales to our government customers, ramp up of spending following the completion and release of our customers IT budgets at the beginning of each fiscal year and the effects of the $7.1 million in software sales that occurred in the fourth quarter of 2018, which have been expected to occur in the first quarter of 2019.
As Peter mentioned earlier, demand and momentum going into 2019 is strong as demonstrated by the growth rate over the last two weeks of 11.2%. Net Income is estimated to range from $35.8 million to $39.5 million; adjusted net income from $48.8 million to $52.5 million; and adjusted EBITDA from $96.3 million to $101.3 million.
Our adjusted net income estimates do not include the quarterly cash tax savings of $7 million related to the amortization deduction for goodwill and trademarks.
I will now turn the call back over to Peter for some closing remarks. Peter?
Thank you, Ed. As our quarterly results continue to prove out, our scale, size and breadth of services has us well positioned to benefit during a period of historic secular growth for the services industry. Without doubt, the world of work is changing.
Accelerating digital transformation, coupled with favorable labor and immigration legislation and an improving and stable U.S. governmental market are all market forces occurring in our space. We are optimistic that ASGN is well situated to continue experiencing strong results into the foreseeable future.
The entire ASGN team is pleased with our fourth quarter performance and our results for 2018 as a whole. We entered 2019 with a healthy tailwind in all of our segments and are optimistic that we will drive continued performance in the first quarter.
As we’ve stated before, our focus remains on growing the business profitably along with maintaining our healthy rate of growth.
To conclude our prepared remarks, I want to take a moment to acknowledge and congratulate our many loyal, dedicated and talented employees whose efforts have enabled ASGN to progress to where we are today.
Thank you for your time. I would like to now open the call up to participants for questions. Operator?
[Operator Instructions] Our first question will come from the line of Jeff Silber with BMO Capital Markets. Please go ahead.
Thanks so much. That’s close enough. In looking at your supplemental materials, you provide a lot of information. I specifically was focusing on the change in your staffing consultants. I think it went up about 10% in Apex, but went down slightly in Oxford. Is there anything to read into that? And I am just curious what your plans are for the two different divisions regarding internal headcount for 2019. Thanks.
Yes, thanks. I think on a normal basis, we always say that we are going to invest in headcount and it’s likely just a little bit less than the rate of growth in the business. If you see in any one quarter that maybe we have a headcount fall like in Oxford. It maybe seasonal around a little bit turnover in the fourth quarter it take us a little while to attract talent at the end of the year. But our goal there is to continue to invest. I don’t think our plans have changed at all there.
Okay, fair enough. In the prepared remarks, you’ve alluded to the government shutdown, and just talking about the increase in DSOs, was there any other impact on your business in the quarter? Should we expect any kind of collateral damage so to speak for the rest of the year?
Yes, so, as it relates to the government shutdown, really very little impact on revenues in the fourth quarter and I think we estimated a couple of million for the first quarter. Now with that said, there has been a slowdown in approval of a newly competed work or resolution of protest but that’s just a deferral. It’s not a loss of opportunity or business.
Okay. My final question, I am sorry, just dealing with your M&A strategy. I guess, the last couple of larger acquisitions has been focusing on the government contract area. Is that where your focus is going to be going forward in terms of M&A?
No. Jeff, it’s wherever we see the best opportunity, strategically and as far as ease of integration, as you saw from Apex, we just have a juggernaut that grew 2.5 x, 3 x to the industry and it’s better to pull a SG&A versus buying something to the extent that we found something interesting that enhances the services that we can offer our clients at Apex, we do it. In the government space, we have told you previously that our goal is to get to $1 billion in revenue for that segment.
And we think that provides them with different credentials and credibility and the ease of integration is a little bit different on the government space than it is in the commercial space. And there is some real opportunities to add to our delivery capabilities.
So, the last couple of deals, one was a platform ECS and then, the second was DHA to add to the capabilities. But we are looking across the universe of the services that our customers need and can we build it organically quick enough or do we need to buy up a company to deliver to our customers.
Okay. Appreciate the color. Thanks so much.
Thank you. And next we go to the line of Gary Bisbee with Bank of America. Please go ahead.
Hey guys. Good afternoon. I guess, first question on the software sale within ECS, can you just help us understand, should we think it as more one-time? Or is this something that happens on a recurring basis with some of these that’s just a little more episodic in nature and are you willing to say that just the last part of that, how much of that actually impacted the gross margins?
In other words, ex that was the gross margin about how it would have been trending for that segment earlier in the year? Thank you.
Yes, I’ll go first and then I’ll ask George to add some color. But one, these software licenses and hardware are instrumental and necessary for us to deliver the solution to our governmental customers. So, no way should you construe that we are in the business of selling independently software and hardware. This is we can’t deliver the solution artificial intelligence, machine learning without the software and the equipment it may reside on.
There is some seasonality, Gary to how that hardware software spend occurs against these contracts typically more in the fourth than you would see in the third or second. We are not breaking out what the impact is to the gross margin.
I would just tell you that, gross margins on a line item basis within ECS are relatively stable. It just has to do to the impact as you are alluding to of how much software hardware sales flow through a quarter versus another quarter. George, would you like to add something to that?
Yes, thanks, Peter. I think that emphasizes the seasonality of it and hitting in Q4 as opposed to what we normally thought we are going to hit in Q1 and the gross margins, just a minor impact, I don’t think we provide the details on those kind of things. But as Peter said, it’s part of our solution set. It is continuing as part of our business moving forward. And we will expect some more of this, but Q4 has been a lot heavier than Q1 in every year in terms of getting the licenses and such to deliver our solutions.
Great. Thanks. And then, just a follow-up, for the business overall, just how if at all are you seeing tighter labor markets impacts your ability to source talent? Number one, and number two, your ability to charge for it in terms of higher bill rates. Any change in the last few months in how you think either of those factors? Thanks a lot.
Well, I am not moving qualitative response and then I’ll let Rand speak to it a little bit, but I mean, we had a fastest quarterly growth rate of 18 in the fourth despite the unemployment rate continuing to be at historic low levels.
So our teams between their effort, the tools, their brand, and the opportunities that we can show consultants versus someone else have a very attractive recruiting profile and George and Teva, would you add to that? Excuse me, Rand and Teva would you add to that? Rand?
Well, I’ll start. I’ll start. In the supplemental material or the press release Ed gave out, he does give average bill rates and for Apex, you’ll see as you went through Q3 and Q4 of 2018 our bill rates have increased.
So, is the labor market tight? Yes, it’s been tight in the IT world for a long time. You have to really work to make sure you are building your portfolio of resources to deliver to clients. Are we seeing some increase in bill rates? Yes, particularly in certain skill sets.
Great. And then just one last one on the continued outstanding growth at Apex. You’ve talked about a lot of factors that have driven that, but is there anything you call out today as particularly important over the last few quarters or is it just continue to be the various factors you discussed last year at the Investor Day?
Well, I do believe it’s the relationships we’ve created our size, our credibility. If you are asking was there like a one-time spend, a large project awarded that wouldn’t occur again, this is pretty state business, if that’s what you are getting at, Rand anything else?
No, I agree you, Peter. It’s just steady state and Gary, we said it along, when you are investing particularly the Apex side of the business you are investing in a portfolio of accounts which continues to grow and deepen. So, that growth in deepening of those account relationships make us a stronger business.
Okay. Thanks, guys.
Thank you. Next we go to the line of Ed Caso with Wells Fargo. Please go ahead.
Hi, good afternoon. It’s Rick Eskelsen on for Ed. I was wondering if we could just dive a little deeper into the ECS business even when you pull out the impact of the past the growth has been very strong there. So wondering if you could just provide a little more detail on why you think you are able to outgrow the market by a pretty considerable amount so far?
Well, George, you go first and then I’ll follow.
Yes, thanks for the question. We believe we’ve got the right customer sets and right capabilities in this market. It’s something we’ve been building here at ECS for the last ten years and we feel good about our positioning. Like I said in my statements, we’ve seen this – see the interest, very heavy interest in cyber cloud and digital modernization and we’ve got the capabilities, the customer relationships, as well as the contract vehicles to go accomplish the missions for the customers.
We are not a super large company. We are – so, we will probably have some customer intimate relationships than sometimes in some of the much larger wins. So that might give us a little bit of advantage. But like, I just said a second ago, it’s our customer relationships, our ability to have the capabilities to solve their problems and have the contract vehicles to respond to that.
Yes, so, Rick, I think our revenue streams are little more homogenous than just the broader industry. As you know, we’ve – we are not trying to be a multi, multi-billion dollar government services contractor. We are trying to be a large IT solution services provider to the government.
So, a lot of our skills and practices maybe growing faster than some of the other things like mission support or language translation or passport renewal outsource contracts that others in that umbrella category of government services may do.
And just to reiterate what George said, when you really go on our website and you see the contract vehicles that we are on as a prime, we really do have the right licenses to compete for large pieces of business. And there has been a good flow. We’ve been successful over the last couple of years of winning some nice pieces of business.
Thanks. That makes sense. I guess, if I could just follow-up on the leverage profile as well. I think what you guys have said at the time of the acquisition was you expected to exit this year around 2.5 times and now you are at about 2 times. Just could you talk a little bit about sort of the faster than expecting delevering and the opportunities for other things to more acquisitions like D&A any share repurchase stuff like that? Thank you.
Well, it’s a combination of better conversion of EBITDA to free cash flow and little faster growth of EBITDA. And as we always say, we – our shareholders capital competes for what’s the most attractive long-term return, whether it’s share repurchase, rapid deleveraging or acquisitions. And in the first quarter, it was to do a little acquisition. And we are – we evaluated every quarter what’s best.
Great. Thank you very much.
Thank you. Next we will go to the line of Tim McHugh with William Blair. Please go ahead.
Thank you. First, I guess, two questions on ECS. First off, the comment about, I guess, EBITDA grew 3.5%. I realize probably a lower margin on that product sale, but is there an increase – I guess, why would generally the EBITDA will be growing a little slower than I thought the underlying revenue.
If I look at the customer breakout there it feels like, DoD and intelligence in particular is driving a substantial part of the growth and maybe Federal and civilian a little slower. Does that just reflect budget – government budget trends or is there something you are seeing more so at one trend in terms of market share gains and customer wins that’s driving that?
Well, our focus really is to be a value trusted partner to the intelligence and Department of Defense and stay away from some of the civil and civilian agencies. And as you know from our prepared remarks, because our work is being essential, the only real big impact we had in our portfolio of business in the first quarter from the shutdown was at the EPA.
And so, the other stuff was being essential and carried on. George, do you want to give a little more color to the components that affected the reported number of the adjusted EBITDA growth?
Yes, sure. And I’ll have to say the same thing that Peter said. We really do focus on mission-critical customers which happen to be defense and intelligence, the law enforcement. And there are some federal civilian organizations that are also very focused on mission-critical Department of Homeland Security as another example.
And that again seems to marry up very well with not just our capabilities, but also our business model in terms of going to the much higher end and trying to solve the most difficult problems. In those areas are where we are really growing quite a bit particularly in the AI, ML and software integration areas.
Okay. Great, thank you. And then, I guess, just, following up on Oxford, I guess, you are seeing a – I guess, I know there is some timing around sales force. I guess, but there also a comment in the prepared remarks about continue to see margin improvement, I guess.
Just more broadly, if we step back, where you are at with kind of productivity levels in Oxford – and margins in Oxford relative to what you consider, I guess, the ultimate goal or the kind of the ideal kind of levels for that business?
Well, I guess, Tim, we are kind of monitoring that as we go. I think you can see in our gross margin at Oxford that as we create bigger more meaningful customer relationships that we are having to get that sometimes at a different price, also some of it is around business mix which units are growing the most and what is the margin profile of that unit.
But I think ultimately, not only do we want to sustain best-in-class growth rates above the market, but we also want to find higher levels of productivity from our field staff and from our back office costs. And so, I think we are midstream on that.
That’s not changing overnight, but certainly growth is going to begin to help that more where in the past, we haven’t really – when we weren’t growing, we weren’t really getting a help there. So, I think those are all we evaluate those as we go, but certainly, we look to get better productivity statistics out of our team as we go forward.
That’s fair enough. Thank you.
And thank you. Next we go to the line of Mark Marcon with RW. Baird. Please go ahead.
Good afternoon. Just wondering if we could talk a little bit more about Apex with regards to increasing the mix of statement of work and consulting light engagements and how we should think about that with regards to the margin profile? And also, if you could just give us a little more color in terms of the growth that you are seeing there and who you are replacing?
Rand?
Well, the growth rate in our consulting business is growing, I would say twice what it is in our staffing business, Mark, so it gives you some sense. The margins are healthier. We don’t give out that detail. But they are definitely healthier than the staffing, because you are taking more risk and providing more value to the client in the work. The key is to control the risk. So it doesn’t erode your margin and yes, still deliver more value than you would by just providing staffing support.
Should that translate into higher gross margins on a year-over-year basis for – I mean, as that is growing twice the rate within the Apex unit? Obviously there is multiple components within that unit and so we don’t see all of it. But just wondering how we should think about that?
Well, Mark, we always promise you our goal is to have stable gross margins and expanding EBITDA margins. We didn’t have that in the quarter for the reasons we told you. But as you point out, there are various components, whether it’s permanent placement and conversion fee contribution. Whether it’s SOW, whether just pure assignment, the contract assignment gross margin, they vary.
And there is more pressure on the staffing contract gross margin than there is on others. So, it ebbs and flows. But we’ve been able to manage that portfolio of business. So that we have a relatively stable to it at times expanding gross margin and I think you should consider that.
For modeling purposes, we are not predicting a dramatic erosion, but as we have some tools, we can use to adjust if we find ourselves in a difficult pricing environment on the staff aug business.
Great. And then, with regards to further integrating the Life Sciences within Apex, are there any implications that we should think about either from a profitability perspective, growth rate perspective, SG&A leverage perspective, how should we think about that?
Yes, so, a couple of thoughts. One, I don’t think there – on accounting basis, you are going to see us coming out with one-time write-offs or things like that for closure of this or that. So, I don’t think for modeling purposes, you will get a bunch of one-time announced, we are stopping this or that that causes us to recognize a loss.
As it relates to the reported numbers now that they are going to be embedded in Apex, it’s going to – the Life Science business was growing slower – excuse me, slower than Apex. So if you – but it’s so much smaller than Apex. It’s not going to have a big number. But it could mute things a little bit and you shouldn’t automatically correlate that to – it’s in our IT business, it could just be a blend of business.
And the margin on the Life Sciences business was slightly lower than Apex’s business. So that could, on a reported basis, causing to look a little different. So it’s incumbent upon us which we will try to do to tell you if there is anything that’s reported – that’s affecting the reported numbers. But just want to reiterate, whether in reality, things play out this way or not, we are not guiding to compressing gross margins.
A quarter here or there may get reported where it looks down 10 or 20 BPS, but that’s more because of mix of businesses than we are seeing an erosion. So, Apex stable gross margins. Apex reported with Life Sciences could feel compressed a little bit, but that’s just mixture. That has nothing to do with pricing power at Apex. Does that answer your question?
I think so. Although, I mean, if, I mean, I am not sure how we are blending both together anyway. So, why would that impact the gross margins?
Well.
Peter, can I comment?
Yes, one thought, yes, you are right, I mean, we give you the segment, but when we look at it, deconstructed, I told you the reality that the margins move around because of the margin profile on those two lines of businesses and the perm contribution et cetera. Go ahead, Rand.
Mark, I was just going to point you that you see the number is that we kind of come out within a few charting this over the quarters. First of all Apex margin improved in the quarter over year a ago in that quarter. Life Sciences margin held very steady. The growth rate of the Life Sciences business, if you look at the last four quarters, it crescendoing up.
So this is really all about serving client and having critical mass to be close proximity to the client and the wherewithal to deliver the skills needed whether they are clinical, life sciences or IT skills.
So I think you see it in our numbers, if you look at a quarter-to-quarter, what we're getting is better client service, better flow of business, better response to that business and very consistent gross margins and now improved growth rates in our life sciences business.
Yes, it all sounds positive. I was just trying to figure out if there might some more SG&A leverage just as you integrate things a little bit more together?
The SG&A has been going on now for really couple years. So we – as I said in my comments, we integrated that two years ago. Uncommon platform, common systems, common applicant tracking, so that’s pretty much already shared which made this transition really smooth and almost non-eventful.
And we’ve recycled some of that savings into investment in headcount. So, it’s not like it’s we are bringing it all to the bottom-line. Some of it is offsetting some of the top-line – top, the growth in our headcount.
Right.
And then, on to Creative Circle, that continues to perform really well. What are you hearing from clients? How should we think about some of the early discussions about budgets and how they are thinking about things beyond this quarter and what they are seeing?
Rand?
Well, I am not sure how to answer that, Mark. I mean, even as good as we are we don’t have a crystal ball on the IT spend in our customer base always. For our bigger accounts we do, which is really what’s happening with Creative Circle. We’ve added to it, which has always been a very strong business, we’ve added to it a top accounts program.
So we are working with more of the bigger guys in their programs where we do get a little bit more visibility on what they are thinking and what they are doing around Creative’s marketing. So, I think it’s a good broadening of the portfolio of accounts we have in that business. And the more and more we do that, more we become more stable and more consistent in our performance.
Okay, great. And then, on DHA, it generated about $50 million in revenue in 2018. Is that growth rate consistent with what you are seeing across ECS in terms of what we should expect over the coming year and how will that end up impacting the EBITDA margins and the gross margins for that line?
Yes, so, we told you when we announced the transaction, $15 million and kind of trailing our 12/31/2018 revenue and about a 20% top-line growth rate which is higher than ECS’ smaller piece of business. And their EBITDA margin, we gave you a range of 8% to 9% for DHA and that’s a little bit less than ECS and that’s because their gross margin is a little bit less than ECS and we think, George, you can address, so that positively impact that over a term of time. George?
Yes, sure, Peter. It’s a great company. It’s got great customer relationships. We look to their contract mix. Their contract mix is time material fixed price and we do believe that we can walk that margin up a little bit.
Great, thanks.
Okay. Thank you. [Operator Instructions] And we’ll go to the line of Tobey Sommer with SunTrust. Please go ahead.
Thanks. Peter, in your prepared remarks, you mentioned some favorable legislation. Could you talk just about what legislation you are pointing to, what effects have been felt in the market and/or maybe you expect to feel in the market on a prospective basis?
Well, it’s not necessarily anything that’s happened in the last 30, 60 days, but as you know the focus on H1B visa and appropriately applying the existing immigration laws to make sure that we are bringing in people on prevailing wages, there is tighter compliance with that which means, people are not doing a wage arbitrage with offshore labor versus domestic labor as easily. And domestic labor is being used more.
The whole shared resource, the gig economy, people continuing to try to turn human capital into a variable cost versus a fixed cost ensuring a resource to get a 100% productivity. And there is, with the tax law changes last year, the government has to continue to find revenues and the biggest source of lost revenue for the government is misclassification of employees.
So state and federal agencies are more vigilant about making sure that employee status is accurate. So, somebody wants to share a resource, the truly, the legal way to do it is through us or a company like ours or a consulting shop, where we are the W-2 employer of record and paying those required taxes into the governments versus trying to find someone off the internet to work as a 10-99. And that has driven business our way as well and I firmly believe that will continue.
Thanks. Are you experiencing that change or that impact more your statement of working business or staffing and is it – is this on the edge that you are getting a couple of basis points faster growth? Or is it percentage points?
Well, I can’t quantify that at this point for you and I don’t know we will – we have the data and I’ll see if it’s appropriate to give it on an ongoing basis. But, no I mean, look, it depends on the sophistication of the customer, the buyer.
It also depends on the type of work, is it creative, is it digital, is it, IT. And so, all these things were having an impact, whether it’s immigration, whether it’s wage hour compliance. Those are all having an impact of one, domestic labor, and two, using a resource where someone is paying taxes.
Great. In terms of the government business, I was wondering, what your perspective is on more product and solutions in that area to build an even higher margin business , because you are active in your services business that is above industry margin and kind of the other way to keep going from there might be a bigger proportion of products and solutions?
Yes, so, I’ll go first. But if you are trying to draw comparison to what Kake recently did which was a wonderful company where they are actually building and selling a proprietary product. I really don’t think that’s where we are going to be. We are going to remain a service provider. I think it’s a big market that’s not going away.
We do have to buy software which enables the solutions that we may develop and/or operate for the customer. But that’s building a proprietary radar or a missile defense and then, selling that as a product to the army, that’s not where we are really going. And I think you’d be surprised if we have announced something about that. George, do you want to add?
Yes, I mean, the biggest emphasis is that we are moving a little bit higher end into – and with that comes hiring margins typically in some of our software solutions which also include a hardware component of them.
So, as Peter said, we are not going to go and invest and deliver a production line of new vehicles or something like that. But we are going to be delivering some pretty complex solutions that include both hardware and software. And as I hope for that, also driving more capabilities, more technical capabilities as well as little bit higher margins.
Thanks. And I just had two final questions. Could you give us a little color on the change in the backlog at ECS? And then, can you describe to us any – where you are kind of cross-selling in bringing the different businesses together to markets and whether that’s to get the opportunity over time?
George do you want to take – address the cross-selling and you know kind of the rules of engagement and process that you and Apex are trying to do together and then Ed, can you address the backlog?
Yes, I’ll touch the backlog first, it’s pretty simple. I mean, we’ve continued to maintain a very healthy backlog as we continue to win new contracts and also expand on our existing contracts. And as I mentioned in my earlier comments, we are looking, like we are going to have a very strong Q1 in terms of a book-to-bill.
So we are very – we feel comfortable about that. As far as the cross-selling, we took a little while to get integrated with ASGN and get to know Oxford and Apex and we are moving forward with opportunities to cross-sell both from what was the obvious in terms of Apex providing additional resources on contracts, particularly in the high-end and hard to fill positions.
But we are also working together to move forward and provide some of our higher-end solutions in cyber and cloud delivery to some of their commercial customers.
Thank you very much.
Thank you. And speakers, currently there are no questions in queue.
All right. Well, we appreciate your time and attention and look forward to speaking to you again on our first quarter quarterly conference call. Thank you for your time today.
Thank you, ladies and gentlemen. That does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.