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ASGN Incorporated (ASGN) Q3 2020 Earnings Call Transcript

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ASGN Incorporated (NYSE: ASGN)
Q3 2020 Earnings Call
Oct 28, 2020, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to ASGN Inc.'s Third Quarter 2020 Earnings Call. [Operator Instructions] It is now my pleasure to introduce your host Kimberly Esterkin, Investor Relations. Thank you. You may begin.

Kimberly Esterkin -- ADDO Investor Relations

Thank you, operator. Good afternoon, and thank you for joining us today for ASGN third quarter 2020 conference call. With me are Ted Hanson, President and Chief Executive Officer, Rand Blazer, President of Apex Systems, George Wilson, President of ECS, and Ed Pierce, 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 these statements made on today's 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 the GAAP and non-GAAP measures are included in today's press release.

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

Theodore S. Hanson -- President and Chief Executive Officer

Thank you, Kimberly. And thank you for joining ASGN's third quarter 2020 earnings call. ASGN reported strong results for the third quarter with both revenues and adjusted EBITDA exceeding our expectations. For the quarter, revenues totaled $1.01 billion, up 0.9% from the prior year and ahead of our guidance of $913 million to $938 million for the quarter. Adjusted EBITDA totaled $113.3 million or a margin of 11.2% for the third quarter, well ahead of our guidance.

Performance was broad based with each segment outperforming our initial expectations. ECS in particular saw better than expected results for the third quarter, with revenues up 40% over the prior year. Apex Segment revenues, though lower than Q3 of 2019 on tough year-over-year comps, were up sequentially by 3.3%. The improvement was mainly the result of a turnaround in our Apex Systems commercial business.

Throughout the quarter, clients continued to request bids on new work in both the commercial and federal government markets. In fact, we witnessed very balanced growth in Q3, with week- over-week revenue improvements across all segments. We believe this steady revenue growth during Q3 is evidence that our commercial business hit trough levels in the second quarter and is now on a solid upward trajectory. Ed Pierce, our CFO, will discuss more on this recovery and our fourth quarter guidance later in today's call.

As I've emphasized previously, ASGN's scale, high-end IT service offerings and large and diverse client base provide us with stability throughout market cycles. These aspects of our business model also provide us with the ability to accelerate as our clients pursue their IT modernization and digital transformation initiatives. M&A continues to be a great way for us to build our capabilities in key solution areas, while simultaneously moving higher up in the value chain. In September, we acquired LeapFrog Systems, which is now a part of the Apex Segment. Then, just post quarter end, we acquired Skyris as part of ECS. Both companies were purchased with cash on hand. Our free cash flows is our principal source of liquidity and has enabled us to make acquisitions, an important part of our capital allocation strategy, without the need to take on additional leverage.

Before getting into the specifics of the LeapFrog and Skyris acquisitions, let's first turn to our segment performance for the third quarter. Apex, our largest segment, which includes Apex Systems and Creative Circle, services clients across multiple commercial end markets. For the third quarter of 2020, the Apex Segment generated revenue of $596.1 million, down 7.5% year-over-year, but up 3.3% sequentially. For the third quarter, Apex Systems revenues declined 2.7% year-over-year, while Creative Circle revenues declined double-digit compared to Q3 2019. Importantly, both Apex Systems and Creative Circle continue to rebound from the COVID-19-related slowdown experienced in the second quarter, with sequential revenue improvements of 3.3% and 3.6%, respectively. Apex Systems exited the third quarter at weekly revenue levels above the pre-COVID-19 levels. Creative Circle's weekly revenues while down double-digits from the prior year, continue to move higher with ad, event and permanent placement revenues seeing the steepest declines and digital-related skills and services holding steady.

Revenues for Apex Systems demonstrated some notable trends for the third quarter. First, top accounts achieved low single-digit growth rates for Q3, while retail and branch accounts were down. Second, three of our five industry verticals saw revenue improvements, including financial services, healthcare and business and government services. Consumer and industrials and technology, media and telecom vertical revenues declined year-over-year. Revenues in financial services accounts, our largest vertical, continued to experience solid double-digit growth across all sectors, including big banks, regional banks, wealth management, insurance and FinTech clients. Our consumer and industrial vertical while still showing declines year-over-year, experienced growth within e-commerce, consumer staples and utility accounts, while retail, energy, hospitality and transportation, including airlines, were down.

Gross margins for the Apex Segment were 29%, down 80 basis points year-over-year due primarily to the lower permanent placement mix in Creative Circle as a result of COVID-19. Gross margins at Apex Systems, however, were up over the prior year period and both Apex Systems and Creative Circle maintained strong EBITDA margin. Importantly, we continue to grow our commercial consulting revenues. Consulting work for the Apex and Oxford segments combined totaled $110.7 million for the third quarter, up 10.6% year-over-year, returning to double-digit growth rate. Our pipeline for consulting work also remained strong and was up double-digits over the prior year period.

We expect that our high-end consulting offering will remain an important source of value we provide for our clients, and so we continue to make acquisitions that bolster our consulting capabilities. As noted previously, during the third quarter, we acquired LeapFrog, a specialized consultancy headquartered in Boston, Massachusetts. LeapFrog focuses on providing enterprise scale digital business transformation services to Fortune 500 clients and expands the Apex Segment's proficiency in digital innovation and enterprise solutions for the financial services, insurance and healthcare industries. With an accelerating trend toward digital transformation, now is an ideal time to welcome LeapFrog to Apex and ASGN.

Under the Apex umbrella, LeapFrog benefits from greater access to industry-leading methodologies and a broader talent pool. At the same time, LeapFrog provides Apex subject matter expertise and long-standing client relationships. While we are just beginning our joint work with LeapFrog, October marks our one-year anniversary of our acquisition of Intersys. With the addition of Intersys, we've been able to bid on an increased amount of work, including securing new contracts in cloud strategy, data and analytics, agile and DevOps engagement for multiple Apex clients leveraging Intersys and their work with our cloud partners. We are also seeing great traction with Intersys' near-shore Mexican Development Center.

For one new client this past quarter, the combined Intersys and Apex team was engaged to provide expertise in cloud data engineering, architecture and enterprise data governance to expand the client's customer service digitization initiative. We provided a digital roadmap for work execution using both U.S. and Mexican resources to expand our client's cloud data warehouse. We also launched a near-shore engagement with a very large global oil and gas company to develop a mobile fueling app as part of this customer's go-to-market strategy. Our work included design and implementation on an Azure DevOps platform consistent with the client's digital architecture.

Let's now turn to ECS, which provides mission-critical solutions to the federal government, including the Department of Defense, intelligence agencies and other civilian agencies. ECS experienced an exceptional quarter of industry-leading revenue growth with revenues of $288.6 million, up 40% year-over-year. This growth was primarily driven by the increased demand for artificial intelligence and machine learning or AI/ML services. The federal government is rapidly increasing its AI/ML spend. Bloomberg government is anticipating $2 billion in governmentwide contract spending on artificial intelligence and machine learning projects for the current fiscal year, up $500 million from 2019. ECS supports customers across a wide range of domains in the AI/ML space, including imagery and video analysis, supply chain and logistics, and sentiment analysis.

ECS revenues in the third quarter also benefited from the development and expansion of unclassified networks as well as opportunities presented through previous strategic M&A. ECS' new business pipeline remains strong. The segment was awarded approximately $383.2 million in new business and achieved a book to bill of 1.3 to 1 for the third quarter. Backlog improved sequentially to total $2.7 billion at the end of the third quarter or a healthy coverage ratio of 2.7 times ECS' trailing 12-month revenue.

Key contracts won in Q3 included an award to provide the FBI with a full spectrum of cyber and information assurance support across all of their technology systems, another award to provide data analytics and software development support to the FBI, several contracts to support cloud, DevOps, business intelligence and data analytics to the Department of Homeland Security, and AI/ML support to the government's COVID-19 response and management efforts.

Similar to our commercial end markets, we continue to acquire in the government space. Just post quarter end, on October 1st, we announced the acquisition of Skyris. Skyris has joined ECS' mission solutions business unit, which is focused on a range of cutting-edge and technically complex DoD, intelligence community and other federal civilian programs and missions. Skyris is one of the largest providers of remote sensing and data science expertise to the National Geospatial-Intelligence Agency and is the prime contractor on several significant NGA contract vehicles. Adding Skyris' unique capabilities to ECS further advances the mission-critical solutions we offer our customers and expands ECS' relationship with the NGA. We expect to leverage ECS' past performances and Skyris' capabilities to execute on existing task orders as well as win new geospatial contracts.

Turning to our last segment, Oxford. Oxford offers on-demand consulting talent for commercial IT, healthcare, life sciences and engineering clients as well as permanent placement talent through our CyberCoders division. The Oxford segment reported revenues of $127.2 million for the third quarter of 2020, down 16.6% from the prior year, but up 5.8% sequentially. Both Oxford and CyberCoders are seeing a solid recovery from their second quarter lows. Across the U.S. and Europe, Oxford's offerings in IT, life sciences and engineering are trending up as our mid-market accounts gain more confidence in their own business recovery. Although a small part of the business, CyberCoders' permanent placement services also showed strong sequential rebound.

ASGN's business continues to evolve to meet the critical I needs -- IT needs of our customer. The government market, even with overall market volatility spurred by the impending election, remains insulated from the COVID-19 induced commercial market recession. The commercial market is making a turnaround, and our high-end consulting services and solutions are seeing positive bookings as clients continue to express confidence in our ability to support their needs. I remain bullish on the existing and emerging opportunities for ASGN. We have the right capabilities with the right industry expertise ready to meet the needs of our large and diverse customer accounts.

With that said, I'd now like to turn the call over to Ed Pierce, our CFO, to discuss our third quarter performance and fourth quarter guidance in further detail. Ed?

Edward L. Pierce -- Executive Vice President and Chief Financial Officer

Thanks, Ted. Good afternoon, everyone. Ted mentioned, our financial performance for the quarter was well above our guidance estimates, driven by the high growth of our federal government business and the solid growth of all of our all our commercial divisions from the trough level revenues experienced in late May of last quarter.

Revenues for the quarter were just above $1 billion, which is the highest quarterly revenue level since Q4 of last year. Q3 revenues were up slightly year-over-year and up 8% sequentially. Net income and adjusted EBITDA were also both up sequentially. Our adjusted EBITDA margin was 11.2%, which was in line with the preceding quarter and higher than our guidance estimates. Commercial revenues for the quarter accounted for 71.5% of total revenues and, because of the pandemic, were down year-over-year on one additional billable day. However, on a sequential basis, commercial revenues were up 3.7% and all commercial divisions generated higher revenues per billable day than the preceding quarter.

Federal government revenues accounted for 28.5% of total revenues, up 40% year-over-year and up 20.4% sequentially. The high growth was driven by a number of factors, including increased volume on certain existing programs, new contract awards and the contribution from Blackstone Federal, which was acquired in January of this year.

Gross margin for the quarter was down year-over-year due to changes in business mix stemming from the decline in permanent placement revenues and the high revenue growth of our federal government business, which carries lower gross margins than our commercial business. Gross margin on federal government revenues was lower than Q3 of the last year due to high volume from certain programs under cost reimbursable contracts, which typically have lower margins than other contract types.

The contract gross margin for the commercial business, which excludes the effects of permanent placement revenues, was up slightly year-over-year. This improvement reflected, among other things, the higher contribution of consulting revenues and lower billable consultant expenses, which are generally passed through to the customer with no markup.

SG&A expenses were 17.5% of revenues, a year-over-year reduction of approximately 130 basis points in the expense margin. This improvement reflected effective expense management by our operating units and lower incentive compensation expense. Net income was $52.3 million, down 8.9% year-over-year on lower gross profit, partially offset by the decrease in SG&A and interest expenses.

As mentioned earlier, adjusted EBITDA was $113.3 million and the related margin was 11.2%, which was 40 basis points above the mid-point of our guidance estimates. Free cash flow was $81.9 million, and the conversion rate of adjusted EBITDA into free cash flow was 72.3%. Cash used for investing activities included capital expenditures of $5.7 million and the acquisition of LeapFrog for $66 million.

Quarter end cash and cash equivalents were $229.7 million, up 10.5% sequentially. There were also no outstanding borrowings under our $250 million revolving credit facility, and our senior secured debt leverage ratio was 1.13 to 1, well below the maximum allow -- allowable ratio of 4.25 to 1.

We are providing formal financial guidance for the fourth quarter of 2020. These estimates, which are set forth in our earnings release and supplemental materials, are based on current production trends and assume no deterioration in the markets that we serve. Furthermore, these estimates are as of the date of our earnings release. Consequently, any worsening of the pandemic could adversely affect results for the quarter.

Regarding our financial estimates for the fourth quarter, we estimate revenues of $968 million to $988 million, net income of $44.4 million to $48.1 million and adjusted EBITDA of $101 million to $106 million. These estimates assume revenues will be down low single-digits sequentially due in part to there being 3.5 fewer billable days than Q3, and we estimate revenues per billable day will be up low single-digits over Q3.

For our commercial business, we estimate revenues will be flat to down sequentially because of the 3.5 fewer billable days, and revenues per billable day will be up 4% to 4.5% sequentially. Although we are not providing specific details on recent weekly production, the weekly production trends and outlook experienced in Q3 have continued into the first three weeks of Q4 and were considered in our financial estimates.

For our federal government business, we expect year-over-year revenue growth will be slightly above 10% despite the very high Q4 2019 comparable. As we have previously reported, revenue growth for the fourth quarter of last year was over 30% and benefited from $34.4 million in revenues from the early renewal of software licenses. Relative to the third quarter of this year, we estimate revenues will be down because of 3.5 fewer billable days and the lower expected government spending on certain cost reimbursable contracts in which there was a high level of spending in the third quarter.

Thank you for your time, I will now turn the call back over to Ted for some closing remarks. Ted?

Theodore S. Hanson -- President and Chief Executive Officer

Thanks, Ed. As we enter the fourth and final quarter of the year, I can positively say that ASGN has established a solid foothold at scale in the commercial and federal government marketplaces for IT services. Our customers are feeling more confident than in months past, and they are seeing the need to continue moving forward on their strategic technology roadmaps more clearly than ever before. This favorable dynamic creates consistent and growing demand for ASGN's high-end consulting services.

From an M&A perspective, we will continue to look to acquire companies in the commercial and government markets that provide us new capabilities, new customers or new contract vehicles. DHA, which we acquired in January of 2019, expanded our relationship with the FBI and strengthened our cyber security offering. Intersys, which we acquired in October of 2019, expanded our consulting capabilities in big data and business intelligence, while also providing a near-shore Mexican Development Center. Blackstone Federal, which we acquired at the beginning of 2020 provides us with a much stronger footprint with the Department of Homeland Security.

Turning to our most recent acquisitions, LeapFrog offers us new capabilities in digital innovation, while Skyris broadens our geospatial expertise and strengthens our position with the NGA. I'm very pleased to see that our business is on a solid upward trajectory and is meeting or in many cases exceeding our internal expectations. Through both organic growth and acquisitions, we have positioned ASGN for continued success in this new remote working environment. We will continue to look for ways to strengthen and advance the IT services we provide each of our commercial and government clients throughout the fourth quarter.

That concludes our prepared remarks for today. I want to thank our management team and all of our employees for a fabulous third quarter. On behalf of our entire company and the Board of Directors, we appreciate your continued support of ASGN. We will now open up the call to your questions. Operator?

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Gary Bisbee with Bank of America. Please proceed with your question.

Gary Bisbee -- Bank of America Merrill Lynch -- Analyst

Hey, guys, good afternoon. And another very strong quarter. I guess, maybe if I could just start with, you gave the guidance said it assumes no deterioration in market. I guess how are you thinking about the recent spike in virus activity and any impact that could have on your commercial staffing businesses at this point?

Theodore S. Hanson -- President and Chief Executive Officer

Well, Gary, thanks for the question. I think that if we look at what's going on in Europe, we haven't seen an impact yet on this new wave of cases. Our business remains fairly steady there. We haven't seen clients change their behavior there. And I expect, since there are few weeks ahead of us here, that hopefully we'll see kind of that same trend. I don't know where this is going. Obviously, we carve that out in our guidance that we didn't know how or if that may affect our performance. But I can tell you in -- I can tell you just in terms of what we're seeing every week in the business, our trend continues here. And some of the things that we've seen, whether it's COVID affected industries or small accounts, they obviously are still struggling to some degree. And so performance in those areas, although it's a small percentage of our business, is still difficult. But in large accounts, non-COVID affected areas, federal government, our business is still on a good footing.

Gary Bisbee -- Bank of America Merrill Lynch -- Analyst

Okay, thanks. And then in your discussion of the ECS growth, I think Ed maybe attributed to the growth in the quarter, the several things, growth in existing contracts, new wins and obviously there has been some M&A as well. I -- can you talk a little bit about that concept of growth in existing contracts? Is that a meaningful driver over time and how significant is that today or as a driver of growth of the bid? Thanks.

Theodore S. Hanson -- President and Chief Executive Officer

Sure. Well look, I'll let Ed break the numbers down for you and then let George comment as well, but definitely the extra growth, if you want to call it that, that we saw in the quarter was driven by some heavy spending on a couple of existing contracts here at the end of the government's fiscal year coming into the end of our calendar third quarter. Ed, do you want to break down the numbers for Gary?

Edward L. Pierce -- Executive Vice President and Chief Financial Officer

Yeah. Gary, we mentioned in our earnings release, as you know, about -- we made the comment that the existing programs, the -- for higher spend, there were a couple in particular that we saw a surge in spending in Q3 over Q2. And that increase was about, let's say, $38.5 million. And as Ted mentioned, it sort of coincided with the end of the government's fiscal year. Look, I think on a go-forward basis, you're going to -- you should expect that largely that in terms of sort of where our growth is coming from, it's going to be coming from existing program. Now, as it relates to that surge, if you were to exclude the surge from the revenue growth that we saw in the quarter, we still had 20% revenue growth, right, for the quarter. So you kind of think about it in those terms. And then as it relates to Q4, we don't expect to see a similar surge from those contracts of those programs and so that's all contemplated in our numbers.

Gary Bisbee -- Bank of America Merrill Lynch -- Analyst

Great. Thank you.

Edward L. Pierce -- Executive Vice President and Chief Financial Officer

Okay.

Operator

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

Jeffrey Silber -- BMO Capital Markets -- Analyst

Thanks so much. You spend some time in your prepared comments giving us a little bit color on the acquisitions and I do appreciate it. Things like the pace of acquisition seems to have ramped up a bit. Is that something that we should expect to continue? And then I'm also curious, what you're seeing in terms of deal multiples, how they're trending as well?

Theodore S. Hanson -- President and Chief Executive Officer

Yeah. Thanks for the question, Jeff. I mean obviously this -- these acquisitions are important part of building capabilities. I mean we have a -- we are in the right spot with the right account portfolio across a diversified set of industry segments and so we have access to a lot of work opportunities and the more capabilities that we can bring into our business, whether we build them organically or we acquire them through M&A is going to give us a real chance for better work, better growth and to move up the value chain, if you will, with these customers. So will the pace continue like this, I don't know. Obviously, we're always working and our pipeline, it's kind of -- we have a high bar in terms of the type of companies and the things that we're looking for as we've kind of laid out for you in the past. So I can't quite talk to the pace, but it's been a good marketplace for M&A here lately, and both in the commercial and the government sector we've had a lot of good things to look at.

As it relates to multiples, it's -- we've gotten some things done here, some pretty, what I think are pretty good reasonable multiples, whether it's high single-digits on adjusted EBITDA or low double-digits on adjusted EBITDA. We've been able to make acquisitions that we believe to be accretive here right off the bat. And again, what's most important is not the revenues and EBITDA they bring into our business, because in the grand scheme of things that's a little smaller, but the revenue synergy opportunities and having that capability and having those those new partners in our go-to-market approach is really paying off, and as we mentioned that, if you will, in the prepared remarks.

Jeffrey Silber -- BMO Capital Markets -- Analyst

Okay, great, that's helpful. My follow-up, can you give us a little bit of color on how bill pay spreads are trending? And I'm just curious from a supply perspective, is the talent -- is it easier to find talent, is the supply constraints loosening up in this environment?

Theodore S. Hanson -- President and Chief Executive Officer

So I would tell you that this unemployment picture and this recession has not been about IT talent being out of work. So I don't see that things that we've seen a great change if you will in that way. Rand, do you want to talk a little bit about what you see there and also about bill pay spread.

Randolph C. Blazer -- President, Apex Systems

I think you said it correctly. This -- what we're going through is not a recession for IT workers. So it's been steady as we've had for the past years. Bill pay spread though has continue to inch up inside of our commercial units, and I think that's more around the discipline that we have and the fact that we have value clients that we put these people to work with. And when you're number 1 or 2 in the industry, you get some preference, I think, to some extent. So I think it's steady as we go.

Jeffrey Silber -- BMO Capital Markets -- Analyst

Okay. Appreciate the color. Thanks so much.

Operator

Our next question comes from the line of Tobey Sommer with Truist. Please proceed with your question.

Tobey Sommer -- Truist Financial Corporation -- Analyst

Thank you. I was wondering if you could comment about what you're seeing from and hearing from customers with respect to reshoring or near-shoring work as supply change and delivery capabilities are retooled and rethought? And in the context of that, could you let us know what your medium or long-term goals maybe for either growth or percentage of sales and profit from the consulting area?

Theodore S. Hanson -- President and Chief Executive Officer

Ed, do you want to talk about that.

Edward L. Pierce -- Executive Vice President and Chief Financial Officer

Well, first of all, I'd say, we have commented all along that when we're in a business, we want it to be a $1 billion business. So, our first goal in consulting is to get it to a $1 billion and continue to grow double-digits. So we're on that path. We've made great gains on that path in the last couple of years. That's on the commercial side. On the government side, you can see how fabulously ECS is doing. As far as offshore, near-shore, Tobey, I'm not going to say there is a mega-trend here going on. There are certainly -- the virus created a scenario where to have better direct control line of sight with some of the things you -- we put overseas to bring it back on shore was definitely a trend early back in March, April timeframe. We reported on that I think in the second quarter. There are still some of those discussions, but it's a case-by-case basis. I'm not -- I don't think we're that big in that market to say there is a mega trend going on. But as you continue to put scrutiny on building in the U.S. workforce, American workers limiting in the H1Bs, getting customer a personalized customer assistance, getting direct response in line of sight around these teams. There are some influencers that would say, closer the better, because I can't see it, control it and react to it better and it's in the right time zone. Does that answer your question, Tobey?

Tobey Sommer -- Truist Financial Corporation -- Analyst

It does. Thanks. And as a follow-up, is there a point at which the consulting business approaches such a scale, if you're able to put yourself on the trajectory for $1 billion in sales, at which existing consulting customers of your staffing lines of business see you as a competitor and choose to direct their demand to alternative staffing providers.

Edward L. Pierce -- Executive Vice President and Chief Financial Officer

Ted, you want me to say...

Theodore S. Hanson -- President and Chief Executive Officer

Yeah.

Edward L. Pierce -- Executive Vice President and Chief Financial Officer

Take that? I'll start and then Ted will jump on. Tobey, I don't think so. Fortune 500 companies, let's just use them as a population, spend X amount of money on staffing and X amount of money on consulting. The consulting number is much bigger than the staffing number. I think they are looking for value. I don't think they are trying to mix and match or to use one of the other where there is good value that is technical competence, quality work and particularly these new digitization technologies and roadmaps and good price point around it, you're going to win. And I think what we're seeing is our clients are willing because of our excellence in the staffing world and having a valued account relationship and have brought value to them, they're pulling us into the consulting side, saying I think you can do more. Let's talk about this. And once we get going, we certainly win our share of those, but we need to continue to add, as Ted said earlier, add technical capability and muscle, and make sure that we're able to deal with the requirements and the solutions that they're looking for. But we definitely have a reputation and a value offering to these clients and we have deep account relationships, which are extremely valuable.

Theodore S. Hanson -- President and Chief Executive Officer

And I think all should -- the customers asking, as Rand said, for these big traditional consulting firms to stay up in strategy, architecture and design, and they don't want to pay their mark up to fees to execute the work in most instances. And I really think at the end of the day, as Rand said, the clients driving that. I think the other thing we have going on here is that as the IT staffing market was a $30 billion market and is probably not too far off of that, but that's where it was here in the U.S. and IT U.S. consulting market is more like $300 billion and growing faster. So I just think there's plenty of room here to play in the market and I don't see there be the conflict, if you will they around services out we provide versus that of the big traditional staffing, I mean, big traditional consulting firms.

Tobey Sommer -- Truist Financial Corporation -- Analyst

Thank you very much.

Operator

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

Surinder Thind -- Jefferies -- Analyst

Good afternoon. Congratulations on a fabulous quarter. I guess, my first question here is just on the commercial side of the business. It's a follow-up to the last question. Can you talk a little bit about how you're thinking about the outlook for demand on the consulting side versus the staffing side? In the way that I'm trying to think about this is maybe a little bit of color on the conversations you're having with clients there in terms of the current environment and how they're may be thinking about -- when we look at the unemployment numbers, obviously, the top-line numbers are coming down, but the structural unemployment numbers seem to be growing. And so maybe some color how business is and their confidence and if there's a preference for one model over the other if the structural unemployment was to increase or continue increasing.

Theodore S. Hanson -- President and Chief Executive Officer

Rand?

Randolph C. Blazer -- President, Apex Systems

Yeah. Well, thanks Ted. As the -- there is a number of questions in there. Well, first of all, let me go back and say when the client talked, he talks about, they talk about their business problem or their technology needs. And so that's where the dialogue is taking place. In Apex terms and a lot of our Oxford and commercial units where we're doing some consulting work now and Creative Circle, the conversation goes from you've always provided these staff that can you do more. And they see us as an expert in workforce management and productivity of workforces and the ability to quickly surge or pull back and to get productivity out of a smaller team than their traditional using. So we quickly got dragged into that side of our solution set, what we call, workforce management. And you can say that's a natural extension of staffing.

But I think what's happened is as we've built more insight into the client's technology architectures and business needs, we have seen the need to put together, what we call, digital roadmaps and we have them for the 26 segments of the industry we work in, because that roadmap is different from a hospital, from a retail company, from a bank. And so we get engaged now around the digital roadmap. And there's a lot of good work to be done, as Ted was saying. Accenture may be the architect of those roadmaps, but there is a lot of data movement or housing or even constructing clouds or hybrid clouds or distributed cloud to support different aspects to the business.

Looking at movement of harnessing and putting business data into dashboards for the client. I mean we're very capable of those things quality assurance in the healthcare world, HIM coding and recoding which they recognize, they need to stay up on in order to get their revenue flow going consistently. So there is always a set of business needs. Some of them are not as sexy, but they are definitely more in the, what I call, modern enterprise or digital transformation area. And as we build up our technical skill, we're now engaging in those kinds of dialogues and we're actually winning some work. In terms of structural employment, I guess I'm not sure Surinder where you're headed there. What's you're thinking. I mean, are you referring to the absolute state particularly.

Surinder Thind -- Jefferies -- Analyst

I guess what I was thinking about is in terms of if we're hearing about things like Boeing, increasing layoffs, obviously more permanently layoffs at Disney, I guess that was the genesis of the question is maybe if we're heading into more of our recessionary type environment versus what seems initially was a lot of temporary layoffs and now what we're beginning to see is more permanent layoffs and if -- are we potentially -- I guess the question is how does demand for you guys on a go forward basis look if we were to enter into a more traditional recessionary environment? I mean, should we expect one business over the other to maybe within the commercial side hold up better or they just -- they're closely tied?

Randolph C. Blazer -- President, Apex Systems

Sure.

Surinder Thind -- Jefferies -- Analyst

I mean obviously there is different growth rates for different reasons.

Randolph C. Blazer -- President, Apex Systems

Yeah.

Surinder Thind -- Jefferies -- Analyst

But it's just more about how the clients view those two businesses or those two services?

Randolph C. Blazer -- President, Apex Systems

Well, Ted, if I could. Surinder, that's why we provide you information around the 8 industries and 26 segments we work in. We have said repeatedly over the last couple of quarters, there is a couple of sectors of the economy, like our airline clients, our transportation clients, our -- some of our oil and gas clients, there are hospitality clients that are definitely on their back and the spending and the amount of business there is a negative growth for us and service to those clients, OK. Disney is probably not so much the IT factor. When California shut down Disneyland, you've got a lot of people that were working there that can't go to work. So, I mean it's -- Boeing is a little different animal, because it's tied into the overall air travel and transportation scenario that the world is facing, not just the U.S. So, on the other side, regional banks, banks, wealth management, e-commerce, or Amazon, Microsoft, Apple or technology clients they're continuing to do very well.

And in fact, in some of these industries, for example, banks. They've cut back their staff, if not closed their branch banks. Well, they have to replace that with automation and better personalize automation that supports their customer base. Those of us that are using the bank for financial transactions. So if you looked at it, 31% of financial transactions in 2019 took place digitally. Today, that number will be 80-some percent, where they're using Zelle or PayPal or Venmo or whatever, and all of that requires technology to get it up and running, make it easy for the customer to use, and to maintain those capabilities, not even to mention massaging the data that you see there and how you can provide better customer service.

So as you just see from the remarks that Ted made, in some of our industries, we're clearly growing, financial services, healthcare, the technology side of technology and communication, our government side, where we're working with the big integrators, and you can certainly hear from George, all the interest in modernization and digitization of the federal businesses. So those are a lot of positives. Are these industries that are a little bit down going to be structurally down forever, I don't -- I'm not a predictor of that. But I think they're going to have to find ways to -- it's hard to change air travel until the world gets past COVID. But I'm not sure if that their long-term and when we talked to oil and gas or hospitality, I mean, they're still trying to do things to automate, be more productive in size, digitize their business and digitize their relationship with their customer base, which is where we fit in. Ted?

Theodore S. Hanson -- President and Chief Executive Officer

Yeah. Surinder, the only thing I would add to what Rand said, which I agree with is, the value of this firm is a large account portfolio with a third of it in the government services sector almost and the rest in the commercial sector, all of that wrapped around large accounts with the right industry diversification. And so, I really believe in that. Those are the clients that are going to need IT services from us. We're growing our capabilities to meet that, and I don't see a structural issue with that going forward.

Surinder Thind -- Jefferies -- Analyst

Okay. That's very helpful. Thank you.

Operator

Our next question comes from the line of Seth Weber with RBC Capital Markets. Please proceed with your question.

Seth Weber -- RBC Capital Markets -- Analyst

Hey, guys, good afternoon. Appreciate all the commentary around the ECS business. I just -- I'm trying to understand and there's sort of the implications around the margin. Is there any color on the contract type that's in the backlog? I see the disclosure about the revenue by contract, but is there any way to think about the backlog composition by contract type?

Theodore S. Hanson -- President and Chief Executive Officer

All right. George, you want to take that one?

George Wilson -- President, ECS Federal

Yeah, sure. Thanks for the question, Seth. We provide you a breakdown, as you mentioned there, in terms of the types of contracts that we have. We really don't provide sort of a backlog -- break-up by the backlog, and we could look at doing that. But I would say that, in general, what you see there in terms of what our percent of the three different types of contracts, it probably generally reflected in our backlog as well.

Seth Weber -- RBC Capital Markets -- Analyst

Okay. So is the current margin dynamic is a sort of a fair representation of how we should be thinking about it going forward then, is that accurate?

Theodore S. Hanson -- President and Chief Executive Officer

Yeah. Seth is in the quarter the surge definitely caused a spike-up in the cost-plus area. And so...

Seth Weber -- RBC Capital Markets -- Analyst

Okay.

Theodore S. Hanson -- President and Chief Executive Officer

I don't think that this quarter reflects that. I think if you look at our mix in the second quarter and what we expect it to be in the fourth is a more equal contribution of fixed price, time material and cost-plus, and so obviously that would delay a different -- a little bit better gross margin profile, is that fair George.

Seth Weber -- RBC Capital Markets -- Analyst

Right.

George Wilson -- President, ECS Federal

Yeah. You don't want to pick one quarter and say that's it. And I will say also that several of the contracts that we've won recently, both the FBI and the Homeland Security are all material -- timing materials, not in the cost-plus areas and those are just starting to ramp up.

Seth Weber -- RBC Capital Markets -- Analyst

Okay, that's helpful. Thank you. And then just to follow-up on Apex. I appreciate the color around retail brands versus top accounts, can you just talk to whether you're seeing, I guess, the same degree of sequential improvement across the two or is -- are top accounts performing better sequentially?

Theodore S. Hanson -- President and Chief Executive Officer

Rand, do you want to take that?

Randolph C. Blazer -- President, Apex Systems

Yeah. There is sequential improvement in our top accounts. Yes, that is not in our branch accounts. Remember top accounts represent about 74%, 75% of the Apex business. We've now put a top accounts program in Creative Circle and Oxford as well. So, all of them are different stages of this and Apex case is the most mature, but there is sequential growth in the top account, but not so in the smaller branch accounts. Branch accounts are typically more mid-market smaller accounts that are not national in scope, don't hit two or three of our offices, so we can service them in one office by themselves. And given that they're smaller accounts, we've seen some, just like the general economy, some deterioration in that sector of the economy.

Seth Weber -- RBC Capital Markets -- Analyst

Right. Okay. That's very helpful. I appreciate it, guys. Have a good night.

Operator

Our next question comes from the line of Kevin McVeigh with Credit Suisse. Please proceed with your question.

Kevin D. McVeigh -- Credit Suisse -- Analyst

Great, thanks, and nice results for sure. Hey, is there any kind of extended holiday impact we should think about it in the guidance as it relates to kind of with the holiday falls or anything you'd call out, Ted, one way or the other, just as we're thinking about the guidance which obviously looked pretty good regardless?

Theodore S. Hanson -- President and Chief Executive Officer

Thanks, Kevin. So, obviously, sequentially coming from the third to the fourth, we always have fewer days. Ed, can you talk about just the framework of that and how we thought about it when we put the guidance together?

Edward L. Pierce -- Executive Vice President and Chief Financial Officer

Yeah. I mean we obviously considered that. And like you say, sequentially we're going to have fewer billable days. When you compare with Q4 of last year, it's the same number of days. And so Kevin, it's not really -- it's already reflected, and we did consider it.

Theodore S. Hanson -- President and Chief Executive Officer

And if you look at it on a billable day basis, Kevin, you've got solid sequential growth there, third to fourth quarter. So, anyway, for what it's worth.

Kevin D. McVeigh -- Credit Suisse -- Analyst

No, I know, I guess I was thinking more along the lines with kind of the New Year is on a Thursday, and the Christmas holiday on the 25th, that you think it'll be...

Theodore S. Hanson -- President and Chief Executive Officer

No, Kevin, we considered all that.

Kevin D. McVeigh -- Credit Suisse -- Analyst

Okay, OK. And then just I guess, any other kind of thoughts on -- just some structural cost benefit post-COVID, whether it's even less real estate occupancy, T&E, anything like that you're thinking about that can use kind of either -- let kind of flow through to the margin or maybe reinvest in the business, anything that you're thinking about along on those lines?

Theodore S. Hanson -- President and Chief Executive Officer

Well, you've seen a little bit of that right now, right. So on a gross margin side, obviously, we have -- our consultants have less travel and billable expenses which we don't pass through with the mark up. So there is a small, almost inconsequential kind of pickup right there. Within our SG&A, obviously, we're benefiting a little bit from less travel, lower healthcare, but at the same time, we're investing in the business. So each one of our businesses have been invested in a modest amount of headcount where it's appropriate in order to support current account opportunities or even beyond that prepare ourselves for 2021. And so there is some savings there and there's also some pickup.

So I'm sure that we'll not travel the way we used to, although there will be some travel expenses that come into the business, healthcare expenses will kind of come into the business, but we'll -- we're, I think, overall if I step back from all that, Kevin, we're still on a march here to try to move our EBITDA margins from where they are kind of in the $11 million, $11.5 million range to up to the $12 million range, which is our long-term objective here. And so we still feel confident that we're going to get there. Some of these little things are going to contribute. But also we're going to do a better job of leveraging our SG&A structure through automation and other things. So that's really what we're focused on here. It's just move to those margin profiles that we had in our long-term plan.

Kevin D. McVeigh -- Credit Suisse -- Analyst

Super helpful. Thank you.

Operator

Our next question comes from the line of Tim Mulrooney with William Blair. Please proceed with your question.

Tim Mulrooney -- Tim Mulrooney -- Analyst

Yeah. Good afternoon. Two questions here. As consulting work continues to grow as a piece of your business, I'm wondering if you could share some additional details around the services provided outside of ECS. Are there certain project types, account types or industries that are grabbing a larger share of the commercial consulting type of work?

Theodore S. Hanson -- President and Chief Executive Officer

Sure. Rand, you want to talk to that?

Randolph C. Blazer -- President, Apex Systems

Yes. I would say most of our consult -- remember, we operate in eight industries, we report on five at our financial services sector, our government integrator side of the business and healthcare tend to be our stronger consulting sectors, if you will. Consumer industrial was strong, in these past six months it's fallen off a bit, but I suspect it will come back. So the only one that hasn't done and we're dealing little bit in technology, but telecommunications intact probably little less so than the other areas. What kind of work we are doing? I think I've described earlier. Workforce management is a certain base, which is a natural extension of what we're doing where the client saying, this is your confidence not mine, you take over this responsibility, build it for me, run it, manage it and hit different productivity levels. They've also turned to us for developing agile teams or different teams to deal with specific technologies, whether that's for in the auto industry or it's in our aerospace defense or other areas. We've built a lot of centers of excellence for clients in certain technologies and then manage the throughput through those centers of excellence.

Now we're getting into what we call the digital roadmap, digital transformation kinds of services, where we've developed a roadmap. We have some insight based on best practices in different sectors of the economy, where they think they can digitize their business, whether that's harnessing and capturing more data or correlating the data and translating that into personalized customer service. It's manifesting itself in mobile apps in different areas. Some cases it's a matter of helping them redistribute the cloud for key areas that they need to have either certain security on or certain visibility around. So it varies. What I think we're moving into is dashboards, more dashboards using data that's harnessed in the cloud to help them operate their businesses even more effectively than are doing today. But I mean that's a lot of different things. What we are not is the architect of that structure necessarily, somebody like Accenture or IBM can do that, but there is a lot of areas here where we can help.

Tim Mulrooney -- Tim Mulrooney -- Analyst

Right, OK. Thank you, Rand, for all that detail. I've got another one for you, a kind of along the same lines, but more focused on your consultants. Has the current environment created an opportunity for you to provide additional training to consultants and new technologies or offerings? And if so, on which areas are they focused on?

Randolph C. Blazer -- President, Apex Systems

Well, first of all, if you look at our -- Ted, I am sorry, go ahead. It's fine, I'm sorry. But Ted's well versed in this as well. I mean our deployment model is to use contingent laborhood to build many of our consulting teams. So, while we may have the leadership in the structure and the methodology and the experience, we do rely on pulling in contingent labor that has specialized industry experience in specialized technologies, whether it'd be ServiceNow, Salesforce, Workday or a specific operational requirement around the cloud or in dashboards. So we don't have to overly train our team, because we're bringing and using a workforce that's generally very experienced and very industry specialized.

Now, to that extent, we do have ongoing technical training, the technology training for our national account leaders and for our salespeople as well as for our consulting people. And we do that around certain technologies. We certainly done it around cloud. We certainly done it around cyber security. We certainly done it around Salesforce, ServiceNow and some of the other very hot areas. Dashboards is something -- and by the way, we ourselves are a digital business, a highly digital business. Ted alluded to this in a minute ago about continuing our investment in that. We also have our own experience around building dashboards and doing things that consolidating in our cloud, information that can support across the ASGN networks. So we do have expertise. We are relying on a contingent labor pool that is trained and specialized. And when we do have to go out, we'll pick certain select areas and/or will work with our talent university network, which we have, which will help us put that training in place. Did that give you a feel?

Theodore S. Hanson -- President and Chief Executive Officer

Yeah. And it's worth adding there, remember our clients never come to us for inexperienced workforce. I mean, they always want workforce experienced in technology with industry expertise based on their own business. So, that's their need to us and really our model around providing talent and consulting services in the commercial part of our business, the Apex and our other units is really around not carrying a bench and bringing that talent on adjusting time basis. That way we're 100% utilized and we're not worried about, all the time, about utilization and we can charge a rate and a fee for that kind of work that's very competitive. So that really is a differentiated part of our business model there.

Tim Mulrooney -- Tim Mulrooney -- Analyst

Understood. Thank you, gentlemen.

Operator

Our next question comes from the line of Mark Marcon with Robert W. Baird. Please proceed with your question.

Mark Marcon -- Robert W. Baird & Co. -- Analyst

Hey, good afternoon, everybody, and I want to add my congratulations. I was wondering what are you thinking with regards to your current capacity and what sort of internal headcount additions you're thinking about from a short-term perspective? And I've got some follow-ups for George on government.

Theodore S. Hanson -- President and Chief Executive Officer

Okay. So, Mark, I mean, like I mentioned earlier, we are -- we feel like we have capacity right now to do more and so you're seeing that in our performance. We are modestly adding to headcount, maybe a little less than we would typically do, but we don't have a freeze on, if you will. So if there are account opportunities that we can serve, if there are other work opportunities where we need to deploy talent that we don't have to then obviously we're adding that. So a little bit of investment in headcount, not only for today, but getting ready for 2021, but a little less than our regular pace.

Mark Marcon -- Robert W. Baird & Co. -- Analyst

All right. And then, I mean how much excess capacity would you say you have? I'm just trying to think through like what the incremental margins might look like on the commercial side when we get on the other -- when we truly get on the other side of COVID?

Theodore S. Hanson -- President and Chief Executive Officer

Yeah. Well, I think, Mark, that's difficult to say. I mean, I would just guide you back to we've been performing kind of in the mid, I'll call it, the 11.5% range kind of pre-COVID in that part of our business and obviously, there are times that we performed at 12% EBITDA margins and we're kind of moving there on a sustainable basis. So I'd kind of keep you right there, if you will. And you had a question for George.

Mark Marcon -- Robert W. Baird & Co. -- Analyst

Yeah. Can you talk -- George, can you talk a little bit about the implications from the election. Assuming that the polls are right, how does that impact you? What have you seen in prior changes when we've had sweeps?

George Wilson -- President, ECS Federal

All right. Yeah. Thanks for the question, Mark, sure. We have seen some shifts and if we do get us sweep here, obviously we're going to get some changes in policies and such. But what we're trying to focus on the ECS is to stay focused on mission-essential customers and product lines that have broad support across the political aisle. So we are really not specialized in something you could classify as gen more or Republican more and we're going to stay focused that way, because that's where we chase the R&D dollars, that's where we chase the high-end application or high-end technologies. And so we -- either way it goes, we don't think there's going to be any significant impact to our programs.

Mark Marcon -- Robert W. Baird & Co. -- Analyst

Great. And then from a short-term...

Theodore S. Hanson -- President and Chief Executive Officer

And Mark, one thing too, if you think about the areas where we traffic and specialize, right, cyber security, AI machine learning, cloud and data migration, I mean those are things that are going to be a long-term -- have long-term budget support if you will across the government. So I think George is right and we feel really confident that those are going to be things -- areas that we want to be and we're going to be fairly disciplined about staying there.

Mark Marcon -- Robert W. Baird & Co. -- Analyst

Great. And then from a very short-term perspective, we do expect the same sort of mix in terms of pass-through software revenue as we had a year ago or is that -- should we think about the seasonality from that perspective? Just a really short-term question.

Theodore S. Hanson -- President and Chief Executive Officer

George?

George Wilson -- President, ECS Federal

Yeah. So we had continued pass-through to accomplish our missions that's from the license as well as also technology, other technology purchases. We do not expect a huge slug in Q4 like we did last year in Q4. We've got a pickup in this Q3, and I expect that moving forward, we will have to continued pick ups, but it's not necessarily seasonal, but it will just like it is in Q3, provide a supplemental surge to our revenue.

Mark Marcon -- Robert W. Baird & Co. -- Analyst

Okay. Thank you very much.

Operator

There are no further questions in the queue. I'd like to hand the call back to Mr. Hanson for closing remarks.

Theodore S. Hanson -- President and Chief Executive Officer

Great. Well, we thank everyone for being on the call today and we look forward to talking to you about our fourth quarter results in the first parts of 2021. Everyone stay safe and healthy.

Operator

[Operator Closing Remarks]

Duration: 63 minutes

Call participants:

Kimberly Esterkin -- ADDO Investor Relations

Theodore S. Hanson -- President and Chief Executive Officer

Edward L. Pierce -- Executive Vice President and Chief Financial Officer

Randolph C. Blazer -- President, Apex Systems

George Wilson -- President, ECS Federal

Gary Bisbee -- Bank of America Merrill Lynch -- Analyst

Jeffrey Silber -- BMO Capital Markets -- Analyst

Tobey Sommer -- Truist Financial Corporation -- Analyst

Surinder Thind -- Jefferies -- Analyst

Seth Weber -- RBC Capital Markets -- Analyst

Kevin D. McVeigh -- Credit Suisse -- Analyst

Tim Mulrooney -- Tim Mulrooney -- Analyst

Mark Marcon -- Robert W. Baird & Co. -- Analyst

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