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On Assignment, Inc. (NYSE:ASGN)

Q1 2014 Earnings Conference Call

April 23, 2014 4:30 PM ET

Executives

Ed Pierce – EVP and CFO

Peter Dameris – President and CEO

Rand Blazer – President, Apex

Mike McGowan – COO; President, Oxford Global Resources

Analysts

AJ Rice – UBS

Edward Caso – Wells Fargo Securities

Gary Bisbee – RBC Capital Markets

Sara Gubins – Bank of America

Paul Ginocchio – Deutsche Bank

Tobey Sommer – SunTrust

Stephen Sheldon – William Blair

Henry Chan – BMO Capital Markets

Randle Reece – Avondale Partners

Mark Marcon – Robert W Baird

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the On Assignment Q1 2014 Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct question-and-answer session and instructions will be given at that time. (Operator Instructions). Also, as a reminder, today’s teleconference is being recorded.

And at this time, I would turn the conference call over to our host, Mr. Ed Pierce. Please go ahead sir.

Ed Pierce

Thank you. Good afternoon. First, I’d like to remind everyone that our presentation contains forward-looking statements, representing our current judgment of what the future holds. Although we believe these statements are reasonable, they are subject to risks and uncertainties and could cause actual results to differ materially from those statements and we do not assume the obligation to update statements made on this conference call. We describe some of these risks and uncertainties in today’s press release and in our filings with the Securities and Exchange Commission.

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

Peter Dameris

Thank you, Ed. Good afternoon everyone. I would like to welcome everyone to the On Assignment 2014 first quarter earnings conference call. With Ed and me today are Rand Blazer, President of Apex Systems and Mike McGowan, COO of On Assignment and President of Oxford Global Resources.

During our call today, I will give a review of the markets we serve and our operational highlights, followed by a discussion of the performance of our operating segments by Rand and Mike. I will then turn the call over to Ed for a more detailed review of our discussion and discussion of our first quarter and our estimates for the second quarter of 2014. We will then open the call up for questions.

Now, on to our first quarter results. Revenues from continuing operations in the first quarter were $439.3 million, up 15.9% year-over-year. First quarter results were somewhat negatively impacted by severe weather in the east and Midwest. Income from continuing operations was $14 million or $0.26 per diluted share, up from $10.2 million or $0.19 per diluted share in Q1 of 2013.

Revenues generated outside the United States were $20.6 million or 4.7% of consolidated revenues in the first quarter versus $20.4 million or 5.4% of first quarter 2013 revenues. Adjusted EBITDA from continuing operations was $40.2 million or 9.2% of revenues, up from $33.2 million or 8.8% of revenues in the first quarter of 2013.

On March 26, 2014 we hosted our first Analyst Day Meeting, where we discussed our latest five-year strategic plan. During our year long planning process, we determined the most effective way to position the company for continued success.

As to one, continue to specialize in the large and growing professional staffing markets of technology, life sciences and healthcare. Two, be a dominant competitor in each of these markets. Three, realign our scientific staffing business with Apex and our clinical research and health information management businesses with Oxford.

Four, we focused non-physician healthcare staffing expertise on business and technology opportunities in the healthcare industry and away from clinical skills. Five, focus on domestic markets which provide significant growth opportunities over more fragmented and complex international markets. And six, leverage fixed cost to continue expanding our industry high adjusted EBITDA margins.

The rationale for realignment is to match the operating units by business model to leverage our scale and expertise, in addition improving our reach and to the entire addressable market for each operating unit. With this strategy, we can further accelerate revenue growth and our flow of growing operating units, create deeper management and strength, share customer relationships and simplify our infrastructure to open capacity to integrate future acquisitions. Our realignment is well underway and progressing as planned.

During this call, we will present to you our results for the first quarter and comparisons to prior periods, based on the post realignment reporting structure of our operating units.

All markets we serve remain productive and stable during and exiting the quarter in all of our divisions including Physician Staffing, showed positive momentum exiting the first quarter.

Apex now includes U.S. lab support, the legacy scientific staffing business. For the first quarter of 2014, the Apex segment grew 16.1% year-over-year and down 90 basis points sequentially. We have seen an increase in demand in all geographies despite the severe weather in the Northeast.

Oxford now includes our high-end clinical research business, health information management practice and our CyberCoders business. The segment grew 14.4% year-over-year on a reported basis in the first quarter, including the result of CyberCoders which was acquired on December 5, 2013. Excluding the results of CyberCoders, the Oxford segment contracted 2.5% year-over-year and was flat sequentially with the fourth quarter.

As we mentioned on our fourth quarter conference call, Oxford had a significant project at one of their largest clients included in their results for the first half of 2013, which is now negatively impacting the year-over-year comparisons.

Having said that, we see demand picking up in all disciplines, consultant counts increasing back to the levels of the third quarter of 2013 and quarter comparisons getting easier in the second half of 2014.

The Physician segment excluding the results of Whitaker, which was acquired on December 2, 2013 contracted by 6.8% year-over-year but flat sequentially, buying are stable but we are still experiencing softness in demand from our government sector.

Our demand in the commercial sector is slighting improving. While demand still remains challenging to Physician Staffing market, our teams are working hard to gain market share.

Exiting the quarter are high volume IT and scientific businesses in the Apex segment. And our high-end staffing business at Oxford had the strongest momentum and appeared poised to have another strong growth year.

As many of you have heard us state, we believe our scientific staffing business is the most directly correlated to GDP growth and our best internal predicting tool of strength of the broader U.S. economy.

Based on the demand in that division, exiting the quarter in our actual first quarter results, we believe the broader U.S. economy is gaining momentum. As for the IT group, we continue to see positive demand and a continuing adoption of staff augmentation as a viable alternative to outsourcing, off-shoring and consulting.

Consolidated gross margins of 31.3%, was up from 29% in the first quarter of 2013 to the higher mix of revenue from permanent placement business. The sequential expansion in gross margin was also primarily due to a higher mix of permanent placement and conversion fees, which were 4.6% of revenue for this quarter, up from 2.1% in the fourth quarter of 2013. This was due to the inclusion of CyberCoders for the full quarter versus only one month of results in the fourth quarter.

Regarding our operating efficiency, the percentage of gross profit converted into adjusted EBITDA was 29.2% during the quarter compared with 30.2% in the first quarter of 2013. This quarter and going forward, these conversion rates will be lower than prior periods due to the contribution of permanent placement revenues from CyberCoders.

Although CyberCoders’ EBITDA margin is higher than our historical EBITDA margins, conversions of gross profit into EBITDA is lower, due to the over 90% gross margin on perm revenue.

We believe our conversion rates are amongst the highest in the staffing industry despite a lower contribution of revenues from perm and conversion fees. Our adjusted EBITDA margin was 9.2% in the quarter compared with 8.8% margin in the first quarter of 2013. For those of you who are not familiar with our business, we see a seasonal impact from the fourth quarter to the first quarter due to the payroll tax reset.

Because of our lack of dependence on perm and conversion fees for profitability, we believe that as we increase our contribution from those services as a percentage of our total revenues, we will expand our profit margins from the levels that exist today.

Regarding industry dynamics, during and exiting the first quarter secular trends continued to permit temporary labor to see greater growth prospects than full-time labor. As we previously mentioned, we believe the macroeconomic environment in North America where we derive 95% of our total revenues has continued to improve in the beginning of 2014 and we continue to see a classic cyclical recovery in professional staffing.

Ed will provide you our second quarter financial estimates later in the call. But based on our current weekly revenues and the normal seasonal patterns, we do not see any appreciable negative change in demand for our services from our customers.

Our operating performance in the first quarter of 2014 and our estimates for the second quarter demonstrate that our business model and areas of focus permit us to grow despite less-than-optimal economic conditions. As for actions we took to sustain our future positive revenue growth rates, we continued to add the number of recruiters and sales personnel that we employ.

Exiting the quarter, demand for our services remained stable in all divisions. Our weekly assignment revenues which, excludes conversion, billable expenses and direct placement revenues averaged $33.3 million for the last two weeks, up 13% over the same period of 2013.

Integration, coordination and cash generation related to our acquisitions continues to be at or above our expectations. Ed will walk you through specifics later in this call. Our leverage is now 2.1 times trailing 12-month adjusted EBITDA.

We also received notification today that Standard & Poor’s upgraded their rating on our debt to BB plus, up from BB minus as a result of lower debt leverage driven by our debt payments and growth in our EBITDA.

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

Rand Blazer

Great, thanks Peter. You would recall from our Analyst Meeting late March, which Peter alluded to, that the Apex business unit consisted the Apex and U.S. lab support divisions of On Assignment.

For Q1, these units grew revenues by combined 15.1% year-over-year as Peter had previously indicated. With Apex posting 16.7% growth and lab support 11.8% growth. We estimated that the unusually snowy winter in the East and Midwest, it in fact impacts our combined growth rate by an estimated $2 million in revenues or an estimated 80 basis points in our top-line growth percentage.

For the combined businesses, gross profit grew 18% with gross margin up 44 basis points year-over-year. We continue to see broad-based growth in our accounts across the businesses with our top accounts in all industry verticals growing. A particular note was our growth in our accounts in the healthcare, financial services and telecommunications verticals which continued to perform well for us.

Our conversion of revenue and gross margin to operating margins continued strong in the quarter, and again of particular note is our Apex division’s contribution for the quarter remained strong on a year-over-year basis driven by an increase in the productivity of our sales, recruiting in back-office teams.

We continue to see a solid market environment for both Apex and lab support businesses in Q2 2014, as Peter has indicated and expect that our revenues and operating performance will continue to grow on a year-over-year and sequential basis.

I’ll now turn the call over to Mike McGowan to discuss Oxford’s results and the performance of our other legacy On Assignment divisions. Mike?

Mike McGowan

Thanks, Rand. As a result of the operational realignment that we discussed in Europe last month and as Peter just mentioned, the Oxford business unit is now comprised of Oxford IT, CyberCoders, our health management information unit and our clinical research unit.

Revenues for the Oxford segment were $117.5 million in quarter one up 14.4% year-over-year. We estimate the inclement weather in the east and Midwest adversely affect the revenues by approximately $1 million.

Quarter one results included $17.4 million of revenues from CyberCoders. They realized record revenues and were up 17.9% year-over-year on a pro forma basis, which was slightly higher than our expectations.

Excluding the contribution from CyberCoders, Oxford’s revenues were down approximately 2.5% year-over-year, flat sequentially from quarter four and in line with our expectations.

Our Oxford IT businesses again started growing in 2014 and the number of contract professionals on billings since quarter four has increased. In 2013, we achieved the high water mark in quarter three with 1,875 contract professionals on billing, which dropped to 1,740 at the end of December.

We exited quarter one with 1,814 on billing and we expect to continue to make steady progress in growing the number of consultants and assignment throughout quarter two and the rest of the year.

Our gross margin for the quarter was 41.7% up from 33.9% in quarter one of 2013. This expansion was due to the contribution from CyberCoders whose revenues are predominantly perm fees with an actual gross margin of over 80%.

Now moving to Vista, our Physician Staffing segment. Revenues for the quarter were $31.8 million, up 20.9% year-over-year. This increase was due to the inclusion of Whitaker Medical which accounted for $7.3 million of Vista’s revenues in the quarter. Whitaker grew 17.4% year-over-year, on a pro forma basis and its performance was slightly higher than our expectations.

Excluding the contribution from Whitaker, revenues were down 6.8% year-over-year. This decline was primarily a result of softness in our government practice and lower demand from several long-term clients related to overall budget decreases. While government demand continues to be lower year-over-year, demand from our commercial client is improving, as Peter mentioned earlier.

Average bill rates were flat compared to the prior year period. The segment’s gross margin was down 65 basis points year-over-year due to a lower mix of perm revenues.

Looking forward to quarter two, we expect to be up over 20% year-over-year on a reported basis and up low single-digits sequentially. The improvement sequentially is reflective of typical seasonality and increases in demand from our commercial appliance segment.

As reported over the last several quarters, the overall Physician Staffing marketplace is experiencing choppy growth on the near term, but the macroeconomics that drives supply and demand in the segment remain viable.

And finally, our Life Science unit in Europe, which we report now as other. Revenues for this segment were $11.6 million in the quarter, a 12.5% increase year-over-year. Key drivers of growth for this segment included an improved operating environment across all core industries, new project awards within targeted accounts with biotech and pharmaceuticals leading demand for contract and direct hire services.

Gross margin for the segment was 36.4%, down from 37.2% in the first quarter of 2013. The year-over-year compression in gross margins was primarily a result of business mix and competitive pricing pressures.

Demand for contract contingent and retained services remain steady in the second quarter of ‘14. And we are encouraged with the number of weekly contract assignments and permanent placement activity.

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

Ed Pierce

Thanks Mike. Before reviewing our financial results, please note that our reporting segments have changed as a result of the operational realignment that we overviewed at our Analyst Day Meeting last month. We have restated our core lead historical and statistical balance for 2012 and 2013 to conform to our new segment reporting configuration.

This reset is the restated data are included in an appendix to our Analyst Day presentation that appeared on our website. Also please note that I’ll be making references to pro forma results. Our pro forma results assume the acquisitions of Whitaker Medical and CyberCoders occurred at the beginning of 2013.

As Peter mentioned, a key financial metrics for the quarter were above the high-end of our previously announced estimate. Revenues for the quarter were $439.3 million, up 15.9% year-over-year and 9.8% on a pro forma basis.

Our two largest segments Apex and Oxford, which comprised 90% of our total revenues grew 15.6% year-over-year and 10.8% on a pro forma basis. Our two other segments, Physician and other grew 18.5% year-over-year and 1.3% on a pro forma basis.

Conversion and direct hire revenues for the quarter were $20.3 million or 4.6% of revenues, up from $7.2 million or 1.9% of revenues in Q1 of last year. The increase was due to $13.3 million in perm revenues from CyberCoders which was acquired in December 2013.

Gross margin for the quarter was 31.3%, up from 29% in Q1 of last year. The year-over-year expansion in gross margin was attributable to the higher mix of perm revenues resulting from the Acquisition of CyberCoders.

SG&A expenses for the quarter were $104.1 million or 23.7% of revenues, compared with $81.9 million or 21.6% of revenues in Q1 of last year. The year-over-year increase in the expense margins, primarily related to including the CyberCoders in the current quarter which is a higher SG&A expense margin than our other business units.

Amortization of intangible assets for the quarter was $6.2 million, up from $5.4 million in Q1 of last quarter. The year-over-year increase related to amortization of tangibles of the three businesses that we acquired in December 2013.

Interest expense was $3.3 million, down from $5.1 million in Q1 of last year. This decrease was primarily due to lower interest rates from the debt refinancing in May 2013 and February of this year. The February refinancing resulted in an interest expense savings of approximately $1 million on an annual basis.

At the end of Q1, our effective interest rate which, include the amortization of deferred loan cost was 3.2%. And our effective cash interest rate was 2.85%. Our effective income tax rate for the quarter was 41.4% which was slightly lower than the effective rates for 2013 of 41.6%.

Income from continuing operations was $14 million or $0.26 per share compared with $10.2 million or $0.19 per diluted share for Q1 of last year. Income from continuing operations included $0.5 million in acquisition, integration and strategic planning expenses after income taxes which were not included in our previously announced estimates.

Excluding these expenses, income from continuing operations was $14.5 million or $0.27 per diluted share. Our adjusted income from continuing operations was $23.1 million or $0.43 per diluted share up from $18.8 million or $0.35 per diluted share in Q1 of last year.

In the appendix to our Analyst Day presentation, we included the quarterly calculations of adjusted EPS for 2012 and ‘13.

Adjusted EBITDA for the quarter was $40.2 million, up from $33.2 in Q4 of last year.

Now, turning to our financial estimates for the second quarter of 2014, we estimate revenues of $469 million to $472 million, gross margin of 31.9% to 32.1%, income from continuing operations of $19.6 million to $20.5 million, income per diluted share of $0.35 to $0.37, adjusted EBITDA of $50.5 million to $52 million, adjusted income from continuing operations of $28.2 million to $29.1 million and adjusted income per diluted share of $0.51 to $0.52. These estimates do not include any acquisition, integration or strategic planning cost.

Now, I will turn it back to Peter, for some closing comments. Peter?

Peter Dameris

Thank you, Ed. We continue to believe that we are well positioned to take advantage of what we believe will be an historic secular and cyclical growth for the staffing industry over the next many years.

While the entire On Assignment team is very proud of our performance to date, we remain focused on continuing to profitably grow our business. We would like to once again thank our many loyal, dedicated and talented employees whose efforts had allowed us to progress to 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). Our first question comes from AJ Rice of UBS. Please go ahead.

AJ Rice – UBS

Thanks. Hi, everybody, just a couple of questions if I might. It sounds like you’re saying that the CyberCoders’ contribution was a little bit better than you were expecting and I guess I should ask that here you write on that $13 million. And can you just comment on the underlying trend you’re seeing in that perm placement business there and the prospects for the rest of the year for CyberCoders from your perspective?

Peter Dameris

Good afternoon, AJ. They beat the top-line revenue by several hundreds of thousands of dollars not millions of dollars. So that’s why we described as a slight beat to our expectations. They had a great quarter, 17.9% organic growth year-over-year.

And we find the permanent placement market to be stable and productive. So we have a lot of confidence in the team and believe that we stay focused. It’s a profitable place to remain focused and growing.

AJ Rice – UBS

Okay. If I look at your, in the physician business, just specific question. It looks like the average staffing consultants were up about 40% both sequentially and year-to-year. If I’m reading it right, the bid, the bill rate was down about 7%. Is that – is something going on there with the type of specialties you’re placing or what’s behind that?

Peter Dameris

Yes. So I think with Ed just to the answer, does that include Whitaker, the supplemental information?

Ed Pierce

Only for the period that we bound the business.

Peter Dameris

Right, for the full first quarter of 2014.

Ed Pierce

And December last year.

Peter Dameris

And December last year. So, a couple of things. One is, we have seen a shift of more work in kind of primary care emergency medicine which does have a lot of bell rate.

And strategically one of the attractive features of the Whitaker acquisition is they do have about 30% of their revenue coming from advanced practices so nurse practitioners etcetera, which also carry us slightly over bill rate. But as we get further into this new world of provisioning of healthcare in the United States, I think physician extenders are going to be in huge demand.

AJ Rice – UBS

Right, right. Okay. And then, maybe just a last question and I’ll pass to someone else. But probably you guys in the – obviously you had a flurry of acquisitions there towards the end of the last year. What do you see it in the pipeline and any characterization as to whether we’re likely to see further deals this year or not?

Peter Dameris

We really, AJ don’t have any additional comments over and above what we said at our Analyst Day. We think that we can get to $3 billion in revenue in the next four to five years. And impressed in that revenue goal is 10% organic growth and then a plug of about $240 million of acquired revenue.

So, we’re constantly developing a pipeline and visiting to make sure that we can partner with the right management teams. And that’s part of our DNA and we do it when it’s right. And we’re disciplined and because of the growth that we have in our business. We don’t feel any sort of burning need to have to do anything. You should expect to see something in the future.

AJ Rice – UBS

Okay, all right. Thanks a lot.

Operator

Thank you. Our next question in queue comes from Edward Caso with Wells Fargo Securities. Please go ahead.

Edward Caso – Wells Fargo Securities

Hi, thank you. Congrats on the numbers. Are you giving full year guidance, you gave it last quarter but I didn’t see it in the release and you didn’t mention it?

Peter Dameris

Yes, so, Ed, the guidance that we gave last quarter for the full year remains the same. We haven’t adjusted it. And we’d kind of just adjust one quarter out. So, if there needs to be something done to the full year guidance we’ll tell you. But that guidance still stands and it’s still good.

Edward Caso – Wells Fargo Securities

Okay, terrific. Can you talk on the – when you talk about margin expansion, you talked about productivity scale and the back-office integration. Sort of where are you with each of those pieces in the process and I’m particularly interested in the operations and systems consolidation.

Peter Dameris

So, let me pass that off to both either Rand or Ed, and then to Mike. And we’ll talk more on operational basis of some of the coordination we’re doing and some of the early wins we’re getting on cross-selling of customers and some of the coordination with regard to back-office tools. Rand, you want to go first?

Rand Blazer

Sure. Ed, listen, I think we’ve mentioned that as we put these segments together, there is an opportunity for consolidation of our back-office. So in the last four to eight year, Ted Hanson has taken the lead for us to look at where those opportunities there, 10 or 11 different 12 areas. And we’ve started to move on all of them.

And it’s natural it’s not really forced because our businesses as Peter said are very aligned. We go to market in a very similar way and while we provide different skill-sets to our client base, it’s very similar business models. So, aligning our systems is underway. I think we’re looking at everything from our applicant tracking systems all the way back to how our financials integrate and how our productivity tools and our people work in workflow and business intelligence tools. So, does that give you a sense?

Edward Caso – Wells Fargo Securities

Great.

Peter Dameris

And then, Mike on the HIM and the clinical please.

Mike McGowan

Yes, I mean, we’ve got a lot of things going on. As we mentioned, we integrated the HIM group, the health information management group in with our healthcare IT group so we can present to our clients and prospective clients a full package. And that’s been actually going very well after only a month.

We’ve also integrated the high-end clinical research business in with Oxford, which focuses on the high-end critical hard to find skills, which is in sync with the strategies that we talked about in New York.

And then, on CyberCoders we’ve actually started a lead generation pilot between a few of the segments within Oxford directly to CyberCoders and that’s also presenting well rush, are going to open that to the rest of Oxford over the next 30 days because of the early success in our pilot. So, everything that we discussed in New York were moving further along.

Edward Caso – Wells Fargo Securities

But the CyberCoders you said is extending into the rest of Oxford. Is there going to be a parallel Apex?

Peter Dameris

It is. And we’re figuring out the best way to handle that whether it’s just a direct referral of the contingent search opportunity without any sort of involvement by Apex or whether it’s Apex controls the presentations of the candidates or the customer because of deep customer relationship.

But we’re not – we’re trying to do it in a softer way not overwhelmed with the recruiting system and make sure that we’re really quantifying the opportunity to build these sales channels. So, it’s on a step-by-step basis versus the Big Bang theory.

Edward Caso – Wells Fargo Securities

Great. Thank you.

Operator

Thank you. Our next question in queue will come up from Gary Bisbee with RBC Capital Markets. Please go ahead.

Gary Bisbee – RBC Capital Markets

Hi guys, good afternoon. In thinking back on the Analyst Day a bit more and the M&A target, it seems to me one of the reasons you had such a class of M&A, you’ve done businesses that you didn’t have to integrate into the business. And so, there wasn’t a lot of overlap sales force disruption, all of that.

As we think forward to what you need to do to achieve the five-year plan. Are you confident that there are other nations and areas that would be complimentary but not highly disruptive, such that you could do several things within IT and in areas around that to hit that target?

Peter Dameris

We do. We think between business analytics, cyber security, healthcare IT. Remember Gary, that we stated that the model that we presented to you in New York said that hit the $3 billion, if we hit the 10% compounded annual growth only requires $240 million of acquired revenues over five years. So that’s not a tall task over a five-year period define niche businesses that we can support and compliment.

Gary Bisbee – RBC Capital Markets

Okay. And, how did those – is there a group within Oxford and Apex that’s looking at other ancillaries you get into and is there likely to be conflict there or are you confident that there is just a broad-net set of opportunities you can look at that would – that were on the portfolio?

Peter Dameris

Well, we’re confidently looking at whether the early adoption technologies and the big spins for the forward periods and trying to develop some of those practices organically. And if we can do it organically that’s our preference. But as we do it organically, we can find a dominant niche player that can be the platform for our practices and that’s what we’ll do.

But we think, we feel confident that we can remain disciplined and not acquire something that’s going to overwhelm our boat with regard to sales channel conflict.

Gary Bisbee – RBC Capital Markets

Okay. And then just one clean-up one. I think I heard you say $20 million of revenues overseas that’s roughly twice what’s in the new, other segment. Where else is the overseas revenue?

Peter Dameris

Oxford has some revenue as well.

Gary Bisbee – RBC Capital Markets

Okay, great. And then lastly, I just wanted to say thank you for the historical pro forma, either I’m sorry, adjusted EPS because I had asked for that Investor Day, and I see you put that out there. Thanks.

Peter Dameris

Yes. The whole purpose of this realignment of the divisions into different reporting segments is to realign the sales and go to market strategy, not to confuse the numbers. So we tried to lay it out as clearly as possible so that you can do like-on-like comparisons.

Gary Bisbee – RBC Capital Markets

I appreciate it. Thanks.

Operator

Thank you. Our next question in queue will come from Sara Gubins with Bank of America. Please go ahead.

Sara Gubins – Bank of America

Hi, thanks, good afternoon. Could you help us understand a bit more about your revenue growth expectations in the second quarter by segment?

Peter Dameris

Say it again Sara, please.

Sara Gubins – Bank of America

Yes, within the expectations for the second quarter, how you’re thinking about trends by the various segments?

Peter Dameris

Yes, so, let me think, let’s just refer to the press release again. So I think at the end of that press release, because these estimates assume year-over-year revenue growth in the mid-teens for Apex and Oxford, over 20% for the Physician and low teens for others. So, that’s on an as reported basis.

And then, this final sentence says, on a pro forma basis we assume the acquisition of Whitaker and CyberCoders occurred at the beginning of 2013. The estimated growth rate for Oxford was low single-digits, the Oxford strategy reporting segment is low single-digits. And for Physicians it’s low single-digit decline. And then for Apex, it’s – there is no acquisition there so it’s the number we gave you for Apex is mid-teens.

Sara Gubins – Bank of America

Okay.

Peter Dameris

Does that answer the question?

Sara Gubins – Bank of America

It does, yes.

Peter Dameris

Okay.

Sara Gubins – Bank of America

Could you talk about over time how you’re thinking about your ability to move bill rates up?

Peter Dameris

Well, wage inflation over the long-term is a staffing company’s trend not club. And if you have rapid wage inflation there can be disconnect between the customers’ beliefs and world realities. But we’re on a labor constrained segment of the economy and our customers are mostly realistic about what they have to pay in order to attract talent at their company versus their competitors. So we see that as an ability to grow revenues without even having to grow headcount.

Sara Gubins – Bank of America

Okay. We haven’t seen those trends recently do you think that we should expect that to change in the relatively near term?

Peter Dameris

Yes, I think recent report shows that there has been modest wage inflation. So it’s starting to pick-up.

Sara Gubins – Bank of America

Great. And then, just last – how was the healthcare IT segment in the first quarter and how are you thinking about that over the rest of the year?

Peter Dameris

Just I’ll make a brief generic comment and turn over to Mike. But we saw as we expected a reacceleration. And Mike, do you want to add color to that?

Mike McGowan

No, they’re okay. I think as again we saw the decrease in the fourth quarter. But since the 1 January, we’ve seen increasing consultant On Assignment. And we’ve actually reached an all-time high within the last couple of weeks. So it’s continuing to increase as we expected. And we also anticipate that will continue into the rest of the year.

Sara Gubins – Bank of America

Thank you.

Operator

Our next question in queue will come from Paul Ginocchio with Deutsche Bank. Please go ahead.

Paul Ginocchio – Deutsche Bank

Thanks. I think you answered my first question which is we probably haven’t seen almost any kind of benefit yet from putting CyberCoders together On Assignment, right. There has been very little cross-sell to this point, it’s all still to come, is that correct?

Peter Dameris

That’s correct.

Paul Ginocchio – Deutsche Bank

And then second, back to Sara’s question about the bill rates. Maybe we’re seeing wage inflation in the U.S. start to pick-up, your bill rates is basically still flat to slightly down year-on-year? And I guess, maybe the question is, when you think your bill rate starts to increase year-on-year?

Peter Dameris

Yes, I mean, what I would tell you is there – it’s so hard to draw back an absolute conclusion about wage inflation on our published bill rates. Because remember the skill mix can skew that.

So, for instance at Apex, in a particular quarter we have a surge in demand for lower end user support, the critical client that we have to support. That’s a lower bill rate than a lot of the architectural work that we do in a year on piece base. So, what I would tell you is the tilt is towards wage inflation versus stagnation at this point in the economic recovery.

Paul Ginocchio – Deutsche Bank

Great, thank you.

Operator

Thank you. Our next question in queue will come from Tobey Sommer with SunTrust. Please go ahead.

Tobey Sommer – SunTrust

Thank you. I wanted to get your perspective on a comment you made, we’re poised for certainly better economic growth based on what you’re seeing in your businesses. How would that faster GDP growth impact Oxford versus Apex? Thanks.

Peter Dameris

Okay. So, the first is the division that is the most directly correlated to U.S. GDP growth as our scientific staffing grew last quarter. And I will answer the question Tobey but. So for instance we do work with BASF Automotive Paints or Corning Glass or PPG, as the economy grows and more production occurs then they use more scientists and chemists.

As it relates to Oxford, to date we really believe that the majority of demand has been driven by secular changes and technological changes. And if the economy heats up and more and more people start engaging in technology projects and labor gets even tighter, then Oxford’s business model was rapid response, the right resource when you need it right now which is typically the work we work on today at Oxford. We’ll start generating revenue typically five business days from that day.

So, as the markets tighten Oxford should benefit slightly disproportionate to maybe a different type of IT staffing model because people are prepared to move swiftly.

Tobey Sommer – SunTrust

Thank you. That makes sense. And relative to CyberCoders, you haven’t owned it very long, do a first complete quarter as part of the firm. When is a reasonable timeline where the influence of On Assignment’s ownership should be felt and seen in the growth rate?

Peter Dameris

Yes, that can always be good or bad, right Tobey. So well so far it’s good-good. But we’re taking the back-office and we’re going to imagine be completed in the next month. As it relates to accelerating their growth rate, that will just unfold as the realities of the marketplace and the dynamics of Oxford and Apex as sales channels unfold and prove themselves out.

So, and they grew 17.9% in the quarter. We honestly believe that we can at a minimum increase the quality of the orders that our recruiters at CyberCoders work on. And also supplement and augment the orders that they generate on their own. So, as we said, step one is Oxford has started a referral program and certain practices within Oxford, not all the practices. Mike’s broadening that out in the ensuing weeks and months.

At Apex, we’ve taken a designated number of pre-qualified orders and thrown that over the trends so to speak while CyberCoders to work on discreet orders. But we haven’t opened up the entire sales channel of Apex to CyberCoders. So, as I said, this is not going to be a Big Bang theory. We’re going to return on slowly and absorb it gradually. And it will show up in the numbers whether we’re successful on building those sales channels or not.

Tobey Sommer – SunTrust

Thanks. Just last – one quick question. Did you say that at Oxford in the recent weeks you’re at an all-time high in terms of consultants On Assignment?

Peter Dameris

No. What we said is the third quarter, the high water mark was 18.57 and I think we’re…

Mike McGowan

18.75.

Peter Dameris

18.75 and I think we’re now at what Mike?

Mike McGowan

It was 18.75, we finished the year at 17.40 and we finished quarter one at 18.14. So, we’re not quite back up to the high water mark.

Peter Dameris

We’ve made good progress and I think we’re to watch with regard to Oxford is really the weekly, monthly, quarterly sequential growth. And we are making good progress and it’s growing again.

Mike McGowan

Tobey, the one comment I made actually to the question about healthcare IT, we actually set a record high in healthcare IT for consultants On Assignment.

Tobey Sommer – SunTrust

Thanks. And is the Oxford index show any good signs for next couple of months and quarters?

Mike McGowan

Yes, for the next quarter additionally an improvement.

Tobey Sommer – SunTrust

Thank you very much.

Operator

Thank you. Our next question in queue will come from Tim McHugh with William Blair. Please go ahead.

Stephen Sheldon – William Blair

Hi, this is actually Stephen Sheldon for Tim. Thanks for taking my questions. So first is on the second quarter, the guidance you provided. It looks like you’re assuming roughly 30% growth in core SG&A versus roughly 15% revenue growth. I know a lot of that is due to the acquisitions. But is that spending, that assumed spending hitting any segment and more than the other segments?

Peter Dameris

Actually the increase is modest sequentially. And we reported $104.1 million in SG&A in Q1. And our range for Q2 is $106.7 million to $107.7 million. So it is a modest increase and that’s predominantly driven by the increase in – the sequential increase in gross profit and the commissions and the incentives related to that.

Stephen Sheldon – William Blair

Okay, that’s helpful. And then, you’ve talked in the past about the – your strong ability to attract quality IT talent even in the market with tight supplies. So what do you attribute that to and has the way that you’ve attracted talent had to change over the last few years?

Peter Dameris

Well, I just think that our – you would look at our business models, our focus are consistent gross margins and how we consistently try to recognize and compensate people that professional recruiters feel confident that they can build their career with us.

And our higher growth rate, our market share gains and our comp programs all lead to stability. And I think that will continue.

Stephen Sheldon – William Blair

Okay, thanks.

Operator

Thank you. Our next question in queue will come from Jeff Silber with BMO Capital Markets. Please go ahead.

Henry Chan – BMO Capital Markets

Hi, this is actually Henry Chan calling in for Jeff Silber. I just had a quick question from a high level perspective looking at the secular trend in IT staffing. As the economy recovers and accelerates, do you see any change of where you see the most demand, variety staffing in terms of industry verticals?

Peter Dameris

Rand, you want to take a stab at that? And then Mike and I can follow up.

Rand Blazer

Henry, we reported in our statement that we feel teams and accounts in seven industry verticals. And all seven are growing. The three that were growing the most were financial services, healthcare and by the way we’re the other big part of healthcare, our offerings to the healthcare market which we’re seeing very strong performance and then telecommunications industry verticals.

At the other verticals we operate in, government, business services, consumer industrials for example are all very positive and certainly growing as well. It’s nice to see financial services continue to grow because as you all now on the call, we’ve all talked a lot about – they tend to be a major user of IT services, so. Mike?

Mike McGowan

Yes, I would agree with everything Rand said. The only thing I’d add and really Peter had answered, I think the first or second question was, part of the issue going forward is technology. So, for instance if there is more technology enhancements, if there is more widgets developed and created that creates more jobs, more opportunities etcetera. So, specially from an Oxford perspective, we’re more project based. So, the more of the technology is adopted and developed, you’d see an increase in our kind of service needs.

Peter Dameris

So, and I would just wrap up I think, as the economy improves, we see the demand, the high growth demand broadening beyond just the financial services in general, telecommunications industry.

Henry Chan – BMO Capital Markets

Got it. Thank you.

Operator

Thank you. (Operator Instructions). Next in queue is Randle Reece with Avondale Partners. Please go ahead.

Randle Reece – Avondale Partners

Good afternoon. I was just wondering if you felt any different about the HCIT end-market this year. We’re hearing some mixed messages once again about the spending levels of the end-customers and how they’re affected by continual movement of ACA deadlines?

Peter Dameris

Not really Randy. I mean, we have the deferral of the ICD-9 to ICD-10. But I can tell you that HIM practice of ours, which is very small kind of $25 million to $26 million had enormous growth. And our healthcare IT practices continued to kind of reaccelerate it from – reaccelerate from the low they had in the fourth quarter.

So, I think I know that a smaller public company reported a decline. I think that may have to do with the kind of healthcare IT services they may be doing, the code they’re implementing, the amount of trading that maybe embedded in their projects. And as you know, we don’t do any training. But we’re seeing it as a productive market.

Randle Reece – Avondale Partners

Very good, thank you very much.

Operator

Thank you. Our next question in queue will come from Mark Marcon with Robert W Baird. Please go ahead.

Mark Marcon – Robert W Baird

Good afternoon and congratulations on the strong results. I was just wondering if you could talk a little bit about the reaction internally if there was a need to the Analyst Day presentation and some of the reorganization? I know it’s still relatively early in terms of the changes but just how would you describe the feel at the ground level?

Peter Dameris

Right. So, Mark, as you can imagine, the communication path and the actual roll-out and implementation occurred internally sooner than we disclosed externally. And so, we do have more data points and information about that just marks 26 and it’s gone very well.

I mean, the whole purpose of the realignment wasn’t cost savings, it was to be able to allow the divisions to more forcefully address the entire market, not just the retail market but the large volume market to provide greater tools and coordination, to share some deep customer contracts and to increase this rate of core by having larger branch offices on the scientific side and it’s gone very well.

I mean, when people’s jobs get easier and they have the opportunity to make more money that’s a good thing. So, the major focus was really on growth and coordination and offering of tools when it was cost cutting. So we’re not cutting recruiters or sales people for the contrary, we’re adding.

And we have similar cultures. The last core group is very similar to Aerotek. And Aerotek is a twin-sister to Tech Systems. So, and Apex’s business model is very similar to the Tech Systems model. So those two blend hand and glove very well.

On the clinical research side, as you know most of those are very high bill rate assignments that are typically long-line delivery, meaning we find someone in Princeton New Jersey that ends up doing a travel assignment in Riley or San Francisco. And that’s what Oxford excels at is high skill, high bill rate, long line focused recruiting. So, with their tools and management we feel that we can accelerate the clinical research growth.

So, it’s been well accepted. I think the management team Rand’s group and Mike’s group has done a great job of communicating and coordinating. And so, I mean, this was all going on as we were producing the first quarter results. So, and this is all going on and we’ve given you second quarter results which are an acceleration from the first.

So, it’s going as well as we had hoped for. And it’s because we thought about the people first. And I think that everyone is aligned.

Mark Marcon – Robert W Baird

Great. But can you talk – and I apologize if I missed this. So, I’ll come back offline if it was already asked. But on the financial services vertical, can you talk a little bit about some of the trends that you’re seeing in terms of IT and particularly all the things that we’ve talked about in the past with regards to the heightened emphasis on cyber security and particularly now that we’ve had the heart bleed (ph) scare that’s been out there?

Peter Dameris

Right. I would just reiterate what Rand have said first that demand continues to be robust. The spending has – the spending levels which are already high in the financial services space remain elevated. And that the influences of sophistication and concerned by our customers about cyber securities is pushing consolidation of purchasing into the larger more sophisticated IT staffing companies at the expense of a small or medium sized companies.

Mark Marcon – Robert W Baird

Great. Thank you.

Operator

Thank you. At this time, there is no additional questions in queue. Please continue.

Peter Dameris

So, we thank you for your time and attention. And look forward to visiting with you again for our second quarter conference call. Thank you very much.

Operator

Thank you. And ladies and gentlemen that does conclude your conference call for today. We do thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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