AMN Healthcare Services Inc (AMN) 2004 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the AMN Healthcare fourth-quarter 2004 earnings conference call. At this time, all participants are in a listen-only mode. Later, there will be an opportunity for questions and comments. Instructions will be given at that time. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host. With us today is Mr. Steven Francis, Chief Executive Officer; David Dreyer, Chief Financial Officer; Susan Nowakowski, President and Chief Operating Officer; and Renee Grable Mullen, Director of Investor Relations. Please go ahead.

Good morning. I'd like to welcome everyone to the AMN Healthcare Services conference call to discuss the Company's earnings results for the fourth quarter and year end 2004. A replay of this webcast is available at www.AMNHealthcare.com/investors, and will be replayed until March 22nd, 2005. 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 that we make about future expectations, plans and prospects constitute forward-looking statements. Forward-looking statements are identified by words such as believe, anticipate, expect, intend, plan, will, may and other similar expressions. Any statements that refer to expectations, projections or other characterizations of future results 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 annual report on Form 10-K for the year ended December 31, 2003, our quarterly report on Form 10-Q and our current report on Form 8-K, which have been filed with and are publicly available from the SEC. These 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 on the information currently available to us. Developments subsequent to this call may cause these statements to become outdated. The Company does not intend, however, to update guidance prior to its next earnings release.

I will now turn call over to Steven Francis, AMN Healthcare's Chief Executive Officer, who will review highlights of the Company's fourth-quarter and year-end results, the current market conditions and future trends.

Thank you, Renee. And good morning, and thank you for joining us today to discuss AMN's fourth-quarter and year-end results for 2004. We appreciate your interest in AMN, and thank you for taking the time to participate in our earnings call.

We're especially pleased to be talking with you today to discuss several positive topics, including our results for fourth quarter and year end 2004, the current stable industry trends and the trends that we expect to see later in 2005. Susan Nowakowski, President and Chief Operating Officer, will provide an update on supply and demand trends specific to AMN and our related operations and strategic initiatives. David Dreyer, our Chief Financial Officer, will review the fourth-quarter and year-end financial results for 2004 and AMN's revenue and earnings guidance for the full year 2005.

AMN's past policy was to provide guidance for the upcoming quarter only. However, the recent market stabilization, the Company is extending or expanding its guidance to include revenue and earnings per share for the full year 2005.

Let me begin with financial highlights from our fourth quarter before moving on to the full year. Overall, our results for the fourth quarter were in line and generally at the upper end of our guidance provided to you last November. AMN generated revenue of $158 million for the fourth quarter and diluted earnings per share of $0.14. During the quarter, we had an average of 6,297 temporary healthcare professionals working on assignment at over 1,000 facilities across the country. This fourth-quarter average traveler count was 3 percent higher than last quarter, reflecting the first notable quarterly volume increase in seven quarters and continued stabilization in AMN's healthcare staffing business.

For the full year 2004, AMN generated revenue of $629 million and diluted earnings per share of $0.55. Although challenging, we look back on 2004 as an important year, as we took opportunities to invest in and strengthen our operations and systems that allowed us to leverage our infrastructure for future growth.

With regard to our current and future business environment, we believe there are healthy signs of recovery, including both continued stronger demand and growth in travel nurse supply. Our services provide a valuable, cost-effective solution for hospitals to deliver quality patient care by supporting their staffing needs. As admissions fluctuate and staffing requirements change, our services help to fill these needs.

And, although admission softened during 2004, hospital industry analysts reported that January admissions improved following December's weakness, due to a later-than-expected flu season. In addition, analysts are projecting 2005 admissions to remain relatively stable in the first half of the year, with modest increases in the second half of the year. This continued stabilization and modest growth should result in increased demand for our services in the second half of 2005.

In addition to admissions, general unemployment impacts demand for our services. As general unemployment drops and spouses that were laid off return to being the primary wage earners, nurses become more empowered and are more likely to change jobs or move to part-time or just stop working. This attrition translates into increased demand for our services. Similar to admissions, recent reports are projecting unemployment to remain relatively stable, then drop slightly in the second half of 2005. We believe we will benefit from the stabilizing unemployment rate, and look forward to the future positive effects this could have on our business.

A growing trend and another factor that can drive regional demand for our services is legislation that relates regulates nurse-to-patient ratios. Let me start by giving you an update on the California nurse-to-patient ratio law. As most of you know, in January of 2004, California implemented mandatory nurse-to-patient ratios which led to an increase in demand for our services in California. In January of this year, the California nurse-to-patient ratios were supposed to decrease -- for example, going from 1 to 6 to 1 to 5 ratio in medical/surgical units.

In December 2004, the Schwarzenegger administration enacted emergency regulations postponing the 1 to 5 ratio requirement until January 2008. Last week, a California court issued a ruling essentially overturning the emergency regulations postponing the lower ratios. This basically means that higher ratios should have gone into effect on January 1, 2005.

Additionally, Rhode Island and Illinois recently proposed legislation for nurse-to-patient ratios similar to those in California, and New Jersey passed legislation requiring hospitals to disclose their nurse staffing ratios to patients. We're encouraged by these trends because of the impact it has on the demand for our services.

So, what does this all say about the healthcare staffing industry in 2005? The Staffing Industry Analysts' February report, a newsletter that tracks staffing trends, summed it up very well. They stated that the healthcare staffing market appears to be improving, and projected the healthcare staffing industry to grow 4 percent in 2005. For an industry in recovery, we believe this is a reasonable growth target.

In addition to the growth outlook, they affirm the impending acceleration of the increased demand for temporary nurses, due to the worsening shortage. We're encouraged by the current stabilization and the projected modest growth expected in the industry for 2005. And more importantly, we are ready to capture this growth as the industry recovers.

Yesterday, we also announced some executive role changes that will take place in conjunction with our annual shareholders' meeting on May 4th. One of those changes is the promotion of Susan Nowakowski to Chief Executive Officer. As you may know, Susan has been with AMN for over 15 years, and has been President for the last two years and our Chief Operating Officer since 2000. During her tenure, Susan has contributed greatly to the strategic growth and operational excellence of the Company, and over the last five years in particular, has worked very closely with me to position AMN as the premier healthcare staffing company in the US. Having worked with Susan for over 15 years, I am confident that she is the right person to continue the leadership of the Company through its next growth phase. Her executive leadership capabilities are exceptional, and I think those of you who have met Susan would agree that she will do an excellent job.

Also on May 4th, I will be assuming the position of Executive Chairman of the Company. In this role, I will continue to provide guidance and oversight to the organization, as well as setting strategic direction for the Company and evaluating acquisition opportunities. Mr. Haas, who is AMN's current Chairman, will be continuing as a Director of the Company. I would like to particularly thank Mr. Haas for his tremendous leadership as our Chairman over the last five years, as his support and guidance have been a very important contributor to our success.

These leadership role transitions are really the result of a natural evolution of the Company, and we are especially confident in making these changes now, in light of the stability and future opportunities we believe exist in our business.

And with that, I would like to hand the call over to Susan Nowakowski to talk about the Company's business development and operation initiatives that we have underway. Susan?

Thank you, Steve. I very much appreciate your confidence and support, and that of the entire Board, and I am excited about the future opportunities for AMN, and I look forward to leading the Company during this next stage.

You know, while we are proud of the accomplishments and success we have been able to achieve with the Company over the last two decades, I firmly believe that our greatest opportunities truly lie ahead. But even in the short term, we're optimistic about the current trends in our industry and the prospects for 2005. We're looking forward to reaping the benefits of the recent investments we've made and of the initiatives that we currently have in the works.

But first, let me reflect back on the fourth quarter and some of the trends that are bringing us into 2005. Demand from our clients continued to grow in the fourth quarter versus the third quarter. We largely measure demand as the average number of open orders during the quarter. Most of the growth in the fourth quarter came from states in the eastern US, but there were also a few states in the west that experienced growth.

A general trend we saw was at the end of the year and the beginning of 2005, hospitals were reacting to softer-than-expected admissions and somewhat typical year-end budgeting paralysis, and we saw orders decline. We also believe the decision to postpone the lower California nurse-to-patient ratios likely had an effect. But orders resumed growth in February, and recently are again back at the peak levels of the fourth quarter. This puts us at roughly 50 percent higher than at the same time last year. We believe the growth in orders that has been occurring for several quarters now speaks to the increased stability in our markets.

We are currently at the highest order levels we have seen in the last two years. We don't believe that the temporary dip that we saw in orders in December is reflective of the longer-term trend that we've seen in increased demand. The strength in demand is not being driven by just a handful of nursing specialties. Over the past month, we've seen growth in all of the major specialty categories, with the exception of pediatrics. But even more importantly, we have seen growth in the general medical/surgical floor nurses, which really speaks to the strength in demand. And, although a smaller piece of our business, we have also seen growth in the demand for allied healthcare professionals.

As you know from prior quarterly calls, demand has been growing for several quarters now, but the growth in the supply of new nurses interested in traveling has been lagging significantly. We did see the momentum in new supply start to pick up, primarily in the third quarter of last year. During the fourth quarter, we continued to see these improvements, with year-over-year unique applications rising double digits in the fourth quarter versus the prior year.

Sequentially, unique new applications were down in the fourth quarter, but that's a typical seasonal trend we see. We believe our improving supply growth is the result of our more focused segmented marketing efforts, but is also due to the overall word-of-mouth referrals and increased awareness about the greater number of travel assignments available in the industry.

This strength in new supply continues as we have entered 2005, and we're projecting continued momentum during the year. This momentum should be driven by expected declines in unemployment that Steve referred to earlier, as well as the projected growth in demand, which has a magnetic effect of pulling supply into the industry.

We believe AMN is poised to attract a greater share of the market supply growth, due to our unique multibrand recruitment strategy, as well as our very aggressive Internet portal strategy and some new internal recruiting initiatives and training programs. To gain further speed and internal efficiencies in our recruitment efforts, we recently launched a sophisticated lead management system. This improved system will allow us to increase our recruiting efficiency by better prioritizing and tracking our leads and new applications.

So that's a little color on demand and supply, both of which are continuing to improve. Moving on to other drivers in our business, pricing remained stable. And even in this competitive market for travelers supply, we have been able to maintain consistent gross margins on a year-over-year and quarterly basis. This is a sign of stability in our market, but also is a result of our focused attention on controlling and balancing our direct costs.

Maintaining a relatively flat SG&A, which we intend to leverage into our future, has also been a key focus of our management team. During 2003 and 2004, we made some significant investments to develop and improve our service delivery infrastructure. We started to see those changes pay off during 2004, and we certainly expect to see future benefits.

In addition to our focus on operational efficiency, we are also working on enhanced and new service and product development initiatives that we believe will benefit AMN in the latter half of 2005 and more so in 2006. For obvious competitive reasons, we won't be discussing the details of these initiatives publicly until we've launched them into the market. But innovative client-focused strategies have been a key contributor to our competitive success, and we will continue to develop solutions that will serve our clients better and further differentiate AMN from the competition.

While many of our initiatives relate to our US recruiting brands, we're also continuing to expand the offerings of O'Grady-Peyton, our international recruiting brand. Building on the current OGP recruiting platform, we recently rolled out some new programs to provide more diverse solutions to our hospital clients.

One of these programs is a 12-month assignment option, primarily aimed at international nurses who are already working here in the US. Our 12-month assignment program attracts those nurses who are looking for more stability than a traditional travel assignment. Many of the foreign-trained nurses come to US with their families. This program offers them the ability to stay in one place for a full year and put their children in school, but it also enables them to continue to explore America. By offering this type of assignment to our foreign nurses who are coming off of their 18-month contracts, we believe that we have a greater chance of rebooking them.

Hospital clients were introduced to this program late in the fourth quarter and, although still very new, we have received positive feedback from both our hospital clients and healthcare professionals.

Most of you should be aware from some of our prior calls that this year, the Joint Commission on Accreditation of Healthcare Organizations, also known as JCAHO, launched a program to certify healthcare staffing agencies as a quality standard in our industry. AMN participated with other staffing companies to help JCAHO define the standards by which companies will be measured. AMN has scheduled our JCAHO review for certificate as one of the first multi-site providers later this month. And, due to our strong infrastructure and our stringent quality management policies, we are extremely confident, and expect to meet or exceed all of the JCAHO standards.

Overall, our operations are extremely healthy, and on track to handle the growth we anticipate in the future. We have some exciting new client offerings in the works, and we are looking forward to seeing the benefits that these will bring for us. Of course, financial impact from these initiatives won't happen overnight, and will likely benefit us more in 2006 and beyond, but we believe they will be important to the strategic growth of our business.

Now, I will turn the call over to David Dreyer, our Chief Financial Officer, who will provide you with a detailed review of our fourth quarter.

Well, thank you, Susan. As Steve highlighted in the beginning of this call, we reported revenue of $158 million for the fourth quarter of 2004, which was at the high end of our guidance range.

Diluted earnings per share for the fourth quarter of 2004 was $0.14, which was at the midpoint of our guidance range. Revenue for the fourth quarter represents an increase of 1 percent from the third quarter of 2004 and a decrease of less than 1 percent from the fourth quarter of 2003. Diluted earnings per share for the fourth quarter increased by 8 percent relative to the third quarter of 2004, and decreased by 7 percent, as compared to the fourth quarter of 2003.

Average traveler count for the fourth quarter of 2004 was 6,297 and represented a 3 percent increase from the third quarter of 2004, and less than a 1 percent decrease from the fourth quarter of 2003.

The Company generated 2004 revenues of $629 million, representing a decline of 12 percent from the $714 million reported for 2003. Diluted earnings per share for the year was $0.55, compared to $0.95 reported for 2003. Net income for the full year 2004 was $17.3 million, compared to $37.8 million in 2003.

Although average traveler count was relatively stable throughout 2004, it decreased 12 percent to 6,225 from 7,113 in 2003. The decrease in year-over-year revenue was mainly due to the decline in average traveler count, which resulted from the decrease in demand for our services experienced in 2003 and the lagging effect this reduced demand had on the supply of nurses willing to travel.

Gross profit for the fourth quarter was $36.9 million. This represented a gross profit margin of 23.3 percent, in line with our expectation and comparable on a sequential basis to the third quarter's gross profit margin. Compared to the prior year's fourth quarter, gross margin increased 50 basis points from 22.8 percent, primarily due to a decrease in the cost of housing and insurance expenses, partially offset by increased traveler compensation, as a percentage of revenue.

Selling, general and administrative expense totaled $26.4 million, as compared to $25.5 million reported in the fourth quarter of 2003, which included costs of $1.2 million related to last year's tender offer. The increases in SG&A over the prior year were mainly related to higher employee and professional services for Sarbanes-Oxley compliance and an increase in bad debt expense, partially offset by lower professional liability insurance expense. Overall, SG&A expense increased 4 percent, and represented 16.7 percent of revenue, as compared to 16.0 percent reported in the prior year.

Fourth-quarter SG&A expense was stable relative to the third quarter of 2004, which is reflective of the Company's ongoing initiative to leverage its infrastructure and maintain consistent SG&A spending, exclusive of customary changes related to inflation or adjustments to insurance reserves.

Income from operations was $8.9 million for the fourth quarter, a decline of 4 percent when compared to $9.3 million reported last year. Fourth-quarter income from operations margin declined to 5.6 percent from 5.8 percent last year. This decline was primarily to higher SG&A expense as a percentage of revenue, partially offset by an increase in gross profit margin, due to a decrease in the cost of certain traveler benefits. As expected, fourth-quarter 2004 income from operations margin was comparable to the prior-quarter margin.

I will now provide some additional insight into our key revenue drivers during the fourth quarter. Average revenue per traveler per day during the fourth quarter was $273, which was relatively consistent with the fourth quarter of 2003, and was 1.4 percent lower than the $277 reported in the third quarter. We anticipated this drop during the fourth quarter, as it reflected our normal seasonal decline in billable hours during the holiday period in December.

Net interest expense in the fourth quarter was $1.8 million, compared to $2 million in the fourth quarter of 2003 and $2.4 million in the third quarter of 2004. The decrease in year-over-year interest expense reflects the Company's strong cash flow and aggressive debt reductions during the year. Interest expense in the fourth quarter of 2004 decreased on a sequential basis, mainly to the acceleration of deferred financing costs of $500,000 recorded in the third quarter of 2004.

The 2004 income tax rate declined to 37.8 percent from 38.7 percent in the prior year, due mainly to recognition of state tax benefits. In terms of our financial position at December 31st, cash and cash equivalents were $3.9 million, and total debt was $102 million, which represented a net reduction of $37.2 million since December 31, 2003.

Our days sales outstanding stood at 63 days, reflecting a year-over-year increase of 5 days from December 31st of last year and a 1-day decrease from September 30th. We used $1.8 million in cash flow for operating activities during the fourth quarter of 2004, due mainly to the higher number of traveler pay dates during the quarter. However, for the year, we generated $39 million in net cash from operations.

I will now turn our attention to revenue and earnings guidance for the upcoming first quarter and the full year 2005. As mentioned in yesterday's earnings release, AMN's past policy since late 2002 was to provide guidance for the upcoming quarter only. However, with the recent stabilization that AMN is experiencing, the Company is expanding its guidance to include the full year 2005.

Full-year 2005 revenue is expected to grow 4 to 5 percent from 2004, ranging from $654 million to $660 million. The year-over-year growth in revenue generally reflects an even mix of both price and volume increases. Gross margin in 2005 is expected to remain at approximately 23 percent.

Diluted earnings per share is expected to range from $0.64 to $0.68. This range excludes adjustment for the Statement of Financial Accounting Standard 123(R), or FAS 123(R), which the Company has not yet determined. Our diluted earnings per share is expected to benefit from the combination of growth in revenue, leverage resulting from relatively stable SG&A spending levels and lower interest expense from reduced debt balances.

For the first quarter of 2005, revenue is expected to range from $155 million to $157 million, reflecting a relatively sequentially flat traveler count of 6,275 to 6,350 and two fewer billing days in the first quarter, as compared to the fourth quarter of 2004. First-quarter diluted earnings per share is expected to range from $0.12 to $0.13.

Second-quarter 2005 revenue is expected to trend closely with the first quarter, in a range from $156 million to $160 million. Due to key market growth assumptions, which I'll discuss in a moment, as well as expected seasonal trends, third-quarter 2005 revenue is projected to grow approximately 6 to 8 percent over the second quarter, and fourth-quarter 2005 revenue is expected to grow approximately 1 to 2 percent over the third quarter.

Given the modest growth in our revenue projection, combined with the expectation of stable SG&A spending and reduced interest expense, diluted earnings per share is expected to grow at considerably higher growth rates during the second half of 2005, as compared to revenue growth.

As I previously mentioned, we made several key assumptions in the development of our 2005 guidance. These key assumptions include continued economic recovery with continued decreases in unemployment rates, along with growth in hospital admission levels expected to occur mostly during the last half of 2005. The Company has taken these external variables into consideration in setting its guidance. However, it's important to recognize that changes in these and other variables could negatively impact the Company's quarterly and annual estimates.

As you can see, we continue to experience stability in our results. We are pleased with our past results and the modest increases that we are projecting for 2005.

Again, thank you for joining our conference call today and for your interest in AMN. We would now like to open the call up for questions.

(OPERATOR INSTRUCTIONS). Jeff Silber, Harris Nesbitt.

I have a question about your annual guidance. I am just curious if you would have felt as comfortable giving this same kind of guidance if we had not had the potential change in regulations in California that we seem to be having, based on last week's ruling.

Yes, I think that yes, we did. We had confidence in our plan, and the regulation announcement last week really didn't have any impact on that all. Sure, it's positive news, but we already have a lot of confidence in our planning, and felt confident with going out with full-year guidance.

That’s great. If we can just drill a little bit further down into the guidance, and I'm actually looking at the second-quarter numbers. It looks like you're looking for a slight sequential growth in revenues in the second quarter. And if I remember correctly, there's typically a bit of a seasonal downtick. Since the quarter starts in about three weeks, you obviously have some visibility. I was wondering if you could tell us why you are so optimistic and think you'll get a sequential uptick in the second quarter.

You are right, Jeff. The normal seasonal trend has been that the second quarter has usually dipped down, and has been a little lower than the first quarter -- given, I think, we are so far into the first quarter that we have a pretty good insight as to orders, and we believe that the projection for Q2 is based on our most recent information, and feel confident with that estimate.

Just a couple of numbers questions. What kind of tax rate are you guiding to for the first quarter and the full year '05?

We're using pretty much a consistent average for the year, which is between 39 and 39.5 percent. And that has really been our consistent rate during, certainly, the second half of 2004.

And in terms of Sarbanes-Oxley spending, can you tell us roughly what you spent in '04 and what you're budgeting for '05?

Sure. The outside, third-party expenses in 2004, about $1.5 million. In 2005, we don't really have an exact number, but we believe the spending is going to be between one-third to 50 percent of what we spent in 2004.

Jim Janesky, Ryan Beck & Co.

A couple of questions. Over the past couple of years, we have seen, from time to time, dramatic increases in orders that at various levels did not necessarily translate into higher bookings, and therefore higher revenues down the road. You addressed Jeff's question about the first two quarters.

If we could now go out another two quarters, and then also if you could just let us know what you think is happening now that gives you more confidence that the big jump in orders -- because we are hearing that -- will translate into bookings and revenues?

You have sort of characterized this jump in orders as a recent occurrence. And while we did see this sort of temporary dip in December and a pop back up, we really looked at the growth in orders over the last four or five quarters, and we did see that growth in volume of demand start to translate into actual placements in the fourth quarter.

As you know, our fourth-quarter volume grew sequentially 3 percent. And we think that was a reflection of the stability and some early growth in the industry, and the fact that supply had started to come into the industry and certainly into our brand into the third and the fourth quarter.

So I guess my answer would be we have already started to see the increase in demand translate into volume growth. We saw that in the fourth quarter in our results, and we are feeling confident, as we look into the first and particularly looking forward to the second quarter, seeing that strength continue.

Right, and I certainly agree that there has been some growth, but you are expecting much higher growth in the third and fourth quarters. Is that due to kind of the confluence of demand growing and better job at recruiting supply?

Yes. It's really a combination of a lot of those factors. One, it's our confidence in where our demand is today and the stability that we have seen. It's also the supply growth that we have seen in our new applications, which rose in the fourth quarter and continued to rise in the first quarter.

And then there are the external variables that David referred to -- expected rising admissions in the latter half of the year, expected lowering unemployment, which generally has an impact of higher nurse attrition, which drives both demand and, we believe, supply for us. So it's just a combination of our confidence of where we are today, the increase that we have already seen, but also some of those future variables.

And then, there has been a recent -- I'm sure you're aware -- almost epidemic in a number of states, outbreak of flu and other respiratory ailments. To what extent is that, number one -- how is that affecting your current order trends? And number two, how does that affect your confidence in the market going forward?

Well, that's a somewhat typical seasonal occurrence that happens, as you know, within the hospital industry. And it's always a bit of a guessing game for the hospitals to figure out whether it's going to hit in December, January or February, and the extent of that.

And I think that's what contributed to the little dip we saw in December, is that they miscalculated when the flu season was going to hit. So I think it was just really a timing difference for them, which is why -- you asked about the impact, which is why we believe we saw our orders pop right back up to where they previously were.

And then, one question for Dave. SG&A in 2005 -- you do expect that, I would imagine, to go down as a percentage of revenues?

Yes, we do. And that is part of the leveraging that I discussed. We are managing our SG&A expenses to basically keep them stable. And of course, it's going to grow by inflation, given there is a fairly good salary component. But as we stabilize those expenses, as we grow revenue and gross margin, thus we're able to leverage that into operating profits.

And on an absolute basis, would it be safe to assume that it will only go -- you had it slightly over 101 million -- that it will only go up a couple of million dollars in '05?

No. Basically, I don't think we've given any range. But what we basically have characterized in the past is, if you look at inflation, that would grow somewhere in the 5 to 7 percent neighborhood; that is more in line with what we meant by inflationary increases.

Tobey Sommer, SunTrust.

I have a question for you. In terms of guidance, I was wondering if you could touch on pricing and opportunities for gross margin expansion in the bill pay rate spread. You sort of suggested stable gross margin, and that you were seeing stability in terms of pricing. If we look out to 2005, in terms of a normal scenario, would you expect perhaps higher bill rates over time, slightly higher?

Well, there could be some variation. Certainly, there is a geographic. But what we are really projecting, basically -- fairly stable gross margin at that 23 to 23.5 percent range that I discussed. And so within that, sure, there is a combination of basically managing expenses. As there is going to be some increases in salaries, we offset that with basically efficiencies in our housing. We are continually trying to take advantage of our national presence with housing to work with large vendors, and so to reduce those costs. And so we are really managing it in combination. I believe that the 23 percent rate that we have quoted is a very good estimate.

And Tobey, reflecting back on pricing, we have been in a very stable pricing environment; if you look at our average bill rate for the last year, it's been very stable. But what has happened over the last six months is due to the increased demand for travelers, and the hospitals' awareness that there is a shortage of travelers out there, they become much more interested in potentially increasing their bill rate, or offering bonuses in order to incentivize nurses to come to their assignments.

So as we have renegotiated contracts over the last several months, we have seen more opportunities for increases. So yes, we are projecting that those increases will translate through into our performance in 2005.

In terms of supply, you said that unique applicant activity up double digits in the fourth quarter. Given where orders were in February and early March, has applicant supply accelerated in February and March?

It continues to be up double digits on a year-over-year basis, so we have been very pleased with that.

And, David, I have a question for you regarding option expense. If you were to have expensed options in the fourth quarter, do you have a sense for how many pennies in EPS that would equate to?

Well, historically, if you look at our FAS 123 footnote, it has been $0.02 to $0.03 per quarter. And so, that is what we have disclosed historically.

And then, I do have another question on the sales force. Could you give us a sense for what your headcount was at the end of the year or currently, and how it compares to a year ago, and what your hiring plans are, and your sense for capacity in the sales force to handle higher traveler counts?

We have two sales teams within our business -- the sales team that works with the hospital clients and the sales teams that work with the healthcare professionals. On the hospital side, we have added a few resources to that group over the last year, to really focus on the services that we're providing and building demand and building new orders. We think that that has contributed to the rise in demand over the last year. But it's really just a couple of FTEs.

On the recruiter side, we are roughly at the same recruiter level today as we were a year ago. The good news there is our attrition of recruiters was less in 2004 than it was in 2003.

So that implying that you should be able to get better productivity out of them because of their increased tenure?

Exactly. And productivity in the fourth quarter for our recruiters was actually, on a year-over-year comparison basis, our best quarter for the year. And so, we think we're making headway there. Now, with that said, we're still not back up to the productivity levels of 2001 and 2002. But you know, to us, that's just opportunity. We know we have got a lot of room there for improvement.

Just to give us a sense in terms of capacity, if bookings were to come in a little bit better, perhaps, than your guidance suggests in '05, would you have to add significantly to the sales force? Or do you think you have the capacity to handle slightly higher growth?

We think, with increased productivity, we certainly have the capacity to handle higher growth. With that said, we are always looking for good recruiters.

And then, I would be remiss if I did not ask about the new service and product development that you said you were not going to talk about, and just get a sense for when we may learn more about it. You said you're going to be out in the market and launch that, and we will learn more in the second half. Do you know when you're going to kind of go to market with something?

As you said, I would look for things in the latter half. And there's a (technical difficulty) initiative that we have in the works, so I think you would see (technical difficulty). And we will talk about them, once we're ready to launch them into the marketplace. I look forward to it.

Joe Gagon (ph), Atlantic Equity (ph).

I have a question around the year guidance. The first and the fourth quarters are usually the highest amount of orders for the travel nurses. And you lowered the guidance on the first quarter to 12 to 13 percent, and then you raised the year guidance to $0.64 to $0.68. So I am trying to understand, if the first is usually one of the highest, how you get the 64 to 68. You mentioned unemployment and admissions. Is there anything beyond that that I should understand?

Well, one thing, Joe; let me just explain about the first quarter. Again, if you compare it to the fourth quarter of 2004, there is the two less days, so that has had an impact. In addition, the margin, because we're starting the year, there is basically new starts at the beginning of the year, and we then have a full quarter of housing expense with the two fewer days.

So if you look at our first quarter, and you think the $0.12 to $0.13 cents is down from the fourth quarter of $0.14, it's really a little more comparable. And it's true that we've given first-quarter guidance, but, I mean --

I guess my question is 12.5 times 4 is 50. Right? And this quarter is one of the stronger quarters because, obviously, you have flu season and you have people going on vacation in the South. So this is why, in your industry, obviously, the first and fourth are usually the best. So I'm just trying to understand, how do you get to 66 on average from 50?

Joe, when you're in a growth environment and demand is growing, you're going to grow from the first quarter to the fourth quarter. That's what we would typically expect. You are typically relatively flattish from the fourth quarter to the first quarter, as David described.

And just to clarify, you had said that we lowered our guidance. We have not given first-quarter guidance before. Today is the -- or in our release last night was the first time we have given first-quarter guidance to the Street.

And what we would expect through the year is that the second quarter would be potentially relatively down to flattish, and then your third quarter, in a normal growth environment, is typically your largest sequential increase. And then your fourth quarter -- actually, you see your largest sequential increase on a monthly basis. In fact, October and November are typically your strongest months for traveler count revenue. But because of the December holiday effect -- travelers taking weeks off to go home and see their families, and just generally working less hours -- it puts sort of a drag on the quarter. So you are usually just slightly flat to maybe, potentially, slightly up in the fourth quarter.

So this is actually what we are projecting is, in our eyes, a fairly normal trend in a modest growth environment. Now, the significant increased margin performance that you see is because of the leverage. The revenue growth is relatively modest for the year, but since we intend to keep our SG&A relatively flat, you would see the EPS grow notably faster in the third in the fourth quarter.

Yes, but the -- and that's because of the reduction in the interest expense. Is that what it was?

Well, that's a contributor. But also, we are keeping our SG&A relatively flat. So with revenue growth at approximately 10 percent on sort of fourth quarter of '04 to fourth quarter of '05, you see that kind of revenue growth with a relatively stable SG&A, it's going to drop down to the bottom line pretty quickly.

Now, as far as the admissions in the hospitals and the unemployment -- for example, the admissions at the public hospitals in the fourth quarter were actually worse sequentially than previous in the year. So it doesn't seem like there's any change to the admissions, the negative admissions growth in the hospitals.

And the unemployment over the last several months, although the last job creation was a little bit better than they expected; but overall, last four months, it hasn't changed. So I just want to understand that there's nothing, in reality, that has changed, as far as unemployment or admissions growth at hospitals. Is there something that you know that I don't?

Well, what analysts have reported is exactly what you're seeing in terms of the current environment. It's relatively stable in terms of both admissions and unemployment, but those are both expected to improve in the latter half of 2005. If you look at most of the analysts' reports regarding admissions for the year, they talk about it being relatively soft to stable in the first half, but then picking up with modest growth in the second half of the year.

For unemployment, it's expected to be relatively consistent in the first quarter and then improve, meaning dropping in the second, third and fourth quarter. So those are some of those external variables that we think will have a positive impact on both the demand and the supply for our services.

I just have one more question as far as the metric you use about demand and orders. I think it was starting in the second quarter, you said there was 50 percent increase in demand in orders, and then I believe in the third quarter you said it was over 50. Right?

And in the second quarter, I think your revenues were 153 million, and then the recent -- this quarter right now, the 158. So I guess I'm confused, as far as whether this metric should even be used, because it seems to have no, zero, translation into increased sales.

Well, demand is just -- and when we talk about demand, we're referring to our open orders. That is just one factor of demand. There are other factors that drive bookings within our business -- the number of extensions, the nurses who are currently on assignment -- but we do believe that orders are an excellent tool to use to characterize our demand.

But the reason that has not translated into more performance is because the supply of new nurses coming into the industry and into our business has not increased at the same rate. At the same time we were talking about 50 percent growth in demand, we were saying that we, back in the second quarter, just started to see growth in the supply of new nurses. And at that point, it was very small, single digit.

And it wasn't until the third quarter that we saw a year-over-year increase, and even then it was single digit. In the fourth quarter, we started to see that pick up to double digits. So we're just starting to see the increase in supply, and you have to have the supply of nurses, in order to place them into that growing demand.

Now, as I said earlier, I think that our sequential growth in the fourth quarter is a good reflection that we have been able to translate that increased demand into increased volume, because of the new supply we've had coming in.

(OPERATOR INSTRUCTIONS). Nick Aberle, Caris & Co.

This is Matt McCain (ph), actually, sitting in for Nick. I just had a couple questions. First off, is your 2005 guidance inclusive of the assumption that the nurse/patient staff ratio legislation in California will be upheld? And how much of a contribution do you think it could provide?

No, we did not factor that in. We built the plan prior to the change in legislation or the overruling of the Governor. We really don't know what kind of estimate to put to that, so we have not reflected that in these numbers. Could there be some positive upside? I really couldn't quantify that right now.

How about industry consolidation? What is your outlook for industry consolidation over the next few years?

Certainly, with the recovery of this industry, I think that there will be more interest in particularly private owners of businesses to look for opportunity for the larger companies to perhaps take a look at them. In the last year or so, with the stock prices being lower than people would like – and these owners would like -- everything is pegged off of the public companies. They were not that interested in selling their businesses. But I expect that there will be some more interest in that. Now, whether that will translate into anything this year, I'm not prepared to say. But I do think you'll see some more activity in this area.

Avi Fisher (ph), Harris Nesbitt.

Just a quick question. I hope I'm not beating a dead horse here, but you talked about demand in all specialties growing, especially in surgical and general medical. In California, the ratios are specific to those areas, and I was wondering -- is there a correlation? Are you looking for the demand in California specifically?

We have been asked that a few times now, and in our guidance we really haven't -- that wasn't something that we took, really, into consideration, somehow, the increased demand in California. But I will say, though, that this overruling of the Schwarzenegger administration's emergency rules could potentially be significant. And I think it's significant in many ways.

Although it would certainly, in our viewpoint, increase demand in California, which is a key market for us, I think it also speaks to the fact that there are many states now that are looking at this. And they are looking at California as an example to them. And, like I said my prepared remarks, there are other states like Illinois, for example -- that's no small state, okay -- that now has a bill introduced in the Legislature to mandate lower nurse-to-patient ratios. And that is in a state which we think has probably a high probability of success, because of the fact that the state government is more Democratic, and that those tend to -- Democrats tend to support union positions more, and these are normally -- these nurse-to-patient ratios are usually advocated most by labor unions.

So we think that Illinois, Rhode Island, what is going on here in California, what happened recently in New Jersey, as far as perhaps not setting the ratio but at least informing, having regulations to inform patients what the ratio is -- I think it is an indicator of where this country is going, and where the states are going, as far as mandating these ratios. And we think that this is going to, over the long run, have a very positive effect on our business.

Can you remind us -- I think you had 30 percent of your business in California? And how much in Illinois and Rhode Island?

Well, we don't give specifics on each state. But you are in the ballpark there in California.

And nothing on Illinois, or you are not going to give us anything?

We don't get into those kinds of specifics.

(OPERATOR INSTRUCTIONS). Tobey Sommer, SunTrust

A couple of my follow-ups were asked, but I did have one on cash flow, which was a little bit more modest in the quarter, but very solid for the year. You are paying down your debt. I just wanted to get a sense for your thoughts regarding uses of cash and your cash flow in '05 and '06.

We are going to continue to generate positive operating cash flow. That's a real hallmark of our business. In 2005, we're going to continue to pay down the debt. However, we're also continually evaluating different acquisition opportunities. Again, acquisition opportunities for us would need to be strategic, strategic to our travel nursing business, but also be synergistic with our existing business and, of course, accretive to earnings. So we could possibly be using some of that cash for acquisition purposes, but we are also going to continue to pay down the debt.

In terms of your comment regarding accretive to earnings, is that accretive in the first year? Or what is your sense there? And, as a follow-up, I would like to ask, what is your view in terms of the optimal capital structure for the firm? How much debt (technical difficulty) like to see on the balance sheet kind of over time?

Right now, our debt-to-capital ratio is about 43 percent. And I think we're okay with that. Again, if we did a large acquisition or medium-sized acquisition, there would be some leeway there. It's hard to answer the question about the accretiveness, because it would really somewhat depend on the size of an acquisition. But yes; I think in general, we would like to see it be accretive to earnings beginning after at least three quarters. That would be reasonable, within the first year, to make a positive contribution to earnings.

And there are no other participants in queue at this time.

We want to just thank everyone for attending this call this morning, and we look forward to all of you joining us on our next earnings call. So thanks again for joining us today.

And, ladies and gentlemen, this conference will be available for replay after 11:30 AM today, running through March 22nd at midnight. You may access the AT&T Executive Replay System at any time by dialing 1-800-475-6701 and entering the access code of 767485. International participants may dial 1-320-365-3844. (OPERATOR INSTRUCTIONS). And that does conclude our conference for today. Thank you for your participation and for using the AT&T Executive Teleconference Service. You may now disconnect.