ASGN Incorporated (NYSE:ASGN) Q1 2024 Earnings Call Transcript

ASGN Incorporated (NYSE:ASGN) Q1 2024 Earnings Call Transcript April 24, 2024

ASGN Incorporated reports earnings inline with expectations. Reported EPS is $1.16 EPS, expectations were $1.16. ASGN Incorporated isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings. Welcome to the ASGN Incorporated First Quarter 2024 Earnings Call. [Operator Instructions] I will now turn the conference over to your host, Kimberly Esterkin, Vice President of Investor Relations. You may begin.

Kimberly Esterkin: Good afternoon. Thank you for joining us today for ASGN’s first quarter 2024 conference call. With me are Ted Hanson, Chief Executive Officer, Rand Blazer, 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: Thank you, Kim, and thank you for joining ASGN’s first quarter 2024 earnings call. ASGN achieved solid results for the first quarter. Revenues of $1.05 billion and Adjusted EBITDA of $108.3 million were both near the top-end of our guidance ranges. When we spoke last quarter, we expected our Commercial Segment would see revenue trends in Q1 comparable to that of Q4, while our Federal Government Segment would continue to achieve year-over-year top-line growth. As evident from our segment results, which I’ll review in detail shortly, market conditions were as we predicted. Our commercial clients continued to be cautious and acutely focused on where and when they will spend. Importantly, despite IT budgets being slow to be executed, our clients continued to leverage our high-end consulting capabilities, so our commercial consulting revenues increased both year-over-year and sequentially.

On the government side of our business, revenues improved year-over-year and visibility began to build toward the end of the quarter with the passage of the appropriations bill in late March. While a release in federal spend will not happen automatically, the approval of the budget is a step in the right direction. Speaking of moving in the right direction, we continue to proactively shape and evolve our operations to position our business for continued growth. Our industry-diverse, large account portfolio not only serves us well in good times, but also in more difficult macro conditions. Our federal government services provide countercyclical support to balance out our five diverse commercial industry verticals. We are also focusing on the right type of services, that of higher-value, higher-margin IT consulting where projects and visibility are longer and client relationships are stickier, providing our business with enhanced stability across market cycles.

A highlight of our quarterly results, IT consulting revenues comprised approximately 57% of Q1 2024 revenues, as compared to roughly 50% in the prior-year period. In addition, Adjusted EBITDA benefits from higher commercial consulting margins. ASGN has made great strides in growing our IT consulting business, and with a vast addressable market, there are many more opportunities for further growth. This growth will be driven, in part, by continuing to develop and foster the right customer relationships with the Fortune 1000 and government clients. Our longstanding, trusted client relationships are what drove our progression into IT consulting, and these clients will continue to pull us up the IT services pyramid. Importantly, as we await increased spending, we are making the right investments in our people, training and upskilling our teams in the latest technological developments, including key areas such as cybersecurity, data analytics, cloud, and AI, all with our customers’ needs in mind.

Technology is shifting at a rapid pace, and it is essential that we stay ahead of this change to remain competitive. We are also executing on the right strategic decisions when it comes to our capital allocation. While Marie will discuss our recent term loan B refinancing shortly, I am pleased to announce that just this week our Board of Directors approved a new, two-year $750 million share repurchase authorization. This authorization is the largest in ASGN’s history, reflecting our commitment to deliver value to our stockholders by using our solid free cash flow to buy back shares, while at the same time ensuring that we remain ready to execute on the right strategic acquisitions. With that as a background, let’s turn to our segment performance, beginning with our largest segment by revenue, Commercial.

Our Commercial Segment services large mid-market accounts and Fortune 1000 companies. Commercial Segment revenues for the quarter declined by low double digits year-over-year. Revenues for the segment benefited from the growth in our consulting business, offset by continued softness in the more cyclical areas of our assignment business. Commercial consulting revenues increased 2% percent for the quarter compared to the year-ago period and were also up 3.2% sequentially. Commercial consulting bookings of approximately $323.2 million translated to a book-to-bill of 1.2 times on a trailing 12-month basis. Bookings were again weighted towards renewals in the first quarter. That said, even as IT budgets continue to be prioritized and managed, our customers are actively spending in the areas of cybersecurity, cloud, and data analytics.

Investments in cloud and data infrastructure are often considered a precursor to investments in the AI space, and we are actively working with our clients to solidify their AI foundations. Turning to our vertical performance. All five commercial industry verticals declined year-over-year. That said, we saw year-over-year growth in three sub-verticals, including Utilities, Healthcare Providers, and Telecom accounts. On a sequential basis, two verticals, TMT and Business & Government Services, appear to be stabilizing on a same billable-day adjusted basis. We also saw sequential growth in several sub-verticals on a same billable-day adjusted basis, including Regional Banks, Telecom, Media, Healthcare Payers, Energy, Consumer Staples, and Aerospace and Defense accounts.

While it is encouraging to see these sequential improvements, we have not yet seen an inflection point in IT spending. Nevertheless, our commercial consulting bookings remained solid, and during the first quarter our teams won work across multiple service areas. Cybersecurity continues to be an area of growth for our Commercial Segment, and as discussed last quarter, collaboration with our Federal Government Segment on cybersecurity services has only added to this strength. During the quarter, we won a contract delivering technical remediation and advisory services to a Fortune 500 insurance client. Our comprehensive Governance, Risk, and Compliance solutions helped our client mature their security operations and become an improved governance- and oversight-focused organization.

Beyond cybersecurity, our product and application services are resonating with clients that are looking for opportunities to scale and become more efficient. One way we’ve delivered efficiency to clients is via our world-class nearshore delivery center in Mexico. In the first quarter, a global leader in medical transportation approached our commercial team following difficulties they were having with their current offshore provider. Our Mexico Delivery Center stepped in to offer a team of experts, from developers to testers, who have extensive experience working together in a much more convenient time zone for our client. Our nearshore consultants are not only impressing our client base, but they are also enjoying the projects they are performing and their work environment.

In fact, I am very pleased to report that earlier this month, our Commercial Segment brand Apex Systems was recognized as one of the Best Places to Work for Women in Mexico for the second year in a row. Providing an inclusive, multicultural environment is core to ASGN’s belief systems and corporate policies, and this award is a testament to our continued commitment to career development for all. Along the lines of career development, our growing Data and AI practice is being supported by internal investments in talent, technology partnerships, intellectual property, and training. We are proactively training our workforce in the U.S. and Mexico in the latest Gen AI technologies. For one of the world’s largest telecommunications providers, for example, our AI skillsets enabled us to win a 12-month consulting engagement supporting a Gen AI application development program.

We are providing our client with scalable access to talent, technical leadership, and large language model trainings. In another instance, for an oil and gas company that ranks amongst the top 10 of the Fortune 500, we are leading an implementation of the Databricks Unity Catalog, a cloud-based platform that offers a unified governance layer for enterprise data and AI. Our client has over 100 Databricks workspaces, or deployments in the cloud, and our project team is tasked with helping our client develop a governance structure related around the auditability, security posture, and cost allocation of these workspaces. Our team of consultants is currently collaborating with Databricks and our client’s internal IT team to build automation to onboard these Databricks workspaces with ease and repeatability.

Our pipeline of data and AI work continues to grow, and we look forward to supporting our clients as they focus on data preparation, developing use cases, and ultimately implementing their own AI platforms. Now let’s turn to our Federal Government Segment, which provides mission-critical solutions to the Department of Defense, the intelligence community, and federal civilian agencies. Federal Segment revenues for the first quarter were up solidly year-over-year. Contract backlog was $2.9 billion at the end of the first quarter, or a coverage ratio of 2.2 times the segment’s trailing 12-month revenues. New contract awards were approximately $197.3 million, translating to a book-to-bill of 0.9 times on a trailing 12-month basis. With the recent passage of the Federal Budget, awards previously deferred by the Continuing Resolution are beginning to work their way through the procurement system.

We have been in pursuit of new awards throughout the budgeting process and now hope that with the recent appropriations bill, our proposals submitted and awaiting award will begin to convert at a higher velocity. The recently passed Federal Budget allocates funds to several key service areas in which our government teams have an established leadership presence, one of which is the area of cybersecurity. In the first quarter, our Federal Government Segment won a $120 million, five-year, re-compete cybersecurity contract with the Department of Health and Human Services. Under this contract, our team will provide comprehensive, advanced managed cybersecurity services, threat intelligence analytics, and data forensics to the Centers for Medicare & Medicaid Services and their Healthcare Marketplace.

The newly approved Federal Budget also allocates increased funds towards responsible AI applications. In addition to our growing AI presence on the commercial side of our business, our Federal Government Segment remains recognized as one of the U.S. Government’s leading AI contractors in both mission and enterprise IT. During the first quarter, our National Security and Intelligence Business received additional funding to support the DoD in developing, deploying, and integrating its Next-Gen AI capabilities. We also won a new contract to support AI-enabled Open-Source Intelligence Solutions for which our team will provide extensive training and program support. We continue to win contracts focused on digital transformation and emerging technology services.

Leveraging more than two decades of experience as a leading Microsoft Solutions Partner in Azure, during the first quarter, we expanded our contract ceiling with the IRS to provide digital transformation services, IT operations, application management, and engineering services. We also broadened our work with the Army’s Program Executive Office for Simulation, Training, and Instrumentation. For this particular Army office, we provide full project lifecycle services ranging from project management, modeling, and simulation to emerging technology integration and logistics support. With that, I will turn the call over to Marie to discuss the first quarter results and our second quarter 2024 guidance.

Marie Perry: Thanks, Theodore. Its great to speak with everyone this afternoon. First quarter revenues of $1.05 billion were near the top end of our guidance range and reflect growth in our commercial consulting and federal government business. Revenues from the Commercial Segment were $731.5 million, down 12.1% compared to the prior year. Revenues from commercial consulting, the largest of our high-margin revenue streams, totaled $277.0 million, up 2% year-over-year and up 3.2% sequentially. Revenues from our Federal Government Segment were $317.5 million, up 7% year-over-year. Turning to margins. Gross margin for the first quarter of 2024 was 28.2%, down 70 basis points from the first quarter of last year due to a higher mix of revenues from our Federal Government Segment which have a lower gross margin than Commercial Segment revenues.

Gross margin for the Commercial Segment was 32%, up 50 basis points year-over-year due to growth in our commercial consulting revenues. Gross margin for the Federal Government Segment was 19.7%, down 190 basis points year-over-year, primarily due to contract mix, as well as a higher volume of firm-fixed-price projects that were ramping-up in the prior year, creating a difficult comp. SG&A expense for the quarter were $210.2 million, or 20% of revenues, compared to $224.1 million, or 19.9% of revenues, in the prior year. SG&A expense also included $1.2 million in acquisition, integration, and strategic planning expenses that were not included in our guidance estimates. As expected, interest expense increased year-over-year related to rising interest rates and our refinancing this past August.

Going forward, however, we will see a reduction in our interest expense. In mid-March, we successfully refinanced our term loan B. This refinancing closed on March 13th and was the first high yield repricing of the year to price at SOFR plus 175 basis points, a 50-basis point reduction from our prior-rate spread. As a result of this repricing, for full year 2024, we anticipate cash interest savings of $1.1 million, net of transaction fees, followed by cash interest savings of approximately $2.5 million per year, thereafter. For the quarter, net income was $38.1 million, Adjusted EBITDA was $108.3 million, and Adjusted EBITDA margin was 10.3%. Our Adjusted EBITDA margin reflects the payroll tax reset which occurs at the beginning of every calendar year and has an approximate 100 basis point downward impact as we move from the fourth to the first quarter.

At quarter end, cash and cash equivalents were $158.4 million, and we had full availability under our $500 million senior secured revolver, and our net leverage ratio was 1.77 times. Turning to our cash flow statement. Free cash flow for the quarter was $62.5 million. We deployed $79.7 million in cash to repurchase approximately 800,000 shares at an average price of $96.63 per share. Also, as Ted noted earlier, this week our Board of Directors approved a new two-year $750 million share repurchase plan, replacing and upsizing the prior $500 million authorization. We believe this increase in the size of our share repurchase program indicates our confidence in our continued ability to generate free cash flow. With solid free cash flow generation and full availability under our revolver, we have ample dry powder to make strategic acquisitions when the M&A market improves.

In the meantime, we expect to continue to repurchase ASGN shares given their attractive valuation. Turning to guidance. Our financial estimates for the second quarter of 2024 are set forth in our earnings release and supplemental materials. These estimates are based on current market conditions. Our estimates assume 63.5 Billable Days in the second quarter, which is 0.25 Billable Days more than the year-ago period and 0.75 Billable Days more than Q1 of 2024. We expect market conditions and demand for our IT services in the second quarter to be similar to that of the first. In the Commercial Segment, we anticipate revenues will remain steady to Q1, while in the Federal Government Segment, revenues will be relatively consistent year-over-year.

With this background, we are estimating revenues of $1.035 billion to $1.055 billion for the second quarter. We are estimating net income of $44.7 million to $48.3 million, and adjusted EBITDA of $114 million to $119 million, and Adjusted EBITDA margin of 11% to 11.3%. Thank you; I’ll now turn the call back to Ted for some closing remarks.

Theodore Hanson: Thanks, Marie. As is clear from today’s discussion, our clients remain cautious with their IT spend as they look for more certainty in their business performance against a challenging macro backdrop. Nevertheless, we continue to proactively shape our operating model to be resilient in the current market as well as be ready for when IT spend accelerates. To ensure our service offerings and capabilities match the evolving needs of our clients and our industries, it’s essential that we maintain a solid foundation of client support. With that in mind, I am grateful to our entire team for your hard work and commitment over the past quarter. Your efforts are deeply appreciated, and I am honored to be part of such a talented and client-focused team.

Sourcing exceptional IT talent on a just-in-time basis is one of the many ways in which ASGN differentiates itself in the IT marketplace. Our differentiated recruiting model that relies on contingent labor onshore and nearshore, provides a scalable, flexible solution that sets ASGN apart from traditional consulting companies that rely on a permanent bench. Leveraging a contingent labor force enables us to tailor our offerings and provide our clients across six diverse industry verticals with the exact skillsets, pricing, and industry-based talent they need, whether for a short-term data review project or a longer-term platform integration. A pivotal aspect of our model is that our contingent labor force flexes with revenue, acting as a stabilizer for gross margin, if and when, revenues soften.

This, along with our variable SG&A cost structure, allows us to deliver solid margins and cash flow. As is evident from our go-to-market strategy I just described, ASGN has the right building blocks in place. That said, as Marie discussed, we do not anticipate the seasonal uptick we have historically seen in our revenues in the second quarter, due in large part to the lack of ramp in IT spend and budget releases that we typically see during the first quarter. Nevertheless, our IT consulting pipeline is growing, bookings remain solid, and the projects we are winning are longer in duration and more consultative. We have weathered many economic cycles throughout our Company’s history, and I am confident that when IT spend begins to accelerate, our teams will be at the forefront to lead our clients to their next phases of technological innovation, productivity, and growth.

Thank you again for joining our first quarter 2024 call. Operator, please open the call to questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] And our first question comes from the line of Trevor Romeo with William Blair. Please proceed with your question.

Trevor Romeo: Hi, good afternoon. Thanks so much for taking the questions. First one. I was kind of just wondering if you could maybe speak to demand trends throughout the quarter. I guess it seemed like last quarter, the message was maybe a good degree of stability. I think, as you said, you typically see a revenue uptick in Q2, but doesn’t sound like that’s likely at this point. So we’re just kind of wondering if you could comment on how demand and client conversations have evolved the past few months and how that informs your outlook going forward?

Theodore Hanson: Yeah, Trevor, thanks for the question. In commercial, I would say it just remains steady. You know, we kind of hear from the third quarter into the fourth and now the fourth into the first, you know, adjusted for billing days and seasonality have just really seen a, what I’ll say, just a steady trend. No real change in client tone or conversations, you know, and here in the first three weeks of the second quarter, more the same. So it’s a little out of the norm, if you will. There is typically some seasonality here where when you move out of the first and into the second, your volumes are ramping up. But we don’t see that right now. We just see a steadiness. On the federal side, we had a really solid growth quarter in the first quarter.

I think that we’re hopefully here now going to see our procurement officials begin to take an action on some of these things that we have as submitted waiting awards. So while bookings were a little muted in the first quarter, we’re hoping the pace of that will pick up here in the second and into the third.

Trevor Romeo: Okay, thank you, Ted. That’s helpful. And then just one on AI demand was just wondering for some of the foundational cloud data work, even starting for clients kind of trying to prep for AI, have those projects evolved or changed in any way as they moved along, I guess. Have any of your clients moved closer toward the use case stage there? Just trying to get a sense of how that demand trend could continue to drive new business for ASGN through the next several quarters?

Theodore Hanson: Yeah. Rand, do you want to take that one?

Randolph Blazer: Yeah, I’ll start. And Trevor, I like the way you worded the question, because you have it exactly right. First of all, a lot of work going on in the cloud structures and the data side of the business that continues. Those are among our highest solutions in terms of consulting and even in staffing that we place. The use case side of it is in discussion mode, contemplation, if you will, but not yet, I think taking off, and I think that’s just a question of them setting their governance policies. They’re setting their data sets appropriately. They do have a mind of use cases, and eventually, because they’re prepping the data in a way, they would support that. So I think there’s progress, but it’s slow, and I’d say slow and steady, but nothing robust.

We definitely, I think, had more AI engagements in the first quarter. One, there was one of those engagements featured in Ted Scripp [ph] that he read to you a short while ago in one of our telecommunications clients. So, you know, that was a nice thing to see, but it’s not of the scale that it would certainly outreach any of the work we’re doing in cloud data or cybersecurity, those areas.

Trevor Romeo: Okay, thank you very much.

Operator: Thank you. Our next question comes from the line of Surinder Thind with Jefferies. Please proceed with your question.

Surinder Thind: Thank you. For the first question, can you maybe provide some color around the commercial consulting revenue growth that was quarter over quarter? Were there a few large projects that kind of, that you started in the quarter? Because it looks like in the subsequent quarter that things are going to be relatively stable. So just trying to understand the trends within the commercial consulting segments.

Theodore Hanson: Well, look, Surinder, if you go back, I think you’re seeing consistent bookings right in that unit. And while we’re booking at 1.2, which would lead you to some growth rate, we’re also seeing elongation of those projects. So there’s a slower burn of those bookings. We also mentioned that it’s more heavily weighted to renewals than it is to new work. And so I think clients continue on with mission critical things that they were working on. And so that’s why we see extensions of this work. But I think back to the original part of your question. Was there any one big thing or two big things that got started here that were difference maker net.

Surinder Thind: Got it. And then I guess maybe some additional color on the sub segments within the contingent labor part of the business, maybe specifically like the assignment business versus creative circle and perm placement?

Theodore Hanson: And specifically how are they doing beyond the assignment revenue growth number we gave you or what do you.

Surinder Thind: Yeah, beyond the top line number in terms of just trying to understand trends, if there’s things that maybe have started to maybe stabilize relative to last quarter, just any additional color that you can provide that can help us understand where we are in the cycle?

Theodore Hanson: Yeah, I would say that they’re stabilizing quarter to quarter here. I don’t think that’s totally new, but I think it continues. If you look at the forward metrics for the business, they’re not telling you there’s some inflection here for a slope up. But performance week to week, month to month, and, you know, throughout the first quarter and into the first piece of the second just tells you that that assignment part of the business is steady as well.

Surinder Thind: Thank you.

Operator: Thank you. Our next question comes from the line of Jeff Silber with BMO Capital Markets. Please proceed with your question.

Unidentified Analyst: Hey, thanks a lot. Just Ryan on for Jeff. Was curious, as we move throughout the year, aside from just the automatic stabilizers, what levers do you have to pull in terms of the margin defense and how does that really relate with the negative mix element of the federal government strength in coming quarters?

Theodore Hanson: Well, good question. I think on the last piece of that you’re going to continue, as long as we’re growing in federal and not growing in commercial, you’re going to see the effect of business mix play out. If you think about levers to the first part of your question that we have to pull. Look, I mean, our business model is mostly a variable cost model. So more than 80% of our SG&A is in compensation, incentives, commissions, bonuses, those type of things. So not only are we not dealing with a big bench on the gross margin side, and as revenues move, the cost of goods, their cost of sales is moving and resetting itself. We’re also seeing lower incentives and natural attrition. And those will continue to be the levers that play out here if we see something different.

For now, things are kind of stable. So I would say we’re letting attrition work. We’re backfilling it. In certain areas where we see demand, other areas that don’t have demand, we may not be replacing those resources. And it just continues to be a week to week thing that we monitor.

Unidentified Analyst: Got it. Thank you. And just to follow up, it seems like some of the larger IT service providers have started to feel like, down and a little bit more weakness over the last couple of months. It seems like your consulting business is relatively stable. Is there anything you’d like to call out on kind of that divergence there between the two?

Theodore Hanson: Well, look, on the, as it relates to our offering versus theirs, we are, I think you’ve heard me say many times before, a real productive way for clients to continue to get really critical projects and initiatives done and to keep their spend at a lower rate than maybe some of the big traditional consulting firms. So I think you’re seeing that play out here. Now, I will tell you, I think all the, there’s a lead lag here. While the assignment business was the first and the fastest to fall, you know, during the quarters in ’23, until it found some stability in the latter part of ’23, you’ve seen consulting trail that not just for us, but for the peer group as well. And I think that’s natural. We would have told, we would say, we did say to expect that.

So I go back and just say we have a very capable, high end solution for the client in these areas that are most critical and important to them. We come at a very productive price point in order to get these things done, and so they’re pulling our lever, if you will, in order to stay with it. And I think that’s what you can see playing out in the numbers.

Randolph Blazer: Hey, Ted, is it worth mentioning also, Ryan, that we’re not over weighted in any one industry. So sometimes other consulting businesses are heavily weighted in one or two industries. We’re pretty much spread across the six industries we talked to you about, and I that helps us as well. There are certain industries that still aren’t up in spending in the IT area. And, you know, while we’re affected by that as well, some of the others, they may be more weighted in those industries, so.

Unidentified Analyst: Understood. Thank you very much.

Operator: Thank you. Our next question comes from the line of Kevin McVeigh with UBS. Please proceed with your question.

Kevin McVeigh: Great. Thanks so much, and congratulations on the buyback. I wonder, could you give us a sense, over two years, any sense of the sequencing on the buyback? And if I heard the comments earlier, it sounds like maybe the M&A market isn’t as appealing as you thought. Any thoughts around that? I guess just, again, sequencing of the buyback, and then is it, I think it replaced 750. So can you help us just rather replace the $500 million? So what was the net step up. So I guess what was it in the 750? It is today. So I guess there’s a couple questions in there.

Theodore Hanson: Hey, Kevin, you may be on mute.

Kevin McVeigh: My apologies.

Marie Perry: So, I mean, to your point, the original authorization was 500 million, and we are replacing that with a 750, 750 million. It’s for a two year period. But what was your, was your question really…

Kevin McVeigh: We had, we had 177 million. And so the 750 replaces, replaces that…

Marie Perry: And our intent is always to have at least a year, if not more of authorization on the books. And so typically you would see us some at this time increase it. To your point, we actually did increase it higher than what we typically would do.

Kevin McVeigh: Terrific. That’s helpful. And then just in terms of the lack of normal seasonal uptick, did you expect that going into the year, or is that something new? And is that the macro, or is that a function of anything that kind of drove that?

Theodore Hanson: And you’re saying the uptick, Kevin, and what…

Kevin McVeigh: If I heard you right, that, you know, normally you’d see some seasonal uptick in the Q2, and that hasn’t surfaced yet. Is that the macro, or is there anything else driving out right now?

Theodore Hanson: No, I think it’s a macro, Kevin. I mean, look, you know this. When you come across the holidays, you kind of reset as naturally as projects end and things get restarted. You start out in the first couple weeks of January at a lower level of volumes, and maybe you finished at before the holidays in December, and you spend January kind of recouping that volume through the end of the quarter. And by the time you get to the second quarter, you’re kind of moving on to surpass where you were and grow higher. I think what you’re seeing here is just a steadiness and not that normal seasonal trend because the client’s not back to any acceleration in it spending. I mean, my take in rands is that they have budgets to spend, but they’re holding them very tight and close.

They’re trying to gain confidence in their own business performance and where interest rates are headed. And what does that mean for their business and the outlook here as we go. So this is all a macro issue. Certainly the underpinnings for spending more on it are there. Everybody’s at the start line ready to go. And I think we’re just a little bit of a waiting game here as we watch those things in the macro play out.

Kevin McVeigh: Very helpful. Just one more if I could, in a sense of can you dimensionalize how much of the work’s been gen AI related, whether it’s through bookings or what percentage of the revenue? I know it’s still relatively early, but just any way to think about how much the scope of work has been gen AI?

Theodore Hanson: Very little. I think where you see conversation activity, we see some bookings of small projects to get started in conversations or look at data or think about where does it need to be in the cloud, those kind of things. But while there’s a lot of conversation going on around that stuff, Kevin, there’s no real material spend going. We have bookings around that. It’s growing very fast, but it’s a very small number. And I think that the real push on that is yet to come, which is a good thing. I mean, I think this is not, this is not a false promise. This is just, you know, everybody getting kind of teed up and ready to go.

Kevin McVeigh: Super helpful. Thank you.

Operator: Thank you. Our next question comes from the line of Heather Balsky with Bank of America. Please proceed with your question.

Heather Balsky: Hi. Thank you very much. I’m just curious, especially on the back of the question about buybacks, as you kind of think of use of cash near term and also for the midterm, how are you thinking about your M&A strategy, especially given that some of the challenges in the environment that are still out there, what is your pipeline look like and where would you want to kind of fill in your portfolio?

Theodore Hanson: Yeah, well, look, Heather, I mean, we still believe M&A is the highest and best return on capital when we deploy it the way we do strategic tuck ins that bring capabilities into our business that are very important to our clients, that we can pull across. This account portfolio is really the name of the game. There are certain areas where we can organically build capability, and we’re doing that. There are other places where we’re better off making an acquisition. Our acquisition of Glidefast in the ServiceNow area to become a premier north American partner is a great example of that. And, you know, I think when we go through that exercise, we have a lot of confidence by the time we get to the decision point because we have really good insights into what our clients are thinking about within their pipeline in terms of work to get done.