ASGN Inc (ASGN) 2006 Q4 法說會逐字稿

Good morning. My name is Janice, and I will be your conference operator today. At this time, I would like to welcome everyone to the fourth quarter 2006 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [OPERATOR INSTRUCTIONS] Thank you.

Mr. Brill, you may begin your conference.

Good morning, everyone. Before we begin, I'd 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 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 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. Peter?

Thank you, Jim. Good morning, everyone. With me today are Emmett McGrath, President of Lab Support; Shawn Mohr, President of Healthcare Staffing; and Jim Brill, Senior Vice President and Chief Financial Officer. 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 Jim for a more detailed review and discussion of our fourth quarter financial performance and our financial guidance for the first quarter of 2007 and the full year. We'll then open the call up for questions. All results discussed on today's call exclude any contribution from the recently completed Vista and Oxford acquisitions.

This quarter's performance again resulted in record revenues for our Company. Revenues were $76.5 million for the quarter and $287.6 million for the full year. Revenues grew 20.9% in 2006 over 2005, and 18.3% in the fourth quarter of '06 over the fourth quarter of '05. Our growth in revenues this year exceeded our original 2006 full-year guidance by almost $20 million. Earnings per share was $0.20 for the quarter and $0.39 for the full year. Our fourth quarter net income was positively impacted by the full reversal of the remaining valuation allowance on a historical deferred tax assets. The reversal was predicated on the continued profitability of the Company and resulted in a net tax benefit of $3 million or $0.10 a share. Excluding this reversal, our earnings per share were $0.10 in the fourth quarter and $0.29 for the full year. Again, excluding the impact of the tax valuation reversal, operating income and EPS grew 385% and 233% respectively year-over-year, and all divisions contributed to our strong reported results.

Consolidated gross margins in the fourth quarter were 27.2% and 21.1% for the full year. This quarter's gross margin represented a 94 basis point improvement year-over-year and a 49 basis point increase for the full year of '06 over '05. As many of you are aware, there are fewer billable days and more holidays in the fourth quarter than in the third quarter, and the fewer billable days and extra holiday pay affect our gross margins and revenues. Despite these seasonal factors we were able to grow our revenues sequentially over the last 90 days. Gross margins expanded year-over-year in both of our segments. Our consolidated hourly bill pay spreads also increased year-over-year. Operating income for the quarter was $3.6 million, which included $1.1 million of equity-based compensation expense, and was up $2.9 million from the year-ago period. For those investors who have followed our Company over the years, our ability to grow our fourth quarter revenues and EBITDA over the third quarter is evidence of the strength of our business model and the end markets we serve.

Exiting the quarter, demand for our services continue to be strong for all of our divisions. Our pro forma weekly revenues, which now include the revenues of Vista and Oxford -- and the Oxford acquisition, averaged $10.1 million for the three weeks ended February 18th, 2007, excluding conversion and direct placement revenues. We averaged $9 million in pro forma weekly assignment-only revenues for the same three-week period one year ago. Revenues in the first quarter will be slightly affected due to the winter storms experienced in February, which prohibited our employees from travelling to customer locations, but the impact of the lost billable days will not be material. In addition, our number of hours billed, billable head count and client count continue to be at or near some of the highest levels achieved in 2006. The actions we previously took regarding reduction in cost of services and bill rate increases raised our consolidated gross margins and allowed us to grow our gross profit, operating income and net income faster than our revenues during the fourth quarter and for full year. During the quarter, we increased our year-over-year productivity and gross profit per staffing consultant by 15.8%.

I'm pleased that we once again exceeded our targeted adjusted EBITDA margin of 7%, which was originally anticipated to be achieved by the end of 2007. Adjusted EBITDA this quarter, which excludes equity-based compensation expense, was 7.8% of sales, up from 3.8% in the year-ago period. Our newer lines of business which include health information management, clinical research, engineering, local RN, and direct hire, generated $6.6 million in revenues or 8.6% of total revenue for the quarter, compared to 6.3% in the fourth 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, including physician and IT staffing, as productive and consistent with the trends experienced in the fourth quarter of '06. 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.

Turning to acquisitions, as you are all aware, we announced the completion of the Vista Staffing Solution and Oxford Global Resources acquisitions on 1/3 and 1/31/07 respectively. The Vista acquisition provided us entry into the fast growing physician staffing market. And Oxford provided us access to the $17 billion-plus IT services market. Both of the acquisitions fit well with our strategy of operating in large, fast growing end markets with attractive bill rates and gross margins. We believe that our blend of outstanding services to attractive end markets should yield some of the highest growth rates, bill rates, and gross and EBITDA margins in the staffing industry. Later in the call, Jim will provide you more information regarding the financial impact of the acquisitions.

Now that the acquisitions are closed we are working hard to support our new businesses and to date, things are going well. I would like to take this opportunity to welcome all employees of Vista and Oxford to the On Assignment family, and we all look forward to their positive contributions. This is the 10th consecutive quarter that the Company has met or exceeded its operating objectives and remain consistent with the operating plans that management set forth. Going forward, our long-term operating objectives are to organically grow revenues 10% to 15%, maintain stable gross margins of approximately 30%, and generate 8% or better adjusted EBITDA margins. Towards the end of our call today, Jim will walk you through the forward guidance that we announced in our earnings release. As for our 2007 guidance, we are excited about the groundwork we have laid, and the strength of the end marks we serve. I would like to now turn the call over to Shawn, and then Emmett, for a more detailed review of operations. Shawn?

Thank you, Peter. On Assignment Healthcare Staffing's Q4 results continue to show consistent progress. Our market share and continued client growth over the last several quarters, combined with the strong demand for our healthcare staffing services, all resulted in a 17.8% year-over-year increase in Healthcare Staffing's quarterly revenues. For the fiscal year 2006, On Assignment Healthcare revenues grew 22.3% over fiscal year 2005. A brief summary of Q4 and fiscal year 2006 results per business unit are as follows: In Q4, MF&A revenues were up 17.5% year-over-year to $13.2 million, and Nurse Travel revenues were up 17.9% year-over-year to $32 million. For fiscal year 2006, MF&A revenues grew 26%, while Nurse Travel revenues grew nearly 21%. We continue to gain market share and are seeing increasing staffing consultant productivity. We are also experiencing an ever growing and broadening client base.

We are experiencing a period of sustained growth in the healthcare sector, as staffing demand continues to outweigh supply. A recent report from the National Health Statistics Group estimates the U.S. spending on healthcare services is expected to double over next decade. This demand for services is creating tremendous supply pressure across the entire discipline spectrum, as healthcare facilities increased patient loads are creating needs for all healthcare-related personnel, ranging from nurses to diagnostic professionals to health information billers and coders. The go-forward challenges specific to On Assignment Healthcare Staffing remain the same as in 2006. We must continue to recruit great candidates for our clients, attract and retain key personnel to help service this demand, and diversify our client base within Nurse Travel, where we continue to have a top-heavy customer base. Within Nurse Travel, although we have experienced a 300% increase in clients billed over the last two-and-a-half years, our top two customers still represented almost 30% of revenues in 2006.

In 2007, we will experience a shift in this client mix, as our second largest customer, representing 14% of 2006 revenues, is in the process of shutting down most of its services due to the Federal Government's stated intention of removing Medicare and Medi-Cal funding. We are working diligently to reassign these nurses, and believe that because of the strength of the healthcare staffing marketplace, we will be successful in reassigning these nurses over the next six months. We view this change in circumstances as an opportunity to further diversify our client base within the Nurse Travel division as we have accomplished in prior quarters. To date, we have made fair and measured progress at reassigning nurses away from the customer referenced above, and our dedicated and hard working staffing consultants remain steadfast in their resolve to continue serving our clients with the highest level of quality, relevancy, and speed. With that, I will pass the call over to Emmett McGrath, our President for Lab Support. Emmett?

Thank you, Shawn, and good morning. The Lab Support segment performed well in the fourth quarter. Our combined U.S. and European operations grew an impressive 19% over the same quarter last year and gross margin increased 51 basis points to 33%. Despite historical seasonal challenges, revenues grew approximately 2.5% sequentially, from $30.6 million to $31.3 million during the quarter. For fiscal year 2006, the Lab Support segment grew a solid 19%. Gross margin for the year was 32.5% representing a 33 basis point increase. I attribute our performance in fourth quarter and fiscal year 2006 to the health of the industries we serve, business development and recruiting expertise, management, accountability and focus, increased employee productivity, greater client penetration, stellar execution of newer contract awards, and greater contribution from our clinical research and engineering business lines. Early into the first quarter 2007, I'm encouraged with our contract and direct hire order flow, placement activity, pricing gains, weekly revenue trends and pipeline of new business opportunities. The markets we serve, specifically life sciences, which encompasses biotechnology, pharmaceutical, and medical device, continue to offer great opportunities for profitable growth.

To ensure we continue to generate impressive results throughout 2007, our U.S. and European operations are committed to increasing the number of new client engagements, gaining greater depth with our existing clientele, maintaining gross margins, migrating to higher level high-demand skill disciplines, effective contract execution, and again, increased employee productivity. Historically the first quarter is our most challenging quarter. However, outside of recent and potential weather challenges that are beyond our control, I expect demand for our services to remain strong, and the Lab Support segment to generate impressive results. I am confident that 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 Jim Brill. Jim?

Thanks, Emmett. Consolidated revenues were $76.5 million, up 1.1% sequentially. There were 61.5 billing days in this quarter and in Q4 2005, versus 62.5 days in Q3 2006. For Nurse Travel, there were 92 billing days this quarter, last quarter, and in Q4 2005. Lab segment revenues were $31.3 million, up 2.5% sequentially, and represented 41% of total revenues. Lab Support Europe revenues were $5.1 million, up 1% sequentially. On a constant currency basis, revenues were up 17.7% year-over-year, and up marginally sequentially. Lab Europe revenues were 6.6% of total revenues for the quarter. Healthcare Staffing revenues were $45.2 million, up slightly sequentially and up 17.8% over Q4 2005. Healthcare Staffing represented 59% of total revenues. Within Healthcare Staffing, Nurse Travel revenues were $32 million, unchanged sequentially, and up 17.9% over Q4 '05. Nurse Travel represented 41.8% of total revenues.

MF&A revenues were $13.2 million, up slightly sequentially, and up 17.5% over Q4 2005. MF&A represented 17.2% of total revenues. Conversion and direct hire revenues totaled $1.9 million, compared with $2 million in Q3 2006 and $1.2 million in Q4 2005. Conversion and direct hire revenues represented 2.4%, 2.6%, and 1.9% of total revenues for Q4 '06, Q3 '06, and Q4 '05 respectively. I might just add at this point that going forward for the first quarter of 2007 and beyond, we'll report revenues and results based on four segments in the business: On Assignment Healthcare, On Assignment Lab Support, Vista, and Oxford.

Consolidated gross profit was $20.8 million for the quarter and consolidated gross margin was 27.2%, compared with 26.2% in Q4 2005 and 27.5% in Q3 2006. Lab Support and gross profit was approximately $10.4 million for the quarter, which was a gross margin of 33%, compared to 32.7% for Q3 2006 and 32.5% for Q4 2005. The 51 basis point increase year-over-year was primarily related to increased direct hire and conversion revenues, lower holiday and appreciation pay expenses, and a favorable adjustment for Workers' Compensation expense. These favorable adjustments were offset by higher payroll taxes and increased medical expense.

Healthcare Staffing gross profit was $10.5 million for the quarter, with a gross margin of 23.1%, compared to 23.9% for Q3 '06, and 21.9% for Q4 '05. Within the Healthcare Staffing segment, Nurse Travel gross profit was $6.7 million, which was a gross margin of 21%, compared to 20.3% in Q3 '06, and 19.7% in Q4 '05. The 130 basis point increase year-over-year was primarily related to bill pay margin expansion, offset by increased travel and housing costs, and Workers' Compensation expense. For MF&A, gross profit was $3.7 million for the quarter, which was a gross margin of 28.4% compared with 32.8% in Q3 '06 and 27.4% in Q4 '05. The 98 basis point increase year-over-year was primarily related to higher bill pay margins, lower appreciation, holiday pay and medical expenses, and an increase in direct hire and conversion revenues. These favorable adjustments were partially offset by increased Workers' Compensation expense, increased expenses related to higher travel, and housing costs for contract professionals and payroll taxes.

Total SG&A expense for the fourth quarter was $17.2 million, or 22.5% of total revenues. Excluding $1.1 million related to equity-based compensation expense and severance costs related to the resignation of the CFO for medical reasons, SG&A expense was $15.8 million or 20.6% of revenues. For Q4 '05, SG&A was $16.2 million or 25.1% of revenues, and included $68,000 of equity-based compensation expense. Depreciation expense for the quarter was $1.1 million, compared with $1.1 million in Q3 '06 and $1.4 million in Q4 '05. Amortization expense for the quarter was $242,000, down from $281,000 in the year-ago period, and $243,000 for Q3 '06. Our operating income was $3.6 million for the quarter, compared with operating income of $744,000 for the fourth quarter of 2005.

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 equity-based compensation expense of $1.1 million, adjusted EBITDA was $6 million or 7.8% of revenue. Adjusted EBITDA was $2.5 million in Q4 2005 and $5.7 million in Q3 2006. We ended the quarter with cash and cash equivalents and restricted cash of $110.2 million, up from $35.6 million in the preceding quarter. For the quarter, cash provided by operations was $2.5 million, cash provided by net proceeds from stock transactions was $71.5 million, which includes $71.4 million from the Company's public offering in November. And cash used for investing activities was $652,000. CapEx was approximately $1.1 million, up from $800,000 in the prior quarter. Net accounts receivable was $39.1 million at the end of the fourth quarter, a decrease of approximately $2.2 million sequentially. On a consolidated basis, days sales outstanding were 48.7, down from 51.6 in the prior quarter, and 52.5 in Q4 '05.

Now, turning to productivity, which we define as quarterly gross profit generated per staffing consultant, for the fourth quarter we averaged 261 staffing consultants. They each generated $79,700 in gross profit, a 3% sequential decrease. In Q3 2006, we averaged 253 staffing consultants, and they each generated $82,000 in gross profit. Each staffing consultant had an average of 15.7 contract professionals out on assignment, down from 15.8 in the previous quarter. Lab productivity was 19.4 versus 19.5 in the previous quarter, MF&A productivity was 12 versus 11.9 in the previous quarter, and Nurse Travel was 13.7 versus 14.2.

Turning to guidance, for Lab and MF&A, there are 63.5 billing days in the first quarter compared to 61.5 for the fourth quarter of 2006, and 64.5 for Q1 '06. Nurse Travel and Vista, there are 90 days compared to 92 days in Q4 '06, and 90 days in Q1 '06. For Oxford Global Resources there were 64 days -- there will be 64 days compared with 59.7 in Q4 '06, and 64 in Q1 '06. We currently project consolidated revenues of $120 million to $123 million for the quarter ending March 31st, 2007. This revenue projection includes Vista results for the entire quarter, and two months of Oxford results, based on the January 31st closing date. We're projecting consolidated gross margins of approximately 29% to 29.5% and SG&A of $31.5 million to $32.5 million, including equity-based compensation expenses of $875,000, $200,000 of incremental costs associated with audits and 404 compliance for Vista and Oxford, $2.9 million in amortization of intangible assets and financing costs associated with the acquisitions, and other depreciation and amortization of $1.5 million.

We project earnings per share of $0.02 to $0.04 based on 35.7 million weighted average shares outstanding, which includes approximately 795,000 shares issued in conjunction with the Oxford acquisition at an effective tax rate of 38.5%. We're still in the process of allocating the purchase price of Vista and Oxford to amortizable intangibles and financing costs, and therefore the related amortization is only an estimate, which could rang from $2.5 million to $3 million.

Based on the first quarter guidance and assuming fairly stable labor markets, our guidance for revenues for the full year is $565 million to $585 million, which represents pro forma growth of approximately 10% to 14% over 2006. We're projecting average gross margin for the year of approximately 29.5% to 30.2%, consolidated SG&A of $149 million to $152 million dollars, including equity-based compensation expense of $5.7 million, which is higher due to stock option and restricted stock issuances related to the acquisitions, $800,000 of incremental costs associated with audits and Sarbanes compliance for Vista and Oxford, the preliminary estimate of $15.1 million in amortization of intangible assets and deferred financing costs associated with the acquisitions, and other depreciation and amortization of $6.7 million. We're still in the process of finalizing the allocation of the purchase price of Vista and Oxford. The amortization of intangibles could range from $13.5 million to $15.5 million. This amount will decrease by approximately 50% in 2008.

We project earnings per share of approximately $0.25 to $0.28, which includes the negative $0.26 per share impact of intangible asset amortization related to the acquisitions, net interest expense of $9.3 million, 36.2 million weighted average shares outstanding, and an effective tax rate of 38.5%. Adjusted EBITDA is projected to range from $48 million to $53 million. 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 remarks before we open up the lines for questions. Peter?

Thank you, Jim. On Assignment's growth opportunities still are largely dependent on our own internal execution, and not on any improvement in the end markets we serve. This quarter's performance substantiates the strength of our diversified business model, and is a result of the operational and management changes we have made over the last 36 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. We'd like to now open the call up to participants for questions. Operator?

[OPERATOR INSTRUCTIONS] Tobey Sommer.

Wanted to ask a question about productivity, which had been a theme among the staffing consultants kind of for the last year or so. Could you refresh us maybe on how we should think about that now that you have got some new businesses in the mix, and maybe where those are from a productivity standpoint? And kind of what sort of improvements you think we should expect going forward? Thank you.

Right. Thanks, Tobey. Good morning. Tobey, now that we have different lines of businesses that carry different levels of productivity, we're reevaluating all the metrics. What I can tell you is we're completely committed to being able to give you pro forma growth rates and performance, and allowing you to measure kind of same-store sales for legacy On Assignment, Vista, and Oxford. With that said, we used to quote, and we did in this earnings call, two measurements of productivity. One was gross profit per staffing consultant, where you just take the absolute gross profit dollar and divide it by the number of staffing consultants. And the other was number of contract professionals per staffing consultant, which was a little bit of back of the envelope, because we would have to make some assumptions about full time equivalents.

On a go forward basis, I think the only number we are going to quote you is the gross profit dollars per staffing consultant, because the productivity levels for physician staffing and IT are different than they are for old On Assignment. So I don't think it's a relevant measurement. But we will give you a measurement tool to see how we progress. We feel that we have kind of filled the pipeline with, as you saw, our head count is about 261 at old On Assignment. And Vista and Oxford, at the end of the fourth quarter of '06, each ramped up a little bit on their hiring. So we feel that we've done the requisite hiring, and then we started the year with a full team. And we're looking to leverage the new employees that we have to higher levels of productivity than they currently have. Jim, do you want to add anything to that?

No. I think you summarized it. What we are looking at going forward as far as productivity is, at least for disclosure purposes, gross profit per staffing consultant. And we'll give that to you.

Thank you. I was wondering if you could touch on how the amortization related to intangibles in the acquisitions will kind of roll off the P&L over the next couple of years? Thanks.

As I mentioned in the call, the amortization will drop in 2008 by approximately 50%, and then in 2009 it should drop again by about 50%. So it comes off fairly quickly. It's much faster than a straight line kind of amortization.

And just one other question, Peter, kind of about the revenue guidance. Is there a meaningful difference between the growth rate implied for the legacy On Assignment businesses versus the acquisitions? Or are they, on a blended basis, more or less in the same ballpark?

There's not a big significant change. I would -- I guess the only thing I would share publicly with you is I think we have the physician staffing with the fastest growth rate of kind of the three flavors. But they're all double-digit growth rates.

Okay. And then any comments that you could share with us, and I'll get back in the queue, about the Oxford branch of offices, and any kind of update as to any that have been consolidated? Or any maybe initial successes in cross-selling any services, where one particular flavor of staffing was not represented previously?

Well, let me -- first of all, again, these acquisitions were premised off of growth versus any sort of significant synergy savings. We are looking at leases that are lapsing to see if we can renew and cohabitate together. The real benefit of cohabitation is not so much the lease absorption as, when you've got a branch office that now has 15 or 30 people in it, versus only five or six people respectively, there's just a lot more energy and momentum that is generated from those larger offices. We are looking at -- Mike McGowan is looking right now, and we got have a preliminary target of three or four markets we hope to open or reopen for Oxford in places that we are at, and that should be occurring throughout 2007. I can't give you a time line for that. And then I guess, Emmett, why don't you just give them a little anecdotal story of where it wasn't so much cross-selling, but it was recognition of the two companies where lab was selling, and then independently Oxford was in there, and we got a note from the customer.

Certainly, Peter. Good morning, Tobey. Yes, in the Northern California market, we had an opportunity with a medical device company. And went out to bid, and it was a very nice opportunity. And lo and behold, we found out that Oxford was going for the engineering and Lab Support was going for the scientific. So together, we combined the name, so to speak, and we did get that contract. So it's an example of some cross-selling there. And hope to see more in the coming months.

Thank you very much.

Jim Janesky.

I have a couple of questions. The first is, when you look at the recovery in pro forma revenues for the first couple of weeks of this quarter versus last year, how did that compare to '05? I guess where I'm coming from is, have things accelerated after the usual seasonal slow down, which appeared in the fourth quarter to not be that much of a slow down to begin with, how would you characterize the beginning of 2007 for all of your combined entities?

Good morning, Jim, this is Pete. I'll go first. I'll give you more qualitative versus quantitative. I will tell that you that perm placement is not a bit focus of ours, but did it pick up immediately after the traditional lull of the fourth quarter, which was kind of unique. It wasn't that way in '05. We have seen -- we typically start to dip, and kind of December 14th, and historically for old On Assignment, it took until kind of March the 1st to get back to historical levels. Lab Support and MF&A started the year at higher head count. And although we traditionally experience a lot of terms, so our new starts are offsetting terminations, those two businesses have done very, very well. As you know, for Nurse Travel, it had an absolute spectacular first quarter of 2006. It actually was up, I think, 38%.

We have that phenomenon where we're weaning ourselves off of our second largest customer. But with that said, our head count in Nursing is around 780 nurses today, and that's even -- that's a pretty high number, considering we're down 80 or 100 nurses at that second largest customer. So we're growing over that attrition. So we feel pretty -- very good about the healthcare market. As for physician and IT, both of those businesses are targeted to be up sequentially first over fourth and first over first, with very high growth rates. So I would tell you the markets are pretty good. We have experienced a little higher conversion of our temps to perm, which causes us to have to have more starts. But the market feels pretty good right now. And we probably started the year at higher levels than we did the first quarter of '06.

Okay, thanks. And then could you -- Shawn, could you spend a little bit more time talking about what happened at that second largest customer? I didn't really catch the full story. And how quickly do you anticipate that you will be able to reassign these nurses? I assume the demand is still out there, that you should be able to reassign them, right?

Yes, that's right, Jim. Good morning. First off, we have a large customer that represents around 16% of our 2006 revenues that has been, in essence, told that it is not going to receive its federal and state funding from Medicare and Medi-Cal. And therefore, over the last six months, we have been working with that customer. And really, the impact started to occur in December and early January, where that customer is shutting down most of its services, to the point where it is going to be just providing some outpatient approach. And therefore, we were running a very high head count, and we are running at a small, small fraction of that at this point. So we anticipate that those nurses, as you know, continue to take a little bit of time to reassign to our valued other customers. And that period of time takes about four to six months, where we can really get everybody reassigned in an expedient fashion. Because many of the nurses will take time off, they'll take full-time assignments. So we don't necessarily have a one to one replacement to fill ratio.

That was 16% of Nurse Travel revenues, not company-wide? Right?

T's correct. It was 14% or 16% of Nurse Travel revenues for 2006.

Okay. Great. Thanks for giving more detail. And then final question, Pete, is what do you think are going to be the bigger challenges for 2007 as we go in? You have talked about the highlights of what you are optimistic about. But can you just give us an idea of what the challenges are? Is it integration? Is it -- I know you're not really doing a lot of integration. But if you could give us some idea, that would be helpful.

I don't think there's a lot of risk in the integration side of it, because as you know, we're -- we bought a 16-year-old and a 22-year-old company that have very defined business models and go-to-market approaches. The integration you are going to see is how we map the financials over to ours, so that we can report things, and forecast things internally accurately. I think the challenges we have are the same challenges that our customers have. We're operating in an incredibly tight labor market. And that labor market is very tight for recruiters and sales people and back office support people. So we have to be -- we have got to be world-class in retention and recruitment of our own people, as much as placing of people.

I think, trying to be a little more forward-looking, I think that housing and travel increases, we have got to manage that and be thoughtful with discussions with our customers, that some of these increases that we have to pass along to them are beyond our control. We have been successful, and as you saw in our reported numbers, in being able to avoid a margin compression. But it's a real-life fact that housing and travel has gone up. I don't see a risk of -- our perm placement business is very controlled. So I don't see that as being a big threat for us in '07 if the markets soften a little bit. Our client concentration, except for those two accounts that we addressed in Nurse Travel, really is not sizable. Our product -- our pipeline is very, very robust. And I guess the final thing is to make sure that we don't get lax on our selection process, and we do not get lax on our management of personnel on productivity. As we told you, we kind of ramped up our head count in the fourth quarter so that we were fully loaded for '07. And we need to make sure that our new associates are focused and trained in the right fashion.

Okay, thank you.

Jeff Silber.

Just a couple of follow-ups from some of the previous questions. And I am going to go back to this amortization issue. Is there any specific reason why you're doing this accelerated amortization, why the auditors are telling you to do this? A lot of the other transaction and space we don't see this. And I was wondering if we could get a little bit more color on that?

There are a lot of different methodologies to value a staffing company and to value the intangible assets of a staffing company. In this particular case, obviously Oxford is a significant piece of these two acquisitions. And so the valuation methodology for the Oxford business and the staffing consultants and the customers of Oxford are what's driving this. And there are also has been some additional guidance from the accounting profession on how these businesses ought to be -- on how businesses in general ought to be valued, and how the amortization of these intangibles should be handled. So number one, every company is unique, and this is driven in great part by the valuation of Oxford and the characteristics of Oxford. And two, within the last 12 or 18 months, there's been some additional guidance as to how all this is handled.

And what kind of useful life are we talking about for these assets?

Well, the useful life for Oxford ultimately, I think, is -- from a realistic basis, it ends up being probably 10 or 12 years. But on a weighted average basis, the weighted average probably ends up being two years. Jeff, are you still with us?

Yes, I still have another accounting related question. Sorry about this. In terms of tax rates, had you not taken this valuation allowance in the fourth quarter, what would the tax rate have been in '07? What is the impact of that?

What would the estimated tax rate be in '07?

Yes, I was just trying to see what the impact of this reversal in the fourth quarter was.

You mean in '06?

In '06, yes.

No, I don't have it off the top of my head, I'm sorry.

Okay. And again, did it impact the guidance for '07 at all, the 38.5%?

It did not.

It did not. Okay, great.

It did not.

And in terms of the number of consultants that Vista and Oxford have, you mentioned it ramped up. Can you give us roughly a number how much we're talking about?

I can give you a qualitative. It's like up somewhere between 8% and 10%.

Okay, great. And again, just a little bit more color on the '07 guidance. Is there any reason that stock-based compensation is going up so much?

Yes, as I mentioned, there were -- I'm sorry, we anticipate, and again, there are a number of contingent options and restricted stock grants which are dependent on shareholder approval that we would anticipate will happen in the second quarter. A great deal of that relates to the Oxford and Vista acquisition, and that's why it's ramping up.

Jeff, we went from pre-acquisitions, about 460 full-time corporate support, sales, recruiting people, to post-acquisitions about 1,100 employees. So we need to make sure that we "equitized" our new associates and have everyone aligned with the interest of our shareholders. So we did some awards that have four-year vesting, that are contingent on shareholder approval, as Jim said.

Okay, that's fair. And what kind of CapEx should we be looking for in '07?

It's probably going to be a little bit less than amortization and depreciation. So, somewhere in the $5.5 million to $6 million range.

Great. And then just one final, and I'll let somebody else jump in. I missed -- again, this is a guidance question. Interest expense for the first quarter?

I don't know that we gave it, but I'm happy to give it. It's going to be approximately $1.8 million.

All right. Great. I'll let somebody else jump on. Thanks.

Kevin Foll.

Nice quarter. Congratulations on closing the deals. Just wanted to get a little more color in terms of understanding the seasonality of the gross margin of the Vista and Oxford acquisitions, just so we can make sure we're on the same page. There's some seasonality, right?

Right. For most of the staffing industry, you have seasonality because of the reset of SUI, holiday pay for the new year, stuff like that. There will be less seasonality on Vista than there will on, for instance, Oxford or On Assignment, because the docs, or most of them, are independent contractors.

Okay. Can you kind of talk about, just on a rough -- just on an annualized basis for Vista and Oxford, kind of what kind of gross margin is implicit in your yearly guidance, for those divisions?

I don't know if we broke that out.

We didn't.

And I think what I would share with you, Kevin, not giving any further guidance than we have previously given. Is if you look at the kind of presentations that we made when we announced the deals, I think consistent gross margins, what we have told you our long-term objectives are for consolidated gross margin for all of On Assignment, including all of our lines of business, of approximately 30%, and Jim gave guidance of 29% to 29.5% for the first quarter, which takes into effect the normal payroll tax resetting.

Okay. And will you be breaking out the segment gross margin going forward on a quarterly basis, like you do for the other segments?

We probably will go to four segments going forward. We haven't decided exactly what all we are going to break out, but that probably is going to be something that people will need.

I see. Okay. And -- yes, I guess that's it. Thanks a lot. Take care.

Jeff Ignall.

Can you tell me what your pro forma 2006 EBITDA was for the three businesses combined? And then implied in your guidance for '07, what that growth represents? You gave the revenue growth, so I wanted to see if we could get the EBITDA growth as well.

I don't have the pro forma '06 combined EBITDA in front of me.

Okay. How about the implied '06 -- or excuse me, '07 EBITDA growth pro forma? You said 10% to 14% revenue. What would be the implied EBITDA growth in your guidance?

Well, it's higher than that. But again, I don't know -- I don't have it in front of me. I don't have the combined pro forma in front of me.

Okay, thanks.

Jeff, the only comment I would make, the reason we didn't even go to that effort is because, as you know, to do a pro forma EBITDA calculation, although we have clean numbers, there are so many adjustments that went into the historical EBITDA because of removing a jet and racehorses and stuff like that from a prior owner and stuff like that, there's just so many different things, that it would be a very lengthy conversation. But I can tell you that the EBITDA year-over-year growth, '07 over '06, is higher than the revenue growth that is projected.

Okay, understood. That makes sense. Thanks a lot.

[OPERATOR INSTRUCTIONS] Josh Vogel.

I believe you have mentioned in the past, that the gross margins for the Oxford business averaged at about 34%. Can you remind me what they are for the Vista business?

We said about 26.9%.

Okay. Now, on a consolidated basis, I'm looking at about, if you look at '06, Vista was about 11% of revenue, Oxford was 34%, and the legacy business is 55%. Should I expect a similar revenue mix that's built into your '07 guidance?

Well, again, we haven't broken out the various growth components. Peter said basically they were somewhat similar, so -- .

Okay. Because I know you mentioned, you know what I'm getting at, is you expect each segment to grow at double-digit rates. But I was curious if you're seeing any one of these business lines projected growth accelerate quicker than the others.

Well, there are a whole number of factors. Strength of the end markets, size of the relative Company, positioning. The only thing that we said, Josh, which I would just reiterate, is that of the three kind of companies, that I think we have Vista growing the fastest.

Right.

Okay. Great. Thank you.

[OPERATOR INSTRUCTIONS] There are no further questions at this time, gentlemen.

All right. We appreciate your continued attention and interest in our Company, and look forward to reporting our first quarter results. Thank you very much for your attendance.

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