ASGN Inc

NYSE:ASGN

Earnings Call Transcript

[Operator]

Greetings, and welcome to the ASGN Incorporated First Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kimberly Esterkin, Vice President of Investor Relations. Thank you. You may begin.

[Kimberly Esterkin, executive]

Good afternoon. Thank you for joining us today for ASGN's First Quarter 2025 Conference Call. With me are Ted Hanson, Chief Executive Officer; Shiv Iyer, President; Marie Perry, Chief Financial Officer; and Rand Blazer, Executive Vice Chairman.

Before we get started, I would like to remind everyone that our commentary contains forward-looking statements. Although we believe these statements are reasonable, they are subject to risks and uncertainties, and as such, our actual results could differ materially from those statements. Certain of these risks and uncertainties are described in today's press release and in our SEC filings. We do not assume any obligation to update statements made on this call.

For your convenience, our prepared remarks and supplemental materials can be found in the Investor Relations section of our website at investors.asgn.com. Please also note that on this call, we will be referencing certain non-GAAP measures, such as adjusted EBITDA, adjusted net income and free cash flow. These non-GAAP measures are intended to supplement the comparable GAAP measures. Reconciliations between GAAP and non-GAAP measures are included in today's press release.

I will now turn the call over to Ted Hanson, Chief Executive Officer.

[Theodore Hanson, executive]

Thank you, Kim, and thank you for joining ASGN's First Quarter 2025 Earnings Call. As Kim noted, I'm pleased to welcome our new President, Shiv Iyer to its very first ASGN earnings call. Shiv will make some brief remarks at the close and join us for the Q&A session. Despite macro uncertainty, revenues of $968.3 million and adjusted EBITDA margin of 9.7% were in line with our guidance expectations for the quarter. We continue to deliver solutions that cater to our clients' IT modernization, efficiency and cost containment requirements, leading to strong quarterly bookings for both our commercial and government segments.

Our IT consulting revenues also grew, reaching roughly 61% of total revenues for the first quarter up from 57% in the prior year period. As I noted last quarter, we entered the year with a renewed sense of business optimism from our client base. This improvement in confidence faded as the quarter progressed, with clients remaining cautious about increasing their IT spending. Nonetheless, ASGN's unique business model demonstrates resilience across economic cycles, primarily due to our business stabilizers that support our gross margin along with our variable cost structure, which aids in safeguarding our operating leverage.

Further, our business model also provides flexible onshore and nearshore teams that help reduce our clients' costs while maintaining a commitment to providing high-value IT services. Speaking of providing high-value services in March, we successfully closed our acquisition of TopBloc, a preferred started by Workday Services Partner and recently named Workday Business Impact Partner of the Year. The integration of TopBloc is going well and in a short period of time since the acquisition closed, our Apex and TopBloc teams have already partnered on a number of new consulting opportunities.

Importantly, TopBloc is tracking ahead of our bookings, revenue and adjusted EBITDA expectations. While market conditions remain volatile, we are confident that nurturing our longstanding client relationships, expanding our technology partnerships and enhancing our solution capabilities organically and through strategic acquisitions like TopBloc, we will position ASGN favorably for the future.

So let me provide some examples of our differentiated IT solution capabilities and discuss our segment performance for the first quarter beginning with Commercial. Our Commercial segment services Fortune 1000 and large mid-market companies. Revenues for this segment were again driven by growth in our consulting business, which improved 4.7% year-over-year. Consulting bookings of $336.9 million improved 4.2% as compared to the first quarter of 2024 and put our book-to-bill at 1.2x for the quarter and 1.1x on a trailing 12-month basis.

From an industry perspective, we saw growth in our Consumer and Industrial vertical, which improved mid-single digits year-over-year. Improvement in this vertical was driven by double-digit growth in Materials, Utilities and Consumer Discretionary accounts along with mid-single-digit growth in Industrial. While revenues for the remaining 4 commercial verticals were down year-over-year within our Healthcare vertical, Pharmaceutical and Biotech accounts were up low single digits as compared to the first quarter of 2024. Within our TMT vertical, e-Commerce accounts were up mid-teens year-over-year.

Finally, within the Financial Services vertical, Diversified Financial saw mid-single-digit growth and Regional Banks saw slight growth as compared to the first quarter of 2024. Although Financial Services industry is one of the highest spenders on IT, macroeconomic factors such as higher inflation and uncertainty regarding tariffs have driven cautiousness to spend on new projects across the banking sector. Despite these headwinds, our differentiated IT solutions remain in demand by our diverse U.S.-based Fortune 1000 clients. Consulting engagements for the quarter focused on AI and data solutions, Gen AI, cybersecurity, cloud and digital engineering with projects specifically aimed at permitting cost savings and efficiency.

Let me provide a few examples. For Fortune 200 consumer and industrial clients in the process of modernizing their supply chain, our industry and technical leaders are helping develop and operationalize a data and AI strategy. We are providing a nearshore team of consultants to support the implementation of our clients' supply chain optimization solutions using Informatica's cloud-native and AI-augmented platform to support data and machine learning operations. Although enterprise-wide applications of Gen AI are still to come, we continue to see AI initiatives like this that focus on high-impact use cases to improve efficiency, reduce costs and provide deeper data insights.

In another example of a large health services company, we help build a scalable, secure and efficient identity and access management platform that supports our clients' growth, compliance and evolving business needs on migrating to a new IAM platform. Our client will be able to better manage data controls that provide appropriate access and governance across their organization. Our scope of work encompasses the application and integration basis of the new IAM platform including integration across hundreds of different applications, while optimizing workflows and performing thorough testing and validation. Through innovative optimization techniques, we will enhanced automation, risk management and user experience for our client.

Improving data processing, while at the same time driving efficiency and cost savings remain top priorities across our client base. For Fortune 100 oil and gas client, for example, we successfully implemented the Databricks Unity Catalog, a unified governance solution. By optimizing compute resources and nightly processing times, we significantly reduced our clients' Databricks costs.

Driving innovation and automation on cloud-based platforms is also a high debate. In the first quarter, we collaborated with a U.S. banking client to create a cloud-first automation framework, integrating APIs and modern engineering practices. By eliminating manual file handling, our client achieved end-to-end automation of their costing process by which they assign fees to their products and services, thereby enhancing their overall workflow efficiency.

Each of these consulting projects involve aspects of intelligent, data management and the usage of AI is increasingly becoming essential to successfully managing enterprise data. Even as companies limit their IT spend, our clients continue to scale their investments in AI. Clients early in their AI journeys are investing in AI workshops and AI literacy trainings to prepare their organization for future AI usage. Clients further along in their journeys are partnering with us on thought leadership pieces and innovation studies to drive competitive advantages.

The most common AI use cases we are currently seeing include the development of agent assistants or copilots, the implementation of Gen AI to accelerate the software development life cycle, the usage of AI tools for code conversion and documentation, especially in banking and leveraging AI for IT operations.

With that, let's turn to discuss our Federal Government segment. Our Federal Government segment provides advanced IT solutions for the Department of Defense, the intelligence community and other critical agencies in support of national security. Although the segment's quarterly revenues declined year-over-year, bookings were strong with new contract awards totaling $343.1 million for the first quarter. This put our book-to-bill at 1.2x on both a quarterly and trailing 12-month basis.

In addition, contract backlog was over $3.1 billion at quarter end or a coverage ratio of 2.6x the segment's trailing 12-month revenues. We are not immune to DOGE and our first quarter federal government segment revenues and margins saw a slight impact from DOGE's cost-cutting efforts. That said, our solution capabilities and agency focus remain well aligned with the administration's priority. The government will gain efficiency through IT modernization that leverages AI, automation, and a commercial delivery model.

ASGN brings those exact services and delivery best practices to our customers with our core solution capabilities in AI, cybersecurity and digital modernization for mission-critical defense, national security and law enforcement programs. Our government teams consistently led the charge in IT innovation and during the quarter, we won a new 5-year firm-fixed-price contract with the FBI's laboratory division to provide IT modernization services. As the prime awardee on this contract, our team will centralize and modernize information and operational technology or IT and OT by streamlining technology usage, powering the FBI services with AI tools and automating key processes that enhance the FBI's ability to solve cases and prevent acts of crime and terror.

Our services to the FBI include infrastructure support, cloud integration and modernization, enhanced cybersecurity protection and improved data governance. The FBI is a long-standing client of ASGN, and this contract represents an additional opportunity to promote the agency's essential missions. We also support the essential missions of the Department of Defense and during the first quarter, our Defense and Intel unit won additional work with the DoD's Chief Digital and AI office to operate the department's premier AI development environment or innovation at speed and scale. As a mission-critical partner, we will collaborate with the DoD on AI innovation work streams that provide improved operational insight and decision-making capabilities as well as enhance value across global war fighting domain.

Also during the quarter, we secured a large recompete contract with a strategic logistics customer. By providing technical expertise and solutions to our customers' engineering and technical support center, we will help them reduce their costs while at the same time drive quality and innovation across their operations. As illustrated by these 3 examples, we continue to see a steady flow of work consistent with DOGE's efficiency and IT modernization missions.

Nonetheless, as is prudent, we are actively tracking DOGE activities and identifying ways to support our customers with additional work or to move the central work onto contracts with available ceilings. Although we remain in a continuing resolution through September, customers are extending current projects. We expect that Defense and National Security Programs along with essential citizen services, which together constitute the vast majority of our federal government support will remain priorities in the new government fiscal year.

With that, I'll turn the call over to Marie to discuss the first quarter results in our second quarter 2025 guidance.

[Marie Perry, executive]

Thanks, Ted. For the first quarter, revenues totaled $968.3 million, a decrease of 7.7% year-over-year and in line with our guidance expectations. Given the timing of the acquisition close on March 4, TopBloc contributed less than 1 month to our first quarter results.

Revenues from our Commercial segment were $672.2 million, a decrease of 8.1% as compared to the prior year. Assignment revenue totaled $382.1 million a decrease of 16% year-over-year, reflecting continued softness in portions of our commercial segments that are more sensitive to changes in macroeconomic cycles. Revenues from commercial consulting, the highest of our high-margin revenue streams totaled $290.1 million, an increase of 4.7% year-over-year. Revenues from our Federal Government segment were $296.1 million, a decrease of 6.7% year-over-year, mainly due to a few programs ending and a slight impact from DOGE, as Ted previously noted.

Turning to margins. Gross margin for the first quarter of 2025 was 28.4%, an increase of 20 basis points from the first quarter of last year. Gross margin for the Commercial segment was 32.4%, up 40 basis points year-over-year, reflecting a higher mix of consulting revenue as well as margin expansion in these revenues. Gross margins for the federal government segment was 19.5%, a decline of 20 basis points year-over-year, primarily due to higher rates of fringe benefits.

SG&A expense for the quarter was $214.5 million compared to $210.2 million in the first quarter of 2024. SG&A expenses included $3.3 million in acquisition, integration and strategic planning expenses and a $4.4 million one-time write-off related to previously capitalized costs for software enhancements that will no longer be placed into service. As a reminder, these types of costs are not included in our guidance estimates. Excluding these onetime items as well as noncash expenses, such as depreciation and stock-based compensation, SG&A declined by approximately $6 million year-over-year. For the first quarter, net income was $20.9 million. Adjusted EBITDA was $93.6 million, and adjusted EBITDA margin was 9.7%.

In the quarter, as discussed, we completed our acquisition of TopBloc for $340 million, consisting of 10% equity and 90% cash of which approximately $56 million came from our cash balance and the rest was a drawdown on our revolver. In addition, we deployed $50.4 million to repurchase approximately 0.6 million shares at an average share price of $78.44. At quarter end, we had approximately $478.6 million remaining under $750 million share repurchase authorization.

Also at quarter end, cash and cash equivalents were $107 million, and we had $250 million available on our $500 million senior secured revolver. This brings our net leverage ratio to 2.6x at the end of the first quarter. Free cash flow totaled $6.6 million for the first quarter. Free cash flow was lower than we typically see in the quarter, primarily due to an increase in DSO driven by timing issues of certain enterprise accounts. We expect DSO to improve on a go-forward basis.

Turning to guidance. Our financial estimates for the second quarter of 2025 are set forth in our earnings release and supplemental materials. These estimates are based on current market conditions and assumes no further deterioration in the markets we serve. Guidance also assumes 63.25 billable days in the second quarter, which is 0.25 billable days fewer than a year ago period and 1.25 days more than the first quarter.

Given the overall macro uncertainty, we are widening our revenue guidance range for the quarter. Our revenue estimates incorporate less than a 2% impact from DOGE. In terms of our second quarter margins, while we no longer have as large of an impact from our payroll tax reset that we did in the first quarter, we anticipate that margins will be negatively impacted by the loss of some of our higher gross margin federal work as a result of DOGE cancellations. With that as background, for Q2 2025, we're estimating revenues of $985 million to $1.015 billion, net income of $29.3 million to $34.3 million, adjusted EBITDA of $101 million to $108 million and adjusted EBITDA margin of 10.3% to 10.6%.

Thank you, I'll now turn the call back over to Ted.

[Theodore Hanson, executive]

Thanks, Marie. Even in the face of macroeconomic uncertainty and factors beyond our control, ASGN performed in line with our revenue and adjusted EBITDA expectations for the first quarter. Our unique operating model positions us for sustained progress in delivering higher-end, high-value IT services and despite client IT spending hesitations, our commitment to innovation, customer satisfaction enabled us to deliver strong bookings. The appointment of Shiv as President and the acquisition of TopBloc for pivotal developments that underscore our adaptive and forward-thinking approach and as I noted previously, TopBloc is already exceeding our bookings, revenue and adjusted EBITDA expectations.

Looking ahead, the resiliency and versatility of our offerings and AI data in cybersecurity, in particular, continue to drive demand and affirm our go-to-market approach in these critical areas of client needs. Our ability to maintain robust client relationships while expanding our technology partnerships provide us confidence that we are well prepared to capture future opportunities and enhance shareholder value.

We remain cautious but hopeful about the go forward, knowing that our unique delivery model is the fastest and best way for our clients to accelerate their IT investments. It is precisely our innovative contingent labor model and the vast prospects it provides that inspired Shiv, among other reasons, to join the ASGN team. So let me pass the call over to Shiv to share is insights and wrap up our prepared remarks.

[Sadasivam Iyer, executive]

Thanks, Ted. I'm excited to be part of my first ASGN earnings call. It's a great time for me to join the team and immediately make a positive impact on our company. Over the past 7 weeks, I've hit the ground running, collaborating closely with our segment teams and engaging with our dynamic leadership. The pace of technological change is staggering and our clients are constantly looking for the right talent with deep targeted skills. I'm confident that our model leverages a combination of internal capabilities and a highly skilled contingent labor force, is the optimal approach in this rapidly evolving technological landscape where maintaining the right IT skill sets is exceedingly challenging through a permanent bench model.

In my initial weeks at ASGN, I've been immersing myself with our commercial consulting teams, rapidly climbing the learning curve while inserting my own expertise when applicable. Since the past 2 decades in the consulting industry, I'm thrilled to bring my experience to ASGN to help evolve our strategy and differentiation. Unfortunately, we are at a point in time where clients must exercise caution with their IT spend. Nonetheless, I've been through these economic cycles before each time learning something new, growing my knowledge base to emerge even stronger on the other end.

While we may be experiencing increased market volatility at the present moment, that is doubt in my mind that having access to a diverse pool of talent, continuing to focus on our strong account base and providing the right solutions will allow our company to stay ahead of the competition. I look forward to seeing ASGN continue to take market share.

Thank you again for joining ASGN's First Quarter 2025 Earnings Call. We will now open up the call to your questions.

[Operator]

[Operator Instructions] First question here is from Tobey Sommer from Truist Securities.

[Tobey Sommer, analyst]

I wanted to ask about your bookings in the quarter across different businesses. Could you characterize them from a new customer and new project kind of new work perspective versus renewal of existing work? And then I'll have a follow-up.

[Theodore Hanson, executive]

Sure. Tobey, this is Ted. Thanks for the question. If you think about the commercial side of things where we continue to see consistently good bookings there a mix of renewal work and new work and renewal is still a larger percentage than the new, but the new is progressing. So the trend there hasn't really changed. On the Federal side, our bookings this quarter, which were very strong, keep us moving up, if you will, in book-to-bill now 1 point to on a trailing 12 months basis, again, same characterization. We had some recompete work that we won. We had some new work that we won. And in addition, some of that -- I should have said some of that recompete work also had expansions of work. So it varies, but I wouldn't say any different trends there, Tobey, than what we've seen in the latter quarters.

[Tobey Sommer, analyst]

Then, if I could pivot based on that response and ask a question about DOGE and the impact in the Federal business. Is there a way to characterize -- I mean, you put some numbers there, but from a type of work or type of customer perspective, is there a way to describe where you're seeing the impact and how?

[Theodore Hanson, executive]

Sure. So Tobey, I don't think this will be inconsistent with maybe what we're seeing in other -- across the industry with other players. But where we've had small interruptions of work, it's been less more on the Fed civilian side, not so much on the Defense and Intel side. It may have been 3 pieces of work where we were doing more what I'll call maybe traditional management consulting program oversight was probably the nature of the work. If we look at the work where we're really good hands-on technical work, with a scope to get the customer to a certain outcome or objective, which is the highest propensity of our work. That's been steady, remains in place and so hopefully, that gives you a little bit of a flavor.

[Tobey Sommer, analyst]

It does. With respect to that program management consultative work, how much does that represent in the business? Maybe that describes a couple of points of impact. Is there much that remains? Or does that sort of zero out the category?

[Theodore Hanson, executive]

Yes. It's a small piece of what we do, Tobey. I mean, most of our work is kind of categorized as real good technical work in AI, data, cybersecurity, helping manage IT systems and operations. We did very little work on the general management consulting side and in the regulatory type federal civilian agencies.

[Operator]

Next question is from Mark Marcon from Baird.

[Mark Marcon, analyst]

I want to -- you've did a really impressive job in terms of maintaining the margins here during the quarter. I'm wondering if you can talk a little bit about -- and the guide also reflects strong margins. And so I'm wondering if you can talk a little bit about how you've been able to raise the margins -- the gross margins through the mix. If we were to look at things from an apples-to-apples perspective, in terms of project to project, would it also show that the consulting margins are holding steady in terms of like-for-like type projects? And how should we think about the SG&A going forward, particularly if things soften a little bit. I think most people are still at an early stage in terms of trying to determine what the environment is going to be like.

[Theodore Hanson, executive]

Great. Well, Mark, if you think about the nature of the commercial consulting work as we do more, and it becomes a bigger percentage of the business, obviously, that's going to lever up our gross margins and will continue to contribute to expanding EBITDA margins. If you think about adding capabilities like TopBloc and Workday, what we do in ServiceNow, more work that we're doing in AI and data, those are all areas where we can get an expanded gross margin. So on a like-for-like basis, just based on the nature of the work and the value proposition for the customer, you're seeing that expand in and of itself to your first question.

And then as it relates to SG&A, we -- this will -- our model, which is bringing the talent for this work on a contingent basis is going to continue to support the business, whether revenues move up or down. We have business stabilizers that will help us both at the gross profit and gross margin level. And then it's a highly variable cost structure in SG&A, and that's going to continue to be an important stabilizer of the business.

So you see all this working kind of real time. Remember, it doesn't always happen in the moment. So in the month or the quarter, we may have a little bit of a lead or a lag as it relates to the business stabilizers kind of flowing through, but if you look over a period of quarters, you can kind of consistently see that the SG&A and the stabilizers there in around our model are working as they should.

[Mark Marcon, analyst]

It certainly is evident. Just for my follow-up real quickly, can you talk a little bit -- maybe this is a question for Ted or Shiv or Rand, but what are you hearing from your commercial clients with regards to not the ongoing projects, but projects that they may have been contemplating starting up a month from now, 6 months from now, later on, like how -- what's the level of certainty that some of those projects are going to go through versus we're kind of in a wait-and-see mode? And how variable do you think that could be based on your cumulative experience through multiple cycles?

[Theodore Hanson, executive]

Shiv, do you want to take that?

[Sadasivam Iyer, executive]

Sure. Mark. Well, so far, what we're seeing is clients are still continuing to expand in areas of strategic importance like AI and cybersecurity. And I don't think there's evidence of them slowing some of that down. Obviously, with the macros that we see with some of the uncertainty around, we're waiting and watching across all sectors. But so far, we're not seeing evidence in strategic areas of technology investment, whether it's around cloud, innovation on cloud, data AI, cybersecurity, there's any sort of slowdown.

[Theodore Hanson, executive]

So Mark, if you think about the commercial customers by industry, they're all a little bit in a wait-and-see mode just to add to what Shiv said which ultimately is going to make them cautious here. They're going to stick with it in certain areas. And I think to Shiv's point, they're going to play their cards here for a little while before they dive in at higher levels of spend. I mean even if you look at a third party data point like ISG, I think they've come out and said that basically IT services right now are going to be kind of flat based on the cautiousness and the latency mode, if you will, around tariffs and what's going on in the market.

So there -- and look, I think -- we think about our business the same way. There are certain critical areas of advancement that we need to make in our own systems around data, the use of generative AI and other things that we think are going to be critical for the future. And then there are some areas that is more discretionary, we can hold back on right now. And so I always think our clients are thinking about this and managing it the same way we look at our own business.

[Mark Marcon, analyst]

Thanks for the color and congrats on the margins.

[Operator]

Next question is from Kevin McVeigh from UBS.

[Kevin McVeigh, analyst]

Great. Could you just drill down and help us understand how much TopBloc contributed to the first quarter in terms of revenue and how it impacts the Q2 guidance, I guess, in terms of revenue, EPS. Just want to start there, if I could.

[Theodore Hanson, executive]

Yes. So Kevin, we gave when we made the acquisition, what our expectations were for the year for TopBloc, I'd just refer you back to that. We only owned it for a few weeks during March. So it was -- contribution was kind of immaterial, if you will, to the broader results. And again, as it relates to what may entail for the second quarter or the rest of the year, I mean pretty easy to do the math and what we laid out before.

[Kevin McVeigh, analyst]

Okay. And then I guess, I know you talked about some initial DOGE impact, Ted, but do you think we're through the process at this point? Or do you think there could be more potential adjustments? Or how are you thinking about that and have the conversations changed at the federal level at all?

[Theodore Hanson, executive]

Rand, do you want to take that one?

[Randolph Blazer, executive]

Yes. I mean, I think we've keep in touch with this day to day. And we think that, listen, DOGE will still continue to seep into clients' environment. But most of our discussions are with the clients and around the technology and what they're spending money on. So I mean, I guess I would say, Ted, that DOGE is not the premier person that's second guessing anything at this point. Clients are trying to do a good job of controlling their own spend.

And that's been true for a while, and that's kind of what continues on, so I think we're not looking over our shoulder. We're just trying to do good work that provides cost efficiency and modernization of their systems. And remember, on the Federal side, Kevin, we're very involved in what I call the enablement of Mission Systems where, as Ted alluded earlier, we do very little in just the general program management consulting area of the business. So we're much more close to the mission, the systems and even the weapon systems around security, around connectivity of the technology.

[Operator]

Next question from Trevor Romeo from William Blair.

[Trevor Romeo, analyst]

First one I had was just on the guidance, I guess, I appreciate it's certainly being a bit wider than normal in this environment. And thanks Marie for comment on the DOGE impact. But I was just wondering if you could maybe speak a bit more specifically to what's embedded in the guidance for each segment and maybe where some of the upside or downside could be there?

[Marie Perry, executive]

Trevor, so from a guidance perspective, the information that we give is really on a consolidated basis. So to your point, we did highlight the potential impact of DOGE, which was less than 2% on total revenues and then provided the other factors from the guidance perspective.

[Theodore Hanson, executive]

If you just think about the kind of commentary around all of it, Trevor, I mean, I think we would say things are pretty steady. So as you -- maybe as you just think about, we've been in kind of a pretty stable environment year as it relates to revenue per billable day coming out of the second half of the year and into the first half of the year. We had kind of a normal viewpoints of adjustment that we would always see at the beginning of the year, especially in our commercial business, that's just natural as projects kind of come to an end and then begin to ramp up. And I don't think our outlook on the go forward here is going to -- we would say anything different, but continued stability here. So if you just think about that our revenue per billable day basis, that's probably the best way just to give it some color.

[Trevor Romeo, analyst]

Okay. That's helpful. And then for the follow-up, just thinking, I guess, as clients may even look to go further into cost-cutting mode potentially here, how are you thinking about the opportunity for your Mexico near-shoring capability? Is that an area where you're either seeing or you would expect to see a little bit more resilience in demand in this type of environment?

[Theodore Hanson, executive]

Rand, do you want to take that one?

[Randolph Blazer, executive]

Well, the answer is yes. We've seen that over the past year, 1.5 years, 2 years, we've had and built Mexico up. So the fact that it continues to grow is indicative of the cost pursuit that clients have. But I think the future is really around our ability to weave technology together. Shiv would use the word digital engineering across the different data domains, cloud domains and technologies. So will Mexico be a part of all that? Yes, it will be.

[Operator]

Our next question is from Jeff Silber from BMO Capital Markets.

[Jeffrey Silber, analyst]

I wanted to shift back to the federal government segment. If we could just step back, maybe you could just describe what are the mechanics if an agency wanted to cut a contract short before it expires? How much notice do they have to give you? Any details around that and the implications would be great.

[Theodore Hanson, executive]

Yes. Well, look, a lot of this is new, Jeff, right? So we're kind of seeing this for the first time. I think that if you think about what's been going on, there's -- it's maybe 2 levels that the DOGE Group has been pursuing certain contracts that happen to be on the radar screen for whatever reason that they are, right? And there was an initial wave of that. And then following that, there was an edict unit to the agency heads to find certain cost savings or efficiencies and report back on those, and they've been going through that for the last few months.

On the second part of that, as I mentioned, we've been engaged with our customer on a one-by-one basis as they look at the contracts and look at the delivery and whether they're getting the value that they're getting for those. And then once they make those decisions, they'll decide to make a -- what I'll just call a modification to that arrangement or to leave it in place. And so we do that real time with them as that comes up.

And so I think that it's -- I don't need to be overly vague about your question, but I don't think that there's a very specific set of rules here to follow as they go through this. Obviously, they can do what they say is terminate a contract for convenience and give a certain time period in order for that to come to an end, and that gives us time to react as well as the other contractors to react on that. But again, I think as the client goes through this, it's kind of real-time contemplation.

[Jeffrey Silber, analyst]

Okay. I understand. And obviously, a lot has changed since you set your budget for 2025. And I'm just curious about your own internal plans in terms of investing, hiring, capital allocation. Any changes being made to that for the rest of the year?

[Theodore Hanson, executive]

Look, I guess we're making real-time assessments about where to allocate investment inside of the business where we see that there's real opportunity. I think Shiv did a great job going through areas where we still see good solid demand with our clients and new bookings. And so we're making sure that if there are areas where we're not getting the bang for the bucket investment that we're reallocating it to those areas. I think that's probably the most important thing, Jeff.

Our principles around capital allocation don't change too much here. I mean, those are kind of longer-term thoughts about what is the best allocation of capital for the business and for investors. And we talk about strategic M&A. We talk about next to that, the opportunity to repurchase shares and return capital to investors and -- so those things don't change on just a 1- or 2-quarter basis. I mean that's kind of a principle of the business, if you will, going forward.

So anyway, hopefully, that helps. And I think we just have to play this as we go through the year because obviously, things are developing real time here. And so being really smart about scrutinizing every expense in the business, making sure that it's pointed towards place where we can get a good productive outcome and ultimately, EBITDA margin for that is critical.

[Operator]

Next question is from Surinder Thind from Jefferies.

[Surinder Thind, analyst]

One of the questions I'd like to start with is just kind of how we should be thinking about intra-quarter visibility at this point and the willingness of clients to change minds, start projects, delay projects relative to how they've maybe been behaving over the last 6 months or so given that you guys did widen the range? Like I would have assumed intra-quarter visibility would have been very high, right, 95%, 98%.

[Theodore Hanson, executive]

Yes. Well, thanks, Surinder. I mean I'll let Rand take the overall question. I will tell you that I think it's just the right thing to do here to widen the range because there's a new piece of news almost daily here that all of our clients are reacting to as either relates to tariffs or DOGE. So I think just good caution is what's behind widening the range. Rand on the first part of that in terms of what you're seeing starting, stopping projects?

[Randolph Blazer, executive]

Listen, on the government side, as we just discussed with Jeff, it's -- they have provisions in the contracting process to be able to stop work for convenience, and that can be pretty quickly or real time, as Ted said. On the commercial side, I think Surinder, we've seen for the last 6 months, cautiousness and ensure that when they're going to spend money on IT that they're going to get some value and return and cost saving drive driven toward cost savings. I don't think we've seen a change in the behavior of the client on the commercial side on that side. So -- it's just prudence, if you will, to be focused on their cost, and I think they're very focused on their cost today just as much as they were 6 months ago. So I'd say it's pretty steady.

[Surinder Thind, analyst]

Got it. That's helpful. So I think the interpretation would that be is the caution is coming more from the government side or the ECS side of the business in terms of widening the range. That's where the greater amount of uncertainty is because I think that's the way I would interpret your comments.

[Theodore Hanson, executive]

Well, I don't know if I would interpret that way...

[Surinder Thind, analyst]

If there's no change in commercial so.

[Theodore Hanson, executive]

Yes. I don't know if I would interpret it that way, Surinder. I think generally, there are macro issues in both market segments. And so we're just recognizing that. Look, if we were having a problem with projects in commercial being stopped, we would report it to you. You would see low bookings because we would have debookings and we're not seeing that. But we are seeing a lot of customers think hard about the go forward because they're wondering how they may be impacted either by tariffs, inflation remaining high or other things that affect their ultimate marketplace and then could in turn affect their investment.

So I would just interpret it as just general caution. And look, we only expanded the range by $10 million on the top and a few million on the bottom. So it wasn't like this. This is not as draconian as you will, as maybe if you think back to COVID, we actually didn't give guidance for the second quarter. We gave a pretty dramatic two scenario set of ranges or potential outcomes, I shouldn't call it a range, potential outcomes. So this is nowhere near that.

[Surinder Thind, analyst]

Okay. That's actually quite helpful. And then as a follow-up, just in terms of when I think about the 2Q margins, at least relative to my expectations, the quarter-over-quarter improvement isn't quite as significant as it has been in the past. You kind of walked through the puts and takes of the loss of some high-margin contracts and so forth.

I would have expected TopBloc to offset that. And so can you help me understand the margin dynamic here because I think, unlike the second person that asked the question on the call, I view it as there's more margin weakness here than anticipated relative to the second question's comments or the second Q&A person.

[Theodore Hanson, executive]

Go ahead, Marie.

[Marie Perry, executive]

Yes. Surinder, when you think about the Q2, there's a couple of factors to consider, first, from a business mix perspective. So we have a slightly higher mix of federal revenue, as you know, carries a lower margin than commercial. And then what you just referenced and we've been talking about, even on the federal side, it multiplies slightly because of the impact of DOGE and DOGE revenues have higher margins. So the combination of that offset by the incremental for TopBloc gets us to where our range is.

[Surinder Thind, analyst]

Got it. So I guess put it another way, then 2Q should be kind of the average run rate going forward? Or is that starting point on a go-forward basis?

[Theodore Hanson, executive]

Yes.

[Operator]

Next question is from Joseph Vafi from Canaccord Genuity.

[Joseph Vafi, analyst]

Welcome on board Shiv. Just -- could we drill down a bit on the financial services commentary, Ted? I know at least last quarter, it sounded like some of the bigger banks were starting to act just a bit better, heard your commentary. But just wondering kind of how you see the cadence of momentum with those larger bank customers share kind of real time versus kind of what we saw in Q1. I have a quick follow-up.

[Theodore Hanson, executive]

Rand?

[Randolph Blazer, executive]

Yes, Joseph. Joe, Ted did mention, I think, in the last quarter that we saw an uptick in rec flow, for example, some big banks that's on the assignment side and some good pipeline in the consulting side. What we've seen in the first quarter was it just leveled off, just stayed pretty consistent from the first week to the last week that basically showed flatness in the business flow, if you will, from the big banks.

But actually, we've talked to some of the big banks, and I think some of them are just doing what we've just talked about in the last couple of minutes with Jeff and Surinder. They're just waiting for to see how the macros go, make sure they have their things lined up on individual projects, and we haven't seen any major movement back up yet from the financials -- from the big banks. Other sectors or other parts of the sector, I think Ted commented on during the script, but not from the big banks.

[Joseph Vafi, analyst]

Got it. And then just one more on DOGE. I mean we kind of talked about some scope changes and other things, areas where there's focus area where it's not. Just in general, I was wondering if you have commentary on kind of velocity of adjudications going on, if you're seeing that, the DOGE effect kind of ripple into slower decision-making on adjudications? Or is it just really more from the existing book and backlog?

[Theodore Hanson, executive]

Rand, do you want to take that?

[Randolph Blazer, executive]

Yes. Yes. That's a really good question. And what we've seen is in the velocity from DOGE to our -- and clients, I mean agency heads. That velocity is less visible to us. What we have seen is agencies making sure that up and down the chain of command that they're in alignment with what they're doing whether it's curtailing work or more importantly, continuing work. As Ted mentioned, we've won a few pieces of work in this quarter in a couple of key client areas.

And every piece of work that gets funded after the contract is getting checked off by more levels in the agency. So it's more in the agency, I think, is what we would say to you, Joseph -- Joe, not so much the DOGE interaction with the agency. And of course, that's -- we wouldn't be privy to that at any rate.

[Operator]

This concludes the question-and-answer session. I'd like to turn the floor back to Ted Hanson, CEO, for any closing comments.

[Theodore Hanson, executive]

As we conclude, I'd like to express my gratitude to the entire fabulous ASGN team for your dedication and hard work throughout the past quarter. We have an exceptional team and together we'll continue to advance our business. Thank you again for joining us today. We look forward to speaking in July on our second quarter call.

[Operator]

This concludes today's teleconference. You may disconnect your lines at this time. Thank you again for your participation.