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Executives

Jim Brill - Chief Financial Officer

Peter Dameris - Chief Executive Officer

Michael McGowan - President of IT and Engineering Group

Analysts

Jim Janesky - Stifel Nicolaus

Tobey Sommer - SunTrust Robinson

Jeff Silber - BMO Capital Markets

On Assignment, Inc. (ASGN) Q4 2009 Earnings Call February 19, 2010 4:30 PM ET

Operator

Good afternoon. My name is Christine and I will be your conference operator today. At this time I would like to welcome everyone to the On Assignment fourth quarter 2009 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. (Operator Instructions)

I would now like to turn the call over to Jim Brill, Chief Financial Officer; please go ahead sir.

Jim Brill

Thank you, Christine. 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 and similar expressions.

We believe these remarks to be reasonable, but they are subject to risks and uncertainties 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 assume the obligation to update statements made in this conference call.

I would now like to introduce Peter Dameris, our CEO and President, who’ll provide an overview of fourth quarter results. Peter.

Peter Dameris

Thank you, Jim. Good afternoon. I would like to welcome everyone to the On Assignment 2009 fourth quarter earnings conference call. With Jim and me today is Michael McGowan, President of IT and Engineering 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 myself and Mike. I will then turn the call over to Jim for a more detailed review and discussion of our fourth quarter financial performance, and our financial guidance for the first quarter of 2010. We will then open the call up for questions.

The market we serve remain constrained in the fourth quarter, but where much more productive than any other quarter of 2009. Despite there being approximately three fewer billable days in the fourth quarter, consolidated revenues grew $1.9 on an absolute basis over the third quarter of 2009 and approximately 6% on a same number of billable day basis. Our absolute basis divisional sequential revenue growth in the fourth quarter was 11.7% for our IT Group, 1.6% for our Life Sciences Group and 14.8% for our Allied Healthcare Group.

During the fourth quarter, Nurse Travel contracted 11% on an absolute basis and our physician group contracted 11.2% on an absolute basis. The severe economic downturn that occurred in 2009 affected all staffing firms differently, ironically those staffing firm with healthcare exposure were the most adversely affected. In addition, companies with the greater exposure to small and medium size businesses were more severally impacted as well.

On Assignment, small and medium size businesses and the healthcare industry are important components of our business. Although, these components of our business are currently headwind to growth, albeit at a much smaller level we firmly believe as the economy continues to stabilize that each of these markets will be points of strength for our company.

As we reflect back on 2009, we take great pride that our gross margins are at record levels. We generated $42.8 million in cash flow from operations before debt reduction and earn out payments. We reduced our term loan by $48 million. We payout the remaining $9.8 million due on our earn out obligations, we did not report a net income loss or take any restructuring charges, our adjusted EBITDA margin for the full year was 7.7% and finally our talented team remained intact.

We firmly believe that by having preserved our gross margins, during this economic crisis, we will return to peak EBITDA levels more quickly than others. As we have often said, our main challenge in 2009 has been a macro economy issue.

Going forward, what were once challenges to growth should be contributors to growth, much attention is and will be given to helping small and medium size businesses grow. Healthcare and biotech will not disappear in this country and the short term decisions made by many of our healthcare customers, out of necessity will not sustainable in 2010 and beyond.

Looking more broadly, contract labor should perform very well in what appears to be a slower than normal economic and labor market recovery. This belief is based on the assumption that so many of the decisions that corporate America was forced to make in 2009 cannot be sustained long term.

Employee staffing and productivity levels are at record low and high levels respectively and the average age of many employees is much higher than in prior periods. In addition, the payment challenges experienced by corporate America in 2009 will not be forgotten quickly and that mindset should be a big positive for the staffing industry.

Of the 8.6 million jobs loss since the beginning of the recession, a good many were temporary. Our industry worked at the level to permit businesses to ramp employee headcount down quickly. The industry should now also work to permit businesses to ramp employee headcount quickly.

Exiting this very difficult financial and economic crisis, our company has never been in a better operating position. As I stated earlier, gross margins are at record levels, three new practice areas have been launched and because our debt has been reduced by $48 million over the last year, we are now able to pursue strategic acquisitions.

As we reflect on our financial and operating position at the beginning of this economic expansion period versus the last, we feel that a few comparisons to prior periods are informative: First, our mix to services has broadened, IE, IT, engineering, healthcare information management, physical therapy and physician staffing were added.

Second, our capitalization has improved. Third, full year gross margins are 695 basis points higher than the full year gross margins that we recorded in 2004. Four, our average bill rate in 2009, was 6,167 versus 3,570 in 2004.

Finally, our adjusted EBITDA margin of 7.7% for the full year of 2009 compares to a negative adjusted EBITDA for 2004, while 2010 will be challenging, we believe we will continue to make good progress in regaining loss profits and building equity value for our shareholders.

In addition, based on the significant amount of debt we have repaid in 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 our company for several years, GAAP EPS was impacted by a non-cash amortization expense of $15.3 million in 2007 and $9.4 million in 2008.

These non-cash expenses related to amortization of identifiable intangibles acquired in connection with our two acquisitions in January of ‘07. Most of the non-cash expense was eliminated by the end of ‘09. Before turning to our fourth quarter results, we’d like to share with you our operating objectives for 2010 and beyond.

For 2010, we are committed to sequential revenue growth, enhancing our existing service offerings and developing a strategic plan to achieve a $1 billion in revenues over the next five years. Since early January of 2010, we have been engaged with an outsize strategic consulting firm to create a plan and achieve our stated $1 billion revenue goal. Much of this growth will come from organic internal initiatives, but some of our growth will come from strategic acquisitions.

We hope to share more details of the strategic plan we are developing over the coming months. What I can share with you today is that the strategy is not just straight away from our existing verticals, our gross margin levels, but rather to add adjacent offerings within each vertical that harmoniously coexists with our core offerings.

Now to the fourth quarter, revenues in the fourth quarter decline 32.3% over the fourth quarter of ‘08. Net income was $1 million or $0.03 per share. Revenue generate outside the U.S. was $6.2 million or 6.2% of consolidated revenue in the fourth quarter, versus $7.7 million or 5.2% in the fourth quarter of 2008.

Consolidated gross margins in the fourth quarter were 33.2% up from 32.9% in the fourth quarter of ‘08. Adjusted EBITDA was $7.8 million or 7.8% of revenue for the fourth quarter down from $15.6 million or 10.6% of revenue in the fourth quarter of ‘08. Exiting the quarter demand for our services continues to strengthen.

Our weekly assignment revenue, which excludes conversion, billable expenses, and direct placement revenues average $7.3 million for the last three weeks, which included Martin Luther King holiday compared to an average of $7.5 million and weekly assignment revenues for the three week period prior to our earnings release last quarter.

Before turning the call over to Mike, I would like to give a brief review of operations. As we look at the Nurse Travel Group, we experienced stabilization in revenue generation in Q4 mainly due to the increase in new order that picked up in mid September, October. Moreover we again were successful in maintaining our gross margins at high levels in the context of the current economic conditions and challenging marketplace.

For the quarter gross margins finish strong a 24.6%, representing in 80 basis points sequential decrease, but a 115 basis point improvement year-over-year. During 2009 we made significant investments in building up highly experience sales team that will help us increase our geographical presences and expand our market share with existing customers.

Revenue for the Life Sciences segment grew on an absolute basis over the third quarter to $22.9 million which represented at 1.6% sequential increase and a 25.6% decrease year-over-year. The sequential increase is a major improvement over the prior quarter’s results and we attribute this performance to an improved economic environment.

Gross margins for Life Sciences segment were 32.8% for the quarter, the second strongest quarter in 2009. This represented an 85 basis point decrease over the prior quarter and a 151 basis point decrease year-over-year. On a divisional basis, the U.S. gross margin was 32.4%, a decrease of 90 basis points over the prior year and a 151 basis point decrease year-over-year.

Foreign gross margin was 34.8%, representing a 51 basis point decrease and a 191 basis point decrease from the prior year. A significant contributor to the declining gross margin was lower direct higher and conversion fees.

Moving onto the first quarter of 2010, demand for both contract and permanent placement services remained steady and the business climate in most of our markets continued to stabilize and improve. However, our market conditions are far from historical post recession levels. Early in the quarter, we are encouraged with the steady flow of job orders, number of weekly assignments and permanent placement activity.

Now, I’d like to turn to the Allied Healthcare group, I’m please to report that revenues grew on an absolute basis over the third quarter to $11.8 million. This represents a 14.7% sequential increase on an absolute basis and a 10% decrease year-over-year. We attribute this growth to an effective response to an unprecedented demand for flu vaccinations during the quarter.

Historically, during the third and fourth quarter of each year, the Allied division aggressively targets and support providers of flu vaccination services. As we’ve reported in our third quarter earnings call, demand for standard flu vaccinations coupled with the H1N1 pandemic, soared the record levels. The momentum we realized later in the third quarter combined with planning on successful execution, resulted in favorable results in the fourth quarter of 2009.

Our core business continued to stabilize during this period and its performance was consistent with normal fourth quarter seasonality. As we go forward in 2010, we continue to plan, develop new business partnerships and position our field operation to meet the demand of this seasonal event. We expect to cater our first share of seasonal flu vaccination services in the second half of 2010, although most likely at lower levels than 2009.

Although the operating environment improved during the quarter, further growth was constrained by the following specific economic factors: A continued reduction and demand for elective procedures and greater number of patients choosing more cost effective forms of treatment such as self medication over more cost medical procedures, hospitals reduced usage of contract professionals in response to decline in cash balances in patient admissions and a reduced demand for less critical allied skill modalities.

Turning to the first quarter of 2010, the market in which we operate continued to stabilize and momentum we realized in the prior quarter has positioned us well for continued growth. However, as expected the demand for standard seasonal flu and H1N1 vaccinations have significantly dissipated.

Demand for our core clinical lab, medical financial local nursing, Allied Travel, Rehab Therapist, nature I am professionals continues to improve. Our focus continues to be on new business development gaining greater presence in higher level skill disciplines, permanent placement, preservation of gross margins and improved productivity.

Now I would like give a little insight into our position staffing segment; as most of you witness this segment remained strong early in 2009, lagging the staffing industry as a whole and feeling the effects of the recession. Unfortunately we believe it will also lag a bit in the recovery.

Demand trended downward in Q3, but flattened in Q4 and has started to trend up. The good news is that we have been able to push our fill rates and margins to historical highs, offsetting some of the depression and demand for services. We expect the lag to be short lift with the segment rebounding in late Q2 of this year.

Here’s more detail. As noted the segment was strong early in a year, but Q4 revenues came in 14% lower than in the same quarter last year and 11% lower than the third quarter of 2009. The net result was a 2% decrease in revenues and 2009 versus 2008. This decrease in revenue can be directly attributed to a decrease in demand as measure by days of coverage requested or sold days.

Sold days were down 43% in the fourth quarter from the same quarter last year and almost 12% sequentially. Gross profit fell 17% in the fourth quarter versus last year’s fourth quarter and 9% sequentially. However we ended the year with a 4% increase in gross profit for the full year.

We attribute this to a strong focus on building and maintaining margin which jumped 242 basis points in the fourth quarter of the same quarter last year and 95 basis points sequentially. Our gross margin for the fourth quarter was 34.3%; our full year gross margin jumped 186 basis points from 30.7 in 2008 to 32.5% in 2009. We also focused on increasing fill rate to offset the decrease in demand.

Our fill rate was 59% in the fourth quarter of 2009 and 54% increase over the 38% fill rate in the fourth quarter of 2008. Fill rates of about 30% have been standard throughout the history of this segment of the industry. As noted last quarter [Inaudible] emerging diversified businesses are also making important contributions during this economic downturn.

Combined revenue for our international placement and position search and consulting division increased 41% in the fourth quarter of 2009 compared to the fourth quarter of 2008 and 23% sequentially. The international placement division staffs positions in Australia, New Zealand and Bermuda and is expanding.

We have also successfully integrated the experience consultants brought to us through our recent acquisition of Fox Hill Associates, a small competitor. The division provides permanent placement for clinical, clinical academic and clinical executive openings and in-house requirement program development and consulting.

Despite the uncertainty, we think that healthcare reform will create opportunities in the physician staffing sector. Common themes in the latest major reform proposals lead us to believe that medicate will be expanded, that primary care resources such as community health centers will receive greater attention and that programs aimed at prevention, wellness and expanded coverage for children will receive funding.

In additional, the California Department of Managed Healthcare announced new requirements, limiting wait times for appointments for member of management healthcare organizations. Effective January 20, ‘11 the new standard will certainly drive up the need for positions, because more than 21 million Californians belong to health maintenance organizations.

Physician shortages and mal-distribution increase the demand for physician staffing services and bode well for the Locum Tenens companies in June. The provisions aimed to simplifying the administration of healthcare insurance problems are ultimately included. It would become less complex to place a Locum Tenens Physician and easier to insure the healthcare organizations could appropriately reimbursed for their services.

Looking forward we expect make a slow stead return to formal levels of productivity, the decline in demand is flattened out and we are taking steps to be well positions in the recovery. Unlike most of competitors, we weathered last year without having to cut staff. Given the time it takes to ramp up qualified sales professionals in this very complex staffing niche, we see that as a strategy advantage.

I’d now like to turn the call over to Mike McGowan, the President of Oxford Global Resources. Mike.

Michael McGowan

Thank you, Peter. I’m pleased to report fourth quarter revenues for the IT and Engineering Group was $35.6 million and 11.7% sequential increase over the third quarter of 2009. This revenue increases in a reversal of the prior quarterly trends most recently being a 2% decrease in quarter three over quarter two.

The improvements reflects monthly increases on our average weekly sales starting in September, 2009 and were the result of a significant increase in the number of billable consultants On Assignment. Some what offset though by continued decreases in our average bill rates.

On a full year basis, 2009 revenues for our IT and Engineering Group or $138.1 million, a 36.9% decrease over the $218.7 million we realized in 2008. The decrease in revenues compared to 2008 was due a few billable consultants On Assignment, lower bill rates and decreases in bill expenses and conversion revenues.

As we’ve discussed on previous calls, Oxford specializes on recruiting senior consultants and contractor 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, experiences the largest percentage revenue decrease year-over-year and continue to be negatively impacted by the lack of available capital and by our clients reluctance to start new projects during the recession. Thankfully, we are now starting to see that change as clients are beginning to approve budgets for capital projects and for new programs. Contrary to our experience in the IT discipline, 2009 revenue for the telecom discipline was actually down only 1.3%, compared to 2008.

Now for more details, during the fourth quarter of 2009, we averaged 641 billable consultants and assignment, 19.3% increase over the third quarter. The average bill rate in the fourth quarter of 2009 was $109 per hour, compared to $123 in the fourth quarter of 2008 and $112 in the third quarter of 2009. Our gross margin for the fourth quarter of 2009 remain strong at 35.7%, but down slightly from 37.9% for the same period in 2008.

During the second half of 2009, we intentionally relaxed our historically high mark-ups to drive revenue. Nonetheless the bill rates in gross margins of our IT and engineering segment continue to be among the highest in the staffing industry. During the fourth quarter, we are also successful in continuing our strategy of being highly diversified across clients and industries, billing over 620 different client companies with no single client accounting for more than 3.1% of our revenue.

Our recent business trends reflect the shift underway in our broader U.S. economy away form heavy manufacturing sectors toward higher tech products and service industries. Demand of our IT and engineering consultants continued to increase from telecom, medical equipment, utility, and semiconductor companies as well as from education and healthcare organizations. As we expected the largest declines in our business were from manufacturing firms including appliances, machinery and instruments.

From an organizational standpoint, our internal staffing consultants drive our business and are significant investment necessary for current and future growth. While the average number of our staffing consultancy increased during the first two quarters of 2008 to high of 447, since that time we have decreased the number of consultants and averaged 269 over this past quarter.

We monitor our operational activity dealing and we’ll continue to align a size of our sales staff with current and future economic conditions. As a result of our strong performance in the fourth quarter, which is somewhat continued in January and February. We’re beginning that sales consultant to select Oxford International and Oxford & Associates Offices.

As we announced last quarter, we reintroduced a permanent placement line of business to our current temp service offerings to take advantage of the increased demand for permanent IT and engineering professionals that that will accompany the recovering economy.

As of last week we have hired seven staffing consultants, who will focus 100% of their time on firm opportunities led by almost tenured executive who managed our IT and engineering firm business prior to the 2001 recession and who has been with the company for over 25 years. We anticipate the service will provide added value for our clients in addition to keeping our comparators from gain in a foot hold in our client companies and will drive growth to our bottom line.

Consistent with the other On Assignment divisions we anticipate the future firm revenue with in our IT and engineering segment will be a small percentage of our total revenue. Another investment opportunity for is within healthcare IT. The 18 U.S. populations, the need to make our healthcare system more efficient and the U.S. Government investments and health information technology presents a compiling opportunity for our IT business.

We conducted the pilot market test in 2009 and based on our positive results, we are expanding our presence in the healthcare IT markets. We have dedicated 12 staffing consultants to the effort in one of our Oxford International [telecenters] and are adding the service to select Oxford & Associates offices in metropolitan areas with large concentration of hospitals and healthcare networks.

As I mentioned earlier, we have seen an increase in consultants On Assignment and a result in increasing weekly sales from September, reflecting the slow and steady economic recovery similar to the previous recession. We experience the normal seasonal drop off at the end December and early January in terms of consultants On Assignment, but have experienced steady progress since then. An anecdotal reports from our clients are the most intending increase their temporary hiring throughout the year.

In addition our own quarterly survey of clients the Oxford index, also indicates a slight increase in hiring for quarter one over quarter four. Even though the economic recovery has been relatively stable we are certainly hopeful for even more increase momentum in a second half of the year.

As Peter and Jim I just completed quarterly business reviews with all of our operating units. Our directive to everyone throughout the organization was to continue their efforts on the new business development; cross selling to clients within our existing disciplines; and expand our database of potential clients and consultants. I can assure you that our entire team remains committed, are still working very hard and are glad to get this recession behind us.

I’ll now turn the call over to Jim Brill. Jim.

Jim Brill

Thanks Mike. As Peter mentioned consolidated revenues for the quarters were $99.9 million, down 32.3% from 2008. There are approximately 61 billing days in this quarter, 64 in the third quarter and approximately 62 in the fourth quarter of 2008. However for Nurse Travel there were 92 billing days this quarter, 92 last quarter and 92 in the fourth quarter of 2008. Foreign currency had about a $700,000 positive impact on revenue relative for last years fourth quarter and $180,000 positive impact on revenue relative to last quarter.

Now let me address some of the variances and their related explanations to the extent Peter or Mike has not. The travel nursing group, the bill rate relative to the third quarter was essentially flat and the bill pay spread as well as the bill pay margin expanded. The bill rate was down 6% from the fourth quarter of 2008 and the bill pay spread contracted. However, the bill pay margin expanded.

The bill rate, bill pay spread and margin in Life Science was essentially flat with the third quarter. The bill rate was down 2% from the fourth quarter of 2008 as was the bill pay spread, while the bill pay margin remained relatively flat and Allied Healthcare the bill rate relative to the third quarter was up 3.5%, the bill pay spread was also up, but the bill pay margin was down.

In physician staffing, we saw a slight decrease in the bill rate and the bill pay spread relative to the third quarter as well as fourth quarter of 2008. The increases in gross margin were driven primarily by a decrease in medical mall practice expense and an increase in direct higher fees.

At our It and Engineering division, Mike mentioned that we saw drop in gross margin from last year which was driven primarily by a drop in the bill pay margin and a decrease in conversion revenue. Conversion in direct higher revenues totaled $2.1 million in the quarter or 2.1% of revenue as compared to $2 million or 2% of revenue in the third quarter and $2.9 million or 2% of revenue in the fourth quarter of 2008.

Total SG&A expense for the third quarter was $29.6 million or 29.6% of total revenues, which is up from $28.5 million or 29% last quarter and $38.2 million or 25.9% in the fourth quarter of 2008. The reduction from the fourth quarter of 2008 was in part related to lower employee cost due to the reduced number of employees and $870 million reduction in amortization of intangibles related to the acquisitions.

The increase from the previous quarter was in part due, insurance settlement gain were about $300,000 and positive adjustment to old works compensation claims of about $150,000, experience in the third quarter which did not reoccur in the fourth quarter. Also included in SG&A in the quarter is $1.4 million of depreciation and $1.3 of equity based compensation.

Our operating income was $3.6 million or 3.6% of revenues for the quarter, compared to $4.3 million or 4.4% of revenues last quarter and $10.3 million or 7% of revenues in the fourth quarter of last year. Our tax rate for the quarter was 47.7%. Net income was a $1 million or $0.03 per diluted share.

We believe it’s 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 $6.5 million, excluding equity based compensation expense of approximately $1.3 million, adjusted EBITDA was $7.8 million or 7.8% of revenue. Adjusted EBITDA was $8.7 million or 8.9% of revenue last quarter and $15.6 million or 10.6% of revenue in the fourth quarter of 2008.

We ended the quarter with cash and cash equivalents of $26 million, down from $35.1 million last quarter, while we generated $2.2 million in cash flow from operations during the quarter, we used $5 million to pay down our term loan and $4.8 million to make the final earn out payment related to our acquisition.

CapEx was approximately $900,000, down from $1.1 million last quarter, and down from $1.9 million in the fourth quarter of 2008. Net accounts receivable was $50.2 million at the end of the fourth quarter, and day sales outstanding were 46 days, the same as last quarter, but down from 48 days in the fourth quarter of last year.

Now turning to productivity, which we defined as quarterly gross profit generated per staffing consultant. For our fourth quarter we averaged 570 staffing consultants, and gross profit per staffing consultant was $58,000, down from $66,000 in the fourth quarter of 2008, but up slightly from the third quarter.

Biosciences segment generated $78,000 in gross profit per staffing consultant, unchanged from the $78,000 last quarter. The healthcare segment generated $54,000 in gross profit per staffing consultant for the quarter as compared to $55,000 last year. The physicians staffing segment generated $75,000 for the quarter, compared $92,000 last quarter; and the IT and engineering segment generated $47,000 in the quarter, as compared to $41,000 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 worldwide economy. So given that backdrop, based on labor markets not getting any worse than they are today, and normal seasonal trends which do not include the impact of the recent or future winter storms, we currently estimate consolidated revenues of $95 million to $99 million for the quarter ending March 31, 2010. We are estimating consolidated gross margins of approximately 32.4% to 32.6%, which includes the reset of employment taxes.

SG&A of $29.4 million to $30.2 million including equity base compensation expense of approximately $1.3 million, approximately $600,000 in amortization, intangible assets and financing costs and depreciation of approximately $1.5 million. We estimate net income of $700,000 to a loss of $500,000, and earnings per share of $0.02 to a loss of $0.01 at an effective tax rate of about 47%. Adjusted EBITDA is estimated to range from $4 million to $6.3 million.

Now I’ll turn the call back to Peter for some closing comments before we open it up for questions.

Peter Dameris

Thank you, Jim. We believe that with a 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 margin that we reported today against such a back drop is the 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 focused on positioning the company for accelerated growth coming out this recession. I would like to once again thank our many loyal dedicated and talented employees whose efforts have allowed us to progress where we are today.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jim Janesky - Stifel Nicolaus.

Jim Janesky - Stifel Nicolaus

A couple of questions around margins; when you look to the first quarter obviously there’s payroll resets, and then pretty dramatic increases in state unemployment taxes; we have seen that from everyone, but as we go throughout 2010, we should expect that the margins will go up, but they will be under some pressure because of state unemployment taxes; is that a way that we could look at it?

Peter Dameris

That’s a fair analysis Jim. We are starting to tighten the margin profile back up in IT, that’s going to be a slower progress. It’s undeniable that it’s a very, very competitive marketplace. The Nurse Travel marketplace which thank God is only 9% of our revenue is probably the most price sensitive right now, and some of the larger competitors are really racing to the bottom.

We feel that there could be some compression, potentially on our margin, but we don’t think it will show up because of the improvements we are making in another areas, as well as we’re hoping that conversion and additional emphasis on permanent placement will be a contributor to expanding the margin.

Jim Brill

Jim, just one other thing to add on employment taxes; generally speaking over the course of the year employment taxes will tend to drop off. The big question I think will be whether or not the unemployment taxes continue to get reset upward through the year or whether the reset will not happen until sometime in the beginning of next year.

Peter Dameris

Just grading the pricing, not strength, but just rational behavior in the markets we service. Locum’s IT, Life Sciences and even Allied Healthcare are manageable, but it’s pretty irrational right now in nursing industry.

Jim Janesky - Stifel Nicolaus

Longer terms however, obviously that’s going to depended up on the mix your IT and Engineering segment. If that continues to out perform then we should see margins expand, but I mean do you have a long term kind of goal for gross profit margins; is it over a 33%?

Jim Brill

They are higher than they are right now, but I wouldn’t quote here; we’re not giving kind of full year. We are going to be Jim, sharing with you as I said kind of our five year plan later in this year with you, but as I said what I can’t share with you is we’re not planning on deviating from our gross margin profile significantly.

Jim Janesky - Stifel Nicolaus

Then a final question on operating expenses; the range that you gave from the first quarter is up from the fourth quarter. Are you making investments somewhere that would cause that to blip up for the year?

Peter Dameris

I’ll go first and I’ll let Jim add. We have added a couple of people, and we are spending several hundreds of thousands of dollars with this outside consulting firm, building our five year growth plan. Jim, you want to add anything to that?

Jim Brill

There also some bonuses that are included in this year’s plan that were not included in last year.

Peter Dameris

Just normal cycle of how our audit and SOX expenses flow in the first versus fourth.

Jim Brill

That’s true.

Operator

Your next question comes from Tobey Sommer - SunTrust Robinson.

Tobey Sommer - SunTrust Robinson

I think if I caught it correctly, you gave a lot of details in the prepared remarks, but you talked perhaps about sequential growth in the top line throughout the year. I was wondering if you could comment, are you seeing any lengthening of assignments or orders placed perhaps for longer lead time?

Jim Brill

We’re actually Tobey seeing a shortening of assignments on the nursing, and we’re seeing just last overtime call work for the physicians right now, which is on the physician’s side not significant, but whereas traditionally we could assume that there would be a certain amount of overtime call work, but we’re just really not seeing that right.

The Allied and the Life Sciences, I would say are progressing nicely and are stable, and on the nursing, the hospitals are trying to cut it down to the bear minimum and have the most flexibility of the shortest time period they have to commit to in order to get a traveler. So they’re block bookings, they’re trying to use per diem instead of a travel nurse. Mike you want to address the IT side?

Michael McGowan

Tobey on the length of assignment it’s been five months for a quite sometime and is actually still is about that, so we really aren’t seeing much change in that. In terms of the lead time in your question, we’re starting to see a little bit more lead time, because some of the clients are improving capital projects, which are obviously more planned out longer term. So we’re starting to see some a longer lead time if you will, on when they’re going to need consultants, but that’s not even appreciably more than what we normally see.

Tobey Sommer - SunTrust Robinson

I had another question for you. There’s been some talk of an evidence of a pick up in a CapEx kind of upgrade cycle broadly for IT, and I know that those kind of initiatives aren’t necessarily you’re daily work. We’ll you’re going to place a lot of people on a particular project, but could you describe if you’re seeing evidence of that yourself and how On Assignment may play in that kind of environment?

Michael McGowan

We actually are starting to see it. We started seeing a little bit up tick in the fourth quarter, not an awful lot in the ERP market especially we started seeing it, and six weeks now in the New Year we’re actually starting to see clients that are having those capital projects improved and they’re going to need consultants.

As you’re aware, we don’t put five or six people on, but we’ll do the one or two and we’re now starting to see that in the SAP, PeopleSoft, Oracle, etc. projects. So we’re starting to see it. It’s not a rocket, but as I mentioned in my prepared comments, it’s just kind of steady at this point.

Tobey Sommer - SunTrust Robinson

Peter, I wanted to ask you a question about the staffing market broadly. Are you hearing from clients that they are going to rely more heavily on temporary staffing and try to increase the flexibility of the labor force at this point, are they saying all the right things and then I want you to also characterize the actual behavior, and maybe see if that behavior is matching the words at this point?

Peter Dameris

Right, the answer is, yes. I firmly believe that the staffing industry in general is going to benefit from this kind of slower growth and uncertainty. I mean, we are entering this new expansion period at levels of productivity Tobey, and levels of just shared number of employees that really we haven’t seen in prior recessions and that bodes very to its customer base, it’s coming out with a very, very good reputation.

If you look at corporate America, they were able to react and recalibrate their expense in their employee levels very, very quickly and it was because the staffing industry, service offering work the way it was positive. So there’s a very positive belief on the usage of staffing and I think that’s just kind of grow. As it relates to customers, it’s really by discipline.

Life Sciences and IT are performing very well, it’s still pretty irrational on the healthcare side, and that is going to be a boomerang and I will tell you that, there’s going to be a day of reckoning for this kind of a rational buying that’s occurred, and we don’t think the healthcare business can really do much harm to us in 2010, but it’s just a tough slot right now and I’m not seeing really any kind of significant change in behavior.

I’ve spoken with a lot of customers as well as vendor management programs and the irony of it is that the wholesale business, the BMS business is down even harder than the retail business. So it will work itself through, it always does but right now I think we are probably, my gut tells me we’re 60% through the tunnel to get to the other side of the tunnel on the nursing side at least.

The Allied Healthcare side is starting to feel a little bit better and as we said, we didn’t want to overstate the strength, we had an incredible fourth quarter, but we had a nice little pop from a reoccurring seasonal flu service business, but even stripping that out and just looking at our other business, it’s making steady progress and we’re seeing some nice progress in some of our newer practices, rehab therapy and health information management. The more kind of value added services are growing faster than kind of the commodity skill sets.

Tobey Sommer - SunTrust Robinson

One last quick question; Jim, you mentioned that there’s a possibility that payroll taxes could get reset throughout the year. I was wondering how you assess that risk and just getting some color there? Thanks.

Peter Dameris

There are certain states that off cycle increases and that could happen, we think we’ve taken that into account in our budgeting process. The majority of states reset on a regular basis.

Michael McGowan

So Tobey, we didn’t go into the year, just saying it was ex-percent in the State of Pennsylvania in 2009 and that’s what we’re going to use for 2010. We raised it, so the potential risk is, did we raise it enough? But we have raised it, even though we haven’t gotten notification of what it’s going to be for 2010.

Operator

Your next question comes from Jeff Silber - BMO Capital Markets.

Jeff Silber - BMO Capital Markets

Just wanted to go back to your first quarter guidance a bit, you’re looking for a slight sequential drop in revenues. I’m just wondering are we going to see it in any specific segment more than others.

Peter Dameris

Yes, I mean we are actually seeing and budgeting for sequential growth and pretty much everything except nursing and locums. As I said in prepared remarks, Jeff we think locums will return to growth at the late second quarter. So it’s really just nursing at this point.

Jeff Silber - BMO Capital Markets

Just one more quick numbers question, what’s the share count that you are using for your guidance?

Jim Brill

It is 37.1.

Peter Dameris

Let me correct one other thing that I just said. I said it was mostly just nursing; that is a 100% correct. The Allied business maybe down slightly, sequentially, but that’s because of the removal of the flu vaccination services.

Jeff Silber - BMO Capital Markets

I was just going to ask on that. If you could quantify that what the impact was on the quarter that would be helpful?

Jim Brill

Well, maybe about a $1.5 million.

Peter Dameris

I think that’s probably a good number.

Jeff Silber - BMO Capital Markets

In terms of adding new sales consultants this year, I know it’s early, it sound like you’re starting to do that in IT and I may have missed it. Are you talking about doing that in any other areas as well?

Peter Dameris

We might see a little bit of that in the Life Sciences space. As we said in our prepared remarks, we are at the highest headcount in the history of our locums business. Unlike others we have not may have single reduction in staff and our doc business. We added at the sales force, but we really don’t envision adding to the sales to the recruiting force in nursing business and Allied business, it would be at the minimums add, it would just be the strength in some of our new practices.

So the real growth that you would see in headcount would be in the IT followed by Life Sciences, but not nearly as large growth in Life Sciences as we might seen in IT.

Jeff Silber - BMO Capital Markets

Then just one final question, from a balance sheet perspectives can you just remind us, are there any constraints on your debt repayments?

Peter Dameris

No

Jeff Silber - BMO Capital Markets

So in theory you could start paying down debt as you continue to generate more free cash flow?

Peter Dameris

Yes

Operator

Your final question comes from Tobey Sommer - SunTrust Robinson.

Tobey Sommer - SunTrust Robinson

I had a numbers question as well, just wanted to make sure I understood the amortization and depreciation. The $1.5 million of depreciation and the $600,000 amortization you talk about for the first quarter. Is that all in for D&A or could you refresh me on, is the tail from identifiable intangibles from the acquisition is that pretty much over.

Jim Brill

The amortization is what’s left over from the acquisition, so that’s kind of where we are with regard to the first quarter..

Peter Dameris

But can you quantify Jim, its relatively small compared to previous years right?

Jim Brill

Yes its down significantly, even compared to last quarter, its down from $900,000 last quarter. Base on the way it works Tobey, it going to drop down again in the third through the fourth quarters to closer to $400,000.

Tobey Sommer - SunTrust Robinson

Another numbers question, I may have missed is there point and which you get a step down in interest or anything like that as a result of bringing the debt levels lower?

Peter Dameris

Not lower than this, no.

Operator

(Operator Instructions) There are no further questions at this time, please proceed with any further comments or closing remarks.

Jim Brill

Once again we thank for your attention and interest in our company and look forward to reporting our first quarter results. Thank you for this afternoon.

Operator

This concludes today’s conference call. You may now disconnect.

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