ASGN Incorporated (ASGN) Q2 2025 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call presents a mixed picture: a slight decline in overall revenue, offset by growth in commercial consulting. The federal segment faces challenges, yet TopBloc is performing well. Margins are pressured, but free cash flow supports share repurchases. The Q&A reveals cautious optimism, with AI investments seen as beneficial. No strong catalysts for significant stock movement are evident, leading to a neutral outlook.

Key Financial Performance

Revenue $1.02 billion, a decrease of 1.4% year-over-year. The decline was attributed to softness in portions of the Commercial segment sensitive to macroeconomic cycles.

Commercial Segment Revenue $708.1 million, a decrease of 2.4% year-over-year. Assignment revenues within this segment declined by 13.9% year-over-year due to macroeconomic sensitivity, while commercial consulting revenues increased by 15.7% year-over-year, driven by contributions from TopBloc.

Federal Government Segment Revenue $312.5 million, an increase of 1.1% year-over-year. This included approximately $10 million of higher-than-expected license revenues. However, the segment faced challenges due to DOGE and budget constraints.

Gross Margin 28.7%, a decrease of 40 basis points year-over-year. The Commercial segment's gross margin increased by 30 basis points to 33%, while the Federal Government segment's gross margin decreased by 140 basis points to 19.2%, impacted by low-margin software licenses and loss of higher-margin work under DOGE.

Net Income $29.3 million. No year-over-year comparison provided.

Adjusted EBITDA $108.5 million, with an adjusted EBITDA margin of 10.6%. No year-over-year comparison provided.

Free Cash Flow $115.8 million, a conversion rate of approximately 107% of adjusted EBITDA. This strong free cash flow was used for share repurchases and maintaining a healthy balance sheet.

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Operating Highlights

AI Innovation Center: Launched to enhance innovation, optimize resource utilization, and promote AI-driven business growth. Includes solution accelerators and AI University for upskilling and education.

AI Accelerators: Developed to solve specific business problems quickly and cost-effectively. Examples include financial services agents, rapid code discovery tools, and network security assistants.

Commercial Consulting Bookings: Totaled $417.5 million with a book-to-bill ratio of 1.2x. Growth driven by demand in data, AI, and digital engineering.

Federal Business Contract Awards: New contracts totaled $72 million with a backlog of over $2.9 billion. Focused on AI, cybersecurity, and digital modernization.

Revenue Performance: Q2 revenues reached $1.02 billion, exceeding guidance. IT consulting revenues grew to 63% of total revenues.

Cost Optimization: SG&A expenses included $8.3 million in strategic planning and cost optimization initiatives.

AI Investments: Focused on leveraging AI to enhance consulting efficiency and ROI for clients. Includes the establishment of the AI Innovation Center and AI University.

Technology Partnerships: Strengthened partnerships with AWS, Elastic, and Workday to deliver advanced solutions in cloud migration, cybersecurity, and enterprise platforms.

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Risk or Challenges

Macroeconomic Uncertainty: Macroeconomic uncertainty is impacting discretionary spending, which could affect the company's revenue growth and client investments in IT modernization.

Federal Contract Challenges: Federal contract awards were challenged due to slowness in award velocity and the impact of DOGE on procurement and approval processes, potentially affecting federal segment revenues.

Decline in Commercial Assignment Revenues: Commercial assignment revenues declined by 13.9% year-over-year, reflecting softness in portions of the commercial segment sensitive to macroeconomic cycles.

Budget Constraints in Federal Segment: Defense and intelligence revenues in the federal segment were down year-on-year due to budget constraints, which could limit growth in this area.

Gross Margin Pressure: Gross margin for the federal government segment declined by 140 basis points year-over-year, impacted by a higher volume of low-margin software licenses and loss of higher-margin work under DOGE.

SG&A Expense Increase: SG&A expenses increased year-over-year, including $8.3 million in acquisition, integration, and strategic planning expenses, which were not included in prior guidance estimates.

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Guidance & Outlook

Revenue Guidance for Q3 2025: ASGN estimates revenues of $992 million to $1.012 billion for the third quarter of 2025.

Net Income Guidance for Q3 2025: Net income is projected to be between $35.8 million and $39.4 million.

Adjusted EBITDA Guidance for Q3 2025: Adjusted EBITDA is expected to range from $108.5 million to $113.5 million, with an adjusted EBITDA margin of 10.9% to 11.2%.

Market Trends and Client Investments: Despite macroeconomic uncertainties, clients are continuing to invest in AI to maintain a competitive edge. ASGN is strategically positioning its business to capitalize on this trend.

AI Innovation Center: ASGN launched the AI Innovation Center to enhance innovation, optimize resource utilization, and promote AI-driven business growth for clients. This includes solution accelerators and an AI University for upskilling.

Federal Business Outlook: ASGN remains optimistic about the long-term positioning of its federal government business, particularly with the recent expansion of the U.S. defense budget, which aligns with its core competencies in AI, cloud migration, and cybersecurity.

Commercial Consulting Growth: Commercial consulting revenues increased by 15.7% year-over-year, driven by demand in cloud and data solutions, AI, and digital engineering. This trend is expected to continue.

Strategic Initiatives for Future Growth: ASGN plans to host an Investor Day in Q4 2025 to discuss near- and long-term strategies for growth and value creation.

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Shareholder Return Plan

Share Repurchase Authorization: At quarter end, we had approximately $470 million remaining under our $750 million share repurchase authorization.

Share Repurchase Activity: We deployed $9.5 million of our free cash flow to repurchase approximately 200,000 shares, at an average share price of $58.69.

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Key Q&A

Q:How is TopBloc performing relative to expectations and what was its contribution to results?

A:TopBloc is performing slightly ahead of expectations in terms of revenue and bookings, with EBITDA margins in the high teens. It was expected to contribute $150 million in revenues for the full year, starting from its acquisition date on March 1.

Q:What impact is AI having on the Creative Circle business?

A:AI is not having a massive impact on the Creative Circle business at this time. The softness in the top line is attributed to macroeconomic factors and cyclicality. The business has been stable quarter-to-quarter, and consulting work within the business is growing, representing about 25% of the business.

Q:What is the long-term margin profile for the government consulting area in the ECS business?

A:The long-term gross margin for the federal business is expected to remain in the 20%-21% range. While higher-margin DOGE revenue is diminishing, there are opportunities to increase direct labor and reduce the impact of license revenue. The government is expected to allocate significant new funds, especially in defense, which could positively impact the business.

Q:What was the impact of the DOGE revenue loss on the federal government segment?

A:The DOGE revenue loss was less than 2% of total revenues, in line with expectations for Q2, and the same impact is expected in Q3.

Q:What is the tone of the commercial consulting and assignment revenues?

A:The commercial consulting business is showing positive signs, particularly in areas like cloud, data, AI, and custom software development. However, larger industries like banking remain flat, and the company is cautiously optimistic about future growth.

Q:What AI investments is the company making, and how do they fit into the business model?

A:The company is investing in account and deal-specific IP development, broader platforms like code discovery, and AI applications in cybersecurity. They are also working with partners like AWS and Workday to build scalable IP. Internally, AI is being used to improve productivity in recruiting, sales, bid proposals, and cybersecurity.

Q:What is the appropriate baseline or run rate revenues for the Government segment?

A:The baseline revenue for the Government segment is estimated to be in the mid-$290 million to mid-$295 million range, excluding pass-throughs and surge direct labor billable work.

Q:What drove the strength in the Consumer and Industrial segment?

A:The strength was driven by subsectors like materials and utilities, as well as demand for solutions in cloud, data, AI, and custom software development. Partnerships, such as with Databricks, have also contributed to scaling industry-specific solutions.

Q:What efficiencies has the company found internally using AI?

A:The company has implemented AI in recruiting, sales, bid proposals, and cybersecurity to improve productivity. They are also leveraging AI in enterprise software tools and exploring Agentic AI opportunities to enhance operations.

Q:What are the costs associated with AI investments?

A:The company has not quantified the costs of AI investments but stated that these investments are not degrading margins. Instead, they are contributing to margin improvements as the initiatives mature.

Q:Review of Unclear Management Responses

A:Management avoided directly quantifying the costs of AI investments, providing only general statements about their positive impact on margins. Additionally, while discussing the long-term margin profile for the government consulting area, the response included vague language about opportunities and diminishing impacts without specific details.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

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The earnings call reveals mixed results: a decline in total revenues and federal segment revenues, but an increase in commercial consulting revenues and gross margins. The Q&A section reflects uncertainty about government contracts and unclear management responses, slightly dampening sentiment. Despite strong consulting performance, revenue guidance is weak. The TopBloc acquisition is a strategic positive, but overall, the market is expected to react neutrally due to the mixed financial performance and guidance, aligning with the company's mid-cap status.

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ASGN Slides

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ASGN Report

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