AMN Healthcare Services (AMN) Q4 2018 Earnings Conference Call Transcript

In Locum Tenens, the problems are visible in our lower fourth-quarter revenue and first quarter outlook. Last spring, we converted our Locum Tenens business to a more scalable operating model, including new front and back-end system. The sales force-based system is powerful, but it has required several months of further configuration to make it easier to navigate. There were also issues with data migration from the three legacy systems.

During this time, the necessity of maintaining good customer service flowed our sales productivity. Performance was also hindered by the fact that we got a bit behind in hiring up new sales producers. We began the ramp-up hiring in the third quarter and have accelerated that into the new year. We expect to begin benefiting from these new hires' productivity in the second half of 2019.

Returning Locum Tenens to growth is our top priority. Locum is an attractive market that is of high strategic importance to our clients. Now let's review our latest results and outlook. Fourth-quarter consolidated revenue of $529 million grew 4% year over year.

Gross margin was 32.6% and adjusted EBITDA was $66 million or 12.6% of revenue. Our Nurse and Allied segment posted revenue of $329 million, which grew 2% year over year. Revenue for our largest business, Travel Nurse Staffing increased 2% year over year. Volume growth was relatively in line with our expectations.

The year-over-year headwinds of lower premium rate assignments lessened and the average build rate gap continued to improve. We knew that we would experience a difficult year-over-year comparison in Nursing for the first quarter of 2019 due to the exceptionally high utilization of winter assignments and a very strong flu season last year. That comparison has proven to be even more difficult due to a reduction in utilization at one of our top clients. This reduction has nothing to do with AMN's service delivery, but rather specific sensors dynamics for this client.

Excluding this impact, Nurse staffing revenue is expected to be up about 5% year over year in the first quarter. Allied staffing continued its winning streak with revenue growing 8% year over year as volume was strong again in the fourth quarter. Order growth has continued to improve and booking trends support continued mid-single-digit growth or better. For the Nurse and Allied segment overall, we expect revenue to be down about 1% to 2% year over year in the first quarter due to the client-specific reduction I mentioned.

Excluding this impact, this segment is expected to be up about 5%. In the Locum Tenens segment, fourth-quarter revenue of $82 million was 24% lower year over year. We had expected revenue to be down about 12% to 14%. On top of the higher-than-expected attrition and lower productivity we experienced, there were also greater-than-expected declines in the emergency medicine and hospital specialties as clients reduced demand.

Ralph and Brian can provide a bit more color for this segment in the Q&A, as I'm sure many of you'll have questions. On the bright side, our Locum's MSP business continues to add clients and is now 20% of segment revenue. We've seen stable client and clinician satisfaction scores indicating that we are taking care of our providers and clients despite the challenges. For the first quarter, Locum Tenens' revenue is expected to be down year over year similar to last quarter.

Fourth-quarter revenue in our Other Workforce Solutions segment was $117 million. Year-over-year growth was 48%, including our April acquisitions and up 1% organically. Our interim leadership and permanent placement businesses comprised about 50% of this segment's revenue. These business lines collectively grew 15% year over year with organic growth of 2%, driven by permanent placement and RPO.

Our mid-revenue cycle division produced $38 million of revenue in the fourth quarter. Medical coding revenue was slower than expected, offsetting growth in other specialties. Other Workforce Solutions also includes our VMS business, where revenue was down year over year in the fourth quarter. Transfer of VMS have improved as 2019 gets under way.

And finally, our workforce optimization and predictive analytics team at Avantas continues to make nice progress, with revenue up in the fourth quarter and growth continuing into 2019. Within our VMS and Avantas offerings, we continue to make important investments in mobile capabilities, analytics and serving additional healthcare settings. In the first quarter, total revenue for the Other Workforce Solutions segment is expected to be up about 40% overall, due primarily to the acquisitions we made last April. In January, we added an innovative new offering to our workforce solution with the acquisition of Silversheet.

Our clients have repeatedly told us that one of their biggest workforce pain point is credentialing for their permanent staff. This is the process of reviewing and verifying a clinician's education and training, work experience, licensure, board certifications and malpractice history. These are compliance verifications that need to be made upon hiring, but also on an ongoing basis while the clinician works at a facility. Silversheet has created a cloud-based platform that gives healthcare organizations a completely digital credentialing process, which makes this process easier, faster and more reliable.

We are eager to support Silversheet faster growth and to integrate them into our solution set. We remain intend every day on earning our place as our clients' strategic workforce partner. To do that, AMN must continue to add capabilities that address all aspects of healthcare labor, contingent and permanent. The people who make this future possible are the amazing AMN team members and healthcare professionals.

We owe them our deepest gratitude for their talents, enthusiasm and can-do attitude even in times when we ask them to do more. Now I will turn the call over to Brian for a financial update, after which Ralph and Dan will join us for the Q&A session.

Brian Scott -- Chief Financial Officer

Thank you, Susan. Good afternoon, everyone. The company's fourth-quarter revenue of $529 million was $5 million below the low end of our guidance range. As Susan noted earlier, this shortfall was driven mainly by lower-than-expected revenue from our Locum Tenens segment.

Gross margin for the quarter was consistent with our guidance at 32.6%, up 80 basis points from last year, but 60 basis points lower than the prior quarter. Our April acquisitions were accretive to our consolidated gross margin, representing 50 basis points of the year-over-year increase. The increase also resulted from a change to recognizing certain physician perm placement recruiting expenses and SG&A that were historically in cost of revenue. These increases were offset in part by our lower Locum Tenens gross margin.

On a sequential basis, the margin decrease was due mainly to an unfavorable revenue mix shift and a lower Locum's margin. SG&A expenses in the quarter totaled $111 million or 21% of revenue compared with 19.7% last year and 23% last quarter. The year-over-year increase in SG&A margin was primarily the result of the physician perm placement cost shift, a higher expense margin from our acquisitions and higher integration expenses, a sequential favorability related to the prior quarter legal reserve expense. Fourth-quarter Nurse and Allied segment revenue was $329 million, an increase of 2% from the prior year and 8% higher sequentially.

The sequential increase stemmed mainly from 5% higher volume plus a 2% increase in bill rate. Nurse and Allied gross margin of 27.2% was down about 20 basis points from prior year and prior quarter, though consistent with our expectations. Segment EBITDA margin was 13.8%, 120 basis points lower than the prior year. Fourth-quarter Locum Tenens' segment revenue of $82 million was 24% lower than the prior year and down 19% on a sequential basis with the declines driven by lower volume.

Locum Tenens' gross margin of 27.2% was down 210 basis points from the prior year and 120 basis points sequentially. Gross margin was negatively affected by unfavorable adjustments as the byproduct of the new system transition and an unfavorable specialty mix shift. Locum Tenens' adjusted EBITDA margin was 8.6%, down 290 basis points year over year, driven by the lower gross margin and negative operating leverage on the lower revenue. Fourth-quarter Other Workforce Solutions segment revenue of $117 million was up 48% year over year, but down 2% sequentially with growth coming mainly from the recent acquisitions.

Gross margin of 51.7% was lower by 140 basis points year over year and 70 basis points sequentially. The year-over-year variance was due mainly due to the acquisition of MedPartners, which has a lower gross margin in the segment average. On a consolidated basis, fourth-quarter adjusted EBITDA of $66 million was up 3% year over year. Adjusted EBITDA margin of 12.6% was flat year over year and down 20 basis points sequentially.

We reported net income of $36 million and diluted earnings per share of $0.74 in the fourth quarter. Adjusted earnings per share was $0.81 compared with $0.63 in the prior year quarter. Our income tax rate in the quarter was 29% and is expected to be similar in the first quarter. Interest expense and other in the quarter was a credit of $200,000, which includes a gain of $6 million on the fair market value adjustment of a minority investment.

Excluding this gain, net interest expense was $5.8 million. Cash provided by operations was $59 million for the quarter. For the full-year 2018, cash flow from operations totaled $227 million, up 41% year over year. Day sales outstanding at quarter end were 64 days, same as last quarter, compared with 63 days in the year ago quarter.

At December 31, cash and equivalents totaled $14 million. Capital expenditures in the fourth quarter were $11 million. During the quarter, we repurchased 271,000 shares of stock for $14 million. At quarter end, our total debt outstanding was $445 million and our leverage ratio was 1.7 times to one.

Now let's turn to first-quarter 2019 guidance. The company expects consolidated revenue of $520 million to $528 million. This represents top-line growth of 0% to 1% year over year. On an organic basis, revenue is expected to be down approximately 6%, due primarily to the lower Locum Tenens' revenue.

Nurse and Allied segment revenue is expected to be down about 1% to 2% from the prior year, with the Allied growth offset by lower nurse staffing revenue. Gross margin is projected to be approximately 33%, and SG&A expenses as a percentage of revenue are expected to be approximately 22.5%. Adjusted EBITDA margin is expected to be approximately 12%. As it relates to Silversheet, they will add less than $1 million of revenue this quarter.

Silversheet is still an early stage company, just starting to gain revenue momentum. We anticipate this business will reach breakeven sometime next year and will lower quarterly EPS by $0.01 to $0.02 and reduce EBITDA margin by 10 basis points throughout 2019. Other first-quarter 2019 estimates include the following: interest expense of $5.8 million, depreciation expense of $5 million, amortization expense of $6.8 million, stock-based compensation expense of $5.5 million, acquisition and integration-related expenses of about $2 million and diluted share count of 47.8 million shares. The stock compensation expense is higher in 2019 in part from certain plan changes, and we expect approximately 4.5 million per quarter for the remainder of the year.

Amortization expense is based on a preliminary valuation of amortizable intangible assets from the Silversheet acquisition. And now we'd like to open up the call for questions. 

Questions and Answers:

Operator

Thank you. [Operator instructions] Our first question from the line of Tobey Sommer with SunTrust. Please go ahead.

Tobey Sommer -- SunTrust Robinson Humphrey -- Analyst

Thank you very much. I was wondering if you could start up by may be telling us what the orders have been like in the Travel Nurse area, so I understand the quarter you're guiding for has a little bit of noise in it based on demand from a single client? And then if you could comment on pricing that would be great? Thanks.

Susan Salka -- Chief Executive Officer

Absolutely. I'll have Ralph jump in a little bit more on the specifics in the order trends, which have been quite honestly largely favorable and positive still, if you sort of take out that single large client. Regarding pricing, I mentioned that we've actually seen continued favorable mix trends, meaning that the gap that we -- in the headwind that we were feeling year over year in premium rate assignments has actually gone down. And so we would expect that will continue to see more favorable trends kind of going into the second quarter.

But those headwinds are lessening for us and actually lessening even more than we thought in the fourth quarter, but even more so if you look at the first quarter. So I'd say it's a very sort of stable pricing environment and we'll be lapping those headwinds very soon. So Ralph, maybe a little bit more color on the Travel Nurse order?

Ralph Henderson -- President of Professional Services and Staffing

Sure. In the fourth quarter, first, they were up versus prior year. The overall mix was actually a little unfavorable with more third-party orders or vendor neutral programs, where our fill rates are lower. But on a positive side, facilities with orders were up than facilities with TOA were up.

As we look forward into Q1, outside of the super client, we're going to see an increase in demand and orders there, and -- but probably a little lower on the -- because of the flu season, so not super robust growth there, probably the last components will look further forward as we continue to the implementation of Tenet and some of the other new deals, I would expect us to start having pretty significant lap over prior year in demand.

Tobey Sommer -- SunTrust Robinson Humphrey -- Analyst

Thank you. Ralph, just a follow-up on that. Does that imply that the orders for your MSP clients kind of on average is growing a little bit more slowly than those outside of your kind of direct exposure?

Ralph Henderson -- President of Professional Services and Staffing

Yes, oddly. Probably the first time we've seen that in a long time. It's a good question. But once you kind of exclude, kind of, one large client who's just down on a year-over-year basis and just to cover that may be a little bit more, certainly a client that which will continue to grow for many years, but this is just a seasonal issue for them.

I think they did not see as much enrollment in their system as they had expected and so were impacted by that. But otherwise, I think, it's pretty strong. The other third-party there kind of -- it's been an interesting mix there. And we -- often we look at that.

It's not as favorable demand for us. Our fill rates on those third-parties can be in the teens versus 50%, 60% on our MSPs, but it's been across the board. There's nothing really different about the way that looks to other than just an increase.

Tobey Sommer -- SunTrust Robinson Humphrey -- Analyst

OK. If I could ask a couple of questions about the Locum Tenens, then I'll get back in the queue. Susan, you mentioned sort of satisfaction scores holding steady for customers and for practitioners. But I was just curious you can't have revenue declines very long and still get fill rates, so the revenue churns could be keep challenging for your push into MSP.

Could you talk about that? And how you're kind of navigating this, hopefully, temporary phenomenon and meeting the needs of those clients if you need to?

Susan Salka -- Chief Executive Officer

Absolutely. And you're right, with MSPs clients, we have not only the opportunity to make the placement, but an obligation, and our No. 1 objective is always to get their position filled whether it be through us or through an affiliate vendor. And we're very fortunate to have a stronger panel of affiliate vendor partners that help us to hit those fill rates expectations of our clients.

And even internally, we have our best fill rates at our MSP clients. It's a priority that we make for our recruiters and account managers and quite honestly we even align incentives and other ways to make sure that everyone's focused on hitting those fill rates, which is why -- again they're much stronger for our MSP clients than they are. You could argue that we are filling our MSP jobs at the expense even perhaps some of our other direct or third-party, but that's how we expect to build the business longer term. And I think the more we have MSP base of business, it actually builds a stronger, more predictable, more recurring revenue type of client base.

And we're really pleased that I think I mentioned 20% of our Locum's revenue is now coming from MSP. So we're making good progress there. But as I said, it could be perhaps to the expense of having lower fill rates than what we think is possible that we know. We have lower fill rates, it was possible, at our direct and third-party orders.

Tobey Sommer -- SunTrust Robinson Humphrey -- Analyst

OK. Last question from me, and I'll get back in the queue. Could you talk about your plans to roll out new systems in the sort of the Nurse business...

Susan Salka -- Chief Executive Officer

Yes, thank you for the question. We will not be rolling out any new systems for the remainder of the year and, quite honestly, until we get stability and improved performance within our Locum's division. The vast majority of our technical and even sales operations resources are focused on improving the performance of the system for Locum. And then we will consider how we might, if ever, bring the Nursing business on to the same platform.

And we want to make sure we're actually getting the benefit out of the changes before we consider moving anything out. And I will say, whenever we bring them on to the system, it will be in a very different methodology in terms of how we implement in probably more phases as opposed to a big bang. I mentioned, Mark Hagan joining us last summer as our new Chief Information Officer. He inherited this problem, if you will, and has done a great job of really getting his arms around with his team.

But we also have to make sure we've got the right resources both third-party contractors and in-house talent to be able to not only fix these issues, which they're doing a good job of, but also as we contemplate doing anything more in the future. I probably told you more than you asked, but I want to make this clear that we're not ready to embark on anything big like this in the foreseeable future.

Tobey Sommer -- SunTrust Robinson Humphrey -- Analyst

Thank you very much.

Operator

Our next question from the line of A.J. Rice with Credit Suisse. Please go ahead.

Caleb Harris -- Credit Suisse -- Analyst

Hey, folks. This is Caleb Harris on for A.J. Just on the topic of the larger clients. It sounds like it's related to lower enrollment in the system.

So is there someway that could bleed in the future quarters as well? Or do we know that it's confined to Q1?

Susan Salka -- Chief Executive Officer

There was a certain amount of volume from this particular client that happens to spike in the first quarter, pretty much every year. We've had that history, and so -- and it falls off more going into the second quarter. Every year, it's a little bit different as to whether the volume continues more in the second quarter or falls off more sharply in, say, the April time frame. So there will be -- we would think some amount of reduction in the second quarter on a year-over-year basis from this client, but it would likely not be as much as what we saw in the first quarter because quite honestly their first quarter utilization last year was exceptionally high, which makes the gap just even that much more severe for the first quarter this year.