AMN Healthcare Services, Inc. (NYSE:AMN) Q3 2023 Earnings Call Transcript November 2, 2023
Operator: Good day and thank you for standing by. Welcome to the AMN Healthcare Third Quarter 2023 Earnings 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 first speaker today, Randy Reece, Senior Director of Investor Relations and Strategy. Please go ahead.
Randy Reece: Good afternoon, everyone. Welcome to AMN Healthcare’s third quarter 2023 earnings call. A replay of this webcast will be available at ir.amnhealthcare.com at the conclusion of this call. Various remarks we make during this call about future expectations, projections, trends, plans, events or circumstances constitute forward-looking statements. These statements reflect the company’s current beliefs based upon information currently available to it. Our actual results may differ materially from those indicated by these forward-looking statements because of various factors and cautionary statements, including those identified in our most recently filed Forms 10-K and 10-Q, our earnings release and subsequent filings with the SEC.
The company does not intend to update guidance or any forward-looking statements provided today prior to its next earnings release. This call contains certain non-GAAP financial information. Information regarding and reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are included in our earnings release and on our financial reports page at ir.amnhealthcare.com. On the call today are Cary Grace, President and Chief Executive Officer; and Jeff Knudson, Chief Financial Officer. I will now turn the call over to Cary.
Cary Grace: Thank you, Randy and welcome everyone. As the healthcare sector tries to find post pandemic normal for demand and costs, managing labor costs while building a sustainable workforce has been a major theme in healthcare for 2023. Amidst extraordinary staffing challenges during the pandemic, healthcare employers struggled to keep up with hiring needs and used contingent labor to bridge the gap. Healthcare organizations have made significant progress in hiring permanent workers and this has been felt across the staffing industry in the form of lower demand for travelers. We anticipated a market reset was coming, but it has been deeper and more sustained than we and the rest of the industry expected. At the same time, as clients think about building a more sustainable workforce, our broad and deep set of technology enabled talent solutions has positioned us well to support clients as they redesign their own workforce mix and day-to-day operations.
Third quarter revenue was in line with our expectations. Consistent with what the market is experiencing, third quarter revenue was 14% lower than Q2 and down 25% year-over-year. We expect the rate of sequential decline in revenue to be a mid-single digit percentage for Q4, a slower decline than the prior two quarters. This outlook calls for a stable to slightly higher number of nurse and allied travelers on assignment, offset by lower bill rate and hours and seasonal declines in other businesses. While staffing demand varies from client-to-client, most clients are asking for help with more than temporary staffing. To that end, we have made solid progress on our four key priorities that we discussed at the beginning of the year to extend our leadership in Total Talent Solutions.
First, we have reinforced our position as the preferred partner to help healthcare organizations optimize their workforce strategy. We began the year with a strong push to re-establish more proactive relationships with clients after three years of crisis management. To serve all clients current and future needs, AMN has established an accelerated cadence of rolling out enhancements and innovations in our technology platform that will continue through the end of this year and beyond. After focusing on serving our MSP clients in a time of crisis, we are back to serving the broader market with the entirety of our solutions set. We are doing things that will greatly help us and our clients over the long-term, true innovation. Our connection with clients is accelerating in several ways.
At the front end, we are making it easier to do business with AMN. This means empowering our client facing team members with greater integration across our — solutions. We have strengthened our ability to deliver multifaceted tech enabled workforce solutions that simplify labor management and provide a variety of options for making the labor force more flexible and cost effective. Clients will be able to access our full set of solutions through our better integrated sales and service organization. This effort to simplify our client relationships includes a stepped up branding initiative that aims to drive greater recognition of the breadth and depth of our presence in the marketplace for healthcare workforce solutions. Recently, we announced that Staff Care and Merritt Hawkins have been consolidated under the AMN Physician Solutions brand.
As we continue to integrate into the AMN brand across our businesses, we expect to produce many benefits for our healthcare professionals in current and prospective clients. Second, we have made strategic moves to ensure AMN is the preferred employer for healthcare professionals and team members. We have delivered greater workplace flexibility, aligned pay and benefits with market benchmarks, launched new career planning and mentoring support and reinforced our industry leadership in diversity, equality, equity and inclusion. Our team members are gaining empowerment from improved ease of processes, faster, more responsive team communications and the integration of AMN Passport, our industry leading mobile app into our workflows. Passport continues its strong growth of registrants and average daily users.
This growth is driven by the increasing value we are building into Passport for healthcare professionals. Our roadmap for Passport is to broaden its reach across the spectrum of healthcare occupations and job types. We are excited about the power that Passport is bringing to healthcare professionals and see it gaining momentum every day. Passport is only part of the promising results we have produced in improving the credentialing process and candidate experience. Third, we have strengthened our portfolio of talent solutions in many ways with our strong commitment to technology enablement of our ONE AMN initiative. We are more digitally connected. AMN already has launched powerful integrations and strong implementation and support capabilities that are essential to integrating our solutions into bigger tech stacks and into total workforce solutions.
Over the next few quarters, our transformative efforts will make the value proposition across our solutions come to life. A major milestone in our digital acceleration is the Go-Live this month of ShiftWise Flex, the latest generation of our market leading vendor management system that is trusted by many of the nation’s largest health systems. The newly reengineered platform manages a full-range of program management options as well as clinical and non-clinical labor sourcing options from agency staffing and independent contractors to float pool and direct hire. ShiftWise Flex empowers users with intuitive dashboard, real time data-driven labor market insights, powerful supplier support and Passport integration for AI powered talent matching, credentialing and candidate self-service.
ShiftWise Flex is here at the right time as health systems seek faster and more powerful and transparent ways to develop sustainable workforce agility that delivers great outcomes for patients and their caregivers. And Fourth, we have continued to generate strong cash flows and put capital to work. Our capital expenditures this year are on track to reach a record high $100 million, focused primarily on innovations that we expect to bring attractive long-term returns. Last week, we announced plans to acquire MSDR, which will bolster our locum tenens growth strategy and present in attractive physician specialties. Accelerating our organic locums growth with an acquisition has been a priority for us. And the expertise and track record of MSDR are strong complements to and growth accelerators for our existing locums business.
Our strong balance sheet and cash flows enable us to make acquisitions that improve the value we bring to all stakeholders. Across the AMN organization we are excited to have reached the stage of our progression. I have been honored to lead this extraordinary group of people from identifying needed changes to developing a growth map, accelerating our pace of innovation and delivering results, while simultaneously managing through a significant post pandemic workforce reset. We have turned the sales engine back on for all market segments and have been rewarded with some early traction and wins. We are positioning AMN to win across all market segments as the market recovers. We are confident that the long-term investment thesis for AMN is attractive.
The healthcare workforce faces structural constraints serving demand growth for care driven by an aging population. We are convinced that our tech enabled services model will win and AMN is well positioned with valuable clients who need our depth and breadth of solutions. While the overall market continues to be challenging, our pace of positive change is accelerating and AMN is doing the right things to embrace all levels of our very large market opportunity. Now I’ll turn the call over to Jeff, who will review our latest financial results and outlook.
Jeff Knudson: Thank you, Cary, and good afternoon, everyone. Third quarter revenue of $853 million was near the high-end of our guidance range driven by outperformance in our Nurse and Allied segment. Consolidated revenue was down 25% from the third quarter of 2022. Sequentially, revenue was lower by 14% as the operating environment remained challenging with clients maintaining lower demand levels and lower bill rates within Nurse and Allied and BMS, as well as lower volumes across Physician and Leadership Solutions. Gross margin for the quarter was 33.9%, slightly exceeding our guidance range. Compared with the prior year period, gross margin was up 10 basis points. Sequentially, gross margin increased 60 basis points primarily due to the release of a Workers Compensation reserve.
Consolidated SG&A expenses were $163 million or 19.1% of revenue compared with $215 million or 18.9% revenue in the prior year period and $202 million or 20.4% of revenue in the previous quarter. Third quarter SG&A expenses were reduced by several favorable items that amounted to a benefit of $5 million. The decrease in SG&A expenses year-over-year was primarily due to lower employee expenses stemming from the current demand environment and lower bad debt reserve. Sequentially, lower employee expenses driven by lower business volumes and a decrease in non-recurring expenses led to the significant decrease in SG&A expenses. Adjusted SG&A which excludes certain non-recurring expenses and stock based compensation expense was $157 million in the third quarter or 18.4% of revenue, compared with $204 million or 17.9% of revenue in the prior year period and $170 million or 17.1% of revenue in the prior quarter.
The increase in adjusted SG&A as a percentage of revenue both year-over-year and sequentially was primarily due to lower revenue. In the third quarter, Nurse and Allied revenue was $573 million, down 31% from the year ago period. Sequentially, segment revenue was down 17%, driven by the continued trend of lower volume, hours and bill rates. Average bill rate was down 10% year-over-year and down 7% sequentially. Year-over-year, volume was down 19% and average hours worked were down 4%. Sequentially, volume was down 12% and average hours were down 1%. Travel nurse revenue for the third quarter was $384 million, a decrease of 34% in the prior year period and 20% from the prior quarter. Allied revenue during the quarter was $168 million, down 12% year-over-year and 8% sequentially.
Nurse and Allied gross margin during the third quarter was 27.5%, which increased 50 basis points from the prior year period and 80 basis points sequentially. A benefit of 40 basis points came from the release of a Workers Compensation reserve. Segment operating margin of 14.5% increased 60 basis points year-over-year due to higher gross margin and lower bad debt expense, partially offset by lower SG&A leverage. Sequentially, operating margin decreased 40 basis points as the improvement in gross margin was more than offset by lower SG&A leverage. For our Physician and Leadership Solutions segment, third quarter revenue of $160 million was down 9% year-over-year and sequentially. The decrease in revenue year-over-year was primarily due to lower performance within Interim and Search while sequentially the revenue fall was driven by lower volumes across all three businesses in the segment.
Locum tenens revenue in the quarter was $113 million, a 6% increase from the prior year period. Sequentially, locum’s revenue was down 8% driven by lower volume primarily in non-CRNA positions. Interim leadership revenue of $31 million decreased 35% from the prior year period and 15% from the prior quarter. Search revenue of $16 million was down 25% from the prior year and down 10% sequentially. Interim and Search revenue were down year-over-year mainly due to lower demand as cost management remains a prominent factor for healthcare assistance. Gross margin for Physician and Leadership solutions was 33.4% down 60 basis points year-over-year mainly due to an unfavorable revenue mix shift partially offset by improved gross margin within locum tenens.
Sequentially gross margin was down a 170 basis points primarily due to lower gross margin in locum tenens. Segment operating margin was 13.5% which decreased 10 basis points year-over-year. Sequentially operating margin decreased 150 basis points primarily due to lower gross margin. Technology and Workforce Solutions revenue for the third quarter was $120 million, down 11% year-over-year and 4% sequentially. Language services revenue of $66 million increased 20% year-over-year and 4% sequentially. VMS revenue for the quarter was $38 million, a decrease of 37% year-over-year and 18% sequentially. Segment gross margin was 65%, down from 75.6% in the prior year period, primarily due to an unfavorable revenue mix shift and lower gross margin in Language Services.
Sequentially, gross margin fell 170 basis points as margin improvement within Language Services was more than offset by the revenue mix shift. Segment operating margin in the third quarter was 42.1% compared with 52.7% in the prior year and 44.1% in the prior quarter. The decrease in operating margin was driven by lower gross margin compared with the prior periods. Third quarter consolidated Adjusted EBITDA was $134 million, a decrease of 27% year-over-year and 17% sequentially. Adjusted EBITDA margin of 15.7% was down 30 basis points year-over-year and 60 basis points sequentially. The favorable items that impacted SG&A expenses and the workers comp reserve release increased adjusted EBITDA margin by 90 basis points. Third quarter net income was $53 million, down 43% year-over-year and down 13% sequentially.
Third quarter GAAP diluted earnings per share was $1.39. Adjusted earnings per share for the quarter was $1.97 compared to $2.57 in the prior year period and $2.38 in the prior quarter. Day sales outstanding was 61 days, 8 days higher than the prior quarter and two days higher than the prior year, primarily due to expected billing delays with the implementation of a new back office system in the quarter. Operating cash flow for the third quarter was $172 million and capital expenditures were $30 million. As of September 30th, we had cash and equivalents of $29 million, long-term debt of $945 million including a $95 million draw on a revolving line of credit and a net leverage ratio of 1.4 times to 1. Moving to fourth quarter 2023 guidance, we project consolidated revenue to be in a range of $790 million to $810 million, down 28% to 30% from the prior year period.
Guidance does not include the pending acquisition of MSDR, which we expect to close later this quarter. Gross margin is projected to be between 32.3% and 32.8%. Reported SG&A expenses are projected to be 21% to 21.5% of revenue. Operating margin is expected to be 5.9% to 6.5% and adjusted EBITDA margin is expected to be 12.5% to 13%. Sequentially, adjusted EBITDA margin is expected to be lower due to lower gross margin from a revenue mix shift toward lower margin businesses and less leverage over SG&A with lower revenue. Additional fourth quarter guidance details can be found in today’s earnings release. Now operator, please open the call for questions.
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