Peter T. Dameris – President and Chief Executive Officer Edward L. Pierce – Executive Vice President and Chief Financial Officer Randolph C. Blazer – President, Apex Systems Michael McGowan – Chief Operating Officer-On Assignment and President-Oxford Global Resources.

Frank Carl Atkins – SunTrust Robinson Humphrey Sara Rebecca Gubins – Bank of America Merrrill Lynch A.J. Rice – UBS Securities LLC Gary Bisbee – RBC Capital Markets Ato Garrett – Deutsche Bank AG Jeff M. Silber – BMO Capital Markets Tim J. McHugh – William Blair & Co. LLC Mark S. Marcon – Robert W. Baird & Co., Inc. .

Ladies and gentlemen, thank you for standing by and welcome to the On Assignment Q2 2014 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. instructions will be given at that time. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Chief Financial Officer Mr. Edward Pierce. Please go ahead..

Great, thank you. Good afternoon. First, I would like to remind everyone that our presentation contains forward-looking statements, representing our current judgment of what the future holds.

Although we believe these statements are reasonable, they are subject to risk and uncertainties that could cause actual results to differ materially from those statements and we do not assume the obligation to update statements made on this conference call.

We described some of these risk and uncertainties in today’s press release and in our filings with the Securities and Exchange Commission. I would now like to introduce Peter Dameris, our CEO and President, who will provide an overview of our results for the quarter.

Peter?.

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

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

We will then open the call up for questions. Now on to the second quarter results, revenues from continuing operations in the second quarter were $468.6 million, up 8.6% on a pro forma basis and 14.9% on an as reported year-over-year basis.

Second quarter revenue growth was slightly below our estimates, primarily due to lower than expected headcount growth at Oxford, and lower than expected growth, and certain large accounts at Apex.

We expected Oxford to hit an inflection point during Q2, where the number of contract professionals ongoing would exceed the high watermark of 1,875 set in the second quarter of 2013. While Oxford did hit that number, it happened much later in the quarter than we expected.

Income from continuing operations, adjusted EBITDA and conversion of gross profit to adjusted EBITDA were all above our projections. Income from continuing operations was $20.7 million, or $0.38 per diluted share, up from $7.2 million, or $0.13 per diluted share in Q2 of 2013.

Revenues generated outside of the United States were $20.3 million or 4.3% of consolidated revenues in the second quarter, versus $19 million or 4.7% of the second quarter revenues of 2013. Adjusted EBITDA from continuing operations was $54.4 million, or 11.6% of revenues, up from $43.1 million or 10.6% of revenues in the second quarter of 2013.

During the quarter, we continued to execute against our five-year strategic plan that we announced on March 26, 2014 at our Analyst Day and the realignment of divisions has gone well. All markets we reserved remain productive and stable during the quarter, and all of our divisions showed positive momentum exiting the second quarter.

The Apex segment grew 13.5% year-over-year and 7% sequentially. The Oxford segment grew 44 basis points on pro forma basis year-over-year, 15.4% year-over-year on an as reported basis and 7.2% sequentially.

Excluding the results of CyberCoders, the Oxford segment contracted, as expected 2.8% year-over-year, but was up 6% sequentially in the first quarter, from the first quarter. Oxford, as we expected hit a new high – all-time high number of consultants on billing during the quarter.

However, the growth in billable headcount to new highs happened later in the quarter than we had internally estimated. Having said that, we continue to see steady demand in all disciplines and expect consultant counts will continue to increase.

The Physician segment grew 27.2% on an as reported basis year-over-year, but was essentially flat on a pro forma basis. Revenues were up 5.9% sequentially. Overall volume is stable on demand in the commercial sector is improving slightly, while demand in the government sector remains soft.

The Life Sciences Europe segment grew 11.8% year-over-year and while the European economy – economic recovery remains soft, overall demand in our end markets continues to improve.

Exiting the quarter, our permanent placement business, high volume IT, and scientific staffing businesses had the strongest momentum and appear poised to have another strong growth year related to overall market.

As many of you have heard us state, we believe our scientific staffing business is the most directly correlated to GDP growth and our best internal predicting tool of the strength of the broader U.S. economy. Based on demand in that division, exiting the quarter and our actual second quarter results, we believe the broader U.S.

economy is slightly gaining momentum. As for IT, we continue to see stable demand and adoption of staff augmentation as a viable alternative to outsourcing, off-shoring and consulting.

With respect to our strategic plan, we have substantially completed the back office integrations of CyberCoders and Whitaker Medical, have rolled out and had some early wins in our referral program to drive sales of CyberCoders, and have completed the realignment of Lab Support U.S.

to Apex in our health information management and clinical research businesses to Oxford. Our consolidated gross margin was 32.6%, up from 32% on a pro forma basis year-over-year and up from 31.3% in the preceding quarter.

The year-over-year expansion was primarily due to higher mix of revenues from perm placement, which carries a higher gross margin and higher contract margins.

Regarding our operating efficiency, the percentage of gross profit converted into adjusted EBITDA was 35.6% during the quarter compared with 35.5% as reported and 34.5% pro forma in the second quarter 2013. We believe these conversion rates were among the highest in the staffing industry.

Our adjusted EBITDA margin was 11.6% in the quarter compared with 10.6% in the second quarter of 2013.

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

Regarding industry dynamics, during and exiting the second quarter, secular trends continue to permit temporary labor to see greater growth prospects than the full-time labor market.

As previously mentioned, we believe the macroeconomic environment in North America, where we derived 96% of our total revenues has continued to improve since the beginning of the year.

Our operating performance in the second quarter of 2014 and our estimates for the third quarter demonstrate that our business model and areas of focus permit us to grow despite less-than-optimal economic conditions.

As for actions we took to sustain our future positive revenue growth rates, we continue to add the number of recruiters and sales personnel that we employ. Exiting the quarter, demand for our services remains stable in all divisions.

Our weekly assignment revenues, which excludes conversion, billable expenses and direct placement revenues averaged $33.7 million for the last two weeks, up 8.9% over the same period of 2013. Integration, coordination and cash generation related to our acquisitions continue to be at or above our expectations.

Our leverage is now 1.98 times trailing 12-month adjusted EBITDA. Looking forward based on current operating trends, we expect that overall, we will grow above the market for the remainder of the year and that our earnings and adjusted EBITDA for the full year will be within our previously announced full-year estimates.

We expect our revenues for the full-year will be slightly below about 30 basis points below. Our previously announced estimates mainly due to lower growth and top accounts at Apex and slower than expected growth at Oxford, which is being partially offset by stronger performance in our perm and health information management practices.

While Oxford’s growth is below our earlier expectations, it reported strong sequential growth in Q2 and is expected to grow sequentially over the next two quarters.

The lower growth in Apex top accounts is representative of the normal ebb and flows and these accounts and we believe Apex will continue to outperform the market over the remainder of the year. On July 21, 2014, our Board of Directors approved the establishment of a $100 million share repurchase program.

The program permits the company to purchase on the open market from time-to-time and based on market conditions up to $100 million for the company’s common stock. The plan expires August 4th 2016 and will be funded with cash on hand, cash generated from operations, and borrowings under our credit facility.

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

Rand?.

Okay. Thank you, Peter. The Apex business unit, consisting of the Apex and U.S. Lab Support divisions posted solid numbers for Q2. The combination of revenue growth, gross margin improvement, and continued strong conversion rates led to high bottom line contribution.

For Q2, the Apex and Lab Support units grew revenues by a combined 13.5% as Peter mentioned year-over-year with Apex posting 13.5% and Lab Support 14.3% growth.

For the combined businesses, gross profit grew 16.1% with gross margin in the quarter up 63 basis points year-over-year, driven in large part by Apex’s work to increase bill rate/pay rate differentials in our account portfolio, the mix of business supported in the quarter and an increase in the percent of perm placement revenues achieved.

We experienced a shift in our growth across our accounts and across the combined businesses with our top accounts continuing to grow albeit at a slightly lower rate and our retail accounts increasing their growth.

Accounts in six of our seven industry verticals posted year-over-year growth for Q2, only consumer industrial accounts showed no growth on this basis. Government accounts showed slower growth with growth in the single-digit range. Our accounts in the financial service sector continue to grow, but at lower rate than the previous quarter.

Our account in the healthcare, technology and business services verticals continue to show strong growth. Overall, I believe our top accounts growth reflects a pause in our client spending, as Peter mentioned earlier, and is a transition from projects started last year to new projects going forward.

Therefore, while our 2013 comps are high based on our strong performance in Q2 through Q4 in 2013, we see a steady market environment for both Apex’s and Lab Support businesses in Q3 2014, and expect that our revenues and operating performance will continue to grow on a year-over-year and sequential basis.

Lastly, we continue to be very focused on executing the right balance of revenue growth and profitability. This focus again led to higher conversion rates of gross profit into divisional profitability in the quarter. We expect this trend to also continue in Q3.

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

Mike?.

Thanks, Rand. I will start with Oxford, which includes CyberCoders, which we acquired in December 2013. And then comment on Vista and Life Sciences Europe.

Oxford’s revenues for the second quarter of 2014 were up sequentially over quarter one by 7.2% and up 15.4% year-over-year on an as-reported basis, and up 40 basis points on a pro forma year-over-year basis.

Excluding CyberCoders revenue Oxford’s core second quarter revenue was up sequentially by 6% and declined over the comparable period in 2013 primarily due to the project completion of largest client last year.

Gross profit for the second quarter increased 4.2% over the second quarter of 2013 on a pro forma basis, and gross margin for the quarter was 42.5% and 854 basis point increase over the second quarter of 2013 on an as-reported basis, or 852 basis point increase on a pro forma basis.

The increase in gross profit and gross margin was related primarily to the inclusion of CyberCoders, whose revenues are predominantly perm placement fees. However, excluding CyberCoders, Oxford’s core gross margin for the second quarter of 2014 was 34.4%, 35 basis point increase over the second quarter of 2013.

CyberCoders experienced a very strong second quarter. Perm placement revenue for the quarter was $16 million, a record quarter and 18.1% higher than their quarter two 2013 revenue. We are pleased with CyberCoders performance since our acquisition and our optimistic regarding continued growth.

As we commented last quarter, we expect Oxford to reach the inflection point of consultants on assignment in quarter two. And we did indeed do that albeit later in the quarter then we had anticipated. Overall, our revenue and operating results for 2014 have stabilized and shown improvement throughout the year.

Including an increase in our average weekly sales throughout quarter one and quarter two. However, these results were not at the levels that we had originally forecasted in January of this year.

Significant work has been done to regain the momentum of prior years and we have seen positive results in several disciplines and segments and we expect that trend to continue.

Specifically, our healthcare IT business has been lumpy as compared to prior period, our year-over-year growth rate through June for this segment was up 11.8%, but due to the completion of several large projects in the current quarter and with mix and sluggish demand, our expectations for quarter three are more tempered.

Based on input from our clients and several prospects, we do expect some modest improvement later in the third quarter and into the fourth quarter of this year. Furthermore, our ERP business has also been experiencing softer growth, primarily driven by slower growth in new ERP software licenses and upgrades.

However, notwithstanding software demand in our healthcare IT and ERP segments, our other business units have been increasing consultants on, On Assignment every month throughout the year and the same is expected during the second half of 2014. So although, Oxford’s overall growth in revenues were below our expectations.

Important success and progress was made in the expansion of gross margins, integration, development of new skill practices and positioning this segment for higher growth in the future.

Now turning to VISTA Staffing Solutions, revenues for our Physician segment were up 5.9% sequentially over quarter one, but down 34 basis points year-over-year on a pro forma basis, which assumes the acquisition of Whitaker Medical occurred at the beginning of 2013.

While government demand continues to be soft, demand overall, including for our commercial clients is showing improvement, as Peter mentioned earlier.

As we have discussed on previous calls, the overall Physician staffing marketplace continues to experience uneven growth, but the macroeconomics the drive supply and demand in this segment remain very positive.

The Life Sciences Europe consolidated revenue for quarter two was $11.1 million, a sequential decrease of 4.4% over the prior quarter, but as we expected, an 11.8% increase year-over-year.

even though Europe’s economic recovery continues to be sluggish, our Life Sciences Europe performance improved in the first half of the year, as the economic recovery gained momentum in a number of our markets.

Contract assignments improved in Benelux as it continued to benefit from a greater strategic management focus and increase in exposure to a new high growth markets. The sequential decrease of revenue from quarter one to quarter two was the result of several clients converting our temps to permanent positions.

In addition from a discussion with our clients, they suggest the companies expect the economic environment to improve further in the next 12 months, creating opportunities to secure incremental new business. I will now turn the call over to Ed Pierce.

Ed?.

Thanks, Mike. As Peter mentioned earlier, we reported another strong quarter. We exceeded our earnings and adjusted EBITDA estimates despite slightly lower than expected revenues. Revenues for the quarter were $468.6 million, up 8.6% year-over-year on a pro forma basis and up 6.7% sequentially.

Pro forma assumes the acquisitions of CyberCoders and Whitaker occurred at the beginning of 2013. Our revenue growth rate was above market, but slightly below our estimates due to, as mentioned earlier, slower growth from Oxford’s IT businesses and lower than expected growth in top accounts at Apex.

During the quarter, Oxford’s IT unit experienced slower growth in the second half of the quarter, mainly due to sluggish demand for new implementations and follow-on work at its IT Healthcare unit. The lower than expected growth in top accounts at Apex is we believe, primarily related to timing of project completions and commencement of new projects.

For the quarter, Apex our largest segment, which accounts for approximately 64% of our revenues, grew 13.5% year-over-year and 7% sequentially. Apex accounted for approximately 96% of our pro forma revenue growth in the quarter.

Oxford, our second largest segment, which accounts for 27% of revenues, was up 40 basis points year-over-year on a pro forma basis and 7.2% sequentially. These two segments together accounted for approximately 90% of our total revenues.

Direct hire and conversion revenues for the quarter were $22.7 million, or 4.9% of revenues, up from $6.2 million or 1.5% of revenues in Q2 of last year. This increase was due to $16 million revenues from CyberCoders, which we acquired in December of last year.

Gross margin for the quarter was 32.6%, up from 29.7% in Q2 of last year and 32% on a pro forma basis. The year-over-year expansion of gross margin was attributable to the higher mix of perm revenues and the expansion and contract margins in all of our segments.

SG&A expenses for the quarter were $107.9 million, or 23% of revenues, compared with $84.4 million or 20.7% of revenues in Q2 of last year. The year-over-year increase in the expense margin, primarily related to the inclusion of CyberCoders in the current quarter, which has both higher gross and expense margins than our other business units.

SG&A expenses for the quarter also included $2.1 million in acquisition, integration and strategic planning expenses, virtually all of which related to accrued severance for management whose positions were eliminated as a result of our realignment and consolidation initiatives.

Amortization of intangible assets for the quarter was $6.2 million, up from $5.3 million in Q2 of last year. This increase related to amortization of two businesses that we acquired in December of last year. Interest expense was $3.1 million, down from $4.1 million of Q2 last year.

This increase was primarily due to lower interest rates as a result of our debt refiancings. Our leverage ratio, which is total debt to trailing 12 months, adjusted EBITDA was 1.98 to 1 at quarter end. Our effective income tax rate for the quarter was 41.8%, which was slightly above the effective tax rate for 2013 of 41.6%.

Income from continuing operations was $20.7 million or $0.38 per diluted share, compared with $8.7 billion, or $0.16 per diluted share for Q2 of last year on a pro forma basis. Our income from continuing operations included $1.3 million after-tax in acquisition, integration and strategic planning expenses.

These expenses were not included in our financial estimates, and if you exclude these expenses, income from continuing operations was $22 billion, or $0.40 per diluted share. Adjusted EBITDA for the quarter was $54.4 million, up from $43.1 million in Q2 of last year.

Cash flows from operating activities were $29.3 million, up from $26.8 million in Q2 of last year. Now turning to our financial estimates for Q3 2014, we estimate revenues of $479 million for $483 million, gross margin of 32.4% and 32.6%.

Income from continuing operations of $22.1 million to $23 million, income per diluted share of $0.40 to $.41, adjusted EBITDA of $55.5 million to $57 million, adjusted income from continuing operations of $30.7 million to $31.6 million and adjusted income per diluted share of $0.55 to $.0.57.

These estimates do not include any acquisition, integration or strategic planning expenses.

For the full year, as Peter has previously mentioned, we expect earnings and adjusted EBITDA to be within our previously announced financial estimates, but we do expect revenues will be below the low end of those estimates by approximately 30 basis points and below the midpoint by approximately 1.1%.

I’ll now turn it back to Peter for some closing comments.

Peter?.

Thank you, Ed. We believe that we continue to be well positioned to take advantage of historical, secular and cyclical growth for the staffing industry over the next five years. While the entire On Assignment team is very proud of our performance, we remain focused on continuing to grow our revenue profitably.

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?.

(Operator Instructions) And our first question comes from the line of Tobey Sommer with SunTrust. Please go ahead..

Hi. This is Frank in for Toby. I wanted to ask the Oxford segment. You indicated that gross margin improved year-over-year, even excluding the CyberCoders.

I wanted to see what was driving that, was it mix shift or bill pay spread or what other things might be driving that gross margin improvement there?.

Frank, it’s both. it’s mix shift and we have been successful on increasing the bill pay spread a little bit..

Okay. Great.

And then on Physician, can you talk a little bit about the pricing environment and what you see going forward there for the remainder of the year?.

Still competitive. still kind of lumpy. commercial is definitely better than servicing state and federal government agencies. so I would say really no kind of dramatic improvement or change in the pricing or demand environment..

Okay.

And then finally, as you look out concerning both Apex and Oxford at the supply of candidates, have there been any significant changes, in your view, of what’s out there in terms of continuing the supply?.

I think that specifically in IT, we operate in a supply constrained environment and the staffing firm that excels in recruitment, i.e. fulfillment grows faster than that that focuses on sales. It’s still a productive market. We can still find people.

and I wouldn’t say, at least for our company, I wouldn’t say that the industry growth rates are being at this point impeded by just an incredibly overly tight labor market where we can’t find people quick enough..

All right, great. Thank you very much..

And next, we’ll go to line of Sara Gubins with Bank of America. Your line is open..

Hi, thank you.

For Apex, why do you think the large clients are pausing their spending? Do you see this as a function of their IT budgets or something else? And I’m wondering how do you know that this is just a pause and not some sort of a mixed shift between types of staff augmentation versus off-shoring versus other uses of IT? And then last, following up on that, do you see the 10% growth rate for the third quarter as the new growth rate, or would you expect that growth to ramp back up as the projects kick in?.

Yes. So I’ll go first and then turn it over to Rand. But Sara, we really do believe this is just a natural ebb and flow, and specific circumstances that can occur within a customer. Some had been aggressive and they are taking a pause before they start another major project.

I do not see this is a step back in the adoption of staff augmentation versus off-shoring, or consulting. I do think enterprise spend in IT has been somewhat muted over the last quarter and a half, two quarters, versus previous spend. And I don’t think this is the new normal.

I just think, I just believe it’s an ebb and flow, I do not believe we’ve lost any market share as demonstrated by our above market growth rates. And I do not believe our growth rates are reflective of an inability to find resources, as I think a couple of other firms have mentioned.

I really think it has to do with enterprise spend, some lumpiness in healthcare IT.

Rand, would you articulate it further?.

I think everything you said, Peter was right on, the – Sara, if you look at our growth for Apex in Qs 2, 3 and 4 of last year and even the first quarter of this year, it was substantive and very high-level growth, which are projects that were projected year – nine months to year ago.

It’s natural those projects will rotate and evolve and curtail at some point, and then new projects will get started. So I do believe as Peter said, it’s an ebb and flow, and you just look at the history.

In terms of shifting spend between staffing and outsourcing, and perm placement or organic staff, I think we can look at the pipeline of our business and get a sense that that’s not a shift, that’s occurring. as Peter said, just the ebb and flow of our business and we don’t see that to be the new number, a normal number.

It’s just a number at this point..

Okay, great. And then separately, you mentioned ERP work was experiencing soft growth.

I’m guessing that that is at least in part due to shift more towards cloud based implementation? So, first, do you agree with that? And then, second, how big is ERP for you? And do you need to think about shifting those resources into other areas for longer-term growth?.

Yes. So let me go first, and then I’ll turn it over to Mike and Rand, if you have any comments, please add. But look, on the ERP has been the dominant enterprise planning tool and it will continue and people have millions of dollars invested in it.

I think license sales have been a little bit slower attributable to that comment I made about enterprise spend. We’re constantly making sure that we have the right blend of skills.

And Sara, if ERP, if this is the new normal for ERP, which I don’t think we are prepared to say that, then we’ll have to start moving into newer practices, but very much different than that company like Accenture or a Cognizant.

We don’t have 10,000 salaried employees that we got to worry about reselling because if we don’t put them on billing they are sitting on a bench and it destroys our productivity.

So the issue is, as you know, we are constantly looking for the newer practices, whether it's cloud-based, social media, data warehousing, business analytics, cyber security. And if there is an atrophy or slowdown in one of our legacy core competencies, then those newer practices have to grow faster.

And specifically as it relates to Oxford, that has not necessarily completely occurred yet and that’s why there was good sequential growth, but muted year-over-year growth. Mike, you want to add anything..

No. I think, right on Peter. I think in terms of percentages, 15% or so of our total business on an annual basis. And as Peter said, we are constantly looking for new skills and moving in different directions. So at the appropriate time if it comes, we would certainly reallocate those resources to other skill areas..

Thank you..

Rand, do you want to add anything..

No. I mean I think for our Apex side, ERP is a very small percentage of our business; application development is much larger and growing. So I don’t think we ever leveraging ERP. As Peter said, it will ebb and flow and will be there when it comes back. .

Thank you. Next we will go to A.J. Rice with UBS. Your line is open..

Thanks. Hi, everybody. A couple questions, if I might. First of all, obviously you’ve been going through some consolidation and realignment of the businesses. When you look at some of the moderation in growth trajectory that you saw in Oxford and Apex, you are mainly pointing to external factors.

Do you think the realignment has had any impact short-term on the tone of business?.

Very clear question A.J. I can tell you absolutely that the biggest piece of business that we realigned, the U.S. Lab Support business, it did not have any impact. In fact, the growth rate accelerated. I think it was 40.5% growth year-over-year. The only place where we’ve seen a little bit of a ding moving businesses around was our U.S.

clinical research business, which is about a $20 million division and we had a couple of terminations and didn’t fill those spots rapidly. And there has been a decline in that unit’s year-over-year revenue. but as I told you in the scheme of $400.7 billion in revenue, $20 million unit got dinged up 10%, 15%, 20%.

So the answer is fortunately no, it hasn’t been because of the realignment that we’ve seen this kind of moderation and growth, that moderation and growth was for the reasons that we gave..

And this is small, but the $2.1 million in severance and other sort of those types of costs, is that done, or is there some of that that will carry in the back half of the year as well?.

I think it has been fully accrued in the quarter. So I think that there might be a couple other things, as we do some further realignment, but I don’t think it’s very sizable..

Okay. And if I could maybe ask you a little bit about CyberCoders and the permanent placement business.

The year-to-year growth you are seeing, how would you characterize that? Is it underlying market growth? Are you doing some things to grab share there? What are the prospects for that continuing?.

Well, a couple of things, and then I’ll let Mike add. First, as you know, I think the perm placement, marketplace has gotten better. I think that the people, Heidrick & Struggles, Korn Ferry reported good results, Robert Half showed an acceleration of growth.

And CyberCoders was growing double digits before we acquired, and it’s accelerated a little bit. We’ve had some, as we said in our prepared remarks, we’ve had some early modest wins on sharing of orders between the divisions into CyberCoders. But most of this has been based on the hard work and the aggressive hiring that that units done.

Mike, I mean what else would you add?.

Yes.

It really, as we’ve changed, obviously we’ve made some changes in terms of management that which we’ve talked about in the past, we’ve changed the internal processes that I think have sped up the response time, I think, to our clients and probably the biggest impact is we’ve added significant number of recruiters to that organization over the last four months that have added folks.

So you also probably heard me talk about the Centerpoint perm staffing division in Oxford. We actually moved all those folks over to the CyberCoders organization. So they’re starting to be productive there as well..

So if you have gone from 1.5% being perm placement a year ago to now 4.9% this year, if you look out a year or so, do you think it will be materially higher as a percent of the business?.

No, because you’re spreading it on such a big base of revenue, I mean we’d be delighted if they could get up to six, we never want to be 10 or 20, but it incrementally impactful, it’s good business and we think that it will continue to move north because it is growing faster than the contract revenue business right now..

Okay. And then, just last, I am going to ask you about the buyback and that's it. What is your thoughts about the buyback? Is it use of free cash flow to do that? Are you thinking about – you mentioned how your leverage has come down.

Are you thinking about taking on some leverage? Give us some perspective on how you might use that?.

Yes, so you’ll recall A.J.

that we publicly said that under two and a half time leverage, we feel like our cap structure is not optimized, our cash cost of debt is very cheep right now, and we are generating a lot of cash I think we are going to generate somewhere between $80 million and $85 million of cash for the full-year and you have to be patience and disciplined if you are going to acquire things.

We’d love to continue to acquire businesses. We are having a lot of conversations, but it’s just not happening as quickly as we are generating cash and this is probably the best way to return capital to our shareholders, it’s accretive. And we’ve got room to expand our leverage ratio.

So we’ll probably do fund that acquisition of our shares through borrowing on our credit facility..

Okay. All right. Thanks a lot..

And next we’ll go to line of Gary Bisbee with RBC Capital. Your line is open..

Hi, guys, good afternoon. I guess you talk about the normal ebb and flow within Apex. Can you help me understand how long could that last? It seems like you must have seen from several customers, not just one or two, given all the commentary.

And also, it's curious to me that you gave such specific commentary related to the full-year impact of the prior guidance, if ebb and flow is just a few projects coming off and you hope to get them back out the next quarter?.

Rand, you go first and then I’ll follow-up..

Well, I think that first of all the comment on the forecast was based on past trends this is what we see going forward. In terms of the ebb and flow, the ebb and flow does just that. It ebbs and flows depending on when companies approve budgets and start new projects.

Our performance in last four quarters were still strong, it was natural, we’re going to see some attrition from those projects, when they get started again, it could be weeks, it could be a month, could be couple of months.

If you look at our performance over a period of years you’ll see occasionally there is a quarter here and there that doesn’t look like in the normal range of others and then all of a sudden it bumps up.

So it’s hard for us to predict what the IT spend will be, but IT spend obviously the function of company earnings and other needs and those are all positive indicators, right now in the economy..

Gary I would tell you as you entered the second half of the year. We know how many people we have on billing and we are not assuming that they are going to be any sort of early terminations or freezings. In the fourth quarter there is always rushed to either freeze or flash budgets, because you don’t want to lose it if you don’t use it.

And that is the nature of IT spending cycles. And I don’t think we are saying anything that is much different than you maybe hearing from other IT service business, albeit they may not be in staff augmentation.

They might be in outsourcing, or project consulting, but it’s a stable market, enterprise spend is okay and good, ERP spend is a little bit flatter than normal.

And we have some customers that for internal reasons, maybe taking a pause, But overall we are continuing to take market share that the staffing – IT staffing industry is projected to grow 7%, 8% for 2014 and we’re growing faster than that in our IT units on a consolidated basis.

And we’ve outlined what has been the inhibitor to growth at the Oxford group..

Okay. And then just, are there any – is there any commentary you can provide about what your sales people are hearing? I think we have all seen things like – and I'm sure this is more company specific, but Microsoft announcing the big upcoming layoff.

They specifically said they were going to reduce the number of contracts and temp workers within that.

Do you think that kind of thing is part of it? Or are you hearing pretty consistently from sales people that it's just this project that's come off and you're waiting for new ones to materialize?.

Yes, I mean that’s always a risk. We try to manage the quality of our revenue versus the quantity. We do work for Microsoft, but that’s not. If that was what the situation was we would tell you. That’s not what the situation is, it just has to do with how certain companies are spending.

I mean the Microsoft stuff is mostly related to the Nokia acquisition. We had – I’m not going to give you the name of the bank, but we had a bank that literally announced several years ago about what they were going to do with headcount and cost, and they would hedge that constructively and appropriately in hitting those targets and they did.

And they put kind of a freeze on new hiring and guess what that lasted for a short period of time and new projects are being released, and hiring is picking up in that particular account, just nothing straight up, nothing straight down.

It's a little bit jagged and when you are talking about IT spend and what we’re telling you is what's caused the change and the percentage of revenue growth, but we still see above market revenue growth.

And as Rand said, at times we choose to focus on profitability versus share revenue growth, because pushing on the revenue it means we’re going to compress the margin and in those periods of time that don't last particularly long, it’s better to protect the margin and focus on conversion of GPD EBITDA than it is to just try to get an extra point or two revenue growth..

No. That makes sense to me. I guess that leads to the last question, which is just the positive one, which was the margins were very strong, both gross margins and operating margins and EBITDA, I guess.

It sounds like a lot of that is just mix shift within the business because CyberCoders is doing great and some of the other business slowed a little bit. But we have seen some early indications, I think, maybe of some professional wage inflation picking up a touch.

Are you seeing that? Is there any – are you optimistic at all about potential for bill pay spreads to improve over the next year or two, or is it really more mix shift that's a big driver today? Thank you..

Well, look, we try to be as clear as possible. I don’t want the hard work of each of the divisions to get lost under the comment that a lot of the expansion was attributable to greater percentage of perm placement.

In our prepared remarks, as well as included in the supplemental financial information to our press release, you’ll see that all of the divisions expanded their contract gross margin. So it was a combination of both. So we are seeing a productive pricing environment.

We are seeing a little bit of wage inflation and as you know, we try to be respectable to the customer as well as to the talent and manage that go phase spread and we report that on a consolidate basis to you in the financial supplemental information..

Okay. Fair enough. Thanks..

And next we’ll go to line of Ato Garrett with Deutsche Bank. Please go ahead..

First, looking at the pause in client projects at Apex, how high do you think the growth rates could be once the clients get back, ramped up to speed?.

Well. I’m going to make kind of a cavalier comment, Ato.

I don't mean it – I mean, if you could tell us what enterprise spend is going to be and what banks are going to start new major projects I could speculate, what I could tell you is, we don’t see an enormous deterioration in the marketplace, nor do we see an enormous acceleration, because there is the sudden urge, or surge to engage in adoption of some new technology.

I mean Rand, you are closer to the larger accounts what are you hearing..

Listen, I think we said all along, that we have outperformed the market by 2x. And so I think we’ll continue to do that and we did it in Q2, we’ll do it again, in Q3 and Q4. And we don’t – as you said Peter, it’s hard to say here is what the IT spend will be earnings in Q1 by big clients were down a little bit.

in Q2, they’re up, maybe that portends they’ll start spending more in the IT world. We’ll see how that all works out; it typically is the way to close. But I know we’ll outperform in the marketplace..

Okay, great. And going back to your comments on the gross margins, I know you covered some of the factors that contributed to the improvements there.

Is there any reason that shouldn’t continue in the second half of 2014 or even into 2015?.

Well, this is the consistent comment. This is not a new comment for the quarter. When we can get expansion of margins, we will. But we’re in a business where sometimes margins can compress and we typically don’t budget for the expansion.

We kind of budget and forecast kind of stable margins based on what the blend of business is at the time we give guidance..

Okay, great..

We do think there is more room for expansion of our EBITDA margin and I think our expansion in year-over-year is reflective of what we think we can do and why we gave in our five-year aspirational goals the statement that we think we can expand our EBITDA margins 100 basis points to 250 basis points over the next five years..

Okay, great.

And then looking at your comments regarding your expected performance relative to full year guidance, what do you see in the fourth quarter that might contribute to you guys making your comments there, or is that all attributed to your second quarter performance and third quarter guidance?.

Well, we just said, as we told you, when we gave the full year guidance in February, Ato, we expected faster growth in the second half of the year specifically for Oxford. Although Oxford grew 7.2% sequentially, second over first. We expected faster growth rate for the third and fourth quarters. So that’s point one.

Point two is Apex is achieving, or slightly exceeding their budgets, but we’re not seeing kind of that acceleration based on major new projects being awarded, because of the ebb and flow and a pause in a couple of accounts spending. but that’s what’s driving where we think we’re going to be.

we were just – we were at the low end of our guidance by $400,000 in the second quarter and the guidance that we gave for the third quarter in price that we have to have a bigger sequential growth fourth over third. and that can happen, but typically that happens when you have a more robust spending environment for IT and the GDP of the U.S.

economy is better and you got fewer billable days in the fourth than you do the third. So that added – I’m not trying to tease, but could we still hit the up flow year guidance? Yes, if we grew sequentially, fourth over third, and that could very well happen, but I just don’t think based on what we’re seeing, it would be prudent to make that bad.

So that’s why we said we think that the revenues are going to be a little bit softer than what we expected in 2014 when we set the full year guidance..

Great. Thank you very much..

And next, we’ll go to the line Jeff Silber with BMO Capital Markets. Please go ahead..

Thanks so much. Just a couple quick numbers questions. I know it’s late. You mentioned the weakness in large accounts at Apex.

Roughly, what percentage of your business is that?.

Rand, you speak it up, but Jeff, I would not use the word weakness, because we didn’t lose market share within those accounts.

they just grew slower, I mean it’s just a – it’s a temporary situation, but anyway Rand what is that, it’s like 17% of our total business?.

Yes, a little in excess of 17% of our business..

Of the Apex unit, or the total business as a whole?.

Of the Apex unit..

Got it.

And then in terms of your exposure to healthcare IT, roughly what percentage of the business is that?.

Are you asking Apex?.

I think that you mentioned that when you were talking about Oxford..

We will do it – why don’t we let Rand speak to Apex and Mike will speak to Oxford..

Just rough numbers is fine..

Yes. so Apex, our healthcare unit is – I’m looking at the number here is about 19% of our business..

Let me make one clarification on that Jeff, I don’t want you to think that 19% derived from doing epic concern or implementations. Apex does a lot of business with companies like Serner – excuse me, Kaiser Permanente and other hospital systems helping them with their infrastructure and other applications besides EMR.

So healthcare is an industry vertical. and within that industry vertical, EMR implementations is an important product.

do you follow me?.

Yes, I got it..

Now, when Mike gives you his number, his EMR number is a bigger percentage of his healthcare industry vertical spend..

Correct..

So for our piece, Jeff, it’s a little less than 20% of Oxford's total business. Core business not including the CyberCoders piece..

Got it, okay great.

And then just shifting gears to the share buyback when can you be back in the market after reporting earnings in order to buyback that stock?.

Two days..

Two days. Fantastic. Okay thanks so much..

And we do have a question from the line of Tim McHugh with William Blair. Your line is open..

Hi yes, thanks, Tim McHugh.

I know you said this, but I just give us comfort around how you have conviction that you are sure you are not losing any share, I guess, with – and that’s what’s impacting the growth for Apex and Oxford here?.

Ran you go first and then I'll follow up? I think,.

Well, SIA, as you know, Tim, is the industry analyst. And they published numbers that they think IT spending around staffing will be somewhere in 7% to 8% growth number. Now they do that on a go-forward basis and then they just.

After they leave what really happens, I guess is just say second quarter was may be spending 6% or 7% rate, having said that we look at our comps, we look at Robert Half technology. We will watch the other reports from other firms and you can see that they had a soft in manpower negative numbers.

So we can look at the comps and we can kind of see what our competitors are doing .We can also get a sense after the fact what SIA is seeing happened in the quarter. But whatever that number is, it’s probably around 6% or 7% number. And for us our IT units combined grew at a healthy 13%, 13.5%, 14%..

Okay well I guess maybe in the mere rephrase to just I guess I know have been looking obviously your numbers are better than those I guess just – I guess any sense of the slightly slower growth not knowing you are still growing faster and gaining shares I guess on an absolute basis.

Any sign that slightly slower growth is reflective of a changing competitive trends are competitive behavior. I guess what are you. Most are what you’re hearing from the ground up from your people in that regard. .

Right so our sales people are in our major accounts and they knew who else are in the major accounts. And they are not telling us that we did $30million with XYZ and our competitor did $10million and now it’s flat where we’re doing 20% and they are doing 20%.

Now so I can tell you that the flip side of the story is for instance we have a major private competitor that is more deep with penetration in the Microsoft and we try to more deeply penetrate Microsoft and we did pick up market share. We held what we had, but we didn’t gain on that competitor.

The flip side to that is anecdotally, we’re being told that our – most of our competitors that we share accounts with, or not gaining ground on us in those accounts and becoming a more dominant player. It’s just an absolute – the spend hasn’t shifted amongst competitors. The spend just has been more muted..

Okay, great. And can you just – on Apex, I know you said ebb and flow. But consumer industrial, is there anything about the type of customers or something macro happening to, I guess – I know that’s a big broad group of types of companies.

But what are you – anything you’re seeing, I guess, in terms of, I don’t know retailers versus someone else or something like that?.

Rand?.

Yes. So Peter or Tim, in that industry sector, we have combination of portfolio of accounts, say, in the airline industry. those accounts have been a little slower on the take recently, although just this past week, they’re reported their earnings. So we expect to see some upturn in our spend with the airlines.

The biggest block within our consumer industrial are energy companies. And energy companies definitely flow up and down, up and down in terms of their spend. So they are just in a pattern right now. The third group, retailers, which are also not as steady as you’d want them to be.

but then your big industrials like GE and others that get to be more steady and they provide a more stable base. But what we had in all those factors is a combination of energy was down, retail was down just a little bit and the airlines were certainly doing it, okay..

Okay, that’s helpful. Thank you..

We do have a question from the line Mark Marcon with Robert W. Baird. Your line is open..

Good afternoon. You saw really good growth in terms of lab support.

Can you talk a little bit about, what’s embedded in terms of your expectations for the overall Apex group from lab support?.

I think it’s likely faster growth than Apex, Mark but because lab support is 10% Apex’s consolidated revenue, so to speak, it’s going to take a lot of over performance to dramatically change the consolidated SEC segment reported number.

I think that we – I think Rand said that last quarter 14.5% and Apex grew 13.5% and combined with a 13.8% or 13.5% growth rate. So you can see, lab would have to really over index to move the needle a lot.

And so, Apex had a good high growth rate slower than previous period, but still above the market and it was on its own hard work not because last quarter was so much faster..

Understood. Yes. I was just trying to get a sense for what you were anticipating, and it sounds like you would expect that the growth rate would continue in terms of Lab Support relative to what they've just experienced.

Is that correct?.

Yes. That’s what we are continuing to see..

Okay. And then with regards to CyberCoders, obviously, really strong growth there.

What is the assumption that they will continue to track along the same pace, or potentially accelerate?.

As we talked earlier, Mark, a lot of it is contingent upon, obviously, the economy, which certainly looks good, but also the number of recruiters that we have. And we've been continuing to add recruiters. So we expect basically that they can continue to grow. So I don't have the percentages, Mark, committed to memory.

But what I can tell you is our internal projections assume that the third quarter revenues will be higher than the second quarter of 2014 revenues. So we’ll continue to see growth in the business..

Yes. I would anticipate that, as well. Just wondering whether it was going to accelerate or not. Just going back to Apex. One question, Rand.

You mentioned that ERP is a small percentage, but can you quantify that any further?.

Peter, okay. I’m pulling out my date. I can quantify, but it’s just smaller percent in terms of, if you look at our business by industry sort of implied bread down of that. If you look at our business by the skills we provide ERP is a small single-digit percent of the skill mix that we provide to our client base.

Now general apps work, Java.net and other apps is a much larger piece. But pure ERP around Oracle, SAP, other software couple of percent..

Okay, great. That's wonderful. And then, finally….

Mark, this is – Mark, you got to remember that on the ERP stuff a lot of that stuff is hard to find, more critical skills. That’s why ERP percentage would be higher in the Oxford side versus the Apex side..

Got it. And then with regards to – part of your five-year strategic plan is further acquisitions.

How are you feeling about that, Peter, at this point, given that we're still early in the integration phase in terms of the reorg?.

But, I think that the team has done some very solid work in getting some of these balls that we threw up in the air down. The realignment it’s going pretty well as we mentioned previously, some of the lift and shift that we refer to it and some of the back office support processing is going methodically.

So if we found the right cultural corporate business model company to buy, we feel like we could do it, our cap, our leverage is down even with borrowing a little bit to do a share repurchase, we are working hard to developing relationships and awareness with people, but we are just not going to buy something for the sake of buying it and we just haven’t found the right thing yet..

Great. Appreciate the color. Thank you..

And next we’ll go to the line of Randy Reece with Avondale Partners. Please go ahead..

Good afternoon.

Is there a range for staff in gross margin or maybe some assumption for permanent placement that are embedded in your third quarter guidance?.

Randy, I think our full-year guidance – well let me try to answer this way and then you correct me if I’m wrong. In our five-year guidance, we said kind of stable gross margins around 32% fairly reported a higher number than that, but I’m struggling because I don’t know if we give that breakout.

But I don’t think we are expecting a disproportionate contribution from perm that’s embedded in the forward gross margin guidance..

Yes, that correct..

So it’s kind of steady state, somewhere banging around 4.5% to 5.5% of total revenue coming from perm..

And so, if perm happened to be a significantly higher percentage of your mix, it's very likely the SG&A would be higher than you expected because of the incremental cost.

Is that correct?.

That would be a fair assumption on commissions, but our gross margin would be substantially higher..

Yes. All right. Thank you very much..

And the impact on EBITDA is higher than the impact on gross margin..

At this time gentlemen there are no further questions. Please continue..

Thank you. Well, we appreciate your attention and look forward to speaking with you again when we report our third quarter earnings. Thanks everyone for your attention today..

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