Edward L. Pierce - Chief Financial Officer & Executive Vice President Peter T. Dameris - President, Chief Executive Officer & Director Randolph C. Blazer - President, Apex Systems, Inc., On Assignment, Inc. Michael J. McGowan - Chief Operating Officer, President, Oxford Global Resources Theodore S.

Hanson - CFO & President-Lab Support Division, Apex Systems, Inc..

Kevin McVeigh - Macquarie Capital (USA), Inc. Edward S. Caso - Wells Fargo Securities LLC Timothy McHugh - William Blair & Co. LLC Ato Garrett - Deutsche Bank Securities, Inc. Sara Rebecca Gubins - BofA Merrill Lynch George K. F.

Tong - Piper Jaffray & Co (Broker) Henry Chien - BMO Capital Markets (United States) Randle Glenn Reece - Avondale Partners LLC Gary E. Bisbee - RBC Capital Markets LLC Tobey Sommer - SunTrust Robinson Humphrey, Inc. Mark S. Marcon - Robert W. Baird & Co., Inc. (Broker).

Ladies and gentlemen, thank you for standing by, and welcome to the On Assignment Third Quarter 2015 Earnings Call. At this time, all lines are in a listen-only mode. Later there will be an opportunity for your questions and instructions will be given at that time. And as a reminder, this conference is being recorded.

I'll now turn the conference over to Ed Pierce, Chief Financial Officer. Please go ahead, sir..

Thank you. Good afternoon and thank you for your time today. Before we get started, I'd like to remind everyone that our presentation contains forward-looking statements representing our current judgment of what the future holds.

Although we believe these statements are reasonable, they are subject to risk and uncertainties and our actual results could differ materially from those statements. Some of the 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.

Please note that on this call we'll be making references to pro forma and constant currency information. Pro forma data assume the businesses we acquired in the second quarter of 2015 were purchased at the beginning of 2014. Constant currency data were calculated using the foreign exchange rates in effect during the third quarter of 2014.

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. I'd like to welcome everyone to the On Assignment 2015 third 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, a discussion of our third quarter results, and our estimates for the fourth quarter of 2015.

We will then open the call up to questions. Now, onto the quarter. Revenues in the third quarter were $572.1 million, up 29.3% year-over-year, 30.3% on a constant currency basis. Revenues, excluding the contribution of $75.7 million from acquisitions, were up 12.2% to $496.4 million and up 13.1% to $500.3 million on a constant currency basis.

Revenues generated outside the United States were $25.4 million or 4.4% of consolidated revenues in the third quarter versus $20.8 million or 4.7% in the third quarter of 2014.

For the third quarter, adjusted income from continuing operations, adjusted EBITDA, and conversion of gross profit to adjusted EBITDA results were above the high end of the guidance range we provided in the second quarter earnings press release.

We are particularly pleased with our higher revenue growth rates, which reflect, among other things, the contributions from our hiring surge of sales and recruiting consultants that began in the fourth quarter of 2014.

Adjusted EBITDA was $74.9 million, or 13.1% of revenues, up from $52.9 million or 12% of revenues in the third quarter of 2014 on an as reported basis. The year-over-year improvement in adjusted EBITDA includes higher incentive compensation expense compared to the year-ago period.

All divisions contributed to our strong third quarter performance with Apex, Creative, Oxford, and CyberCoders accelerating throughout the year. Revenues in our local mid-market accounts grew double-digits with our larger account customer base growing at a slower rate.

After several quarters of declining growth rates in 2014, revenue growth rates are expanding again. We believe based on current performance that this growth trend will continue.

Our IT business continues to grow above published industry growth rates and we continue to see positive demand from our customers and a continuing adoption of staff augmentation as a viable alternative to outsourcing, offshoring, and consulting.

In addition, we continue to see signs that the ongoing debate regarding the on-demand workforce or gig economy is accelerating the usage of contract labor. Rationalization of human capital by using the staffing industry services is the only way to truly avoid the risk of misclassification of employees as independent contractors.

Our customers have and are realizing this and that is why we believe that secular growth opportunities for the entire professional staffing industry are so attractive. Exiting the quarter, we feel we are well-positioned to continue to accelerate our revenue growth.

Integration, coordination and cash generation related to our acquisitions continues to be at or above our expectations. Since the closing of the Creative Circle acquisition, we have repaid $71 million of our debt.

Our current leverage ratio is 3.21 times trailing 12-month adjusted EBITDA and we expect by the year-end that the leverage ratio would be at or below 3 times. During the quarter, we saw year-over-year growth in our U.S. divisions.

Our weekly assignment revenues, which excludes conversion, billable expenses, and direct placement revenues, averaged $42.4 million for the last two weeks, up 36% over the same period in 2014. Excluding the contribution from Creative Circle, revenues were up 17.8% over the same period in 2014.

We are raising our revenue estimate by $15 million to $20 million for the fourth quarter to $563 million to $568 million. We continue to see strong demand from the end markets we serve and we are benefiting from the improved productivity of the additional head count we added during our hiring surge in the fourth quarter of 2014.

The productivity levels for these individuals are in line with our expectations and there are approximately 50% of a tenured staffing consultant. Due to the strength of the end markets and the success of our hiring surge in 2014, we have decided to add an additional 100 staffing consultants and have done so since the end of the second quarter.

The additional investment in head count was not included in our previously announced estimates for the second half of 2015. While spending at some of our larger financial services and government customers continues to ebb and flow, the actions we have taken to accelerate our revenue growth rate in a substantial fashion has taken hold.

We believe that future productivity gains from our hiring surge combined with strong end market demand and the recently added staffing consultants will position us to capture the current market opportunities and further improve our growth in 2016. I'll now turn the call over to Rand Blazer, President of Apex, who will review his operation..

first, double-digit Q3 revenue growth on a year-over-year basis in our accounts in six of the seven industry verticals we service. Only the government industry set of accounts didn't grow on a year-over-year basis, but did achieve sequential growth from Q2 to Q3.

Second, Apex local branch midmarket business momentum continued in this quarter, with increasing double-digit revenue growth rates again in Q3. Third, sales force productivity grew in the quarter with the surge hires now firmly in their assigned markets and producing sales at higher levels.

Fourth, growth in our top accounts showed revenue acceleration in the quarter, although a number of top accounts in the financial services, oil and gas, and government industry verticals continue to lag behind in revenue growth on a year-over-year basis.

Overall, the Apex Segment had a solid quarter with quarterly revenue growth accelerating on a year-over-year basis, stable gross margins and conversion of gross profit to divisional EBITDA remaining solid. With that, I'll turn it over to Mike..

Thanks, Rand..

The Oxford Segment, yeah..

12.2% for Oxford Core, 16.8% for CyberCoders, which included 19.6% growth in its perm revenues, and 26.1% for Life Sciences Europe. Oxford Core has realized year-over-year and sequential growth throughout 2015 in both of its operating divisions and across the majority of our skill disciplines.

This improvement was driven by growth in our key accounts, continued sharp focus on assigning consultants within our targeted skilled disciplines, increased demand for EMR implementations, upgrades and optimization projects, and ongoing demand for coating and consulting services.

CyberCoders perm revenue growth has been driven by increases in sales staff and newly implemented training programs for new and experienced staff. CyberCoders has continued to invest in new technology to more efficiently identify and match relevant candidates to our open job orders.

Our gross margin for the segment was 41.5%, which was in line with our estimates and the same is the gross margin for the preceding quarter. Based on our recent production activity, our expectation is for continued growth throughout the fourth quarter of 2015. I'll now turn the call over to Ed Pierce.

Ed?.

Thanks, Mike. As Peter mentioned, our operating results for the quarter were above the high end of our previously announced estimates. Revenues for the quarter were $572.1 million, up 13.4% year-over-year on a pro forma basis.

Excluding the contribution of the two businesses acquired in the second quarter, revenues were up 12.2% year-over-year and up 13.1% on a constant currency basis. On a reported basis, our contract revenues were $539.4 million, up from $420 million in the third quarter last year.

Our direct hire and conversion revenues were $32.7 million, up from $22.5 million in the third quarter of 2014. Direct hire and conversion revenues accounted for 5.7% of total revenues, up from 5.1% in Q3 of last year.

Our gross margin for the quarter was 33.5%, which was within our previously announced financial estimates and slightly down sequentially on a pro forma basis. The sequential decline primarily was a result of higher mix of revenues from the APAC segment. SG&A expenses were $128.6 million or 22.5% of revenues.

SG&A for the quarter included $1.7 million in acquisition, integration, and strategic planning expenses primarily consisting of outside consulting fees on a strategic and integration planning project for Creative Circle and expenses to integrate various divisions on to Oxford's operating and back office platform.

SG&A also included approximately $1 million to $1.5 million related to the increase in sales consultants and recruiters during the quarter. Excluding Creative Circle, the average number of sales consultants and recruiters for the quarter were 2,039, up from 1,720 in the third quarter 2014.

Adjusted income from continuing operations for the quarter was $43.8 million or $0.82 per diluted share. And please note, the calculation of adjusted earnings per diluted share can be found in our press release. Adjusted EBITDA, not GAAP measure also defined in our press release was $74.9 million or 13.1% of revenues.

Income from continuing operations was $24.9 million, which was above the high end of our financial estimates for the quarter.

Our financial estimates did not include acquisition, integration, and strategy expenses of $1.7 million, nor did they include the accretion of discount of $0.7 million on our earn-out obligations, which are discounted using our weighted average cost of capital.

These two excluded items totaled $2.4 million or approximately $1.6 million after income taxes. Cash flows from operating activities were $35.3 million and capital expenditures were $4.8 million.

During the quarter, we paid down $46 million on our long-term debt and our leverage ratio at the end of the quarter was 3.21 to 1, down from 3.51 at the end of the second quarter. Turning to our individual operating segments. Our APAC segment accounted for 73.6% of total revenues. Apex's revenues were $421.1 million, up 37.6% year-over-year.

Excluding Creative Circle, Apex revenues were up 13.7% year-over-year. Apex's gross margin for the quarter was 30.6%, an expansion of 2.1 percentage points from Q3 of last year, mainly due to the inclusion of Creative Circle. On a pro forma basis, Apex's gross margin was in line with our estimates and up sequentially on a pro forma basis.

Our Oxford Segment accounted for 26.4% of total revenues. Oxford's revenues for the quarter were $131.1 million, up 10.7% year-over-year on a reported basis and up 14% on a constant currency basis. Excluding the revenue contribution of the acquired business, Oxford's revenues were $152.2 million on a constant currency basis, up 11.6% year-over-year.

Oxford's gross margin for the quarter was 41.5%, which was in line with our estimates and the same as the pro forma gross margins for the preceding quarter. Now turning to our financial estimates over the fourth quarter of 2015. We estimate revenues of $563 million to $568 million.

Adjusted income per diluted share of $0.72 to $0.75, and adjusted EBITDA of $66.7 million to $69.6 million. These estimates do not include any acquisition, integration or strategic planning cost. Our estimates assume pro forma revenue growth of approximately 12% and assume billable days of 60.7 or approximately 3 fewer days than the preceding quarter.

Our current financial estimates for the second half of the year are either within or above the high end of our previously announced estimates. Our current revenue estimates for the second half of the year are $32 million to $37 million above our previous high-end estimate.

Our current adjusted EBITDA estimate if you exclude the cost of the additional hiring surge, which was not included in our previous expense estimates are also above the high end of our previously announced estimates. I'll now turn the call back over to Peter for some closing remarks.

Peter?.

Thank you, Ed. We believe and we continue to believe that we are well positioned to take advantage of what will be historic secular growth rate for the entire staffing industry and dynamic changes in the technology world as it moves more into a digital one.

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 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 out to participants for questions.

Operator?.

Thank you. Our first question will come from Kevin McVeigh with Macquarie. Please go ahead..

Great. Thanks and congratulations on just a great outcome. Hey Peter, if I have the math right, it sounds likes the net additions including the incremental 100 is 240.

And was the 50% kind of at production, was at a total 240 of the initial 140 that you hired?.

That 50% number is an average and it's on the original hiring surge people. So the new people are a drag that we're not getting any productivity out of them, they're just barely in the training classes right now..

Okay..

But it's just giving up jump on 2016..

Got it. And is the split – I know you said before it was about 70% Apex, 30% the rest of business.

Is that a good way to think about it?.

It's very similar to those splits..

Okay. And then just on the direct hires, I mean just really nice outcome there at almost 60% of revenue overall.

What's driving that? Is it just kind of scarcity of talented people, you're starting to some bring in-house or is there other dynamics in terms of the way you're recruiting?.

No, I think, Kevin, it's all of the above. I would tell you that we're having better luck with matching the right people quicker than others because we really are using some unique tools to do some predictive analytics. The market is tight for technology, especially on some of the newer technologies and in the digital world.

And so over all of 2015, credit to the management team, we've hired I think at Cyber alone over 250 people since we acquired that business and they really are gaining a lot of productivity.

What I would tell you is, as you know, normal seasonality, fourth quarter it's harder to get people to leave jobs and start new ones because of bonus risk and stuff like that. But we continue to see a robust market for perm services..

Awesome. I'll get back in. Thanks..

Thank you. Our next question will come from Edward Caso with Wells Fargo. Please go ahead..

Hi. Good afternoon and congrats. Last quarter you talked about pricing maybe in the context of, I think, with the (21:44) flexibility.

What are you seeing on this pricing or flexibility front now? Is it eased up at all?.

Well, I'm parsing your words, Ed, but eased up, what I would tell you is, as we told you we would do at the right time, we have elected not to take certain work from certain customers as the ebb and flow moves more in our direction. So margins are pretty stable. We're seeing a bigger flow of more attractively bid work than we did even six months ago.

So we're not as flexible about agreeing to work on certain customers' business. It's not that it's a difficult negotiation. Some of the work that we took was just offered up at a certain rate and it was kind of a 'take it or leave it' situation, and that's not how most of our business works.

So the pricing environment is rational and it's productive for both sides..

There was a recent press release indicating you're opening an onshore or near-shore facility in Dallas.

Is that a change in strategy here?.

No. What I'm going to do is I'm going to turn it over to Rand, but that is for – I'm not going to name – I generically will name it's an airline, and we're helping them with some specific matters on the reservation system.

Rand, will you give him the strategic reasoning why we did that for the customer?.

Yeah. No, I mean, I think it's consistent, Ed, with the what we call value-added services to our clients.

So it's not just providing arms and legs in technical IT talent, but it's also putting that in a package where we can help manage that workforce and locate, in this case, the client needed it to be housed somewhere and we offered that and it was an opportunity for us to show that we can do that. So it's a win-win..

Let me sneak in one more for Mike.

ICD-9 to ICD-10, is that done at this point, and how big a factor was it in the last quarter?.

Well, Ed, as we even talked last time, it continues to increase. The date has come and gone, no reported issues. So in terms of the revenue certainly that we saw in the quarter, it was certainly part of what we experienced..

Ed, what I'd add to that is, it's very much like Sarbanes-Oxley. There was the surge to get compliant, and then there's an ongoing obligation to comply. So now that we're all over to the ICD-10, that's how things get coded and built. So we still see a big demand for that..

Great. Thank you. Congrats..

Thanks..

Thank you. We now have a question from Tim McHugh with William Blair & Company. Go ahead, please..

Yes. Just want to reconcile, I guess, the comment that you're being more selective now that you've got faster growth with the kind of the 33% gross margin at the midpoint versus 33.5%.

Is that mix in terms of perm or fewer days? Can you just, I guess, kind of reconcile that?.

So you're referring to the fourth quarter?.

Yes, yes, sir..

And as I've previously mentioned, there is less perm contribution typically in the fourth quarter than in the third quarter. And as we look at our numbers on our spreadsheets on contract gross margin alone, it's pretty stable to what we reported.

And save and except wholesale dramatic increases by some of the divisions that may have a lower margin, we have stable to slightly expanding gross margins..

Okay.

And then you had talked – it was announced, a large, I guess, DoD contract, where you're one of the named, I guess, supporters or I don't think it's subcontractor, but whatever the right term is, what can we expect in terms of the contribution? I assume that's not helping you yet, but will that be a meaningful factor as we think towards 2016?.

Right. So I'll let Rand answer that. We'll give you a qualitative answer, but we're not giving any quantitative guidance as to how much we're going to get and when we're going to get it.

Rand?.

So, yes, not a factor, Tim. As Ed would know from his work in the government side, takes a while for the government to get going in the contracts. So at this point there, it's a pretty big large roll-out and implementation of new systems. So we are a subcontractor on the team and I suspect it'll come.

It's not impacting our business yet in terms of performance. When will it start impacting depends on the timeline the government lays out, which they're still laying out that roadmap. So I don't think it's something we assume will happen in the near-term..

Okay. Thank you..

Thank you. We'll go next to Paul Ginocchio with Deutsche Bank. Please go ahead..

Hi. Good afternoon. This is Ato Garrett on for Paul. Just you guys spoke earlier to your end market performance and, specifically, when you're looking at your top accounts, you said the financial services and some other verticals were lagging behind.

But can you give a little more detail about how the financial services end market is trending? Is that getting any better or worse or staying about the same?.

It depends on the account. We've had a couple of important customers that have kind of reengaged and we have one of our top four bank customers that has disengaged more so than they previously had. So it's really an account-by-account basis.

But the good news for us is our larger financial services customers are spending a little bit more than they had in the first part of the year..

Great. And also just looking again into that fourth quarter, I know you've spoken a little bit to the fact that you're getting a little bit less perm contribution in the fourth quarter, so that's going to play into gross margins.

But is there anything else there that's happening about that can, I guess, help reconcile the faster implied revenue growth and gross margin growth when you're looking at fourth guidance? For example, is there anything you're doing about targeted growth initiatives relating to pricing?.

What I want to leave you with is the thought that contract gross margins are quite stable and that on a consolidated reported basis it has to do with contribution from perm and conversion fees and if Apex grows, the Apex division within the Apex Segment, or Lab Support, if it grows a little bit faster than Oxford or Europe or Creative Circle, then that would have a impact on the consolidated number.

But if you look at it on an individual case-by-case basis, they're pretty much stable..

Great. Thank you very much..

Thank you. We now have a question from Sara Gubins with Bank of America Merrill Lynch. Go ahead please..

Hi. Thank you. So I might be beating a dead horse, but just to check on the pricing environment and the bill pay spread being down year-over-year.

As you ease up on taking less than some of the lower priced work, should we expect to see an improvement in the bill pay spread?.

Yeah, it depends on the skill sets, the particular skills that we're placing and that we have opportunity to fill, but yes, typically that is the case..

Okay..

So, again I will try to state, we think that we have a stable to slightly expanding contract gross margin..

Okay.

And then on the cost side, have you now hired all of the people that you're planning to hire? And can we use the fourth quarter as a run rate for employee cost as we try to think about beginning to model early 2016?.

It's a fair question, but I'd hope that we would get compliments for being good deployers of capital. I mean we hired an enormous number of people that have us in an incredible position for the start of 2016, and we've reported a 13.1% adjusted EBITDA margin. So I don't know if we're done. It depends what the market is telling us.

And if we see pockets of strength, where we can accelerate and get a return, we'll do it. But I think as it relates to the fourth quarter that the number we gave you for SG&A is the right number. And we're in the midst of budgeting for 2016 and taking into consideration all the people we hired in 2015.

That's the most direct guidance I can give you at this point..

Okay. Thank you..

Thank you. Our next question is from George Tong with Piper Jaffray. Please go ahead..

Thanks. Good afternoon.

Peter, can you discuss how much additional improvement you would need to see in financial services and government, in order to continue to deliver accelerating growth in the business?.

My qualitative answer to that is zero. We just don't need it to hurt us, just stay flat, because the numbers that we reported this quarter had an improvement in certain accounts within financial services, but not across the board. And as our prepared remarks reflect, it was a broad-based expansion of demand across multiple industries..

Yep.

And can you talk a bit about trends you're seeing in ERP spend, whether there could be a new catalyst for a wave of ERP upgrades that might drive increasing spend?.

Well, let me try to address it this way and then Mike, if you want to – or Rand, if you want to add anything, please do. We see IT service spend as stable and we're taking market share based on employment model and we're also seeing the benefits of the secular change of shared resources versus full-time resources.

We are seeing people doing some more strategic thinking around their ERP systems and how they're using their data, but there hasn't been some sort of dynamic bolt-on module that is driving insatiable demand, this pretty steady state.

Mike or Rand, do you want to add anything?.

No, I would agree with that, Peter. I think, as always, on the Oxford side of the business, we have ebb and flows within disciplines as you said, ERP is one, the others. So we see that constant ebb and flow. So it's a stable environment from our perspective as well..

Okay.

And then lastly, could talk about how much cross-pollination you're seeing between Creative Circle and Apex and how that's tracking versus your earlier expectations?.

Well, it's not a matter of if, it's when. And when you're growing at Creative at 22.6%, you're not looking for a lot of cross revenue synergy. So there's been an enormous amount of coordination and targeting of which customers we want to address.

We're actually seeing that maybe the flow towards Apex, which hasn't occurred yet, what I'm saying now is not reflected in any of our forecast or our historical results, but we are seeing a lot of opportunities coming from the Creative customers into the Apex line of business.

And as we look to introduce Creative into the Apex customers, it's a matter of how deeply penetrated into the customer we're prepared to go on the creative/digital side, as you know because Creative's more two, four, six people per account, Apex is much larger. So we're working out the rules of engagement. There hasn't been sales channel complex.

We continue to confirm to ourselves our pre-acquisition analysis that there is revenue synergies amongst the various organizations..

Great. Thank you..

Thank you. We now have a question from Jeff Silber with BMO. Please go ahead..

Hi. Good afternoon. It's Henry Chien on for Jeff. I was curious about the staffing consultants that you added in the quarter.

Were there any trends in terms of end markets that are growing faster than others, or any color you can add there?.

Well, they went into predominantly IT, a little bit into Lab Support and then a little bit more into the Creative Group. And I would tell you, as far as internal employees go, we have as hard a time hiring and identifying talented people as our customers do, but we're continuing to chip away at it, but it's mostly in the technology world..

And for your 4Q guidance, would you be able to provide an organic rate that's embedded in that..

We did. Organic. Of course, the way we're looking at is on a pro forma basis and we said 12% growth..

So that pro forma basis, does that include Creative Circle or no?.

Yes..

It does?.

It assumes the acquisitions we made in the second quarter of 2015 were actually made at the beginning of 2014..

Got it.

And would you be able to provide a number excluding acquisitions?.

I don't have that off the top of my head..

Okay, all right. Thanks so much..

It's not much different..

No, it's not going to be that much different..

Got it. Okay. Thanks..

Thank you. We now have a question from Randy Reece with Avondale Partners. Go ahead please..

Afternoon.

My first question has to do with what surprised you the most versus your guidance in the third quarter?.

Right. Great question. Randy, I think it was the reacceleration at both Apex and Oxford gained steam throughout the quarter. There wasn't any sort of a plateauing and the hard work and the timing of our investments paid off..

You have competition, you have minimal competition, you just went out there and took market share. I don't see that you're necessarily saying that the market growth rate itself steered your results that much.

Is that correct?.

Well, I don't think that we are saying that the overall market rapidly expanded. I think it remained stable and robust. What I would tell you is we did with more feet on the street, gained greater accounts.

But more importantly, specific to us, some of the ebb and flow that occurred in some of our accounts worked to our advantage versus our disadvantage within the quarter..

Your commentary about companies turning to agency contractors over independent contractors, that's been a phenomenon for quite a while. It's been kind of hard to tell how much of an influence it has had over the staffing industry.

But why in particular did you bring that up this quarter?.

You know, as we do more and more work and there's more and more discussion, Randy, about the shared economy or the gig economy and Uber being sued for misclassification and everybody doing new apps and this and that, it's just a true realization as you said of what we've been seeing for a number of years, specifically in the IT world.

I will tell you in the Creative world, our strategic analysis, pre-acquisition and post-acquisition, shows that about $8 billion is spent annually on non-full-time labor and currently only $2 billion of that $8 billion runs through staffing up these W2 employees.

And that's partially because of the uniqueness that customers may feel certain creative, digital, graphic type people have. And if the person only is willing to work as a 1099, then they're going to look the other way. Partially, it's because of the size and sophistication of the end customer, but we're seeing that trend change dramatically too.

So as I've said often publicly, the largest single source of incremental revenue for the federal government is not raising taxes. It's eliminating the misclassification of employees.

And as more and more of these web companies try to tout that you can go online and work independent, not as a W2 employee, the government's going to come down harder and harder to prohibit that..

I promised no questions about gross margin. Good quarter. Thanks a lot..

Thank you..

Thank you. Our next question is from Gary Bisbee with RBC Capital Markets. Go ahead, please..

Hey, guys. Good afternoon. The improvement was pretty stark and across, sounds like, on virtually every business, but government and some of the big banks.

Can you help us sort of frame what was the most important and least important of the various things you mentioned? I mean it sounds like the surge hire is becoming profitable, it's a big contributor. It also sounds like at Apex you saw acceleration in a few of the verticals that maybe hadn't been quite as strong.

And then you talked about top accounts also getting somewhat stronger.

Is the surge hiring the key and these other ones also were modest positives or is it a more balanced contribution?.

It's more balanced. I mean, we're building a business for the long haul and there can be some changes quarter-to-quarter.

We admitted that maybe we got a little bit light on the hiring in the first half of 2014 and we suffered the consequences of that and then we got back on the right side of the hiring in the second half of 2014 and now we're seeing the benefits of that.

I will tell you if my numbers are correct, the financial services sector – industry sector for us instead of shrinking year-over-year grew 7.6%. Not every account within financial services grew, but some grew enough to offset the shrinkage in other accounts. And on a consolidated basis, we grew 7.6%.

So that helped to unmask the momentum and the growth that we had outside of financial services, Gary..

Okay..

The rest of it was just hard, nose blocking, tackling, daily revenue generating activity in a market that is receptive..

Sounds good. Peter, you typically mention on the call that the domestic Lab Support business is the most cyclical. And from that you infer an updated comment on how you see the U.S. economy playing out.

Unless I missed it, I don't think that was in your prepared remarks, but what do you guys think?.

It wasn't. It grew slower than the IT divisions, but we have been doing an enormous amount of work to reposition it, to be able to more forcefully compete and service larger customers.

Ted, I know you're on a cell phone, but do you want to add anything, any color about Lab?.

The only other thing I'd say is we've seen stable order flow. So I think if we look at that and say, is that a marker for what we see out here in general economy, it's stable..

Okay, great. And then just on SG&A, I just wanted to make sure that I heard it right.

So you said the $1 million to $1.5 million would be the incremental – I think, Ed, you said that the incremental amount from those new hires you've done since the second quarter in the fourth quarter – was that the right number?.

I was referring to what was included in Q3 related to the incremental hire, right..

Got you. Okay..

It's going to be – when it's fully loaded, it's going to be closer to, say, $2 million..

For the fourth quarter?.

For the fourth quarter, yes..

Got it. So SG&A is about flat. But you said the Q3 number included $1.5 million or whatever it was from the nonrecurring stuff. So you layer that in, and that gets the head count run rate. Okay. Very good. Thank you very much..

Thank you. Our next question is from Tobey Sommer with SunTrust. Go ahead, please..

Thank you. Peter, the cash paydown has occurred very rapidly. And by my math, you could be closer to 2 times levered by the end of next year.

I know that's several quarters away, but how do you think about the business as you approach a historical norm in terms of leverage in the business?.

Right. So I think what we've said publicly, Tobey, is we think that we can get to 2.5 times before the end of 2016 and probably think sooner than later.

When we first started saying that, we thought we'd say at the end of 2016, if things continue apace the way they are right now, as far as EBITDA, growth and cash generation, we think we'd get there sooner in 2016.

As we've always told you, as well as the credit rating agencies and our investors, anytime we are at 2.5 times leverage, I think the future cash generation is better served, either being returned to shareholders in the form of share repurchases or, if we can identify an attractive asset, acquiring another business.

So there is a real upside to us delevering quickly. We are creating equity value. We are reducing our interest expense. But most importantly, we're positioning ourselves to retain our credibility with our stakeholders and be able to do share repurchases and acquisitions..

Peter, the strategic review that you conducted a while back yield other areas, new areas that the firm could enter, you don't have to mention what those are, but just wondering if there are new segments that you would consider?.

Sub segments of technology, clinical research and Creative, but we're not going to get into foreign language translation or anything like that. I would just tell you it's a sub-segments..

Okay. And two other questions for me, because a lot of stuff has been asked. The one numerical one – on the staffing consultant growth, what was that as of the end of the quarter, excluding Creative Circle? I think you might have given it, but I don't think my pen was fast enough..

So we gave the numbers in the prepared remarks. And let me just give you the absolute number, if I can find it. I think....

And in the meantime, while you're looking for that, Ed, you mentioned back-office integration.

Is there much work to do there? And is there any kind of margin impact either negative or positive on an ongoing basis?.

We'll have more to say about that next year. We're winding down on a couple of things. One is an integration of our European operations and also an integration of some domestic visions into the Oxford Segment.

But there is going to be some efficiencies gained and we'll have more to say about the actual effect of that on our – when we give some guidance on 2016..

Okay, thank you..

As it relates to the numbers that you asked for on head count, excluding Creative Circle, and this is average number for Q3, was 2,039 and that's up from 1,720 in the third quarter of 2014..

Thank you very much..

Okay. Sure..

Thank you. And we do have a question from Mark Marcon with RW Baird. Go ahead, please..

Good afternoon and congrats.

With regards to Creative Circle, can you talk a little bit about the performance of the organization from the perspective of just turnover; what are you seeing in terms of being part of the organization? Obviously, the revenue growth has been terrific, but just what are you seeing qualitatively?.

Thank you. Mark, it's a great organization that was built by a couple of great people and they put underneath them a great second tier. So one of the enduring features of the business beyond its great margin and the great end market was they were our kind of folks, great people and they feel empowered.

It's been a net positive for everyone, our shareholders, but for our new employees, they are now participants of our employee stock purchase plan, the first window just open for them. They are seeing the ability to participate in the growth of the equity of the company, and the company doesn't have to be sold to get liquidity and they are holding.

A lot of the city managers and others are receiving equity awards on an annual basis. And so we've, so to speak, equitized them and they're now part of our programs. And there is no self-channel conflict. I mean, we've had a lot of events in the marketplaces and creating awareness and there is a very good esprit de corps.

We have not lost anyone because of the acquisition. They have a number of employees. Have we lost some people because of relocation or want to stay-at-home? A couple, but all-in-all, it's a net positive. And the cooperation and the collaboration has been very good.

And that's why you see not a deceleration in the revenue, you have continued healthy growth rate and margins. I mean, they grew 22.6%..

Great. A question for Rand, if I may. With regards to the verticals that you're actually seeing good growth in, can you talk about the ones that you're seeing the strongest growth? And also, are you seeing any sort of signs of weakness in the industrial economy? That's a frequent topic as it relates to financial news..

So, Peter, go ahead and respond. We saw, as Peter said earlier, growth across the board – double-digit growth as we said in all the industries expect for government. Technology, business services were particularly strong, financial service is particularly strong, considering some of our best or top accounts were not giving us a lift.

But it was pretty much across the board, I would say. In terms of industrial activity, are you talking about what consumer industrial companies, that unit also grew – not the oil and gas portion of it, but the other parts of it did grow..

And no slowdown in that part?.

In consumer industrial, no. No, double-digit growth..

Excellent.

With regards to the financial services sector, what do you think happens to a company that disengages? Are there other suppliers out there that are going to be willing to meet their needs? Or do you think they're just going to run short on talent?.

Yeah, Mark, on that one, what we were referring to is not that a customer said, we price our business 300 basis points lower than we used to, and we say no and someone else picks it up. Without naming banks, there are couple of banks that have cut their spend with all vendors by 50%..

So that's kind of what you're referring to?.

On ebb and flow with the specific banks..

Okay, great. And then with regards to – on the Oxford side, nice growth there. Any areas that seem to be accelerating more than usual – and I'm talking about Oxford Core..

Yeah, it's pretty broad-based. So I hate to say I'm not going to speak for competitive purposes, but I've learned the hard way. We've spawned a lot of boutiques in the sub-segments by bragging about their growth rate. So you know where we're playing and I would tell you it's pretty broad based..

That's great. Super. Thank you..

Thank you. And we have no further questions..

We appreciate your time and attention. And we look forward to visiting with you again on the fourth quarter conference call and our management will be in New York for a couple of conferences in November. Thank you..

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect..