ASGN Inc (ASGN) 2009 Q2 法說會逐字稿

Good afternoon. I will be your conference operator today. At this time, I would like to welcome everyone to the On Assignment second quarter 2009 earnings conference call. (Operator Instructions). Mr. Brill, you may begin your conference.

Thank you, Melissa. 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 other similar expressions. We believe these remarks to be reasonable, but they're 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 you to the On Assignment second quarter earnings conference call. With me today are Jim Brill, Senior Vice President and Chief Financial Officer, and Emmett McGrath, President of our Life Science and Allied Healthcare Groups.

During our call today, I will give a review of the markets we serve and our operational highlights followed by a discussion of the performance of our operating segments by myself and Emmett. I will then turn 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 of 2009. We will then open the call up for questions.

During the second quarter the markets we served remained weak and were more challenging than we had projected in late April. Although revenues are still difficult to forecast, gross, operating and adjusted EBITDA margins continued to trend at or better than we had forecasted. During our first quarter conference call, we stated that revenue trends had started to stabilize in all of our divisions, except Nursing, and as of today the trend of stabilization continues.

The Nursing division, however, continues to see a severe constraint in purchasing from hospitals. In fact, end market demand in this segment of staffing weakened considerably, as we predicted during the second quarter. However, based on our current revenue level we believe, excluding normal seasonality, that there will not be any significant further reduction in revenues for this division.

The reduction in demand in the Nurse Travel group is not due to loss of market share or due to lower needs, although patients censuses are down, but rather hospitals' current mindset to conserve cash until the credit crisis eases and the temporary flood of nurses available for full-time employment eases as well. Hospitals have seen a significant increase in demand for indigent care, have been severely impacted by the shutdown of the bond market and their endowment income has been reduced by losses in the debt and equity markets. As many of you know, most not-for-profit hospitals rely heavily on income from their endowment and charitable contributions to provide a large portion of the capital necessary to fund their day-to-day operations.

In the IT group, although demand is still constrained, the focus on cash preservation by our clients has lifted considerably. Our Physician business remains strong and our Life Science and Allied Healthcare businesses appear to be improving. Although revenue trends have stabilized for most of our divisions, our third quarter revenues will most likely be flat to slightly lower than the revenues we reported today.

The primary driver of this revenue forecast is that in our Nursing group, as I mentioned earlier, the market continued to deteriorate throughout the second quarter and hours permitted by hospitals to be worked per week by nurses have been lower than in previous years. These factors caused our Nurse Travel group's revenue in June to be lower than the revenues generated in April and May. In addition, although the IT groups consultants and billings have started to grow nicely, June's revenues were lower than April and May's revenues on an average daily basis.

The results released today remain consistent with our operating focus for 2009 of concentrating on gross margins, EBITDA and cash generation. In this current economic environment, we continue to elect 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 report their second quarter results, it will again become evident that our gross and adjusted EBITDA margins remain at the top of the entire 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 higher than the average staffing industry, bodes very well for us once we have sequential revenue growth.

In addition, based on the significant amount of debt we have repaid and the majority of amortization for identifiable intangibles related to our two acquisitions running off, our EPS should grow nicely once revenue growth returns.

For those who have followed our company for several years, GAAP EPS was impacted by a non-cash expense of $15.3 million in 2007 and $9.4 million in 2008, related to the amortization of identifiable intangibles acquired in connection with our two acquisitions in January of 2007. Most of this cash non-cash expense will be eliminated by the end of 2009.

Our second quarter results continue to confirm to us that our current revenue generation is only a macroeconomic issue and otherwise we are performing very well. During the quarter, we believe we again expanded our market share in the Locum Tenens industry. Our market share gains were based on absolute positive growth in the Locum's end market.

Although the second half of 2009 will be challenging, albeit less so than the first half of 2009, 2010 should present us with a more productive marketplace to offer our services into. Our belief is based on one, many of our clients have reduced their employee base to unsupportable levels, two, stalled or postponed projects due to the credit crisis are beginning to be released, three, IT spending and IT staffing appear to be rebounding faster than other segments of the staffing industry. It is important to remember that this segment is On Assignment's largest and highest gross margin group. Four, smaller competitors have ceased to exist and five, sales and productivity initiatives that we put in place earlier in the year should start to generate results.

Before turning to our actual results for the quarter, it's important to remember that 2008 was a growth year for On Assignment and second quarter 2008 revenues grew 8.5% over the second quarter of 2007. Specific operational accomplishments in the quarter were one, our consolidated gross margin expanded to 32.8%, a record for our company, two, we maintained an adjusted EBITDA margin of 7.3%, up from 6.9% in the first quarter of 2009. Three, our Physician Staffing segment gross margins expanded by 180 basis points over the second quarter of 2008, four, our Nurse Travel group expanded its gross margins by 140 basis point and five, our Allied Healthcare group expanded its gross margins by 135 basis points.

With regard to SG&A, we continue to monitor the markets we serve and the level of investments we have made or are making for future growth. In the second quarter of 2009, we reduced corporate expenses, including the number of our internal personnel in all divisions, except Physician Staffing.

Now, let's review the second quarter. Revenues in the second quarter declined 34.8% over the second quarter of 2008. Net income, excluding a non-cash gain of $685,000, or $0.01 per diluted share on the mark-to-market of our $73 million interest rate swap was approximately $291,000 per $0.01per share. Revenue generated outside the United States was $4.8 million or 4.8% of consolidated revenues in the second quarter versus $9.1 million or 5.8% in the second quarter of 2008.

Consolidated gross margins in the second quarter were 32.8% up from 32.5% in the second quarter of 2008. Adjusted EBITDA was $7.5 million or 7.3% of revenues for the fourth quarter -- for the quarter down from $17 million or 10.9% of revenue in the second quarter of 2008. Once again our financial performance was achieved without any significant contribution from permanent placement.

Exiting the quarter, demand for our services continues to be constrained, but to a lesser degree than in previous quarters. Our weekly assignment revenue, which excludes conversion, expenses and direct placement revenues averaged $7.1 million for the last three weeks this year compared to $11.9 million in weekly assignment revenues for the same three-week period one year ago. Once again it's important to remember that On Assignment grew 9% in the third quarter of 2008.

Before turning the call ever to Emmett, I would like to give you a brief review of the operation. In the Nurse Travel group, we experienced decline in revenue consistent with the general decline in the overall Nurse Travel market, but were able to expand our gross margins to record levels in spite of our very challenging operating environment.

For the quarter, revenue of $14 million was down sequentially 34.1% and down 55% year-over-year. Gross profit of $3.5 million represented a 30.3% decline sequentially and a 52.3% decline year-over-year. In spite of the decline in gross profit, gross margins finished strong at 24.9%, a 136 basis points sequential increase and 140 basis point improvement year-over-year.

Looking forward, while the Nurse Travel staffing environment remains challenging we are starting to see signs that demand is improving. Specifically order volume which leveled off during the first quarter is now starting to gradually increase and our nurse headcount has leveled off in recent weeks. Order volume still remains lower than what we've seen historically, but we are focusing our efforts on expanding our share of those opportunities with more effort and resources dedicated to our client salesforce. As an example, we recently expanded our Nurse Travel sales team with the addition of a highly experienced executive level manager, which will better position us to capture more market share now and grow more rapidly when the market recovers. At the same time, we continue to refine our financial controls to drive profitability as demonstrated by our continued improvement in gross margins.

Additionally, we reduced SG&A expenses in the front office by nearly 35% on a year-over-year basis to better match our cost levels with the current market. Beyond this, we continue to be extremely successful in retaining key talent at all levels within the Nurse Travel group.

Our Physician Staffing group, Vista, continues to show growth in this difficult market. The division is showing great focus and discipline and using this time to understand and adapt to what we believe will be fundamental changes in the marketplace.

Revenue for Q2 2009 was $23.3 million, that's a 7% increase over Q1 2009 and a 7% year-over-year increase. Volume as measured by days of physician coverage provided was 1,427. Again, that's a 7% increase and a 3% year-over-year increase.

Gross profit for the quarter was $7.6 million, up 16% over Q1 and 13% year-over-year.

Most impressive in my opinion is our ability to grow our gross margin. Gross margin was 32.5% in Q2, up 240 basis points from Q1's, 30.1% and up 180 basis points year-over-year from 30.7%.

Conversion revenues, which were way down in Q1 rebounded in Q2 to levels more in line with historical trends. As we noted last quarter, we expect changes in the marketplace. Client demand is dropping as health organizations deal with lower patient volumes, declining healthcare plan enrollments, reduced investment income and reduced access to capital.

Our requests for coverage measured in days dropped 12% in Q1 to Q2 2009 and 27% year-over-year. We have also seen an increase in client cancellations with most common reasons cited, client hired permanent doctor, permanent doctor returned to practice and client filled days with existing staff. Fortunately, this has not caught us by surprise.

We have been anticipating openings and because this historical fill rate in this sector has been below 30%, this change can be accommodated. We are seeing steady increases in our ability to fill the openings we have with fill rates climbing to 44.6% in Q1 to 51.2% in Q2. Individual physicians seem to be changing behavior as well, gravitating towards more stability and more work.

The average gross profit per contracted physician jumped 33% from Q1 to Q2. We should remember that this business is about more than easing a shortage of physicians. It is also based on solving the maldistribution of physicians, getting physicians from areas of oversupply to areas that are underserved. This need won't decline, so their services will remain vital to the healthcare industry. Overall, we continue to focus on recruiting top quality doctors and providing value-added services to clients to win market share and a chance to fill the shrinking number of available jobs.

Last quarter's earnings reports clearly show that we are taking market share from our publicly traded competitors. This will remain our focus throughout the remainder of 2009.

Turning to the IT group, revenues for IT and Engineering segment were $32.5 million, which represents a 14.8% sequential decrease from the first quarter of 2009 and a 42.3% decline year-over-year, obviously reflecting the continuing economic recession. The decrease in revenues was due to pure billable consultants on assignment, lower bill rate and decreases in billed expenses and conversion revenues. However, as I mentioned in our Q1 earnings call, the demand for consultants as measured by new assignments per day stabilized in early February and that trend has continued throughout Q2. Therefore, the primary reason for the decrease in actual consultants on assignment and the significant portion of the resultant sequential revenue decrease from Q1 to Q2, was the direct impact of consultants that had been assigned in the fourth quarter of 2008 that did not come off their respective assignments until Q1 and even into Q2. This segment specializes in recruiting senior consultants for core technical discipline, information technology software and hardware engineering, mechanical and electrical engineering and telecom.

The IT discipline, which is primarily ERP, experienced the largest percentage revenue decrease year-over-year. The IT discipline continues to be impacted by the significant decrease in available capital and of our respective clients' reluctance to start new projects until the end of the recession is more clearly visible.

On a more positive note our, Telecom discipline actually grew revenues year-over-year by 4.1%. During the second quarter of 2009, we averaged 537 billable consultants on assignment, a 13% sequential decrease from the 617 we had on assignment in Q1 and the 35.8% decrease compared to the average of billable consultabilities in the second quarter of 2008.

The average bill rate in the second quarter of 2009 was $113.34 per hour compared to $125.17 in the second quarter of 2008 and $118.72 in the first quarter of 2009. Our gross margin for the second quarter of 2009 remains strong at 36.8% compared to 37.8% in the same period last year. Our bill rates and gross margins continue to be among the highest in the staffing industry.

We continue to be highly diversified across clients and industries in Q2 filling over 652 different client companies with no single client accounting for more than 4.1% of our revenues. From an overall industry perspective, we have seen strength in hi-tech industries, such as semiconductors and electronic component manufacturers and in retail and trade. We continue to see weakness in machinery and appliance manufacturing.

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 2008 to a high of 447, over the next 12 months we decreased the number of sales consultants and averaged 283 over the past quarter. We monitor our operational activity daily and we will continue to ensure that the size of our sales staff is in line with the current and future economic conditions.

Actual demand for consultants is measured by new assignments per day stabilized in early February and that trend has continued throughout the second quarter and actually strengthened into the third. In addition, the Oxford Index, our quarterly survey of Oxford clients, for Q3 has also indicated the same level of stabilization regarding their hiring plans and we're pleased that assignments per day in July have actually increased over February through June trends.

I'll now turn the call over to Emmett McGrath, the President of our Life Science and Allied Healthcare groups. Emmett?

Thank you, Peter, and good afternoon everybody. Revenues for the Life Science segment were $22.7 million, which represented 10.4% sequential decrease from the prior quarter and a 29.2% decrease year-over-year. On a divisional basis, US operations generated $19.6 million in revenues, representing a 9% sequential decrease and a 26.9% decrease year-over-year. European revenues were $3.1 million, decreasing 17.6% sequentially and 41% year-over-year.

We attribute the second quarter's performance to the challenging economic environment. Specific factors include one, our current and prospective clients continue to focus on cost containment rather than completing projects, R&D and enhancing existing product lines, two, a greater number of assignment terminations associated with our larger and long term clientele, three, further tightening of venture capital funding and a decline in the number of new investments in the Life Sciences sector, four, our clients' decision to reduce the number of billable hours, five, less conversion and perm placement fees and six, decreased demand for recent graduates and lower level scientific skill disciplines.

Gross margin for the Life Science segment was 31.8% for the quarter, which represents a 10 basis point decrease over the prior quarter and 120 basis point decrease year-over-year.

On a divisional basis, US gross margin was 31.4%, an increase of 24 basis points over the prior quarter and a 94 basis point decrease year-over-year. European gross margin was 34.9%, representing a 164 basis point sequential decrease and a 173 basis point decrease from the prior year. Gross margins for the quarter were primarily impacted by a declining conversion and permanent placement fees. Given the continued pricing pressure faced from both our clients and competitors, we are quite pleased with these results which reflect our disciplined operational culture.

Moving on to the third quarter trends, although we have seen an uptick in orders and a number of new assignments, the business climate continues to be challenging. Clients remain cautious and focused on controlling costs. However, our sales and recruiting staff are focused on strengthening the Life Science division competitive position through increased sales and marketing efforts gaining greater depth with existing clients and expanding our database of candidates and client contacts, all of which enhance our ability to meet the demands of the inevitable economic recovery period.

As reported in 2008, in the first quarter of 2009, we continued to adjust our cost structure to market conditions and performance results. In an effort to maintain gross margins, we have refined our cost of services to reflect current market conditions and enhance our pricing practices. Although we have made necessary reductions in our cost structure, we believe the Life Sciences segment's competitive position remains strong and we will continue to protect the Life Sciences brand. As we go forward through the second half of 2009, we remain focused on cost containment, new business development, preserving gross margins and employee productivity.

Now I'd like to turn to Allied Healthcare. Revenues were $9.2 million for the second quarter of 2009. This represents a 9.8% sequential increase -- a 9.8% sequential decrease and a 37% decrease year-over-year. As previously reported, we attribute this decline to the following specific recessionary factors. Number 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 reduce usage of contract professionals in response to declining cash balances and patient admissions, four, our clients' effort to control costs by reducing number of billable hours and transferring contractor duties to internal staff, five, reduced demand for less critical Allied skill modalities, six, less conversion fees and seven, less term placement fees associated with our HIM business line.

Allied Healthcare gross margin for the quarter was 33.9%, which represents 163 basis points sequential increase and 135 basis point increase year-over-year. The Allied division also successfully increased its average bill pay spread 230 basis points sequentially and 377 basis points year-over-year.

As for the third quarter of 2009, the markets in which we operate continue to be challenging. Core modalities such as diagnostic imaging, clinical lab and lower level billers and coders continue to be soft. However, although not at optimal levels, we see improved demand for rehab therapy and HIM professionals. As we have done in other divisions, we continue to respond to the current economic climate by focusing on new business development, gross margin preservation and greater attention to individual performance metrics.

In addition, we have implemented targeted marketing campaigns to better position us to meet seasonal demands and crisis situations such as the recent H1N1 Swine Flu Virus. As for cost containment, we have made reductions in SG&A and will continue to monitor cost levels throughout the quarter and the remainder of 2009.

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

Thanks, Emmett. As Peter mentioned, consolidated revenues for the quarter were $101.8 million, down 34.8% from 2008. There were approximately 63.5 billing days in this quarter, 63 in the first quarter and approximately 64 in the second quarter of 2008. However, for Nurse Travel there were 91 billing days this quarter, 89 last quarter and 91 in the second quarter of 2008. Foreign currency had about an $850,000 negative impact on revenue, a little under 1%.

Now, let me address some of the variances and their related explanations to the extent Peter and Emmett has not. In the Nurse Travel group, bill pay spread contracted, however, bill pay margin expanded. Most of the other components of cost of sales moved positively with the exception of Workers' Compensation insurance expense, which increased slightly. This group, as well as the rest of the Company, has reduced SG&A significantly.

In Physician Staffing, the significant revenue growth included a 4.2% bill rate increase. As Peter mentioned, we saw good margin expansion off the first quarter in last year, which included an increase in the bill pay spread versus last year and the amount of conversion and direct hire revenue.

At our IT Engineering division, Peter mentioned that we saw a drop in gross margin from last year, driven by a drop in the bill pay margin, an increase in employment taxes and other consultant expenses. The gross margin remained flat compared to the first quarter, as a drop in the bill pay margin was offset by improvement in employment taxes and other consultant expenses.

I think Emmett did a thorough job of addressing both revenue and gross margin in Life Sciences and Allied Healthcare. I'll just add that we again benefited from a lower than anticipated Workers' Compensation insurance expense.

Conversion and direct hire revenues totaled $1.9 million in the quarter or 1.9% of revenue as compared to $2 million or 1.7% of revenue in the first quarter and $2.8 million or 1.8% of revenue in the second quarter of 2008.

Total SG&A expense for the second quarter was $30 million or 29.4% of total revenues, which is down from $33.1 million or 28.4% last quarter and $38.8 million or 24.9% in the second quarter of 2008. The reduction from the second 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 $500,000 in equity-based compensation to $1.1 million. Also, included in SG&A in the quarter is $1.5 million of depreciation.

We are particularly pleased with this $7.8 million or 23% reduction in cash SG&A from the second quarter of last year. As Peter and Emmett both mentioned, we continue to monitor our operating expenses as they relate to revenue and look for ways to reduce costs and to be more efficient.

Our operating income was $3.4 million or 3.4% of revenue for the quarter compared to $3.9 million or 3.3% of revenues last quarter and $11.8 million or 6.6% of revenues last year.

As we 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%. This instrument matured at the end of the quarter. The increase in value was $685,000 and this non-cash income is netted in nonoperating expense and thus excluded from EBITDA. Our tax rate for the quarter was 59.3%. Net income was $571,000 or $0.02 per diluted share.

We believe it's 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 $6.4 million, excluding equity-based compensation expense of approximately $1.1 million, adjusted EBITDA was $7.5 million or 7.3% of revenue. Adjusted EBITDA was $8.1 million or 6.9% of revenue last quarter and $17 million or 10.9% of revenue in the second quarter of 2008.

We ended the quarter with cash and cash equivalents of $44.5 million, down from $46.5 million last quarter. While we generated $13.2 million in cash flow from operations, we used $10 million to pay down our term loan and $5.3 million to pay the final earnout related to the acquisition of our Physician Staffing business.

CapEx was approximately $950,000, down from $1.6 million last quarter and $2.5 million in the second quarter of 2008. Net accounts receivable was $51.2 million at the end of the second quarter and days sales outstanding were 46 days, down from 40 eight days last quarter and 49 days last year.

Now turning to productivity, which we define as quarterly gross profit generated per staffing consultant. For the second quarter we averaged 587 staffing consultants and gross profit per staffing consultant was $57,000 down from $65,000 in the second quarter of 2008, but up from $55,000 in the first quarter. The Life Sciences segment generated $70,000 in gross profit per staffing consultant for the quarter as compared to $92,000 in the second quarter of 2008. Healthcare generated $54,000 in gross profit per staffing consultant for the quarter as compared to $82,000 in the second quarter of 2008. The Physicians Staffing segment generated $98,000 in gross profit per staffing consultant for the quarter as compared to $90,000 in the second quarter of 2008 and the IT and Engineering segment generated $42,000 in gross profit per staffing consultant for the quarter as compared to $48,000 in the second quarter of 2008.

Looking at the third 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 continue -- we currently estimate consolidated revenues of $95 million to $102 million for the quarter ending September 30. We're estimating consolidated gross margins of approximately 32.6% to 32.8%, SG&A of $30 million to $30.3 million, including equity-based compensation of approximately $1.1 million, $1.5 million in amortization of intangible assets and depreciation of approximately $1.5 million.

We estimate net income of a negative $200,000 to $900,000, earnings per share of a negative $0.01 to $0.03 and an effective tax rate of about 47%. Adjusted EBITDA is estimated to range from $5.5 million to $7.6 million.

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

Thanks, Jim. We believe that with the benefit of hindsight, history will show that the second quarter of 2009 will turn out to have been the most challenging quarter for the entire staffing industry. The gross and adjusted EBITDA margins that we reported today against such a backdrop are a true measure of the strength of our company. While the entire On Assignment team is very proud of our performance in this economic environment, (inaudible) positioning the Company for accelerated growth 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. I would now like to open the call up to participant for questions. Operator?

(Operator Instructions). Your first question comes from Tobey Sommer with SunTrust.

Hi. This is Frank in for Tobey. Wanted to ask a little bit about pricing pressure and any color you have on the IT side, specifically? What's going on in that competitive environment?

Frank, this is Peter. Remember, our IT business is a higher bill rate and a higher margin and we focus on a much more critical need than the average IT staffing firm and therefore, we're more directly tied to capital expenditure budgets than maybe somebody that works on (inaudible) and maintenance or simple code development.

The pricing pressure that we've seen is just the mindsets of most companies trying to use the economic downturn to their financial benefit or to get someone to move quicker than normal giving a slight price concession, but as you can see from our results for the first six months of this year, the movement in our margin has been negligible. It's been less than 100 basis points.

So, we feel and as you can see from the guidance that we gave today, for the third quarter, we actually believe sitting here today if things remain the same that we could have margin expansion over the second quarter of 2009 which was a record for the company.

Okay, great. And turning to Physicians, can you talk to a little bit of the breakdown between primary care and specialty and what you're seeing kind of evolving there?

Yes. Jim, do you have those numbers in front of you?

I do not. We don't have those yet.

I can tell you, Frank, the last time we polished them was about a month ago in our investor presentation that's on the web, but I think primary care was about 21% and anesthesiology and radiology were both under 5%, but you can pull that off of the presentation and we'll be updating that shortly I think.

Okay. And on the Healthcare side, we've seen some data from the BLS about a decline in hours worked. If you could speak a little bit to what you're seeing in hours worked trends and what clients are thinking at that point?

Well, it's stabilized, but as I said in my prepared remarks, we're seeing the hours that hospitals will permit nurses to work to be at a much lower level than they historically have been. I mean traditionally we were able to negotiate a guaranteed 48 hours a week to work in order to travel outside of our home, whereas most of our competitors' model was 36 hours guaranteed.

The numbers are dramatically down from there and I think there's an American Hospital Association report that states that 75% of hospitals are dealing with constrained operating budgets, which are forcing them to have to make dramatic changes in their staffing levels. So, it is down.

One positive note, we are hearing from our nurses that are on assignment, that the burnout is accelerating quickly and the amount of overtime work that nurses that are currently working is unsustainable and the fact -- and the final fact is that hospitals are using recently graduated nurses in more critical care positions than they have in the past and that's again not a sustainable business model.

So, eventually it will stabilize, but it's still challenging on the Nursing side, but Nursing represents only about 18% of our total revenue today and considering where we are right now, we think we're at a relatively stable base that we can start growing from again.

All right, great. Thanks very much.

Your next question comes from Jim Janesky with Stifel Nicolaus.

Yes. Good afternoon. A couple of questions. Pete, you mention that the second quarter could be the low, yet in the third quarter you do have revenues, the upper end would be about flat. Are you talking about the low in terms of momentum and that maybe that could pick up toward the end of the year and, if so, I mean what is giving you that -- any level of confidence that that's kind of the environment that we're in? And if you could just kind of mention by segment how you feel?

Right. Specifically, Jim, with regard to the comment that I made in our second quarter -- our first quarter press release, I was mentioning revenues and when we made that comment, we did not expect the Nursing division -- industry and our division to face the challenges as greatly as they are currently. What gives me and our guidance does incorporate being flat, but it does also incorporate potentially being down over the second quarter of 2009 and that's predominantly because of the weakness in the nursing business and industry.

What gives us encouragement that we're seeing things improve, we're seeing week-over-week improvement in the IT side and as you know, that's our largest segment, pretty favorable improvements. So, knock on wood, as long as things don't change from what we've seen through July and the first couple of days of August, we feel that we've hit the bottom and we're starting to grow. We think that we'll probably grow fourth over third.

I don't know that we'll grow third over second in that IT group, but things definitely feel on much, much better footing in the IT group.

I'll speak and then I'll let Emmett add to it, but on the Allied Healthcare group, we believe that we'll probably grow third over second. We're seeing some good trends in some of the newer practices that we started last year, rehab therapy and continued development of our health information management. And on the Life Science side, which is probably most directly correlated to GDP growth, it's still challenging, but the terms are starting to dissipate a little bit. Emmett, why don't you add additional color.

I echo all your comments, Pete. Starting out with Allied Healthcare, it feels a lot better, Jim, this quarter. I mean it's still -- our customers are very cautious, so I remain cautious, but we are seeing an uptick in new job orders, no doubt about it. New assignments are picking up. On the Allied side we are seeing week-over-week revenue growth, so we're really encouraged with some of those trends. Pete touched on rehab therapy. It's a small business, but we're gaining traction. It's all organic.

HIM is picking up steam. We've had the soft spot on the perm side, but the contract labor side of HIM is starting to pick up.

On the Life Sciences side, we're stabilizing. New business is coming in. Job orders are up. New assignments are up. I'm not as bullish on the revenue trends. I think we're getting there, but it feels a lot better. We've seen a little bit of improvement in direct hire recently, but it's still soon to say, because last quarter we saw a false bottom, but I'm feeling better about it. Customers are definitely giving us more orders. Just we need more of it to catch up to prior quarter results.

And then on the Physician Staffing side I would tell you, Jim, that that market, although we're doing very well in it, probably is a little more challenging today than it was six months ago, but still we feel based on the results that we've posted since we got into that segment that we're performing very, very well and will continue to do so.

Okay. And then I know it's too early, but do you have any feel for seasonality in the December quarter? That's always been a seasonal quarter where things can happen, especially like on the Lab side with respect to closures and on the Nurse Travel side with respect to holidays and such. So, do you have any early feel?

Let me take them division by division. I don't think that we'll -- as I said, I think we'll actually grow fourth over third in the IT side. I think we'll experience normal seasonality in the Nursing side. Absent some sort of dramatic increase in the economic recovery, which we're not banking on at this point, I think we'll see normal seasonality on the Life Science side and there's a chance for a little bit of growth fourth over third in the Allied Healthcare side.

Okay. All right. Thanks a lot.

You bet.

Your next question comes from Andrew Fones with UBS.

Yes, thanks. Just kind of wanting to touch on the revenue guidance a little bit. I was wondering if you could help us understand -- I know you gave us the overall revenue progression through the quarter, but how did it look by division? Perhaps April, May, June and then July if you're able to give us a sense that, would be really help?

Yes. Let me go first and, Jim, if you would please add. Andrew, as I said, I think the second quarter is going to end up proving to have been the most challenging quarter for the entire staffing industry. And my belief, personal belief, is that the companies that reported earlier in the first quarter, had less visibility as to what might transpire because if you would have waited just a couple of weeks, I think you would have seen this kind of glimmer of hope that we all had that the second quarter would be more productive than the first dissipate rapidly. So, June was worse than May. May was worse than April, but July and August have been performing at or slightly better than previous months' levels. Jim?

I think you pretty well covered it, Peter. In some, Andrew, in some of the groups, June began to get a little bit better and then the groups we talked about that are looking up, July obviously was better than June was. So, Nurse Travel in particular, sort of continued to slide south throughout the quarter.

Okay. And so on Nurse Travel would I be right in thinking that continued slide into July for outside of that -- that was a pretty good commentary across the other businesses there?

Yes. I think that's right, Andrew, and I think although we don't really directly compete with them, American Mobile and Cross Country are going to be reporting in the next couple of days and I think you're going to hear commentary about the challenges they're currently facing in that market, which is their dominant service offering, and I think they probably are experiencing some of these dramatic declines a little bit slower than us because their assignments typically were 13 weeks where ours were typically four weeks, but I think the hurricane force winds really hit the Nurse Travel industry in the second quarter, much more so than the first quarter and I think if you review our prepared remarks from the first quarter conference call, we predicted that the market was going to weaken. I will tell you here today it weakened more than even we expected.

Okay. That was really helpful. And then on the gross margins, obviously you did a great job there. Going forward, how do you see that kind of tradeoff if you like, between revenue growth and gross margins and do you think there's a little bit of opportunity to take advantage of the fact that you're seeing seeing such strength in the margins.

We are selectively looking at certain businesses where we can manage our portfolio of assignments and maybe give a little bit more than we want to on one assignment if we can overachieve on another.

Remember, we're not a bulk seller, but I've been through three of these recessions and I can tell you, there will be an end to it and the firms that hold onto their pricing models and their margins and their personnel, will be rewarded ten-fold, but right now it's just a very, very challenging marketplace, as it relates to certain of the lower-end service offerings that we don't participate in. But we just don't see that we would be bringing a lot to the bottom line by significantly compromising on our margins. I mean if you look at some of the other -- the commercial staffing guys that reported today, I mean you look at the amount of revenue and the negative EBITDA.

I mean, I just don't think -- I could probably put another $10, $15 million of revenue on the book, but I don't think it would significantly move the EBITDA contribution and so I think we'll be viewed as having made the right operational decisions if the marketplace just gets rational in the next six months.

If this thing drags on longer than the -- the irrationality drags on more than six months, then you probably have to reevaluate the position on your pricing, but right now as you see our adjusted EBITDA margin expanded from the second quarter and we're starting to see some positive trends in some of our divisions, which means that we may be touching the bottom of the pool. We still think that our operating strategies are the right ones.

Okay. Thanks and on the impact to Workers' Comp, you mentioned that was a little bit of a benefit in the quarter, but going forward perhaps that could reverse. Any thoughts on as you look out to 2010 what the impact could be on your gross margin?

Jim, you want to take that?

Yes. I don't think that there will be a significant impact one way or the other from Workers' Comp Andrew. I think we do a pretty good job of managing that. I think with regard to impact, it's probably going to come for all staffers in the area of unemployment, but Workers' Comp, we just have -- we've done a good job of managing it. We haven't seen a spike in the claims rates and we've managed what we have. So, throughout this year, in fact, probably over the last 1 year to 1 1/2 years, we've had each quarter, some minor improvements in it and we probably won't continue to see significant improvements in Workers' Comp going forward, but I don't think that it's going to get a lot higher.

We're just not particularly in dangerous lines of business and the line of business that could potentially have the most claims, sore knee, sore back, the Nursing business, it's a smaller percentage of our total revenue these days.

And then on (inaudible), you mentioned obviously with rising unemployment that could be a bigger impact next year. Any thoughts on that one?

I don't have any numbers yet, Andrew. It's only anecdotal to the extent that, obviously there's an increase in unemployment claims and sooner or later that's going going to back up into anybody who's paying salaries.

Okay. And a couple of just small ones, if I could squeak those in as well. You mentioned a 47% tax rate in Q3. Is that because you're looking at a close to breakeven number and any thoughts on whether there is kind of a permanent change into tax rate longer term? And then also, you mentioned amortization should be fairly small in 2010, but can you remind us on what you're expecting there? Thanks.

The tax rate for this year, full-year, the 47% tax rate for this full-year, is only because of the reduced pretax income line. I would expect that that tax rate would go down as pretax income goes up to more normalized levels and the amortization related to intangibles for next year is about $1.7 million.

For the entire year?

Yes.

Thanks. Thanks.

Yes.

Your next question comes from Jeff Silber with BMO Capital Markets.

Thanks so much. Just wanted to go back to some of the gross margin discussion from earlier and I just want to double check something. Did you say in both the Allied segment and the Physician Staffing segment that the bill pay spread increased year-over-year?

Hang on and I will tell you. Just a second. In the Allied segment, the bill pay spread increased year-over-year. In the Physician segment the bill pay spread increased year-over-year.

Okay, great. Can we drill down into that a little bit because it's somewhat surprising especially compared to some of your other verticals and from the rest of the industry as well, although we haven't heard from everybody obviously. Is there a mix shift involved? What are you doing to make sure that that continues to increase?

Well, let's talk about the Physician segment first and in the Physician segment as you'll recall, over the past few quarters, we've talked about the fact that we began looking more at what our pay rates were relative to what our bill rates were at the time of placement and historically that segment had had a set rate card. They now basically price on a placement-by-placement basis just like the rest of our segments do. So, I don't know that we'll continue to see the kinds of increases that we've seen in the past, but I can tell you they're doing a much better job of managing their gross margins than they had and in certain cases, we will either benefit or we'll have a detrimental effect from the mix.

In this case, I believe we had really not a whole lot of mix component in it, but rather just a component in managing the placements and also we had a little bit more conversion revenue come in this quarter on top of the bill pay spread.

And in rest of the segments, Jeff, just as Peter mentioned, each one of our placements is individually priced and so we watch gross margin very closely and are attuned to it, if you will.

Great. I'm sorry, did you comment on Allied in there as well or -- ?

You want to take that one and then I'll add something?

You me to take that one, Pete?

Yes. Go ahead, Emmett.

I couldn't hear you, sorry. Jeff, some of the things we've done, I picked up the Allied division earlier last year at the beginning of 2008 and one thing that Pete and I wanted to do is kind of straighten up our cost of services, a little loose, so we tightened that up. That's contractor benefits. That's background checks. It's drug tests, all that kind of stuff. We might have been given away a little too much. So, we have tightened that up and that's enhanced our margins and then just new management. We've changed some management, greater focus on our target kind of client and that kind of client that we're looking for is that client that really values our experience, our speed of delivery, our quality over price. So, Peter talked about it earlier. We're walking away from some business that's low margin. We're looking for that customer that really values our experience and our quality of service and that's reflective in these margins for this quarter.

And then the final thing that I would add, Jeff, is we are benefiting from a mixed shift where some of our HIM permanent placement or our contract rehab or HIM is benefiting the overall mix.

Okay. That's very helpful. Thanks so much. In terms of the guidance that you have for gross margins in the third quarter, if I look at that sequentially, you're looking for it to be flat to maybe slightly down. Can you give us a little cooler by segment what your expectations are for 3Q gross margins compared to the second quarter? Thanks.

Well, we don't give out guidance by segment, but what I could tell you is that -- just bear with me one second. I want to confirm something. Yes. I mean we basically think things will be about the same. If our IT business grows the way we think and our Nursing business performs the way we think, on a mixed shift basis, we'll be up. We are seeing more focus on if we can accept work in the IT business at a level less than we had in the past, but you can see from the performance of the group, that it's not -- it won't be a significant move. As Jim said on the Physician side, we're probably, Jeff, 650 basis point higher than any of the other Physician Staffing firms right now. So, we don't think that that's going to move dramatically up, although we think based on our current internal reports that that is still achievable absent some sort of change in medical malpractice reserves, which we don't contemplate.

On the Life sciences Side they're probably experiencing the largest end market pressures where some of the more commodity players are willing to try to bulk sell, but we're holding our own. We're having to walk away from more business there, but we don't -- again, we don't see significant change there. As Emmett said in his prepared remarks, actually that the little bit of perm placement that we do in all of our businesses looks a little bit better in the third than it did in the second, which could potentially have a positive benefit in the event that we want to be a little more competitive on pricing structures to see if we can grow a little faster.

Okay, great. That's very helpful, just one more quick one. What kind of share count should we be using in the third quarter?

Unfortunately the diluted share count depends somewhat on the --

Price.

Yes. So, it may be up a little bit. If you look at a basic, it may be up a little bit off of this quarter and then wherever the price goes.

Okay, great. Thanks so much.

(Operator Instructions). There are no further questions.

All right. Well, thank you. We appreciate your time and attention and we look forward to sharing our third quarter results with you.

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