ASGN Inc

NYSE:ASGN

Q2-2025 Earnings Call

[Operator]

Greetings, and welcome to the ASGN Incorporated Second Quarter 2025 Earnings Call. [Operator Instructions].

It is now my pleasure to introduce your host, Kimberly Esterkin, Vice President, Investor Relations. Thank you. You may begin.

[Kimberly Esterkin]

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

Before we get started, I would like to remind everyone that our commentary contains forward-looking statements. Although we believe these statements are reasonable, they are subject to risks and uncertainties, 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 Second Quarter 2025 Earnings Call. ASGN reported solid results for the second quarter. Revenues of $1.02 billion were above the high end of our guidance range, while adjusted EBITDA margin of 10.6% was at the top end of our expectations for the quarter.

Our IT consulting revenues continue to grow, reaching approximately 63% of revenues for the second quarter up from 57% in the year ago period. Macroeconomic uncertainty remains impacting discretionary spending. Still, clients are focused on staying competitive driving demand for cloud and data solutions to modernize legacy systems and capitalize on AI. According to ISG Index second quarter 2025 call, the demand for AI is overcoming macroeconomic distractions with companies actively investing in Generative and Agentic AI deploying cost savings from other areas of their operations. We are experiencing this trend in our commercial consulting bookings, where we are seeing continued demand in data, AI and digital engineering, including custom application and development.

Commercial consulting bookings for the quarter totaled $417.5 million, translating to a book-to-bill of 1.2x on a trailing 12-month basis. While bookings remain weighted towards renewals, we are increasingly winning larger, more complex, multi-capability deals as we advance our commercial practice areas and technology partnerships.

Our technology partnership with Workday is progressing very well. and top block, which continues to perform above our expectations, contributed to growth of our commercial consulting bookings for the second quarter. In our federal business, new contract awards totaled $72 million for the second quarter or a book-to-bill of 1.1x on a trailing 12-month basis. Contract awards were challenged as anticipated, reflecting a slowness in award velocity and the impact of [ DOGE ] on procurement and approval processes. -- new federal contract backlog was over $2.9 billion at quarter end or a coverage ratio of 2.4x the Federal segment's trailing 12-month revenues.

Despite lower federal quarterly bookings, our core solution capabilities in AI, cybersecurity and digital modernization remain well aligned with the administration's efficiency cost savings priorities. In addition, the recently passed one big beautiful bill represents one of the largest single year increases in U.S. defense spending and modern history. Much of this funding focuses on our primary competencies including AI and automation, cloud migration, secure communications and threat intelligence platforms.

Ultimately, a constant among this ongoing transformation is a critical need for skilled IT professionals. Case in point, ISG estimates that in the next year of enterprises plan to expand their IT resources to accelerate the capture of AI benefits. ASGN's distinctive model, which delivers a broad spectrum of skill sets just in time on a contingent basis continues to set us apart and will enable us to serve as an excellent partner to enterprises and public agencies seeking to achieve their IT modernization goals.

We are uniquely positioned to identify the right skill sets for our clients. And with an industry-led focus, we deeply understand the nuances of each sector's IT needs.

With that, let me turn the call over to our President, Shiv Iyer, to discuss our industry and solution performance in the second quarter.

[Sadasivam Iyer, executive]

Thanks, Ted. It's great to speak with everyone this afternoon. Beginning with our commercial segment verticals. Consumer and industrial accounts performed the strongest in the second quarter and were up mid-double digits year-over-year. Improvement in this vertical was driven by mid-teens or better growth in materials, utilities, industrials and consumer discretionary accounts.

Our health care vertical was relatively flat compared to the prior year as a result of double-digit growth amongst our pharmaceutical and biotech clients. Financial services, business services and TMT accounts declined compared to the year ago period. On a sequential basis, we achieved growth in 4 of our 5 commercial industry verticals with consumer and industrial accounts gain leading our performance.

Our consumer and industrial clients have been leveraging our nearshore delivery center in Mexico as a cost-efficient and capable alternative for application development and data modernization. In the financial services vertical, we saw double-digit growth amongst our wealth management and insurance clients, both of which were active with our cloud and infrastructure teams in the quarter.

In our TMT vertical, we saw mid-single-digit growth in telecom, e-commerce and software and services. For clients in this vertical, we supported enterprise platform implementations, including integrating new AI capabilities into existing cloud platforms and developing solutions to help clients harness the power of their data, AI and advanced analytics.

In our federal business, we track our revenues across 4 end customers. Defense and Intelligence, national security, civilian and other clients. Defense, intelligence and national security accounts comprised approximately 72% of our total government revenues. Growth in national security accounts was largely driven by work for the Department of Homeland Security, examples of which I will share shortly.

As anticipated, our civilian business for the quarter was impacted by DOGE, the impact of which was unchanged and consistent with expectations. Defense and intelligent revenues though up sequentially by mid-single digits, but down year-on-year due to budget constraints. We remain bullish on the long-term positioning of our federal government business, particularly with the recent expansion of the defense budget.

To provide greater clarity on the dynamics driving bookings across our commercial verticals and government clients, let's turn to our solutions capabilities. For the quarter consulting engagements across the company focused on 4 major areas, including cloud and data infrastructure, cybersecurity, enterprise platform advisory and implementation and AI services.

Let me provide a few examples of each, beginning with cloud. For a global financial services company, we were engaged to assess the current state of their cloud operations evaluate a newly procured FinOps tool and build a multiyear cloud road map. As a result of our advisory services, our client will be able to improve its cloud governance taxonomy, capacity and consumption across its wealth management lines of business.

Importantly, this framework provides our clients the confidence to accelerate their cloud migration. For a Fortune 500 life insurance and retirement company, our consultants were engaged to determine if migrating to Amazon's cloud-based system would provide cost savings, operational efficiency and improved scalability for the company. Our team delivered a viable migration model in just 8 weeks, resulting in query execution 3x faster and generating significant cost savings for the client.

By deploying this model, our client will be able to accelerate their data center exits and mainframe retirement while simultaneously unlocking the AI capabilities provided by migrating to AWS. We also work side-by-side with AWS as a premier partner and managed services provider in the federal space. Similar to the commercial market, federal agencies are looking to modernize legacy infrastructure.

In the second quarter, we partnered with AWS on behalf of National Security and Defense Agency clients to secure scalable cloud migrations and continuous compliance in AWS GovCloud. Alongside cloud support, our cybersecurity expertise was another solution area in demand this past quarter. For DHS Cybersecurity and Infrastructure Security Agency, or CISA, we were awarded incremental work to deliver essential technical and digital engineering services with to protecting critical infrastructure and enhancing national cybersecurity.

We also partnered with Elastic a leading platform for search power solutions to add AI search capability into CISA's continuous diagnostic and mitigation dashboard thereby enhancing cross-domain visibility of the agency and reducing national security vulnerabilities. Collaboration with our alliance partners is critical to our success.

Our strategic alliances with partners like AWS and Elastic enable us to deliver cutting-edge technology solutions tailored to our clients' unique business needs. The value of our technology partnerships is particularly evident in enterprise platform implementations, which represented a third area of focus. As an example, TopBloc, a leading high-growth tech-enabled Workday consultancy recently partnered with a global provider of insurance solutions to leverage the full Workday suite across 11 countries.

For this client, top log provided end-to-end implementation of the Workday Human Capital Management and payroll modules, full-service change management, manage testing services and post go-live support. A new win for the quarter, this initiative was designed to centralize our clients' HR operations, streamline its internal processes and enhance the company's ability to attract and retain top talent.

TopBloc was also engaged during the quarter to develop a custom built Workday application for a national mechanical contractor. This application enables the company's foreman and site managers to enter time on behalf of their crews in real time, aligning with the unique needs of the construction environment and showcasing TopBloc ability to support complex unionized work environments across multiple implementation phases.

Our ServiceNow implementations are also on the rise particularly as the company makes a push to become the AI platform for digital business. In the quarter, we assisted a prominent global video game and entertainment company with deploying ServiceNow's Gen AI capabilities within the HR service delivery environment. This consulting project focused on increasing automation and improving user experience by implementing Gen AI to automatically classify HR cases, auto generate resolution summaries and enhanced case documentation and audit readiness.

In addition to platform-driven implementations, we are helping drive to a smarter future for our clients by providing a comprehensive suite of AI services, ranging from advisory and literacy to developing and building Agentic architectures powered by our assets and accelerators.

In the advisory space, one of the world's largest professional services firms engaged our team of consultants, architects and cross-capability solution leaders to rethink the process and technical design of some of their key knowledge management workflows. These workflows are currently conducted manually and involved the complex task of updating governance policies in thousands of downstream documents and systems.

The advisory phase of the engagement was successful, and we're now moving into delivery for collaboration between our U.S. consulting team and our Mexico delivery center. We are also leveraging our AI capabilities to improve data management and accelerate model deployment within the federal space.

During the quarter, our government team used advanced analytics and machine learning to support the U.S. Navy in processing vast amounts of maritime data. By training and deploying AI models on their behalf for helping the Navy enhance its situational awareness safety and operational efficiency.

Beyond AI advisory, we are growing our Agentic AI practice by architecting and building agents to support a myriad of client use cases. Just last week, we published an Agentic AI customer service tool on the new AI agents and tools storefront in the AWS marketplace. This agent is 1 of the many AI accelerators being built by our teams. Ted will discuss more about our AI accelerators and investments shortly.

But first, I'll turn the call over to our CFO, Marie to discuss ASGN's second quarter segment performance and third quarter guidance.

[Marie Perry, executive]

Thanks, Shiv. For the second quarter, revenues totaled $1.02 billion, a decrease of 1.4% year-over-year, but above our guidance expectations. Revenues from our Commercial segment were $708.1 million, a decrease of 2.4% compared to the prior year.

Assignment revenues totaled $382.4 million, a decline of 13.9% year-over-year, reflecting continued softness in portions of our commercial segments that are more sensitive to changes in macroeconomic cycles. Revenues from our commercial consulting, the largest of our high-margin revenue streams, totaled $325.7 million, an increase of 15.7% year-over-year and included the contribution from TopBloc.

Revenues from our federal government segment were $312.5 million, an increase of 1.1% year-over-year, including approximately $10 million of higher-than-expected license revenue. As Shiv noted, the impact from DOGE in the second quarter was in line with our expectations.

Turning to margins. Gross margin for the second quarter of 2025 was 28.7%, a decrease of 40 basis points from the second quarter of last year. Gross margin from our Commercial segment was 33%, up 30 basis points year-over-year, reflecting a higher mix of consulting revenues as well as margin expansion in these revenues.

Gross margin from our Federal government segment was 19.2%, a decline of 140 basis points year-over-year due to higher volume of low-margin software licenses. Gross margin was also impacted by loss of higher-margin work under DOGE. Excluding the impact of client-driven license revenues that were outside of our guidance estimates, consolidated company gross margin was within our guidance range for the quarter.

SG&A expenses for the quarter was $216.8 million compared to $205.6 million in the second quarter of 2024. The SG&A expenses included $8.3 million in acquisition, integration and strategic planning expenses, inclusive of cost optimization initiatives. These items were not included in our previously announced guidance estimates.

For the second quarter, net income was $29.3 million. Adjusted EBITDA was $108.5 million, and adjusted EBITDA margin was 10.6%. Also at quarter end, cash and cash equivalents was $138.9 million, and we had $320 million available on our $500 million senior secured revolver. Our net leverage ratio was 2.46x at the end of the quarter. Our strong free cash flow provides a strategic advantage that enables ASGN to fund growth initiatives, opportunistically repurchase shares and invest in strategic M&A, all while maintaining a healthy balance sheet.

Free cash flow was $115.8 million for the second quarter, a conversion rate of approximately 107% of adjusted EBITDA. We deployed $9.5 million of our free cash flow to repurchase approximately 200,000 shares at an average share price of $58.69. At quarter end, we had approximately $470 million remaining under our $750 million share repurchase authorization.

Turning to guidance. Our financial estimates for the third quarter of 2025 are set forth in our earnings release and supplemental materials. These estimates are based on current market conditions and assume no further deterioration in the markets we serve. Guidance also assumes 63.5 billable days in the third quarter, which is the same number of billable days as the year ago period and 0.25 more days than in the second quarter. Estimates do not include any acquisition, integration or strategic planning expenses.

With that as background, for Q3 2025, we are estimating revenue of $992 million to $1.012 billion net income of $35.8 million to $39.4 million, adjusted EBITDA of $108.5 million to $113.5 million and adjusted EBITDA margin of 10.9% to 11.2%.

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

[Theodore Hanson, executive]

Thanks, Marie. As discussed at the outset of today's call, despite ongoing macroeconomic uncertainties, our clients are continuing to invest in AI, recognizing that maintaining a competitive edge requires staying at the forefront of technological advancements.

With that in mind, I'd like to take this opportunity to further highlight ASGN's ongoing AI investments. And how like our clients, we are strategically positioning our business amid rapid technological change. AI enables our consultants to work faster, smarter and with more insight driving a higher ROI for our clients. But leveraging our deep expertise in application development and managed services, we've been able to create relevant AI applications for our consultants every day work and ultimately share this IP with our Fortune 1000 and defense and intelligence customer base.

As part of our commitment to unify our company-wide AI expertise, we launched the ASGN AI Innovation Center, a collaborative initiative between our commercial and federal businesses, designed to enhance innovation, optimize resource utilization and promote AI-driven business growth for our clients. The innovation center offers development environments, a centralized, repeatable, IP repository, documented best practices, thought leadership and new technology evaluation.

At the core of our innovation center are the solution accelerators proof of concept developed to quickly solve specific business problems with the help of AI. By building out these accelerators, we create repeatable, lower-cost solutions that can be easily deployed for our clients' custom environment.

Several accelerators have already been published and many more in the pipeline for launch this year. Some examples of those already in use include financial services agents, rapid code discovery tools, network security assistance and AWS Agentic AI tool previously highlighted. Our AI University is also a crucial competent of the ASGN Innovation Center. Our AI University provides resources for upskilling our sales and technical teams while serving as a launching pad for developing white papers, best practices and training for our customers.

We found that by incorporating AI understanding and education into ongoing professional development, we can drive continuous innovation by ensuring that our professionals remain relevant in a rapidly evolving market. Through the establishment of our AI innovation center and our many centers of excellence, we are enhancing our solutions capabilities and positioning ourselves as a leading authority in all facets of commercial and federal IT modernization.

Our diverse customer base has equipped us with a deep understanding of the distinct data and IT needs across a wide range of sectors, enabling us to effectively support each client's long-term IT road map. Speaking of long-term road maps, I'm excited to share today that ASGN will be hosting at Investor Day in the fourth quarter.

During this event, we will speak about our company's near- and long-term strategy to unlock the next wave of growth and value creation. We look forward to sharing more details in the coming weeks.

That concludes our prepared remarks. I'd like to extend my gratitude to all of our employees for your unwavering commitment this past quarter. Your efforts have been evaluable to fostering our client relationships as we continue to evolve our business into higher-end, high-value IT consulting.

With that, we'd now like to open up the call to questions.

[Operator]

[Operator Instructions]. Our first question comes from the line of Tobey Sommer with Truist Securities.

[Tobey Sommer, analyst]

Wanted to start out and ask how TopBloc is performing relative to your expectations and maybe numerically what was the contribution to results?

[Theodore Hanson, executive]

Yes. So Tobey, thanks for the start of the call and the question. If you remember, we -- at the acquisition date said that TopBloc was going to contribute over the course of the year, $150 million in revenues for the full year. Mind you, it closed in the first of March.

And then EBITDA margins in the high teens. And to this point, I'd say they're tracking just ahead of those numbers on revenue, just ahead of those numbers on bookings kind of in the range on EBITDA.

[Tobey Sommer, analyst]

Okay. Perfect. You talked a lot about AI in your prepared remarks in terms of opportunities and described a lot of initiatives and actions that you're helping with customers. Could you talk about the more cyclical part of your assignment business, specifically sort of the Creative Circle piece? And What, if any, impact are you seeing from AI on that business? Or would you describe the top line softness as purely cyclical at this stage?

[Theodore Hanson, executive]

Yes. Will let Shiv answer that. I'd say pretty stable right ship and the cyclicality of it, it is one of the more cyclical pieces of the portfolio.

[Sadasivam Iyer, executive]

Yes. I think that's spot on Ted. We're not seeing anything that would indicate that there's a massive impact of AI on that business. I think it's largely the macros and cyclicality at this moment.

[Theodore Hanson, executive]

And I think, Tobey, going on to like -- and into the beginning of the third quarter, I'd say that, that business has been stable kind of quarter-to-quarter.

[Sadasivam Iyer, executive]

It has been stable quarter-to-quarter. We expect that, and we also expect some parts of the consulting piece of that business to continue to progress, which we're seeing some uptick on.

[Theodore Hanson, executive]

Yes. If you think about the opportunity in that business, even though the the discretionary piece of this is earning the results of the traditional staffing part, the opportunity in customer experience is definitely a growth area. We're seeing that to Shiv's point inside the business. And our consulting work in there is growing. It's not the biggest part of the business. I'd call it maybe 25%, but it's growing, and we think there's a big opportunity there as we go forward. So we'll continue to emphasize that. And at some point here, the discretionary spending is going to return and we think both of those things will contribute to [ Career ] Circle.

[Tobey Sommer, analyst]

And then in the government consulting area in the ECS business, a couple of topics on that. One, what is the long-term margin profile? Is it any different because of the the high-margin dose contracts perhaps no longer being ongoing. And do you think you grow from here? We've heard some other dedicated companies that focus on this area of the market exclusively, talk about perhaps an opportunity for calendar third quarter kind of a bigger than usual contract award period because of slow awards year-to-date in the federal fiscal year?

[Theodore Hanson, executive]

Yes. I'll take the second part, and I'll let Marie talk about the gross margins. But I do think that there is a lot percolating here for the third quarter. So we're only a few weeks in. We'll have to watch that play out, but it does feel like we're back to kind of a normal cycle there.

It has been muted in the second quarter, as you mentioned, just because of the -- I think just the wait-and-see approach of the government contracting officials and the agency heads. But I think the positive note is here, we've -- we've got a new bill out. There's going to be a significant amount of new money in the budget, especially in the defense area, which is where we are embedded.

And so I think all those portend good for us. So I look for a good third quarter, but I really look for a good bookings outcome here as we get a little further down the road because the government has got to put that money to work. they're going to have to get it on the street and compete with us and our peer group to be able to get these things done because as you know very well, Tobey, the government doesn't have all these assets inside of their operation to accomplish these things that need to be accomplished in data and AI and technology modernization, cybersecurity and other areas where we play, and then Marie on the gross margin.

[Marie Perry, executive]

Tobey. Yes, so you were really referencing kind of gross margin and what the long-term view is. And so when we think about the federal business, and you alluded this to as well, that the DOGE revenue that we're losing is higher margin. The reality is some of that is kind of toggling back and forth and so we'll see how that works out.

But the leadership at our federal government is also looking at increasing direct labor. So there's opportunities kind of down the road as we look at the gross margin for federal to increase our direct labor. And then as we've talked about just some diminishing impact on the license revenue or the balance of the license revenue that's embedded in our federal continues to get smaller and smaller.

[Theodore Hanson, executive]

We've kind of played in a 20% to 21% range, and you have some of these pass-throughs coming in and out, and so that moves up and down, but that still think that's that's a range that we expect to be in Tobey.

[Operator]

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

[Jeffrey Silber, analyst]

Sorry, just one more on federal government and then I can move on. You said that the DOGE impact was in line with your expectations. Can you remind us what those expectations were -- and what do you think the impact will be in the current quarter?

[Marie Perry, executive]

Absolutely. We -- and last quarter, we actually said that the DOGE impact would be less than 2% of total revenues. As noted, unchanged, in line with our expectations for Q2, and we expect that same in Q3.

[Jeffrey Silber, analyst]

Okay Great. If commercial and maybe we can segment it between your assignment and your consulting revenues. I'm just wondering what the tone is -- it sounds like on the consulting side, there's a lot going on -- but I don't know if you're seeing the same kind of maybe potential enthusiasm on the assignment basis. Any color would be great.

[Theodore Hanson, executive]

Yes. Well, I'll let Shiv comment, but you're -- I think coming out of Q2, obviously, we had a very good bookings quarter and it was stronger at the end of the quarter than it was at the beginning -- and I think here, the first 3 weeks, we're seeing little incremental positive on 4 metrics in the assignment business. So -- and then Shiv just a tone of conversation with clients.

[Sadasivam Iyer, executive]

No. Absolutely, Jeff. I think the -- as you can see from our bookings numbers, there's -- we're seeing some positive signs in our commercial consulting business, specifically in certain areas like cloud, data and -- and then -- and it's obviously a tale of different industries. You can see from our results that some of our industries are doing much better than the others.

The reason weren't out there declaring that there's something majorly under phase. We're still watching some of our larger industries like banking and looking for the turn in those industries, which is still sort of a wait and watch for us. But overall, the sentiment, at least, is we're seeing enough good things to give us cautious optimism.

[Theodore Hanson, executive]

And if you think about the places where we have real strength, Jeff, like data and AI, application, development, modernization, cybersecurity, enterprise systems around ServiceNow and Workday. I mean those are all kind of developing areas of strength here as things begin to emerge, and that's the core of our capabilities, if you will. So I think we're positioned pretty well here for things to begin to release and I think Shiv hit the nail on the head, while we're seeing some positive signs of the Ford metrics.

We do need a big industry like banking specifically to begin to turn positive instead of just flattish.

[Operator]

Our next question comes from the line of Surinder Thind with Jefferies.

[Surinder Thind, analyst]

Can you maybe talk a little bit about the AI investments that you're making? And more specifically from the perspective of just kind of building IP. One of the narratives more broadly as we seek across IT services is that in this next wave of growth, I guess the idea is that firms will need to build more IP than they have in the past. Can you comment on that or your thoughts and views on how that fits into your business model, in which you use more temporary workers to provide some of the consulting services on the commercial side.

[Theodore Hanson, executive]

Right. Well, I think you're on the right track, Shiv.

[Sadasivam Iyer, executive]

Absolutely. Surinder, that's very much part of the strategy for us and the evolution for us. We think about -- let me talk about the fact that we're doing -- making investments in AI, as Ted would say, which is very focused on account and deal-specific IP development. That doesn't mean we're not investing in just broader platforms. We are -- we've got things like code discovery and open source tools around code discovery, which is our own IP.

We've got open source tools around applying AI to cybersecurity, which we're deploying for clients as well. So we're doing all of that. But more and more, what we're doing is we're working with partners like AWS, like Workday to start to build IP, specific to client requirements, which, in many cases, tends to be ours, but we can rapidly then scale them across multitudes of clients. So that's very much part of our strategy. That's one big pillar of how we're doing that.

The second big pillar is, we call it our own best qual kind of idea, where we're starting to apply agents within our own business again, with partners with the intent to sort of go with them to monetize them externally. So you hit the nail on the head. It's a big part of our strategy. We're not out here declaring that we've taken the hill of this stuff, but we are actively building on all those vectors that you talked about.

[Theodore Hanson, executive]

And remember, our AI capabilities within the federal government, which was our first exposure here, our leading capabilities for many years here. So bringing together our commercial and our federal expertise in our AI innovation lab, training our people and using that halo to lift us forward on the commercial side is really what's afoot here.

And I think Shiv is right. While we haven't taken the hill yet. -- you do see that the technology cycle here is emerging. There's been -- there has been and remains an enormous amount of money spent on the compute part of this with the chips -- now we're moving to -- obviously, we're in the [ mill of ] Data Center in power, which we need to power all this stuff. You can already see the investments by big tech into software enterprise to try to bring Agentic AI into their products. So then they can bring that into the customer market.

Our piece of that is laying down all those AI capabilities into our customers' technology environment, which nobody knows better than us since we've been there for so long years year kind of helping them along their road map. So I would say that's developing. It's not fully emerged, but I think this is playing out as we've been speaking about over the past quarters and a couple of years. Anything Shiv want to add?

[Sadasivam Iyer, executive]

No, I was just going to say one more thing, which is as a result of what Ted alluded, right, there is a lot of our clients -- a lot of our clients are grappling with what's the best architectural approach to go about doing this. Should we build our own, should we integrate what is existing and -- we're also seeing a pretty big uptick in advisory work around those kinds of questions, which then allows us to parlay it right down to how do you not just think about the architecture, but how do you then build it and deploy it and integrate it into your environment?

[Surinder Thind, analyst]

Got it. That's actually -- I appreciate the detail there. And then when we think about the government segment, can we talk a little bit about what is the appropriate baseline or run rate revenues? We saw the tick-up in the cost plus segment this quarter. How much of it is truly just incremental or specific to the quarter? It seems like there's obviously a lot of volatility there in that segment. And what is the right starting point or right baseline of revenues?

[Theodore Hanson, executive]

Yes. Well, I think if you take what we said in the release about the pass-throughs, which were about $10 million to $12 million here during the quarter, and back that out of the number, it kind of brings you down into the $300 million range. We also had a surge of some good, but I felt good direct labor billable work, so of a few million, which contributed to the quarter. So I mean, I think your baseline is in the mid to $290 to mid $295, something like that is a good baseline to think about going forward.

And obviously, we've got a 1.1 book-to-bill. I mean that is going to portend here that as we go into future quarters, we've got some growth in the backlog. And then back to the first question from Tobey, what's going on in that marketplace, but we now have a bill. We're going to have more money flowing into the defense department. There's money flowing into the areas that we practice.

So I don't want to get you Shiv words say that we've taken the hill, but we've got things developing here, and it may take a couple few quarters for them to play themselves out, but we're on a path here. You know that I think that we're we're going to be in a good spot here based on what the government's initiatives are and where we've got the business positioned.

[Surinder Thind, analyst]

Got it. I'll leave it there for my colleagues.

[Operator]

Our next question comes from the line of Jason Haas with Wells Fargo.

[Jason Haas, analyst]

I was curious if you could speak a little bit more about what drove the strength in the Consumer and Industrial segment since that saw a nice acceleration in the quarter.

[Sadasivam Iyer, executive]

Yes, Yes. I mean I can give you some color on what drove the strength. Look, we've -- as we pointed out and when we talked about our earnings, there were certain subsectors like materials and utilities which were a significant part of what drove our strength in that from a sectoral perspective.

From a solutions perspective, I think what we're seeing is continued dynamic investments and demand from our clients in states like cloud, data and AI, custom software development. And that's where we're seeing the biggest uptick. So we had several areas where we were able to either add new logos or continue to expand our work in those domains.

[Theodore Hanson, executive]

And I'll add like in the energy and utilities subsectors of that category, obviously, they have checks to right here to bring themselves forward and meet the needs of the power generation, but for the for the people and for the data centers. And so there's kind of opportunity there that traditionally may be a little stoic as an industry, but it's a lot more dynamic now over the last year or 2.

[Sadasivam Iyer, executive]

And also in certain industries like energy, our partnership strategy is paying out pretty significant dividends where we've built some assets for very industry-specific questions on asset utilization, predictive maintenance, et cetera, with partners like Databricks. And that's allowing us to scale across the industry.

So it's different parts of the strategy playing out, but it's essentially continued strength in our solution areas.

[Jason Haas, analyst]

That's great. That's great color. And then as a follow-up, I was curious if you could talk about -- you gave some good examples of how AI is helping you generate revenue and helping our clients leverage and use these AI tools. But I was curious about if you could talk about your internal use of AI, and if you've been able to find some efficiencies within your own business from using some of those tools.

[Theodore Hanson, executive]

Yes. Well, look, I think that we're -- I mean, Shiv put it right, we want to be an AI-led organization, both for ourselves and the productivity and opportunity that gives us and to showcase that in front of clients. in all of our enterprise software tools, whether it's our front office systems or our back office systems or our digital layer with ServiceNow.

There's a Agentic AI opportunities in all of those enterprise systems that we're going to -- are beginning to bring to bear and are going to bring to bear further in our own operations. If you think about our function as an IT staffing company and the recruiting and sales that go along with that.

We've implemented AI techniques in there to make us much more productive -- that's been an ongoing effort here for years. We're developing tools that help us on the bid proposal and win process to bring use cases up very efficiently for our team and delay those down into presentations in a way that we used to use a lot of pushing of the keyboard to do.

So I think those are just some of the opportunities here. I probably should also not let it go without saying cybersecurity has been a big one. Our work that we've done in cybersecurity, beginning in the federal government now in the commercial marketplace, the number of threats are so voluminous that you just can't process at all without AI capabilities.

And some of those are bringing -- brought by the security software firms and some of that's being generated by us. So I think these are all examples across our organization, where we're diving in head first into all of these AI opportunities that make us better, more productive, more growthy and a great call for our customer.

[Operator]

Our next question comes from the line of [ Alex Sinatra ] with Baird.

[Unknown Analyst]

I've just got a quick 1 just because a lot of things were covered already, but I was just wondering, given this discussion around AI and this big initiative that you're undergoing with all these investments. I was wondering kind of what the cost of that is on your end, especially for can you lot co-discovery the cybersecurity of the agents, just what that will end up costing. Any color on that would be great.

[Theodore Hanson, executive]

Yes. Look, I don't think you're seeing it. I guess, maybe I'll put it this way. We're not quantifying all these costs, but you're not seeing it degregate or margin profiles. If anything, you're seeing we're thinking about like your clients, which is where can we make an investment here and get an acceleration to a return.

And so in that way, we're able to meet the business case objective, whatever the case may be. And we're continuing to see our our margins here kind of be creeping up because of that. So I mean I won't quantify the number for you, but I'll just say it's not degradating. It's adding to our margin profile will continue to as those things get more mature.

[Operator]

Thank you. And we have reached the end of the question-and-answer session. I would like to turn the floor back to Ted Hanson for closing remarks.

[Theodore Hanson, executive]

Great. Well, I want to thank everyone for being here this afternoon, and we look forward to speaking with you in October on our third quarter earnings release conference call. Thank you and be well.

[Operator]

Thank you. And this does conclude today's conference, and you may disconnect your lines at this time. We thank you for your participation.