ASGN Inc (ASGN) 2002 Q4 法說會逐字稿

Good morning. My name is Jeff and I will be your conference facilitator today. At this time I would like to welcome everyone to the On Assignment 2002 fourth quarter earnings teleconference. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. If you would like to ask a question during that time, please press star, then the number 1 on your telephone key pad. If you would like to withdraw your question, press the pound key. Thank you.

I would now like to turn the conference over to Joe Peterson, chief executive officer of On Assignment. Please go ahead, sir.

Thank you, Jeff, and welcome everyone to our fourth quarter and year-end earnings teleconference. With me this morning is Ron Rudolph, executive vice president of finance and chief financial officer, and Michael Jones, chief operating officer of our health care division.

We will begin today with Ron providing our disclaimer statement and reviewing our summary financials.

Thank you, Joe.

Except for strictly historical information that we will cover today, other statements we'll make in the course of this teleconference are forward-looking statements within the meaning of Section 21e of the Securities Exchange Act of 1934, as amended and involve a high degree of risk and uncertainty. Forward looking statements include statements regarding the effectiveness of the company's sales force, client reaction to our recent reorganization efforts, the effectiveness of our infrastructure upgrades, and their ability to reduce expenses. The company's ability to effectively compete and differentiate its services and other statements regarding the company's expectations, beliefs, hopes, intentions and strategies regarding the future.

All forward-looking statements are based upon information available to the company as of the date here of, as of today. Actual results could differ materially from the company's current expectations, contained in such forward-looking statements. Factors that could cause or contribute to such differences include general economic and business conditions, the company's ability to attract, train and retain qualified staffing consultants, the availability of qualified temporary nurses and other qualified temporary professional employees. Also risks inherent in expansion into new international and domestic markets and the integration of acquired operations management of growth and other risks detailed from time to time in the company's report as filed with the SEC, including the company's annual report on form 10k for the year ended December 31, 2001 as filed on March 29, 2002.

Lastly, the company specifically disclaims any intention or duty to update any forward-looking statements made during this teleconference or included in the press release.

In terms of the highlights of the quarter, revenue of 66,019,000 was up from 46,822,000 excluding the revenue from HPO revenue, the revenue decrease from 46,822,000 to 35,367,000. Lab segment revenue was down 21% from the fourth quarter year ago from 33,054,000 to 26,226,000. The health segment revenues increased from 13,768,000 - 13,768,000 to 39,793,000, that includes the results of HPO. Excluding the results of HPO, health segment revenues decreased to 9,141,000. HPO revenue was up 4% from 29,396,000 a year ago to 30,652,000 in the most recent fourth quarter.

Now I would like to give it back to Joe for an overview of our quarter and where we are.

Thanks, Ron.

I will use the following agenda for my prepared remarks today. We'll begin with a discussion basis for our fourth quarter results putting our revenue and earnings performance into perspective. I would like to review the year and a description of our achievements and their impact on our business and we'll look ahead at 2003, our strategy and tactics and performance guidance, and afterwards, of course we look forward to your questions.

First, the fourth quarter's results - overall and as we outlined in the release, we managed operating costs through October and November in line with revenue. We were moving toward an EPS for 2002 within our guidance range. However, December is always a vulnerable period, especially for short-term travel staffing companies like On Assignment.

In the few years of the existence of the short-term nurse travel business, holiday attrition has been dramatic, primarily because of the short-term nature of the assignments allows nurses to drop out for the holidays and reapply at the beginning of the year. This year we made a premeditated decision to initiate an aggressive nurse and client retention program. The program involved bonuses for assignments that spanned the holidays, selective rebates for clients and matching bonuses for the completion of the assignment. This is a common industry practice and in fact our per nurse and per client spending was very targeted and less than the offers made by competitors.

The good news is that our program was extremely effective. We lost only 29% of our nurses, a fraction of the falloff experienced in prior years, we lost no clients and we entered January with a majority of our nurses still on assignment. The complimentary news is that the retention program comprised the majority of the December earnings shortfall. The cost of the retention program and an adjustment to our workers compensation reserves dropped down the December earnings and affected our year end EPS. As a result of this retention scheme we entered 2003 with a best-ever compliment of nurses on assignment, its financial cost unfortunately can deflect attention from the important milestones we have achieved.

Some comments on the lab staffing business. As Ron mentioned, revenue for the quarter was 26.2 million versus 33 million for the fourth quarter of 2001. This division is now six months into its reorganization and continues to face a dismal demand environment. This is especially significant in the biotechnology sector, which represents 25% of the demand for our laboratory staff. Another 25% comes from pharma, the remaining 50% from other industries. We achieved the revenue without compromising on markups and margins, and in fact our fourth quarter lab support average markup was close to its historic levels with a 31.6% gross margin for the quarter and over 32% for the year.

We ended the quarter with 100 staff consultants in the lab division, a productivity of 23, the average number of employees each staff consultant manages. During the quarter, we closed under performing secondary offices and completed our redirection of resources to major markets. Within these markets, we now have a full compliment of staffing consultants, or 100% of the consulting staff required to operate lab support, this is a first for On Assignment. The positive effects of our revamped trading, compensation and field management structures has reduced voluntary turnover to a fraction of On Assignment's historic turn rate, this has important implications for 2003. This field force stability allows to us build a base of the selling skills necessary to maintain this division's high gross and net margin. Again, I believe this to be a very solid base to begin 2003.

Let me turn now to health care staffing. During the quarter, we continued to focus on our stated strategy of being a full service health care staffing provider, by consolidating our nurse and allied travel and local sales forces into a single team. With this we are having excellent early results. Today, when an On Assignment health care staffing consultant calls on a hospital client, we offer that client more than 11 important categories of staff, including nurses, surgical techs, medical techs, diagnostic imaging technologists, cytotechnologists, phlebotomists, therapists, billers, coders, claim specialty staff as well as administrative and supervisory staff.

A tremendous amount of work has gone into achieving this fusion of the former HPO with our reformulated local offices. This fusion was structurally completed on November 1, and this division has entered 2003 focused on delivering a compelling value proposition to our clients and potential clients.

The health care division made significant progress on its reorganization, which is integral to our strategy and our future success. The division now has a single common sales force that offers the combined staffing power of 41 local offices and local recruitment with a centralized travel operation. Four separate sub-brands now address temporary professionals and clients as a single brand of On Assignment health care staffing - where each of our divisional silos used to address their few hundred clients, we will now collectively address over a thousand health care clients who use some form of temporary staff from On Assignment. Where others sell over the phone, we sell face to face. And where our clients want simplification of the swarm of vendors they face, we present a single personal point of contact and a single invoice for all staff.

Our local and health care - our local health care unit stabilized by the end of the fourth quarter. The former HFS DIS and CLS divisions reported flat results following the November reorganization - this is a solid improvement over past performance and an excellent base upon which to begin 2003. Like lab support, the reorganization of the health care field force has dramatically reduced the turnover of staff and consultants. This stability of talent is crucial to increasing the effectiveness and productivity of our local offices. Local health care ended the year with 78 staffing consultants and a productivity of 13. Gross margins for the units were 33%.

The growth of our travel nurse and travel allied division slowed in the fourth quarter. This can be attributed to three factors. First, the impact of the integration of the local and travel health care sales operations, which began in November. Increased competition, that characterized the last two quarters of 2002 throughout the industry, and normal seasonality factors associated with the holiday season, particularly with travel nurse staffing. Travel nurse ended the year with 63 staffing consultants, that means account management and fulfillment staff, and a productivity of 13. Our goal is to move this health care productivity number to 20.

Our centralized support and corporate operation staff achieved important milestones in the fourth quarter. Most notable was the successful completion of the first and largest phase of our PeopleSoft implementation. As we announced in June, On Assignment required an significantly upgraded information system that would better support the assignment making process, offer more contemporary interface to our clients and provide staffing consultants and management with the information that tracks sales and provides analysis of our business activities. In December we completed the customization of the PeopleSoft enterprise platform. As of January 2, all On Assignment domestic offices and back-office successfully transitioned to PeopleSoft. Our old systems are fully off-line and the business has been transitioned to the PeopleSoft system without disruption.

We are very happy to remove this project from the list of risks that we raised in transforming the organization. And we will be working to realize the benefits of this system throughout 2003. We have not yet moved our travel operations on to the PeopleSoft platform as the former HPO will eventually benefit from the system but this conversion is essential -- is not essential in the very short-term. Instead, we have a growth target for our travel operation that when reached will signify the return to strong growth in that market and only then will we begin to integrate the PeopleSoft platform. As we do implement PeopleSoft in to our travel operations, our objective is to drive manual cost out of the system overall, thereby reducing cost and increasing efficiency and to support the tailoring of our offerings to individual nurses and clients. I am again happy to eliminate this consideration from the list of challenges attributed to my reformulation of On Assignment.

While we made this and other upgrades to our back-office functionality, we managed other costs downward in the fourth quarter. Expenses were down sequentially from 16.1 million in the third quarter to 15.3 million in the fourth quarter. While we made focused investments we have made aggressive cuts, at times of entire units and functions. Our spending has been necessary but disciplined. Our investments have been consistently and wholly focused in the management, training, stability and technological support of our revenue producing teams.

I do want to take a few minutes to summarize the year. I think this is important as you consider our progress and estimate the timing and impact of this progress on financial results for 2003. On Assignment entered 2002 with not having a CEO for just four months. In the first quarter we pursued an aggressive strategy to expand our health care activities. We identified HPO and completed that acquisition in April.

At the same time I put in place an entirely new management team. All new managers are seasoned executives with both general service industry and staffing experience and perspectives. They certainly are the most seasoned managers On Assignment has ever recruited. As a team, we addressed the chronic problems of field turnover and poor selling performance. Our first step was to explore options to cure these problems. In the analysis it became clear that full scale renovation was the most appropriate yet painful solution. We entirely restructured the assignment making organization and the management of staffing consultants from market selection to compensation to training, reporting and communication. In July, we implemented this new model in the lab support business. In November, we repeated the process with local health care staffing offices, later because it was substantially more complex to reorganize as well as consolidate multiple pre-existing divisions.

We created an entirely new information system in the form of a customized version of the PeopleSoft enterprise solution, which as I mentioned has been implemented successfully in our back-office operations and in 70 local offices. As we finish the year, we are nearing the completion of our objective to be a full-service multi-occupation medical staffing provider - a unique value proposition in this marketplace. We have of course recently put these staff and offices into their new structure and they now are intensively training on the new resources, tools and value we have created.

We're proud of what we accomplished in 2002. However, I do have to point out the difficulty in predicting the pace of recovery of a reorganized company particularly in an uncertain economic environment like we are experiencing today. In the first two quarters of the year we completed the HPO acquisition and our plans for the second half of the year to aggressively transform the company. We begin reinvesting in the necessary management, training and technology resources to recapture the organic growth of the past On Assignment.

Worth noting at the start of 2002 the financial community was predicting economic recovery in the third or at the latest, the fourth quarter. As we announced our plan and its medium term future we lowered guidance according to the cost of evolution and offered a widened range of outcomes because of the difficulty I mentioned in estimating the pace of recovery of a reorganized service business.

For On Assignment, 2003 is a year of head-down focus on execution. Our staffing consultants and executives have a stable organization and effective compensation plan, a new internal system and superior value proposition. Now we're helping everyone continue to settle into the new enterprise and make assignments. During the first half of the year, we expect that the organization will continue to evolve while still overcoming the residue of massive change and associated growing pains.

In 2003, our health care division will provide the majority of our growth. The lab division still faces a depressed economy. We do, however, expect staffing consultant productivity to increase as we strive to maintain markups and margins by delivering historically industry-leading service and accuracy. The On Assignment health care division supporting the broadest portfolio of offerings in our industry provides us with the beginning of an important strategy, which we will focus intensely upon as we go forward.

We're collaborating with our clients. I think this is crucial to survival and success in the years ahead. Today, health care staffing companies and hospitals have an adversarial relationship that fuels our clients efforts to rid themselves of staffing companies and in doing so, we act to stymie our growth. On Assignment strategy is in large part one of getting closer to clients to listen closely to their needs and priorities and tailor our service to their agenda. Offering multiple occupations from single point of contact begins to address their desire to simplify. Single invoice does the same. And by having face-to-face relationships with all our clients, we are positioned to keep listening and responding as we go forward.

Our next steps in evolving our value proposition will be expansion of the types of temporary nursing staff we offer through both organic growth and possibly a small acquisition. This is essential to all clients who need more than just one price point of nurse, instead they need a broader, multidimensional offering of short-term travelers, long-term travelers, international and permanent nurses. With this portfolio staff assembled we will be positioned to tailor solutions to client needs rather than trying to sell one product to fit different requirements. We'll be collaborating and that's the stuff of longer-term relationships, with all the efficiency of increasing revenue density from a targeted population of clients.

Our evolution is costing us more money at our current size but this is temporary. As we achieve growth, I expect the expense ratio of the business to decline as our more robust organization and systems can accommodate a great deal of growth without further investment. For your perspective sake, we estimate that our current infrastructure can accommodate more than 300 million dollars of growth without significant additional investment. Those are my updates and comments for today.

I and everyone on the On Assignment team appreciate the energy, courtesy everyone has shown in following our progress in this very busy and very complicated year of transformation for On Assignment.

Now, Ron will provide detailed financial information and then we will open the call up to questions.

Thank you, Joe.

As noted we have included much more information as supplemental financial disclosure in the press release itself. That being said, I would still like to give some highlights of the quarter and the year and give some additional detail on gross margins and operating margins and then finish up with our guidance for the first quarter.

I have already commented on the year over year numbers, both quarter to quarter and with and without HPO. Just at the consolidated level, EBITDA was down 21% from 5,863,000 in the fourth quarter of last year to 4,600,000 this year. Operating income decreased from 5,482,000 to 2,928,000. Net income decrease decreased from 3,362,000 to 1,854,000 and net margins which were 7.8% a year ago were 2.8% in the most recent quarter and earnings per share a year ago, 16 cents and this last fourth quarter, 7 cents per share.

On a sequential basis, overall revenues decreased from 74,583,000 to 66,019,000, that's 11 1/2% from Q3 to Q4. Lab segment was down 6 1/2% from 28,017,000 to 26,226,000. Health care segment was down 14 1/2% from 46,566,000 to 39,793,000. And the HPO operations, revenues were down 15.6% from 36,346,000 to 30,652,000. Excluding the results of HPO, revenue was down 7 1/2% sequentially from 38,237,000 to 35,367,000 and health care excluding HPO, health care segment minus HPO results was down 10.6% from 10,220,000 to 9,141,000. Average revenue per day in the third quarter was 1,175,000 and in the fourth quarter, was 1,073,000.

Foreign revenues decreased from 7 1/2% of total revenue a year ago, fourth quarter to 4.6%, the most recent quarter that's 3.1 million. Conversion fees a year ago were 2.1% of revenues, dropped, have dropped to .7% of revenues in this latest fourth quarter - total conversions was 460, those involving fees, 96. Total dollars of conversion fees, 427,000 average fee per conversion involving a paid fee, 4,500 dollars. Days in the quarter were 61 1/2 days.

Turning to gross margins on a consolidated basis, gross margins decreased from 32.8 to 27.6%, reflecting the mix of HPO's margins in the total aggregate business. Lab segment gross margins decreased from 32.6% to 31.6%, health segment margins, including HPO's results from 32% to 27 1/2% in the latest fourth quarter. HPO margins from 24.5% a year ago to 22.6% and non-HPO health care stayed the same at 33.1% to 33.1% both this year and last year's fourth quarters.

Impacting the margins on a consolidated basis in the quarter, the actual spread between bill and pay on an overall basis added 23 basis points. The impact of workers' comp and other benefits decreased gross margins by 46-basis points. And the lower conversion fees and other, and the inclusion of more expenses in the bill rates of, for the HPO hospital customers decreased overall gross margins by another 54-basis points for a total decrease of 77-basis points and that's, I'm sorry, that's excluding the results of HPO.

On a consolidated basis markup, the increase in basis points from the spread between bill and pay was plus 46-basis points. The impact of workers' comp and other benefits was down 686-basis points. The impact of fees and expenses was up 126-basis points and the overall decrease in margins from a year ago was 514-basis points.

Margin on a sequential basis, the margins decrease was 167 basis points on a consolidated basis and that splits between a compression on bill and pay of 67 basis points, some impact of workers' comp and benefits, 8-basis points and impact of lower fees, 92-basis points, overall drop of approximately 1.7%. Bill rate, lab support in the fourth quarter, $24.14. Health segment excluding HPO 23.26. Nurse travel nurses, $66.72. Allied, $60.53 and local health care distributed, delivered by HPO, $30.01.

Operating expenses on a consolidated basis increased from 20.6% to 23.2%. Number of account managers was up 6.7% versus a year ago. Number of employees down 6.7%. Operating margins 7.8% a year ago to 4.4%. And latest quarter, net margins 4.9% to 2.8%. Cash and equivalence is 33,991,000, that's down 62%. Impacted mostly by the cash consideration in the HPO acquisition and to a lesser extent by the stock buyback program. Accounts receivable, 32,781,000, day sales outstanding for the company at the ends of the quarter were 45. On Assignment excluding HPO, the DSO was 48 including and HPO by itself was 40 days DSO. Equity is up 75% to 201,047,000. Capital expenditures during the quarter, 1.6 million. Depreciation and amortization, total of 1. 1.672,518,000 depreciation, 1,154,000 and amortization of intangibles. Almost done.

And then lastly, in terms of first quarter guidance which we didn't address in our press release, but we're addressing today, we expect at this point revenues during the first quarter of 2003 to range from 60 to 62 million and earnings per share to range from 1 to 2 cents. Margins in the quarter were just reporting 27.6%, we expect margins in the first quarter of this year to average closer to 27% and we expect SG&A to increase to levels closer to Q3 as we begin to add spends in relating to the amortization of the PeopleSoft investment and other expenses necessary to achieve our plans in 2003.

Our tax rate assumption has changed slightly from 38% to 39%, reflecting lower cash balances and therefore, lower interest, tax-free interest income. Capital expenditures expected for 2003 are $4 million total. Half of that relating to Peoplesoft and the rest normal consolidated capital expenditures for the combined operation of On Assignment and HPO.

That's it for our prepared remarks. And now if our call coordinator could open it up for questions, we would be happy to take those at this time.

At this time I would like to remind everyone in order to ask a question, please press star, then the number 1 on your telephone key pad. We'll pause for just a moment to compile the Q&A roster.

Your first question comes from Marta Nichols (ph) with Banc of America Securities.

Good morning, thanks.

I'm wondering if you can maybe address, this is probably implicit in the guidance, I haven't worked that through my model yet. But can you give us a sense of what you think your base level of SG&A is on a going-forward basis, maybe on a quarterly basis? If we look at for example your September level of operating expense, it was a little over 16 million dollars. And even with the increase in expenses in the fourth quarter for things like the nursing retention program and some incrementals cost for the new management structure and so for, your SG&A levels went down. I'm wondering if we can get some sense of, you know, what levels of SG&A we should be expecting on a going-forward basis.

Well, just in rough terms, Marta, we would expect in the first quarter of this year, approximately 16 million. You're returning to the levels of September, of the September 30 quarter. The major contributors to that, I mean we have made all the cuts that we can. We have, you know, an organization and an infrastructure in place that can sustain the growth that Joe alluded to.

But we really can't make any other cuts and the net of what we cut and what we have added gets us back to this Q3 level mainly because of amortization of PeopleSoft, the expensing of people who were working on the PeopleSoft project who had previously been capitalized as part of that, you know, development process. Some other projects, new equipment and depreciation relating to the new equipment from the PeopleSoft. So it's not, it's not, certainly not head counting, it's certainly not, you know, frivolous spending in any way, but it reflects things that we didn't have to deal with in the fourth quarter. The net of which is to increase our SG&A line to about 16 million in Q1 '03.

Turning to expenses in the HPO business, I'm wondering if you can maybe speak to why particularly if the decision to offer the retention bonuses to nurses in the fourth quarter was premeditated, how that was contemplated or whether it was contemplated in the guidance that you gave in October or whether there's, you know, some aspect of having offered those retention bonus that you anticipated somehow to make up on the revenue line and if so, why that didn't occur?

Hi, Marta.

The retention schemes coming to year-end are something that the short-term in its brief life that the short-term travel activity has always engaged in, and we intended to do so this year as the company has done in previous years. What really happened at the end of the year, I think, is that the industry really started upping the ante with nurses so for all the reason that's short-term, for the other 50 weeks of the year, can be a remarkably attractive and compelling proposition to the biggest population of nurses for all the same reasons, they can be sort of moved and recruited with equal ease at year end. And so the retention program that we actually engaged in ended up being quite a bit more robust than what we thought we would need to do something in to the fourth quarter.

Okay. So I guess the point is, you didn't anticipate it back in October and even though you embarked on this retention program, I'm guessing early in December, can you maybe speak to why it took until, you know, I guess the end of January to get a sense of how, what the impact was going to be on earnings given that you were - obviously spending levels were a lot higher and revenues weren't covering that?

I think, you know, in terms of when do you decide to up the ante and not to speak too much this morning in metaphors, really very difficult to understand where your program is going to need to end up in a year like this until everybody plays their cards and that means the major competitors in the industry segment. So that's what's attributable as much as anything for late November and really December based decisions as to how we would engage in a client and nurse retention strategy.

The basis for doing so, by the way, is directly related to the fact that what we're doing now is turning to our existing clients as much as we are new clients and addressing them with occupations that they don't perhaps buy from us today. If you look across the health care book of business for On Assignment which as you know has never collaborated between divisions until now, moving health care staff in, despite that depending upon which market you're in, we have between 5 and 20% of our health care clients have more than one occupation from us. So on the nurse side, we were interested in not losing clients as we were in not losing nurses and that means keeping nurses on assignment through the new year.

But in terms of what the magnitude of the program needs to be, that was not possible to know until really until the beginning of December, as competitor companies started to play their hands for nurses.

Okay. And then if I could just have maybe one last question taking maybe a bigger picture view, you have obviously made a tremendous number of changes to the cost structure over the last year, year and a half. And, you know, assuming at this point that the cost structure has been kind of largely fixed that you kind of know what your numbers are going to be on the cost basis going forward and there isn't anymore incrementally added on the cost line, it sounds as though your business is still extremely competitive across all areas and I guess my concern is, you know, could we see the incremental shoe that drops being something relating to pricing? Meaning at this point you have been able to maintain your gross margins for the most part maybe with the exception of nursing. Is there a chance that given the competitive nature of the rest of your business lines, all of your business lines that you have to begin really tweaking pricing to generate demand?

Well, the short answer is, is that we really only are watching that actively in the HFS occupation. We still have a real slice of variegated demand for HFS occupations. In certain markets we're able to mark them up at historic levels; in other markets they have clearly become commodities. As you know and as we have been very forthcoming through 2002, we continue to watch HFS very closely.

So I would say that we don't have any pre-formulated boundaries about what margins should be or need to be in HFS, and we expect to be able to explore that and other questions like this in a lot greater detail based on the strength of our regional sales managers, which is, you know, the regional sales managers the company sports today are - they're no longer graduated staffing consultants. Some of them are, but all of them are either terrifically successful as pre-existing graduated staffing consultants or they're professional regional sales managers that the company has never had. That, as much as anything, will give us a degree of insight in to much more complicated questions about margin than On Assignment has ever had to face and answer in the past.

To circle back around to the original question, the only place where we really see at the moment that we see, that we may be adjusting margins is with HFS. If we are finding through the course of the year that HFS, which is a popular service to many clients, that HFS can grow more aggressively in terms of numbers of clients and that we can follow those HFS occupations up with discussions and sales of nurses and allied occupations, then HFS may very well be in the line where we take margins down.

Otherwise in health care, the pressure that you feel back at the moment has less to do with whether the markup rate is 5% one way or 10% the other way and a lot more to do with just the push-back from the client base against staffing companies in general. That's why we're much more focused in many ways on the strategy of how we're positioned with the client rather than just what the markup rate is. As far as lab is concerned, you know, we're holding fast to those margins. There's no indication to us in lab that substantially changing our margins would substantially kick the business forward at this point.

Okay, thanks.

Your next question comes from Jim Janansky with Janny Montgomery (ph).

Good morning. When you look at, I know it's difficult to predict, but when you look at a run rate and the inflection point in your business, economics aside and let's look at integration of your businesses, et cetera, at what point do you think we can expect to see leverage in the business and, you know, get us back at or anywhere near a run rate that we had in the December quarter?

Well, in terms of our expectation at this point, you know, if we have established a positive trajectory, back to Q3 levels or back to being able to replicate the fourth quarter levels, you know, 66 million, you know, by the second quarter, then I think well, everything has taken as good as traction as we would expect. So I think we're in the trough and coming out of it, you know, we would expect sequential improvement in the second quarter versus the first quarter. Whether it gets all the way back to 66 million or not, you know, it's difficult to see. There's no visibility in terms of what we have control over and the expectations of our operating people.

Sure.

To think we can grow in the second quarter.

The 66 million in revenues would then, I mean we would have to take into account the 16 million dollar run rate of expenses, right?

Right.

Okay. And second, I think something that was missing from your comments about your travel nurse segment that is different from the rest of the industry is the demand question, that there is clearly a push-back from hospitals on the demand side as well as a significant push-back in pricing in some areas. I mean, I know that the hospitals might have difficulty getting any travel nurses, but we're hearing some providers are trying to get 30% year over year reductions in pricing. Can you comment on those two?

Yeah. I mean the demand in the fourth quarter, which is just, if we take that as a snapshot, has really been affected by two things. First, it's been diluted by a lot of start-up competitors. And, you know, the beauty and the curse of a service business, particularly in health care is, is that a local small start-up business will have personal relationships with local facilities and can provide a pretty high level of service. The prospective on the local businesses is, however, they can't sustain that level of service, they don't have the resources to grow, and at one point they're offering to the employees becomes insufficient. It doesn't prevent them, though, in the short-term from redirecting demand as facilities look for all sorts of different alternatives to reduce their staffing costs.

Facilities are also pushing back, I think much more aggressively than and in a much more organized fashion than I think anyone expected them to, certainly in the fourth quarter. Hospitals, as you know, have always had the ability to tell a floor, a department or a division to just get by with what they have got and that's that. There's never been a mechanical relationship between revenue and staffing levels. That at times, of course causes a lot of their bad relationships with their working nurses. All that is to say that I think that the facilities to a degree are pushing back?

Our response to this, however, is really to do two things. First of all, we have a much better knowledge today of which facilities or for which facilities temporary staff period, much less our short-term nurses in general makes sense and we are now targeting to a level that neither company has ever engaged in the past. In order to do that we have brought on board full-time a very experienced ex-hospital chief operating officer who is helping us formulate the value proposition for clients. So, you know, we're in a moment where the market is continuing to find itself in terms of clients, deciding how they're going to deal with staffing shortages, it is inevitable that we're going to need to use temporary staff, but the market certainly is a lot messier now than I think it's going to be in six to nine months.

In 6 to 9 months our view is, is that both survival and success as I have spoken earlier is only going to be offered to those staffing companies who are starting to get a lot closer to what their clients need in terms of value and matching of temporary staff and temporary staff expenses against need. So that is to say there will be some degree of pricing pressure in the industry, but with 6,000 hospitals and 1.4 million nurses, too much push-back by a facility simply cause it is nurses and staffing companies to redirect resources toward other facilities.

Okay. Okay. Moving on to use of cash, you still have a substantial buyback program in place, you mentioned a little bit off to the side about acquisitions. Do you think an acquisition versus a buyback is a better use of cash here? Or do you plan to do both with the stock at these levels?

Well, we would certainly want to buy back some stock when we can, which will be next Monday when we're back in an open window for doing that. The remaining authorization is 1.4 million shares. So if we did the whole authorization at the current level, I mean it's $7 million, it wouldn't impact our overall cash reserves in terms of opportunistic things on acquisitions. The discussion on acquisitions, it would be small, strategic, tuck-in kinds of things to get us more share, more penetration in a particular market, not into a new business, not even a new health care vertical, but really expanding what we have. So both, you know, judicious use of cash for both reasons is buyback and acquisition on the horizon - clearly the question as to which is better, our attitude here over a year ago before the HPO acquisition was that we wanted to preserve our cash for that sort of an opportunity, rather than exhaust the buyback authorization at that point in time. So, you know, sort of keeping the powder dry argument is still in place here but we'll certainly be doing selective stock purchases starting next week.

Thanks, that's helpful. Final question, Joe, do you think that everything is in place internally, you know, in terms of restructuring and reorganizing and integrating currently? And is there anything that would, you know, allow you to change your mind and change a course of direction and maybe do another type of restructuring or integration or do you really think that, you know, 2003 is a fresh start with focusing on execution?

2003 is a fresh start focusing on execution, absolutely, well described and that's where we are. As you consider On Assignment and where we are on the curve, the thing that we would ask is that people remember that that integration and all the other very energy demanding verbage you use, all of which we have done, were finished, was finished in December which it's important even for our own staff to remember that that was some 45 days ago.

So there are, there is still adjustment time, there's still training time, but, you know, the changes are done, I think we're very pleased with the fact actually that we told people, you know, 2002 is the reformulation year, it is going to take all year, it hasn't taken any more than that. The only thing that we'll be doing going forward, and this is tweaking, but I want to answer your question carefully, the only thing we'll be doing going forward is continuing to take this company, which has always driven field compensation on the basis of head count, and now with our much more sophisticated collection of staffing consultants and regional managers, we will, with PeopleSoft now in our hands through the course of the year, we will undoubtedly be working to tweak incentive compensation in all the staffing activity areas to address gross margins. But that's a subtle, you know, through the course of the 12 months way of helping us both preserve and improve our margins in the field. That's the only thing we're going to do. Otherwise, it's just head down with our value proposition now.

Okay, thank you.

Sure.

Your next question comes from Anad Desai (ph) with SAB Capital.

My question regarding the travel nurses, you attributed the slowdown to the impact of the integration of the sales force, competition, and the normal seasonality. For each of those, how much would you attribute to the first one, the integration of sales force versus for the general industry and pushback you were talking about? And in terms of competition, are you seeing competition in also this sort of short-term travel, the four-week travel nursing that you offer? Or are the longer, the bigger 13-week travel companies now offering the shorter-term travel nurses also? In terms of seasonality, what was the sequential either growth or decline last year from the third quarter to the fourth quarter? And lastly, I guess you gave first quarter guidance and can you break out what, of that guidance what the HPO guidance would be?

Okay. Let me make sure I can remember all those, and I will start with the first one first. The fourth quarter downturn, internal distractions of consolidating the sales force and market conditions, probably 50-50. What was the second question? That was four questions ago.

You also attribute it to increased competition, particularly from local -

Right, right. Today the longer-term travel nurse business in our business are very different businesses in the sense that we address different populations of nurses. So we don't find ourselves today at least from our perspective bumping heads with larger longer-term travel staffing companies as the source of competition there. There are other short-term travel companies and we compete with them and we compete with local start-ups as well.

Just to be clear, the local start-ups are offering also this shorter-term offering?

There are some that do that absolutely, I mean if you think about what start-up means today, start up means a web site and a telephone and you're in business.

So local start-up, you know, they can run sort of a - quite a reasonable income statement for a local start-up starting if they get up to 30 nurses working.

I guess my question is, when you attribute the decline to the local start-ups, is that, what do you mean? Do you mean on the shorter term?

Yes.

Okay, so it's not from the longer term, it's really you're offering the same pie but shorter-term travel nurse?

To the extent that there are, you know, big black and white categories, I mean there's all nature of offers being made to nurses and arrangements being made with facilities, but it's easier if you answer the question and say, we compete with other short-term opportunities and not with long-term ones and almost anybody can offer a nurse an arrangement if they want to set up a staffing arrangement.

Okay. And in terms of normal seasonality, do you know what the revenue growth or decline was from the third to the fourth quarter?

This is Ron Rudolph speaking. I don't have the reprice numbers for HPO other than what we reported for fourth quarter year ago was 29, over 29 million. A year ago there wasn't a sequential decline, I mean in the year of 2001, HPO revenues were about 81 million compared to, you know, less than a third of that the year before. So growth rate at the time were 200%. What I do recall about the seasonality last year is that HPO month to month sequential decline from November to December was on the order of 15%, and that was with some level of incentives to retain nurses, through the holiday period and so when we look at that doing due diligence a year ago, we said we need to do more to mitigate that drop in nurses. So sequential seasonality based on HPO history a year ago, you wouldn't have detected it except in that month-to-month pattern, but not in the quarter.

Do you know what it was this year, November to December?

I don't have that number off the top.

Okay.

In terms of splitting out guidance, the guidance that I gave is all we're going to do at this point, we won't split the guidance out by segment or operating division.

Okay. Thank you.

Next you have a follow-up question from Marta Nichols of Banc of America Securities.

Thanks, just a quick follow up question. I'm wondering if you can tell us roughly what GNA is expected for this year, I think you mentioned cap-ex at 4 million but I know you're increasing the GNA. What is the run rate for the year look like?

Well, most of the - obviously most of the amortization is related to the intangibles in the process of doing the purchase price accounting for HPO. So we have got another, you know, 3 million or so of intangible amortization to do, actually closer to 4 million in tangible amortization. This year depreciation should increase slightly because of the amortizing PeopleSoft, both the project cost itself and the hardware, so I would expect that our depreciation, which we reported, you know, 500,000 in the fourth quarter, probably increased to about 800,000 on a quarterly basis. So the sum of all, that you know, would be 3 million in appreciation and another 4 million in amortization of intangibles for 2003.

So 7 million total?

Yes.

Okay, great. Thanks.

Your next question comes from Chandy (ph) Smith with CIBC World Markets.

Good morning. Are you getting a sense that - you mentioned biotech in particular was weak on the scientific staffing side. Are you getting a sense that any of the markets or industries that you're in are stabilizing or turning a corner?

You're talking about lab support obviously.

Yes.

And the short answer on that is no. All of those segments are, have economic difficulty, even those segments that dropped things that go up under the, you know, sort of the cloud of the threat of war like personal care production and food and beverage, nevertheless everybody is being very, very frugal and cost conscious and that's impacting the demand for lab support.

Okay. And what's your typical seasonal decline for Q1 historically in lab support?

its run anywhere from 5 to 8%.

Okay.

I mean if you look in every Q4, Q1 transition in On Assignment's history, you would see, except in the year 2000 when we had, you know, European expansion and Leap Year and everything pushing Q1 numbers up, that's sort of the order of magnitude on the lab seasonality.

Would you expect anything significantly different from that this year?

No, no.

Okay. And then you mentioned you finalized some of the branch closings that you had been working on last year. So how many branches by segment, I suppose, if you have that?

I don't have a good count to give you on branches today. I mean we, you know, the old methodology of counting branches as you know one facility could have - one physical location could have three branches and we're reporting hundreds of, you know, hundreds of branches and 30 branch openings every year, I don't have an accurate number to give you right now on what the breakout is. We have 41 health care offices, we have approximately, you know, we still have total of 80 markets. So worldwide we have about 80 branches in lab, including ten in Europe.

Okay.

That's rough orders of magnitude.

In terms of physical locations we closed 13 physical locations, several in Europe, I believe the breakout is physical locations in lab and by the end of the first quarter, 7 physical locations in health care.

Okay. Great. Thanks.

Your next question comes from Van Brady (ph) with Presidio (ph) Management.

I'm kind of new to the story and I would appreciate it if you could tell me just what your temporary nursing offerings are. We talked about four-week travel. You're not in the 13-week travel at all?

No, we're not. We provide short-term travel nurses, which we believe they address a specific portion of the demand that any facility has for highly variable staffing demand. We certainly intend to compliment that through the course of the year with the ability to deliver a longer term nurse. In many ways, a short-term travel nurse is a tremendous door opener in to a facility but it needs to be followed up by the offering and by the institution of lower bill rates and longer relationship nurses.

When you say that retention of bonuses have always been part of the business, you're referring to just the four-week part of it where people will take a four-week assignment ending right before Christmas and then go home? Whereas a 13-week would have signed up to extend through the whole quarter, is that the difference?

Yes. I mean everybody is in the retention game over the holidays, whether it's 13-week travel or short-term travel. But the treasure is a little more intense on short-term travel because it's easier for them to elect to not work for a brief period of time.

You're not doing any per diem either?

We do not do per diem.

Thank you very much.

Thank you.

Your next question comes from Ann Hawkins (ph) with Lab Support.

Hi, I had two questions, actually. The first one is what kind of changes, if any; do you anticipate over the next few months in the field management as far as either the structure of the territories or the size of the field management force?

We don't expect any further changes, Ann, in the structure of the field management.

Okay. And then my other question was, what plans have been discussed regarding career growth opportunities for the staffing consultants, if any? And what impact do you see that having on the continued reduction of the staffing consultant turnover?

Well, it's a good question to ask. And I think that, you know, certainly with integrated sales operations and with the new field management structure, there's probably more vertical opportunity than the company has ever had before. And we believe that's a substantial driver of a reduction in turnover. As you personally know, I'm someone who has always believed that the turnover within the company is problematical, and I think that that is only ever in part due to compensation issues.

At this time we would like to once again remind everyone to ask a question, please press star, then the number 1 on your telephone key pad.

At this time there are no further questions.

Good. Thanks, everyone. We really appreciate the energy and the time and the focus you have put on the following us through the year. We know it hasn't been an easy task to follow us in 2002. We hope that in 2003 we'll make it a rewarding one to have done so. And we look forward to speaking again next quarter. Thanks very much.

Thank you.

This concludes today's conference call. You may now disconnect.