ASGN Inc (ASGN) 2014 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the third quarter earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session. Instructions will be given at that time. (Operator Instructions). As reminder, this conference is being recorded. I would now like to turn the conference over to Mr. Ed Pierce, Chief Financial Officer. Please go ahead

Good afternoon and thank you for your time today. Before we get started, I would like to remind everyone that our presentation contains forward-looking statements representing our current judgment of what the future holds. Although we believe these statements are reasonable, they are subject to risks and uncertainties that could cause actual results to differ materially from those statements. Some of the risks and uncertainties are described in today's press release, and in our SEC filings. We do not assume the obligations to update statements made on this call. I would now like to introduce Peter Dameris, our CEO and President, who will provide an overview of the results of the quarter. Peter.

Thank you, Ed. Good afternoon. I would like to welcome everyone to the On Assignment 2014 third quarter earnings conference call. With Ed and me today are Rand Blazer, President of Apex Systems, and Mike McGowan, CEO of On Assignment, and President of Oxford Global Resources. 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 Rand and Mike. I will then turn the call over to Ed for a more detailed review and discussion of our third quarter, and our estimates for the fourth quarter of 2014. We will then open the call up for questions.

Now onto the third quarter results. Revenues from continuing operations in the third quarter were $477.8 million, up 7.2% on a pro forma basis, and up 13.4% on an as-reported basis year-over-year. Income from continuing operations, adjusted EBITDA and conversion of gross profit to adjusted EBITDA were well within our projections. Revenues generated outside of the United States were $21.2 million, or 4.4% of consolidated revenue in the third quarter. Versus $20.4 million, or 4.8% in the fourth quarter of 2013.

Adjusted EBITDA from continuing operations was $56.1 million, or 11.74% of revenues, up from $51.9 million, or 11.65% of revenues in the third quarter of 2013 on a pro forma basis. During the quarter, permanent placement services experienced the fastest growth followed by scientific staffing, IT staffing, and physician staffing respectively. Spending amongst our local smaller customers grew about 20%, with our larger account customer base specifically financial services clients growing at a slower rate. IDC, Gartner and other large IT service businesses have recently spoken about slower enterprise IT spending, and we believe this is temporary and not unusual. With that said, we believe going forward that we can grow faster by expanding the percentage of business we derive from smaller accounts, and getting to the return to normality and spending in our larger accounts.

In order to support this initiative without causing a loss of focus on appropriately serving our larger customers, we're hiring over 100 new recruiters sales people during the remainder of the year. This accelerated hiring will increase branch expenses approximately 1.9% over the prior year's quarter. During the quarter we continue to execute against our five-year strategic plan that was announced on March 26, 2014 at our Analyst Day. The realignment of divisions has gone well, and has not negatively impacted the realigned groups growth rates.

In October of 2014 we completed the cutover of the lab support front and back office systems to Apex. While our customers continue to execute against their budgeted IT projects, currently there's not any early adoption of exciting new technology that is experiencing a rapid deployment cycle. Our financial services customers continue to execute on mission critical projects, but have deferred for the time being spending on new products or tools. In addition, we further believe that the current merger and acquisition environment will lead to greater IT spending on integration in some industry verticals. Exiting the quarter we're poised to have another strong growth year relative to the overall market. As many of you have heard us state, we believe our scientific staffing business is the most directly correlated to GDP growth and our best internal predicting tool of the strength of the broader US economy. Based on the demand in that division, exiting the quarter in our actual third quarter results, we believe the broader US economy is stable.

As for the IT, our business continues to grow above published industry growth rates, and we continue to see positive demand from our customers, and a continuing adoption of staff augmentation as a viable alternative to outsourcing, offshoring and consulting. During and exiting the quarter as I previously mentioned, we aggressively hired internal staff to position us for growth in 2015 and beyond. And to more fully address our end markets. Internal recruiter and sales personnel increased by 6.1% year-over-year on a pro forma basis. Demand for our services remained stable in all divisions. Our weekly assignment revenue which excludes conversion billable expenses and direct placement revenues averaged $33.9 million for the last two weeks. Up over 4% over the same period in 2013 on a pro forma basis. Integration, coordination and cash generation related to our acquisitions continue to be at or above our expectations. Our leverage ratio is now 2.06 times trailing 12-month adjusted EBITDA.

As we discussed on our second quarter conference call, on July 21st, 2014, our Board of Directors approved the establishment of $100 million share repurchase program. The plan expires on August 4, 2016, and will be funded will cash on hand, cash generated from operations and permitted borrowings under our credit facility. As of October 28, 2014 we have repurchased 68.2 million of our shares under the stock repurchase plan, and intend to utilize the remainder of our share utilization plan based on share price market condition. I will now turn the call over to Rand, President of Apex Systems, who will briefly review the operations of his segment. Rand?

Great. Thank you, Peter. The Apex segment consisting the Apex and US Lab support business units grew revenues by 10.5% in the third quarter over the third quarter of 2013. Revenue was $306 million. Gross profit for the quarter grew 10.7% on a year-over-year basis, with a gross margin rising to 28.5%. Segment profit contribution grew faster than revenues as we continued to convert revenues and gross profit to earnings. Pacing Apex segment growth with third quarter year-over-year growth in our business services, healthcare, and technology, and lab support top accounts. Our mid market accounts also posted solid revenue growth in the quarter. We saw measured spending by our clients and in the market overall in Q3 with corporate IT spending slowing on a year-over-year basis. We expect that spending environment will continue for Q4 2014. With that said, we expect our revenues and operating margins will grow in Q4 on a year-over-year and sequential basis. As Peter mentioned, we have increased the head count of our sales and delivery teams and are executing on specific initiatives aimed at select markets throughout Q4, as we push for continued strong performance in Q4, and into 2015.

I'll now turn the call over to Mike McGowan to discuss of results of Oxford, physician, and the European business segments. Mike.

Thanks Rand. The Oxford segment consisting of the Oxford and CyberCoders business units grew revenue by 1.3% on a pro forma basis to $125.9 million. Gross profit for the third quarter increased 6.4% over the third quarter of 2013 on a pro forma basis, and gross margin for the quarter was 43.1%. CyberCoders had a very strong quarter with record revenues approximately 25% greater than the third quarter of last year. We continue to be very pleased with CyberCoder's performance in the integration with the Oxford business unit, as the synergy between the two have resulted in incremental perm placements. We also remain optimistic regarding continued growth as we continue to add staff recruiters to the CyberCoder's team. Oxford's core revenue was $104.9 million, down sequentially by 1.2% and 2.3% over the third quarter of 2013. Oxford's core gross margin for the third quarter remains strong at 34.3%.

The decline in revenue has been primarily due to the completion of several large healthcare IT projects, and very sluggish command for new electronic medical record projects and actual EMR assignments. Based on feedback from our clients, we expect new EMR implementation, optimizations of previously installed systems, and overall demand for consultant use to slowly start to increase in 2015. We are also in the process of adjusting our service offerings in terms of EMR optimization and other required areas, to address the ever-changing needs of the healthcare industry. Based on the projection of increased consultant use in 2015, we are making additional investments in our healthcare IT sales and delivery staffs.

Oxford's other core division, Oxford International, has shown slight improvement throughout 2014 primarily driven by our regulatory and compliance in our traditional engineering segments. As reported on prior calls, our ERP and software hardware engineering segments have been relatively soft throughout the year. Overall though, Oxford International has been impacted by measured IT spending in some of our high end specialized skills. Just as Apex is making investments in additional sales and delivery staff we are doing the same in select segments and geographical areas that have realized growth in 2014, and projecting the same for 2015. Vista, our physician staffing segment, experienced a good quarter as revenue was up 3.8% sequentially, and 4.1% on a pro forma basis with the addition of Whittaker Medical acquired in December of last year. In addition, we have discussed previously government demand has been inconsistent, but it is beginning to show signs of stability. Demand from our commercial clients is also starting to improve, and excluding our government business, we grew 13.1% year-over-year.

From an industrial perspective, the overall physician staffing market continues to experience choppy growth in the near term, but the macro economics that drive supply and demand in the segment remains positive. And finally our life science segment in Europe had a respectable quarter, reflective of the softness of the overall European economy. Ed, now over to you.

thank you, Mike. Before I get started I would like you to note that I will be making references to pro forma results which assume the acquisition of CyberCoders and Whittaker occurred at the beginning of 2013. Turning to financial results for the quarter, third quarter revenues were $477.8 million, up year-over-year 13.4% on a reported basis, and 7.2% or a pro forma basis. Adjusted income from continuing operations was $31.1 million, or $0.57 per share, and adjusted EBITDA was $56.1 million, or 11.74% of revenues. Cash flows from operating activities were $45.3 million, and capital expenditures were $4.6 million.

These results were in line with our financial estimates for the quarter, except for revenues which were below our estimates by less than a quarter of a percentage point. Direct hire and conversion revenues for the quarter were $23.7 million or 5% of revenues, up from $20.5 million, or 4.6% of revenues in Q3 last year on a pro forma basis. CyberCoders accounted for $17.2 million of perm revenues for the quarter. Our gross margin for quarter was 32.6% up 2.4 percentage points year-over-year on a reported basis, and 34 basis points upon a pro forma basis. The expansion and margin on a pro forma basis was the result of the higher direct and higher conversion revenues and slightly higher contract margins. SG&A expenses for the quarter were $108.7 million, or 22.8% of revenues, compared with $98.7 million or 22.2% of revenues in Q3 of last year on a pro forma basis. SG&A for the quarter included $1 million in acquisition and integration expenses, primarily related to our realignment and consolidation initiatives on our last support business, which is now included in our Apex segment.

Our conversion to gross profit into adjusted EBITDA which is a measurement of our operating efficiency was 36.1% for the quarter. The conversion rate was up 0.5 of a percentage point from the preceding quarter and flat year-over-year on a pro forma basis. We believe our conversion rates are among the highest in the industry. Our adjusted income from continuing operations was $31.1 million, or $0.57 per diluted shared, up from $27.8 million, or $0.51 per diluted share in Q3 of last year on a reported basis. The calculation of adjusted earnings per diluted share is included in our press release, and the quarterly calculations for 2013 are included in our Analyst Day presentation, which can be found on our website.

During the quarter, we repurchased 2.3 million shares of our common stock, this repurchase reduced our diluted share count for EPS purposes by approximately 1.1 million, resulting in an increase in EPS of approximately seven-tenths of a cent, after considering the after tax interest expense associated with the purchases. The effect on EPS in Q4 will be approximately $0.015. Turning to our individual operating segments, our Apex segment accounted for 64% of total revenues Apex revenues for the quarter were $306 million, up 10.5% year-over-year, and 2.7% sequentially. Apex's gross margin the quarter was 28.5%, up approximately 10 basis points sequentially, and flat year-over-year. The average number of staffing consultants of Apex was 875, up 4.8% sequentially.

Our Oxford segment accounted for 26.4% of total revenues. Oxford's revenues for the quarter were $125.9 million, up 17.3% year-over-year on a reported basis, and 1.3% on a pro forma basis. Oxford's gross margin was 43.1%, an expansion of 2 percentage points year-over-year on a pro forma basis, which was mainly the result of the higher mix of revenues from CyberCoders. The average number of staffing consultants for the quarter was 813, up 1.1% sequentially. Our physician segment accounted for 7.3% of total revenues. Revenues for this segment with $34.9 million, up 33.3% year-over-year upon a reported basis, and up 4.1% on a pro forma basis. Gross margin was 29.6%, up 1 percentage point on a pro forma basis. And this improvement was due to favorable business mix and medical malpractice experience.

Our life sciences Europe segment accounted for 2.3% of total revenues, and revenues for this segment were down slightly year-over-year. This segment accounts for approximately half of our European revenues. Revenues from all of our European operations were adversely effected by the strengthening US dollar relative to the Euro, which resulted in a $750,000 sequential decline in revenues. As mentioned earlier, we repurchased 2.3 million shares of common stock during the quarter, at a cost of $68.2 million. Most of which was funded out of cash on hand. At quarter end our bank indebtedness was $403.7 million, up $26.9 million from the end of Q2. Our leverage ratio which is total indebtedness to trailing 12-month adjusted EBITDA was 2.06 to 1, up slightly from 1.98 in the preceding quarter.

Turning to our financial estimates for the fourth quarter, we estimate revenues of $467 million to $473 million. Adjusted income per diluted share of $0.50 to $0.53, and adjusted EBITDA of $48 million to $51 million. These estimates do not include any acquisition integration or strategic planning costs. Our estimates assume billable days of 60.9 for the fourth quarter, which are 2.8 fewer than the third quarter. Based on revenue per billing day in the third quarter, the effect on revenues of fewer billing days in the fourth is approximately $20 million. As with all other estimates on this call, they are subject to the risks mentioned in our press release and SEC filings. I will now turn it back to Peter for some closing remarks, Peter.

Thank you, Ed. We believe we continue to be well-positioned to take advantage of what we believe are historic secular and cyclical growth opportunities 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 and very dedicated and talented employees, whose efforts have allowed us to progress to where we are today. Operator, I would now like to open the call up for participants to ask questions

Thank you. (Operator Instructions). And our first question comes from the line of Kevin McVeigh, Macquarie. Please go ahead

Great, thank you. I wonder if you could just give us a little more color on the new recruiters, the incremental 100 hires. What the P&L expense would be, did we start to see that in Q3, and then ultimately in Q4 as well, should we think about it of as the share buy-back offsetting that incremental investment, and then how will those folks scale as we think about the revenue trajectory Q4 into Q1 of next year?

Yes, this is Peter.

Hey, Peter.

Good afternoon. First of all, with regard to impact, we really don't expect a revenue or profit impact, favorable profit impact in the fourth quarter. It typically takes on the short end six months, typically 9 to 12 months for someone to get productive. As you know in the staffing industry, most of these people are working on around $40,000 to $50,000 base salary. But what I can share with you is that we said that the expense, the branch expense is up about 1.9% over the fourth quarter of 2013. That's about $10 million. Some of that was budgeted.

On an annual basis.

Right. So we're hiring. Some of this is truly incremental. Some of it we would have been hiring based on a 2015 growth patterns, and most of it really is to go ahead, and as I said in my prepared comments, more fully address the entire market, and more local small account business versus just our larger enterprise accounts, without losing any focus or quality of servicing to them. As it relates to the share repurchase, we'll continue to do that. We're generating a fair amount of cash. I think you saw that we purchased a lot, and our bank debt plus any kind of commitment we have for earnouts only took it up to 2.06 versus 1.98 at the end of June. And so we have lots of capacity to continue to do that as we generate cash. And I think a full quarter impact, about a penny-and-a-half, based on if we don't purchase anything else, which we fully assume we'll continue to purchase.

Got it. Okay.

Does that answer your question?

Very helpful, yes. Thank you.

Thank you. Our next question comes from the A.J. Rice with UBS. Please go ahead.

hi, everyone. Thanks. First of all maybe a clean-up questions on the recruiters. Are they assigned to one of the two of the broad divisions, are they more in the sub groups, or how does a recruiter focus their time?

AJ, we are organized by divisions so each division has specific hiring plans. And they're solely focused within that division.

Any sense of how these 100 break down?

Yes, I would say at this point of it in terms of 70/30 Apex and the rest of the business.

Okay. Can you just remind us on Apex and Oxford sort of the seasonality of the business, how much of what we're talking about has some reflection of seasonality? Is there a normal, spending on IT capital can tend to be pushed into the fourth quarter, because people are trying to make budgets, but I assume that's not how your business works, and I'm just trying to remember seasonality for Apex and Oxford a little bit?

I'll go first and then I'll let Mike and Rand add anything that they feel is appropriate. Typically the strength of the quarters is third, second, fourth, and first. And most of that has to do with billable days. The number of billable days and weather and holidays, et cetera. With that said, in the IT world, you can have both positive and negative influences. You can have budget freezes. If people see their business going wrong or you can have budget flushes, use it or lose it. We're not seeing any dramatic movement in either of those directions. It's just kind of steady state. And what really drives. What we're seeing right now is just the current projects and the release of projects, to the number of consultants we have on billing. We are not seeing a deterioration. We're just not seeing in some of the larger accounts a particular strengthening above where we were. We're seeing it in pockets, but not broad based in the two IT divisions. And then you always have the overlay of at times consultants can for their own personal reasons get distracted, and may want to take more PTO time which limits the amount of time we can bill our customers. Rand or Mike, do you want to add anything?

The only thing I would say, AJ, I agree 100% with what Peter was saying. The only thing in the Oxford business, sometimes it would make a difference based on for instance government decisions. As I mentioned in my prepared comments, the healthcare IT business obviously was impacted by some of the decisions the government made, in terms of delay of some of the target dates, so that could impact it a little bit. But other than that, I agree with the seasonality that Peter commented on.

Okay. Maybe I'm last one. On the comments that you do expect the EMR assignments, and generally how HC IT sounds like those order flows to pick back up gradually over 2015, can you just remind us, how much of a lead time you get to see whether that assumption is right? Do those orders happen and then you have to fill them pretty quickly? Or is there a fairly broad lead time there?

Mike?

Yes, most of them are, I mean we're following a lot of the job opportunities already and a lot of the health systems are saying, we think we're going to start in X, Y, Z date, mid-December, mid-January or mid-February, et cetera. We're following. We probably have in most cases two weeks to 30 days probably to actually fill them once they give us the go-ahead.

Okay.

Generally.

So your comments were sort of based on the back and forth discussion-wise but the orders are still starting to come in the be next month or two basically it sounds like?

That's with they're saying. Some are saying in the first quarter. Some are saying we're going to wait and see. Some are saying we're finishing out the year, but generally we believe that we'll start seeing some of those projects come to fruition in the first quarter.

AJ, I want to reiterate that our visibility in the healthcare IT implementation space is about as clear as mud right now. We have been consistently wrong relying on customers saying it's going to come on, because we've had these rolling deferrals on stuff that we're following. So don't misunderstand those comments to mean that we're not positive about the space, and it coming back and being a forceful area for us to have meaningful growth. It's just in the short run, the visibility is very cloudy.

Right. Okay. Thanks a lot.

Thank you. Our next question comes from the line of Tobey Sommer with SunTrust. Please go ahead.

Thank you. One question on the physician business, Vista. Is the new VA funding that emerged a few months ago when the VA was kind of prominently featured in the news in a negative light, is that the driver to stable government business? Or is there something else going on?

Tobey, that's incremental. But take the state of California for an example. You've got a booming stock market, you've got a lot of state income tax that gets collected. And you have a booming IPO market and a lot of state income tax collected. So a lot of states, revenues have recovered and they're spending more on social programs. So I think it goes beyond VA funding. It's just a general economic recovery because whether tax rates have gone up or the stock market has gone up, states have greater collections in revenues and they're spending it.

Okay. Kind of switching gears. In Oxford during the discussion of HCIT in the prepared remarks, I think if I heard correctly you talked about maybe changing a little bit of I don't know internally or externally kind of how you go to market or package your offering. Could you, if I did hear that correctly, could you elaborate a little bit?

Yes, I'll go first. Really, it's just a realization and a continued evolution that a lot of the first wave of implementations are behind us, so you're kind of on phase 2 which is more optimization and beyond just the self-attest meaningful use of installing an EMR system. So what we're really doing is broadening the skill sets that we provide around the electronic medical records, and moving more into a sales focus of phase 2, since the initial wave of implementations will be there, but not as great a rate as they were in the last 2.5 years. Mike?

Yes, I would agree. That's what I meant by my comments, Tobey and as Peter says for instance we need to make sure we've got right skills which we are working on now to do the optimization versus the initial installation, so we're needing to make sure and we're recruiting those kind of consultants right now to be ready for that into next year.

Thanks. Two little questions on Oxford. How did ERP perform in the quarter, and what's your expectation for the fourth quarter? And are you seeing any particular specialty or area within the IT, and engineering area, in which growth is in urgency among clients, can kind of replace those two areas of what had been pretty good growth a year or two ago?

I think again we're seeing as I commented, the ERP and some of our more traditional software hardware engineering has been relatively soft throughout the year. The thing that we're doing and we commented remember even on the Analyst Day back in New York, was we're continually looking at new skill areas, and we're adding those as it makes sense in terms of the market demand, et cetera. We're adding new things all the time, in terms of for instance the cloud computing, and all of that stuff. Has it taken over the size of an ERP, no it hasn't, and that why we continually look for those new skill areas and add them appropriately within our different segments.

Thank you. Our next question will come from the line of Sara Gubins, Bank of America Merrill Lynch. Please go ahead

Thanks, good afternoon. In terms of the incremental sales expense in the fourth quarter, should we figure that if it's $10 million on an annualized basis, you'll do about half of that in fourth quarter, or a little over $1 million in the fourth quarter, and then we would need to add in another $1.25 million in the first quarter to get to the right run rate?

Sara, it's included in our estimates or our SG&A estimate, and we're anticipating about $1.5 million.

$1.5 million, okay so we need to add about another $1 million into the first quarter to get the right run rate?

If you're going to normalize it, yes.

okay. And I know that it's early to think about 2015, but I'm wondering, do you think you can grow your margins next year, given the incremental sales costs, and the delay in their ramp?

Well, my comment to that, Sara would be right now we have been in the midst of moving some things around, like lab support to Apex, and we told you on October 14 we completed the cutover but we're still running in the background the old systems, and things like that. We had hoped there would be some incremental savings over time with regard to that as we fully sunset some things. We hope and believe based on the production we're seeing that the Apex business will improve, and we're generating these industry-leadingEBITDA margins without there being the time of traditional operating leverage, because of the incremental revenue from Oxford and from the physician group and also the European group. So if those groups start growing, we should have some operating leverage. Versus the negative operating leverage that we've had this year.

Okay, great. And then are there particular kinds of projects that some of your larger IT clients in Apex are thinking about for next year, that gives you some confidence that you'll see it return to normal for those kinds of clients?

Yes, I mean it's a rolling thing. We can't name names, but I can tell you that, and Rand, why don't you pick up on this without giving the customer's name. We just won a major contract that will start ramping up in the next three to four months that's in the kind of Aerospace/manufacturing industry. Rand?

Yes, what you said is correct, Peter and I think to answer your question, Sara, we have a pipeline set of information, so our pipeline is continuing to build. I think it is just when the clients pull triggers across different companies in different industries. So yes, our pipeline looks very healthy, and IT spending in enterprise accounts tends to spurt, and it will spurt and we have good pipeline, expect things will pick up.

We really, Sara, haven't seen a decline in the amount of work that we can bid on across the universe for new business. It's more so that some of our enterprise customers may be spending less at a particular time. Another company reported yesterday, and had a very good quarter, and they said their financial services customers were spending very well in the third and fourth quarter. That's different, and we really don't do a lot crossover with them in major money center banks, but a couple of our large money center banks have even publicly stated that they're spending less currently. That's temporary and it will change. But not all enterprise accounts spend in their spending cycle the same way, but right now it's stable. We grew 10.5%, but we didn't see an acceleration in spending in financial services.

Okay. Thank you.

Thank you. Our next question comes from the line of George Tong with Piper Jaffray. Please go ahead.

Hi, thanks. You've indicated you're seeing slower enterprise IT spending in some of your larger accounts, and that it's temporary and not unusual. Can you comment on what trends you're seeing that gives you confidence this trend is in fact temporary, and when you expect a turn in demand from some of your large accounts?

I'll go first. George, it's 35 years of experience, and multi, multi years, ten years of experience with various customers. Our Top 10 customers or Top 20 customers what was No. 1 in 2013, may be No. 8 in 2014, and it may be No. 3 in 2015. Their spending cycles just ebb and flow. As I've said, the broader landscape in order to bid on work hasn't deteriorated significantly. I think our growth rate revenues generated from financial services companies actually shrunk 1% quarter-over-quarter, year-over-year. And that wasn't because we lost to someone else. It was just temporary slower spending within those customers. With that said, we also pointed out that our local business and smaller number of placements per customer business grew north of 20%. So it's an ebb and flow, and that's how it's always worked for us. We're seeing new sizable working awarded and allotted as we just mentioned in response to Sara. And we firmly believe as long as the macroeconomic environment remains stable, which it is, that the broader IT spending market will be good. Our comments about enterprise-wide spending has been anemic. It's not saying it's terrible. There's just no exciting new technology that's in the midst of rapid deployment, or a major M&A integration that has been led, or at least that we've won that spikes the growth rate dramatically above the normal growth rate. Rand, what would you add?

well, I wouldn't add anything. I think what you said is correct. George, the answer is we have lots of years of experience. You plot our growth rate quarter-by-quarter, and it spurts and then it kind of settles down and then it spurts again. We have pipeline data to look at, and I think we are and very pleased with the portfolio of accounts that we have in our key industries in our top accounts and these have been long-term good clients, and we continue to build on that.

And rather than just waiting for them to turn on, what we're trying to say is that we think without losing focus and quality of attention that we can grow faster while these enterprise accounts are a little flat by picking up more of the local smaller number of placement account-type business. And we were very successful in the third quarter. It was 20% growth. But that type of business makes up 30% of our revenue, not 70% of our revenue.

Alright. That's very helpful. I would like to go a bit deeper into ERP spending within Oxford. How do you expect ERP demand trends to play out over the next several quarters, and when can your newer skills focus begin to kick in the supplement year--?

Mike?

Yes, I mean on the ERP side itself, it's very similar to what Peter and Rand just said. We have the same sort of thing. We have a pipeline of clients that we're working with on projects and tracking, and all that sort of thing. So it really is the same ebb and flow, if you will, in terms of our client spending that we experienced in Apex. That's on the ERP said. On the new skill areas, we actually have several projects underway now with some of those new skills, and we continually add new skills and take other skills away. If a skill becomes commoditized, we take it away. So it really is into next year, and again a log of its going to depend a lot on overall IT spending, in terms of what specific skills our clients are going to need from that high end urgent need demand sort of the perspective.

Yes, that's helpful. You've noted in your prepared remarks that the IT business continues to grow above industry rates. Can you comment on the competitive landscape and market share changes you've noticed that support this trend?

Yes, so, I think we said they grew about 11.8% and we never compete with them because they're mostly lower ball rate and smaller size accounts. Very good segment, nice business but different that what we really, I mean they're really dealing with corporations that have less than $200 million, $300 million of revenue. And so it's more of the customer size versus the number of placements within the customer and the skill set, but they grew 11.8% and said the small and medium-sized business is growing faster and I think that's true. K4 had a very nice quarter and said that their financial markets are growing. Like I said, I don't think we really share the same customers as it relates to the financial services industry. But, they I think grew 12.4% and we grew 10.5% in the quarter, and then the outliers are two large private companies, Tech Systems which is owned by Allegis, and Insight Global, which is owned by private equity. And I think that they, I don't have hard data, but I think they probably have grown a little bit faster than any of the public guys. And so if there's been any market share gain, maybe it has been from some of the private guys. But as I said, I think the industry stated growth rate is 7%, and we grew 10.5%. We're trying to be as transparent as possible on the up and down side. We just really haven't seen sizable customer penetration in our dominant accounts by others, and this has been more just an overall lack of spending in some of our enterprise customers in a particular period, than someone else is doing the business versus us.

That's helpful. Just two more quick ones. In past quarters revenues were to some extent constrained by supply elements. In this quarter would you say supply constrained revenue performance at all?

Not really, George. There is always the very high end skill sets that are hard to come by, but this was more just timing of spend, and current demand for particular skill sets. So I wouldn't say it was supply constrained.

Got it. And then last question, in terms of capital allocation, you have indicated in the past your target debt multiple is around 2.5 times EBITDA, and you're now at about 2.1 times. Can you share your thoughts on potential increases in financial leverage, to support further share repurchase activity or M&A?

We constantly evaluate what is the best use of our shareholders capital, and acquisitions would be at the top of the list followed by share repurchases and we're not going to do an acquisition that's not a good fit or well thought out and we would go above 2.5 times for an acquisition, but under 2.5 times we believe there's a better use of our shareholders capital, and to the extent what we shoot through this remaining $30 million and we generate in cash, we'll have conversations with the Board, and look to replenish the share repurchase if that's the right thing.

Very helpful. Thank you.

Thank you. Our next question comes from the line of Jeff Silber with BMO Capital Markets.

Thanks so much. I know it's late. Peter you mentioned something about the breakdown between your small and large customers. I think you said your small customers are about 30% of your revenues. How do you define a small customer? And where do you think that percentage will grow over time?

Yes. So for us, a small customer is typically were putting in the maybe two, three, four consultants on billing versus the size of the customer. And it's more of a local relationship than an enterprise relationship. So that's how we really address it. And it's 30%. We have looked quality of revenues as much as quantity of revenues, and these enterprise accounts can sway up and down, but we have a lot more intimacy with the customer when they are spending $30 million or $40 million a year with us, than if they're just doing six placements that add up to $462,000 over a year. So we're not going to lose our focus on enterprise accounts. But that doesn't mean that we can't incrementally grow and pick up some of the business that maybe we weren't fully addressing because we were growing 15%, 16%, 17%, 18% previously.

Just so I understand from a go-to-market strategy, you have separate salespeople for your enterprise accounts versus the smaller accounts as you call them?

Typically, that's correct.

Okay, great. And can you also remind me in terms of your financial services exposure roughly what that is?

Yes, Rand, wasn't it at its peak 29% of Apex's revenue?

Yes, at the peak. Now it's in the 20s, mid-20s.

Alright, great. Thanks so much.

And Jeff, at Oxford, it was less than 1% just because of the skill sets in the margin profile and financial services.

And that's still the case. Alright. That's really helpful. Thanks so much.

Thank you. Our next question comes from the lime of Gary Bisbee with RBC Capital Markets. Please go ahead.

Hi, guys. Good afternoon. Just following up on the smaller account commentary. Can you give us any sort of high level thoughts on how that 30% of your revenue is in terms of profitability, and also productivity of the people you bring on as recruiters or salespeople?

Yes, so Gary, it's typically more profitable and that's one of the reasons that the margins up at Apex. And it's typically is more labor intensive, meaning that yes, you don't get the same kind of leverage of exclusivity of awarded orders, and focused on time to fill by the customer. So I would tell you better margin, more labor intensive.

Okay, fair enough.

And that's standard for the entire industry.

Okay. Alright. And then I appreciate the commentary in the press release about the fewer days sequentially that impacts the revenue. How does that compare to what the sequential change in days was third quarter to fourth quarter of last year, and has there been any big difference, throughout the third quarter or fourth quarter that would impact year-over-year comparisons, or is it pretty similar?

Gary, it is very similar. Last year Q3 it was roughly 63.7 days, and it was down to 60.6 days in Q4. So very similar trend.

We are an using the same methodology in 2014 that we used in 2013 to calculate billable days.

Okay. Fair enough. Okay. And then, just back to the financial services customers for a second. Is there any, I assume you do a broad set of type of work within the banks, Is there any particular area that is weak, or has it just been across the board pulling back spending as you've described it thus far?

Rand, do you want to go first?

Well listen, over a period of time it ebbs and flows around. If they've had mergers and acquisition activity, then there's probably two or three years of heavy project work around that integration. When that settles down, then they go into more systems, system generation, systems maintenance and infrastructure around current systems, and current operating systems, more around business intelligence, building mobility into their systems for their business base. So it varies depending on what activity the banks have been involved with in the first place. But I'd say over time the mergers and acquisition work has settled a little bit, and it's more operational and special consumer oriented systems and systems support and infrastructure.

I would add that not to confuse things, but clearly we don't win everything we bid on. But I will tell you that we have elected not to renew a couple of contracts with some major money center banks that we would have done in the range of $10 million to $20 million because the margin profile was just too low, considering what we think will eventually will be available throughout.

Just last one and I'll pass it over. One thing being in a huge bank and having switched from one to another last year, it seems like clear that they're all spending an enormous amount of money on compliance. Have you been able to work an IT angle to get involved with the compliance work, which seems like it's probably going to accelerate as more and more of the Dodd-Frank stuff goes in, or is that really more financial oriented as opposed to IT?

No, it's IT oriented. A very attractive piece of business that we did out here on the West Coast for a mortgage company was doing business analytics data warehousing, so that they could value their toxic assets for purposes of their capital base for Dodd-Frank compliance. So absolutely, the government regulation stimulates required spending by the major money center banks. So that has been a net positive, and we've participated in that space.

Peter, could I add to that for just a minute?

Please.

I think it's a great question and with our enterprise accounts and big bank accounts, compliance has always been a portion of their spend with us and our support. But these compliance requirements are filtering down now to the mid market banks and we've seen, Peter already reported as we did, our mid market accounts including our financial services mid market banks is growing at a 20% rate, and some of it in that sector are around compliance issues, compliance opportunities. So it's kind of where that compliance is flowing as it is being pushed down from the enterprise accounts into the mid market area.

Okay. Thank you.

Thank you. Our next question comes from the line of Tim McHugh with William Blair and Company. Please go ahead.

Thank you. I think you said earlier with regard to Apex that you expect the markets still to be up sequentially and year-over-year despite the increased sales force investment, but the guidance implies kind of overall EBITDA margins down close to 100 basis points. Is the drag and the investment particularly pronounced, or creating a big drag as we think about the other segments? I guess to try and reconcile those two data points?

Couple of things. My reference about the margins being up were more related to the gross margin, because of the mix of business, Tim, versus the EBITDA margin. You're correct that the guidance we gave implies a lower EBITDA margin as a percentage of revenue in the fourth quarter than what we posted in the third. And lower than, I think if my memory's correct, lower than what we posted in the fourth quarter of 2013. At the end of the year, we'll see what we've spent, what the accruals for incentive comp are. We haven't adjusted that yet. So where the margin comes in is yet to be determined. It's probably more towards the upside than the downside. But the guidance does contemplate that there will be an erosion because of this hiring, and no return on this hiring in the fourth quarter.

Okay. That's helpful. And then Mike, I guess you talked about healthcare IT being a pretty big drag. Can you give us roughly, I mean what was the run rate of that business I guess in Q3, and I guess maybe any sense of how low are you expecting that in the Q4 numbers, if we could just help us dissect that piece versus the rest of Oxford?

Mike, do you have that or do you want Ed to do it?

If Ed has got the specifics, that would be great, thanks.

Tim, that division peaked in Q2 with roughly $21 million in revenues. In Q2. And then in Q3, fell off to roughly $16.9 million. And we're estimating $13.1 million in Q4.

So Tim, I think that's a good question to try to paint a picture about what's going on at Oxford, because it's not all bad news. Oxford unfortunately on a consolidated basis probably going to shrink year-over-year about 2.8%, 3% for the full year, including the fall-off from healthcare IT. Healthcare IT just a standalone practice is probably going to be down 30% year-over-year. So the other business although it's not growing as fast as we want, it is not this pervasive, universal weakness at Oxford. It is pockets of weakness and the pockets of strength although they're improving, haven't been strong enough to offset this 30% fall-off in the healthcare IT group.

Okay. That is helpful. And then just one other question. I think you gave kind of the last couple week's growth rate. I know that excludes perm, but I think it was 4% growth rate versus kind of, it seems like pro forma kind of 6% or so your guiding queue for Q4. Is the difference between those the impact of perm, is it that big, or I guess what's the bridge there? Do comps get easier as the quarter goes, kind of just talk about that?

It was a strange measurement period. We fully believe that number will go up. And we have seen in the percentage growth, great rate go up. I think it's a little bit of an anomaly. But make sure I'm clear. Any time we give that two-week guidance, it never includes perm. So that's not skewing the number down or up in any particular period that we quoted, because we always exclude a conversion and direct hire. So I just think it's a billing time collection issue in that, our guidance doesn't reflect that we're going to grow 4% for the quarter. That just happened to be the raw data for those two weeks.

Okay, thank you.

Thank you. Our next question comes from the line of Paul Ginocchio with Deutsche Bank.

I just want to go around to the questions around the 100 people. I just want taking a longer time to find candidates. Is there any kind of impact from talent scarcity, or is that all about reaching out to the more retail or smaller client?

It's a good question and I'll let Rand talk about our success on fill rates. This isn't because we're losing business because other people are filling them faster. To the contrary. I think we've been more successful on filling what we call our B recs versus our A recs. We've increased that. This is really to focus on capturing a segment of the market that we were addressing, but we weren't as fully and forcefully addressing as we could, and making sure that we don't get distracted in servicing our enterprise customers. Rand.

Well, that's correct. So the second part of that is no, we're having no trouble filling requirements. Our fill ratios are up quarter-over-quarter, year-over-year. We're doing really well on that side. To go back, Paul, I know on the Apex side we're adding a significant number of heads, the vast majority are in the sales side, not on the recruiting sourcing side, okay?

Great. That's clear and Peter, sorry if I missed it, what was perm growth or what was CyberCoder's growth. I think it was 18% in the second quarter. What was it in the third?

I think it was 21%.

25% in the third.

Excuse me, 25%. And Paul, it was even higher than that. I don't want to confuse things but CyberCoders had a small, very small piece of contract revenue, staffing revenue in their consolidated revenues when we acquired them, and we told them we want you all to start sunsetting that, and really just focus on being a pure contingent perm shop, and not worrying about getting, $5 million or $10 million or $15 million of IT staffing revenue. So the IT staffing revenue there has been declining because we've been focusing on perm. I think their perm, pure contingent search perm revenue grew north of 30%. Is that correct?

25%.

That was the consolidated number, wasn't it?

Hold on a second. I'll get that number.

So Peter, in that nice acceleration you saw from the second quarter into the third, how much is that because you're giving them better leads, or there's some synergy with your existing business, or how much is that is just improvement in the perm market?

Not to take away from the cooperation and the hard work that Oxford and to a lesser extent Apex, but most of this has been on their back, and as you appropriately pointed out, the improvement in the perm market, and we have hired aggressively in that space, and we're still trying to tweak the referral bonuses and compensations to stimulate the right referral behavior. We helped them, but not significantly yet. But we still passionately believe that we can continue to improve the rec flow and the quality of the rec flow.

Last one. This is a little more complicated but within Oxford if I ignore CyberCoders, obviously you have got the moving piece of healthcare IT and slow-down enterprise spend in ERP, but then obvious list we're starting to lap some of this. When does everything lap, and when will we start to see a now normalized growth rate? How far out is that?

Oxford?

Correct.

Well, I hope I don't come across as being insensitive, but I mean we're down to $13 million in quarter revenue in the healthcare IT, so it just can't hurt us as much. They actually Oxford I think our internal forecast for them to actually up on a consolidated basis. Old Oxford to be up to an consolidated basis even with the dramatic fall-off in healthcare IT for the first time in the fourth quarter year-over-year. So things are starting to return to a more normal at least positive forward growth trajectory, because remember Ed told you that we think that the healthcare IT group is going to do approximately $13 million in the fourth, and it did what, $16.9 million in the third. So Oxford is going to grow even with covering kind of a $4 million fall-off in quarterly revenue from healthcare IT. And the 10%-plus growth rate that we gave you for Apex, I would point out that although that's not our target long-term growth rate for them, that is a 10% growth rate off of a 20% fourth quarter 2013 growth rate.

If I just kind of deal, sticking with Oxford, you had that large client sent some temps back, and we've now I think cycled that in the fourth quarter. It sounds like we're cycling a lot of the healthcare IT spend reduction enterprise--?

The first half of 2014 healthcare IT I think we reported grew 12%. So there was, like $20 million and $18 million of revenue in the first and second quarter of--.

$20 million and $21 million.

$20 million and $21 million. And it will coming off a $13 million quarter in the fourth quarter of the 1014. But what we're telling you is we think that the core business has now grown where we can deal with it.

Okay, great. So it just sounds like for Oxford overall, ex-CyberCoders second half growth in 2015 looks a lot better than the first half?

Yes, unfortunately the comps are easier.

Yes.

Beyond that, we're hoping that you will see sequential growth on the same number of billable day basis.

Thank you.

Thank you. Our next question comes from the line of Randy Reece with Avondale Partners. Please go ahead.

Good afternoon. At what percentage just all-in was your non-US revenue in the third quarter, total revenue?

Randy, I think we quoted that, and it was this quarter 4.4% and it had a $750,000 negative currently translation.

Sequentially.

Sequentially.

And likely a more negative effect on the fourth quarter, is that correct?

Well, we're anticipating, Yes, basically continuation to the deterioration of the exchange rates in Europe.

In guidance, what are you assumptions for direct hiring conversion fees for the fourth quarter, and versus staffing gross margins?

Okay. I think our contingent search gross margin, Randy, is 100%, right?

Yes. The temporary staffing gross margin versus the amount of direct hiring conversion fee dollars you are assuming in the fourth quarter guidance?

Well, in terms fourth quarter guidance, Randy, we're the perm should come in above $16 million. Okay?

Comparable with the --

Just looking at CyberCoders in particular, they're going to come in almost at $16 million, and the others probably in total less than about $800,000, $800,000 to $900,000. And CyberCoders we are estimating will grow year-over-year about 30% in Q4, just the perm piece.

So when he quotes those numbers, if I'm understanding it correctly, he's quoting you perm revenues, not CyberCoder revenues.

Right.

So if we go past that and just look at assumptions for staffing, temporary staffing, contract staffing, gross margins, Apex is a little bit lower than expected this quarter. Everything else was pretty much in line. On a sequential basis, how do you expect staffing gross margins to behave?

Yes, it should be the same. Maybe a tinge down just because of holidays, but other than that we're seeing a stable pricing environment.

We were up sequentially on the contract. Just the contract margins and I believe that was about 10 basis points essentially so you would expect us to be down off of that in Q4.

Our press release says these estimates assume year-over-year revenue growth on a reported basis of approximately 10% for Apex. Right. So pretty stable to what we reported for the third quarter, Randy, just now.

Alright. Thank you.

Thank you. (Operator Instructions). And our next question comes from the line of Mark Marcon with RW Baird. Please go ahead.

Good afternoon. I wonder if, a similar sort of dynamic for the ERP side of Oxford as you did on the healthcare IT side, just in terms of the revenue peaking?

I don't know if we have that information, but what I can tell you is it's not nearly as dramatic, Mark, but I don't think we have that data breakout for you to show you where that peaked in what quarter of 2013 or 2014. But it's not nearly as dramatic, it's more of a flatness than a 30% down year-over-year. That's not what we're talking about in the ERP.

Okay. So that's been way more stable? Mike, clean that up for me, please.

It really has for the year it really has been soft. We've actually seen a growth in consultants on assignment since the first of January. Relatively flat since last year but we've actually been seeing growth throughout the entire year in the ERP space. Nothing like healthcare IT like Peter was saying.

Great. And then just on the legacy Apex side, are the gross margins basically flat year-over-year, or are how are they trending? What are you seeing in terms of bill pay spreads?

Bill you're on the call. Do you want to address that?

Yes, our gross margin is up 20 basis points on a year-over-year basis, and we're seeing some continued improvement in bill rate, pay rate differentials.

Great. And then with regards to the old scientific staffing, how is that going as part of the integration within Apex now? Just in terms of project leads and some of those bigger jobs?

Rand, do you want to go first?

I'm sorry. Just ask that in the integration of Apex and lab support, some of the large accounts that we share between those two business units, the project lead generally includes a national account leader from one of the other group with coordination with the other. So if that's what the question you're asking. And then there's a network of AMs, account managers, that will work in support of that. So we have, if you will, a consolidated lead. The account leader that will take the biggest lead will be the one where we had the biggest amount of revenue, which typically is on the Apex side but not always, depending on the nature of the account.

But Mark, I think I'm interpreting your question, it's actually gone pretty well. We've actually seen it go both ways. It's not one-for-one, but we have actually seen a couple of large bidding opportunities, where we were either invited to bid or our profile looks more attractive because we can offer both the scientific and the IT. And this new contract that we just won with Aerospace company, it was predominantly IT, but we also are getting scientific orders from it. We still believe that the growth rate I think for the scientific business was 12.5% in the third, and so we've seen good growth, and we feel that our strategic analysis or assumptions about putting these companies together, and then being able to help each other is being proven out as we're bidding on some larger pieces of business.

Great. And that revenue hasn't kicked in yet, has it?

No.

Okay. Great. Thanks for the color.

Hey, Peter, I want to mention one thing just to give some clarifications to some numbers. This, Randy is in response to the questions that you had about perm. Let me frame it up a little bit better than what I did earlier. We are estimating perm for the total Company to be roughly $20 million in Q4. And of that, about $15.9 million will come from CyberCoders. And that reflects about a 30% year-over-year pro forma growth rate.

And CyberCoders will generate additional revenue above perm for contract assignments. But you were just quoting perm revenues.

Yes.

Okay. Thanks.

Thank you. We have no further questions in queue.

Alright. We appreciate everyone's attention, and we look forward to speaking with you on our fourth quarter conference call. Thank you.

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.