AMN Healthcare Services Inc (AMN) 2003 Q4 法說會逐字稿

Welcome to the AMN Healthcare Services 2003 fourth-quarter earnings conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. Speaking today, we will have Chief Executive Officer, Steven Francis, President and Chief Operating Officer, Susan Nowakowski, Chief Financial Officer, Donald Myll. And I would now like to turn the conference over to the Director of Investor Relations, Joseph Marino. Please go ahead, sir.

Thank you. Good morning. I would like to welcome everyone to the AMN Healthcare Services conference call to discuss the Company's earnings results for the fourth quarter of 2003 and for the year ended December 31, 2003. A replay of this Webcast is available at www.AMNhealthcare.com/investors, and will be replayed until March 26, 2004. Additional information regarding non-GAAP financial measures may be made available from time to time at this same website. Details for the audio replay of the conference call can be found in our earnings press release.

I would also like to mention our policy regarding forward-looking statements. As we conduct this call, various remarks we make about future expectations, plans and prospects constitute forward-looking statements. Forwarding-looking statements are identified by words such as believe, anticipate, expect, intend, plan, will, may and other similar extensions. Any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. It is possible that our actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those identified in our quarterly report on Form 10-Q for the quarters ended March 31, June 30 and September 30, 2003; and the risk factors discussed in our annual report on Form 10-K for the year ended December 31, 2002, all of which have been filed with and are publicly available from the SEC. The results reported in this call may not be indicative of results for future quarters. These statements reflect the Company's current beliefs and are based upon current information currently available to it. Developments subsequent to this call may cause these statements to become outdated. The Company does not stand, however, to update the guidance provided today prior to its next earnings release. I will now turn the call over to Steven Francis, AMN Healthcare's Chief Executive Officer.

Thanks, Joe. I would like to welcome everyone to AMN Healthcare's fourth-quarter 2003 earnings conference call. We appreciate your interest in AMN Healthcare and thank you for your participation today. Yesterday, we reported our financial results for the fourth quarter and for the full year of 2003. We were pleased with the performance of our business and our industry in the quarter. And considering the changes in the demand trends in the healthcare industry over the past 12 months, we look back on 2003 and are satisfied that we managed the business well, and we took necessary steps to invest in our future growth and that we used our resources and capital structure to deliver value for AMN Healthcare shareholders.

Let me begin with some financial highlights from our fourth quarter before moving on to the full year. We reported revenue of $160 million for the fourth quarter, generating diluted earnings per share of 15 cents. During the quarter, we had an average of over 6300 temporary healthcare professionals working on assignment at over 150 facilities across the country. We reported adjusted diluted earnings per share for the fourth quarter of 17 cents before the impact of a tender offer charge of $700,000, net of taxes related to our self tender offer in October of 2003. These revenues, earnings and volume results are right in line with our expectations for the fourth quarter. For the full year 2003, AMN generated revenue of $714 million. This represents a decline of 8 percent compared to 2002. We reported diluted earnings per share of 97 cents before the impact of the tender offer charge compared to $1.12 in the prior year. Including the impact of this charge, we generated adjusted diluted earnings per share of 95 cents for 2003. We believe that these results have been relatively strong, considering the industry-wide decline in demand during the year.

In October of 2003, we successfully completed our $180 million tender offer of AMN securities, which we described in detail on our third-quarter conference call. This transaction continues to provide value to our shareholders through the effective use of our capital structure. AMN continues to lead the industry with more traveling healthcare professionals working than any other staffing provider, and we have contracts with over 40 percent of the country's acute-care hospitals. Our large base of available healthcare professionals and geographically dispersed hospital clients provide us with a significant referral source to continue to attract and place new travelers. We believe our that number one position reflects hospitals' preference to utilize high-quality nurses and allied healthcare professionals and to work with staffing partners who have a reliable and deep infrastructure. We think these key factors continue to provide AMN with a competitive advantage over smaller competitors.

Throughout our 2003 conference calls, we have described changes occurring in the hospital staffing patterns that led to a reduction in demand for our industry in early 2003. On our third-quarter conference call, we reported some early but positive signs regarding demand. Namely, the trend for client orders, a leading indicator of demand, has stabilized. During the fourth quarter, we saw increases in overall hospital demand. Currently, our orders are higher than they were one year ago. Our clients have indicated to us that their temporary staffing needs have increased due to current and expected future rises in hospital admissions, increased attrition of a permanent staff and an increased need for flexible staffing due to legislative changes. Legislation limiting the mandatory over time of nurses and addressing nurse-to-patient ratios continued to be discussed throughout the state legislatures. There are nine states that currently have legislation which would limit nurse-to-patient staffing ratios. There are 11 states that have legislation pending that would limit nurses working mandatory overtime in addition to the seven that have already passed over time legislation. While there is legislative activity around the country focused on limiting mandatory overtime for nurses and establishing staffing ratios, the most significant legislation that has been passed is the California nurse-to-patient staffing law which went into effect last month. This new law sets limits on the number of patients a nurse can care for during a given shift within a hospital. We cannot completely determine yet how these ratios are impacting the overall demand for nurses in California. But what I can say is that we have seen our demand in California increase over the last few months. And we believe that some of these increases can be attributable to these new ratios.

An important component that impacts the demand for our services is hospital admissions. The most recent data provided by the American Hospital Association shows that hospital admissions increased at a compounded annual growth rate of over 2 percent from 1999 to 2002. During earlier in 2003, we saw a decline in the growth of same-store admissions for public hospitals. However, during the fourth quarter of 2003, the public hospital systems reported average same store admissions growth of 2.4 percent. This is an increase from the third quarter of eight tents of one percent. And in addition, hospital industry analysts expect this growth to continue in 2004 with projected same-store admissions increases to range from 1.1 percent to 1.9 percent. We feel this growth in admissions is a very good time for the overall healthcare staffing industry. We obviously view these current trends as positive for the industry and for AMN. The increased demand for healthcare services driven by an aging population and a deepening of the nursing shortage are in our view, very compelling over the next several years. As the demand for nurses continues to increase and the supply fails to keep pace, the U.S. nursing shortage will become even more severe. The U.S. government is estimating that the nursing shortage will be between 400 and 800,000 nurses by 2020. In fact, it is estimated by 2010, over 40 percent of all nurses working in the U.S. will be over the age of 50. In addition, while many of these nurses will be retiring, those entering the nursing profession are not meeting the predicted supply needs. While nursing school enrollments did increase slightly over the last few years after declining over the previous five years, the increase is relatively small compared to the overall nursing shortage. The overall demand, supply/demand imbalance continues to be concerning for our hospital clients as they strive to meet their staffing needs today and in years to come. It is these long-term macro drivers of the healthcare staffing industry that gives us the greatest confidence in our ability to grow our business. Legislation, admissions, attrition and the economy might change slightly from year-to-year. But the increased healthcare services demanded by an aging population and the impact of a deepening of the nursing shortage are, in our view, undeniable over the next several years.

With that, I will turn the call over to AMN President and Chief Operating Officer, Susan Nowakowski.

During 2003, I often heard and spoke the word transition and turbulent to describe our business environment. It helped the staffing industry transition to a new level, as hospitals rationalize their utilization of temporary staffing. These shifts in demand clearly create a turbulence in our industry. But we believe that this will prove to be a healthy shift for AMN. To be proactive in our approach, the AMN team took many steps in 2003 to reassess and reconfigure many facets of our sales and service delivery. And as we begin 2004, we are already seeing the benefits of these investments with traveler count stabilizing and the demand from our hospitals growing.

There are two main factors which are going to drive business in '04. First, how many of the 2 million nurses across the U.S. will join the travel industry? Second, what will be the volume and the clinical specialty needs of our hospital clients. Now these supply and demand factors might some day (indiscernible) are admittedly not new for the industry. But the way in which we are addressing these needs is new. During this last year, we have worked more closely with our clients, both our travelers and our hospital clients, to better understand their needs and how we can help provide solutions to them, both short-term and long-term. With demand rising, having more supply of available nurses is even more critical. From our research and collaboration with our nurses, we believe we have determined better ways to identify, segment and offer targeted services to the thousands of potential travelers working in the U.S. These more-focused efforts should allow us to recruit nurses more efficiently and improve our recruiting of the specialties needed most by our hospital clients.

An additional effort we have underway is to educate the nursing profession about the increasing number of available travel assignments. We have often said in the past that supply follows demand in our industry. When demand is rising, nurses hear of all the great opportunities available, and they feel more empowered to leave their permanent positions and pursue other professional development opportunities, like traveling. When demand is high, nurses are also more inclined to refer other nurses to the travel industry. But on the flip side, with fewer travel jobs offered over the last year, nurses became more hesitant to pursue travel assignments; and as a result, when demand declined during the first half of '03, we subsequently saw fewer new nurses joining the travel ranks. We feel that as a leader in our industry, AMN should assume the responsibility to spread the word to the nursing profession that demand for travelers is growing. In fact, not only has the number of available positions grown, but because of how tightly staffed hospitals are today, the need is appearing to be more urgent than before.

2003 was an extremely important year in strengthening our relationships with our hospital clients. Many clients downsized their temporary staffing needs from their high point in 2001 and '02, but they also downsized the number of staffing providers they work with. This transition during 2003 allowed AMN to work more closely with many clients to better understand their needs and develop more streamlined processes that benefit both the hospital and AMN. Our closer partnerships have also allowed us to strategize with several thought leaders in nursing and healthcare management to understand what additional services AMN can provide to be that valued partner for the hospital, not just today, but really more importantly, three, five and ten years from now.

Steve mentioned demand for our services has increased in a majority of the U.S. In California, one of our largest states for travelers working, which is right in our backyard, we have seen a steady increase in demand since the summer of '03. In fact, by the end of 2003, the demand in California has increased well over 100 percent since August. But California isn't the only area of growing demand. Some of the other regions with a relatively significant rise in orders include the northeast and the Mid-Atlantic southern region.

While our results are driven primarily by our core travel staffing business, a small but unique component to our service offering is our international recruitment division, O'Grady-Peyton. This division represents less than five percent of our travelers working, but it does provide an important differentiator to our hospital clients. During 2002 and '03, we were investing in the growth of our pipeline of international nurses. These are high-quality, skilled nurses who are recruited from English-speaking countries, primarily the UK and Australia. During the fourth quarter of 2003, we placed a record number of international nurses on assignment ending the year with nearly 50 percent more O'Grady-Peyton nurses working than during the summer. This placement momentum is expected to continue into the first quarter. The international division offers a valuable service to our hospital clients through longer-term staffing solutions. With typical assignment links of 18 months, which is much longer than our standard three months travel assignment, our nurses become an even more integral part of the core staff of our hospital clients, while at the same time, providing AMN with a growing base of predictable revenue.

Our supply and demand strategies are not the only area of focus at AMN. We have also been working on several efficiency and cost-saving initiatives. Even with our tenured and industry-seasoned management, we believe that we can always find new ways to streamline. We are constantly seeking improvement. It's really just part of our culture. So during the fourth quarter, we partnered with a well-known management consulting firm to conduct a business process review. This project was very beneficial in identifying potential opportunities for cost-savings, for better service delivery to our clients, and for incremental revenue generation. We are currently implementing several of the collaborative recommendations, and we are continuing to evaluate others. This was a very healthy process for our team, and is consistent with our commitment to look for every opportunity to deliver better value to our clients and our shareholders.

Back about a year ago, when we first saw our traveler count drop sequentially, we believe we were one of the last companies in our industry to experience a decline. Now, for the first quarter since the beginning of 2003, we are expecting our travel accounts to be sequentially stable from the fourth quarter of 2003 to the first quarter of '04. We think this is a positive trend that reflects both a stabilizing market environment and the results generated by our investment and the hard work of the entire AMN team.

With that, I will hand the call over to Donald Myll, our Chief Financial Officer, who will now discuss our financial results.

Thank you, Susan. As Steve mentioned earlier, we reported revenue of $160 million for the fourth quarter of 2003, generating adjusted diluted earnings per share of 17 cents before the impact of an after-tax charge of $700,000 related to the tender offer completed in October. This charge was recorded within selling, general and administrative expensive, and relates to compensation expense associated with stock options that were purchased in the tender offer. After deducting this 2 cent per share charge, we generated earnings per diluted share of 15 cents. These were both within our guidance range. Revenue for the fourth quarter represents a decline of 23 percent from 2002 and a decline of 7 percent from the third quarter. Diluted earnings per share, adjusted for the impact of the tender offer charge, represents a decline of 45 percent from the fourth quarter of 2002 and a decline of 23 percent from the third quarter of 2003. These declines were primarily related to the overall decline in demand for traveling healthcare professionals during 2003. AMN had 33.1 million diluted shares outstanding for the fourth quarter.

For the full year of 2003, the Company generated revenue of $714 million, representing a decline of 8 percent from the 776 million reported for 2002. Diluted earnings per share for the year, including the tender offer charge, was 95 cents compared to the $1.12 per share reported for 2002. Net income for the full year of 2003 was 37.8 million compared to the 52.4 million in 2002. Revenue and earnings declined compared to the prior year, primarily due to the decline in demand for our services during most of 2003, which led to a 9 percent decline in year-over-year average travelers and lower gross margins. Cash flow from operations increased in 2003 to $65 million as compared to $57 million for 2002.

My comments for the remainder of this financial review will focus primarily on our results for the fourth quarter and compared to last year. Gross profit for the fourth quarter was 36.4 million and this represents a gross profit margin of 22.8 percent, in line with our expectations and remained steady with the two previous quarters. Compared to the prior year's fourth quarter, gross margin declined 160 basis points from 24.4 percent, primarily due to the increases in housing benefits provided to our travelers. Selling, general and administrative expense, excluding costs related to the tender offer of $1.2 million, totaled 24.3 million during the fourth quarter. The expansion of our sales and service efforts and our facilities, in anticipation of increased future demand, as well as increases in professional liability insurance, were offset by reduced employee costs resulting from the lower traveler count. In addition, improved customer payment experience leading to reduced write-offs resulted in a $350,000 pre-tax reduction in the Company's reserve for uncollectible accounts in the fourth quarter. Overall, SG&A expense decreased 5 percent and represented 15.2 percent of revenue, excluding the tender offer charge, as compared to the 12.3 percent reported in the prior year. Compared to the third quarter of 2003, SG&A expense increased, primarily due to an increase in professional liability insurance and other support costs that were partially offset by the reduction in the Company's reserve for uncollectible accounts.

Income from operations was $9.3 million for the fourth quarter, a decline of 60 percent compared to the 23.5 million reported last year. Income from operations margin declined from 11.4 percent last year to 5.8 percent. This decline was due primarily to higher direct wage and benefit costs for our travelers compared to last year and higher SG&A expense as a percentage of revenue. As expected, income from operations margin declined 320 basis points as compared to the third quarter of 2003.

As usual, I will now provide some additional insight into our key drivers of revenue for the fourth quarter. A $47.4 million decrease in revenue, or 23 percent in the fourth quarter of 2002, was driven primarily by the 22 percent decrease in travelers working from our historical peak of over 8100 travelers last year to 6339 travelers for the fourth quarter of 2003. On a sequential-quarter basis, the number of travelers decreased 6 percent from the third quarter. This was the smallest sequential quarterly decline during 2003. The fourth quarter, as we mentioned on our last conference call, is seasonally impacted by December, when many travelers end their assignments before the holidays. Without the impact of December, our traveler count was relatively consistent from September through the fourth quarter. The fourth quarter's average revenue per traveler per day of $274 remained relatively consistent with the fourth quarter of last year, and was 1.3 percent lower than the $277 reported for the third quarter. We anticipated this trough in the fourth quarter due to the seasonal impact of December, with nurses working less hours and overtime. Client bill rates increased slightly compared to the third quarter, and were up 1.6 percent over the fourth quarter of 2002. The slight increase in mix of flat-rate traveler contracts drove an offsetting small reduction in revenue per traveler per day as compared to the prior year. The 7 percent flat rate contract mix remained similar to the third quarter, and represented an increase of 4 percent -- from 4 percent -- in the fourth quarter of last year.

Net interest expense in the fourth quarter was $2 million, reflecting our new $130 million term loan and drawings on our revolving credit facility used to fund our $180 million self tender offer in October. We have fixed the interest rate on a majority of our debt at approximately 5 percent. The fourth-quarter income tax provision of 32.8 percent reflects the adjustment required to bring our full year income tax rate for 2003 to 38.7 percent, resulting from changes in our state tax provision.

Turning to our financial position at December 31, we had cash, cash equivalents of $4.7 million, and total net of 139 million. Our days sales outstanding stood at 68 days, showing a year-over-year increase of seven days over both December 31 of last year and September 30. We generated $1 million in cash flow from operations during the fourth quarter of 2003. The increased DSOs is attributable to our upgraded payroll and billing systems that were implemented in the fourth quarter. During the implementation, we took extra time to audit the payroll and billing transactions with our travelers and our hospital clients. As a result, we temporarily extended the customer billing cycles to ensure accuracy during this transition. Billing cycles are now back on schedule, and we expect an improvement in DSOs at the end of the first quarter, along with the correlating boost in cash flow from operations. We expect to enjoy efficiency in payroll, billing and collection processes from this implementation, and will serve as a platform for delivering future advanced customer service features to both our hospital clients and our travelers.

I will now turn our attention to revenue and earnings guidance for the first quarter of 2004. Our guidance for the first quarter reflects the positive signs that Susan and Steve mentioned. We expect first-quarter traveler count to be comparable with the prior quarter. This would represent the first time since the beginning of 2003 in which traveler count has not declined from one quarter to the next. We expect the number of travelers on assignment in the first quarter of 2004 to range between 6300 and 6400 travelers. For the first quarter of 2004, we expect the Company to generate revenue ranging from 160 to $163 million. Net income for the first quarter is expected to range between 4.4 and $5.1 million, and is expected to generate net earnings per diluted share between 14 and 16 cents. The average diluted shares outstanding is expected to be approximately 31.3 million.

Average revenue per traveler per day is expected to range from 278 to $279, reflecting relatively constant pricing and contract mix with the fourth quarter. As we have historically experienced, we expect our first-quarter gross profit margin to decrease slightly as compared to the fourth quarter. This is attributable to temporarily higher housing and traveling payroll costs resulting from the frictional impact of the higher percentage of new traveler assignment starts in January. That concludes my financial review. We are prepared to answer any of your questions.

(OPERATOR INSTRUCTIONS). Nicholas Aberly (ph), Charis (ph) & Co.

The first question is with respect to the SG&A expenses bumping up in Q4. I know you cited that a lot of this was due to higher professional liability insurance and expansion in corporate facilities. Can you give us a little bit of color as to how these SG&A trends are going to play out going into 2004? And maybe a little bit more specifics on what exactly you have done on the corporate facility expansion side?

I will give you a little bit of color. The SG&A expense only covers, for our discussion purposes here, the first quarter. So I cannot give you anything beyond the first quarter. But the SG&A expense is going to be roughly in line, directionally, with the fourth quarter's SG&A, excluding the impact of the tender offer charge.

Okay. And in general, can you speak to what you see, trend-wise, with respect to liability insurance and going forward?

Sure. The fourth quarter had an additional charge for the quarter related to increasing our reserve for professional liability payroll coverage, as we renewed our policy this year. That charge in the quarter was larger than normal quarters, and is not expected to -- is a noncash charge to increase that reserve; and do not anticipate it to be ongoing in the first quarter.

Regarding your question on the facilities, back in 2001, we were in six different buildings here in San Diego (indiscernible), sort of our corporate facilities, where most of our corporate employees are. And it was really very inefficient and also was somewhat of a constraint for us as we were growing. So we made the decision back then, as our lease came up, that we needed to move into one building that could accommodate our growth for the future. And so we made that decision at the end of '01; moved into the new building in the summer of '03. It fixes our facility costs here at our corporate headquarters for the next several years, and gives us room that we need to grow.

Taking a step back and looking back over 2003, can you describe any changes in the overall marketshare picture? Can you also comment on your take on InteliStaf picking up StarMed staffing assets, and how that is going to affect the marketshare situation?

I will answer your question about StarMed, and I will let Susan answer the question you had. About half of StarMed's business was travel and the other half is per diem. The travel brand really was not much of a competitor to us. So we really don't have an opinion on this. It doesn't really impact us at all. I do know that InteliStaf is a well-managed per diem operator. And I think if anybody can do anything with StarMed, I think they probably can. And I suspect they will do a decent job of it.

Regarding marketshare, if you look back over the last three to four years, I think that history and numbers would show that our strategy and operating model allows us to capture marketshare in a growing market. So '99, 2000, '01, '02, we were growing nearly twice as fast as some of our larger competitors. When a market is declining or stable, we are not taking marketshare, although I would say considering our traveler count is now projected to be stable, and I believe others in the industry are not, that would tell us that as the market -- as the demand has grown that over the last few months, we may start to (indiscernible) taking market share.

Lastly, your biggest competitor is on the horn during their call talking about demand really picking up in California and it being a robust environment. On the other hand, they are also citing that there are recruitment issues and difficulty in finding nurses in California. Do you see these same issues, and how is that going to play out in Q1?

First off, I think this California legislation is very significant to our industry. The reason I say that is because this nurse to staff -- these ratio laws -- are being looked at at many, many different states, even on the national level. So I think this generally, when the government starts looking at this and starts to mandate these ratios, I think it is very positive for our industry. And in California, the first state and largest state to implement such legislation, again, I think it is very positive. That is particularly positive for our company because of the fact that we are the largest player, we believe, in California. This is where we are located. And we are, in our viewpoint, seeing how this legislation is picking up the orders in this state. And I think that this hasn't even begun yet. I know hospitals are struggling very, very hard right now trying to meet these ratios. I know that this is getting to be more intense as time goes on. Being in California, as our largest brand, American Mobile Healthcare, being in California, gives us an advantage too in bringing nurses into the state. Many times, when nurses want to go to a particular area, they may apply with a brand that happens to be located in that area. That's one of the reasons we do multibranding. So having a large presence here in California is very positive for us, as far as paying clients, getting orders and attracting nurses.

Jeff Silber, Harris Nesbitt Gerard.

You mentioned in the review that the management consulting firm came in and provided. I was wondering if you can give us a little more color in terms of some of their recommendations, whether on cost savings or on future revenue streams?

I do not know that we are prepared to disclose exactly what it is that we are implementing and doing. I will say, in characterizing it, it's not a massive restructuring. It's really going in and fine-tuning and making improvements in areas where we can gain some cost savings, efficiencies and some potential margin enhancement or revenue generation. It is interesting with this management team -- senior management team -- that has been here at AMN, has been here for 12, 13, 14 or 15 years. And this is the first time that we have gone through a comprehensive process like this. And it was a very healthy process for us. What I think we found was, it is very well-managed and we are very efficient. But there is always those little -- there is always that little room for improvement, and we found that. So we are excited about making those changes and reaping the benefits in the future.

On a different topic, some of the other companies in this space have cited the fact that some of the hospitals, with everything going on, may be a little bit less willing to enter into the typical 13-week travel contracts and are looking for shorter-term contracts. Is that an area that you might be focusing on?

We have always offered eight-week contracts. And at the beginning of last year, we responded to our clients needs and began offering even shorter-term contracts. I would say the demand for those shorter contracts has not grown significantly. We asked some clients who prefer shorter contracts. But they will, quite honestly, often extend them for 13 weeks after they have been there for say, six weeks. It's not a new trend that has accelerated in the last few months. In fact, to the contrary, when we look at our re-books, the people who are ending assignments and either re-booking for an extension or a new assignment, we have seen an increase in longer-term bookings as opposed to shorter term extension, which we think is a positive trend.

I have a couple of modeling-related questions for Don. In terms of your guidance for the first quarter, what kind of tax rate should we be assuming?

Use a 39 percent tax rate going forward.

I know you're not giving any guidance for the year, but I am just curious on the capital expenditures line item -- I guess it would be safe to assume CAPEX will be down in '04 versus '03. Can you give us some sort of order of magnitude there?

Our business model has not changed significantly over the years. This year, we had higher CAPEX to get us into this new facility that Susan described, and to put in some new software systems, like the billing and payroll systems by mentioned. That has been a higher concentration this year. The general guidance I have used in the past is roughly 1 percent of revenues, is a good guide. And I think we are back to that.

You had mentioned the increase in the professional liability reserve in the fourth quarter. Can you just quantify roughly what that was relative to norms?

Yes. It was a non-cash increase, and it was a little over $1 million, roughly, just general numbers. That is kind of a treatment we will not expect going forward.

Steven Halper, Thomas Weisel Partners.

My question on the SG&A side, assuming at some point you start to see some sequential revenue growth and you start anniversarying (ph) -- and the year-over-year comparisons get easier, do you feel as though you will be able to leverage your current SG&A? Or when that happens, will you need to kind of grow that in line with your revenue growth?

Absolutely, we will be able to leverage that SG&A. We will need to add some cost as the traveler count increases. But some of those fixed costs that we described, like professional liability and the facility costs, and our increase in our hospital client service team, we will not need to increase as the number of travelers goes up.

My other question is for Don. Could you try to explain the mechanics of the compensation charge for the tender offer? It's probably complicated.

It's not too complicated. The options that were exercised for accounting purposes are assumed to have a $15 base to them. And that $15 was determined at the IPO date. So the difference between the $15 accounting base cost and the $18 in the tender offer is that $3 per option exercised, times the number of options, gives you 1.2 million. Also included in there is some payroll taxes associated with it.

Mark Allen, SunTrust Robinson Humphrey.

Susan, I think you had mentioned something to effect you're seeing "more urgency" on the part of some of the hospital customers. I guess a two-part question, what are the leadtimes on orders now versus where they were a year ago? And how would you respond to the school of thought that hospitals had maybe erred (ph) on the side of understaffing recently? And if they were to see some increase in their admission, it might snap back positively the other way for you guys?

You are absolutely right, Mark. And what we are hearing from our clients is that they are very tightly staffed, in fact, understaffed in many areas. And that's why their demand for travelers today is growing. But also, the need for those travelers is very urgent. The leadtime in our orders has not changed significantly. But the urgency in which the hospital wants to make a commitment and get that person on board has changed. They were previously meaning (ph) over the last three to four months, wanting to wait until the last moment to confirm someone. Today, they give us in order, they want to start interviewing people much sooner.

That is kind of an old metric in staffing -- if the customers are taking less time to make decisions, that is positive for demand. The second question is kind of following Jeff's question -- maybe asked a different way -- on the number of contracts that are not the standard 13-week contracts, do we have any ballpark guess what percent of your -- whether it's by head count or hours -- how many of those would be not standard contracts?

It's a number that we do not disclose publicly. So I am not sure I could provide you that exact number. And it also depends upon how you measure it. If you are talking about true initial assignments that are for less than 13 weeks, it's a relatively small number. But then you do have people who go on an assignment and extend. And it depends on whether you consider that extension to be another short-term assignment. But the short answer is, it's a small part of our business.

One of the factors I think that was mentioned -- as being a pressure factor on gross margin was housing benefits. And I just wonder whether you're seeing any issues relative to housing utilization, or nurses taking housing allowances versus using company provided housing. Any changes there, and how is that having an impact on your margins?

The shift between those travelers that take a subsidy, or we provide the actual housing, has not changed substantially over the last year. So the reason why the housing cost is higher in the first quarter, as I mentioned, is the frictional quality of the first quarter, where you have a lot of starts not all starting at the beginning of the month and so on. Over the last year or so, our margins have been impacted a little bit from the competitive nature of demand, and part of that is housing. Whereas we may, as part of the total compensation package, may have offered a little bit more housing benefit than we have in past years. That is just the competitive nature which shows up in our margins.

Final question, I think another competitor had raised what I would call an order-quality issue. Just to lay that one on the table, is one of the issues in filling orders is they are somehow not in desirable locations? Or they are too short notice? Or nurses are concerned about the stability of working as a traveler? I guess to tie into that, what are you doing relative to retention so you give your current travelers visibility on their next assignment?

I think we are in a great position for that. First, we do not believe the order quality has declined in any way. In fact, almost the opposite. We feel that it possibly improved. A lot of our increase in demand has been in very attractive areas. But the reality is the demand and orders available today are less than they were two years ago. And that has created this decline in new travelers signing up within the industry. And so we have to really re-educate the nursing population, that orders are on the rise now. I would say we are in a better position than anyone because we believe we have more assignments to offer than any other company in the industry. So we just have to get out there and really spread the word and make those assignments known to those nurses.

In terms of retention, of course we have increased our focus on retention because in a market where you have declining new nurses coming into the industry and into our ,business it's even more important that we retain those nurses. Over the fourth quarter, our retention rates remained fairly stable on a sequential basis. So we were pleased with our efforts there.

Scott Marks, a private investor.

Scott Marks from independents. You guys are talking about the base business stabilizing and its positive trend. How do you know it is not -- what things lead you to believe it's not a hiccup to a downward trend? And what are you seeing in the business? And how much do you think is attributed to the flu season, as far as stabilizing?

First to address the flu, I know several public hospitals have mentioned that admissions were up in December due to the flu. We don't believe we have seen a significant impact due to that.

Why do we believe that we are in a stabilizing market? The demand for travel nurses and our orders began to stabilize back in the April/May time frame, and remained relatively flat through September/October. And then the demand began to rise. That gives us the confidence that we are in at least a stabilizing; and if not, potentially going into a growing market. That has translated into a stable traveler count. Our traveler count was declining at the beginning of 2003, and then in September, began to stabilize from September to October to November; and now has continued to stabilize into the first quarter. So we feel there has been enough time passing here that it's not just a hiccup, that we're really feeling stable and more confident in the market conditions.

Jeff Silber, Harris Nesbitt Gerard.

On some prior calls, you have been able to give us a breakdown of revenues by volume, pricing and mix. I was wondering if you could do the same thing now?

In the past, we were talking about the growth in revenues, so it's a different metric calculation.

I understand.

But regarding our prior quarter, the third quarter, if that's the most helpful for you, the mix drove a decrease of about 1 million in pricing -- drove an increase of about 1 million. And the rest of the decline is based on traveler count.

Can we get the same thing in terms of gross profit?

We have not provided that, gross profit, in the past. So no, I am not going to be able to provide that to you.

(OPERATOR INSTRUCTIONS). Mark Allen, SunTrust Robinson Humphrey.

Just one more. This question I guess is regarding what would be normal seasonality, and specifically out to the second quarter, obviously, you don't provide guidance out that much. But what is the normal seasonality between say demand and margins as you move from a first quarter to a second quarter?

As I think Don mentioned, margins in the first quarter are typically down a bit due to some of the friction and housing costs due to a shorter month in February and whatnot. In terms of directionally, the traveler count, in normalized historical periods, we would see the traveler count decline in the second quarter. We are not prepared to provide guidance on that. But if you were to look back to more normalized years, which we are not prepared to say that we are in right now, you would expect a decline in traveler count going into the second quarter. And that's due to the decline in some of the seasonal needs in the Sunbelt states.

I wanted to make sure we were clear on that. On the margin side, are payroll tax withholdings significant between first and second quarter? A lot of staffing companies have a little lift in the second quarter because of the run-out on payroll withholdings.

Not for us, not a material difference between the first quarter and the second quarter.

It's really just the nurses don't start bill Jan. 1?

Correct. That is the bulk of it.

We have no additional questions in queue. Please continue.

I want to just thank everyone for your interest and participating in today's call. We look forward to speaking with you all again when we do our first quarter conference call. So thank you all for listening.

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