ASGN Incorporated (ASGN) Q2 2019 Earnings Call Transcript

ASGN earnings call for the period ending June 30, 2019.

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ASGN Incorporated (NYSE:ASGN)
Q2 2019 Earnings Call
Jul 24, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, we do appreciate your patience and welcome to the ASGN Second Quarter 2019 Earnings Release Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the call over to your host, Kimberly Esterkin. Please go ahead.

Kimberly Esterkin -- Investor Relations

Thank you operator. Good afternoon, and thank you for joining us today for ASGN's second quarter 2019 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 certain 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, a 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 financial 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 President and Chief Executive Officer, Ted Hanson. Ted?

Theodore S. Hanson -- President and Chief Executive Officer

Thank you Kimberly and thank you all for joining us today. I am very pleased to report that we delivered solid financial and operational performance for the second quarter. Over the past three months, ASGN generated revenue growth well ahead of market rates in addition to producing industry-leading profitability and strong free cash flow. Our go-to-market strategy enables us to provide our clients higher-value services via our differentiated delivery model, making us more agile, effective competitor in the IT services industry. Since our strategic acquisition of ECS, we vastly expanded our cybersecurity, cloud computing, AI, machine learning, IT modernization and advanced science and engineering services. Our government and commercial IT consulting solution services continue to grow at an even faster pace than our traditional staff-augmentation work.

I would now like to provide a brief overview of ASGN's results for the second quarter, including each of our segments; Apex, ECS and Oxford. Rand and George will discuss Apex and ECS respectively in more detail later during today's call. ASGN delivered strong top-line performance for the second quarter with revenues totaling $972.3 million, up 10.7% year-over-year and at the midpoint of our guidance. This growth was driven primarily by strong performance from our Apex and ECS segments, each of which saw double-digit revenue increases year-over-year. Excluding certain one-time adjustments, which Ed will discuss shortly, all of our results for the quarter fell within our guidance ranges. Apex, our largest segment, generated revenues of $628.5 million, up 10.8% year-over-year. This above industry growth was driven by strong performance in our commercial top account portfolio and a continued high rate of growth in our consultative work. ECS outperformed expectations with revenues of $190.6 million, up 22.8% year-over-year and sequential growth in its contract backlog of 9.5%. Excluding the $15.6 million contribution from DHA in the quarter, revenue growth of ECS was 12.7% year-over-year, an acceleration compared with the preceding quarter. ECS continues to successfully bid for contracts to provide unique, high-end IT services and solutions to the federal government. During the second quarter, ECS secured $360 million in contract awards, which translates into a very strong book-to-bill of 1.9 times. Initial indications show bookings trending positively into the third quarter.

Today and going forward, we will speak about new wins and services we are now able to offer our clients in our commercial and government IT solutions consulting businesses. The Oxford Segment reported revenues totaling $153.2 million, a slight decline of 1.7% over the prior-year period. The decrease in revenues was largely the result of a decline in our permanent placement work, the majority of which resides in our CyberCoders business. Higher than expected turnover at CyberCoders led to internal execution challenges, which impacted our productivity and drove the decline in the Oxford Segment revenues for the second quarter. We are addressing these challenges head on, and we will continue to keep you updated on our efforts.

Our consolidated gross margin for the quarter, although ahead of much of the industry, compressed about 70 basis points year-over-year. This compression primarily related to the lower mix of permanent placement revenues, which was down seven-tenths of a percentage point. As you know, permanent placement revenues gross margins are close to 100%. Our adjusted EBITDA totaled $114.2 million for the second quarter, also within our guidance. This resulted in a corresponding margin of 11.7%. After adjusting for the cash portion of the CEO transition expenses, which was $1.8 million, adjusted EBITDA totaled $116 million with a corresponding margin of 11.9%. Adjusted net income for the quarter was $63.1 million or $1.18 per diluted share, which approximated the midpoint of our guidance range for Q2 excluding the one-time effect of the CEO transition expenses. For the second quarter, free cash flow totaled $88.1 million. After paying down $83.0 million in debt during Q2, our leverage ratio was 2.40 times our trailing 12 months adjusted EBITDA at quarter-end.

Going forward, we estimate our leverage ratio will be approximately 2.23 times at the end of the third quarter and roughly 2.0 times at the end of 2019, barring any share repurchases or acquisitions. We have consistently stated that once we reduced our leverage ratio to 2.5 times or below, we would evaluate additional ways to return value to our shareholders.

With that said, at the end of the second quarter, our Board of Directors approved a $250 million stock repurchase plan as part of a balanced capital allocation strategy that not only includes debt repayment, but also includes investments in our organic growth and in strategic acquisitions. Now that we have reached and exceeded our target leverage ratio, we have the right plan in place to buy back our shares. These repurchases do not preclude us from making strategic acquisitions. ASGN is an acquirer of choice and M&A remains a core component of our long-term growth plan. We have an active pipeline of prospective acquisition targets in place that we are currently evaluating to support our ongoing business operations.

We are focused on adding high-value IT consulting services and solutions as well as expanding our capabilities and footprint in the Federal government space. Overall, it was a very strong quarter by all measures and I am confident that we are headed down the right path to continue to achieve above-industry growth as we position ASGN for today, tomorrow and the future.

I'll now turn the call over to Rand Blazer to speak in further detail about Apex's second quarter performance. Rand?

Randolph C. Blazer -- President of Apex Systems, LLC

Great. Thank you, Ted. The Apex Segment, which consists of Apex Systems and Creative Circle business units, again reported solid results for the quarter. As Ted reported, revenues totaled $628.5 million, up 10.8% over Q2 2018 with margins in-line year-over-year, reflecting a steady pricing environment.

Let me now provide a bit of color on our quarterly results. For the quarter, the Apex Segment's performance was driven by a number of factors, including Apex Systems again led the way with double-digit revenue growth in four of the eight industry verticals we service including Aerospace & Defense, Financial Services, Consumer & Industrial and Technology industry accounts. Healthcare posted high single-digit growth. The remaining three industry verticals including Life Sciences, Telecommunications and Business Services posted very slight negative year-over-year revenue growth. Apex Systems' top accounts achieved double-digit revenue growth that continues to outpace our overall topline growth. Retail or branch-centric accounts grew more slowly. Although Creative Circle's revenue growth remained lower than our expectations, we saw growth in our top accounts this past quarter as we leveraged our account relationships with these accounts across the segment. Growth in consulting work across our Apex and Oxford segments also continues to outpace our expectations and overall revenue growth rate. Led by Apex, our growth rate in consulting is more than 2.5 times the growth rate of our other services, and it is approaching low-teens as a percentage of our business.

I want to highlight one of our engagements with a Fortune 500 Transportation Company to give you a sense of the consulting opportunities we are seeing with our client accounts. For this client, we are responsible for supporting large-scale software development projects using the Agile method for operations support, fuel management, scheduling and traveler eligibility systems. We are finding that we can enhance our value for our client accounts by stepping into this type of work, providing both domain and IT expertise and methodology and by taking responsibility for our work. We remain excited about these opportunities, capitalizing on our consulting solution offerings, and we look forward to continuing to service our clients in these areas.

In summary, I am pleased with the Apex Segment's performance in revenue and margins. Given our strong performance in Q2 2018, our Q2 2019 results are particularly impressive.

I'll now turn the call over to George Wilson to speak about our ECS Segment. George?

George Wilson -- President of ECS Federal, LLC

Thank you, Rand. ECS achieved strong performance in the second quarter of 2019 as we continue to execute our strategy to provide advanced technical solutions coupled with deep-subject matter expertise and address our customers' most pressing mission needs via large and durable prime contracts. ECS' growth continues to be significantly ahead of industry averages for peer companies operating in the federal technology space. As Ted noted, ECS revenues grew by 22.8% on a reported basis and 12.7% after adjusting for the $15.6 million contribution from DHA acquired in the first quarter of this year. DHA's post-acquisition performance is exceeding our expectations and the integration of DHA is progressing ahead of schedule and as is the expansion of its EBITDA margin.

We have seen topline revenue synergies with recent contract awards have found opportunities to cross-sell our cloud and cyber capabilities and with DHA's preferred mix of 100% fixed price and time and materials, we see opportunities for additional EBITDA margin expansion. In the second quarter, we received a total of $360 million in contract awards, of which approximately 85% were attributable to new contract awards and revenue growth under existing contracts. This resulted in a book-to-bill ratio of 1.9 for the quarter, another period of very strong performance on the business development front. Some recent awards contributing to our growth include a competitive cybersecurity award to design and deploy the next generation continuous diagnostics and monitoring dashboard or CDM 2.0 for Federal civilian agencies and an award to deliver the next generation US Marine Corps aviation training management information system. This award positions ECS as the leader in both ground and aviation training information systems for the Marine Corps. We have also seen an expanded demand for delivery of our innovative AI and cloud solutions and services to defense, federal, state and commercial customers as well as continued strong demand for use of the ECS-designed, built, and deployed secure, but unclassified network and operational enclaves delivering key technical solutions and services to an expanding list of customers.

ECS cyber capabilities and technology partnerships continue to expand along with our list of commercial clients, as ECS approaches 1 million endpoints under protection through our advanced cyber threat defense platform, which includes AI-based zero-day threat detection, automated cyber hygiene, continuous risk assessment and threat sharing across multiple platforms. Our recent successes illustrate how our cyber solutions are addressing the rising volume and velocity of cyber threats. As always, we continue to invest heavily in our technology partnerships, solution architects and internal capabilities through continuous training and certification of our workforce.

We are also tracking several acquisition opportunities to strengthen our technical capabilities and deepen our customer relationships. Looking forward, the number and the size of new business opportunities continue to grow. Proposal activity has remained at record levels in the past two quarters and shows no sign of retreating. At the current time, we have a backlog of proposals submitted and awaiting award nearing $2 billion, another all-time high. At the end of the second quarter, ECS had $1.9 billion in total contract backlog, which equates to a healthy coverage ratio of 2.7 times our trailing 12 month revenue.

I will now turn the call over to Ed Pierce to discuss ASGN's consolidated financial results for the quarter. Ed?

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

Thanks George. Revenues, earnings and adjusted EBITDA for the quarter were generally at the mid-point of our guidance after adjusting for two one-time charges, which I will discuss momentarily. Revenues for the quarter were up 10.7% year-over-year on the same number of billable days as the second quarter of last year and the effects of changes in foreign currency exchange rates were not significant. Revenues included a $15.6 million contribution from DHA, which was acquired in the first quarter of this year and excluding that contribution, revenues were up 8.9%.

Gross margin for the quarter was 29.3%, which was at the low end of our guidance and down approximately 70 basis points year-over-year. The compression was the result of, one; a lower mix of permanent placement revenues, which was 3.8% for the quarter, down from 4.5% in the second quarter of last year and two; the inclusion of DHA, which carries a lower gross margin than ECS as a whole. Excluding DHA, the gross margin for ECS was up year-over-year, while our consolidated assignment gross margin was the same as the second quarter of last year.

SG&A expenses were $198.8 million for the quarter and included two one-time charges totaling $8.6 million, which were comprised of, one; CEO transition expenses of $5.3 million, which included $3.5 million in stock-based compensation and two; the write-off of certain foreign trademarks totaling $3.3 million. Excluding these charges, SG&A expenses were $190.2 million, which was at the low-end of our guidance.

Net Income for the quarter was $43.1 million, which included the after-tax effects of the two one-time charges totaling $6.7 million. Excluding these one-time charges, net income was $49.8 million, which approximates the midpoint of our guidance. Adjusted Net Income was $58.9 million and excluding the after tax effects of the one-time CEO transition expenses, was $63.1 million and at the mid-point of our guidance. Adjusted EBITDA was $114.2 million or 11.7% of revenues. Excluding the cash portion of the CEO transition expenses of $1.8 million, adjusted EBITDA was $116.0 million, or 11.9% of revenues.

Cash flows from operating activities were $96.5 million and free cash flow was $88.1 million, or 9.1% of revenues. Free cash flow for the quarter reflected the sequential quarterly reduction of 2.8 days in DSOs. During the quarter, we paid down $83.0 million of our debt and, since the acquisition of ECS, we have paid down debt approximately $350 million and reduced our leverage ratio from 3.7 times to 2.4 times.

Now I would now like to make a few comments on our Q3 guidance. We estimate revenues of $993 million to $1,003 million, which implies year-over-year growth of 9.5% to 10.7% on a reported basis. Estimated billable days are 63, which is one-half day more than the third quarter of last year. We also assume that changes in foreign currency exchange rates during the quarter will not be significant and that there will be a slight sequential decline in the mix of permanent placement revenues. We estimate gross margin will range from 29% to 29.3%. This range assumes the gross margin on assignment revenues will be flat sequentially and that the gross margin at ECS will be sequentially lower as a result of a higher mix of revenues from cost-plus contracts and the effects on revenues from time and materials contracts of the one additional holiday in Q3. We estimate net income will range from $52.5 million to $56.1 million and that our Adjusted EBITDA will range from $115 million to $120.0 million or 11.6% to 12% of revenues.

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 look to the second half of 2019, and into 2020, we are on the right path to continue to deliver valuable services to our clients and strong results to our shareholders. Our scale, breadth of services, and differentiated delivery model has us positioned well to serve our clients across the government services and commercial markets while continuing to take market share.

We have long, trusted customer relationships with over 300 of the Fortune 500 companies as well as major Defense and Federal government agencies. These relationships, and our growing government solutions business and commercial IT consulting and managed services business enable us to maintain a sustainable business model and margins and that can withstand economic cycles.

I'd like to thank you for your time today and for your support of ASGN. In closing, I would also like to thank our employees, our stockholders and our Board of Directors for placing their trust in me to lead ASGN. We look forward to continuing to share our progress on future quarterly calls.

We will now open the call to your questions. Operator?


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Questions and Answers:

Operator

Certainly. [Operator Instructions] And our first question will come from the line of Jeff Silber with BMO Capital Markets. Please go ahead.

Jeffrey Marc Silber -- BMO Capital Markets Equity Research -- Analyst

Thanks so much. Just had a couple of quick questions on guidance. If I look at the adjusted EBITDA margin guidance, it looks like you're projecting it to be down. If my math is correct, about 40 to 80 basis points year-over-year and flat to slightly down sequentially. Can you just give us some color why that is?

Theodore S. Hanson -- President and Chief Executive Officer

Yeah. Thanks for the question. Ed, you want to talk about our guidance for the third quarter?

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

Yeah. Jeff year-over-year and you may remember this last year. Q2 or Q3 of last year was our highest adjusted EBITDA margin of all the quarters and we had a favorable variance that quarter of about 60 basis points in our expense margin and that's really the big driver for the differential between last year and this year. And as it relates to sequentially, it's mix related. I mean, we gave commentary as it relates to our SG&A expense margins, that's only up slightly and our gross margin is going to be, maybe about as much as 30 basis points down sequentially and again, it's mix ECS will be a bigger part of the business as a result of their high growth. And the other thing is that we're expecting a slight decline in ECS margins or margins sequentially for the reasons I mentioned on the call.

George Wilson -- President of ECS Federal, LLC

In addition to that, we've got prime placement revenues which although sequentially we expect will grow that they maybe a lower part of the mix that certainly affects the gross margin. Otherwise, we expect our assignment margin work to be consistent from second quarter to third.

Jeffrey Marc Silber -- BMO Capital Markets Equity Research -- Analyst

Okay, great. That's helpful. And on the firm side, you mentioned in your prepared remarks about higher than expected turnover in CyberCoders. Can you just talk a little about what's happening there and and how you plan to address that? Thanks.

Theodore S. Hanson -- President and Chief Executive Officer

Well, it's an active market, so I think that they have experienced more turnover than they have in the past. In addition, predominantly most of their business is done in the technology vertical. That's a pretty difficult space right now because it's so candidate driven. So there's a couple -- we're making a couple of modifications or reacting to that if you will. You can see that we've reallocated some of our team out of California and we're actually going to be opening up in both Florida and Texas, which we're excited about and those will be good markets, as well as a few other things internally that we think will help promote more tenure and therefore help us to continue to grow the firm revenues in that business.

Jeffrey Marc Silber -- BMO Capital Markets Equity Research -- Analyst

Okay, great. I'll get back in the queue. Thanks so much.

Operator

Thank you. We will go to line of Gary Bisbee with Bank of America. Please go ahead.

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

Hey, guys. Good afternoon. I guess the first question Ted, now they've got a quarter under your belt in the new role, any changes you're looking to make, whether it's to the team or focus areas or anything else that's worth calling out?

Theodore S. Hanson -- President and Chief Executive Officer

Gary, I don't think anything worth calling out. I mean, we talked about this at the end of the second quarter and I think we've been pretty steady around it here in the third is that we have the right strategy in place. We're certainly making really good headway in terms of IP services and the business units that serve that marketplace and we'll stay focused on that. The transition has gone very smoothly. There hasn't been any interruption if you will, in terms of how our divisions are performed or distractions of any kind. So I don't think you'll see any hard right turns. We're going to stay after both in the commercial and the government marketplace and keep increasing our penetration of IT services market.

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

Okay. Thanks. And then just given the increasingly tight labor markets, pockets of skill shortages and all that, I realized that's all beneficial to demand for the business, but can you talk about on the supply of candidates and finding people and the ability to close business, I guess how is the tighter labor markets impacting the business and are there any of your businesses that are more or less impacted at this point? Thanks.

Theodore S. Hanson -- President and Chief Executive Officer

Well, I think, within the IP spectrum, talent has been tough, if you will, for many, many years. And so I don't think that dynamic good that is new necessarily. You can see in our supplemental information that most of our growth has come not through bill rate increase, although we've had a little bit of that. Most of it has come through volume of new work, which is helpful. We'd like to have a balance of both of those things, which we do. And I think that just exhibits the fact that we're able to find the talent as we need it in order to work on these projects.

Rand, would you add anything else to that?

Randolph C. Blazer -- President of Apex Systems, LLC

No, Ted. I think all our indicators as you said are kind of up. We've increased the pipeline of candidates that we draw upon. We've increased the number of placements we've made, we've increased the fill ratios if you will the metrics we use to measure the flow of candidate to us and then to the client and we've seen no disruption in that despite what we hear so much as a tight labor market. So I think everything you said Ted is steady as we go here.

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

And then just one last one if I could. Just any update on the progress with the changes you'd been making at Oxford in recent quarters with the go-to-market strategy and what not and just where we are in that? Thank you.

Theodore S. Hanson -- President and Chief Executive Officer

Yeah. I think Oxford continues to institutionalize it's sales methodologies and the things that we've been working over which we've talked many times about in past quarters. Two bright spots this quarter although the revenue didn't quite meet our expectation. If you look at their volume of work in the supplemental information, they were up mid single digits in terms of billable hours work. They had a slight decrease in their bill rate, which made their growth kind of 1% year-over-year if you look at that. And I think that, we just stick with these things. We're definitely reaching customers in a methodical way according to the strategies we laid out. We're definitely cross-selling services, so able to do more with one customer than we used to do in the past. And so we stick with those things and continue to move forward. We're excited about their EBITDA margins this quarter. They actually improved beyond our expectations, which was a positive. So there's some good signs there in terms of productivity.

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

Thank you.

Operator

Thank you. We will go to the line of Edward Caso with Wells Fargo. Please go ahead.

Edward Stephen Caso -- Wells Fargo Securities -- Analyst

Great. Thanks. I was wondering if you could talk a little bit about your intent on repurchasing stock. You talked about getting a leverage down below 2.5 to 2. Is that a hard and fast rule or sort of how much could be there in the future. Is there an intent to keep the option dilution down or is there intent to take advantage of a depressed sale stock price? Thanks.

Theodore S. Hanson -- President and Chief Executive Officer

So thanks, Ed. We have been, although I don't know if it's a hard and fast rule in those words, it's certainly a commitment that we've made to our investors and to the other people that are interested that we would pay our debt down post acquisitions until we got to 2.5 or lower. So I think now that we're at that range, we can certainly look to exercise our ability to repurchase shares under this facility. Every capital dollar here competes for its best use. We've said many times that we believe acquisitions are the highest and best use of our capital. So to the extent something is ready to go there, that's our preferred pathway. Should something not be at the lip to the cup, we definitely feel like we're in a place where we can take advantage of reinvesting capital now that we're under 2.5 to repurchase our shares. So it's good that we have those options and I think that our story there remains consistent with how we've handled that in the past.

Edward Stephen Caso -- Wells Fargo Securities -- Analyst

I guess my other question is related. You talked about acquisitions in the government space. I'm curious what your interest level is on the commercial side, attending new areas of focus and then M&A on the government side has had a depressive effect on your gross margin and your EBITDA margin is at, is too -- we continue to expect that sort of compression as we work our models into the out quarters. Thanks.

Theodore S. Hanson -- President and Chief Executive Officer

Yeah. There's a lot to that question. So let me take it in pieces. On the commercial side, we certainly are prospecting for potential acquisitions. We feel like we have a great account portfolio in our commercial segments that we serve that not only want to use us for staff argumentation, but also would like us to step into higher value work. So to the extent we can find the right capabilities if you will in the industry segments that are important to us. Then it would be great to make acquisitions there and just raise our capability and enhance our value proposition to the CIO.

We've said on the government side that acquisition is an important part of our strategy there as we move ECS from where it is today to $1 billion and beyond. I don't believe as we stay on that path that we will make acquisitions that would ultimately hurt our progress toward our five-year plan on our margins. I mean, we've laid out a five year plan into a team for ASGN that we thought we'd get to $5 billion and that we could increase our EBITDA margins to between 12% and 12.5% and I think growing ECS both organically and with key acquisitions that support the solution they want to be and that we can still manage both end to that.

And then what's our third part of that Ed?

Edward Stephen Caso -- Wells Fargo Securities -- Analyst

No, you got it. Thank you.

Theodore S. Hanson -- President and Chief Executive Officer

Okay, thank you.

Operator

Next in queue we will go to line of Mark Marcon with R. W. Baird. Please go ahead.

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

Good afternoon everybody. I was wondering when we take a look at the customer data both for Apex and Oxford, there's a decline in terms of the average number of customers. But obviously on Apex, you continue to do really well. So I'm just wondering, is that part of a deliberate strategy with regards to focusing on key accounts or how should we think about that?

Theodore S. Hanson -- President and Chief Executive Officer

Rand, you want to take that?

Randolph C. Blazer -- President of Apex Systems, LLC

Yeah. I think Mark I wouldn't say it's a deliberate strategy to call out clients if you will. We certainly are focused on the Fortune 500 and now the Fortune 1000. I think what we've seen in this past quarter a little bit is the smaller brand-centric account began to slow down their spend in general. So I don't know that we're walking away from anything. It's just that it's not as brisk as some of the other business we are facing. So it added inflows. Mark, I think generally speaking though, Apex will largely be a Fortune 500, Fortune 1000 account service provider. Having said that, there will be some ebb and flow in the account base and certainly in the retail account base, OK.

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

Okay. What would you say the primary reason is for those retail accounts potentially curtailing a little bit of their spending. Is it just what we're reading about from a general macro perspective or anything else that you would call out?

Randolph C. Blazer -- President of Apex Systems, LLC

I think maybe some of it is, look, it's hard to generalize. I'd say it just depends on the segment, the market segment they are in. Some of it is, the smaller accounts can't compete for resources in the same way the bigger accounts can. So you've seen bill rate expansion not just with us, but with some of our competitors.

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

Yeah.

Randolph C. Blazer -- President of Apex Systems, LLC

When it gets a lot more expensive to hire these people, the smaller accounts tend to take the backseat. It goes part and parcel Mark, to what I've said always that technology ripples through the economy through industries. Your big banks, telecommunication technology companies are first, government is last. Small retail accounts oftentimes you're in that ending pool and mostly it's their ability to compete for the resources where they're embracing technologies as quickly as the others are. But now I think it's just, maybe just kind of where we are in that quarter.

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

Okay, great. And then with regards to just the guidance that you're giving, can you give a little bit of granularity with regards to what your expectations are for ECS? It looks like you had a lot of success there. It looks like DHA is performing well. What percentage of revenue would you anticipate coming from government?

Theodore S. Hanson -- President and Chief Executive Officer

Mark, the growth rate that we reported for Q2 and you can for ECS you can pretty much expect will be about what we do for Q3.

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

Okay. And how else would you characterize Apex and Oxford segments?

Theodore S. Hanson -- President and Chief Executive Officer

So we don't give growth rates by division, OK. But I think it's pretty similar to what has been along the same sort of trajectory.

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

Okay. And then Rand, can you talk a little bit about creative circle and what you're seeing there?

Randolph C. Blazer -- President of Apex Systems, LLC

Well, I think creative circle, Ted, I will go ahead, if you agree here. Look, I think we've talked about in the past about Creative Circle really had a niche place and supported ad agencies and some of the creative work companies are doing in revenue generation marketing activities. And that world is being turned upside down. You can read about the ad agency work, you can read about digital marketing, and when you get into more digital marketing, you have a different set of competitors that come into it, the other staffing firms, consulting firms. So the world has changed a bit for them over the past two or three years. And with that, we've seen some dilution in their growth rate if you will. They have held very steady on margins. We are also focusing on a -- I think a more balanced portfolio of accounts Mark, both big accounts and small accounts, weaning-off of that agencies if you are going direct to the client -- to the end client. All that's in transition.

Having said that, in the quarter, they had a really good strong year last year, as you know, certainly in quarters two, three and four. In the first two quarters this year they've come off of that a little bit. But there are still, if you look at other creative marketing companies, they're performing very well compared to their if you will peers, but not the growth rate we want, but business is we want them to hold their margins and they're doing that. Now they're going to benefit from some of the cross-selling we're doing between Apex, Oxford and create a circle around large and bigger accounts.

We are going to be pushing some things where I think we can help. Push, but we don't want to loose the margins at this point. But on the other side, they've had two years now to adjust to this changing market. So I think they're in there getting through that and I think things will improve for them.

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

Perfect. And then just two more on the guidance, real quick. This 53.6 million share count for Q3 in terms of the guidance we ended up 53.4 million, you continue to get the debt down so we could potentially buyback more stock and that could end up being a conservative number as it relates to 53.6 million. Is that correct?

Theodore S. Hanson -- President and Chief Executive Officer

I don't know if that qualified as conservative, but the 53.6 million assumes that we are not buying back stock, OK. But we most likely will. So you're right the number could come in lower than what we're forecasting.

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

Great. And just to absolutely clarify with regards to the Q3 margin guide, it's really just firm and the ECS as the percentage of the mix that's really driving things. There's nothing else.

Theodore S. Hanson -- President and Chief Executive Officer

If you're talking about the gross margin, yes.

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

Right. And can you elaborate on the SG&A as well?

Theodore S. Hanson -- President and Chief Executive Officer

Well, I think in the -- we're pretty clear in the prepared remarks in terms of sequentially how much of an increase we will have over what we reported in Q2 and it's about $0.5 million.

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

Great. Thank you.

Theodore S. Hanson -- President and Chief Executive Officer

Sure.

Operator

And next in queue will go to line of Tobey Sommer with SunTrust. Please go ahead.

Tobey O'Brien Sommer -- SunTrust Robinson Humphrey -- Analyst

Thanks. Ted, in the context of your long-term margin goals, as you kind of work past the CyberCoders turnover issue, should we look for CyberCoders to be rebuilt up to its prior percentage of sales or is that gonna be a margin headwind over the next couple of years? How are you going to manage that?

Theodore S. Hanson -- President and Chief Executive Officer

I don't expect that there will be a margin headwind, I mean that business has proven over a long period of time that it has good, steady growth prospects and that its EBITDA model has been fairly consistent. So I don't believe that to be a headwind, Toby.

Tobey O'Brien Sommer -- SunTrust Robinson Humphrey -- Analyst

Okay. So you do intend to kind of build it back. Okay. And then with respect to ECS, could you give a little color about contract duration and the mix of contract type in your submitted bids sort of what does that convey about the margin outlook for the business? Thanks.

Theodore S. Hanson -- President and Chief Executive Officer

I'll let that George talk to that. George?

George Wilson -- President of ECS Federal, LLC

Yeah. Thanks Ted. Thanks, Toby. So yeah, let's talk about margins for a second here. We don't give out segment margins, but I will tell you that they ECS EBITDA margin is a second to only one other company in our industry space. In terms of growth rates, performer as well as stand-alone we're two times the industry average in our peer group. Our book-to-bill we've reported, our contract backlog is increased 9.5% and our contract mix has moved more and more toward time and materials to fixed price with the DHA acquisition. And over the last year, we've doubled their EBITDA margins from where they were a year ago. So we're seeing a lot of positive movements in terms of our EBITDA margins, our growth and our contract backlog and the submitted weighting award that I said it was close to $2 billion and the activity increases, I only see that going up over the next couple of quarters and I do see also that our book-to-bill, which over the last trailing twelve months you know how the book-to-bill can go quarter-by-quarter you can get a little bit of something that's just one-time. But over the last twelve months, it's 1.5. So we're on a pretty good tear in terms of growth, in terms of an increase in our margins, in our space.

And the other thing I'll talk about is that, the type of work that we're winning. The recent awards that we've had this win, the recent awards we will announce next quarter because we picked them up in the last 30 days. All are very high end, very long duration, prime contracts with very mission focused customers that are benefiting from the positive environment in the space and congressional plus ups and such like that. So yeah, we feel pretty bullish about it.

Tobey O'Brien Sommer -- SunTrust Robinson Humphrey -- Analyst

Great. Really, it what I was -- the first part of my question was getting out after contract duration which I understand is being elongated in the industry and for yourself. It renders from the outside book to bill and contract awards to be a tool of limited utility when we're trying to forecast, because the contract awards could be for a longer term. So could you pass that out if you were to have apples to apples term with the contract awards over the last 12 months still be a nice positive figure over one.

Theodore S. Hanson -- President and Chief Executive Officer

Yeah, typically we'll be doing three or five year contracts is what we're, so. Okay.

George Wilson -- President of ECS Federal, LLC

It's George. I'd say there's -- you don't see a meaningful difference in the contract duration through DHA and some other awards we've had a higher move toward time and materials. So Tobey I think to your question, I don't know that the portrays anything different if you will for us in terms of how we expect to play that out in the future.

Theodore S. Hanson -- President and Chief Executive Officer

Yeah. Now the same contract -- average contract wins what we got.

Tobey O'Brien Sommer -- SunTrust Robinson Humphrey -- Analyst

Okay. How do you plan on managing the headcount growth internally with respect to kind of hitting your revenue growth targets in across the different businesses if you could provide a little bit of color? Thanks.

Theodore S. Hanson -- President and Chief Executive Officer

Yes. Well, look, we're always investing in ourselves. Typically, what you'll see is our headcount growth. And I've said this before trails slightly the rate of growth of the business. So we're always investing in ourselves to grow organically. We're also always striving for expecting and getting higher levels of productivity each year. They always need to keep inching up. So to me, I think our plan on a constant basis is to continue to invest in the people aspect of our business in order to help us to grow, but you should expect it to be just a little bit less than the rate of growth of the business, because we do expect that increase in productivity.

Tobey O'Brien Sommer -- SunTrust Robinson Humphrey -- Analyst

Thank you very much.

Operator

Next in queue, we'll go to line of Seth Weber, RBC Capital Markets. Please go ahead.

Seth Robert Weber -- RBC Capital Markets -- Analyst

Hey, guys. Good afternoon. I think on the last quarterly call, you gave some exit rate trends for the first quarter for Apex and Oxford, I was wondering if you could, if you will be willing to do that again here for this quarter.

Theodore S. Hanson -- President and Chief Executive Officer

Sure Seth. So in the past, we've given you date on this call for how the first two weeks have been versus the two weeks of the quarter in the prior year. I think as our business evolves, it becomes less meaningful, especially now at ECS being nearly 20% of the business and they don't have a metric, if you will of that regard that helps. I will tell you that if we were to publish the information, the first two weeks of this year would have been up high single digits over the same period last year, but it's not very predictive in my estimation of where the business is headed. So I would take that with [Indecipherable].

Seth Robert Weber -- RBC Capital Markets -- Analyst

Okay, fair enough. And I guess I know you're not giving segment revenue guidance, but just on the Oxford business being down here in the second quarter, do you think that's represent -- I mean directionally is that representative of how we should think about it as this transition takes a lot of time to work its way through or I'm just trying to think through how long this process might take. When do you think that growth stays negative here through the next couple of quarters?

Theodore S. Hanson -- President and Chief Executive Officer

Remember, the Oxford division if you will and the Oxford segment are two different things. So slight growth in the Oxford business in the second quarter, in the segment though, it was offset by a revenue loss if you will in CyberCoders, so the Oxford business did slightly grow and expanded it to EBITDA margins and our expectations are that Oxford business will continue to grow there. There are pieces of it. They're growing nicely, there are others that are coming up and we look to do better in the future. So we do expect them to grow. However I think to Ed's comments earlier, we are --CyberCoders as a mix of the business and remember it, plus or minus $25 million out of $1 billion in revenues for the quarter. We think that that may be a slightly lower mix if you will in the third quarter and our guidance reflects that.

Seth Robert Weber -- RBC Capital Markets -- Analyst

Okay, I appreciate you guys. Thank you very much.

Operator

Next in queue will go to line of Kevin McVeigh with Credit Suisse. Please go ahead.

Palmer Pawlusiak -- Credit Suisse AG -- Analyst

Hey, guys, this is Palmer on for Kevin. May be one for George. Looking at DHA, can you expand on the revenue synergies you mentioned in the prepared remarks, some of the cross-selling that you folks talk about?

George Wilson -- President of ECS Federal, LLC

Ted, would you like me take that now?

Theodore S. Hanson -- President and Chief Executive Officer

Yeah. Please, George.

George Wilson -- President of ECS Federal, LLC

Yeah, sure. Okay. So, they were very, very heavy into the FBI, Department of Justice. We had presence in the Department of Justice as well. We've been doing for the last nine years the combined DNA index system development. So there are some opportunities that we've targeted and we won together in that realm as well as what we're finding is their deep relationships with a lot of the customers and their length of time that they've been in with working with these customers. We're finding that our capabilities in cloud and particularly and then cyber are benefiting these customers as we actually reach out and talk to them. And so we're being able to do some cross-selling there as well. And then the last thing that we're doing it again is that we found that their relationships and their program managers and some of their technologists are just outstanding in terms of some of the ways that we can use their skill-sets and cross-sell back in some of the contracts that we've also had. I remember last quarter I think we announced that we run won the FBI's Red Team Blue Team contract, which is to run all the Red Team Blue Teams for the FBI. And so again, we were able to move some of their relationships, some of their capabilities and strengthen our ability to serve that customers well. So it's been a good positive experience on both sides, which is what you want when you go doing an acquisition like this.

Palmer Pawlusiak -- Credit Suisse AG -- Analyst

Thank you very much.

Operator

[Operator Instructions] We'll go to the line of Surinder Thind with Jefferies. Please go ahead.

Surinder Thind -- Jefferies & Company -- Analyst

Hi, thank you for taking my questions. I'd like to start with the deal pipeline. Can you maybe provide a little bit of additional color there in terms of when you're looking at deals with the valuations kind of look at this point in time and then maybe from an opportunities perspective, the balance of kind of looking at something maybe a little bit more strategic versus maybe I'll say a more financial oriented acquisition, one that can be rolled right into your existing business. Any thoughts there would be appreciated.

Theodore S. Hanson -- President and Chief Executive Officer

Well, look I think that couple things there. So the pipeline is strong. It's active and we're doing a lot of work there to evaluate opportunities there. I would say there is a lot of competition out there for good businesses, but the same time that's not necessarily new here in the technology space. And so it's an environment that we're used to working and evaluating and working through. If you think about acquisitions for us in the future, I think we've been pretty clear that we're very happy with our account portfolio, both in the gov space and in the commercial space and we continue to grow that and add important clients, but what will continue to make us sticky with those clients is to have the right solution sets for them and so acquiring businesses that have key solution sets that we see in the marketplace and the customers that we serve is very important and to the extent we can find those and bring this to bear, integrate them into our businesses and provide those services to the customer, that's going to be a positive for our business over the long haul.

Surinder Thind -- Jefferies & Company -- Analyst

That's helpful. And then in terms of just some of the disclosures, it looks like there's been a slight change. One of them is used to provide like staffing consultant numbers by the different divisions. It looks like like you guys have moved to kind of more of a total hours worked component there or disclosure. And then also in the past it appear that maybe there was more quantitative disclosures around the organic growth rates within each of the segments or within each of the divisions or the subdivisions. Any thoughts on that at this point?

Theodore S. Hanson -- President and Chief Executive Officer

I think the one change that we made in the supplemental information is to give you a number of billable hours work for the Apex and Oxford segments versus just consultant headcount. That's a true reflection of the volume of work going on. So that's a minor change. I don't think it's material to anything other than just to try to give you a better metric around that.

Surinder Thind -- Jefferies & Company -- Analyst

Thank you.

Operator

[Operator Instructions] And speakers, currently we have no additional questions in queue. Please do continue.

Theodore S. Hanson -- President and Chief Executive Officer

Right. Well, I want to thank everyone for being here with us today on the call. We look forward to being with you in 90 days to discuss our third quarter. And as always, we appreciate your interest in ASGN and look forward to speaking with you soon. Thanks.

Operator

[Operator Closing Remarks]

Duration: 53 minutes

Call participants:

Kimberly Esterkin -- Investor Relations

Theodore S. Hanson -- President and Chief Executive Officer

Randolph C. Blazer -- President of Apex Systems, LLC

George Wilson -- President of ECS Federal, LLC

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

Jeffrey Marc Silber -- BMO Capital Markets Equity Research -- Analyst

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

Edward Stephen Caso -- Wells Fargo Securities -- Analyst

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

Tobey O'Brien Sommer -- SunTrust Robinson Humphrey -- Analyst

Seth Robert Weber -- RBC Capital Markets -- Analyst

Palmer Pawlusiak -- Credit Suisse AG -- Analyst

Surinder Thind -- Jefferies & Company -- Analyst

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