ASGN Q2 2025 Earnings Call Transcript

Quartr
Provided by Quartr
July 23, 2025

Key Takeaways

  • Positive Sentiment: ASGN delivered $1.02 billion in Q2 revenue, surpassing the high end of guidance, with an adjusted EBITDA margin of 10.6% at the top of expectations.
  • Positive Sentiment: IT consulting now represents approximately 63% of revenues, up from 57% a year ago, driving higher-margin growth.
  • Positive Sentiment: Commercial consulting bookings reached $417.5 million with a book-to-bill of 1.2× and saw wins of larger, multi-capability deals, led by TopLock’s outperformance.
  • Negative Sentiment: Commercial assignment revenues declined 13.9% year-over-year, reflecting ongoing macroeconomic uncertainty weighing on discretionary staffing.
  • Positive Sentiment: ASGN launched an AI Innovation Center and AI university to create repeatable solution accelerators, unifying IP and upskilling teams for client deployments.
AI Generated. May Contain Errors.
Earnings Conference Call
ASGN Q2 2025
00:00 / 00:00

There are 5 speakers on the call.

Speaker 1

Greetings and welcome to the ASGN Incorporated second quarter 2025 earnings call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operating assistance, please press Star zero on your telephone keypad. It is now my pleasure to introduce your host, Kimberly Esterkin, Vice President of Investor Relations.

Speaker 2

Thank you.

Speaker 1

You may begin.

Speaker 4

Good afternoon.

Speaker 4

Thank you for joining us today for ASGN second quarter 2025 conference call. With me are Ted Hanson, Chief Executive Officer, Shiv Iyer, President, and Marie Perry, Chief Financial Officer. Before we get started, I would like to remind everyone that our commentary contains forward-looking statements. Although we believe these statements are reasonable, they are subject to risks and uncertainties, and as such our actual results could differ materially from those statements. Certain of these risks and uncertainties are described in today's press release and in our SEC filings. We do not assume any obligation to update statements made on this call. For your convenience, our prepared remarks and supplemental materials can be found in the Investor Relations section of our website at investors.asgn.com. Please also note that on this call we will be referencing certain non-GAAP measures such as adjusted EBITDA, adjusted Net Income, and free cash flow.

Speaker 4

These non-GAAP measures are intended to supplement the comparable GAAP measures. Reconciliations between GAAP and non-GAAP measures are included in today's press release. I will now turn the call over to Ted Hanson, Chief Executive Officer.

Speaker 2

Thank you, Kim, and thank you for joining ASGN Incorporated's second quarter 2025 earnings call. ASGN reported solid results for the second quarter. Revenues of $1.02 billion were above the high end of our guidance range, while adjusted EBITDA margin of 10.6% was at the top end of our expectations for the quarter. IT consulting revenues continue to grow, reaching approximately 63% of revenues for the second quarter, up from 57% in the year-ago period. Macroeconomic uncertainty remains, impacting discretionary spending. Still, clients are focused on staying competitive, driving demand for cloud and data solutions to modernize legacy systems and capitalize on AI. According to ISG Index's second quarter 2025 call, the demand for AI is overcoming macroeconomic distractions, with companies actively investing in generative and agency AI, deploying cost savings from other areas of their operations.

Speaker 2

We are experiencing this trend in our commercial consulting bookings, where we are seeing continued demand in data, AI, and digital engineering, including custom application development. Commercial consulting bookings for the quarter totaled $417.5 million, translating to a book-to-bill of 1.2 times on a trailing twelve-month basis. While bookings remain weighted toward renewals, we are increasingly winning larger, more complex multi-capability deals as we advance our commercial practice areas and technology partnerships. Our technology partnership with Workday is progressing very well, and TopBloc, which continues to perform above our expectations, contributed to growth of our commercial consulting bookings for the second quarter. In our federal business, new contract awards totaled $72 million for the second quarter, or a book-to-bill of 1.1 times on a trailing twelve-month basis. Contract awards were challenged as anticipated, reflecting a slowness in award velocity and the impact of DoD on procurement and approval processes.

Speaker 2

New federal contract backlog was over $2.9 billion at quarter end, or a coverage ratio of 2.4 times the federal segment's trailing twelve-month revenues. Despite lower federal quarterly bookings, our core solution capabilities in AI, cybersecurity, and digital modernization remain well aligned with the Administration's efficiency cost savings priorities. In addition, the recently passed One Big Beautiful bill represents one of the largest single-year increases in U.S. defense spending in modern history. Much of this funding focuses on our primary competencies including AI and automation, cloud migration, secure communications, and threat intelligence platforms. Ultimately, a constant among this ongoing transformation is a critical need for skilled IT professionals. Case in point, ISG estimates that in the next year 60% of enterprises plan to expand their IT resources to accelerate the capture of AI benefits.

Speaker 2

ASGN's distinctive model, which delivers a broad spectrum of skill sets just in time on a contingent basis, continues to set us apart and will enable us to serve as an excellent partner to enterprises and public agencies seeking to achieve their IT modernization goals. We are uniquely positioned to identify the right skill sets for our clients, and with an industry-led focus, we deeply understand the nuances of each sector's IT needs. With that, let me turn the call over to our President, Shiv Iyer, to discuss our industry and solution performance in the second quarter.

Operator

Thanks Ted. It's great to speak with everyone this afternoon. Beginning with our commercial segment verticals, consumer and industrial accounts performed the strongest in the second quarter and were up mid double digits year over year. Improvement in this vertical was driven by mid teens or better growth in materials, utilities, industrials, and consumer discretionary accounts. Our healthcare vertical was relatively flat compared to the prior year as a result of double digit growth amongst our pharmaceutical and biotech clients. Financial services, business services, and TMT accounts declined compared to the year ago period. On a sequential basis, we achieved growth in four of our five commercial industry verticals, with consumer and industrial accounts gain leading our performance. Our consumer and industrial clients have been leveraging our nearshore delivery center in Mexico as a cost efficient and capable alternative for application development and data modernization.

Operator

In the financial services vertical, we saw double digit growth amongst our wealth management and insurance clients, both of which were active with our cloud and data infrastructure teams in the quarter. In our TMT vertical, we saw mid single digit growth in telecom, e-commerce, and software and services for clients. In this vertical, we supported enterprise platform advisory and implementation, including integrating new AI capabilities into existing cloud platforms and developing solutions to help clients harness the power of their data, AI, and advanced analytics. In our federal business, we track our revenues across four end customers: Defense and Intelligence, National Security, civilian, and other clients. Defense, Intelligence, and National Security accounts comprised approximately 72% of our total government revenues. Growth in National Security accounts was largely driven by work for the Department of Homeland Security, examples of which I will share shortly.

Operator

As anticipated, our civilian business for the quarter was impacted by procurement delays, the impact of which was unchanged and consistent with expectations. Defense and Intelligence revenues, though up sequentially by mid single digits, were down year on year due to budget constraints. We remain bullish on the long term positioning of our federal government business, particularly with the recent expansion of the defense budget. To provide greater clarity on the dynamics driving bookings across our commercial verticals and government clients, let's turn to our solutions capabilities for the quarter. Consulting engagements across the company focused on four major areas including cloud and data infrastructure, cybersecurity, enterprise platform advisory and implementation, and AI services. Let me provide a few examples of each, beginning with cloud.

Operator

For a global financial services company, we were engaged to assess the current state of their cloud operations, evaluate a newly procured FinOps tool, and build a multi-year cloud roadmap. As a result of our advisory services, our client will be able to improve its cloud governance taxonomy, capacity, and consumption across its wealth management lines of business. Importantly, this framework provides our clients the confidence to accelerate their cloud migration. For a Fortune 500 life insurance and retirement company, our consultants were engaged to determine if migrating to Amazon's cloud-based system would provide cost savings, operational efficiency, and improve scalability for the company. Our team delivered a viable migration model in just eight weeks, resulting in query execution three times faster and generating significant cost savings for the client.

Operator

By deploying this model, our client will be able to accelerate their data center exits and mainframe retirement while simultaneously unlocking the AI capabilities provided by migrating to AWS. We also work side by side with AWS as a premier partner and managed services provider in the federal space. Similar to the commercial market, federal agencies are looking to modernize legacy infrastructure. In the second quarter, we partnered with AWS on behalf of National Security and Defense Agency clients to secure scalable cloud migrations and continuous compliance in AWS GovCloud. Alongside cloud support, our cybersecurity expertise was another solution area in demand this past quarter. For DHS Cybersecurity and Infrastructure Security Agency, or CISA, we were awarded incremental work to deliver essential technical and digital engineering services vital to protecting critical infrastructure and enhancing national cybersecurity.

Operator

We also partnered with Elastic, a leading platform for search-powered solutions, to add AI search capability into CISA's continuous diagnostic and mitigation dashboard, thereby enhancing cross-domain visibility of the agency and reducing national security vulnerabilities. Collaboration with our alliance partners is critical to our success. Our strategic alliances with partners like AWS and Elastic enable us to deliver cutting-edge technology solutions tailored to our clients' unique business needs. The value of our technology partnerships is particularly evident in enterprise platform implementations, which represented a third area of focus. As an example, TopBloc, a leading high-growth tech-enabled Workday consultancy, recently partnered with a global provider of insurance solutions to leverage the full Workday suite across 11 countries. For this client, TopBloc provided end-to-end implementation of the Workday human capital management and payroll modules, full-service change management, managed testing services, and post-go-live support.

Operator

A new win for the quarter, this initiative was designed to centralize our client's HR operations, streamline its internal processes, and enhance the company's ability to attract and retain top talent. TopBloc was also engaged during the quarter to develop a custom-built Workday application for a national mechanical contractor. This application enables the company's foremen and site managers to enter time on behalf of their crews in real time, aligning with the unique needs of the construction environment and showcasing TopBloc's ability to support complex unionized work environments across multiple implementation phases. Our ServiceNow implementations are also on the rise, particularly as the company makes a push to become the AI platform for digital business. In the quarter, we assisted a prominent global video game and entertainment company with deploying ServiceNow's GenAI capabilities within the HR service delivery environment.

Operator

This consulting project focused on increasing automation and improving user experience by implementing GenAI to automatically classify HR cases, auto-generate resolution summaries, and enhance case documentation and audit readiness. In addition to platform-driven implementations, we are helping drive to a smarter future for our clients by providing a comprehensive suite of AI services ranging from advisory and literacy to developing and building agentic architectures powered by our assets and accelerators in the advisory space. One of the world's largest professional services firms engaged our team of consultants, architects, and cross capability solution leaders to rethink the process and technical design of some of their key knowledge management workflows. These workflows are currently conducted manually and involve the complex task of updating governance policies in thousands of downstream documents and systems. The advisory phase of the engagement was successful, and we're now moving into delivery collaboration between our U.S.

Operator

Consulting team and our Mexico Delivery Center. We are also leveraging our AI capabilities to improve data management and accelerate model deployment within the federal space. During the quarter, our government team used advanced analytics and machine learning to support the U.S. Navy in processing vast amounts of maritime data. By training and deploying AI models on their behalf, we're helping the Navy enhance its situational awareness, safety, and operational efficiency. Beyond AI advisory, we are growing our agentic AI practice by architecting and building agents to support a myriad of client use cases. Just last week, we published an agentic AI customer service tool on the new AI agents and tools storefront in the AWS Marketplace. This agent is one of the many AI accelerators being built by our teams.

Operator

Ted will discuss more about our AI accelerators and investments shortly, but first I'll turn the call over to our CFO Marie to discuss ASGN's second quarter segment performance and third quarter guidance. Thanks, Shiv.

Speaker 4

For the second quarter, revenues totaled $1.02 billion, a decrease of 1.4% year over year, but above our guidance expectations. Revenues from our commercial segment were $708.1 million, a decrease of 2.4% compared to the prior year. Assignment revenues totaled $382.4 million, a decline of 13.9% year over year, reflecting continued softness in portions of our commercial segment that are more sensitive to changes in macroeconomic cycles. Revenues from our commercial consulting, the largest of our high margin revenue streams, totaled $325.7 million, an increase of 15.7% year over year and included the contribution from TopBloc. Revenues from our federal government segment were $312.5 million, an increase of 1.1% year over year, including approximately $10 million of higher than expected license revenue. As Shiv noted, the impact from DOGE in the second quarter was in line with our expectations.

Speaker 4

Turning to margins, gross margin for the second quarter of 2025 was 28.7%, a decrease of 40 basis points from the second quarter of last year. Gross margin from our commercial segment was 33%, up 30 basis points year over year, reflecting a higher mix of consulting revenues as well as margin expansion in these revenues. Gross margin from our federal government segment was 19.2%, a decline of 140 basis points year over year due to higher volume of low margin software licenses. Gross margin was also impacted by loss of higher margin work under DOGE. Excluding the impact of client driven license revenues that were outside of our guidance estimates, consolidated company gross margin was within our guidance range for the quarter. SG&A expenses for the quarter were $216.8 million compared to $205.6 million in the second quarter of 2024.

Speaker 4

SG&A expenses included $8.3 million in acquisition, integration and strategic planning expenses inclusive of cost optimization initiatives. These items were not included in our previously announced guidance estimates for the second quarter. Net income was $29.3 million, adjusted EBITDA was $108.5 million and adjusted EBITDA margin was 10.6%. Also at quarter end, cash and cash equivalents were $138.9 million and we had $320 million available on our $500 million senior secured revolver. Our net leverage ratio was 2.46 times at the end of the quarter. Our strong free cash flow provides a strategic advantage that enables ASGN to fund growth initiatives, opportunistically repurchase shares, and invest in strategic M&A, all while maintaining a healthy balance sheet. Free cash flow was $115.8 million for the second quarter, a conversion rate of approximately 107% of adjusted EBITDA.

Speaker 4

We deployed $9.5 million of our free cash flow to repurchase approximately 200,000 shares at an average share price of $58.69. At quarter end, we had approximately $470 million remaining under our $750 million share repurchase authorization. Turning to guidance, our financial estimates for the third quarter of 2025 are set forth in our Earnings Release and Supplemental Materials. These estimates are based on current market conditions and assume no further deterioration in the markets we serve. Guidance also assumes 63.5 billable days in the third quarter, which is the same number of billable days as the year ago period and 0.25 more days than in the second quarter. Estimates do not include any acquisition, integration, or strategic planning expenses.

Speaker 4

With that as background, for Q3 2025, we are estimating revenue of $992 million to $1.012 billion, net income of $35.8 million to $39.4 million, adjusted EBITDA of $108.5 million to $113.5 million, and adjusted EBITDA margin of 10.9% to 11.2%. Thank you. I'll now turn the call back.

Speaker 2

Thanks, Marie. As discussed at the outset of today's call, despite ongoing macroeconomic uncertainties, our clients are continuing to invest in AI, recognizing that maintaining a competitive edge requires staying at the forefront of technological advancements. With that in mind, I'd like to take this opportunity to further highlight ASGN's ongoing AI investments and how, like our clients, we are strategically positioning our business amid rapid technological change. AI enables our consultants to work faster, smarter, and with more insight, driving a higher ROI for our clients. By leveraging our deep expertise in application development and managed services, we've been able to create relevant AI applications for our consultants' everyday work and ultimately share this IP with our Fortune 1000 and defense and intelligence customer base.

Speaker 2

As part of our commitment to unify our company-wide AI expertise, we launched the ASGN AI Innovation Center, a collaborative initiative between our commercial and federal businesses designed to enhance innovation, optimize resource utilization, and promote AI-driven business growth for our clients. The Innovation Center offers development environments, a centralized, repeatable IP repository, documented best practices, thought leadership, and new technology evaluation. At the core of our Innovation Center are the Solution Accelerators, proofs of concept developed to quickly solve specific business problems with the help of AI. By building out these accelerators, we create repeatable, lower-cost solutions that can be easily deployed for our clients. Several accelerators have already been published, and many more are in the pipeline for launch this year. Some examples of those already in use include financial services agents, rapid code discovery tools, network security assistance, and AWS Agency AI Tool previously highlighted.

Speaker 2

Our AI University is also a crucial component of the ASGN AI Innovation Center. Our AI University provides resources for upskilling our sales and technical teams while serving as a launching pad for developing white papers, best practices, and trainings for our customers. We found that by incorporating AI understanding and education into ongoing professional development, we can drive continuous innovation while ensuring that our professionals remain relevant in a rapidly evolving market. Through the establishment of our AI Innovation Center and our many Centers of Excellence, we are enhancing our solutions capabilities and positioning ourselves as a leading authority in all facets of commercial and federal IT modernization. Our diverse customer base has equipped us with a deep understanding of the distinct data and IT needs across a wide range of sectors, enabling us to effectively support each client's long-term IT roadmap.

Speaker 2

Speaking of long-term roadmaps, I'm excited to share today that ASGN will be hosting an Investor Day in the fourth quarter. During this event, we will speak about our company's near and long-term strategy to unlock the next wave of growth and value creation. We look forward to sharing more details in the coming weeks. That concludes our prepared remarks. I'd like to extend my gratitude to all of our employees for your unwavering commitment this past quarter. Your efforts have been invaluable to fostering our client relationships as we continue to evolve our business into higher-end, high-value IT consulting. With that, we'd now like to open up the call to questions.

Speaker 1

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press Star one on your telephone keypad. A confirmation tone will indicate a line is in the question queue. You may press Star two to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys.

Speaker 2

One moment, please.

Speaker 1

While we poll for questions, our first question comes from the line of Tobey Sommer with Truist Securities. Please proceed with your question.

Operator

Thank you. Wanted to start out and ask how TopBloc is performing relative to your expectations, and maybe numerically, what was the contribution to results?

Speaker 2

Yes. Toby, thanks for joining the call and the question. If you remember, we at the acquisition date said that TopBloc was going to contribute over the course of the year, $150 million in revenues for the full year. Mind you, it closed on the first of March, and then EBITDA margins in the high teens. To this point, I'd say they're tracking just ahead of those numbers on revenue, just ahead of those numbers on bookings, and kind of in the range on EBITDA.

Operator

Okay, perfect. You talked a lot about AI in your prepared remarks in terms of opportunities and described a lot of initiatives and actions that you're helping with customers. Could you talk about the more cyclical part of your assignment business, specifically sort of the Creative Circle piece? What, if any, impact are you seeing from AI on that business? Would you describe the top line softness as purely cyclical at this stage?

Speaker 2

Yeah, let Shiv answer that. I'd say pretty stable. Right, Shiv.

Operator

And yeah.

Speaker 2

The cyclicality of it is one of the more cyclical pieces of the portfolio.

Operator

Yeah, I think that's spot on, Ted. We're not seeing anything that would indicate that there's a massive impact of AI on that business. I think it's largely the macros and cyclicality at this moment.

Speaker 2

I think, Tobey, going on to the beginning of the third quarter, I'd say that business has been stable, you know, kind of quarter to quarter.

Operator

It has been stable quarter to quarter. We expect that, and we also expect some parts of the consulting piece of that business to continue to progress, which we're seeing some uptick on.

Speaker 2

If you think about the opportunity in that business, even though the discretionary piece of this is earning the results of the traditional staffing part, the opportunity in customer experience is definitely a growth area where we're seeing that, to Shiv's point, inside the business. Our consulting work in there is growing. It's not the biggest part of the business. I'd call it maybe 20%, 25%, but it's growing and we think there's big opportunity there as we go forward. We will continue to emphasize that. At some point here the discretionary spending is going to return and we think both of those things will contribute to Creative Circle.

Operator

Thank you. In the government consulting area in the ECS business, a couple of topics on that one. What is the long-term margin profile? Is it any different because of the high margin DoD contracts perhaps no longer being ongoing? Do you think you grow from here? We've heard some other dedicated companies that focus on this area of the market exclusively talk about perhaps an opportunity for calendar third quarter, kind of a bigger than usual contract award period because of.

Speaker 2

Slow awards year to date in the federal fiscal year. I'll take the second part and I'll let Marie talk about the gross margins. I do think that there is a lot percolating here for the third quarter. We're only a few weeks in, we'll have to watch that play out. It does feel like we're back to kind of normal cycle there. It has been muted in the second quarter as you mentioned, just because of the wait and see approach of the government contracting officials and the agency heads. I think the positive note is here we've got a new bill out. There's going to be a significant amount of new money in the budget, especially in the defense area, which is where we are embedded. I think all those portend good for us.

Speaker 2

I look for a good third quarter, but I really look for a good bookings outcome here as we get a little further down the road because the government is going to put that money to work. They're going to have to get it on the street and competed with us and our peer group to be able to get these things done. As you know very well, Toby, the government doesn't have all these assets inside of their operation to accomplish these things that need to be accomplished in data and AI and technology modernization, cybersecurity and other areas where we play. Marie, on the gross margin.

Operator

Hi, Toby.

Speaker 4

Yeah, you were really referencing kind of gross margin and what the long-term view is. When we think about the federal business, you alluded to this as well, that the revenue that we're losing is higher margin. The reality is some of that is kind of toggling back and forth, so we'll see how that works out. The leadership at our federal government is also looking at increasing direct labor. There are opportunities down the road as we look at the gross margin for federal to increase our direct labor. As we've talked about, just some diminishing impact on the license revenue or the balance of the license revenue that's embedded in our federal continues to get smaller and smaller.

Speaker 2

You know that we've kind of played in a 20 to 21% range, and you have some of these pass throughs coming in and out, so that moves up and down. I still think that's a range that we expect to be in.

Operator

Tobey, thank you very much.

Speaker 1

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

Operator

Thanks so much. Sorry, just one more on federal government and then I can move on. You said that the DoD impact was in line with your expectations. Can you remind us what those expectations were and what do you think the impact will be on the current quarter?

Speaker 4

Absolutely. Last quarter we actually said that the Doge impact would be less than 2% of total revenues, as noted, unchanged in line with our expectations for Q2. We expect that same in Q3. Okay, great.

Operator

Thanks so much.

Speaker 2

Commercial.

Operator

Maybe we can segment this between your assignment and your consulting revenues. I'm just wondering what the tone is. It sounds like on the consulting side there's a lot going on, but I don't know if you're seeing the same kind of, you know, potential enthusiasm on the assignment basis. Any color would be great.

Speaker 2

I'll let Shiv comment, but I think coming out of Q2, obviously we had a very good bookings quarter and it was stronger at the end of the quarter than it was at the beginning. I think here in the first three weeks, we're seeing little incremental positive on four metrics in the assignment business. Shiv, just tone of conversation with clients.

Operator

No, absolutely, Jeff. I think as you can see from our bookings numbers, we're seeing some positive signs in our commercial consulting business, specifically in certain areas like cloud and data and AI. It's obviously a tale of different industries. You can see from our results that some of our industries are doing much better than others. The reason we aren't out there declaring that there's something majorly under FE is we're still watching some of our larger industries like banking and looking for the turn in those industries, which is still sort of a wait and watch for us. Overall, the sentiment at least is we're seeing enough good things to give us cautious optimism.

Speaker 2

If you think about the places where we have real strength, Jeff, like data and AI application development, modernization, cybersecurity, enterprise systems around ServiceNow and Workday, those are all kind of developing areas of strength here as things begin to emerge. That's the core of our capabilities, if you will. I think we're positioned pretty well here for things to begin to release. I think Shiv hit the nail on the head. While we're seeing some positive signs in the forward metrics, we do need a big industry like banking specifically to begin to turn positive instead of just flattish. Okay, that's really helpful.

Speaker 4

Thanks so much.

Speaker 1

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

Speaker 2

Thank you.

Operator

Can you maybe talk a little bit?

Speaker 2

About the AI investments that you're making? More specifically, from the perspective of just kind of building IP, one of the narratives more broadly as we think across IT services is that in this next wave of growth, I guess the idea is that firms will need to build more IP than they have in the past. Can you comment on that or your thoughts and views and how that fits into your business model in which you use more temporary workers to provide some of the consulting services on the commercial side? Right. I think you're on the right track, Shiv.

Operator

Absolutely. That's very much part of the strategy for us and the evolution for us. We think about, you know, let me talk about the fact that, you know, we are, we're doing, making investments in AI, as Ted would say, which is very focused on account and deal specific IP development. That doesn't mean we're not investing in just broader platforms. We are. We've got things like code discovery and open source tools around code discovery, which is our own IP. We've got open source tools around applying AI to cybersecurity, which we're deploying for clients as well. We're doing all of that. More and more, what we're doing is we're working with partners like AWS, like Workday to start to build IP specific to client requirements, which in many cases tends to be ours. We can rapidly then scale them across multitudes of clients.

Operator

That's very much part of our strategy. That's one big pillar of how we're doing that. The second big pillar is we call it our own best qual kind of idea where we're starting to apply agents within our own business, again with partners, with the intent to sort of go with them, to monetize them externally. You hit the nail on the head. It's a big part of our strategy. We're not out here declaring that we've taken the hill on this stuff, but we are actively building on all those vectors that you talked about.

Speaker 2

Remember our AI capabilities within the federal government, which was our first exposure here, are leading capabilities for many years. Bringing together our commercial and our federal expertise in our AI Innovation Center, training our people, and using that halo to lift us forward on the commercial side is really what's afoot here. I think Shiv's right. While we haven't taken the hill yet, you do see that the technology cycle here is emerging. There has been and remains an enormous amount of money spent on the compute part of this with the chips. Now we're moving to, obviously, we're in the middle of data center and power, which we need to power all this stuff. You can already see the investments by big tech into software enterprise to try to bring agency AI into their products so they can bring that into the customer market.

Speaker 2

Our piece of that is laying down all those AI capabilities into our customers' technology environment, which nobody knows better than us since we've been there for so long, years here, kind of helping them along their roadmap. I would say that's developing, it's not fully emerged. I think this is playing out as we've been speaking about over the past quarters and couple of years.

Operator

No, I was just going to say one more thing, which is as a result of what Ted alluded, there is a lot of our clients, a lot of our clients are grappling with what's the best architectural approach to go about doing this. Should we build our own? Should we integrate what is existing? We're also seeing a pretty big uptick in advisory work around those kinds of questions, which then allows us to parlay it right down to how do you not just think about the architecture, but how do you then build it and deploy it and integrate it into your environments?

Speaker 2

Got it. I appreciate the detail there. When we think about the government segment, can we talk a little bit about what is the appropriate baseline or run rate revenues? We saw the tick up in the Cost plus segment this quarter. How much of it is truly just incremental or specific to the quarter? It seems like there's obviously a lot of volatility there in that segment. What is the right starting point or right baseline of revenues? I think if you take what we said in the release about the pass throughs, which were about $10 to $12 million here during the quarter, and back that out of their number, it kind of brings you down into the $300 million range. We also had a surge of some good, I'll call good direct labor billable work, so a few million which contributed to the quarter.

Speaker 2

I think your baseline is in the mid to, you know, $290 million to mid $295 million, something like that is a good baseline to think about going forward. Obviously we've got a 1.1 book-to-bill. That is going to portend here that as we go into future quarters, we've got some growth in the backlog. Back to the first question from Tobey. What's going on in that marketplace? We now have a bill. We're going to have more money flowing into the Defense Department. There's money flowing into the areas that we practice. I don't want to, using Shiv's words, say that we've taken the hill, but we've got things developing here and it may take a couple few quarters for them to play themselves out. We're on a path here.

Speaker 2

I think that we're going to be in a good spot here based on what the government's initiatives are and where we've got the business positioned. Got it. I'll leave it there for my colleagues. Thank you.

Speaker 1

Thank you. Our next question comes from the line of Jason Haas with Wells Fargo. Please proceed with your question.

Operator

Hey, good afternoon. Thanks for taking my questions. I was curious if you could speak a little bit more about what drove the strength in the consumer and industrial segment, since that's a nice acceleration in the quarter.

Speaker 2

Yeah, yeah.

Operator

I can give you some color on what drove the strength. Look, as we pointed out when we talked about our earnings, there were certain subsectors like materials and utilities, which were a significant part of what drove our strength in that. From a sectoral perspective, from a solutions perspective, I think what we're seeing is continued dynamic investments and demand from our clients in spaces like cloud and data and AI, custom software development. That's where we're seeing the biggest uptick. We had several areas where we were able to either add new logos or continue to expand our work in those domains.

Speaker 2

In the energy and utilities piece, subsectors of that category obviously have checks to write here to bring themselves forward and meet the needs of the power generation, both for the people and for the data centers. There is kind of opportunity there that traditionally may be a little stoic as an industry, but it's a lot more dynamic now over the last year or two.

Operator

Also, in certain industries like energy, our partnership strategy is paying out pretty significant dividends where we've built some assets for very industry-specific questions on asset utilization, predictive maintenance, et cetera, with partners like Databricks. That's allowing us to scale across the industry. It's different parts of the strategy playing out, but it's essentially continued strength in our solution areas. That's great to hear. That's great color. As a follow-up, if you talk about, you give some good examples of how AI is helping you generate revenue and helping your clients leverage and use these AI tools. I was curious if you could talk about your internal use of AI and if you've been able to find some efficiencies within your own business from using some of those tools. Thanks.

Speaker 2

I think that we're, I mean, Shiv put it right, you know, we want to be an AI-led organization both for ourselves and the productivity and opportunity that gives us and to showcase that in front of clients in all of our enterprise software tools. Whether it's our front office systems or our back office systems or our digital layer with ServiceNow, there's agency opportunities in all of those enterprise systems that we're going to, you know, are beginning to bring to bear and are going to bring to bear further in our own operations. If you think about our function as an IT staffing company and the recruiting and sales that go along with that, we've implemented AI techniques in there to make us much more productive. That's been an ongoing effort here for years.

Speaker 2

We're developing tools that help us on the bid proposal and win process, you know, to bring use cases up, you know, very efficiently for our team and to lay those down into presentations in a way that we used to use, you know, a lot of pushing of the keyboard to do. I think those are just some of the opportunities here. I probably should also not let it go without saying cybersecurity has been a big one. Our work that we've done in cybersecurity, beginning in the federal government, now in the commercial marketplace, the number of threats are so voluminous that you just can't process it all without AI capabilities. Some of those are being brought by the security software firms, and some of that's being generated by us.

Speaker 2

I think these are all examples across our organization where we're diving in headfirst into all of these AI opportunities that make us better, more productive, more growthy, and a great quality for our customer.

Speaker 4

Great caller.

Operator

Thank you.

Speaker 1

Thank you. Our next question comes from the line of Alex Sinatra with Robert W. Baird. Please proceed with your question.

Operator

Hi, I've just got a quick one. Just because a lot of things were covered already. I was just wondering, given this discussion around AI and this big initiative that you're undergoing with all these investments, I was wondering what the cost of that is on your end, especially for things like the co discovery, the cybersecurity, like the agents, just what that'll end up costing. Any color on that would be great.

Speaker 2

Yeah, look, I don't think you're seeing it. I guess maybe I'll put it this way. We're not quantifying all these costs, but you're not seeing it aggregate our margin profiles. If anything, you're seeing, you know, we're thinking about, like, our clients, which is, where can we, you know, make an investment here and get an acceleration to a return? In that way, we're able to, you know, meet the business case objective, whatever the case may be, and we're continuing to see our, you know, our margins here kind of be creeping up, you know, because of that. I won't quantify the number for you, but I'll just say it's not degrading, it's adding to your margin profile and will continue to as those things get more mature.

Operator

Great. Thank you.

Speaker 1

Thank you. We have reached the end of the question and answer session. I would like to turn the floor back to Ted Hanson for closing remarks.

Speaker 2

Great. I want to thank everyone for being here this afternoon, and we look forward to speaking with you in October on our third quarter earnings release conference call. Thank you and be well.

Speaker 1

Thank you. This does conclude today's conference. You may disconnect your lines at this time. We thank you for your participation.

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