IT Staffing Report: Jan. 4, 2018

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Latest round of earnings offers mixed results with ingredients of brewing momentum

Against the backdrop of improving US GDP growth, IT staffing may have trended more positively as we approached the close of 2017. Although the Staffing Industry Analysts Pulse Survey can show month-over-month volatility, the latest October results reflect a significant improvement from September in terms of IT staffing sales difficulty. In fact, the October results were the most positive by this measure since April 2016.

While publicly held IT staffing companies reported mixed results on balance in 3Q17, there are indications US IT staffing trended generally in a stable-to-positive direction as the quarter progressed and into October. The drag on 3Q17 revenues from Hurricanes Harvey and Irma were relatively minor. Robert Half (NYSE: RHI), for example, reported the storms negatively impacted revenue by approximately $3 million to $5 million, while On Assignment (NYSE: ASGN) and Kforce (NASD: KFRC) both reported a revenue hit of approximately $1 million in the quarter.

Storms aside, On Assignment’s total revenue for the quarter of $667.0 million grew 6.0% year over year, or 6.6% when adjusting for constant currency and billing days. Continuing to take share of the US IT staffing market, its Apex Systems segment grew to an estimated $387.1 million, up 10.9% year over year. Management noted during its earnings conference call that Apex bill and pay rates remained stable. Four of its seven verticals experienced double-digit growth, including: aerospace and defense, technology, consumer industrial and financial services. Its healthcare vertical grew at high-single digits.

On Assignment’s Oxford core division, which excludes its CyberCoders direct hire and Life Sciences Europe businesses, declined approximately 7.1% to an estimated $111.9 million, due to the completion of two large projects in 4Q16. For 4Q17, On Assignment guided total company revenue growth to between 5.5% and 7.1% year over year, excluding the expected $5 million contribution from its recent acquisition of StratAcuity, a Boston-based life sciences staffing firm.

Kforce’s 3Q17 revenue of $341.1 million was essentially flat (up 0.2% year over year). However, its Tech Flex (IT temporary staffing) division grew 1.7% year over year, or 3.3% adjusting for billing days and 3.6% when also adjusting for the hurricane impact. Kforce experienced year-over-year growth in six of its top 10 industries as management highlighted communications, manufacturing, energy, and certain professional services and solutions companies supporting the Federal Government having performed particularly well in the quarter. IT talent around mobility, cloud computing, cybersecurity, e-commerce, machine learning, and digital marketing were in highest demand.

Management noted spreads between bill and pay rates improved for the second consecutive quarter. Also encouraging, the company observed longer assignment lengths and solid new assignment volumes. Together, these factors contributed to upbeat 4Q17 guidance, particularly for Tech Flex, which assumes an acceleration to 5% year over year revenue growth.

There were two sides to Robert Half’s 3Q17 earnings report. On one end, revenue continued to decline. Robert Half Technology, its IT staffing segment, reported revenue of $157.0 million, down 6.3% year over year, or down 5.2% year over year adjusting for constant currency and billing days.

While these results were mostly neutral-to-negative, there may be a parting of the clouds in the offing. Management’s tone in both its press release and conference call turned markedly positive on its demand trends, including new projects in its IT staffing middle market client base. The Microsoft Office 365 upgrade cycle was an example that is providing uplift.

CTG (NASD: CTG) reported 3Q17 IT staffing revenue of $52.1 million, down 6.8% year over year as it continues to experience reduced demand from its largest staffing clients, including IBM. Fourth-quarter 2017 revenue guidance factors in an expectation for this to persist through the end of the year. Appropriately, diversification of its staffing client portfolio was one of the foundations of its previously outlined three-year strategic plan, along with a renewed focus on midsize clients, permanent placement revenue and partnerships with managed service providers.

Mastech Digital (NYSE MKT: MHH) updated its revenue reporting structure to distinguish between contributions from its traditional IT staffing segment and its data and analytics services division, led by its recent acquisition of InfoTrellis. The former grew revenue 2.6% year over year to $35.2 million, while also growing its billable consultant headcount by 3%. Impressively, the InfoTrellis acquisition was immediately accretive to earnings.

Among the larger, more diversified global staffing companies, Adecco’s global IT staffing business generated €600 million in 3Q17 revenue, a decline of 3% year over year in constant currency. Within Randstad, US IT staffing increased 4% year over year, an acceleration from 2% growth in 2Q17. ManpowerGroup’s Experis revenues from IT skills declined 10% year over year on a billing days adjusted basis, reflecting an additional 2% deceleration from the 2Q17 level.

As a reminder, CDI Corp. was acquired during 3Q17 by AE Industrial Partners, a private equity investor, in a deal valued at $157.5 million, and no longer publishes its quarterly results.

Looking forward into 2018, the potential impacts of the proposed tax reform bill was a common theme. For example, On Assignment suggested, using its year-to-date pre-tax income through 3Q17, tax reform would increase net income by $12 million to $20 million, while Kforce suggested with a 20% corporate tax rate it could see an incremental $8 million to $10 million in cash at its current profitability levels.

In summary, while IT staffing results are currently mixed, there appears to be a general trend of improvement. More details and analysis around the 3Q17 financial results of staffing companies, across all segments, can be found in Staffing Industry Analysts’ report: Financial Results of Staffing Companies: December 2017 Update.

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