ASGN Inc (ASGN) 2009 Q1 法說會逐字稿

At this time I would like to welcome everyone to the On Assignment first quarter 2009 earnings 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) Mr. Brill, you may begin your conference.

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 first quarter results. Peter?

Good afternoon. I like to welcome everyone to the On Assignment 2009 first-quarter earnings conference call. With me today are Jim Brill, our Chief Financial Officer; and Mike McGowan, President of our IT and Engineering Group. During our call today I will give a review of the markets we serve and operational highlights, followed by a 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 first-quarter financial performance and our financial guidance for the second quarter of '09. We will then open the call up for questions.

Throughout the first quarter, the markets we serve continued to weaken. Consolidated revenues in each month during the quarter were lower than the prior months. Revenue trends in our Nursing and IT and Engineering groups were weaker than we had forecasted during the fourth quarter conference call. Although revenues are difficult to currently forecast, gross, operating and adjusted EBITDA margins are trending at or better than we had and are currently forecasting.

Looking forward, revenues are starting to stabilize in most of our divisions except Nursing. The Nursing division is currently seeing a severe constraint in purchasing from hospitals. The reduction in demand is not so much due to lower needs, although patient censuses are down, but rather hospitals' current mind set to conserve cash until the credit crisis eases. Hospitals have been severely impacted by the shutdown of the bond markets, and their endowment income has been reduced by the losses in the debt and equity markets.

As many of you know, most not-for-profit hospitals rely heavily on income from their endowments and charitable contributions to provide a large portion of the capital necessary to fund their day-to-day operations.

In addition, many of our IT customers have elected to eliminate, reduce or defer their IT capital expenditures in 2009, and that decision has disproportionately impacted our IT and Engineering divisions.

Our Physician business continues to grow, and our Life Science and Allied Healthcare businesses appear to be flattening. While it appears that things have begun to stabilize for most of our divisions except Nursing, our second-quarter revenues will most likely be lower than the revenues we reported today.

The primary drivers of this revenue forecast are that our IT Engineering division will perform in the second quarter at close to the revenue level generated in March. While business has stabilized in this division and not changed significantly from March, our January and February results in this division were significantly better than March.

Secondly, in our Nursing group, as we suggested during our fourth quarter conference call, the market has deteriorated. While new orders are relatively stable, extensions and end-of-assignment terminations still outpace new starts.

In addition, hours permitted to be worked per week have been lower than previous years.

The results released today are consistent with our operating focus for 2009 of concentrating on gross margins, EBITDA and cash generation. In this current economic environment we have elected not to accept or pursue low-margin business or business that cannot be collected timely. Our focus on credit quality has permitted us to avoid large write-offs and enhance our cash generation. While we are not at all satisfied with our revenues, the business is generating results consistent with our stated operating objectives.

As other companies begin to report their first-quarter results, it will become evident that our gross and adjusted EBITDA margins remain close to the top of the industry and that the Company has preserved its profitability. While we cannot predict when this current crisis will end, we can predict, based on over 20 years of operating history, that our business will perform very well coming out of this crisis. The fact that our gross margins have actually expanded and our adjusted EBITDA margins have remained high bodes very well for us once we have sequential revenue growth.

Our first quarter results confirm to us that our current revenue generation is only a macroeconomic issue, and otherwise we are performing very well. Specific operational accomplishments in the quarter were, one, excluding $584,000 non-cash expense related to an adjustment of the medical malpractice liability discount rate mentioned in our press release, the Company maintained an adjusted EBITDA margin of 7.4%, down from 8.5% in the first quarter of 2008.

Two, our Physician staffing segment gross margin expanded by 186 basis points.

Three, our Nurse Travel group expanded its gross margin by 202 basis points.

Four, our Allied Healthcare group expanded its gross margin by 186 basis points.

And five, our IT and Engineering group maintained a gross margin of 36.8%.

With regard to SG&A, we continue to monitor the markets we serve and the level of investments we have or are making for future growth. In the first quarter of 2009 we reduced corporate expenses, including the number of internal personnel, in all divisions except Physician staffing. To date, the majority of expense reductions have been with third-party vendors.

Now let's review the first quarter. Excluding $2.4 million in revenues derived from supporting a long-standing Nurse Travel customer who experienced labor disruption in the first quarter of 2008, revenues in the first quarter declined 22.1% over the first quarter of 2008. Net income excluding a non-cash expense of $584,000 or $0.01 per diluted share related to our adjustment of the discount rate applied to our medical malpractice insurance liability and a non-cash gain of $660,000 or $0.01 per share on the mark to market of our $73 million interest rate swap was approximately $1.6 million or $0.04 per share. Revenue generated outside the US was $5.6 million or 4.8% of consolidated revenues in the first quarter versus $7.3 million or 4.8% in the first quarter of 2008.

Consolidated gross margins in the first quarter were 31.7%, up from 31.1% in the first quarter of 2008. Our consolidated hourly bill pay spread in the quarter also increased year-over-year. Adjusted EBITDA was $8.6 million for the quarter, excluding $584,000 non-cash expense related to the adjustment of our medical malpractice liability discount rate that I had previously mentioned, down from $13 million in the first quarter of 2008. Once again, our financial performance was achieved without any significant contribution from permanent placement.

Exiting the quarter, Physician staffing is the only segment that continues to have strong demand. Life Science, Allied Healthcare and IT have started to stabilize, and Nurse Travel demand continues to be constrained. Our weekly assignment revenue, which excludes conversion, billable expenses and direct placement revenues, average $7,771,000 for the first three weeks of the second quarter this year compared to $11,317,000 in weekly assignment revenues for the same three-week period one year ago.

Before turning the call over to Mike, I would like to give you a brief review of operations. Revenues for Life Science segment were $25.4 million, which represents a 17.7% sequential decrease from the prior quarter and 22.1% decline year-over-year. On a divisional basis US operations generated $21.6 million in revenues, representing an 18.2% sequential decrease and 21.7% decline year-over-year.

European revenues were $3.8 million, decreasing 14.6% sequentially and declining 24.5% year-over-year. We attribute the first-quarter performance to a number of factors -- one, our clients' continued focus on cost containment rather than completing projects, R&D or enhancing product lines; two, further tightening of venture capital funding and a decline in the number of new investments in the Life Science sector; three, our clients' decision to reduce the number of billable hours; four, less conversion and perm placement fees; and five, the foreign exchange rate for the British pound and the euro combined with a deepening recession in our European markets.

Gross margins for Life Science segment were 31.9% for the quarter, which represents a decrease of 96 basis points year-over-year. On a divisional basis US gross margins were 31.1%, a decrease of 79 basis points year-over-year. European gross margin was 36.5%, a 176-basis-point decrease from the prior year. The decline in gross margin was primarily attributable to a decline in perm, placement and conversion revenues in this division. The average bill rate for the Life Science segment grew 1.9% year-over-year.

Moving onto the second quarter of 2009, the challenges that we faced in the first quarter have carried over into the second quarter but to a lesser extent. Although we continue to operate in a challenging business climate, we are seeing an uptick in orders and proposal activity. However, demand for services remains at weaker levels compared to the second quarter of 2008. As we did through 2008 and in the first quarter of '09, we continue to adjust our cost structure. The Life Science segment's competitive position remains strong, and we will continue to protect the Life Sciences brand.

Now I'd like to turn to Allied Healthcare. Revenues were $10.2 million for the first quarter of 2009. This represents a 23.3% year-over-year decrease and a 22.2% sequential decrease. We attribute this decline to the following specific recessionary factors -- one, a decrease in the number of elective procedures and admissions; two, a greater number of patients choosing more cost-effective forms of treatment such as self-medication over more costly medical procedures; three, hospitals' reduced usage of contract professionals in response to declining cash balances and patient admissions; and four, our clients' efforts to control cost by reducing the number of billable hours and transferring contractor duties to regular staff.

Allied Healthcare gross margins increased 186 basis points year-over-year to 32.2%. The Allied division also successfully increased its average bill rate 2% year-over-year.

As for the first quarter of '09, although not at optimal levels, we continue to see demand for health information management and rehab therapy services. Core modalities such as diagnostic imaging, clinical lab, respiratory therapy and lower-level billers and encoders continue to be soft. As we have done in other divisions, we continue to respond to the current economic challenges by focusing on new business development, gross margin preservation and greater attention to individual performance metrics.

As for cost containment, we have made reductions in SG&A and will continue to monitor SG&A levels throughout the quarter and the remainder of 2009.

Turning to the Nurse Travel group, during the quarter we continued to expand our gross margins and preserve many of our gains in diversifying our client base in spite of a more challenging operating environment. Our first quarter revenues of $21.3 million was down 31.8% year-over-year. Excluding $2.4 million in labor disruption revenues from the first quarter of 2008, revenue would have been down 26% year-over-year. Our gross margin was 23.6%, a 202-basis-point year-over-year improvement. We billed 321 clients during the quarter compared to 319 in the same quarter last year, and 282 two years ago. Our top 10 clients accounted for 33% of revenue compared to 29.3% for the same quarter last year and 38.7% two years ago. Average bill rates increased just under 1% from the first quarter of last year.

Looking forward, we expect the operating environment to continue to be challenging in the second quarter. However, we are starting to see signs that demand is stabilizing. As an example, the average hours worked per nurse improved sequentially towards the end of the first quarter, suggesting that hospitals continue to have strong needs for the specialized nurses we provide. As well, order volume leveled off towards the end of the first quarter and remained steady into the second quarter. Order volume still remains lower than we had seen historically, but we are focusing our efforts on expanding our share of those opportunities with more effort and resources dedicated to our client sales force.

At the same time, we continue to refine our financial controls and drive profitability, as demonstrated by our improving gross margins. Additionally, we have taken a hard look at the organization and have carefully reduced SG&A expenses by nearly 23% to better match our cost level with the current market and also position the division for a quick rebound when the market recovers. Beyond this, we continue to be extremely successful in retaining key talent at all levels of the Nurse Travel group.

Now let's turn to Physician staffing. VISTA, our Physician staffing segment, had solid Q1 performance with key indicators growing year-over-year for the quarter. VISTA maintained productivity, carefully controlled expenses and decreased reimbursed income as a percentage of revenue, which allowed it to grow its gross margin for the quarter. Revenue for the first quarter was $21.7 million, a 5.7% increase over the same quarter in '08. Volume in terms of days billed held almost steady year-over-year. Assignment revenue increased 7.6% year-over-year as we continued a six-month trend of carefully controlling expenses and reducing reimbursed income as a percentage of revenue.

Gross profit also showed strong growth as gross margins grew 186 basis points year-over-year from 28.2% to 30.1%. Included in gross profit this quarter is a non-cash charge of $584,000, which is the result of a change in the discount rate related to our malpractice reserves. Without this non-cash expense, the division would have enjoyed an increase in its gross margin to 32.8% or a 455-basis-point increase year-over-year. Like most organizations, our Physician staffing segment is seeing mixed trends. Physicians drive revenue for healthcare organizations, making physician staffing slightly less vulnerable than many areas of contingent staffing. However, in Q1 we did have a few large clients cancel scheduled days of physician coverage due to decreased enrollment in their healthcare plans, a result of increased unemployment. We were able to redeploy most of the physicians quickly, but the drop in demand was felt.

We have also noticed that many clients are slower to committing to physicians for upcoming coverage, and we have also seen a decline in conversions, clients recruiting locum tenens physicians for permanent jobs and paying the resulting conversion fee. The total number of physicians worked in the quarter was steady year-over-year but dropped 7% sequentially this quarter, another potential indication of the wait-and-see attitude that is slowing down the industry a bit this quarter.

Demand far outstripped supply in the Physician staffing industry. Historically, fill rates have been approximately 30%. We have been focusing on increasing our fill rates with key strategic clients for the past year. The slowdown in demand has pushed our fill rates with these clients up from 35% to 50%. In the long run we believe meeting the needs of key clients more consistently will help us build stronger relationships with clients and win market share.

Positive indicators on the Physician staffing horizon are the funds allocated to some of our key constituents through the American Recovery and Reinvestment Act signed in February of '09. The Act includes $155 million to fund 126 new community healthcare centers and shore up existing centers. The administration anticipates the creation of 5500 jobs in conjunction with these grants and hopes to provide healthcare to 750,000 Americans who currently lack care.

We expect to play a role in finding and enabling qualified physicians to work in these new healthcare centers.

In summary, we saw initial signs of a steep decline in demand, which quickly moderated. Market realities including the acute shortage of physicians and the fact that people can only delay healthcare for so long kept this division relatively stable and will now give them a strong platform to build on.

I'd now like to turn the call over to Mike McGowan, the President of our IT and engineering group. Michael?

Good afternoon. As announced in the fourth quarter earnings call, 2008 was a record year for Oxford in terms of revenue, profit, bill rates and gross margins. However, our operational results for the first quarter of 2009 reflect the impact of the continuing economic recession. Oxford's first-quarter revenues were $38.2 million, a 30.3% decrease from the $54.7 million in the first quarter of '08. The decrease in revenues was due to the fewer billable consultants on assignment and lower bill rates.

As most of you are aware, Oxford specializes in recruiting senior consultants in four technical disciplines -- information technology, software and hardware engineering, mechanical and electrical engineering and telecom. We experienced revenue decreases in the first quarter of 2009 over the first quarter of 2008 of 22.1% for software and hardware engineering, 23.6% for mechanical and electrical engineering and 41.9% for information technology, which is primarily ERP.

Revenue from our telecom discipline actually grew 13% in the first quarter of 2009 compared to the same period in 2008. During the first quarter of '09 we averaged 617 billable consultants on assignment, a 26.2% decrease compared to the average of 836 billable consultants in the first quarter of '08 and 836 billable consultants in the fourth quarter. The average bill rate in the first quarter of '09 was $118.72 per hour compared to $123.59 in the first quarter of '08 and $122.50 in the fourth quarter of '08.

Our gross margin for the first quarter of 2009 remained very strong at 36.8%, as Peter mentioned earlier, equal to the first quarter of 2008, as our bill rates and gross margins continued to be among the highest in the staffing industry.

We continued to be highly diversified across client companies and industries in quarter one, billing over 656 different client firms with no single client accounting for more than 2.9% of our revenue. From an overall industry perspective, our business was strong in the telecommunications industry, and with medical equipment, machinery, instruments and semiconductor manufacturers. Business declined with pharmaceutical companies, educational organizations and firms and other service-related industries. We had relatively few consultants in the financial services, mortgage and insurance industry.

Our internal sales consultants drive our business and are a significant investment necessary for current and future growth. While the average number of sales consultants increased during the first two quarters of '08 to a high of 447 in quarter two, we decreased the number of sales consultants in the third and fourth quarters of '08 and the first quarter of '09 due to the current economic environment in both the United States and Europe. We averaged 395 sales consultants during the fourth quarter of '08 and 349 in the first quarter of '09. We monitor our operational activity daily and will continue to ensure the size of our sales staff is in line with the current and future economic conditions.

To place our overall results in some context, I would like to take a few moments to explain how Oxford's performance is affected by the dynamics of the economy. There are three main reasons Oxford is able to command industry-leading bill rates and margins. First, we focus on the high end of the market for IT and engineering consultants. Second, we specialize in serving the clients in this market with time-sensitive projects who need consultants immediately. And third, our business model is designed to position us to respond immediately to our clients' urgent need for high-end talent.

Over our 24-year history, Oxford's business strategy has been extremely successful. When the economy is growing, relatively flat or in a mild recession, Oxford outperforms other firms in the IT and engineering segments of the staffing industry, as our recent results from 2003 through 2008 attest. However, there are short-term periods such as the type of major economic downturn we are now experiencing that includes significant capital and cash restrictions when Oxford's revenue performance may trail the market. Companies scale back, put on hold or cancel their new IT and project engineering projects. As a result, the urgency of our clients' need for consultants diminishes. As an example, a large portion of our IT business is in the ERP space. We provide high-end consultants who are responsible for developing and implementing large-scale ERP systems for medium to large firms. In the current economic environment firms put their ERP implementations and upgrades on hold and wait until capital is available and the end of the economic downturn is in sight.

That's exactly what has happened over the last six months as the demand for consultants for large ERP vendor installations and upgrades for SAP and Oracle have slowed significantly in the fourth quarter of 2008 and the first quarter of 2009. On Assignment is a perfect example. We had preliminary plans to upgrade our PeopleSoft system in 2009 but decided to put the project on hold until the economy rebounds. Many other firms are doing the exact same thing.

The revenues of other public IT service firms might not be as volatile in these significant economic downturns, as they concentrate on lower end, less urgent skills and command lower bill rates and margins. These jobs, lower end IT skills such as help desk or other technical support and networking jobs, are the opportunities and skills that we do not focus on.

To summarize, in normal recessions the demand for all types of IT and Engineering temporary labor does indeed decrease. However, in severe recessions, which we are currently experiencing, companies cut back on new, capital-intensive IT and product development engineering projects, which ultimately decreases the urgent demand for Oxford's high-end consultants.

Going forward, we continue to see some project cancellations and budget constraints that are affecting our number of new assignments. The Oxford Index, our quarterly survey of Oxford clients, has been highly predictive of actual demand since 2002. And the results of our survey from quarter two show continued soft demand for our consultants in most of our specialty areas with the notable exception of our telecom segment. In addition, based on our average five-month length of assignment, we continued to experience terminations in quarter one of consultants that were assigned last year and will therefore realize a revenue decline in the second quarter over the first.

However, on a positive note, the decline in demand appears to be stabilizing, as Peter mentioned earlier. From February 1 we have been averaging the same number of new assignments per day, so our weekly revenue in April is beginning to stabilize. In addition, within Oxford and Associates, our local office network, new job orders have been increasing every month since December '08, including the month of April. Also as of today, new starts over terminations have been positive, which is the first month since September that has occurred.

Our Oxford international European operations and our IT discipline have also had more starts over terms in April. Therefore, if we experience even a slight economic recovery in the next few months, we could experience a sequential revenue growth in the second half of the year.

I will now turn the call over to Jim Brill. Jim?

As Peter mentioned, consolidated revenues for the quarter were $116.8 million, down 23.4% from 2008. Last year's quarter also included $2.4 million in labor disruption revenue in Nurse Travel. There were 63 billing days this quarter, 62 in the fourth quarter and 63.5 in the first quarter of 2008. However, for Nurse Travel there were 89 billing days this quarter, 92 last quarter and 91 in the first quarter of 2008.

Foreign currency had about a $1.2 million negative impact on revenue, a little under 1%.

Now let me address some of the variances and the related explanations to the extent Peter or Mike has not. In Physician staffing the significant revenue growth, which included an 8.7% bill rate increase, was discussed by Peter and, as he mentioned, we saw good margin expansion off the fourth quarter and last year, which included an increase in bill pay spread. Again as we've mentioned in the last couple of quarters, the actions that we took to turn margins around are working well.

In the Physician staffing segment we had a $584,000 non-cash expense in cost of sales related to adjusting the discount rate on our medical malpractice liability. This reduction in the discount rate was made as a reflection of current interest rates. I think Peter did a thorough job of addressing both revenue and gross margin, Life Sciences, Allied Healthcare and Nurse Travel. I'll just add that, although we had higher payroll taxes as we experience in each first quarter, we again benefited from lower than anticipated workers compensation insurance expense. Our IT and Engineering segment revenues, as Mike mentioned, were impacted by a drop in billable consultants as a result of the economy. Conversion and direct hire revenues totaled $2 million in the quarter or 1.7% of revenue as compared to $2.9 million or 2% of revenue in the fourth quarter of 2008 and $2.9 million or 1.9% in the first quarter of 2008.

Total SG&A expense for the first quarter was $33.1 million or 28.4% of total revenues, which is down from $38.2 million or 25.9% last quarter and $39.7 million or 26% in the first quarter of 2008. The reduction in the fourth quarter of 2008 is in part related to an $830,000 reduction in amortization of intangibles related to the acquisitions to $1.5 million and a reduction of $460,000 in equity-based compensation to $1.1 million.

Also included in SG&A in the quarter is $1.5 million of depreciation.

As Peter and Mike both mentioned, we continue to monitor our operating expenses as they relate to revenue and look for ways to reduce cost and to be more efficient. Our operating income was $3.9 million or 3.3% of revenue for the quarter compared with $10.3 million or 7% of revenue last quarter and $7.7 million or 5.1% of revenue in the first quarter of last year.

As we've previously discussed, in the second quarter of 2007, as required by our bank agreement, we entered into a two-year interest rate swap for $73 million, which fixed our 90-day LIBOR equivalent rate at 4.94%. The increase in market value of this instrument was $660,000 in the quarter, and this non-cash income is included in non-operating expense and thus excluded from EBITDA.

Our tax rate for the quarter was 41.7%. Net income was $1.6 million or $0.05 per diluted share. We believe it's meaningful to compare EBITDA and adjusted EBITDA when comparing the current quarter's results with prior quarters. As outlined in today's press release, EBITDA for the quarter was $6.9 million. Excluding equity-based compensation expense of approximately $1.1 million and $584,000 of non-cash expense related to the medical malpractice liability discount rate, adjusted EBITDA was $8.6 million or 7.4% of revenue.

Adjusted EBITDA of $15.6 million or 10.6% of revenue last quarter and $13.0 million or 8.5% of revenue in the first quarter of 2008.

We ended the quarter with cash and cash equivalents of $46.5 million, up from $46.3 million last quarter. While we generated $18.2 million in cash flow from operations, we used $15 million to pay down our term loan and $1 million to pay fees and expenses related to the amendment of our loan agreement. This amendment provided us with increased covenant flexibility, and the interest rate was increased to LIBOR plus 375 basis points with a LIBOR floor of 3%. CapEx was approximately $1.6 million, down from $1.9 million last quarter and $2.5 million in the first quarter of 2008.

Net accounts receivable was $61.9 million at the end of the first quarter. Days sales outstanding were 48 days, equal to last quarter and down from 52 days last year.

In addition, today we paid down $10 million on our term loan, leaving the balance at $100.9 million.

Now turning to productivity, which we define as quarterly gross profit generated per staffing consultant, for the first quarter we averaged 676 staffing consultants, and gross profit per staffing consultant was $55,000, down from $61,000 in the first quarter of 2008. Life Sciences segment generated $75,000 in gross profit per staffing consultant for the quarter as compared to $95,000 in the first quarter of 2008. The Healthcare segment generated $58,000 in gross profit per staffing consultant for the quarter as compared to $73,000 in the first quarter of 2008. The Physician staffing segment generated $87,000 in gross profit per staffing consultant for the quarter compared to $80,000 in the first quarter of 2008, and the IT and Engineering segment generated $40,000 in gross profit per staffing consultant for the quarter compared to $46,000 in the first quarter of 2008.

Looking at the second-quarter revenue expectations this year, it continues to be very difficult to estimate what will happen to revenues because of the worldwide economy. So, given that backdrop, based on labor markets not getting any worse than they are today and normal seasonal trends, we currently estimate consolidated revenues of $105 million to $108 million for the quarter ending June 30, 2009. We are estimating consolidated gross margins of approximately 31.9% to 32.1%, SG&A of $31.1 million to $31.6 million including equity-based compensation expense of approximately $1.1 million, approximately $1.5 million in amortization of intangible assets and financing costs and depreciation of approximately $1.5 million.

We estimate net income of $500,000 to $1.5 million, earnings per share of $0.01 to $0.04 and an effective tax rate of about 42%. Adjusted EBITDA is estimated to range from $6 million to $7.7 million. These estimates do include approximately $685,000 in income related to the mark to market of our $73 million swap which matures at the end of June.

Now I'll turn it back to Peter for some closing comments before we open up the lines for questions.

Thank you, Jim. Despite facing an increasingly more challenging economic environment, we were very satisfied with our success in expanding and/or maintaining our operating and gross margin and generating cash. While the entire On Assignment team is very proud of our performance in these difficult economic times, we are now focused on positioning the Company for acceleration coming out of this recession. 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 would like now to open the call up to participants for questions. Operator?

(Operator instructions) Tobey Sommer, SunTrust.

I was wondering if you could speak to the signs and indicators that you look at in the business and maybe give a little bit more color on the signs of relative stability and that quote that I think you got in the press release to talk about 2Q maybe being a low point. Is that something where maybe we actually could get growth, or is it a return to seasonal trends that would then manifest and make 2Q the low point?

Well, a couple of things. I'll go first, and then I'll let Mike McGowan speak specifically for the IT group. But as you know, at On Assignment specifically, we manage our business by the hour, day and week, so we have production reports that we are looking at constantly, and we look at the number. For instance, as I mentioned in my prepared remarks, orders have -- booked weeks have actually grown in the nursing business. Unfortunately, we can't get an extension on a nursing on billing currently, the way we historically could. We historically could rely on pretty much like a 60% rebook rate with nurses currently on billing, and that's dropped dramatically.

So our new fills have been covering end-of-+assignment terminations. But we are seeing booked weeks up week over week. Orders are still substantially suppressed, but they've gradually grown.

On the Life Sciences side, as we look at our weekly production, number of temps on billing hours worked in that group as well as in the Allied Healthcare group, if things continue to trend the way they did early in April, we'd have some very, very modest growth second over first.

The Physician group is just -- that business is booked three months out, and we have a pretty good view that that business will grow, albeit for the first time since we've been in the locums business, we actually saw some booked days canceled, as I mentioned in my prepared remarks. But we don't think that's a trend; we think that was an isolated circumstance with a healthcare provider in Northern California, where they're just suffering with double-digit unemployment and thereby lower membership rates, which are causing them to have to rethink their staffing levels.

With that, I'll turn it over to Mike to give you some color about the positive trends that he's seeing and I think he mentioned in his prepared remarks.

We look at a lot of the same kind of production, what we call production numbers, that we do in all of the On Assignment divisions. The biggest that we always look at is just what we call listings of job orders per day and then the resultant assignments per day. As I mentioned, one of the positive things we are already starting to see is in our local market, Oxford and Associates, we have actually been seeing increasing number of listings per day, which obviously translates into per month, increasing since December. And that's positive, as our fill ratio is still better than 50%. So we're filling more than 50% of the job orders we take.

The other thing that we've seen is we've had the same number of assignments per day since February 1, so that's another reason we've seen the stabilization here in the second quarter. And a real positive thing that I mentioned in my remarks is that our starts over term for the month of April are positive for again our local markets [on a] -- our Oxford international European operations and our Oxford international IT operations, which is that big ERP group that we have. So all of those groups, their starts over terms for the month of April are positive. So, good numbers.

And to answer the final part of your question, about seasonality, you are correct, Tobey, that, traditionally, we would expect the second to be stronger than the first and the third to be stronger than the second. But with these trends' continued deterioration, as we saw in the first quarters, January was stronger than February, March was weaker than February.

We think we've hit the bottom, and for a number of weeks we are kind of on a more stable footing as far as future business goes. And we think that there will be a slowdown in the number of assignments that are normally ending because of just the expiration of the time frame originally contracted for and that our starts will equate or exceed our terms.

Thanks. One last question and I'll get back in the queue. I know you talked about really selecting to stick with your gross margins, and that's an impressive performance in the quarter. Specifically on the IT side, could you describe what your assessment would be of the rate of decline in demand over the last couple months with -- not on a sequential basis but year-over-year basis on the high end of IT versus kind of the low end of IT staffing, if you could compare and contrast that for me? Thanks.

Mike, do you want to go first? And then I'll just kind of give a consolidated response.

Sure, I'd be glad to. Also I commented, Tobey, and the numbers are pretty much even started to go into the second quarter, they started to alleviate a little bit. But the IT, which is our highest area, which is primarily the ERP group, we saw quarter over quarter declines in 2008 of about 42%. The other skills, the software, hardware and engineering, was only about a 22% drop. Engineering, which are the mechanical and electrical areas, only about 24%. And then even in our telecom group or telecom engineering group, that was actually a 13% growth.

So the biggest decline that we've seen and the biggest impact because of the economy is in that ERP space. That's where I commented about the issue about capital and cash restrictions for companies just like On Assignment that said no, I'm going to hold off on my ERP implementation or my ERP upgrade and wait until the economy recovers. So that's where we've seen the biggest impact to our business.

The others -- like I said, in that 20% range and then the telecom actually up.

Tobey, on a consolidated basis analysts often hear about customers or staffing firms selectively firing customers. We weren't firing customers. We just elected not to do business with select people who don't value the service appropriately or won't pay for the service appropriately. And we are one of the few -- I think history shows we're one of the few staffing firms that the reason our margins continue to expand and be relatively stable is because we have made a conscious decision of how we run our business. We constantly tell you about our client concentration. We are not a bulk seller of human capital. And we've been saying for eight quarters that perm placement is a great business. But it masks the true strength of your margins because when it comes out it's fast and furious and it has a multiplying effect on the downside just as much as the upside.

So the reason you're seeing the performance that you've seen out of On Assignment through all of '08 and specifically the two most difficult quarters, the fourth and first, is because this is steady-state business.

Jim Janesky, Stifel Nicolaus.

Yes, thank you. A couple of questions. First, Jim Brill, you gave a number in EBITDA, adjusted EBITDA, that didn't really reconcile what was on the press release. Did you say it was 8 --?

That had the $584,000 of non-cash adjustment to the liability related to the discount rate added back to it. That's why, Jim.

Okay, so that was non-cash. How much was that, again -- $584,000?

$584,000. It's up in cost of sales.

Okay, thanks. And the second thing is, you did mention that your outlook for the second quarter does include the mark to market?

Yes, and the reason for that is, we now know what that number is because it matures at the end of June, at the end of the second quarter. So whatever is left on our balance sheet today is going to come out in the second quarter, and that's what the number is. So that's why it includes it.

And Jim, I'd point out, that affects EPS but it doesn't affect EBITDA.

Right, because that is in the interest income and other line?

That's correct. But since we knew it, we just decided we'd give it to you.

Okay, thanks. I wanted to just talk a little bit more about the stability comments that you are making. Certainly, a lot of other companies have made those as well. And my main question has to do about why are orders stabilizing. Are customers telling you -- and maybe you could talk a little bit segment by segment -- that things are looking better for them, or they are just less worse?

Well, first of all, I would characterize it as stabilizing, not stability. And the second thing I would say is that we really believe we currently perform below recessionary levels. We have significantly been impacted by this credit crisis where companies are hoarding cash. I think the article in the Wall Street Journal today announced the first-quarter GDP that business investment was down 38% in the quarter. And that's a direct effect on our IT business.

The big surprise for me has been how challenging the hospital environment is. It doesn't matter if you're selling supplies, human capital services, equipment -- there has just been an absolute lock-down in the hospitals. And that still hasn't really fixed itself. But people are at just such a level that it's almost criminal to do without at this point.

So we're not seeing huge changes in demand. We're seeing some changes where demand was artificially lower than recessionary levels because of the credit crisis, and some of that is starting to loosen up and we're getting that business back that we would not have lost but for the credit crisis.

So it's -- a sequential decline in revenues that normally would be seasonally better is not stabilizing, to me. You're saying that the majority of that or the worst part of that is better, it is within Nurse Travel and VISTA?

No, IT, Oxford and Nurse Travel. The worst part of it currently is in Nurse Travel and Oxford. In our forecast to you, building it up, we think that the Allied Healthcare business and the Life Science business will either be flat to slightly up, the Physician business will be up and that Nurse Travel and Oxford will be down. And the specific reason for Oxford being down as much as they will be second over first is because each month in the quarter was less than the prior month.

So if you have three Marches so to speak, in the second quarter, that's just going to generate a different number than if you would have had three Januaries of Oxford's numbers in the second quarter.

Andrew Fones, UBS.

Thanks for detailing how we should think about revenue sequentially, but between the declines that you were expecting in Nurse Travel and IT and Engineering on a dollar basis, which would you expect to be the greatest in the second quarter?

Well, on an absolute dollar basis, they're pretty similar. On a percentage basis, because Nurse Travel is smaller, it would be Nurse Travel. Do you follow me?

Yes, thank you. And then in looking at the SG&A reduction in your guidance, it appears as though you'll still be running below trend in terms of gross profit per consultant, trend being what you saw last year. So it sounds as though you still feel as though you probably have a little bit of spare capacity, despite the cuts. Is that fair?

That's fair. But you know, Andrew, we've tried to be -- to the extent we can prudently have a longer-term perspective. When you look at our adjusted EBITDA margin of 7.4%, that's almost double anybody else that's reported today. So I've got to balance that with the fact that can I get another 100 basis points of income in the quarter, which would offset my acceleration of growth as soon as we have any sort of stability in the US economy.

I'd also point out to you that these numbers -- you don't see anywhere in our press release that we are taking a one-time restructuring charge. We're just running through severance, etc., which -- it's not enormous. I think it's a couple of hundred thousand dollars in the first quarter, through the P&L. So we're absorbing whatever right-sizing we need to do without taking restructuring charges.

Got it, thanks. And then on the gross margin, it was up year-over-year in Q1, but it looks like you're expecting it could decline year-over-year in Q2. Can you talk through why that's the case?

Yes. It's because, as you know, Oxford grew 19.3% in the first quarter of '08, and I think it was like 15.8% in the second quarter of '08. And they are shrinking, and it's a mix issue that our highest gross margin business is not as big a percentage of total consolidated revenues in the second quarter of '09 as they were in the second quarter of '08.

That's purely just the mix shift?

Yes, that's the only reason.

Okay, you have not seen any kind of undue pricing pressure or anything? I know you only have small contracts, typically.

Not yet. I mean, we see it. But in good times we resist that, and in bad times we resist it. It probably is more severe than normal, but we have the same discipline and we walk away -- we continue to walk away from that type of business in bad times as much as we do in good times.

Okay, and then finally, you mentioned in the second quarter you've got this adjustment, the other, I guess, interest expense or income included in your guidance. Can you give us what that number is?

Yes, I gave it to you when I spoke. It's $685,000 in other income, really, so it's below the operating line.

Okay.

And it's non-cash, so --

Right. So it's income of $685,000?

Correct.

Kevin Casey, Casey Capital.

A couple of quick questions. I just want to clarify the stabilization. That's in orders, not in revenues?

Correct.

And then what's the lag, a quarter?

Kevin, we're not prepared to give that out. I think we said that we thought that the second quarter could mark the bottom of revenues.

I was just curious typically what the lag is. Right? It's about a quarter?

Yes.

And then Q3 interest -- does that bump up to about 1.8 because you no longer have the gain from the swap?

Well, yes. I think what you can do is whatever you figure that outstanding debt is going to end up being with some amount of interest income, depending on what yield we're able to get on the cash that we have hanging around. We know that, unless something changes, the interest rate on the loan is going to be a LIBOR floor of 3, plus 375 basis points. So it's 675.

And then you kind of answered this last question about the need for restructuring. I assume, if we are lucky and the market does stabilize, there's going to be no need for restructuring?

We're thinking we can handle what we need to do without having to do some sort of major restructuring charge.

Jeff Silber, BMO Capital Markets.

Thanks, I know it's late. Just a couple of quick follow-up questions. Going back to Andrew's question about pricing pressure, I know you talked a little bit about it on the IT side, can you just tell us, is it coming from competitors? Is it coming from your customers itself? Just a little bit more color not only in IT but in some of the other verticals as well. Thanks.

Jeff, most of it is coming from the customer. Now, whether that's being stimulated by someone coming in and dropping their drawers in front of the customers, I can't tell you. I can tell you, that may stimulate the idea in a customer's mind, but most customers are sophisticated. They're using this opportunity to restructure their pricing as well. They know that people are more discoverable.

So we have seen on the nursing side, for instance, and on the IT side people saying I don't want to pay the same bill rate, this is what I want to pay -- sometimes just artificially establishing it. And we go to the consultant or the nurse, and we say this is what the current bill rate proposal is now at the customer. They've changed it. What do you want to do? Do you want to walk the assignment, or do you want to complete it at a lower pay rate or wait for us to find you a higher-paying assignment?

And that's why we've been able to see a bill pay spread expansion, because as we've had to at times adjust the bill rate, we have correspondingly adjusted the pay rate. See, we don't work off of a gross markup, like a lot of the larger bulk sellers do.

Okay, great, that's actually helpful.

And the same thing is happening in the IT market, Jeff. As Peter mentioned, it really is customer-driven, and that's why, as I mentioned, our bill rate has come down from $123 down to $118 year-over-year, but we've been able to maintain our 36.8% gross margin. Again, that's not perm business, that's just our gross margin on our temp business. So we've been able to push that down through the consultants because the availability of consultants is a lot greater than what it was in the 12 months.

Appreciate that color too, Mike. And just one quick follow-up on the non-cash impact on gross margin. I'm assuming this is a one-time issue. Should we expect something like this going forward?

Only to the extent that the interest rates drop significantly from where they are today --

Which would be hard to do.

I think that probably is true. So it's adjusted today because the interest rates have dropped.

Dramatically.

Yes; it's basically long-term interest rates.

And was this something that was reviewed annually? Is that how it came into vogue, or -- ?

We review it on a regular basis.

There are no further questions at this time.

Well, we appreciate your attention and support and look forward to reporting our second-quarter results. Thank you very much.

This concludes today's conference call. You may now disconnect.