ASGN Inc (ASGN) 2004 Q3 法說會逐字稿

Good afternoon. My name is Miles and I will be your conference facilitator today. At this time, I would like to welcome everyone to the On Assignment third-quarter financial results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) It is now my pleasure to turn the call over to Mr. Ron Rudolph, Chief Financial Officer. Sir, you may begin your conference.

Thank you Miles. Before we begin, I would like to remind everyone as we do each quarter that our presentation contains predictions, estimates and other forward-looking statements representing our current judgment of what the future holds. These include words such as forecast, estimate, project, expect, believe and similar expressions. We believe these remarks to be reasonable but they are subject to risks and uncertainties that could cause actual results to differ materially from these forward-looking statements. We describe some of these risks and uncertainties in today's press release and in our filings with the Securities and Exchange Commission. We do not assume the obligation to update any statements during this conference call.

Now I would like to turn the call over to Pete Dameris, Chief Executive Officer. Pete?

Thank you, Ron. Good afternoon. I would like to welcome everyone to the On Assignment 2004 third-quarter earnings conference call. With me today are Ron Rudolph, Executive Vice President and Chief Financial Officer; Emmett McGrath, President of Lab Support U.S.; Shaw Mohr, President of Healthcare Staffing; and Michael Holtzman, Senior Vice President of Finance.

During our call today, I will give a review of our operational highlights and numbers followed by a more detailed discussion of the performance of our operating segments by the Presidents of each of those segments. I will then turn the call over to Ron for a more detailed review and discussion of our third-quarter financial performance, the charges we announce today and our financial guidance for the fourth quarter of 2004. We will then open the call up for questions.

Consolidated revenues grew sequentially for the first time in four years. Revenues in the third quarter were 49.6 million, compared with 46.3 in the second quarter of 2004, and essentially flat with the revenues generated in the third quarter of 2003. Consolidated margins were 26.8, which represents an 80 basis point improvement from the second quarter of 2004.

The improvement in gross margins was primarily due to Lab Support and MF&A groups, our highest gross margin businesses, representing a larger percentage of our total revenues. Higher conversion of permanent-placement fees and improvement in our cost of Workers' Compensation insurance. Our loss per share was $1.28 compared to 12 cents in the second quarter of 2004. Our loss per share before charges was 9 cents.

The charges we announced today are set out in the table attached to our earnings release. Ron will go into greater detail regarding the charges later in this call. To fully appreciate the performance of our company during the third quarter, investors should evaluate each operating groups' performance separately. Our Lab Support segment generated 22 million in revenue, up 8.7 percent from the second quarter of 2004, maintained a 31 percent gross margin, billed 1346 clients, up from 1188 at the end of the second quarter of 2004, added 324 new or reactivated clients, and increased the average number of temporary professionals on billing by 117 in the quarter.

Our European operations, which were reported as part of our Lab Support segment, grew 11.8 percent sequentially over the second quarter of 2004, generated 2.7 million in revenues, and maintained gross margins of 36.6 percent. Our top 10 customers in Lab Support represent less than 10 percent of the total Lab Support segment revenues, and our average total number of staffing consultants at the end of the third quarter was 102, up from 97 at the end of the second quarter of 2004.

The Medical Financial & Allied Group generated 8.3 million in revenues during the quarter, up 26.5 percent from the second quarter of 2004, achieved a 29.6 percent gross margin, billed 752 clients, up from 644 at the end of the second quarter of 2004, added 245 new or reactivated clients, and increased the number of temporary professionals on billing by 132 in the quarter.

Our top 10 customers at MF&A represents less than 14 percent of total MF&A revenues, and our average total number of staffing consultants at the end of the third quarter was 91, up 18 from the 73 at the end of the second quarter of 2004.

The Nurse Travel Group generated 19.2 million in revenues, down 1.4 percent sequentially from the second quarter of 2004, and up 6 percent from the third quarter of 2003. Gross margins were 20.7 percent, up from 19.7 percent in the second quarter of 2004. Total number of nurses on billing were 480 at the end of the third quarter, compared to 499 at the end of the second quarter of 2004, and total number of clients billed was 102, up from 90 at the end of the second quarter of 2004. During the quarter, we added 28 new clients. Our top 10 clients represent 69.5 percent of total revenues for Nurse Travel. This compares to 70.7 percent at the end of the second quarter of 2004.

I would describe each of the end markets we serve except for Nurse Travel as stable and productive. Our Nurse Travel market still remains flat to down with most industry analysts not predicting year-over-year growth until fiscal year 2005. Despite the challenging Nurse Travel industry operating environment in which we derived 38.8 percent of our total revenues, On Assignment on a consolidated basis was capable of growing 7 percent sequentially over the last 90 days, without sacrificing its solid gross margins.

During the quarter, we completed the reorganization of our senior management team and continued to flatten the corporate organization. Year-to-date, we have eliminated 7 non-revenue generating executive positions at an approximate annual savings of 2.4 million, some of which has been reinvested in revenue generating resources.

In September, we promoted Shawn Mohr to President of Healthcare Staffing Services. Shawn now oversees both MF&A and Nurse Travel Groups which affords us better coordination in SG&A expense levels. Since taking over, Shawn has significantly streamlined both organizations and focused the field management more clearly on daily revenue generating activity.

Emmett McGrath, our new President of Lab Support U.S. took over September 1 and is already making a positive impact on that group.

Going forward, our focus will remain on supporting our core offerings and growing our new service lines that exist harmoniously with our core offerings. We are very focused on returning to appropriate levels of profitability as soon as possible. With regard to staffing and consultant productivity, we are currently averaging $57,000 gross margin, per staffing consultant. As we continue to turn the business around, complete our European implementation and our recently hired staffing consultants increase their tenure with the Company, we would expect an approximate gross profit dollar per staffing consultant to be around 69,000 per quarter.

Because today more of our staffing results are focusing exclusively on sales or fulfillment versus both activities, we felt gross profit dollar per staffing consult was a more meaningful metric than tracking billable personnel per staffing consultant. Ron will speak further to this topic during his segment of the call.

I would now like to turn the call over to Shawn and then Emmett for a more detailed review of operations. Shawn?

Thank you Peter. On Assignment Healthcare Staffing consists of 2 operating units. First is MF&A, our Medical Financial & Allied Group that focuses on placing professionals in a variety of Allied medical disciplines, including diagnostic imaging, health information management, Clinical Lab, respiratory therapy and other non-nurse, non-doctor positions, primarily from a network of Local Healthcare offices throughout the United States.

Our second offering is Nurse Travel focused on 4 to 13 week travel nursing assignments. Let me start with our MF&A group. MF&A represents 30.2 percent of Healthcare Staffing revenues. This line of business increased 26.5 percent sequentially from 6.6 million to 8.3 million. Since implementing and executing on our revitalization plan starting in Q1, the Local Healthcare group has made great strides. Previously this business unit was experiencing significant revenue declines quarter-over-quarter.

Weekly revenues are now up, 58 percent off the year low, temporary employees build are up 57 percent off the year low, and client count has increased by 103 percent off the year low. All of this has been accomplished while maintaining margins and bill pay spreads. The operational goals in this group are simple.

The first is to hire, train and retain the best talent in the market space. The second is to focus on driving increased levels of revenue generating activities. And the last is to migrate into higher margin, higher bill rate healthcare disciplines while continuing to grow our core service offerings.

Let me provide you with some tangible insight on each of these goals. We've hired 17 people over the last 90 days; for perspective on January 1, 2003, we had 97 staffing consultants. By the end of 2003, we were down to 62 staffing consultants. As of the start of Q3, we were up 27 staffing consultants to 89, a year-to-date increase of 43.5 percent as part of our continuing revitalization plan put in place at the beginning of 2004.

We focused our corporate recruiting team on attracting talent with previous staffing experience, preferably healthcare staffing experience, providing these new hires with world class staffing specific sales training and retaining them through an attractive incentive based compensation program and continued career development training. This is much different On Assignment's old approach of only hiring healthcare people with no staffing experience and teaching them the business.

Aside from the delivered upon quarter-over-quarter revenue growth we are experiencing, other tangible results of hiring seasoned and proven staffing consultants have included a significantly reduced turnover rate and a much more sales force focused atmosphere in the field.

The second goal was to increase levels of revenue generating activity. Staffing is not rocket science. If you do a certain amount of activity, you will get a certain amount of results. In the last two quarters, we reintroduced KPIs, or key performance indicators within the Local healthcare markets. KPIs measures a few key activities like the number of sales calls weekly and the number of candidates interview. KPI has helped to focus staffing consultants on ensuring that they are during the right kinds of activities day in and day out as well as driving up the number of activities that are revenue generating in nature.

Last was the goal of migrating into higher margin, higher bill rate healthcare disciplines. We started 2 new disciplines within the last two quarters. First, is our HIM, or health information management business unit. This group focuses on placing health information management professionals which includes credentialed hospital coders, auditors and interim managers. These occupations and skill sets are in very high demand.

Since launching our HIM business line, we have seen steady and sizable growth with growth margins approaching 40 percent and average bill rates exceeding $65 an hour. Although this currently is a small part of our overall Healthcare Staffing revenues, we expect this business line to become a larger part of healthcare revenues in 2005 as we gain traction in this sector.

The second discipline we've moved into is what we call local RN, or local nursing placement. Local RN is different from Nurse Travel in that we utilize our local office infrastructure to place nurses that live within a 50 mile radius of a hospital, physicians group, clinic, or other health care facility. These nurses drive to an assignment from home daily and don't have the expenses associated with travel like airfare, housing and rental cars. For this reason gross margins in this business line are generally higher than that of Nurse Travel.

The local RN business unit will not be placing nurses on per diem daily shift basis, but will focus primarily on assignments that last 13 to 26 weeks in length opposed to 4 to 13 weeks in length in for Nurse Travel. Although we are very early in this business line rollout we have already seen promising signs of traction and demand. HIM and Local RN fit well into our existing Healthcare Staffing business model and we can leverage synergies with our existing business lines to help grow these two new disciplines.

These new business lines complement our MF&A business and will help to pave the way for additional increases in revenue and margins as we continue to gain market share.

Now let me turn to our Nurse Travel Division which represents approximately 69.8 percent of Healthcare Staffing revenues and was essentially flat quarter-over-quarter. Since taking over the reins of the Nurse Travel division a couple months ago I have focused on executing on several initiatives to drive up revenues while maintaining or increasing margins.

Initiative one is to reallocate resources and increase our field sales recruiting productivity. We've successfully done this in short order taking out an annualized 1.4 million in non-revenue generating personnel, and reinvesting half that amount back into the business by hiring a dozen sales recruiters and account managers. We've promoted Tom McKenna (ph) from Regional Director of MF&A to Senior Vice President of Nurse Travel. Tom has over 20 years of healthcare experience most of which is in sales and operational management roles within the Nurse Travel sector. Tom now resides in Cincinnati and works out of our Nurse Travel headquarters to provide daily hands-on management for this team.

Initiative 2 is to develop a dedicated quality assurance team. Previously, our recruiting team was tasked with managing the quality assurance process within our candidate pool. We've moved this time-consuming function from our recruiters and have successfully implemented a centralized quality assurance team, taking the burden off of the recruiters and onto a group solely dedicated to handle the tasks associated with verifying licenses, certifications and the multitude of items required before a nurse can be placed On Assignment.

This change will continue to ensure that we maintain the highest level of quality in our nurse candidate pool while at the same time increasing productivity amongst our recruiting team which is currently spending in excess of 30 percent of their time on these nonrevenue generating tasks.

The last initiative is to diversify our client base. Our goal is to become a mile wide and a foot deep, not a foot wide and a mile deep when it comes to client count. Currently our top 10 clients represent 69.5 percent of revenues. We need to increase our revenues amongst existing clients where Nurse Travel spend levels are high but our share of the spend is low. We also need to increase our new client count each quarter. We have already trained and hired new account managers on gaining market share within existing clients and have hired additional sales personnel to drive new client opportunity. I look forward to seeing the results of our existing new colleagues on this client count category.

Simply put we're executing across all healthcare business lines on doing the basic blocking and tackling that will help drive results. We're increasing sales capacity, streamlining our operations and getting our entire team focused on revenue generation. The overall sequential increases this quarter over last in On Assignment Healthcare are early indicators that our activity and execution strategies are already beginning to create results. I am hopeful that this execution will continue as we gain traction with new and existing clients and continue on our path of growth and expansion.

With that, I will pass the call over to Emmett McGrath, our new President of Lab Support U.S. Emmett?

Thank you Shawn. To begin, I first want to thank Peter and our Board of Directors for the opportunity to be a part of On Assignment Lab Support. As a former competitor of Lab Support I admire their history, business model, success and most importantly their commitment to the staff scientific space. I truly am thrilled lead Lab Support U.S. and look forward to a successful and rewarding career.

Ending the quarter, Lab Support U.S.'s revenue increased 8.3 percent without sacrificing our hard earned margins. Our revenues for the 9 months ended September 30, 2004, were just over 54 million. Gross margin for the quarter was 30.17 percent; our 9 month average is 29.6 percent. We continue to see quarter-over-quarter improvement in gross margin, the highest in this industry.

Investments made in sales operations combined with effectiveness in recruitment and business development resulted in our highest key performance indicator levels this year. The average number of temporary scientific professionals grew by 8 percent in Q3 over Q2; overall revenues grew 14 percent Q3 over Q1. We increased our number of clients by 14.7 percent Q3 over Q2, adding 106 new clients and 129 reactivated former customers, a total of 235 additional customer engagements in a mere 90 days.

In addition, we reached our highest level of direct hire placement fees in 2 years, a 103 percent increase over Q2, and a 288 percent improvement over Q1.

We are certainly on the right track sticking to basic fundamental sales and recruiting technique and commitment to our core competencies continues to drive positive results. Our market leaders, sales and recruiting staff are to be commended for achieving another quarter of sequential growth.

Early into the fourth quarter I'm encouraged with our positive revenue trends; increase in RFPs and job order flow. As you know in Q4 we are faced with seasonal challenges related to the holidays, fewer actual work days and customer shutdowns which result in less billable days. Notwithstanding these seasonal challenges, we continue to increase our pipeline of orders and candidates and core markets remain stable and continue to offer opportunity for growth.

As the new leader of Lab Support U.S., I'm committed to ensuring that we build upon our momentum. In an effort to add vitality to this positive growth trend, sustain our margins, increase profitable growth and ultimately capture more market share, we continue to strategically enhance our service offering. As we did with clinical research, we're committed to improving our competitive position.

In support of this, my executive team and I conducted a thorough analysis of our business operations, examining our customer base, our processes, temporary professional mix and services. We've taken a forward focused approach focusing on profitable revenue generating initiatives specifically we are implementing the following to further enhance our service offering.

One, direct hire; two, large accounts and BOP strategy; three, higher level placements migrating into higher bill and GM skills; four, existing customer development.

Number one, direct hire. As I stated earlier, Lab Support realized its highest level of direct hire or permanent placement fees in Q3. This was achieved absent of any strategy or incentive plan. Our potential in this area is good. Direct hire will be a strategic complement to our temporary staffing service offering. Though this is not a new concept to Lab Support, our approach is fresh, and level of commitment greater. Our direct hire program includes a new incentive plan and performance metric. We will utilize our existing staff base in support of this effort incurring no additional cost.

Being that the majority of our scientific candidates prefer a direct position, this enhancement is a welcome strategy to our staffing consultants, customers and candidates. Furthermore as we engage more large accounts where we were place in excess of 20 to 30 temporary professionals, direct hire fees will help offset potential margin compression.

Number two, large account strategies. In Q3 we saw a spike in RFPs from this prospect base. Our large account strategy, another welcome enhancement to our service offering will enable us to compete for high-volume opportunity, predominantly in the middle market arena. Since inception, Lab Support has not had a strategy to develop it large user accounts, but large accounts strategy will further secure our position for competitive threats, specifically the trend of vendor, consolidation and outsourcing.

We have assembled a team to address this area. In addition to obtaining primary status with our larger customers, we are developing a strategy for the VOP, vendor on promise model. Our target being a vertical approach centralizing the procurement and management of a pure scientific contingent workforce. Positioning Lab Support as a primary or VOP provider increases job order flow and helps forge stronger customer relationships.

Three, migrating into a higher level of discipline. As Shawn stated earlier there exists opportunities to migrate into higher margin, higher bill rate position at Lab Support, so this has been a part of our service offering. There is plenty of room to capture more of this population on a contract and direct hire basis. We currently are seeing gains in this area in support of clinical trial, engineering, and in general senior level science need from our biotech, medical device and pharmaceutical customers.

Other lesser served vertical markets that demand such talent include specialty chemicals, environmental, and petroleum, all of which we are developing.

Four, existing customer development. Through Q3, Lab Support billed over 1000 clients, each client offers potential for additional opportunity for scientific talent. We're designing training techniques and materials that will aid our sales force to expand our presence at existing customer sites. Enhancing our presence at customer sites strengthens our competitive position as well as drives revenues. In support of this initiative, we have developed an organizational or departmental sales approach for vertical markets such as Biotech, pharmaceutical, medical device and food and beverage.

Our sales force will be armed with appropriate knowledge to effectively penetrate all potential buying entities within an organization. A mere addition of one temporary professional at each of our customer sites will have a dramatic impact on our revenue base. These initiatives I have addressed are basic enhancements to our current operating model. I'm encouraged with how these efforts have been embraced by our staff.

Lab Support U.S. continues to show positive signs in the right direction; 3 quarters of sequential growth, increased temporary professionals headcount, a robust customer base and impressive margins. As we go into the fourth quarter, we remain committed to providing high-quality, temporary and direct hire scientific staffing solutions. I am confident that we have the required talents and focus to capitalize on these operational initiatives and continue this positive momentum.

Thank you and again, it is a pleasure to be a member of On Assignment Lab Support. I would now like to turn the call over to Ron Rudolph, our Executive Vice President and Chief Financial Officer. Ron?

I'd like to recap some of the numbers you have heard already, but it's important to put them all in context here. Revenues for the Company in the third quarter were 49.6 million. This is a decrease of 2 percent from the year-ago quarter but up 7 percent sequentially from the second quarter. There were 64 billing days in this quarter compared with 63.5 days in the third quarter of last year and 63.75 days in the second quarter of this year.

Lab Support's segment revenues were 22 million, a decrease of 3 percent from the third quarter of last year and an increase of 8.7 percent sequentially. Lab Support U.S. revenues increased 8.3 percent sequentially, to 19.3 million in the third quarter. Lab Support Europe revenues increased 12 percent sequentially to 2.7 million in the third quarter. The Lab Support segment accounts for 44 percent of total revenues.

Healthcare segment revenues for the third quarter were 27.5 million down 1 percent from the third quarter last year and up 6 percent sequentially. This segment represents 56 percent of total revenues. Within the Healthcare segment, Nurse Travel revenues of 19.2 million were up 6 percent from the third quarter last year, and decreased 1.4 percent sequentially second quarter to the third quarter this year. Nurse Travel makes up 39 percent of total revenues.

Medical Financial & Allied, MF&A revenues decreased 13 percent from third quarter last year to 8.3 million but increased close to 27 percent sequentially. MF&A comprises 17 percent of total revenues.

Turning the gross margin. Gross profit was 13,261,000 for the quarter, a sequential increase of 1,236,000 or 10 percent compared with the sequential revenue increase of 7 percent so obviously we had margin expansion during the quarter. This represents 26.8 percent of total revenues compared with 27.7 percent of revenues for the margin in the year-ago third quarter and 26 percent in the second quarter of 2004.

The 80 basis point sequential improvement is primarily a result of greater contribution to revenues from the stable and traditionally high gross margin Lab Support in MF&A businesses including higher levels of conversions and direct placement fees, combined with reductions in indirect labor costs of the third quarter, principally Workers' Compensation expense.

Conversion and direct placement fees combined totaled 854,000 in the third quarter, compared with 412,000 in the year-ago period quarter and 541,000 in the second quarter of this year. Reductions in Workers' Compensation expense during the quarter and this year are a result of ongoing efforts of our internal staff and enhanced safety training and loss prevention combined with very aggressive claims management and loss containment.

Lab Support and MF&A combined represented 61.2 percent of revenue in the third quarter, up from 57.9 in the second quarter. Lab Support segment gross profit was 6.18 million for the quarter, this represents 31 percent compared with 33 percent margin in the third quarter last year and 30.6 in the second quarter of this year.

Healthcare segment gross profit was $6.443 million for the quarter, and this represents a 23.4 percent gross margin compared with 24.7 in the year-ago quarter, and 22.4 percent in the last quarter -- the second quarter of this year.

Within the Healthcare segment, the Nurse Travel gross profit was 3.987 million for the quarter. This represents 20.7 percent gross margin compared with 21.3 percent in the third quarter last year, and 19.7 percent, second quarter of this year.

MF&A gross profit was 2.456 million for the quarter represents 29.6 percent gross margin compared with 31 percent in the year-ago third quarter, 30.4 percent in the second quarter of this year.

Turning to operating expenses and the discussion of selling general and administrative more specifically, total expense for the quarter was 18.8 million, this includes almost 1.3 million or includes 1.3 million in severance costs and 436,000 in write-offs of nonproductive assets. 18.8 million represents 38 percent of total revenues. This compares to 13.65 million or 27 percent of revenues in the third quarter last year, and 16.9 million or 36.5 percent of revenues for the second quarter of 2004.

The sequential increase reflects a number of items including higher branch operating expenses in the third quarter, previously mentioned severance costs write-offs of certain assets, Sarbanes-Oxley implementation costs and increases in other corporate expenses. The primary contributors to the sequential increase in branch operating expenses were salaries and commissions and branch marketing expenses.

Depreciation during the quarter was 1,020,000 compared with 772,000 in the year-ago quarter and 880,000 for the second quarter of this year. This increase in depreciation on a sequential basis is principally due to accelerated write-offs of website investments and to a less degree due to our ongoing investment in PeopleSoft. Amortization decreased to 691,000 in the third quarter from 866,000 in the year-ago quarter and decreased from 717,000 in the second order of this year.

Flattening of our operations management has reduced quarterly expenses from budgeted levels by approximately 400,000 on a net basis. Approximately 200,000 of this quarterly savings has been reallocated or reinvested in revenue generating field positions. As a result of the 3.9 million write-down of intangible assets, starting October 1, quarterly amortization expense will decrease by approximately $275,000. This decrease will maintain throughout each quarter of 2005 as well.

Further cuts in spending on telecom related items and other cost reduction efforts on our part have been offset by above planned spending on IT and marketing, higher-than-expected Sarbanes-Oxley implementation costs and an accelerated depreciation of our current website as mentioned before. Therefore, while we are targeting a reduction in normalized quarterly operating expenses for our 2000 (ph) and plan in the 16 million range with depreciation and amortization reduced to approximately 1.5 million, we project that selling general and administrative for the fourth quarter, these expenses will fall somewhere between 16.5 to 16.8 million.

Operating results for the quarter, operating loss including the goodwill impairment and the impairment of intangibles and other write-offs and severance costs and all of the things that have been mentioned so far, the operating loss was 35,897,000, compared with an operating income a year ago of 312,000 and an operating loss of 4.883 million in the second quarter of 2004. The current loss includes goodwill impairment charge of 26,421,000, and write-offs and write-downs of intangible assets of 3,907,000.

EBITDA for the quarter was negative 3,857,000 compared with a positive 1,950,000 for the third quarter a year ago and a negative 3,278,000 in the second quarter of 2004.

Reported GAAP earnings per share loss for the quarter was $1.28 compared with income of 1 cent in the third quarter last year, and a loss of 12 cents in the second quarter '04. Excluding the effects of goodwill impairment, the write-off of intangible and other assets and severance and other costs associated with streamlining the organization, non-GAAP EPS was a loss of 9 cents for the current quarter for an improvement of 1 cent compared with comparable GAAP loss of 10 cents in the second quarter.

The $1,236,000 sequential increase in improvement in gross profit which by itself would have resulted in a favorable variance of 3 cents per share was offset by the aforementioned higher cost for Sarbanes implementation, accelerated website depreciation and other corporate expenses.

Turning to the balance sheet and cash flow. We ended the quarter with cash and equivalents of 26.1 million, down 4.9 million sequentially. This was after funding 1.5 million in capital expenditures. During the quarter there were no repurchases of On Assignment shares in the open market. Net account receivables were 25.5 million at the end of the third quarter an increase of 2.8 million due to higher revenues and a slight increase in DSOs.

Implied days outstanding on a consolidated basis is 50 days up from 47 days in the second quarter due to slower payments from newer Nurse Travel customers. Paying according to terms but they are slower payments compared to the average in the second quarter. This compares to 56 days at the end of the last year for DSOs. If we break out the DSOs on a consolidated basis since the components for Nurse Travel on the one hand and lab and Medical Financial & Allied on the other hand, the Nurse Travel DSOs increased sequentially (technical difficulty) from 42 to 47 days while the combined lab and MF&A DSOs remained flat at 51 days.

As noted, we are now providing productivity statistics on a quarterly basis to assist in measuring our progress, growing our business and returning to profitability. For this purpose we are defining productivity to be quarterly gross profit generated for the average quarterly number of people comprising our direct sales and fulfillment work force. It is all of our revenue generating personnel.

For the third quarter, we achieved the productivity result of 57,000 on an average number of 233 staffing consultants and equivalents, again revenue generating staff. Compared with an ending number, the average was 233 compared with the quarter end number of 245. Based on preliminary 2005 operating expense targets our consolidated 2005 productivity goal to achieve great EBITDA is 62,000 for a staffing consultants while breakeven operating income would require 69,000 in gross profit for staffing consultant.

To achieve these targets each staffing consultant would need to add respectively to get to breakeven EBITDA or breakeven operating income 1 or 3 temporary professionals on assignment assuming cost of gross margins. Performance required to achieve this goal is below performance previously sustained by each of our divisions.

Lastly, turning to guidance, based on the recent trends and fewer billing days in the fourth quarter, facility shutdowns over the holidays for certain Lab Support clients, fewer nurses working over the holiday period, fewer employees working over the holiday period, including nurses increased holiday pay and holiday incentives specifically for Nurse Travel employees, we are currently projecting revenues of 48.5 million to 50 million in the fourth quarter and a loss per share of 9 to 11 cents. We expect average revenue per billing day to range from flat to up 3 percent sequentially on a consolidated basis and to increase sequentially for Lab Support and MF&A by 1 to 3 percent.

As you know, these estimates are subject to risks mentioned in today's release.

Now I would like to turn the come back to Peter for some closing comments before we open up the lines for questions.

Thanks Ron. In closing, while we are pleased with our progress, we also realize that we still have much work to do. We have worked very hard over the last 10 months to reorganize our management and business and I believe we are now well positioned to continue growing and managing our business. There will not be any change in the focus or strategy because the people who are driving the business today are the designers of the revitalization plan.

We think we are now doing a lot of things better and we want to continue doing what we set out to do. I would like to once again thank our many loyal dedicated and talented employees whose efforts have allowed us to progress to where we are today.

I would like to now to the call over to the operator to provide a Q&A session.

Thank you sir. (OPERATOR INSTRUCTIONS) Jim Janesky with Ryan Beck.

Thank you. A couple of questions. Do you expect sequentially revenues to be out in the December quarter, but the loss per share to be at or above this quarter? I know you went into a couple of reasons, but if you have to pick out the primary reason, is it the bonuses in the Nurse Travel, or what would you say it is?

I'll take a stab at it first, Jim, and then we will turn it over to Ron or Michael. It's a number of things. The first thing is the gross margin is impacted by the numbers of billable days, the holiday pay and kind of the stay bonuses that we pay the nurses. The second is we are moving some Sarbanes-Oxley costs out of the first into the fourth to go ahead and get the rest of that stuff done.

And the third main point is we have a number of -- some accelerated depreciation related to our websites that we are going to be turning off at the end of March of '05. So if you try to get to a normalized basis, we are going ahead and we continue to clean stuff up and we have some expenses that are running through the P&L whether it is related to tweaking some things on PeopleSoft for our billing systems to run a little bit smoother or as I said, Sarbanes or some other assets that we're just writing off. We had some expenses that I don't think really are reoccurring. Ron, do you want to add anything to that?

No. You have covered categorically what is going on. I mean, in spite of the great improvement sequentially, Jim, in our gross margin we are obviously projecting lower gross margin in the fourth quarter combined with higher expenses due to the items, Sarbanes and depreciation of website that is becoming obsolete at the end of next quarter. So we clearly are targeting a different level of operating expense and a different level of gross margin starting in the first quarter of next year, but this is our -- what it looks like for Q4 at this point.

Staying with cost, do you think the severance costs are behind you, or could we expect any more in the fourth quarter?

No, we are pretty close. I think that what you will see as we walk through this period, we are getting more and more of these unexpected expenses or unbudgeted expenses out of the way. There are just fewer issues that we are dealing with real-time that aren't things that you would ordinarily budget for. The numbers will be cleaner and cleaner as each quarter goes by.

Shifting into Lab Support, the vendor on premise in the larger customer focus is a variance from your past. Emmett, did you decide that the Company should go in that direction? Whoever did decide if they could answer why you think that is the way to go at this point?

It was my decision. I have experience in that space. Typically in the scientific. In my previous life I oversaw IT, healthcare, engineering, information technology and I had on-site in all of those markets, specifically in scientific but medical device and pharmaceuticals and environmental companies. So I think this is a great enhancement to our service offering that will bolster our security, our secure position at our customer's sites.

Jim, I would just add that it's not really that much of a deviation from our plan because one, it's more of a middle market focus. We again are not trying to compete with Kelly or Adecco and manage everyone from janitor to secretaries. This is going to be a product that is to be the manager of scientific spend, predominately into middle market where the average size may be a 5, $10 million account, versus a $250 million account at Procter & Gamble where you're putting pickers and packers and janitors and scientists all at work at the same time.

Okay. Thank you.

Marta Nichols with Banc of America Securities.

Good afternoon. Thanks. I just wanted to delve into the headcount numbers in a little bit more detail. I guess first of all, as I recall at the end of the second quarter, you also had about 245 internal staffing consultants or revenue generating employees. But it sounds like you also ended the third quarter at 245 and yet we are talking about a 233 average for the quarter. Can you just reconcile that? Did you dip at some point in mid quarter and then get higher again later in the quarter?

We are naturally going through Marta and cycling. There's a certain amount of involuntary terminations for poor performance and a certain amount of voluntary. I would tell you the voluntary terminations have been below historical levels and very attractive levels. And as we move further in the implementation stage of this revitalization plan, people that we have put into markets that haven't performed we're reevaluating and replacing.

We also are working with the presidents of our division Shawn and Emmett and Mike Holtzman and Pete and I to work on a metric that we can consistently measure. Decided, if -- have defined the denominator for this productivity equation to be revenue generating people and some of the numbers we were reporting earlier in the year. Administrative or assistant type people that are in the branch office but they are no more revenue generating than people in headquarters office would be working in the accounting department. So there has definitely been growth in headcount and growth in average headcount every quarter this year, pretty much behind us now.

But we have changed the way we are defining the nominator to just include revenue generating people so that is all staffing consultants, account managers, recruiters, assistant recruiters, regional salespeople and the like, but it doesn't include any indirect people who reside in branch offices.

Okay, so the 240 -- just to be clear with what you said, Ron, the 245 that we were looking out at the end of the second quarter may have included some of those admin folks?

Absolutely did. We really had not focused on that definition and we wanted to make sure everybody agreed to what the best input, output measure was and it was revenue generating people in relation to gross profit and not people who were in an indirect capacity.

And Marta, to help, I don't have the precise number but in order of magnitude, I think it may have been like 10 to 15 people.

Thank you for that. It is a possible too then to go through it on a segment basis? I think you may have touched on this in your opening remarks but there was a lot of new data in there. Can you just tell us for the 3 segments how that 245 breaks down?

Yes. I think in Lab segment which includes Europe and the U.S., we were at 100 what was it? 102? Michael, why don't you walk them through it?

Well, we have the average numbers -- .

Wait, wait, wait, do you have the actual quarter end?

I've got the average, Marta. The average for Q3 for the last quarter segment was 102. That is versus 97 in Q2. For Nurse Travel for Q3 it was 40 versus 42 in Q2. For MF&A, it was 91 in Q3, versus 73 in Q2. So that is a total for the Healthcare segment of 131 versus 115. For on a consolidated basis, its 233 versus 212.

Okay, so again those were averages in each of the quarters?

Right.

And just a more strategic question about hiring, do you still feel like you're essentially at the right number? Is 245 the right number of revenue producing folks for where you are at today? Should we anticipate seeing significant incremental hiring or is it all about flowing additional assignments through to folks that you've already hired at this point?

That is a great question. We had originally budgeted at full capacity to be 255 under the revitalization plan, Marta. But where we are now, we are over capacity. We clearly don't have the utilization levels or the productivity levels that we would want, but I think as we demonstrated here in the third quarter on a consolidated basis, and how we did it in the second quarter in MF&A and on Lab that we are starting to run more assignments through each one of these staffing consultants. And we should be able to grow nicely in '05 without having to significantly move up the headcount.

Okay. Turning to more of a cost issue and an operations issue, the PeopleSoft implementation, where are we on the life cycle of that at this point? I know it's been kind of an ongoing issue for you as opposed to something that was I think initially expected to be relatively short-term. Where are we in the cost life cycle of this and the implementation and when do you expect it to be essentially fully complete?

We've got a pretty good pay bill order entry system. The number of billing issues we have has declined significantly. We are getting the kind of just over the last kind of month, 2 months we are getting better weekly and monthly operational reports. We still have work to do. We really don't have the type of front-end system that has source retrieval attachment functionality the way that we want. Which I don't think is going to be a big issue because it is not going to do some big implementation or integration into the PeopleSoft system. But we still have some work to do.

We are in the process right now of trying to independently determine what we think the ongoing operational cost of the PeopleSoft system is, but I hate to use a cliché, but we are definitely closer to the end of the pipe than being at the beginning of entering the pipe. It is just this thing has still got some work to be done on it.

Okay. I guess a final question can you talk us through what your thoughts are with respect to holiday incentives for the nurses this holiday season? That has been in the past a source of surprise as it relates to cost and I'm just wondering how you are budgeting for it and how you are expecting it to weigh against revenues this year versus past years?

I will take a stab at it and then I will let Emmett -- excuse me, Shawn speak to it as well. It is definitely budgeted in the projected numbers for the fourth quarter that Ron just spoke of. The second thing is, it is about 25 percent of the total dollar spent in 2002, and we don't think that it is going to -- we are going to offer something; we think it is appropriate and competitive but we don't it is going to significantly impact the headcount any more than just the refusal of a nurse to work over Christmas and New Years. So with that, Shawn, do you want to add to it?

Yes. Mart, I would just add that that you will find over the last couple of years the number of this year being spent is considerably less than the year before and the year before. So we are remaining competitive in our incentives given to the nurses in order to keep them On Assignment but we're also finding that we are able to keep that number down to a minimum this year that we don't believe is going to significantly impact our revenue stream while at the same time cutting our costs in that area.

Is the issue -- I mean -- the number that Peter gave of 25 percent of the dollars you spent you spent in '02, clearly a huge step down, is it because the market overall is spending less on holiday incentives that you still feel like this is a competitive way to incent the nurses to stay?

Yes it is actually. I think everybody was a little above board in the last couple of years and so it is coming down to more stabilized incentive program and our program which is less spend than the last two previous years is considerably competitive with any of our people out there that we compete against.

Okay, thank you.

(OPERATOR INSTRUCTIONS) At this time, there are no further questions. Mr. Rudolph, are there any closing remarks at this time?

We appreciate your attention to our Company, and look forward to reporting our progress and rebuilding the business on a go-forward basis. Thank you.

Thanks everybody.

Thank you gentlemen. Ladies and gentlemen we do appreciate your participation in today's conference call. This does conclude today's On Assignment third-quarter 2004 financial results conference call. You may now disconnect.