IT Staffing Report: May 14, 2015

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1Q15 IT staffing earnings recap: the best of times, the worst of times

The title of an imagined book on the 2015 first quarter earnings season in IT staffing could well be A Tale of Two Markets, as the companies that are well positioned to tap market demand continue to prosper, while others are scrambling to find their feet.

In its Apex division, On Assignment (NYSE: ASGN) reported $294.3 million in revenue for the first quarter of 2015, up 5.7% year-over-year (y/y). This is a marked deceleration from the quarterly growth rates posted by Apex in 2014, a slowdown which the company attributed to y/y declines in revenue from its major money center banking, government services, and oil and gas clients, which provide nearly half of the division’s total revenue. Helping to offset those weaker verticals, Apex saw double-digit y/y sales growth from its customers in the business services, healthcare and technology markets as well as its local branch accounts.

Oxford, On Assignment’s other technology staffing division, lagged the y/y revenue growth exhibited by Apex in Q1, though its performance actually constitutes an improvement over the growth trajectory it was on exiting 2014. Backing out the contribution of CyberCoders, which focuses on permanent placement, Oxford had $105.0 million in revenue, up 4.9% from 1Q14. The uptick in electronic medical record (EMR) implementations that management reported seeing in December carried through Q1, and was accompanied by increased activity related to the impending Oct. 1 conversion to ICD-10 medical coding.

Having substantially completed the hiring plans implemented in 2014, which drove a nearly 15% y/y increase in sales rep and recruiter headcount in 1Q15, On Assignment anticipates a meaningful impact on revenue to begin late in the third quarter, as it has historically taken an average of nine to 12 months for its new staff to ramp up. For 2Q15, management projects companywide revenue of $454-$459 million, the midpoint of which implies growth of approximately 6.4% on an organic, constant-currency basis.

Kforce (NASDAQ: KFRC) saw y/y top-line growth of 8.3% in its Tech Flex (temporary staffing) division, which accounted for two thirds of companywide revenue, to $208.4 million in 1Q15. According to management, weather significantly disrupted operations early in the quarter in the Northeast, where the company generates about 25% of its overall staffing revenue. However, new Tech Flex starts volume saw an inflection point in mid-March, and Kforce’s current order pipeline suggests further acceleration in assignments in May, with notable demand coming from financial services, manufacturing and healthcare customers.

The company anticipates Tech Flex y/y revenue growth in the current quarter to remain fairly consistent with the high-single-digits rate seen in Q1, before picking up to 10% or higher in the second half of 2015. Like On Assignment, Kforce has been staffing up its internal workforce to better respond to the strong market for its services, increasing revenue-generating headcount by 8.7% over the past year. The company cited another consequence of this demand—an increase in temp-to-perm conversions in the recent quarter—as something of a mixed blessing. While conversion fees provide an immediate influx of high-margin revenue, they make it difficult to maintain the volume of contractors in the field necessary to meet staffing revenue growth projections.

Continuing the trend of accelerating y/y revenue growth exhibited throughout the second half of last year, Robert Half (NYSE: RHI) reported $153.7 million in sales for its Robert Half Technology division, up 16.2% y/y as reported, or 19.0% y/y when adjusted for same billing days and constant currency. When the company held its year-end earnings call in late January, management said it had seen a roughly 2% benefit to revenue growth up to that point in Q1 due to the absence of harsh weather relative to what it experienced in January 2014; by the end of the quarter, that improvement had slipped to 0.5%, still better than most peers have reported.

Perhaps more interestingly, the company said the typical seasonal pattern of projects winding down at year end and a lull intervening before new deals are inked was much less pronounced this year. The tight tech labor market making client employers more reticent to let contracted talent slip away, along with the more critical nature of projects RHI is supporting in areas like app development, cloud migration and data security were cited as drivers of the shift.

Two firms in the midst of strategic reorganization, Volt Information Sciences (NYSE: VISI) and CDI (NYSE: CDI), again reported y/y drops in IT staffing revenue in 1Q15. On a pro forma basis, Volt’s staffing services revenue decreased 8% y/y, to $360.8 million. Though the initiative to reduce its exposure to customers with less-favorable business terms is negatively impacting top-line growth, it helped swing operating income from a $2.8 million loss in 1Q14 to a positive $1.7 million in the recent quarter. CDI continues to suffer the ill effects of having too many of its eggs in IBM’s basket, as that single customer contributes 70% of revenue in the Hi-Tech Professional Staffing Services segment, and was the full cause of its 15% y/y decline.

CTG (NASDAQ: CTG) reported $65.2 million in revenue from IT staffing, which constituted about 67% of its total sales in 1Q15, a nominal increase of 9.7%, though the growth is reduced to 3.1% when analyzed on a per-billing-day basis. The company characterized general IT staffing demand as robust, but said that its largest customer — IBM, at nearly 24% of total company revenue in the quarter — had exerted some downward pricing pressure early in 2015. Combined with a slowdown in the company’s solutions business tied primarily to fewer Electronic Medical Record system implementations, this led management to reduce the company’s 2015 revenue and earnings projections.

While the constructive environment for IT staffing revenue growth has led many market observers to have Great Expectations for 2015, several publicly held companies in the industry must address the internal issues that are holding them back, lest their investors pull off a disappearing act worthy of (the other) David Copperfield.

1Hi-Tech segment of Professional Staffing Services reporting unit
2IT Staffing reporting segment 
3Tech Flex reporting segment 
4Excludes CyberCoders
5Robert Half Technology reporting segment; growth adjusted for billing days and currency fluctuations
6Staffing Services reporting segment