ASGN Inc (ASGN) 2006 Q2 法說會逐字稿

Good morning. My name is Michelle, and I will be your conference facilitator today. At this time I would like to welcome everyone to the On Assignment second quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS]

Mr. Holtzman, you may begin your conference.

Thank you, Michelle. Before we begin I would like to remained 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 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 the forward-looking statements. We described some of these risks and uncertainties in yesterday's press release and in our filings with the SEC. We do not assume the obligation to update statements made in this conference call.

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

Thank you, Mike. Good morning. I would like to welcome everyone to the On Assignment 2006 second quarter earnings conference call. With me are Mike Holtzman, our CFO, 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 our operational highlights, followed by a more detailed discussion of the performance of our operating segments by their respective presidents. I will then turn the call over to Mike for a more detailed review and discussion of our second quarter financial performance and our financial guidance for the third quarter of 2006 and the full year. We will then open the call up for questions.

This quarter's performance was the strongest since our new management team took over in September 2004. Our EBITDA and EPS grew 106.5% and 600% respectively on a sequential basis and 257% and 600% respectively year over year. All divisions contributed to our strong reported results. Consolidated revenues for the quarter grew year over year by $11.2 million or 19.6% to $68.6 million. Consolidated gross margin was 28.1%. This represents a 140-basis point improvement year over year and a 260-basis point improvement sequentially. Gross margins expanded year over year in both of our segments. Our consolidated hourly bill pay spread also increased year over year. In the five quarters since the first quarter 2005, we have grown revenues $74.4 million cumulatively, while our consolidated quarterly SG&A has remained essentially flat at $16.1 million, excluding FAS 123(R). Operating income for the quarter was $2.6 million, which includes $555,000 of FAS 123(R) expense, up $2.8 million from the year-ago period. For those investors who have followed our Company over the last three years, our second quarter EBITDA exceeded the full-year EBITDA generated by the Company in 2003, excluding goodwill impairment charges. Our performance this quarter is a testament to the strength of our business and the labor markets we serve.

Exiting the quarter demand accelerated for all of our division services. Our weekly revenues averaged $5.6 million for the two weeks ended July 23rd of this year, excluding Conversion and Direct Placement revenues. We averaged $4.6 million in weekly revenues for the same two-week period one year ago. In addition, our number of hours billed, billable headcount and client count continues to exceed the highest levels of 2005. The actions we put in place regarding reduction of cost of services and bill rate increases over the last eight quarters increased our consolidated gross margin by 140-basis points over the prior-year period, and allowed us to grow our profits faster than our revenues. During the quarter, we increased our year over year productivity per staffing consultant by 19.5% and we achieved the fifth consecutive quarter of net income. I'm also pleased that we are well ahead of schedule in achieving our targeted EBITDA margin of 7% by the end of 2007. Adjusted EBITDA this quarter, which excluded FAS 123(R) expense, was 6.5%, up from 1.9% in the year-ago period. All of our divisions positively contributed to our revenue growth and net income generation.

To fully appreciate the performance of our Company during the second quarter investors should evaluate each operating group's performance separately. The Lab segment generated $29.1 million in revenues, up 21.5% year over year and had gross margins of 33.4%. Lab support billed approximately 1,400 clients, up 1,334 in the prior quarter, and added 256 new or reactivated clients in the quarter. The average number of contract professionals on billing increased 246 or 13.8% year over year. The average bill rate for this group increased 5.3% year over year. Our European operations generate $4.3 million in revenues, up 23.5% from the year-ago period, and had gross margins of 34.9%. During the second quarter our top ten customers represented 15% of Lab support segments total revenues and the average number of staffing consultants was 113, down two sequentially.

The MF&A group generated $12.6 million in revenues for the quarter, up approximately 34% year over year. MF&A billed 1,090 clients, up from 1,033 in the prior quarter, and added 293 new or reactivated clients in the quarter. The average number of contract professionals on billing increased 160 or nearly 21% year over year. The average bill rate of the group increased nearly 6% year over year. For the second quarter our top ten customers in MF&A represented 22.4% of total MF&A revenues and the average number of staffing consultants was 86, flat sequentially.

The Nurse Travel group generated $26.9 million in revenues, up 12% year over year. Gross margin was 27 -- excuse me, 20.7%, flat to the second quarter of 2005. The number of nurses billed averaged 684 compared to 593 in the year-ago period, and the total number of clients billed was 260, up 86 from the year-ago period. The average bill rate for the group increased 2% over the year-ago period. For the second quarter we add 69 new or reactivated clients, and our top ten clients in Nurse Travel represented 48.6% of Nurse Travel revenues versus 57.2% in the year-ago period. During the week of July 23rd this year, we billed 206 customers and had 783 nurses on assignment. New nurse orders continue to be at the highest levels.

We remain focused on our newer lines of business, including H.I.M., Clinical Research, Engineering, Local RN and Direct Hire. These lines of business generated $5.1 million in revenues or 7.4% of total revenues for the quarter, compared to 4.6% in the second quarter of 2005. If you remember, most of these businesses were launched in 2004 on an organic basis. I would continue to describe each of the end markets we serve as very productive and improved over the second quarter of 2006. The labor markets have not tightened to the point that we are experiencing rapid contract employee wage inflation that we cannot pass along to our clients. This is our eighth consecutive quarter that the Company has met or exceeded its operating objectives and remain consistent with the operating plans that management has 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 fifth consecutive quarter of net income was achieved by continuing to increase revenues, expanding gross margin and focusing on our SG&A expenses. Towards the end of the call today Mike will speak to you regarding the forward guidance that we announced in our earnings release. As for the updated 2006 guidance, we continue to remain excited about the groundwork we have laid and the strength of the end markets we serve.

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

Thank you, Peter. On Assignment Healthcare Staffing's Q2 results continue to show steady progress. Our market share and continued client growth over the last several quarters, combined with a strong demand for our Healthcare Staffing services, all resulted in an 18% year over year increase in Healthcare Staffing revenues. Revenues for the segment represented 57.6% of the total revenues for the quarter. Gross margin for the segment was 24.1% for the quarter, up 90-basis points year over year and 200-basis points sequentially.

Highlights of the Q2 results for our Medical, Financial, and Allied business unit are as follows. MF&A revenues were up 34% year over year and 9% sequentially. This performance continues, as the trailing average assignment numbers, not including direct hire, conversion or billable expenses, for the two weeks ended July 23, 2006 versus the same two-week period in the prior quarter were $984,000 in revenues versus $902,000, 955 professionals on assignment versus 912, and 604 billed clients versus 546. All of these early third quarter results are above the second quarter averages, and are being achieved with staffing consultant levels consistent with 2005 and the previous quarter. The market demand for all of our Healthcare professional services remain strong. We continue to gain market share, are seeing expanding staffing consultant productivity levels, and the positive market momentum continues.

Now let me turn to our Nurse Travel division. Nurse Travel revenues for Q2 increased 12% year over year. Excluding $211,000 in revenues derived from labor disruptions occuring in Q1, revenues declined 5.4% sequentially. As discussed in the Q1 conference call, we anticipated that our Q2 revenues would be affected from a conscious decision made to focus on shifting our client concentration and expand our client count.

As you recall, in Q1 of 2006 we'd experienced a much faster ramping of nurses almost immediately within the quarter, as several of our largest clients had sizable needs at the start of the year that we were able to fill. Some of these clients have now returned to more normalized nurse count levels. As these nurses began to come off assignments early in Q2, we took the opportunity during a tight labor market to reassign many of these nurses to newly-developed clients, in order to diversify our client base and revenue streams. These reassignments could not all occur simultaneously during the varied assignment end dates and, therefore, took about eight weeks to complete and affected revenues during this time span. The net effect of this client diversification effort is that we have, over the last quarter, experienced an increase of nearly 29% in clients billed and put On Assignment Nurse Travel in a much better position to grow future revenues off of an expanded client base, as the nurse pool loosens up during the second half of the year.

This concerted effort to change our client concentration mix has already begun to positively affect our revenues in Q3. Demands across this expanded client base continues to remain strong, as the trailing average weeks numbers for the two-weeks ended July 23, 2006, versus the same two-week period in the prior quarter were $2.4 million in revenues versus $2 million, 785 nurse on assignment versus 652, and 205 billed clients versus 167. As Peter said, our top ten clients in Nurse Travel represented 48.6% of Nurse Travel revenues versus 53.2% in Q1 and 57.2% in the year-ago period.

Our highly focused efforts over the last two years have made us more diversified, niche focused, and less susceptible to large client demands. We've focused on broadening client base with great success, while at the same time working to maintain a high nurse reassignment ratio. We also continued to experience increases in market demand within the types of high-skilled nurse disciplines we place, and our biggest challenge is always in continuing to attract new highly-skilled nurses to our supply pool. So I'm pleased to say that our new nurse applicant numbers increased sequentially, and we're beginning to see an expanding nurse pool late into Q2 and early Q3, as we had hoped. Our value propositions deliver a model and focus on placing high-demand and high-skilled nursing positions continues to make us uniquely diversified and different from other travel nurse companies.

With that I will pass the call along to Emmett McGrath, our President for Lab Support. Emmett?

Thank you, Shawn, and good morning. As you have heard earlier today, the Lab Support segment had a very strong quarter. Both our U.S. and European operations generated impressive results, consistently reaching new highs in key performance areas. I am pleased to report that revenues for the segment increased 21.5% year over year and 9.9% sequentially. Revenues for the segment represented 42.4% of the total revenues for the quarter. Gross margin for the segment was 33.4% for the quarter, representing an all-time high. This represents 180-basis point increase over the same quarter last year, a 290-basis point improvement sequentially.

I attribute this performance to a number of key operational factors. First, our immediate focus during the quarter was to continue to build upon the momentum realized in the first quarter. Key focus areas were, and continue to be, effective delivery of high-margin contracts in direct-hire service offerings, new business development, reactivation of former clients, execution of newer contract awards, and greater penetration with existing clients. As a result, we were successful in improving gross profit by expanding bill and pay rate, increasing the number of contract professionals on assignment, and growing our client base. We expanded the hourly bill pay spread 4.4% over the same period last year and 3.4% sequentially, through higher level placement and a greater contribution from our newer service lines. We also increased the number of contract professionals placed on assignment by 13.8% year over year and 4.3% sequentially, and we billed approximately 1,400 clients and generated 256 new and reactivated clients.

Second, our commitment to maintain and expand gross margin through internal and external efforts. Internally, we have been successful in reducing and controlling our cost of services. We are now realizing margin expansion, as a result of prior decisions to modify contractor benefits and minimize nonbillable expenses. Externally, our staffing consultants excelled in maximizing margin through consistent pricing practices, engaging clients that value our specialized services, increasing Direct Hire and Conversion activity, avoiding high-risk work environments, passing through expenses and tax increases, and, finally, migrating to higher-level skill disciplines. Third, our attention to individual productivity. During the quarter, gross profit per staffing consultant increased approximately 17% over the same quarter last year and 23.1% sequentially. This improvement is in direct response to operational excellence, demand for our services, and the quality of our staffing consultants.

Fourth, our growth in the newer business lines. Clinical Research and Engineering grew revenues nearly 122% over the same quarter last year, and 31.6% sequentially. I attribute this performance to our dedicated sales and recruitment professionals, and the strength of the markets that we serve. Early into the third quarter of 2006 I am encouraged with our operating trends, job order flow and pipeline of new business opportunities. To ensure continued profitable growth, we remain committed to maintaining and expanding gross margin, gaining greater operational leverage, building our client base, and controlling costs. I am confident that we have the necessary leadership, field staff, and demand for our services to make the third quarter a success.

I would now like to turn the call over to Mike. Mike?

Thanks, Emmett. Consolidated revenues were $68.6 million, up 2.9% sequentially. Excluding $211,000 in revenues derived from staffing hospitals experiencing labor disruptions in the first quarter, consolidated revenues were up 3.2% sequentially. There were no such revenues in the second quarter of this year. There were 63.5 billion days in this quarter, compared with 64 days in Q2 of '05 and 64.5 days in Q1 of '06. For Nurse Travel there were 91 billing days compared with 91 days in Q1 of '05 and 90 days in Q1 2006. Lab Support segment revenues were $29.1 million, up 9.9% sequentially, and represent a 42.4% of total revenues. Lab Support Europe revenues were $4.3 million, up 18% sequentially. On a constant currency basis, revenues were up 13.2% sequentially. Lab Europe revenues were 6.2% of total revenues for the quarter.

Healthcare Staffing revenues were $39.6 million, down 1.7% sequentially, and represented 57.6% of total revenues. Within Healthcare Staffing Nurse Travel revenues were $26.9 million, down 6.1 sequentially, and represented 39.2% of total revenues. Excluding $211,000 in revenues derived from staffing hospitals experiencing labor disruptions in the first quarter, Nurse Travel revenues were down 5.4% sequentially. MF&A revenues were $12.6 million, up 9.1% sequentially, and comprised 18.4% of total revenue. Conversion and Direct Hire revenues totaled $1.7 million, compared with $963,000 for Q2, 2005, and $1 million in Q1, 2006. Conversion and Direct Hire revenues represented 2.5% of total revenues, versus 1.7% for Q2 of 2005 and 1.5% in Q1 2006. Consolidated gross profit was $19.3 million for the quarter, compared with $15.3 million in the year-ago period and $17 million in the previous quarter. Consolidated gross margin was 28.1%, compared with 26.7% in Q2, 2005, and 25.5% in Q1 2006.

Lab Support gross profit was $9.7 million for the quarter, which was a gross margin of 33.4% compared to 31.6% for Q2 2005 and 30.5% for Q1 2006. The 180-basis point increase year over year was primarily related to lower Workers' Comp expense, lower appreciation and holiday pay expense, and higher Direct Hire revenues. Healthcare Staffing gross profit was $9.6 million for the quarter, which was a gross margin of 24.1% compared to 23.2% for 2Q 2005 and 22.1% for Q1 2006. Within the Healthcare Staffing segment, Nurse Travel gross profit was $5.6 million, which was a gross margin of 20.7%, flat to Q2 2005 and up from 20.2% for Q1 2006. For MF&A, gross profit was $4 million for the quarter, which was a gross margin of 31.5%, compared with 25.8% for Q2 2005 and 27% for Q1 2006. A 170-basis point increase year over year was primarily related to higher bill pay spreads, lower appreciation and holiday pay expense, and higher conversion revenues. These favorable adjustments were partially offset by increased expenses related to Workers' Comp and higher travel and housing costs for contract professionals.

Total SG&A expense for the second quarter was $16.6 million, or 24.2% of total revenues. Excluding $555,000 related of FAS 123(R) expense, SG&A expense was $16.1 million, or 23.4% of total revenues. For Q2, 2005, SG&A was $15.6 million, or 27.1% of revenues, and did not include FAS 123(R) expense. The year-over-year increase was primarily tew to a higher number of staffing consultants and commissions due to higher revenues. The sequential increase in SG&A was $86,000, excluding accelerated depreciation in the first quarter and FAS 123(R) expense. Depreciation expense for the quarter was $1 million compared with $1 million in Q2, 2005, and $1.5 million for Q1 2006. Amortization expense in the quarter decreased to $237,000 from $282,000 in the year-ago period, and was $235,000 for Q1 2006. The year-over-year decrease was primarily due to the step down amortization of our identifiable intangible assets. Our operating income was $2.6 million for the quarter, compared with an operating loss of $221,000 for Q2 2005, a year-over-year improvement of $2.8 million.

We believe it is meaningful to compare EBITDA when comparing the current quarter's results to prior quarters. EBITDA for the quarter was $3.9 million. Excluding FAS 123[R] expense of $555,000, adjusted EBITDA was $4.4 million, compared with $1.1 million for 2005 and $2.3 million in Q1 2006, excluding $459,000 in FAS 123(R) expense. We ended the quarter with cash, cash equivalents and restricted cash of $33.8 million, up from $27.4 million for the preceding quarter. For the quarter, cash provided by operations was $6.9 million, cash provided by stock option exercises was $630,000, and cash used for investing activities was $1.9 million. CapEx was $660,000, down from $1.6 million in the prior quarter, due to completion of our front office IT project for Lab U.S. and MF&A. Net accounts receivable were $35.1 million at the end of the second quarter, a decrease of approximately $2.1 million sequentially. On a consolidated basis, days sales outstanding were 48 days, down from 52 days in the prior quarter. 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 second quarter, we averaged 252 staffing consultants, including two who were dedicated to Direct Hire activity. They each generated $76,500 of gross profit, a 13.5% sequential increase and nearly 20% increase year over year. In the previous quarter, we averaged 252 staffing consultants and they each generated $67,400 in gross profit. In the year-ago period we averaged 240 staffing consultants and they each generated $63,900 in gross profit. Each staffing consultant had an average of 14.6 contract professionals out on assignment, up from 13.1 in the year-ago period and 14.1 in the previous quarter. Lab productivity was 18.1 versus 17.4 in the year ago period, and 16.9 in the previous quarter. MF&A productivity was 11.1 versus 8.6 in the year ago period and 10.1 in the previous quarter. And Nurse Travel was 12.7 versus 12.4 in the year ago period and 14.3 in the previous quarter.

Now turning to guidance. For Lab and MF&A, there were 62.5 billing days in the third quarter compared with 63.5 for Q2 2006. For Nurse Travel, there were 92 days compared with 91 days in Q2 2006. Based on the first three weeks of the third quarter of 2006, we currently expect revenues of $73.5 to $74.5 million for the quarter ending September 30, 2006. We are projecting consolidated gross margin of 27.5% to 28% and SG&A of $16.2 to $16.6 million, including depreciation and amortization of $1.4 million, and excluding approximately $850,000 in FAS 123(R) expense. Using an effective tax rate of 30%, we project earnings per share of $0.08 to $0.10, which includes FAS 123(R) expense of approximately $0.02 per share.

For the year, assuming fairly stable labor markets and no loss of major clients in Nurse Travel, we are raising our guidance for revenues to $279 to $282 million from $270 to $275 million, which represents growth of 17.3% to 18.6% over 2005. We are projecting average gross margin for the year of approximately 27%, SG&A of $64.5 to $65.5 million, excluding $2.6 to $2.8 million in FAS 123(R) expense, and raising our earnings per share guidance to $0.21 to $0.24 from $0.15 to $0.18, including FAS 123(R) expense of $0.08 per share. We'll continue to review our annual guidance on a quarterly basis and update it, as appropriate. 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 up the lines for questions.

Thanks, Mike. On Assignment's growth opportunities still continue to be largely dependent on our 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 direct result of the operational and management changes we have made over the last 30 months. 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.

So I'd like to now open the call up to participants for questions. Operator?

[OPERATOR INSTRUCTIONS] And your first question comes from Jim Janesky.

Yes, good morning. I have a couple of questions. My first one is for Emmett. Emmett, can you give us an idea of what's driving the growth within Lab Support? Is it market share? Is it the end markets growing? A combination of both? Just give us an idea of what the trends are.

Good morning, Jim. I think the driver is the combination of both. We have strong markets, and another thing is we have great contract awards that we're executing well on, that are adding momentum to the business. Also, people are ramping up. We hired some people, we invested in the Company and they're ramping up. So there's strong demand for our services. We're in good markets -- you know, biotechnology, pharmaceutical, food and beverage. These markets are growing and we're capturing that. Also, it's our focus on certain markets, too; the small middle market where we're getting more traction. And overall, everybody's just executing well. We have good leaders that are holding people accountable. We have metrics in place and incentive programs to drive the performance.

You know, Jim, I would just add -- this is Pete. I mean, you've followed the Company probably longer than most, but Lab Support brand is probably one of the strongest specialty brands in the staffing industry. And we've got the right management and the right staffing consultants, and we're really regaining market share, along with just the expanding economic environment.

All right. Thanks. Shifting to Shawn, did you say that there were no labor disruption revenues this quarter, Shawn?

That's correct, Jim.

Okay. And something I wanted to follow up on was a comment that you made. You do expect the supply of nurses to loosen up in the -- supply of nurses willing to travel, I think is a better way of putting it, to loosen up in the second half of the year. What do you think is going on in that area that's going to loosen up that supply?

Good question, Jim. First off, it's a general market trend. In the second half of the year, generally there are more nurses that looking to take on travel assignments, as they end through the summertime and move into the third quarter. Secondly, we seem to see our applicant flow, based on some of the things we're doing from a marketing perspective right now, that are really opening up the doors for us to be able to provide opportunities for nurses in a great demand market space right now. So we see our applicant flow increasing. We see some of the just general market trends moving in the right direction. And as nurses exit the summertime, we're starting to see a bigger applicant pool entering our market space.

Okay. And that makes sense that, you know, as we -- as these assignments do take sometimes a little bit of time to organize, there is more of a seasonal flow as we -- I know, no one can think when it's like 150 degrees here on the East Coast about colder months, but that movement into warmer areas. But are you at all looking out towards the -- you know, the seasonal impact towards the end of the year in some of the, you know, vacation parts of the country? Or just give us an idea of what the trends are in volume, because, frankly, it appears as if you folks are outgrowing the market on the volume side and are in line, maybe, on the pricing side.

Yes. I mean, Jim -- this is Pete, I would tell you that our volume growth has to do with direct correlation to expansion of our client list. We are trying to avoid these kind of temporary spikes because of fluctuations, because of a flu season or because the snow birds. This is all directly related to volume growth created by new clients and our value proposition. We're not trying to pick up 150 nurses at Cedar Sinai Hospital. We're trying to pick up the ten to 15 most difficult assignments with the highest skill sets, and that's what's driving it.

Okay. And then a question for you, Pete. What are -- you know, from the whole Company perspective, is there any hesitation on the part of clients due to economic trends and concerns and so there's any type of pull-back in demand? Or I guess, even directional nervousness as the quarter progressed and as you went into the third quarter?

I'll give you my experience here at On Assignment and then my broader staffing experience. The things that we look for in a staff augmentation environment is cancellation of projects, delay of projects, lengthening of decision making with regard to candidates that are presented, slowdown in conversion or firm placement fees. We've seen none of that. All we have seen is a strengthening in demand and an increase in our headcount. And a lot of our contracts, in like some of the other companies or the commercial staffing companies, are longer-term assignments. So, you know, people haven't pulled back yet. They're not seeing it in their business. They still have work that has to be delivered to their superiors, and they're continuing to execute on their business plan. The public equity markets are saying that the expansion cycle is over with, but I think I remember someone telling me a long time ago that Wall Street's collectively -- correctly predicted 13 out of the last six recessions. [LAUGHTER]

Yes, okay. Thanks.

Your next question comes from Tobey Sommer with SunTrust Robinson Humphrey.

Thanks. I wanted to ask a question about your cash flow and balance sheet. The performance in the quarter, cash from operations, was very good. Want to know, you know, kind of if you expect cash from operations to continue to track nicely over the balance of the year, given your revised guidance for profitability? Peter, maybe looking at the balance sheet, shoring up that cash position even further, how do you look to deploy that? What do things look like out in the acquisition market? Thanks.

Yes, we -- On Assignment is a great little cash generator. We've gotten through this prior excessive CapEx spending, and we've also gotten through some required CapEx spending in '06 for our front office system. But if you remember back, Tobey, this Company, from basically 1992 through 2000 generated $110 million in free cash that found its way onto the balance sheet. So this is a little cash generator. So we fully expect that, absent our working capital needs, that we'll continue to generate positive cash.

With regard to acquisitions, you know, we feel that we're acquisition ready, meaning that we've got our front-end systems and our back-end systems working appropriately, that we could accretively add revenues to our existing portfolio of services, and effectively cut out some back office costs that would accrete to us. You know, the pricing environment is still rather robust. We're seeing financial buyers outbidding strategic buyers, but we will find the right thing. We have the benefit of being able to post the type of organic growth, and we don't have a positioning problem, so we're being very patient. We filed a shelf, and we really have no immediate needs or plans to do anything with the shelf, especially at this price. It's just -- doesn't make any sense to raise capital at these prices. But we were going to prefund our acquisition program. We're not going to take any risk on the capital side, whether it's raising capital at a low price or putting an excessive amount of debt to EBITDA ratios on the Company. We are see going opportunities. We're just being very patient about it.

Maybe shifting gears a little bit and looking at your revised revenue guidance for the balance of the year, understand some of the diversification in the Travel Nurse side, which gives you optimism. Are you getting a further visibility in terms of how far out your orders are stretching? Any changes in either assignment length or how far out you're getting an order for a temporary assignment?

Yes, I mean, that's a good question. I don't think our orders -- the initial contracted order is elongating, but I think our reassignment and the number of, as we say, tours of duty that a nurse does at a given hospital have increased, which means that, you know, I guess the hospital has more visibility, because they're -- even though they're keeping the assignment a certain length, they're renewing it on a more frequent basis. So that gives us, you know, comfort that the customer is more predictable with regard to their ongoing demand. But we haven't seen kind of a sea shift change in how the hospitals are viewing the length of assignments. And I think that may be particular to us because of our business model.

Right. Thanks. The gross margin kind of surprised us in terms of being a little bit better in -- I was wondering if could you kind of parse out the drivers there? I know you touched on it in your prepared remarks between, you know, bill and pay rate spread, and then maybe some of the things internally that you've talked about in the past in terms of, you know, some opportunities for you to harvest a little bit more margin. If could you add a little color there, that would be great.

Yes, a couple of things. The number one driver, we've been very thoughtful and have implemented a pretty consistent billing -- or pricing discussion with our customers, And we've had some success in raising our bill rates with our customers in a collaborative fashion. The second thing is on the cost of services, we had better Workers' Comp expense. We continue to only try to sell quality business. We're pretty unique with regard to our risk management. We actually -- unlike a lot of staffing companies, we actually do site reviews as to the safety of the environment we're putting our temp in. So we think that the Workers' Comp trends will continue, going forward.

We did make some changes to some appreciation holiday pay. We were -- we were some pioneers with regard to appreciation and holiday pay, and had not revisited those programs in about ten years. And we revised them,and it provided a positive impact to our income statement. And even with the revisions, we're still better than the majority of the staffing industry with regard to how lucrative the programs are. And just finally, you know, it's just a better pricing environment. We did have a little impact, as well, from higher conversion and perm placement revenues.

Well, you dovetailed into my follow-up question, then I'll get back in the queue. It would be any changes in your thoughts as to how big you'd like to have conversion and perm fees be as a percentage of revenue? And then, does your guidance incorporate any kind of strike or any other kind of revenue in there? Thanks.

We never predict strike revenue, nor do we ever budget it. We really use that as a tool to stay close to our customers, so we're not out seeking it. We actually react to inbound calls for it. The second thing is, with regard perm placement, we've publicly stated to our investors that we think that we never want to get much more than 3.5%, 5%. Perm placement is extremely lucrative right now, but as you know, it's kind of an all-or-none service offering. And with us being able to maintain the type of margins we do on contract labor, we just don't think we need to layer that type of risk object to generate the type of operating leverage and profitability leverage that we think this business can generate. So we haven't changed our view of, you know, 3.5% to 5% max.

Thanks a lot, Peter.

Your next question comes from Josh Vogel.

Hi. Good morning, fellows. Have you thought about maybe looking at the temporary physician sector? I think the industry term is locum tenants.

Yes, Josh, we look at -- we do strategic thinking about all the lines of business and that's a very nice line of business. My preference would be to find a higher-margin business that has lower risk, i.e. no malpractice, that's also a bigger annual spend. I think the staffing industry report pegs it at kind of a 12% growth and $1.4 billion. When you look at other sectors that have multi, multi-billion dollar annual spend, I think there are other areas we can go into. The other thing is that a lot of the locums business has a retained search feature to it, and a lot of people think that retained search in healthcare is a lot more insulated and defensive than the other industries. But we're trying to have the vast majority of our revenues generated from contract ongoing assignments versus retained search or permanent placement.

Okay. That's helpful. I guess this question's more for Emmett. We had the strong year over year sequential jump in gross margins in Lab Support. I was just wondering if could you go into more detail into which business lines within the segment specifically drove this margin expansion?

All three business lines. Lab Support is really a majority of the business that we're reporting on. Clinical Research and Engineering are fairly newer business, but all contribute to the overall margin. Back to what Peter said, we improved our margins, modifying our appreciation pay and our holiday pay program. But also there's been a great embracement of direct hire with all three divisions and greater conversion activity. But we have a very good pricing culture in Lab Support. Everyone is committed to maximizing their gross margins. We have also incentive programs that drive the desired behavior, as well. So I would single out, probably, our cost of services, our pricing culture, direct hire, and new business operations.

Okay. And just finally, as we look in the third quarter, are there any seasonal factors that should contribute to strength or weakness in each of the segments, and could you just go over a broad overview there?

Let me start, and then, Mike, you can remind them the number of billable days and if there's any differential. But typically, Josh, here at On Assignment, our third quarter is the strongest for Lab Support and MF&A. First is typically our seasonally weakest, and the third is typically our seasonally strongest. On number of billable days, Mike?

Yes, we have one fewer for the legacy lines of business. It's now down to 62.5 from 63.5.

That's based on number of holidays, Josh.

And then there's actually one additional day for Nurse Travel.

Okay. Great. That's helpful. Thank you.

Yes.

Your next question comes from Jeff Silber.

Looking at your guidance for the remainder of the year and backing out the third quarter, it looks like you're looking for a sequential drop, or slight sequential drop in revenues in the fourth quarter. Again, is that seasonality related?

Yes, Jeff, good morning. A couple of things. The first thing, Jeff, I would say, is that, you know, you have the Christmas and Thanksgiving holidays, and Nurse -- in the Nurse Travel business, it's just hard to predict how many of the nurses just flat say, I want to go home and not be in an apartment in San Diego on December 24th through January 1. So we're always a little more conservative than normal, because we just don't know how that's going to swing. If you look at our historical performance in '05 and see what the sequential drop fourth over third was, when you exclude the strike revenue that we had in the third quarter of '05, it wasn't a big -- it wasn't a big drop. But for the time being, we think that the guidance we've given is an appropriate guidance. And then on the third quarter conference call, if things are shaping up differently, we'll revise.

Jeff,there is -- for the legacy lines of business, there's one fewer business days. And then we also get impacted by plant closures between Christmas and New Year's at some of our clients.

Okay. Great. That's helpful. Just one question on the income statement. The tax rate was a little bit higher than we had projected. Was there something going on in the quarter that's in the going to continue?

Yes, we actually closed two IRS audits, and related -- there weren't any adjustments for the '04 audit but in the '03, there was -- we had a receivable $100,000 higher. It was a timing difference. Normally, we would have recorded a deferred tax asset, but given that we have a full valuation allowance against those, we had to run it through the provision. So it's a timing difference. We think we'll get the benefit down the road. It's just because of a valuation allowance, we had to record it in the quarter.

Okay, great. And just getting back to the core business, you mentioned the range of bill rate increases. Can you give us some comparable pay rate increases?

Yes, Mike?

Yes, overall the weighted average was 3.9%. Breaking out by segment, Lab was 5.8%, MF&A 2.8%, and Nurse Travel 2.2%.

I'm sorry, is that something you expect to continue in those kind of ranges going forward?

Yes. As we said in our prepared comments, wage inflation hasn't gotten out of hand to date.

Great. Just on the Nurse Travel side, you mentioned the diversification in terms of the client base. Are you getting similar billing rates at some of these new clients relative to your legacy client?

Actually, they're slightly higher.

Okay, great. Then one final one. Last quarter you gave us a little bit of an update on the PeopleSoft. [inaudible] if we can just get an update as well now?

Right. Actually the RecruitMax. PeopleSoft was rolled out 2003 and we spent all of '04 and '05 getting it corrected and properly implemented, and we feel pretty good about the platform. RecruitMax we started rolling out kind of in May of '06, and we fully implemented it, and we're tracking it, and it's flowing very well. These results that you're looking at were substantially booked off of our new RecruitMax system.

Great. Sorry I got the vendor wrong. Thanks again.

Absolutely.

Your next question comes from -- is a follow-up question from Jim Janesky.

Mike, can you give us the weekly revenue statistics that you gave earlier in the call? I missed them.

Yes. Jim, I gave those.

Oh, okay.

It was -- for the last two weeks ending July 23rd -- and the reason we do that is to back out the July 4th, which, you know, causes the revenues to move around were -- I'm just flipping to my script -- were $5.6 million, excluding Conversion and Direct Placement, and for that same two-week period ending July 23rd of '05 it was 4.6.

Okay. Thanks. And then a question about the gross profit per account manager. Big jump there. Where do you think that tops out in terms of average? In terms of recruiter productivity or number of temps per recruiter, I should say, you said that that could get into maybe inching toward 20, so I would imagine the gross profit metrics could go up, as well. Is that correct? Is that a correct assumption --

That's correct. That's correct.

Okay. Alright, thank you.

[OPERATOR INSTRUCTIONS] And at this time there are no further questions.

Thank you very much. We appreciate your attention to the Company and we look tore ward to reporting our next quarter results. Good-bye.

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