AMN Healthcare Services, Inc. (NYSE:AMN) Q1 2024 Earnings Call Transcript

AMN Healthcare Services, Inc. (NYSE:AMN) Q1 2024 Earnings Call Transcript May 9, 2024

AMN Healthcare Services, Inc. beats earnings expectations. Reported EPS is $0.97, expectations were $0.93. AMN 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 the AMN Healthcare’s First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [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.

Randle Reece: Good afternoon, everyone. Welcome to AMN Healthcare’s first quarter 2024 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, and welcome to our earnings call. I want to first express my gratitude for the AMN Healthcare professionals and team members in the U.S. and around the world for their strong commitment and tireless efforts in the first quarter of 2024 in furthering our mission of empowering the future of care, and especially to our wonderful nurses as we recognize them during National Nurses Month for the extraordinary role they play in healthcare. First quarter revenue of $821 million was in line with expectations, with earnings coming in ahead of consensus estimates. Several of our businesses display positive trends, including language services and locum tenens. Our second quarter revenue guidance for the two business segments other than nurse and allied is in line with consensus.

Healthcare organizations focus on reducing contingent labor continues to depress demand for our largest business nurse staffing. We expect nurse and allied segment revenue in the second quarter of 2024 to be down 14% to 16% from the first quarter, with nurse staffing declining more than the overall segment. Other AMN service lines have been affected by the labor cost squeeze in healthcare, including VMS, RPO and search. Interim leadership, while down year-over-year showed sequential revenue growth for the first time in six quarters, international nurse staffing revenue in Q1 dropped as expected by 11% sequentially and 7% year-over-year due to the State Department’s constraints on new visa applications. We continue to see strong client demand for international nurses.

Trends in our allied business are favorable for some specialties. In the first quarter, we saw good year-over-year growth in volume and net week’s book for therapy and imaging. Our school’s business grew on assignment headcount 20% year-over-year. These growing segments were more than offset by declines in lab and especially respiratory, where volume was off 50% from the year ago quarter late in the pandemic. As we have discussed in previous quarters, we see clients focused on both near-term labor cost spend as well as implementing new models to sustainably address increasing patient demand. Based on the latest client feedback, the majority of our top MSPs have indicated they have reached or cut below their targets for contingent nurse labor spending.

Indications from smaller clients are that their progress on contingent nurse labor spending lags the largest systems by a couple of quarters. In the first quarter of this year, the four public hospital companies averaged spending 43.7% of revenue on salaries, wages and benefits, compared with 45.4% for the same quarter five years ago. These figures are consistent with our view that the largest health systems have made substantial progress on labor cost control, with some moving to grow in a cost effective manner to meet increasing utilization. We remain convinced that in the long run, growing patient demand across many different sites of care relative to a finite supply of healthcare professionals will drive greater opportunities for both nurses, physicians and other professionals and the workforce technology solutions that help optimize labor utilization and cost.

In line with these trends, we are actively partnering with our clients and prospects to develop and implement workforce models that help them improve efficiency and automation and reduce labor costs using our technology and network of healthcare professionals. We expect the low demand environment to continue for some of our businesses such as travel, nurse, VMS, RPO and search. In anticipation of these trends, we are managing second quarter SG&A expenses excluding share-based compensation, acquisition-related integration and other costs to be approximately $10 million lower than the first quarter. Working against lower revenue and gross margin headwinds, we are targeting an adjusted EBITDA margin for Q2 that is in line with analyst estimates.

We have reduced headcount to align with the lower demand we have seen in some of our service lines. In addition, we have taken other actions to restrain spending where appropriate. We have reduced our CapEx spending plans for 2024 by approximately 20% to a range of $65 million to $70 million for the year, prioritizing spend on key areas of growth and focus with our clients. This includes rolling out the next-generation of our industry-leading vendor neutral platform, ShiftWise Flex, to current and new clients. We have successfully migrated clients representing 36% of ShiftWise VMS spend onto Flex in the first quarter and are targeting 70% by the end of the year. Our CapEx plan also includes continued investment in our language services business, which grew 16% year-over-year.

Our industry-leading clinical staffing app, AMN Passport, is contributing a rising percentage of our applicants filling high need jobs. ShiftWise Flex, Passport and language services account for nearly half of our CapEx spend. Our One AMN transformation strategy is also proceeding well, with some promising gains visible this quarter. New technology and internal process improvements have greatly accelerated our speed in fulfilling orders, which was challenging for us during the pandemic. These changes have cut our order to book time in travel nurse and allied staffing in half and enabled us to improve our position in the vendor-neutral market. At our largest third-party client, where we had ranked outside the top 15 suppliers a year ago, AMN has improved to the number three ranking among vendors.

Our new Smart Square mobile app, which enables advanced self-scheduling capability, reached more than 90,000 clinicians in the first 45 days after launch. And the Smart Square workforce optimization platform is ranked best in the class survey again this year. These outcomes are important milestones for our intermediate and long-term growth prospects. All these strategic changes were necessary to restore the ability of AMN to gain market share and serve a fast-changing market that demands broader and more cost effective solutions to the unique workforce conditions in healthcare, which is expected to be a leading growth sector for the U.S. economy in the coming decades. The physician and leadership solutions and technology and workforce solutions segment have attained some stability in revenue outlook after a solid first quarter.

AMN is making early gains in reopening our sales engine to the whole healthcare staffing market and we are seeing our VMS sales pipeline build and progress. With all we have done and have in progress, AMN will be in a better competitive position as the most aligned total talent solutions partner for healthcare professionals and the employers who depend on them when staffing demand comes back. We are also demonstrating the ability to rightsize our organization in concert with market demand. Our business mix is more diversified now than in past cycles, helping AMN maintain profit margins that are higher than AMN experienced in other market downturns. We are managing through short-term risks, while building for sustainable long-term growth of a talent rich values-based organization serving an important mission for all our stakeholders.

AMN is proud to have been recognized this month in Becker’s top 150 places to work. Our team members have admirably led through this difficult environment, while keeping our strong values and mission at the center of everything we do. Now, I’ll turn the call over to Jeff for more details about our results and outlook.

Jeff Knudson: Thank you, Cary and good afternoon everyone. First quarter consolidated revenue was $821 million, down 27% from the first quarter of 2023. Sequentially, revenue was flat and organic revenue was down 3%. The sequential decrease was primarily driven by volume in the Nurse and Allied segment and the search and VMS businesses. Consolidated gross margin for the quarter was 31.4% near the high end of our guidance range. Gross margin was lower by 140 basis points year-over-year, driven mainly by the growth of locum tenens revenue, lower nurse staffing margin and declines in higher margin businesses, partly offset by a favorable segment mix. Sequentially, gross margin decreased 50 basis points, primarily due to the mix shift towards locum tenens in physician and leadership solutions and lower gross margin in our travel nurse business.

Consolidated SG&A expenses were $175 million or 21.3% of revenue, compared with $206 million or 18.3% of revenue in the prior year period and $185 million or 22.7% of revenue in the previous quarter. The decrease in SG&A expenses year-over-year reflects our proactive efforts to adjust our expense base to match the current demand environment. Sequentially, SG&A expenses decreased as fourth quarter expenses had been elevated due to the acquisition, integration and other costs associated with the MSDR acquisition. Adjusted SG&A, which excludes acquisition, integration and other costs and stock-based compensation expense was $162 million in the first quarter or 19.7% of revenue compared with $191 million or 16.9% of revenue in the prior year period and $159 million or 19.4% of revenue in the previous quarter.

The resumption of incentive compensation, payroll tax reset and a full quarter of MSDR operating expenses added $10 million to adjusted SG&A compared with the prior quarter, partly offset by efficiency efforts. In the first quarter, nurse and allied revenue was $519 million, down 37% from the first quarter of 2023. Sequentially, segment revenue was down 3% driven by lower volume partially offset by increased hours worked in allied businesses. Average bill rate was down 15% year-over-year and flat sequentially in line with our expectations. Year-over-year volume decreased 24% and average hours worked were 3% lower. Sequentially volume was down 3%, while average hours worked increased 1%. Travel nurse revenue in the first quarter was $334 million, a decrease of 44% from the prior year period and 5% from the prior quarter.

Allied revenue in the quarter was $170 million, down 13% year-over-year and up 4% sequentially. Nurse and allied gross margin in the first quarter was 25.1%, which decreased 80 basis points year-over-year and 40 basis points sequentially. The decrease in gross margin year-over-year was primarily due to lower margin in travel nurse, driven by less leverage over housing, travel and allowances and inflation in these expenses, offset in part by a favorable revenue mix shift as the year-over-year declines in travel nurse outpaced the rest of the segment. Segment operating margin of 10.3% decreased 350 basis points year-over-year and 140 basis points sequentially, driven primarily by the deleveraging effect of lower revenue and to a lesser extent gross margin.

Moving to the Physician and Leadership Solutions segment. First quarter revenue of $189 million increased 14% year-over-year, primarily from the MSDR acquisition, partially offset by decreases in interim leadership and search. Sequentially, revenue was up 12%, driven by a full quarter impact of MSDR, partially offset by lower revenue from search. Locum tenens revenue in the quarter was $145 million, up 36% year-over-year, with almost all of the growth from the addition of MSDR. Interim leadership revenue of $30 million decreased 25% from the prior year period, but was up 3% from the prior quarter, mainly due to positive trends in both volume and pricing. Search revenue of $13 million was down 29% year-over-year and down 12% sequentially as demand remained soft.

Gross margin for the Physician and Leadership Solutions segment was 31.6%, down 360 basis points year-over-year and 170 basis points sequentially. The year-over-year decline was attributable to the revenue mix shift and a lower bill pay spread in organic locum tenens. Segment operating margin was 11.8%, which decreased 330 basis points year-over-year, tracking the lower gross margin. Sequentially, operating margin decreased 120 basis points. Technology and workforce solutions revenue for the first quarter was $113 million, down 17% year-over-year as the revenue increase within language services was more than offset by the declines in our VMS and outsourced solutions businesses. Sequentially, revenue was flat. Language services revenue of $71 million increased 16% year-over-year and 4% sequentially.

VMS revenue for the quarter was $29 million, a decrease of 46% year-over-year and 5% sequentially, in line with trends in our travel nurse business. Segment gross margin was 59.9%, down from 71.4% in the prior year period, primarily attributable to lower VMS and outsourced solutions revenue and lower gross margin in language services. Sequentially, gross margin fell 60 basis points, driven by revenue mix shift within the segment. Segment operating margin in the first quarter was 39.3%, a decrease from 49.3% in the prior year driven by the change in revenue mix. Segment operating margin increased 250 basis points from the prior quarter. First quarter consolidated adjusted EBITDA was $98 million, a decrease of 46% year-over-year and 6% sequentially.

Adjusted EBITDA margin for the quarter of 11.9% was slightly above the high end of our guidance range. Year-over-year adjusted EBITDA margin was down 400 basis points and sequentially was down 80 basis points. The decrease in EBITDA margin year-over-year was primarily due to deleveraging on lower revenue. First quarter net income was $17.3 million, down 79% year-over-year and up 39% sequentially. First quarter GAAP diluted earnings per share was $0.45, adjusted earnings per share for the quarter was $0.97 compared with $2.49 in the prior year period and $1.32 in the prior quarter. Days sales outstanding for the quarter was 64, six days lower than the prior quarter and nine days higher than the prior year. We expect more progress towards historically normal DSO through the rest of the year.

Operating cash flow for the first quarter was $81 million and capital expenditures were $18 million. As of March 31, we had cash and equivalents of $51 million, long-term debt of $1.3 billion, including a $425 million draw on our revolving line of credit and a net leverage ratio of 2.4:1. Moving to second quarter 2024 guidance. We project consolidated revenue to be in a range of $730 million to $750 million, down 24% to 26% from the prior year period. Gross margin is projected to be between 30.7% and 31.2%. Reported SG&A expenses are projected to be 21.5% to 22% of revenue. Operating margin is expected to be 3% to 3.7% and adjusted EBITDA margin is expected to be 11% to 11.5%. Average diluted shares outstanding are projected to be approximately 38.3 million.

Additional second 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: Thank you. [Operator Instructions] And our first question comes from Kevin Fischbeck of Bank of America. Your line is open.

Kevin Fischbeck: Great. Thanks. Just to get a little bit more color about kind of how you’re thinking about, I appreciate the comments about like kind of the long-term underpinnings of demand for the business. I think those are clear. I guess the question we’re all still trying to figure out is when does that bottom? Do you believe that Q2 is kind of where we should be thinking about the bottom and the back half of the year continued growth? Or is it still not clear? Or do you expect a little bit more continued decline in the back half? Thanks.

Jeff Knudson: Hey, Kevin, this is Jeff. So when we look at demand within travel nurse during the first quarter, it was down approximately 30% from the fourth quarter of 2023 average. And in the recent weeks, really since April 1, although that demand has been stable, it’s down 13% from the first quarter average. So when we look into the back half right now for travelers on assignment within nurse and allied, we would expect June to be the low point. And those travelers on assignment in the month of June will be about 10% lower than the second quarter average. And so that’s the trajectory that we would be carrying into the third quarter.

Cary Grace: Kevin, I mentioned this in the opening comments, but if you – as we talk to our clients, for the majority of our largest MSP clients, they’re at or below what their target contingent spend is on the nursing side. We still have some clients who are probably lagging by a couple quarters of what you see in the largest clients, the narrative around the largest clients, I think you’ve seen that even in some of the public commentary around the largest health system. And so the question for us and Jeff gave you some color about what we’ve been seeing over the past quarter, and certainly the past couple weeks is where that kind of across the board stabilizes out between what we’re seeing with a number of our clients versus what we’re also seeing with some clients who still have some work to do.

Kevin Fischbeck: Okay. That’s helpful. I guess – so that means that you think that the back half of the year off of June that’s kind of the low point. Is there something to point to there as far as actual indication of demand? Because some of the companies that are public have been saying for a few several quarters that they might look to hire more, but it doesn’t seem like they have. I’m just trying to get a little more color as to kind of is it more just a view of what you see broadly from a macro perspective, supply demand eventually should go on, or are there like firmer kind of initial conversations about what the back half or 2025 might look like?

Cary Grace: Well, I’d say two things. If you look at the macro conditions, all of the supply demand to macro conditions remain intact in the travel nurse market because you had such high utilization and cost coming out of COVID that was a big area of focus as we’ve talked about over the past couple quarters. So one is macro conditions, but our focus really is on bottoms up, rolling up feedback with every individual client and where they are. Not every client has a target. A number of clients do, especially our largest clients. And so we really are working with them on what their goals are and aggregating up that feedback.

Kevin Fischbeck: Okay, great. And maybe just last question, can you talk a little bit about the competitive environment for new contracts? I think last quarter you talked about a relatively large contract that I think is kicking in more towards the end of Q2. So I guess maybe more in Q3 would we see it? But anything to highlight there as far as contract wins, contract losses, turn things like that heading into the back half? Thanks.

Cary Grace: Yes. So we continue to make progress both on sales and renewals. And I know over the past couple quarters we talked about coming out of the pandemic, you had really multi years of renewals that you had really representing a larger year last year than certainly we have this year. We are tracking better on both sales and I’d say kind of overall renewals than last year. We continue to build and progress our pipeline from a sales standpoint and almost half of our pipeline is vendor neutral. So we’re making progress as expected. What I will say is it’s a very competitive market. It has been a competitive market. We expect it to continue to be a competitive market.

Kevin Fischbeck: Okay, great. Thanks.

Operator: Thank you. One moment for our next question. And our next question comes from Trevor Romeo of William Blair. Your line is open.

Trevor Romeo: Hi. Good afternoon. Thanks for taking the questions. I just wanted to go back one more on the demand environment for nurse and allied. I guess when you speak to the client base, are you still seeing a high level of scrutiny on the staffing decisions from the CFO’s or the finance organizations of the clients? Or is any of that decision making starting to shift back to the clinical side? Just kind of wondering if that might be a sign of alleviating pressure if some of the CFO’s kind of take a step back in that process.

Cary Grace: Yes. Thanks, Trevor. I would say it depends on the clients. And so we have some clients where you still see, I’d say, strong engagement of both the clinical team and the finance team in those decisions. You see some clients where it really is the clinical team looking at how they’re going to staff relative to their target. Our goal, as you know is we want to be the total talent solutions partner for our clients. So we work with our clients on how they want to staff across the board and that’s through the clinical team, the finance team is often engaged and how they optimize their workforce against the patient demand they’re seeing.

Trevor Romeo: Okay. Thanks, Cary. That’s helpful. And then for the follow-up, just switching over to the locum side. And this is your first full quarter with MSDR. So if you have any update on how that’s fitting into the company thus far, that would be great. And then on the organic side, I think Jeff you had said almost all the growth was from MSDR in the quarter. So could you give us maybe a progress update on some of the efforts to reinvigorate growth, kind of on the legacy side of locums and where you’re seeing success? Or are still seeing some challenges there?