IT Staffing Report: March 12, 2015

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4Q14 IT staffing earnings recap: Steady as she goes

In broad terms, IT staffing firms’ operating results for 4Q14 produced few surprises, and were generally a continuation of trends reported through the first nine months of the year. While there are many bullish indicators for 2015, the earnings calls did yield a few potential areas of concern, some of which are actually byproducts of the supply/demand imbalance that has created such a fruitful climate for IT staffing growth.

On Assignment (NYSE: ASGN) reported 4Q14 revenue of $307.7 million (up 9.5% y/y) in its Apex division and $105.1 million (up 4.5% y/y) for its Oxford segment’s core business (excludes contingent search specialist CyberCoders). Growth in the latter division was hampered by sluggish demand for new electronic medical record (EMR) implementations in the second half of last year, but management said activity in that channel began to pick up in December, and feedback from its clients suggests a slow-but-steady increase throughout 2015.

The company continued to outline the plan to sharpen its focus on smaller accounts, which grew at 21.7% year-over-year (y/y) in 2014, a significantly higher rate than that of the firm’s larger customers, particularly the money center banks. In response to analyst questions, management clarified that this characterization of customer size was based on account purchasing volumes rather than the scale of the overall enterprise. Thus, these may be opportunities to scale up the relationship with clients that spend a considerable sum on IT staffing services, but currently allocate a relatively small share of that spend to On Assignment.

For 1Q15, the company is targeting total revenue of $432 million to $439 million (approximately 7% to 9% organic growth), which includes $2.5 million to $3.5 million in adverse weather impact and about a one percentage point reduction in growth due to the strengthening of the dollar relative to the euro.

In its Tech Flex (temporary staffing) division, Kforce (NASDAQ: KFRC) saw revenue growth of 9.9% y/y, and 3.3% from the preceding quarter on a per-billing-day basis. Demand strength was described as broad based, with the three largest end markets being financial services, communications and healthcare. Tech Flex is Kforce’s largest segment, providing 68% of total revenue in 2014.

The company expects y/y revenue growth in its Tech Flex segment to once again approach 10% in 1Q15, but for revenue to decline slightly from 4Q14 on a per-billing-day basis. This is due to a reduction in division headcount early in 2015 following an uptick in perm conversions in Q4, which reveals one downside of a high-demand, supply-constrained tech labor market. Joining the chorus with On Assignment, management said weather conditions in the Northeast US had cost roughly $2 million in overall revenue early in Q1. However, leading indicators in terms of job orders and external submittals in Tech Flex were called “very high,” and the company cited enhanced revenue visibility for the segment due to an increasing proportion of revenue coming from statement-of-work (SOW) and project-based contracts.

Mastech Holdings (NYSE MKT: MHH) also cited worker attrition as a primary factor in its very slight y/y revenue growth in 4Q14, despite a demand environment that management characterized as robust. Unexpected resignations and client hires compounded higher-than-typical fourth quarter assignment ends to reduce the company’s billable consultant base. Upward wage pressure contributed to a gross margin that was 80 basis points narrower than the prior year period.

Robert Half (NYSE: RHI) reported $152.9 million in sales for its Robert Half Technology division, up 11.4% y/y as reported, or 12.7% y/y when adjusted for same billing days and constant currency. The firm’s initiative to increase recruiter headcount during 2014 enabled it to improve fill rates in IT, where demand was notably strong for developers of web and mobile applications. Business accelerated in December, and US temporary and consulting revenue (not specific to IT) was up 19% in the first three weeks of January from the same period in 2014. About two percentage points of that increase was attributed to the absence of harsh weather as compared to early 2014. RHI’s earnings call was held relatively early in the reporting season, on Jan. 29, so it will be interesting to see how the blizzards in February might have affected the intra-quarter trend when RHI reports its 1Q15 results.

Both Volt Information Sciences (NYSE: VISI) and CDI (NYSE: CDI) reported y/y declines in IT staffing revenue, but they were more indicative of company-specific issues than market conditions. A 24% y/y decline in revenue from CDI’s Hi-Tech Professional Staffing Services segment was attributed almost entirely to lower sales to IBM, which represents about 70% of that unit’s total business. The company announced a new restructuring plan, and said that it will increase focus on regional and developing clients in North America in an effort to diversify its staffing revenue base. Volt, likewise in the midst of a strategic and structural re-focus, saw its staffing services revenue decline 18.2% from 4Q13.

CTG (NASDAQ: CTG) reported $63.8 million (up 2.4% y/y) in revenue from IT staffing, which constituted 65% of its total sales in 4Q14. Guidance for total revenue in the current quarter was flat on a y/y basis, which reflects a continuing slowdown in EMR implementation projects offset by a projected modest increase in staffing revenue.

Though it seems fairly clear that demand for IT staffing services remains healthy in general terms, the year-end reports revealed several potential stumbling blocks for stakeholders to monitor. The timing and magnitude of a potential reacceleration in EMR and ICD-10 projects in the health IT arena, as well as a renewed technology investment cycle from large financial services companies will do much to determine whether the market meets or exceeds the 7% growth we estimated for 2014 and currently project for 2015 as well. Meanwhile, rising worker attrition and upward pressure on pay rates may present challenges to profitability.

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