ASGN Inc (ASGN) 2013 Q2 法說會逐字稿

Ladies and gentlemen, welcome to the On Assignment Q2 2013 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. (Operator instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Chief Financial Officer, Ed Pierce. Please go ahead, sir.

Thank you.

Before we begin, I would like to remind everyone that our presentation contains predictions, estimates, and other forward-looking statements representing our current judgment of what the future holds. Although we believe these statements to be reasonable, they are subject to risk and uncertainties that could cause the actual results to differ materially from the forward-looking statement and we do not assume the obligation to update statements made on this conference call. We describe some of these risks and uncertainties in today's press release and in our filings with the Securities and Exchange Commission.

I am now going to turn the call over to Peter Dameris, our CEO and President, who will provide an overview of our results for the quarter. Peter.

Thank you, Ed. Good afternoon.

I would like to welcome everyone to the On Assignment 2013 second quarter earnings conference call. With Ed and me today is Rand Blazer, President of Apex Systems; and Michael McGowan, COO of On Assignment and President of Oxford Global Resources, our high-end IT skilled 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 the operating segment by Rand and Mike. I will then turn the call over to Ed for a more detailed review and discussion of our second quarter financial performance and our estimates for the third quarter of 2013. We will then open the call up for questions.

Now, on to the second quarter results. All markets we serve remain productive and stable during and exiting the quarter and all of our divisions showed positive momentum exiting the second quarter. Once again, we saw particularly strong growth and strength in the IT end markets. Our IT group grew 18.4% year-over-year on a pro forma basis. Our healthcare groups continue to make solid progress in improving their operating performance and in the second quarter we saw stable demand for our services and physician staffing and Allied Healthcare groups.

During the second quarter we built on the increased end market demand in Allied Healthcare. Currently, we are seeing a return to a more normal usage of healthcare services than what we experienced between 2009 and 2011and that return to normality is driving demand for services. As we've mentioned many times in the past, we firmly believe that the healthcare end markets will provide some of the great opportunities for our Company in the future.

As for our Life Sciences group, during the second quarter revenue growth continued to be slightly more challenging, although we did experience a slight sequential growth over Q1 2013 and we continue to expect similar end market trends in that division for the second half of 2013. With that said, we've made adjustments to our operating plans and expect sequential growth in the third quarter and beyond. Consolidated gross margin of 29.8% was down from 30.8% in the second quarter of 2012 on a pro forma basis primarily due to the inclusion of Apex's revenues, which carries a lower gross margin and less contribution as a percentage of total revenues from perm placement and conversion fees.

With the inclusion of Apex's revenues, permanent placement and conversion fees were 1.5% of our total second quarter revenues. For those of you who are not familiar with the Company, Apex generates approximately 1% of its revenues from permanent placement conversion fees versus the legacy on assignment divisions which historically generated about 3% of total revenues. Gross margin came in slightly lower than we expected due to higher growth from lower margin business lines, higher mix of reimbursable expenses which are passed along to customers with no markup, and a lower mix of permanent placement revenues.

Regarding our operating efficiency, the percentage of gross profit converted into operating income was 26.4% up from 21% in the first quarter of 2013 and 25.2% in the second quarter of 2012 on a pro forma basis. The percentage of gross profit converted into adjusted EBITDA was 35.5% up from 34.4% in the second quarter of 2012 on a pro forma basis.

We believe these conversion rates are amongst the highest in the staffing industry. Despite a lower contribution of revenues from perm and conversion fees, our adjusted EBITDA margin was 10.6% in the second quarter, the same as the second quarter of 2012 on a pro forma basis. This was achieved by a year-over-year 110-basis point improvement in our conversion rate of gross profit into adjusted EBITDA. Because of our lack of dependency on perm and conversion fees for profitability, we believe that as we increase our contribution from those services as a percentage of our total revenues, we will expand our profit margins from the levels that exist today.

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. Currently, we believe the macroeconomic environment in North America where we derive 95% of our total revenues has become slightly more stable from the beginning of the second quarter of 2013 and we continue to see a classic cyclical recovery in professional staffing. More specifically, we've seen a slight positive change in demand trends of the markets that we serve and those that we saw the end of the second quarter.

As a financial services sector, we continue to see higher demand from our clients in that sector than we experienced in the second quarter of 2012. Ed will provide you third quarter financial forecast later this call, but based on our current weekly revenues and normal seasonal patterns, we do not see any appreciable negative demand change in demand for our services from our customers. Our operating performance in the second quarter of 2013 and our estimates for the third quarter of this year and for the full year demonstrate that our business model and areas of focus permit us to grow despite less than optimal economic conditions.

As for actions we took to sustain our future problems of revenue growth rates, we continue to add to the number of recruiters and sales personnel that we employ. Revenues in the second quarter were $417.9 million, up 15.4% year-over-year on a pro forma basis and up 7.4% sequentially. Income from continuing operations, excluding the one-time write off of loan cost, was $17.4 million or $0.32 per diluted share, up from $10.6 million or $0.23 per diluted share in the second quarter of 2012.

Revenues generated outside of the United States was $19.1 million or 4.6% of consolidated revenues in the second quarter versus $19 million or 5.2% of second quarter revenue of 2012 on a pro forma basis. Adjusted EBITDA of $44.2 million or 10.6% of revenue up from pro forma adjusted EBITDA of $38.4 million or 10.6% of revenue in the second quarter of 2012 on a pro forma basis.

Exiting the quarter, demand for services remained stable at all divisions. Our weekly assignment revenues, which exclude conversion, billable expenses, and direct placement revenues averaged $31.5 million for the last two weeks, excluding the holiday week for the Fourth of July, up 15% over the same period in 2012. 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 the call; however, our leverage is now 2.3 times trailing 12-month adjusted EBITDA.

As for an update on our strategic planning, we are working hard and in the middle of the same. The [Parthadine] group has presented preliminary findings to our board and management, and we still expect to complete this planning process by the end of 2013.

Finally, we completed the process of refinancing our existing credit facility. The purpose of the refinancing was to lower our cost of debt, increase our financial flexibility for stock repurchases and acquisitions, and modify our maintenance covenants to mirror current market conditions. Pricing of this refinancing lowered our cost of debt by approximately 150 basis points on the term loan B and 75 to 125 basis points on the term loan A.

I will now turn the call over to Rand Blazer, President of Apex, who will review the operations of his segment. Rand.

Great. Thank you, Peter.

I'm pleased to report that Apex Systems had another very solid quarter. First, we saw continued good requisition flow from the marketplace into Apex with requisitions received in Q2 up on a year-over-year and sequential basis. We turn that flow of requisitions into year-over-year and sequential revenue and earnings growth and posted revenues of $233.4 million, representing the 19.8% growth over the same period in 2012 and sequential growth over Q1 of 9.7%.

Growth continues to be paced for us by positive performance across our top 142 accounts, which we refer to our top accounts program, and all seven industry verticals. Our top accounts program continues to represent slightly more than two-thirds of our Business with retail accounts picking up the other one-third. Our largest growth came from our top accounts in the healthcare, telecommunications and media, and consumer industrial verticals. We also continue to see positive growth in two other important verticals with our financial services and government services verticals growing soundly in Q2 on both a year-over-year and sequential basis.

Gross margins for the quarter were down slightly from a year ago, 27.4% versus 27.7% a year ago. Continued growth in our revenue from our top accounts and the mix of skill sets required in those accounts impacted our gross margin performance. Notwithstanding, we indicated that the pricing environment would remain steady in the second quarter and we would expect to see some increase in our gross margin from Quarter One and we did.

Our conversion of revenue gross margin to operating margins remains very strong in the quarter as we continue to increase the percent of revenue and gross margin that falls to our operating margin. These increases in operating margins resulted from a continued increase in the productivity of our sales, recruiting, and back office teams. We continue to see a solid market environment for our Business in the coming quarter and fully expect that our revenues and operating performance will continue to grow both on a sequential and year-over-year basis.

I will now turn the call over to Mike McGowan to discuss Oxford's results and performance of our other legacy On Assignment divisions. Mike.

Thanks, Ran.

Oxford had another strong quarter with second quarter revenue of $101.5 million, which was 15.2% over the comparable period in 2012 and a 6.5% sequential growth over the first quarter of 2013. Demand for our services remained strong in all of our operating units and we continue to reach all-time highs in terms of consultants On Assignment.

Oxford's Healthcare IT business unit continues to be our fastest growing division and represents 18.6% of total revenues for the first six months of 2013 compared to 10.5% in the first six months of 2012. The current run rate for this division is approximately $80 million. Our second quarter gross margin decreased compared with the second quarter of 2012. The compression was primarily related to a change in our overall mix of business. The gross margin for our Healthcare IT division is about 500 basis points less than the other divisions, and as I just stated, is our fastest growing division.

The lower margin is due to the fact that we have significantly more competition within this segment from small private competitors and a higher mix of revenues related to reimbursable expenses, as Peter mentioned earlier, which are billed to the customers with no markup. We continue to believe that our gross margins within all of our high end IT skill segment are at or near the highest in that industry.

Regarding the third quarter consultants On Assignment have continued to grow. Our Oxford Index, the forward-looking quarterly survey, suggests that consultant demand will be about the same level in the third quarter as it was in the second.

Turning now to our Life Sciences segment. Despite the continued challenges in Europe, this division reported sequential increase of 3.5% and a year-over-year increase of 3.4% in revenues to $41.9 million. US operations, which comprise 77% of total sales, grew 5.9% sequentially and 7% year-over-year. As for gross margin, we realized a sequential decrease of three basis points in gross margin attributable to a decrease in permanent placement fees that were offset by a reduction in contractor-related benefit costs. The year-over-year decrease in gross margin of 105 basis points is a result of the decrease in European retained search fees and a shift in overall business mix.

As we look forward to the third quarter of 2013, we continue to see signs that the macroeconomic environment in which this segment operates is stable and growing. We expect, however, greater growth from our US-based operations. Specifically, the Clinical Research business units as pharmaceutical and biotech clients increase their investments in R&D and outsourcing. As for our traditional Laboratory Staffing business, we believe this group should outpace GDP growth in the US, assuming the economy continues to improve. Early in the third quarter, we encouraged with the level of contract and permanent orders, number of weekly contract assignments, and permanent placement activities.

Revenue for our physician segment grew 1% sequentially and 5.7% year-over-year. The slower growth rate in the second quarter was a result of a slowdown in new orders for physician coverage and a stall in activity in two of our key clients. However, we're seeing early demand in the third quarter which has improved to first quarter levels. We experienced an increase in bill rates compared for the first year prior year which was successful as a result of pricing efforts with clients and new contracts.

Business gross margins are down year-over-year as a result of an increase in our medical malpractice reserves and a higher mix of slightly lower margin specialties wherein we generate less call and overtime billings. Heading into the third quarter, we expect the early improvement in sold days activity to continue to strengthen.

And finally within the legacy divisions of On Assignment, our smallest division, Allied Healthcare, reported 1.6% sequential and 7% year-over-year increases in revenue to $14.7 million. Gross margins for the Allied group decreased 18 basis points sequentially which is primarily related to an increase in billable expenses and travel and housing costs, and was flat year over year.

As we enter the third quarter, the pricing environment continues to be highly competitive and demand has improved, however, at a slightly slower pace. As we go forward, as with the other divisions of On Assignment, we remain committed to new business development, productivity improvements, and a continual focus on our gross margins.

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

Thanks, Mike.

Before over viewing our financial results, please note that I will be making comparisons of our results for the quarter with pro forma results from the second quarter of 2012. The pro forma results are included in the table in the earnings release and assumes the acquisition Apex Systems occurred at the beginning of 2012.

I'd also like to draw your attention to the reconciliation of income from continuing operations on a GAAP basis to the corresponding non-GAAP amount, which is also included in the table in the earnings release. Virtually all of the difference between these two measurements is the write off of loan costs related to our debt refinancing which I will discuss presently. In the ensuing review, references to income from continuing operations are to the non-GAAP amount.

Now on to the review of the results for the quarter. As Peter mentioned, revenues for the quarter were $417.9 million, up 15.4% year over year on a pro forma basis, and up 7.4% sequentially. All business segments reported year over year and sequential revenue growth in the quarter. Our technology segments, Apex Systems and Oxford, which comprise 80% of our total revenues, accounted for approximately 93% of the revenue growth in the quarter. These segment grew 18.4% year over year on a pro forma basis and 8.7% sequentially.

Our non-technology segments, which account for approximately 20% of our total revenues, grew 4.7% year over year and 2.2% sequentially. Conversion and direct hire revenues for the quarter were $6.4 million or 1.5% of total revenues compared with $7 million or 1.9% of total revenues in the second quarter of 2012 on a pro forma basis.

Gross margin for the quarter was 29.8% up 71 basis points sequentially and down approximately 100 basis points year over year on a pro forma basis. The year-over-year compression and margin related to the decrease in permanent placement revenues, a shift in mix towards Apex Systems, whose gross margin is lower than the other segments, higher growth in low margin account, higher mix of reimbursable expenses, and higher non-payroll consulting costs on accounts that have all-inclusive bill rates.

HE&E expenses for the quarter were $86.5 million or 20.7% of revenues up from $84.2 million or 21.6% of revenues in the first quarter of 2013. These expenses were in line with our estimates for the quarter. Amortization of intangible assets was $5.3 million, down slightly from the preceding quarter. Interest expense for the quarter was $4.2 million, down from $5.3 million in the first quarter.

The effect of interest rate, which includes the amortization of loan costs associated with a new credit facility, was 3.7% at the end of the quarter. As a result of the refinancing of our credit facility in May, we wrote off $15 million in loan costs associated with the old credit facility. For accounting purposes this refinancing was treated as an early extinguishment of debt.

Non-GAAP income from continuing operations was $17.4 million or $0.32 per share compared with $12.7 million or $0.24 per diluted share in the second quarter of 2012 on a pro forma basis. Net income, excluding the writeoff of loan costs, acquisition-related costs, and strategic planning expenses were $16.9 million, or $0.31 per diluted share. Net income is comprised of income from continuing operations of $17.4 million and the loss on discontinued operations of $0.5 million.

Adjusted EBITDA for the quarter was $44.2 million, or 10.6% of revenues up from $38.4 milliion, or 10.6% of revenues in the second quarter of 2012 on a pro forma basis after excluding $0.5 million earn-out obligation reduction. Despite the compression in gross margin, the adjusted EBITDA margin was flat year over year due to a 110 basis point increase in the percentage of gross profit converted into adjusted EBITDA. Our conversion rates, which are a measure of our operating efficiency, are among the highest in the industry.

For the third quarter of 2013 we estimated revenues of $429 million to $433 million, gross margin of 29.8% to 30.1%, income from continuing operations of $17.8 million to $18.9 million, income per diluted share of $0.33 to $0.35, adjusted EBITDA of $46 million to $48 million, adjusted income from continuing operations of $25.8 million to $27 million, and adjusted income per diluted share of $0.47 to $0.49. These estimates do not include any acquisition-related expenses or fees and expenses of the consulting firm assisting us in our strategic planning efforts. For the full year, we are turning to the high end of our previously announced full-year estimate.

I will now turn it back to Peter for some closing comments. Peter.

Thank you, Edward.

We believe that are well positioned to take advantage of what we believe is still a historic secular and cyclical growth opportunity for the staffing industry. While the entire On Assignment team is very proud of our performance, we remain focused on continuing to profitably grow our business. We would like to once again thank our many loyal, dedicated, and talented employees, whose efforts have allowed us to progress to where we are today.

We would like to now open the call to participants for questions. Operator.

(Operator instructions) A.J. Rice, UBS

In the press release you guys mentioned on the front page this phenomenon of a shift toward IT staffing and away from other models consulting and off shore. Can you just sort of maybe expand a little bit on what you're seeing there and is that translating into more orders and longer assignments? How is that impacting the business?

I will start off, A.J., and then if Randy or Mike you want to add anything, please do. But, A.J., our divisions grew on a consolidated basis 18.4%. You saw, I think if I'm correct, Robert Half report basically 9% growth on a same billing date basis, and I think manpower shrunk. So, the industry -- the IT staffing industry is very healthy, but if you look at the percentage growth of IT services, it is not $19 spend, it's not 19%-- 18%. And what we're seeing is a shift in spend within the four classic deliverable alternatives.

A customer can implement technology by either self-execution, i.e., using internal personnel, a kind of an offshore Indian centric offshore model, project consulting through somebody like an IBM Accenture or HP or staff augmentation. And what we've seen because of accountability, control of the project, cost, and also uncertainty with immigration reform that more of every IT dollar spent in 2013, IT service dollars spent in 2013 is being performed by staff (inaudible) versus offshoring or project consulting.

So, we think that our growth goes beyond just taking market share. We think the industry is growing because of this shift in how IT service spend is being split amongst the deliverable alternatives. Randy, do want to add anything to that?

No. I think that hit it pretty well.

Okay, good. And then I noticed in the stacks that you provided it looks like Oxford's revenue contribution from its top 10 customers jumped sequentially a bit, about almost 400 basis points. Is there anything interesting behind that to talk about?

Mike?

No, A.J. Actually it's just a couple of customers that we have had over the last six months that have added a significant number of projects and, as you know, we usually play that onesie twosie game, and we've actually had a couple of clients where we've had 20 to 30 consultants on multiple projects within the clients. So, nothing really beyond that. That's really the reason you saw the jump.

Okay. And I'll maybe ask one more and then I'll let some others ask, but I know one of the objectives the IT staffing businesses are doing very well. But I know one of the long-term opportunities is to improve that permanent placement mix. Any progress this quarter or do you wait for the market to come to you on that?

Well, I'm not being facetious, but I don't think we made much progress in the second quarter. As a percentage of total revenue, it was 1.5% of our total revenue versus 1.9% in the second quarter. We're still focused on it, but we're not the leader in that space, and we view that as an enormous opportunity and as I said in my prepared remarks, because we're not dependent on permanent placement for profitability or for being able to expand our profit margin, when we finally do crack the code on that, A.J., we feel that our margins will expand.

Okay.

But that is still work in progress and as we say in Texas, meat on the bone.

Okay. All right. Thanks a lot.

Randy Reece, Avondale Partners.

Hello. We had heard some news from a computer task group talking about some disruption and demand for HCIT people and also saying that they saw some staffing firms letting health information management people go because of excess capacity. Are there any issues such as that that you've seen in the marketplace?

A couple of comments. I don't know if those comments truly are appropriate to represent the marketplace. That may be company specific, and I'm not familiar with their healthcare IT, but maybe it's because of the type of work that they do. Maybe they had some training, maybe they had some very large projects but, as we pointed out, we've seen an acceleration, we have not seen a deceleration. And almost 100% of our revenues in that space, Randy, are implementation services, not training or data conversion or anything like that.

Okay.

If you know who they're laying off, please tell us, because we'll hire them.

I will pass it on. In terms of just the -- let's say the ongoing balance between client's expectations for wages that they expect to pay and the wages that you need to get talent, how is -- what are the trends looking like recently?

It's the same. As we told you, we think -- as Rand made comment to, and as we made comment to on a consolidated basis, the gross margin environment is stable. We have not seen that inflection point where the markets have gotten so tight that the customers have gotten more constructive and productive about pricing increases, but it's still a reasonable pricing environment.

What I will tell you is we have taken this opportunity of kind of less than optimal GDP economic activity in the US to continue to grow, and we have taken some business that we might have priced slightly lower than in a tighter labor market, because we're building some very, very important new relationships. And you may criticize us, but we were able to do it, not really compress our gross margins, and still deliver it to the EBITDA line and have the highest EBITDA margin in the industry. So, we've established some very important new customers, and we're a little more flexible on pricing because it was an investment and hopefully a long-term billing relationship.

When you're sitting there with those margins, you're in a different position than somebody at the other end of the spectrum. Thank you very much.

Next, we'll go to the line of Mark Marcon.

Good afternoon. You mentioned in the release that you might make some adjustments within Life Sciences and Healthcare. I was wondering if you could expand a little bit upon that? And it looks like we're expecting a little bit of a pickup with regards to the revenue growth rate in Life Sciences. I was wondering if you could also talk a little bit about what's going to drive that?

Well, to start off with, the third quarter is always the strongest quarter of the year for the Life Sciences group just on the ebb and flow of the business. So, we expect that historical seasonal pickup. We may -- they're smaller divisions compared to our IT groups, but we made investments in those groups. We really haven't seen a return on investment, and we're going to expect a higher level of intensity to sustain that investment level. The team is working very hard.

As you know, Mark, from following the business, that business has got the highest percentage of revenue for the division outside of North America so that that's a little bit tougher marketplace for them to fight in. And they are more correlated to GDP growth in their personal care, food and beverage, agricultural, petrochemical verticals that they serve versus just the clinical research in the large pharma and biotech.

So, we don't think we have necessarily a business model issue. We think that we're just going to have to -- nothing is being given to us and we're going to just have to expect even higher performance than the high performance they're already trying to deliver.

Would you expect to keep the headcount levels there relatively stable? Do you need to make any more additions or at this point, given the way things are going, would we expect to see most of the investments, at least the organic investments, be really concentrated in the IT area?

They had a budget and in a very prudent way they did their hiring early in the year to hopefully get the full impact of the new personnel for the full year. They weren't under invested in. Absent a couple of vacancies because of medical leaves for pregnancies and stuff like that, they weren't understaffed, and we've hired people and we've got to get them to quicker productivity. But if we can't, we can do 4% growth with a little less investment and give those investment dollars to somebody that can grow 10% to 15%.

How do you feel like you are staffed on the IT side?

We're still very aggressive in the hiring. So, our gun is loaded and that's why we delivered 18.4% growth and we're starting to see some gains in productivity from those people.

Great. And then last question for me. On a couple of conferences you've talked a little bit about areas for potential expansion through acquisitions. I'm wondering, what you see within the Life Sciences and in physician perm area in terms of potential targets?

We're looking, Mark. It's not as target-rich environment as IT staffing is because, as you know, they are smaller end markets and we have very good divisions and we're just very selective about what we're going to add to those groups so that it is additive and not dilutive to their efforts to make forward progress. They grew I think, what was it, 4.4%, that 20% of our business and if you compare that to any other flavor of staffing outside of IT, I think you're going to see, although they're not taking market share, they're clearly probably in the top quartile. So, we're pushing to improve that growth rate.

Great thank you.

Ed Caso.

Hi. Thanks. Congratulations on another great quarter. I was curious on the IT side whether you're seeing more aggressive hiring behavior by the traditionally offshore centric firms as they try to reposition for at least the threat of visa and immigration reform and whether that's putting any upward pressure on wage levels?

Right. So, Rand is probably best to address that because of the number of people they would be hiring versus Mike, as you know he does more of the onesies twosies that the Indian-centric people wouldn't be hiring except for project managers. So, Rand, why don't you address that one.

Yes. Ed, I would say no, we don't see any particular trend there. I can't -- I'd only be guessing as to what the reason maybe we're not seeing it. Maybe they're just waiting for some uncertainty to go away, maybe they're not growing enough, but no we haven't seen any of that. And I think Randy, somebody asked earlier, our bill rates are going up slightly higher than pay rates, so we think our balance between bill and pay rate or impact on our wages is just normal seasonal kind of thing, not anything coming from that kind of a trend.

Great. Pete, can you talk a little bit about constraints on repurchase activity, whether you've done any recently and what would be the triggers that would get you to do it in the future?

So, we have not-- we'll tell you in every quarterly conference call that we did not purchase any shares and we still have restraints on the use of our credit facility, but the buckets have substantially been increased, that was one of the reasons we did the refi. And really it's just an analysis on management and the board's part as to what's the best use of our shareholders capital.

The former CapEx guidance for the year I believe was $15 million to $16 million. Is there any change in that?

No, there is not.

Okay. And the last question is DSOs in the second quarter?

DSOs for the second quarter were 58 days, about 1.9 fewer days than the preceding quarter. On the top of your head to do you have the free cash flow generation in the quarter?

It's in the press release. We generated roughly $27 million of operating cash flow. And so reduce that by $4.5 million of CapEx.

Great, thank you.

Sara Gubins.

Thanks. Good afternoon. I'm wondering if there's anything that makes you think the fourth quarter revenue growth would fall off versus what you've seen earlier in the year or if you are mostly just being conservative to suggest that guidance for the full year will be at the high end?

No. Sara, we just give full-year guidance and we only adjust guidance one quarter out. So, you shouldn't assume that we see something and that's why we didn't adjust the full-year guidance. I think that we've given targets and they're appropriate. And, as we said on the second quarter -- on the first quarter conference call and today on our second quarter conference call, we're still trending towards the high end of the full-year guidance.

Okay, great. And then separately, could you talk about the type of work where you're seeing greater pickup for Apex and Oxford? Thank you.

Okay. Mike, you want to go first and then hand it off to Rand?

Sure, be glad to. As I mentioned, the biggest area that we're seeing growth and continue to see growth and we've seen it for many quarters now, is in the whole healthcare IT arena with the projects that are going on there and the government stimulus it's paying a lot of the bills. So a lot is in the healthcare IT and then some in our -- actually, some of the classical engineering activity in the electrical, mechanical-type arena is actually still doing well and picking up a little bit even into this year, so those are the two primary skill areas that we are seeing continued investment. Rand?

Yes. Sara, I'd say we look at growth a number of different ways, geographically by industry or by skill area. By industry, we reported healthcare, clearly telecom and media and consumer industrial companies and those accounts are giving us the biggest growth, but all seven of our industry sets of accounts are growing.

From a skill point of view, it's number of skills. Tech support is still a big area for us. Java and Microsoft apps, mobile apps is a big area, database and business intelligence, and program management are the ones that we probably see the most growth in by skill area.

Sara, I would just add trying to be real-time, not saying that it's a longer-term trend, but we did see a little bit slower demand in ERP, classic ERP implementation work, but it's too early to say if that's a permanent slowdown in implementation services demand, but it was slightly slower than the second quarter.

Great, thank you.

Than the first quarter, I apologize.

Tobey Sommer.

You discuss your conversion from gross profit to EBITDA is improving. I was wondering if you could just talk about the main couple drivers of that and it looks like you are saying that you have opportunity for more?

Yes, well I mean I think it's just how we deliver the services at some of these larger accounts. We have a different pricing model for the customer, which means we have a different cost delivery model to be able to deliver that services without it being compressing to our reported adjusted EBITDA. Ed, you want to add anything to that?

Yes, I think there is another factor that's important. One is you're just going to leverage your fixed cost as you scale your business, so that is a component as well.

Peter, can I jump in for a minute? This is Rand.

Yes, please do.

Tobey, you know that you have to see productivity in all three groups, your sales team, your recruiting team, your delivery teams, and your back office, and we have ways of measuring that. And we're seeing productivity improvement in all three of those areas, which contributes to great conversion.

Thank you. And then a question about the HIT space. Is that an area that you think will have legs beyond the timeframe for government subsidies?

Yes. So, as we and I said publicly, Tobey, what we've seen in the marketplace of work that's been performed by customers and by others is that there has been such a rush to get to self attest meaningful use so that you can get the stimulus dollars, but there has not been thoughtful mapping of business processes to the systems that are being implemented.

So, we still passionately believe once we're through the implementation phase there is going to be an enormous amount of work performed to optimize the systems that have been implemented so that you can get the benefits and automation of the implemented software and optimization lends itself more to staff augmentation than off shoring or outsourcing. So, we don't think that this is going to be a fall off the cliff phenomenon.

Now, if you have huge client concentration and you're doing a huge rollout for one of the major hospitals and that represents 80% of your growth in that division, then you might have a problem, but that's not our phenomenon. I mean, we are well diversified and we think that we will be in those accounts for a long time, helping them optimize the systems that have been implemented.

Thank you, that's helpful. Peter, do you have any parameters that you're thinking about for the MNA program that you could share in the context of the appetite that you might have for leverage, given the cash flow that you've been generating where we are in the cycle in your strategic review? Any color you could share about how you're thinking of the world would be helpful.

Yes. So, look, as far as maximum leverage, we're very mindful of the fact that we're a publicly traded company and that our public shareholders don't tolerate as much leverage as a private equity shop may and that we don't want to put any leverage on a business that is going to cause the stock not to perform to its natural ability. And I think if you try to put leverage above four times on a staffing company, you're going to cause a lot of angst in the public shareholder community, and we've never done that.

With regard to -- as you pointed out, we do have an ability to de-lever. As it relates to return on capital and return on investment and things like that, that -- the deal has to be accretive and we debate how we deploy our capital every day, and it needs to be accretive and more accretive than organic growth or repurchasing our shares. So, I think you can figure out -- I don't want to state targeted levels at this time, but we've never done a dilutive deal and we've done highly accretive deals even with managing low leverage ratios.

Great, thanks. And then I had kind of a longer term numbers question. Ed, how should we think about the tax rate over time? Not just in the third quarter because you obviously gave us an articulated figure for that, but is there an opportunity to lower that a little bit?

I think if you look out, Tobey, you should see some improvement, and I'm talking about out year, you should see some improvement just by virtue of the growth in your income, your pretax income, relative to the growth in your permanent differences. So, that is going to create some improvement. But in the near term, I think we're pretty much going to operate at the levels that we are at today. We're very focused on trying to employ some tax funding strategies that potentially could drive down the rate, but unfortunately the rate is primarily, our state income taxes, about the statutory or federal -- state income taxes and the tax affects of the disallowance of meals and entertainment. So, until those become a smaller piece of pretax, it's just not going to move very much.

Understood. Thank you very much.

Tim McHugh.

Thanks for getting me in. One question is just on Oxford. The high teens growth rate for Q3 is a little bit of an improvement from the 15% for Q2. Is there anything that you are seeing differently moving from 2Q into Q3?

Mike, you want to address that?

Yes. Nothing much more than what I answered really on that previous question in terms of the growth that we're seeing in the healthcare IT is continuing to improve, as well as I said some of the engineering areas that we're doing. We have got some pretty decent projects that are coming on board and consultants starting in the third quarter. So, nothing much more than that to be honest with you, Tim.

Okay. And then for Apex, if I look at the number of customers, it's not really growing, I think it was flattish year-over-year, but obviously the revenue growth is great. You kind of talked about your larger customers. I guess, is there still -- I guess you feel comfortable there is still a long runway to just still grow with existing customers? And then a second part of that maybe for Rand, is the right way to think about the improved growth that you've seen financial services and government step up relative to what it was during the last year?

Rand, why don't you start and I'll follow up.

All right. So, Tim, first of all the 142 top accounts we talk about is the program. We set that number every year. Every year that number goes up. So, it's a specific set of accounts which we put a lot of focus and national attention on. So, that's why you don't see that number change in each of our quarterly statements until next year and you'll see the 142 go up to something higher. So, our total number of accounts and the number of accounts we're pursuing is certainly a larger population.

Is there more runway? Yes. If you look at our penetration, the Fortune 500 accounts, we penetrated and worked with about 200 of those, so there are still 300 that we can be penetrating, and we certainly have an active program and a plan to kind of work our way toward that. But that top accounts program is a set program for a year, so we really bear down on that for year.

The second part of your question was, I think a lot of people on the call have been focused on our financial services and government services sector, mostly because the sequestration on the government side, and mostly because financial services for us was down if you remember last year little bit. I wouldn't say down but just not growing as robustly. But we said all along financial services has historically been our greatest sector. It's definitely on the way back up, and the government services sector is holding very well even given sequestration. So, that's -- we see good growth in both of those two, not the same growth in some of the other industries, but certainly very positive and increasing growth.

And, Tim, I would just add with regard to availability to get further business from existing customers. That's just a case-by-case basis, but as I made reference to earlier, we've established some new meaningful relationships with some very large organizations, that we're just now starting to derive revenue from. So, if they grow to levels of other important customer bases, there is a lot of growth within those accounts.

Okay, great. One last one. Just Oxford, Mike, I got your comments about the impact of healthcare IT work with the gross margin. But, if we strip that out, would -- what would gross margins be doing for Oxford excluding the healthcare IT?

If we strip out the healthcare IT?

Yes.

Ed, we've done that analysis internally. Have you got some of the numbers in front of you, Ed, that we can share?

No, I do not. We'll try to do that for you, Tim, but if you try the back of the envelope, we said that it was 18% of Oxford's revenue in the quarter and it was 500 basis points less, about 500 basis points less gross margin.

Sure. I'll try and run that myself. Okay, thanks.

[PaulSundra].

Great. Thanks. Do you guys do healthcare IT and Apex segment as well, right? It's not just Oxford?

That's correct.

So, I wondered, how big is it in that for apex? And I wondered if you could talk about is there difference in service offerings that our clients serve and that kind of thing?

It's a similar offering, it's implementation technology services and it's similar to maybe $5 million, $10 million larger in size than Oxford.

So, is there any overlap or cannibalization or anything like that there?

No, there is not. There's no cannibalization. We control the entry points and try to decide who should perform the work.

Okay, great. I just wanted to ask another question about the guidance. Given your annual goals, it looks like fourth quarter could potentially be down sequentially. I'm just wondering, is that a possibility?

That's just because we didn't raise the full year. So, when we report third quarter, we will give you guidance for the fourth and it may cause the full-year number to go up, but we're not adjusting it at this point. Ed, you want to add anything to that?

Yes, I think a couple things. I think one thing that's pretty clear that we're focused on is how we are trending as it relates to our adjusted EBITDA targets. So, when we speak about our trending relative to the full-year estimate, that is the estimate that we're really focused on. And so we are trending very well relative to the $170 billion target that we have. As far as to get there you can draw your own conclusions in terms of what is meant to happen at the top line.

Okay. Understood. Thanks a lot.

Ato Garrett.

I just have two quick ones. One, not using some of the preliminary recommendations from the Parthenon project that you guys have been working with, can you give us a sense whether or not -- how significant that is looking like, or how transforming that's going to be? And also looking at some of the actions you mention regarding the Life Science plans -- the Life Sciences group and some of the changes you might make there in the third quarter, can you give us more details on that? Thanks.

No, I really cannot give you more details other than what we previously provided. I can tell you that what we are talking about is not disruptive, and it's not Star Wars, and anything that we implement will be in a controlled environment and executable, but we did not think we have a business model issue. And this really has to do with efficiency and focus and execution.

And also looking forward as to what are the next areas for growth for our business, as well as are we pricing our Business too high, too low, what are the long-term drivers of shareholder value? What should be the right operating leverage and areas of integration and things like that, but I don't want to get into that on a financial earnings conference call.

Okay. And then regarding the changes to the Life Sciences group that you mentioned?

We previously addressed that in the call.

Thank you.

Speakers, currently we have no additional questions in queue at this time. Please do continue.

We appreciate your time and attention and look forward to speaking with you to report our third quarter. Thank you very much.

And that does conclude our conference for today. We thank you for your participation and for using the AT&T executive teleconference. You may now disconnect.