ASGN Inc (ASGN) 2005 Q4 法說會逐字稿

Good morning. My name is Janice and I will be your conference operator. At this time I would like to welcome everyone to the On Assignment Fourth Quarter Results Conference Call. [OPERATOR INSTRUCTIONS] Mr. Holtzman, you may begin your conference.

Thank you, Janice. 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 on 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 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 yesterday'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 fourth quarter results. Pete.

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

During our call, I will give a review of the markets we serve and the operational highlights followed by a more detailed discussion of the performance of our operating segments by those presidents. I will then turn the call over to Mike for a more detailed review and discussion of our fourth quarter financial performance and our financial guidance for the first quarter of 2006 and the full year. We will then open the call up for questions.

Consolidated revenues for the quarter grew year-over-year by 13.4 million, or 26.2% to 64.7 million. Consolidated gross margins was 26.2%, which is a 120 basis point improvement year-over-year. These results were achieved despite there being 2.5 fewer billable days in the fourth quarter and many of our nurses electing not to work during the last week of the quarter. This quarters performance represents the third consecutive quarter that the company grew revenues and expanded its gross margin. Operating income for the quarter was 744,000 compared with a operating loss of 3.8 million in the year ago period.

Entering the first quarter of 2006, our business continues to strengthen and the markets we serve continue to be very productive. For the first six weeks of the first quarter of 2006, our weekly revenues have, on average, exceeded 4.9 million, excluding conversion and direct placement revenues. We averaged 3.7 million in weekly revenues for the same period one year ago. In addition our numbers of hours billed, billable head count, and client count continue to be at, or near, the highest levels of 2005.

I am very pleased with the revenues, gross margins, EBITDA, and net income per share that we posted for the quarter, as they were once again above the high end of our range of previous guidance. I'm also pleased that we increased our year-over-year staffing consultant productivity by nearly 25%, and we achieved the third consecutive quarter of net income. 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 fourth quarter, investors should evaluate each operating group's performance separately.

Our lab support segment generated 26.3 million in revenues, up 19.7% year-over-year and had gross margins of 32.5%, which is within 50 basis points of its all time high. Lab support billed 1,307 clients, up from 1,300 in the prior quarter and added nearly 238 new or reactivated clients in the quarter. The average number of contract professionals on billing increased by 267 or 15.4% year-over-year. The average bill rate for this group increased nearly 3% year-over-year.

Our European operations generated 4 million in revenues, up over 26% from the year ago period and had gross margins of 35.7%. During the fourth quarter our top ten customers represented 11.3% of Lab Support Segment total revenues and the average number of staffing consultants was 110, up 6 sequentially.

The Medical, Financial and Allied Group generated 11.2 million in revenues for the quarter, up 38.3% year-over-year. MF&A billed 1,012 clients, down from 1,100 in the prior quarter, and added 265 new or reactivated clients in the quarter. The average number of contract professions on billing increased by 170, or nearly 25% year-over-year. The average bill rate for the group increased 7% year-over-year. For the fourth quarter our top ten customers in MF&A represented 20% of total MF&A revenues and the average number of staffing consultants was 84, flat to the previous quarter.

The Nurse Travel Group generated 27.1 million in revenues, up 28.2% year-over-year. Gross margin was 19.7%, an 80 basis point improvement over the fourth quarter of 2004. Gross margins are traditionally negatively affected in the fourth quarter due to fewer days that the nurses are willing to work and correspondingly our ability to spread our housing costs against the same. The number of nurses billed averaged 680 compared to 496 in the year ago period and the total number of clients billed was 220, up 107 from the year ago period. The average bill rate for the group increased 2.3% over the year ago period. For the fourth quarter we added over 50 new or reactivated clients and our top ten clients in nurse travel represented 57.7% of nurse travel revenues versus 68.7% in the year ago period.

During the week of February 12th, 2006, we billed nearly 170 customers and approximately 780 nurses on assignment. Each of these data points are all time highs for that division. New nurse orders continue to be at, or near, the highest levels for 2005. Once again, our newer lines of business grew, including Health Information Management, Clinical Research, Engineering, Local RN, and Direct Hire. These lines of business generated 4.3 million in revenues or 6.6% of total revenues for the quarter. If you remember, most of these businesses were launched in 2004 on our organic basis.

I would continue to describe each of the end markets we serve as productive and improving. Both of our segments experienced increases in bill rates and bill pay spreads year-over-year. The improvement and demand in our Health Care Segment can also be seen in the fact that we work with the largest number of clients in this quarter compared to any other quarter over the last two. This is the sixth consecutive quarter that the company has met or exceeded its operating objectives and remain consistent with the operating plans that management set forth previously.

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 third consecutive quarter of net income was achieved by continuing to increase revenues, expand our gross margins, and focus on leveraging our SG&A.

Towards the end of the call today, Mike will walk you through our forward guidance that we announced in our earnings release. As for 2006 guidance, we're very excited about the groundwork we laid in '05 and the strength of the markets we serve. 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 Health Care's key core results were once again very strong. Our market share growth and client penetration over the last several quarters, combined with clear increases in demand for our Health Care Staffing services, all resulted in a 31% year-over-year increase in Health Care Staffing revenues.

Highlights of the Q4 results of our Medical, Financial, and Allied business unit are as follows. MF&A revenues were up 38.3% year-over-year. On a per day billing basis, Q4 revenues increased 5.3% sequentially during a quarter where we typically see a sequential revenue falloff due to the holidays. This performance continues as the trailing average assignment numbers for the last three weeks in MF&A were 858,000 in revenue, nearly 840 professionals on assignment and 525 billed clients. All of these results are near or above the fourth quarter averages and indicators that our field sales and recruiting productivity can continue to increase.

In 2004 within MF&A, we re-established our allied travel business and started a new health information management practice known as HIM. These combined business lines represented nearly 20%of MF&A's total revenues for Q4, 2005. Both of these businesses will continue to grow at rates above the rest of MF&A. Our consistent local market operating model and clear signs of increased market demand positioned the MF&A business for continued growth.

Now let me turn to the Nurse Travel Division. Nurse Travel revenues for Q4 increased 28.2% year-over-year. Excluding 1.6 million in revenues for staffing hospitals with labor disputes in Q3, Nurse Travel revenues achieved 1.8% sequential growth. Q4 revenues are typically below the prior quarter's results due to nurses taking time off during the holidays. So the sequential core business revenue growth is a great achievement for our Nurse Travel team.

Demand continues to remain strong as the trailing average week's numbers for the last three weeks versus the prior quarter's reported first three weeks average in Nurse Travel are 2.3 million versus 2.2 million in revenues, 759 versus 720 nurses on assignment and 164 versus 150 billed clients. All of these metrics continue to perform at all-time Nurse Travel highs. Our client count high for Q4 was 162, representing a 200% increase off the 2004 lows.

I'd also like to stress two other relevant growth indicators. First we've experienced nearly 110% year-over-year increase 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 7% year-over-year to 81%, surpassing our 2005 operating goal in this category.

These indicators show the 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 highly skilled nurse disciplines we place.

Since implementing the new strategic and operating plan six quarters ago, On Assignment Nurse Travel's billable nurse head count has increased nearly 70%. Our strategy of focusing on placing high demand and highly skilled nursing positions across the diversified client base has strengthened this business unit and put On Assignment in a much better position to leverage the increase in demand for specialty nurses. Our value propositions, consistent delivery model, and laser sharp focus in recruiting, and placing high demand and highly skilled nursing positions, makes us uniquely different than other nurse travel companies and will allow us continued growth opportunities. With that, I'll pass the call over to Emmett McGrath, our President for Lab Support. Emmett.

Thank you, Shawn. And good morning. As you have heard today the Lab Support Segment performed well in the fourth quarter. Commitment to previously outlined strategic and tactical efforts combined with greater operational leverage continues to drive impressive results. Our combined U.S. and European operations grew revenues nearly 20% year-over-year and gross margins increased 270 basis points to 32.5% compared to 29.9% for Q4 2004.

Historically the second and third quarters are our best quarters. The fourth quarter is typically one of our more challenging quarters due to seasonality, plant shutdown, and fewer billable days. I am pleased to report that the fourth quarter was our second best quarter in 2005. We realized minimal sequential revenue change and I attribute the success to a number of key operational factors.

First, we billed over 1,300 clients in the quarter. Second, our newer engineering and clinical research businesses gained greater traction generating a larger number of higher level placements, which contributed to the sequential improvement in the bill pay spread and gross margins. Revenues for these two business lines increased nearly 1% sequentially and nearly 160% year-over-year.

Third, direct hire activity in the U.S. and Europe continue to complement our revenues and enhance our margins. Direct hire fees were 725,000, representing our second strongest quarter of the year. Direct hire fees increased 400% over Q4 of 2004.

Fourth, is our emphasis on new business development, specifically in the small to middle markets where attractive margins are more attainable.

Fifth, continued focus on better pricing, expansion of new business lines, and tighter control over cost of services aided in sequential improvement in gross margins.

Sixth, reallocating resources to growth markets and to key client engagements aided in driving revenue and margin expansion.

Finally staffing consultant productivity, a critical operational objective focused on improving billable head count and gross profit per staffing consultant.

Early into the first quarter of 2006 I'm encouraged with our contract and direct hire placement trend, job order flow, contract awards and pipeline of new business opportunities. To insure continued profitable growth, we remain committed to operational excellence in 2006. In addition to fundamental sales and recruiting activities, key focus areas are greater operational leverage, margin expansion, better client penetration and new business development. I am confident we have the necessary leadership, field staff and demand for our services to make the first quarter a success. I'd now like to turn the call over to Mike Holtzman. Mike.

Thanks, Emmett. Consolidated revenues were 64.7 million down 1.9% sequentially. Excluding 1.6 million in revenues derived from staffing hospitals experiencing labor disruptions in the third quarter, consolidated revenues were up 0.5% sequentially with fewer billing days. There were 61.5 billing days in this quarter compared with 62 days in Q4 of 2004, with 64 days in Q3 of this year. For Nurse Travel, there were 92 billing days compared with 92 days in Q4, 2004 and 92 days in Q3.

Lab Support Segment revenues were 26.3 million, down 1% sequentially and represented 41% of total revenues. Lab Support Europe revenues were 4 million, down 3.6% sequentially. On a constant currency basis, revenues were essentially flat with fewer billing days. Lab Europe revenues were 6% of total revenues for the quarter.

Health Care Staffing revenues were 38.4 million, down 2.5% sequentially and represented 59% of total revenues. Within Health Care Staffing, Nurse Travel revenues were 27.1 million, down 4% sequentially and represented 42% of total revenues. Excluding 1.6 million of revenues derived from staffing hospitals experiencing labor disruptions in the third quarter, Nurse Travel revenues were up 1.7% sequentially.

MF&A revenues were 11.2 million, up 1.2% sequentially and comprised 17% of total revenue.

Emergent Direct Hire revenues totaled 1.2 million compared with 703,000 for Q4, 2004 and 1.4 million in Q3. Emergent Direct Hire revenues represented 1.9% of total revenues versus 1.4% for Q4, 2004 and 2.1% in Q3. Consolidated gross profit was 17 million for the quarter and consolidated gross margin was 26.2% compared with 25% in Q4, 2004 and 27.2% in Q3, a 100 basis point sequential decrease due primarily to increased holiday pay, and other contract professional expenses, and a decrease in Direct Hire revenues.

Lab Support gross profit was 8.6 million for the quarter, which was a gross margin of 32.5% compared to 29.9% for Q4, 2004 and 32.3% for Q3. The 20 basis point sequential increase was primarily due to a decrease in Workman's Comp expense offset by higher holiday and appreciation pay expenses and lower Direct Hire revenues.

Health Care Staffing gross profit was 8.4 million for the quarter, which was a gross margin of 21.9% compared to 21.3% for Q4, 2004 and 23.8% for Q3. Within the Health Care Staffing Segment, Nurse Travel gross profit was 5.3 million, which was a gross margin of 19.7% compared to 18.8% for Q4, 2004 and 20.6% for Q3. The 90 basis point sequential decrease was primarily due to higher holiday pay and incentives offset by lower Worker's Comp expense and travel and housing costs.

For MF&A, gross profit was 3.1 million for the quarter which was a gross margin of 27.4% compared with 27.8% for Q4, 2004 and 31.9% for Q3. The 440 basis point sequential decrease was primarily driven by favorable Worker's Comp expense adjustment recorded in Q3 and an increase in non-billable expenses related to contract professionals in Q4 and lower Direct Hire revenues.

Total SG&A expense for the fourth quarter was $16.240 million or 25.1% of total revenues, including 324,000 in accelerated depreciation related to the write-down of the front office module, PeopleSoft, as a result of the implementation of a new front office system. For Q3, SG&A was $16.370 million, or 24.8% of revenues and also included 324,000 in accelerated depreciation. The sequential decrease was $125,000.

Depreciation expense for the quarter was $1.4 million compared with 1.2 million in Q4, 2004 and 1.5 million for Q3. Year-over-year increase is principally due to accelerated depreciation explained previously. Amortization expense in the quarter decreased to 281,000 from 456,000 in the year ago period, and was unchanged from Q3. Year-over-year decrease is the result of a step-down in the accelerated amortization of customer relations.

Our operating income was 744,000 for the quarter compared with an operating loss of 3.8 million for Q4, 2004. 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 meaningful to compare EBITDA when comparing the current quarter's results to prior quarters. EBITDA for the quarter was positive 2.4 million or $0.09 per share compared with negative 2.2 million, or negative $0.09 per share for Q4, 2004 and positive 3.3 million, or $0.13 per share in Q3 of this year. We ended the quarter with cash, cash equivalents, and restricted cash of 25.4 million, essentially flat to Q3 of this year and up from 22.8 million at December 31, 2004.

For the quarter, cash used by operations was $17,000. Cash provided by stock option exercises and employee stock purchases was 1.2 million, and cash used for investing activities was $850,000. CapEx was approximately $800,000, down from 950,000 in the preceding quarter.

Net accounts receivable were 35.3 million at the end of the fourth quarter, an increase of approximately $300,000 sequentially. On a consolidated basis, day sales outstanding were 52.5, up 1.7 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 for staff consultant. For the fourth quarter, which is seasonally impacted, we averaged 247 staffing consultants and they each generated 68,800 of gross profit, a 9% sequential decrease. In the previous quarter we averaged 238 staff consultants and they each generated 75,400 in gross profit. Each staffing consultant had an average of 14.3 contract professionals out on assignment, down from 14.6 in the previous quarter. Lab productivity was 18.2 versus 18.7 in the previous quarter and MF&A was flat at 10.1. Nurse Travel was 12.8 versus 13.6 in the previous quarter.

Turning to guidance. For lab MF&A there were 64.5 billing days in the first quarter compared with 61.5 for Q4 2005. For Nurse Travel there were 90 days compared with 92 days in Q4, 2005.

Based on a quicker recovery from seasonally lower levels in employees on assignment and strength of revenues generated in the first six weeks of 2006, we currently expect revenues of 64 to 65 million for the quarter ending March 31, 2006. Due to traditional seasonal factors, we are projecting gross margins of approximately 26% and SG&A of 16.4 to 16.6 million, excluding FAS-123R expenses and including depreciation and amortization of 1.7 million, which includes 324,000 of accelerated appreciation related to capitalized IT projects to be replaced at the end of the first quarter. Using an effective tax rate of 30%, we project earnings per share of approximately $0.00, which includes charges related to stock based compensation of approximately $500,000 or $0.02 per share.

For the year, assuming fairly stable labor markets and no loss of major clients in Nurse Travel, our guidance is for revenues of 268 to 275 million, which represents growth of 12.7% to 15.6% over 2005. We are projecting average gross margins for the year of 26.5 to 27%, SG&A of 64.5 to 66 million, 2.8 million in FAS-123R expenses, or approximately $0.08 per share and net income per share of $0.14 to $0.18 after accounting for FAS-123R expenses. As you know these estimates are subject to the risks mentioned in yesterday'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 still are largely dependant on our own internal execution and not on any improvement in the end markets we serve. This quarter's performance continues to substantiate the strength of our diversified business model and is a result of the operational and management changes we made over the last 24 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? Is the operator on the line?

I apologize, sir. [OPERATOR INSTRUCTIONS] Your first question comes from the line of Tobey Sommer of SunTrust Robinson.

Good morning. Wanted to see if you could step back and take a look at the nurse staffing unit and maybe describe, as you see it, what is both drawing demand and supply to you? Is it the older nurses that came back in the work force during the recession, kind of peeling off and then - - are more of them those experienced nurses coming to you and, if so, why? Thanks.

Good morning, Tobey. From our perspective, remember, we're a niche provider in the travel industry. A lot of our demand is driven by the number of quits, because we're dealing with more seasoned nurses, it's a way for them to go into semi-retirement. We're also not as threatening to the hospital because we're not trying to taking over 100 or 150 nurses at a time. We're trying to take over the 5 to 10 most difficult assignments, either because of location, skill set, time slot, or pay.

So we're not nearly as threatening on a recruiting basis to the hospital and we're more partnering with them by saying, you focus on the nurses that you can most reliably fill 24 by 7, 365 days a year and those 10 to 15 assignments that you can't reliably fill, turn those over to us and we'll help you with that because that's our core competency.

You know the other thing is that the hospitals, although patient censuses have been flat to down, they haven't figured out how to effectively recruit and retain these nurses. So the turnover within their staff is equally great, despite the aging of the nurse.

And then on the supply side, in terms of your ability to attract nurses, any changes there?

You know, we're just doing it the old fashioned way. We're having as many contacts and as many conversations as we can with nurses trying to express to them the attributes and the attractiveness of working part-time or on a nurse assignment. And as the nurse gets older, the prospect of working 20 weeks versus 51 weeks and making over a majority of what she made full time, is an appealing story to listen to. So we're just having more conversations in order to attract more nurses.

Is the sustained higher level of orders, impacting the tone of those conversations? Are you finding more and more nurses willing to hear your recruiters out?

I don't know if it's because of the orders as much as it is the personal circumstances of the nurses. The nurses are definitely more receptive to listening to the story, as you know credibility has returned to the industry about being able to in a credible way keep a nurse busy as many weeks a year as they want. During the downturn as the hospitals were competing with the per-diem groups or some of the other thirteen week nurse travel product lines, they would argue, they'd say don't listen to that - - whatever that recruiter tells you because we're not going to give the travel agency any business, so they can't keep you busy.

So the nurse during a down-turning economy didn't give up their full-time job because they were afraid that they wouldn't get enough work through the travel agency. And we can reliably and factually substantiate that we can keep her busy as much as she wants, and she has greater choices of locale now.

Shifting gears, I'll ask one more question, then I'll get back in the queue. Could you comment on the level of staffing consultants in a - - if you're happy, and maybe how you may expand that and where in '06? Thank you.

I'll start off then I will give it to Mike Holtzman. We pretty aggressively elected in kind of the late November/December period, because of what we saw going on in our business, to try to ramp up some hiring in some selected geographical markets where our staffing consultants are at appropriate levels of productivity and in our newer lines of business and in nurse travel. We're trying to get to a closer levels of what we call full employment of budgeted sales people and recruiters. And we think that'll permit us to continue to grow the way we have been.

So you will see some head count growth, predominantly in areas like Engineering, Clinical Research, Health Information Management, Allied Travel and then the Nurse Travel Group and then in the core legacy Lab Support offerings and then MF&A. You may see some head count growth in some markets that are really growing fast and to gain any additional revenue, the most plausible way to do that is to add some additional resources. Mike, you want to give him some numbers?

Yes. We averaged 238 in the third quarter. And as I indicated we're at 247 in the fourth quarter. And I think due to seasonal factors, as well as the increase in head count, it did have an impact on the productivity, in that when you take a look at the traditional metric that we report, the average number of contract professionals per staff consultants, it was down slightly from 14.6 in the third quarter to 14.3 in the fourth quarter. But we were kind of expecting that though just due to seasonality and due to the fact that we were ramping up in some of these faster growing lines of business. So.

I'll ask one follow-up if I could and then I'll get back in the queue. In terms of capacity on a blended basis, are we still somewhere around 50, 60% of what capacity had been in the prior expansion period in terms of the number of contract professionals per staffing consultants?

Right, no. Remember, I think we publicly stated that our short term goal was to try to get to 22 over the next 24 months and we're around 14 something, under 15. And kind of the blended benchmark number during the prior peak of the cycle was about 28. So we're not suggesting that we're going to get to 28. But we do think, even with additional head count, over the next 24 months, if the markets remain productive and our people remain focused, that we can get higher than the 15 and closer to the 22.

Thank you very much. Congratulations on a good quarter.

Thank you very much.

Your next question comes from the line of Jim Janesky of Ryan Beck & Company.

Yes, Good morning. Staying on the productivity topic, I have a couple questions around that. First is, is the reason that you're not getting as much SG&A leverage at this point in the cycle, does that have to do with the increased hiring that you decided to do?

Yes, good morning, Jim. That is exactly what it was. We made a conscious decision to hold on to some resources in markets that are productive, but are below our targeted productivity levels and at the same time increase our head count growth in some of the markets that are growing faster, lines of business that are growing fast. So, we could layer off some stuff in increased productivity. But it's our judgment based, on the strength of the markets we serve and the tone of the conversations we're having, to give some of these markets where we have resources a little more time.

Okay. And then looking out throughout 2006, is this hiring going to be front end loaded? Will it be spread out over the four quarters? What are your thoughts there?

It's staged. But, you should assume the biggest percentage increase coming in the first and second quarter so we get the benefit of their talents throughout the biggest - - the largest portion of the year.

Okay, sure. And then looking at the productivity per consultant in the fourth quarter, moving sequentially into the first quarter, your revenue guidance and - - would imply that that would - - on a apples to apples basis should stay flat. But I would imagine with the increased hiring, we could see that go down slightly or do you expect these people you hire are going to hit the ground running very quickly?

Well for a conservative assumption, you would assume that we are hiring some people and that they're not going to hit the ground running as quickly as you would hope. And that would mean we would be flat, down slightly on productivity. But you never know, somebody may enter in a market that's very productive, and because of previous experience, hit the ground running and offset the drag. But, I would say that probably flat to down slightly on the productivity in the first quarter.

But this is different than the - - when you first came on board, Pete, and you were looking at ramping up productivity and where your level of head count should be, there were a lot of moving pieces including personnel issues both at the top and within the field. I mean now, just to be clear, is what you're saying is we could do more business in markets that are at their peak productivity by adding more people, I mean, so there is a chance that the productivity ramp-up could be faster. Is that a correct assumption?

That's correct, Jim. I mean, when we first started this rebuild, a lot of the markets that we re-populated, the markets hadn't been stimulated at all, so it took us a little bit longer than we expected. That's not the case now. I mean, this is one of those judgment calls on our part that we really think that the markets are pretty productive and if we put the right people in the market, that we can continue this good growth rate, and get the right return on investment on this variable cost. If we're wrong, and we haven't been wrong on the market strength yet, if we're wrong, we'll make sure that we peel back some of the investment.

Right. So I mean the assumption, it appears, for the year is that you will continue to invest pretty heavily. And if you do that, then that should have a positive effect, of course, on revenues and gross profit. But if you see that something is going on in the market, you could peel it back and then the operating expenses might come in lower, right?

Correct. And the productivity numbers would go up.

Okay. All right. Well, thanks for that detail.

You bet.

Your next question comes from the line of Jeff Silber of Harris Nesbitt.

Thanks a lot. Just wanted a little bit of clarification on some of the guidance issues. Mike, you had mentioned, I think, the $500,000 in stock based comp expense for the first quarter and 2.8 million for the year. Is that pre-tax or after-tax?

That's pretax. And Jeff, as you know, we don't get a tax benefit on [ISO's], so that's why I provided the pre-tax number as well as the impact on an after-tax basis on EPS. So that the effective tax rate on FAS-123R is actually lower than on the operating income, excluding it.

Okay, great. And when talking about tax rates, you mentioned the 30% effective tax rate for the first quarter. What are you using for your guidance for the entire year? Is it also 30%?

It's 30% at this point. And Jeff, that has to do with the fact we've got a full evaluation allowance on. And in accordance with FAS-109, we had to go through and calculate what the payable was for the year. But then we also had to take a look at the deferred assets that have been fully reserved. And we had to map out those that we're going to reverse over the last two years, because we had to net that against the provision. And that's why the tax rate looks a little bit out of whack.

Okay, great. In terms of some of the other aspects of your business, you gave us revenue and gross margin guidance. Are there going to be any diverse trends by the specific segments, or they're all going to kind of run in line with the guidance for the overall company?

You know, it's a great question, Jeff. Where we sit today, I think that you might see - - and we're not giving public guidance on this. But there is a chance you could see the Nurse Travel Business grow faster than some of the other segments. I think that the Direct Hire Business and Lab continues to be strong, but as we publicly stated, I don't think that will ever be more than like 3.5 to 5% of total revenue. We're controlling that because we're a contract labor shop.

And then we have pretty good feelings about the growth in the Allied Travel and the Health Information space. But as you saw in our fourth quarter results, all of our business lines are turned on right now. It's just which will grow faster than the other.

Okay, great. Speaking of the Nurse Travel Business, I know you've got some sizeable exposure in California. Have you seen any impact, either positive or negative, from the anniversarying of the minimum staff-patient ratio loss?

No, not really. I think people are quietly trying to get more and more in compliance with it. But we haven't seen a dramatic benefit over what we currently are experiencing. And no more chatter, by the way.

Okay, thanks. If we can also get an update just in terms of the PeopleSoft rollout, how that's been impacting the company?

Well the People - - prior management installed the PeopleSoft in 2002, 2003, and unfortunately it didn't go very well and we spent all of 2004 correcting it. And when I got here, we basically had a paid bill order entry system. And for the last six and a half, seven months, we've been working on the rollout of a front end system that - - it's off the shelf, industry specific software called Recruitmax. And we've done all of our testing, sandbox testing, and user acceptance. And we're hoping that April we'll start rolling that out and we think the net benefit from the rollout of this front office system is that we'll have a more bust client contact, search retrieval attachment tool which will allow the staffing consultants day - - if they spend eight hours a day, they'll spend a couple hours a day less on running around looking for a contact phone number or for a resume, et cetera.

Okay, great Thanks a lot.

Your next question is a follow-up question from Tobey Sommer of Sun Trust Robinson.

Thanks. I had a request regarding any possible revenue outlook you had for labor disruptions at hospitals. I know that's difficult to gauge, but wonder if there was anything on the horizon that would lead you to believe that you could garner some revenue from that kind of business near term?

You know Tobey, in '06 - - in '05 as is in '06, we did not budget any revenue to be derived from that. And we're not actively marketing that service. We are staying close to customers and to the extent we had a previously signed contract that springs into existence in the event they have an emergency or we're called upon, we're using that as a tool to stay as a valued partner to the hospital. But there are - - I have been alerted through e-mails from some of our operators, that there's some rumblings out there, some small strikes. But, we see such a small percentage of that business, I'm not the best indicator of what's going on in the nurse market as far as labor disruptions because we just don't pursue that business that much.

Sure.

But none of it's - - we haven't budgeted anything in our '06 numbers.

And, Peter, you've got some cash on the balance sheet. And I would assume, given positive EPS in the year, the outlook is to perhaps add to that cash balance through cash from operations and free cash flow. What are your thoughts on how to deploy that cash if your end markets stay constructive and the core business continues on its upward trend? How may you think about your uses of cash?

Sitting here today, I have a couple of thoughts. The first is we can increase our earnings per share by completing and expanding our share repurchase program which I feel more comfortable about doing in '06 than I did in '05, because we are in a cash-generation position. So we are spreading our profits over a smaller share base, which will permit earnings surges if our revenues continue to grow the way they are.

The second is we don't have a gross profit problem. We don't have a revenue growth problem. We don't have any sort of atrophy in any of our divisions which requires us to go look for new lines of business to participate in. However, with that said, if we can find businesses that have attractive gross margins, have attractive growth rates, it would substantially assist us in our fixed-cost SG&A absorption.

So to the extent we can find the right company - - and as you know, I've done 85 staffing acquisitions in my previous life. To the extent we can find something that's additive and we can be disciplined in our pricing, we will do something because it would be very additive to our SG&A absorption. But right now, a lot of the stuff we look at because of the growth rate in the margin is dilutive to our growth rate and our gross margins, even though it may be additive to our EPS at this point. So, we're looking. We're having conversations. But we're not - - we're going to do the right thing to continue to enhance our enterprise value and our shareholder value.

So I think you'll probably not see anything that would be out of left field. I think that you'll see us maybe institute a share repurchase program some point in the year to the extent that our trends continue the way they are. But that's subject to Board approval, as you know.

Thanks. And, I was wondering if you could - - I'm not sure if you gave this in the prepared remarks. The new lines of business that are what about a year and a half old now or so, could you tell us what they were as a proportion of overall revenue? I think you broke it out on a segment basis.

Yes, I think the total consolidated for the fourth quarter was 6.6. Let me just check my notes real quick. It was 6.6. It was $4.3 million in gross revenues for the fourth quarter. And it was 6.6% of total revenues for the fourth quarter.

Any sense for where that can go? Is there another line or two of business that you think you may want to unveil in the near term?

Well, I would share with you that those businesses are productive. You know, we're fortunate enough that we have good brands that, for instance, Emmett has brought a couple of people on on the engineering side and really kick-started that business. We've always been in the coding and billing side, but we weren't on the hiring side of HIM, and we brought in some people who really understood that business and we've added some additional people to it because we see it as a pretty productive marketplace.

I would tell you that that's a very productive area for us because we don't have to compete with the usual suspects. Most of the nurse travel companies aren't in that space. So we're looking more on resources in those lines of business versus companies.

Okay. And I'll ask one more question I will get back in the queue. Gross margin, I was wondering if you could comment on the outlook for favorable bill pay rate spread expansion and/or the opportunity for you to continue to kind of shift some of your former package expenses to more of an a la carte system and what the outlook is there for the contribution from both bill pay rate spread expansion as well as those other items to your gross margin.

Right. It's a great question and I'm not trying to be elusive, but three points I would make. First of all, I think our margins are some of the highest consolidated margins for the health care staffing industry and I think we've done a good job of expanding it and I think we can maintain them. Expansion from this point forward would come as follows. One, we're not expecting it all to come from bill increases from our customers, but rather what you said, changing our cost of services on some appreciation pay and holiday pay. So we think there's some things we can do on the margin to impact our cost of services, even if we don't increase our bill rates.

The second thing is the market is tightening, specifically if you're dealing with experienced, seasoned people. And our technical resources have multiple opportunities. And our customers are coming to realize that if they want the candidate that they may have to pay a little bit more.

So we're having thoughtful, non-threatening conversations with our customers trying to express to them that we do have some additional costs in the way of increased airfare or housing, increased costs for background checks, drug screening, things like that. And that there's those willing to pay for the same resource and if they want that exact resource, they may need to pay a little bit more on the bill rate.

It is really been a conscious effort starting just now in the first quarter and we hope that it bears fruit. But we think the market is of such a nature that it'll support our efforts to try to increase our bill rates. But that is something we're doing market by market. It is not a big bang theory. But we are trying to see if the market will accept price increases.

On the same vein, could you comment on what - - I think you gave this in your prepared remarks, what was pricing up in the nursing unit?

It was the smallest increase year-over-year. I believe it was 2.3%.

I'm curious if you look at your customer base in that unit, is that increase being driven by the smaller customers, or do you have some of your larger customers also participating in, albeit the slower increase, but in increases.

I would say it's probably smaller customers because the larger customers are some of our largest bill rate.

Okay. Thank you very much.

Thank you.

[OPERATOR INSTRUCTIONS] Gentlemen, we have no further questions at this time. Are there any closing remarks?

We appreciate your continued attention and support of the company and look forward to reporting our first quarter results. Thank you very much.

Ladies and gentlemen, that concludes today's conference call. You may now disconnect.