ASGN Inc (ASGN) 2012 Q3 法說會逐字稿

Good afternoon. My name is Shawday, and I will be your conference operator today. At this time, I would like to welcome everyone to the On Assignment third 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. Ed Pierce, you may begin your conference.

Thank you. Before we begin, I'd like to advise everyone that our presentation contains predictions, estimates, and other forward-looking statements. These include words such as forecast, estimate, project, expect, believe, and other 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'll now turn the call over to Peter Dameris, our CEO and President, who will provide an overview of our third quarter results. Peter?

Thank you, Ed, and good afternoon. I would like to welcome everyone to the On Assignment 2012 third quarter earnings conference call. With Ed and me today is Mike McGowan, COO of On Assignment and President of Oxford Global Resources, our high-end IT skill staffing group, and Jim Brill, our Chief Administrative Officer.

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 Michael. I will then turn the call over to Ed for a more detailed review and discussion of our third quarter financial performance and our estimates for the fourth quarter of 2012. We will then open the call up for questions. Before we start today's call, I would like to remind everyone that today's results include a full quarter of contribution from Apex.

Now on to our third quarter results. All markets we serve, including Nurse Travel and Physician Staffing, remained productive and stable during and exiting the quarter. Once again, we saw particularly strong growth and strength in the IT end markets. Our Healthcare groups continue to make solid progress in improving their operating performance, and in the third quarter we saw solid execution in our Physician Staffing group. In the Physician group, physician days sold increased 4% in the third quarter over last year's third quarter and 15% over last quarter.

During the third quarter, we also built on the increased end market demand in Nursing and Allied Healthcare. Based on days sold in the Physician group and our growth in professionals on billing in our Healthcare group, we believe double-digit revenue growth will be achieved in 2012 for those 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. As for our Life Science group, during the third quarter, revenue growth continued to be slightly more challenging, and we are expecting similar end market trends in that division for the remainder of the year.

Consolidated gross margin of 30.7% was down 292 basis points from the third quarter of 2011 primarily due to the inclusion of Apex's revenue, which carries a lower gross margin and less contribution as a percentage of total revenue from perm placement and conversion fees.

With the inclusion of Apex's revenues, permanent placement and conversion fees are now 1.9% of our total third quarter revenues. For those of you who are not familiar with our company, Apex generates approximately 1% of total revenue from permanent 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 of our divisions. Our adjusted EBITDA margin was 11.7% in the third quarter up from 11.2% in the third quarter of 2011.

Regarding industry dynamics, during and exiting the third quarter, secular trends continued to permit temporary labor to see greater growth prospects than full-time labor. While the macroeconomic environment in North America, where we derive 95% of our total revenues, has become slightly more challenging, we continue to see a classical cyclical recovery in professional staffing. More specifically, we have not seen an appreciable change in demand trends in the markets we serve from those that we saw at the beginning of the third quarter. As for the financial services sector, although demand has slowed for the entire industry from the rate of growth in 2011, recently, we have seen a slight stronger demand from our clients in that sector.

Ed will give you our fourth quarter financial forecast later in this call, but based on our current weekly revenues and the normal seasonal patterns that include holidays and customer facility closures, we do not see an appreciable change in demand for our services from our customers. With that said, uncertainty regarding the economy is somewhat heightened in the fourth quarter due to the elections, resolution of the fiscal cliff, and a perceived slowdown in economic activity. This uncertainty could cause customers to delay projects and/or urge contractors or employees to take more time off during the holidays.

Our operating performance in the third quarter of 2012 and our guidance for the fourth quarter of this year demonstrates that our business model and 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 our nonrevenue generating cost and expanding our service offerings, we were able to grow our adjusted EBITDA about twice as fast as our revenues from the third quarter of 2011 on a pro forma basis. We believe this operating leverage trend will continue to allow us to grow adjusted EBITDA faster than revenues for the remainder of 2012 and into the future.

As for the actions we took to sustain our positive revenue growth rates, we substantially added to the number of recruiters and sales personnel that we employed. In the third quarter of 2012, we averaged 1,556 recruiters and sales personnel, of which 906 were in the legacy business. This compares to 816 in the legacy business in the third quarter of 2011.

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

Revenues in the third quarter of $388.3 million increased 139% over the third quarter of 2011 and 37% sequentially. Net income was $17.4 million or $0.33 per diluted share. Revenues generated outside the United States was $19.7 million or 5.1% of consolidated revenues in the third quarter versus $17.6 million or 10.8% in the third quarter of 2011.

Consolidated gross margin in the third quarter was 30.7% down from 33.6% in the third quarter of 2011, again, primarily from the inclusion of Apex revenues which carry a lower gross margin. Adjusted EBITDA was $45.5 million or 11.7% of revenue for the quarter, up from $18.2 million or 11.2% of revenue in the third quarter of 2011.

Exiting the quarter, demand for our services remains stable in all divisions. Our weekly assignment revenue, which excludes conversion, billable expenses, and direct placement revenues, averaged $29.8 million for the last two weeks. This is up 14% from the same period in 2011.

Integration, coordination, and cash generation related to the Apex acquisition continues to be at or above our expectations.

Ed 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 $27.5 million in the third quarter and our leverage is now under 4 times trailing 12-month adjusted EBITDA.

Before turning the call over to Mike McGowan to discuss our legacy groups, I'm going to briefly review Apex. At Apex, our IT staffing and services offering serving the full spectrum of IT resource needs for Fortune 1000 and mid-tier businesses, revenue for the quarter was $202.7 million, an all-time high, and up 14% from the same period in the prior year and up 4% sequentially over the prior quarter.

During and exiting the quarter, we saw our client requisition flow increase nicely over the prior year and 4% over the prior quarter. We attribute this growth to positive trends in our industries. Specifically, in our seven industry verticals which you heard us describe in last quarter's conference call, we experienced our highest sequential quarterly growth in healthcare, technology, and business services and modest growth in communications, consumer and industrials, and financial services businesses. Only our aerospace and defense business had a negative growth number in the quarter, but September numbers showed upward movement in that industry vertical, and business volume and performance is up.

Gross margin for the quarter was 28.1%, which is up sequentially from the margin we reported in the prior quarter by 70 basis points. We attribute this increase in gross margin primarily to an increase in permanent placement revenue as a percentage of total revenue, which moved up from 1% of revenue in Q2 2012 to 1.3% of revenue in this quarter. Our average bill rate was also up slightly from the prior quarter.

The conversion of gross margin to the bottom line was the highest rate in the history of our business. Our gross profit per staffing consultant was $88,000 and was up sequentially and year over year and our fill ratios were up both on a sequential and year-over-year basis. The combined productivity of our sales and delivery teams continues to contribute to increasing operating profit margins.

As we ended Q3 and leading into the first few weeks of the fourth quarter, we have seen some acceleration in requisition flow. The opportunities we see from our client portfolio are solid in all industry verticals, and we remain positive on the demand trends within the IT staffing and service market.

I will now turn the call over to Mike McGowan, Chief Operating Officer of On Assignment and President of Oxford Global Resources, who will review the operations of our legacy groups. Michael?

Thanks, Peter. Let me first address Oxford Global Resources where we had another solid quarter. Revenues for the third quarter of 2012 were $88.1 million, a 25.7% increase over the third quarter of 2011. This followed year-over-year quarterly increases for the four previous quarters of 34.9%, 31%, 31.4%, and 47.7%, respectively. The increase in year-over-year quarterly revenue was due to increasing bill rates and a higher demand for consultant labor across all of our business units. Although revenue was flat from the second quarter due to the slowdown in August, demand [picked] back up again in September and continues to be strong into October.

Our gross margin for the third quarter of 2012 remained strong at 35.5% compared to 35.8% for the same period last year. As we've mentioned on previous calls, we believe that Oxford's bill rate and gross margins continue to be among the highest in the staffing industry.

Our Healthcare IT business continues to be Oxford's fastest growing area. Total revenue in Healthcare IT was $11.5 million for the third quarter of 2012 compared to $5.8 million in the third quarter of 2011, a 99% increase. Demand for our IT consultants was strong in the third quarter in financial services, retail trade, and durable goods and slowed in food manufacturing and pharmaceuticals.

On the engineering side, companies in the high tech equipment, machinery manufacturing, and pharmaceutical industries continued to add consultants while demand declined slightly in medical equipment, appliance, and electronic product manufacturing firms.

Over the previous ten quarters, we have seen progressive highs in terms of consultants on assignment, and this trend continued into the third quarter of 2012. Billable consultants hit an all-time high for Oxford during the quarter, surpassing the previous mark set during the second quarter. In fact, the third quarter of 2012 was the most productive third quarter on record in terms new assignments per day. We expect this trend to continue through the fourth quarter and into 2013, and due to this and our strong growth over the past ten quarters, we continue to selectively add staffing consultants to our Oxford International, Oxford and Associates, Oxford Healthcare IT, and Centerpoint divisions.

The Oxford Index, our forward-looking quarterly survey, suggests demand for our services will continue to be strong in the fourth quarter of 2012 across all of our business units. This is consistent with our actual results in September, which indicate clients are increasing their temporary hiring.

Finally, in their September report, Staffing Industry Analysts estimates the US IT staffing market will attain an all-time high of $24.9 billion in 2013. All these trends bode well for the Technology segment of our business, including both Apex and Oxford.

Let me turn now to our Life Sciences segment. Revenue for the third quarter of 2012 was $40.6 million, which represents a slight increase over the prior quarter and a 2.8% decline year over year. Although demand remained fairly stable, meaningful growth for the Life Science segment was constrained by the European economic climate, foreign exchange rates, a decline in retain search fees and a slowing demand with historically active client engagements.

The year-over-year decline is also due to the loss of revenues associated with the voluntary termination of a low-margin client engagement, which we had previously discussed and [was active] throughout the prior year.

Gross margin for the Life Science segment was 34.4%, which represents a 36 basis point sequential and a 58 basis point year-over-year increase. The sequential increase in gross margin was the result of a decrease in payroll taxes, workers' compensation insurance expenses, certain contracts or related expenses and a nonrecurring increase in the Belgium tax subsidies. These savings were partially offset by increases in holiday pay and bill/pay margin contraction. The year-over-year increase in gross margin was attributable to similar factors.

Moving on to the fourth quarter of 2012, despite economic challenges in Europe and some uncertainty in the US, demand for contract, contingent, and retained services in most Life Sciences end markets has improved. Early in the fourth quarter, we are encouraged with the level of contract and permanent orders and the number of weekly contract assignments as well as the level of permanent placement activity. However, normal fourth quarter seasonal factors will constrain sequential revenue growth on an absolute dollar basis.

Now I'd like to turn to Allied Healthcare. Revenues for the Allied Healthcare division were $15.6 million, which represents a 13.8% sequential increase and a 32.9% increase year over year. We attribute the sequential and year-over-year revenue increase to the improved operating environment, improved operational execution, and market share expansion.

Allied Healthcare gross margin for the quarter was 32.5%, which represents a 52 basis point sequential and a 77 basis point year-over-year increase. The sequential change in gross margin was due to a decrease in payroll taxes, workers' comp insurance expenses, and certain contractor-related expenses, which were partially offset by bill/pay margin contraction and lower perm and conversion fees as a percent of our total revenues. The year-over-year increase was attributable to similar factors and an increase in bill/pay margin.

For the fourth quarter of 2012, the Healthcare markets in which we operate continue to show signs of improvement. Early in the fourth quarter, we are encouraged with the level of contract and permanent placement orders, the number of weekly contract assignments, and permanent placement activity. The main challenges we face in the quarter are fewer billable days, normal seasonal factors, economic issues, and for similar reasons cited earlier. Based on our current run rate and the pipeline of orders that we have, we expect revenues to be seasonally down on an absolute dollar basis from the third quarter.

For our Physician Staffing segment, VISTA, revenue in the third quarter was $27.5 million, which represents 9.7% sequential growth. On a year-over-year basis, revenue increased 17.5% overall and 11.9% excluding the acquisition of HCP. Conversion and permanent placement revenue was up 87% sequentially and up 27% from the third quarter last year.

Gross margin in the third quarter was 30.5%, up 29 basis points sequentially, for On Assignment revenues only in the locums business, excluding a $500,000 favorable adjustment to our medical malpractice insurance expense in the second quarter of 2012. The year-over-year drop in gross margin of 287 basis points was primarily due to a $500,000 favorable adjustment to the discount rate applied to our medical malpractice insurance reserve calculation during the third quarter of last year and the acquisition of HCP, which does more business with lower gross margin government customers.

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

In the third quarter, top ten locum tenens client revenues represented 19% of our overall revenues. VISTA's legacy third quarter locum tenens average bill rate was up 4% year over year with no change sequentially. In the third quarter, as Peter mentioned, our sold days increased by 4% year over year and were up 15% sequentially, which indicates continued growing 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.

At our Nurse Travel group this quarter, we improved our top line performance by addressing market needs related to both labor disruption and transitions to electronic medical records. For the quarter, Nurse Travel revenue of $13.8 million was down sequentially 18% and down 10.2% year over year. Gross margin was 24.8%, up from 24.3% last year in the third quarter but down from 26.3% last quarter. This quarter includes $1.7 million from labor disruption staffing and the third quarter of 2011 included $3.9 million from labor disruption staffing.

While this is an overall quarterly decline in revenue, adjusting for the labor disruption, the third quarter revenue grew 5.8% compared to a year ago and sequentially. The adjusted gross margin of 24% represents a 47 basis point year-over-year increase and is flat sequentially. We have seen the number of travelers on assignment increase by 8% sequentially and by 10% year over year. We have also seen the number of billed clients increase 3% sequentially and 12% year over year.

I'll now turn the call over to Ed Pierce. Ed?

Thanks, Mike. As Peter mentioned, net income for the quarter was $17.4 million or $0.33 per share on record revenues of $388.3 million. This performance was driven by the inclusion of Apex Systems for a full quarter and the 14.3% combined year-over-year revenue growth rate of the other business segments. Apex accounted for $202.7 million or 52.2% of total revenues for the quarter compared with $98.5 million or 34.8% of revenues in the preceding quarter.

There were approximately 62.5 billing days in the quarter, 1 less than the preceding quarter, and 1.5 less than the third quarter of 2011. Our consolidated average bill rate for the quarter was down approximately 3% year over year primarily due to the inclusion of Apex whose average billing rate is lower than the combined average billing rate for the other business segments. The consolidated bill/pay spread also contracted year over year as Apex operates at a lower spread than our other business segments.

While Apex's gross margins are lower, its operating margins are comparable to our other business units due to its scale and the efficiency of its operating model.

Conversion and direct hire revenues for the quarter were $7.4 million or 1.9% of total revenues down from 2.1% in the preceding quarter and 3% of revenues in the third quarter of 2011. Foreign currency translation adversely affected revenues $2.3 million year over year and $400,000 sequentially.

Net income was $17.4 million or $0.33 per share, up from $8.5 million or $0.19 per share in the preceding quarter excluding acquisition-related costs of $0.8 million in Q3 and $6.6 million in Q2 and the reduction in the HCP earn-out obligation. Net income for the quarter was $17.5 million or $0.33 per share compared with $12 million or $0.26 per share for the preceding quarter.

SG&A expenses for the quarter were $82.5 million or 21.3% of revenues, up from $69.3 million or 24.5% of revenues last quarter. Virtually all the increase related to the inclusion of Apex for a full quarter. Excluding acquisition-related costs and the reduction in the HCP earn-out obligations mentioned earlier, SG&A expenses for the quarter were $82.8 million or 21.3% of revenues compared with $63.2 million or 22.4% of revenues in Q2. This reflects a significant improvement in operating efficiency.

EBITDA for the quarter was $41.6 million. Excluding equity-based compensation expense and acquisition-related costs, adjusted EBITDA was $45.5 million or $11.7% of revenues, up from $32.3 million or 11.4% of revenues in Q2. We ended the quarter with cash and cash equivalents of $13.9 million and during the quarter paid down our debt by $27.5 million.

Our leverage ratio, which is total debt to 12 months trailing adjusted EBITDA, was 2.96 at quarter end down from 3.79 at the close of the Apex acquisition.

Accounts receivable were $248 million at quarter end and days sales outstanding were 58 versus 57 days last quarter.

With respect to third quarter productivity, we averaged 1,556 staffing consultants and gross profit per staffing consultant was $76,000 up from $59,000 in the second quarter and $67,000 in the third quarter of 2011. This increase in productivity was primarily the result of including Apex for a full quarter.

Finally, a few comments on our financial estimates for the fourth quarter. Based on the first three weeks of October, considering normal, seasonal trends, one less billing day in the fourth than the third, and estimated revenue supporting a customer that is anticipating a likely labor disruption, we estimate revenues of $385 million to $389 million, gross margin of 30.1% to 30.4%, net income of $13.3 million to $15.4 million, earnings per share of $0.25 to $0.29, and adjusted EBITDA of $37.1 million to $40.8 million. These estimates do not include any acquisition-related cost or synergy savings.

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

Thanks, Ed. We believe that we are well positioned to continue 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 continuing to profitably grow our business. We'd 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 to participants for questions. Operator?

(Operator Instructions) Your first question comes from Kelly Metzler of Bank of America Merrill Lynch.

Hi. Thank you. This is Kelly Metzler for Sara Gubins. Gross margin for Apex was up nicely sequentially which you attributed to more permanent placement. Is this a trend that you expect to continue going forward?

Yes. I'll address part of the question then turn the other part over to Ed. Our focus has always been on stable to expanding gross margins. I wouldn't forecast that the margin would go up considerably from here, but we do believe that there's a little bit of room. Ed'll break out for you what allowed us to grow at 70 basis points from the prior quarter. Ed?

There are two pieces. One is an improvement in the permanent placement mix. In the second quarter it was 1% of total revenues. This quarter it was 1.3%. The other is the contractor gross margin increased sequentially by about 40 basis points, so it's almost evenly split between the two.

Thanks. And just to follow up, what sort of trends are you seeing in bill/pay spreads? Are there any particular segments that stand out?

You know, the higher you go on the skill set, the better negotiating power we have with the customer as it relates to bill/pay spreads. I will tell you that the mid-tier skill sets, Life Sciences, and in Nursing, it's pretty tight on demands for pay rates, and so there's not a lot of negotiating power right now because unemployment rates are pretty low in most of the skill sets that we have.

Great. Thank you.

Your next question comes from Edward Caso with Wells Fargo Securities.

Hi. Good evening. Thanks for taking my call. Question is around the government market or the companies that support the federal and state government market. Just can you remind me how much work you do into that sector and what you might be seeing given all the sequestration noise? Thanks.

So, Ed, we'll have to get back to you on a precise percentage, but it's single digits, and as we said in our prepared remarks, there was a noticeable slowdown with some of the prime government contractors that we sub to, but that's starting to -- that started to lighten up a little bit, the constraints started to lighten up a little bit in September and in October. But we're not expecting the same type of purchasing behavior in 2013 as we did in let's say 2009 or 2010.

The Apex, I think you indicated it was 14% year-over-year growth in Q3. My memory is that the growth rates used to be meaningfully above that. Is there a transition that brings you down to these new levels or is this just sort of the new normal level here for Apex, sort of low teens? Is this what we should be thinking about?

Your memory's correct. I think in 2011 their growth rate was about 29%. And the growth rate at around 14% this year is just a reflection of what the entire IT staffing industry is facing, which is a dramatic slowdown in spending by financial services, large money center banks. At its peak, large money center bank IT staffing work represented 29% of total revenues for Apex, and that number is below 20% right now. So we've done -- we've taken advantage of the slowdown in financial services to build up some of our other industry verticals like healthcare and IT.

But, the financial services industry will always be one of the most important end markets for us because they're the biggest spenders and earliest adopters. We're still growing about 400 basis points faster than the stated industry growth rate. And we're just -- we're getting what we think is real demand out of the marketplace currently and not getting distracted. And we firmly believe when you get normalized GDP growth and normalized spending from the financial services industry, which is so important to IT staffing, that we can grow 20%-plus again.

Quick question for Ed. The 25% to 29% EPS in Q4, what does the math work out to then being -- what's the 2012 estimate on that equivalent basis, the first [call] equivalent number?

Let us do that for you real quick and get that to you as they pull it off of the spreadsheet and answer some more questions, Ed.

Great. Thank you.

Your next question comes from Tim McHugh with William Blair & Company.

Yes, Peter, I just wanted to follow up on something you were just talking about, which is the financial services sector and some of the challenges there. It sounds like based on your comments you feel better about that. So, I was wondering if you could just give a little more color on if you think that's a market turn, if you think that's internal execution, and kind of where you're seeing better demand for Apex out of the financial services sector during the last couple months.

Yes, some of it is specific to us. But I do think that some of the banks that had stalled on Dodd-Frank are really starting to look hard at the business intelligence data mining initiative they have to engage in to appropriately represent the value of the assets that they hold. As it relates to other things that have allowed us to have a little bit faster demand than say the first and second quarter, we do have some customers that may be specific to our company that aren't shared with other publicly traded IT staffing companies that engaged in acquisition activity later in the cycle that are going through integration work now versus -- for instance, to give you like JPMorgan Chase and Bear Stearns, which were at the beginning of the cycle. But we're seeing a slight improvement -- and it's stability.

Okay. Good. And then on Oxford, Mike, you made the comment about August being slower. Was that just normal, seasonal slowdown or was there something you saw different from clients as you got late in the quarter?

Well, it was a couple things. One is we had a very strong second quarter, so that was one thing. Our perm revenue actually from second quarter down to the third was down by $0.5 million. And then I had mentioned we actually had an all-time high in terms of consultants on assignment, but when we look at actually hours worked, not only here in the United States, but especially in Europe, was considerably down just in the number of hours worked. So, some of that same seasonal stuff, but really generally not much more than that. As we've seen -- as I mentioned, September started increasing and October now is increasing as well. So, nothing really out of the ordinary.

Okay. Great. And then last just on the integration of Apex with Oxford, can you talk about any crossover synergies you've seen? I mean, can you quantify it at all or give any additional color on how you might -- the two businesses might be benefitting from each other at this point?

No, it's actually playing out along the lines we expected. We are starting to see some better coordination on some perm placement where Apex has been requested to do it and Oxford's acting as the fulfillment center. Actually, we're seeing a lot of really productive activity out of the Life Science customer base as much as we're seeing opportunities to jointly bid on work, Oxford and Apex together, where we give a broader spectrum of service offerings. So, it's going along the lines we expected.

Would we see that more in Apex revenue or Oxford's or kind of both at this point?

You'll see it on the perm side at Oxford and on the contract assignment only revenue side at Apex.

Okay. Great. Thank you.

And, Operator, before we take the next call, I think Ed Pierce has the answer for Ed Caso.

Ed, as it relates to projected EPS for the full year, it would be at the low end of what we're projecting for Q4, $0.93, and at the high end $0.97.

Your next question comes from the line of Tobey Sommer with SunTrust.

Thank you. I was wondering if you could comment on what assignment links are like as -- on the new orders over the last couple months. Any changes there in terms of visibility? And I ask that in the context of some of the dimensions of uncertainty that you cited in your prepared remarks.

Thanks, Tobey. We really have not seen any appreciable change in the length of assignment. I'll give you one caveat. One large money center bank has the actual assignment ending up still being around six months, but they're kind of giving themselves the flexibility for it to be a three-month assignment and then they renew it. But as an industry trend or a customer trend, we haven't seen any change.

Okay. Thank you. Just a numbers question that I may have missed. Perm as a percentage of revenue was 1.3% in the quarter?

For Apex it was.

Oh, for Apex? Do you have a consolidated number?

Yes.

1.9.

And how does that compare to either the year ago or the prior quarter, whichever you think is the relevant comparison?

Well, in the prior quarter, it was 2.1% and the same quarter in the prior year it was 3%.

Yes, so excuse me, Tobey. The third quarter 2011 had no Apex revenue in it.

Right. Right.

So, I think really it's going to take a while to get apples to apples comparisons because even the second quarter of 2012 only had six weeks of Apex revenue in it, and that's why the 2.1 was slightly higher.

Understood. Just a -- comment about how you plan to perhaps strategically drive a slightly greater percentage of revenue from perm. The organizational structure that you have now across the different segments, are you operating with a dedicated staff or are staff consultants performing perm assignments and filling them on an ad hoc basis?

It's on a case-by-case basis. We have dedicated teams for Physician Staffing, for IT, and Clinical Research. We, on a highly restricted basis, allow our Life Science and Allied Travel -- our Allied Healthcare groups to do it with -- the same recruiter doing contract can do perm.

Okay, and then in order to get up to a 4% or 5% threshold over time, does that require a change to the organizational structure and more emphasis on dedicated teams or can you do it as-is?

We would have to do more on the IT side.

Okay. Do you have an expectation for the disruption, labor disruption revenue in the fourth quarter? And I think -- I guess there's something planned for the first of November at this point that I see.

Yes, it's within that range that we usually have, somewhere over $1 million for this one client for a one-week period.

Okay. Thank you very much. I'll get back into queue.

Your next question comes from the line of A.J. Rice with UBS.

Hello, everybody. A couple questions, if I could ask. First of all, I understand the commentary around the economy and how that ripples through the business lines. I guess I just want to step back and wonder is the message that because of that uncertainty that's reflected in the guidance that you're giving us to the fourth quarter or is the message about those comments that there's maybe a little more volatility around the guidance than normal because of the economic uncertainty? I guess just flesh that out a little more for us.

Thank you, A.J. So we think based on a month completed, so to speak, and what we see on our booked business that the numbers we give you we have visibility into. What we don't have visibility into is if the elections go a particular way or the rhetoric about the fiscal cliff gets incredibly heated, that a large number of large corporations say you know what, we're shutting down for 2012 and we're telling our full-time employees to flush their PTO and we're telling contractors we're going to finish these projects in 2013, but we're not incurring any more expense in 2012. And we don't have -- we don't expect that, but if that occurred, that's not baked into our estimates. Does that make sense to you?

That makes sense. That's good clarification. Obviously, the leverage target came down nicely in the -- I mean the leverage came down nicely in the quarter. Can you just remind us on what your goal for that leverage ratio is? And also comment, if you would, about getting back on the buyback trail at some point, when that might make sense.

Right. So, the way I would respond to that is we thought that we could get to about 3 times leverage by the end of 2012. We got to that by the end of the third quarter. We think maybe if trends continue the way we expect, maybe we can get around 2.75 by the end of 2012 and maybe to 2.5 by sometime in 2013. And at that point, 2.5 times leverage, based on our cash generation capabilities, based on the cost of our debt being under around 4.6%, which we'll probably at that point want to refinance, we need to seriously look at what's the best for our shareholders and either to return capital to shareholders or to look at some appropriate strategic niche acquisitions. But paying the debt down to zero just doesn't make a lot of sense based on our cash generation capabilities and the cost of debt.

Okay. These are in the smaller divisions, but on the Nurse Travel side you mentioned the EMRs transitions that a lot of hospitals are doing, and that's helping demand. Can you sort of give us a flavor for how big that is at this point and where you think we are in terms of is that something that'll continue to be a tailwind for 2013 or are we sort of seeing that peak out here or any thoughts along those lines?

No, I think you can pretty much rely on it for 2013. I don't want to go out much farther than that, and it typically will be something like 20 to 40 nurses per project.

And if you were to look at your entire business at this point, do you -- is it moving the needle on the entire business?

On the growth rate of the Nurse Travel group, yes.

Yes. Okay. And then finally just the strength in the Allied business year-to-year sequentially, any interesting thing to cull out there? I know that's a small unit for you, but anything interesting?

It's actually bigger than our Nursing group now, and --

Right.

-- it's just -- actually, the end market dynamics of Allied Healthcare are healthier than the Nurse end market. There are a lot more points of purchase and it's projected to be a $4 billion market versus a $1.5 billion market, and we're just seeing a nice recovery from a very, very steep fall off. I think the Allied Healthcare market in 2008 was $8.8 billion and it dropped to $4 billion in 2011 or 2010, so there's a lot of room to grow. But we're seeing a lot more consumption of Healthcare services outside of the acute care hospital setting.

Okay. All right. Thanks a lot.

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

Thank you so much. Peter, you mentioned earlier about the low unemployment rate in some of your end markets. I'm just wondering is there an issue in terms of finding supply? Is it getting worse? Also, the same question about your staffing consultants. How easy is it to find staffing consultants these days? Thanks.

So, it's easier to find internal staff than it is billable temps, especially with our profile right now. We're having a good run of it (inaudible.) And our business model, Jeff, which is we hire a lot of people straight out of college with no experience and do some intense training. So we're hiring very attractive people both on academics and competitive spirit. They played for football, baseball, lacrosse teams at Division 2 and 3A schools and that's continuing to go very well for us. As it relates to technical resources, I'd say that it's tightened somewhat.

In any specific one of your verticals, is it getting worse?

I would tell you across the board.

Across the board it's tightening. Okay. Great. Just a couple numbers questions. I know you're not going out to 2013, but roughly what should we expect for capital spending next year?

I think for this year we're talking about roughly $13 million to $14 million in total.

It's kind of less than 1% of total revenue.

Okay, that's fine. And then, Eddie, you mentioned in your remarks something about an HCP earn-out. I missed that. Can you just go through the dynamics of that?

The HCP earn-out under G- --

Are we talking about the acquisition accounting rules (multiple speakers) every quarter?

We re-measure the earn-outs obligations every reporting period. And just based on the current trends, we determined it was appropriate to reduce that obligation by roughly $1 million in the quarter, and net of tax that's roughly $620,000.

All right, and when is that earn-out to be paid?

In -- well, it's -- the measurement period is from August 1 of this year until July 31 of next year, so it would be paid probably sometime in September, maybe, the following year or September of 2013.

It's a small earn-out. To give you a little more perspective about it -- not accounting treatment, but, Jeff, classically when you have these conversations with entrepreneurs, they always are very optimistic about how much they can grow. And so in this particular-earn out, there were kind of two stages to the earn-out -- what I thought was a realistic at or slightly higher than industry growth rate and then there was a second tier to it, which was if they continue to grow what was their historical growth rate, which was twice the industry growth rate. And we said if you can continue to do it, we'll pay you. Well, they're growing closer to industry growth rates than their historical growth rate, which means they're probably not going to hit the second tier.

The full amount.

For the full amount. That's right.

We're still assuming that there's going to be an earn-out payment.

Sure.

Did I explain that --

Yes, no, no. I got it. I understand. It's okay. All right. Thanks so much.

Your next question comes from Ato Garrett from Deutsche Bank.

Good afternoon. I wanted to go back to IT staffing and trends that you've seen. You've already spoken to the trends within financial services clients. I was wondering is there anything else that might be happening there, either by client vertical or another way to slice that apart?

There's nothing different in the financial service vertical than what we've described. We are continuing to see a nice, robust growth in the healthcare vertical. And then we're seeing in the consumer cyclicals a little fluctuation based on how their fortunes on revenue growth are going. But it's pretty much a steady state. As we said in our prepared remarks, Ato, we're not really seeing a dramatic difference in purchasing behavior in the fourth quarter than what we saw at the beginning of the third.

Great. Thank you.

Your next question comes from Mark [McKinney] with R.W. Baird.

Hey, it's Mark Marcon. Hey, Peter and Eddie. Can you talk about Apex just in terms of the number of billable days, the comparison relative to a year ago? Is that going to be roughly the same?

Let us look through our spreadsheets. It may be a day or day and a half down.

The reason why I'm asking is because you went from 12.8% growth in the second quarter to 14% growth but you're guiding to 10%. And it sounded like things were getting a little bit better in financial services, so I was just wondering if it was a bill rate difference -- I mean a billable day difference.

Well, we did say there's 1.5 fewer days in the fourth versus the third.

Right. I'm talking about year over year.

Year-over-year I think it's in the fourth -- 1.5. In the fourth, it's --

It's 2.5.

Yes, it's actually about the same this year as it was last year. Apex, Mark, to remind you, they were on a 4-4-5 before we purchased them, so we'll need to look at what Apex did last year. That's a different world because of the 4-4-5 versus the calendar.

Got it. Got it. Okay, that -- and then in terms of Oxford, it looks like we're going to see some slight acceleration based on the way the guidance is worded. Are there particular areas or are you thinking that maybe the bill rates are going to improve?

No, as Peter mentioned, the biggest increase which we commented was really in the Healthcare IT market. We're continuing to see growth and expansion there and then also as I commented, in some of the specific industries within the engineering group. A lot of regulatory and compliance stuff, we're doing a lot more. In fact, even in some ways we look a little closer to the Apex model. We have 10 or 15 consultants on a particular client project versus the onesie-twosies that you're used to hearing us talk about. So, those two areas are probably our biggest growth areas right now.

Mike, on top of it, we're just not budgeting or forecasting to see a monthly performance like August.

Correct.

In the fourth quarter.

Correct.

So we -- our guidance does assume that even though there are fewer billable days that Oxford will be up on an absolute dollar basis fourth over third.

Correct.

Great. And then in terms of the SG&A guidance, what's the major area of the increase in sequential spending for the fourth quarter relative to the third?

Mark, bear in mind there were some one-time items like the HCP obligation reduction.

Right.

Okay, so you're not going to have anything similar to that.

Yes.

Going forward.

And we do have some increased expenses as we broaden the senior management team and things like that.

In addition, there are normal seasonal increases for things like annual audit fees, so that sort of thing.

Just how the cycle spin spreads.

Right.

Okay. Yes, I was just looking at it relative -- but there's no -- aside from those sort of normal things, there's nothing really major that's occurring?

No.

No.

Okay. Great. Thank you.

Your next question comes from Randy Reece with Avondale Partners.

Good afternoon. I don't know if there's more hype than reality here, but I've been asked frequently by investors about these online contractor staffing businesses that are charging in the neighborhood of 8% to 15% markups to provide 1099 and payroll contractors on kind of a centralized, online delivery method. And I was wondering if you have seen this out in the competitive marketplace at all, if customers have said anything to you about it, and what you think of the business model.

The answer is no, and we're just -- we don't complete with clearinghouses, Randy. So, it just -- we have not seen that. We haven't lost a single piece of business to a clearinghouse.

Is it accurate to say that there's a fundamental difference here in recruiting for yourself versus going to somebody who can recruit for you?

We do a lot of [passive] recruiting, a lot of -- especially on people who can legitimately qualify as an independent contractor. Those people are even harder to discover than somebody that'll work through you as a W-2.

Do you believe that your business has gotten -- at least gotten some staffing business in areas that maybe used to be filled with independent contractors because of employers' increasing reticence about the legal implications of using independent contractors?

The answer is absolutely yes, specifically in the clinical research side. It used to be that a Ph. D. could go directly as an independent as a medical [writer] to one of the major pharmaceutical companies. And legal and HR have just shut them down and said I don't care how valuable this resource is, we're not taking that risk of an IRS audit for misclassification. So, if you want that person, you're going to either have to pay more for them or you're going to have to find them in a place where we're not bearing the risk for misclassification.

So we think that that's one of the big secular drivers as the US government continues to look for revenue. The biggest place the US government can increase their revenues without increasing taxes is narrowing the classification and having more people working as W-2s versus independents, because there's a big number of people in today's society that continue to work in a nonemployee classification status. And that's a big driver for the entire staffing industry.

Very good. Thank you very much.

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

Thanks. Just a couple quick follow-ups here. The staffing consultant sequential growth in the third quarter was pretty good, a little under 3%. Do you anticipate continuing to add to those ranks in the fourth quarter?

You know, Tobey, as long as we continue to see appropriate demand and it's not dilutive to our targeted operating leverage, the answer is yes.

Okay. And in the IT world, I was wondering if you've evaluated taking on more solutions work and actually developing a bench type business.

The answer's hell no.

Thank you very much.

We will -- you know, we will look at benched employees to do staff augmentation on healthcare IT just because of how tight the inventory is. But trying to compete with Accenture or HP on a fixed fee basis and having to do solutions determination and avoid scope creep, we don't have to do that and we're not going to.

Okay. Thank you, Peter.

You have no further questions at this time.

We appreciate your time and attention and look forward to reporting our fourth quarter results in the future. Thank you so much for your attention today.

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