AMN Healthcare Services, Inc. (NYSE:AMN) Q4 2023 Earnings Call Transcript

AMN Healthcare Services, Inc. (NYSE:AMN) Q4 2023 Earnings Call Transcript February 16, 2024

AMN Healthcare Services, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and thank you for standing by. Welcome to AMN Healthcare’s Fourth Quarter and Full Year 2023 Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Randle Reece, Senior Director of Investor Relations. Please go ahead.

Randy Reece: Good afternoon, everyone. Welcome to AMN Healthcare’s fourth quarter and full year 2023 earnings call. A replay of this webcast will be available at ir.amnhealthcare.com at the conclusion of this call. Various remarks we make during this call about future expectations, projections, trends, plans, events or circumstances constitute forward-looking statements. These statements reflect the company’s current beliefs based upon information currently available to it. Our actual results may differ materially from those indicated by these forward-looking statements because of various factors and cautionary statements, including those identified in our most recently filed forms 10-K and 10-Q, our earnings release and subsequent filings with the SEC.

The company does not intend to update guidance or any forward-looking statements provided today prior to its next earnings release. This call contains certain non-GAAP financial information. Information regarding and reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are included in our earnings release and on our financial reports page at ir.amnhealthcare.com. On the call today are Cary Grace, President and Chief Executive Officer; and Jeff Knudson, Chief Financial Officer. I will now turn the call over to Cary.

Cary Grace: Thank you, Randy. AMN Healthcare finished 2023 with a solid fourth quarter and a stabilizing outlook for the first quarter of the new year. Last year, we successfully balanced 2 objectives. We worked through the largest cyclical reset in industry history, partnering with clients to help them optimize their workforce mix to meet their strategic and financial objectives. At the same time, we positioned AMN for stronger growth in technology-centric total talent solutions for healthcare. Throughout the history of our company, AMN has excelled at innovating to support healthcare professionals and clients during changing times. And 2023 saw our team members pull together to transform AMN as clients need shifted during the pandemic.

While we navigated a declining staffing market, AMN initiated a wide-ranging series of initiatives to accelerate our agility and align our value proposition with the increasing need for innovative solutions to solve significant healthcare workforce challenges. From the beginning, our strategy has been guided by 4 pillars: be the preferred partner to help healthcare organizations optimize their workforce strategy, be the preferred employer for healthcare professionals and team members, build on and digitize our unmatched portfolio of total talent solutions for healthcare and be good stewards of capital, investing prudently for the short and long term. Where at the middle of last year, we were just getting started adapting to market changes and developing our operational plan for growth.

I am now pleased to report that AMN has made progress on all these objectives. We made ourselves a better partner and elevated our total talent solutions by moving to integrate our solutions, our systems and our brands going to market truly as One AMN. In addition, we restarted our sales organization to pursue growth opportunities in all segments of our market. As healthcare leaders made workforce management a top strategic priority, we developed the flexibility to deliver a comprehensive range of solutions through our technology platform. We took the best new technology and made our services more powerful, easier to use and faster to deploy. We have the breadth and depth of solutions to serve clients in any model they choose, ranging from direct staffing to vendor-neutral and master vendor MSP to recruiting solutions and workforce management technology or a hybrid of model.

Our ability to broadly serve the market is enabling us to grow our sales pipeline across all service lines. Becoming more agile meant speeding up the pace of IT and operational transformation at AMN and we have completed some of the largest improvement projects in company history. These included moving 9 Nurse and Allied and 3 Physician and Leadership brands under the AMN Healthcare brand and into one AMN front door for healthcare professionals. Important milestones for getting the benefit of operating as a total talent solutions organization. Brand recognition for AMN is already testing at an all-time high and candidate traffic and applicants have outpaced expectations. This quarter we are on track to move Nurse and Allied to the new cloud version of our proprietary front-end platform.

Last quarter was the debut of ShiftWise Flex, the cloud-enabled version of our industry-leading VMS software which we also have extended to a mobile app, enabling on-the-go workforce management. ShiftWise Flex has an embedded market insights and analytics dashboard available as a standard feature, addressing the critical need for actionable transparent market intelligence, this solution provides our MSP and VMS customers with daily updates on clinical labor trends and market rates, supporting informed decision-making and strategic planning. We also are deploying embedded market rate analytics that can project bill rate at the work order level as far as 90 days out. Our investment in ShiftWise Flex are being validated by the broader market reception and competitive renewals with our existing VMS relationships.

We are deploying ShiftWise Flex to current clients and new MSP clients as well. And we have completed API integrations with client systems to automate work order entry, clinician onboarding and offboarding, timekeeping and invoicing. These changes at AMN have strengthened our ability to serve healthcare professionals. One AMN branding is an important element of how we support an increasing number of workers through our industry-leading AMN Passport mobile app. Passport has expanded from its start in nursing to encompass allied and soon, physicians and advanced practices. AMN Passport now features AI-driven enhancements to our proprietary matching algorithm. Clinicians receive opportunities that best match their skills and preferences and they can book for themselves, further personalizing and optimizing their Passport experience.

AMN Passport has become an important tool for engaging the workforce, enabling self-service and giving professionals an always-on connection to AMN. Our development work is making it easier for professionals to find the career options they want and manage not just their assignments but their careers. AMN Passport and ShiftWise Flex are also central to our powerful solutions that enables clients to manage internal resource pools, internal agencies and direct sourcing. Passport’s acclaimed clinician experience is essential for clients to attract the best people at the best cost in less time. Our change initiatives also have provided exciting opportunities for our corporate team members. We have automated labor-intensive tasks and enabled around-the-clock credentialing, bringing our team members to be more productive and focus on higher-impact activities such as time with clients and clinicians.

Our team received the valuable experience of working with the latest technology. And our entire go-to-market has been reshaped to be more customer-friendly and efficient which will empower our team members to make even a bigger difference in the continuum of care. As proof points, our team member engagement scores last year ranked at the top of our industry and above the Gallup benchmark for best practice organization. We improved team member retention. Becker’s named AMN one of the best healthcare places to work and we are recognized by numerous organizations for our strong culture of inclusion and diversity. Along with what I have noted, we have reinforced our total talent solutions in other ways. Our One AMN brand consolidation is only part of the heavy lifting that we have done to integrate the sales and delivery of our solutions, simplifying and speeding service to new and existing clients.

On the front end, we have built on our 39 years of experience to provide advisory services under the leadership of Chief Business Officer, Meredith Lapointe; and Chief Growth Officer, Pat McCall. In last quarter, we acquired MSDR to expand our scale and diversification in locum tenens. This acquisition was our first major deal since 2020 and a large part of the investments we made last year. AMN generated $372 million of operating cash flow in 2023, enabling us to invest a record high $104 million in capital expenditures. We also used our strong balance sheet to repurchase $425 million of our stock which we continue to view as an attractive investment opportunity. Early in 2024, we see a mixed picture in our market. Our Allied Staffing business expects sequential revenue growth in the first quarter.

Interim leadership and search show signs of stabilization and a sense of reaching the bottom. Our sales pipeline continues to both grow and progress and recent new client wins in staffing include the largest win we have seen since 2019. In the direct and third-party staffing market, we have early signs that our technology and process changes are making us more competitive across the entirety of the market. We continue to expect organic growth in a solid market for locum tenens. And with our recent acquisition of MSDR, our annualized revenue run rate in locums is now more than $600 million. Language services continues to be one of our strongest growing businesses with its strongest pipeline of prospects. Offsetting these positives, our Q1 guidance assumes slightly lower Nurse and Allied segment revenue than fourth quarter levels.

First quarter guidance assumes 0 labor disruption revenue and the typical cancellations of some winter needs orders happened earlier in the quarter than usual. The overall labor backdrop is favorable and this year’s 30% increase in ACA marketplace enrollment indicates that the insured population is growing which we expect will fuel demand utilization. We are encouraged by the green shoots we see from our total market growth strategy and are pleased with our accelerated progress. Our strategy will unfold over multiple years and we expect our initiatives to have an increasingly positive impact on our business later in 2024 and beyond. Now, I’ll turn the call over to Jeff who will review our latest financial results and outlook.

Jeff Knudson: Thank you, Cary and good afternoon, everyone. Fourth quarter revenue was $818 million which included a $13 million contribution from the November end acquisition of MSDR. Organic revenue was towards the upper end of our guidance range. Consolidated revenue was down 27% from the fourth quarter of 2022. Sequentially, revenue was lower by 4% and organic revenue was down 6%. The sequential decrease was driven mainly by the expected lower bill rates, volume and hours worked in the Nurse and Allied segment and VMS business. Gross margin for the quarter was 31.9%, slightly below our guidance range, primarily due to lower bill pay spreads in the Nurse and Allied business and less VMS revenue. Compared with the prior year period, gross margin was down 140 basis points.

Sequentially, gross margin decreased 200 basis points, primarily due to lower Nurse and Allied margin and an unfavorable revenue mix shift in Technology and Workforce Solutions. Consolidated SG&A expenses were $185 million or 22.7% of revenue compared with $219 million or 19.5% of revenue in the prior year period and $163 million or 19.1% of revenue in the previous quarter. The decrease in SG&A expenses year-over-year was primarily due to lower employee expenses driven by lower business volumes, along with lower bad debt reserve. Sequentially, increased acquisition, integration and other costs and SG&A for MSDR led to the increase in SG&A expenses. Adjusted SG&A which excludes acquisition, integration and other costs and stock-based compensation expense was $159 million in the fourth quarter or 19.4% of revenue compared with $202 million or 17.9% of revenue in the prior year period and $157 million or 18.4% of revenue in the previous quarter.

In the fourth quarter, Nurse and Allied revenue was $538 million, down 35% from a year ago. Sequentially, segment revenue was down 6%, driven by lower bill rates, volume and hours worked. Average bill rate was down 12% year-over-year and down 3% sequentially, in line with our expectations and an improvement from the 7% sequential decline we experienced in both Q2 and Q3. Year-over-year, volume was down 22% and average hours worked were 4% lower. Sequentially, both volume and average hours worked ticked down 1%. Travel Nurse revenue in the fourth quarter was $353 million, a decrease of 40% from the prior year period and 8% from the prior quarter. Allied revenue in the quarter was $164 million, down 16% year-over-year and 2% sequentially. Nurse and Allied gross margin during the fourth quarter was 25.5% which decreased 110 basis points from the prior year period and 200 basis points sequentially.

The decrease in gross margin was primarily due to lower bill pay spread and lower hours worked. Third quarter gross margin had been unusually high due to some benefits that did not recur which mainly included a release of a workers’ compensation reserve. Segment operating margin of 11.7% decreased 100 basis points year-over-year due to less revenue and lower gross margin. Sequentially, operating margin decreased 280 basis points. Moving to the Physician and Leadership Solutions segment. Fourth quarter revenue of $168 million was flat year-over-year as organic growth in locum tenens and the addition of MSDR were offset by decreases in interim leadership and search. Sequentially, revenue was up 5% due to MSDR, partially offset by lower revenue from organic locum tenens, interim and search.

Locum tenens revenue in the quarter was $123 million, including $13 million from MSDR. Excluding MSDR, revenue increased 7% year-over-year. Slightly lower volume in the organic business was more than offset by an increase in bill rates. Sequentially, organic revenue was down 2%, mainly due to lower volume driven by seasonality. Interim leadership revenue of $29 million decreased 35% from the prior year and 5% from the prior quarter. Search revenue of $15 million was down 20% year-over-year and down 6% sequentially. Interim and search revenue were down year-over-year, primarily driven by lower demand. Gross margin for the Physician and Leadership Solutions segment was 33.3%, down 170 basis points year-over-year and in line with the 33.4% gross margin generated in the third quarter.

The year-over-year decline was mainly due to the revenue mix shift within the segment and a specialty mix change in locum tenens. Segment operating margin was 13% which decreased 370 basis points year-over-year comparing against an unusually high profit margin in the fourth quarter of 2022 of 16.7% compared with 13.2% for the full year 2022. Sequentially, operating margin decreased 50 basis points due to the revenue mix shift towards locum tenens. Technology and Workforce Solutions revenue for the fourth quarter was $113 million, down 16% year-over-year and 7% sequentially. Language services revenue of $68 million increased 18% year-over-year and 3% sequentially. VMS revenue for the quarter was $31 million, a decrease of 45% year-over-year and 20% sequentially.

Segment gross margin was 60.5%, down from 73.3% in the prior year period, primarily attributable to lower VMS and RPO revenue and lower gross margin in language services. Sequentially, gross margin fell 450 basis points, mainly driven by a revenue mix shift within the business segment. Segment operating margin in the fourth quarter was 36.8% compared with 50.2% in the prior year and 42.1% in the prior quarter as the business mix shifted toward language services. Fourth quarter consolidated adjusted EBITDA was $104 million, a decrease of 40% year-over-year and 22% sequentially. Adjusted EBITDA margin for the quarter of 12.7% was at the midpoint of the guidance range. Year-over-year adjusted EBITDA margin was down 280 basis points and sequentially was down 300 basis points.

The decrease in EBITDA margin year-over-year was primarily due to lower gross margin and less operating leverage. Fourth quarter net income was $12.5 million, down 85% year-over-year and 77% sequentially. Fourth quarter GAAP diluted earnings per share was $0.33 in the quarter. Adjusted earnings per share for the quarter was $1.32 compared with $2.48 in the prior year period and $1.97 in the prior quarter. Days sales outstanding, excluding MSDR, was 66, 5 days higher than the prior quarter and 11 days higher than the prior year, primarily due to billing delays related to a back-office system conversion. We expect DSO to return to historical levels as we progress through 2024. Operating cash flow for the fourth quarter was a use of $41 million, driven by the timing of cash collections and $67 million of deferred income tax payments.

Capital expenditures for the quarter were $30 million. As of December 31, we had cash and equivalents of $33 million, long-term debt of $1.3 billion, including a $460 million draw on our revolving line of credit and a net leverage ratio of 2.2x to 1x. Recapping financial highlights for the full year 2023, we reported revenue of $3.8 billion, a year-over-year decrease of 28%. Gross margin for the year was 33%, an increase of 30 basis points. Adjusted EBITDA was $579 million, a decrease of 32% from the prior year. Full year adjusted EBITDA margin of 15.3%, was 80 basis points lower year-over-year. Net income of $211 million decreased 53% compared with 2022. For 2023, GAAP EPS was $5.36 and adjusted EPS was $8.21 compared with GAAP EPS of $9.90 and adjusted EPS of $11.90 in 2022.

Full year cash flow from operations was $372 million and capital expenditures totaled $104 million. Moving to first quarter 2024 guidance. We project consolidated revenue to be in the range of $810 million to $830 million, down 26% to 28% from the prior year period. Gross margin is projected to be between 31% and 31.5%, Reported SG&A expenses are projected to be 21% to 21.5% of revenue. Operating margin is expected to be 4.2% to 4.9% and adjusted EBITDA margin is expected to be 11.2% to 11.7%. Average diluted shares outstanding are projected to be approximately 38.2 million. Additional first quarter guidance details can be found in today’s earnings release. And now operator, please open the call for questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Trevor Romeo with William Blair.

Trevor Romeo: One I had just on the supply of Nurse and Allied professionals and kind of the overall population there. I think last quarter you might have mentioned AMN’s applications for Nurse and Allied roles are somewhere around 30% to 50% above pre-pandemic levels or something like that. So I had a 2-part question related to that. One, I guess, are you still seeing that interest and willingness to take travel assignments well above pre-pandemic levels? And then two, are your clients receptive to a structurally larger contingent contract population as a percentage of their overall workforce? Or would they like that percentage to come kind of all the way back down to where it was pre-pandemic.

Cary Grace: Trevor, thanks for the question. Let me give a little bit of context where clients are and a bit about how they’re thinking about their workforce. And then I’ll touch a bit on what we’re seeing in supply in our different businesses. First off and I think this has been widely documented, particularly over the past quarter. Workforce issues remain, if not the top priority for CEOs and C-suite of healthcare organizations. It’s among the top priorities. And so we’re seeing the focus on workforce manifest itself in kind of 2 ways. One is how do I continue to focus on expense management, that’s an overall comment and workforce is a part of it. And then the second part of that is how do I ensure I have the right workforce to be able to serve what they see as increased demand utilization in the coming years.

Once you get past those macro conditions, what we see from clients, it really varies client to client with what their mix looks like overall. I’d say as a broad comment, you saw a tremendous reset in 2023, coming off of all-time highs of using contingent labor. And so a lot of the progress of stabilizing, you really saw it play through in 2023. There are a number of organizations over the past couple of weeks who have talked about being at or close to their target from a contingent standpoint. We also have some systems and some clients who still have some work to go. So I think that where clients are, are very client specific. In terms of overall supply, if we look at, I’d say, Nurse and Allied and there might be some allied specialties where we do see more demand than you have supply but generally speaking, the focus is more on how do you think about increasing demand.

If you get into our locums business, you have a lot of demand out there and we continue to think that will be the case in 2024. And so we’re very focused on how we continue to increase our supply which the MSDR acquisition was a big part of that. And then if you go into our TWS segment, you typically see VMS follows suit with our Nurse and Allied segment. And if you look at Language services, we continue to see demand, very healthy demand in that space. And so again, our focus is on how do we continue to have the supply to meet that healthy demand.

Trevor Romeo: That was really helpful. And then maybe 1 for Jeff, I guess. It’d be great to get a sense for your bill rate and TOA volume assumptions for the Nurse and Allied segment, I guess, in Q1 and then anything preliminary you have for the rest of 2024. And then as we kind of think about seasonality for the rest of the year, does it feel like the typical seasonality should be coming back to the business in the coming quarters? Or should we still be building an additional room for normalization?

Jeff Knudson: So Trevor, in the first quarter, bill rates will be flat over Q4 levels. And so any change in the Nurse and Allied revenue will be driven by volume. So the implied guidance for Nurse and Allied is that it will be down 1% to 4% sequentially and that will entirely be driven by TOA. As we look forward, the demand trends that we’re seeing currently, demand is down in the low 20% range from Q4 levels within Travel Nurse. Allied demand remains healthy. It’s still above 2x from 2019 levels. And on the seasonality point, historically, Nurse and Allied revenue, excluding any impact from labor disruption or acquisitions would be down mid- to high single digits sequentially, Q2 over Q1, with an average of right around 6%.

Just given with where demand trends sit right now, we would expect that Nurse and Allied revenue would be down high single digits in the second quarter off of the midpoint of our Q1 guide which would be at the high end of that range. And that would be driven more by volume than bill rate, about 2/3 to 1/3 split there.

Operator: Our next question comes from the line of A.J. Rice with UBS.

A.J. Rice: First off, generally speaking, when you gave your guidance for the quarter ahead, you’ve got pretty good visibility on it. And I know this time, gross margin dropped even normalizing for the unusual item in the third quarter, about 170 basis points. And you had — guys had guided for 100, I think, decline, 100 basis points in the fourth quarter. I think you singled out pressure in VMS as well as the bill pay spread tightening. I wondered, I assume some of that was already forecast. Where was the surprise that ended up it being worse than you thought as it played out in the quarter?

Jeff Knudson: I would say, A.J., it was predominantly within Travel Nurse and really on the winter needs orders and the bill pay spread that we took there to drive a higher internal capture on those winter needs orders.

A.J. Rice: On the comments around bill pay spread and thinking about that into ’24, is it the competitive dynamics that are driving the tightening? Are you trying to cushion the impact of — for nurses to keep them — taking additional assignments? Would — give us a little more about what you’re seeing in bill pay spread and how quickly that might start to recover.

Jeff Knudson: Yes. I think a quarter ago, A.J., we had talked about that there’s typically a two quarter or so lag in between where bill rates settle out and clinician compensation expectations. As we move into the first quarter of this year, the expectation is that Nurse and Allied gross margins will be flat over Q4 levels. Underlying that, there is some improvement in the bill pay spread but that will be masked by the revenue mix issue with our international nurse business trending down sequentially with the impact of visa retrogression. And we would expect that to continue throughout the year where the bill pay spread will modestly improve as we move through the year. But the impact from visa retrogression will increase and neutralize that.

A.J. Rice: And maybe one last one to ask about the VMS conversion, the ShiftWise upgrade or change. Is that — sounds like that’s affecting the volume of the business that you’re doing in VMS as well as the DSOs. For example, is the DSO impaired? The receivables impaired? Or is that just a delay in collection that you’ll hope to hopefully recover quickly once the system integration or upgrade is completely done? And similarly, some of the pressure you’re seeing in VMS, is that because of this transition and you’ll see it revert or is it other dynamics of what’s happening in the business that are putting pressure there?

Jeff Knudson: Yes, A.J., so the ShiftWise Classic to ShiftWise Flex, that has nothing to do with the DSO. That was from an ERP implementation in the third quarter of last year and we’re just working through some back-office delays that have led to billing and then also unapplied cash spiked up post the implementation which made it harder, quite honestly, to collect receivables. So that has nothing to do with ShiftWise Flex and ShiftWise Flex also isn’t impacting any volumes within the VMS business. There’s only a handful of clients right now that have transitioned onto Flex.

Cary Grace: A.J., what I would add to that is what we’re seeing as we have announced ShiftWise Flex in the market is that it’s being very well received. And we’ve started the implementation with clients. We actually implemented our largest client this week. And so the ShiftWise Flex implementation is going well.

Operator: Our next question comes from the line of Kevin Fischbeck with Bank of America.

Kevin Fischbeck: I wanted to ask about the — it sounds like you signed a large customer in the quarter. How do we think about the timing of when that contract starts? And as an MSP contract, I guess in the past, you’ve talked about how if you were to lose an MSP contract, you would still be servicing most of that business because the incumbent would still be relying on you to provide that. I guess, how long should we think about an MSP contract win to ramp as you start to replace the incumbent vendor within that?

Cary Grace: Yes. So typically, you would see that take a couple of quarters to start seeing the impact of it. So you should expect that those wins would affect more the back half of 2024. We have a lot of initiatives going on to continue to do process improvement around speed but expect that, that’s more of a back half phenomena.

Kevin Fischbeck: Can you give any color, maybe even related to that contract specifically or just broadly, I guess, somewhat if — a large customer decided to change, what were they looking to change? How did you fit in and solve that? And then, I guess, maybe just a broader comment on kind of — it sounds there are a lot of contracts for renewal which I guess also means things to defend. So like maybe any commentary on win rate, retention rates as well.

Cary Grace: Yes. Let me give you first where we are on renewals. So if going into 2023, we had effectively 3 years of renewals that were taking place in 2023. So clients that normally would go through an RFP cycle in 2021 and 2022, during COVID, really pushed those into 2023. So if we typically have in any given year because clients typically have a 3- to 5-year RFP cycle, we would be defending, call it, 20% to about 1/3 of our book. Last year, in 2023, we were beyond the high end of that range because of the 3-year build-up. If you look into 2024, as we start the year on renewals, we are at the lower end of that range, including 2 RFP processes from last year that came in. So as we start this year, that looked very different than it did last year.