ASGN Inc (ASGN) 2007 Q2 法說會逐字稿

Good afternoon. My name is Mark, and I will be your conference operator today. At this time, I'd like to welcome everyone to the On Assignment Second Quarter Earnings Release conference. 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.

Thank you. Before we begin, I would like to remind everyone as we do each quarter that our presentation contains predictions, estimates and other forward-looking statements representing our current judgment of what the future holds. These include words such as 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 describe some of these risks and uncertainties in today's press release and in our filings with the Securities and Exchange Commission. We do not assume the obligation to update statements made in this conference call.

I would now like to introduce Peter Dameris, our CEO and President, who will provide an overview of our second quarter results. Peter.

Thank you, Jim. Good afternoon, I would like to welcome everyone to the On Assignment 2007 second quarter earnings conference call. With me today are Jim Brill, Senior Vice President and Chief Financial Officer, and Mike McGowan, President of Oxford Global Resources, our IT and engineering staffing business. During our call today I will give a review of the markets we serve and our operational highlights, followed by discussion of the performance of our operating segments by myself and Mike. I will then turn the call over to Jim for a more detailed review and discussion of our second quarter financial performance and our financial guidance for the third quarter 2007 and the full year. We will then open the call up to questions.

This quarter's performance again resulted in record revenues for our company of 143.9 million. Revenues grew 110% in the second quarter of '07 over the second quarter of 2006. Due in great part to the acquisitions of VISTA and Oxford. Net income was 2.938 million or $0.08 per share versus 1.914 million or $0.07 per share in second quarter of '06. Revenue generated outside the United States was 6.6 million, or 4.6% of consolidated revenues in the second quarter of '07 versus 6.1 million or 4.7% in the second quarter of 2006. Consolidated gross margins in the second quarter was 32.1%, up from 28.1% in the second quarter of '06. Consolidated hourly bill pay spreads in the quarter also increased year over year.

Adjusted EBITDA was 14.8 million, up over 230% year over year, and 1.6 million over the high end of guidance that we gave of 13.2 million. Operating income for the quarter was 7.2 million, up over the 4 million from the last quarter, this includes 2.2 million of equity based compensation expense, 3.8 million of amortization related to intangibles, and 1.6 million of depreciation.

For those investors who have followed our company over the years or our significant growth in EBITDA was attributable to the strong performance of our core business and contributions from the recently completed acquisitions. Our strong performance was achieved again without any significant contribution from firm placement and is evidence of the durability and strength of our gross margins and business model.

Consolidated revenue growth in the second quarter 12.2% on a pro forma a basis was impacted by slower than expected growth in the healthcare segment and to a lesser extent in the IT engineering segment. In healthcare we were impacted by our previously disclosed realignment of our nurse travel customer base, our decision to reduce placements at lower gross margin nurse travel customers, as well as the general lack luster nurse travel end market. While we do not expect the nurse travel end market to improve significantly in the second half of 2007, we do believe we can grow revenues in the remaining portion of '07 without compromising our expanded gross margins.

Exiting the quarter, demand continues to be strong for all of our services. Physician staffing and life sciences continue to have the strongest end market demand, followed by IT, engineering and then healthcare staffing. Based on published reports regarding current nurse shortages our belief that patient admissions will eventually improve, and the overall age of working nurses being at its highest level in recent history, we believe the demand in the nurse travel end market should reaccelerate in 2008.

Our weekly assignment revenues which exclude conversion, billable expenses and direct placement revenues averaged 10.9 million for the two weeks ended July 23rd. We averaged 10 million in pro forma weekly assignment revenues for the same two week period one year ago, including Oxford and VISTA.

Operating leverage continued to improve during the quarter. Our adjust EBITDA margin reached 10.3%, up from 8% in the first quarter of 2007. We grew our gross profit, operating income and net income faster than our revenues in the second quarter. During the quarter, despite maintaining a higher number of staffing consultants, we increased our year over year productivity and gross profit per staffing consultant by 12.5% on a pro forma basis. The labor markets have not tightened to a point that we are experiencing rapid contract employee wage inflation that we cannot pass along to our clients.

Before turning the call over to Mike McGowan, I would like to give you a brief review of our operations. The On Assignment healthcare segment second quarter results continue to show progress in improving gross margins and diversifying its customer base. Our healthcare staffing revenues increased 10.4% year over year. As mentioned earlier, this end market to date, has had the smallest growth in absolute end market demand, i.e. hospital admissions. Yet it is the segment that is experiencing the greatest shortage in qualified personnel. Eventually, hospital admissions will increase, which will cause even greater opportunities in the segment and an even greater sense of urgency on the part of hiring managers at hospitals.

In Q2, Allied Healthcare revenues were up 13.5% year over year to 14.3 million. And nurse travel revenues were up 8.9% year over year to 29.3 million. As we've discussed during previous conference calls our second largest customer in nurse travel which represented 5.8% of 2006 consolidated revenues has been shutting down a number of its services due to not meeting Medicare and Medicaid funding requirements. At this time last year we had 87 nurses on billing at that facility. This year we have 18. During the quarter we averaged 770 nurses on billing versus 684 last year despite the significant reduction at the above referenced customer.

Over the last two years we have made great progress in reducing our client concentration. In the second quarter of 2007, we billed 325 customers at the top and the top ten customers accounted for 36.3% of nurse travel revenue as compared to 260 customers in the second quarter of 2006, when the top ten accounted for 48.9% of revenue.

Life science segment performed very well in the second quarter. Our combined U.S. and European operations grew 14.9% over the same quarter last year and gross margins increased 60 basis points to 34.1%. Our physicians staffing business continued to perform well, growing 22.4% over the second quarter of 2006. And gross margins increased to 31.3% in the second quarter of '07, from 30.1% in the second quarter of '06 on a pro forma basis.

I would now like to turn the call over to Mike McGowan, President of Oxford for a review of their performance in the second quarter. Michael.

Thank you, Peter. Oxford Global Resources, On Assignment's IT and engineering division, delivered solid second quarter financial results, our first full quarter with On Assignment. Our revenue growth was slightly less than expected due to a lower number of planned internal staffing consultant head count, although gross margin and average bill rates continue to exceed our targets. We expect continued growth and strong financial performance for the remainder of 2007. Revenues in the second quarter were 48.7 million an 8.7% increase over the second quarter of 2006. Approximately 68% of Oxford's increase in sales was due to increased bill rates, and approximately 32% of the increase was due to more billable consultants on engagements. Sequential revenue growth in the second quarter on a pro forma basis was 6.1% from 45.9 million in the first quarter.

During the second quarter, Oxford billed 720 client companies. As no single client accounted for more than 3% of revenue during the quarter. Oxford's average bill rate if the second quarter was $118 per hour. A 6% increase over the second quarter of 2006. This was based on an average of 774 billable consultants in the second quarter, compared to 741 consultants during the second quarter of '06. Gross margin for the second quarter was 37.2%, 62 basis points higher than the second quarter of 2006.

Oxford specializes in recruiting senior consultants in four technical disciplines, driving the global economy's long-term growth, information technology, software and hardware engineering, other engineering and telecom. A brief review of each of these specialty areas will provide insight and perspective to our overall results for quarter two, as well as our prospects for long-term growth.

Oxford's IT specialty accounted for 52% of our business. Revenue growth in the second quarter was driven by a strong increase in demand for our SAT consultants. Average bill rates exceeded $150 per hour and gross margins were 37.5%, representing a 3.8% bill rate and 3.9% gross margin increase over quarter 2, 2006. Software and hardware engineering contributed 26% of Oxford's revenues in the second quarter but declined from quarter 2, '06. Most of the decline was limited to the software application space, while our core hardware design and embedded systems development skills remained solid. Demand for Oxford's other engineering consultants and related revenue was up nicely over the second quarter of 2006.

The main drivers were mechanical engineers in the aerospace industry, controls engineers and manufacturing engineers. This engineering specialty accounts for 16% of our revenue. Telecom is our smallest specialty area, accounting for the remaining 6% of Oxford's revenue. Telecom experienced a decline compared to the second quarter of 2006, due in part to a slow down in the development of the industry's wireless infrastructure.

On the strategic front Oxford's integration with On Assignment is progressing smoothly as expected. In fact, we have leveraged On Assignment's existing support and infrastructure as we re-entered one of the markets where On Assignment already exists. We are also leveraging On Assignment's presence in the life sciences market to explore opportunities to provide IT consultants to healthcare and biotech companies, as those industries increasingly embraced the productivity gains and cost savings that technological advances have afforded other industries, and that will be required to provide health care service to the growing U.S. population.

Our outlook for the third quart is positive and supported by our forward-looking survey at market demand, the Oxford index. This correlated survey of Oxford clients has been highly predictive of actual demands since 2002, and indicates quarter 3 top line results will exceed the second quarter.

I would now like to turn the call over to Jim Brill. Jim?

Thanks, Mike. As Peter mentioned, consolidated revenues were 143.9 million, up significantly due to the acquisitions. There were 63.5 billing days in this quarter. Versus 63.5 in the first quarter. And 63.5 in the second quarter of 2006. However, for nurse travel, there were 91 billing days this quarter, and in the second quarter of '06, versus 90 days in the last quarter. The life sciences segment revenues were 33.4 million, up 5.4% sequentially and 14.9% over the second quarter of last year. Life sciences's Europe revenues were 5.1million, up 20% over last year and 5.5% over last quarter. On a constant currency basis European revenues were up 11.4% year over year.

Healthcare segment revenues were 43.7 million up 2.4% sequentially and up 10.4% over Q2 2006. Within the healthcare segment, nurse travel revenues were 29.3 million, up 3.6% sequentially, and up 8.9% over Q2, 2006. Nurse travel revenues were negatively impacted, as Peter mentioned, by the loss of a large customer. Allied Health care revenues were 14.3 million, up slightly sequentially, and up 13.5% over Q2, 2006. The physicians staffing segment revenues were 18.1million, up 22.4% over last year and up almost 1% over last quarter. Our IT and engineering segment revenues were 48.7 million up 8.7% over last year. The acquisition of Oxford did not occur until the end of January, and only 2 months of Oxford's results were included in the first quarter.

Oxford's sequential growth on a pro forma basis was 6.2%. Conversion and direct hire revenues totaled $3 million in the quarter, or 2.1% of revenue as compared to 2.3% of revenue in Q1 '07 and 1.8% in Q2 '06. Consolidated gross profit was 46.2 million for the quart and consolidated gross margin was 32.1%, compared to 30.5% at Q1 '07 and 28.1% in Q2 '06. The life sciences segment gross profit was 11.4 million for the quarter a gross margin of 34.1%, compared to 33.4% for Q2 '06 and 32.9% of Q1 '07. The 60 basis point increase year over year was primarily related to a favorable adjustment for worker's compensation expense, increased direct hire and conversion revenues and an increased bill pay spread.

The healthcare segment gross profit was 11.1 million for the quarter, the gross margin of 25.4%, compared to 24.6% in Q1 '07 and 24.1% in Q2 '06. The 130 basis point increase year over year was primarily related to bill paying margin expansion, reduced travel and housing costs, a favorable adjustment to worker's compensation expense, and increased direct hire revenues, which were partially offset by an increase in other temporary employee expenses. The physician staffing segment gross profit was 5.7 million for the quarter, a gross margin of 31.2% up from 29.4% in Q1 2007. The 190 basis point increase was primarily due to an increase in the bill pay margin, a reduction in medical malpractice expense, and an increase in direct hire and conversion revenues. The IT and engineering segment gross profit was 18.1 million for the quarter, a gross margin of 37.2%, up from 37.1% in Q1 2007.

Total SG&A expense for the second quarter was 39 million, or 27.1% of total revenues. Included in SG&A is 2.2 million of equity-based compensation expense, 3.8 million of amortization related to amortizable intangibles, and 1.6 million of depreciation. In Q1 2007, which only included two months of Oxford's results, SG&A expense was 34.3 million or 27.9% of revenues. That included 1.1 million of equity-based compensation expense, 4.2 million of amortization of intangibles, and 1.3 million of depreciation. In Q2, 2006 SG&A expense was 16.6 million or 24.3% of revenues, which included 555,000 in equity-based compensation expense, 237,000 of amortization of intangibles, and $1 million of depreciation. Our operating income was 7.2 million for the quarter compared with operating income of 2.6 million for Q2 '06 and 3.2 million for Q1 2007.

In the quarter we entered into a two-year interest rate swap in the amount of $73 million effective June 30th, 2007, which fixed our 90 day LIBOR equivalent rate at 4.94%. The increase in market value of this instrument was $431,000 in the quarter, and included in nonoperating income, and thus excluded from EBITDA. Our tax rate was 40.2%, and net income was $2.9 million or $0.08 per diluted share. We believe it is meaningful to compare EBITDA and adjusted EBITDA when comparing the current quarter's results to prior quarters, as outlined in today's press release, EBITDA for the quarter was $12.6 million, excluding equity-based compensation expense of 2.2 million, adjusted EBITDA was 14.8 million, or 10.3% of revenue. Adjusted EBITDA was 4.4 million in Q2 2006, and 9.8 million in Q1 2007.

We ended the quarter with cash and cash equivalents of 29.4 million, up nicely from 22.6 million last quarter. And bank debt of 144.3 million down from last quarter of 144.6 million. CapEx was approximately 1.2 million, down from 1.5 million in the previous quarter. Net accounts receivable was 78 million at the end of the quarter. Days sales outstanding were 49.4 days, down from 50.6 days in the prior quarter.

Now, turning to productivity, which we define as quarterly gross profit generated per staffing consultant. For the second quarter we average 714 staffing consultants and gross profit per staffing consultant was $64,780. The life science segment generated $100,471 in gross profit per staffing consultant for the quarter as compared to $86,252 in Q2 '06 and $93,070 in Q1 '07. The health care segment generated $73,796 in gross profit per staffing consultant for the quarter, as compared to $68,329 in Q2 '06, and $71,959 in Q1 '07. The physician staffing segment generated $86,219 in gross profit per staffing consultant for the quarter, compared to $78,483 last quarter. The IT and engineering segment generated $46,969 in gross profit per staffing consultant for the quarter, compared to $46,317 last quarter.

Based on fairly stable labor markets, we currently project consolidated revenues of 149 million to 151 million for the quarter ending September 30, 2007. We are projecting consolidated gross margins of approximately 31.9% to 32.3%, SG&A of 38.5 million to 39.5 million, including equity-based compensation expenses of approximately 1.4 million, approximately 3.8 million of amortization of intangible assets and financing costs and depreciation of approximately 1.5 million. We project earnings per share of $0.09 to $0.13, and an effective tax rate of 39.9%. Adjusted EBITDA is projected to range from 14.8 million to 17 million. Based on the third quarter guidance, continued stable labor markets and no further loss of large customers, we currently project revenues for the full year to be between 565 and $575 million, which represents a pro forma growth of approximately 10 to 12% over 2006.

We are projecting gross margins for the year of approximately 31.6% to 31.9%, consolidated SG&A of 152 to $153.5 million, including equity based compensation expense of $6.2 million, which includes stock option and restricted stock issuances related to the acquisitions. Approximately $15.5 million of amortization of intangible assets and deferred financing costs, and depreciation of approximately $6 million. The amortization of intangibles is anticipated to decrease by approximately 40% in 2008. We project earnings per share of approximately $0.27 to $0.38 including net interest expense of $9 million, 36.2million weighted average shares outstanding. and an effective tax rate of 39.9%. Adjusted EBITDA is projected to range from 53 million to $59 million. As you know, these estimates are subject to the risks mentioned in today's press release and at the beginning of this conference call.

And now I'll turn it back to Peter for some closing comments before we open up the line for questions. Peter?

Thanks, Jim. On Assignment's growth opportunity 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, our ability to generate outstanding operating leverage and the operational management changes we have made over the last 42 months. I would like to once again thank our many loyal, dedicated and talented employees whose efforts have allowed us to progress to where we are today.

I would like to now open the call up to participants for questions. Operator.

(OPERATOR INSTRUCTIONS) Your first question comes from Jim Janesky with Stifel Nicolaus.

Good afternoon. A couple of questions. Your outlook for revenues for the rest of the year came down a bit. But your outlook on the bottom line went up. Can you talk about what's going on in the two trends of revenues and profitability? Expectations for the rest of the year?

Yes, Jim, good afternoon. First of all, we gave guidance that we would do, kind of, 10 to 15% revenue growth for the full year, when we announced our fourth quarter results. Due to the slower growth that we have experienced in nurse travel and the lower end double digit growth on revenue the first half of the year, the 585 number just wasn't realistic. There is not enough runway for the second half of the year.

Now, despite saying that, every dollar of revenue we are generating is a lot more valuable than what we originally forecasted at the beginning of the year because of the operating leverage we are delivering, we are not promising, we are realizing it. We raised our adjusted EBITDA budget by almost $6 million despite lowering top revenue guidance. So that is just cost containment, increased productivity and enhanced margins. So we feel pretty good that we are turning the right levers. As you can tell, despite others experiencing declines in gross margin in the healthcare staffing industry, this is the second consecutive quarter that we have increased our gross margins. So we are just being selective about the type of business we are willing to do.

So that, you think, is more -- is the bigger issue? Is that you are not -- you are walking away from lower margin business more than anything else?

Yes. We are. Let me be clear with that. In my prepared remarks, is that, the nurse travel end market has been lack luster. I would say that the there's been no sense of urgency with regard to making decisions. Despite that, we still grew 8.9%. We did elect, in this tight labor market, not to fill as many orders at some lower margin opportunities. We, with regard to our growth rate being 12.3% this quarter, it was attributable to slightly slower growth in the IT group, which was an internal issue regarding not being fully staffed with recruiters and sales people, we are closer -- we are more highly-staffed than we have been previously, although they grew at a 8.9% growth -- 8.7% revenue growth rate, they are over achieving on the EBITDA line. And with regard to the second half of the year, what I'm telling you is, because we were at the lower end of the growth rate on revenue for the first half of the year, we couldn't double up in the remaining six months of the year. But despite that, we are still going to over achieve on the profit line.

Where do you stand with head count growth in Oxford? Are you comfortable with where you're at? Do you think that the back half of the year could, will the profitability metrics continue to go up? What do you expect on the revenue line item? Have you found more recruiters, is there a shortage? What are your thoughts?

I'll let Mike answer that directly. But as we have always done we're never going to overpromise we're just going to deliver. Mike, go ahead.

We are continuing see demand in the IT and engineering space. So, we are going to continue to hire in the second half of the year sales people and recruiters. And again, the labor markets are tight. It's tough finding all those folks. But we're going to continue to hire.

We are in much better shape today than we were three months ago. We are still not quite where we want to be.

And as Mike's prepared comments said, based on our Oxford index and what's going on for the first couple of weeks of the third quarter, we expect growth quarter over quarter. So we feel pretty good about growth rates continuing.

Sequentially you feel good?

Absolutely.

You think that's going to grow? Okay. Thank you.

Sequentially and year over year.

Okay. Thanks.

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

Thanks. Wanted to talk about gross margins, which surpassed our expectations and your guidance. I want to see if you could maybe enumerate the contributors to that in the context of whether you know it is pay bill spread expansion, are you trimming some of the things you used to offer? Some of the temporary workers? Just maybe the drivers in priority would be interesting. Thanks.

I'll go first and then I'll let Jim clean up anything that may be slightly inaccurate. Again, in the prepared remarks, Tobey, gave a pretty detailed description of where the contribution was. It was from bill pay expansion, it was from some favorable adjustments to worker's comp and the life science space it was from some additional direct hire. We did not take anything away from the temporaries, so we are not cutting costs of services that way. We did have improvement in our cost of services related to travel and housing in the nurse travel side. And the nurse travel guys did a particularly good job of moving their margins up. Because, as you know, that is not the highest margin sector in the staffing industry and they got their margins up fairly nicely in the quarter.

I think that pretty well covers it.

Yes.

Could you quantify the worker's comp benefits? And maybe let us know in which segment it was most impactful? And then, how it compares to benefits in recent quarters, whether it is larger or kind of the same?

I can tell that you it wasn't impactful in physician staffing, because there isn't any. They did have an impact of medical malpractice. My stance on the historical pick up on worker's comp was maybe it was a few hundred thousand dollars, couple hundred thousand dollars. And that sort of historically related on a go forward basis, we probably are going to be someplace in the range that we are today. We are doing a better job of managing that, but also, I think the market itself, and my guess is that you'll probably hear it from others, is such that everybody has benefited a little bit from that.

But Toby, I want to leave you with the impression that we earn these gross margins the old fashioned way, and we think they are sustainable. And to further articulate, there wasn't a big, positive adjustment in the Oxford business, because they just don't have a big worker's comp component to it. And the reason we are having favorable adjustments is we are selling high quality business. If you go on our web site we have what we call a Safety Ready program. And we take risk management seriously.

I think lab sciences probably was the biggest beneficiary of it.

Thanks. Just a couple of numbers questions and I'll get back in the queue. You gave the number of recruiters in the quarter. I was wondering if you could give the number of recruiters in the year ago period just so we could get a sense for your growth rate.

I don't have it. I don't have numbers to numbers for Oxford and VISTA.

Do you have a sequential one perhaps?

Not right in front of me. But I can certainly --

But while he is looking for that, I can tell that you that it was up year over year.

Okay. Peter, just in the context of the better margins and improved outlook from an earnings perspective, in a couple of quarters now, at least one solid one and then most of the first quarter, both Oxford and VISTA, as part of On Assignment, when do you think you'll feel comfortable to poke your head out and look at what else is available in the marketplace?

Well, we are seeing really good operating leverage. And as we said, publicly, we want to report a couple of good, clean quarters and let people see that our core business and our acquired business are operating very well. That we have great growth prospects and operating leverage still in our story. And as I would say, it took 16 months to do VISTA and it took over 8 months to do Oxford. We are having conversations and having lunches and dinners and there is some attractive things there. But there is nothing pending or anything imminent. We're not going to do the deal 'de jour' that these small boutique banks bring around. We are looking for things where we can create a meaningful dialog and understand the contributions and the risks. So we are doing just fine without anything and we are looking for what would be additive on a strategic basis beyond just financial.

Last quarter's staffing consultants were 694.

Thank you very much.

Next question is from the line of Andrew Fones with UBS.

Hi, guys. First of all, I was wondering if you could just check a couple of numbers for me. Did you say the pro forma growth in Q2 was about 12%, 12.2?

Yes.

And then was it about that in Q1 also?

It was -- Jim?

I have to look for you.

Okay. And now you're guiding to 10 to 12% pro forma growth for the year. So it seems as though you are kind of currently kind of skimming along the top end at that kind of guidance in terms of the growth year to date?

Right.

Okay. And then, as I look at your gross margin in Q2, your gross margin for the balance of the year, it seems as though you are looking for the gross margin to remain approximately kind of steady. In the second half versus where it was in Q2.

Correct.

Now, in terms of seasonality, is there anything we should be aware of this terms of gross margins? You normally get a bit of a lift in the second half versus Q2, or would you say, fairly steady, is kind of how the gross margin would normally trend?

There will be a little bit of a pick up, Andrew, because of the highly-compensated individuals that work for Oxford maxing out on their employee taxes or FICA, we're, as you know, we are incurring that as incurred versus spreading it over 12 months. So there is a little bit there. There is the chance that there could be a little additional compensation expense on the nursing side for state bonuses in December. But it's too early to predict that. But our guidance, again we try to do what we think's thoughtful. And if we can do better than that, we will. But the margins are about, without -- we told you what the conversion in the perm placement contribution was, it was less than 2.1% of total revenues, 32.1% gross margins is best of breed.

Right, right. Okay, thanks.

I might just add, Andrew, the other thing is that if we, at this point, given what we've been able to achieve with our gross margins, if we're going to lean in one direction or another, we're probably going to lean more -- a little bit more toward revenue. So we've tried to be reasonable about our gross margin forecast.

Okay. Thanks. That sounds fair. And kind of, perhaps delving into that a bit more in detail. Your IT engineering group, we saw revenue growth accelerate just a little bit there in Q2 versus Q1. You said that you may decide to kind of turn the dial a bit more toward growth rather than margin. Where do you see yourself in terms of moving down that path?

It's a placement by placement decision. And it's strategic with regard to what it means for the ongoing relationship with the customer. But, we feel pretty good about our growth prospects. And we've got more people -- well, Mike. Why don't you tell him? We've got more people hired now over at Oxford than the history of the firm. Why don't you follow and finish --.

When you look at our total staffing consultants, which is the sales folks and the recruiters, we actually have more on board now than we've ever had in the history of the Company. So we feel pretty good position-wise. We always got a lot of training, development and retention to do. But we feel very good, very good in terms of positioning for the last six months as well as into 2008.

Especially for '08, the labor markets stay the way they are, you get six months under their belt. We have more people than Oxford's ever had in its history. What I'm most proud about are these operators, invested for the future, expanded our operating leverage, and we hired them, and we said well, we didn't come to you and say our profit was held back because we hired for future growth. We hired for future growth and increased our operating leverage by 230 basis points.

So, if I think about these new hires kind of ramping up by the beginning of '08, should we be expecting perhaps a little bit of acceleration in revenue growth, as we look out six months plus?

I mean, we haven't given you any '08 guidance and we're not going to do it today, Andrew, but, we hired these people with the expectation that they're going to become productive.

It will depend segment by segment on how things kind of roll-out. You asked about pro forma revenue growth in the first quarter was 12.9%.

Okay. Thanks. And then, perhaps if you could also kind of touch on physician staffing as well, I think we saw growth slow there a bit from the first quarter. Were you taking kind of a close look at margins there, or was there a difficult comp? Can you just kind of help me understand kind of the change there?

Yes. As we told you if you reflect back on our prepared comments in the first quarter, we had like 40% plus growth rate. And it was because of the strength of the business. But also we pointed out that the first quarter of 2006 that we were comparing against was weaker than normal. So that accentuated the year over year comparison. The second thing is that, there was a little bit of a slow down in productivity in the month of June. I mean our June -- but we have overcome that and feel very good about the productivity and the revenue generation for September and October. But our June, in the physician business wasn't what we were expecting, and that was because of an internal, just a daily revenue activity execution and we fixed that. And we feel very good about what we've seen in the third quarter and the number of days booked for physicians in September and October is running very high compared to the previous year.

The comps get tougher as the year goes on in physician staffing.

Okay. So, as I kind of reconcile a weak Q1, but tougher comps go forward, should we expect a little bit of a slow down in growth as we go through the second half of the year?

Let me answer it this way, all published reports say that they think physician staffing [welcome's] business is going to grow, kind of 12, 15%, Andrew, we're 22.9% this quarter, I mean, long term we want to outgrow the industry, but I just don't think it's good to give guidance that you're going to double industry growth rate, infinitum.

Yes.

And layer on top of that that the comps get more difficult. We have promised, and we have not backed away from this is, double digit revenue growth, some of the highest gross margins in the industry, and realtime delivery of operating leverage, and when you see what we've done, and what's going forward and the momentum we have, we're sticking by that.

Okay, thanks. I'll leave it there. Thanks, guys.

(OPERATOR INSTRUCTIONS) Your next question is from the line of Jeff Silber with BMO Capital Markets.

Thanks so much. Peter, in your comments you talked about, I think it was the lack luster nurse travel end market. I'm assuming you are referring to hospital omission trends. Has that gotten any worse over the past quarter?

Jeff, I've got to tell you, that market is the one where we are having to work the hardest for revenue. And every -- every -- that 8.9% growth that we had there, we worked for every basis point of that. So, I would tell that you it hasn't gotten much worse, but it hasn't gotten much better and it's just sloppy. There is just not a real sense of urgency. But, despite that, we are expanding margins and we're growing close to double digits, and we told you in our prepared remarks that we will grow sequentially third over second and we are particularly happy that we are doing that despite losing that major account and we are particularly happy with the quality of our revenues because our client concentration of top 10 customers is down to 38%. And when you first started covering the Company, if you remember, our top 10 customers represented 67% of total revenues in nurse travel.

Okay. And just a follow-up on the gross margin issue. Is it safe to assume that if I drilled down in the nurse travel that gross margins went up both on the nursing side and the allied side year over year and.

Yes, sir. (multiple speakers) for you.

Okay, good. I just wanted do double check on that. In terms of the EPS guidance, you mentioned the fact that you are getting sizable operating leverage. Are you seeing the operating leverage more so in any one specific of your segments?

No. It's really across the board. The other thing I would point out to you, which wasn't in our prepared remarks, is this operating leverage isn't coming from SG&A back office cuts at Oxford and VISTA. It is coming from expanded gross margins and holding our budget and head count constant. And in fact, we are running at higher headcounts than we did in the previous 90 days. So, we are earning it the old fashioned way.

Okay. Good. I hate to ask a tax question on the call, but I'm going to do it anyhow. Your taxes were a little bit higher in the quarter than you had guided to, and they also look like they are going up for the rest of the year. Can you just provide a little color on that?

We sat down and sharpened the pencil on what each of our segment profits were going to look like. And we also took a look at ductibility on some of the equity components and decided that our tax rate was going to be a little bit higher than we had previously planned it to be.

Okay. That's great. Thanks for the color.

Your next question is from the Lynn of Kevin Casey with Casey Capital.

Hi. Guys. Question about the cash flow in the quarter. Cash flow from operations. Was there any one-time items in there? Or is that kind of a normalized rate?

No one-time items.

And then, Jim, it looks like it is about 8 million a quarter?

Yes.

And so that's kind of normal, because I think also if I backed out the numbers the other way, you get around that 32 million run rate, ballpark plus or minus a few million dollars? That sound about right? If I backed it out with your EPS and --

Yes. Yes.

Okay. And then can you talk about the capital structure. Like what do you want to use the cash flow for? And then the acquisitions, are they more opportunistic as you worry about the capital structure only when you see something great?

Well we are worried about the capital structure. The cash flow, as we've said, we wanted to demonstrate, and are demonstrating that this model would throw off cash, and I think we are doing a good job of that. We want to try and ensure that we are able to step down our incremental borrowing rate by the end of the year, which we are on track to do, potentially, without making any debt pay downs. Debt pay downs would be, certainly, one of the uses of cash flow. Another use of cash flow, as we've said from the beginning, is for acquisitions. And we look at opportunities all the time. We've said we'd like to try and demonstrate some cash generation before we start doing some deals, but we look at transaction, and a transaction could come along at some point.

Unless we have a use of the capital we're going to pay down the debt, a couple of -- we are looking at enhancing our GAAP EPS in '08, one, because, as Jim mentioned, the 40% drop in accelerated amortization of identifiable intangibles. Two, hopefully the step down in our interest rate because of our debt to EBITDA ratios hitting the target. And three, pay down a debt which means less interest expense. So we are focused for a good '08.

And then, I guess I can assume the acquisitions are kind of, maybe you guys were planning on this, are going extremely well since that is where you are getting some of the enhanced margins, some of the increased productivity?

And that is not by surprise. That was by design. That's why we bought these business.

That's right.

So the recruiters are operating at better level than they did a year ago?

I won't necessarily say that.

We are getting more productivity. If you take a look at the productivity figures, I suppose you could say that they are operating at a better level. We have gotten some productivity out of recruiters. As far as the acquisitions go, each one of the acquisitions has their own way of operating, within the markets they serve. And we were comfortable with that when we acquired the companies. We didn't want to make any sort of knee jerk changes to it. As it's turned out we may have tuned things in one direction or another. But they are running as we would have hoped them to run. I mean, we did mention that we had hoped for more staffing consultants in Oxford than we ended up having coming out of the first quarter. We have more now. Things are going well.

I would just add, some of the productivity enhancement is that, even as good a job as Oxford was doing, and they get full credit for this, for their gross margins, they are up over 100 basis points and the same for VISTA, even as good a job as they were doing on their contract position staffing business, they were over 31%, so, even with the same number of dots per recruiter sales person you are getting more GP dollars because of the enhanced increased bill rate and GP dollar, I mean, we're hitting above rate, the bell rate's gone up and the margin's going up. So, we get more GP dollars per doc and per IT professional and per nurse.

Sounds great. Thanks, guys.

You bet.

Next question from the line of [Shawn Willard with Signess].

Good afternoon, gentlemen. A couple of quick questions regarding your comment about the depreciation or amortization of intangibles. The comp expense looks like it is going to be flat into next year or maybe just slightly down. Does that also have a acceleration period on it where it's going to start to drop off in '08 or on a go forward basis? Or was that mostly standard across-the-board for the Company as a whole?

There's not going to be a significant drop off in '08.

Okay. And the same thing with your standard depreciation?

Standard depreciation ought to be pretty stable in '08.

Okay. In the realm of acquisitions, first of all you are six, seven months into these, are they pretty much completely integrated at this point or is there further consolidation operating margins that you might be able to pick up out of it? You have done very, very well. Don't get me wrong. I was just curious if that's completely in place at this point or now you are fine tuning.

I would tell you we have gotten zero synergy savings to date. We bought platform companies. Mike McGowan, over at Oxford, still run on a separate PeopleSoft system, and Jim and I have said publicly, that that's something, any sort of systems integration we are looking at kind of maybe the back end of '08 we are taking integration and back off expenses very, very slowly. We don't want to be penny wise and pound foolish. We feel very good. Again, there is no overlapping, there is no overlapping marketplace conflict. We bought platform companies that would harmoniously co-exist with our core offerings. And the integration on an operational basis has gone very smoothly, and the reporting and the monitoring and the management, that's fully in place. Relating back off the synergy savings, we are going through stuff right now like merging 401-K plans, merging our purchasing of worker's comp insurance, and renewing our malpractice and that stuff's going well. But there hasn't been any sort of significant synergy savings because we crash pay bell and IT systems and things like that.

Right. Okay. I know you mentioned that you expect the intangibles to drop by about 40% in '08. When I read through the 8-K that you filed that had the schedule there, looks like there is another step off two years or so past that. Is that about right as well, where the rest of the acceleration goes away?

Well it is 40% in '08. It is another 40% in '09. 40% of that in '09. So -- So it comes off pretty quickly. And then beyond that it drops, no, it drops pretty significantly after that.

Okay. What I meant is the balance that's left which is pretty small at that point --

It's going to drop off pretty quickly after that.

And then, as far as acquisitions, obviously you are still working on two fairly significant ones. What do you see out there in the environment? I mean, is pricing starting to get better? I had heard about a number of people that were for sale but the evaluations were just astronomical. Are people starting to come in line as cash has become a little more expensive and some of these companies are getting a little tight?

It's too early to say. I think the irrationalness was at its peak about three or four months ago. We really tried to stay away from the deal de jours. I'd say there's -- actually there is a rush of product. There is a huge flow of product that's coming into the marketplace. That is not necessarily always the high quality companies you want to purchase. But I think some of the private owners see that the window on private equity may be closing. So they are rushing to get in. Two, there is a fair amount of push that some of the private owners want to go ahead and if they were thinking they had to sell, that they wanted to do it while Cap gains rates are 15%, because, I think they fully believe we're not going to have that type of a tax rate a couple of years from now. So, while the cycle's good, if they think they're going to sell, they're thinking maybe that they should start the process sooner rather than later.

One last question. Between now and the end of the year, what is the biggest risk that you have to your business?

Execution. Internal execution.

All right. Thank you very much.

(OPERATOR INSTRUCTIONS) You do have a follow-up from the line of Tobey Sommer with SunTrust Robinson Humphrey.

Thank you. I was wondering if you could give the percentage of revenue from perm and conversions? Maybe give a reference to the year ago period or maybe first quarter?

I got it. Bear with me.

Another question while you are getting that. On the taxes, the tax rate being a little bit higher, does that have to do with a better growth rate, perhaps, in the Locums business and the fact that that typically has more reimbursed expenses than you can deduct for tax purposes?

It has to do with the mix of businesses and what the profitability in those businesses is. That's one component of it. But there are other components as well. So I wouldn't want to point you toward one particular area.

Okay. Fair enough.

Okay, conversion of direct hire. This quarter it was 2.1% of revenue, in Q1 it was 2.3% of revenue, and in Q2 last year it was 1.8% of revenue.

So Toby, the reason I'm so proud of these results is, you know from our conversations, we are probably the odd man out. But we are -- the variability of our gross margin is probably the highest in the industry because we have the least contribution from perm, which is typically all or none, and our gross margins went from 30.5 to 32.1, and the percentage contribution from perm and conversion went from 2.3 to 2.1, so it actually went down.

Well 2 point in the quarter --

in the quarter to second. That's correct.

All right. Thank you very much.

You also have a follow-up question from the line of Andrew Fones with UBS.

Hi. Guys. I had a question about your Q3 guidance, the revenue range is about 2 million, while the net income range is 1.4. Can you just kind of explain what some of the assumptions are that you have made there, the top and bottom line, and kind of why the net income range is so wide relative to the revenue range?

Yes. If you just walk down, sort of the income statement and start out with the revenue range, and then take it to the gross margin range, take it to the SG&A range, if you swing all the way to one side, it's going to dramatically swing the bottom line one way. If you swing all the way to the other side, it is going to dramatically swing the bottom line the other way. So, basically, it is more of a mathematical process as opposed to narrowing it down any. That's the only reason.

I think just kind of looking back at prior quarters, the range was a little bit narrower, relative to the revenue range. I think it was at 2 and $3 million revenue range previously and now a 0.7 or just $1 million net income range.

Right. In all it is just relative to the, if you swing all the way to one side negative or swing all the way to one side positive. That's it.

Okay. And then just in terms of your thoughts, as to what gets you to kind of the high end versus the low end of the range?

Well, if we are able to -- if we are able to continue to march along with gross margins, and hold them stable. If we are able to hold operating expenses stable if there are no unique things that may come in either one of those areas, then that's pretty much where we are.

Okay. Yes. Okay. Thank you.

And there are no further questions at this time. Do you have any closing remarks?

We just thank everyone for their continued attention and support, and look forward to reporting our third quarter results. Thank you, very much.

And this concludes today's conference call. You may now disconnect.