ASGN Inc (ASGN) 2005 Q3 法說會逐字稿

Good morning. 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 Results Conference Call. (Operator Instructions) Mr. Holtzman, 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 forecasts, estimate, project, expect, believe and similar expressions. We believe these remarks to be reasonable, but they are subject to the risks and uncertainties that could cause actual results to differ materially from forward-looking statements. We described 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 statements made in this conference call.

Peter Dameris, our CEO and President, will now provide an overview of our third quarter results. Pete?

Thank you, Mike. Good morning. I would like to welcome everyone to the On Assignment 2005 third quarter earnings conference call. With me today are Mike Holtzman, our Chief Financial Officer; Emmett McGrath, President of Lab Support; and Shawn Mohr, President of Healthcare Staffing.

During our call today, I will give a review of the markets we serve and operational highlights, 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 Mike for a more detailed review and discussion of our third quarter financial performance and our financial guidance for the fourth quarter of 2005. We will then open the call up to questions.

Consolidated revenues for the quarter grew year-over-year by 16.4 million or 33% to $66 million. Consolidated gross margins were 27.2% which is a 40 basis point improvement year-over-year. During the quarter, our revenues were negatively impacted by approximately $150,000 due to an office closing and lost billable days in markets affected by Hurricanes Rita and Katrina.

This quarter's performance represents the second consecutive quarter that the company grew revenues and expanded its gross margin. Operating income for the quarter was 1.6 million compared to an operating loss of 35.9 million in the year-ago period which included 30.3 million in impairment charges and a $1.8 million charge related primarily to severance.

Entering the fourth quarter, our business continues to strengthen. For the first three weeks in October, our weekly revenues have on average exceeded $5.1 million excluding conversion and direct placement revenues. In addition, our numbers of hours billed, billable headcount and client count continue to be at or near the highest levels of the year.

I am very pleased with the revenue, gross margin, EBITDA, and net income levels that were posted for quarter, as they were once again above the high-end of our range of previous guidance. I am also pleased that we increased staffing consultant productivity by nearly 20% and we achieved the second consecutive quarter of net income. The EPS of $0.07 that we reported is a $0.06 sequential improvement and $0.08 better than the midpoint of our previous guidance.

All of our divisions positively contributed to our revenue growth, margin expansion and net income generation. To fully appreciate the performance of our company during the third quarter, investors should evaluate each operating group's performance separately. Our Lab Support segment generated 26.6 million in revenue, up 21% year-over-year and had gross margins of 32.3%, which is within 70 basis points of its all-time high. Lab Support billed nearly 1,300 clients, up from 1,200 in the prior quarter and added nearly 260 new or reactivated clients in the quarter. The average number of contract professionals on billing increased by 240 or 14% year-over-year. The average bill rate for this group increased $1.07 or 4% year-over-year.

Our European operations generated 4.1 million in revenues, up over 50% from the year-ago period and had gross margins of 36.6%. Headcount, new order and direct hire placement activity in Europe continues to be at its highest levels. During the third quarter our top 10 customers represented 9.2% of total revenues of that segment and our average number of staffing consultants was 104, up two sequentially.

The Medical, Financial and Allied group generated 11.1 million in revenues for the quarter, up 34% year-over-year. MF&A achieved a gross margin of 31.9%, up 230 basis points year-over-year. MF&A billed nearly 1,100 clients up from 1,000 in the prior quarter and added 255 new or reactivated clients in the quarter. The average number of contract professionals on billing increased by 160 or over 20% year-over-year. The average bill rate for this group increased $1.31 or nearly 5% year-over-year. For the third quarter, our top 10 customers in MF&A represented about 15% of total MF&A revenue and the average number of staffing consultants was 84, down six from the 90 in the previous quarter. Exiting the quarter, MF&A continues to increase its bill rates and weekly revenues.

Nurse Travel group generated 28.3 million in revenue, up 47% year-over-year. Excluding 1.6 million in revenue derived from providing staffing services to hospitals that experienced labor interruptions, Nurse Travel revenue was up almost 40% year-over- year. Gross margin was 20.6, essentially flat from the third quarter of 2004. The number of nurses billed averaged 665 compared to 475 in the year-ago period. And the total number of clients billed was over 200, up over 100 from the year ago period. The average bill rate for this group increased $3.56 or 6.25%. For the third quarter, we added 50 new or reactivated clients and our top 10 clients in Nurse Travel represented 56 of Nurse Travel revenue versus 62% in the year-ago quarter.

During the week of October 23, we billed nearly 160 customers and had almost 740 nurses on On Assignment. Each of these data points are all-time highs for this division. New nurse orders are at the highest levels for the year.

Once again, our newer lines of business grew including health information management, clinical research, engineering, local RN and direct hire. These lines of businesses generated 4.1 million in revenues or 6% of total revenues for the quarter. If you remember, these businesses were launched in 2004 on an organic basis. We believe these new service offerings will permit us to grow at a double-digit rate well into the future.

I would continue to describe each of the end-markets we serve as productive and improving. All of our divisions experienced increases in bill rate and bill pay spreads year-over-year. The improvement in demand in our healthcare segment can also be seen in the fact that we worked with the largest number of clients in the quarter compared to any other quarter over the last two years. This is the fifth consecutive quarter that the company has met or exceeded its operating objectives and remain consistent with the operating plans that management set forth in its previously -- previous quarterly earnings releases.

Going forward, our focus will remain on growing our EBITDA faster than our gross profits and growing our operating income faster than our revenues. Our second consecutive quarter of net income was achieved by continuing to increase revenues by expanding our gross margins and focus on leveraging of our SG&A expenses. Towards the end of the call today, Mike will walk you through the forward guidance that we announced in our earnings release. As for 2006 guidance, we are in the middle of our budgeting process and will give full year guidance when we release our fourth quarter results.

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

Thank you, Peter. Q3 within On Assignment Healthcare was rewarding and promising. The enhancements within our operating model over the last several quarters combined with clear increases in demand for our Healthcare Staffing services, all converged during the quarter and resulted in an 11.8 million or 43% year-over-year increase in Healthcare Staffing revenues.

Let me first start off by highlighting the Q3 results from our MF&A or Medical Financial and Allied business unit. MF&A revenues for Q3 2005 grew 34% year-over-year. This performance continues as the trailing average assignment numbers for the last three weeks in MF&A were 866,000 in revenues, nearly 900 professionals on assignment, and 500 billed clients. All of these results are near or above the Q3 averages and great indicators that our field sales and recruiting productivity are increasing and expanding.

We remain confident that we can continue to organically re-grow this business line without significantly increasing headcount and SG&A in the field. Since we made the strategic decision over a year ago to reinvest and grow MF&A, we gained significant client -- candidate traction through our sales and marketing efforts in many local markets that were either closed or highly neglected under previous management. Many of these markets have started to grow and have strong revenue upside still remaining. In most locations, our share of the overall market remains low, so we truly have an excellent opportunity as we continue to market our services to existing and prospective clients.

Within MF&A, we also re-established our Allied Travel business and started a new health information management practice known as HIM in Q3 of last year. Both of these businesses had great success. Allied Travel revenues increased 72% sequentially. HIM's results were very promising as well, posting 60% sequential revenue growth. These combined business lines represented 18.7% of Q3 2005 total revenues for MF&A versus 13.3% for Q2 of 2005.

Both of these business lines fit well into the MF&A operating model and into our strategic focus of expanding our offerings into higher margin, higher billed rate niches within the healthcare arena and we see both Allied Travel and HIM continuing to grow at levels outpacing the rest of On Assignment Healthcare and the industry. All of these factors combined with our consistent local market operating model and clear signs of increased marketing demand position the MF&A business for continued growth.

Now, let me turn to our Nurse Travel Division. Nurse Travel revenues were 47% higher year-over-year. Excluding 1.6 million in revenue for staffing hospitals with labor disruptions, Nurse Travel revenues were 26.7 million, which represents 39% year-over-year growth. Demand continues to remain strong as the trailing average week's numbers for the last three weeks versus the prior quarter's reported three weeks statistics in Nurse Travel were 2.2 million versus 1.9 million in revenues, 720 versus 630 nurses on assignment and 150 versus 130 billed clients. All of these metrics continued to perform at or near all-time Nurse Travel highs. Our client count high for Q3 was 155 representing a 187% increase off the 2004 lows. Our low and high in 2004 were 54 and 85, respectively.

I would also like to stress two other relevant growth indicators. First, we've experienced nearly 120% year-over-year increases in order activity. Second, our retention rate, which is the rate at which we reassign nurses on either extensions at the same facility or on a new assignment once they've completed their assignment, has increased over 10% since last year. These indicators show that demand for our services is increasing while at the same time our quality nurses are being asked to extend the length of their assignments or are requesting more work upon completion of their current assignment. We are experiencing increases in market demand within the types of nurse disciplines we place and feel confident that it will continue.

As you know On Assignment Nurse Travel focuses on placing the hard to fill, high demand, low supply nursing positions. Clients use On Assignment Nurse Travel for our exceptional service levels and consistent delivery model along with the quality, relevancy and speed we're known for throughout the industry. We feel that our value proposition and laser sharp recruiting and placement focus will allow us to continue to grow our Nurse Travel business at a rate much faster than competitors who are focused on the more traditional 13-week commoditized staffing model.

Lastly, I would like to announce on the call that we've been officially notified that we have received our JCAHO certification. Our 100% file compliance during the review process and feedback from JCAHO that we receive consistent excellent client and staff feedback is a testament to the hard work and commitment to quality our entire company adheres to everyday. We feel confident that we can continue achieving results above and beyond that of our peers in both business lines.

With that, I'll pass the call over to Emmett McGrath, our President for Lab Support. Emmett?

Thank you, Shawn and good afternoon. As you have heard today, the Lab Support segment performed well in the third quarter. Commitment to previously outlined strategic and tactical efforts continues to drive impressive results. Our combined US and European operations grew nearly 21% year-over-year. Our gross margin increased 130 basis points at 32.3% compared to 31% for Q3 2004.

Performance during the quarter is attributable to six key factors. First, the industries we serve are healthy and continue to offer opportunity for profitable growth. The skill disciplines provided are in great demand and critical to our clients' success. Our revenue base and competitive position grew through targeted efforts to recapture market share, new business development efforts, enhanced service offerings, greater client depth, and committing resources to high demand industry in geographic areas. We billed nearly 1,300 clients in the quarter. We expect greater depth from this client base going forward.

Second, setting clear expectations, focusing on core competencies and adhering to operational procedures drove operational excellence and generated attractive results. Third, our commitment to attracting, retaining and developing top scientific staffing consultants combined with proactively upgrading existing talent strengthened our competitive position.

Fourth, we attribute our third quarter gross margin performance to clients that value our specialty service offerings, strict adherence to pricing guidelines, tighter control over cost of services and effective execution of our direct hire service offering. Our direct hire business line generated 811,000 in revenue for Q3 2005 up from 490,000 in the prior quarter. In addition, we realized greater momentum in proving hard-to-find clinical research and engineering professionals.

Fifth, in support of our large account strategy, we improved our competitive position with previous contract awards in the healthcare products, medical device, clinical trials and pharmaceuticals industries. Attaining primary or exclusive relationships bolstered our positions and resulted in more scalable and profitable revenue engagements. And finally, our newer business lines in the clinical research and engineering fields gained greater traction during the quarter generating higher bill and pay spreads and direct hire fees.

Clinical research revenues were up over 60 % from the prior quarter. Engineering revenues were up over 33% from the prior quarter. Together, clinical research and engineering accounted for 5.6% of Lab Support segment revenues for the quarter.

Early into the fourth quarter, I'm encouraged with our placement trends. The Lab Support segment operations continued to reach year highs in weekly revenue, client and contract professional accounts, and direct hire fees. In recent weeks, we have been awarded accounts with leading biotechnology and pharmaceutical companies and have a healthy pipeline of opportunities. I'm confident that we have the necessary leadership, field staff, and demand for our services to make the fourth quarter a success.

I would now like to turn the call to Mike Holtzman, our Senior Vice President and Chief Financial Officer. Mike?

Thanks Emmett. Consolidated revenues were $66 million, up 33% year-over-year and 15% sequentially. There were 64 billing days in this quarter compared with 63.5 in Q3 last year and 64 days in Q2 of this year. For Nurse Travel, there were 92 billing days compared with 92 days in Q3 of last year and 91 days in the previous quarter.

In the Lab Support segment, revenues were $26.6 million, up nearly 21% year-over-year and 11% sequentially and represented 40% of total revenues. Lab Support Europe revenues were $4.1 million, up over 50% year-over-year and nearly 20% sequentially. On a constant currency basis revenues were up over 20% sequentially. Lab Europe revenues are all the company's foreign revenues and were 6% of total revenues for the quarter.

Healthcare staffing segment revenues were $39.3 million, up 43% year-over-year and 18% sequentially, and represented 60% of total revenues. Within the Healthcare staffing segment, Nurse Travel revenues were $28.3 million, up 47% year-over-year and 17% sequentially and represented 43% of total revenues. Excluding 1.6 million in revenues from staffing hospitals with labor disputes in the third quarter of this year, Nurse Travel revenues were up 39% year-over-year and nearly 14% sequentially.

MF&A revenues were $11.1 million, up 34% year-over-year and 18% sequentially and comprised 17 % of total revenue. Conversion and direct hire revenues totaled $1.4 million compared with $854,000 for Q3 last year and $964,000 in the previous quarter. Conversion and direct hire revenues represented 2.1% of total revenues versus 1.7% of total revenues for Q3 of last year and 1.7% of total revenues in the previous quarter.

Consolidated gross profit was $17.9 million for the quarter and consolidated gross margin was 27.2% compared with 26.8% in the year-ago period and 26.7% for the previous quarter. The 50 basis point sequential improvement is due to lower workers' comp expense and payroll taxes, an increase in direct hire and conversion revenues offset by higher holiday pay and other contract professional expenses.

Lab Support segment gross profit was 8.6 million for the quarter which was a gross margin of 32.3% compared to 30.6% for Q3 of last year and 31.6% for Q2 of this year. The 70 basis point sequential increase was primarily due to the increase in direct hire and conversion revenues and lower workers' comp expense offset by higher holiday pay and a decrease in the pay billed spread.

Healthcare staffing segment gross profit was $9.4 million for the quarter, which was a gross margin of 23.8% compared to 23.4% in the year-ago period and a 60 basis point improvement from 23.2% in the previous quarter. Within the Healthcare staffing segment, Nurse Travel gross profit was $5.8 million, which was a gross margin of 20.6%, essentially flat compared with 20.7% for Q3 of last year and 20.7% for Q2 of this year.

For MF&A, gross profit was 3.5 million for the quarter, which was a gross margin of 31.9%, compared with 29.6% for Q3 last year and 29.8% for Q2 of this year. The 210 basis point sequential increase was primarily driven by lower workers' comp expense and higher bill pay spreads offset by higher holiday pay and other contract professional expenses.

Total SG&A expense for the third quarter was $16.4 million or 24.8% of total revenue. Excluding accelerated depreciation of $417,000, SG&A was $15.9 million or 24.2% of total revenue. Excluding 30.3 million in impairment charges and 1.8 million primarily related to severance charges, SG&A in Q3 of last year was 17 million or 34.4% of total revenue. For the second quarter of this year, SG&A was 15.6 million or 27.1% of revenue.

The sequential increase of $800,000 includes 417,000 in accelerated depreciation related to the implementation of a new front office system and the write-down of the related module in PeopleSoft as well as, nearly $200,000 for non-cash charges and compensation expense related to stock and restricted stock issuance.

Depreciation expense for the quarter was $1.5 million, compared with $1 million in Q3 of last year and 1 million for Q2 of this year. The year-over-year and sequential increase was principally due to accelerated depreciation, explained previously. Amortization expense in the quarter decreased to 281,000 from 691,000, in the year-ago period and was unchanged from the second quarter of this year. The year-over-year decrease is the result of a step down in the accelerated amortization of customer relations.

Our operating income was 1.6 million for the quarter, compared with an operating loss of $35.9 million for Q3 last year, including the one-time charges outlined earlier, and an operating loss of 221,000 in Q2 of this year

Based on our decision to book a nominal tax provision until evaluation allowance is no longer needed, and due to our higher levels of depreciation related to prior year's IT initiatives, we believe it is more meaningful to compare EBITDA when comparing the current quarter's results to prior quarters. EBITDA for the quarter was positive $3.3 million or $0.13 per share, compared with negative $3.9 million or negative $0.15 per share for the third quarter of last year, and positive 1.1 million or $0.04 per share in Q2 of this year.

We ended the quarter with cash, cash equivalents, restricted cash, and marketable securities of 25.3 million, essentially flat to Q2 of this year and up from 22.8 million at December 31, 2004. For the quarter, cash used by operations was 1.1 million, cash provided by stock option exercises and employee stock purchases was 1.7 million, and cash provided by investing activities was 1 million. CapEx was approximately 1 million, up slightly from $900,000 in the preceding quarter.

Net accounts receivable were 35 million at the end of the third quarter, an increase of $5.8 million, sequentially. On a consolidated basis, Day sales outstanding were 50.8, up 2.4 days sequentially. During the quarter, there were no repurchases of our shares in the open market.

Now, turning to productivity, which we define to be the quarterly gross profit generated per staffing consultant. For the third quarter, we averaged 238 staff consultants and they each generated 75,400 of gross profit, nearly a 20% sequential improvement. In the previous quarter, we averaged 240 staffing consultants and they each generated 63,900 in gross profit. Assuming $16 million in SG&A and 240 staffing consultants, operating income breakeven on a quarterly basis is $67,000 of gross profit per staffing consultant.

Each staffing consultant had an average of 14.6 contract professionals out on assignment, up from 13.1 in the previous quarter. Lab productivity was 18.7 versus 17.4 in the previous quarter and MF&A was 10.1 versus 8.6. Nurse Travel was 13.6 versus 12.4 in the previous quarter.

Turning to guidance, for Lab and MF&A, there is 61.5 billing days in the fourth quarter of this year, compared with 64 for Q3, which is a decrease of nearly 4%. For Nurse Travel, there are 92 days in Q4, compared with 92 days in Q3. Based on the strength of revenues generated in the first three weeks of October and due to seasonal factors that impact revenues and gross margins, including holiday incentives, we are currently projecting fourth quarter revenues of 61.5 million to 62.5 million and breakeven to $0.02 of EPS.

We expect operating expenses of 16 million to 16.4 million, including depreciation and amortization of 1.7 million, which includes accelerated depreciation of $324,000. Our tax assumptions are based on a nominal provision, until evaluation allowance is no longer warranted. Assuming fairly stable labor markets and no loss of major clients in Nurse Travel, we're raising our full-year revenue guidance to 234.7 to 235.7 million from 220 million to 223 million, which represents growth of approximately 21% over 2004.

We project average gross margin for the year to be approximately 26.5%. As you know, these estimates are subject to the risks mentioned in today's release and at the beginning of this conference call. Now back to Pete for some closing comments before we open the lines up for questions.

Thank you, Mike. On Assignment's growth opportunities are still largely dependent on our own internal execution and not on any improvement in the end markets we serve. This quarter's performance substantiates the strength of our diversified business model and are a result of the operational and management changes we have made over the last 18 months. 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 open the call up to participants for questions. Operator?

(Operator Instructions) Your first question comes from the line of Jim Janesky with Ryan Beck.

Yes, good morning. A couple of questions -- it kind of has to do with margins. What are conversions and permanent placement running? And what's your goal or how high do you think that can go as a percentage of, let's say, gross profit?

Good morning. Jim, typically, we're pricing that stuff at above 25% of the annual salary. And as we've publicly stated to our investors, we think that we should control the maximum percentage of our total revenues to be at this time not more than 3.5%. When it's good, it's good, but when the labor markets flatten, that's hard gross profit to replace if it represents a double-digit percentage of your profitability.

Okay. Well, taking that and your other comments into consideration such as, you have room to grow productivity, you have room to continue to grow your base of recruiters that -- the end markets are very strong across the board, where do you think operating margins -- like what is your goal for target operating margins, let's say, over the next 12 to 24 months?

Well, next 12 to 24 months we're consistent with what we previously said, which is we believe that this is a minimum 27% gross margins business and that the appropriate level of SG&A as a percentage of revenue should be around 20% -- 13 to 16% for branch level SG&A, and another four or five points for corporate. So we think we could get to 7% EBITDA margin.

Yes. Jim, I would just add to that. When you look at depreciation and amortization, we continue to have a step down on next year in the amortization of identifiable intangibles. And then, as far as the PeopleSoft depreciation is concerned, the bulk of that will be written off by the end of '07, and we think we'll get back to more normalized levels of D&A.

Okay. So then after '07 -- I mean your peak years ago when arguably you were under invested in infrastructure and technology; was around 12 or 14%, that's probably too high. But after the depreciation wears down it could be higher than 7, is that appropriate?

Right. And also the other thing I would take away is when you look at the branch level contribution, Jim, remember before 2001, On Assignment was a 33% reported gross margin business because we didn't -- we weren't in the Nurse Travel business, which is by its own nature a lower margin business. So if -- we still have $65 million of legacy revenues to recapture. But if we were a $200 million old On Assignment business without Nurse Travel, we'd have a much easier chance of getting to that double-digit EBITDA margin than with a $255 million, $265 million, 27% gross margin, because we have 21% -- $100 million of 21% Nurse Travel revenues in that mix now.

Sure. And if you said this on the call, I apologize, but $5.1 million per week run rate in the first couple of weeks of October, comparing apples-to-apples as much as possible, can you give us an idea of where that stands in the history of the company in terms of how much higher that can go?

Well, I mean it's a great question. I don't have it in front -- those numbers in front of us, but what I can tell you is I can repeat what I've just a minute ago said. When we look at our legacy business, there is still about $65 million of revenue that we have to recapture in MF&A and Lab support to get to kind of all time high revenue numbers.

Okay. Good. Thank you.

Your next question comes from the line of Shawn Boyd (ph) with Westcliff Capital.

Good morning, gentlemen. Just a couple of quick questions. The 120% year-over-year increase in order rates, can you clarify, was that for the whole business or just for nursing?

That statistic was quoted specifically for Nurse Travel.

Okay. And I mean, that just strikes me as a huge increase.

I caution you, orders don't buy groceries, what buys groceries are filled orders. And there -- it's been well documented that there is an acute shortage of nurses.

All right.

And I will tell you what's particularly impressive about that number for us is we scrub our order backlog list much tighter than others do. Because somebody -- you could get an order to put a 20-year highly skilled ER nurse in Anchorage, Alaska getting paid $2.65 an hour. And is that a real order or not?

Right.

So the 120% growth in orders is real from our perspective because we scrubbed it. It's things that we put in our backlog that we'll let people try to fill that we think because of the location, the skill set, and the pay rate we realistically can fill on a rapid basis.

Got you. Okay. What was that number a quarter ago? Just for perspective here?

I do not think, we publicly quoted that, but Shawn Mohr just whispered to me, I think it's about 100%.

Okay.

So it's anout 20% sequentially.

Got you. Okay. And the other question I want to hit the HIM is what percentage of the MF&A segment now?

That number is -- bear with me one second. It's around 10%.

It's about 10%. And it's growing at what rate again?

It grew 60% sequentially.

Okay. So as you continue to push this lines, we're going to just see that start to -- well as we already seen -- we're seen it take bigger and bigger chunk of that segment.

Well, that was the strategic reason for getting into these higher growth, higher margin businesses -- to allow MF&A to grow faster and on the clinical research side begin added to Lab support to allow Lab support to grow sustainable double-digit growth rates.

All right. And that's - the last thing I wanted to hear in terms of the growth rates overall, with the business now growing 30% on the bottom line, in terms of total revenue growth with all the segments, and then with your guidance for another 20, over time I understand it being something over double digits. But should we really -- I mean should we really expect - is there anything going on to see that much of slowdown in 2006? I guess what I'm looking out -- I feel like we're sort of two quarters into the strength year and its seems like you see a pretty good run in terms of this growth before we see significant slowdown. And I'm just wondering is there anything that I should thinking about that would change that?

I guess the best way I can address it is, we're not giving any '06 guidance. We've told Wall Street that we think we're a 10% to 15% three to five-year grower. What we did say in our call and in our press releases, we're not seeing any slowdown or change in purchasing behavior from our customers. And we're a pretty good barometer. We look at probably 12 to 16 months of about market activity.

Okay. Thank you very much.

Thank you.

Your next question comes from the line of Toby Sommer with SunTrust Robinson. One moment please.

Good morning.

Good morning.

I apologize, because I may -- if I repeating anything, I've been on and off a couple of calls. I was wondering if you could comment on the local nurse unit and see whether you're seeing in terms of supply more nurses looking at that and I know the units been pretty good for you but I wanted to get a sense for whether there you're sensing any change in the market relative to that alternative as an employment choice?

Well, Toby. Good morning. I'll let Shawn answer the LRM question. In general, our nursing pools are inflating because of the type of nurses that we typically employ. And as you quote from some of the data that you look at, quits they have accelerated especially amongst the seasoned veteran nurses. And baby nurses graduating from nursing school can't fill those positions. So not only the aging baby boomer population consuming more services, the aging nursing population plays perfectly into our sweet spot because those nurses may retire full-time but then turn to a new career, which is a Travel Nurse assignment. With regard to the LRM business, Shawn, you want to can give him some guidance?

Yes. Hi, Toby. Good morning. In regards to the LRM piece of the supply pool, which I believe you're asking for, we are seeing an increase in supply and an increase in demand for those types of services that we place, which are about a 60 mile radius within any of our local office market space. So that in combination with the types of demand and supply that people are asking for, which is the higher level much more experienced individual that we do place, The combination of those two between local nursing and Nurse Travel, we are seeing a pickup in demand and supply for that.

Well, that should be -- pretty good because that the deeper part of supply there at the local. In terms of stepping back and looking at the turnaround, you had pretty good operating margins, well ahead of what we were looking for. What kind of potential margins does the business have? And I'm not asking for guidance, but just kind of looking at the business structurally, how should we think about that?

I appreciate. As we previously stated, we believe that short-term meaning the next 24 months our targeted, profitability margin is about 7% EBITDA margins, and that's getting our SG&A down to 20% and keeping our margins at 27%. If there is something -- if there is any margin expansion because of growth of our newer lines of business or because of more direct hire fees, or we continue to be successful in refining our cost of services as it relates to direct expenses that we should seek reimbursement for, a more attractive holiday, appreciation bonus plan for the Company, continued improvement with our worker's compensation expenses, things like that, you might see a point or two elsewhere. But I think being appropriately, conservatively spoken, I think our 7% is what we've said, and we have believed on that.

Okay. And the cash balance was stable and relatively ample I guess, for the size of your business looking at the broader market and sort of, comparables any updated thoughts on uses of that cash or attractive opportunities when it comes time to looking at acquisitions given the fact that you -- it appears that you're on a good growth trajectory in the legacy business?

Right. Well, now, that we've demonstrated that our existing business is a high margin double-digit growing business, and that we've cleaned up a fair amount of the interoperability of our back-office systems, a targeted small acquisition in Health Information Management, Clinical Research, Allied Travel, would be very accretive, because I do believe that we could take over some of the back-office functions and that would truly be synergistic savings that adds to the profitability of that business as a standalone prior to the acquisition.

As regards with share repurchases, we've had a history of repurchasing our shares in the open market. It's been comforting to our investors for us to be able to demonstrate that we don't have any sort of cash constraints to growth. I think we'll start generating some free cash flow, and our job is to have growth in EPS from topline growth, margin expansion and also if we can hold our share count constant. So we're looking at all those issues at the appropriate time.

Also, do you have share repurchase authorization in place now?

Yes. We still have -- it's a little bit less than 300,000 shares left on the authorization from prior years.

Okay. Thank you. And I guess, that's it for me. I'll get back in the queue. Thank you.

Thanks.

Your next question comes from the line of Christa Lewis (ph) with CIBC World Markets.

Hi. Good morning, guys. Congratulations on the quarter.

Thank you.

First question I had regards the PeopleSoft rollout. I guess at the beginning of next year, you guys will be rolling out the front-end to a lot of your staffing consultants out there in the field. I was just wondering, will that have an even more dramatic impact on your gross profit per staffing consultant than we've seen this year as those existing consultants get rolled out on the new system? And where do you think that could go to?

Right. I'll try to give you a real world indication of that and then I'll let Emmett speak on behalf of his group. But I mean our view on the pickup is that, as you know, unfortunately, prior management unplugged all the legacy systems and put PeopleSoft in which was basically a pay bill order entry system. So we have lost any sort of contact management, customer relation management, or candidate profiling search or management.

And when we put recruit back in and have it completely rolled out to the field, I think there's probably going to be 25% pick-up in people's time, meaning that they're not scrambling to find a phone number in a file cabinet or not being able to do laser searches on an automated basis. So I think the pick-up is, we have 25% more time of our sales people and recruiters to be externally focused on filling more orders. So that's the net pick-up. I mean, Emmett, can you put some more meat on the bone?

Just to really -- I mean Peter did touch on all the key points. I'll just add to that. We will see more productivity as it relates to less time on administrative duties and, like you mentioned, manual time, manual effort. So searching the database, it's got robust technology for searching, managing our clients and candidates. So it's just - we're going to see a lot more productivity and efficiencies with our new tool.

And by the way, this stuff isn't Star Wars. I mean, it's unfortunate that we've done without something like this for as long as we have because most everybody else that we compete with daily have it. So it's not like, we're swearing that this is new technology that's going to transform the industry. We're just getting back to basics.

Right. And I imagine it's kind of a system where those recruiters could take maybe about six or -- I mean may be even less amount of time, maybe a couple of months just to train on it. And after that, probably by the second quarter of next year would really start seeing the benefits of that. Would you say that's fair?

Right. Now some of the people already have had exposure to this system or other similar systems because of employment at other professional staffing companies. And what we're putting in place is an industry-specific software. We've been very, very disciplined about only turning on the functionality that is absolutely essential for productivity so that it's not confusing or cumbersome.

Right. Okay. And the second question I had was, on your local RN, clinical research, your engineering, and your health information management, all these newer service offerings that you have in the MF&A business, what's the difference in the gross margins between those newer service offerings and your legacy MF&A business that you already have?

You know what? They're higher bill rates, so when you have a higher bill rate on similar gross margins you get more net gross margin dollars. But I would tell you that they're similar to the existing businesses. The net is that we have more high margin business than low margin business coming from Nurse Travel.

Right.

Then, again, Nurse Travel is a 21% gross margin business, but it's on a $70 bill rate. So when the absolute net gross margin dollars generated per hour is attractive because of the high bill rate.

Right. Okay. So it's, I guess, the function of those newer service offerings is moreso to build out the MF&A business and have more of a, I guess, in excess of 30% gross margin business in -- I guess n the total company rather than -- I mean it's just more to offset the lower gross margin business in Nurse Travel and grow out MF&A business a little more just in terms of where you're focusing your investment dollars investing in the higher margin business lines.

Correct.

Okay. Those were the questions I had. Thank you.

Thank you.

(Operator Instructions) And we'll take Toby Sommer with SunTrust Robinson.

Thanks. Question from a geographic standpoint, was there much of a -- much variance as far as demand from your customers in the any of the segments, frankly? But I guess I had a mind Nurse Travel.

No, I mean, I think consistent trends, Toby, as we have good and healthy exposure to the California market which tends to be one of the most attractive markets for Nurse Travel. We saw very good activity in the Northeast and in the Bay area for our Lab Support and clinical research business. So I wouldn't say we saw a dramatic shift in geographical revenue penetration.

And again, thinking about Nurse Travel, any change in the renewal rates or average duration of assignments?

Yes. I'll let Shawn address that. We did -- Shawn why don't you quote again the renewal reactivation rates.

Absolutely. Hi Toby. We had a reactivation renewal rate approaching 74%. As you know, we quoted last quarter that our number was roughly between 68 and 78%, with an overall goal of trying to achieve 80% in our renewal and retention rate. So we're making good progress towards that goal.

Great. And then I don't know if you commented on this, so I apologize ahead of time for rehashing, but did you comment on open orders either Nurse Travel or other segments?

We did. I mean our backlog of order activity across all lines of business is at its highest levels for the year. Specifically for Nurse Travel, I think we quoted -- I think it's less of an indicative barometer but others quote it so we do to -- we experienced 120% year-over- year increase in order activity for Nurse Travel alone.

Thank you very much. I'll get the other details that you quoted after the call. Thank you very much.

Thank you.

And at this time, gentlemen, there are no further questions. Are there any closing remarks?

We appreciate your attention to On Assignment and look forward to reporting our fourth quarter results at the beginning of next year. Thanks so much.

Thank you sir. Ladies and gentlemen, we appreciate your joining us today. This does conclude our On Assignment conference call. You may now disconnect.