ASGN Inc (ASGN) 2014 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the fourth-quarter earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded and is available for replay.

I would now like to turn the conference over to our host, On Assignment CFO Ed Pierce. Please go ahead.

Thank you, Operator. 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 our 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 obligation 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 our results for the quarter. Peter?

Thank you, Ed. Good afternoon. I would like to welcome everyone to the On Assignment 2014 fourth-quarter earnings conference call. With Ed and me today are Rand Blazer, President of Apex Systems, and Mike McGowan, COO 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 fourth-quarter results and our estimates for the first quarter of 2015. We will then open the call up for questions.

Now onto the fourth-quarter and full-year results. Revenues from continuing operations in the fourth quarter were $475.8 million, up 8.3% on a pro forma basis and 12.5% on an as-reported basis year over year.

Full-year revenues from continuing operations were $1.86 billion for the fourth quarter. Income from continuing operations, adjusted EBITDA, and conversions of -- conversion of gross profit to adjusted EBITDA were above our projections provided in the third-quarter earnings press release.

Revenues generated outside the United States were $20.6 million or 4.3% of consolidated revenues in the fourth quarter versus $19.2 million or 4.4% in the fourth quarter of 2013.

Adjusted EBITDA was $54.7 million or 11.5% of revenues, up from $50.2 million or 11.4% of revenues in the fourth quarter of 2013 on a pro forma basis.

On February 1, 2015, we completed the sale of our physician staffing business. Accordingly, we will not be commenting on the segment's results. Later in this call, Ed will walk you through the restated financial statements included in our earnings press release that exclude the physician staffing segment for comparative purposes.

Spending amongst our local small customers grew 21.7%, with our larger account customer base, specifically financial services clients, growing at a slower rate. With that said, we believe going forward that we can grow faster by expanding the percent of business derived from smaller accounts and benefit from the return to normality in spending in our larger banking customers.

As we discussed on the third-quarter conference call, in order to support this initiative without causing a loss of focus and appropriately serving our larger customers, we hired approximately 140 new recruiter salespeople during and exiting the fourth quarter. This accelerated hiring will increase 2015 branch expenses by approximately 3.3% over pro forma 2014 results.

Excluding the physician staffing segment, the number of internal recruiters and sales personnel increased 10.1% year over year on a pro forma basis in the fourth quarter.

During the quarter, we continued to execute against our five-year strategic plan that we announced on March 26, 2014, at our analyst day meeting. On February 1, 2015, as I previously mentioned, we completed the sale of our physician staffing segment and refocused the Company on our IT, engineering, and life sciences businesses.

Exiting the quarter, we are 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 strength of the broader US economy. Based on demand in that division exiting the quarter and our actual fourth-quarter results, we believe the broader US economy is stable.

As for 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.

Demand for services remained stable in all divisions. Our weekly assignment revenues, which excludes conversion, billable expenses, and direct placement revenues, averaged $32.3 million in the last two weeks, up 6% over the same period in 2014. The most recent two-week period has been adversely affected by the inclement weather we've experienced in the Northeast.

Integration, coordination, and cash generation related to acquisitions continued to be at or above our expectations. Our leverage ratio is now 2.06 times trailing 12-month adjusted EBITDA.

As you will recall from our January 20, 2015, conference call in which we discussed the sale of our physician staffing business, we also announced that our Board of Directors approved the establishment of a second $100 million share repurchase program. The plan expires on February 23, 2017, and will be funded with cash on hand and permitted borrowings under our credit facility.

The window for us to be able to purchase shares under the new authorization opens up on February 23, 2015. We intend to execute our share repurchase program based on share price and market conditions.

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.

The Apex segment, consisting of the Apex and US lab support businesses -- business units, grew revenues by 9.5% in the fourth quarter over the fourth quarter of 2013. Revenue was $307.7 million.

Gross profit for the quarter grew 11.4% on a year-over-year basis, with gross margin of 28.5%, an increase of 47 basis points compared to the fourth quarter of 2013.

Segment contribution in terms of divisional EBITDA grew 14.3% for the quarter as we continue to grow our business on the top and the bottom line. Pacing Apex's segment growth was fourth-quarter year-over-year growth in our business services, healthcare, and technology accounts. Our lab support unit also posted solid revenue growth.

The Apex and US lab support business units grew full-year revenues by 12.3% in 2014 over 2013. Revenue was $1.19 billion. Gross profit for the 2014 period grew 13.8% on a year-over-year basis, with gross margins of 28.2%, which is up 38 basis points from the previous year.

Segment contribution in terms of divisional EBITDA grew 17.2% year over year.

The Apex and US lab support business units see a stable market for our services going into the first quarter of 2015. Apex also successfully completed our initiative to add headcount for our field teams as we start 2015, as Peter had indicated earlier.

I will now turn the call over to Mike McGowan to discuss the results of Oxford, Oxford physicians, and European business segments. Mike?

Thanks, Rand.

The Oxford segment, consisting of Oxford core and CyberCoders, had revenue of $123.9 million for the fourth quarter, a 6.7% increase over the fourth quarter of 2013 on a pro forma basis. Gross margin for the quarter was 41.7%.

Oxford's core revenue for the fourth quarter was $105.1 million, up sequentially by 22 basis points over the third quarter of 2014 and an increase of 4.3% over the fourth quarter of 2013. Oxford's core gross margin for the fourth quarter remains strong at 33.8%.

Within Oxford core, the Oxford international division, which comprises all of our national recruiting centers in the US and Cork, Ireland, as well as our local office operations, showed steady improvement throughout 2014 and had a strong fourth quarter.

Revenue in the quarter was $84.6 million, a 3.3% sequential increase over the third quarter and year-over-year growth of 9% as compared to the fourth quarter of 2013. The revenue growth was primarily driven by our regulatory and compliance and traditional engineering segments.

Our ERP segment also started to show improvement in the fourth quarter, after experiencing relatively soft trends during the first three quarters of the year.

Based on our early results in 2015, our expectation is for continued growth in the first quarter, tempered somewhat by the negative impact of the strengthening US dollar against the euro and the recent significant snowstorms that Peter mentioned in the Northeast. The strong performance in Oxford international was somewhat mitigated, though, by a continued slowdown in revenues for other core division, Oxford healthcare IT. As we mentioned in our previous conference call, while the first five months of 2014 were good, revenues declined from June through November as a result of the completion of several large projects and a sluggish demand for new electronic medical record implementations and actual EMR assignments.

The good news, though, is that this division had a strong December and our current expectation is for continued growth in 2015 off of our fourth-quarter base. Based on feedback from our clients, we expect several new EMR implementations, optimizations of previously installed systems, and overall demand for consultant use to slowly increase during 2015, including the need for ICD-10 related work.

Finally, CyberCoders had a very strong quarter with revenues of $18.7 million, 22.7% greater than the fourth quarter of 2013 on a pro forma basis. During the fourth quarter, we increased our recruiter headcount by approximately 6%. In addition, we are continuing to invest in our in-house systems and search technology that we believe will continue to increase our efficiency and drive business. Like Oxford, based on early results in 2015 we expect continued growth in the first quarter and throughout the year.

Ed, over to you, please.

Thanks, Mike.

Before reviewing the results for the quarter, please note that we restated our historical results to report our European retained search unit as discontinued operations. This unit closed in December and incurred a loss of approximately $1.8 million on revenues of $2 million for the full-year 2014.

Also, please note that I will be making references to pro forma results, which assume the acquisitions of CyberCoders and Whitaker occurred at the beginning of 2013.

Now turning to the financial results for the quarter, fourth-quarter revenues were $475.8 million, up 12.5% on a reported basis and 8.3% on a pro forma basis. Adjusted income from continuing operations was $31.4 million or $0.60 per share and adjusted EBITDA was $54.7 million or 11.5% of revenues.

Cash flows from operating activities were $28.1 million and capital expenditures were $5.5 million. These results either exceeded or were in line with our financial estimates for the quarter.

Direct hire and conversion revenues were $21.1 million or 4.4% of revenues, up from $16.6 million or 3.8% of revenues in Q4 of last year on a pro forma basis. CyberCoders accounted for $15 million of the perm revenues for the quarter.

Our gross margin was 32.3%, up 1.7 percentage points on a reported basis and 42 basis points on a pro forma basis. The expansion in gross margin was primarily the result of higher mix of direct hire and conversion revenues.

SG&A expenses were $108.6 million or 22.8% of revenues, compared with $108 million or 22.6% of revenues in the preceding quarter. SG&A expenses for the quarter included $1.8 million in acquisition, integration, and strategic planning costs and expenses related to our realignment and consolidation initiatives and expenses related to the sale of the physician segment, which closed Q1 of 2015.

Our conversion of gross profit into adjusted EBITDA, which is a measurement of operating efficiency, was 35.6% for the quarter. We believe our conversion rates are among the highest in the industry. Our adjusted income from continuing operations was $31.4 million or $0.60 per diluted share, up from $27.6 million or $0.50 per diluted share in Q4 of last year. The calculation of adjusted earnings per diluted share is included in our press release.

During the quarter, we repurchased 1 million shares of our common stock at an average per-share price of $30.50, and for the full-year 2014, we repurchased approximately 3.4 million shares at an average per-share price of $29.78. These repurchases reduced our diluted share count for EPS purposes by 2.8 million shares, resulting in an increase of approximately $0.02 per share in our EPS.

Now turning to our individual operating segments, our Apex segment accounted for 64.7% of total revenues. Apex's revenues for the quarter were $307.7 million, up 9.5% year over year. Apex's gross margin for the quarter was 28.5%, up 47 basis points year over year. The average number of staffing consultants at Apex was 942, up 7.7% sequentially.

Our Oxford segment accounted for 26% of total revenues. Oxford's revenues for the quarter were $123.9 million, up 6.7% year over year on a pro forma basis. Oxford's gross margin was 41.7%, an expansion of 47 basis points year over year on a pro forma basis. This was mainly the result of the higher mix of perm revenues.

The average number of staffing consultants for the quarter was 836, up 2.8% sequentially.

As previously mentioned, we closed the sale of our physician segment on February 1. Gross proceeds from the sale were $123 million and net proceeds after tax and transaction expenses are estimated to be $102 million to $105 million.

For financial reporting purposes in 2014, this sale is treated as a subsequent event and the segment is included in our consolidated operating results from continuing operations. Beginning with reporting for the first quarter of 2015, this segment will be reported as discontinued operations and our historical results will be restated for this change in reporting. To assist you with the effect of the upcoming restatement, we included tables in today's press release that restated our quarterly and full-year historical results for 2013 and 2014 to include the physician segment as discontinued operations.

For the fourth quarter, the physician segment accounted for approximately $2.3 million or 10.4% of our consolidated income from continuing operations and $4.1 million or 7.6% of our consolidated, adjusted EBITDA.

For the full-year 2014, this segment accounted for $5.5 million or 7% of consolidated income from continuing operations and 12.9 million -- or $6.3 million of consolidated adjusted EBITDA. As previously mentioned, beginning with our reporting for the first quarter of 2015, results of this segment will be included in discontinued operations.

Our life sciences Europe segment accounted for 2% of total revenues. Revenues from this unit were down 11.3% year over year. The decline in the euro relative to the US dollar was the principal reason for the decline. The effect on revenues of the decline in the exchange rate was approximately 8.1%, and on a constant-currency basis, revenues from this segment were down 3.2%.

As previously mentioned, we repurchased 1 million shares of our common stock during the quarter at a cost of $31.8 million, most of which was funded out of cash on hand. At quarter-end, our bank indebtedness was $415.1 million, up $11.4 million from the end of Q3.

Our leverage ratio, which is total indebtedness to trailing 12-month adjusted EBITDA, was 2.6 to 1, the same ratio as the preceding quarter.

Now turning to our financial estimates for the first quarter of 2015, we estimate revenues of $432 million to $439 million, adjusted income per diluted share of $0.41 to $0.44, and adjusted EBITDA of $38 million to $40.5 million.

These estimates do not include any acquisition, integration, or strategic planning cost. These estimates assume the inclement weather in Q1 will adversely affect revenues $2.5 million to $3.5 million and that the deterioration in the euro relative to the US dollar will adversely affect our Q1 growth rate by approximately 1 percentage point.

Our Q1 estimates also include the effect of the payroll tax reset that occurs at the beginning of each year. The estimated effect of the reset in Q1 is a sequential increase of $4 million to $4.5 million in the cost of sales and a $3 million increase in SG&A expenses.

As with all other estimates in this call -- on this call, they are subject to the risk mentioned in our press release and SEC filings.

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

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

I would like to now open the call up to participants for questions. Operator?

(Operator Instructions). Kevin McVeigh.

Nice job. Peter, if you said this, I missed it. It sounds like you went to 140 on the new hires in sales. Is that a net number in terms of what came off with the sale of the physicians or what would be the net impact to the adds if you factor out the recruiters that went with the physician sale, if any?

It is my understanding that those numbers are net of the physician headcount.

Okay.

It is a combination of sales and recruiters, heavily weighted towards sales.

Got it. I know it was about -- if I had the number right, about $10 million or so for the 100. The increase for the full year, the 3.3%, can you just -- what's the expense impact for the incremental full year, just what the total expense impact is for 2015 from those 140?

I don't have that, Kevin. I guess what I would do is just extrapolate from the numbers that we gave you.

Okay, okay. Then, listen, it looks like Oxford had its first year-on-year sequential acceleration since Q2 [1/2]. Nice job there. Is that some of those recruiters hitting the ground already and we should expect more momentum as we work our way through 2015?

No, it's not -- we really haven't seen any sort of positive impact from the hiring because the hiring really started in Q4. It takes time for them to be onboarded, trained, and actually stop shadowing people and have their own book of business.

Mike, why don't you just walk him through qualitatively what drove the performance in the fourth quarter that allowed you to have the sequential and the year-over-year growth?

The biggest thing, Kevin, was some very, very specific targeted sales initiatives that we conducted in Oxford international, which were those national recruiting centers in our local operations, as well as in the healthcare IT group. That's primarily it.

We had about five or six major initiatives that we focus on in terms of, as an example, of increasing penetration in some of our accounts, some of those sort of things. But that was really the result in a really aggressive posture that we have taken, and now it's doing the same thing. Because we have those same initiatives and programs now in 2015, we are seeing the same positive impact.

Kevin, they've been working hard all year, it just -- it takes time -- the passage of time for some of these things to start bearing fruit. They were working harder in the second and third quarter than they may have even been in the fourth, but time just hadn't passed and reaction to our initiatives hadn't occurred to allow us to report the revenues, and now passage of time has occurred.

That's a nice outcome, and last question, then I will jump back in. The weather impact, was that across all segments or did it disproportionately impact one versus the other?

It's more on the IT side than the life sciences side.

Super, thanks again. Nice job.

George Tong.

Hi, it's George from Piper Jaffray. You have indicated you are seeing a return to normality in spending from some of your larger customers at Apex. Can you provide some more context here, what specifically you are seeing and what's driving the rebound in spend?

George, I will go first and then I will ask Rand to specifically address it.

But our prepared comments were we are confident that there will be a return to normality, but we are not actually saying that we have seen it specifically in the financial services industry. And that although we are growing above industry growth rates, it is a little bit less growth than we would expect because of our brand and size, and the growth, as we said, from our smaller accounts. Again, a small account could be Johnson & Johnson that we do $500,000 a year with and we don't do $10 million a year with them. It's not that the customer has 300 employees.

We saw almost 22% growth in our smaller purchasing size accounts, and that has been carrying a little bit of the load while some of the large money center banks have been muted in their spending. Rand, what would you add to it?

I think you said it and we said in the comments, too. The industries where our top accounts are continuing to shine are technology, business services, and healthcare account.

Right. You mentioned you expect healthcare IT spending at Oxford to increase as you move through 2015. Can you talk about how much visibility into this increase you have and how expectations now differ from what they were a year ago?

Yes, so look, our comments -- prepared comments were we expect to grow off of our fourth-quarter run rate and the fourth-quarter run rate was around $13 million, $14 million, whereas the second-quarter 2014 run rate was about $21 million.

So we feel like a good portion of some of the surge in spending is through our system, and people are starting to look more forcefully at phase 2 of these implementations and optimizations.

I wouldn't get overly excited. We are excited that it is not shrinking and that we are starting to see more work to bid on, but it's one week at a time.

Got it, and then, final question for me. Your leverage ratio is currently at 2.06. Can you discuss your strategic views on where you would like to take that and what the implications are for additional indebtedness and share repurchase activity?

Yes, so absent an acquisition, we said anytime we are under 2.5 times leverage, we don't think that based on current cash flow generation and cost of debt that our capitalization is optimized. So we tried to get to 2.5 leverage with the first $100 million share repurchase and it didn't happen, and now we have a situation of about $105 million in net proceeds, plus we are going to generate north of $100 million in free cash flow this year. So we're going to be looking to get to 2.5 times leverage through the share repurchase if we don't have attractive acquisitions to work on.

Great, thank you.

Tobey Sommer.

Another question for you about the large customers. How do you feel like on an apples-to-apples basis the large customers have performed since last summer? And then maybe if you can segregate it and talk to the large customers from a perspective of this year, do you have access to a different or larger sets of potential large customers? Thanks.

Rand, why don't you go first and I will follow?

Tobey, first of all, yes. Every year, we target or retarget the top accounts we really want to service. A high percentage of them stay the same year after year, but what we've found is we have targeted accounts in technology, business services, and healthcare obviously over the last few years, and those areas continue to grow for us.

Our stable and historic base have been the banks, the financial institutions, the consumer industrial companies, and government contract companies, and what we have seen there is a little bit of ebb-and-flow business. So for example, our energy and -- our energy accounts are down in their spending and obviously our revenue from them is down a bit.

Our banking clients are relatively flat over this past year. We still believe we have the same, if not a growing, market share in those accounts, but their spending is down a bit. Now having said that, we continue to target and pursue other accounts within that sector -- insurance accounts, midmarket banks, and other things.

The government accounts, I think, are also clear. We have seen them decline during the course of the year, a little bit of a turn up in Q4, but not enough to say we're out of the woods. But I think we can all watch what goes on in Washington, DC, and we will get a sense of where spending will come.

Where we are leveraged the best in government is defense and homeland security, and that's the area that I suspect will get more funding as we go forward. Does that give you some sense, Tobey?

It does, thank you.

Tobey, I would just add as you said about 2015, you know, our customer base, the wisdom of the large customer base is we worry about quality of revenue as much as quantity of revenue, and by having these larger accounts, they may move around and instead of being number one, they are number 10 in any given year, and then move back to number four the following year, but we have a stable of clients that we can pretty much rely on year in, year out that we're going to get some sort of business from.

But we added to that stable in the fourth quarter, so we have a couple of major wins that will start firing up in 2015 that we really didn't do any significant work with in 2014. That offset some of the fall-off in some of the bank spending or energy companies.

Okay. I was wondering -- if you commented on it, I apologize, but how did ERP perform in the fourth quarter? And to the extent you have any comments on an expectation for the first quarter, it would be appreciated.

Our comment was that after a couple of sluggish quarters in 2014, that in the fourth quarter ERP performed better and we expect that continued performance in 2015.

Then my last question is just a numeric one. I think you said the 140 new recruiters and salespeople represented -- is that 6% growth?

Well (multiple speakers) my prepared comments said -- excluding the physician staffing segment, the number of internal recruiters and sales personnel increased 10.1% year over year on a pro forma basis as of the fourth quarter. Now I gave you some apples and oranges numbers, Tobey, because what I just read you was fourth quarter and the 140 was as of last week.

Okay. Thank you very much. I will get back in the queue.

Edward Caso.

It is actually Rick Eskelsen on for Ed. Hoping to dig in a little bit on the financial services side and just see if you can parse out a little more where you are seeing demand, what areas the banks are or are not spending on, and your expectations in 2015 on how that may or may not change. Thanks.

Without getting into specific customers, generically, Rand, would you talk about where you are seeing the urge to spend in the money center banks?

I think what's happened is some of the merger activity over the last two or three years has calmed down, so that spending is decreasing.

What's increasing is consolidation of operations, operating systems that are more end-user pointed, infrastructure cost consolidations in the bank and the financial sector, which is an ongoing thing and it's a good cost -- it's a cost-savings mechanism for the banks.

The biggest thing that has probably come down a bit over the last year is merger and acquisition activity. It really started two, three years ago.

Okay, and then just building on that, Rand, you had also talked about healthcare being an area of strength. If you could maybe give a little more detail into the pieces of healthcare where you are seeing any solid demand.

We support on the Apex side -- remember, we have healthcare units both on the Oxford side and the Apex side. I think Mike gave a good description on the Oxford side.

On the Apex side, we focus on the account and our spending has ebb and flowed from spending around EMR/EHR systems implementation, say, over the past couple years to now more just infrastructure, database generation, connectivity, interoperability of systems, what I would call the normal core and fundamental IT kinds of core requirements that they need.

We, too, are experiencing less EMR/EHR implementations, but we are definitely focused on the account and have moved as nicely over the past year, year and a half into the other core infrastructure areas to the other areas of spend. It's across payers and providers, so it's with the hospital systems and hospital chains, as well as the payers. A little bit of pharmaceutical work is in our healthcare sector. A new entrant into this is some of the VA and the government healthcare spending, which is ebb and flowing also, I would say.

Okay, then just the last one for me on the -- overall across your client base, I don't know if you have a sense for maybe what the IT budgets are looking like for 2015 now that we are towards -- well, actually close to the end of February, and then specifically within that, what about the new technology, the more discretionary areas of spending in technology? I think the last time you guys have talked about new tech, you said there wasn't -- clients were maybe being a little more deliberate in how they were deploying that. Thank you.

A couple of comments. With regard to budgets, they are genuinely productive, saving except a couple of customers that have specific desires of how they want to manage their P&L in 2015 and earnings production and stuff like that.

But with regard to newer technologies, cybersecurity is getting a lot more attention and money spent on it, but the continued focus on new product development and just business analytics, data warehousing, and Dodd-Frank compliance with regard to the major money center banks tends to be what is garnering the most attention of the CIO's office right now.

Great, thank you very much.

Jeff Silber.

Now that you have divested the physician business and closed the European retained search unit, are you happy with the business mix as it stands? And if not, what areas might be missing?

No, no, we feel pretty good. We think that we have the right focus, breadth, scale to be -- we are the second largest in North America and we have got a laser focus on building it out. And as you saw, Jeff, in the quarter because of our business models, we can throw dollars at SG&A and grow our business versus having to acquire things. So we feel pretty good that we are in the right space, which is IT, engineering, and life sciences.

Okay, that's great to hear. Eddie, I guess a question for you. On the statements at the back of the press release that show continuing operations going forward, I just want to double check. Within discontinued operations, that's both the physician staffing segment, as well as the European retained search unit?

Yes.

Okay, good. So this is the format that it will look like when you report your first-quarter numbers?

Exactly.

Okay, fantastic. Then just one more quick one and not to nitpick on the numbers, but since you gave us so many, when I look at the average number of customers in the Apex segment, it looks like that declined both on a year-over-year and sequential basis. Was there something specifically going on there?

Let me make sure we are looking at the same data. Average number -- top 10 customers -- average number of customers. It shows it down by 100 or so sequentially. I don't know. Rand, do you have an explanation?

No, I'd have to go back and look at that. I wouldn't say there is any major movement there. We're still moving across the board. If anything -- I would have to go back and look at those numbers.

(multiple speakers) that number may move -- Jeff, I'm sorry. That number may move around a little bit more as you get more smaller accounts.

Okay.

Than historically.

Peter, one thing I would add, too, is I assume that number includes Apex and lab support business.

That is correct.

Yes, and the lab support business is going through their migration in with us, if you will, and they've focused more on some of the large accounts, and so as some of the smaller onsie/twosie accounts have probably fallen to the wayside, which is fine as far as we're concerned and our team is driving. So I think that's probably a piece of that.

Okay, that's understandable. Thanks so much.

You didn't ask the question, but I will make the statement. We are not aware of a loss of any major customer.

Correct.

Paul Ginocchio.

Pete, just if you could maybe break out the bill rate for large versus small clients. I do see it's picked up. It is up 2% -- 2.4% year over year, which has been better than it has been. Could we just get a look at that, maybe, on a like-for-like basis, small versus large, and is your initiative to going into smaller clients, is that what's starting to show up with the bill rate, or is it just better pricing?

The bill rate is not moved by the customer size as much as the margin is. That's just ebb and flow of the mix of skill sets that are sold in a particular quarter to a particular customer.

Again, I just want to distinguish how we define our small accounts versus others. A small account is not a company that has 100 employees. A small account is somebody that we may do $200,000, $300,000 of revenue with, so it could be General Electric, but for whatever reason General Electric only buys $300,000 of revenue services from us a year, whereas another person would define a small account as Pete's Hardware Store that has five stores that does $10 million in revenue and they need a new website built and they have a total of 150 employees.

Our initiative is not to go down and find customers that have 150 employees. Our initiative is to broaden our customer base and to accept more smaller-sized accounts and build some intimacy with them where they may become one of our top 200 accounts someday.

Okay. And just can we talk about the outlook for the bill rate? Despite everything we hear about talent scarcity in IT staffing, your bill rate was down 13 or slightly down this year. It was down the first half. It was up in the back half. Could we get to 3% to 5% bill rate growth?

The bill rate is just mix, so on Apex if you see any compression, it's because of how they report the scientific staffing, which has on its own bill rate that's $20 lower than their -- or $30 lower than their core bill rate. That's all that is.

As it relates to Oxford, the bill rate moves around again with skill sets. The regulatory affair engineers that come in when there has been an FDA inspection and there have been cited violations, those people are going out at a much higher rate than a normal SAP implementer. That, once again, is moving around.

We are seeing pricing pressure, meaning more conversations from the billable temp about wanting wage increases, and we are having those conversations real time with the customer.

Okay, just a couple more, if you don't mind. You didn't break out the payroll increase a year ago, but you did this time. Was that because it was unusual this year relative to last year or you just wanted to call it out?

We did actually, I think, in our first-quarter earnings release -- not the release, but in our prepared remarks. I think we said it was roughly $3 million to $5 million.

Is it unusual this year or no, just the normal course of business?

I'm sorry, I'm sorry. That was weather. I was thinking of weather. No, in fact, if you look at it year over year, it's about the same percent -- the increase is about the same percent of revenue this year than what it was last year.

Okay. Then just on direct hire, I think it was -- your revs were down about 13.5%. One of your competitors was down 12% Q-on-Q from third quarter into fourth quarter and another one in a different end market was only down a few single digits. I would have thought with CyberCoders that you may have outperformed one of your IT comparables peer companies, but in fact your direct hire revs were down a little bit more. Is there anything going on in CyberCoders or --

Let me clear that up for you, because CyberCoders had a huge fourth quarter. Remember when we bought CyberCoders, it had two components to its business, a small component of contract staffing and then the vast majority of it being search fees. The search fees grew almost 32% in the fourth quarter and we have told intentionally CyberCoders to stop doing the contract stuff because we have got billions of that our own. So you all go after the contingent search business.

That Q-on-Q decline of maybe a bigger percentage was more because of the reduction in temp?

That's correct. They had more temp revenues in the fourth quarter of 2013 than they did -- at a faster growth rate than they did in the fourth quarter of 2014.

And that was reported in that $18.2 million?

I believe that's correct.

Yes, it was. Yes.

If I could sneak one more in, apologies. ACA, have you put a price increase through and is that going to cover costs, or is it just not really an issue for you?

The guidance we gave you -- it's not an issue. The guidance we gave you is that we are factoring it into our pricing and you see what the margin is that we expect in the quarter.

Great.

Tim McHugh.

I just wanted to ask -- I know you're not giving annual guidance, but I guess given the margins it seems are down a little year over year in Q1, and I get you are adding a lot of salespeople, is it simply that we need time for those to mature? I guess whether you want to say for this year or, I guess, over a 12- to 18-month horizon, do you still think we're at a point where earnings should be growing faster than revenue or are we in a sustained period here where you may continue to push on SG&A to drive the organic growth where margins will be down, I guess, over the medium term?

Tim, I would answer the question this way. We think we got stable to slightly expanding gross margins.

On the EBITDA margin, the first quarter is down for a variety of reasons, which is the payroll reset. We just hired 140 people. We are divesting of a segment and we are layering off back-office processing personnel, and we are wearing belts and suspenders in the back-office now until we finish the transition services to the new buyer as well, as we have pretty much finished the lift and shifting of the lab support out of Calabasas into Richmond, Virginia.

All things considered, I think we actually expanded our EBITDA margin 2014 fourth quarter over 2013 fourth quarter, even with the surge in hiring. I am not particularly concerned that we are not going to be able to continue to expand our operating leverage if we get a return on investment on these people.

So, I want to choose my words carefully. I know others are trying to expand their EBITDA margins, but we have consistently always done that and I think we will continue to do that.

Fair.

We gave you targets in March 2014 at our analyst day that we think we could expand them 100 to 250 bps, and we expanded them in 2014 and we have got plans to do some things that'll allow us to do it in 2015.

Okay. Then if I look at the topline by segment, I guess typically in the guidance you give us the growth rates by segment and I didn't see that this quarter. I did hear in the prepared comments, I think Oxford, Mike had said, similar growth rate to what they saw in Q4. Is it fair -- is that a similar kind of comment for Apex as we think about that in Q1 in terms of what growth you are expecting?

As it relates to Apex, we'd be looking at somewhere between 9% and 10% topline growth in Q1, and as it relates to Oxford, actually you would expect an acceleration on a pro forma basis from what you saw in Q4.

With slightly faster growth rate in the first quarter than the fourth.

Yes, exactly. So our [search] should be maybe 6% to 8%.

By the way, Tim, to point out the obvious, that 9%, 10% growth rate for Apex is pretty impressive when you consider they grew 16.5% in the first quarter of 2014 and we had inclement weather in the first quarter of 2015.

Right. Okay, thank you. That's all I had.

Gary Bisbee.

First question for me, so it's great to see the sales and recruiter hires. I guess looking back, though, any commentary on why prior to this quarter the year-to-year growth in that -- on an organic basis, stripping out the divestiture and stripping out what CyberCoders added, had really slowed in the first nine months of 2014? Was that more a reaction to demand or was it you were focused elsewhere and for some other reason slowed the growth of those hires?

Gary, I think to repeat what we said previously, the performance in 2014 through the first three quarters was because of the ebb and flow in large customers, a dramatic slowdown in electronic medical records, a little bit of distraction in our shifting of the clinical research business in the US to Oxford, and the decline in the euro, but other than that, I don't think it was anything other than that.

It wasn't a deterioration in the market. It wasn't a deterioration in our competitive profile. Maybe we watched our SG&A a little too tight coming out of the second quarter, but we resolved that quickly, and we are playing for the long haul. And I think that between what we did with the expansion of our EBITDA, the improvement of our capitalization and the hiring of these new people, and the reacceleration of growth at Oxford that we are well positioned for 2015.

Okay, all right. Moving on, just you said earlier that things would be good if these new hires were productive. Any comment you can give us on how we might gauge your confidence in the earning a good return on those investments, and particular I ask it from the perspective of when you talked about it a quarter ago, you talked about targeting slightly different segments, so smaller customers or customers where you were doing less revenue and some other things.

Do you have a good handle on how those customers act such that you feel like you have a good handle on the return you'll earn on those investments?

We have a good handle on understanding the productivity and the financial performance of each person that works for us and that question will be more answerable in June, but you will be able to see it in the gross profit per staffing consultant that we give you in the supplemental financial information.

Okay, all right. And then, just any from a high-level change in dialogue with clients as you moved into the new calendar year, particularly in some of those areas where you saw slowing in the second half of the year? Are budgets reopening or is it really just still -- I guess I would say it sounds like you said it's still spotty in some areas. Did that change at all in the last month and a half?

What we've tried to communicate is that absent the financial service industry and energy, things are relatively stable productive, and in those spaces, financial services, it's -- it will be fine. It will just take some time and then we'll get back to normalized spending.

Look, they are the biggest spenders on new technology. They are the fastest to spend and they're the fastest to turn off, and there is just a cycle to it, and some of it has to do with the deployment cycle of a particular customer, so I am just using these names as an example, not as specifics, but JPMorgan may be in a different place in their spend cycle and deployment cycle than Bank of America, and that could be the case in 2014, and then 2015, it flip flops, and it just depends which banks you do business with.

But all in all, the financial service industry will always be a productive place to invest our time and sales efforts and we are planning for it to get better throughout the year.

Great, and then just one cleanup numbers one. Thanks for the restatement ex the divestiture and the closed business. I don't think you gave your adjusted earnings on a restated -- was the physician business a material piece of the amortization of intangibles? It seems like that might be the one that changed.

No, it was not material, but the effect on 2014 of pulling out the physician is roughly $0.058 per share, okay? So roughly --

On GAAP or adjusted?

On adjusted, which is about $0.055 a quarter.

Okay, all right, that's helpful. Thank you, guys.

But we did give the numbers going forward to help you, right, for the next five years. That's what our projections are.

Dan Dolev.

Thanks for taking my question. This is Dan Dolev. It looks like the guidance implies sequential deceleration in Q1 on an apples-to-apples basis, ex physician. Can you maybe comment on what's driving that specifically?

Dan, I just think it has to do with the inclement weather. It has to do with, as we told you on a year-over-year basis, the drop in the currency translation, which is about 100 bps, and just the release of budgets.

But for the vast majority of our IT business, we are feeling the low end of guidance I think is, what, Ed, around 7% and the high end is around 9%. That's with $3.5 million (multiple speakers)

The other thing is -- Ed was reminding me of is, as I previously mentioned on this call, Apex grew 16.5% in the first quarter of 2014. That was just a byproduct of there was a large spend cycle going on at a couple of major banks that wound down towards the end of the first quarter.

What would -- how would you envision the progression of Apex as the comps get easier as the year progresses?

We are giving one quarter at a time, but we still believe that we are a double-digit revenue grower.

And that we're going to grow faster than the market.

And we are growing faster than the IT staffing market. That's, I think, the only forward guidance we are prepared to give.

Got it. Then last question, just a housekeeping question, you have been so kind last three quarters to provide some detail, which we are modeling, at least here, on the Oxford sub-segments. Can you provide a little bit of color as to at least what it was in Q4 between healthcare IT and the non-healthcare IT part?

All I can tell you is if you go back to the prepared remarks, we said the following, that the Oxford core was $105 million and it was up 4.3% off of the fourth quarter of 2013. And that the --

Oxford international.

-- international grew 3.3% sequentially and 9% over the fourth quarter of 2013. Those are the two staff that we gave you.

Got it. Yes, sorry I missed that.

One thing, Dan, we ought to make clear is on a go-forward basis, we are going to give information related to the Oxford segment for Oxford core, which is their everything but CyberCoders, and we did CyberCoders separately, so that's how you are going to see -- that's what we're going to talk about on a go-forward basis.

Got it, so you are consolidating healthcare IT and international?

Yes.

Got it. Okay, very helpful. Thank you very much.

Sara Gubins.

This is David Ridley-Lane for Sara. On the M&A pipeline, are you seeing a good flow in terms of potential deals and how would you characterize your level of appetite?

I would tell you, yes, there is good flow. It's just you have to be disciplined and patient and make sure that the business is the right fit.

I will tell you in our lifecycle, we are through the divestitures. We are through the lift and shift of the lab support business. We have got a little bit of remaining time on transition services for the healthcare business, but we have got a lot fewer balls in the air in March 2015 then we did in October 2014. So that gives us more confidence as well.

I know the share repurchase is subject to market and stock price, but it sounds like, from your comments around the strong free cash flow you are expecting and the proceeds from the divestitures, you're inclined to be a bit active on share repurchase, absent any attractive M&A?

Right.

Okay, great. Then just a quick numbers, is the 40% tax rate a good proxy for the full year?

For 2015, I think, generally speaking, yes.

All right, thank you so much.

Randy Reece.

Maybe I missed this, but did you comment as you usually do directionally on the relative growth rates of the segments that are embedded in your revenue guidance?

Yes, Randy, we did in response to a question, and the response was basically that Apex would grow 9% to 10%, roughly, and that Oxford would be -- the Oxford segment would grow 6% to 8%.

When you pull that together, how much is Apex affected, if at all, by currency? And which of the two segments do you think has the best revenue mix versus the market going into this year?

I will speak as it relates to the currency exposure. There is little to no currency exposure at Apex. They do have some Canadian operations, but it's de minimus relative to the whole.

The main currency exposure is in the life sciences segment, and Oxford does have a European business that is about -- almost the same size as the life sciences Europe, but the number that we mentioned in our earnings estimate in terms of the adverse effect on our growth rate, that is -- that is our calculation of what we think the effect will be, and anyway, Peter, on the --

Our skill mix, we're always trying to stay in tune with early adoption and what customer demand is, so I think both -- all the divisions are appropriately aligned with what the customers have in mind.

It seems like this is an unusual technology environment in that small companies can flash up from zero to being very substantial and disruptive to the marketplace in a short amount of time. That affects the success rate of existing technology providers and it also is accelerating the rate of change. Have you seen this affect any demand from, let's say, legacy users, just historically large users of tech staffing services?

Right, so I understand your comments and I think they are insightful. I would tell you I would have two reactions to how I interpreted what you said, Randy. First, we don't work with a lot of start-up companies that could be the one out of 1,000 that are the next Snapchat or WhatsApp.

I mean, we work with Snapchat and WhatsApp, but not when they are 15 people and 10 dogs in an office.

As it relates to disruptive technology, that is a benefit to us because it causes churn and we try to stay, and Rand gave you a disclosure of which of our customer industries are growing the most, but I use this as a dynamic example, but it is not like we're working with Eastman Kodak and every day that goes by they sell less and less film because of digital photography.

We don't have a lumbering, old economy customer that is on an AS/400 platform that we've been doing code maintenance for that we are just going to do less and less for each year, if that's what you were driving at. We do a lot of work with relevant, large, newer technology companies, but not when they are at their venture-capital stage. We do that more on the medical device, life sciences, biotech side versus the IT side. There is too much credit risk.

In the search area, you made a really good bet on when to dive into the search area. Does that feel like it's getting to be a stronger area of demand in 2015 or are there other things you can do to take advantage of the changes in the labor market?

I think the market for contingent search is going to be good in 2015. Our team had a good 2014 and they were comfortable budgeting internally what we thought was a good number, and I think they are benefiting from three things.

One, the overall market is improving, which is giving people confidence to hire full time. Two, I think contingent search is taking market share from the retained search market on the lower salary level because research is a lot more competitive because of the likes of LinkedIn and other parsing software, and so a contingent search firm can compete with a retained search better than they could in the past.

The third is just that we have better, we think, technology and have a large base of -- we've got over 290 people basically, the majority of them sitting in one place, and all they do is have a single focus on identifying candidates almost on a passive basis that could be presented to customers who want to hire full-time employees. I think that's what's driven our higher-than-industry growth rate in that space.

Very good, thank you very much.

Mark Marcon.

It's Mark Marcon from Baird. Can you talk a little bit about what you are seeing on the Oxford -- legacy Oxford gross margin side? How are the pay bill spreads trending there?

Mike, you want to address that first?

Yes, I can. Overall, again, a lot of this comes back to the mix issue that Peter was talking about in terms of bill rate and all that, so it really comes back to fluctuations within our mix. Some segments have higher markup, obviously; others, lower.

Really, we are not seeing trends, if you will, except as Peter mentioned some of the pressure on the consultant side. As they feel the economy is continuing to get better, they are going to want more money, so that's a negotiation process we have every day with our clients because, as you know, most of our deals are negotiated at one on one with our clients.

Other than that, there is nothing really unique in terms of what's going on from a trend standpoint.

Mark, to just add to that, if you are trying to compare this to 2007, there is no doubt that the gross margin has gone down, and that's a product of two specific events.

One is we are trying to reaccelerate the growth and more deeply penetrate the customer, so it's less of a one-off one-by-one pricing. It may be a three-by-four pricing now.

The second is what Mike was saying, just the shift in skill mix.

But is the gross margin down maybe 120, 140 basis points from 2007? Yes, but if you look at the branch contribution and the segment reported gross margin, they're up and we're just managing the portfolio. We think that is just probably the reality of what the margin is on a go-forward basis, which is, at 33.8%, still very healthy.

Yes, absolutely. And then, how are you thinking about CyberCoders for within embedded in your first-quarter guidance?

It is probably the fastest growth rate, percentagewise, of any of the service offerings.

Yes, but we are not being granular as it relates to our estimates.

Okay. I was just trying to compare the CyberCoders relative to the Oxford discussion in terms of the 6% to 8% growth, and just -- because you're coming (multiple speakers)

Let's just leave it at this. If you took CyberCoders out, Oxford is still going to grow and they're continuing to heal.

Okay, great. Then with regards to Apex, it does look like the gross margins are going up over there. Is that just because of the small business mix?

That they are going up?

Yes.

Yes, that's more attributable to the 21.7% growth in the smaller accounts.

Okay, great. Then you mentioned energy a couple of times. Obviously, we have all seen it in the news. How big is energy for you?

I don't have that off the top of my head, but it is not -- it is not top seven, eight industry verticals.

Okay, so it's not going to be a big change going forward?

No. What we said is implicit in our guidance is we're going to grow 9%, 10% off of a 16.5% growth rate in 2014 for Apex, and that's with bad weather and energy slacking off, we still think we can grow 9%, 10%, so it's not going to be a big impact.

Okay, and then the net 140 that we ended up adding in terms of the recruiters and account managers, which sounds like up roughly 10%, do we think -- do you think that's something that will continue through the year or do you think this was a step function?

One, we want to stay above that number, but you know it's a constant challenge to retain people and we do have to hold people accountable. Two, our 2015 budgets have investments that headcount continues to increase --

Above that.

-- above that number, maybe not at the same rate of growth, but yes. There is additional hiring that will continue throughout the year.

Okay, great. Thank you.

We have no questions in queue. Please go ahead.

All right. We appreciate your attention and look forward to reporting our first-quarter conference -- our first-quarter earnings call on the next conference call. Thank you very much for your attention.

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.