Healthcare Staffing Report: Nov. 13, 2014

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Healthcare staffing earnings recap for 3Q14

The strong order volumes reported by both AMN Healthcare (NYSE: AHS) and Cross Country Healthcare (NASD: CCRN) exiting the second quarter were borne out by very solid third-quarter earnings reports and boosted forward guidance. Consequently, each has been rewarded by investors with substantial gains in share price, in contrast to the sell-offs that followed the announcement of underwhelming first quarter results.

AMN reported Q3 revenue of $264.6 million, up 2.9 percent year-over-year (y/y), and a gross margin of 30.4 percent, representing a y/y improvement of 100 basis points (bps). Nurse and allied segment revenue increased 2.0 percent y/y, to $174.3 million. The division had a 1.2 percent y/y increase in average bill rate, which was more than sufficient to offset the 2.4 percent decline in volume that resulted primarily from a slowdown in electronic medical record (EMR) implementation coverage. Travel nurse revenue increased 2 percent y/y, though growth would have been 13 percent y/y excluding the decline in EMR. Allied staffing revenue also rose 2.0 percent y/y, and order trends in both business lines continue to strengthen. The inclusion of the higher-margin ShiftWise business — the VMS acquired by AMN in the fourth quarter of last year — helped boost nurse and allied gross margin by 130bps y/y, to 28.7 percent.

Locum tenens staffing revenue for the quarter totaled $78.8 million (up 4.7 percent y/y) as a 6.1 percent increase in bill rates outweighed a 2.0 percent decline in volume (days filled). Surgery and emergency medicine continue to be areas of strength in AMN’s locum business, as do MSP contracts, which accounted for 12 percent of segment revenue in the third quarter. Gross margin narrowed by 30bps y/y, to 29.0 percent, due to tighter bill/pay spreads. Physician Permanent Placement revenue was $11.5 million, up 5.4 percent from 3Q13.

AMN’s adjusted EBITDA margin in the quarter was 8.2 percent, edging lower by 20bps y/y. Net income was $8.5 million, or $0.18 per share, down slightly from $8.6 million, or $0.18 per share in the prior year period. For the fourth quarter, AMN expects revenue of $265-$269 million, a gross margin of approximately 30 percent and an adjusted EBITDA margin of approximately 8.0-8.5 percent. On a segment basis the company anticipates y/y revenue growth of at least 10 percent in nurse and allied (15 percent in travel, “mid-single digits” in allied) while the locum segment is expected to remain flat from 4Q13.

Cross Country Healthcare reported pro forma (excluding revenue from the MSN acquisition in June 2014) y/y revenue growth of 7 percent, totaling $188.9 million. Gross margin fell 110bps y/y, to 25.0 percent, due to the payroll tax impact of the newly integrated MSN personnel as well as a lower gross margin contribution from the locum division. Nurse and allied pro forma y/y revenue growth was 12 percent, buoyed by 22 percent growth in travel nursing revenue.

Physician staffing revenue declined 9 percent y/y on a pro forma basis, to $32.3 million, due to lower volume. On the earnings call, CEO Bill Grubbs stated the management change made in this division during Q2 had successfully stabilized the division, but the improvement plan now in place could take a few more months to begin yielding improvements.

Cross Country reported an adjusted EBITDA margin of 3.5 percent, and a loss from continuing operations of $7.5 million, or $0.24 per share (vs. a loss of $1.5 million, or $0.05 per share, in 3Q13). Excluding non-recurring items, however, net income would have been positive in the amount of $0.07 per share. For 4Q14, the company expects revenue of $187-192 million (up 8 percent to 11 percent y/y, organic) a gross margin between 25.7 percent and 26.2 percent, and an adjusted EBITDA margin of 3.5 percent to 4.0 percent. By division, the company expects nurse and allied revenue to grow “in the low double-digit range” y/y, while physician staffing revenue is expected to decline “in the low-single digits.”

The two healthcare staffing firms were singing a similar tune of order volumes that have risen steadily throughout 2014 to reach multi-year highs. As the market has now shifted to a supply-constrained dynamic, both have been hiring more recruiters in an effort to boost fill rates, and both expressed relatively bullish outlooks heading into next year. Much of the progress over the last two quarters seems to have been driven by improving budgets at for-profit hospital systems, largely as a result of higher admissions and reduced charity care due to coverage expansion under ACA. Therefore, it must be noted that Health and Human Services this week released a projection that between 9 and 10 million individuals would again coverage through ACA exchanges in 2015, far lower than the 13 million previously estimated by the Congressional Budget Office. Meanwhile, the significant gains by Republicans in the midterm elections could stop — or even reverse — the recent trend of expanding state Medicaid programs. While neither development is likely to curtail industry momentum in the near term, both deserve monitoring in 2015.