Peter Dameris - CEO Ed Pierce - CFO Mike McGowan - COO & President of Oxford Global Resources Ted Hanson - President, On Assignment, Inc. Rand Blazer - President of Apex Systems.

Kwan Kim - SunTrust Robinson Humphrey, Inc. Kevin McVeigh - Deutsche Bank Gary Bisbee - RBC Capital Markets Jeff Silber - BMO Capital Markets Ed Caso - Wells Fargo Mark Marcon - Robert W. Baird Tim McHugh - William Blair George Tong - Piper Jaffray.

Ladies and gentlemen, thank you for standing by, and welcome to the First Quarter 2017 Earnings Call. At this time, all lines are in a listen-only mode. Later we will have a question-and-answer session and instructions will be given at that time. [Operator Instructions]. And as a reminder, today's conference is being recorded.

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

Thank you. Good afternoon and thank you for joining us today. Before we get started, I would like to remind everyone that our presentation contains forward-looking statements. Although we believe these statements are reasonable, they are subject to risks and uncertainties and our actual results could differ materially from those statements.

Certain of these risks and uncertainties are described in today's press release and in our SEC filings. We do not assume the obligation to update statements made on this call. For your convenience, our prepared remarks can be found in the Investor Relations section of our website.

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

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

Peter?.

Thank you, Ed. I would like to welcome everyone to the On Assignment 2017 first quarter earnings conference call. With Ed and me today, are Ted Hanson, President of On Assignment, and Rand Blazer, President of Apex Systems and our Apex Segment.

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

We will then open the call up for questions. Now, on to the first quarter. Our results for the first quarter exceeded the high-end of our previously announced financial estimates for revenue and were within the range of our estimates for adjusted EBITDA and earnings per share.

Revenues for the quarter were $626.5 million, up 7.6% year-over-year, or up 8.2% on a same billable day basis. This marked the 13th consecutive quarter that our company grew above the IT staffing industry's projected annual growth rate since January 1, 2013.

Our growth rate reflected, among other things, the continued deepening of many larger new customer relationships that we have established over the last three years and the continuing increase in the rate of adoption of our delivery model.

This quarter's year-over-year revenue growth was higher than our year-over-year growth rate for the fourth quarter of 2016, which is impressive considering normal seasonality, inclement weather affected revenues by $700,000 and higher adverse effect of foreign currency exchange impacted revenues by $1 million compared to $500,000 in the first quarter of last year.

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

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

Our IT business continues to see high demand from its customers, driven in part by greater adoption of staff augmentation as a viable alternative to outsourcing, offshoring and consulting. Wage inflation continues to be manageable.

With respect to recent production our weekly assignment revenues, which excludes conversion, billable expenses and direct placement revenues, averaged $47.6 million for the last two weeks, up 9.2% over the same period in 2016. Since the closing of the Creative Circle acquisition on June 5, 2015, we have repaid $243 million of our debt.

Our leverage ratio was 2.21x trailing 12-month adjusted EBITDA. During the quarter, we repaid $24 million of our debt. We estimate our leverage ratio to be approximately 2.14x by the end of the second quarter of '17. As you will recall, we announced on June 13, 2016, that our Board of Directors authorized a new $150 million share repurchase program.

Since inception, we have repurchased approximately 1.4 million shares at an average price of $39.07. During the first quarter, we repurchased approximately 229,000 shares at an average price of $44.31, and quarter-to-date we have not purchased any additional shares.

We intend to continue to execute on our share repurchase program based on share price and market conditions. We continue to see signs with 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's services is truly the only way to avoid the risk of misclassification of employees as independent contractors. Our customers have and are realizing this and that is why we believe the secular growth opportunities for the entire professional staffing industry are so attractive.

We also believe that we are well positioned to serve our customers' IT needs as technology rapidly evolves and is adopted. Throughout this year, we continued to benefit from the ongoing debate regarding H1B Visa reform and further adoption of our development/deployment model, i.e. staff augmentation.

Recently signed executive orders have only further solidified the trend towards adoption of our model versus offshoring. I would like to now turn the call over to Ted Hanson, our President, who will review the operations of the segment, and then over to Rand.

Ted?.

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

Across all our business units, our IT, creative/digital/marketing, engineering and software/hardware offerings showed the most strength in the quarter and demand in those end markets remains very solid. Now on to the Oxford results. The Oxford segment is comprised of Oxford Core, CyberCoders, our permanent placement business, and Life Sciences Europe.

For the first quarter of 2017, Oxford segment revenues were $144 million, down 3.3% year-over-year, or down 2.6% on a constant currency basis. Oxford core revenues, which account for 75.5% of the segment revenues, were down 4.4% year-over-year.

The decline in revenues is attributable to the completion of two large projects and lower contribution of permanent placement fees. CyberCoders, our permanent placement service offering, which accounts for 95.4% of segment perm placement revenues, was slightly down year-over-year.

However, they are up 10.4% sequentially as we saw momentum build throughout the quarter, with March showing year-over-year growth. For CyberCoders, we are seeing an increase in both opportunity flow and an improvement in the time to fill cycle. Gross margin for the segment was 40.4%, down 100 basis points year-over-year.

The decline is primarily related to business mix of contracts to permanent placement and run-off of higher gross margin revenues from the large project completions mentioned above. As we discussed last quarter, we continue to take actions we believe will better position Oxford with their customers as well as improve our return on invested SG&A.

First, we have realigned field management and skill practices within Oxford to better leverage our competencies. Second, we are addressing the increase in field expenses, which ramped up during the second half of 2016, for which we did not earn the expected return.

And finally, we remain focused on rebuilding our sales model in order to deepen our customer relationships and increase our market share. Oxford's secret sauce has always been its ability to deliver high-end, hard to find talent to its customers in multiple skill disciplines via a recruiting driven model.

While this will remain a core tenant of our business, we will look to leverage this best-in-class recruiting capability with a more progressive accounts focused sales strategy. I will now turn the call over to Rand Blazer.

Rand?.

Great Ted. Thank you. The Apex segment, which consists of the Apex Systems, Apex Life Sciences and Creative Circle business units, once again reported strong results for the quarter as Ted had mentioned. Revenues for this segment were $482.5 million, up 11.4% year-over-year.

Both Apex Systems and Creative Circle, which combined account for 92.3% of the segment's revenues, reported double-digit revenue growth, while our Life Sciences' unit was down slightly in Q1. Gross margin for this segment was 29%, which was 10 basis points lower than Q1 of 2016, due largely to a slightly lower mix of perm placement revenues.

Pricing for the quarter remained stable in our end markets with bill pay spreads increasing slightly from the preceding quarter. Increases in top account growth for the segment across all units also had an impact on gross margin.

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

With respect to Apex Systems, our IT staffing division, revenue growth was propelled by a number of factors, including growth in accounts in five of our seven industry verticals with double-digit revenue growth in our Aerospace and Defense unit, Financial Services accounts, Healthcare accounts and Consumer Industrial accounts.

Only the Telecommunications and Technology industry accounts exhibited slight negative growth year-over-year, although these accounts in these industries were our strongest performers a year ago. Top accounts continues to lead the way with double-digit year-over-year growth, while retail accounts showed only slight growth in first quarter.

Our bookings for SOW type work were also strong in the quarter and significantly exceeded our expectations. Finally, as mentioned, our field teams continued to excel with increasing productivity supporting Apex Systems' revenue performance and conversion rates.

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

Overall, the Apex segment had another high performing quarter with double-digit revenue growth and each of its business units contributing solid conversion of gross profit to EBITDA. Ed, I'll turn it over to you..

Thanks Rand. As Peter mentioned, revenues for the quarter exceeded the high-end of our previously announced financial estimates. Our revenue growth rate for the quarter was 7.6%, which was 1.6 percentage points, or 27% higher than the published IT staffing industry growth rate.

Using the same number of billable days as Q1 of last year, revenues on a same billable day basis were up 8.2% year-over-year. The effect of year-over-year fluctuations in foreign exchange rate was approximately $1 million.

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

Gross margin for the quarter was 31.6%, which was at the high end of our previously announced estimates, but down 64 basis points year-over-year.

The decline was primarily due to a lower mix of permanent placement revenues, which was 5.1% of revenues, down from 5.6% in Q1 of last year and a higher mix of revenues from our Apex segment, which has lower assignment gross margins. SG&A expenses were $146.1 million, or 23.3% of revenues.

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

Interest expense for the quarter was $8.5 million, down from $9 million in the first quarter of last year.

Interest expense included $2 million in costs related to the amendment of our credit facility in February, which among other things, reduced the interest rate on our Term-B loan one-half of a percentage point and increased our capacity under the revolver to $200 million. The costs of the debt amendment were not included in our financial estimates.

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

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

Net income for the quarter was $22.4 million, or $0.42 per diluted share, up from $17.4 million, or $0.32 per diluted share in the first quarter of last year. Net income included acquisition, integration and strategic planning expenses, the debt amendment costs and the excess tax benefits, all of which were mentioned earlier.

The after-tax effect of these items totaled approximately $700,000 million in additional expense, or $0.013 per diluted share. Adjusted EBITDA for the quarter was $64.6 million. Cash flows from operating activities were $43.8 million. And free cash flow, a non-GAAP measure, was $37 million.

The conversion rate of gross profit into adjusted EBITDA was 32.6% and the conversion rate of adjusted EBITDA into free cash flow was 57.3%. During the quarter, we repaid $24 million of our long-term debt and used $10.1 million of our cash to repurchase approximately 229,000 shares of our common stock.

Now turning to our financial estimates for the second quarter of 2017, we are estimating revenues of $650 million to $660 million; net income of $29.4 million to $31.3 million; and earnings per share of $0.55 to $0.59; and adjusted EBITDA of $76 million to $79 million.

Now these estimates do not include any acquisition, strategy or integration expenses, nor do they include any excess tax benefits related to equity-based compensation. I will now turn the call back over to Peter for some closing remarks.

Peter?.

Thank you. We continue to believe our scale, size and breadth of services has us well positioned and distinguishes us from others and provides us the opportunity to take advantage of what we believe are historic secular growth opportunities for the entire staffing industry.

While the entire On Assignment team is very proud of our performance, we remain focused on continuing to profitably grow our business and increase our rate of growth. We would all like to once again, thank our many loyal, dedicated and talented employees whose efforts generated these results.

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

Operator?.

[Operator Instructions]. Our first question will come from the line of Tobey Sommer with SunTrust. Please go ahead..

Hi. This is actually Kwan Kim on for Tobey. Thank you for taking my questions. First up, what kind of trends are you seeing in terms of the impact of the H1B Visa program restrictions done by President Trump, and how are your current and potential customers reacting to the changes? Thank you..

So we have spoken about this on several calls and we told you that we've seen a change in behavior over the last 14 months.

And the recently signed executive orders really just combination of what people have known about for a while, we've seen a change in behavior with regard to, first, work that may have previously been competitively bided to be done offshore is being done onshore.

Existing work that's been taken offshore is remaining there but we are starting to see some repatriation.

We're also seeing clients becoming increasingly concerned about reliance on the offshore model and that many IT professionals in India or the Philippines who may have wanted to come over on an H1B Visa - and these are the type of people that were exploiting the loophole in the H1B Visa, lower paid people, are not willing to do it because they don't have certainty that they'll have a job here and for how long.

The people that are coming over and doing algorithms to medical device, drug discovery work, that are getting paid $100,000 or more, they are still coming over and willing to work under an H1B Visa.

But some of the technologists that were coming from these lower cost places at $60,000, $70,000 a year, they are opting out and working elsewhere outside the United States, so that all benefits us. And as CIOs - even before the debate about immigration reform, CIOs got more comfortable and reliant on our deployment model versus the offshore model.

They saw that they had greater control visibility and quality. And so we benefited from that for several years, but it is definitely benefiting us with regard to what work is to be performed onshore versus offshore unless it's going offshore these days..

Thank you. That's helpful.

And given the improved regulatory outlook in hire rates among financial services companies, how is that affecting the demand level in that sector?.

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

Sure. Yes, I'm sorry. I got on mute. Well, we've enjoyed a long run here of financial services accounts with double-digit growth now for four or five quarters. So I think combination of things. The health of those institutions, those businesses, recent trends that need for better technology and more technology to enhance the business.

So we are seeing pretty good business in that sector both on the consulting - the SOW and the staffing side..

And I would just add, as we said in our prepared remarks, one of the pleasant uptick or resurgence in demand was in the Aerospace and Defense and we are optimistic that will continue..

Got it. Thank you..

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

Great. Thank you. Peter, appreciate the context on the growth but just want to - you guys are outpacing the market so much. Is that large client mix as well, it's mid market or are you're just seeing more outpaced growth on the financial side that hadn't been spending for a while. Just really, really impressive growth overall.

Just wanted to understand that a little bit more..

Well, I'll go first. Then I'll led Ted add additional color. But qualitatively, Kevin, we've gotten to a size and breadth of services which includes digital and SOW that there is just a handful of companies that can really effectively incredibly bid on work.

And as CIOs are relying on our deployment development model, they want the companies that have the most credibility and delivering the service reliably, and our customers are not casual users of our service. We are not billing customers that have 50 internal employees that want help desk [ph] administration.

We are billing fives and tens and 20s of millions of dollars a year to major corporations, and I think that distinguishes us from maybe other publicly traded companies. Our two largest competitors really are private. They are TEKsystems and Insight Global.

Ted, what would you offer more granular than that?.

The only thing I would add, Peter, is that definitely within our Apex business, our large account portfolio is driving the growth. There is some growth in our retail accounts but certainly the big growth is coming in our large account portfolio.

And then the marketplace on the creative side for creative digital marketing is very good and robust both in the small and in the large customers that we're playing in right now. The two of those things together are pretty powerful engine right now for all of On Assignment..

Hey, Peter, can I make a comment also?.

Please do..

Kevin, I think it goes to having - Ted mentioned the word portfolio. It goes to building the portfolio of accounts in large accounts, smaller counts, mid-market accounts and across seven different industries that we focus on. And in any one point in time, may be couple of the industries are really hot and some are not but it ebbs and flows.

But the key is to build a portfolio that gives you strength in all different kinds of times, and I think we've worked really hard over the last decade of building that portfolio across all of our business units and it's working. It's working for us now and I think that makes a big difference..

I think, Kevin, that's why we don't talk about economic conditions and GDP growth. We have a portfolio of customers that are going to do business with us.

We don't know how much necessarily every year, but we know they are going to do business with us versus someone else and it's because of their project needs not because of how fast the economy is growing and certainly they have about hiring. So that's what drives us is we establish relationships that we can rely on.

We don't know how much revenue each year but we can rely on them..

It's helpful. And then just - and this is a little bit. On the guide, the revenue - it looks like you're above consensus EBITDA as well. EPS is in line.

Is that tax-driven or is there anything abscond the impacting the EPS just for reconciling?.

Not really. In fact the excess tax benefits, we do not include that in our income tax provision or effective tax rates. So no, everything is - as you see it in our estimates, there is nothing out of the ordinary..

Okay. Thank you. Great job..

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

Hi, guys. Good afternoon. Pretty encouraging commentary on perm relative to a number of the other staffing companies that have reported.

I guess, can you give us any more color on if you have a sense what drove the improvement throughout the quarter? What changed? And I think you also said a shorter time - that the sales cycle is improving or the customers are making decisions more quickly relative to last fall. What's behind that and any color? Thank you..

Well, Gary, we said in 2016, our performance was more reflective of our positioning versus the market. Clearly the perm market wasn't a strong footing [ph] as we started to see in the fourth quarter of 2016 and then in the first part of '17 but some of it had to do with our reliance on a technology-based sales initiative versus feet on the street.

I'll let Ted talk about some of the changes we've made that are internal and specific to us. But we started talking, I think, on the third quarter conference call that we've started to see better engagement and activity from our West Coast clients and that momentum has continued and the team has done a really good job.

So I'm not quite certain about what others are saying and the elongation of decision-making, but our view into the marketplace shows us that we have greater confidence about year-over-year growth of '17 than we did in '16.

Ted?.

Well, Gary, to follow what Peter said we can only give you a view of the market based on our view. We can't - I don't know what everyone else is seeing.

But I do know that - to Peter's point, we've expanded, if you will, our go-to market capabilities by having an electronic means of going to the market and also go into the market with a traditional sales force, so that's something we've been working on harder for the last few quarters and we measure our time to bill cycle.

So not only are we seeing orders up but on time and bill cycle where we might have lost, let's say, 10 days coming through to '16 in terms of how long it took clients to make decisions from a time an order was entered until we actually got it filled. Now we've gotten a few of those days back.

We are not all the way where we were, so the productivity in that unit is not quite back to where it was in its heyday but we've taken some days out of the cycle, if you will. So we've taken some of this lockout and we hope we'll keep marching forward the same way here as we go into the second quarter..

Okay, great. And then, Pete, you had said last fall I think it was when you were asked about your appetite for M&A that - with the stock trading below private multiples, your stock looked a lot more attractive than anything else. I guess the stock is up quite a bit since then, and I'd argue it's still inexpensively priced.

But any updated thoughts on how you think about that? You clearly continue to buy back stock but your leverage is down. What's in your mind these days? Thanks..

The way we approach acquisitions are opportunistically and we got to find a good fit and a good service offering, and we've been all more active and had more conversation I would tell you as of recent and it's not because of our stock price.

It's because we've been having more breakfast, lunches and dinners and with people and they have found some things. There is nothing at the lip of the cup right now. We'll continue to buy our stock because there is a quality revenue stream. There is a quality earnings stream and there is a quality cash flow stream.

And as I always say, you shrank the share count and you grow the earnings, you have earnings surging. So we'll continue to balance our deployment of capital but if we find the right fit, we are - as we pointed out, I think we are going to be 2.14 by the end of the second quarter. So we've got plenty of gunpowder. It's just pulling the trigger..

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

Well, we've had some compression, and some of that has been mixed perm versus contract. Some of it has been larger accounts growing faster than slower accounts. Nut some of it, Gary, has been - we've had some challenges over at the Oxford unit and our margins are down a little bit to flat.

And so an uptake - as a percentage of revenue, perm is greater than it has been historically. That's going to have a positive impact, but we always guide, and as you know, we're getting towards the end of our five-year financial goals that we set out in 2014, but we always got into stable gross margins and if we can expand them, we clearly do.

I think we are really focused on regaining some of the operating leverage that we had and earlier in the latter half of '15 we saw a little bit of a compression in our EBITDA margin because of less perm and also some of the compression because of the investments we've made at Oxford that didn't pay off.

But we think that margins are in the right spot and there is room for improvement if the things that I discussed occur..

Great. Thank you very much..

The next question comes from the line of Jeff Silber with BMO Capital Markets. Please go ahead..

Thanks so much. Just a follow-up on Gary's question about M&A.

If you do go back to the market, are there any specific verticals or specialties that you'll be looking to sell?.

There is nothing. We are going to just continue to stay on our existing verticals and enhance our skill selection in the services that we can provide our customers within those verticals and domestically - I think we'll stay focused domestically as well, Jeff..

Okay.

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

Yes, so Ted, you want to address that but basically we are not trying to call a bottom on the turn on the revenue growth there.

But Ted, why don't you walk him through some of the stuff we're doing and some of the underlying trends that show strength beyond just the top line stated number?.

Yes, I think we have two things going on. When we think about Oxford, we are organized into skill disciplines and several of our skill disciplines are showing good year-over-year growth. Within IT, where we've had the large project in the prior year that now is running off.

As it gets completed, we are going to have a pretty tough comp again, not only here in the first but in the second and third to about the same extent. There was a pretty steady revenue generator, if you will, in the first, second, third and into the fourth quarter last year. So I think the comp is going to be difficult.

We are going to work on our sales strategy. The piece that we are working on with Oxford around better appointing our investments and better allocation of SG&A, we'll see that help us a little bit in the SG&A line as we get into the second half of this year..

Okay, that's helpful.

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

Well, it's going to be different than what it was in Q1 because we did not - obviously we had the amendment [ph] expense, but Jeff, as it relates to interest expense probably maybe $6.8 million..

Okay, that's great.

And then how about capital spending for the year, and if possible, for the quarter?.

Well, I'll talk about it next quarter. We don't really give anything out passed before assessed. It should be pretty much the level that you saw in Q1, which is roughly $7 million..

Okay, fantastic. Thanks so much..

Yes..

Our next question comes from the line of Edward Caso with Wells Fargo. Please go ahead..

Good evening or good afternoon. Congrats on the numbers. I had a - with the talk around H1Bs and the client starting to look more domestically here, are the US IT professionals starting to ask for greater wage increases? Are you - because I seem to remember there is a bit of a lag before you could translate that into pricing increases.

So could we be seeing some margin pressure in the coming quarters?.

Well, two parts to that answer. The first is we are not - the technical resource is aware of the scarcity and they are savvy. They know what's going on. They search the internet. So we have those conversations about what the appropriate pay rate is for a particular assignment.

I don't think that it is elevated the potential or the level of that conversation because they say, you know what, these lower paid people from overseas can't do anything more, so I'm the only game in town, you got to pay me more. That hasn't occurred yet, Ed..

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

Yes, on the healthcare side, Ed, we are growing. We had some pretty good comps last year that are difficult to deal with right now and within that unit, in addition to that, our health and information management offerings around billers and coders is way off from the heyday at the ICD 10 work.

So I think in healthcare, it's really the sum of those two things. In our skill sets around engineering and software/hardware, we are getting good growth. And absent of our big projects within IT, we are actually seeing some growth there. We just have a headwind with the run-off of the large project that we won this time last year..

Great. Thank you..

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

Good afternoon. Great quarter.

Wondering if you can talk a little bit more about the impact of the H1B on this quarter because, Peter, you mentioned it's been building for a while, and how do you foresee it further accelerating as we look out over the next year or two just assuming a constant economic backdrop? Just how much more incrementally do you think we could grow from the increased level of interest?.

Mark, I think the most rational way to really address the change is to just state when a CIO is looking at a portfolio of project they want to complete, they have the privilege of using project consulting through Deloitte or Accenture, outsourcing through HP, Dell Services, offshoring through the Indian firms or staff augmentation through us or another large provider and the strengths and weaknesses of each of those models.

And as there is uncertainty about reliability and timeliness of delivery of technical resources, they are opting less to award new work to the offshores using their offshore model.

And the model is going, in my opinion, to become less attractive because, one, they are not going to be able to price their work as competitively if they have to pay $100,000 a year for someone versus $60,000 a year and there is plenty of data on the internet that shows that the people that are awarded H1B Visas through Apple or Facebook or Google are all well above $100,000 and the average salary of a H1B Visa recipient at one of the offshores is about $70,000.

So they are not going to have - their cost of services is going to be higher if they are having to pay more, and especially if the lottery system is eliminated. The other thing is quality.

If there is a turn by customers that because of the uncertainty about time to fill an approval, some of the quality people overseas that were making $60,000, $70,000 a year won't come to the United States. They will go to another country.

And I don't think that's necessarily bad for our country, because as I told you it's going to open up more visas for the highly skilled people that are making $100,000 [ph]. So I think all of that continues to drive adoption of the other deployment model, project consulting, outsourcing, staff augmentation versus offshoring..

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

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

So I can't really make that direct lineal connection..

Okay. But obviously it's going to continue to be a positive. Can you talk a little bit couple of other things.

How much was the bill rate increase on the Apex side?.

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

Yes, I was just thinking about the Apex system. Just trying to strip….

We just give it by segment..

Yes, okay. And then….

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

Sure.

With regards to Creative Circle, did that accelerate?.

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

Okay.

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

Yes..

Okay, great. And then lastly, on the statement of work.

Can you characterize that a little bit more? Give a little more color in terms of what you're seeing and what the impact is from a margin perspective?.

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

No, the amount of incremental work that you're getting, what you're seeing there and what you're - how you're able to go forward?.

Let made try to address it this way. It's many hundreds of millions. It's $400 million or $500 million of revenue for us. We are seeing that SOW, as a delivery model, is growing very, very nicely and actually faster than staff augmentation.

And Rand and Ted and their management teams have worked very hard to continue to build infrastructure and expertise so that we can capture more of that business and that is a big focus of ours that we intend to continue to pursue aggressively..

Great. Thank you..

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

Hi. Just wanted to follow-up and just ask about the statement of work.

Is that tied at all to your comments about the - to the best you can tell, I guess, the pressure on immigration and debates on using offshore labor, or is there a different initiative or a factor that is helping you to grow faster there?.

Well, I would address it this way, Tim, just being higher level. I think that the SOW deployment model competes more with the project consulting deployment model or development model than it does the offshore model.

So I don't think it's the H1B Visa that's driving it as much as CIOs are continuing to try to find a lower cost model to do work and SOW fall somewhere between pure staff augmentation and project consulting. And so they are just blending their cost structures based on what project they want a certain model to develop or deploy..

Okay.

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

Are you talking consolidated or by segment?.

I was looking at the consolidated but if it's different then….

Tim, the comments related to SG&A, let me try to frame it a bit. But first of all, when you compare with our estimates, our estimates do not include acquisition strategy or integration expenses, okay. So that's about - that was $900,000 in the quarter. So you really do a like-on-like comparison with the estimates you had to consider there.

The other thing is that we were - we exceeded our estimates for revenues and gross profits, so when you consider the additional incentive compensation on the level that we beat or exceeded our estimates, then you consider the SG&A impact on that. Then we were pretty much in line with what we had originally estimated..

The only thing I'd add as well, which we didn't call out in our prepared remarks, is we had a little bit higher than budgeted expense on some medical plans and workers' comp because of a couple of just freak slip and falls in icy whether that were a little bit higher than normal and those will normalize as we move through the year hopefully..

But the big driver, there are two things, the integration and acquisition expenses and then the additional incentive comp and the higher revenue levels..

Okay, all right. That's helpful. Thank you..

Yes..

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

Hi, thanks. Good afternoon. I'd like to dig a bit deeper into Oxford.

You talked a little bit about this earlier, but can you elaborate on how you plan to align your skill practices and talk about how you plan to rebuild the sales model in order to bringing the segment growth closer to industry levels?.

Well, I don't know if we'll give you the granular detail.

But Ted why don't you qualitatively walk him through some of the initiatives that you have going?.

So, George, at its most simple level, Oxford has had a differentiated recruiting driven model where that skill was pushed into the marketplace based on the ability to get the highest rate in any one particular client without a thought of creating relationship with that client and setting the stage to do more with them in the future.

So I think what we are trying to do at Oxford is stay true to our recruiting driven model in the sense that we do - we are differentiated in the high-end hard to find talent that we have in our database but create a sales model where we can develop relationships with clients that are durable and sustainable for the long-term, so that we sell more than just one consultant, if you will, into any client.

We can sell one which will become two, three, four, five and six. So our issue is not that we don't have enough clients in our portfolio. It's that we don't have deep enough relationships with them that have been sustained over a long period of time so that we can increase our share of their wallet.

I think it is most simple to know there is a lot of underlying on all of that in terms of how we have realigned resources and the tactics we use in order to accomplish that, but the more simple level I think that's what we're trying to get at..

Right.

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

I think that - I wouldn't say we are deemphasizing anything. I think we are very happy with our skill set practices at Oxford. What we are trying to do is to group them so that that's most logical to sell them into whoever the hiring manager is at a particular company.

So instead of running a separate account plan or account focus plan for our healthcare IT group and our health and information management group who are both selling into like hospitals, we should be going at the marketplace together and selling all of our healthcare technology and HR professionals, all of our consultants.

So in that sense what we're trying to do is align. That's an example of trying to align those two units together so that we can cover more clients and we can cross-sell both of those into those same clients.

The same thing on the life sciences side, instead of having that it aligned with maybe some of the more technical or technology related practices, we want those more aligned with the healthcare side because a lot of those skill sets go into those type of clients. So I think when we - we are not trying to deemphasize anything.

We are trying to do more in all our skill practices but we are trying to set them up so that we are taking advantage of the opportunity to most productively go to the marketplace..

Yes, makes sense.

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

Well, I think on that side because we are not getting any revenue growth at Oxford right now, our productivity is naturally falling.

Will it return to normal times? I think it will because the strategy around creating deeper customer relationships and having more consultants on at any one customer is automatically going to make our recruiting team more productive.

Whether it will get back to and even exceed our prior highs? I certainly think we can get back there but I think we are still working through that, George..

Great.

And then any comments - same question for Apex?.

Apex right now is as productive as they have ever been. I won't say it's high because we are always trying to get an inch better there. But Apex is one of two of our divisions that have the highest conversion of gross profit to EBITDA and it's coming both from our sales teams, our recruiting teams and from leveraging corporate infrastructure.

So we're getting good productivity across all of that within the Apex business and we are always looking for that to continue..

All right. Thanks very much..

And we have no further questions in queue..

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

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