Healthcare Staffing Report: Aug. 21, 2014

Print

2Q14 healthcare staffing earnings recap

What a difference a quarter can make! While neither AMN Healthcare (NYSE: AHS) nor Cross Country Healthcare (NASD: CCRN) reported blockbuster financial results for 2Q14, the tone of both calls was far rosier than what we heard for the first quarter. Each company echoed the other’s sentiments that order volumes had steadily risen through Q2 and in the weeks following the quarter’s close.

For Q2, AMN reported $250.9 million in revenue, down 1.2% year-over-year (y/y), and a gross margin of 30.8%, up 150bps y/y. Nurse/allied revenue fell 2.5% y/y, to $165.9 million, as a 1.3% y/y increase in the average bill rate was not enough to offset a 6.1% decline in volume. That pricing strength, along with effective cost control, did help boost nurse/allied gross margin by 190bps from 2Q13 to 2Q14, to 29.1%. Within the Nurse and Allied segment, travel nurse revenue fell 2% y/y. However, management said y/y percentage growth in travel nurse had been up by double digits for the last six weeks, and were currently running 80% above levels seen last year. The higher demand is also positively impacting bill rates, and the company is staffing up internal sales and operational resources in response.

While Allied is still weighed down by therapy, strength in imaging and lab specialties was sufficient to produce the first sequential (Q1 to Q2) revenue growth for the business in the last seven quarters. Still, sales were down 7% y/y, and despite positive order trends, the company expects a slight y/y decrease in allied revenue again in 3Q14. The local staffing business continues to be a drag on results, with revenue down y/y in Q2 and the same expected for Q3. Demand was reported as generally weak, and the company is focusing primarily on aligning its resources in this segment to support its MSP clients, which it sees as the best path to improvement. 

Locum tenens staffing revenue totaled $74.3 million, driven by a 5.5% increase in the average bill rate, partially offset by a 2.2% decline in days filled. Gross margin in locum was 29.8%, a y/y improvement of 80bps. Continued growth of the MSP business, which accounted for 9% of locum revenue compared to 5% a year ago, is enhancing profitability in the segment.

AMN’s adjusted EBITDA margin in the quarter was 9.3%, up 70bps y/y and approaching the company’s goal of 10%. Net income was $7.2 million, or $0.15 per share, down from $8.4 million, or $0.18 per share in the prior year period. For Q3, AMN expects revenue of $254-$258 million, a gross margin of about 30.5% and an adjusted EBITDA margin of approximately 8.5%.

Total revenue at Cross Country was $122.7 million in 2Q14. The reported revenue growth of 11% was due in large part to the allied health staffing business it acquired in December 2013; organic revenue growth in the quarter was closer to 2%. Gross margin expanded by 130bps from 2Q13, to 26.4%, likewise driven by the impact of the acquired business, but also by expanded bill-pay spreads. Nurse/allied revenue increased to $82.6 million, up 26% y/y, or 11% organically. In contrast to AMN’s comments, electronic medical record projects were cited as a strong spot for the division.  Also boosting results were higher orders and improved fill rates from the company’s MSP customers. On the call, management said current order volumes in travel nursing and allied are the highest they had experienced since July of 2008, and that this was the sixth consecutive quarter of y/y increases in travel nursing and allied bill rates and bill-pay spreads.

Physician staffing contributed $30.8 million in revenue, down 11% y/y, as lower volume (days filled down 14% y/y) outweighed a slight increase in average revenue per day. On the call, management stated plainly that they view the weakness in locum as a company-specific problem, and not reflective of market demand. A leadership change in the division was made during the quarter in an effort to address the problem.

Cross Country reported an adjusted EBITDA margin of 2.7%, and a loss from continuing operations of $3.2 million, or $0.10 per share (vs. a loss of $1.4 million, or $0.05 per share, in 2Q13). Including the impact of the company’s recent acquisition of rival MSN, guidance for Q3 includes revenue of $187 million to $192 million (+6-8% y/y), a gross margin of 26.0% to 26.5%, and an adjusted EBITDA margin of 3.0% to 3.5%. The latter metric has substantial room for improvement between current levels and Cross Country’s stated goal of 8%, slightly less ambitious than AMN’s goal of 10%.

Following a difficult Q1 that took a toll on both companies’ operating results — not to mention their share prices — the sanguine outlook for the second half of 2014 expressed in both earnings calls was refreshing. Interestingly, uncertainty regarding implementation of the Affordable Care Act (ACA) was cited as a primary demand constraint back in Q1. Considering that open enrollment was extended through March 31, and accounting for the typical one- to two-month lag in between obtaining coverage and accessing care, it seems plausible that the ACA has now shifted from headwind to tailwind for healthcare staffing demand. With an estimated 6-8 million newly insured coming into the system this year, either through exchanges or Medicaid expansion, and a similar increase projected for 2015 due to the implementation of the employer mandate, the healthcare staffing industry may be at a favorable inflection point.

Click on chart below to enlarge.