ASGN Inc (ASGN) 2015 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the first quarter earnings call.

(Operator instructions)

As a reminder, today's conference is being recorded. I would now like to turn the conference over to our host, CFO, Mr. Ed Pierce. Please go ahead, sir.

Thank you. 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 risk and uncertainties and our actual results could 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 2015 first 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. We'll then turn the call over to Ed for a more detailed review and discussion of the first quarter results and our estimates for the second quarter. We'll then open up the call for questions.

Now onto our first quarter results, revenues from continuing operations in the first quarter were $430 million, up 6.7% year over year on a constant currency basis. For the first quarter, adjusted income from continuing operations, adjusted EBITDA and conversion of gross profit's of adjusted EBITDA results were within the guidance range we provided in the fourth quarter earnings press release. Revenues generated outside the United States were $19.3 million or 4.5% of consolidated revenues in the first quarter versus $19.9 million or 4.9% in the first quarter of 2014.

Adjusted EBITDA from continuing operations was $38.7 million or 9% of revenues, up from $38.2 million or 9.4% of revenues in the first quarter of 2014. As a reminder, on February 1, 2015 we completed the sale of our physician stamping business. Accordingly, we will not be commenting on that segment's results. Later in the call, Ed will walk you through the restated financial statement included in our press release that exclude the physician staffing segments for comparative purposes.

Revenues in our local midmarket accounts grew double digits with our larger account base growing at a slower rate. With that said, we believe going forward that we can grow faster by expanding the percentage of business we derive from midmarket accounts and benefiting from the return to normality in the spending in our larger banking customers.

As we disclosed on our fourth quarter conference call, in order to support this initiative without causing a loss of focus and appropriately serving our large customers, we hired over 150 new recruiter salespeople during the fourth quarter of 2014 and in the first quarter of 2015. This accelerated hiring increased first quarter 2015 branch expenses by approximately $2 million over the first quarter of 2014 results. The number of internal recruiters and sales personnel increased 14.6% year over year in the first quarter.

Exiting the quarter, we feel we're well-positioned to accelerate our revenue growth and pursue strategic acquisitions. Integration, coordination and cash generation related to our previous acquisitions continues to be at or above our expectations. Our current leverage ratio is 1.77 times trailing 12 month adjusted EBITDA. Despite the April jobs report we currently believe the broader US economy is stable.

As for IT, our business continues to grow above published industry growth rates albeit, at a slower rate than we previously have had. 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 the quarter we saw year-over-year growth in the US divisions. Our weekly assignment revenues which exclude conversion, bill to book expenses, direct placement revenues averaged $32.3 million for the last two weeks, up 5.2% over the same period in 2014.

As you will recall from our fourth-quarter conference call, we also disclosed that the 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. During the quarter, we purchased 43,000 shares at an average price of $38.26. We intend to execute on our share repurchase program based on share price and market conditions.

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

Great. Thanks, Peter. The Apex segment consisting of the Apex and US lab support business units grew revenues by 5.7% in the first quarter of 2015 over the first quarter of 2014. Revenue was $294.3 million. Gross profit for the quarter grew 5.5% on a year-over-year basis. While the Apex gross margin grew year over year, the lab support gross margin declined with the overall segment gross margin down 6 basis points to 27.1% compared to the first quarter of 2014. The decline in lab gross margin is mostly attributable to less current placements in the quarter than the previous year's quarter.

Overall, Apex segment contribution in terms of divisional EBITDA grew slightly for the quarter again, on a year-over-year basis, despite the surge in field headcount added by the end of 2014 as alluded to by Peter. Apex's segment growth was strongest in our business services, healthcare, technology, and retail or local branch midmarket accounts all growing revenues double digits year over year in Q1 2015 over Q1 2014.

Growth in our financial and particularly, our major money center banks accounts, government services and oil and gas accounts posted negative growth in revenue over those same periods in Q1 2015 versus Q1 2014. Given that our accounts in these last sectors of financial government services and oil and gas accounts, represent almost 50% of our revenues, their lack of growth impacted our overall segment performance and have done so over the past few quarters. Nonetheless, we expect to see improvement in the IT spend in these accounts in the future as bank earnings improve, government budget, particularly in defensive and homeland security increase, and oil prices rebound.

Additionally, the Apex segment completed our initiative of adding to our field teams headcount for the beginning of 2015. These staff additions are now servicing target accounts. As Peter said many times, we expect productivity from this headcount surge to impact our performance in Q3 and Q4 of 2015.

I'll now turn the call over to Mike McGowan to discuss the results of the Oxford segment. Mike?

Thanks, Rand. The Oxford segment, consisting of Oxford International, Oxford Healthcare Technology, formerly referred to as Oxford Healthcare IT, and CyberCoders business units had revenue of $127.5 million for the first quarter of 2015 an 8.5% increase over the first quarter of 2014 or a 10.4% increase on a constant currency basis and 2.9% sequential growth over the fourth quarter of 2014 or a 3.8% increase on a constant currency basis.

Gross margin for the quarter was 42% compared to 41.7% for the first quarter of 2014. Revenue for the combined Oxford International and Oxford Healthcare Technology business units was $104.9 million in the first quarter of 2015, an increase of 5.7% over the same period of 2014. First quarter gross margin for both was 32.1%. Oxford International, which comprises all of our national recruiting centers in the United States and Europe as well as our US local office operations, accounts for almost 80% of the revenue of these combined business units and had first quarter revenue of $83 million, an increase of 12.3% over the same period of 2014. On a constant currency basis, with consideration for the strengthening US dollar against the euro, year-over-year growth would have been 15.4%.

Oxford Healthcare Technology realized first quarter revenue of $21.9 million, up sequentially by 6.8% over the fourth quarter but down 13.6% compared to the same period last year. This division had a strong December, 2014 which continued into the first quarter of this year based on increasing demand for new EMR implementations and optimization activities as well as new ICD-10 related work. We have also experienced positive results from our diversified skill set offerings and our expanded sales force. We expect for this demand to continue into the second quarter, resulting in sequential growth from quarter one to quarter two.

Turning now to CyberCoders, I'm pleased to report that they had their best quarter on record with total revenues of $22.5 million, 23.5% greater than the first quarter of 2014. Prompt placement activity continues to outpace job creation and CyberCoders reported another quarter of strong perm placement growth with a 32.7% year-over-year increase. The momentum in this business unit is strong as we continue to invest in incremental staff.

Finally, Life Sciences Europe, only 1.9% of On Assignment's overall revenue, experienced a reduction in revenue by 8.1% or EUR645,000 year over year. As I mentioned on a previous conference call, this reduction is attributed to the overall sluggish European economy, legacy clients decline in annual spend, and a reduction in the length of assignments from 20 weeks to 14 weeks within the lab support business unit.

Ed, now over to you.

Thanks, Mike. Before reviewing the results from continuing operations, please note that we closed the sale of the physician segment on February 1, as Peter mentioned previously. As result, operating results of this segment are excluded from continuing operations and are now included in discontinued operations. As you may remember, we provided tables in last quarter's earnings release that restated historical results to include results of this segment and discontinued operations.

Turning to financial results for the quarter, first quarter revenues were $430 million, up 5.7% year-over-year and up 6.7% on a constant currency basis. Our reported revenues were 0.5% point below the low end of our revenue estimates for the quarter mainly due to the effects of inclement weather and foreign currency translation. As we mentioned on our Q4 earnings call, we estimated inclement weather would adversely affect revenues $2.5 million to $3.5 million in Q1. The actual affect was approximately $2 million higher.

The adverse effect of foreign currency translation was approximately $0.9 million more than expected. Most of our foreign revenues are denominated in euros. The affect on Q1 revenues of the decline in the average exchange rate from Q1 of last year was approximately $4 million. On a constant currency basis, our revenues for Q1 were $434 million and our growth rate was 6.7%, a full percentage point above our reported growth rate.

Despite the unfavorable variances related to weather and currency, translation, our adjusted EBITDA and adjusted income from continuing operations were within our financial estimates. Our GAAP income was also within our estimates after adjusting for acquisition, strategy and integration expenses which, consistent with our past practice, we do not include in our financial estimates. During the quarter, we incurred $1.3 million in acquisition strategy and integration expenses or $0.8 million after taxes.

Contract revenues for the quarter were $406.1 million, up from $387.9 million in Q1 of last year. Direct hire and conversion revenues for the quarter were $23.9 million, up from $19 million in Q1 of last year. Direct hire and conversion revenues accounted for 5.6% of total revenues, up from 4.7% of total revenues in Q1 of last year. CyberCoders accounted for $18.7 million of perm revenues or 78.3% of the total.

Our gross margin for the quarter was 31.6%, up 10 basis points year over year. The expansion in gross margin was the result of the higher mix of direct hire and conversion revenues. As you know, our gross margin in Q1 is lower than other quarters because of the reset of payroll taxes. We estimate this reset resulted in a $3.6 million increase in our cost of services and a related 85 basis points reduction in our gross margin.

SG&A expenses were $105.9 million or 24.6% of revenues compared with $96.1 million or 23.6% of revenues in Q1 of last year. SG&A for the quarter included $1.3 million in acquisition integrations and strategic planning expenses and $2 million in expense related to the hiring surge. The average number of sales consultants and recruiters for the quarter was 1,887, an increase of 14.6% year-over-year. We do not expect a noticeable lift in revenues from this investment until late third quarter. It typically takes on average, 9 to 12 months for new staff to achieve meaningful levels of productivity.

Our adjusted income from continuing operations was $21.6 million or $0.41 per diluted share compared with $21.8 million or $0.40 per diluted share in Q1 of last year. Our adjusted income from continuing operations included the after-tax effects of the expense associated with the hiring surge. Please note that the calculation of adjusted earnings per diluted share can be found in our press release. Income from discontinued operations was $26.1 million or $0.51 per diluted share.

Discontinued operations included the after-tax gain on the sale of the physician segment of $25.7 million. The after-tax cash proceeds from this sale were approximately $108 million. Since June 30 of last year, to date, we have repurchased 3.4 million shares of our common stock at an average price of $29.89. These repurchases increased our earnings per share approximately $0.011 for the quarter.

Now turning to our individual operating segments. Our Apex segment accounted for 68.4% of total revenues. Apex's revenues for the quarter were $294.3 million, up 5.7% year over year. Apex's gross margin for the quarter was 27.1% which is the same as Q1 of last year.

Our Oxford segment accounted for 29.6% of total revenues. Oxford's revenues for the quarter were $127.5 million, up 8.5% year over year. On a constant currency basis, Oxford's revenues were $2.2 million higher than reported revenues and the corresponding year-over-year growth rate was 10.4%, the highest quarterly growth rate for Oxford since 2013. Oxford's gross margin for the quarter was 42% and an expansion of 26 basis points year over year. The expansion resulted from the higher mix of perm revenues.

Our Life Sciences Europe segment accounted for 1.9% of total revenues. Revenues from this segment were down 24.3% year over year on a reported basis. On a constant currency basis, revenues were $1.8 million higher than reported revenues and the corresponding year-over-year growth rate was 16 percentage points higher.

At quarter end, our bank indebtedness was $335 million, down $80 million from the end of last year. Our leverage ratio, which is total indebtedness to trailing 12 month adjusted EBITDA was 1.77 down from 2.06 to 1.0 at the end of 2014. Returning to our financial estimates for the second quarter of 2015 we estimate revenues of $454 million to $459 million. Adjusted income per diluted share of $0.53 to $0.56 and adjusted EBITDA of $49 million to $52 million.

These estimates are based on recent foreign exchange rates and do not include any acquisition, integration, or strategic planning costs. The midpoint of our revenue estimates for Q2 implies year-over-year growth of approximately 5.1% and 6.4% on a constant currency basis. As with all of other estimates on this call, they are subject to the risk mentioned in our press release and SEC filings.

I will now turn the call back over to Peter for some closing remarks.

Thanks, Ed. We believe that we are well-positioned to take advantage of what we believe will be historic secular growth for the staffing industry and dynamic changes in the technology world as it moves more into the digital era. We remain focused on continuing to profitably grow our business and increase our rate of growth. We would like to once again thank our many loyal, dedicated, and talented employees whose efforts have allowed us to progress to where we are today.

I would like now to open the call up for participant's questions. Operator?

(Operator instructions)

Kevin McVeigh, Macquarie.

Thanks. Peter, can you give us a sense, it seems like new salespeople, I thought it was 140 last year. We stepped that up a little bit, the 150. Just generally, where do they stack in terms of how many of them are in that 9 to 12 months bucket versus nowhere?

Just trying to get a sense of as the rampant and scale in Q3 to Q4, how should we think about the growth? Because you have got pretty easy comps so I'd expect pretty nice reacceleration in the back half of the year. Just trying to get a sense how much of that will be the sales force investment.

And if you could, how much of that is a small to medium-size business versus larger clients in terms of where the efforts are?

Kevin, I won't to be able to answer all of those questions because it's not that precise. But what I can tell you is the hiring probably splits 50-50, Forth into the first. The split -- the 150, generally speaking, is 100 at Apex, 20 at Lab and 30 at Oxford. And pretty much skews 70% sales, 30% fulfillment and the fulfillment people more towards large accounts and the salespeople are more towards the local midsize business.

That's super helpful.

And then, was the $2 million in terms of incremental step up in occupancy costs, was that factored in or was that something incremental beyond the expense associated with the hires?

That was basically within our guidance that we gave you for the first quarter on cash SG&A.

Great. Thank you. I'll get back in queue.

Gary Bisbee, RBC Capital Markets.

Hi guys, good afternoon.

I want to know what really happened at Apex? Halfway, actually it was a couple days longer than halfway through the quarter, you said 9% to 10% and was trending there. And then it obviously ended up being a lot worse than that.

Does that imply it didn't really grow in March or sort of what happened there? Thanks.

Gary, what happened is a continuation of the slow spending on the financial services side. I think we may have seen a peak in the constraint of spending on the money major center banks in the first quarter. And, while we did make good progress in other accounts it's just they did not grow fast enough to offset the flatness or the negative spend in some of those larger accounts.

March was not an inflection point. With regards specifically to spending in some of those major money center banks and government customers and that is reflective in our second-quarter guidance.

With that said, our growth rate compared to what others have reported, which was good, is more reflective of our mix of customers and industries than the overall health of the IT staffing market. Let's not forget that our mix of customers benefited us much more than others in the third and fourth quarter of 2014 and the first quarter of -- excuse me, the third and fourth quarter of 2013 and the first quarter in second quarter of 2014 more so than others because our banking customers were spending. We're just unfortunately seeing the backside of that customer mix today.

So, while we have growth, it's not the growth that we would expect from a dynamic business like Apex and it has taken a long time to build some meaningful lasting relationships. We've actually increased our percentage of spend within customers in some of these important customers but their overall spend with everybody is down. And that is affecting our growth rate at Apex on a reported basis.

So what gives you confidence the large banks will come back? The comment in the prepared remarks that as their earnings grows does not inspire a whole lot of confidence. And yet, a second ago, I believe you said you think you may have seen the peak of the resistance to spend or the down cycle or something.

So we're not calling a bottom because we're not in the Board room with regard to the comments that people are making about controlling spend. But what I can tell you is the conversations that we're hearing say that for the first time in six years they feel like there is no $1 billion penalty or government fine that is left in the closet and that, on a go forward basis, there may be a couple of hundred million dollar problem here or there from a State Attorney General.

But most of the stuff may finally be behind them. So that is something of a positive for the overall banking spending marketplace.

And the other confidence that we have for those that have serviced the banking customer industry for a long term, is it is the single largest spender on IT staffing. They're the earliest adopters of new technology but they also turn on and off the fastest. We have been through these cycles before.

While I cannot tell you when the cycle is over with, I can tell you that they are stall on spending has been lengthy and it cannot go on forever. That is the best I can really give you.

Okay, thank you.

Sara Gubins, BofA Merrill Lynch.

The negative trends in bill pay spreads is being driven by Apex. I'm hoping we can get some more color there and what conversations have been with clients around adjusting bill rates higher? Thanks.

I will make an opening comments and then Rand and Ted, if you all would address it, I would appreciate it. Remember, when we talk about Apex's and SEC reporting segment, it has the Lab Support business in it as well. So the segments' numbers move around because of contributions from Lab Support.

If you want to zone in just as to Apex, I think we can make some general comments. Rand and Ted?

I will start. We have always said our bill rate and pay rates are really a function more of the skill types that our clients are using from us. So when we have more of one skill type versus another, you will see the bill rate fluctuate a little bit.

Overall, our bill rates in the first quarter did fluctuate up and down, I think $1 variance Ted, if I recall, on the Apex side. But again, it is more of a reflection of the skills that are being procured, if you will, through us or by us in our business.

Ted, any other comments you'd make?

I think that's it, Rand.

I want to on a more like-for-like basis (technical difficulties).

I'm sorry, Sara. I did not hear that question.

If you were looking at any individual rule or skill set, are you seeing an improvement in bill pay spread?

I think that what happens is, not within any one skill but for example, if more infrastructure people are procured or are used through us, then you're going to see bill rate migrate down a little bit. When we have more Java, mobility, architects ERP, it migrates up a bit. So that slows throughout the course of the period. There's still a lot of both kinds of work out there.

If you looked at our still skill sets that are growing in the quarter, there was infrastructure growth for sure, network engineering, there was also a lot of Java. So there's a dichotomy. Similarly, on the lab side I could go through similar kind of skill sets. But, as I said, it fluctuated quite a bit in the quarter.

I think if you look probably where we ended the quarter, we would ended up where we started. But within the quarter, it moved up and down. Just again based on the flow of the placements we made.

So Sara, the actual spread was up at Apex year-over-year, the bill pay spread, even though the bill rate may have compressed a little bit. And that has to do with what Rand was saying, skill mix as well as the contribution of the Lab Support business. But the bill pay spread margin was actually up quarter-over-quarter.

Yes. And FX gross margin did grow year-over-year basis, 20 basis points on FX.

Okay, thanks.

And then, just separately on capital deployment, share repurchases were not outsized in the first quarter. So I guess I'm wondering, how you thinking about share repurchase? Should we expect to see that go up during the rest of the year assuming no acquisitions?

Well, if there are no acquisitions you would see it go up. And Sara, we're very disciplined. I think we have a track record of being able to do thoughtful things and we have been working hard and we feel like we're closer to doing some meaningful things today than we have been in the last six months or so.

But it is too early to say that anything going to get completed. We're balancing deployment of capital now while we're thinking about some things.

Okay, thanks.

George Tong, Piper Jaffray.

Hi, thanks. Good afternoon.

Within your Oxford segment, can you discuss your outlook for just a further recovery in the ERP spend cycle and healthcare IT spend and how that outlook has evolved over the past three months?

I'll make one comment and then turn it over to Mike for a more detailed explanation.

We said on the fourth quarter conference call, that the quote nuclear winter and healthcare IT spending was starting to thaw and that thaw was not going to be quick enough to allow us to report year-over-year growth rates. But that we thought that we had hit the bottom in the fourth quarter and that we could start showing sequential growth quarter-over-quarter every 90 days. And first quarter substantiated that, at least in the short run.

Mike, will you answer the rest of his question?

Sure. And again, I would just reiterate on the Oxford healthcare technology, that was not only again, we saw increase in spend for the EMR implementations but also some of the ICD-10 work. So that's also increased from the fourth quarter into the first quarter and we basically expect the same kind of increase into the second quarter.

And as far as the other disciplines of Oxford which is 80% of our business, ERP saw a slight increase from the fourth quarter to the first quarter as well as all of our other disciplines. Basically, it was pretty equal across all of them. One wasn't carrying more than the other.

That's helpful.

And as far as supply is concerned, I've heard supply being described as the most constrained in the tech segment of staffing. Can you discuss whether you're seeing supply constraints and if your hiring plans have evolved in light of supply dynamics?

No. That's why we did not put all of these incremental hires into sales. Some of it is put into recruiting fulfillment. But our revenue growth is not because the labor markets were so tight. It's reflective of our customer mix and the spending patterns at some specific industries.

If you look at the growth rate at Oxford or at some of our peers that are not tethered to larger customers or to money center banks, you'll see that the labor markets are not so tight that you cannot grow, George. So you're having to work a little bit harder but that's not a prohibited condition to growth.

Right. And as you look at Apex, can you provide us with an update on what mix of Apex is tied to large financial money center banks? And talk about trends that you're seeing in other verticals within Apex including some of the smaller accounts where you're putting some of your sales investments?

Yes. So Rand's prepared remarks stated that the financial industry and government entity customers were flat to negative year-over-year and that local midsize accounts, retail, technology, were up mid-teens.

Rand, do have the number? I do know that the high watermark for contribution from financial services was 29% of Apex IT staffing revenues alone and it's down closer to the 21% to 22% today.

It's actually 24% number for financial services and George, just again, business services accounts, healthcare, technology and the local branch midmarket accounts all grew double digits in the quarter over year over year. Financial, government services and oil and gas accounts and those accounts represent about 50% of our business with financial services portion of that being about 24%. We're half of that 50%. We're negative growth.

All right, thank you.

Paul Ginocchio, Deutsche Bank.

Yes, I just want to follow up on that last one.

Are government and oil and gas roughly evenly sized? What is the difference there?

And of the three that are weak right now, is one still decelerating? Which is the worst of the three? It sounds like maybe you think financial services might be the best of the bad three.

And then finally, I'm just doing some calcs on that, you got a percent greater exposure to direct hire in perm year-on-year and I thought on the back of the envelope calculations that would add about 70 BPs to your gross margin. But your gross margins only have 10 BPs. What is holding back gross margins as your perm exposure rises quite significantly year on year? Thanks.

Ed, why don't you talk about the margin first?

As it relates to margins you can -- even from the press release you can basically do a bag of (inaudible) to determine what is going on with our contract margins. But generally speaking, contract margins are flat year over year as it relates to Apex and down at Oxford.

The main reason that Oxford is that they're going after some, they've changed their business plan to some degree and they're going after higher volume, lower margin accounts to spur the growth rates. So that is probably the big contributor for you not seeing the lift or pickup from the increase in the perm mix.

Thanks, Ed.

And then, Rand, with regard to oil and gas banks and government?

Yes. So Paul, in those three industries, our accounts in those industries, financial services is the largest of those three industries, government is in the middle and oil and gas is the smallest. It's about 24% of financial, about 17% or 18% government and about 4% oil and gas. In terms of which were more negative, government and oil and gas were more negative than financial services in the quarter.

And are those two still getting weaker or you have seen some stability recently?

Well, I don't know how forward projecting I should be. But for one, I'm encouraged by the federal government passing the budgets and adding $50 billion to defense and homeland security which most of our accounts in the government services sector are in the defense and homeland security side.

So, I think that's a good sign. Oil and gas spend probably tends to correlate with the price of oil so we can all truck the price of oil. I'm just saying that kind of what I look at it in a macro sense.

And financial services, I think Peter hit it. You watch the earnings reports and you watch what they are doing. We're obviously also continuing to diversify our portfolio business and continue to grow our smaller accounts, even the small top accounts into bigger accounts. But that is for rack and stack.

Does that help at all?

That's perfect, Rand. Thanks.

Jeff Silber, BMO Capital Markets.

Thanks so much.

I hate to go back to these end market verticals but you mentioned your financial government and oil and gas exposure in Apex. Can we get similar figures for Oxford? I'm just wondering how those units are doing in Oxford as well?

Okay, so virtually zero for financial services. And on oil and gas and government, Mike, do you have that number?

I don't have it but very little. We do very little with obviously in both of those areas. Little bit more in defense and some of the suppliers. But not certainly to the amount that Apex does.

So it would be under 6% or 7% for those two segments, right?

Absolutely.

Okay, great. Probably another reason for the diverging trends.

Also, can you give us a break down between what you would call your middle market and your larger accounts both for Oxford and Apex? Rough numbers are fine.

Yes. Jeff, I don't know if we can do that to be honest with you.

What I can tell you is we specifically said that the midmarket accounts growth rate was about mid-teens. But I cannot break it down. What we have said publicly in the past is I think the midmarket accounts represent somewhere between 20% to 30% of Apex's total revenue.

Okay, that's helpful.

And then finally, on share repurchase, when does the window open up again? When can the Company be out buying shares?

Two days. (Multiple speakers)

All right, thanks so much.

Dan Dolev, Jefferies.

Thanks.

Peter, can you -- last time you provided detail on the committee expectation by segment. I want to make sure I did not miss that on what you expect in terms of growth for Apex versus Oxford in Q2?

Yes, it's in --

It's in the earnings release.

It's in the earnings release according to Ed.

And Dan, at the bottom of the financial estimate, if you go to that page you can see that the first sentence of the second paragraph under the table, the estimates imply year-over-year growth of -- I'm sorry, second sentence, mid-single digit for Apex. Mid to high-single digit growth at Oxford.

Thank you. Sorry I missed it.

Mark Marcon, Robert W. Baird.

With regards to the staff additions, I did not fully catch the prepared remarks with regards to what percentage are going to be deployed to Apex relative to Oxford?

As far as the hiring surge?

Yes.

About 100 people at Apex, 20 at Life Sciences and about 30 or so at Oxford, Mark.

And would they all have that roughly that 70-30 split in terms of sales to recruiting?

Not precisely but that's a good enough rule of thumb.

Okay, great.

And then, they would start becoming more productive as we get towards the back end of the third quarter. Are they going to be all dedicated to the areas that are growing or are some of them going to come in to some of that 50% of Apex's verticals that are still challenged?

I don't mean this sarcastically but we are trying to be a little more longer-range thinking then just the quarter out or what is hot today. I think strategically, we are saying that there is some local midmarket business that we can service without being distracted from our important major customers.

And there's some emerging technologies that take time to develop credibility and expertise in that are a longer sales cycle that we want to just get started on. But they are being deployed thoughtfully for a longer-term basis versus a quick pop. And it's where we see demand geographically as well as industrywise.

Great.

And then, with regards to CyberCoders, they're doing extremely well. Any constraints on their growth going forward? How much capacity do you have there?

Well, we have actually really hired significantly and actually ahead of budgeted headcount numbers within their 2015 budget because their beating budget and we see the opportunity to grow faster. That business really does have a direct correlation to the number of people in cubicles and the growth of revenue and how long it takes them to get productive.

So we're still hiring. We're not allowing the budget to be a constraint to that hiring process because they are beating the revenue side of it.

And how large would you ideally allow the perm part to become as part of the overall business?

What we've said publicly was kind of 5% or 6% or around that. And it may feel a little bit larger than that if their revenues are growing faster than contract revenue. But that will correct itself sooner than later. I still think 5%, 6%, 7% is still the right number.

Great and then with regards to the Lab Support margins, you mentioned that those gross margins were coming down. Is that just because of the pursuit of some of the larger clients?

Exactly.

Okay, great. Thank you.

Randy Reece, Avondale.

Good afternoon.

If I break down Apex between top 10 customers and everything else, you had pretty significant sequential decline in revenue in the top 10 customers. Does that correlate exactly with your commentary about verticals or was there anything else going on there?

Randy, that correlates to the spend in those verticals and we did not lose those at first. In fact, in one of our most important customers we actually increased in the ranking.

I'm not going to give you names but we have one bank that spent $1.5 billion last year and they even announced they're going to spend $1.1 billion this year against all their IT service vendors. So you are correct in your analysis that it is the industry vertical and nothing else.

Trying to get your number for the second quarter, it looks like if I grow both the large and the small customer segments in both Apex and Oxford, similar to what they did in the second quarter of last year, then I get into your range if you just have the same seasonalities you had a year ago. I don't know what you're actually -- if you're expecting a difference on the large customer side versus small customer side?

But that's the way it just looks with the map. Do expect the big customers to rebound in the second quarter?

That's not what we are guiding to. Our guidance is for Apex which has the largest contribution from major customers that it assumes mid-single digit revenue growth.

Sequentially that is still a pretty decent increase. But that is also pretty normal seasonality as well.

Okay. Thank you very much.

Tim McHugh, William Blair.

I apologize I missed some of the remarks but the government sector weakness, can you talk about what changed there? I know we have talked about financial services and I get that the budget environment has been weak for a few years but you have not seen the weakness in that sector until now.

I'm trying to understand why it's become more challenging for you in the last quarter or couple of quarters?

Rand, do you want to --

Yes, Tim actually, not true. If you look at our earnings discussions the last couple of quarters, we have not highlighted government as a fast growing. I think we've performed better than the market in the government side but it's been coming down for a number of quarters now and not double-digit growth.

So I think that's what we reflected in our earnings call. I think if you go back and look at budgets in the government sector, same sectors, defense and homeland security, you can see a pretty tight correlation.

Okay.

But if anything, it sounds like some government contractors are, maybe they're just optimistic. But there's more optimism coming out of those companies at least as they look forward in terms of contract wins and things like that that they saw at the tail end of last year.

Well Tim, I have watched Northrup Jones dynamics and Lockheed Martin earnings calls and while their revenue numbers were not good in Q1, they were optimistic. I hope they are right and I trust they will be because those would be examples of opportunities for us.

But it has to flow from the government to them and then them to their vendors that support them. So I think there's a feeling of optimism out there in the government defense sector but it has to unfold.

I think that is an important point that Rand made is, Tim, most of our business in the government services is through a government contractor versus direct to the government.

Okay, fair enough.

And as you think -- you've talked about adding resources to spur growth. Are you at a point where you are shifting resources away from some of the financial services or government or oil and gas, the weaker areas? If there's enough demand in the other opportunities, why not shift the resources out of those sectors?

Rand, you and Mike might want to address that in terms of how we allocate our resources among areas where we see opportunities which I know that we are doing but you can probably provide better color on it than we can.

Let me start. This is Rand.

On the Apex side, Tim, for sure. And I think it has happened long before this discussion right now. We have certain areas that are not growing as fast and we have shifted resources toward midmarket accounts or technology accounts or other possible accounts. So some of that has been going on.

There are other accounts, among our top accounts particularly, where there is still flow. You have to be there. When you're supporting these accounts, you have to support whatever flow of recs they do show. It may be negative, because in many of these accounts we're the number one or number two vendor.

So you still have to support them. It's just negative growth when you look at it year-over-year. When you look at our comps from a year ago, it varies.

But yes, we are shifting resources within these sectors. At the same token, there are still some of these areas, when we look forward, we think are good growth opportunities. So we're going to still put our best foot forward.

Mike?

Okay, that's helpful.

Tim, on the Oxford side we do the same thing. We're constantly deploying the resources where we need them.

What is the fastest growing? We train people differently on different skill sets and all that kind of thing. Obviously, we're organized more on discipline versus industry.

But as the same time, as Ed mentioned, we've changed our strategy a little bit. We're going after some larger accounts. So we have moved some of our resources specifically, some of those sales resources, into those functions. But overall, it's an ongoing basis and we always do it.

Maybe just one follow-up to that Mike, the lower margin work that you just alluded to, I guess the larger accounts. Is that healthcare? What type of work is that that you are pursuing more?

It's really across all of our disciplines. It is across the healthcare technology area as well as some of the ERP stuff and some of the other disciplines we do. So instead of a onesie twosie we may be able to sign three or four consultants to a specific project.

But Tim, to make sure that we ring fence this, excluding the healthcare IT business which you know does carry a lower margin, the IT staffing business that Oxford is doing is still well above a 32.5% gross margin. So it's not like things are being heavily discounted.

It's just things may be moving -- I think the peak at Oxford in 2007 may have been a 35% gross margin. I don't know if we're getting what the gross margin is for Oxford International but it is still well above 30%.

Absolutely.

Okay, thank you.

(Operator instructions)

Tobey Sommer, SunTrust.

Thank you.

My first question, Peter, are there areas that you are targeted perhaps new technologies that you are targeting for organic growth to build business and create value maybe similar to HIT several years ago?

You don't have to name them by name. But I'm just curious if some of the investments are dedicated towards that kind of effort?

We are. And we're seeing lines blurred in certain areas and I'd rather wait a little bit to talk about that with you. Our job is to constantly look for emerging technologies or changing and changes in customers buying behavior and who is controlling spend.

And so, as you know, we spend a lot of time thinking about it strategically and a lot of our marketing dollars are spent on understanding the marketplace versus just brochures. And we have some thoughts about that that we hope to share at some point with you.

Peter, could I add to that for a minute, Tobey? An example of that, Tobey, is we talk about serving 13 major skill areas within IT but in the last year and certainly in the last half of the last year, we have expanded to 14 and 15 skill areas, mobility and cybersecurity which we have invested in as part of this buildup. So Peter, I think that supports what you are saying.

Okay.

Turning to CyberCoders, how should we think about the incremental margin associated with revenue growth? I understand from your comment that you are kind of reinvesting because the business is exceeding plan. But maybe over a broader period of time, what sort of profitability could you derive from that?

Well, you hit the nail on the head, Tobey. It's still very profitable EBITDA margin but it's not nearly, the incremental EBITDA margin is not nearly as high because we are investing aggressively in internal headcount. If we had not done that, we could have had an enormous incremental EBITDA margin. It probably would not have shown up in the revenues in the quarter or so but we would have felt it later on.

We're in a cycle. We want to support the growth and get as much as we can. And so, we're not going to be overly piggish and as you know, our EBITDA margin on perm is north of 22%. I'd rather grow that overall revenue than scrape another 10 percentage points on incremental EBITDA margins by holding the SG&A constant.

I just wanted to ask you, when do the comps get easier for the financial services piece within Apex? When did that really grip last year?

If my memory serves me correct, Apex's gross margin was 16.5 -- excuse me, Apex's growth rate was 16.5% year over year in the first quarter of 2014, 13.8% in the second quarter of 2014, 10.1% in the third quarter of 2014 and 9.5% in the fourth quarter. So the growth rates came down in the third and fourth quarters.

It should get a little bit easier on a comparison basis in the latter half of the year just because of the growth rates coming down and hopefully, because these new hires start to become productive.

Just to make sure that we are clear. Peter was referring to the Apex piece of the Apex segment.

That's right. Apex IT, not Lab.

Right, understand. The business not the segment.

And my last question is, just within the financial government in oil, the slower areas, is there some room for on kind of a targeted basis for you to maneuver and get access to new a client? Just that approach or is it a situation where you are not able to nudge out a little bit of growth within those areas at this point because of what is going on in the marketplace?

Tobey, I want to be clear. We're not blaming the market and we're not saying that others aren't growing faster. We just think that the particular construct or mix of our customers within these industry verticals has restrained the normal growth rate.

With that said, we tend to take a longer-term perspective and we're not going to ruin the natural purchasing rhythm with our customers by overreacting and starting to work on stuff that we just don't think is high-quality business on a longer-term basis. Maybe people are going to criticize us for this but we clearly could have grown faster it at Apex we wanted to start dropping the gross margin and bidding on work that is not as sticky or meaningful and we have elected not to do that.

We don't think that there has been a wholesale shift in the end markets that are causing our revenue to slow. Quite the contrary because when we do our customer satisfaction and we look at our ranking within these major customers, we're not dropping. We're staying the same, and/or we have come up a little bit. So it's not like we have gone from third to tenth and someone else has gone from tenth to third at our expense.

This is mostly a complete across the board decline in spending. And one staffing firm may have a bigger pigeonhole in a bank than we do or vice versa. We're not being hardheaded.

Trust me, there's plenty of focused passion and focused on where we can expand in a sustainable thoughtful fashion and the market still remains relatively productive. All we are saying is it is much more productive in certain verticals than others and our construct of mix leans today more heavily in the unproductive industry verticals than the productive industry verticals. And it's served us well in the past and it is hurting us now and it will serve us well again in the future.

Thank you very much.

Mark Marcon, Robert W. Baird.

Just a follow-up with regards to Lab Support. What was that growth rate again?

I don't know Mark if we gave you the Lab Support business growth rate. Ed can give it to you.

Mark, for the Apex segment, it was 5.7% in total and Lab was 5.2%.

Okay. And how are you thinking about that segment going forward? Do you think with going after some of the larger clients, should we start to seeing an acceleration as the accounts get a little bit easier?

Yes. They had a pretty good 2014 and we always say they are the most directly correlated.

That's why I'm asking.

To GDP growth. And we just got some GDP growth numbers that were pretty anemic but we feel the prospects there are good both because of the market and what the customers that Apex can share with it. And the focus on being easier to do business with it on a large account scale basis.

Great. And then, if I recall correctly, CyberCoders was about $22.5 million. Is that right?

Yes. I think that's what the prepared remarks is.

Including the contract.

Yes, $22.5 million.

Okay, great. Thank you.

Thank you. We have no more questions in queue.

We appreciate your time and we look forward to visiting with you again in the near future.

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.