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Edited Transcript of ASGN earnings conference call or presentation 26-Apr-17 9:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 On Assignment Inc Earnings Call

CALABASAS Apr 29, 2017 (Thomson StreetEvents) -- Edited Transcript of On Assignment Inc earnings conference call or presentation Wednesday, April 26, 2017 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Edward L. Pierce

On Assignment, Inc. - CFO and EVP

* Peter T. Dameris

On Assignment, Inc. - CEO and Director

* Randolph C. Blazer

Apex Systems, Inc. - Chief Operations Officer

* Theodore S. Hanson

On Assignment, Inc. - President

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Conference Call Participants

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* Edward Stephen Caso

Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst

* Gary E. Bisbee

RBC Capital Markets, LLC, Research Division - MD of Business Services Equity Research

* Jeffrey Marc Silber

BMO Capital Markets Equity Research - MD and Senior Equity Analyst

* Keen Fai Tong

Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst

* Kevin Damien McVeigh

Deutsche Bank AG, Research Division - Head of Business and Information Services Company Research

* Kwan Hong Kim

SunTrust Robinson Humphrey, Inc., Research Division - Associate

* Mark Steven Marcon

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Timothy John McHugh

William Blair & Company L.L.C., Research Division - Partner and Global Services Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the First Quarter 2017 Earnings Call. (Operator Instructions) And as a reminder, today's conference is being recorded.

I'd now like to turn the conference over to our first speaker, Ed Pierce. Please go ahead.

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Edward L. Pierce, On Assignment, Inc. - CFO and EVP [2]

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Thank you. Good afternoon, and thank you for joining us today. Before we get started, I'd like to remind everyone that our presentation contains forward-looking statements. Although we believe these statements are reasonable, they are subject to risks and uncertainties, and our actual results could differ materially from those statements. Certain of these risks and uncertainties are described in today's press release and in our SEC filings. We do not assume the obligation to update statements made on this call.

For your convenience, our prepared remarks can be found in the Investor Relations section of our website.

Please note that on this call, we will be referencing certain non-GAAP measures, such as adjusted EBITDA and adjusted net income. These non-GAAP measures are intended to supplement the comparable GAAP measures. Reconciliations between the GAAP and the non-GAAP measures are included in today's press release.

I will now turn the call over to Peter Dameris, our CEO, who will provide an overview of our results for the quarter. Peter?

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Peter T. Dameris, On Assignment, Inc. - CEO and Director [3]

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Thank you, Ed. I would like to welcome everyone to the On Assignment 2017 First Quarter Earnings Conference Call. With Ed and me today are Ted Hanson, President of On Assignment; and Rand Blazer, President of Apex Systems and our Apex segment.

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 Ted and Rand. I will then turn the call over to Ed for a more detailed review and discussion of our first quarter results and our estimates for the second quarter of 2017. We will then open the call up for questions.

Now on to the first quarter. Our results for the first quarter exceeded the high-end of our previously announced financial estimates for revenue and were within the range of our estimates for adjusted EBITDA and earnings per share. Revenues for the quarter were $626.5 million, up 7.6% year-over-year or up 8.2% on a same billable day basis. This marked the 13th consecutive quarter that our company grew above the IT staffing industry's projected annual growth rate since January 1, 2013. Our growth rate reflected, among other things, the continued deepening of many large new customer relationships that we have established over the last 3 years and the continuing increase in the rate of adoption of our delivery model. This quarter's year-over-year revenue growth was higher than our year-over-year growth rate for the fourth quarter of 2016, which is impressive considering normal seasonality, inclement weather affected revenues by $700,000 and higher adverse effect of foreign currency exchange impacted revenues by $1 million compared to $500,000 in the first quarter of last year.

Adjusted EBITDA for the quarter was $64.6 million or 10.3% of revenues compared with $62.4 million or 10.7% of revenues in the first quarter of 2016. Cash generation continues to be at or above our expectations.

Virtually all of our divisions contributed to our strong first quarter performance. Revenue growth came from our local, mid-market and large national accounts, reflecting strong customer demand. Our size and service offerings enabled us to grow faster than published staffing industry growth rates, and we believe that we are well-positioned to generate solid, above-market revenue growth in the future.

Our IT business continues to see high demand from its customers, driven in part by greater adoption of staff augmentation as a viable alternative to outsourcing, offshoring and consulting. Wage inflation continues to be manageable. With respect to recent production, our weekly assignment revenues, which excludes conversion, billable expenses and direct placement revenues averaged $47.6 million for the last 2 weeks, up 9.2% over the same period in 2016.

Since the closing of the Creative Circle acquisition on June 5, 2015, we have repaid $243 million of our debt. Our leverage ratio was 2.21x trailing 12-month Adjusted EBITDA.

During the quarter, we repaid $24 million of our debt. We estimate our leverage ratio to be approximately 2.14x by the end of the second quarter of '17.

As you will recall, we announced on June 13, 2016 that our Board of Directors authorized a new $150 million share repurchase program. Since inception, we have repurchased approximately 1.4 million shares at an average price of $39.07.

During the first quarter, we repurchased approximately 229,000 shares at an average price of $44.31. And quarter-to-date, we have not purchased any additional shares. We intend to continue to execute on our share repurchase program based on share price and market conditions.

We continue to see signs that the ongoing debate regarding the on-demand workforce or gig-economy is accelerating the usage of contract labor.

Fractionalization of human capital by using the staffing industry's services is truly the only way to avoid the risk of misclassification of employees as independent contractors. Our customers have and are realizing this, and that is why we believe the secular growth opportunities for the entire professional staffing industry are so attractive. We also believe that we are well positioned to serve our customers' IT needs as technology rapidly evolves and is adopted.

Throughout this year, we continued to benefit from the ongoing debate regarding H-1B Visa reform and further adoption of our development / deployment model i.e. staff augmentation. Recently signed executive orders have only further solidified the trend towards adoption of our model versus offshoring.

I would like to now turn the call over to Ted Hanson, our President, who will review the operations of the segments and then over to Rand. Ted?

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Theodore S. Hanson, On Assignment, Inc. - President [4]

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Thanks, Peter. As Peter noted, revenues from our Apex and Oxford segments grew collectively 7.6% year-over-year. The Apex segment had another strong quarter of double-digit growth driven by Apex Systems, our largest division, and Creative Circle both of which Rand will discuss in his comments.

Our Oxford segment was slightly down year-over-year. Across all our business units, our IT, creative/digital/marketing, engineering and software/hardware offerings showed the most strength in the quarter and demand in those end markets remains very solid. Now on to the Oxford results.

The Oxford segment is comprised of Oxford Core, CyberCoders, our permanent placement business, and Life Sciences Europe. For the first quarter of 2017, Oxford segment revenues were $144 million, down 3.3% year-over-year or down 2.6% on a constant currency basis.

Oxford Core revenues, which account for 75.5% of the segment revenues, were down 4.4% year-over-year. The decline in revenues is attributable to the completion of 2 large projects and lower contribution of permanent placement fees.

CyberCoders, our permanent placement service offering, which accounts for 95.4% of segment perm placement revenues, was slightly down year-over-year. However, they are up 10.4% sequentially as we saw momentum build throughout the quarter with March showing year-over-year growth. For CyberCoders, we are seeing an increase in both opportunity flow and an improvement in the time to fill cycle.

Gross margin for the segment was 40.4%, down 100 basis points year-over-year. The decline is primarily related to business mix of contracts to permanent placement and run-off of higher gross margin revenues from the large project completions mentioned above.

As we discussed last quarter, we continue to take actions we believe will better position Oxford with their customers as well as improve our return on invested SG&A. First, we have realigned field management and skill practices within Oxford to better leverage our competencies. Second, we are addressing the increase in field expenses, which ramped up during the second half of 2016, for which we did not earn the expected return. And finally, we remain focused on rebuilding our sales model in order to deepen our customer relationships and increase our market share. Oxford's secret sauce has always been its ability to deliver high end, hard to find talent to its customers in multiple skill disciplines via a recruiting-driven model. While this will remain a core tenant of our business, we will work to leverage this best-in-class recruiting capability with a more progressive account focused sales strategy.

I will now turn the call over to Rand Blazer. Rand?

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Randolph C. Blazer, Apex Systems, Inc. - Chief Operations Officer [5]

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Great, Ted. Thank you. The Apex segment, which consists of Apex Systems, Apex Life Sciences and Creative Circle business units once again reported strong results for the quarter, as Ted had mentioned. Revenues for the segment were $482.5 million, up 11.4% year-over-year. Both Apex Systems and Creative Circle, which combined account for 92.3% of the segment's revenues, reported double-digit revenue growth, while our Life Sciences' unit was down slightly in Q1.

Gross margin for the segment was 29%, which is 10 basis points lower than Q1 of 2016, due largely to a slightly lower mix of perm placement revenues. Pricing for the quarter remained stable in our end markets with bill pay spreads increasing slightly from the preceding quarter. Increases in top account growth for the segment across all units also had an impact on gross margin.

Once again, our segment's EBITDA contribution reflected high conversion of gross profit to EBITDA driven by the continuing increase in the productivity of our sales and delivery teams.

With respect to Apex Systems, our IT staffing division, revenue growth was propelled by a number of factors, including: Growth in accounts in 5 of our 7 industry verticals with double-digit revenue growth in our aerospace defense unit, financial services accounts, healthcare accounts and consumer industrial accounts; only the telecommunications and technology industry accounts exhibited slight negative growth year-over-year, although these accounts in these industries were our strongest performers a year ago; top accounts continues to lead the way with double-digit year-over-year growth, while retail accounts slowed -- showed only slight growth in the first quarter; our bookings for SOW-type work were also strong in the quarter and significantly exceeded our expectations; finally, as mentioned, our field teams continued to excel with increasing productivity supporting Apex Systems revenue performance and conversion rates.

Our Creative Circle units continues to see good opportunities for growth with the market for creative marketing skill sets remaining strong. Similarly, we expect to see an increase in requisition flow for contract labor during the second quarter indicating some pickup in client demand for clinical and life sciences skills.

Overall, the Apex segment had another high-performing quarter with double-digit revenue growth and each of its business units contributing solid conversion of gross profit to EBITDA.

Ed, I'll turn it over to you.

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Edward L. Pierce, On Assignment, Inc. - CFO and EVP [6]

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Thanks, Rand. As Peter mentioned, revenues for the quarter exceeded the high-end of our previously announced financial estimates. Our revenue growth rate for the quarter was 7.6%, which was 1.6 percentage points or 27% higher than the published IT staffing industry growth rate. Using the same number of billable days as Q1 of last year, revenues on a same billable day basis were up 8.2% year-over-year. The effect of year-over-year fluctuations in foreign exchange rate was approximately $1 million.

Assignment revenues for the quarter were $594.5 million, up 8.2% year-over-year and permanent placement revenues were $32 million, down 1.5% year-over-year. While down year-over-year, permanent placement revenues were up 10.7% sequentially, and we're estimating both sequential and year-over-year growth in Q2 of 2017.

Gross margin for the quarter was 31.6%, which was at the high-end of our previously announced estimates, but down 64 basis points year-over-year. The decline was primarily due to a lower mix of permanent placement revenues, which was 5.1% of revenues down from 5.6% in Q1 of last year and a higher mix of revenues from our Apex segment, which has lower assignment gross margins.

SG&A expenses were $146.1 million or 23.3% of revenues. After adjusting for $900,000 in acquisition, integration and strategic planning expenses, which were not in our financial estimates, and incentive compensation related to higher than estimated growth in revenues and gross profit, our SG&A expenses were in line with our financial estimates.

Interest expense for the quarter was $8.5 million, down from $9 million in the first quarter of last year. Interest expense included $2 million in costs related to the amendment of our credit facility in February, which among other things, reduced the interest rate on our Term B loan, 0.5 percentage point and increased our capacity under the revolver to $200 million. The costs of the debt amendment were not included in our financial estimates.

Our effective tax rate was 36.2%, which included excess tax benefits of $1.1 million related to our equity-based compensation. These excess tax benefits were not included in our financial estimates. These benefits are the tax effect of differences between book expense and the related tax deduction for equity-based compensation.

In prior periods, these benefits were accounted for as adjustments to stockholders' equity. As a result of guidance issued by the FASB last year, we, along with other public companies, are now required to flow these benefits through the provision for income taxes.

Net income for the quarter was $22.4 million or $0.42 per diluted share, up from $17.4 million or $0.32 per diluted share in the first quarter of last year. Net income included acquisition, integration and strategic planning expenses, the debt amendment costs and the excess tax benefits, all of which were mentioned earlier. The after-tax effect of these items totaled approximately $700,000 in additional expense or $0.013 per diluted share.

Adjusted EBITDA for the quarter was $64.6 million, cash flows from operating activities were $43.8 million and free cash flow, a non-GAAP measure, was $37 million. The conversion rate of gross profit into adjusted EBITDA was 32.6%, and the conversion rate of adjusted EBITDA into free cash flow was 57.3%.

During the quarter, we repaid $24 million of our long-term debt and used $10.1 million of our cash to repurchase approximately 229,000 shares of our common stock.

Now turning to our financial estimates for the second quarter of 2017, we're estimating revenues of $650 million to $660 million, net income of $29.4 million to $31.3 million, and earnings per share of $0.55 to $0.59 and Adjusted EBITDA of $76 million to $79 million. These estimates do not include any acquisition, strategy, or integration expenses nor do they include any excess tax benefits related to equity-based compensation.

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

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Peter T. Dameris, On Assignment, Inc. - CEO and Director [7]

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Thank you. We continue to believe our scale, size and breadth of services has us well positioned and distinguishes us from others and provides us the opportunity to take advantage of what we believe are historic secular growth opportunities for the entire staffing industry. While the entire On Assignment team is very proud of our performance, we remain focused on continuing to profitably grow our business and increase our rate of growth. We would all like to once again, thank our many loyal, dedicated and talented employees whose efforts generated these results.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will come from the line of Tobey Sommer with SunTrust.

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Kwan Hong Kim, SunTrust Robinson Humphrey, Inc., Research Division - Associate [2]

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This is actually Kwan Kim on for Tobey. First off, what kind of trends are you seeing in terms of the impact of the H-1B visa program restrictions done by President Trump? And how are your current and potential customers reacting to the changes?

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Peter T. Dameris, On Assignment, Inc. - CEO and Director [3]

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So we've spoken about this on several calls. And we told you that we've seen a change in behavior over the last 14 months. And the recently signed executive orders really just combination of what people have known about for a while. We've seen a change in behavior with regard to: First, work that may have previously been competitively bidded to be done offshore is being done onshore; existing work has been taken offshore is remaining there but we are starting to see some repatriation. We're also seeing client becoming increasingly concerned about reliance on the offshore model and that many IT professionals in India or the Philippines who may have wanted to come over on an H-1B visa, and these are the type of people that we are kind of exploring the loophole in the H-1B visa, lower pay people are not willing to do it because they don't have certainty that though have a job here and for how long. The people that are coming over doing algorithms, medical device, drug discovery work that are getting paid $100,000 or more, they are still coming over and willing to work under an H-1B visa. But some of the technologists that were coming from these lower cost places at $60,000, $70,000 a year, they're opting out and working elsewhere outside the United States. So that all benefits us. And as CIOs -- even before the debate about immigration reform, CIOs got more comfortable in relying on our deployment model versus the offshore model. They saw that they had greater control visibility and quality. And so we benefited from that for several years, but it is definitely benefiting us with regard to what work is to be performed onshore versus offshore unless it's going offshore these days.

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Kwan Hong Kim, SunTrust Robinson Humphrey, Inc., Research Division - Associate [4]

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That's helpful. And given the improved regulatory outlook in the higher rates among financial services companies, how is that affecting the demand level in that sector?

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Peter T. Dameris, On Assignment, Inc. - CEO and Director [5]

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Well, Rand, since you have the greatest exposure, you want to address that? Rand?

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Randolph C. Blazer, Apex Systems, Inc. - Chief Operations Officer [6]

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Yes. I'm sorry, I was on mute. Well, we've enjoyed a long run here, finance services accounts with double-digit growth now for 4, 5 quarters. So I think combination of things. The health of those institutions, those businesses, recent trends, they lead for better technology and more technology to enhance the business. So we're seeing pretty good business in that sector both on the consulting and -- excuse me, SOW and the staffing side.

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Edward L. Pierce, On Assignment, Inc. - CFO and EVP [7]

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And I would just add. As we said in our prepared remarks, one of the pleasant uptick or resurgence in demand was in the aerospace and defense, and we're optimistic that will continue.

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Operator [8]

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Next question comes from the line of Kevin McVeigh with Deutsche Bank.

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Kevin Damien McVeigh, Deutsche Bank AG, Research Division - Head of Business and Information Services Company Research [9]

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I appreciate the context on the growth. But just want to -- I mean, you guys are outpacing the market so much. I mean, is that kind of large client mix as well as kind of mid-market? Or are you just seeing more outpace growth on the financial side that hadn't been spent in for a while, which is really impressive growth. Overall, I just wanted to understand that a little bit more?

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Peter T. Dameris, On Assignment, Inc. - CEO and Director [10]

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Well, I'll go first and then I'll let Ted add additional color. But qualitatively, Kevin, we've gone to a size and breadth of services, which include digital and SOW. There are just a handful of companies that can really effectively and credibly bid on work. And as CIOs are relying on our deployment development model, they want the companies that have the most credibility in delivering the service reliably. And our customers are not casual users of our service. I mean, we're not billing customers that have 50 internal employees that want help desk administration. I mean, we're billing 5s and 10s and 20s of millions of dollars a year to major corporations. And I think that distinguishes us from maybe other publicly traded companies. Our 2 largest competitors really are private, they're TEKsystems and MSI Global. Ted, I mean, what would you offer more granular than that?

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Theodore S. Hanson, On Assignment, Inc. - President [11]

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The only thing I would add, Peter, is that definitely within our Apex business, our large account portfolio is driving the growth. There is some growth in our retail accounts, but certainly, the big growth is coming in our large account portfolio. And then the marketplace on the creative side for creative digital marketing is very good and robust, both in the small and in the large customers that we are playing in right now. The 2 of those things together are pretty powerful engine right now for On Assignment.

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Randolph C. Blazer, Apex Systems, Inc. - Chief Operations Officer [12]

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Peter and Kevin, can I make a comment also?

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Peter T. Dameris, On Assignment, Inc. - CEO and Director [13]

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Please do.

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Randolph C. Blazer, Apex Systems, Inc. - Chief Operations Officer [14]

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Kevin, I think it goes to having -- Ted mentioned the word portfolio, it goes to building the portfolio of accounts in large accounts, small accounts, mid-market accounts and across 7 different industries that we focus on. And in any onetime point-in-time, may be couple of the industries are really hot, some are not. But it heads and flows, but the key is to build a portfolio that gives you strength in all different kinds of times. And I think we've worked really hard over the last decade building that portfolio across all of our business units, and it's working. It's working for us now. And I think that makes a big difference.

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Peter T. Dameris, On Assignment, Inc. - CEO and Director [15]

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And, Kevin, that's why we don't talk about economic conditions and GDP growth. We have a portfolio of customers that are going to do business with us. We don't know how much necessarily every year, but we know they're going to do business with us versus someone else and it's because of their project need not because of how fast the economy is growing and certainly, they have about hiring. So that's what drives us is, we establish relationships that we can rely on. We don't know how much revenue each year, but we can rely on it.

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Kevin Damien McVeigh, Deutsche Bank AG, Research Division - Head of Business and Information Services Company Research [16]

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It's helpful. And then just -- and this is a little nip on the guide, the revenue. It looks like you are above kind of consensus, EBITDA as well. EPS kind of in line. Is that tax driven? Or is there anything else kind of impact in the EPS just for reconciling?

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Edward L. Pierce, On Assignment, Inc. - CFO and EVP [17]

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No, not really. In fact, the excess tax benefits, we did not include that in our income tax provision or effective tax rate. So no. Everything as you see it in our estimates. There's nothing out of the ordinary.

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Operator [18]

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Our next question comes from the line of Gary Bisbee with RBC Capital Markets.

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Gary E. Bisbee, RBC Capital Markets, LLC, Research Division - MD of Business Services Equity Research [19]

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Pretty encouraging commentary on perm relative to a number of the other staffing companies that have reported. I guess, can you give us any more color on -- if you have a sense of what drove the improvement throughout the quarter? What sort of change? And I think you also said a shorter time that the sales cycle is improving or the customers are making decisions more quickly relative to last fall. What's behind that? And any color?

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Peter T. Dameris, On Assignment, Inc. - CEO and Director [20]

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Well, Gary, we said in 2016, our performance was more reflective of our positioning versus the market. Clearly, the perm market was in a strong '15 as we started to see in the fourth quarter of 2016 and in the first part of '17. But some of it had to do with our reliance on a technology-based sales initiative versus feet on the street. I'll let Ted talk about some of the changes we've made that are internal and specific to us. But we started talking, I think, on the third quarter conference call that we started to see a better engagement activity from our West Coast clients, and that momentum has continued. And the team has done a really good job. So I'm not quite certain about what others are seeing and the elongation of decision-making. But our view into the marketplace shows us that we have greater confidence about year-over-year growth in '17 than we did in '16. Ted?

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Theodore S. Hanson, On Assignment, Inc. - President [21]

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Well -- And Gary, kind of, to follow what Peter said, we can only give you the view of the market based on our view. We can't -- I don't know what everyone else is seeing. But I do know that to Peter's point, we've expanded, if you will. Our go-to-market capabilities have no electronic means of going to the market and also going to the market with the traditional sales force. So that's something we've been working on hard over the last few quarters. And we measure our time to build cycle to not only seeing orders up, but on time to build cycle where we might have lost with 10 days coming through to '16 in terms of how long it took clients to make decisions from a timing order was entered until we actually got it billed. Now we've gotten a few of those days back. We're not all the way where we were. The productivity in that unit is not quite back to where it was in its heyday. But we've taken some days out of the cycle, if you will. So we've taken some of the slack out, and we hope we'll keep marching forward the same way here as we go into the second quarter.

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Gary E. Bisbee, RBC Capital Markets, LLC, Research Division - MD of Business Services Equity Research [22]

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Okay. Great. And then, Pete, you said last fall, I think, it was when you were asked about your appetite for M&A, that with the stock trading below private multiples, your stock looked a lot more attractive than anything else. I guess, the stocks are quite a bit since then, I'd argue it's still inexpensively priced. But any updated thoughts on how you think about that? You clearly continue to buy back stock, but your leverage is down. What's on your mind is there?

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Peter T. Dameris, On Assignment, Inc. - CEO and Director [23]

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The way we approach acquisitions are opportunistically, and we got to find a good fit and a good service offering. And we've been a little more active and had more conversations I would tell you as of recent, and it's not because of our stock price, it's because we've been having more breakfasts, lunches and dinners with people, and they have found some things. There is nothing to look at the cup right now. We'll continue to buy our stock because there is a quality revenue stream. There is a quality earning stream, and there is a quality cash flow stream. And as I always say, you shrink the share cap and you grow the earnings, you have earnings surge. So we'll continue to balance our deployment of capital. But if we find -- if we find the right fit, we're -- as we pointed out, I think, we're going to be 2.14 by the end of the second quarter. So we got plenty of gunpowder for just pulling the trigger.

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Gary E. Bisbee, RBC Capital Markets, LLC, Research Division - MD of Business Services Equity Research [24]

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And then just one last quick one for me. With the perm returning, it sounds like the year-over-year growth in margin going forward, how should we think about the puts and takes around gross margins, both within your guidance for Q2, but also just thinking about later this year? Any color?

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Peter T. Dameris, On Assignment, Inc. - CEO and Director [25]

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Well, we've had some compression. And some of that has been mixed, perm versus contracts. Some of it has been larger accounts growing faster than slower accounts. But some of it, Gary, has been, we had some challenges over the Oxford unit, and we -- our margins are down a little bit to flat. And so an uptake as a percentage of revenue of perm is greater than it has been historically, that's going to have a positive impact. But we always guide, and as you know, we're getting towards the end of our 5-year financial goals that we set out in 2014, but we always got into a stable gross margin than if we can expand them, we clearly do. I think we're really focused on regaining some of the operating leverage that we had in -- earlier in the latter half of '15, where we saw a little bit of a compression in our EBITDA margin because of less perm and also some of the compression because of the investments we made at Oxford that didn't payoff. But we think that margins are in the right spot, and there is room for improvement as the things I discussed occur.

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Operator [26]

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Next question comes from the line of Jeff Silber with BMO Capital Markets.

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Jeffrey Marc Silber, BMO Capital Markets Equity Research - MD and Senior Equity Analyst [27]

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Just a follow-up on Gary's question about M&A. If you do go back to the market, are there any specific verticals or specialties that you will be looking to sell?

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Peter T. Dameris, On Assignment, Inc. - CEO and Director [28]

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There is no thing (inaudible). We're going to just continue to stand our existing verticals and enhance our skill selection and the services that we can provide our customers within those verticals. And domestically -- I'll say we'll stay focused domestically as well, Jeff.

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Jeffrey Marc Silber, BMO Capital Markets Equity Research - MD and Senior Equity Analyst [29]

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Okay. And then in turning back to your guidance for the current quarter, does it assume that Oxford returns to growth that we will probably see Oxford down year-over-year again?

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Peter T. Dameris, On Assignment, Inc. - CEO and Director [30]

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Yes. So Ted, you want to do address that? But basically we're not trying to call a bottom on the turn on the revenue growth there, but Ted, why don't you walk them through some of the stuff we're doing and some of the underlying trends that shows strength beyond just the top line stated number.

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Theodore S. Hanson, On Assignment, Inc. - President [31]

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Yes. I think we have 2 things. One, we have -- when we think about Oxford, we are organized into skill discipline. Several of our skill disciplines are showing good year-over-year growth within IT, where we have had the large project in the prior year that now is running off as it gets completed. We're going to have a pretty tough comp, again, not only here in the first and in the second, third. It's about the same extent. That was in a way a pretty steady revenue generator, if you will, in the first, second, third and into the fourth quarter last year. So I think the comp is going to be difficult. We're going to work on our sales strategy, the piece that we're working on with Oxford around better pointing our investment and better allocation of SG&A. We'll see that help us a little bit in the SG&A line as we get into the second half of this year.

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Jeffrey Marc Silber, BMO Capital Markets Equity Research - MD and Senior Equity Analyst [32]

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Okay. That's helpful. And then again just going back to guidance, what should we be modeling for interest expense in the current quarter? Is that going to be any different as the year progresses?

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Edward L. Pierce, On Assignment, Inc. - CFO and EVP [33]

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It's going to be different than what it was in Q1, because we did not, obviously, we had the amendment expense. But, Jeff, as it relates to interest expense, probably may be $6.8 million-or-some.

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Jeffrey Marc Silber, BMO Capital Markets Equity Research - MD and Senior Equity Analyst [34]

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That's great. And then how about capital spending for the year and a possible for the quarter?

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Edward L. Pierce, On Assignment, Inc. - CFO and EVP [35]

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Well, I'll talk about next quarter. We don't really give anything else past the quarter, but it should be pretty much at the level that you saw in Q1, but it's roughly $7 million.

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Operator [36]

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Your next question comes from the line of Edward Caso with Wells Fargo.

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Edward Stephen Caso, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [37]

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Congrats on the numbers. I had a -- with the talk around H-1B sort of the clients starting to look more domestically here, are the U.S. IT professionals starting to ask for greater wage increases? Are you -- I seem to remember, there is a bit of a lag before you can translate that into pricing increases. So could we be seeing some margin pressure in the coming quarters?

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Peter T. Dameris, On Assignment, Inc. - CEO and Director [38]

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Well, 2 parts to that answer. The first is, we're not -- the technical resource is aware of the scarcity, and they're savvy. They know what's going on. They search the Internet. So we have those conversations about what the appropriate pay rate is for particular assignment. I don't think that it is elevated the potential of the level of that conversation because they're saying, "You know what, these lower-paid people from overseas can't do it anymore, so I'm the only game in town, you got to pay me more." That hasn't occurred yet, Ed.

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Edward Stephen Caso, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [39]

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My other question, may be Ted could drill a little bit into what service offerings are working within Oxford and what areas are not, particularly around healthcare?

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Theodore S. Hanson, On Assignment, Inc. - President [40]

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Yes. On the healthcare side, Ed, we are growing. We had some pretty good comps last year that are difficult to deal with right now. And within that unit, in addition to that, our health information management offerings around billers and coders is way off from the heyday of the ICD-10 work. So I think, in healthcare, it's really the sum of those 2 things. In our skill sets around engineering and software/hardware, we're getting good growth. And absent of our big projects within IT, we're actually seeing some growth there. We just had a headwind with the run-off of the large project that we won this time last year.

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Operator [41]

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Our next question comes from the line of Mark Marcon with RW Baird.

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Mark Steven Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [42]

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Great quarter. Wondering if you can talk a little bit more about the impact of the H-1B on this quarter? Because, Peter, you mentioned it's been building for a while. And how you foresee it further accelerating as we look out over the next year or 2 just assuming kind of a constant economic backdrop? Just how much more incrementally do you think we could grow from the increased level of interest?

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Peter T. Dameris, On Assignment, Inc. - CEO and Director [43]

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I mean, Mark, I think the most rationale way to really address the change is, to just say, when CIOs looking at portfolio project they want to complete, they have the privilege of using project consulting through Deloitte or Accenture, outsourcing through HP, Dell Services, offshoring through the Indian firms or staff augmentation through us or another large provider. And you know the strengths and weaknesses of each of those models. And as there is uncertainty about reliability and timeliness of delivery of technical resources, they're opting less to award new work to the offshores using their offshore model. And the model is going, in my opinion, to become less attractive because: One, they're not going to be able to price their work as competitively if they have to pay $100,000 a year for someone versus $60,000 a year. And there is plenty of data on the Internet that shows that the people that are awarded H-1B visas through Apple or Facebook or Google are all well above $100,000 and the average salary of a H-1B visa recipient at one of the offshores is about $70,000. So they're not going to have a -- their cost of services is going to be higher for having to pay more and especially, if the lottery system is eliminated. The other thing is quality. If there is a return by customers that because of the uncertainty about time to fill an approval, some of the quality people overseas that were making $60,000, $70,000 a year won't come to the United States, they'll go to another country. And I don't think that's necessarily bad for our country because as I told you, it's going to open up more visas for the highly skilled people that are making a $100,000. So I think all of that continues to drive adoption of the other deployment model, project consulting, outsourcing, staff augmentation versus offshoring.

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Mark Steven Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [44]

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I appreciate all of that. I was wondering, if we take a look at the growth that you've seen, would you say a half of the growth...

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Peter T. Dameris, On Assignment, Inc. - CEO and Director [45]

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I can't really numerically attach a percentage of what our growth is because, again, it has to do with attractiveness of the model. And the specific mindset of particular CIO, why they want to perform a certain project with contract labor versus offshore labor or project consulting labor versus staff augmentation labor. So I can't really make that direct lineal connection.

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Mark Steven Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [46]

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Okay. And obviously, it's going to continue to be a positive. Can you talk a little bit -- couple of other things? How much was the bill rate increase on the Apex side?

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Peter T. Dameris, On Assignment, Inc. - CEO and Director [47]

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It's in the financial. I don't know if we gave it on a segment basis. But in our supplemental financial information, the bill rate at Apex, it looks like it was up almost $2. First quarter '17 over first quarter '16, if I'm reading the data correctly.

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Mark Steven Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [48]

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Yes, I was just thinking about the Apex System. Just trying to...

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Peter T. Dameris, On Assignment, Inc. - CEO and Director [49]

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We don't -- we just give it by segment.

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Mark Steven Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [50]

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Yes. Okay. And then...

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Peter T. Dameris, On Assignment, Inc. - CEO and Director [51]

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As you know, it's a big percentage of the total segment.

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Mark Steven Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [52]

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Sure. With regards to Creative Circle, did that accelerate?

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Peter T. Dameris, On Assignment, Inc. - CEO and Director [53]

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It continues to be the highest growth rate in the company right now. And they continue to be, as we told you, in the team. So it's a good market and they're doing well. But we don't give specific division of growth rates.

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Mark Steven Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [54]

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Okay. Broadly speaking, would you say that February and March were stronger than January and that things were accelerating as -- on a corporate-wide basis?

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Peter T. Dameris, On Assignment, Inc. - CEO and Director [55]

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Yes.

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Mark Steven Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [56]

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Okay. Great. And then lastly, on the statement of work, how -- can you characterize that a little bit more? Give a little more color in terms of what you're seeing? And what the impact is with -- from a margin perspective?

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Peter T. Dameris, On Assignment, Inc. - CEO and Director [57]

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So do you want us to try to describe the type of work or the revenue side...

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Mark Steven Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [58]

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No. The amount of incremental work that you are getting what you're seeing there? And what you're -- how you're able to go forth?

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Peter T. Dameris, On Assignment, Inc. - CEO and Director [59]

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Let me try to address it this way. It's many hundreds of millions, $400 million, $500 million of revenue for us. We're seeing that SOW as a delivery model, is growing very, very nicely and actually faster than staff augmentation. And Rand and Ted and their management teams have worked very hard. They continue to build infrastructure and expertise so that we can capture more of that business. And that is a big focus of ours that we intend to continue to pursue aggressively.

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Operator [60]

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Next question comes from the line of Tim McHugh with William Blair.

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Timothy John McHugh, William Blair & Company L.L.C., Research Division - Partner and Global Services Analyst [61]

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Just wanted to follow up on -- just ask about the statement of work. Is that tied at all to your comments about the -- to the best you can tell, I guess, the pressure on immigration and debates on using offshore labor? Or is there a different initiative, or kind of factor that's helping you to grow faster there?

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Peter T. Dameris, On Assignment, Inc. - CEO and Director [62]

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Well, I would address it this way, Tim, just being higher level. I think that the SOW deployment model competes more with the project consulting deployment model, development model than it does the offshore model. So I don't think it's the H-1B visa that's driving it as much as CIOs are continuing to trying to find a lower cost model to do work. And SOW would fall somewhere between staff -- pure staff augmentation and project consulting. And so they're just blending their cost structures based on what project they want a certain model to develop or deploy.

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Timothy John McHugh, William Blair & Company L.L.C., Research Division - Partner and Global Services Analyst [63]

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Okay. And the comment on the SG&A, did it come in higher than you thought? Or is it for the quarter? And I guess, what would drive that? Or is it just we're still -- you're still talking about kind of a step-up last year that you have any time to fix?

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Peter T. Dameris, On Assignment, Inc. - CEO and Director [64]

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Are you talking consolidated or by segment?

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Timothy John McHugh, William Blair & Company L.L.C., Research Division - Partner and Global Services Analyst [65]

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I was talking at the consolidated, but -- I mean, if it's different, I'd be happy to hear?

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Edward L. Pierce, On Assignment, Inc. - CFO and EVP [66]

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Yes, Tim, the comment related to SG&A, let me try to frame a bit. But first of all, when you compare with our estimates, our estimates do not include acquisition strategy or immigration expenses, okay? So that's about -- that was $900,000 in the quarter, okay? So you really do a like-on-like comparison with the estimates, you have to consider that. The other thing is that our -- we were -- we've seen in our estimates for revenues in gross profit. So when you consider the additional incentive compensation on the level that we beat or exceeded our estimates, then you consider the SG&A tied on that, then we were pretty much in line with what we had originally estimated.

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Peter T. Dameris, On Assignment, Inc. - CEO and Director [67]

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So the only thing I'd add is, well, which we didn't call out in our prepared remarks. If we had a little bit higher than budgeted expense on some medical plans and workers comp because of a couple of just freak slips and fall and icy weather that we're little bit higher than normal. And those all normalize as we move through the year hopefully.

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Edward L. Pierce, On Assignment, Inc. - CFO and EVP [68]

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But the big driver are the 2 things: the integration and acquisition expenses and then the initial incentive comp were on the higher revenue levels.

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Operator [69]

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And the last question that we have in queue comes from the line of George Tong with Piper Jaffray.

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Keen Fai Tong, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [70]

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I'd like to dig a bit deeper into Oxford. You talked a little bit about this earlier, but can you elaborate on how you plan to align your skill practices? And talk about how you plan to rebuild the sales model in order to bring the segment growth closer to industry levels?

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Peter T. Dameris, On Assignment, Inc. - CEO and Director [71]

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Well, I don't know if we'll give you granular detail, but I want to kind of qualitatively walk them through some of the initiatives that you had going.

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Theodore S. Hanson, On Assignment, Inc. - President [72]

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So George, at its most simple level, Oxford has had a differentiated recruiting-driven model where that skill was pushed into the marketplace based on the ability to get the highest rate in any one particular client without a thought of creating a relationship with that client and setting the stage to do more with them in the future. So I think what we're trying to do at Oxford is stay true to our recruiting-driven model in the sense that we do. We are differentiated in the high-end, hard to find talent that we have in our database, but create a sales model where we can develop relationships with clients that are durable and sustainable for the long term so that we sell more than just one consultant, if you will, into any client. We can sell one which will become 2, 3, 4, 5 and 6. So our issue is not that we don't have enough clients in our portfolio, it's that we don't have deep enough relationships with them that have been sustained over a long period of time so that we can increase our share of their wallet. So -- and really, I think it is most simple. Now there is a lot underlying and all of that in terms of how we realign resources and the tactics we use in order to accomplish that. But it's the most simple level. I think, that's where we're trying to get at.

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Keen Fai Tong, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [73]

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Right. And as it relates to the skilled practice realignment, could you maybe give us some examples of areas that you are deemphasizing and areas where you plan to over-index in order to chase the growth, if you will?

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Theodore S. Hanson, On Assignment, Inc. - President [74]

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I think that -- I wouldn't say we are deemphasizing anything. I think we're very happy with our skill set practices at Oxford. What we're trying to do is to group them so that, that's most logical to sell them into whoever the hiring manager is at a particular company. So instead of running a separate account plan or account focus plan for our healthcare IT group and our health information management group for a best-selling into like hospitals, we should be going at the marketplace together and selling all of our healthcare, technology and HIM professionals, all of our consultants. So in that sense, what we're trying to do is align. That's an example of trying to align those 2 units together so that we can cover more clients, and we can cross-sell both of those into those same clients. The same thing on the Life Sciences side, instead of having it align with maybe some of the more technical or technology-related practices. We want those more aligned with the healthcare side because a lot of those skill sets go into those types of clients. So I think we're not trying to deemphasize anything, we're trying to do more in all our skill practices, but we're trying to set them up so that we're taking advantage of the opportunity to most productively go to the marketplace.

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Keen Fai Tong, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [75]

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Yes. Makes sense. And then secondly, could you talk a little bit about your recruiter outlook for hiring trends? What your cadence for future hiring will be? And what recruiter productivity should look like? And what the implications would then be for margins?

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Theodore S. Hanson, On Assignment, Inc. - President [76]

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Well, I think on that side because we're not giving any revenue growth. At Oxford, right now, our productivity is naturally falling. Well, it returns to normal times. I think it will because the strategy around creating deeper customer relationships and having more consultants on any one customer is automatically going to make our recruiting team more productive. Whether it will get back to and even exceed our prior hires, I certainly think we can get back there. But I think we're still working through that, George.

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Keen Fai Tong, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [77]

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And then any comments -- same question for Apex?

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Theodore S. Hanson, On Assignment, Inc. - President [78]

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Apex right now is as productive as they have ever been. I won't say it's a high because we are always trying to get in and it's better there. But Apex is one of -- 2 of our divisions that have the highest conversion of gross profit to EBITDA. And it's coming both from our sales teams, our recruiting teams and from leveraging corporate infrastructure. So we're getting good productivity across all of that within the Apex business, and we're always looking for that to continue.

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Operator [79]

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And we have no further questions in queue.

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Edward L. Pierce, On Assignment, Inc. - CFO and EVP [80]

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Well, we appreciate your attention and look forward to reporting our second quarter earnings. Thank you very much.

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Operator [81]

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And ladies and gentlemen, this does conclude today's conference. Thank you for your participation and for using AT&T. You may now disconnect.