Feb 19, 2014
Executives
Peter Dameris - President and Chief Executive Officer Ed Pierce - Chief Financial Officer Rand Blazer - President, Apex Systems Mike McGowan - Chief Operating Officer, On Assignment and President, Oxford Global Resources
Analysts
A.J. Rice - UBS Edward Caso - Wells Fargo Gary Bisbee - RBC Capital Paul Ginocchio - Deutsche Bank Frank Atkins - SunTrust Stephen Sheldon - William Blair Jeff Silber - BMO Capital Markets Mark Marcon - R.W.
Baird Randle Reece - Avondale Partners Brian Davis - Bank of America
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the On Assignment Q4 2013 Earnings Call.
At this time, all participants are in listen-only mode. Later, we will conduct question-and-answer session.
(Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Mr.
Ed Pierce. Please go ahead sir.
Ed Pierce
Thank you. Good afternoon.
First, 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 risks and uncertainties that could cause the actual results to differ materially from those statements and we do not assume the obligation to update statements made on this conference call.
We describe some of these risks and uncertainties in today’s press release and in our filings with the Securities and Exchange Commission. I would now like to introduce Peter Dameris, our CEO and President, who will provide an overview of our results for the quarter.
Peter?
Peter Dameris
Thank you, Ed. Good afternoon everyone.
I would like to welcome everyone to the On Assignment 2013 fourth quarter earnings conference call. With Ed and me today are Rand Blazer, President of Apex Systems and Mike McGowan, COO of On Assignment and President of Oxford Global Resources.
During our call today, I will give a review of the markets we serve and our operational highlights, followed by a discussion of the performance of our operating segments by Rand and Mike. I will then turn the call over to Ed for a more detailed review and discussion of our fourth quarter and full year financial performance and our estimates for the first quarter of 2014 and the full year of 2014.
We will then open the call up for questions. Now, on to the fourth quarter and full year results.
Revenues from continuing operations in the fourth quarter were $423.6 million, up 14.7% year-over-year. Income from continuing operations was $17.4 million or $0.32 per diluted share, up from $12 million or $0.22 per diluted share in Q4 of 2012.
Revenues generated outside the United States was $19.8 million or $4.7 million of consolidated revenues in the third quarter versus $19.8 million or 5.4% in the fourth quarter of 2012. Adjusted EBITDA from continuing operations was $48.4 million or 11.4% of revenues, up from $39.4 million or 10.7% of revenues in the fourth quarter of ‘12.
All markets we serve remained productive and stable during and exiting the quarter, and all of our divisions, including Physician Staffing, showed positive momentum exiting the quarter. Once again, we saw a particularly strong growth and strength in the IT end markets.
Our IT group grew 16% year-over-year in the fourth quarter. Our Life Sciences group grew 11.8% year-over-year and reported its strongest performance since the first quarter of 2012.
While demand still remains challenging in the Physician Staffing market, our team is working hard to gain market share. Exiting the quarter, our IT and Life Sciences groups had the strongest momentum and appeared poised to have another strong growth year.
As many of you have heard us state, we believe our scientific staffing business is the more directly correlated to GDP growth and our best internal predicting tool of the strength of the broader U.S. economy.
Based on demand in that division, exiting the quarter in our actual fourth quarter results, we believe the broader U.S. economy is gaining momentum.
As for IT staffing, we continue to see positive demand and a continuing adoption of staff augmentation as a viable alternative to outsourcing, offshoring and consulting. Consolidated gross margins of 30.6% was up from 30.3% in the fourth quarter of 2012 and up from 30.2% in the preceding quarter.
The year-over-year expansion was primarily due to a higher mix of revenues from permanent placement, which carries a higher gross margin and a favorable adjustment to the medical malpractice actuarial reserve. The sequential expansion in gross margin was also primarily due to a higher mix of permanent placement and conversion fees, which were 2.1% of total revenues for the quarter, up from 1.7% of total revenues in Q3, 2013 driven by the inclusion of CyberCoders for the month of December.
Regarding our operating efficiency, the percentage of gross profit converted into adjusted EBITDA was 37.3% during the quarter and 35.3% for the full year. We believe these conversion rates are amongst the highest in the staffing industry despite a lower contribution of revenues from perm and conversion fees.
Our adjusted EBITDA margin was 11.4% in the fourth quarter compared with 11.3% in the preceding quarter. Because of our lack of dependence on perm and conversion fees for profitability, we believe that as we increase our contribution from those services as a percentage of our total revenues, we will expand our profit margins from the levels that exist today.
As we previously reported on December 2, 2013, we sold selected operating assets of our Allied Healthcare unit and acquired two companies CyberCoders, a $58 million revenue contingent search business and Whitaker Medical, a $27 million revenue physician staffing business. We are moving quickly and thoughtfully to integrate the two acquired businesses and build sales bridges between our existing business and the acquired businesses.
During our Analyst Day, we hope to layout our five-year growth plans, move EBITDA percentage targets and integration optimization projects that should permit us to expand our EBITDA margins. Regarding industry dynamics, during and exiting the fourth quarter secular trends continued to permit temporary labor to see greater growth prospects than full-time labor.
As previously mentioned, we believe the macroeconomic environment in North America where we derive 95% of our total revenues has improved from the first half of 2013 and we continue to see a classic cyclical recovery in professional staffing. As for the financial services sector, we continue to see higher demand from clients in that sector than what we experienced in Q3 of 2013.
Ed will provide you our first quarter financial estimates later on this call, but based on our current weekly revenues and the normal seasonal patterns, we do not see any appreciable negative change in demand for our services from our customers. Our operating performance in the fourth quarter of 2013 and our estimates for the first quarter demonstrate that our business model and areas of focus permit us to grow despite less-than-optimal economic conditions.
As for the actions we took to sustain our future positive revenue growth rates, we continued to add to the number of recruiters and sales personnel that we employ. Exiting the quarter, demand for our services remained stable in all divisions.
Our weekly assignment revenues, which excludes conversion, billable expenses and direct placement revenues averaged $31 million for the last two weeks, up 11.2% over the same period of 2012 and also reflects the impact of the adverse weather on the Northeast. Integration, coordination and cash generation related to our acquisition continues to be at or above our expectations.
Ed will walk you through the specifics later in this call. Our leverage is now 2.2 times trailing 12-month adjusted EBITDA.
As for an update on our strategic planning, we have completed the same and we will have an Analyst Day on March 26, 2014 at the New York Palace Hotel in New York City. Notices and invitations have gone out and you can contact Ed Pierce for further information.
Finally, we have launched a process to amend our existing credit facility to replace $82.5 million of our term B loan with a like amount of term A loan. This amendment will save us about $1 million a year in interest and is permitted under the terms of our existing loan agreement.
I will now turn the call over to Rand Blazer, President, Apex Systems, who will review the operations of his segment. Rand?
Rand Blazer
Great, thank you Peter. Apex Systems had another solid quarter.
Requisition flow from our accounts for Q4 continued to rise on a year-over-year basis and we again turn that flow into year-over-year revenue and earnings growth. We posted revenues of $249.9 million, representing 20.4% growth for the same period a year ago and sequential growth over Q3 of 1.4%.
For the full year 2013, we achieved revenues of $942.5 million. Going back to Q4, our growth was paced by positive double-digit revenue growth across our portfolio of accounts in all seven industry verticals that we operate in.
For the year, our largest growth came from our top accounts in the financial, healthcare, telecommunications and consumer industrial verticals. Again in Q4 we saw broad based growth in accounts across all industries.
Gross margins for Apex for the quarter were up 34 basis points from a year ago at 27.68% versus 27.34%. Growth in our revenue from the mix of skills required by our accounts impacted positively our gross margin performance.
The pricing environment remains steady in the quarter. Our conversion of revenue and gross margin to operating margins continued strong in the quarter.
Apex business unit contribution for the quarter was up from a year ago driven by the continued increase in the productivity of our sales, recruiting, and back-office teams. We are seeing a solid market environment for our business in Q1, 2014 as Peter mentioned and expect that our revenues and operating performance will grow on a year-over-year basis.
The weather we are seeing to-date in East and Midwest, particularly, will impact our growth in revenues by approximately 1% in the quarter. Overall though, we believe Apex will perform well despite these impacts.
I will now turn the call over to Mike McGowan to discuss Oxford and legacy On Assignment division results. Mike?
Mike McGowan
Thanks, Rand. As Peter mentioned earlier, we saw selective operating assets of our Allied Healthcare units in December.
We retained a health information management, or HIM practice of Allied and it has been integrated with Oxford’s Healthcare IT division. Accordingly, HIM is now reported on Oxford’s segment data for all periods.
The Oxford segment also includes the results of CyberCoders. Oxford’s quarter four revenues were $101.8 million, a 6.6% year-over-year increase, which included $3.6 million in revenues from CyberCoders.
For the quarter, average consultants on assignment were up approximately 2%. However, average bill rates were slightly lower primarily due to the inclusion of HIM.
Our firm revenues for the quarter were $3.7 million, up from $935,000 in quarter four 2012. This improvement in mix relates to the inclusion of CyberCoders that accounted for $2.7 million of the year-over-year increase in firm revenues.
As we previously discussed, Oxford’s second half of 2013 revenue performance was negatively impacted by the winding down of a significant project at our largest client and lower growth in our Healthcare IT group. The quarter played out as we predicted in December and we have started to see our consultants on assignment increase since the 1st of January, especially in our Healthcare IT group.
Oxford’s 2013 fourth quarter gross margin of 37.01% was 224 basis points higher than the fourth quarter of 2012 and 258 basis points higher than the third quarter of 2013. Both of these increases were related to the inclusion of CyberCoders and improvements in our contract margin.
Excluding CyberCoders, our fourth quarter gross margin was 35.46%, a 68 basis point improvement over the fourth quarter of 2012 and a 103 basis point improvement over the third quarter of 2013. Moving into 2014, as I just mentioned, we have started to see our consultants on assignment increase in quarter one and the trends that we experienced in the second half of 2013 are beginning to be reversed.
However, as Rand stated, we will also see a negative impact in the quarter due to the weather we have been experiencing. Revenues in quarter four for our Life Sciences segment were $45 million, a 2.1% increase over the prior quarter and an 11.8% increase year-over-year.
Our U.S. operations, which comprised 74%, total segment revenues grew 1.6% sequentially and 12.3% year-over-year.
European operations increased 3.4% sequentially and 10.2% year-over-year. Key drivers of growth for this segment included an improved operating environment across all core industries with pharmaceuticals, biotech and food and beverage leading demand for contract and direct hire services.
Gross margin for the Life Science segment was 32.81%, a sequential increase of 39 basis points, but down year-over-year. The year-over-year decline was primarily the result of gross margin lift from a non-recurring Belgium tax subsidy that we recognized in the fourth quarter of 2012.
Moving on to the first quarter of 2014, we continue to see signs that the environment in which we operate is stable and growing. Demand for contract, contingent and retained services throughout the United States and Europe remained steady and we are encouraged with the number of weekly contract assignments and permanent placement activity.
However, as with the other divisions, we have weather issues to deal with this quarter. Now, moving on to our Physician Staffing segment, revenues were up 2.3% sequentially to $26.8 million and up 2.9% year-over-year.
This improvement related to $2.3 million contribution from Whitaker Medical. The core business, excluding Whitaker, was as expected down 5.8% year-over-year.
Demand from key clients slowed in the fourth quarter. However, intra-quarter cancellations from previously booked business, was less than previously experienced.
Our government business, which is 40% of our mix slowed throughout the year as a result of state and federal budget issues. Our average bill rates were down slightly at 1% as compared to prior year period, primarily due to mix.
Gross margins were flat year-over-year and up 207 basis points sequentially due to a favorable medical malpractice reserve adjustment. The overall Physician Staffing marketplace continues to experience slow growth, has been very inconsistent from quarter-to-quarter.
However, on a long-term basis, we believe that drivers of the overall market are very positive. I will now turn the call back over to Ed Pierce.
Ed?
Ed Pierce
Thanks Mike. Before reviewing our financial results, please note that our results from continuing operations do not include Allied Healthcare, which was sold in Q4.
Results of this division are now reported as discontinued operations and the restated quarterly results for 2012 and 2013 were included in our press release on December 2, 2013. Also in December, we acquired Whitaker Medical Physician Staffing business and CyberCoders, a permanent placement firm.
The operating results of those two businesses are included in our consolidated results of operations only for the period from the date of acquisition through the end of the quarter. In the segment data, included in our press release, please note that Whitaker is included in our Physicians segment and CyberCoders is included in our Oxford segment.
The healthcare information management practice that was formally part of the Allied Healthcare segment is now included in the Oxford segment. As Peter mentioned, our key financial estimates for the quarter were above the high end of our estimates after adjusting for acquisition and strategic planning expenses, which we did not include in our estimates.
Revenues for the quarter were $423.6 million, up 14.7% year-over-year and 0.5% sequentially. Excluding the revenues of the acquired businesses, revenues were up 13.1% year-over-year.
Our technology segments, Apex Systems and Oxford, which comprised 83% of our total revenues, grew 16% year-over-year and 14.9% excluding CyberCoders. Our non-technology segments, Life Sciences and Physicians, which accounted for approximately 17% of total revenues, grew 8.3% year-over-year and 4.9% excluding the revenues from Whitaker.
As Peter mentioned earlier, Life Sciences reported year-over-year growth in the quarter of 11.8% and our Physicians segment was up 2.9%, which included $2.3 million in revenues from Whitaker. Conversion and direct hire revenues for the quarter were $8.9 million or 2.1% of revenues, compared with $6.6 million or 1.8% of total revenues in Q4 of 2012.
The improvement in mix was due to $2.7 million in perm revenues from CyberCoders. Gross margin for the quarter was 30.6%, up from 30.3% in Q4 of last year and 30.2% in the preceding quarter.
The year-over-year improvement in gross margin was attributable to the higher mix of perm revenues and slightly higher gross margins on our contract business. SG&A expenses for the quarter were $90.2 million or 21.3% of revenues, compared with $77.9 million or 21.1% of revenues in Q4 of last year.
SG&A expenses for the quarter included acquisition and strategic planning expenses at $2.6 million and a $1.6 million benefit from the reduction in an earn-out obligation. SG&A expenses from the two acquired businesses totaled $2.8 million or 0.7% consolidated revenues.
CyberCoders accounted for $2.4 million of that amount. While CyberCoders has higher gross margins, it’s SG&A expense margin is higher than our other businesses.
Amortization of intangible assets for the quarter was $5.9 million, up from $5.2 million in the preceding quarter. The increase related to amortization of intangibles of the two businesses that we acquired in December.
Interest expense was $3.4 million, down from $5.4 million in Q4 of last year. The effective interest rate at the end of the quarter was 3.7%.
The effective income tax rate was 42.4% for the quarter and 41.6% for the full year. The effective rates for the quarter and full year were higher than our estimates as a portion of the acquisition expenses incurred in Q4 were not deductible for tax purposes.
Income from continuing operations was $17.4 million or $0.32 per diluted share compared with $12 million or $0.22 per diluted share for Q4 of 2012. Income from continuing operations included $1.5 million in acquisition and strategic planning expenses after tax and $1 million benefit after tax on the settlement of an earn-out obligation.
Our adjusted income from continuing operations was $27.5 million or $0.50 per diluted share. Adjusted EBITDA for the quarter was $48.4 million, up from $39.4 in the – in Q4 of 2012.
Our conversion of gross profit into adjusted EBITDA was 37.3% or about the same as Q3. Our conversion rates which are measurement of our operating efficiency are among the highest in the industry.
Free cash flow which is operating cash flows less capital expenditures was $33.3 million, up from $22.6 million in Q4 of 2012. Accounts receivable DSOs excluding the two acquisitions were 54.4 days at the end of the quarter and an improvement of 1.8 days from the end of the preceding quarter.
Now, turning to our estimates for Q1 of 2014, we estimate revenues of $434.0 million to $438 million, gross margin of 30.6% to 30.9%, income from continuing operations of $12.1 million to $13 million, income per diluted share of $0.22 to $0.24, adjusted EBITDA of $37 million to $38.5 million, adjusted income from continuing operations of $20.8 million to $21.6 million and adjusted income per diluted share of $0.38 to $0.39. These estimates do not include any acquisition, integration or strategic planning cost.
These estimates assume billable days of 61.9 in the quarter compared with 62.4 in Q1 of 2013 and 61.4 in the preceding quarter. The estimates also consider the loss in revenues from the inclement weather which we estimate to be between $3 million and $5 million.
These estimates reflect a slight sequential decline from our pro forma Q4 revenues of $438.7 million due to the weather. We are also estimating a sequential decline from our pro forma Q4 gross profit of $140.7 million mainly due to the effects of the sequential decline in revenues and higher cost of services related to the reset of payroll taxes.
The payroll tax reset which occurs in the first quarter of every year results in an estimated increase in cost of services of $4 million to $5 million. We also estimate our SG&A expenses will be up over our Q4 pro forma expenses of $98.6 million.
Most of this increase relates to the sequential increase in payroll taxes of $2.5 million due to the payroll tax reset investments in our branch offices that support revenue growth and higher professional fees mainly related to our year end audits and stock compliant efforts. Amortization of intangible assets is estimated to be $6.2 million and reflects the inclusion of the two recently acquired businesses partially offset by the drop in amortization from Apex Systems.
In our press release, we also included estimates for the full year. I will now turn it back to Peter for some closing comments.
Peter?
Peter Dameris
Thank you, Ed. We believe we are well positioned to take advantage of what we believe will be an historic secular and cyclical growth for the staffing industry over the next three to five years.
While the entire On Assignment team is very proud of our performance, we remain focused on continuing to profitably grow our business. We would like to once again thank our many loyal, dedicated and talented employees whose efforts had allowed us to progress to where we are today.
I would like to now open the call up to participants for questions. Operator?
Operator
Thank you, sir. (Operator Instructions) And we will go to line of A.J.
Rice of UBS. Please go ahead.
A.J. Rice - UBS
Hello, everybody. Thanks.
Just a couple of questions if I might. First of all, let’s drill down a little bit more on Oxford, so in the Q1, it says I guess that you are assuming it will be flat year-to-year excluding the acquisitions and I am assuming that’s basically the continued runoff of the one large customer as well as some Healthcare IT choppiness.
Can you comment on what your assumption is for the rest of the year on Oxford?
Peter Dameris
Yes. So I will go first and then I will pass it on to Mike McGowan.
But A.J., we had a decline in revenue growth in the second half of the year for the reasons we have discussed several times. We think we are through most of that and we have hit – I think we are starting to hit an inflection point we think that March probably really where the inflection point is, but we are not trying to call the bottom, but we are seeing a growth in the headcount.
We are seeing our order book return to normality and this wasn’t because the lack of execution, but more so just some vagaries in the market of Healthcare IT spending. You are very familiar with the healthcare world in the second half of the year and also just the grow-over problem of a major product at a major account winding down.
So, all that’s left really is we had real high revenues in the early part of ‘13 from that major account and from Healthcare IT. So that will skew some of the growth.
So I think sequential growth will probably for the first two quarters of 2014 be more indicative of the trend and the momentum than the year-over-year. Mike, do you want to add something?
Mike McGowan
Not really, Peter. I think that really addresses, A.J.
what the issue is. And again, we are optimistic and feel good based upon what we have seen so far in the first quarter.
A.J. Rice - UBS
Okay. And I remember when you guys announced the sale on the Allied Health business you guys were retaining the working capital and any update on how that’s progressed – were you able to collect everything you thought you were?
Is there still some to be done there?
Peter Dameris
Well, we are collecting the receivables and DSOs went down 1.8 days. So, yes, we know the credit analysis in establishing those client relationships that we fully expect to collect all the working capital.
A.J. Rice - UBS
Okay. And then maybe just last, I know – and you took a charge I guess in the fourth quarter for this, the strategic planning process you have been through.
I know you have got an upcoming Investor Day, any early preview of your thoughts on that whole strategic planning process you went through and some of the conclusions?
Peter Dameris
Yes. I mean, one, I am just going to tease you.
I think it’s full logical stuff nothing that’s disruptive or would be alarming, I think we tried to hint that. We have got some things that we think we can do to expand our already large adjusted EBITDA margins.
And Ed, correct me if I am wrong, we didn’t take a charge, all we did was expense it through the P&L and then pointed out to you that’s an add-back to adjusted income.
Ed Pierce
That is correct.
A.J. Rice - UBS
Sorry, yes, of course. Okay, alright.
Thanks a lot.
Operator
And next we go to line of Edward Caso, Wells Fargo. Please go ahead.
Edward Caso - Wells Fargo
Hi, thanks. I was wondering if Rand could talk about the various verticals within his world, particularly capital markets, what trends he might be seeing?
Peter Dameris
Rand?
Rand Blazer
Well, I think as we pointed out we had good growth in fourth quarter across all seven our industry verticals, including government, which was as I said all double-digit growth. So we have always said financial services is sort of bellwether.
It kind of leads the economy up and leads the economy down. So the fact that we are seeing this across the board, not just financial services, which we saw pick up for the second half of last year and government is staying strong.
I think everything is ticking along from our point of view. Is that?
Edward Caso - Wells Fargo
Yes, that helps. My other question is on the how involved is On Assignment with the Affordable Care Act and are we going to hit some pause here both for that and the upcoming deadline for the ICD-9 to ICD-10, if we go into a testing phase.
And so are there some Healthcare IT pauses here that we have made up, but too long for a couple of quarters?
Peter Dameris
Yes. So, there are couple of questions embedded in that, Ed.
One, we are doing any and perhaps that we are not doing anything to support the government and the creation of the website. So our – we need to work, just patient in Affordable Care Act.
We have exposure to potential greater demand, but the demand base of ICD-10 were separate and apart from Obamacare, one. Two, Obamacare and just Medicare reimbursements and the overall kind of sloppiness in healthcare spending and admissions and the profit hospital chains grappling with what their responsibilities are under ACA I think will continue to make the waters choppy.
We are fortunate that we have pretty good distribution of customers and skills and the skills that we provide are not as commoditized as nursing or some of the other clinical skills. And we are mostly on the technology side or on the highest end the physician side.
But it’s the irony of it is healthcare has a lot less visibility as to confidence in spend and the flow of spend than biotech or IT or engineering does at this point.
Edward Caso - Wells Fargo
Great, thank you.
Operator
And next we will go to line of Gary Bisbee, RBC Capital. Please go ahead.
Gary Bisbee - RBC Capital
Hey guys, good afternoon. I guess a couple of questions on my end.
So the health IT that you have cited in the past has been somewhat choppy, can we get an update on how that’s trending and how the outlook for 2014 is?
Peter Dameris
Yes, Mike you want to go first and then I will follow-up.
Mike McGowan
Yes. As I mentioned, we saw a little slowdown in the second half of 2013 and primarily because of a lot of the hospitals were – had little doubts about their reimbursement practices, if you will, and what the government was going to do.
And that’s somewhat subsided with the new fiscal year for them in January. So we are starting to see an uplift in spending here in the first quarter and we anticipate that will continue throughout the year.
Peter Dameris
Yes and it’s more generic basis. As we see our headcount of new consultants going on billing Gary.
Specifically at Oxford a nice percentage of it is coming from healthcare IT.
Gary Bisbee - RBC Capital
Okay, great. And then within IT demand just at a high level any changes, I assume that the commentary that everything remains on track and the guidance seems to imply no real change in demand and that you are calling for quite a bit slower growth, is that just conservatism and comping against what’s been two really terrific years of Apex or is there anything else going on?
Peter Dameris
Well, I mean granted may be projected slower growth we will see what happens, but it’s still double digit growth. What I would really say is that as we look at the different verticals what its cyber security, business analytics, data warehousing, ERP, I think ERP is probably still the most muted growth.
And that may just be the number of ERP systems that are embedded and how much optimization work has been completed to-date. That we still think is a very important valuable area and that there will be innovation cycles, but at this point if you compare it to some of the spend in other areas it’s a little more muted.
Gary Bisbee - RBC Capital
And then just sticking on that last comment as we see more and more companies adopting and implementing some of these cloud-based software as a service model, is there I guess not as much work as a huge ERP implementation. Is there work for you there, can you see this continued migration to newer technologies, are you getting the same level of work from that?
Peter Dameris
That’s why we get the bill – the margins. We are trying to say on early adoption technologies and our view the cloud is just if anything it’s disintermittenting or disrupting the need for infrastructure housed at the customer versus working to drive interfaces and to customize cloud-based products.
Gary Bisbee - RBC Capital
Okay, and then how much of the gross margin improvement in the guidance for 2014 is CyberCoders, I assume that’s the largest driver of that, but s there an underlying expectation of moderate improvement ex that?
Ed Pierce
It’s mainly driven by CyberCoders in fact our medical firm revenues should increase to say roughly 4.3% up from 1.8% that’s what it was in 2013. So that’s the biggest driver.
Gary Bisbee - RBC Capital
Okay, thank you.
Peter Dameris
Thank you.
Operator
And next we will go to the line of Paul Ginocchio of Deutsche Bank. Please go ahead.
Paul Ginocchio - Deutsche Bank
Thanks. Just looking at your 2014 guidance, the only thing that kind of stood out was your SG&A growth, could you just comment on your pro forma SG&A growth because that was a little bit low and I just wondered what it looks like on a pro forma basis for ‘14 versus ‘13?
Peter Dameris
Right, so Paul a couple of things, if you took down the P&L I think when you look at consensus and everything our revenue, our GP dollars, our adjusted EBITDA that I think is above consensus, but a lot of analyst had models that had an SG&A number that was substantially below the guidance we gave. And in some instances I actually assume that there would be a cut in the actual SG&A 2013 meaning that we spend less in ‘14 than we did in ‘13.
And when you are growing, that’s just really not feasible. What I think the disconnect came from that some people may have annualized our fourth quarter run rate of SG&A that had some one-time savings that were larger than normal medical malpractice and then we had this reversal of this earn-out to the tune out that we disclosed at 1.4 and that maybe part of the disconnect.
But we are not dramatically increasing the SG&A. And the other thing is as you know we only owned CyberCoders for three weeks and Whitaker for a month and some people may have only picked up the expense for that period owned versus on a pro forma basis with the SG&A expenses for full quarter, but we are not growing SG&A faster than we are revenues or profit.
Then Ed, what else would you add?
Ed Pierce
On a pro forma basis, Paul, pro forma 2013 when you include CyberCoders and Whitaker for the full year, SG&A is roughly $415 million. So relative to the guidance or the estimates that we are giving for SG&A in 2014 is about say 8.5% to 9% increase year-over-year.
Paul Ginocchio - Deutsche Bank
Great. And is that how much variability?
Is that already spent? Is that because of your 8% to 9% growth in recruitment and sales or is there some wiggle room in that?
Ed Pierce
There is wiggle room in that. There is wiggle room to the extent that if we are at the lower end of the revenue range, then bonuses and commissions would be left.
There is wiggle room in the fact that we are going to lower end of revenues then we probably don’t hire as many sales consultants. So, yes, that’s a variable cost number.
And to be honest with you, the vast majority in the spend is it just takes time to hire and recruit beyond what we are normally doing.
Peter Dameris
And just one minor qualitative comment, if you look at SG&A, it’s going to be the increase is going to be weighted more towards brand expenses and the investments that we are talking about relative to sales consultants and recruiters?
Paul Ginocchio - Deutsche Bank
Peter, let me just ask in a different way, 8.5% to 9% SG&A growth sort of 10% revenue growth, so, SG&A growing at 85% to 90% of revenue that seems little high relative to your history?
Peter Dameris
Well, it’s yet to be determined until all that 8.5% gets done.
Paul Ginocchio - Deutsche Bank
Okay. And then just one more on Oxford since it seems to be a focus over the last half of the year, anyway you could just give us where it’s looking like year-to-date on a year-on-year growth basis?
Peter Dameris
Again, Mike, I will let you answer, but again Paul, I think the more informative comparison is going to be the sequential, because remember the first quarter of 2013 had a fair amount of revenue from that major biotech company, medical device company. So what we can tell you qualitatively and quantitatively is we are starting to see the headcount recover and the number of consultants ongoing exceed what it was in the fourth quarter, but what we said is it’s going to take a quarter, quarter and a half to really prove up that inflection point and to continue to grow.
Paul Ginocchio - Deutsche Bank
Peter, I was trying to ask how much does that accelerate from January to get to your sort of pro forma flat for the first quarter?
Peter Dameris
I don’t have that calculation on top of my head. So once you call back and we will see with the public data we can piece that together for you.
Paul Ginocchio - Deutsche Bank
Thank you. Thanks Peter.
Operator
And next we go to line of Tobey Sommer of SunTrust. Please go ahead.
Frank Atkins - SunTrust
Hey, this is Frank in for Tobey. In your prepared remarks you talked about some positive trends in physicians, can you give us a little bit more on them?
And what gives you confidence that physician is seeing some signs of growth?
Peter Dameris
Well, Frank, we don’t have real high growth rates early in the year. We know how important the services that is provided.
And remember the physician staffing business, any work that we work on today, we don’t generate a revenue, $1 revenue for three months. So we have kind of forward visibility in that, the forward visibility looks stronger than what we’re seeing historically.
So that’s and the number as we said in our prepared remarks, the number of intra-quarter cancellations were down. So that giving us the confidence to think that although it’s still sloppy, it’s still variable quarter-to-quarter that we maybe moving into a more stable period of purchasing.
Frank Atkins - SunTrust
Okay. And a quick numbers question.
Would you have a CapEx estimate for 2014?
Ed Pierce
We’re estimating $17.5 billion or $19.5 billion, I’m sorry, and roughly $7.5 billion in Q1.
Frank Atkins - SunTrust
Okay, great. And then as you look at both Apex and Oxford as we get into a tighter environment of waiver.
We’re hearing more anecdotes of just how difficult it is to get quality talent? Are you seeing any changes in terms of the supply side of these equations?
Peter Dameris
It’s been tight and we tend to excel on recruitment as much as sale and Oxford specifically they probably excel more on recruitment than sale. I just read something today that I think Bloomberg had a survey that estimates that wages are going to go up 2.1% in 2014.
So I think the real pressure Frank is going to be more on customers realizing not only is the market tight but wage expectations are going to be moving quicker than maybe they had hoped.
Frank Atkins - SunTrust
Okay, great. Thank you very much.
Operator
And next we go to the line of Tim McHugh of William Blair. Please go ahead.
Stephen Sheldon - William Blair
Hi, this is Stephen Sheldon for Tim. First I just want to ask I think you talked a little bit about the new facility in your prepared remarks.
So is there any interest expense savings factored into your guidance?
Ed Pierce
No.
Peter Dameris
No.
Stephen Sheldon - William Blair
Okay. And then also want to ask about Apex a little bit, it’s – growth there remain really strong in the quarter, ticked down just slightly and then as expected to moderate in 2014, still remain really strong but moderate.
Is there anything particular there, is it just tougher comps and also what are you seeing in the first month or two of the quarter?
Peter Dameris
They’re seeing continued momentum. They had a great 2013, what was it 19.7% for the full year and we will put up as high numbers as are constructive and prudent, but we budgeted for a market that the way we see it currently.
Stephen Sheldon - William Blair
Okay, great. Thanks.
Peter Dameris
They went with it. The budgeting has nothing to do with any sort of trend, downward trend that we’re seeing in the business.
Operator
And next we go to the line of Jeff Silber of BMO Capital Markets. Please go ahead.
Jeff Silber - BMO Capital Markets
Thanks. I just wanted to follow-up on the supply related question.
Are you having any difficulty finding and retaining your staffing consultants?
Peter Dameris
Our IT people I mean our internal staff…
Jeff Silber - BMO Capital Markets
Your internal staff and consultants, correct.
Peter Dameris
Yes, I mean the more we put numbers up like this the more we have creditors coming after us, and we have some lawsuits that are pending. But all-in-all we’ve got a good team, (good core) and we’re holding on to our people because we treat them right and make more money with us because of the stability of our business versus the promises that others make to them that tend not to hold true.
But it is – it’s more and more hand to hand warfare and I’d say nine out of 10 times we’re winning the battle because we treated people well in good times as well at the bad times.
Jeff Silber - BMO Capital Markets
Are you seeing any material change in turnover rates?
Peter Dameris
No.
Jeff Silber - BMO Capital Markets
Okay, good. And then you mentioned in the press release the impact of bad weather on revenues and I know this is more of an art than a science.
But I was wondering if you can give us some kind of estimate of the impact of bad weather on adjusted EBITDA?
Peter Dameris
No, we really can’t. All we did publicly state was we think it will be around $3 million to $5 million in the quarter in revenue.
Jeff Silber - BMO Capital Markets
Okay. And just a couple of quick numbers question, you went through a few of I guess what we’ll call one-time charges, the acquisition-related cost, the strategic planning and benefit from the reduction in the earn-out.
Do you have what those are on an after-tax basis preferably on a per share basis?
Ed Pierce
Jeff, I think what you should – the easiest way to calculate that is just assume a marginal tax rate of 39%.
Jeff Silber - BMO Capital Markets
Okay, great. That’s helpful.
And then you also mentioned the favorable adjustment for the physician and medical malpractice. Did you quantify that?
Ed Pierce
Yes. 770,000.
Jeff Silber - BMO Capital Markets
Okay, good. You’re anticipating my questions Ed.
I appreciate it.
Ed Pierce
Okay. You’re welcome.
Jeff Silber - BMO Capital Markets
Right. Thanks.
Operator
And next we go the line of Mark Marcon, R.W. Baird.
Please go ahead.
Mark Marcon - R.W. Baird
Good afternoon. Thanks for taking my question.
With regards to the earn-out reduction, what was that related to?
Peter Dameris
It was the Valesta which is the clinical research company in Belgium.
Mark Marcon - R.W. Baird
Okay.
Peter Dameris
We set some very high targets for them for the outward years to get a second earn-out and they didn’t achieve them.
Mark Marcon - R.W. Baird
Okay. And with regards to physician firm, what are you seeing there in terms of areas that it should get better?
Peter Dameris
You said limit the comment just physician permanent placement..
Mark Marcon - R.W. Baird
Right.
Peter Dameris
It’s less than 2%, 3% of our total revenue in that division. So we’re not the dominant player there.
What I will tell you is I think it’s gotten tougher Mark because you’ve got hospital systems like HCA that have really ramped up their internal recruiting department for permanent placement. And they’re more self-fulfilling the work than they had in the past.
So I think it’s a stable market but I think that there is some just kind of market headwinds, but we’re not the most dominant player in that space. So somebody like CHG or maybe AMN would have different take that we do.
Mark Marcon - R.W. Baird
Okay. Did Whitaker meet your expectations?
Peter Dameris
They did.
Mark Marcon - R.W. Baird
Okay. So that’s tracking, would you expect them to grow or to basically stay flat?
Peter Dameris
No, no, I think we had said low – high single low teens for the full year 2014 is what we hoped based on our analysis when we get the deal.
Mark Marcon - R.W. Baird
Okay. And can you give us an update with regards to CyberCoders just in terms of how it’s been tracking and how you’re planning to thoughtfully integrate them, I know you are very careful about that?
Peter Dameris
Yes. So our focus is more on building sales bridges between the companies because they really provide us service that we didn’t really dominate in the past which was contingent search on the IT side.
So we’ve actually had quite a few meetings and have launched some referral programs and are continuing to refine that the sales programs. I think as you know Mark you have to look at perm more on a kind of a longer term basis than just a nine day basis because you could have delays in starts which caused delays in revenue recognition.
But on the revenue side it’s meaning I think the majority of our expectations and on EBITDA side I think some expense is front-loaded in the first half of the year. We’re trying to hire I think up to 50 additional people in that group and hope that we’re going to be able to accelerate the sales channel.
So all-in-all it’s been 45 days we’re pleased.
Mark Marcon - R.W. Baird
Great. And then with regards to the consultant headcount both in terms of Apex and Oxford.
Where are you relative to year-end just in terms how quickly that ramp backup?
Peter Dameris
Internal or billable headcount.
Mark Marcon - R.W. Baird
Billable?
Peter Dameris
I think things are progressing the way we expect. And continued momentum at Apex at the level is a bit experienced and a reacceleration over at Oxford from their second half and specifically their fourth quarter growth rates.
Mark Marcon - R.W. Baird
I was just wondering you have one competitor mentioned that they had seen a rebound relative to project year-end, project terminations come back a little bit faster than maybe experienced in past years..
Peter Dameris
We really didn’t have any year-end project cancellations of terminations. So we’re – I guess trying to answer your question directly we’re seeing the classic normal spends, we didn’t see any sort of disruption except really in healthcare IT and other than that it’s just a healthy market and the ones that are growing faster or maybe taken a little bit of market share and the ones that are shrinking maybe have a customer specific issue or losing market share.
Mark Marcon - R.W. Baird
Okay. And then last question and then I’ll jump back in the queue is the – your internal capacity with regards to Apex and Oxford.
How is that relative to their current run rates? Do you need to add a lot in terms of headcount in order to continue the growth or how we should think about that?
Peter Dameris
No, I think we still have capacity because of the hiring we did ahead of the curve in 2012 and 2013. But if we want to continue to grow we have to always stay ahead of the curve and that’s what we budgeted for.
So what I’m telling you is we – a lot of the hiring or a portion of the hiring that we need for 2014 growth was done in 2013. And a lot of the hiring we’re doing in 2014 is for 2015.
Mark Marcon - R.W. Baird
Great. Thank you.
Operator
And next we go to the line of Randle Reece, Avondale Partners. Please go ahead.
Randle Reece - Avondale Partners
Good afternoon. Really didn’t know what to think about the seasonality when it came to trying to model CyberCoders and probably (fouled) that up.
But I’m just wondering what approach you took in your guidance to kind of balancing now the expectations for CyberCoders through the year?
Peter Dameris
Well I mean Randle as I said its 45 days in consultation with management who has run the business for a long time. We built and refined the budget.
There is seasonality to firm placement, a lot of people don’t want to leave their jobs in the fourth quarter for fear of losing their Christmas or year-end bonus and the same thing hold true, in the first quarter the bonus isn’t paid until March. So those types of things have been taken into consideration now whether we smoothed it or polarized it the right way will be – is yet to be determined.
But what I can tell you is we took that into consideration and whether we did it right we’ll see, but that was taken into consideration.
Randle Reece - Avondale Partners
Right. Is that the kind of business, the way they do their business, are they – is affected by any of the weather effects as some of your other businesses are – they seem to be a little more distributed?
Peter Dameris
Well remember it’s because it’s what really dictates the revenue that we report to you is the start. And my instant and my belief is Randle the only way it would affect – bad weather would affect the revenue is if the person couldn’t travel for the interview with us or with the customer.
Randle Reece - Avondale Partners
Okay.
Peter Dameris
So you’re correct. They shouldn’t be as weather impacted as someone who have to travel to a customer five days a week to perform the work.
Randle Reece - Avondale Partners
Very good. Thank you.
Operator
And next we go to the line of Brian Davis, Bank of America. Please go ahead.
Brian Davis - Bank of America
Hi guys this is Brian filling in for Sara. Thanks for taking my question.
Looking at the SIA’s expectations for IT staffing growth in 2014, they’re forecasting 7% growth which is on par with what have been forecasted for 2013, that’s obviously below your expectations for growth in 2014. So I’m wondering how you characterize your outperformance in the IT segment?
Thanks.
Peter Dameris
I’ll go first and then I’ll let Mike and Rand and whoever wants, but I really think it has to do one with the amount of investments that we made in 2011, 2012 and 2013. Two, our size were the second largest so we were able to bid and deliver much more reliably on large projects with major sophisticated customers than the broad group of competitors that makeup this survey for SIA.
And finally it has to do with our focus on skill mix. Mike and Rand you want to add anything to that?
Mike McGowan
Yes. The only thing I would add is because I agree especially on the skill mix issue and that’s what we go after the leading edge analysis if you will.
But the other piece and one of the other analysts mentioned they’re asked the question in terms of recruiting. We actually like on the (opposite) side, we like a tight market because our recruiting expertise we’re actually able to fill more than what we normally do in another less favorable environment.
So I think you add up what Peter said and you add on our recruiting expertise we can beat then the market. So Rand anything else…
Rand Blazer
No, I think you guys captured I mean at the end of the day we want to outperform SIA everyday, every year. So that is all.
Brian Davis - Bank of America
Perfect. Thank you guys.
Operator
And next we go back to the line of Paul Ginocchio of Deutsche Bank. Please go ahead.
Paul Ginocchio - Deutsche Bank
Thanks. Two questions, I see your headcount up 8.4% year-on-year at the end of the year.
What does that look like on a pro forma basis and then second Peter sorry if I missed it. Did you give a growth rate for CyberCoders either in the fourth quarter or for 2013 if you didn’t could you do that?
Thanks.
Peter Dameris
We did give a growth rate.
Paul Ginocchio - Deutsche Bank
Okay.
Peter Dameris
In the December call back in press release I think we said it approximately 19% top-line.
Ed Pierce
High teens.
Peter Dameris
High teens, okay. So that answers your first question.
On the pro forma I don’t think we have that, Paul.
Paul Ginocchio - Deutsche Bank
Okay, no problem. I’ll follow-up.
Thank you.
Peter Dameris
Yes.
Operator
And there is no one else in queue at this time. Please continue.
Peter Dameris
Great. Well, we appreciate your time and attention and we hope to see many of you at our Analyst Day on March 26.
Thank you very much.
Operator
That does conclude our conference call for today. Thank you for your participation and for using AT&T Executive Teleconference service.
You may now disconnect.