ASGN Inc (ASGN) 2012 Q2 法說會逐字稿

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

Thank you. Mr. Jim Brill, Chief Financial Officer you may begin your conference.

Thank you. Before we begin, I'd like to remind everyone, as we do each quarter, that our presentation contains predictions, estimates, and other forward-looking statements representing our current judgment 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'd now like to introduce Peter Demaris, our CEO and President, who will provide an overview of the second quarter results. Peter?

Thank you, Jim. Good afternoon. I would like to welcome everyone to the On Assignment 2012 second quarter earnings conference call. With Jim and me today is Rand Blazer, President of Apex Systems, our mission-critical IT skills staffing 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 Rand. I will then turn the call over to Jim for a more detailed review and discussion of our second quarter financial performance and our estimates for the third quarter of 2012. We will then open the call up for questions.

To begin today's conference call, I thought we would give you a final recap of our acquisition of Apex Systems. On May 15, we closed the transaction two weeks ahead of our original schedule. Terms of the financing of this transaction came in slightly better than expected and our expected interest rate on this facility over the next 12 months is approximately 4.7%.

Before we start today's call I would like to also remind everyone that today's results include only six weeks of contribution from Apex.

Now, on to the second quarter results. All markets we serve including Nurse Travel and Physician Staffing remain productive and stable during and exiting the quarter. Once again, we saw particularly strong growth and strength in the IT end markets. As we noted during our first quarter conference call, our Healthcare groups have made solid progress in improving their operating performance, and in the second quarter we once again saw solid execution in our Physician Staffing group. In the Physician Staffing group, physician days sold in the second quarter has increased over the same period in last year's second quarter.

During the second quarter, we also built on the increased demand in Nursing and Allied Healthcare that we saw in the first quarter. Based on days sold in the physician group and our growth and professionals on billing in healthcare, we continue to believe double-digit revenue growth is possible for 2012 for our Physician and Healthcare groups. As we have mentioned many times in the past, we firmly believe that the Healthcare end markets will provide some of the greatest growth opportunities for our company in the future.

During the quarter, revenue growth became slightly more challenging in our Life Sciences group and we are expecting similar end market trends in that division for the remainder of the year.

Consolidated gross margin of 31.4% was down 255 basis points from the second quarter of 2011, primarily due to inclusion of Apex's revenue, which carries a lower gross margin and less contribution as a percentage of total revenue from permanent placement and conversion fees. With the inclusion of Apex's revenues, permanent placement and conversion fees are now 2.1% of our total second quarter revenues. For those of you who are not familiar with our company, Apex generates approximately 1% of total revenue from perm placement conversion fees versus the old On Assignment divisions, which historically generated about 3% of total revenues.

Gross margins came in stronger than we expected due to solid performance in all divisions and a greater-than-forecasted perm placement revenue contribution for the On Assignment legacy businesses. Adjusted EBITDA margin was 11.4%, up from 10.3% in the second quarter of 2011.

Regarding industry dynamics, during and exiting the second quarter, secular trends continue to permit temporary labor to see greater growth prospects than full-time labor. While the macroeconomic environment in North America where we derive 93.3% of our total revenues has become slightly more challenging, we continue to see a classic cyclical recovery in professional staffing.

Recently, the financial services sector had slowed down, but everything we see from our customers in that industry leads us to believe that demand for our services at current levels could remain constant for the remainder of the year.

Our operating performance in the second quarter of 2012 and our guidance for the third quarter of this year demonstrates that our business model in our areas of focus permit us to grow despite less than optimal economic conditions. By increasing our gross margins, substantially paying down our debt with cash generated from operations, adjusting non-revenue generating costs, and expanding our service offerings, we were able to grow our adjusted EBITDA about 20% faster than our revenues in the second quarter. We believe this operating leverage trend will continue to allow us to grow adjusted EBITDA faster than revenues throughout 2012.

As for actions we took to sustain our future positive revenue growth rates, we substantially added to the number of recruiters and sales personnel that we employ. In the second quarter of 2012, we averaged 1,515 recruiters and sales personnel, of which 882 were in the legacy business. This compares to 776 in the legacy business in the second quarter of 2011.

During the second quarter, we did not acquire any shares of our common stock. Revenue in the second quarter of $283.2 million increased 97% over the second quarter of 2011 and 70% sequentially. Net income of $8.5 million of $0.19 per diluted share. Revenue generated outside the United States was $19 million or 6.7% of consolidated revenues in the second quarter versus $19.7 million or 13.7% in the second quarter of 2011.

Consolidated gross margin in the second quarter was 31.4%, down from 34% in the second quarter of 2011. Adjusted EBITDA was $32.3 million or 11.4% of revenue for the quarter, up from $14.8 million or 10.3% of revenue in the second quarter. Permanent placement and conversion fees represented 2.1% of revenues for this quarter.

Exiting the quarter, demand for our services remained stable in all divisions. Our weekly assignment revenue, which excludes conversion, billable expenses, and direct placement revenues averaged $26.6 million for the last two weeks. This is up 14.8% from the same period in 2011. Since the closing of the Apex acquisition on May 15, 2012, integration, coordination and cash generation has been at or above our expectations. Jim will walk you through specifics later in this call, but because of our strong cash generation, we were able to pay down our debt by $23.4 million in the second quarter and our leverage is now under 3.4 times trailing 12 month adjusted EBITDA.

Before turning the call over to Rand, I would like to give you a brief review of operations. Our IT and Engineering segment, Oxford Global Resources, had another excellent quarter. Revenue, gross profit, gross margin and EBITDA met or exceeded our expectations with continued improvement during each month of the quarter.

Revenue for the second quarter of 2012 was $88.1 million, an 11.9% sequential increase over the first quarter of 2012, and a 34.9% increase over the second quarter of 2011. This followed year-over-year quarterly increases for the four previous quarters of 31%, 31.4%, 47.7%, and58.4% respectively. Our quarterly revenue of $88.1 million not only exceeded our pre-recession levels but is also an all-time historical high for Oxford.

The increase in year-over-year quarterly revenue was due to increasing bill rates and a significant increase in demand for consultant labor across all our business units.

Our gross margin for the second quarter of 2012 remains strong at 35.9% compared to 35.8% for the same period last year. As we've mentioned on previous calls, we believe the bill rates and gross margins of our IT and Engineering segment continue to be amongst the highest in the staffing industry.

Our Healthcare IT business continues to be our fastest growing area within this segment. Total revenue in Healthcare IT was $9.9 million for the second quarter of 2012 compared to $4.4 million in the second quarter of 2011, a 125% increase. This business currently has an annualized run rate of over $41 million. Demand for IT consultants was strong in the second quarter in pharmaceutical, retail trade, and durable goods companies, and slowed in financial services and information services.

On the Engineering side, companies in the appliance, instruments, electronic products and medical equipment, manufacturing industries continued to add consultants, while demand declined in the semiconductor, (inaudible) equipment and machinery manufacturing industries.

Over the previous nine quarters, we have seen progressive highs in terms of consultants On Assignment and this trend continued into the second quarter of 2012. In fact, billable consultants per staffing consultant had an all time high for Oxford during the second quarter. We expect this trend to continue into the third quarter and due to this and our strong growth over the past nine quarters, we continue to selectively add staffing consultants to our Oxford International, Oxford and Associates, Oxford Healthcare IT, and Centerpoint division. The Oxford Index , our forward looking quarterly survey, suggests demand for our services will continue to be strong into the third quarter of 2012 and across all of our business units. This is consistent with our actual results in June, which indicate clients are increasing their temp hiring.

Finally, in their April report, staffing industry analysts predict the US IT staffing market in 2012 will surpass its 2000 peak of $21.5 billion in revenue set at the height of the dotcom boom. All these trends bode well for the IT and Engineering segment of our business.

Life Science segment revenues for the second quarter of 2012, was $40.5 million, which represented a 2% decrease over the prior quarter and a 2.2% increase year-over-year. We attribute the majority of the sequential revenue decline to the termination of a low margin client engagement at the end of the first quarter. While our US operations drove the segment's year-over-year growth, second quarter results were constrained by a steady increase in assignments conversion and additional public holidays in Europe compared to the year ago period.

Gross margin for the Life Science segment was 34.1%. The sequential growth in gross margin is primarily attributable to a reduction in payroll taxes and bill rate expansion. However, it was partially offset by a reduction in permanent and conversion fees as a percentage of revenues.

The year-over-year decline in gross margins is primarily attributable to a lower contribution from permanent and conversion fees as a percentage of revenue, increased payroll taxes, and workers' compensation insurance cost. The year-over-year increases were partially offset by bill pay margin expansion.

Moving on to the third quarter of 2012, demand for contract, contingent, and retained search services throughout the US and parts of Europe remained steady. However, the challenging European economic climate continues to impact our European operations.

The business climate overall is stable, although growth has been constrained compared to this time last year. Early in the third quarter, we are encouraged with the level of contract and permanent orders, number of weekly contract assignments, and permanent placement activity.

Based on our current run rate and pipeline of orders, we expect revenues to be up on an absolute dollar basis over the second quarter. Our sales and recruiting staff are focused on new business development, increase sales and marketing efforts, gaining greater depth with existing clients, and expanding our database of candidates and client contacts.

Now I would like to turn to the Allied Healthcare Group. Revenues for the Allied Healthcare division were $13.7 million, which represents a 9.1% sequential increase and a 25.6% increase year-over-year. We attribute the sequential year-over-year revenue increase to an improved operating environment, improved operational execution, and market share expansion. Allied Healthcare gross margin for the quarter was 32%, which represented a 21 basis point sequential and a 47 basis point year-over-year decrease.

We attribute the sequential change in gross margin performance to an increase in contractor-related expenses, specifically travel and housing, which were partially offset by a reduction in payroll taxes and a bill pay margin expansion. The year-over-year decrease was attributable to an increase in contractor-related expenses, specifically travel and housing, and workers' compensation insurance cost. The increased costs were partially offset by an increase in permanent and conversion fees and bill pay expansion.

Turning to the third quarter of 2012, the healthcare markets in which we operate continue to show signs of stability and growth. Early in the third quarter, we are encouraged with the level of contract and permanent placement orders, number of weekly contract assignments, and permanent placement activity. Based on our current run rate and pipeline of orders, we expect revenues to be up on an absolute dollar basis over the second quarter, which is consistent with historical results.

We continue to focus on new business development, gross margin preservation, cost containment, process improvement, and greater attention to individual performance metrics. In addition, we will continue to implement targeted sales and marketing campaigns to capture seasonal and core staffing needs.

Our Physician Staffing segment had revenues in the second quarter of $25 million, which represents a 3.9% sequential growth. On a year-over-year basis, revenue increased 47.3% and 9.3% without the acquisition of HCP.

Conversion and perm placement revenues were down 41% sequentially and 25% from the second quarter last year. Gross margin in the second quarter, which included a $500,000 favorable actuarial adjustment to our medical malpractice insurance expense, was down 30 basis points sequentially, primarily due to the reduction in conversion and permanent placement revenue. The year-over-year drop in gross margin was primarily due to the acquisition of HCP, which is more business with lower gross margin government customers.

With regard to specialty mix, this is as following the overall market trends as reported by the staffing industry reports. Primary care and emergency medicine are expanding while radiology and anesthesiology continue to be demand-constrained.

During the second quarter, top 10 locum tenens clients' revenues represented 19.8% of our overall assignment revenues. VISTA's legacy second quarter locum tenens average bill rate was up 5.3% year-over-year and no change sequentially. In the second quarter, our sold days increased by 8% year-over-year and were up 6.7% sequentially, which indicates continued growing client demand for locum tenens services.

HCP contributed $6.4 million of revenue for the quarter, which is included in our consolidated results for the quarter. Exiting the quarter, demand continues to be good and we see revenue growth continuing into Q3 and over Q4.

The Nurse Travel segment with revenues of $16.8 million was up sequentially 63% and up 56% year-over-year, and included $5.3 million of revenue related to supporting customers experiencing labor disruptions. Adjusting for the labor disruptions, our quarterly revenue grew 11% sequentially and 15% year-over-year. The 209 basis point increase in gross margin from the second quarter of last year was in part driven by the higher gross margin we achieved in supporting these labor disruption customers.

During the second quarter, we saw an uptick in demand for Travel Nurses while the pool of available nurses willing to travel remained steady. The increase in the core business revenue is mainly explained by the 10% sequential increase and the average number of travelers 14% year-over-year. We also billed 15% more clients this quarter compared to the prior quarter and 16% more clients compared to the second quarter of last year. There is no significant change in the average bill rate or the average hours worked. As we look forward to the second half of the year, the Nurse Travel segment is likely to remain somewhat volatile in the near and medium term. For this reason, we have adapted our business model to address the market needs.

In addition to strengthening our core business and helping our clients experience -- and helping clients who are experiencing labor disruption, we're pleased with the progress in establishing new clients in need of implementing various forms of electronic medical record systems.

Finally, we have focused on developing partnerships with selected VMS and MSP providers. All of these strategies help On Assignment and our clients navigate the challenging and turbulent market conditions. We are pleased with these results for the first half of the year and believe the second half has the potential to be even better.

I'll now turn the call over to Rand Blazer, President of Apex Systems. Rand?

Great. Thank you, Peter. First, let me say, speaking for Ted Hanson, our CFO who is on the call with me today and for the entire Apex team, we're pleased to be now part of On Assignment. We believe that together the opportunity for us, Apex and On Assignment, to continue to be a best-in-class IT staffing and services business is as strong as it has ever been. We look forward to our future together.

As Peter, mentioned, the OA results includes six weeks of Apex performance result. For that six week period, Apex revenue was $99 million with our gross margin at 27.3%. Our revenue results and our adjusted EBITDA contribution were in line with our collective expectations. Let me add a few additional points to that reporting.

First, revenue was steady for us in the quarter with our growth rate for the quarter over Q2 of 2011 at 12.8%. We go to market in three ways, through our branches, or by way of our geographic coverage of the market, through our industry -- industries, which comprise serving top accounts in the financial, consumer, and industrial, aerospace, defense and government, telecommunications and media, business services, technology, and healthcare industries, and by the IT services we offer, which is IT staffing and services in 13 key skill areas.

While our overall growth rate for Q2 was a solid 12.8%, the most illuminating trend we saw in our business was that six of our seven industry verticals grew at the rate of 20% in the second quarter relative to last year, while our financial sector revenues were down 7%. Our financial sector business represents about 20% of our business in the quarter, though its performance certainly has an impact on our overall results.

As Peter and others have mentioned and noted, this sector has recently been challenged in the previous periods, but we believe the current run rates -- our current run rates -- are more stable and our business in these financial accounts could improve in the next quarters.

Our gross margin was up in the second quarter over the first quarter. This movement is in part due to employment taxes and unemployment insurance costs moderating. But it's also impacted by the mix of skills and the margins we achieve on those requirements placed in the quarter.

Our workforce productivity remained very strong both in the field and with our shared services support team. This strength is derived from the focus we take with our teams and the amount of volume business we take on with our client accounts.

Our productivity translates into strong bottom line contribution. Our divisional contribution as expressed in adjusted EBITDA before transaction expenses expanded in Q2 and has continued to expand for us over the past year.

Overall, our business remains steady. Our geographic coverage IT focus and industry alignment puts us in a position to continue our growth .With our strong workforce productivity we're positioned to continue to support top and bottom line performance.

Peter, back to you.

Thank you, Rand. Jim?

Thanks, Peter. As you may have noticed we've tried to cut back on the amount of information that we provide on this call. We've added some additional divisional information to the tables in our press release, which I'd refer you to.

As Peter mentioned, consolidated revenue for the quarter was a record $283.2 million, which included $99 million from Apex. The growth rate, excluding the acquisition of Apex, was 28%. There were approximately 63.5 billing days in this quarter, 63.5 in the last quarter and in the second quarter of 2011. However, for Nurse Travel there were 91 billing days this quarter, 91 last quarter, and 91 in the second quarter of 2011. Foreign currency had a $2.1 million negative impact on revenue relative to last year's second quarter, and resulted in a 1% lower year-over-year growth rate. Foreign currency had a $400,000 negative impact on revenue relative to the first quarter.

Now let me address some of the variances and their related explanations to the extent Peter and Rand did not.

As we noted in our release, our consolidated average bill rate for the quarter relative to last year's second quarter increased by about 1%. Apex's average bill rate is slightly lower than that of the legacy business. Both our Physician Staffing business and our foreign Life Sciences businesses experienced decreases in their average bill rates. The consolidated bill pay margin also contracted relative to last year's second quarter. Again, because Apex operates at a lower bill pay margin than our legacy business.

Peter discussed the Apex operating model in his remarks, noting that Apex runs at a lower operating cost as a percent of revenue, as compared to our legacy business. He also mentioned that conversion of direct hire revenues totaled $5.9 million in the quarter, or 2.1% of revenue, as compared to 3.1% of revenue in the first quarter and the second quarter of 2011.

Total SG&A expense for the second quarter was $69.3 million, or 24.5% of total revenue, which is up from $45.1 million, or 27% last quarter, and $38 million or 26.5% in the second quarter of 2011. Excluding acquisition-related expenses of $6.6 million, SG&A was $62.7 million, or 22.2% of total revenues, which includes $1.6 million of amortization related to the acquisition of Apex.

The remainder of the increase from last quarter, which also included $2.5 million of acquisition-related expenses, is in part related to an increase in revenue generating headcount, an increase in commissions related to increased revenue, and the SG&A at Apex from the acquisition date May 15. The increase in SG&A is in part offset by a $500,000 adjustment to the expected payout of a future earn out for the HCP acquisition. Also included in SG&A in the quarter is $2.3 million of equity based compensation expense, $2.2 million of amortization, which includes that related to Apex, and $1.6 million to depreciation.

Our interest expense was $4.9 million and included the write-off of deferred loan costs of $1.2 million. Our tax rate was 42.3%, and we had net income of $8.5 million, or $0.19 per share. Excluding the transaction related expenses and the write-off of deferred loan costs, net of tax, our net income was $13 million, or $0.28 a share.

We believe it's meaningful to compare EBITDA and adjusted EBITDA when comparing the current quarter's results with prior quarters. As outlined in today's press release, EBITDA for the quarter was $23.4 million. Excluding equity-based compensation expense of approximately $2.3 million, and acquisition-related expenses of $6.6 million, adjusted EBITDA was $32.3 million, or 11.4% of revenue.

We ended the quarter with cash and cash equivalents of $18.4 million, and we were able to pay down our debt by $23.4 million and our leverage ratio of total debt to trailing 12-months adjusted EBITDA has dropped from 3.79 at the close of the Apex acquisition to less than 3.4 at the end of the quarter. As of today, we reduced our debt by an additional $3 million.

CapEx was approximately $5.3 million, up from $2.1 million last quarter and $2 million in the second quarter of 2011. CapEx this quarter was higher than usual for a couple of reasons. We elected to change voice technologies because of long-term savings and invested in the related hardware upfront. We had an opportunity to revise some of software licensing to more attractive terms in the long run with an upfront investment due to the acquisition of Apex. And we elected to buyout some of the leases at Apex. Next quarter we should be back in the $2.5 million range.

Net accounts receivable was $239 million at the end of the second quarter, and days sales outstanding on a pro forma basis including Apex were 57 days versus 56 days last quarter and 51 days in the first quarter last year. Apex's DSO was 62 days and we think there is some opportunity to improve it in the future.

Now, turning to productivity, which we define as quarterly gross profit generated per staffing consultant, for the second quarter, as Peter mentioned, we averaged 1,515 staffing consultants, and gross profit per staffing consultant was $59,000, down from $63,000 in both the first quarter and the second quarter of 2011. If Apex had been included for the full quarter, productivity at Apex would have been $85,000 and consolidated productivity would have been $77,000 as opposed to $59,000.

Looking at the third quarter revenue expectations, based on the first four weeks of July, considering normal seasonal trends, and the fact that there is one less billing day in the third quarter than in the second, we currently estimate consolidated revenues for On Assignment of $382 million to $388 million for the quarter ending September 30, 2012. We are estimating consolidated gross margin of 30.3% to 30.6%, SG&A of approximately $84 million, excluding any acquisition costs; equity-based compensation expenses of approximately $2.8 million; approximately $3.8 million in amortization of intangible assets; and depreciation of approximately $1.9 million.

We estimate net income of $14.8 million to $16.5 million, earnings per share of $0.28 to $0.31, and an effective tax rate of about 42%. Adjusted EBITDA is estimated to range from $40.3 million to $43.2 million. Again, none of these estimates include acquisition-related expenses or any synergy savings.

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

Thank you, Jim. We believe that we are well-positioned to continue to take advantage of what we believe are historic secular and cyclical growth opportunities for the entire staffing industry for the next 3 to 5 years. While the entire On Assignment team is very proud of our performance, we remain focused on continuing our profitable growth of all of our businesses. 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 A.J. Rice.

Thanks, UBS. Hello everybody. First of all, maybe, you alluded to in a couple times in your comments, but maybe to just to ask directly, it doesn't sound like you feel like there's been much impact from the moderation in macro feelings out there about the economy. Can you just tell us whether you're seeing anything in your discussions with the underlying customer base as you ripple through the different segments that we should be aware of?

Yes, thanks A.J. Well, our results are quite solid for the second quarter and I think the third quarter guidance indicates that we see continued growth. It's a more challenging market out there and we're not representing that we are counter-cyclical or immune to the cyclicality of the business. But I think because of our focus on higher-end math and science skills, the distribution of our customers across large customer bases in small and medium enterprises that we're better positioned to continue to grow in an environment that's less than optimal and we are taking market share and that's because of the execution from our work force.

We're fortunate to be 94% North American centric and we're also fortunate that we have a broad diversification of service offerings as well as industries that we penetrate. Rand, do you want to offer anything specific to the IT marketplace?

I think, Peter, you summarized it well and I think we've already mentioned that it's the broad portfolio of accounts in the different industry segments and the breadth of skills we offer as a team, certainly within Apex as well. And we're taking market share, that's important, we just have to dig for it.

Yes. Okay. Thanks, that's great. And then maybe just follow-up on the comments about the IT Engineering seeing the strength in healthcare particularly and as well as in the Travel Nursing and other, you're talking about the benefit of the EMR meaningful use imperative. Is the strength on the IT side in healthcare related to that as well or is it sort of broader than that?

You know A.J., it's -- the strength is in both IT implementations as well as Travel Nursing to support replacement nurses as the fulltime workforce is taken off the floors or out of the ICUs to be trained on these new systems. So right now, the only true limitation on growth for us in those spaces is candidates. If we could find more people who have the level of experience in, for instance, Epic software and Cerner software, things like that, we could grow even faster than we are right now. And as we quoted you in our prepared remarks, we grew 126%. And on the Nursing side, some of these projects are being completed, we're seeing a kind of a bigger pipeline than we had historically seen on demand for replacement nurses.

Okay. All right, that's great. Thanks a lot.

Your next question comes from the line of Tobey Sommer.

Hi, this is Frank in for Tobey. I wanted to ask about the supply side for Oxford and Apex, what are you seeing out there in terms of your ability to get talented professionals in that IT segment?

You know Frank, it's a little bit tighter, but as you know from comments we've made previously that our companies thrive in a candidate-constrained business. We actually are better at recruitment and fulfillment than at times at sales. And so that's why I think you see us posting results that are stronger than some others, because we outperform typically in tight candidate-constrained marketplaces. With that said, you've seen the added headcount that we have made in our higher growth divisions. And so, we're supporting our recruiting efforts as much as we can early on, earlier than a lot of people.

Okay, great. And some quick numbers questions, kind of your thoughts for the year, CapEx tax rate and stock comp?

So that the fourth quarter probably is going to have a little bit higher CapEx than what we estimated for the third quarter. Tax rate right now for the year ought to be fairly close to what we estimated for the third quarter. And as far as the stock comp the fourth quarter ought to be similar to what we're estimating for the third quarter.

Okay, great. And finally on the Life Sciences side, you talked about exiting a low margin account and described a little bit of a challenging environment as we approach the back half of the year. Can you talk to us a little bit about any changes in demands or what you might want to see to get more comfort with an upturn in that business?

Yes. So as we said in our prepared remarks, demand has softened a little bit. As we've said often in the past, the Lab Support Group, which is part of the Life Sciences group, is probably the most directly correlated to GDP growth. Remember we do business with Avon and Frito Lay and people like that. And we refer to them as kind of a tip of the sphere. So, they saw the effects of a moderating US economy a little bit faster than others.

I would tell you right now if I was to split it, it's probably 50-50, 50 external and 50 internal execution. We can do a better job and the team is focused on doing a better job. As it relates to the permanent placement, as you know, we have a very high end retained search permanent placement business based out of London and the European markets have been a little bit more challenging for the multi-national pharmaceutical companies. But with that said, there are still plenty of areas to grow and we just got to work a little bit harder.

Your next question comes from the line of Jim Janesky.

Thank you. Rand, you made a comment that you saw stability in the financial services sector sequentially moving from the second to the third quarter. I'm wondering what you're doing that might be different? I mean, certainly there isn't stability in the financial services sector, I'm just wondering you think you're taking share or what prompted those comments?

Well, Peter, if I can, the -- I think there is a couple of things we look at. First of all, we have strong relationships with many of our clients in the financial sector, so we know what their schedule is for the projects that are upcoming. They've slipped a lot of projects from early in the year to late in the year, integration projects as well as new development projects. So we see that. We also see we've added some new accounts into our portfolio of business which we've worked really hard at over the last year at any rate, so we know that's coming online. And then the third I think is just getting more precision in the way we recruit and get ahead of their requirements, so we're first to the door if you will with the best quality candidate and that's an execution issue. And I think we're all very focused on it.

Jim, the only thing I would add to Rand's comments is I think we're fortunate that we were disciplined and while we had the privilege and the benefit of a lot of integration work with some of the major money center banks, we also didn't take our eye off the ball of making sure that we were going after what Rand just said, new accounts. So most of our integration work kind of ran through our system in the first quarter of 2012 and we're actually blessed to have some larger newer projects that are starting for banks that have engaged in some acquisition activity in 2011 that they're kicking off their integration programs now. So it's a blend of focus and discipline on new sales as well as having a healthier blend of historical revenues.

Okay. And Pete, can you give us an idea of your sequential expectations for the Allied and Nurse Travel segments? Can you remind me that the labor disruption of $5 million, almost $5.5 million, where does that fit in terms of the average that you have per quarter? And then if you could just comment on your expectation sequentially for each division?

Yes. So Jim that's probably a higher number than usual, but it's hard -- it's just so lumpy and that's why we always call it out.

Sure.

But I do need to point out that even though we call it out, you've got to recognize that sometimes, we forgo doing other work while we're doing that work at times. So it's good margin. It's a lot of revenue very quickly. The recruiting allows us to replenish our databases. So it's not a 100% incremental, but -- so that people can understand the lumpiness we always call it out quarter-to-quarter. But it was a little bit more than what we would have expected in one particular quarter. It's a hostile environment right now for the hospital systems right now and we expect continued activity in that arena. As for sequential growth, I don't think we -- we don't ever kind of forecast that, but what we can refer you to is we gave explicit kind of estimates of what the year-over-year growth rate would be for those divisions in our earnings press release.

Well, you said for healthcare, it was low-single digits, right, Pete?

Right. That's what we talked about for healthcare. So probably Allied is going to be a little bit stronger than Nurse Travel.

And the Nursing business has -- we'll talk about it on the third quarter of 2012 conference call. But there is some year-over-year comp comparable issues because there were some strike revenues in the fourth quarter of 2011.

Right. So probably Nurse Travel if you just look at it straight up it's going to be down a little over the third quarter of last year because of the strike revenue in the third quarter.

But if you do it on a excluding strike, excluding strike, it's still probably double digits.

Yes.

Okay. Thank you.

Yes.

Your next question comes from the line of Jeff Silber.

Thank you so much. I wanted to focus on your staffing consultants, I'm just curious if you think you'll be continuing to add them and if so in which divisions?

Jeff, I'm not trying to be overly arrogant, but we had the privilege of expanding our operating leverage and still adding over a 100 people in the legacy business and Apex did a fair amount of hiring. As long as we can keep growing our EBITDA margin, we're going to keep advancing our advantage over the competition and hiring and training people. So when the inevitable turn in GDP occurs, we are the first at the starting line.

Are there any specific divisions you think you might be a little bit more aggressive than others?

Well, we've been more aggressive. In the first and second quarter of this year, we were pretty aggressive on the physician side and we're starting to see a modest benefit from that and we've remained incredibly aggressive on the IT side.

Okay, great. That's helpful. And then just a couple of numbers related questions. In your prepared remarks I think it was on the Apex discussion you talked about the exposure to financial services in Apex. What is the exposure to financial services in Oxford?

They are a preferred customer. We prefer not to do business with them at Oxford because of the pricing constraints.

Okay. And how about in terms of European exposure in your Life Sciences business?

European exposure Life Sciences business I would say, Jim...

Yes. I mean, about 25% of the Life Sciences business is in Europe.

And, that's where the bulk of your European exposure is within the company?

That is correct. That and Oxford has about $30 million, $40 million as well. I would point out to you, Jeff, though when you break down the European exposure on the Life Sciences side that our clinical research business typically has guaranteed 12 month assignments. The Valesta business has more visibility than the lab's corp. business in the UK does.

Okay. And just so we can figure out on a pro forma basis, do you have roughly what Apex did last year in the third quarter in terms of revenues?

No, we're not quoting those numbers because as you know, we weren't part of that audit or anything like that, so I apologize, but we are not giving that information out.

Okay. I understand. And then finally, what share count should we be using in the third quarter?

$53 million I think is what we provided in the press release.

Oh, I am sorry. I must have missed that. Okay, great. Thanks so much.

Yes, no problem.

Your next question comes from the line of William Blair.

Hi, guys. Thanks. Just want to ask about Apex first the pricing environment. I apologize if you talked about the bill/pay spreads, but given -- especially in the financial services sector, is it just a weaker demand environment, are you seeing pressure, additional pressure on that bill/pay spread?

Rand, why don't you take a shot at that, please?

Yes. Well, first of all, when you look at Q2 for us over previous quarters our bill rates are up a bit. Our pay rates are up a little bit more. So, overall, we're seeing some increase in both levels but the pay rate area is the area we have to be carefully with. And I think that's just a result of the tightening of the IT labor market. But -- so we have to work that side. But we are seeing some uplift in the bill rates and I think a lot of clients are beginning to understand the shortage or the intentness in the skills, the shortage of skills in the labor market and understand if they want to get top talent they are going to have to make adjustments.

Tim, I would add there is probably a little bit more noise in the financial services market place than there was six months ago because there are certain competitors who had enormous amounts of work on integration that's gone away and they are struggling to replace it and their strategy is to win on price versus just on quality and long-term partnering. And that will clear itself up again shortly.

Okay. Thanks. And can you talk a little bit, I guess it probably impacts Apex the most, but just smaller and medium size customers versus larger customers. Are you seeing any differences in the trends right now in terms of the demand or margin trends?

Well, margins are for the legacy business and I will let Rand and/or Ted address Apex's characteristics, but for your legacy businesses we classically see a higher margin and less negotiation on the margin with the small medium size enterprise businesses than we do if we were having to go through HR procurement at a large organization. Ted or Randy, want to add a little color on Apex?

Yes. Peter, within Apex, we've actually seen this year a growth in our mid market accounts and the revenue associated with those accounts over last year. We had a tremendous last year as you all know, SIA reports that. And was driven really by what we call our top accounts or enterprise accounts. Our mid market accounts this year have jumped up and increased their growth rates and then margins on these accounts are typically higher than we get on the big accounts because the volume discounts or other things that the big accounts can negotiate with us. So, of course, we can bring that to the bottom line through productivity. So the answer to your question is our mid market accounts are growing and a little faster rate now than they did a year ago and our margins are stronger.

Tim McHugh Okay. And then my last question would -- for Peter on the healthcare business. You have talked in the last year or two about wanting to kind of revitalize the salesmanship or kind of the aggressiveness of that sales -- of the staffing consultants in that business. Can you just give updated thoughts where you are at relative to where you were a year ago? Are you pleased, is there a lot more to do or -- and just some thoughts on that?

Yes, I'll go through each division. I think Christian Rutherford has done an incredible job over at VISTA in getting greater performance awareness and intensity, and it's showing up quite nicely early on in his tenure, and we think that will continue. On the Allied side, I think that was the bright spot for Emmett McGrath. He has really done a great job, he is the divisional President in his regional leadership and really expanding the growth rate, and I think what was it, 27%, Jim, and really increasing the quality of the services, a lot more health information management revenues as a part of our overall revenue mix.

So we are quite pleased with what that team has done with growth rates as well as quality of revenue stream.

And then finally Katie Abby over at Nurse Travel has done a very good job. As you know, the Nurse Travel industry was impacted significantly. And then on top of that, there has been a lot of noise in the marketplace by certain larger organizations just acquiring revenues much more so than really focusing on long-term valued profitable relationships. And I think they have navigated it well both as to just absolute reported growth rates and picking where we do business. So I am pleased with the internal execution on the healthcare side and I think we pointed it out in our opening comments that were prepared.

Okay. One last one if I might on that Nursing side. You talked kind of in the last call that and I think couple of your competitors talked about kind of in February/March kind of there was a significant increase sequentially at least by month in that Nurse Travel business. Your comments here seem to suggest it's a little more choppy since then. Is that fair and is that just seasonal or is there, would you say...?

I would tell you I think that it's probably better sitting here today in July than it was in March or April. So I think it's cleared up a little bit.

Okay.

We are just saying the overall Nurse Travel market remains volatile because of a whole host of issues, whether it's the hospital systems themselves grappling with their struggles or the Obamacare or pricing strategies from other companies, etcetera.

Okay, thank you.

Yes.

(Operator Instructions). Your next question comes from the line of Mark Marcon.

Good afternoon and congratulations on the strong results. Wondering if you could, first of all, mention what was the disruption revenue in Nursing in Q3 of last year?

Jim, I think we gave that, yes. We have given that historically.

I have got it. Hang on.

[Multiple speakers] While he looks for that, what else do you have, Mark?

And then I was wondering you -- on the Apex side, what's the reaction among clients to the news, what you're hearing there? And similarly on Oxford with the high margins that you have, are you having any clients that are saying, we need to be part of a volume price deal or anything like that now?

Yes. So I'll go first and then I will Rand add to it, but it's been good. It was -- as we had expected and kind of thought through before we did the deal, there was a very little absolute crossover. Where there was, in many instances, we are working in different divisions or departments of a company. Out of thousands of client relationships, out of 8,000 people on billing, I would tell you there has only been a handful of where the customers said we want one single point of contact. And in that instance, Oxford has said fine. Apex, you take it and we will go someplace else. So that's the privilege of not having huge client concentration at Oxford, where we can thoughtfully look at who is best, who should retain the account and who is best to service the account. Rand?

I agree with you Peter. Those are exactly the right answers. The very little instances of perturbations or hiccups; occasionally ask for single point of contact, which Oxford and Apex got together and provided. I think the client understands and so do we, and appreciate that Oxford provides within the 13 skill areas a different skill, a higher level skill, if you will, candidate. And so, we're more seen as complementary in the client's eyes than anything else, and that works to both of our advantages.

Mark, there were $3.9 million in labor disruption revenue in the third quarter of 2011.

In Nurse Travel?

In Nurse Travel.

And then on the Apex side, when we think about there is a paragraph after the diluted shares outstanding guidance where we basically say we're expecting low teens growth for Apex for Q3, I know this is unaudited number, but roughly ballpark what's that against?

Again Mark, Jeff had asked the same question. Because we really weren't participants of the audit in 2011 for Apex we're just not giving pro forma or historical quarterly numbers. What I can tell you is the third and fourth quarter were two of the strongest quarters for Apex in 2011.

Okay. How should we think about Apex sequentially given the weekly revenue run rate?

They should be up on an absolute basis off of the second quarter. I'm not trying to be coy. Does that answer the question?

So what you're saying Peter is that the weekly revenue run rate in Q3 should be stronger than the weekly revenue run rate in Q2?

Correct.

Yes.

Okay, great. And so basically, whatever softness you're seeing on the financial services side is being more than offset with regards to the other areas?

Correct. So we believe we'll be up on an absolute dollar basis third over second, you know, full second quarter for Apex versus full third quarter for Apex. The financial services business we think may have plateaued as far as its declines. As Rand had said, six of the seven industry verticals actually grew 20% to offset the 7% decline in financial services.

Great. And when did you see the decline in financial services?

Well, I think we've said it twice in previous conversations that we've seen it most of 2012 and clearly one of our larger financial service customers had a hard stop on March 31, 2012 for all integration work.

Got it, got it. And so, what's your expectation with regards to the pricing environment in the nearer term just given what some of your other competitors have been indicating they would end up doing?

We think it's stable and actually as our mix moves away from financial services, we think there is a run for a slight little increase in the bill pay spreads, especially on the Apex side. With that said, as you know Mark, at times when you're in a tight labor environment there can be a disconnect between what the billable temp wants in pay increases and the willingness of a customer to agree to a bill rate increase, but we think that we're more tilted towards an expansion in the bill pay spread, because of the size of the customers we're servicing and the industries we're servicing versus a continued decline.

Great. And then on a couple of occasions like when Apex was announced and when it closed, you kind of gave full second half guidance and on a recent conference call you also mentioned where you though the debt would end up being. Do you think that those all still hold?

Yes, I mean good question. So absolutely on the debt side, I think we're pleased and maybe operating a little bit better than our expectations on cash generation. So we still hope to be below 3 times by the end of the year, which would be 79 basis points of debt retired in the first six months of a deal, which is great.

That's great.

On the second half year of the guidance, I think you can back into that the EBITDA that we gave for the third quarter pretty much puts us at or slightly above on the EBITDA target we gave you.

It does and that's part of the reason for asking the question is you didn't reiterate it and it looks like things are actually going better.

Yes. And then on the revenue side not to shy away from it, but I think the revenue might come in a little bit less than what the full second half of the year was projected. So I think very much like a lot of companies, we are going to have absolute growth. We are not going to have revenue declines, but the rate of growth may be a little bit less for the full second half of the year than what we thought a couple of months ago.

Yes.

In the past and continuing, we have tried to stay away from going out beyond one quarter. We gave you the back half so that people would have some sense of what the acquisition looked like. I think you have a better sense now of what the acquisition looks like. In the second quarter, we've given you some expectations with the third quarter, so it will give you a better sense for where the fourth quarter maybe sorts out as well.

Yes. And it sounds like on your revenue comment regarding the full back half that would basically be concentrated in terms of the variance, basically be concentrated in Life Sciences and Apex, correct?

That's correct. A little bit slower double-digit growth for Apex and lower growth than what we would have expected at Life Sciences.

All right. But it sounds like Life Sciences is stable, it's not like it's going to -- you don't anticipate it getting worse?

No. I think that it's going to be -- I think what we forecasted for the third quarter is probable.

Great. Terrific. Thank you.

Your next question comes from the line of Miss Ginocchio.

I think that's me. Hi, it's Paul Ginocchio from Deutsche Bank. Peter and Rand, this is just a question about recruiter tenure. Can you talk about trends maybe over the last three to six months or nine months, has recruiter tenure gone down, the overall activity to find talent, is the amount of time or cost gone up to produce a match in today's sort of scarcity versus a year ago? Thanks.

Right. I like your last name Paul. I'll go first and Rand, if you would follow-up, I'd would appreciate it. As it relates to our legacy businesses, as you know, most of our people are organically grown. And because our revenues are growing and people are making more money, so we are not seeing a lot of voluntary turnover, which is a good thing. And as -- and classically, we can show you when people get past kind of two years, they are making good money that they really can't replicate that easily elsewhere. So, our turnover in tenure rates are very, very good as we get past the time of two-year mark. So, as far as finding people, we are still blessed in an environment where when you look at the number of really bright, aggressive young people graduating from good universities and colleges that are having a hard time finding a job that we really are getting a good batch of people to select from, maybe even better than you think you would be able to select from when unemployment is like 4.5% for white collar. So, we are feeling pretty good right now as it relates to that, Paul. Rand, you want to talk about Apex?

Sure. And, Peter, let me clarify. When he says recruiter, Paul, you are referring to our internal recruiters, not the recruiting of outside candidates for these positions, correct?

Yes. I was referring to the former, not the latter.

Yes, our internal workforce.

No, no, for your external hires?

For external...

My apology, then Paul.

I wasn't very clear.

Rand, why don't you answer the question, but I was answering it as it relates to our internal workforce. So, Rand, why don't you go ahead and answer it the way he wanted it answered, which is finding billable temps? Is that right, Paul?

Correct.

Yes. We measure the time to recruit. So from the time we get direct to the time we make submittals and then finally get starts, we measure that and we work on trying to improve that. Automation helps improve that and we worked really hard at having electronic interface between us and the client account for both the retrieval of the rec as well as the middle, and it's actually improved, continue to improve over the years certainly and certainly over the last 12 months.

So our time to respond and our ability to respond has increased. And part of that is the automation, part of that is workforce management and part of that is what we call pipelining. So we work very hard at building pipelines of candidates and we refresh those pipelines so that when we do get a rec we can submit them quickly. And as you know, Paul, in IT, the workforce likes being contingent. There is a certain percentage of the IT labor force that likes being contingent. They feel like they can work on the unique and cool projects and its building those pipelines which helps us be faster.

And Paul just to back track, as it relates to our other businesses, I would tell you -- I just would reiterate that we kind of excel in tight labor markets and it is getting slightly more difficult to find the right resources, but we are adding additional internal recruiters and it hasn't inhibited our growth. As you saw, we grew the other businesses 28% year-over-year organically.

Thank you.

Thanks for both answers.

(Operator Instructions). There are no further questions at this time.

Thank you. We appreciate your attention and we look forward to reporting our third quarter results. Good bye everyone.

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