On Assignment, Inc. Q3 2009 Earnings Call Transcript

Nov. 2.09 | About: On Assignment, (ASGN)

On Assignment, Inc. (NASDAQ:ASGN)

Q3 2009 Earnings Call Transcript

November 2, 2009 at 4:30 pm ET


Peter T. Dameris - President, Chief Executive Officer, Director

James L. Brill - Chief Financial Officer, Senior Vice President

Mark S. Brouse - President of VISTA Staffing Solutions, Inc.


James Janesky - Stifel Nicolaus

Andrew Fones - UBS

Jeffrey Silber - BMO Capital Markets

Analyst for Tobey Sommer - SunTrust Robertson


Good afternoon, my name is Stephanie and I will be your conference operator today. At this time I would like to welcome everyone to the On Assignment third quarter 2009 earnings conference call.

(Operator Instructions)

I would now like to turn the conference over to Jim Brill, Chief Financial Officer of On Assignment. Please go ahead sir.

James L. Brill

Before I begin I would like to remind everyone as we do each quarter that our presentation contains predictions, estimates and other forward looking statements representing our current judgment of what the future holds. These include words such as forecast, estimate, project, expect, believe in similar expressions. We believe these remarks to be reasonable, that they are subject to risks and uncertainty that could cause actual results to differ materially from the forward looking statements.

We describe some of these risks and uncertainties in today’s press release and in our filings with the Securities and Exchange Commission. We do not presume the obligation to update statements made in this conference call.

I would now like to introduce Peter Dameris, our CEO and President, will provide an overview of third quarter results. Peter?

Peter T. Dameris

I would like to welcome everyone to the On Assignment 2009 third quarter earnings conference call. With me today are Jim Brill, our Senior Vice President and Chief Financial Officer, and Mark Brouse, President of our Physician Staffing Group.

During our call today I will give a review of the markets we serve and our operational highlights followed by a discussion the performance of our operating segments by me and Mark. I will then turn the call over to Jim for a more detailed review and discussion of our third quarter financial performance, and our financial guidance for the fourth quarter of 2009. We will then open the call up for questions.

During the third quarter the markets we served remained constrained but were more productive than during the second quarter. Although revenues were down third quarter over second quarter, the majority of the decline was attributed to our Nurse Travel Division. Excluding our Nurse Travel Division revenues, revenues would have been down less than 0.5% versus 3.7%.

Currently the Nurse Travel industry remains the most challenged end market in the entire staffing industry. This segment makes up only 11% of On Assignments total gross revenues, and carries our lowest gross margin. As shown by our third quarter results, we have remained focused on our primary operating objectives, and gross operating and adjusted EBITDA margins have continued to trend at or better than we have forecasted.

The trend of stabilization that we observed towards the end of the second quarter of 2009, continue to strengthen into the third quarter because of recent growth in billable consultants, we believe revenues per billable day will grow fourth quarter over third quarter 2009.

In the nursing division, we continue to see a severe constraint in purchasing from hospitals. However we still believe that the reduction and demand in our Nurse Travel group is not due to loss of market share but rather hospitals’ current mindset to conserve cash until the credit crisis eases, and a temporary flood of nurses available for full-time employment recedes. In addition all of the uncertainty regarding health care reform has really put a pall over the industry.

In the IT group we have seen growth and billable head count and expect to grow fourth over third quarter. Our physician business remain strong, although demand has softened recently due to the uncertainty surrounding health care reform, and finally our Life Science and Allied Healthcare businesses are improving.

Although revenue trends have stabilized, we are starting to grow again for most of our divisions, our consolidated fourth quarter revenues will most likely be slightly lower than the revenues we have reported today.

The primary driver of this revenue forecast is that once again, in our nursing group we will have lower revenues in the fourth quarter as compared to the just completed quarter. As most of you who have followed our Company know, the fourth quarter typically is more seasonally impacted due to holidays and research facility shutdowns, i.e. fewer billable days, than other quarters.

Despite there being fewer billable days and more research facilities shutdown in the fourth quarter, because of the recent growth and the number of contract professionals out On Assignment, we believe that our consolidated revenues will grow on a billable day basis fourth quarter over third quarter and some of our divisions will grow on an absolute revenue basis. In addition, the third quarter is the first quarter since the third quarter of last year that billable head count On Assignment at the end of the quarter will exceed billable head count On Assignment at the beginning of the completed pool.

The results released today remain consistent with our operating focus for 2009 of concentrating on gross margins, EBITDA, and cash generation. In this current economic environment, we continue to elect, not to accept or pursue low-margin business or business cannot be collected timely. Our focus on credit quality and collections has permitted us to enhance our cash generation.

During the quarter we reduced our long term debt by $18 million. While we are not at all satisfied with our revenues the business is generating results consistent with our stated operating objectives. As other companies report their third quarter results it will again become evident that our gross and adjusted EBITDA margins remain at the top of the entire industry, and that the Company had preserved its profitability.

While we cannot predict when this current crisis will end, we can predict, based on over 20 years operating history that our business will perform very well coming out of this crisis. The fact that our gross margins and adjusted EBITDA margins during the quarter, actually expanded does very well for us once we have sequential revenue growth. In addition based on the significant amount of debt we had repaid and the majority of amortization, for identifiable intangibles related to our two acquisitions running off, our EPS should grow nicely once revenue growth returns.

For those who have not followed the Company for several years, GAPP EPS was impacted by a non-cash expense of $15.3 million in 2007, and $9.4 million in 2008. These non-cash expenses related to the amortization of identifiable intangibles acquired in connection with our two acquisitions in January of 2007. Most of these non-cash expense will be eliminated by the end of 2009.

Our third quarter results continue to confirm to us that our current revenue generation is only a macroeconomic issue, and otherwise we are performing very well. During the quarter we believe that we again expanded our market share in the Locum Tenens and Allied Healthcare markets. Although the fourth quarter of 2009 will be challenging, albeit less than the first three quarters of the year, 2010 should present us with a more productive marketplace to offer our services into.

Our belief is based on one, many of our clients have reduced their employee base to unsupportable levels, two, stall their postponed projects due to the credit crisis are beginning to be released. Three, IT spending and IT staffing appears to be rebounding faster that other segments of the staffing industry. It is important to remember that this segment is On Assignment’s largest and highest gross margin group. Four, many smaller competitors have ceased to exist, and five, sales and productivity initiatives that we put in place in the first half of 2009 should start to generate results.

Before turning to our actual results for the quarter, it is important to remember that the third quarter of 2008 was the largest revenue quarter for On Assignment in its history. Specific operational accomplishments in the quarter and since our last conference call were one, our consolidated gross margin expanded to 33.4%, a record for our Company. Two, our adjusted EBITDA margin of 8.9% was up from 6.9% in the first quarter of 2009, and 7.3% in the second quarter of 2009. Three, our Physician Staffing segment gross margins expanded 179-basis points over the third quarter of 2008. Four, our Nurse Travel group expanded its gross margin 256 basis points over the third quarter of 2008. Five, our Allied Healthcare group expanded its gross margins by 274 basis point and grew 12% sequentially. Six, we expanded our Physician Retained Search practice with the acquisition of all the employees from Fox Hill & Associates, and seven, our IT division re-launched a dedicated perm placement line of business for IT and engineering professionals.

With regard to SG&A, we continue to monitor the markets we serve and the level of investments we have or are making for future growth. In the third quarter of 2009, we reduced corporate expenses including the number of internal personnel and all divisions except Physician Staffing. Jim will explain in greater detail later in this call, but our SG&A came in lower than expected this quarter due to some unique items. Finally it is important to remember that while many firms have reported very large restructuring charges over the last several quarters. On Assignment has not and the expenses associated with recalibrating our business in 2009 should not be fully experienced again in 2010.

Now let us review the third quarter. Revenue in the third quarter declined 39.5% over the third quarter of 2008. Net income was $1.5 million or $0.04 a share. Revenue generated outside the United was $6 million or 6.1% of consolidated revenues in the third quarter versus $9.6 million or 6% in the third quarter of 2008.

Consolidated gross margin in the third quarter was 33.4% up from 32.6% in the third quarter of 2008. Adjusted EBITDA was $8.7 million or 8.9% of revenue for the quarter down from an $18.8 million or 11.6% of revenue in the third quarter or 2008. Once again our financial performance was achieved without any significant contribution from perm placement.

Exiting the quarter, demand for our services, continues to strengthen but albeit at lower growth levels than we have historically experienced. Our weekly assignment revenue which excludes conversion, billable expenses, and direct placement revenues averaged $7.5 million for the last three weeks compared to an average of $7.1 million and weekly assignment revenues for the three-week period prior to this last earnings call.

Before turning the call over to Mark, I would like to give you a brief review of operations. As we look at the Nurse Travel group, we continue to experience a decline in revenue consistent with the general decline in the overall Nurse Travel market. But once again we were successful in expanding our gross margins to record levels in spite of a challenging market place and economy.

For the quarter, our revenue of $10.7 million was down sequentially 23.6% and down 67.9% year-over-year. Gross profit of $2.7 million represented a 22.1% decline sequentially and a 64.3% decline year-over-year. In spite of the decline in gross profit, gross margins finished strong at 25.4%, our best performance yet. Representing a 50 basis point sequentially increased in a 256 basis point improvement year-over-year.

Looking forward as we predicted, we have began to see numerous signs of nursing needs growing. Demand has improved and hospital census is building. The latter part of Q3 and the first few weeks of Q4 have shown growth in many of the metrics we follow daily. Specifically in Q3 the average order volume represented a 178% sequential increase from the previous quarter. Moreover, the first weeks of October, the average order volume has increased by 262% compared to Q3.

Order volume in many specialty areas although still low, lower than what we have seen historically are showing signs of rapid improvement. We continue to focus our efforts on expanding our share of these orders with energy and added personnel resources dedicated to our client sales force. At the same time we have continued to improve our internal processes to control cost by reducing SG&A expenses by 40% on a year-over-year basis and to drive profitability as we demonstrated by our continued improvement in gross margins. In conjunction with this we pride ourselves on attracting and retaining key-talent in all levels within the Nurse Travel group.

Revenues for the Life Science segment were $22.6 million which represent a slight decrease from the prior quarter and 33.5% decrease year-over-year. The slight sequential decrease is a significant improvement over the prior quarter’s results where revenues decline 10.4% from Q1 to Q2. We attribute this performance to improved economic conditions in several regions throughout the US and Europe. On a divisional basis US operations generated $18.9 million in revenues, representing a 3.6% sequential decrease and a 33.9% decrease year-over-year. Foreign revenues were $3.7 million, increasing 16.9% sequentially and decreasing 31.1% year-over-year.

Even though business trends have improved during the quarter, sequential revenue performance was constrained due to the challenging economic environment. Specific challenges included; One, continued softness in the clinical trials arena, which is closely tied to the struggling pharmaceutical industry. Two, current and perspective clients continue to focus on cost containment rather than R&D and enhancing existing product lines, and three, decreased demand for recent grads and lower level scientific skills.

On a positive note, gross margins for the Life Science segment was 33.6% for the quarter which represents a 108 basis point increase over the prior quarter and a 56 basis point decrease year-over-year. On a divisional basis US gross margin was 33.3% an increase of 198 basis points over the prior quarter, and essentially flat year-over-year.

Foreign gross margin was 35.3% representing a 33 basis points sequential increase and a 364 basis point decrease from the prior year. We attribute the improvement in gross margins to an increase in permanent placement and conversion fees, a reduction in our cost of services, and a commitment to our contract pricing structure.

Moving forward to the fourth quarter, demand for services remain steady and the business climate in most of our markets continues to stabilize. However, normal fourth quarter seasonal factors coupled with lingering economic uncertainty may constrain sequential revenue growth. With that said we expect revenue production for billable day to be flat to slightly up sequentially excluding the impact from the loss of a large European client at the end of the third quarter.

The wild cards that could hamper growth are greater than expected number of plant closures during the holiday season extended and encouraged time off, poor weather and postponing hiring decisions until the new-year. All of which we experienced the fourth quarter of 2008. To offset these challenges our sales and recruiting staff are focused on new business development, increase sales and marketing efforts gaining greater depth with existing clients and expanding our database of candidates in client contacts.

Now we would like to turn to Allied Healthcare. Revenues were $10.3 million for the third quarter of 2009. This represents an 11.8% sequential increase and a 29.3% decrease year-over-year. With the exception of our allied travel business line which is closely tied to hospital admissions, we attribute sequential revenue growth to an improving operating environment across our core product lines. In addition, as reported in the prior quarter, our strategy to capture seasonal staffing needs contributed to our growth. In this case we were successful in securing both small and large scale contracts supporting the demand for flu vaccinations.

Although the operating environment improved during the quarter, further growth was constrained by the following specific recessionary factors; One, a decrease in the number of elective procedures and admissions. Two is the greater number of patients choosing more cost-effective forms of treatments such as self-medication over more costly medical procedures. Three, hospitals reduce usage of contract professionals in response to clinic cash balances and patient admissions, and finally, reduced demand for a less critical allied skill modality.

Allied Healthcare gross margins for the quarter, was 34.5% which represented a 65-basis points sequential increase and 275 basis point increase year-over-year. We attribute the improvement in gross margins to a stable permanent and conversion fee activity, and reduction in cost of services and an improvement in our bill pay spreads. The bill pay spread increased 4.1% sequentially and 8.3% year-over-year.

Turning to the fourth quarter, the markets on which we operate continue to stabilize and the momentum we had realized in the third quarter has positioned as well for continued growth. Demand for rehab therapists, help information management consultants, clinical lab staff and local REMs remains positive. Furthermore due to the unprecedented demand for standard flu vaccinations and the impending demand for H1N1 vaccines, we expect the need for nurses and medical assistants to continue to the remainder of 2009.

The main challenges we faced in the quarter are seasonal and economic factors beyond our control. Based on our current run rate and pipeline orders, we expect revenues to be up on an absolute dollar basis over the third quarter. As we do in other divisions, we continue to respond to the current economic climate by focusing our new business development, gross margin preservation, cost containment, and greater attention to individual performance metrics.

Revenue for our IT and engineering segment was $31.9 million, a 2% sequential decrease from the second quarter of 2009 and a 43.5% decline compared to the third quarter of 2008. The year-over-year decline is reflective of our strong third quarter in 2008 and the overall economic environment since that time. The moderate sequential revenue decrease was primarily due to decreases in bill rates as a result of overall discipline and exchanges and to a decrease in conversion revenue. The decrease in year-over-year revenues was due to fewer billable consultants On Assignment, lower bill rate and a decrease in billable expenses and conversion revenue.

However as we mentioned in our Q2 earnings conference call, the demand for consultants as measured by new assignments per day stabilized in early February, continued to be stable throughout the second quarter and actually increased in the third. This segment specializes in recruiting senior consultants and contractors in four technical disciplines; Information Technology, software and hardware engineering, mechanical and electrical engineering and telecom. The IT discipline which is primarily focused on the ERP market experienced the largest percentage revenue decreases year-over-year. This discipline, continue to be impacted by the significant decrease in available capital and our respective clients’ reluctance to start new projects until the end of the recession was more clearly visible.

Contrary to our experience within the IT discipline, our year-to-date revenue thru 30 September 2009, for the telecom discipline is approximately equal to the same period of 2008. During the third quarter of 2009 we averaged 537 billable consultants on assignment equal to the consultants on assignment in Q2 of 2009, and a 37% decrease compared to the average of 853 billable consultants in the third quarter of 2008.

The average bill rate in the third quarter of 2009 was $112 per hour compared to $124 in the third quarter of 2008 and $113 in the second quarter of 2009. Our gross margin for the third quarter of 2009 remains strong at 35.7% compared to 38.1% for the same period last year.

During the last two quarters we have intentionally relaxed our historically high and mandated markups in order to drive revenues. Nonetheless, the bill rates in gross margins of our IT and engineering segment continue to be among the highest in the staffing industry. We continue to be highly diversified across clients and industries in the Q3 billing over 540 different client companies with no single client accounting for more than 4% of our revenues.

From an overall industry perspective we have seen a strong year-over-year increase and consultant demand from utilities, educational institutions, transportation, manufacturing companies as well as retail trade firms. The largest declines have been in manufacturing companies including appliances, machinery, instrument and pharmaceuticals.

On a positive note our business and medical equipment nearly doubled in Q3 over the second quarter of 2009 and this is a key industry for our mechanical and electrical engineering discipline. Our internal sales consultants drive our business and our significant investment necessary for current and future growth. While the average number of sales consultants increased during the first two quarter of 2008 to high of 447 in Q2, over the next 15 months we have decreased the number of sales consultants and average of 275 over the past quarter.

We monitor our operational activity daily and we continue to ensure the size of our sales staff is in line with the current and future economic conditions. As we see the economy began to recover we have decided to re-introduce permanent placement to our current temp service offerings. A 25 year tenured executive who managed our IT and engineering perm business prior to the 2001 recession will be responsible for the re-launch of this service offering. We have already hired a few staff consultants who will focus 100% of their respective time on perm opportunities with our clients. We anticipate that this new service will provide additional added value for our current client, in addition to keeping our competitors from gaining a foothold in our client companies.

Consistent with our other divisions we anticipate the future perm revenue within our IT and engineering segment will be a small percentage of our total revenue. As stated earlier, actual demand for consultants as measured by new assignments per day stabilized in early February continued throughout Q2 and actually increased throughout Q3 and now into Q4. Our Oxford index, our quarterly survey of Oxford clients also indicated a slight increase in their hiring plans for Q4 and we anticipate an increase in our average weekly sales in Q4 over Q3 for this segment.

I will now turn the call over to Mark Brouse the President of VISTA our Locum Tenens business. Mark?

Mark S. Brouse

The big picture of VISTA shows revenue down slightly sequentially and year-over-year, the gross profit holding steady due to an increase in margin for our core Locum Tenens business and a 92% year-over-year increase in revenue generated by our permanent international placement divisions.

Here is a little more detail. Revenue for the quarter was $22.6 million which is down 3% sequentially and 4% year-over-year. This reflects a drop in volume as measured by days’ billed in our Locum Tenens business of 2% sequentially and 6% year-over-year. Fortunately gross profit dipped just 1% sequentially and actually rose 1% year-over-year. We credit this, as I mentioned, to an increase in our gross margin to 33.4% which is up 86 basis points sequentially and 179 basis points year-over-year.

We are also very excited about the revenue growth in our diversified businesses. Our international placements division overcame in an increasingly demanding regulatory climate and found a firm foothold in Australia. This supplements the division’s growing volume in New Zealand and Bermuda. Quarterly revenues rose more than 300% for the small division. The Staff Physician Search and Consulting, our permanent position and position executive placement subsidiary is also a big contributor to increased gross margin.

In addition, the subsidiary may be small but strategic acquisition at the end of the quarter.

We purchased Fox Hill Associates, a nine-member permanent position search firm based in Milwaukee. Fox Hill has an exceptional 30-year track record in the industry and a very positive reputation. The seasoned consultants from Fox Hill have all accepted employment with VISTA and have essentially doubled the professionally capacity of this subsidiary.

While the Locum Tenens contract business remains our focus, building our diversified businesses puts us in the position to solve a broader range of our customers’ challenges and also helps us build partnerships with them. This has been an important focus for us during the economic downturn. Speaking of the economic downturn, it continues to impact demand for core Locum Tenens business as we have anticipated.

Client demand which we measure in days of coverage requested has declined 10% sequentially and 41% year-over-year. In a short term, we expect this to be the new norm. So, we put a great deal of effort into filling a greater percentage of these available days. Throughout the history of this industry, [billable rates] have hovered in the 30% range. We have grown our bill rates steadily this year; it is now 56% and growing, up 9% this quarter and 59% year-over-year.

In the longer term, we expect demand to increase. In the last six weeks, demand as measured by new job orders has flattened out and is no longer declining. This upturn in Q3 will help offset some of the normal seasonal declines in Q4 this year and Q1 of next.

Conversions, client hiring temporary doctors for permanent positions took a big jump last quarter and are up 46% year-over-year. We see this as increased confidence among buyers, primarily healthcare organizations that will be energized by economic stimulus programs and forced to expand by healthcare reform. Specifically, the American Recovery and Redevelopment Act will pump $1 billion into prevention and wellness programs. It will also provide a 65% subsidy of corporate programs to help insurance coverage of 7 million people who have lost their jobs. In addition, the Children’s Health Insurance Reauthorization Act will provide insurance coverage to 11 million kids; 4 million of them were previously uninsured.

Increased access to insurance leads to increased demand for doctors is something that generally boosts our business. The American Association of Medical Colleges now predicts the shortage of 124,000 primary care physicians by the year 2025. The association predicts that universal coverage would increase this number by an additional 25%.

Our range of staffing services helped make the most of the time physicians are available and willing to work. We also help with distribution of doctors, bringing them into rural and unreserved areas on a part time basis when an area has trouble recruiting full time doctors.

Healthcare reform is also focusing on successful healthcare organizations that function as integrated systems of care and have a sense of keeping people healthy not just treating them when they are sick. We find that healthcare organizations like these are more tuned in to the value, our physicians provide. The understanding importance of quality physicians and quality matches are less price-sensitive and a more open to alternative staffing arrangements. They have the systems in place to select, orient and put to work the physicians we provide.

Our focuses on building long term partnerships with these organizations so that we could provide pro-active physician staffing and permanent recruitment services. While in the short run, we have experienced a slightly declined in demand for our contract physicians, we believe our long term indicators point to our robust market for physician staffing. As the economy strengthens and uncertainty around healthcare reform lifts, we expect to see a rapid increase in the requests for coverage from our loyal client pool.

I will not turn the call over to Jim Brill.

James L. Brill

As Peter mentioned, consolidated revenues for the quarter were $98.1 million, down 39.5% from 2008. There are approximately 64 billing days in this quarter, 63.5 in the second quarter and approximately 63.5 in the third quarter of 2008. However, for the Nurse Travel division, there were 92 billing days this quarter, 91 last quarter and 92 in the third quarter of 2008. Foreign currency had about a $280,000 negative impact on revenue.

Now, let me address some of the variances and their related explanations to the extent Peter or Mark has not. In the Travel Nursing Group, bill rates were down 6% and bill pay spreads contracted. However, the bill pay margin expanded over the third quarter of 2008. Most of the other components of cost of sales moved positively with the exception of worker’s compensation insurance expense and other consultant expenses which increased slightly as a percent of revenue. This group as well as the rest of the Company has reduced SG&A significantly.

In Physician Staffing, we saw an increase in bill rate and bill pay spread expanded. Mark also noted a nice increase in his conversion of direct higher revenue. At our IT Engineering Division, Peter mentioned that we saw a drop in gross margin from last year and last quarter driven by a drop in bill pay margin and a decrease in conversion revenue.

I think Peter did a thorough job of addressing both revenue and gross margins in Life Sciences and Allied Healthcare. I will just add that we, again, benefitted from lower than anticipated worker’s compensation insurance expense. Conversion and direct higher revenues totaled $2 million in the quarter or 2% of revenue as compared to $1.9 million or 1.9% of revenue in the second quarter and $3.3 million or 2% of revenue in the third quarter of 2008.

Total SG&A expense for the third quarter was $28.5 million or 29% of total revenues which is down from $30 million or 29.4% last quarter and $39.2 million or 24.2% in the third quarter of 2008. The reduction from the third quarter of 2008 is in part related to an $870,000 reduction in amortization of the intangibles related to the acquisitions. The reduction from the second quarter is in part to a couple of insurance settlement gains which totaled about $300,000 and a positive adjustment to an Old Worker’s Compensation claims of about $150,000. This is partially offset by an increased on our equity-based compensation expense to $1.5 million from $1.1 million. Also included in SG&A in the quarter was $1.4 million of depreciation. We are particularly pleased that we have been able to continue reduce cash SG&A during this period. As Peter and Mark both mentioned, we continue to monitor our operating expenses as they relate to revenue and look for ways to reduce cost and to be more efficient.

Our operating income was $4.3 million or 4.4% of revenues for the quarter compared to $3.4 million or 3.4% of revenues last quarter and $13.6 million or 8.4% of revenues in the third quarter of last year. Our tax rate for the quarter was 43.6%. Net income was $1.5 million or $0.04 per diluted share.

We believe it is meaningful to compare EBITDA and adjusted EBITDA when comparing the current quarter’s results with prior quarters. As outlined in today’s press release, EBITDA for the quarter was $7.2 million. Excluding equity-based compensation expense or approximately $1.5 million, adjusted EBITDA was $8.7 million or 8.9% of revenue. Adjusted EBITDA was 7.5% or $7.5 million or 7.3% of revenue last quarter and $18.8 million or 11.6% of revenue in the third quarter of 2008.

We ended the quarter with cash and cash equivalents of $35.1 million, down from $44.5 million last quarter. While we generated $9.2 million in cash flow from operations, we used $18 million to pay down our term loan. CapEx was approximately $1.1 million, up from about $950,000 last quarter and down from $1.7 million in the third quarter of 2008. Net accounts receivable was $49.4 million at the end of the third quarter, and Day Sales Outstanding were 46 days, the same as last quarter, but down from 49 days last year.

Now, turning to productivity, which we defined as quarterly gross profit generated per staffing consultant. For the third quarter, we averaged 569 staffing consultants and gross profit per staffing consultant was $58,000, down from $71,000 in the third quarter of 2008 but up from $57,000 in the second quarter. The Life Sciences segment generated $78,000 in gross profit per staffing consultant for the quarter as compared to $70,000 last quarter. Healthcare segment generated $55,000 in gross profit per staffing consultant for the quarter as compared to $54,000 last quarter. The Physician Staffing segment generated $92,000 in gross profit for staffing consultant for the quarter compared to $98,000 last quarter. In the IT and Engineering segment generated $41,000 in gross profit per staffing consultant for the quarter compared to $42,000 last quarter.

Looking at the fourth quarter revenue expectations this year, it continues to be very difficult to estimate what will happen to revenues because of the world wide economy. In addition, the number of billing days in the fourth quarter will be about 4.5% fewer than those in the third quarter. So, given that backdrop, based on labor markets not getting any worse than they are today and normal seasonal trends, we currently estimate consolidated revenues of $93 million to $98 million for the quarter ending December 31, 2009.

We are estimating consolidated gross margins of approximately 33.25% to 33.45%, SG&A of $29.3 million to $29.6 million including equity-based compensation of expenses of approximately $1.1 million to $1.2 million, approximately $1.4 million of amortization of intangible assets and financing cost and depreciation of approximately $1.5 million.

We estimate net income of minus $200,000 to $1 million. Earnings per share of $0 to $0.03 and an effective tax rate of 45%. Adjusted EBITDA is estimated to be in the range of $5.4 million to $7.6 million.

I will now turn the call back to Peter for some closing remarks before we open up the lines for questions.

Peter T. Dameris

We believe that with the benefit of hindsight, history will show that 2009 will turn out to be the most challenging year for the entire staffing industry. The gross and adjusted EBITDA margins that we recorded today against such a backdrop are a true measure of the strength of our Company. While the entire On Assignment team is very proud of our performance in this difficult economic environment, we are now very focused on positioning the Company for accelerated growth coming out of this recession.

I would like to once again thank our many loyal, dedicated and talented employees whose efforts have allowed us to progress to where we are today. I would like to now turn the call over to the operator to open it up for participants to ask questions.

Question-and-Answer Session


(Operator instructions)Your first call comes from the line of James Janesky with Stifel Nicolaus

James Janesky - Stifel Nicolaus

First question is on the margins within the IT segment, IT and engineering segments. I think looking back that these while still very strong were either among the lowest that the segment has ever reported. You mentioned that it was because of pricing, is that what it is due to and do you expect that pricing is going to remain where it is right now as you have said the gain share, or what are your plans?

Peter T. Dameris

Jim, we consciously agreed to relax the bill pay spread and not walk away from good viable business over 60-basis points or 80-basis points. What also added to the compression year-over-year, which generated 35.7% gross margin which is still the highest in the industry, is that there was really no benefit at all from conversion or perm fees which typically help a little bit in expanding the margin. And finally the relative mix as we mentioned in our prepared remarks. Our telecom group is actually flat year-over-year. There was no decline there and as you know working for telecoms that historically has been a slightly lower margin than the reported division consolidated gross margin for the IT Group.

James Janesky - Stifel Nicolaus

Did you indicate how many recruiters you have now in perm within the IT and Engineering segments and where do you think you want to take that over the next 6 months to a year?

Peter T. Dameris

Yes, I think we probably have four right now and I think we might get up to somewhere between 7 and 10 over the next 6 months. We are actually starting to tighten the margin profile up again in the IT Group. And we, unlike many other staffing firms, we have not taken any restructuring charges so, and we are actually starting to add headcount again.

James Janesky - Stifel Nicolaus

Now you said that the Fox Hill acquisition was 9 additional or permanent recruiters in the physician area, can you give us an idea of what type of rep, when you did that, when it closed and what type of revenue profile it has?

Peter T. Dameris

Yes, I will go first and I will let Mark add some operational colors to it. We acquired that about a month ago. It basically was paying someone to shut their business down and become full-time employees of our physician staffing group. I would share with you that financially it is insignificant, strategically it is very significant. I would guess that, it is less than $1 million or so on historical basis and you apply whatever growth rate you want for permanent placement. But it significantly increases our foothold in the permanent space and Mark will speak to their 25-year history and reputation, Mark?

Mark Brouse

Yes, this is an organization that we have been in brilliant discussions we had for a number of years that we found to be just the most highly-respected of all of the small permanent placement organizations out there. And we were attracted to them because of the strength of that reputation, the quality of the relationship that they have established with their customers. We hired nine individuals, seven of whom are recruitment professionals and that essentially double our recruitment capacity to around 14 professionals. So we think that is going to add tremendous amount of capability to our organization. So many of our Locum Tenens customers have placement need that we have traditionally have been unable to meet and this will give us the ability to really provide them with the kind of services that they are looking for.


Our next question comes from the line of Tobey Sommer with SunTrust Robertson

Analyst for Tobey Sommer - SunTrust Robertson

This is Frank in for Tobey. Going back to the reintroduction of permanent placement, can you talk a little bit about kind of your long-term thoughts there, any targets for as a percentage of revenue or how you might look at growing then?

Peter T. Dameris

Yes, you know Frank we have been very, very disciplined in all facets of our business. Credit quality, gross margin, profile, perm versus contract labor, we are long-term contract labor shop and you look at the length of our assignments, they are rather lengthy. I do not see that division generating more than 3%, 4% of their total revenue from perm but it is a nice little sweetener. It allows for margin expansion on a reported basis for that division, even above their historically high gross margins. And it is the right time in the cycle, because we are not banking on absolute job growth immediately but I can tell you there is going to be a fair amount of musical chairs going on and people who felt as if they were ignored or mistreated during the downturn the first time they get a phone call with a viable job opportunity they are going to hop.

So there is maybe not be net and maybe a zero some gain, as far as number of jobs created, but there is going to be a lot of musical chairs going on and we did do that. That is in our DNA over at Oxford and we have an opportunity to thoughtfully re-launch it. Again these are just incremental strategic things we are doing. I think you will see an expanded reported consolidated gross margin but we are not trying to say that these are game changers. This is just blocking and tackling and remaining strategic. And the timing is right.

Analyst for Tobey Sommer - SunTrust Robertson

Okay great. In your prepared remarks you talked a little bit about the average number of sales consultant’s trends increasing from 447 I think to 275, can you talk a little bit about where that is in at the end of the quarter and what are your thoughts are going forward and how you evaluate where are you going to stand?

Peter T. Dameris

Yes, so it was a decrease. It was a decrease; we decreased the number of sales people in staffing consultants by 275, over the years if I am correct. Is that correct Jim?

James L. Brill

We are down to in average.

Peter T. Dameris

Thank you, so for the IT Group it went from a high of 447 to currently to about 275, is that correct Jim?

James L. Brill


Peter T. Dameris

So that we were just speaking for that division and as you know Frank we do only kind of organic training and hiring at Oxford. And it typically takes someone 12 to 14 months before they have even one or two people on billings. So a lot of the headcount would not generate revenue for some time and that is why we peeled back as much as we did at Oxford considering the revenue fall off. Did I explain that clearly?

Analyst for Tobey Sommer - SunTrust Robertson

Fine. Real quick and number question, at tax rate. That is in the [quite some time?]?

Peter T. Dameris

You mean, what is behind that?

Analyst for Tobey Sommer - SunTrust Robertson


Peter T. Dameris

There are a couple of items that could be unique items in the fourth quarter; it just depends on how these things fall. So that is what’s behind it.


Your next question comes from the line of Andrew Fones from UBS

Andrew Fones - UBS

Thank you, if you could come and go through your different businesses and say which one you think tends to respond to economic recovery, which one tends to lag and then help us understand in terms of the trends you have been seeing in new assignments wins or new sales perhaps what you have experienced as being this far coming out perhaps the downturn, thanks?

Peter T. Dameris

Absolutely, so Andrew the IT group is what is responding the quickest and having the fastest rebound right now. And it is actually quite strong. From a low, I guess we do not do inter-periods but we have bottomed out as far as number of billable consultants in July and we are substantially above that number today. And the weekly trends continue to move on a positive fashion.

The Allied Healthcare group is going to be up sequentially, it is pretty strong. We are getting in the third, fourth and probably in the first, some pretty strong seasonal staffing needs impact. But nonetheless, that division is starting to grow.

The Life Science group is starting to show weekly headcount growth, although you know the fourth quarter is one of its challenging quarters because we do a lot of work with people like AmGen, NorvoNorsk, Pfizer, some of the big pharmaceutical companies. And a lot of those companies will shut down their research facilities between the 24th of December and 22 January. So if we have 10 people for instance at a bio-tech company and they shut down for 7 business days, we have lost 7 billable days at that one account. But not withstanding that, we believe we will be up on a same number of billable days basis fourth over third. And that probably the most directly correlated to the broader GDP growth.

The Locum Tenens business is really and I will let Mark follow up with what I say. A little bit of a quandary and we take responsibility where responsibility is due but what we really are seeing here is this was the last kind of corner of the economy to fall apart and I just think between the steep economic prices whence and its pace as well as now with all these deep uncertainty about what healthcare reform will look like that it has paralyzed a lot of hospital and their normal purchasing behavior. Mark you want to add a little bit to that and then I will follow up with Nurse Travel.

Mark Brouse

Yes, there really been two significant impacts for us. One is increasing unemployment and the resulting number of increase in the number of people without insurance which has impacted our client’s senses and their needs for coverage. The second part of it is general uncertainty that has affected people’s normal decision-making. Individuals are not responding the way to situations within their facility the way that they normally would and are kind of sitting on their hands waiting to see how things develop before they make decisions. I think once we get a little more certainty around healthcare reform, I think we will see them returning to their normal decision-making patterns.

Peter T. Dameris

And finally Andrew as it relates to the Nurse Travel group, I guess the most positive thing I can say is it is only, it is a great division, it is very, very well operated, we have talented people but I guess the most positive thing I could say it is only 11% of our total revenue. It is a much challenged sector right now and we did quote that orders are up significantly. However those orders are not turning into filled orders at the same growth rates. So the numbers of orders we can, look at or up significantly, the number of orders that are truly being filled by us or others is not nearly the same growth rate. But we feel like we have actually gotten pretty close to touching the bottom of the pool and once this uncertainty on healthcare resolves itself we can start to grow again.

Andrew Fones - UBS

That was really helpful, thanks. And then could you give us the number of days in Q4 and Q1 and as you kind of think about guidance going into next year, do you expect to continue with quarterly guidance or as you go into 2010 should we expect you to give 2010 guidance on the Q4 call.

Peter T. Dameris

Well let me give you a reference to guidance, I think we are going to stick with quarterly until we get better visibility as to the economy. For some reason we have great visibility at the end of the first quarter and we can give guidance for the full year, we will evaluate that. But I think you should consider that we are just going to give quarterly guidance for the time being.

Andrew Fones - UBS


James L. Brill

Andrew as far as days go, I do not have Q1 in front of me, Q4 at 61 days with the exception of Nurse Travel which is 92 days.


Okay, and then the one million that you said was the, it is less than $1 million the impact to the Fox Hill acquisition, is that an annual number, I presume it was.

James L. Brill

Yes, that is.


Okay, and then perhaps finally, in terms of SG&A, are you reaching the bottom there also in terms of [Inaudible] that some of the revenue trends are turning would you say in terms of some of the coach you made, to consult in SG&A that we are getting close the bottom there also.

Peter T. Dameris

Yes, I mean, I would not. We are still trying to find savings where we can but the good news we have been trying to hire appropriately throughout the year. And we have a fair number of expenses run through the P&L this year that we have not, Andrew kind of identified as one-time restructuring target. Some of those things will not show up in 2010 which will provide kind of so to speak air cover for incremental head count. So we are not looking to cut SG&A significantly further from this point. We are just looking for rational places where we can become more efficient, but we are actually looking now slowly, incrementally head count where and when appropriate. Jim you want to add?

James L. Brill

No. I think that is pretty appropriate. The other things this year obviously, commissions are way out this year and incentive comp is gone this year so it is not an add-on this year.


So you mentioned four little $50,000 in benefits in lower SG&A this quarter but you have me broken out. On the flip side, some of the cost, can you give us a rough sense of the kind of what some of these kinds of restructuring cost had been?

Peter T. Dameris

Yes, I will give you an example. We took about $100,000 charge for the closure of…not a closure, we merged a branch office out of Alexandria, Virginia, Old Town Alexandria, Virginia into Silver Springs, Maryland and we subleased the space and over the term of the lease is about a $100,000 deficit. We ran that through the P&L, we have a number of severance charges run through the P&L this quarter related just some people that were severed out of the business. So just the normal charges I mean, we just have not identified them as restructuring charge, we have ran them through the P&L, maybe at the end of the year its meaningful we might see if we can identify down a larger basis but you have seen the reduction in headcount, you have seen how we tried to recalibrate our business and we have ran that all through our P&L, Andrew, and I can tell that severance portion of it and the least cancellation portions of it would not run through the P&L in 2010.


[Operator Instructions] Your next question comes from the line of Jeff Silver with BMO Capital Markets.

Jeff Silver - BMO Capital Markets

Peter in your remarks to and I think you were just talking about the IT Division; you are talking about relaxing the mark up to drive revenues. I think it seems to be something new, is that something we should be seeing in your other divisions as well going forward.

Peter T. Dameris

No I do not think so. I mean we are actually, we feel, we gave you gross margin guidance for the fourth quarter Jeff. And that pretty much translate that we think we have pretty stable gross margin. I mean we are going to report consolidated gross margins for all of 2009 most probably about 2008 which is a major feat. We have stayed consistent with our pricing, we do not think we are losing market share, and we are starting to see the market come back a little bit, albeit is at lower levels than historical levels but it is a start. So we think, we do not think we need to do that and we are going to be prudent, we are going to be pennywise and pound-bullish but we have provided valuable services and these are commodity skills sets that are being placed through an online auction or anything like that. And people are still lining to provide pay for our service.

Jeff Silver - BMO

Okay, moving on to the balance sheet. You have noted the sizable amount of debt repayments during the quarter; can you just remind us are there any constraints you have in terms of debt reduction going forward?

Peter T. Dameris

No we are not constraint in the debt reduction.

Jeff Silver - BMO

Okay great, thank you so much…


The only other thing I will add to the balance sheet is we have completed all earn-out payments so there are no earn-payments left. However, at the end of the quarter the Oxford earn-out which was about $4.5 million have not yet been made.

Jeff Silver - BMO

Oh I am sorry, that has been made in the fourth quarter though?



Jeff Silver - BMO

Okay great, there was accrued for prior to that.


Yes Jeff.


[Operator Instruction]. At this time there are no further questions, thank you. Gentlemen do you have any closing remarks.


We greatly appreciate your attention and continued interest in OnAssigment and we look forward to speaking with you during our fourth quarter conference call. Thank you.


Thank you this concludes today’s conference, you may now disconnect.

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