ASGN Inc (ASGN) 2006 Q3 法說會逐字稿

Good morning, I am Dennis and I will be your conference operator today. At this time, I would like to welcome everyone to the On Assignment third quarter 2006 earnings release conference call. [OPERATOR INSTRUCTIONS I will place the call over to Miss Kristi Wolff, VP of Finance and Controller. Please go ahead, ma'am.

Thank you, Dennis. 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 judgement of what the future holds. These include words such as forecast, estimate, project, expect, believe, and similar expressions.

We believe these remarks to be reasonable, but they are subject to risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. We described some of the 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 provide an overview of our third quarter results.

Thank you, Kristi. Good morning. I would like to welcome everyone to the On Assignment 2006 third quarter earnings call. With me today are Emmett McGrath, President of Lab Support, Shawn Mohr, President of Healthcare Staffing, and Kristi will---VP of Finance and Corporate Controller. Kristi will be filling in for Mike Holtzman, our CFO, as he is ill today and will not be able to attend today's call.

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 the respective presidents. I will then turn the call over to Kristi for more detailed review and discussion of our third quarter financial results and for our financial guidance for the fourth quarter of 2006 and the full year. We will then open up the call up for questions.

This quarter's performance resulted in record revenues for our Company. Our operating income and EPS grew 33.9% and 42.9% respectively on a sequential basis and 123% and 42.9% respectively year-over-year. All divisions contributed to our strong reported results. Excluding revenues derived from staffing hospitals that experienced labor disruptions in the third quarter of 2005, consolidated revenues for the quarter grew year-over-year by 11.3 million or 17.6% to 75.7 million. Consolidated gross margin was 27.5%. This represents a 30 basis point improvement year-over-year and a 60 basis point decline sequentially. As many of you are aware, there are more holiday in the third quarter than in the second quarter and the extra holiday pay affects our gross margin. Gross margins expanded year-over-year in both of our segments.

Our consolidated hourly bill pay spreads also increased year-over-year. In the six quarters since the first quarter of 2005 we have grown revenues $103 million cumulatively while our consolidated quarterly SG&A has increased approximately 296,000, excluding FAS 123-R expenses and other nonrecurring expenses. Our SG&A in the quarter was higher due to higher head count, a conscious decision due to the strength of our business, establishment of a new telerecruiting group for our nurse travel group, power IT expenses, and approximately 163,000 in higher than normal expenses related to the partial write down to our shelf registration, board expenses, rent deposit write off and deferred compensation expenses.

OP income for the quarter was 3.5 million, which includes 861,000 of FAS 123-R expense and was up 1.9 million from the year ago period. For those investors who have followed our Company over the last three years, our third quarter EBITDA exceeded the fully year EBITDA generated by the Company in '03, excluding good will impairment and--- good will impairment charges. Our performance this quarter continues to show the strength of the business model and the labor markets we serve.

Exiting the quarter, demand for our services continue to strengthen for all of our divisions. Our weekly revenues averaged $5.9 million for the three weeks ending October 22nd of this year, excluding conversion and direct placement revenues. We averaged 5.1 in the weekly---in weekly assignment revenues for the same three week period one year ago.

In addition our number of hours billed, billable head count, and client count continues to be at the highest levels of 2006. The actions we took regarding reductions in cost of services and bill rate increases over the last nine quarters increased our consolidated gross margins by 30 basis points over the prior year period and allowed us to grow our gross profit, operating income and net income faster than our revenues in the third quarter.

During the quarter we increased our year-over-year productivity per staffing consultant by 8.4% and we achieved the sixth consecutive quarter of net income. I am also very pleased that we exceeded our targeted adjusted EBITDA margin of 7%. Which was originally targeted to be achieved by the end of 2007. Adjusted EBITDA this quarter, which excludes 123R expense, was 7.6% up from 5.3% in the year ago period. All of our divisions positively contributed to our third quarter performance.

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 30.6 million in revenues, up 14.9% year-over-year and had gross margins of 32.7%. The Lab Support gross margin in the quarter was negatively impacted by a worker's compensation reserve adjustment for a claim in a prior period. Lab Support billed approximately 1, 210 clients, down from 1400 in the prior quarter and added 256 new or reactivated clients in the quarter.

The average number of contract professionals on billing increased by 179 or 9.2%. The average bill rate for this group increased 6.3% year-over-year. Our European operations generated 5 million in revenues, up 23% from the year ago period and had gross margins of 34.1%. During the third quarter our top 10 customers represented 15.4% of the Lab Support segment's total revenues and the average number of staffing consultants was 110, down 3 sequentially.

The medical, financial, and allied group generated 13.1million in revenues for the quarter, up approximately 18.1% year-over-year. MF&A billed 960 clients, down from 1,090 in the prior quarter and added 284 new or reactivated clients in the quarter. The average number of contract professionals on billing increased by 112 or 13.2% year-over-year. The average bill rate for the group increased nearly 4.3% year-over-year. For the third quarter our top 10 customers in MF&A represented 18.1% of total MF&A revenues and the average number of staffing consultants was 86, flat sequentially.

Turning to the Nurse Travel Group. It generated 32.1---- $32 million in revenues, up 13.3% year-over-year. Excluding revenues derived from staffing hospitals that experienced labor disruptions in the third quarter of '05. Nurse Travel revenues were up 20% year-over-year. The gross margin was 20.3% down 30 basis points compared to the third quarter of 2005.

The slide compression in Nurse Travel gross margins was due to increases in housing, and per diem expenses that were not off set by bell rate increases as well as an increase in worker's compensation expense. Going forward, excluding the effect of traditionally paid state bonuses to the nurses in the fourth quarter, we do not expect this situation will persist. The number of nurses billed average 805 compared to 665 in the year prior. The total number of clients billed was 294, up 88 from the year ago period. The average bill rate for the group increased 2.4% over the year ago period.

For the third quarter we added 70 new or reactivated clients and our top ten clients in Nurse Travel represented 48.7% of Nurse Travel revenue versus 56% in the year ago period. During the week of October 22nd of 2006, we billed 202 customers and had 835 nurses on assignment. New nurse orders continue to be at high 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 businesses generated 5.8 million in revenues or 7.7% of total revenues for the quarter compared to 5.9% in the third quarter of 2005. If you remember, most of the businesses were launched in 2004 on an organic basis.

As to the markets served, I would continue to describe each of the end markets we serve as very productive and improved over the second quarter and third 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. As our business continues to strengthen, we have started to look for selective acquisitions which would allow us to leverage our fixed costs and increase our services.

Although there are no pending transactions we are encouraged by the level of interests companies have in joining On Assignment and the number of attractive opportunities that are available to us. This is the ninth consecutive quarter that the Company has met or exceeded its operating objectives and remain consistent with he operating plans that management set forth previously.

Going forward, our focus will remain on growing our EBITDA faster than our gross profit and growing our operating income faster than our revenues. Our sixth consecutive quarter of net income was achieved by continuing to increase revenues, expanding gross profit, and focusing on our SG&A expenses. Towards the end of the call today, Kristi will walk you through our forward guidance that was announced in our earnings release. As for the updated 2006 guidance, we continue to remain excited about the ground work we have laid and the strength of the end 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 Healthcare Staffings Q3 results continue to show excellent sequential and year-over-year progress. Our conscious Q2 decision in Nurse Travel to focus on shifting our client concentration and expand our client count, combined with a strong demand for our Healthcare staffing services resulted in a 14% sequential and 14.6% year-over-year increase of health care staffing revenues. Revenues for the segment represented 59.6% of the total revenues for the quarter. Gross margin for the segment was 23.9% for the quarter. Up 10 basis points year-over-year and down 20 basis points sequentially.

Highlights of the Q3 result from our medical, financial and allied business unit are as follows. MF&A revenues were up 18.1% year-over-year and 3.6% sequentially. This performance continues as an atrailing average assignment numbers not including direct hire, conversion or billable expenses for the three weeks ended October 22, 2006 versus the same three week period in the prior quarter were 998,000 in revenues versus 926,000, 1,001 professionals on assignment versus 941 and 600 billed clients versus 602.

All these early fourth quarter results are at or above the third quarter averages and are being achieved with staffing consultant levels consistent with 2005 and the previous quarter and during a quarter that traditionally slows down due to holidays and hiring deceleration. As you may recall, a large number of offices were closed over two years ago under previous management.

Since implementing a revitalization plan, we now have markets that have been reopened for two years and many are gaining significant headway in the most recent quarters. As our brand and service quality become better known. We continue to gain market share and are seeing expanding staffing consultant productivity levels.

Now let me turn to our Nurse Travel division. Nurse Travel revenues for Q3 increased 18.8% sequentially. As discussed in the Q2 conference call, we anticipated that our Q3 revenues would be positively affected from the previous quarter's decision to focus on shifting our client concentration and expand our client count.

The net effect of this client diversification effort is that we have over the last quarter increased our weekly billed client count from 165 at the beginning of Q2 to a high of 215 by the end of Q3. During the same period, we experienced an increase in our weekly nurses on billing from a low of 635 early in Q2 to a high of 838 by the end of Q3. On Assignment Nurse Travel is now in a much better position to grow future revenues off of an expanded client base and available nurse pool.

This performance continues as the trailing average assignment numbers for the three weeks ended November 22, 2006 versus the same three week period in the prior quarter, were 2.534 million in revenues versus 2.433 million, 835 nurses on assignment versus 779, and 206 billed clients versus 203.

Our highly focused operational execution over the ast two years has made us more diversified, niche focused, and less susceptible to large client demand changes. We have focused on broadening our client base with great success, while at the same time working to maintain a high nurse reassignment rate. We also continued to expands increases in market demand within the types of highly skilled nurse disciplines we place and our biggest challenge is always continuing to attract newly high skilled nurses in our supply pool.

I'm pleased that our new nurse applicant numbers increased sequentially and we experienced an expanding nurse pool in Q3, as we hoped. Knowing that the available nurse pool normally expands late in Q2, we took the opportunity, starting in June, to implement a new sourcing and telerecruiting program focused on identifying qualified nurses interested in being travelers.

Although in its early stages, this telerecruiting group has helped stimulate added supply within the quarter , and we anticipate that it will continue paying dividends. Our value propositions, delivery model and focus on placing high demand and highly skilled nursing positions continues to make us uniquely qualified and different than other nurse travel companies and allows us continued growth opportunities.

With that, I will pass the call over to Emmett McGrath, our President of 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 14.9% year-over-year and 5.2% sequentially.

By division, the U.S. operations grew 13.5% year-over-year and Europe, an impressive 23%. Revenues for this segment represented 40.4% of the total revenues for the quarter. Gross margins for the segment were 32.7% for the quarter. A 40 base basis point increase over the same quarter last year. Although satisfactory, gross margin for the quarter was negatively impacted due to an increase in the worker's compensation reserve related to prior quarter claims activity. Absent these charges and on a normalized basis, gross margin was 33.2%, which represent a 90 basis point increase over last year.

I attribute the positive performance of the Lab Support statement to the following key operational factors. First, our media focus during the quarter was to continue to build upon the momentum realized in the first two quarters.

Key focus areas were and continue to be effective delivery of high margin contract and direct hire service offerings, new business development, greater contributions from newer contract awards, reactivation of former clients and greater penetration with existing clients. As a result, we were successful in improving gross profit by expanding bill and pay rates, increasing the number of contract professionals on assignment and gaining greater client depth.

Second, our commitment to maintain and expand gross margins through internal and external efforts. Internally, we have been successful in reducing and controlling our cost of services. We continue to realize margin expansion as a result of our prior decision to modify contracter benefits and minimize nonbillable expenses.

Externally, our staffing consultants excelled in maximizing margins through consistent pricing practices, engaging clients that value our specialized services, increasing direct hire and conversion activities, avoiding high risk work environments, passing through expenses and tax increases, and finally migrating to higher level skills discipline.

Third, our attention to staffing consultant productivity. During the quarter, gross profit per staffing consultant increased approximately 10.2% over the same quarter last year. And 4.7% sequentially. This improvement is in direct response to our focused operation model, attention to individual performance, demand for our services and the quality of our staffing consultants.

Fourth, our growth in newer business lines. Clinical research and engineering grew revenues nearly 97.7% over the same quarter last year and 30.9% sequentially. I attribute this performance to greater client penetration, [aspective] delivery of our niche of service offering. Quality of staffing consultants and increase in new client engagement.

Early into the fourth quarter of 2006, I am encouraged with our operating trend, 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, controlling costs and off setting seasonal challenges we face, such as fewer billable days and the typical client holiday closures. I am confident that the last [core] segment has the necessary leadership, field staff and demand for its services to make the fourth quarter a success.

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

Thank, Emmett. Consolidated revenues were 75.7 million. Up 10.3% sequentially. There were 62.5 billing days in the quarter compared with 64 days in Q3, 2005. And 63.5 days in Q2, 2006. For Nurse Travel, there were 92 billing days compared with 92 days in Q3, '05 and 91 days in Q2, 2006. Lab Support segment revenues were 30.6 million. Up 5.2% sequentially and represented 40.4% of total revenues. Lab Support Europe revenues were 5 million. Up 18.6% sequentially.

On a constant currency basis, revenues were up 16.5% year-over-year and up 14.2% sequentially. Lab year revenues were 6.7% of total revenues for the quarter. Health care staffing revenues were 45.1 per---45.1 million up 14% sequentially. And represented 59.6% of total revenues. Within health care staffing, Nurse Travel revenues were 32 million. Up 18.8% sequentially and represented 42.3% of total revenues.

MF&A revenues were 13.1 million up 3.6% sequentially and comprised 17.3% of total revenues. Conversion and direct hire revenues totalled 2 million. Compare with 1.4 million for Q3, 2005 and 1.7 million in Q2, 2006. Converse and direct hire revenues represented 2.6% of total revenues versus 2.1% for Q3, 2005 and 2.5% in Q2, '06. Consolidated gross profit was 20.8 million for the quarter and consolidated gross margin was 27.5%, compared with 27.2% in Q3, 2005 and 28.1 in Q2, '06.

Lab Support gross profit was approximately 10 million for the quarter which was a gross margin of 32.7% compared to 32.3% for Q3, 2005. And 33.4% for Q2, 2006. The 40 basis point increase year-over-year was primarily related to increase direct hire revenue and lower holiday and appreciation pay, offset by higher worker's compensation expense and payroll taxes.

Healthcare staffing gross profit was 10.8 million for the quarter. Which was a gross margin of 23.9% compared with 23.8% for Q3, 2005 and 24.1% for Q2, 2006. And within the health care staffing segment, Nurse Travel gross profit was 6.5 million which was a gross margin of 20.3% compared to 20.6 in Q3, 2005 and 20.7 for Q2, 2006. The 30 basis point decrease year-over-year was primarily related to higher expenses for travelling nurses, per diems, and medical expense, and worker's compensation expense, offset by higher bill pay margins.

For MF&A, gross profit was 4.3 million for the quarter. Which was a growth margin of 32.8%. Compared with 31.9 for Q3, 2005 and 31.5 for Q2, 2006. The 90 basis point increase year-over-year was primarily related to higher bill pay margins, lower appreciation and holiday pay expense, and a favorable adjustment for worker's comp expense and an increase in direct hire revenue. These favorable adjustments were partially offset by increased expenses related to higher travel and housing costs for contract professionals and payroll taxes.

Total SG&A expense for the second quarter was 17.3 million or 22.8% of total revenues. Excluding 861,000 related to FAS 123-R expense, SG&A expense was 16.4 million or 21.7% of total revenues. For Q3, 2005, SG&A was 16.4 million or 24.8% of revenues and included 157,000 of stock based compensation expense. The sequential increase in SG&A was approximately 206,000. Excluding FAS 123-R expense. The increase includes higher than normal charges in the quarter of approximately 163,000 for professional services and staffing expenses including legal, IT and consultant and our decision to start a nurse telecruiting effort and was offset by lower marketing expenses.

Depreciation expense for the quarter was 1.1 million. Compared with 1.5 million in Q3, 2005 and 1 million for Q2, 2006. Amortization expense in the quarter was 243,000 from 281,000 in the year ago period and was 237,000 for Q2, 2006. The year-over-year decrease was primarily due to the scheduled reduction amortization of our identifiable and tangible assets. On operating income was 3.5 million for the quarter compared with operating income of 1.6 million for Q3, 2005. A year-over-year improvement of 1.9 million.

We believe it is meaningful to compare EBITDA and adjusted EBITDA when comparing the current quarter's results to prior quarters. As outlined in yesterday's press release, EBITDA for the quarter was 4.9 million. Excluding FAS 123-R expense of 861,000. Adjusted EBITDA was 5.7 million or 7.6% of revenue. Adjusted EBITDA was 3.5 million for Q3, 2005 and 4.4 million in Q2, 2006.

We ended the quarter with cash, cash equivalent, and restricted cash of 35.6 million up from 33.8 million from the preceding quarter. For the quarter, cash provided by operations was 2.6 million, cash provided by the net proceeds from stock transactions was 152,000 and cash used for investing activities was 1 million.

CapEx was approximately 800,000. Up from 658,000 in the prior quarter. Net accounts receivable were 41.3 million at the end of the third quarter, an increase of approximately 6.2 million sequentially. On a consolidated basis, DSO's were 52 days. Up from 48 days in the prior quarter. The increase in accounts receivable and DSO's is primarily attributable to the strong sequential revenue growth experienced at Nurse Travel.

Now turning to productivity which we define as the quarterly gross profit generated per staffing consultant. For the third quarter, we averaged 253 staffing consultants. They each generated 82,000 of gross profit, a 7.3% sequential increase. In the previous quarter we averaged 252 staffing consultants and they each generated 76,500 in gross profit.

Each staffing consultant had an average of 15.8 contract professionals out on assignment. Up from 14.6 in the previous quarter. Lab productivity was 19.5 versus 18.1 in the previous quarter and MF&S productivity was 11.9 versus 11.1 in the previous quarter and Nurse Travel was 14.2 versus 12.7.

Now turning to guidance. For lab and MF&S, there are 61.5 billing days in the fourth quarter compared with 62.5 for Q3, 2006. For Nurse Travel, there are 92 days. Compared to 92 days in Q3 2006. Based on the strength of revenues in the first three weeks of the fourth quarter and on seasonal factors which historically have impacted the number of employees working and the number of days worked during the fourth quarter.

We currently project revenues of 72.5 million to 74 million for the quarter ending December 31st, 2006. We are projecting consolidated gross margin of approximately 26.3% to 26.5%. Which includes the impact of higher holiday and incentive pay for travelling nurses and SG&A of 16.4 to 16.7 million.

Including depreciation and amortization of 1.4 million and excluding approximately 820,000 of FAS 123-R expense. We project earnings per share of $0.04 to $0.07 which includes FAS 123-R expense of approximately $0.02 per share and an effective tax rate of 30%.

Our quarterly guidance as discussed and full year guidance as follows. Excludes the potential positive impact of a full or partial reversal of the $4.9 million evaluation allowance we have recorded against our net deferred tax assets. Based on the fourth quarter guidance and assuming fairly stable labor markets and no loss of major clients at Nurse Travel, we are raising our guidance for revenues to 283.5 million to 285 million from 279 million to 282 million.

Which represents growth of 19.2% to 19.8% over 2005. We are projecting average gross margin for the year of approximately 26.8% to 26.9%. SG&A, 65.3 million to 65.5 million excluding approximately 2.7 million in FAS 123-R expense. And raising our earnings per share guidance to $0.22 to $0.25 from $0.21 to $0.24. Which includes approximately $0.08 per share in FAS 123-R expense.

As you know, these estimates are subject to the risks mentioned in yesterday's release and at the beginning of the conference call. Now back to Pete for some closing comments before we open up the lines for questions.

Thanks, Kristi. 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 have taken over the last 33 months.

I would like to once again thank our many loyal, dedicated, and talented employees whose efforts have allowed us to progress where we are today. I would like to now open up the call to participants for questions. Operator?

[OPERATOR INSTRUCTIONS] Your first question is from the line of Jim Janesky with Ryan Beck.

Hi. Yes, good morning. I have a couple of questions. The first one is for Emmett. Emmett, Shawn gave the metrics in the first three weeks for Nurse and MF&A. Can you give us those for lab?

Let me see if we have it on the spread sheet, Jim. One second.

I will move on to.

We can pull it up; we're just opening a spread sheet. We will get that for you.

Yes, no problem. When you look at the end of the year, we talked about in the past, and you have talked about it on the call of course. How, let's say the last couple of weeks of the year, it is dependent upon, possible facility shut downs within the Lab Support area and then number of nurses of course. On assignment.

Can you look at this versus last---- this year versus last year. What happened last year and is there anything different this year that would lead to some type of surprise in the last. On either side. In the last two weeks of the year.

Yes, I mean. Jim, what I would share with you historically. We have kind of been down 3% to 5%. Sometimes the strength of the market can offset that somewhat but it is just impossible. After kind of December 14th. To really have clear visibility. That I am comfortable in providing you. Any greater granularity of detail than we did in our revised guidance.

I can't tell you whether one of the major biotech customers has had a particularly good quarter and they go ahead and take a couple extra days to close down the research and development facilities. This is not a metric we publish on a regular basis. But to give you an order of magnitude on the scientific side, if one of our biotech companies decides they will close from December 24th to January 2nd, and that is five billable days and we have ten people there.

That is 50 lost billable days at one customer, because we have 5----10 people and lost five days. On the nursing side, it can impact our demand two ways, one nurses will say, I am not going to travel until after the holidays, that way I don't have to worry about being away from my home or they can accept the assignment and it is a challenge to persuade them to be on assignment during that week.

So, I know where you are going. I guess what I am saying. We gave you what we are currently doing. Excluding normal seasonality. We haven't seen change in demand. And this is just a normal historical event that occurs in our business and other people who sell the services we do. But you should take solace in the fact that the first couple of the weeks of the fourth quarter continue to strengthen.

Okay.

Emmett, you want to give him the numbers.

Morning, Jim. Early into the fourth quarter--- Here are numbers on revenue 2.4 million. And on clients, I believe it is 1313. 1,013 clients and number of professionals is up to 2200. We are reaching new year highs in the fourth quarter and we are really doing very positive feeling about the early trends in the fourth quarter.

Now the 2.4 million. That is up versus last year.

Yes.

Okay. Great. Switching to the nursing side. Shawn. What have you heard in the market about hospital admission rates and the use of contract labor at hospitals versus just gaining market share. Are you hearing anything positive or negative about the other two metrics.

We have really been seeing a stabilization in that right now, Jim. And I have not necessarily seen positive or negative movement with regards to hospital admission rates at this time. Our focus, from an operational standpoint, is to really go out there and continue to execute well and drive market share. Knowing there is an upside opportunity with many states looking at passing continued nurse to patient ratios.

I would just add, Jim, that as we have said consistently. We are continuing to have ample room to grow, despite the fact that patient admissions and [inaudible] tends to be lumpy and floppy right now and we haven't gotten the kick in, like you saw in 2001 and 02, where there was this insatiable demand for services and increase in admissions.

We are getting this 20% year over year growth of off sloppy admissions. Because the number 1 factor is the nurses are getting older, the supply and demand is getting further out of balance, and management and human capital is a difficult job and the hospitals have had a challenging run of it with the nurses, so we think can grow, even as the environment of sloppy admissions continues.

Okay. Thank you.

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

Thanks. You started off with the last set of questions talking about seasonality. I was wondering if you can refresh us on seasonality from fourth quarter to first quarter.

Yes, sir. Good morning, Toby. For those investors who haven't heard this before, our strength of quarters. Seasonality effect on quarters. Third quarter is typically the strongest because of buying behavior. Number of billable days. Holidays, etcetera, followed by the second quarter being the next strongest quarter. The fourth tends to be the second most impacted quarter and then the first is the most impacted quarter. Meaning the most seasonally affected.

Typically what we will see is continued strength and growth of the revenues, gross profit, head count through December 14th and then we will see a plateau or a little bit of attrition and then it takes sometimes February or towards the end of February, beginning of March to ramp back up. To our kind of pre-December 14th highs. Depending on the strength of the market, as you saw from the performance last year, we had a pretty good early run of it.

It is just too hard to predict right now. We haven't seen what is going to happen post December 14th. But out, our fourth quarter guidance takes into consideration our best view right now. What the seasonality impact will be.

I was wondering if you could comment about orders. You mentioned in the prepared remarks that orders. Continue to be pretty solid and wondering if you can describe any color on either the duration of the orders that you are receiving. Whether it is slightly longer or shorter assignments, any variation there. As well as if you are getting any further visibility of people placing orders further ahead than they used to at this particular time, or is it kind of consistent with historical patterns.

Most of the business is not generic or commoditized, so and people aren't ramping up for the flu season or anything like that. We continue to live in an environment where it is candidate constraint versus order constraint. And I have not been a big disciple of quoting open orders. Because everybody scrubs their order list differently. You heard me give this example. If a hospital in Massachusetts asked for a 36 year old nurse who speaks 17 different languages and is willing to work for $10.50. Is that a real order? And had 20 years of cardiac ICU experience. Is that a real order or not?

What I can tell you is our orders are at highs. We have more inbound calls coming in with people who are pretty challenged with regard to filling their need. They've really over worked their internal staff and turning to them to overtime--- their staff are throwing their hands up and it continues to be a---the key driver is fulfillment versus orders. So, I mean, we don't quote, we had 10,000 open orders in the second quarter and we had 12,500 in the third.

Fair enough. Looking at the productivity. It seems like you made some very good improvement both on aggregate basis as well as on the segment basis. I was wondering if you could give us a little bit more color on your telerecruiting effort; exactly what that is and if you had any early signs of impact on your productivity.

I am going to say 30 words on it and turn it over to Shawn. That was kind of a pre-qualified some nurses so we can further accentuate the effectiveness of our higher paid seasoned nurse recruiters. But Shawn tell them what you are trying to accomplish with that.

Hi, Toby. This is Shawn. Early on, our goal right now is to just to go through as many opportunities and find as many potential qualified nurse who want to expand and move into the Nurse Travel pool. So our goal is to identify these individuals and determine whether or not they're qualified for what we're looking for to enter a pool and a travel environment which they may not have done before. We are really working hard to try to expand the existing nurse pool we have and place more qualified nurses and the disciplines we have into the market space.

And the seasoned recruiter will follow up on what is considered a legitimate lead.

I will ask one last question and get back in the queue. Looking at your offices and your resources, I think couple of quarters ago, you said maybe, you had some officers--offices that were less or more productive than others. Are you happy with the distribution of the resources? Where they are allocated and where they are working and respective markets of where they operate.

I would tell you, which is kind of unique. All of our markets are doing pretty well. And some of the larger metropolitan markets that when we first started this journey. We were talking about. Hadn't turned on as much as we wanted and had real successes and the health care office in Houston has quadrupled in the last six months, and we are happy with the distribution.

It is not that we have 60 offices and 40 are carrying the entire Company and 20 are dragging. We have some challenges in certain market places and I would tell you all in all. Most of the offices are productive and profitable.

Thank you very much.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of Jeff Silber with BMO Capital Markets.

Thanks so much. Just wanted to get a little bit more color on the seasonality question Toby asked. The general trends that you described, do those hold for all the major business segments you are in?

To a lesser degree on MF&A and where we really get impacted on MF&A is if we have people in a physician's group and the most accentuated pronounced effect is first in Nurse Travel and then Lab Support.

Okay. Great. Now, you had mentioned in your prepared remarks, Peter, that you reached your longer term EBITDA margin goals much quicker than expected. Are you setting the bar higher going forward? What kind of long term EBITDA margin goals should we be looking for?

Jeff, you have been on the road with me. What I consistently say is I am going to give you. What is at the upper end of professional/health care companies can do on a gross margin basis, on a revenue growth basis, on an EBITDA basis and if you can run it through your model and if you like it, then we have got a good stop.

If we can do better, we are going to report it. But I am not going to---I am not going to raise it at this point unless----something changes. I feel very comfortable about the sustainability of the business. But we gave a goal of 7%. And we are going to see what we can do to improve on that.

We feel we still have a fair amount of operating leverage, specifically with leveraging the back office. But right now, I think the numbers we are posting, especially considering that the deminimus amount of contribution from direct hire, it is more than enough to distinguish ourselves from the other staffing companies.

Also, to follow up on some of your prepared remarks about acquisitions, any more color you can give in terms of what the market is like for acquisitions and what type of things you are looking at etcetera.

You followed me in my prior company. I have done 85 deals in the staffing industry and they were all accreted and you haven't heard me speak of acquisitions prior to now. We wanted to get acquisition ready. We wanted to make sure that we could leverage the back office by having the front end systems and back end systems operating smoothly. That's happening; we've got all of our businesses growing and we are seeing that there is a wave of consolidation that is occurring.

And we are seeing productive activities across the gambit. Whether it is buying branch offices where we are under performed and we can put them on the pay bill system and train the recruiters quickly on the programs and approach to the market place. As well as some larger companies that have a new health care service offering or a new offering. The----as you know from the universe of publicly traded health care staffing firms, there is not a lot of product out there in health care services, but we are seeing some attractive opportunities and had some preliminary conversations in that space.

In the broader market, whether it is engineering, clinical research or other disciplines, this industry continues to be highly fragmented and our job is to to find a business that has a similar delivery model and similar back office model as ours in culturally something that will cohabitate and harmoniously core exist with our core offering. And we will support all of our existing offerings and I can't predict when. But I feel pretty good about the preliminary work we have done in the prospects of the nice accretive acquisition on a go forward basis.

Thanks so much.

Your next question comes from [Bruce Ackerman] with Sandhill Equity Research.

Good morning, gentlemen. Congratulations on an outstanding quarter.

Thank you.

I had two questions. The first question concern travel nursing. Over time. You had mentioned that in an earlier presentation. That in general, your nurses were working 46 hours a week and my question is, is that still the case and are those nurses paid time and a half so they are overtime and are you able to bill premium time to the hospitals.

Yes a couple of things. Our nurses continue to contract to work 48 hours and we do pay them over time and what we charge the hospital we haven't disclosed but we factor in the added cost.

Okay. Good. Thank you for that. In your inoffice staff, your staffing coordinators on the travel nurse side, are they paid time and a half for any over time?

We don't disclose that information. But all I can share with you is we comply with all the state and federal pay statutes.

Okay. Good enough. I only ask because there has been some litigation in that area. So thank you for your information there.

No, I will tell you almost a year and a half ago, someone had brought a claim and---against us and it was dismissed. Because we were able to substantiate that we are performing properly.

Thank you.

Your next question is a follow up question from the line of Tobey Sommer from SunTrust Robinson Humphrey.

Thanks. I was wondering if you could give us an update as to the percentage of your cost structure that is fixed versus variable at this point, just want to kind of refresh our memory as to the leveragability of the fixed cost base.

Well, the true fixed cost is the branched office network [lease hold payments] that we can't terminate quickly. And then the back office people soft IT, pay bill functions and then I refer to what I call semi-fixed cost which is the core recruiting sales infrastructure and that is a little more variable. God forbid if we had a nuclear winter. There could be some changes in that.

Toby, as you know from visiting with me. I continue. I always say publicly that we think that a 20% SG&A is our target and 13 to 16 points of that SG&A should be spent in the field and somewhere between 3 and 5 points should be spent at corporate. If revenues were to flatten or go down, then commissions would drop. That's a variable expense as you know. So, it is still. The beauty of these businesses and the reason they generate cash is that they are not a high fixed cost business.

And as you are seeing, our CapEx doesn't have to go up for us to do the growth we do. We said we have grown $100 million cumulatively since the first quarter of '05 in the average quarterly SG&A has gone up less than $300,000 and that is taking into consideration increased commissions. This still is a highly leverageable business and we still have a lot of variability on the variable cost side.

Thanks. You do describe a little bit of a supply----challenge. Environment to getting growth in the business although you are growing it very nicely, so I don't mean to imply overly challenged. But I was just curious in terms of---you hire in recruiters. What is that market like? Is that something where you have a decent supply of candidates to choose from and interview.

Yes, we have been fortunate because of the track, actually let me break it down. On the Lab Support side. Because we have actually been taking market share and it is undeniable. We may have tripped as far as our reputation goes on Wall Street. But we never really did that on Main Street. We have seen a huge inflow of people who are prepared to work for Lab Support because of the culture. Because these people are point operated and we don't discount and they can make a higher living in an elegant environment of 33% gross margin business. Than some of the bulk sellers.

We are taking market share and we're also seeing people who want to work for us. On a nurse trave side---most of that is home grown. We have a farm lake, Toby. We have our core nucleus of very talented recruiters, and when they get to a certain level of productivity we attache a recruiter tact that works for them. The recruiter tact is shadowing that person and taking care of the noncritical administrative functions and learning the business to make the higher paid recruiter more profitable and when that recruiter tract has had a number of months, year of shadowing.

We will turn them into a full time recruiter. We don't do as much hiring outside the industry or within the industry on the Nurse Travel side as we do in Lab Support and MF&A. MF&S I would say is probably the market police where we have the most powering that comes from within the industry.

So, we have actually seen continued ample pool of very qualified applicants. So we feel pretty good about our access right now and our turnover has been--- industry leading. I think last time we quoted it. I don't know if it is updated. As of the second quarter, year to date it was less than 38% turnover, voluntary and involuntary.

Thank you very much.

Yes.

At this time there are no further questions. Any closing remarks?

I just want to thank everyone for attending our call and look forward to reporting our fourth quarter results. Thank you very much for your attendance.

Ladies and gentleman, this does conclude the On Assignment third quarter 2006 earnings release conference call. You may now disconnect.