ASGN Inc (ASGN) 2015 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the On Assignment third-quarter 2015 earnings call. (Operator Instructions) And as a reminder, this conference is being recorded.

I'll now turn the conference over to Ed Pierce, Chief Financial Officer. Please go ahead, sir.

Thank you. Good afternoon, and thank you for your time today. Before we get started, I'd 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, 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.

Please note that on this call we'll be making references to pro forma and constant currency information. Pro forma data assume the businesses we acquired in the second quarter of 2015 were purchased at the beginning of 2014. Constant currency data were calculated using the foreign-exchange rates in effect during the third quarter of 2014.

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. I would like to welcome everyone to the On Assignment 2015 third-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 more detailed review and discussion of our third-quarter results and our estimates for the fourth quarter of 2015. We will then open the call up for questions.

Now onto the quarter. Revenues in the third quarter were $572.1 million, up 29.3% year-over-year -- 30.3% on a constant currency basis. Revenues, excluding the contribution of $75.7 million from acquisitions, were up 12.2% to $496.4 million and up 13.1% to $500.3 million on a constant currency basis. Revenues generated outside the United States were $25.4 million or 4.4% of consolidated revenues in the third quarter versus $20.8 million or 4.7% in the third quarter of 2014.

For the third quarter, adjusted income from continuing operations, adjusted EBITDA, and conversion of gross profit to adjusted EBITDA results were above the high end of the guidance range we provided the second-quarter earnings press release. We are particularly pleased with our higher-revenue growth rates, which reflect among other things the contributions from our hiring surge of sales and recruiting consultants that began in the fourth quarter of 2014.

Adjusted EBITDA was $74.9 million or 13.1% of revenues, up from $52.9 million or 12% of revenues in the third quarter of 2014 on an as-reported basis. The year-over-year improvement in adjusted EBITDA includes higher incentive compensation expense compared to the year-ago period.

All divisions contributed to our strong third-quarter performance, with Apex, Creative, Oxford, and CyberCoders accelerating throughout the year. Revenues in our local midmarket accounts grew double digits, with our larger account customer base growing at a slower rate. After several quarters of declining growth rates in 2014, revenue growth rates are expanding again. We believe based on current performance that this growth trend will continue.

Our IT 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. In addition, we continue to see signs that the ongoing debate regarding the on-demand workforce, or Gig Economy, is accelerating the usage of contract labor. Fractionalization of human capital by using the staffing industry services is the only way to truly avoid the risk of misclassification of employees as independent contractors.

Our customers have and are realizing this. And that is why we believe the secular growth opportunities for the entire professional staffing industry are so attractive.

Exiting the quarter, we feel we are well-positioned to continue to accelerate our revenue growth. Integration, coordination, and cash generation related to our acquisitions continue to be at or above our expectations. Since the closing of the Creative Circle acquisition, we have repaid $71 million of our debt. Our current leverage ratio is 3.21 times trailing 12-month adjusted EBITDA, and we expect by the year-end that the leverage ratio would be at or below 3 times.

During the quarter we saw year-over-year growth in our US divisions. Our weekly assignment revenues, which excludes conversion, billable expenses, and direct placement revenues, averaged $42.4 million for the last two weeks -- up 36% over the same period in 2014. Excluding the contribution from Creative Circle, revenues were up 17.8% over the same period in 2014.

We are raising our revenue estimate by $15 million to $20 million for the fourth quarter to $563 million to $568 million. We continue to see strong demand from the end markets we serve, and we are benefiting from the improved productivity of the additional headcount we added during our hiring surge in the fourth quarter of 2014. The productivity levels for these individuals are in line with our expectations, and they are approximately 50% of a tenured staffing consultant.

Due to the strength of the end markets and the success of our hiring surge in 2014, we have decided to add an additional 100 staffing consultants and have done so since the end of the second quarter. The additional investment in headcount was not included in our previously announced estimates for the second half of 2015.

While spending at some of our larger financial services and government customers continues to ebb and flow, the actions we have taken to accelerate our revenue growth rate in a substantial fashion has taken hold. We believe that future productivity gains from the hiring surges -- our hiring surge, combined with strong end market demand and the recently added staffing consultants, will position us to capture the current market opportunities and further improve our growth in 2016.

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

Great. Thank you, Peter. The Apex segment, which consists of Apex systems, Lab Support, and Creative Circle, reported strong results for the quarter. Revenues for this segment were $421.1 million, up 15.2% year-over-year on a pro forma basis or 5.4 percentage points above the pro forma growth rate of 9.8% in Q2.

Revenues from Apex Systems, which accounts for 74% of the segment's revenues, were up 14.8% year-over-year -- more than double its growth rate in Q2. This performance reflects, among other things, higher demand in our end markets, as Peter suggested; improved productivity from our tenured sales consultants; and the contribution from headcount added during the hiring surge.

Lab Support's results were generally in line with our estimates. Creative Circle, which was acquired in June 5, 2015, reported revenues of $73 million, which exceeded our revenue target by $3 million for the quarter. On a pro forma basis, Creative's growth rate for the quarter was 22.8%.

Gross margin for this segment was 30.6%, which was in line with our estimates for the same -- and the same as the pro forma gross margin for the preceding quarter. Our segments' contribution in terms of divisional EBITDA was very strong, with solid conversion of the segment in the segment, despite the surge in field headcount added in the business over the past year.

With respect to Apex Systems, our IT staffing division, revenue growth was propelled by a number of factors, including: first, double-digit Q3 revenue growth on a year-over-year basis in our accounts in six of the seven industry verticals we service. Only the government industry set of accounts didn't grow on a year-over-year basis but did achieve sequential growth from Q2 to Q3.

Second, Apex local branch midmarket business momentum continued in this quarter, with increasing double-digit revenue growth rates -- again, in Q3. Third, sales force productivity grew in the quarter, with the surge hires now firmly in their assigned markets and producing sales at higher levels.

Fourth, growth in our top accounts showed revenue acceleration in the quarter, although a number of top accounts in the financial services, oil and gas, and government industry verticals continue to lag behind in revenue growth on a year-over-year basis. Overall, the Apex segment had a solid quarter, with quarterly revenue growth accelerating on a year-over-year basis, stable gross margins, and conversion of gross profit to divisional EBITDA remaining solid.

With that, I'll turn it over to Mike for the Oxford segment, yes.

Thanks, Rand. The Oxford segment includes Oxford core, CyberCoders, our perm placement business, and Life Sciences Europe. The segment had revenues of $151.1 million for the third quarter of 2015, up 10.7% year-over-year and up 3% sequentially. On a constant currency basis, revenues would have been $4.4 million higher, and our growth rate would have been 14%.

Our permanent placement service revenues grew 19.7% year-over-year to $22.2 million. CyberCoders accounted for 93% of the total permanent placement service revenues and was up 19.6% compared with the third quarter of 2014. The Oxford segment's European revenues were $23.2 million in the third quarter of 2015, up 14.3% over the third quarter of 2014 or 36% on a constant currency basis. Revenues for the third quarter of 2015 include $2.7 million revenues from our second-quarter acquisition.

The Oxford segment's consolidated revenue growth on a constant currency basis was the result of strong year-over-year growth in all of our business units: 12.2% for Oxford core; 16.8% for CyberCoders, which included 19.6% growth in its perm revenues; and 21.6% for Life Sciences Europe.

Oxford core has realized year-over-year and sequential growth throughout 2015 in both of its operating divisions and across the majority of our skilled disciplines. This improvement was driven by growth in our key accounts; continued sharp focus on assigning consultants within our targeted skill disciplines; increased demand for EMR implementations, upgrades, and optimization projects; and ongoing demand for coding and consulting services.

CyberCoders perm revenue growth has been driven by increases in sales staff and newly implemented training programs for new and experienced staff. CyberCoders has continued to invest in new technology to more efficiently identify and match relevant candidates to our open job orders. Our gross margin for this segment was 41.5%, which was in line with our estimates and the same as the gross margin for the preceding quarter. Based on our region production activity, our expectation is for continued growth throughout the fourth quarter of 2015.

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

Thanks, Mike. As Peter mentioned, our operating results for the quarter were above the high end of our previously announced estimates. Revenues for the quarter were $572.1 million, up 13.4% year-over-year on a pro forma basis. Excluding the contribution of the two businesses acquired in the second quarter, revenues were up 12.2% year-over-year and up 13.1% on a constant currency basis.

On a reported basis, our contract revenues were $539.4 million, up from $420 million in the third quarter last year. Our direct hire and conversion revenues were $32.7 million, up from $22.5 million in the third quarter of 2014. Direct hire and conversion revenues accounted for 5.7% of total revenues, up from 5.1% in Q3 of last year.

Our gross margin for the quarter was 33.5%, which was within our previously announced financial estimates and slightly down sequentially on a pro forma basis. The sequential decline primarily was a result of the higher mix of revenues from the Apex segment.

SG&A expenses were $128.6 million or 22.5% of revenues. SG&A for the quarter included $1.7 million in acquisition integration and strategic planning expenses, primarily consisting of outside consulting fees on a strategic and integration planning project for Creative Circle and expenses to integrate various divisions onto Oxford's operating and back-office platform.

SG&A also included approximately $1 million to $1.5 million related to the increase in sales consultants and recruiters during the quarter. Excluding Creative Circle, the average number of consultants and recruiters for the quarter were 2,039, up from 1,720 in the third quarter of 2014.

Adjusted income from continuing operations for the quarter was $43.8 million or $0.82 per diluted share. And please note the calculation of adjusted earnings per diluted share can be found in our press release. Adjusted EBITDA, a non-GAAP measure also defined in our press release, was $74.9 million or 13.1% of revenues.

Income from continuing operations was $24.9 million, which was about the high end of our financial estimates for the quarter. Our financial estimates did not include acquisition integration and strategy expenses of $1.7 million -- nor did they include the accretion of discount of $0.7 million on our earnout obligations, which are discounted using our weighted average cost of capital. These two excluded items totaled $2.4 million or approximately $1.6 million after income taxes.

Cash flows from operating activities were $35.3 million, and capital expenditures were $4.8 million. During the quarter, we paid down $46 million on our long-term debt. And our leverage ratio at the end of the quarter was 3.21 to 1, down from 3.51 at the end of the second quarter.

Turning to our individual operating segments, our Apex segment accounted for 73.6% of total revenues. Apex's revenues were $421.1 million, up 37.6% year-over-year. Excluding Creative Circle, Apex revenues were up 13.7% year-over-year. Apex's gross margin for the quarter was 30.6%, an expansion of 2.1 percentage points from Q3 of last year, mainly due to the inclusion of Creative Circle. On a pro forma basis, Apex's gross margin was in line with our estimates and up sequentially on a pro forma basis.

Our Oxford segment accounted for 26.4% of total revenues. Oxford's revenues for the quarter were $151.1 million, up 10.7% year-over-year on a reported basis and up 14% on a constant currency basis. Excluding the revenue contribution of the acquired business, Oxford's revenues were $152.2 million on a constant currency basis, up 11.6% year-over-year. Oxford's gross margin for the quarter was 41.5%, which was in line with our estimates -- and the same as the pro forma gross margin for the preceding quarter.

Now, turning to our financial estimates for the fourth quarter of 2015, we estimate revenues of $563 million to $568 million; adjusted income per diluted share of $0.72 to $0.75; and adjusted EBITDA of $66.7 million to $69.6 million. These estimates do not include any acquisition, integration or strategic planning costs. Our estimates assume pro forma revenue growth of approximately 12% and assume billable days of 60.7, or approximately 3 fewer days than the preceding quarter.

Our current financial estimates for the second half of the year are either within or above the high end of our previously announced estimates. Our current revenue estimates for the second half of the year are $32 million to $37 million above our previous high-end estimate. Our current adjusted EBITDA estimates -- if you exclude the costs of the additional hiring surge, which was not included in our previous expense estimate -- are also above the high end of our previously announced estimates.

I'll now turn the call back over to Peter for some closing remarks. Peter?

Thank you, Ed. We believe and we continue to believe that we are well positioned to take advantage of what will be historic secular growth for the entire staffing industry and dynamic changes in the technology world as it moves more into a digital one.

While the entire On Assignment team is very proud of our performance, we remain focused on continuing to profitably grow our business and increase our rate of growth. We'd like to once again thank our many loyal, dedicated, and talented employees, whose efforts have allowed us to progress to where we are today.

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

(Operator Instructions) Kevin McVeigh, Macquarie.

Great. Thanks, and congratulations on just a great outcome. Peter, if I have the math right, it sounds like the net additions, including the incremental 100, is 240. Was the 50% kind of -- at production, was that at a total 240 or -- of the initial 140 that you hired?

It's -- that 50% number is an average, and it's on the original hiring surge people. So the new people are a drag that -- we're not getting any productivity out of them. They're just barely in the training classes right now. It's just giving us a jump on 2016.

Got it. And is the split -- I know you said before it was about 70% Apex, 30% the rest of the business. Is that a good way to think about it?

It's very similar to those splits.

Okay. And then, just on the direct hires -- just a really nice outcome there at almost 6% of revenue overall. Is that kind of -- what's driving that? Is it just kind of scarcity of talented people are starting to bring some in the house? Or is there other dynamics in terms of the way you're recruiting?

You know, I think, Kevin, it's all of the above. I would tell you that we're having better luck with matching the right people quicker than others, because we really are using some unique tools to do some predictive analytics. The market is tight for technology, especially on some of the newer technologies and in the digital world. And so we've had over all of 2015 -- credit to the management team -- we have hired, I think at Cyber alone, over 250 people since we acquired that business. And they really are gaining a lot of productivity.

What I would tell you is, as you know, normal seasonality -- fourth quarter, it's harder to get people to leave jobs and start new ones because of bonus risk and stuff like that. But we continue to see a robust market for perm services.

Awesome. I'll get back in, thanks.

Edward Caso, Wells Fargo.

Good afternoon, congrats. Last quarter you talked about pricing, maybe in the context of -- I think you had the flexibility. What are you seeing on this pricing or flexibility front now? Has it eased up at all?

Well, I'm parsing your words, Ed, but eased up -- what I would tell you is we -- as we told you we would do at the right time -- we have elected not to take certain work from certain customers, as the ebb and flow moves more in our direction. So margins are pretty stable. We're seeing a bigger flow of more attractively-bid work than we did even six months ago. So we are not as flexible about agreeing to work on a certain customer's business.

It's not that it's a difficult negotiation. Some of the work that we took was just offered up at a certain rate, and it was kind of a take-it-or-leave-it situation. And that's not how most of our business works. So the pricing environment is rational, and it's productive for both sides.

There was a recent press release indicating you're opening an onshore or nearshore facility in Dallas. Is that a change in strategy here?

No. What I'm going to do is I'm going to turn it over to Rand. But that is for -- I'm not going to name -- I generically will name -- it's an airline. And we're helping them with some specific matters on their reservation system. Rand, will you give them the strategic reasoning why we did that for the customer?

Yes, no, I think it's consistent, Ed, with the -- what we call value-added services to our clients. So it's not just providing arms and legs and technical IT talent, but it's also putting that in a packaged way, where we can help manage that workforce and locate the -- in this case, the client needed it to be housed somewhere. And we offered that. It was an opportunity for us to show that we can do that, so it was a win-win.

Let me sneak in one more for Mike. ICD-9 to -10 -- is that done at this point, and how big a factor was it in the last quarter?

As we even talked last time, it continues to increase. The data has come and gone. No reported issues. So in terms of the revenue, certainly, that we saw in the quarter, it was certainly part of what we experienced.

Ed, what I'd add to that is it's very much like Sarbanes-Oxley. There was a surge to get compliant, and then there's an ongoing obligation to comply. So now that we are all over to the ICD-10, that's how things get coded and built. So we still see a big demand for that.

Thank you. Congrats.

Tim McHugh, William Blair & Company.

Yes, not to -- just want to reconcile, I guess, the comment that you're being more selective now that you've got faster growth with the 33% gross margin at the midpoint versus 33.5%. Is that mix in terms of perm or fewer days? Can you just kind of reconcile that?

So you are referring to the fourth quarter?

Yes, yes sir.

And as I previously mentioned, there is less perm contribution typically in the fourth quarter than in the third quarter. And if you look -- as we look at our numbers on our spreadsheets on contract gross margin alone, it's pretty stable to what we reported. And save and except wholesale, dramatic increases by some of the divisions that we have a lower margin, we have stable to slightly expanding gross margins.

Okay. And then you had talked -- it was announced -- a large DoD contract, where you are one of the named, I guess, supporters, or -- I don't think it subcontractor. But whatever the right term is, what can we expect in terms of the contribution? I assume that is not helping you yet, but will that be a meaningful factor as we think towards 2016?

Right. So I'll let Rand answer that. We'll give you a qualitative answer, but we're not giving any quantitative guidance as to how much we're going to get and when we're going to get it. Rand?

So, yes, not a factor, Tim. As Ed would know from his work in the government side, it takes a lot for the government to get going in the contracts. So at this point it's a pretty big, large rollout in implementation of new systems. So we are a subcontractor on the team. And I suspect it will come.

It's not impacting our business yet in terms of performance. When will it start impacting depends on the timeline the government lays out, which -- they are still laying out that roadmap. So I don't think it's something we assume will happen in the near term.

Okay, thank you.

Paul Ginocchio, Deutsche Bank.

Good afternoon. This is Ato Garrett on for Paul. You guys spoke earlier to your end market performance. And specifically when you're looking at your top accounts, you said that financial services and some other verticals were lagging behind. But can you give a little more detail about how the financial services end market is trending? Is that getting any better, worse, or staying about the same?

It depends on the account. We've had a couple of important customers that have kind of reengaged, and we have one of our top four bank customers that has disengaged more so than they previously had. So it's really an account-by-account basis. But the good news for us is our larger financial services customers are spending a little bit more than they had in the first part of the year.

Great. And also, just looking into that fourth quarter, I know you have spoken a little bit to the fact that you're getting a little bit less perm contribution in the fourth quarter, so that's going to play into gross margin. But is there anything else there that's happening about -- that can, I guess, help reconcile the faster implied revenue growth than gross margin growth when you're looking at fourth-quarter guidance? For example, is there anything you're doing about targeted growth initiatives relating to pricing?

What I want to leave you with is the thought that contract gross margins are quite stable, and that on a consolidated reported basis, it has to do with contribution from perm and conversion fees. And if Apex grows -- the Apex division within the Apex segment -- if it grows -- or Lab Support, if it grows a little bit faster than Oxford, or Europe, or Creative Circle, then that would have an impact on the consolidated number. But if you look at it on an individual case-by-case basis, they're pretty much stable.

Great, thank you very much.

Sara Gubins, Bank of America Merrill Lynch.

I might be beating a dead horse, but just to check on the pricing environment in the bill pay spread being down year-over-year -- as you ease up on some of -- on taking less of some of the lower-priced work, should we expect to see an improvement in the bill pay spread?

It depends on the skill sets, the particular skills that we're placing and that -- where we have opportunity to fill. But yes, typically that is the case.

Okay.

So again, I'll try to state: we think that we have a stable to slightly expanding contract gross margin.

Okay. And then on the cost side, have you now hired all of the people that you're planning to hire? And can we use the fourth quarter as a run rate for employee costs as we try to think about beginning to model early 2016?

You know, it's a fair question, but I'd hoped that we would get complemented for being good deployers of capital. I mean, we hired an enormous number of people that have us in an incredible position for the start of 2016; and we reported a 13.1% adjusted EBITDA margin. So I don't know if we're done. It depends what the market is telling us.

And if we see pockets of strength where we can accelerate and get a return, we'll do it. But I think as it relates to the fourth quarter, that the number we gave you for SG&A is the right number. And we're in the midst of budgeting for 2016 and taking into consideration all the people we hired in 2015. That's the most direct guidance I can give you this point.

Okay, thank you.

George Tong, Piper Jaffray.

Peter, can you discuss how much additional improvement you would need to see in financial services and government in order to continue to deliver accelerating growth in the business?

My qualitative answer to that is zero. We just don't need it to hurt us. Just stay flat. Because the numbers that we have reported this quarter had an improvement in certain accounts within financial services, but not across the board. And as our prepared remarks reflect, it was a broad-based expansion of demand across multiple industries.

And can you talk a bit about trends you're seeing in ERP spend -- whether there could be a new catalyst for a wave of ERP upgrades that might drive increasing spend?

Well, let me try to address it this way. And then, Mike, you want to add -- or Rand, if you want to add anything, please do. We see IT service spend as stable. And we're taking market share based on deployment model. And we're also seeing the benefits of the secular change of shared resources versus full-time resources.

We are seeing people doing some more strategic thinking around their ERP systems and how they are using their data. But there hasn't been some sort of dynamic bolt-on module that is driving insatiable demand. This is pretty steady-state.

Mike or Rand, do you want to add anything?

No, I would agree with that, Peter. I think, as always on the Oxford side of the business, that we have ebb and flows within disciplines, just as you said. ERP is one -- the other. So we see that constant ebb and flow. So it's a stable environment from our perspective as well.

Okay. And then, lastly, could you talk about how much cross-pollination you're seeing between the Creative Circle and Apex, and how that's tracking versus your earlier expectations?

Well, it's not a matter of if, it's when. And when you are growing at Creative at 22.6%, you're not looking for a lot of cross-revenue synergy. So there's been an enormous amount of coordination and targeting of which customers we want to address.

We're actually seeing that maybe the flow towards Apex, which hasn't occurred yet -- what I'm saying now is not reflected in any of our forecasts or our historical results -- but we are seeing a lot of opportunities coming from the Creative customers into the Apex line of business. And as we look to introduce Creative into the Apex customers, it's a matter of how deeply penetrated into the customer we are prepared to go on the Creative digital side, as you know -- because Creative is more two, four, six people per account. Apex is much larger.

So we are working out the rules of engagement. There hasn't been sales channel conflict. We continue to confirm to ourselves our preacquisition analysis that there is synergies, revenue synergies, amongst the various organizations.

Great, thank you.

Jeff Silber, BMO.

Good afternoon. It's Henry Chen on for Jeff. I was curious about the staffing consultants that you added in the quarter. Were there any trends in terms of end markets that are growing faster than others, or any color you can add there?

Well, they went into, predominantly, IT. A little bit into Lab Support, and then a little bit more into the Creative group. And I would tell you, as far as internal employees go, we have as hard a time hiring and identifying talented people as our customers do. But we are continuing to chip away at it. But it's mostly in the technology world.

And for your 4Q guidance, is there -- would you be able to provide an organic rate that's embedded in that?

We did. Organic - of course, the way we are looking at it this on a pro forma basis. And we said 12% growth.

So that pro forma basis -- does that include Creative Circle, or no?

Yes.

Oh, it does.

It assumes the acquisitions we made in the second quarter of 2015 were actually made at the beginning of 2014.

Got it. Would you be able to provide a number excluding acquisitions?

I don't have that off the top of my head.

Okay. All right, thanks so much.

It's not much different.

No, it's not going to be that much different.

Got it. Okay. Thanks.

Randy Reece, Avondale Partners.

My first question has to do with what surprised you the most versus your guidance in the third quarter.

Right. Great question, Randy. I think it was the reacceleration at both Apex and Oxford gained steam throughout the quarter. There wasn't any sort of the plateauing. And the hard work and timing of our investments paid off.

You have competition -- you have formidable competition. You just went out there and took market share. I don't see that you are necessarily saying that the market growth rate itself steered your results that much. Is that correct?

Well, I don't think that were saying that the overall market rapidly expanded. I think it remained stable and robust. What I would tell you is we did, with more feet on the street, gain greater accounts -- but more importantly, specific to us, some of the ebb and flow that occurred in some of our accounts worked to our advantage versus disadvantage within the quarter.

Your commentary about companies turning to agency contractors over independent contractors -- that's been a phenomenon for quite a while. It's been kind of hard to tell how much of an influence it has had over the staffing industry. But why in particular did you bring that up this quarter?

You know, as we do more and more work, and there's more and more discussion, Randy, about the shared economy or the Gig Economy, and Uber being sued for misclassification, and everybody doing new apps and this and that -- it's just a true realization, as you said, of what we've been seeing for a number of years, specifically in the IT world. I will tell you: in the creative world, our strategic analysis preacquisition and postacquisition shows that about $8 billion is spent annually on non-full-time labor. And currently only $2 billion of that $8 billion runs through staffing companies with W-2 employees.

And that's partially because of the uniqueness that customers may feel certain creative/digital/graphic type people have. And if the person only is willing to work as a 1099, then they're going to look the other way; partially it's because of the size and sophistication of the end customer. But we're seeing that trend change dramatically, too.

So as I've said, often publicly, the largest single source of incremental revenue for the federal government is not raising taxes; it's eliminating the misclassification of employees. And as more and more these web companies try to tout that you can go online and work independent and not as a W-2 employee, the government is going to come down harder and harder to prohibit that.

I promised no questions about gross margin. Good quarter. Thanks a lot.

Gary Bisbee, RBC Capital Markets.

The improvement was pretty stark across, it sounds like, on virtually every business but government and some of the big banks. Can you help us sort of frame what was the most important and least important of the various things you mentioned? It sounds like the surge hire is becoming profitable; it was a big contributor. It also sounds like at Apex, you saw acceleration in a few of the verticals that maybe hadn't been quite as strong.

And then you talked about top accounts also getting somewhat stronger. Is the surge hiring the key, and these other ones also were modest positives? Or is it a more balanced contribution?

It's more balanced. You know, we're building a business for the long haul, and there can be some changes quarter to quarter. We admitted that maybe we got a little bit light on the hiring in the first half of 2014, and we suffered the consequences of that. And then we got back on the right side of the hiring in the second half of 2014. And now we're seeing the benefits of that.

I will tell you, if my numbers are correct, the financial services sector -- industry sector for us, instead of shrinking year-over-year, grew 7.6%. Not every account within financial services grew, but some grew enough to offset the shrinkage in other accounts. And on a consolidated basis we grew 7.6%. So that helped to unmask the momentum in the growth that we had outside of financial services, Gary. The rest of it was just hard-nosed blocking, tackling, daily revenue-generating activity in a market that is receptive.

Sounds good. Peter, you typically mention on the call that the domestic Lab Support business is the most cyclical. And from that you infer an updated comment on how you see the US economy pulling out. Unless I missed it, I don't think that was in your prepared remarks, but what do you guys think?

It wasn't. It grew slower than the IT divisions, but we have been doing an enormous amount of work to reposition it to be able to more forcefully compete and service larger customers. Ted, I know you're on a cell phone, but do you want to add anything -- any color about Lab?

The only other thing I'd say is we've seen stable order flow. So I think if you look at that and say, is that a marker for what we see out there in the general economy? It's stable.

Okay, great. And then just on SG&A, I just wanted to make sure that I heard it right. So you said the $1 million to $1.5 million would be the incremental -- I think, Ed, you said that the incremental amount from those new hires you've done since the second quarter in the fourth quarter -- was that the right number?

No, I was referring to what was included in Q3 related to the incremental hire. When it's fully loaded, it's going to be closer to, say, $2 million for the fourth, yes.

Yes, all right. So SG&A is about flat. But you said the Q3 number included $1.5 million or whatever it was from the nonrecurring stuff. So you layer that in, and that gets the headcount run rate. Okay. Very good. Thank you very much.

Tobey Sommer, SunTrust.

Peter, the cash paydown has occurred very rapidly. And by my math you could be closer to 2 times levered by the end of next year. I know that's several quarters away, but how do you think about the business as you approach a historical norm in terms of leverage in the business?

Right. So I think what we said publicly, Toby, is we think that we can get to 2.5 before the end of 2016, and probably think sooner than later. When we first started saying that, we thought we'd say at the end of 2016. If things continue apace, the way they are right now as far as EBITDA growth and cash generation, we think we'd get there sooner in 2016.

As we've always told you -- as well as the credit rating agencies and our investors -- anytime we're at 2.5 times leverage, I think the future cash generation is better served either being returned to shareholders in the form of share purchases or, if we can identify an attractive asset, acquiring another business.

So there's a real upside to us delevering quickly. We are creating equity value. We're reducing our interest expense. But most importantly, we're positioning ourselves to retain our credibility with our stakeholders with our stakeholders and be able to do share purchases and acquisitions.

Pete, did the strategic review that you conducted a while back yield other areas, new areas that the Firm could enter? You don't have to mention what those are, but just wondering if there are new segments that you would consider?

Subsegments of technology, clinical research, and creative. But we're not going to get into foreign language translation or anything like that. I would just tell you it's subsegments.

Okay. And two other questions for me, because a lot of stuff has been asked. The one numerical one -- on the staffing consultant growth, what was that as of the end of the quarter, excluding Creative Circle? I think you might have given it, but I don't think my pen was fast enough.

We gave the numbers in the prepared remarks. And let me just give you the absolute number, if I can find it.

In the meantime, while you're looking for that, Ed, you mentioned back-office integration. Is there much work to do there? And is there any kind of margin impact either negative or positive on an ongoing basis?

We'll have more to say about that next year. We are winding down on a couple of things -- one is an integration of our European operations, and also an integration of some domestic visions into the Oxford segment. But yes, there's going to be some efficiencies gained. And we'll have more to say about the actual effect of that when we give some guidance on 2016.

As it relates to the numbers that you asked for on headcount: excluding Creative Circle, the -- and this is average number for Q3 -- was 2,039. And that's up from 1,720 in the third quarter of 2014.

Thank you very much.

(Operator Instructions) Mark Marcon, RW Baird.

Good afternoon and congrats. With regards to Creative Circle, can you talk a little bit about the performance of the organization from the perspective of just turnover; what are you seeing in terms of being part of the organization? Obviously the revenue growth has been terrific, but what have you seen qualitatively?

Thank you. You know, Mark, it's a great organization that was built by a couple of great people. And they put underneath them a great second tier. So one of the endearing features of the business beyond its great margins and the great end market was -- they were our kind of folks, great people. And they feel empowered. It's been a net positive for everyone and our shareholders.

But for our new employees, they are now participants of our employee stock purchase plan. The first window just opened for them. They are seeing the ability to participate in the growth of the equity of the Company, and the Company doesn't have to be sold to get liquidity in their holdings. A lot of city managers and others are receiving equity awards on an annual basis. And so we've, so to speak, equatized them. And they are now part of our programs.

And there's no sales channel conflict. We've had a lot of events in the marketplaces, and creating awareness, and there's very good esprit de corps. We have not lost anyone because of the acquisition. You know, they have a number of employees. Have we lost some people because of relocation or want to stay at home? A couple, but all in all it's a net positive. And the cooperation and the collaboration has been very good.

And that's why you see not a deceleration in the revenue, a continued healthy growth rate and margin. I mean, they grew 22.6%.

Great. A question for Rand, if I may. With regards to the verticals that you're actually seeing good growth in, can you talk about the ones you're seeing the strongest growth? And also are you seeing any sort of signs of weakness in the industrial economy? That's a frequent topic as it relates to financial news.

So, Peter, I will go ahead and respond. We saw, as Peter said earlier, growth across the board -- double digit growth, as we said, in all the industries except for government. Technology, business services were particularly strong. Financial services particularly strong, considering some of our best or top accounts were not giving us a lift. But it was pretty much across the board, I would say.

In terms of industrial activity, are you talking about -- what -- consumer industrial companies? That unit also grew, not the oil and gas portion of it, but the other parts of it did grow.

And no slowdown in that part?

In consumer and industrial? No. Nope, double-digit growth.

Excellent. With regards to the financial services sector, what do you think happens to a company that disengages? Are there other suppliers out there that are going to be willing to meet their needs? Or do you think they're just going to run short on talent?

Mark, on that one, what we were referring to is not that a customer said we price our business 300 basis points lower than we used to, and we say no, and someone else picks it up. And without naming banks, there are a couple of banks that have cut their spend with all vendors by 50%.

And so that's kind of what you're referring to?

On ebb and flow with specific banks.

Okay, great. And then with regards to -- on the Oxford side, nice growth there. Any areas that seem to be accelerating more than usual, or --? and I'm talking about Oxford core.

It's pretty broad-based, so -- I hate to say I'm not going to speak for competitive purposes, but I've learned the hard way. We have spawned a lot of boutiques in the subsegments by bragging about their growth rates. So you know where we're playing. And I would tell you it's pretty broad-based.

That's great. Super, thank you.

Thank you. And we have no further questions.

We appreciate your time and attention, and we look forward to visiting with you again on the fourth-quarter conference call. And management will be in New York for a couple of conferences in November. Thank you.

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