John Martins: Brian, this is John. Yes. The market is going to do what the market’s going to do right now. And so that does put margin pressures on us as there is a – as demand softens, right, more people are going after the same jobs. So it does create some bit of a margin pressure. And so, of course, that’s how we want to balance, making sure that we’re competitive in the market, but we also want to maintain our profitability. And so that’s when we talk about the balance, and we think we’re doing a good job right now at that. And I think that’s evidenced by the wins we’ve had, and we’re not – and it’s not – we are definitely not buying the business we’re working on good margins. It’s just as an industry, the margins are moving down as a whole.
Bill Burns: Yes. Brian, I’ll add. I mentioned about how demand has stabilized, and then it kind of dropped off. The one interesting note underneath that is that when you look at the open order rates, the bill rates, they’ve remained eerily steady for quite some time. And this is looking at a subset of where we have some critical mass across ICU and Med-Surg that the majority of our demand, the large blocks. And you look and want to see what’s happened to the lock rate, the rate of the orders that you’re closing on. And what’s happening is we’re starting to see a narrowing in the spread. So in other words, we’re having to lock at lower rates, which you’re not going to necessarily be able to pay below market on the nurse compensation or the clinician’s compensation in particular, because [indiscernible] are dictated by the markets they’re going to.
So you naturally will have some margin compression now. Does that foreshadow a longer tail to the margin compression? I think there’s things that the company can certainly do to mitigate that. Number one is we’re still migrating Intellify across our managed service program stack. We’re about 80% converted. I think there’s another $1 million of savings roughly to be garnered from that. And then I think we’re growing, where we are growing is in higher margin businesses, like in the home care and in our education business line. So I think we’ve got the opportunity to see consolidated margins grow. I don’t have a lens as to what happens to the pay bill spreads over time. I would hope that at some point in the future we would be able to see some bill rate improvement, but for now, that’s certainly not the market conditions we find ourselves in.
Brian Tanquilut: I appreciate it. My follow up, as I think about Locums, right, it seems like you’re seeing pretty healthy growth there. What would it take to continue driving that growth? Or maybe even expanded, like, does it have to be acquisition driven or is it contract driven or does it take more investment to grow that Locums segment?
John Martins: Well, we do love the space of Locums and of course, M&A is definitely a part of where we look at our strategy. But we’ve invested quite a bit of money over the past couple of years to build the team where it is today. So when you look at contribution income, it’s not – it’s a little lower than we want it to be right now, because that’s because we’ve made the investments. So we feel that there’s lots of – we have lots of capacity and ability to ramp this business currently and improve that bottom line margin and increase the business. But when we look at we’re approaching a $200 million company in Locums, for us to get to that next level of becoming $0.5 billion, I think that’s going to require acquisitions to get to that level.
Brian Tanquilut: Got it. Thank you.
Operator: Thank you. Next we will hear from Trevor Romeo with William Blair. You may proceed.
Trevor Romeo: Hi. Good evening. Thanks for taking the questions. First one is just kind of on client sentiment regarding contract labor. I think maybe it seems like individual hospitals might be in a variety of different spots in terms of how far they’ve reduced contract labor spend some, maybe all the way back to pre-pandemic, maybe some aren’t. I guess, if you could maybe just generalize your client base more broadly. I guess, does it feel like it’s kind of tilted one way or the other in terms of being content with current spend rates or wanting to reduce further? Or any kind of way you could summarize where your clients are at more broadly?
John Martins: Yes. Let’s take a broad – because every client is a little bit different, but let’s take a broad view. A broad view is, clients for the most part, what we’re seeing, they’re content, I say, is a good way to put it with where their labor spend is right now the number of travelers they have out there. They’re looking for ways for us to continue to help them save money. But sometimes it’s not through travel. It’s through maybe helping them with their core staff. It’s helping them with their internal resource pool, so we can maximize their internal people, which will, again, take a little bit off of the travel side. But in general, on the broad stroke, I think what we’re seeing from our clients is they’re fairly content with the number of travelers they have now.
I think everyone would like to save a little bit of money a little bit more, but they also come to the realization that you could only go so far down and that if you want to make sure you have the number of beds open, if you want to make sure you have the right patient to nurse ratio, if you want to make sure that you have the nurses at the bedside taking care of the patients in the community, you need a certain level of travelers. And I think we’ve kind of hit that point. And I think that’s where when we look at saying, when do we see the bottom of this? And we’re saying, hey, again, not having that crystal ball, which I wish I had, it’s coming sometime in from now to the back half of the year and then we start seeing that sequential growth.
So I think we’re almost there at that point.
Trevor Romeo: Okay. Thanks, John. That’s helpful. And then as you look into Q1, I think the sequential revenue drop you’re guiding to is quite a bit below what you typically would see Q1 over Q4. I think it’s also below what maybe some of your competitors might be expecting in Q1 in terms of the sequential change there. So I was just wondering if you could maybe try to square those differences at all and speak to maybe your level of conservatism in the guidance.
Bill Burns: Yes. Trevor, I’ll try to give you a shot. When you look at the sequential decline that’s implied in the guidance, it’s almost exclusively on the travel side, right? So we’ve talked about the fall off into demand, so we’re looking at that to say how is our net weeks books progressing? And that’s our internal metric for how we see the production. One of the things that’s interesting is even though the demand is down, we’re still booking at a fairly consistent rate overall for the start of the first quarter. I would not say there’s an error of conservativism. I think travel is the one line of business where we have a pretty good lens because of the length of the assignments. And so I think it really is not something that I’m anticipating to see a huge variance to what we’ve guided on the travel side.
There is opportunity now, of course, it’s the restart of the school year as we come into the winter session or the spring session, where you can sometimes see a little bit of an uptick on the education side of the business. But I don’t know, John, if you have anything else you want to throw in there?
John Martins: What I’d say, Trevor, is that I think when you look at, you said, how we compare to our competitors, I think when you look at the growth we had over the last several years in 2021 and 2022. In 2021, staffing industry analysts is kind of how we kind of judge the market, right? And our growth, the market grew at 105% and we grew at 100%. And you got to remember we were going through our digital transformation. We were really reforming the company and really creating a new roadmap and vision for the company. And that happened in 2019 and 2020. And then in 2021 we go from nearly beating up market. And then in 2022, the market grew at 45% and Cross Country grew at 67%, clearly beating the market. And if you actually look in at the travel nurse and travel allied in particular, those numbers are actually a higher percentage of growth in 2022.
And in 2023, we’re not going to be able to see what staffing industry analyst has, where the market has come down to, because they report that in sometime in the summer. And when we do see that, I’m confident that we’re going to show that we once again have outpaced the market even as the market’s going down. So I think that’s one area. And the other area, when you look to our competitors sometimes, we grew so fast in the pandemic in nurse and allied, and they may have been a little bit more diversified. So you’re going to see a little bit of difference in that. And the other thing is, I think when you look at those numbers, you have to also look at acquisitions that happen in that time period to make sure you’re comparing apples to apples.
Trevor Romeo: Okay. Thanks, John. And then maybe if I could sneak just one more in. Just wanted to follow-up on a comment I think you had in the prepared remarks about maybe having a goal to close on some acquisitions this year. Just wondering if you could kind of double click on that and maybe give us an update on what you’re seeing in terms of targets coming to market in the pipeline in your areas of interest.
John Martins: This is, I think, a buyer’s market right now. We’re seeing multiples come down. There’s companies that don’t want to go through another cycle of this downturn that we’ve seen in the market over the last 18 months. And so I think it’s a buyer’s market right now. And there’s opportunities for us. And as we’ve said before, and I said just earlier, we really love the locum [ph] space and there’s opportunities in the locum space. The allied space is something that we like. And our education business, which is just doing phenomenally as on fire. We love that space, and it’s a very fragmented space, but we’ve done a great job of growing that into a fairly sizable business. It’s nearly $100 million business. And I think there’s lots of opportunity in the education space to continue to roll up companies into that space and gain some scale in the education space.
Trevor Romeo: All right. Thank you very much.
Operator: Thank you. Our next question comes from Tobey Sommer with Truist Securities. Your line is open.
Tobey Sommer: Thanks. I know you made some comments about customer retention and market share, but I wanted to explore that a little bit more, if you could. Because it’s a little bit of a challenge externally to take the comment about gross new Intellify sales and think about a ramp to maturity and know how to use that as a modeling input. Are you trying to message that the market share you have within existing customers is stable and your income statement is just kind of transmitting trends in demand and pricing?
John Martins: Yes, that’s correct. I think I can kind of give you a little bit of flavor on where we’re at on that spend under management. When you look at our spend under management, and that includes the Intellify business. Pre-COVID, we were somewhere between $400 million to $500 million and as of December, we were at somewhere between $800 million to $900 million. And now, of course, their bill rates have gone up, but bill rates are up. Bill, what would you say, bill rates are up from that period 15%?
Bill Burns: 25%.
John Martins: 25%. Okay, so that period. So you have a 25%, 30% increase in that. But we clearly have nearly double the amount of spend under management. So we are gaining, and that’s why we think we’re gaining. We feel confident we’re gaining market share, because of those numbers. Now, look, volumes are definitely up a little bit, too, and the market size is a little bit bigger. But on the other side, demand, as Bill called out earlier on the call, demand is actually lower than pre-COVID right now. And so as we get – and that the spend of between $800 million to $900 million doesn’t account to the ramp ups of most of that $200 million plus spend under management that is still being ramped up now.
Tobey Sommer: Okay. Do you feel like the G&A is right sized and appropriate for the 1Q guidance levels? Or is it built for a different level of volume in the business?
Bill Burns: Good question, Tobey. There’s probably two pieces to that. Number one, we do have – I mentioned in my prepared remarks, we’ve had about an 8% reduction in headcount since the start of the year. We won’t get the full quarter of benefit of that. So just bearing that in mind, there is also some impact on the G&A in the first quarter from the payroll tax reset that we usually bare [ph] it’s an $0.5 million on that. And then kind of picking up some of the remarks John made. We do maintain extra capacity in the business if we were to just simply run the numbers, you’d say you could do with fewer headcount. But that’s not the place we want to be in. We don’t want to have to start from ground zero to rebuild the revenue producers that we’ve brought aboard and trained.
And there’s still opportunity. The reality is, I mentioned the off-shoring of labor to India, but as important, we’re still working through a lot of different opportunities for automating a lot of our complex processes. The ERP system that we’re putting in that goes the first phase goes live, but most of the benefits of that will be really realized when we get to the second phase, which is in early 2025. So we’re not done getting at the costs in the G&A. But for Q1, that’s kind of the messaging.
Tobey Sommer: Okay, that’s helpful. Let me see. When you look at the industry, the travel nurse industry as a whole. We’re now two years in change of sort of trying to guess when the business may bottom and then finding new lows. How do you think of the industry at this point in capacity within it for the demand that exists today? And is there too much in what may need to happen to rein that capacity [ph]?
Bill Burns: Well, I guess, Tobey, I’d say that a lot of companies definitely ramped up pretty big. And I think the companies that are support from a third party perspective, the vendors that don’t have the direct client relationships are certainly going to have more capacity, I would imagine, than companies like Cross Country, where you’re still winning new direct relationships and MSP relationships.
John Martins: Yes, I think that’s fair to say, Bill. This is John. Tobey, I think that’s right where the companies that are relying on third party are definitely going to feel a bigger decline in their businesses. And as companies like Cross Country win more market share, it’s important to know like our partner networks and it’s interesting. I mentioned earlier, we have a capture rate of 65% to 70%. And why that’s important to us is we could – actually kind of goes to Trevor’s question. We could actually increase our capture rate even higher and we actually would offset maybe the decline in our revenue, but that’s not our long-term plan. One of the things that’s really important to understand about why our capture rate is between that 65% and 70% is first and foremost, when we have these clients that we’re accountable to, we want to make sure that we’re providing the highest quality clinician to the bedside to serve the patients and the communities.
And unfortunately, if you want to increase that capture rate higher than something like 65% or 70%, you’d actually have to hold orders potentially, and that could affect that patient delivery. And that’s something we would never do at Cross Country. And then secondly, and I’ve called this out on calls before, is we want to make sure that we have excess capacity to win deals. And I think over the last six months, we’ve certainly proven that in the wins that we’ve had, is because we have the excess capacity, we’re able to win these deals. And then the third part of why we want to keep that capture rate in that 65% to 70% is we want to make sure we’re allowing our partner networks and these sub vendors, and these are the companies that rely on the third party business.
We want them to think Cross Country as their first choice. And we want to make sure that as we’re starting to win more deals, they’re there to support our deals so that we’re keeping our clients very satisfied and happy.
Tobey Sommer: Last thing from you, if I can sneak one in. Could you talk about the market trend in MSP and VMS fees on subcontractors now that not only have you been in MSP in the marketplace for a long time, but now that you’ve got Intellify out there. Are fees to subcontractors changing at all?
John Martins: Yes, we have seen – over the years, I think from 2009, I’ve been in the industry way too long. Periodically, fees go up, and as cost pressures happen in competitive bids. What happens is we’re seeing a lot more companies go out there and offer more services and offerings to clients to win their business. And those costs have to come and be passed along to the sub vendors. So we are seeing an increase across the industry of those fees going up. But like I said, I started this industry in 2005, and every several years you see this industry grow up. I think when I first started, the average rate, I think the average fee was, I think 3% in 2004. And so over time, inflation, you have more services going to clients, they end up costing fees.
And when you get, as I mentioned, when you’re getting more and more competitors and you’re seeing more and more companies trying to get into the MSP and VMS space, they’re all offering more and more, what’s the right word? Services and offerings that make it more competitive, that increase the cost of running and managing an MSP and VMS service.
Tobey Sommer: Thank you very much.
Operator: Thank you. Our next question will come from Constantine Davides with Citizens JMP. Your line is open.
Constantine Davides: Hey, Bill. Just on the labor disruption front, you called that out. I think you said a few million. Just wondering if you can put a finer point on that. And then do you have any visibility into anything disruption related that’s going to impact the first quarter?
Bill Burns: Sure, Constantine. It was between $3 million and $4 million that we got within the quarter from labor disruption, so it really wasn’t that significant. And as far as having a line of sight to Q1 labor disruptions, no, I mean, Marc is here, I don’t believe we have any demand right now. Marc, is that correct?
Marc Krug: Yes, that’s correct.
Constantine Davides: Great. And then, John, I think you mentioned 2023 tech spend of about $20 million. I just want to clarify, is that both expensed and capitalized? And I was wondering if you guys could give us some sense for what that spend is going to look like in 2024 on the technology front and where it’s being directed?
Bill Burns: Sure. Constantine, it’s Bill again. That’s correct. The number that John referenced is the combined spend across the project. So that’s capitalized and what’s been run through operating expense as well as what gets deferred. So in cloud computing it doesn’t all go on the investing activities, on your statement of cash flow, some of it is hung up in prepaids and we’ll come back in an amortization once the project is alive. But by and large, the $20-odd million is what we spent across all those projects. And for 2024, we’re anticipating spending a very similar amount.
Constantine Davides: Great. And then last one for me. Where are you guys in the migration of the MSPs over to Intellify? I remember you sort of paused that at some point last year. Just wondering if you can give us an update there? Thanks.
Bill Burns: Absolutely. Yes. I mentioned a little earlier in the Q&A that we’ve seen about 80% of our programs are now on Intellify. We’ve got a handful left that’ll go over the first or second quarter. I think we’ve got two or three in Q1 and two or three in Q2. So we’re nearly there.
John Martins: Yes. And it’s interesting on that is that a lot of times it’s not because of we don’t want to put it there. It’s really competing priorities at hospitals. And so as Bill mentioned, we would have been there earlier. It’s just matching up sometimes with the hospital and getting them set. But right now we have the roadmap to get it pretty complete pretty soon. So as Bill said, before the end of the first half, we should be at 100%.
Constantine Davides: Great. Thank you.
Operator: Thank you. [Operator Instructions] Our next question comes from Kevin Steinke with Barrington Research. You may go ahead.
Kevin Steinke: Hey, good afternoon. I believe you made a comment in your prepared remarks about margin expansion as you move through 2024. Is that correct? And if so, is that tied to just the ramp up of your Intellify business, or are you also anticipating maybe some improvement in market conditions, potentially contributing?
Bill Burns: Hey, Kevin, this is Bill. I guess I’d say we’re looking at Q1, obviously being the softest quarter. We’ve got a number of reasons for that, not realizing the full cost savings, the fact that there’s a payroll tax reset as we progress throughout the year, we’re going to continue to expect to see growth across the higher margin businesses like education. Home care in particular has a number of programs, high-single digit number of new programs that are ramping and will go live in the next few months. So there’s opportunities to see the top line grow. I think as those businesses kind of recover, we’ll see gross profit and gross margin start to rebound. I’m not making any calls right now on the bill pay spread for travel.
I think we’re still in a very tough market, but that’s an opportunity. I think as we move ahead, the Intellify conversions, once we complete those that’s going to add a little over seven figures of opportunity of savings annualized for us to see that’ll contribute to our bottom line. And then finally there’s continuing to look at the opportunities for cost savings, right. So we’ve got the work that we’re moving overseas and we’ve got a very concerted effort, a very large program effort right now going across all of our teams to look and see what efforts we have that can we first automate. And John made some comments about some of the things we’re doing there in the prepared remarks. But if we’re unable to automate and it’s going to be a stable process, we’d like to look at moving that to where we can do it for the most cost effective way.
