ASGN Incorporated (ASGN) Q3 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the On Assignment Q3 2013 Earnings Call. [Operator Instructions] And as a reminder, today's conference is being recorded. I'd now like to turn the conference over to your first speaker, Ed Pierce. Please go ahead.

Thank you. Good afternoon. I'd like to first 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 risks and uncertainties that could cause actual results to differ materially from the statements and we do not assume the obligation to update statements made on this conference call. We describe some of the risks and uncertainties in today's press release and in our filings with the Securities and Exchange Commission. I'd now like to introduce Peter Dameris, our CEO and President, who will provide an overview of our results for the quarter. Peter?

Thank you, Edward. Good afternoon, and I'd like to welcome everyone to the On Assignment 2013 third quarter earnings conference call. With Edward and me today are Rand Blazer, President of Apex Systems; and Mike McGowan, Chief Operating Officer of On Assignment and President of Oxford Global Resources. During our call today, I will give a review of the markets we serve and our operational highlights, followed by a discussion of the performance of our operating segments by Rand and Mike. I will then turn the call over to Ed for a more detailed review and discussion of our third quarter financial performance and our estimates for the fourth quarter of 2013. We will then open the call up for questions. Now on to the third quarter results. Revenues in the third quarter were $432.2 million, up 15.4% year-over-year and 3.4% sequentially. Income from continuing operations was $20.2 million or $0.37 per diluted share, up from $14.7 million or $0.28 per diluted share in the third quarter of 2012. Revenues generated outside the United States was $20.1 million or 4.6% of consolidated revenues in the third quarter, versus $19.2 million or 4.9% in the third quarter of 2012. Adjusted EBITDA was $48.8 million or 11.3% of revenues. All markets we serve remained productive and stable during and exiting the quarter, and all of our divisions, except Physician Staffing, showed positive momentum exiting the third quarter. Once again, we saw a particularly strong growth and strength in the IT end markets. Our IT group grew 19.1% year-over-year. Our Healthcare groups continued to make solid progress in improving their operating performance, and in the third quarter, we saw a stable demand for our services in our Allied Healthcare groups. During the third quarter, we built on the increased end market demand in…

Great. Thank you, Peter. Apex Systems had yet another very solid quarter. Our requisition flow from our accounts for Q3 was up on a year-over-year and sequential quarter basis, and we again turned that flow into year-over-year and sequential revenue and earnings growth. We posted revenues of $246.4 million, representing 21.6% growth over the same period a year ago and sequential growth over Q2 of 5.5%. Growth continues to be paced by positive performance across our top 142 accounts in all 7 industry verticals. You will recall that our top accounts program represents more than 2/3 of our business, with retail accounts making up the remainder. Our largest growth came from our top accounts in the financial, health care, telecommunications and consumer industrial verticals. We also continue to see positive growth in our other verticals with our technology, business services and government services verticals growing soundly in Q3 on a year-over-year and sequential basis. Gross margins for the quarter are up slightly for us from a year ago at 28.2% versus 28.1%. Growth in our revenue mix from the mix of skills required in our accounts impacted positively our gross margin performance. The pricing environment remained steady in the quarter. Our conversion of revenue and gross margin to operating margins continued strong in the quarter. These increases in operating margin resulted from a continued increase in the productivity of our sales, recruiting and back-office teams. We continue to see a solid market environment for our business in the coming quarter and expect that our revenues and operating performance will continue to grow, both on a year-over-year and sequential basis, despite fewer billing days in Q4 compared to Q3. Overall, Apex continues to perform very well in a generally positive market environment for IT spending. I'll now turn the call over to Mike McGowan to discuss Oxford's results and the performance of our other legacy On Assignment divisions. Mike?

Good. Thanks, Rand. Let me start first with Oxford. Our revenue for the third quarter was $100 million, 13.5% over the comparable period of 2012. The increase in revenue was primarily due to an 8.9% increase in average consultants on assignment, and a 2.1% increase in the average bill rate to $122.70. Sequentially, our third quarter revenue was approximately $1.5 million less than the second quarter of 2013. The primary reasons for this sequential decrease in revenue were related to the impact of consultant vacations, overall fewer hours worked in the summer months of July and August, especially in Europe, and the completion of a significant project at our largest client. Those of you familiar with our business model, you often hear me talk about our average client that traditionally has just one or two consultants on assignment. This specific client actually had over 80 consultants on assignment at the peak of the project in the second quarter. This negatively impacted our quarter 3 revenue by a little over $3.3 million. We added new clients and projects during the quarter, not enough to make up for the completion of this large project. In addition, we also saw a decrease in our overall business within the military and defense industries. Our Healthcare IT unit continues to be our fastest-growing unit, with a current annual revenue run rate of approximately $80 million. Our third quarter gross margin within Oxford was 34.7% and was 81 basis points lower than the third quarter of 2012, as we expected. This compression was related to a change in our overall mix of business. Gross margin for our Healthcare IT division is over 500 basis points less than our other divisions, primarily the result of the competitive marketplace and pricing required to assign multiple consultants on each…

Thanks, Mike. As Peter referenced earlier, our operating performance for the quarter was at or above the high-end of our estimates. Our revenues closely approximated the high-end of our estimates, and we exceeded our estimates for gross margin, EPS and adjusted EBITDA. Our adjusted EPS was $0.52 per share, which was $0.03 above the high-end of our estimates. Revenues for the quarter were $432.2 million, up 15.4% year-over-year and 3.4% sequentially. Our Technology segments, Apex Systems and Oxford, which comprise 80% of our total revenues, grew 19.1% year-over-year and 3.4% sequentially. Our nontechnology segments, which account for 20% of our revenues, grew 2.5% year-over-year and 3.4% sequentially. Conversion and direct hire revenues for the quarter were $7.4 million or 1.7% of total revenues, compared with $7.3 million or 2% of total revenues in the third quarter of 2012. Gross margin for the quarter was 30.2%, down 65 basis points year-over-year and up 42 basis points sequentially. The year-over-year compression primarily related to a decrease in the mix of permanent placement revenues; a higher mix of revenues from Apex Systems, whose gross margin is lower than our other segments; and higher growth in lower margin accounts. The sequential expansion in gross margin primarily related to the increase in the mix of permanent placement revenues from 1.5% in the preceding quarter to 1.7% in the third quarter. SG&A expenses for the quarter were $88.5 million or 20.5% of revenues, compared with $77.4 million or 20.7% of revenues in the third quarter of 2012. These expenses were in line with our estimates for the quarter, and the increase primarily related to incentive compensation on the growth in gross profit and infrastructure investments to support the larger organization. SG&A for the quarter included a $1 million benefit for the reduction of an earn-out obligation.…

Thank you, Ed. We believe that we are well positioned to take advantage of what we believe will be a historic secular and cyclical growth marketplace opportunity for the staffing industry over the next 3 to 5 years. While the entire On Assignment team is very proud of our performance, we remain focused on continuing to profitably grow our business. I would like to once again thank our many loyal, dedicated and talented employees, whose efforts have allowed us to progress to where we are today. I would like to now open the call up to participants for questions. Operator?

[Operator Instructions] Our first question comes from the line of Sara Gubins of Bank of America.

First, on Oxford, you mentioned the client that had, had 80 consultants on assignment, and that, that hurt by about $3 million in the quarter. I'm assuming that, that will drag when I think about it on a year-over-year basis for the next 3 quarters, and I just wanted to check that.

Yes, so it was a medical device company, Sara. I think that virtually all of the consultants on billing at that customer are pretty much through. And it was at its peak in the second quarter, but it will be first and second quarter in the comparison numbers. So we anniversary it, really for all practical purposes, third quarter of '14.

That's great.

But we've replaced most of it.

Okay. If I think about your bill rates, they were down sequentially in a couple of your segments. Is there any -- can you talk about what's driving that?

That's just normal ebb and flow of business. It's just mix of business. Apex was the fastest grower of all of our divisions.

Okay, and how do you think about the ability to move bill rates up more over time?

That's just market-driven. We do believe that there's room to expand it. Wage inflation has been pretty muted. But as you know, specifically in the skill sets that we provide, that they're becoming more and more scarce, so that means that our customers are more realistic about what they have to permit us to be able to bill them in order to pay consultants the right level of compensation for them to work at their locations.

Okay, and then last -- any change in the ability to attract consultants?

Say it one more time, please?

Any change in the supply of consultants or the ability to attract consultants?

No. I mean, it's been tough, as far as demand and tightness of the skill sets that we recruit to, but we've been able -- we, once -- we expanded our growth rate and -- at Apex, and grew 15.4%, which was consistent with the second quarter and dramatically above the entire industry. And so we may have to work a little bit harder, but we're not using that as an excuse as to why we're growing at certain levels. There's -- we can still find people. [Technical Difficulty]

We'll go to the next question. Comes from the line of A.J. Rice.

A couple of questions, maybe. On your comments on the IT segment, you mentioned seasonal factors of -- for the sequential performance, I think, on Apex. You got such good secular growth there in those IT segments that I often don't focus on seasonality. Can you just sort of remind me of, if you peel back the sort of secular growth, what is sort of the seasonal pattern for the IT business, in terms of relative strength among the quarters? And how does it lay out typically?

Yes. So first of all, the comment was attributable to Oxford. And as you know, Oxford has European operations. And as you know, a lot of the European countries take a full month off in the summertime. And so it affected -- it affects the ebb and flow more so at Oxford than it does at Apex, because Apex has 100% U.S. base. With that said, A.J., typically for most of our divisions, the third quarter is the strongest quarter of the year. And as far as seasonality impacting the IT world, third quarter is a good quarter to operate in. And absent a declining economy, fourth quarter is typically good for flushing budgets.

Okay. In previous calls, you've commented on, especially in the last call, I think, that you're getting to the point where your businesses are running well, and you're going to look a little more at cross-selling opportunities, maybe realizing synergies broadly in some form or fashion. An update on that, if possible?

Yes. So it's going well. I think that we'll more fully discuss a variety of things that we have developed in the early part of the first quarter of 2014. We probably will have an Analyst Day, but we do have some definitive plans moving forward that we think can help us grow a little bit faster and maybe enhance our operating leverage.

Okay. And then maybe I'll just ask you quickly about the Physician Placement business. The softness that you saw, was that sort of focused on any particular geography or specialty? And I know there's been some discussion by some of the players about MSPs and maybe trying to bring that type of format to the business? Is that having any impact?

Yes. So let's break it down. So we'll take ownership for a certain part of our performance. I think we could have executed a little bit better, but the truth of the matter is, 65% of the overall performance was just a lackluster end market. We had kind of a historically high inter-quarter cancellations for coverage by physicians, which we typically don't have. I mean, we just had a couple of large customers who said, "We just don't have the need for these individuals and don't travel them." And we had one particular hospital that is really struggling financially in the Southwest that said, "You know what, as much as we need the physicians, we got to hold costs off in the quarter, so we're not going to take the coverage." As it relates to the MSP space, I would tell you that again, I think you can ask others that are in the space, too, but I -- that is not going to gain traction. I mean, first of all, you're dealing with physicians. You're dealing in smaller numbers. There's not bulk buying of physicians. It's not unusual within the industry practice that you may have a couple of firms that are filling a single order, meaning a couple of weeks, then another firm is covering the other couple of weeks, et cetera. And we've actually seen the exact opposite. We've seen a couple of such situations where some hospitalist companies awarded MSPs and notified the "subcontractors" and the subcontractors said, "We understand that's your strategic decision, but we're going to place these physicians elsewhere," and started ripping the physicians out, and they backed up on having us to work under the terms that they had dictated under the MSP. So I just -- I get it for the nursing space, because that's a commoditized vocational skill, but I just do not see it on the physician side.

And our next question comes from the line of Tim McHugh. Timothy McHugh - William Blair & Company L.L.C., Research Division: First, I was going to ask about, on the physician side, just to follow up on that. Were you seeing, I guess, a smaller set of orders for physicians from some of the clients versus, I guess, entire contracts? I guess, I'm trying to get a sense for what's the risk that you lost some customer relationships versus, I guess just smaller demand?

Tim, we didn't lose the relationships. And it -- really, we're talking about 6% of our total revenue. The point we're trying to make is entering the quarter, third quarter, when we did our guidance for you all, we had many more days sold booked that typically turn into revenue, and you don't have inter-period cancellations, but because of the patient admissions environment right now, we saw some unexpected cancellations of assignments. So -- but it wasn't a -- because remember, the work that we do in that, or anyone does in the physician space, today, you won't generate $1 revenue from -- for about 3 months. That's how far the advance booking is. So we didn't see a slowdown in demand. What we saw is, what we perceived is book backlog fell off because of the patient admissions environment getting sloppy, and people concerned with Medicare expense cuts and stuff like that. Timothy McHugh - William Blair & Company L.L.C., Research Division: Okay. I guess, you also mentioned government. So I'm assuming that's part of the weak environment, but how much of a hit was the government?

In the physician space? I mean, it pains me to talk about this, because we told you that we missed our second quarter -- our third quarter forecast by $1.5 million, out of $433 million. So I can't really break down how much was day sales canceled versus the government space. I just, qualitatively, I would tell you, some of the government space was slightly less buoyant than we would've expected. And in a particular state. Timothy McHugh - William Blair & Company L.L.C., Research Division: Okay. And then, the -- on the Apex side, the press release talked about what you've talked about before, just taking share from other sources of, or other delivery models for IT services. Can you talk about, I guess, give any more -- did you see anything different this quarter? Or is it just a continuation of that trend? And is there anything in terms of the project management skills you need to oversee temp staff that you're having to invest in that's helping you to do that?

Well, again, it's a deployment model versus a conversion of the staff augmentation model. What we're seeing is that CIOs are looking at staff augmentation as a more attractive deployment model than potentially offshoring or complete project consulting outsourcing because of cost, flexibility, visibility and accountability. And we have the people and the business model and the controls in order to deliver the service, even when it's on a statement of work basis. And what I would tell you is, we haven't seen a change in the CIOs' mindset at this point, that they think they'll spend a bigger chunk of their total IT services dollars on projects that are deployed or developed with staff augmentation versus other deployment models. Rand, you want to add anything on that?

No, I don't know. Tim, did that answer your question, do you think? Or... Timothy McHugh - William Blair & Company L.L.C., Research Division: Yes, that's, I mean, I guess, I was just trying to understand if that's an area you are trying to build up on or if it's not part of the solution that they're turning to you for, I guess.

I think the answer is we're winning. We're winning top accounts, we're winning across the board and we're winning in our staffing and project services, IT-centric services.

Tim, I just want to be clear on this. We're not saying that we're beating Accenture at project consulting. We're saying that the customer is deciding more often than not now that maybe they should do this on an IT staff aug basis, versus a project consulting basis. But we are not trying -- we're not bidding with the same deployment model against Accenture. We may be bidding against Accenture. Accenture is saying, "I'll do it on a consulting basis." And we're telling the customer, we'll do it on an IT-staffing basis, and the customer's saying, on this project, we're going to do it on a staff aug basis versus a consulting basis. Timothy McHugh - William Blair & Company L.L.C., Research Division: And last question on Apex. I think you said the top accounts continue to grow quickly. Is that growing faster than the, I guess, the non-top accounts, the smaller clients?

It is. And I think that's a fair comment that what we're seeing is the larger, more sophisticated organizations, despite uncertainty, et cetera, are engaging more forcefully than $1 billion dollar and below revenue type companies.

Next question comes from the line of Paul Ginocchio with Deutsche Bank.

This is actually Ato on for Paul. First, I was wondering, can you give me the billing days in the third quarter and what you're expecting for -- in the fourth quarter?

Well, we did. It's in the press release. But I'll repeat that. It's 63.4 in Q3, and we're estimating 61.4 in Q4. So -- I'm sorry, 63.7 and 61.4.

Looking -- considering the 80 consultants that rolled off the single client for Oxford, and the labor tightness, the tightness of labor market for IT, was it easy to redeploy those, redeploy those consultants? Or how long did they sit around?

I think the answer is, I wouldn't say easy, but it was manageable, because we were basically flat quarter-to-quarter, even though we had a lot of consultant project completion.

And yes, those are -- this is Mike. They actually are -- 95% of them we are able to keep in our stable, if you will, and they've been now reassigned to other Oxford projects that we got through the quarter.

All right, great. And then just looking at your share gains. Looking at some data from the SIA, it puts your market share at about 5%, and they're expecting the IT staffing market in the U.S. to grow at about 7% in 2013, which we think adds about $1.5 billion of revenue. And our estimates show you guys are gaining -- are adding about $200 million to incremental IT staffing revs, and that implies about 13% of the incremental market growth. I was wondering, are you guys really gaining that much share? Or is the ITA -- or is the SIA estimating market growth too low?

No. I mean, I can't tell you what percentage of the incremental growth we're capturing, but we are taking market share, because we're growing faster than -- forget about the data points that SIA gives out. We are growing faster than what other people are reporting. And it's faster than what -- and I don't think anybody thinks that the market's growing 19%.

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

In prior calls, you talked a lot about Healthcare IT. And I was sort of curious what -- how important it is to you at this point? We had another company that had a difficult time at ICD-9 to 10 because of reduced Medicare, Medicaid payments down to the hospitals. Did you see any issues in the last quarter?

Yes. So Ed, first of all, we do certified coding and billing, but we do that in our health information management practice, which is part of our Allied Healthcare group, and it's not part of our "Healthcare IT group." Our Healthcare IT group currently really only works on technology and deployment implementation of ERP, EMR record systems. But with that said, there was a little bit of a lag at the -- in the third quarter, but we're starting to see a pickup again. The growth rate for the Healthcare IT groups was still significantly above some of the other IT skill set growth rates. And we just finished our quarterly reviews with that group, and they feel relatively positive for the next couple of quarters out. So it's important. I think you will continue to hear us talk about health care being important to us, specifically on technology. And we think it's a big space that will continue to get more sophisticated with its use of technology, so we're staying focused on it, and we don't think that we have, at this point, big grow-over problems because of all the HITECH Act stimulus dollars. We think that there's plenty of work behind that.

Is any of the work you do involved with the Affordable Care Act deployment?

Mike, do you want to address that?

No, most of the stuff that we're all doing, as Peter mentioned, is primarily within the EMR world. And then it gets into the HIM activity that Peter also mentioned. So we're really not involved in that part of the implementation of that.

I can definitively say we were not part of building the website for healthcare.gov. No doubt about that.

That's good to hear. It's been a while since you did an acquisition, a large acquisition. At what point do you feel comfortable? At what leverage ratio? I mean what trigger? Or is it all dependent on your finalizing your strategic plan?

No, I mean, I think when you look at it on just a capitalization basis, Ed, we've been pretty open that once we got to 2.5x trailing 12-month adjusted EBITDA leverage ratio, that we felt that we could do some acquisitions again. And we've been looking hard and getting close to a couple of things, and we are a lot closer today to a couple of things than we were in the second quarter. But to find the right deal and the right fit and on the right terms for both parties takes time. And it's been a difficult marketplace because the debt markets have been so robust. There are a lot of people in the private equity world that will just -- they will pay more just because they can put another turn of leverage, not because the company's worth more, but just because they can put another turn of leverage. So we've walked away from a number of opportunities and remain disciplined, but I'd tell you today, we're on several fronts, a lot closer to some things than we were in the first half of the year.

Last question. You made some comment earlier about the fourth quarter, usually do well with flush. Is that a comment about this year? Your expectation for some levels of IT flush? Or is that more of a generic comment?

That was more of a historical generic comment.

And do you have any thoughts on what you're hearing from your clients, regarding the potential to clean up some budgets here?

Rand and Mike, do you all want to address that? I don't think we've heard anything passionately different than what the historical trends are. But Rand, why don't you go first?

Well, no, but Ed, you're very familiar with the government marketplace. I don't know that there's flushing anymore. Who knows what government budgets are, so and when the right flushing time is. But, as we said, we're seeing a steady environment out there for us, and we're doing quite well, both collectively, Apex and Oxford.

Yes, I would agree, I wouldn't add anything else. I agree with Rand.

Next question comes from the line of Tobey Sommer with SunTrust.

Many of my questions have been answered, but I wanted to get your perspective on temp penetration since we got a September BLS number a few weeks late this week. What do you have as an expectation for the overall temp market, and then I -- in terms of where temp penetration is likely to go this cycle? And I wanted to also get your perspective on the professional staffing, that subcomponent that we -- the BLS doesn't give us transparency into that kind of data, but maybe, your -- any color you would have on where you think temp penetration is professionally, and where it ultimately could go.

So I don't have specific numbers for you, but just to remain consistent with what I said previously on the call, I do believe that we're seeing a very attractive marketplace for professional staffing services, and it's because a lot of customers are realizing that some of the projects that they do, whether it's in science, technology, engineering or mathematics, are better suited to be done on a staff aug basis than on an internal execution basis. So the service is gaining traction, and it goes beyond just GDP growth or economic recovery. And I do think that penetration rate is higher for professional staffing than it is for commercial staffing. And I think that's what's really going to drive the overall temp penetration rate being above its previous historical norms, is that professional staffing temp penetration rate's going to be much, much higher than it has been historically. And I think that correlates to what our thesis is, that IT staff augmentation today, it may change, but today is getting a bigger percentage of total IT service dollar spends than it did several years ago. Now it may be a 10th of a percent, it may be 1%, but we think that our deployment model is gaining traction versus the other deployment models.

That's helpful. And a question about M&A and capital deployment, if I could follow up. You kind of, in your previous response to a question, gave an upper bound of leverage, 2.5x trailing, where you would, again, start to revisit acquisitions. Is there a lower bound of leverage at which point you'd be, feel a little bit more compelled to return cash to shareholders through some other mechanism?

Yes. I mean, I'm not trying to be elusive. Our primary focus or preference would be, if we can do accretive acquisitions and grow our earnings that, that would be better than just sheerly purchasing shares. And by the way, I didn't mean to imply that 2.5x trailing 12-month EBITDA is the upper bound of the amount of leverage that we put on the business. That was just an internal marker, where we wanted to get below to show our shareholders that we can lever and delever quickly. Now that we've demonstrated that, and demonstrated that we can delever quickly and that we're disciplined, if we can find the right acquisitions, we would relever and then delever quickly again.

Next question comes from the line of Paul Condra with BMO.

I wanted to follow up on the Apex, really positive results there. And you mentioned the skill mix, which is helping gross margins trend positive. And I just wondered if you can talk at all about, if you expect that to keep trending in that direction. Can you put any kind of margin expectation for that business, just gross margin expectation?

Yes, I mean, it depends on client acquisition. It depends on a particular demand for certain skills by customers. But what I would tell you, the real takeaway is, from our guidance is, that we see continued positive growth momentum at very high growth rates, and we believe we have a stable margin environment to execute these high growth rates.

Okay, great. That's helpful. And then with the -- this -- the IT staff augmentation, and you talk about the story there. What does that mean for length of assignment and conversion rates? Is there any impact that you expect maybe longer-term from this kind of secular story?

Yes, I mean, the length of assignments have not been shortening. They're typically 5 to 6 months. The amount of repeat business is continuing to go up amongst our customers. And as far as conversion rates, it just depends on the divisions. But conversion of employee -- temps to full-time employee kind of goes against the argument of the 4 deployment models, right? It kind of goes that you have something that we couldn't find, and we tested it out and we like it, and we want to bring it in full-time. Versus, this is a discrete project. We need some very specific skills. We're going to use them for the period we need, and then we're going to turn them back over to you. And we think that deployment model's better than offshoring or project consulting or internal execution. And remember, Paul, we say this in jest, but you can see it in some of our contracts. We refer to conversion fees as liquidated damages. We prefer people not to convert our temps because then, there's one fewer person that we can put on repeat -- repeat assignments.

Great, understood. And then, just switching over to Oxford. The completion of the large project. I'm just wondering if that -- did that happen a little sooner than you had expected? And did that, at all, impact the results being a little lower than you had kind of given soft guidance for last quarter?

The answer is yes and yes.

Next question comes from the line of Dan Dolev with Jefferies.

A question on gross margin. It seems like the implied gross margins in -- or the guidance of gross margins for Q4 is a little bit less than the implied gross margin. When you look back as to when you were giving guidance earlier this year, were you just not -- what was the reason for the gross margin coming in a little bit lighter? Were you just not expecting your Apex business to grow as fast as it did, or maybe the other businesses to grow slower, or? Then, how should we think about the discrepancy of EBITDA doing better than expected versus gross margins doing lower? Are you just converting more? I mean, just to understand how it works.

Well, as it relates to gross margins that we're estimating for Q4, we're estimating it's going to be down slightly, and it's due to a couple of things. I think the primary thing is, we're expecting the mix of permanent placement revenues to be down sequentially. You probably remember, from the comments that we made earlier, it was up sequentially in Q3. It's going to be down sequentially in Q4. And that's, which is a normal, sort of typical seasonal pattern. The other thing is, as it relates to Q4, that contemplates that Apex Systems will continue to grow faster than our other segments, which has an effect on the consolidated gross margins. So those are the 2 factors driving the sequential reduction. As it relates to year-over-year, quite honestly, I think we're lucky to be as close as what we are. Because obviously, there's a lot of moving parts. I think the key thing for us is, that we more than make up for the -- any erosion or compression in gross margin by an improvement in our efficiency, and we saw significant efficiency gains in certain of our businesses.

And we did a lot of hiring early in the year, and some of those people are now becoming productive.

Next question comes from the line of Mark Marcon with R.W. Baird. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: With regards to Apex, the growth has certainly been impressive, particularly with the gross margin improvement, commensurate with that. Rand, can you talk a little bit, a follow-up from the last quarter, in terms of the runway, of expanding the top accounts, you're in 200 of the Fortune 500. Can you describe some of the -- what you're seeing there in terms of the opportunities for next year as it relates to that? And then secondly, can you describe your capacity? Because you have been ramping up quickly. Are there any sort of step functions that we should expect, with regards to needing to add capacity?

Peter, I'll go ahead and say the first part is, no, I think penetration of Fortune 500, along with our retail account business, and this is growing as well, not as fast as our top accounts program is, but no, it continues to be a focus and objective. And I mean, there are 500 Fortune 500 and 1,000 Fortune 1000. We're in 200 of them. So there's plenty of market opportunity for us to continue to grow and take market share, and we think we'll continue to do that, obviously. As far as step function of our capability, internal capabilities, we're disciples of conversion, and improved productivity as Peter mentioned, in both our sales force and our delivery teams and, some of that is automation, better process, better techniques, better leadership. And I think we're continuing to grow. We've had a long history of that kind of growth, and at this point, it's a matter of just sticking to it and focusing.

Mark, just on a -- we've always been pretty clear about the investments we've been making. And we've been making investments and still have been able to expand our conversion ratios and operating leverage. So it's not like, we've been holding back on hiring and investments, and now, all of a sudden, we have a huge investment cycle. I mean, we've been going -- we've been investing along the way. So I don't see any sort of stair-step significant up investment period that would affect our conversion ratios. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: Great. And then with regards to the Oxford business. What are you seeing with regards to the client willingness to absorb higher bill rates? Obviously, the consultants, the really in-demand ones are getting multiple offers. Are you able to pass that through? I mean, the gross margins continue to be some of the best in the industry, but they're down just a little bit. How should we think about that?

Mike, you want to go first?

Yes, I can. Really, Mark, we're not seeing much difference. We were able to pass, to most of our customers, that increased pay rate that were -- have to pay those high-end consultants to the clients. So we're seeing that. The only -- and part of the reason, as I mentioned, we're down a little bit on gross margins, primarily is our Healthcare IT business continues to grow. It's much more competitive than the other segments, as well as the reimbursable expenses that are passed through the client at no markup, are becoming larger. So we're seeing part of that come down in terms of the gross margin. So -- but other than that, in most cases, we're still able to pass the cost on to our end user.

I agree. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: Great. And then with regards to the health care vertical, and what you're seeing at the hospitals, are you getting any sort of color, with regards to when they think things might change, or anything along those lines?

Well, not really. But there are normal seasonal weather patterns that affect patient admissions. Flu season, cold weather affect old people a lot more adversely than the younger populations. So there's times that weather -- seasonal pattern, that can affect demand. But it's just that the health care clinical side, Mark, has just been very, very choppy. And the customers have gotten very aggressive about turning on and off utilization of contingent labor, much more so than any other flavor of staffing that I've ever been associated with. And I just think that's the reality of that marketplace. And as -- that they're having to adjust their expenses real-time much faster than for-profit organizations or, I should say, non-health care organizations. And I think that -- that will only dissipate when labor gets so tight that someone can say, "We understand your need to do that, but if you do that, we can't work as forcefully with you because another hospital won't do that to us." But we're not in that environment right now. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: So it sounds like that could persist for quite a while. How does that impact your appetite on the Physician Staffing side? You'd been in a conference where you indicated an interest in expanding that. And you certainly sound like you're still positive from a long-term perspective.

Look, we're trying to make long-term decisions, and we still find that space very attractive because of the bill rates, the maldistribution of physicians, how long it takes to mint a baby physician, and the influx of a bunch of additional patients, so. But right now, it's a little bit sloppy. But I don't think that, that will continue forever. And we did grow 7.4% for the first 9 months of the year, and I think it's a decent marketplace, but it's more challenging than Life Sciences and IT right now. Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division: Then on the Life Sciences, that was down a little bit year-over-year, or it actually just grew just slightly. You're expecting it to pick up a little bit in the fourth quarter. Is that just from some new projects that are coming on, or anything that we should...

It's based on demand that we have right now. Our Life Sciences group, U.S. operations, actually grew 9.2% year-over-year. And it grew 5.4% over the prior quarter, and it grew 8.6% year-over-year on a consolidated basis. And Europe is still slower growth than the U.S., and the fourth quarter can have -- we do a lot of work with biotech companies. They can close their research facilities for a longer period than other corporations, but with that said, we're seeing a continued improvement in demand in that space. And I think some of the tweaks we've done to our business and our management are starting to pay dividends.

And the last question we have in queue comes from the line of Randy Reece with Avondale.

I'm getting mixed messages from the marketplace about trends in gross margins and vendors' willingness to concede on price. I was wondering if you had seen any changes in that?

Randy, were those comments related to professional staffing or commercial staffing?

It was professional, but it was specific, geographic markets.

Yes. We haven't seen that as an overarching challenge to growth. Our gross margins, actually, real-time expanded third over second. And so, pricing is always a challenge, specifically if you're in certain marketplaces with competitors that are not as disciplined on pricing. But with that said, we're able to grow very high levels. I mean, I think the real takeaway is, how were we able to grow 19.1%, which is probably 1,000 basis points faster than anybody else. And we had margin expansion and not compression. So that tells you we're not giving our services away, right?

And we have no further questions in queue.

Well, we appreciate the time and attention and look forward to speaking with you on the fourth quarter conference call. Thank you, everyone.

Ladies and gentlemen, that does conclude today's conference. I want to thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.