ASGN Inc (ASGN) 2011 Q1 法說會逐字稿

Good afternoon. My name is Christie and I will be your conference operator today. At this time, I would like to welcome everyone to the On Assignment Q1 2011 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).

I'd now like to hand the program over to Jim Brill, Chief Financial Officer. Please go ahead.

Thank you, Christie. 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?

Thank you, Jim. Good afternoon. I would like to welcome everyone to the On Assignment 2011 first quarter earnings conference call. With Jim and me today is Katie Hoffman-Abby, Executive Vice President of our Nurse Travel Group.

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 Katie. I will then turn the call over to Jim for a more detailed review and discussion of our first quarter financial performance and our estimates for the second quarter of 2011. We will then open the call up for questions.

All markets we served, including nurse travel and physician staffing, improved meaningfully during and exiting the quarter. Once again, we saw particularly strong growth and strength in the IT and Life Science end markets. As we noted during our fourth quarter conference call, our healthcare group started to stabilize during the first quarter and we are confident that the first quarter of 2011 will mark the bottom in revenue decline for our physician and nursing groups.

In the physician group, physician days sold in the last six weeks has increased 25% over the same period in the first quarter. During the first quarter, we also built on the increased demand in nursing and Allied Healthcare that we saw in the fourth quarter. Based on days sold in the physician group and our growth in professionals on billing and nurse travel and Allied Healthcare, we believe absolute revenue growth is possible in 2011 for our physician, nursing and Allied Healthcare groups.

Now that revenue growth has returned to these divisions, they will no longer be a drag on our revenue growth, and we firmly believe that this end marked will provide some of the greatest growth opportunities in the latter part of 2011 and beyond.

Consolidated gross margin of 33.3%, up 134 basis points year-over-year, was a new first quarter record for the company.

Regarding industry dynamics, during and exiting the first quarter, secular trends continued to permit temporary labor to see greater growth prospects than full-time labor. And as the economy improved during the quarter, we continued to see a classic cyclical recovery that benefits professional staffing.

As we previously advised, we have developed a five-year strategic plan to get to $1 billion in revenues. The plan requires us to grow approximately 10% compounded annually with approximately $50 million a year in acquired revenues. Our first quarter performance and our second quarter guidance has us on track to realistically have an opportunity to achieve our long-term stated revenue goals.

In addition as we disclosed on February 28, 2011, we closed the acquisition of Valesta, a $20 million clinical research staffing company based in Belgium.

Our operating performance in the first quarter of 2011 and our guidance for the second quarter of this year demonstrates that the actions we have taken over the last two years have us very well positioned. By increasing our gross margins, substantially paying down our debt with cash generated from operations, adjusting our non-revenue generating costs and expanding our service offerings, we were able to grow our adjusted EBITDA about 4 times faster than our revenues in the quarter.

We believe this operating leverage trend will continue to allow us to grow adjusted EBITDA faster than our revenues throughout 2011. As per actions we took to sustain our future positive revenue growth rates, we substantially added to the number of recruiters and sales personnel that we employed. In the first quarter of 2011, we averaged 758 recruiters and sales people. This compares to 580 in the first quarter of 2010.

During the first quarter, we did not acquire any shares of our common stock.

Now to the first quarter, revenues in the first quarter of $129.4 million, increased 34.4% over the first quarter of 2010 and 6.8% sequentially. Net income was $3.2 million or $0.08 per diluted shares. Revenue generated outside the United States was $13 million or 10% of consolidated revenues for the quarter versus 6.5% or 6.8% in the first quarter of 2010.

Consolidated gross margin in the first quarter was 33.3%, up from 32% in the first quarter of 2010. Adjusted EBITDA was $10.5 million, or 8.1% of revenue for the quarter, up from $4.4 million, or 4.6% of revenue in the first quarter of 2010. Permanent placement and conversion fees represented 3.3% of revenues for the quarter.

Exiting the quarter, demand for our services strengthened in all divisions. Our weekly assignment revenue, which excludes conversion, billable expenses and direct placement revenues averaged $10.2 million for the last four weeks. This is up 39% from the same period in 2010, which included the Easter holiday, and up 15% from the same period last quarter.

Before turning the call over to Katie, I would like to give you a brief review of operations. I am pleased to report that On Assignment's IT and Engineering segment, Oxford Global Resources, had another excellent quarter. Revenue growth, gross profit, gross margin and EBITDA exceeded our expectations with continued improvement for each month of the quarter.

Revenue for the first quarter of 2011 was $60.1 million, a 10.9% sequential increase over the fourth quarter of 2010 and a 67.9% increase over the first quarter of 2010. This follows a 52.5% increase in the fourth quarter of '10 over the fourth quarter of '09 and a 48.9% increase in the third quarter of '10 over 2009.

In addition, for the fifth quarter in a row, we experienced growth in each of our respective specialties; IT, software and hardware engineering, mechanical and electrical engineering, telecom and healthcare IT.

The 67.9% increase in year-over-year quarterly revenue was due primarily to a significant increase in demand for consultant labor. Our billable consultants On Assignment increased from an average of 641 in the first quarter of 2010 to an average of 992 billable consultants in the first quarter of 2011, an increase of 54.8%. And the average of 992 consultants was an increase of 4.9% over the average of 946 in the fourth quarter of 2010.

The revenue increase in quarter one was also slightly a result of increasing bill rates, which increased approximately 5.9% in the first quarter of 2011 over the first quarter of 2010. The average bill rate in the first quarter of 2011 was $113.16 per hour compared to $106.89 in the first quarter of 2010 and $111.06 in the fourth quarter of 2010.

Total fees for our perm placement business unit, CenterPoint, were $402,000 in the first quarter compared to $141,000 in the first quarter of 2010 and $248,000 in the fourth quarter of 2010. Total perm fees through CenterPoint represented only 70 basis points of Oxford's total revenues in the quarter.

Gross margin for the first quarter of 2011 remained strong at 34.9%, compared to 35.1% for the same period last year. As we've mentioned on previous calls, the bill rates and gross margins of our IT and Engineering segment continue to be among the highest in the staffing industry.

During the first quarter, we were successful in continuing our strategy of diversifying our business across clients and industries, billing over 800 different client companies. No single client accounted for more than 4.6% of our revenue and revenues from our top 10 clients represented only 13.9% of our total revenues for the quarter. Demand for IT consultants remained strong in the financial services, retail trade, manufacturing and education. We saw an increase in our IT business with food manufacturers and a small decline from utilities in Q1.

On the engineering side; medical equipment, instrument, semiconductor, communication equipment and appliance manufacturers continued to be our mainstays and we saw an increase in demand from each of these industries. We saw a significant increase in our engineering validation business from pharmaceutical companies compared with the past four quarters, while demand from telecom companies has shown a slow decline over the year.

We launched our healthcare IT business in late 2009 and it continues to be our fastest growing area as we continue to add staff and accelerate our penetration in this market. Total revenues from healthcare IT was $3.9 million for the first quarter of 2011, compared to $2.7 million in the fourth quarter of 2010, and only $212,000 in the first quarter of 2010.

We ended the first quarter of 2011 with 65 consultants On Assignment compared to 47 at the end of 2010. Our current annualized run rate in this new business is approximately $18 million.

From an operational standpoint, our internal staffing consultants continue to drive our business and are a significant investment necessary for current and future growth. The average number of staffing consultants reached a high of 447 in June of '08. That number declined throughout the second quarter, second half of 2008 and all of 2009. Since then, we've intentionally increased our staff from 275 staffing consultants in December of 2009 to 404 at the end of 2010, and 421 at the end of this first quarter.

As with previous quarters and even with the addition of this new staff, the efficiency of our team continues to improve. The first quarter of 2011 continued the trend of improving productivity, as aggregate new assignments per day surged pass pre-recessionary levels with a sales staff size that is approximately 13% less than our peak in June of '08. The first quarter of 2011 turned out to be the most productive quarter in Oxford's history.

Due to our strong and increasing efficiency, sequential performance over the past five quarters, which is continuing into the second quarter of 2011, we continue to selectively add staffing consultants to our Oxford International, Oxford and Associates, Oxford Healthcare IT, and CenterPoint offices. We monitor our operational activity daily, and we continue to align the size of our staff with current and future economic conditions.

To summarize, our IT and Engineering segment has seen a steady increase in the number of consultants On Assignment and increases in average weekly sales since September of '09, reflecting the overall IT staffing market and the economy in general. The IT market projections for 2011 and 2012 continue to be strong as the staffing industry analysts are predicting that the US IT staffing market in 2012 will surpass its 2000 peak of $21.5 billion in revenue, set at the height of the dot-com boom.

In terms of current quarter activity, we continue to see strong demand for our services, which is consistent with our Oxford Index, our forward-looking quarterly survey, which indicates that clients anticipate increasing their temp hiring in the second quarter of 2011 and in almost all our specialty areas.

Turning to our Life Science business, revenue grew on an absolute dollar basis over the fourth quarter to $32.9 million, which represents a 6.7% growth sequentially and a 43% increase year-over-year. Revenues attributable to the Valesta acquisition, which took place late in the quarter, were approximately $2 million. Absent Valesta, revenues rose slightly over the prior quarter in 2010.

The improved operating environment of the Legacy Scientific Division combined with the contribution of the Cambridge group and Sharpstream Life Sciences acquisition, helped stabilize what is historically a rebuilding period. Revenues from the Cambridge and Sharpstream acquisitions were $3 million. Excluding all acquisitions, revenues grew 20.9% year-over-year.

On a divisional basis, US operations generated $26.3 million in revenue; essentially flat sequentially and up 35.7% year-over-year. Excluding acquisitions, US operations increased 24.4% over the prior year.

Foreign revenues were $6.6 million for the quarter, increasing 47.1% sequentially and 82% year-over-year. Excluding Valesta, foreign revenues decreased 2.1% sequentially and excluding acquisition, foreign revenues were up 3.2% year-over-year.

Gross margin for the Life Science segment was 34.2%, decreasing 199 basis points sequentially and increasing 255 basis points year-over-year. We attribute the sequential decrease in gross margin to the reset of payroll taxes for the 2011 fiscal year. On a divisional basis, US gross margin was 32.1%, decreasing 257 basis points sequentially and increasing 126 basis points year-over-year. Foreign gross margin was 42.7%, increasing 265 basis points sequentially, and increasing 657 basis points year-over-year.

Moving on to the second quarter of 2011, demand for contract, contingent, retained search services throughout the US and Europe remained steady. The business climate in most of our markets continues to improve and the integration of Valesta is on schedule.

As for Valesta, this acquisition positions us well in the European clinical research market. Clinical research remains a key focus area, which offers critical skill disciplines, high bill rates, long-term contract assignments, permanent placement activity and attractive gross margins. We are confident the addition of Valesta along with Cambridge Group will continue to enhance our competitive position in this exciting field and accelerate profitable growth. As we go forward into the second quarter, our focus within the Life Science Group continues to be on maintaining momentum throughout with consistent emphasis on employee productivity.

Now, I would like to turn to Allied Healthcare. Revenues for the Allied Healthcare division were $10.1 million, which represents a 1% increase sequentially and a 6% increase year-over-year. We attribute the sequential and year-over-year revenue increases to improved operating environment. While the operating environment showed signs of stabilization and growth in the quarter, results were constrained by the following specific factors; poor weather, holidays, clients' continued focus on cost containment, and an economic recovery that is not consistent nationwide. Certain regions have yet to benefit from the end of the recession.

Allied Healthcare gross margins for the quarter were 31.3%, which represents a 134 basis point sequential decrease and an increase of 50 basis points year-over-year. The sequential decrease in gross margins was primarily attributable to the reset of payroll taxes for the 2011 fiscal year.

Turning to the second quarter of 2011, the healthcare markets in which we operate are showing signs of improvement. Demand for core clinical lab, local nursing, Allied Travel and Health Information Management professionals has stabilized and is growing. In addition, we are seeing improvements in permanent placement services associated with Health Information Management and newer Allied Direct Search business lines. As we have done in other divisions, we continue to respond to the current soft healthcare climate by focusing on new business development, gross margin preservation and cost containment.

Now let's turn to our physician staffing segment, VISTA Staffing Solutions. As I previously mentioned, we believe VISTA, and the physician staffing industry as a whole, had hit bottom and started back up. We base this on the fact that our inventory of days available to refill continues to trend upward. After hitting bottom in January of '11, inventory of days rose sharply, and ended the quarter up 7.2% above Q4 2010. This trend has continued into April.

In addition, days filled, days into which we book doctors, increased 19.2% in Q1 2011 over Q4 2010 and 3.5% over Q1 2010. Physician staffing has a longer sales cycle. Typically there is a three to five month lag between the time days are booked and the time doctors actually go to work. As a result, this improved production does not show up in Q1 results. Here are more details about VISTA's Q1 financial performance.

Q1 2011 revenues of $16.5 million, down 5.7% from Q4 2010, and down 12.5% from Q1 2010. VISTA's gross margin was 32.1% in Q1. This is a decline of 204 basis points from Q4 2010, but an increase of 34 basis points year-over-year. The quarter to quarter decline is due to a favorable medical malpractice accrual in the fourth quarter following a year in actuarial study.

Fill rate was down slightly for the quarter and year-over-year, but at 54.2% it's still significantly higher than the historical norms in the Locum Tenens industry. Our bill rate of $184 an hour, a 3.1% drop from Q4 2010, but a 1.7% increase over Q1 2010.

Our average number of working physicians for the quarter was 246, down 6.1% sequentially and 12% year-over-year. Our international placement division earned $260,000 in gross profits in Q1 and VISTA physician search and consulting generated $311,000 in revenues.

In addition to our improved productivity, there are positive signs in the industry. The poll survey on the Locum Tenens industry just published by the Staffing Industry Analyst is one. SIA has been unable to publish this survey for the last several quarters due to low participation by Locum Tenens companies. We believe that companies refuse to participate when their performance was bad, so the very fact that companies felt positive enough to participate is a bellwether for the industry.

The survey predicts a 4% growth in the industry for 2011, but includes an interesting caution. Staffing Industry Analysts report that while hospitals are not willing to cut staff further, a good sign for us, the slow recovery coupled with healthcare reform may complicate things. Healthcare organizations are still seeing increased levels of uninsured admissions and decreased levels of commercial admissions and they continued to find it easier than normal to recruit physicians on their own throughout Q1 2011.

They note -- the group notes that healthcare reforms should push more people on to insurance rolls and increase demand for care. However, if accountable care organizations succeed in giving healthcare organizations an incentive to provide pure services as HMOs did in the 1990s, demand for staffing will stay depressed. To succeed in this market, SIA reports staffing companies must create a stronger value proposition for healthcare organizations.

This market intelligence is completely consistent with our experience. We are working to become a strategic staffing partner, providing premium service and a 100% fill rate to a smaller number of clients. A large nationwide hospital management company recently selected us as one of the two preferred vendors and will be shifting all contract physician staffing over accordingly. The organization in turn will receive top priority response from us.

This valuation proposition is also a good defense against encroachment of low margin vendor management systems in the physician staffing space. Healthcare organizations are realizing that physician staffing is too critical to the organization's success and client vendor and communication is too important to successful placements to give away control of physician recruitment and placement to a third party. So to date, we have not seen large awards to vendor management service companies.

Finally, in a report released April 17th, the American Medical Group Association announced the slightly improving economy has led to a slightly higher turnover rate among physicians employed by American Medical Group Association member organizations. More than 8 in 10, 83% of the group surveyed said they will hire significantly more primary care doctors this year and 79% said the same for specialists according to the report. Increased competition physicians bodes very well for us.

There is no question we are living in interesting times. And with that, I will turn the call over to Katie Abby, Executive Vice President in charge of our Nurse Travel business. Welcome to the call, Katie.

Thank you, Peter. I am pleased to report a strong performance for Nurse Travel in first quarter, the result of hard work during a challenging 2010 to position our division for success in a recovering economy.

Our first quarter results confirm our ongoing commitments delivering excellent service to our providers and clients and reflect the investments and structural changes we made last year. For the quarter, revenue of $9.7 million was a sequential increase of 14.3% and a year-over-year increase of 7.7%. Gross margin of 25.2% represented 68 basis point sequential decrease, but a 284 basis point increase year-over-year. The 68 basis point decline sequentially came from the labor disruption revenue reported in fourth quarter of last year. Adjusting for this revenue, our gross margin would have increased 16 basis points even with the seasonal increase in employment taxes.

The sequential increase in our revenue is primarily driven by a 35% increase in the number of open orders we received from both traditional partners and new clients. We billed 202 clients this quarter versus 173 last quarter. That increase led to a 27% increase in the number of travelers on assignment, a 22% increase in the number of booked weeks and a 35% increase in the number of confirmed assignments.

The average hours worked for traveler increased slightly 1.1%, while sequentially the average bill rate decreased by $0.84 per hour. The current business environment is highly competitive and we must address service needs of our customers faster and more efficiently than we have in the past. We have begun the process of adding more automation to our internal processes to ensure that we are as efficient as possible in our administrative areas. As a result, we saw an increase in productivity of 9% over the same quarter last year and we continue to monitor our expenses.

Analyzing key factors like revenue growth, gross margin and SG&A along with the increase in demand from existing and new clients, we see a significant opportunity for growth. We believe this is a very good time to invest in the future by hiring great people who will help us grow the business in high potential and revenue growth territories.

Looking ahead, we expect to see continued increase in demand along with gains in market share. Staying focused on the current and future opportunities in our business, we will continue to pursue opportunities for productivity improvements. With the solid performance this quarter, we are well on our way to achieving our 2011 goals.

Here is a recap of some important additional metrics for the quarter. Average hours worked per nurse increased sequentially to 40.3 from 39.9 and decreased slightly year-over-year. The percentage revenue from our top 10 clients was 32.8% compared with 30.4% in the fourth quarter of 2010 and 38.2% in first quarter 2010. We made it a priority last year to increase the diversification of our client base and as a result generated more revenue with more clients in the first quarter of this year.

The average number of working nurses in first quarter was 279. It was 219 in the fourth quarter of 2010 and 259 in first quarter last year. And finally, we continued to refine our financial controls to drive gross margin improvement. And I will now turn the call over to Jim Brill. Jim?

Thanks, Katie. As Peter mentioned, consolidated revenues for the quarter were $129.4 million, up 34.4% from the first quarter of 2010. There were approximately 64 billing days in this quarter, 62 in the fourth quarter, and approximately 63 in the first quarter of 2010. However, for Nurse Travel, there were 90 billing days this quarter, 92 last quarter and 90 in the first quarter of 2010.

Foreign currency had a negligible impact on revenue relative to last year's fourth quarter (sic) and an $80,000 positive impact on revenue relative to the fourth quarter.

Now let me address some of the variances and their related explanations to the extent Peter or Katie has not. In Life Sciences, the bill rate was up 5% from the fourth quarter, in part due to the Valesta acquisition, and the bill pay margin increased. Relative to the first quarter of 2010, the bill rate was up 7%, again in part related to Valesta, and the bill pay margin decreased slightly. In Allied Healthcare, the bill rate relative to the fourth quarter was up 2% as was the bill pay margin. Relative to the first quarter 2010, Allied Healthcare's bill rate was up 4% and the bill pay margin expanded.

As Peter mentioned, the bill rate in the physician business was down from the fourth quarter and the bill pay margin contracted. Relative to the first quarter of 2010, the bill rate expanded. However, the bill pay margin contracted. In Nurse Travel as Katie mentioned, the bill rate contracted by about 1% from the fourth quarter. However, the bill pay margin expanded and relative to the first quarter 2010, the bill rate contracted slightly. However, the bill pay margin increased. Peter also mentioned that the bill rate in the IT and Engineering business expanded over the fourth quarter and the first quarter 2010. However, the bill pay margin contracted in both periods.

Conversion on direct hire revenues totaled $4.2 million in the quarter, or 3.3% of revenue, as compared to $4.1 million, or 3.4% of revenue in the fourth quarter and $2.2 million, or 2.2% of revenue in the first quarter of 2010.

Total SG&A expense for the first quarter was $36.8 million, or 28.4% of total revenues, which is up from $35.4 million excluding goodwill impairment, or 29.2% last quarter and $29.8 million, or 31% in the first quarter of 2010. The increase from last quarter is in part related to an increase in revenue generating headcount, an increase in commissions related to increased revenue and an increase of $250,000 in expenses associated with acquisitions.

There were two large offsetting items in the quarter; a total of approximately $550,000 in acquisition-related expenses and approximately $500,000 in foreign currency transaction gains. Also included in SG&A in the quarter was $400,000 in amortization, and $1.5 million of depreciation. Our interest expense was $700,000. Our tax rate was 44.4% and we had a net income of $3.2 million, or $0.08 per 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 $8.4 million. Excluding equity-based compensation expense of approximately $1.6 million and acquisition-related expenses of $550,000, adjusted EBITDA was $10.5 million, or 8.1% of revenue.

We ended the quarter with cash and cash equivalents of $15.8 million. After borrowing $13 million to support the acquisition of Valesta, our bank debt stands at $78.5 million. We generated $6.3 million in cash flow from operations. CapEx was approximately $2.6 million, of which approximately $1.5 million related to our new corporate headquarters. This is up from $2.1 million last quarter and $1.3 million in the first quarter 2010.

Net accounts receivable was $74.9 million at the end of the first quarter, and day sales outstanding were 50 days on a pro forma basis without Valesta versus 47 last quarter and 48 days in the first quarter of last year.

Now turning to productivity, which we define as quarterly gross profit generated per staffing consultant. For the first quarter, we averaged 758 staffing consultants, and gross profit per staffing consultant was $57,000, down slightly from the fourth quarter and up from $53,000 in the first quarter of 2010.

The Life Sciences segment generated $74,000 in gross profit per staffing consultant, down from $77,000 last quarter. The Healthcare segment generated $49,000 in gross profit per staffing consultant, up from $48,000 last quarter. The Physician Staffing segment generated $68,000 in gross profit per staffing consultant, down from $71,000 last quarter. And the IT and Engineering segment generated $51,000 in gross profit per staffing consultant even with last quarter.

Looking at the second quarter revenue expectations, it continues to be difficult to estimate what will happen to revenues because of the worldwide economy. However, the labor markets do seem to be getting better, and considering normal seasonal trends, we currently estimate consolidated revenues of $142 million to $145 million for the quarter ending June 30, 2011.

We are estimating consolidated gross margin of approximately 34%, SG&A of approximately $39 million, excluding acquisition cost, equity-based compensation expenses of approximately $1.6 million, approximately $600,000 in amortization of intangible assets, and depreciation of approximately $1.6 million.

We estimate net income of $4.8 million to $5.4 million, earnings per share of $0.13 to $0.14, an effective tax rate of about 43%, adjusted EBITDA is estimated to range from $13 million to $14 million.

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

Thank you, Jim. We believe that we are well positioned to take advantage of what we believe will be historic, secular and cyclical growth for the staffing industry over the next three to five years. While the entire On Assignment team is very proud of our performance, we remain focused on regaining our peak levels of profitability. I would like to once again thank our many loyal, dedicated, and talented employees whose efforts have allowed us to progress to where we are today. I would like to now open the call up to participants for questions. Operator?

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

Thanks, Peter. I had a question for you about your last comment focused on attaining prior peak margin. What margin do you think you can get to this go around?

Well, Tobey, I am going to quote you a quarterly adjusted EBITDA margin versus annualized one, because the margin is always down in the first quarter because of SUI reset. But if memory serves me correctly, the third quarter of '08 was our highest margin, I think it was about 11.8% and at that time our margins, our consolidated gross margins were in the 32% range. So, we would clearly be disappointed if we weren't able to exceed that again because we have higher margins and we have done some things to become a little more efficient with our non-revenue generating fixed costs. That gives you a little bit of guidance, I think north of 11.8% is where we are targeted.

And that -- again an adjusted EBITDA number?

Yes, adding back only non-cash charges for 123R expense and acquisition cost.

Okay. Jim, I had a numbers question for you, just kind of a detail. The $0.02 or roughly $0.5 million dollars in professional fees for the acquisition, does that flow through and is that included in the quarterly results that you reported?

Yes, it's all up in SG&A.

Okay. So, ex that we are talking about a $0.10 number.

Yes, depending on the tax, it's obviously tax affected so...

Okay.

You would have the tax affect it to get it to whatever the EPS number is. But...

Fair enough.

It's included, but then we add it back.

So we excluded it for adjusted EBITDA, but we did not exclude it for EPS and if you exclude it for EPS, as Jim said, you got a tax effect.

Okay. And then, one more question I will get back in the queue. Now that we've got even the businesses that had been struggling up until recently moving in the right direction and signs pointing to momentum there, Peter what are you focused on now, is it less of a market concern, and just kind of keeping your eye on internal operations to make sure you are focused on the daily stuff that makes the staffing business and then may be adding to it, is it more M&A focused at this stage?

Well, I'll answer a part of it and then I'll let Katie answer a little bit about what she is focused on in driving revenues on the nursing side. We are interested in continuing our thoughtful and disciplined acquisition plan. I don't think it's on the nursing side. I believe it would continue to be on the physician and clinical research side or health IT, or health information management.

We are very focused on the daily revenue generating activity to make sure that we are getting operating leverage and in some of our divisions, the markets have changed and they have changed permanently. So we are having to change our mindset as to what's an effective sales campaign, you are in a acceptable level of performance and productivity because of how certain markets, specifically physician staffing have matured. And with that, I will let Katie address a little bit of how we are starting to grow the nursing business even though we are at a lower headcount than we were even a year ago. Katie?

Well, I think what we are starting to see in the nursing world is that our customers are coming back, the nurses who went back to permanent physicians during the hard times are getting to feel more comfortable, going out being travelers again and this is opening up the market to some extent. It's not consistent by any means across the country at this point, but our strategy is to make sure that we are capitalizing on every opportunity as it comes before us and making sure that our systems are in place and we are very fast and efficient and compete in this market.

If I may ask one last question, I attended a conference this week in which, was focused on government budgets and it looks like the VA is slated to have some significant increases in part related to healthcare. Is there any opportunity on the physician or nursing side for any kind of work you do with the VA to expand in a meaningful fashion?

Yes, we absolutely believe there is a big opportunity working with the VA system both in physician and the nursing segment. In particular, on the nursing side, this is relatively new area for us and we are concentrating on making lots of placements there when we can.

So, that was an area of focus for us for about a year ago to get out GSA contract. We've done a fair amount of work through the physician group with governmental entities, but we really hadn't with our nursing group, but we've elected to tried to get more of that business and it's from a standing start we are making good solid progress and the momentum is pretty positive.

Thank you very much.

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

Thanks so much. Jim, in your remarks, I mean you went through them pretty quickly, you talked about in the different segments, changes in the bill price case spread, but for the most part they seem to be contracting. Is that coming from the billing side, the pay side, if you can give us a little bit more color what's going on, that would be great?

It's the bill pay margins and I don't -- I don't have them all laid out in front of me unfortunately...

I will follow-up offline.

I mean, I think if you listen to what's going on with the bill rates, generally the bill rates have come up. It just depends on period to period what -- where we are so....

So, and a couple of things, Jeff. I am just looking at the script. In the Life Sciences the bill rate was up and the bill pay margin increased. In Allied Healthcare, the bill rate was flat for the fourth quarter, but the bill rate was up 2% and the bill pay margin was up. In the physician and the nurse travel, the bill pay margin expanded. So, we are three for three on expansion. And then, on the IT business, it contracted a little bit.

Now, I would point out to you that there is going naturally to be a little bit of contraction unless you have a large expansion, because SUI rates are more expensive this year than they were last year.

Okay, that makes sense. Maybe we can shift gear to the IT and Engineering segment. I mean, the growth has been phenomenal, but you are starting to come up again some tougher year-over-year comparisons, yet you are still looking for 60% year-over-year increase in the second quarter. I know that can't go on but if you can give me what's going on in that segment, why are you putting up such phenomenal numbers?

If you go back and pull our scripts from three quarters ago when we couldn't sell a consultant to save our lives, we internally focused our people on rebuilding their databases and building their customer contacts and passionately telling our people if you do this now, it may not generate a $1 revenue for you, but we can guarantee you somebody it will, and we are starting to bear some real fruit from all the hard work we did.

I would also point out to you that you got to remember that this business has an average length of assignment of five to six months. So, when we give you a growth rate for the second quarter, it's pretty well locked in.

Okay. That's helpful. And just a quick numbers question. Jim in terms of the guidance, can you give us what interest expense you are using for your second quarter numbers?

Yes, it's about the same as the first quarter.

Okay, great. I will jump back in the queue. Thanks.

Your next question comes from Mark Marcon with R. W. Baird.

Good afternoon and congratulations on the strong results. So, wondering -- with regards to the IT, in terms of the 60% growth that you are currently seeing, how much are you going to need to add in terms of internal headcount or how should we think about the capacity within that division in terms of offices things of that nature, how much do you need to expand -- continue to expand to keep the growth up?

Thanks, Mark, and thanks for the comment about the growth. With regard to the IT division, as you know, that about 65% of the revenue comes from regional recruiting centers and 35 comes from branch offices. So, we have an enormous ability to add to those recruiting centers without having to add a bunch of offices, and we can also redirect those recruiting centers to geographical areas that are stronger than other parts of the United States. What I would tell you that it's particularly strong about the operating leverage that we've recorded in the first quarter is we added significantly to our headcount and still expanded our operating margins and our EBITDA margin.

So, specifically, with regard to the IT group, we had -- here it is. Let see, since we added from at the end of December we had 404, at the end of the first quarter we had 421 and at the end of December of '09 we had 275 sales people and recruiters. So, the numbers we gave you include a significant increase in headcount and on a consolidated basis we told you in the script that, bear with me one second, as I find it...

Headcount?

Yes.

Average of 758 in the first quarter up from 728 in the fourth quarter.

No, year-over-year please.

Okay. That's up from 580 last year?

So, the first quarter of 2010 we had 580 sales people and recruiters. This year we had 758 and the margin went from 4.4% to 8.1% adjusted EBITDA margin.

Yes.

So, we are paying for it as we go.

I appreciate that. I mean, that's tremendous performance. I was just wondering, as we looked ahead, I mean what sort of plans do you have in terms of additional increases? Should we expect the same pace of growth or is it going to level out or how are you going to gain it because you noted, upfront there might be some -- you are certainly seeing a lot of strength -- the overall labor market in general is improving, but at a uneven pace, so how are you going to manage it?

Well, it's just all based on opportunity and visibility. And as we said at couple places in our earnings release in the script that we are focused on operating leverage as much as revenue growth, but what I would tell you is we see some enormous opportunities in certain spaces that we are adding people ahead of the curve. And I think we've been pretty good on our timing in getting quick payoffs, but we could shut down the hiring right now and really spike our margin, but I don't think that's going to serve us well because our vision is -- we've got a pretty historic growth opportunity over the next three or five years. So, we are trying to thoughtfully pay as you go to continue to increase our headcount in certain specialty areas.

Right. And then is there an assumption that there is about $6 million that's going to be added in terms of revenue on Life Sciences with the acquisition?

No. No, it's a little under an additional $4 million next quarter. So, we had about $2 million this quarter. It will be a little under $4 million in the second quarter.

Yes, so $6 million in total.

Right.

Yes.

In that range.

Great, and then, Katie, congratulations in terms of the nursing business. I was wondering can you talk a little bit more about what you are seeing in terms of fill rates and how hard do you have to work in order to get the fill rates up in terms of convincing people to take nurse travel assignments and where are those fill rates relative to the prior peak?

Okay. Well, with regard to the prior peak, the fill rates are -- people still can be pickier because there are more resumes to submit to a customer.

With regard to, Katie, why don't you answer the question as it relates to responsiveness of customers and are they respecting the service or you are having to work hard there for a fill than you did a year ago?

Yes, Mark, it's kind of difficult question to answer because fill rates really depends on the type of customers that we are working with. If you are talking about opportunities within a vendor management group, the fill rates can be very, very low, and but if you are talking with -- about fill rates with our direct customers, we have pretty strong fill rate opportunity and we are coming in 50% to 70% on those.

And so, depending on who we are working with will dictate what the fill rate will be. Our strategy is to have 70% of our opportunity come from direct customers because we feel we have the greatest chance of success in terms of confirming placements and getting the customer to expect our submittals. We've seen a significant improvement in the customers' willingness to actually take our nurses in the last three months as opposed to a year ago when we were putting people out in front of our customers and having very little success.

Great. My understanding is that --orders have been picking up for a bit now, but it's only been recently that the supplies have kind of freed up and people are willing to take these assignments. Is that correct, I am hearing that from some of the other companies, is that your experience?

I am sorry.

The supply of travelers has increased recently.

Yes, I would say that that's accurate. I mean, we really feel that the nurses who during the hard times decided to go back and seek full time employment, permanent employment are now starting to feel more comfortable going back and becoming a traveler again. So, I would concur with that.

And Mark, I would add to that and this will feed on it. So, the other thing we are seeing is the nurse does a calculation, and you have certain nurses who really enjoy travel assignments, but because of uncertainty and also the way that hospitals were very successful in driving down pay rate, when they did the economic calculation they said, I am not making much more than working on the full assignment, but that's starting to change again. And when they can do that calculation and see that they can have the excitement and the variety of change of location and responsibilities and get paid at least as much or more than working full time, they are going to start exiting the full time roles.

Great, thanks for the color and congratulations.

Thank you.

(Operator Instructions).

All right. Well, we appreciate your time and attention and we look forward to reporting the second quarter. Thank you very much.

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