On Assignment Inc. Q2 2008 Earnings Call Transcript

Aug. 4.08 | About: On Assignment, (ASGN)

On Assignment Inc. (NYSE:ASGN)

Q2 2008 Earnings Call Transcript

August 4, 2008 4:30 am ET

Executives

Jim Brill - SVP Finance and CFO

Peter Dameris - President and CEO

Emmett McGrath - President of Life Sciences and Allied Healthcare

Analysts

Josh Vogel - Sidoti & Company

Andrew Fones - UBS Securities

James Janesky - Stifel Nicolaus

Tobey Sommer - SunTrust Robinson Humphrey

Jeff Silber - BMO Capital Markets

Operator

Good afternoon. My name is Rachel, and I will be your conference operator today. At this time, I would like to welcome everyone to On Assignment's Second Quarter 2008 Earnings 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).

Thank you. Mr. Brill, you may begin your conference.

Jim Brill

Thank you, Rachel. Before we 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 includes words such as forecasts, 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 will provide an overview of our second quarter results. Peter?

Peter Dameris

Thank you, Jim. Good afternoon. I would like to welcome everyone to the On Assignment 2008 second quarter earnings conference call. With me today are Jim Brill, our Senior Vice President and Chief Financial Officer, and Emmett McGrath, President of our Life Sciences and Allied Healthcare Groups.

During our call today, I will give a review of the markets we serve and operational highlights, followed by a discussion of the performance of our operating segments by myself and Emmett. I will then turn the call over to Jim for a more detailed review and discussion of our second quarter financial performance and our financial guidance for the third quarter of '08. We will then open the call up for questions.

As we have suggested over the last four quarters the strength of our business model has us well positioned to perform in most economic environments and we are not as closely correlated to gross domestic product and/or labor market growth as others. The positive quarterly results that we release today continue to confirm this position.

The strength of our business model continues to be based on; one, our lack of any significant contribution from permanent placement and conversion, 1.8% in the second quarter of '08.

Two, our diverse client base, our top 10 clients on a consolidated basis in the second quarter represented 7% our revenues and by segment 16% in Life Sciences, 21% in Healthcare, 21% in Physician Staffing, and 14% in IT and Engineering.

Three, the relative strength of the end market we serve; i.e. Life Sciences, Healthcare, IT and Engineering.

Four, the specialized skill sets we recruit for, in each of the end-markets we serve. Finally that professional staffing is the strongest sector of the staffing industry and white-collar unemployment is less than 3%.

The key indicators of demand that we monitor weekly have not materially deteriorated and it appears that things are continuing to perform well. As we evaluate near-term growth opportunities for each of our operating segments, demand remains positive in all segments except Life Sciences.

In our Life Sciences segment, demand is positive, except for spending by our large pharmaceutical clients. Currently, the segments primary challenge to year-over-year growth is related to significant difficulties facing large pharmaceutical clients versus internal execution or market position.

In late April of this year, many of our large pharmaceutical clients started to announce major lay-offs and our Life Science group started to see a slowdown in orders and project delays.

This change in demand was significant to the Life Science group and that it drives 24% of its total revenues from this customer base. However, material sciences and chemical clients have provided a beneficial lift to the Life Science group to partially offset the slowdown and spending from our pharmaceutical customers.

We are confident that we are currently managing the business appropriately for both the short-term and long-term. Emmett will go into end-market trends in greater detail later in the call.

In our IT and Engineering group, demand has somewhat flattened, but we are still performing well and expect healthy growth year-over-year.

Finally, our Healthcare and Physicians Staffing segments appear not to be affected by the current economic slowdown and are increasing their margins and their share of the markets they serve.

Specific operational accomplishments in the quarter included; one, our Physician Staffing division expanded their year-over-year quarterly growth rate to 20.4% versus 14.5% in the first quarter of 2008.

Two, our Nurse Travel group grew 6.5% year-over-year and expanded its gross margin to 23.5% from 22%. Three, our Allied Healthcare group grew 9.8% sequentially and achieved the highest quarterly revenues in the history of On Assignment.

Finally, our IT and engineering group grew for the third consecutive quarter greater than 15% year-over-year.

With regard to SG&A, we continue to monitor the markets we serve in the level of investments we have or are making for future growth. Today, we continue to make and/or retain investments to support our growth and that decision has not had a significant impact on our EBITDA. However should economic circumstances dictate we will manage our SG&A to generate appropriate levels of cash flow.

With that said, let’s turn to the second quarter results. The second quarter’s performance again resulted in record revenues for the company of $156.1 million. Revenues grew 8.5% over the second quarter of '07.

Net income, excluding a non-cash gain of a $1,071,000, or $0.02 per share after-tax, related to the mark-to-market of our $73 million interest rate swap, was approximately $5.5 million, or $0.15 per share. Revenue generated outside the United States was $9.1 million or 5.8% of consolidated revenues in the second quarter, versus $6.6 million or 4.6% in the second quarter of '07.

Consolidated gross margins in the second quarter were 32.5%, up from 32.1% in the second quarter of '07. Our consolidated hourly bill/pay spread in the quarter also increased year-over-year. Adjusted EBITDA was $17 million for the quarter, up 14.7% from the same period last year. Once again, our strong financial performance was achieved without any significant contribution from perm placement and each of our segments expanded their bill/pay margins.

Exiting the quarter, we continue to have productive opportunities to grow. The Physician Staffing, Healthcare and IT/Engineering segments continue to have the strongest end-market demand, followed by Life Sciences. Based on the significant reduction and client concentration that we accomplished in the Nurse Travel division in 2007, and our performance year-to-date, we believe that performance in the Nurse Travel division will continue to improve in 2008.

Geographically, we continue to see strong growth opportunities outside the United States. Since making a significant investment in our IT/Engineering groups European operations, revenues have organically increased a 130% year-over-year in constant currency. Our weekly assignment revenue, which excludes conversion, billable expenses and direct placement revenues, averaged $11,900,000 for the first three weeks of July this year. That compares to $10,965,000 in weekly assignment revenues for the same three-week period one year ago.

Operating leverage continued to improve during the quarter. Our adjusted EBITDA margin reached 10.9%, up from 10.3% in the second quarter of '07. We again grew our gross profits and operating income faster than our revenues.

During the quarter, despite maintaining a higher number of staffing consultants, 784 versus 714 in the second quarter of '07, we maintained our year-over-year productivity in gross profit per staffing consultant.

Before turning the call over to Emmett, I would like to give you a brief review of operations.

Our Physician Staffing division continued to show strong performance. Revenue grew 20.4% over the same quarter last year and 6% sequentially to $21.8 million. The division marked its 9th consecutive quarter of sequential revenue growth and its 23rd consecutive quarter of year-over-year growth. The division's efforts to increase margins have also been successful.

Internal processes and reorganization have led to an increase of 249 basis points in margin for Q2 over Q1, from 28.2% to 30.7%. Demand for coverage continues to grow and request for days of physician coverage grew 6.5% Q2 over Q1, even as the division implemented programs to focus on higher value clients and to increase margins.

Recently, the Healthcare Advisory Board reported that 1639 hospitals are recruiting an average of three internal medicine physicians at any given time in the United States. Similarly, 1762 hospitals were recruiting an average of three family medicine physicians at any given time and another 1229 hospitals are recruiting at least one general surgeon. Hospitals pay daily in terms of lost revenue for these open physicians.

For example, the Board reports that a hospital loses almost a $193,000 of revenue per month. For every month, it is short one orthopedic surgeon. It takes an average of 19 months to recruit an orthopedic surgeon today, for a total loss of $3.6 million. Locum tenens coverage allows facilities to continue serving patients while they recruit and keep their revenue streams intact.

On the supply side, and despite the well-documented physician shortage, interest in locum tenens as a practice option continues to grow among physicians. According to the Healthcare Advisory Board more than 30% of practicing physicians are over the age of 55. In addition, it reports that 63% of young physicians are significantly concerned about having enough free time in their practices. Semi-retirement and full flexibility are the two strongest factors that drive physicians to locum tenens.

VISTA recruited 6.5% more physicians in Q2 than in the prior quarter as more physicians turned to locum tenens as their career choice. We do not expect the economic slowdown to significantly impact this division and the staffing industry analysts predict a 16% growth rate in the sector.

Turning to the Nurse Travel Group, we continue to make significant progress in diversifying our client base and expanding our gross margins and market share. Our second quarter Nurse Travel revenues were up 6.5% year-over-year. Our Nurse Travel gross margin increased 149 basis points to 23.5% and gross profit dollars grew 13.7% to $7.3 million in the second quarter of 08', from $6.5 million in last year's second quarter.

We expect continued revenue growth in Nurse Travel in 2008 because of the changes we made in our operations and the diversification away from the two large clients mentioned in previous earnings calls. Supply constrains and erratic hospital buying behavior continued to be a drag on this sector, however not as superior as in the previous quarters.

With regard to revenue diversification, we build over 378 clients in the quarter, up from 325 a year ago and only 260 two years ago. Our top ten customers now represent 29% of revenue compared to 36% in the same quarter last year and 49% two years ago. We continue to experience demand across the broad customer base with orders up over 12% versus last year and we have experienced a 4.2% year-over-year increase in bill rates.

We are seeing the strongest demand in Central States and demand in California is lower than in previous years. The IT, Engineering division delivered solid second quarter financial results. Revenues gross exceeded our expectations for the quarter, especially in light of the overall condition of the general economy and the strong quarterly results posted in the second quarter of '07.

Revenues in the second quarter were $56.3 million, a 15.7% increase over the second quarter of '07. Approximately 39% of the increase in sales was due to increased bill rates and 61% of the increase was due to more billable consultants on engagement.

Sequential revenue gross in the second quarter was 2.9%. During the quarter, we build over 795 different client companies and no single client accounted for more than 2% of revenue. The group's average bill rate in the second quarter was over $125 per hour, approximately 6.3% higher than the bill rate in the second quarter of '07.

During the quarter, average billable consultants increased to 859 compared to 774 in the second quarter of '07. We saw no unusual project cancellations during the quarter and the average length of assignment remained at approximately five months. Gross margins for the second quarter were 37.8%, a 54 basis points higher than in the second quarter of '07 with gross profit increasing over $3.1 million or 17.4%, compared to the same period in '07.

Our bill rates and gross margins continue to be among the highest in the industry. Strong sales and gross profit performance in the first and second quarter of '08 has resulted in a strong profit contribution even with our continued commitment to increase the number of internal sales consultants, physical expansion in three US tele centers and expansion in Europe.

We also continue to invest in ongoing management and sales training programs and technology projects that are expected to result in increased productivity, sales and profitability in the future. More specifically on the issue of sales consultants, we averaged 446 sales consultants during the second quarter of '08, up slightly over the first quarter of 2008 and up significantly over the average of 386 in the second quarter of '07.

Our outlook for the third quarter of 2008 is cautiously optimistic. We are still seeing demand in each of our four disciplines, but the demand is anticipated to be less than we experienced in the first and second quarters especially in the IT discipline.

I would now like to turn the call over to Emmett. Emmett?

Emmett McGrath

Thank you Peter and good afternoon. The challenges in the Life Science Group that Peter described in the last quarter's conference call continued into the second quarter of 2008. Life Science revenues were $32.1 million, a decline of 3.8% year-over-year. Life Science's US revenues declined 5% from the second quarter of last year and European revenues increased 3.1% year-over-year. The decline in our US Life Science revenues continue to be attributable to the softness in the broader economy, the full impact of unexpected project terminations at two larger clients and reduction in revenues from our largest clinical research client.

On a geographic basis, all US regions with the exception of the Midwest softened. The East coast region, where we derive the majority of revenues from large pharmaceutical clients was impacted the most. As we encountered in the first quarter of 2008, a large percentage of our clients and candidates became more cautious during the quarter, which resulted in few replacements and delayed hiring decisions.

This slowdown in making hiring decisions affected our ability to grow and to offset the loss of the projects mentioned earlier. In addition, the two new contracts that was reported in the first quarter were postponed in the second quarter due to our clients focus on cost controls.

As for gross margin, Life Science segment gross margin continues to be one of the most attractive in the staffing industry. In the second quarter of 2008, it was 33% up 12 basis points sequentially, but down 104 basis points from the second quarter of 2007.

The year-over-year decline within US operations are predominantly due to a reduction in conversion and permanent placement fees, and reduction in gross margin from a large clinical research client.

Despite the challenges we are facing in growing our revenues year-over-year in the second quarter pricing remain consistent and strong. The average bill rate for Life Sciences US grew 3.2% year-over-year. In response to this challenging economic climate, we are monitoring our field staff productivity and other operational expenses.

We have also significantly invested in our recruiting in business development techniques and processes and increased attention to individual performance metrics.

As we enter the third quarter, we believe that the challenges to top line growth has somewhat dissipated. Although, we are not where we want to be on revenue growth, I am encouraged with the trends that we are seeing and feel we have started to grow again.

Over the past few weeks, we have seen a positive uptick in business, recently reaching year highs in the number of contractors On Assignment. We see revenues in client engagements.

However, we do remain cautious and as we go forward into the third quarter, and the remainder of 2008, our focus will continue to be on productivity. We are building our contractor base, new business development, and ensuring SG&A levels are in line with business trends.

Now I would like to turn to Allied Healthcare. I assumed responsibility for this division in December 2007, and I am pleased to report that this quarter represents a record in revenues for the division.

Revenues were $14.6 million for the second quarter of 2008. The previous high-water mark was $14.4 million in the second quarter of 2002. The last time the division generated more than $14 million in revenues were the second quarter of 2007.

This growth represents a 1.9% year-over-year increase and at 9.8% sequential increase. I attribute this growth to the health of the markets we serve and to a combination of better management, operational execution and greater contribution from our newer H.I.M business line that realized sequential growth of 18.5% in the second quarter.

During the quarter we also saw year-over-year productivity increase of 1.2% in gross profit per staffing consultant. Allied Healthcare gross margins increased 22 basis points year-over-year to 32.5% and 213 basis points sequentially.

The Allied division also successfully increased its average bill rate 5.1% year-over-year. Mainly due to greater contribution from the H.I.M or Health Information Management and Allied Travel business lines and improved pricing from the Healthcare Staffing division.

As for the third quarter the end markets unlike more cyclical businesses remain stable offering steady opportunities for continued growth. Our challenge continues to be internal execution, which I am pleased to report is improving. Changes in key management and field staff positions combined with greater accountability are beginning to result in improved productivity.

Overall the Allied Healthcare division is getting closer to more acceptable revenue levels. As for recent weekly trends the division continues to be at highs for the year in both contract employee assignments and weekly revenues. Our focus continues to be on attracting talent; individual productivity; migrating to higher level skill discipline, such as rehab therapy; direct hire and gross margin expansion.

I will now turn the call over to Jim Brill. Jim?

Jim Brill

Thanks Emmett. As Peter mentioned consolidated revenues for $156.1 million up 8.5% from 2007. There were 64 billing days in this quarter versus 63.5 in the first quarter and 63.5 in the second quarter of 2007. However, for Nurse Travel there were 91 billing days this quarter, 91 last quarters, and 90 in the second quarter of 2007.

Now let me address some of the variances and their related explanations to the extent Peter or Emmett has not. In Physician Staffing the significant revenue growth, which included a 6% bill rate increase was discussed by Peter, and as he mentioned we saw a good margin expansion after the first quarter, which included an increase to the bill/pay spread. The gross margin was slightly below the second quarter last year and as we have mentioned in the last couple of quarters the actions that we took to turn margins around are working well.

I think Emmett did a through job of addressing Life Sciences and Allied Healthcare, I will just add that the increase in the Allied Healthcare group's gross margin was driven by an increase in the bill/pay spread and a decrease in worker's compensation, insurance expense; partially offset by an increase in other contract employee expenses.

In the Nurse Travel group, Peter addressed the 6.5% revenue increase. The 149 basis point increase in Nurse Travel gross margin was due to an increase in the bill/pay spread, a reduction in housing and automobile expense and worker's compensation insurance expense; partially offset by an increase in other contract employee expenses.

Our IT and Engineering segment revenues as Peter mentioned were driven by both an increase in bill rates and an increase in billable consultants. The increase in gross margin was driven by an increase in the bill/pay spread, lower employment taxes and an increase in conversion fees; partially offset by an increase in other contract employee expenses.

Conversion and direct higher revenues totaled $2.8 million in the quarter or 1.8% of revenue as compared to 1.9% of revenue in the first quarter of 2008 and 2.1% in the second quarter of 2007.

Total SG&A expense for the quarter was $38.8 million or 24.9% of total revenues, which is down from 26.1% last quarter and 27.1% in the second quarter of 2007. The $1.2 million decrease from the second quarter of 2007 is primarily due to $1.4 million reduction in amortization of intangibles related to the acquisitions to $2.3 million.

Also included in SG&A in the quarter is $1.6 million of equity based compensation expense and $1.2 million of depreciation as-well-as $300,000 gain related to legal settlements.

Our operating income was $11.8 million or 7.6% of revenues for the quarter compared with $7.7 million or 5.1% of revenues last quarter and $7.2 million or 5% of revenues from the second quarter last year.

As we previously discussed in the second quarter of 2007 as required by our bank agreement we entered into a two year interest rate swap for $73 million, which fixed our 90 day LIBOR equivalent rate at 4.94%. The increase in market value of this instrument as Peter mentioned was $1.07 million in the quarter and this non-cash expense is included in non-operating expense and thus excluded from EBITDA.

Our tax rate for the fourth quarter was 43.3%. Net income was $6.1 million or $0.17 per diluted share. We believe it is meaningful to compare EBITDA and adjusted EBITDA when comparing the current quarter's results to prior quarters. As outlined in today's press release, EBITDA for the quarter was $15.4 million. Excluding equity-based compensation expense of $1.6 million, adjusted EBITDA was $17 million or 10.9% of revenue.

Adjusted EBITDA was $13 million or 8.5% of revenue last quarter and $14.8 million or 10.3% of revenue in the second quarter of 2007. We ended the quarter with cash and cash equivalents of $40.1 million, down from $42.9 million last quarter. However, we made earn-out payments related to the VISTA and Oxford acquisitions in the amount of $9 million.

CapEx was approximately $2.5 million, essentially equal to the prior quarter. Net accounts receivable was $84.7 million at the end of the second quarter. Day sales outstanding were 49 days, down from 52 days in the prior quarter and even with 49 days last year.

Now turning to productivity, which we defined as quarterly gross profit generated per staffing consultant. For the second quarter, we averaged 784 staffing consultants and gross profit per staffing consultant was $64,639. The Life Sciences segment generated $92,275 in gross profit per staffing consultants for the quarter, as compared with $101,470 in the second quarter of 2007.

The Healthcare segment generated $81,760 in gross profit per staffing consultant for the quarter, as compared with $73,796 in the second quarter of '07. The Physician Staffing segment generated $89,721 in gross profit per staffing consultant, as compared to $86,219 in the second quarter of 2007. The IT and Engineering segment generated $47,631 in gross profit per staffing consultant, as compared to $46,969 in the second quarter of 2007.

Based on fairly stable labor markets, and normal seasonal trends, we currently estimate consolidated revenues of $156.5 million to $160 million for the quarter ending September 30, 2008. We are estimating consolidated gross margins of approximately 31.9% to 32.15%, SG&A of $38.5 million to $39.3 million, including equity-based compensation expenses of approximately $1.4 million, approximately $2.4 million of amortization of intangible assets and financing costs, and depreciation of approximately $1.3 million.

We estimate net income of $4.9 million to $6.2 million, earnings per share of $0.14 to $0.17 and an effective tax rate of about 43%. Adjusted EBITDA is estimated to range from $15.7 million to $18 million. As you know, these estimates are subject to the risks mentioned in today's press release and at the beginning of this conference call. We do not include any impact related to the mark-to-market of our $73 million interest rate. In order to meet the higher end of our estimates, we will need to see weekly trends continue as they are today.

Now, I will turn the call back to Peter for some closing comments before we open up the line for questions. Peter?

Peter Dameris

Thank you, Jim. Despite facing a more challenging economic environment, we are very satisfied with our success in growing our revenues, expanding our operating and gross margin, generating cash and growing our revenues faster than our competitors.

I would like to once again thank our many loyal, dedicated and talented employees whose efforts have allowed us to progress to where we are today.

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

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Josh Vogel of Sidoti & Company. Your line is open, sir.

Josh Vogel - Sidoti & Company

Thank you for taking my questions. Peter, I may have missed it, but did you discuss the July revenue trends for the IT unit versus a year ago?

Peter Dameris

You know what, Josh we don't break it out by division, but what I will repeat is, we said that the first three weeks of '08 third quarter were $11.9 million, compared to the first three weeks of the third quarter of '07 being $10,995,000.

Josh Vogel - Sidoti & Company

965.

Peter Dameris

$965,000.

Josh Vogel - Sidoti & Company

Okay.

Peter Dameris

A pretty significant difference.

Josh Vogel - Sidoti & Company

Absolutely. We're seeing some competitors start to show a slowing in the IT market, they are actually posting low single-digit growth rates. And I was wondering if you think you can sustain the double-digit growth rate in Oxford for the remainder of the year?

Peter Dameris

Well, a couple of things, Josh, to address that. First of all, the strength of our business model is intact, as we give more data than anybody. No customer made up more than 2% of total IT revenue, but with that said, if you look at the growth rates in the third and fourth quarter of '07, they were 12.8% and 16.1% in '07. We have some difficult year-over-year comparables but we still feel, based on where our headcounts are right now and our weekly flash reports, that we're going to grow. We don't give specific growth rates by division, but we still feel that we are going to grow healthy for the year, and the back half of the year, considering where we are right now.

Josh Vogel - Sidoti & Company

Okay, thank you. And, now with the gross margin guidance, you are looking for it to be down a little bit sequentially. I was wondering, which segments you are expecting to see some contraction here, basically what was driving that, do you expect the bill/pay spread to tighten a little bit?

Peter Dameris

We are really not looking for a whole lot of tightening in the bill/pay spread. Really, what the guidance reflects is that we may see a little bit of an increase in the workers comp insurance expense. We saw a decrease in that this quarter, and in the IT area we are expecting we will see a little bit of compression in bill pay, but not really in the rest of the sectors.

Josh Vogel - Sidoti & Company

Okay, great. And just lastly, could you remind us the seasonality that you usually see in Q3 across the four units?

Peter Dameris

Typically in a normal environment, third quarter would be the strongest quarter of the year.

Josh Vogel - Sidoti & Company

Across all four segments?

Peter Dameris

Pretty much so, yes.

Josh Vogel - Sidoti & Company

Okay, great, thank you very much.

Operator

Your next question comes from Andrew Fones of UBS Securities. Your line is open, sir.

Andrew Fones - UBS Securities

Yes, thank you. I'm just kind of following up from the prior question regarding the first three weeks of July that looks like a bare 8.5% growth, which was kind of close to what you did in Q2 -- what should we expect to close kind of a little of a slowdown -- I think here the mid point you're guiding for Q3 is 6.5%, so what're you looking at? I think it could slow a little bit from Q2 to Q3. Thanks.

Peter Dameris

Andrew, it's a range, and the economy changes then it gives us a little bit of room, but that's why we gave you the first three weeks of the year. We haven't seen anything, but if the economy slows down in the summer time or because the headlines by each of the partitions gets more severe, things could change, but as we see it right now, and based on the first three weeks of the quarter -- we're a runner.

Andrew Fones - UBS Securities

Okay, thanks. And the loss of the largest clients in the Life Sciences business, I think you said that that occurred in April, so would you say you kind of had an all quarter impact there, and that since the loss of those two clients, our business has been relatively steady?

Peter Dameris

We're trying to give you as much data as possible. The Life Science businesses is very stable, but when you're on a with an economic backdrop like we have now it's hard to pick up and grow over the loss of two projects, Dendreon and Novo Nordisk. These had nothing to do with quality of our services. It had to do with an economic decision; the customer deciding we're not going to have a commercially feasible product that they were going to launch, and then they have a couple of major projects delayed. Outside of that we actually grew, but we don't get to exclude that. I mean, things were very stable, and the guys are working hard to capture demand where it existed, and we have had some good luck over in food science and then material sciences and chemicals.

Andrew Fones - UBS Securities

Okay, thanks, and then…

Peter Dameris

I would just reiterate, as Emmett said, the last six weeks had kind of been up, and we are at the highest head counts in weekly revenue for the year. So, it's not going down, it's moving up. Emmett wants to add.

Emmett McGrath

I just wanted to add some just to clarify something. We did have one of those two products that we’re sided in the first quarter and again referring them today. One of those clients did fees operations on one of their products within a clinical trial, the other just delayed. They are faced with some FDA tightening of their standards, and they'll be turning that around, hopefully by the later part of this year, and we are an exclusive partner of theirs, so we are looking forward to that to turn around.

Andrew Fones - UBS Securities

Thanks, that was really helpful. Peter, I think in the past you have mentioned there is a balance between dialing up growth and dialing down gross margin and vice versa. This quarter we did see gross margin pick up a bit, you are guiding to slightly lower gross margin in Q3? Is there an opportunity, do you think to take a few of those slightly lower margin jobs to add to revenue growth? And then my final question, I'll just ask it now so it will be finished, and that's regarding the impact of strikes in the quarter, thanks.

Peter Dameris

Yeah. We had no labor disruption of revenues, if we did we would have broken it out, and with regard to margins, we respect the markup and the pricing on every assignment. With that said, if we could just get revenue, if we could actually accelerate our growth by reducing our margins by 25 basis points, we'd look at it. The range, as Jim said, really is to depict things that until the quarter is closed, we really don't have a real precise handle on it.

I mean, if we have a couple of workers comp claims settled in the quarter, and that effects our incurred but not yet reported rate, it could flux the margin. But our bill/pay spreads are holding up nicely. The Physician Staffing group and the Nurse Travel group, in particular, have done phenomenal jobs of growing faster than the industry and expanding their margins. So we are not seeing an environment where we’ve got to cut rates to get business. That's not what's happening at this shop.

Andrew Fones - UBS Securities

Thank you.

Operator

Your next question comes from Jim Janesky of Stifel Nicolaus, your line is open.

James Janesky - Stifel Nicolaus

Hi, yes, within Nurse Travel, Peter, what Europe 6.5%, what was pricing versus volume?

Peter Dameris

Jim's going to get it, I know that we quoted in the script, Jim, what the bill rate increase was, but I don't have the impact as to the revenue growth. Let me give you…, the bill rate went up, bear with me please,

James Janesky - Stifel Nicolaus

No problem, just an approximation.

Peter Dameris

Yes, the headcount’s up about 3%.

James Janesky - Stifel Nicolaus

Okay, so about half and half.

Peter Dameris

Yes, and the bill rate, we have experienced a 4.2% year-over-year increase in the bill rate.

James Janesky - Stifel Nicolaus

Okay. And where are you seeing the strength, Peter? What either customers or parts of the country or whatever?

Peter Dameris

Right. Jim, again in the script, we said the strongest demand is in the central states, and actually demand in California is lower than previous years, that's partially attributable to weaning ourselves from those two large customers. But again, we focus on higher skill sets, and our bill rates are north of $73, $74, are compared to the commodity skill set, which is around 56. So, I wouldn't correlate what's going on in our business with some of the other Nurse Travel companies, because they are two different markets.

James Janesky - Stifel Nicolaus

Right. But even going into the second quarter, some hospital volumes were coming in a little bit better than expected. Is that at all having an impact on your business?

Peter Dameris

Well, again we're just not as directly correlated to hospital admissions, but clearly when you look at the number of orders, I think we quoted that orders were up 12% versus the same time last year. That doesn't hurt.

James Janesky - Stifel Nicolaus

Right. And as the quarter progressed, Peter, particularly within your Oxford business, IT and Engineering. Did the business soften as the quarter progressed, or was it kind of even throughout the quarter?

Peter Dameris

What I would tell you to that question Jim, is that demand didn't soften, but we saw a little bit of a spike in terminations of assignments and the lengthening of decision making for our customer to place a new consultant on billing. But with that said, we're plus or minus 10-15 heads from the high-mark for the full year.

So the group is still doing a remarkably good job and finding places to succeed. And as you know, we were not a bulk seller of human capital, and we have virtually no exposure to the financial service industry and that's why you've seen three consecutive quarters of better than 15% top line growth organically.

James Janesky - Stifel Nicolaus

Right. And then shifting to the lab area, how much visibility do you have there? It sounds like you think that we've bottomed out there both in margins and in the business, and there are opportunities for that to come in a little bit better than expected in the back half of the year. Is that right?

Emmett McGrath

Yeah. I think we need to be conscious, but like I said and Peter said, the first few weeks of Q3 look pretty good. We've seen an uptick in our business, it's across all our areas within the US and parts of Europe, with a greater emphasis on the Midwest: we're just seeing more growth there. I feel better about the business overall, but I would say, I am cautiously optimistic yet, to be prudent.

James Janesky - Stifel Nicolaus

Okay. Thank you.

Operator

Your next question comes from Tobey Sommer of the SunTrust. Your line is open.

Tobey Sommer - SunTrust Robinson Humphrey

Thanks. Peter, I wanted to ask a question about perm which was I guess down a little bit as a percentage of revenue. Is that part of a conscious decision, any changes to the comp structure to drive a certain behavior to make sure that you are even less exposed to the perm markets?

Peter Dameris

No. Good question, Tobey. Actually the way we run our perm business, we don't have fully dedicated people who do perm placement. We have not changed our comp structure at all, we've managed our people during good perm placements markets and bad perm placement markets to make sure that they are focusing on their contract labor assignments. And it's just really a direct correlation of just a slowing demand mostly in the life sciences side. Emmett was telling me before the call that; why don't you quote it, what would the 48,000 people, Emmett, have been released out of the large pharmaceutical companies.

Emmett McGrath

Big pharma has laid off or shed 47,000 jobs since January 2007.

Peter Dameris

So, that makes it a little bit easier for them to find permanent employees as well. But I would tell you that we are doing very, very well over in Europe on the perm placement side in the Life Sciences space, and we manage it. I mean, I think the high watermark was like 2.1% of our total revenues. In this quarter, we reported Jim what 1.8?

Emmett McGrath

Yes.

Peter Dameris

So it's not a real big issue here.

Emmett McGrath

Having said that, these things do come and go. So, I wouldn't say that we've seen any significant trend in one direction or another. We could get hot for a few weeks, and do very well in perm placement side.

Peter Dameris

Yeah. It comes and goes.

Tobey Sommer - SunTrust Robinson Humphrey

Right. And then, Jim, I think when you were describing, at the end of your prepared remarks and guidance, a fairly stable labor market from here would be required to hit the top end of the range. So, is that to say that you build in yourself a little bit of flexibility, for not a lot of softening, but a little bit of softer labor markets for the balance of the quarter?

Jim Brill

Yes. Peter mentioned that's why we have a range. If things deteriorate some from here then that could drive us down some.

Peter Dameris

And specifically Tobey what we went our way to say is, we don't need to grow to hit the top end, but we have to perform at the levels where we are at right now. So if there is deterioration then the top end would be more of a challenge. But we don't have to grow to hit the top end.

Tobey Sommer - SunTrust Robinson Humphrey

Right. Thank you. That's helpful. And then, I wondered, you gave some really interesting gross profit metrics for us to look at how productivity is progressing in a different unit. But if I step back from macro level, it looks like the staffing consultants are, and the growth is, up a little bit more than the weekly revenue in July. I just wanted to get a sense for, is the number of staffing consultants, is there a wide range of growth rates among the different segments and how are you looking at where to have growth, and where to kind of look for more stability in your staffing consultant headcount?

Peter Dameris

Yeah, another good question. I think what I'm most proud of the management team here is that we are really managing our portfolio of service offerings in our available SG&A very well. And we have significantly invested in the physician staffing space. Emmett's done a remarkable job of significantly investing in the Allied Healthcare space in starting a new rehabilitation travel business there and local business there. We have dialed back a little bit on the Life Sciences side.

And, as you know, from the numbers we gave you on transcript today, we have made a significant investment on the IT side and we're holding that investment. So yeah, it's based on where the demand is, it's based on where the strength is. And I think the steps that we took in the third and fourth quarters of '07 to get better performance out in Nurse Travel and Allied Healthcare are paying dividends I think that we're not waiting for the markets to recover. We're making things happened based on where we see demand.

Tobey Sommer - SunTrust Robinson Humphrey

May I ask one last question, I'll get back in the queue. Peter, when you live through in this industry of softening and stronger labor markets, what is natural attrition internally at On Assignment? And in a moderately softening labor market, do you just write out that attrition and let that work your number down, if you need to, or how much of a change in labor market you need before you actively do things? Thanks.

Peter Dameris

First of all, I am going to make an advertisement to any successful recruiting, professional recruiter or sales person: we are hiring at On Assignment, so please give our recruiting department a call. But; with that said, you hit the nail on the head. We will allow voluntary attrition to check up first. We do not have a program in place where we are proactively terming people involuntarily. We are managing our productivity and giving people a chance to be successful.

But after an appropriate amount of time, if they are not heading the daily revenue metrics that we require, then we are finding a better place for them to work. But we are still making investments, and we are still hiring as you can see from the year-over-year growth rates. And it's not coming at a big expense to our EBITDA. When we get through this tightening period, we are going to be the best staffed and trained, I believe, because we felt the investment and we've had the privilege of being able to hold the investment.

Tobey Sommer - SunTrust Robinson Humphrey

Thank you very much.

Operator

(Operator Instructions). Our next question comes from Jeff Silber of BMO Capital Markets. Your line is open.

Jeff Silber - BMO Capital Markets

Thanks so much. Most of my questions have been asked. In terms of the slowing demand in IT, forgive me if you have answered this one already, but I just want to get a little bit of color, exactly where you are thinking might be seeing that?

Peter Dameris

Predominantly, and what we call IT, as you know we don't do any sort of custom application development, Jeff. Relatively speaking, our growth rate was 15.7% in the quarter. So, we have seen some lengthening, and some decisions being made for major SAP projects, installs, but kind of a little bit on the embedded software, and chip design on the hardware side, but not really across the board. I'd say what we call our IT segment versus our software segment.

Jeff Silber - BMO Capital Markets

Okay, great, that's helpful. In fact, I was wondering if I can get similar comments on Allied Healthcare in terms of the areas of pockets of strengths and weaknesses?

Peter Dameris

Emmett you want to go first.

McGrath Emmett

One is our current modality. That is, we think we can do a better job in servicing those areas, and that's our CLS, HFS, and some of our Respiratory and Diagnostic, so we could just do a better job, and we're starting to do a better job. Some other areas that we are focusing on, like Peter said earlier, is rehab, and that's a growth area for us that we are really focusing on. So we don't see a decline or deterioration in any of those of kind of skill sets.

So the strongest is our Health Information Management, Physiotherapy. Probably the more challenging growth would be in some of the spaces that have lower barriers to entry, uncertified coders, billers, which we're trying. It's a good business, but we were continuing to migrate to higher modalities because of the bill rates, and the barriers to entry.

Jeff Silber - BMO Capital Markets

Okay, great. And just maybe a few numbers questions, maybe Jim you can handle these. In terms of the share count guidance for the third quarter, what should we be looking for?

James Brill

It's probably going to be in the range of 359, something like that.

Jeff Silber - BMO Capital Markets

Okay, and in terms of CapEx guidance for the year?

James Brill

Probably in the $9 million range.

Jeff Silber - BMO Capital Markets

Okay, great. And if you can just remind me, are there any restrictions you have on pre-paying your debt?

James Brill

No, there are no restrictions on pre-paying the debt.

Jeff Silber - BMO Capital Markets

Okay. Is that something the company might be thinking about, going forward?

James Brill

Well, we have a excess cash flow pay down that comes up every year, and so, generally toward the end of the year, we take a look at where we are and take a look at what the opportunities might be in the marketplace in particular, and then make a decision at that point whether to do something. So it isn't simply the excess cash flow; it also has to do with what other opportunities we might be looking at.

Jeff Silber - BMO Capital Markets

Okay, and what would those be, I mean, obviously you have done some acquisitions, is that something you are thinking about as well now?

Peter Dameris

Yeah, I mean, we are having breakfast, lunch and dinner with a great number of people, and trying to find an appropriate acquisition that has the right growth rate, right gross margins, and the right culture, and we are selective. But we are making progress, there is nothing imminent, but we'll do the right thing at the right time. Cash generation has continued into the third quarter nicely, so everything is pointing in the right direction. We are just continuing to keep our heads down, and try to execute.

Jeff Silber - BMO Capital Markets

Thanks. Just one more on the acquisition side, are you seeing seller expectations kind of declining a little bit in the marketplace?

Peter Dameris

A little, I mean, people this isn't meant as a political statement, but Jeff, we scared the Jesus out of them by telling them the truth that their CapEx rates, their capital gains rates were going to go up in '09 if there is a change in administration, and you got to think hard about are you going to create 13% additional value by holding on and waiting another year. So, scare is the wrong word, but alert is, that's the real issue that people have to take into consideration. So, I think people are focused on a bird in hand, and I think they are coming to the realization that there is not nearly as much competition, there is still fierce competition among strategic buyers, but the financial buyers have kind of significantly move to the sideline.

Jeff Silber - BMO Capital Markets

Okay, great. Thanks so much for that color.

Operator

Thank you very much. There are no further questions at this time. Do you have any additional or closing remarks?

Peter Dameris

No, I just want to thank everyone for their continued attendance and interest in the company, and we look forward to reporting our third quarter results.

Operator

Thank you. This concludes today's conference call, you may now disconnect.

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