Edward L. Pierce - On Assignment, Inc. Peter T. Dameris - On Assignment, Inc. Theodore S. Hanson - On Assignment, Inc. Randolph C. Blazer - Apex Systems, Inc..

Gary Bisbee - RBC Capital Markets LLC Jeffrey Marc Silber - BMO Capital Markets (United States) George K. F. Tong - Piper Jaffray & Co. Tim J. McHugh - William Blair & Co. LLC Tobey Sommer - SunTrust Robinson Humphrey, Inc. Randle Glenn Reece - Avondale Partners LLC Mark S. Marcon - Robert W. Baird & Co., Inc.

(Broker) Kevin McVeigh - Deutsche Bank Securities, Inc..

Ladies and gentlemen, thank you for standing by and welcome to the On Assignment Fourth Quarter 2016 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 CFO, Ed Pierce. Please go ahead, sir..

Thank you. Good afternoon and thank you for joining us today. Before we get started, I'd like to remind everyone that our presentation contains forward-looking statements 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 risk and uncertainties are described in today's press release and in our SEC filings. We do not assume the obligation to update statements made on this call.

For your convenience, our prepared remarks can be found in the Investor Relations section of our website. Please note that on this call, we'll be referencing certain non-GAAP measures, such as adjusted EBITDA and adjusted net income. These non-GAAP measures are intended to supplement the comparable GAAP measures.

Reconciliations between GAAP and non-GAAP measures are included in today's press release. I will now turn over the call to Peter Dameris, our CEO, who will provide an overview of our results for the quarter.

Peter?.

Thank you, Edward. I would like to welcome everyone to the On Assignment 2016 fourth quarter earnings conference call. With Ed and me today are Ted Hanson, our new President of On Assignment; and Rand Blazer, President of Apex Systems.

During our call today, I will give a review of the markets we serve and our operational highlights, followed by discussion of the performance of our operating segments by Ted, Rand and myself. I will then turn over the call to Ed for a more detailed review and discussion of our fourth quarter results and our estimates for the first quarter of 2017.

We will then open the call up for questions. Now, on to the fourth quarter results. Our results for the quarter exceeded the high-end of our previously announced financial estimates for revenue and were within the range of our estimates for adjusted EBITDA. Revenues for the quarter were $620.9 million, up 7.5% year-over-year.

This marked the 12th consecutive quarter that our company grew above the IT staffing industry's projected annual growth rate since January 1 of 2013. Our growth rate reflected, among other things, the deepening of many new larger customer relationships that we have established over the last three years.

Virtually all of our divisions contributed to our strong fourth quarter performance. Our size and service offerings again enabled us to grow faster than the published staffing industry growth rate of 4% and we believe that we are well positioned to generate solid, above-market revenue growth into the future.

Revenue growth came from both our local, mid-market and large national accounts, reflecting strong customer demand. We believe, based on current operating performance, that this solid growth will continue into the first quarter.

Our IT business continues to see high demand from its customers, driven in part by greater adoption of staff augmentation as a viable alternative to outsourcing, offshoring and consulting. Wage inflation continues to be manageable. However, in certain large accounts, there is resistance to simultaneously passing along wage increases.

Going forward, due to supply/demand imbalances in IT candidates, we believe our customers, as they have always done, will permit us to increase pay wages for our consultants and thereby increase our bill rates.

With respect to recent production, our weekly assignment revenues, which exclude conversions, billable expenses and direct placement revenues, averaged $46.5 million for the last two weeks; up 8.8% over the same period of 2016.

Adjusted EBITDA for the quarter was $70.7 million or 11.4% of revenues, compared with $70.7 million or 12.2% of revenue in the fourth quarter of 2015. Cash generation continues to be at or above our expectations. Since the closing of the Creative Circle acquisition on June 5, 2015, we have repaid $219 million of our debt.

At 12/31/16, our leverage ratio was 2.32 times trailing twelve month's adjusted EBITDA. During the quarter, we repaid $19 million of our debt. We estimate our leverage ratio to be approximately 2.29 times by the end of the first quarter of 2017.

As you will recall, we announced on June 13, 2016 that our board of directors authorized a new $150 million share repurchase program. Since inception, we have repurchased approximately 1,362,384 shares at an average price of $39.07.

During the fourth quarter, we purchased 525,642 shares at an average price of $39.04 and quarter-to-date we have purchased an additional 228,831 shares at an average price of $44.31. We intend to continue to execute our share repurchase program based on share price and market conditions.

We continue to see signs that the ongoing debate regarding the on-demand workforce or gigeconomy is accelerating the usage of contract labor. Fractionalization of human capital by using the staffing industry's services is the only way to avoid the risk of misclassification of employees as independent contractors.

Our customers have and are realizing this and that is why we believe the secular growth opportunities for the entire professional staffing industry are so attractive. We also believe that we are well positioned to service our IT customers' needs as technology rapidly evolves and is adopted.

On February 9, 2017, we announced the launch of a $50 million expansion for our revolving line of credit and an amendment to our existing Term loan B to lower the pricing of the same. Throughout the year, we continue to benefit from further adoption of our development and deployment model i.e.

staff augmentation and we continue to see solid demand from the end markets we serve. Ed will give you our first quarter guidance shortly, however, I did, want to comment on our profitability in the fourth quarter.

While we exceeded our revenue growth estimate by approximately $3 million, on a reported basis, we were at the lower-end of our estimated range for adjusted EBITDA.

The lower adjusted EBITDA was attributable to the following expenses that are not re-occurring nor were they contemplated in our published estimates for the fourth quarter; $700,000 in a one-time retirement payment to Mike McGowan, $;00,000 in negative currency translation expense related to an inter-company loan; and $5.6 million in higher-than-projected expenses for the cost of services at Apex.

Finally, as you all know from our previous announcements, Ted Hanson has been promoted to President of On Assignment. Ted will report directly to me and will be responsible for operations management. I'd like to now turn the call over to Ted, who will review the operations of the segments and then over to Rand.

Ted?.

Thanks, Peter. As Peter noted, fourth quarter revenues from our Apex and Oxford segments grew collectively 7.5% or 9.8% on a same billable day basis. The Apex segment had another quarter of double-digit growth led by Apex Systems, our largest division, and Creative Circle, both of which Rand will address in his comments.

While our Oxford segment grew year-over-year, its performance still trails our internal expectations. Our IT and creative digital marketing offerings continue to show the most strength and demand in those end markets remains solid. Our life science and engineering offerings have shown less demand and in turn lower growth. Now on to the Oxford results.

The Oxford segment is comprised of Oxford Core, CyberCoders, our permanent placement business, and Life Sciences Europe. For the fourth quarter of 2016, Oxford segment revenues were $144.8 million, up 1.3% year-over-year on an as reported basis, while up 3.4% year-over-year on a same billable day basis.

Oxford Core revenues were up 3.8% year-over-year on an as reported basis, while up 6% year-over-year on a same billable day basis. Our Oxford European unit together with our U.S. Healthcare IT practice showed the most strength within Oxford Core, while we faced challenges in growing our engineering, life sciences and HIM practices.

CyberCoders, our permanent placement service offering, experienced lower revenue year-over-year due mostly to the same trends we have discussed in prior quarters related to the permanent placement market as well as the seasonal nature of the business during the fourth quarter.

Life Sciences Europe was up in revenues year-over-year on a same billable day basis, in line with their industry growth rate.

Gross margin for this segment was 39.9%, down 280 basis points year-over-year, which was primarily due to a lower mix of permanent placement revenues, which was 13.1% of segment revenues for the quarter, down from 15.4% in the fourth quarter of 2015.

While the Oxford segment had revenue growth year-over-year in the fourth quarter, the segment continues to be challenged in finding similar growth in adjusted EBITDA. Over the last two quarters, we have been experiencing lower than historic growth rates at a lower gross margin with higher SG&A expenses.

Our Oxford Core business, which is the largest component of this segment, is growing at industry growth rates but below our internal expectations.

Also the lack of growth in CyberCoders permanent placement revenues, against double-digit growth comparisons in the fourth quarter of 2015, is having a measurable impact on revenues and gross margin for this segment.

Although some of this slowing in permanent placement is a market-based trend, our estimates for permanent placement revenue in the first quarter of 2017 show more stability versus the prior quarters. We are also being affected by lower gross margins due to business mix.

Our Oxford Healthcare Technology practice, which historically carries a slightly lower gross margin, grew faster during 2016 than other higher margin Oxford practices. As we stated last quarter, many investments made in the Oxford Core business in 2016 have not yet provided a return to adjusted EBITDA.

In order to address this, coming out of the quarter and into January, we are beginning to make some important changes within the Oxford Core business. First, we're shifting certain leaders and skill practices within the Oxford Core in order to better leverage management and be more productive.

Second, we have identified some areas where we can reduce expense to find a better return on remaining invested SG&A, which we believe will create opportunities for operating leverage in Oxford Core during the course of 2017.

We believe that as we implement these actions, together with experiencing a more stable permanent placement market, we can return to higher growth rates and EBITDA margins. I will now turn the call over to Rand Blazer.

Rand?.

All right, Ted, Thank you. The Apex segment, which consist of Apex Systems, Apex Life Sciences, which was the old U.S. Lab Support and Valesta business, that has now been rebranded to Apex Life Sciences effective in January of 2017.

So Apex Systems, Apex Life Sciences and Creative Circle business units make up this segment and reported strong results for the quarter. Revenues for this segment were $476.1 million, up 9.6% year-over-year on an as reported basis, but up 12% year-over-year on a same billable day basis.

Apex Systems, which accounts for 74% of the segment's revenues, were up 9.6% year-over-year on the as reported basis and certainly paced the segment's year-over-year growth rate on a same billable day basis as stated earlier. Apex Systems' performance is particularly noteworthy considering the growth rate was 17.5% in the fourth quarter of 2015.

So, obviously, two quarters back to back year-over-year that were very strong. Apex Life Science's revenue growth was flat in the fourth quarter of 2016 on a year-over-year basis, with Creative Circle reporting revenue growth outpacing the growth rate for the segment.

Our Creative Circle unit continues to perform well, with year-over-year growth rate for the quarter continuing at a high rate, consistent with our expectations when we purchased them in June 2015.

Overall, for the full-year 2016 pro forma growth in revenues for the Apex segment was 14.4% and for Apex Systems, the year-over-year growth rate was 15% for the year. Gross Margin for this segment was 29.5%, which was slightly below our estimates.

While pricing for the quarter remained stable in our end markets with bill/pay spreads increasing slightly from the previous quarter in both Apex and Apex Life Sciences, our gross margin for the quarter was adversely affected by out-of-period adjustments of $5.6 million related to cost of service at Apex Systems.

Excluding these out-of-period adjustments, the gross margin for the Apex segment would have been 30.7% or approximately 120 basis points higher than our reported results. Later on this call, Ed will make a brief comment on these adjustments.

Our segment's contribution in terms of EBITDA remained strong with solid conversion of gross profit to EBITDA paced by increasing productivity in our sales and delivery teams and despite the out-of-period cost of services referred to previously.

With respect to – now, little more color on Apex Systems' growth, our IT systems division, revenue growth was propelled by a number of factors including; we achieved growth in four of our seven industry verticals, with double-digit revenue growth in aerospace and defense, financial services, and healthcare account, and single-digit growth in the consumer and industrial industry accounts.

Business services, technology and telecommunications industry accounts exhibited slight negative growth year-over-year, although the technology and business services industry revenue growth in the fourth quarter of 2015 were our highest growth industry verticals.

Apex revenue growth continue to be paced by strong revenue growth primarily in top accounts. Local, mid-market or branch accounts also grew and grew at a slightly higher rate than in the third quarter of 2016. Finally, as mentioned, field productivity continued strong in the quarter, supporting Apex's revenue performance and conversion rates.

The Apex Life Sciences and Creative Circle units continue to see good opportunities for growth with the market, as Peter mentioned earlier, for creative marketing skill sets remaining strong as well as the overall market environment for our units.

Overall, the Apex segment had another strong quarter with revenue and earnings growth continuing on a year-over-year basis. And with that, I will turn it over to Ed Pierce..

Thanks, Rand. As Peter mentioned, revenues for the quarter exceeded the high end of our previously-announced estimates. Our revenue growth rate for the quarter was 7.5%, which was 2.5 percentage points or 50% higher than the published IT industry growth rate.

Using the same number of billable days as Q4 of last year, revenues on a same billable day basis were up 9.8% year-over-year. Assignment revenues were $592 million or up 8.6% year-over-year and permanent placement revenues were $28.9 million, down 11.4% year-over-year. The effect of year-over-year fluctuations in foreign exchange rates was minimal.

Gross margin for the quarter was 31.9%, which was below the low-end of our previously announced estimates and down a 150 basis points year-over-year due to two things. First, a lower mix of permanent placement revenues, which was 4.7% of revenues, down 1 percentage point from 5.7% of revenues in Q4 of last year.

And second, out-of-period adjustments totaling $5.6 million to correct the under accrual of cost of services at Apex Systems. Excluding the effect of the out-of-period adjustments, our consolidated gross profit would have been $203.8 million and our consolidated gross margin would have been 32.8% or 90 basis points higher than what we've reported.

The effect of these out-of-period adjustments was immaterial to all prior periods, approximately one-half related to 2015 and the remainder to the first nine months of 2016. The system and process issues that caused the understatement of cost of services have been evaluated and the necessary corrections have been made.

SG&A expenses were $142.6 million or 23% of revenues. After adjusting for $1.6 million in acquisition and integration expenses, which were not in our financial estimates, SG&A expenses were in line with our previously-announced estimates. SG&A expenses also included two other items totaling $2.1 million that were not in our estimates.

The first item was $1.7 million in expenses related to retirement of the President of Oxford. This included $1 million in stock-based compensation. The second item was a foreign exchange loss of $0.4 million on an intercompany note.

Net Income for the quarter was $24 million or $0.45 per share on a diluted basis, up from $19.3 million or $0.36 per share in the fourth quarter last year. Net income for the quarter was burdened with the after-tax effects of the $5.6 million in out-of-period adjustments and $3.7 million in SG&A expenses not included in our financial estimates.

On an after-tax basis, these expenses totaled $5.6 million or $0.10 per diluted share. Our adjusted EBITDA for the quarter was $70.7 million or 11.4% of revenues, compared with $70.7 million or 12.2% of revenues in the fourth quarter of 2015.

Adjusted EBITDA for the quarter was burdened with the out-of-period adjustments, the cash portion of the two SG&A expense items mentioned earlier. And if you exclude these items, adjusted EBITDA would have been $6.7 million higher and above the high-end of our financial estimates.

Cash flows from operating activities were $55.9 million and capital expenditures were $6.6 million. As Peter mentioned, during the quarter, we paid down $19 million of our long-term debt, which reduced our leverage ratio to 2.32 to 1 at the end of the year.

For the full-year 2016, we generated adjusted EBITDA of $285 million, cash flows from operating activities of $196.3 million, and free cash flow, which is a non-GAAP measure, of $169.1 million. This reflected a conversion rate of adjusted EBITDA into free cash flow of 59.3%.

The reconciliations of the non-GAAP measures to the comparable GAAP measurements are included in today's press release. Now turning to our financial estimates for the first quarter of 2017.

We are estimating revenues of $614 million to $624 million; net income of $21.5 million to $23.4 million or $0.41 per diluted share to $0.44 per diluted share; and adjusted EBITDA, a non-GAAP measure, of $62.5 million to $65.5 million. These estimates do not include any acquisition or integration cost.

After adjusting for fewer billable days in the quarter, the above estimates imply year-over-year growth between 6% and 8%. The growth rate for the quarter reflects a more difficult comparable, as the year-over-year growth rate for Q1 of 2016 was 17.7%, which was the highest growth rate quarter over the last eight quarters.

Our revenue estimates also include the estimated effects of inclement weather in the quarter. Our estimates include the effects of the payroll tax reset, which occurs at the beginning of each year.

This reset results in an estimated sequential increase in payroll taxes of approximately $11.6 million or approximately 1.9% of revenues, of which $7.4 million relates to cost of services and the remainder to SG&A expenses. I will now turn the call back over to Peter for some closing remarks.

Peter?.

Thank you, Ed. We continue to believe our scale, size and breadth of services has us well positioned to take advantage of what we believe will be historic secular growth for the entire staffing industry and dynamic changes in the technology world as it moves more into the 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.

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

Thank you. And our first question will come from Gary Bisbee with RBC Capital. Go ahead, please..

Hey, guys, good afternoon.

I guess the first question, just why do you expect a more stable, firm result in Q1, was there anything sort of driving that statement?.

Gary, it's just, one, we're further away from kind of the stagnation of 2016. There are some animal spirits that are going on in corporate America and some of the things that were specific to us related to our technology-enabled sales outreach being our more of our exclusive sales function has been adjusted, and we have a full-time sales force.

So those three things combined to show us current activity that gives us the belief of a better operating environment for 2017..

Okay. And then more broadly within the Oxford business, anymore color you can give on strategies you're taking to try to resuscitate growth in that business in aggregate? Thank you..

Yeah. So I'm going to make one comment, and then I'll turn it over to Ted. Well, we're not, as we said in our prepared remarks, I think a lot of companies that have already reported in this cycle would love to have had the growth rate that Oxford had, but it is not acceptable to us or what we think the division can do.

And we've made some changes that we think we will assist. And Ted, why don't you give them a little bit of color..

Thanks, Peter. Gary, we've got a recruiting driven model there that clearly is a differentiator in the marketplace. And we think by making a few tweaks to our go-to-market approach and our sales strategy, we can better represent that to our clients. So we definitely think there's an opportunity there to take our sales strategy forward.

And then on the expense side, there are some expenses that – some things we invested in last year that didn't quite show the return we expected. So, we've taken the opportunity to react to that mix change. And some of the things we did I think are going to help our business going forward.

So I think we've got a little bit of all three of those things going on as it relates to sales strategy and then expenses within Oxford..

Great. Thanks..

Thank you. Our next question will come from Jeff Silber with BMO Capital. Go ahead please..

Thank you so much. I wanted to go back to those out-of-period adjustments.

In (25:30) or is there something else going on?.

No, it's cost of service, Jeff, and it was a software configuration issue that we've corrected that didn't capture the expense timely. As we stated in our prepared remarks, they were immaterial and less than 1% of cost of services for Apex..

Okay.

And going forward, do you think this issue has been solved, it's not the thing that we have to worry about going forward?.

That is correct..

Okay. Great. Just wanted to clarify that. And also you mentioned at the beginning of your remarks, Peter, about a potential lag of, I guess, wage inflation versus billing rate increases.

Typically, how long does it take for you to recoup wage inflation from customers?.

Jeff, it really is on a case-by-case basis, depending on the urgency of the project, depending on the level of the skill set, depending on the annual spend of the customer. Some customers hold firm to a annual rate card renewal, and they're willing to take longer times to fill. Others are wanting to react, but we kind of say a quarter or two..

Okay. And if I could just sneak one more in there, I've been getting a lot of questions about potentially H1B visa reform impact on your business and others in the industry.

If you could just comment on that, that will be great?.

Yeah. So, there has been a lot written about it. And there have been abuses of the H1B visa system. Part of the abuse is the fact that when it was written, it was not inflation indexed and $60,000 many many years ago, over 22 years ago, was a lot of money.

But today people with master's degrees don't make $60,000 and the Indian offshores and not us but some staffing firms plug the lottery system and they get the H1B visa and they use cheap labor to perform work that could be performed with U.S. domestic labor. That's going to get shut down as it should.

They're probably going to raise the minimum wage to $100,000 to $130,000.

The most recent article that was in the Wall Street Journal said that Silicon Valley is not going to carry the water for these offshore companies and they're going to be arguing to keep the 85,000 H1B visas, but raise the salary from $60,000 to $100,000 to $130,000, so that we can have access to really talented bright minded people who are doing drug discovery and new technology discovery and development, and not doing helpdesk administration and code maintenance.

And so, I think you're definitely going to see something because both Republicans and Democrats acknowledged that there has been abuse in that area. And for us, we think it's a net positive on two fronts. One, it makes domestic resources more valuable.

And two, this cheap labor that has been used on the frontend to offshore stuff to be done also on the backend is not going be able to – they're not going to be able to do that. They're going to have to use domestic labor on the frontend and then still be able to do some stuff with foreign labor offshore on the backend.

So, I think you'll see this something happen in 2017 and Silicon Valley is going to support reform, because they know there has been abuses. And it hasn't been Silicon Valley by the way that's been abusing the system..

Okay. Appreciate the color. Thanks so much..

Thank you. Our next question is from George Tong with Piper Jaffray. Go ahead please..

Hi. Thanks. Good afternoon. Pete, you indicated that with some large accounts, there is resistance to passing along wage increases.

Can you talk a bit more about how you expect bill pay spreads to evolve over time?.

Yeah. Stable, and I think when you adjust for the kind of ins and outs that we had this quarter, we reported pretty much stable gross margins. And what I – in my prepared remarks, George, I said simultaneously pass along wage increases and bill rate increases.

So they always do allows to adjust the bill rate, it's just sometimes it's not simultaneously. So we still stick to our position that we're operating in a stable gross margin environment, say, even accept lower firm contribution or certain practices that carry a lower gross margin growing faster than other high-margin practices..

Got it. That's helpful. To improve growth rates within Oxford, you've indicated that you will be shifting some leaders and skill practices.

Can you discuss which areas you will be de-emphasizing and which areas you plan to be over-indexing?.

Yeah. I'll let Ted respond to that. But I don't think we said deemphasizing. Ted, why don't you walk them through a little bit of what you all start to do..

Yeah. I think that we're really settled and satisfied with our skill disciplines and offerings. I think the comment was more, we can combine and leverage some of our wealth management, and certainly, we started to do some of that, and then there are some practices that just based on demand are naturally experiencing more growth than others right now.

And those are places where we should invest, and we're not going to leave our other skill practices. But we'll certainly tilt our investment towards ones that are having the most growth right now based on customer demand..

Got it. And then lastly on Oxford, you had indicated before that there were some areas where you could reduce expenses.

Can you elaborate on which areas you plan to (31:30) expenses?.

Ed, you can kind of qualitatively share some stuff with them..

Yeah. Thanks, this is less about head count and more about investment in certain compensation programs and we made some investment in certain programs last year thinking that we were going to get an increase in productivity and we didn't see it.

So, I think that we're going to take those investment dollars and point them at other opportunities, if you will, to get a better return on our invested SG&A..

Very helpful. Thank you..

Thank you. And we'll go next to Tim McHugh with William Blair & Company. Go ahead please..

Thanks. I guess, Peter, are you hearing from clients about the potential for changes to H1Bs and immigration, it's obviously in the news.

Are clients talking to you guys yet about it or is it still something they're going to wait to see how it plays out before they even think about how to change their business activity?.

The answer is yes. And it's been longer than just the last three months, four months.

Over the last 14 months, as our larger more sophisticated customer has become more reliant on our deployment/delivery model, staff aug, and viewing it competitively against project consulting and offshoring, they've been deciding to spend more of their annual budgets on staff aug than offshoring, especially with the uncertainty about immigration reform.

You got to remember that these bills have been introduced both by the Democratic members of the house as well as the Republicans. And so this is something they can probably agree to.

So, what we've seen early on is, even before there is any change in the law, that certain customers are hedging their beds and not being as dependent on newer projects being executed on those deployment models versus domestic deployment models..

And then just two numbers.

I guess, one, Ed, could you give us the billing dates for the year at this point that you're expecting? And secondly, did you give a specific growth rates for Creative?.

For the fourth quarter of 2017?.

Yeah, fourth quarter..

Yeah. We said it exceeded the growth rate of this segment. It was almost identical to what we said the Apex Systems was, which was about 15%..

Tim, we're anticipating or estimating 249.4 billable days. And one thing I'll point you to is, if you look at our recent investor presentations, which you can find on our website, we actually do now have a page that shows that information. Not only for the....

Thank you..

...the year, but also by quarter..

Thank you..

Okay..

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

Thank you. I had a question for you about the financial services vertical.

With the prospects for rising net interest margin of banks and a little bit less regulation on financial services broadly, are you hearing from customers that that they may kind of unquote some additional projects as they maybe can grow a little bit more and are more profitable going forward?.

I'm going to let Rand answer that more fully. But, Tobey, they've been all through 2016 engaging with us in a very productive way. And I think we stated in our prepared remarks that the financial services grew double digits.

So, Rand, what would you add?.

No, I think you said it right, it's been going on for a while, and they're spending money – good IT money to improve themselves, and we've been growing double-digits for quite some time now..

Okay.

I understand that the growth has been double-digit, I understood that, but the prospect for net interest margin are more recent than that and they may extend in the future, should we think of these as catalysts for additional growth?.

Yeah, I think for continued constructive execution of their budgets, I think that the budgets weren't constrained in 2016 the way they were in 2015, and the discussions we're having about 2017 are kind of more normalized spend that isn't constrained, because of outsized litigation expenses or settlement.

So, yeah, what we're trying to communicate – I apologize, is that we find the financial services industry to continue to be a productive area, and as you know, they are the classically the fastest spenders and the biggest spenders on technology for our particular deployment model, staff augmentation..

Okay.

Your head count additions for 2017, what kind of staffing consultant growth rate should we look for?.

I think for the full year of 2016, it was about 11%....

Yeah..

...and for 2017, I think it's steady state, unless we really have accelerated growth, which would be somewhere in the 5%, 6%, 7% range..

Okay. And the last question from me relative to your capital deployment and balance sheet, the stock market seems to be discounting an elongated cycle and kind of a refresh on growth.

How do you think about your repurchasing, debt repayment versus deploying to fresh capital and acquisitions at this point?.

Well, if we could find which we will, but if we could find the right acquisition candidate, we would do that first. Second, at this stage of our leverage and our cost of debt which is going down again hopefully, it would be share repurchases. And third, it would be the continued deleveraging of the business.

We balance deleveraging and share repurchases through 2016 and we did both. I mean we could have just done share repurchases, but we elected to do both. And I think because we did both, that put us in a position to continue to drive pricing of our debt down..

Okay. Thank you very much..

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

Good afternoon..

Good afternoon, Randy..

I was wondering if you could give the underlying change in staffing gross margins that's implied in the Q1 guidance?.

Is that possible, Ed?.

Well, it's in S-1..

Okay. You have....

I'm not sure, I'm following Randy, because one other things we include in our financial estimates is the range..

Yes..

I guess it's by divisions..

Temporary staffing..

We don't put that granular in the guidance, but I think, Randy, you should assume but for the annual reset of taxes and but for lower contribution of firm placement versus the historical level, that we stick to our public statement that we think we are in a stable gross margin environment..

All right. And....

Randy, the reset on payroll prices we're estimating it's going to have about a 1.2 percentage point of that sequential effect on gross margin of Q1..

Versus normalized Q4 gross margin?.

Yeah. Versus, yeah, a normalized Q4. And so if you normalize Q4, you'd get roughly – for the out-of-period, you get roughly 32.8%..

And within the Apex mix, is there anything particularly unusual going on in the life sciences or lab support end market.

We've heard some concerns about activity levels in that vertical?.

From others?.

Yes..

Yeah, Ted, respond and then I'll follow-up..

So, Randy, that unit has been growing a little slower, although in line with industry growth rates, both in the Apex segment and in the Oxford segment as it relates to life science skill sets.

So, I guess, if you're trying to put that in perspective of the rest of the business from an IT perspective, we're obviously seeing a lot of more growth there, but I guess that's what we're seeing right now within the life science skill sets..

All right. Very good. Thank you..

Thank you. Our next question is from Mark Marcon with R.W. Baird. Go ahead please..

Hi, good afternoon.

On the Oxford side, how long do you think it would take before your initiatives in terms of changing the Oxford Core would really take effect and where the results would be visible?.

Well, I'm going to let Ted address that, but what we're doing is not some novel that it's got a high risk of own execution.

This is some stuff that is best practices, and Ted, why don't you walk them through your expectations?.

Yeah. I think on the expense side, we'll see that sooner, although that'll be a smaller part of the total return in the future. The sales strategy, some small tweaks there as Peter put it, not a wholesale change, if you will, but if some tweaks around that will take a little bit longer to institutionalize and see the return on.

So, I think the expense side over the next couple of quarters and on the sales side, in the back-half of the year and into 2018..

Great. And then with regards to the perm business, when we think about CyberCoders, when you said stable, does that mean like a deceleration in the rate of decline or does that basically mean we're going to be slight year-over-year, or does it mean on a sequential seasonally adjusted basis, we're flattening out.

How should we interpret those comments ?.

Yeah. Good question. I think you should interpret it that if we don't have any sort of change in economic activity, just the way things are right now, because of the results in 2016 that we would hope to be up low-, mid-, single-digits year-over-year on an absolute basis..

Oh! That's great.

And you are starting to see some improvement there?.

The word we used was stability, yeah. And I would point out again, Mark, as the year is now over, CyberCoders actually did an admirable job. We had budgeted for them to be down on revenues and basically flat year-over-year on EBITDA, and they pretty much hit that budget.

And some of the changes that they have made and the hard work that they've done, I think that they can grow 3%,4%,5%, 6% this year..

All right.

And then within Apex, when we take a look at the detail in terms of the industry verticals that are both growing as well as those that are contracting a little bit, would you expect that with a better economic environment, the verticals that have been going up against tough comps and fell slightly negative this last quarter that those could start bouncing back relatively soon.

Is that built into your expectations or how should we think about that?.

Well, I don't meant this to sound defensive, but I think that what we've been trying to communicate on a very grounded basis is that we see a productive marketplace. And based on my recollection, we've grown a 1,000 basis points faster than anybody else that's reported in this cycle organically.

So, I point that out just to say, we continue to believe because of our size and our positioning that we will continue to have very attractive growth prospects in 2017. Now, the spend in telecom and technology right now wasn't as strong as it was in financial services and healthcare and that may switch, and probably will if there is some tax reform.

But all in all, we feel fortunate that our positioning permits us to grow fairly significantly and we're excited about that opportunity continue to grow..

Yeah. And Peter, (45:28) diminishing the execution as well as the productivity there, that wasn't what I meant, because....

No, no, no. I didn't really take it that way. I think it's a loss that, on a same billable book day basis, this company grew 9.8%..

Yeah. I think that's coming across loud and clear.

I guess, the question was, more along the lines of your going up like – you do have tough comps, because you have been doing well, but do you think it's possible with some of those verticals that recently shrunk, that those could come back, now that there is a little bit more in the way of animal spirits or is that something that – and therefore there could be some acceleration? Or do you think, hey, there is a couple of things that are going on specific to those verticals that they're probably – it's probably going to take a little while before those kick back in?.

Let me address it this way. Well, the only time we've called out a vertical was in healthcare IT, because the stimulus dollars going away. And then in the financial services, we called out ebbs and flows in the third quarter and fourth quarter of 2015.

But as it relates to spend in telecom and in technology, that maybe just a collection of our customers and something like that.

But we feel good about the continued rate of adoption of staff augmentation vis-à-vis other delivery deployment models, we feel very good about our positioning and we continue to believe that we can be a net market share gainer and grow, even though we grew faster in 2016 than the statements discloses, we still think we can grow 200 basis points to 300 basis points faster than the stated industry growth rate.

And if we continue to do that, we'll create real value. So we're feeling as if company, it's operating in an industry that is relatively productive and healthy. And so it's our job to go execute..

Great. Thank you..

Thank you. Our next question comes from Kevin McVeigh with Deutsche Bank. Go ahead please..

Great. Thank you so much.

Hey, any thoughts in terms of the boost to the revolver in terms of the $50 million, does that give you additional flexibility from a buyback perspective or just any thoughts on were you able to kind of amend the covenants, have more flexibility on that, or just any thoughts on what drove the increase?.

Yeah. The increase, it just give us greater flexibility. The real change which, Kevin, is not apparent is when we have an annual reset and we file our results with the banks that refreshes our restricted payment basket.

So we've used a fair amount of our capacity to buy shares and that's all gotten replenished and set back down to levels where we could execute the remaining availability under the $150 million repurchase with the refresh of our basket. So, yeah, we have plenty of capacity.

And if we want do an accelerated repurchase, we could draw on the revolver if we thought that was the most prudent thing to do..

Got it. And then, Peter, it's be very helpful kind of laying out the cost in terms of the quarter. Is there any way to think about what the EPS impact was of those....

Yeah..

...

in terms of overall?.

So it was kind of on a GAAP EPS basis?.

Yeah. I'm just trying to....

It was.

Yeah..

It was $0.10..

Wow..

And on an adjusted EPS basis, it was about $0.09. So, based on my calculations, if you accept the adjustments, we would have reported about $0.73 versus $0.64 on an adjusted basis. And on a absolute GAAP basis, we would have reported $0.55 versus $0.45, which is well above consensus, high-end of analyst guidance or the high-end of our range..

Actually it would come in at $0.73 as opposed to – it's a great job.

And then just – my last question if I could is, from a sourcing perspective on the IT side, we've been getting a fair amount of questions given how tight demand is, are you comfortable with kind of the mix of producers versus sourcers within the business, I mean, I know we're pretty aggressive with the hiring last year and that's paying dividends.

Are you comfortable with the way kind of that production versus sourcing set right now Peter or does that equilibrium need to change at all?.

I think that's a real complement to the division of leadership is the reason we've been able to grow a 1,000 basis points faster than others is because we were able to fill the orders, find the people to fill the orders, and so I think they've done an appropriate balance of sales and fulfillment.

And I think that's been a core competency of our company, and I think it will continue..

Great. Thanks, again, nice job..

Thank you. Okay. Gentlemen, we have no further questions. Please go ahead with any closing remarks..

We greatly appreciate your attention and look forward to speaking to you on our first quarter conference call..

Thank you. And 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..