Cross Country Healthcare, Inc. (NASDAQ:CCRN) Q4 2023 Earnings Call Transcript

Cross Country Healthcare, Inc. (NASDAQ:CCRN) Q4 2023 Earnings Call Transcript February 21, 2024

Cross Country Healthcare, 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 afternoon, everyone. Welcome to Cross Country Healthcare’s Earnings Conference Call for the Fourth Quarter 2023. Please be advised that this call is being recorded and a replay of this webcast will be available on the company’s website. Details for accessing the audio replay can be found in the company’s earnings release issued this afternoon. At the conclusion of the prepared remarks, I will open the lines for questions. I would now like to turn the call over to Josh Vogel, Cross Country Healthcare’s Vice President of Investor Relations. Thank you and please go ahead, sir.

Josh Vogel: Thank you and good afternoon, everyone. I’m joined today by our President and Chief Executive Officer, John Martins; as well as Bill Burns, our Chief Financial Officer; and Marc Krug, Group President of Delivery. Today’s call will include a discussion of our financial results for the fourth quarter and full year of 2023 as well as our outlook for the first quarter of 2024. A copy of our earnings press release is available on our website at crosscountry.com. Please note that certain statements made on this call may constitute forward-looking statements. These statements reflect the company’s beliefs based upon information currently available to it. As noted in our press release, forward-looking statements can vary materially from actual results and are subject to known and unknown risks, uncertainties and other factors, including those contained in the company’s 2022 annual report on Form 10-K and quarterly reports on Form 10-Q, as well as in other filings with the SEC.

The company does not intend to update guidance or any of its forward-looking statements prior to the next earnings release. Additionally, we reference non-GAAP financial measures such as adjusted EBITDA or adjusted earnings per share. Such non-GAAP financial measures are provided as additional information and should not be considered substitutes for or superior to those calculated in accordance with U.S. GAAP. More information related to these non-GAAP financial measures is contained in our press release. Also during this call, we may refer to pro forma when normalized numbers pertain to our most recent acquisitions as though the results were included or excluded from the periods presented. With that, I will now turn the call over to our Chief Executive Officer, John Martins.

John Martins: Thanks, Josh, and thank you, everyone, for joining us this afternoon. Overall, I was pleased with our fourth quarter and full year 2023 results, and particularly in how we have responded to the challenging market conditions in our Nurse and Allied segments as health systems seek ways to reduce their reliance on contingent labor. After declining in the first half of 2023, travel demand remained fairly stable. However, coming into the new year, we were seeing another pullback in orders, which appears to be industry-wide across most specialties and geographies. Many systems are nonetheless seeing increases in volumes, which we believe will ultimately translate into rising demand for our services. And with our focus on innovation and operational excellence, as well as the health of our balance sheet, Cross Country is well positioned to weather these near-term headwinds, and we believe we are poised to see sequential growth in the back half of the coming year.

Now I’d like to take a moment to reflect on our full year performance. We generated $144 million of adjusted EBITDA, our second best year in company history, following the record year in 2022. We also had a record year for cash flow from operations, generating $249 million, which enabled us to end the year with a strong debt-free balance sheet. In addition, we invested more than $20 million on technology initiatives and repurchased 2.3 million shares of stock, representing approximately 6% of our outstanding shares this year. Perhaps the most noteworthy accomplishment from 2023 was the rollout of our vendor management system Intellify. This VMS technology amplifies and enhances productivity by more effectively managing, deploying, and anticipating workforce needs for our clients.

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Q&A Session

Throughout the year, we witnessed the level of interest in this technology grow, leading to a series of wins that exceeded internal targets. In fact, two fairly sizable deals that we closed early in the fourth quarter were fully implemented before year-end, demonstrating the speed at which we can deploy this technology. In addition to our client-facing Intellify offering, we rebranded our Xperience app last year, which is a candidate-facing tool that enables clinicians with the power to manage their careers anytime, anyplace they want. Equally exciting, Xperience is on our roadmap to be fully integrated into Intellify. Unlike conventional job matching, Xperience ensures a precise alignment of clinicians with roles that uniquely match their skills and aspirations.

In 2023, we had more than 18,000 app downloads and over 100,000 unique viewers that accessed Xperience through our mobile app and website. And finally, we launched data aggregation services, or DAS, which offers unique insights on bill rate trends that help hospitals validate their costs by providing real-time benchmarking and visibility. From an MSP and vendor-neutral sales perspective, 2023 was a very active year in our industry. And though we experienced a higher level of attrition in the earlier part of the year, we left 2023 on a very positive trajectory from both a retention and new client perspective, as well as having a robust pipeline. The annualized spend under management from our recent wins is estimated to be over $125 million when fully ramped.

And since late December, we’ve had two more wins, including one verbal, with total estimated annual spend of more than $75 million. We believe that these and other wins we expect to close throughout the year will provide some tailwinds in the second half of the coming year. It’s also interesting to note that we’ve seen more balanced interest from hospital systems between MSP and vendor neutral programs, and we are strategically positioned to capitalize and grow share on both these fronts. Our focus for 2024 is on continuing to expand our client base and growing our relationships with existing clients through an expansion of services. And though we are always focused on driving efficiency, our plans for the coming year include leveraging both our offshore operations, as well as continuing to invest in cutting-edge technologies, such as AI agents and robotic process automation.

These efforts will allow us to lower costs, enhance predictive job matching, improve talent sourcing, and assess candidate suitability. I look forward to sharing our progress on these and many other initiatives on future calls. Turning to the quarter, consolidated revenue was $414 million, which is above the high end of our guidance range. And though adjusted EBITDA of $21 million was within our guidance range, it would have been even higher had it not been for a charge to allowance for doubtful accounts, which Bill will cover in more detail. As expected, travel revenue in the fourth quarter was down 12% sequentially, on track with our expectations for both rates and volumes. Looking ahead, travel bill rates continue to stabilize and are trending in line with expectations.

As we have called out previously, there remains a gap in expectations around bill rates with clients and pay rates from clinicians on many orders, impacting both our fill rate as well as our margins. As we navigate this dynamic, we will remain competitive in order to preserve our market share, while balancing overall profitability. Turning to our other business lines, Physician Staffing continued its strong performance with reported fourth quarter revenue of 26% year-over-year, quickly approaching an annual run rate of $200 million. Driving this was a combination of higher billable days and an improved mix of higher bill rate specialties. The segment’s contribution to income reflects the ongoing investments we are making in the business that we believe will drive organic growth and margin expansion throughout 2024.

Our Education business continued to perform well, up 9% from the prior year and more than 50% from the third quarter following the start of the new school year. Our Homecare business was flat sequentially and year-over-year, though we exited the year on a solid trajectory. As we reported last quarter, we had five Homecare MSP wins and presently have nine programs in implementation. On the backs of these wins, I believe this business will experience strong organic growth in 2024. Now, turning to our outlook for the first quarter, given my earlier comments on the current market backdrop, including recent travel demand trends and industry-wide margin pressure, we anticipate that first quarter revenue will be between $370 million and $380 million, with adjusted EBITDA coming in at $13 million to $18 million.

As a reminder, the annual reset in payroll taxes compresses margins at the beginning of the calendar year. I want to stress, as we work through the current market climate, we are taking actions to drive organic growth and margin expansion. In addition to ramping recent vendor-neutral and MSP wins across acute care and pay settings, we will continue to diversify physician staffing into higher margin modalities, as well as seek to capitalize on our growth and education through geographic expansion into even more markets. Additionally, we will remain diligent on the M&A front, with a goal to close on several accretive acquisitions that can further enhance our value proposition and diversify our platform into higher margin offerings. Looking ahead, we will continue to balance investments that serve to further diversify and differentiate Cross Country with necessary cost savings to preserve profitability, such as leveraging our operations in India.

In fact, I just came back from India, where we held our 2024 company-wide kickoff. Coupled with the enhanced productivity and efficiency gains we are seeing through technology investments, I remain confident in our ability to drive long-term, sustainable, profitable growth, and we intend to remain focused on increasing shareholder value by leveraging our balance sheet and through the deployment of capital, including additional share repurchases, ongoing technology investments, and potential M&A opportunities. In closing, we are confident about our prospects for 2024. Outside of the broader pressures in travel, we are seeing strong momentum with Intellify, Locums, Education, and our Homecare business. The team continues to execute at a very high level, and none of this is possible without our devoted employees.

We were recently named a 2023 winner of Best Company Culture and Best Company for Diversity by Comparably. These recognitions say something about our tapestry of culture that we work so hard to uphold, making Cross Country the employer destination of choice. I want to thank all of our employees and our healthcare professionals for your continued hard work and contributions, as well as our shareholders for believing in the company. With that, let me turn the call over to Bill.

Bill Burns: Thanks, John and good afternoon everyone. As John highlighted, our fourth quarter performance was largely in line with expectations, with revenue slightly exceeding the high end of our guidance range and adjusted EBITDA within our range. The outperformance on revenue was mainly attributed to better-than-expected performance across both education and physician staffing, as well as several million dollars from a labor disruption. Consolidated revenue for the fourth quarter of $414 million, was down 6% sequentially and 34% over the prior year, driven by the continued normalization in both travel demand and bill rates. I’ll get into more details on the segments in just a couple of minutes. Gross profit for the quarter was $91 million, which represented a gross margin of 21.9%.

Gross margin was down 10 basis points sequentially and 20 basis points over the prior year due primarily to the tightening of the bill pay spreads for travel assignments and was partly offset by certain burdens like workers’ comp and health insurance. Moving down the income statement, selling, general and administrative expense was $68 million, down 3% sequentially and 17% over the prior year. The majority of the decrease relates to lower salary and benefit costs associated with our reductions in headcount, as well as lower variable compensation, following the historic performance throughout the pandemic. In 2023, we reduced our U.S. headcount by approximately 22% while continuing to invest in technology and areas of the business with the highest growth potential.

Since the start of 2024, we have reduced our headcount by an additional 8% with plans for further reductions as we proceed throughout the coming year. As we called out, to the extent, we are unable to automate processes in the near-term, we are seeking to leverage our center of excellence in India to support our shared service teams. Over the last several quarters, we’ve grown our headcount in India by nearly 30% and we expect to double that investment in 2024. To just give you some context, for every 100 positions staffed in India, we save approximately $3 million annually. As bill pay spreads remain compressed amid softer demand, we continue to emphasize the importance of continuous productivity and efficiency gains. We are looking across the entire organization to identify opportunities to drive margins higher and to reduce our overhead, while balancing investments in capacity for future growth.

Based on cost actions taken to-date, as well as lower compensation associated with a sequential decline in revenue, we anticipate total SG&A will decline in the mid single-digits for the first quarter. As a percent of revenue, SG&A was 16% in the fourth quarter, flat sequentially and up from 13% in the prior year. Our goal is to exit the year with an SG&A of 15% through a combination of organic top line growth as well as by leveraging our offshore operations, executing targeted cost savings and the further deployment of technology. For instance, the first phase of our ERP project is set to launch in Q2, and as phases are completed, we should have more opportunities to drive efficiencies. We reported adjusted EBITDA of $21 million, representing an adjusted EBITDA margin of 5%.

Though revenue was above the high end of our expectations, our adjusted EBITDA was impacted by an increase in our bad debt expense. One of our MSP clients has fallen behind on payments for services rendered throughout the pandemic, leading to deterioration in the aging that requires us to take an additional reserve of $2 million for that specific account. We continue to have ongoing dialogue with the client and we’ve negotiated a payment plan that we believe will recover the remainder of the balance in the coming quarters. As revenue with the client has wound down throughout 2023, we do not anticipate a drag on top line performance in 2024. We’ll continue to monitor the situation closely and look forward to provide updates on future calls.

Excluding the bad debt charge, we would have reported approximately $23 million in adjusted EBITDA, representing a 6% adjusted EBITDA margin for the quarter. Our goal remains achieving a high single to low double-digit adjusted EBITDA margin, and we continue to believe we can attain it over time. Since we’re managing this business towards long-term sustainable profitability, we must continue to make certain investments in our digital platforms as well as to ensure we have the capacity to be ready to capitalize when the travel market turns. Interest expense in the fourth quarter was $600,000, which was down 12% sequentially and 83% from the prior year. The decline was entirely driven by lower average borrowings throughout the quarter. The majority of the interest expense reported for the fourth quarter was related to the carrying costs by the ABL and fees on our outstanding letters of credit.

The effective interest rate on amounts drawn under ABL was 7% as of December 31. And finally, on the income statement, income tax expense was $4 million, net of some discrete items representing an effective tax rate of 30%, essentially in line with expectations. Our overall performance resulted in adjusted earnings per share of $0.29 near the midpoint of our guidance. Turning to the segments, Nurse and Allied reported revenue of $367 million, down 7% sequentially and 38% from the prior year. Our largest business, travel nurse and allied was down 12% sequentially and 44% over the prior year. Bill rates for travel were down 4% sequentially, while billable hours were down 8%. Looking to the first quarter, we expect travel to decline sequentially in the low double-digit range, driven primarily by continued softness in travel demand, with bill rates declining in the low single-digits.

After seeing travel orders rise modestly throughout the second half of last year, we’ve seen another pullback coming into the start of 2024. This seems to be an industry-wide issue across most specialties and geographies, and while orders from existing clients may rebound, we believe that our recent wins will continue to ramp, providing a catalyst to regrow our travelers on assignment. Our local or per diem business continued to feel the impact from the softness in demand as well as the timing of the holidays. Fourth quarter revenue was down 29% from the prior year, though up about 1% sequentially, due in part to the labor disruption I mentioned earlier. The majority of the year-over-year decline comes from a reduction in billable hours, as rates were down about 2% over the prior year.

Also, within the Nursing Allied segment, our education business reported 9% year-over-year growth and was up 50% sequentially following the start of the new school year. Finally, Physician Staffing once again delivered a strong top line, reporting $47 million in revenue, which was up 26% over the prior year and 3% sequentially. The primary driver for the growth was a rise in the number of days filled across specialties such as anesthesiologists, CRNAs and nurse practitioners, and to a lesser extent, an increase in the average revenue per day filled. Turning to the balance sheet, we ended the year with $17 million in cash and no outstanding debt. With the help of our balance sheet and strong cash flow, we remain well-positioned to make further investments in technology and accretive acquisitions, as well as to continue repurchasing shares under our $100 million share repurchase plan.

From a cash flow perspective, we generated $12 million in cash from operations in the fourth quarter, bringing the full year cash from operations to $249 million, our strongest year in company history and driven in large part by collections and reductions in net working capital. DSO was 68 days down four days since the start of the year, and excluding the impact from the single MSP client I mentioned earlier, our DSO would have been 62 days, much closer to our target. Our goal remains to bring DSO below 60 days, which is more in line with our historic performance before the pandemic and believe we can get there and make progress to that throughout the coming quarters. Cash used in investing activities was $3 million, primarily reflecting investments in our tech initiatives such as Intellify experience and our new ERP system.

From a financing activity perspective, we repurchased an additional 300,000 shares during the quarter under both our 10b5-1 and our 10b-18 trading plans. This brings me to our outlook for the first quarter. We’re guiding to revenue of between $370 million and $380 million, representing a sequential decline of 8% to 11%, driven predominantly by the expected decline in both billable hours and rates for travel. We’re guiding to an adjusted EBITDA range of between $13 million and $18 million, representing an adjusted EBITDA margin of approximately 4% at the mid-point of guidance. Adjusted earnings per share is expected to be between $0.15 and $0.25 based on an average share count of 34 million shares. Also assumed in this guidance is a gross margin of between 21% and 21.5%, interest expense of $500,000, depreciation and amortization of $5 million, stock comp of $2 million, and an effective tax rate of between 32% and 33%.

And that concludes our prepared remarks, and we’d now like to open the lines for questions. Operator?

Q – Kevin Fischbeck: Great. Thanks. So I guess just wanted to follow-up with some of the comments you made about how things will trend throughout the year. I guess you’re talking about sequential growth in Q2 in second half of the year, which I guess means you would think that Q2 will be down sequentially versus Q1. Is that the right way to think about it?

Bill Burns: Hey, Kevin, it’s Bill. I don’t – we’re not giving guidance to Q2 at this point, but based on how we come into the year with demand, it’s a possibility that we could see a sequential decline going into the second quarter. But it all depends on how much of that is travel, because we’re still seeing great growth across other parts of the business. So we’re not going to call out Q2 just yet as to whether it’s sequentially down or up. But as we look at the back half and as we expect our wins to ramp, our – that’s kind of our lens looking at when we think the travelers on assignment will start to regrow. John, if you want to…

John Martins: Yes. Kevin, this is John. I would just add, you’re getting a sense now that we’re getting back to that cyclical nature of this industry, back to pre-COVID, where you’re going to see traditionally a little bit of a dip in Q2 from Q1. But I do think with the recent wins that we’ve had on the MSP and VMS side, with the diversification of our businesses, as Bill mentioned, and the growth, that there’s an opportunity to buck that trend in Q2.

Kevin Fischbeck: Okay. I guess then when you say the second half is going to ramp, then are you assuming then that from an industry perspective things are going to be flattish and it’s your wins that get you to growth? Or is it a combination of the industry starting to pick up again in the back half?

John Martins: Yes, I think the way to look at it is, as we start looking at the macro data, right, and looking at, you have census and hospitals are still remaining high and increasing. Looking at the Affordable Care Act and seeing that, look we had in 2010, there was 16% of the nation didn’t have insurance and now it’s 7%, 7.2%. I think the number is, you still have this fundamental shortage of nurses, and we’re seeing that demand. We think demand will start to pick up at one point in the year. Now, I wish I had that crystal ball saying, does demand from a market standpoint start picking up sometime in the second quarter? Is it the end of the second quarter? Is it in the third quarter? It’s hard to forecast when that happens, but what we’re confident about is how we’re executing on a business, winning more deals.

And so part to answer your question is part of it is, yes, we think we can outperform the market based upon the deals we’re winning, based how we’re really looking at executing above the market in many of our segments. And then add that to hopefully some market tailwinds and then we’re in a great place. But we do think that we can buck the market trend just on our wins, on our MSPs and VMS.

Bill Burns: And, Kevin, just to add a little more color to that, as you look at the macro conditions in the market, the demand today, as a snapshot, remains below the pre-pandemic, yet contingent usage by our clients is still higher. So there’s some misalignment out there right now that we do think that the demand will rebound. And I’ll just give you a little retrospective on 2023. We saw a sharp drop in the first quarter, and it kind of bounced back as we got in through the second quarter and then remained steady, probably ticking up throughout the second, third and fourth quarters. And so this is a pretty significant step down. It doesn’t seem to be something that is – that there’s a structural change in the market that would have led to that kind of a demand fall off. So it does feel a little bit perhaps of an overcorrection or a timing issue that we think can work its way back.

Kevin Fischbeck: Okay. And just to make sure I understand, how you guys talk about deals, you talked about the spend under management of 125 and then another couple of wins of 75. Are those MSPs? So we should think about those as, like, revenue numbers or is that a mix of MSP and VMS? And so it’s not necessarily a revenue way to think about it.

John Martins: Yes, it’s a mix of VMS, vendor neutral and MSPs. The vendor neutral side, we’re going to capture somewhere in that 30% range could be a little bit higher. And on the MSP side, you’re going to capture – traditionally, we capture somewhere between 65% and 70%.

Kevin Fischbeck: Okay, great. Thank you.

Operator: Thank you. Our next question comes from Brian Tanquilut with Jefferies. Your line is open.

Brian Tanquilut: Hey, good afternoon, guys. John, one of your comments, you talked about kind of keeping market share. And so just curious, how are you weighing that? Balancing market share maintenance and maybe gains versus maintaining the margins. And maybe a follow-up to that Bill, where do you think margins eventually shake out, assuming we return to kind of like a normalized level of demand?