AMN Healthcare Services Inc (AMN) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the AMN Healthcare third quarter 2007 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-session. Instructions will be given at that time.

(OPERATOR INSTRUCTIONS)

As a reminder, this conference is being recorded. I'd now like to turn the conference over to Mr. Christopher Schwartz, Vice President of Investor Relations. Please go ahead.

Good afternoon. I would like to welcome everyone to the AMN Healthcare Services conference call to discuss the Company's earnings results for the third quarter 2007. For the call this afternoon, we have Susan Nowakowski, AMN's President and Chief Executive Officer, and David Dreyer, AMN's Chief Financial Officer.

A replay of this webcast is available at www.amnhealthcare.com/investors and will be replayed until November 13, 2007. 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 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 annual report on Form 10-K for the year ended December 31, 2006, our quarterly reports on Form 10-Q for the quarters ended March 31, 2007, and June 30, 2007, and our current reports on Form 8-K, 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 information currently available to it. Developments subsequent to this call may cause these statements to become outdated. The Company does not intend, however, to update the guidance provided today prior to its next earnings release.

I will now turn the call over to Susan Nowakowski, AMN Healthcare's President and Chief Executive Officer.

Thanks, Chris. Good afternoon, everyone, and thank you for joining us today. We appreciate your interest in AMN Healthcare and in taking the time to participate in our earnings call today.

All of our business segments performed in line or slightly better than our expectations this quarter, driving revenue and earnings growth on both a year-over-year and a sequential basis. Our industry-leading revenue of $300 million and earnings of $0.29 per diluted share reflect our strong client relationships and our national brand recognition.

We are nearing the end of our third fiscal year since we took the first steps in executing our strategy of building the most comprehensive healthcare staffing company. The result? We have nearly doubled our revenue and earnings since 2004 and, more importantly, have significantly diversified our revenue and earnings streams.

While three years ago 100% of AMN's revenue and earnings were derived entirely from nurse and allied staffing, today approximately 30% of our revenues and 40% of our earnings are generated by physician staffing services.

Another important part of our strategy is to be the leader in each key segment where we compete. Today we are in a strong number-one position within travel nurse staffing. We are number one in the fast-growing segment of locum tenens, and we are number one in the very profitable segment of physician permanent placement. We're within the top five competitors for allied staffing, but our goal is to be number one in that market as well.

Over the last 20 years we have built these leading positions and expect to expand them by staying close to the changing needs of our clients and remaining agile in our approach and execution. We'll talk today about our third quarter results and our expectations for the fourth quarter. However, our primary objective is to develop our service offerings to build a stronger, healthier company for the future while executing well and delivering the best current results possible.

So let's talk about the current results first. This quarter's consolidated revenues grew 6% over the prior period and 2% sequentially, reflecting growth in all of our business segments. But what was equally positive is that gross margins improved significantly over the first half of the year, the result of initiatives that we put in place over the past several months. We feel good about the progress we've made in improving our margins and expect to continue to make further improvements over the next year.

Our nurse and allied staffing revenues grew slightly compared to last year and last quarter. The growth was driven primarily by improvements in pricing, with volumes slightly down for the quarter. Average bill rates and renegotiated pricing levels have been in line with our expectations, although we do believe there is more opportunity in certain markets.

While we've been successful implementing pricing increases, growing the volume of travelers on assignment has been more challenging. As we outlined on our last earnings call, the primary issue causing flatness in our short-term travel nurse volumes was the softness in demand in certain key markets, particularly California. Across the country we still have more open orders than we have travelers coming off assignment each month. And in fact, we have seen increases in demand and traveler count in many states.

Another contributor to the lower traveler count in the third quarter was the continued immigration challenges, putting pressure on our international recruitment business, O'Grady Peyton. The availability of visas has been significantly restricted for any applications filed after 2002, and while we have been able to secure a few visas this year, it is critical for hospitals across the country to get this situation fixed.

Remember, nearly one-sixth of the nurses passing the NCLEX exam and applying for licenses are foreign trained. This is a real problem for hospitals who are trying to build their permanent nursing workforce. For us, although it is currently less than 5% of our overall revenues, it is still causing a slight drag on our current results.

After a long year of congressional lobbying efforts, we finally have some very encouraging news to report today. Last week, the Senate passed a provision to recapture unused visas for nurses from prior years as part of the Health and Human Services Appropriation Bill. This is a very similar fix that we helped achieve in 2005. The bill is now in conference with the House, and we are working with congressional leaders to ensure that the visa provision of the bill will remain intact.

While we continue our lobbying efforts, we also continue to make adjustments to our international operations to reduce expenses in response to the situation. There are certain business decision points that we will face if the legislation does not progress over the course of the next two months. This will not affect our overall outlook for 2007 but will be factored into our '08 planning.

Our allied staffing business, which largely includes rehabilitation therapists, imaging technicians and pharmacy staffing, is progressing well. While a relatively small piece of our business today, it is one of the faster growing service lines within the industry, and we are optimistic that we will be able to build our market position over the next several years, both organically and through acquisitions.

Now, turning to our locum tenens staffing business, the demand for contract physicians continues to grow at a rapid pace. And while we do not have enough supply to fill all of the demand that is coming in, the supply is growing at a healthy rate. The Staff Care team has done a great job in serving our clients. And while there is no public data available, our sense is that we have been taking market share over the past few quarters.

During the third quarter, revenues grew 21% compared to last year and 4% compared to last quarter. All specialties and all regions were relatively strong for the business. Our fastest-growing specialties continue to be radiology and surgery.

Another good story here is that gross margins increased both sequentially and year-over-year. While we experienced some gross margin pressure in the business earlier in the year, the initiatives our team put in place have been successful, and we now seem to be on track for producing relatively stable margins. With a healthy market environment and a team that's executing exceptionally well, we expect to see strong growth in this segment.

Our physician permanent placement segment continues to be on a positive track for the future. During the third quarter, revenues grew both year-over-year and sequentially. Our team drove a double-digit increase in placements compared to last year, and we expect continued growth in the fourth quarter as well. As the largest physician search firm in the U.S., Merritt Hawkins continues to be recognized as the recruitment expert among physicians and healthcare executives.

In addition to recruitment expertise, AMN is also recognized for our screening and credentialing expertise. Our ability to consistently deliver higher quality healthcare professionals is a key reason why facilities prefer AMN over our competitors.

In August, the Journal of Nursing Administration published a report developed by Dr. Linda Aiken, which outlined findings that the utilization of travel nurses actually improves the quality of care within hospitals. Some of this improvement was driven by the fact that supplemental staffing helps hospitals to achieve higher and safer staffing levels. This was certainly a very positive study for our industry and should help hospitals as they continue to try to balance the cost of care and the quality of care.

As we look to the future and execute our strategy, we continue to be encouraged by the long-term fundamental drivers. In September, staffing industry analysts published a report reinforcing the strength of these trends and forecasting continued growth in the temporary healthcare industry. The report cited long-term drivers such as the aging population and the increase in healthcare needs and spending that goes along with this. They also mentioned the growing demand and deepening shortages of healthcare professionals, particularly nurses. There's no doubt that the healthcare staffing industry, like most others, can have short-term fluctuations, but the long-term fundamental drivers are in our favor.

Before I turn the call over to David, I'd like to make a few comments about the wildfire events in San Diego last week. I'm sure many of you watched the news as firefighters fought to save homes and contain the fires. In addition to the mandatory evacuation of our office for two days, some AMN team members had to evacuate their homes. Most all were able to return within a day or two, and we're very fortunate that all of our team members are safe.

AMN team members both in San Diego and at our remote brand sites worked tirelessly to ensure that our clients were taken care of. Our systems allowed many of our team members to continue working in San Diego. Additionally, having multiple sites with experienced staff across the country allowed us to minimize disruption to the business.

Our disaster recovery systems and business continuity plans are quite extensive, and we were very pleased with how smoothly things went. This is surely a result of the careful planning ahead of time, but even more so is a testament to the dedication and skill of the AMN team throughout the country. Again, I'd like to thank our team for their commitment to our clients and their caring and support for their fellow team members.

And with that, I'd like to turn the call over to our CFO, David Dreyer, who will recap our third quarter results and full year 2007 guidance.

Well, thank you, Susan, and good afternoon. We reported revenue of $300 million for the third quarter, which was 6% higher than the third quarter of last year and 2% higher than last quarter. Diluted earnings per share was $0.29, which is 4% above last year and 12% higher than last quarter.

Revenue generated by our nurse and allied staffing segment this quarter was $204 million compared to $202 million last year and $201 million last quarter. The year-over-year improvement was mainly due to a 3% increase in revenue per traveler per day and the acquisition of Rx Pro Health in May 2007, partially offset by a modest decline in travelers on assignment. Compared to last quarter, the sequential increase in revenue primarily reflected a 2% increase in revenue per traveler per day and one extra calendar day this quarter, partially offset by a modest decline in travelers on assignments.

Revenue generated by our locum tenens staffing segment this quarter was $83 million, an increase of 21% compared to last year and up 4% from last quarter. The year-over-year increase in revenue was due to an 11% increase in days filled combined with a 9% increase in revenue per days filled. The sequential increase in revenue was due mainly to a 5% increase in revenue per days filled. A larger mix of higher bill rate physician specialties and bill rate increases overall this quarter drove the improvement in revenue per days filled.

Revenue for our physician permanent placement segment this quarter was $13 million, an increase of 7% compared to last year and 4% to last quarter. An increase in the number of physicians placed during the quarter compared to last year and last quarter contributed to the increase in revenue. Looking forward for this segment, an anticipated increase in the number of producing sales team members is expected to result in higher revenue during the fourth quarter of this year.

Consolidated gross profit this quarter was $80 million, representing a gross margin of 26.6%, which compared to 27.1% reported last year and 25.5% reported last quarter. The year-over-year decline was mainly due to higher housing and health insurance costs in the nurse and allied segments. When comparing to last quarter, gross margin improved by 110 basis points, with the increase mainly coming from a widening bill -- pay to bill spread both in the nurse and allied and locum tenens staffing businesses.

On a segment basis, gross margins this quarter were 24.2% for nurse and allied, 27.0% for locum tenens and 60.2% for physician permanent placement. Gross margins improved in all of our segments this quarter compared to last quarter and are expected to remain relatively stable in the fourth quarter.

SG&A expenses this quarter were $56 million, or 18.6% of revenue, which compared to 19.1% last year and 18.2% last quarter. The decline in SG&A expenses as a percentage of revenue compared to last year was due mainly to our careful management of operating expenses to leverage more profitability.

Net interest expense this quarter was $3.1 million, down from $4.2 million last year and unchanged from last quarter. The decrease in net interest expense compared to last year was due primarily to continued payments to reduce our debt outstanding. Our income tax rate for the third quarter was 43.7%, which increased compared to the 40.1% last year and 40.2% last quarter. This quarter's increase was due mainly to a $600,000 adjustment to our income tax reserve, which resulted in a $0.02 reduction to this quarter's diluted earnings per share. Our effective tax rate going forward is expected to approximate 40%.

Also occurring in the third quarter, based on our strong cash flow and ongoing commitment to enhance shareholder value, we initiated and completed a common stock repurchase. We purchased 1 million shares of our common stock at an average price of $18.48 per share. Because the repurchase occurred during the middle of the third quarter, we will not realize the full benefit of the share reduction until next quarter. For the third quarter, we had an average of 34.7 million fully diluted shares outstanding, and for the full year 2007, we expect fully diluted shares to approximate 35 million.

Turning to our financial position, this quarter we generated $21 million in operating cash flow, which, in addition to cash on hand, was used to repurchase the $18.5 million of our common stock and reduce debt outstanding by $10 million. We ended the quarter with $6 million in cash on the balance sheet and $157 million in total debt outstanding, resulting in a leverage ratio of 1.6 times. Days sales outstanding, or DSOs, at the end of this quarter was 60 days compared to 59 days last year and 60 days last quarter.

Now I would like to provide you with our revenue and earnings guidance for the fourth quarter and the full year 2007. Fourth quarter revenue is expected to range from $286 million to $288 million, and diluted earnings per share is expected to range from $0.24 to $0.26. For the full year we're reaffirming our guidance, with revenue expected to range from $1.16 billion to $1.17 billion and diluted earnings per share expected to range from $1.02 to $1.04. As is typical for the fourth quarter, we're anticipating a moderate decrease in revenue and earnings from the third quarter, mainly due to year-end seasonality within our nurse and allied and locum tenens segments.

With regards to Susan's comments earlier on legislative movement towards obtaining more visas for international nurses, we would not expect any upside in the fourth quarter, as it will take at least four months from the effective date of any legislation before we're able to see new nurses starting. And if the legislation does not move forward for some reason, we've already reflected this in our fourth quarter guidance.

We started 2007 with approximately 575 international travelers in this division and we expect to end the year at about 400. The legislation currently in conference, if it gets enacted, we could be back to the 575 level by the end of 2008. Conversely, if no legislation is enacted, the runoff in assignment contracts could take us to approximately 100 nurses working at the end of 2008.

We generally would not give this level of detail for such a small division within a segment. However, I know many of you have been questioning the overall impact of the immigration bottleneck, and so we hope you'll find this information to provide clarity.

This concludes my financial overview. I'll pass the call back to Susan for some additional comments on our outlook for 2008.

Thanks, David. As I mentioned at the beginning of the call, we are feeling positive about the effectiveness of our strategy and our team's ability to execute well, even in the face of short-term challenges. All of the business segments grew in 2007, and while the market for travel nursing was not as robust as we all would have liked, I think our team did a good job of remaining agile and identifying those opportunities for growth.

As we look forward to 2008, it is still a bit early to provide full-year guidance, but we did want to provide some color regarding our early expectations. The long-term fundamental drivers of the travel nurse and allied staffing business seem to be firmly intact. In the short term, demand in volumes are up in many regions of the country. However, demand is still lower than preferred levels in certain key markets.

The fact that we have more clients in more locations than any other company and a strong supply of candidates coming in should help us to maximize the market opportunity. Overall, we believe we will be able to continue to drive revenue and earnings growth in this segment during 2008.

The demand and supply dynamics for locum tenens appears to be conducive for continued double-digit growth rates into the coming year, which is very consistent with industry analysts' projections. Our Staff Care team is executing very well, and we believe we are growing market share in this fast-growing industry. Our physician permanent placement business is expected to grow at a faster pace in 2008 than it did this year. Recent trends of increased new searches provides us with a growing pipeline for more placements in the future.

In 2008, we will continue to make investments in parts of our business that are important to our long-term strategy. These are primarily internally focused but will also include continuing to look at acquisition opportunities that can augment our growth. We think 2008 will be a year where our clients and our shareholders will continue to benefit from our comprehensive and diversified service offerings.

And with that, we would like to open up the call to any question.

Yes, ma'am. (OPERATOR INSTRUCTIONS)

First question is from Tobey Sommer of SunTrust Robinson. Please go ahead.

Thank you. I wanted to ask you a question about the gross margin performance and kind of improvement that we saw sequentially. You highlight a couple of things in terms of widening bill pay spreads, et cetera. I was wondering if you could describe kind of where you're seeing particular strength in your three different business units, and maybe you could rank them in terms of order of pricing and bill pay rate spread strength? Thanks.

Sure. Maybe I'll talk kind of anecdotally and kind of broad brush and, David, you could dive into the numbers a little bit more. Saw particular strength and growth in both the nurse and allied segment as well as the locum segment. Nurse and allied was driven by pricing increases really across the board, across the country, across all specialties, probably particular strength kind of on the eastern side of the U.S.

And then we take a -- really an aggregate approach in managing our gross margins. As you know, we have multiple compensation pieces that we have to allocate those bill rate increases, and as we've seen rising costs in housing and health insurance, we've used those bill rate increases to cover those and basically maintain a relatively flat pay rate, therefore widening the bill to pay spread.

On the locums business, it's really more all about the bill to pay spread. And we manage that business a little bit differently in that we're typically negotiating the bill rate and the pay rate for each placement. And so we really have an opportunity with each and every assignment to try to maximize our gross margins and manage that bill to pay spread.

And so through initiatives and processes put into place over the last few months, the team has done a great job of creating a little bit more distance between the bill to pay spreads, both in driving up pricing, as David said, the growth that we saw in the locums business sequentially was almost all driven by increases in revenue per days filled, which is both the combination of the mix and the pricing increases. So they're doing both a good job in pushing up pricing, but also in managing the provider pay.

David, you want to provide a little more color?

Sure. That was excellent. But if you look at the three -- our change in gross margin sequentially was 110 basis points. We were at 26.6% versus the 25.5% last quarter. The biggest was payroll, which is because of the bill pay spreads in the nursing and locums division. That accounted for 70 basis points.

Our improved housing, which is again partly due to bill rate and also managing housing costs, contributed 20 basis points to the favorable variance. And our health insurance overall was another 20 basis points favorable. So all three of those items basically make up that 110 basis point difference.

Thanks. I'll ask one more question, and then I'll get back in the queue. Kind of a two-pronged question. I don't -- didn't hear, and I apologize if I missed -- if you mentioned what cash flow from operations was in the quarter. And then to Susan, I was wondering if you could comment on prospectively what your priorities will be for cash flow deployment given the fact that you were active in share repurchases for the first time in a while in the quarter. I was wondering if you could comment on that. Thank you.

Sure. The operating cash flow was $20.8 million this quarter, very positive. Basically, income drove most of that. And basically, if you looked at things like our working capital, in essence, there were favorable changes in our [group] liabilities as well.

In terms of our priorities for that cash, we're very comfortable with our debt levels where they are. And so, absent an opportunity, we'll continue to pay down debt. But ideally, we would like to find additional acquisition opportunities, particularly in the physician staffing businesses and the allied businesses. While we are the strong leader in the locum staffing segment of the market, we think we could increase our market share and our competitive position if we added to that.

Likewise, in the allied segment, we're probably kind of a number three, four player, and there are other acquisition opportunities that could help increase our size but also increase our exposure to other healthcare professionals that we may not be placing today. The addition of the pharmacy staffing company in the second quarter was a good example of that. So we'll continue to look for those opportunities within allied.

Thanks. Susan, any change following the turbulence in the credit markets regarding expected multiples on behalf of potential acquisition targets?

I think it potentially has begun to bring more realistic valuations into the discussions just because you have seemingly a few less financial sponsors in there aggressively going after these candidates. It's a little early to tell, but we've seen maybe a slight adjustment in the attitudes of potential sellers out there.

Thank you very much.

Thanks, Tobey.

Thank you, sir. And the next question is from Jeff Silber of BMO Capital markets. Please go ahead.

Thanks so much. Just wanted to go back to gross margins for a second. You stated in your remarks in terms of the improvement in gross margins in both the nursing side and the locum tenens side, some of the improvement came sequentially because of the initiatives that you've put in. Can you remind us what those initiatives were, both in the nursing side and the locum tenens side, and how sustainable are those kind of initiatives?

Sure, Jeff. Well, first, on the nursing side, it's making sure that we're focused on achieving appropriate bill rate, a competitive bill rate. And there are, we believe, additional opportunities to continue to be renegotiating pricing in markets where the demand is growing fairly significantly. So we do think there's continued opportunity in pricing, and that was kind of the key contributor from the second to the third quarter.

Second is looking at our compensation package for our travelers and making sure that we're managing really each and every placement at an appropriate level. But also kind of looking across the board and deciding where we want to build our market share and, if necessary, increasing pay rates in some areas but also, where appropriate, holding pay rates steady if we get a bill rate increase. So we've been able to manage that in aggregate to the point where we've kind of widened that spread between the bill and the pay.

So we think that is a sustainable strategy, although we want to make sure that we're remaining very competitive. So, if needed, we will increase pay rates where we need to build market share or, in some cases, maintain market share. Within the locums business, as I described, it's really a daily management of each and every placement. And we think that the processes and kind of the competitive strategy that they've put in place is sustainable and will continue to work for them. So we think that the margins there are probably at a level where they'll kind of stabilize going forward.

I would concur. The other initiatives that we've talked about is clearly we've focused a lot on our housing. While a lot of that has been improved upon with the bill rate increases, we continue to manage that very actively with further resources to keep those costs down.

Also, the health insurance is an area that we're seeing some improvement. We did talk about we had a second offering to nurses earlier this year, a day one start plan, and we're seeing the benefits of that. Our average insurance cost by enrollee is actually coming down. So we're seeing positive changes there as a result of the costs as well.

Okay, great. I was actually going to ask about housing. So thank you, David, for touching on that.

Sure.

I really appreciate the detailed information you gave us on the international nursing side, but I just had a follow-up question there as well. If I remember correctly, you do get a higher gross margin percentage for your international nurses because you don't necessarily have to pay their housing costs. What about revenue per average traveler per day? How does that compare to your domestic nursing?

It's pretty comparable. It's within usually a dollar or two of the average RN -- domestic RN bill rate across the country.

Okay, great. In terms of, and forgive me if I'm getting this term wrong, but the renewal rate in terms of when a nurse comes off an assignment and re-ups on another one, how has the been trending?

It's been trending well. Certainly having fewer orders in some of the more attractive states like California makes it more challenging. But we're still running within the 70% to 75% rebook rate that we've been in, quite honestly, for the last several years. But we think that there's room to push that up. We're more at the lower end of that, and it's dropped a little bit over the last quarter, but not significantly.

Okay. And finally, one more. At a recent industry conference there was some talk about some smaller competitors potentially violating some tax issues on the travelers side and the IRS looking into this a little bit further. Have you heard any of that? If you can give us any color on that, I'd appreciate it.

Well, we have heard that certainly at the conference. But also we hear it competitively on a daily basis, as our recruiters are talking with travelers who might be signed up with some of these smaller companies that, unfortunately, don't fully understand the IRS rules.

As you know, we and I think most of the larger competitors are very in tune with the requirements of both housing reimbursement, travel reimbursement, any type of per diem that needs to be substantiated and requires proof of a permanent tax home. So we have very thorough processes to ensure that our travelers can attest that they have a permanent tax home and qualify for the tax deduction or the non-taxability of those items.

We think it's good, actually, that there's becoming much more public awareness of the issue. We certainly do our best to try to point the travelers to information that will educate them so they can make the best decision for them and not get pulled into something like that. But at the end of the day, it's up to them to make the decision. So if others are out there talking about it publicly, I think it's only good for those companies that are following the rules.

All right, that's great to hear. I'll jump back in the queue. Thanks.

Thanks, Jeff.

Thank you, sir. And the next question is from Jim Janesky of Stifel, Nicolaus. Please go ahead.

Yes, thank you. A couple of question. First, David, did you say that you expect the gross margin in the fourth quarter to be relatively consistent with the third quarter?

I did suggest that we were basically expecting to stay the gross margin at these rates. You have to remember, fourth quarter there's always a slight decline because of seasonality. For example, in nursing with the housing costs, you're going to have more vacancy. And so you'll see typically a downward trend of, let's say, 20 to 30 basis points. But the rates that we've achieved, barring that seasonality, we believe will be more steady on a go-forward basis.

Okay. Then if you look at your outlook for the fourth quarter on the bottom line of $0.24 to $0.26 with going back to a tax rate of about 40%, unless I'm missing something, it looks like the EBITDA margin would be down sequentially about 100 basis points. Is there something in the SG&A line that is unusual in the quarter?

Our adjusted EBITDA rates, we don't really normally give guidance. But realistically, there is some swing. It has to do somewhat also if you're measuring that as a revenue base of slightly lower as well. I guess if you're looking at basic -- the percentage, I'd say that's going to be your bigger variable is more of the revenue change is going to affect that.

SG&A would actually remain pretty stable from third to fourth quarter. So it's really stable SG&A off of what's seasonally a lower, slightly lower revenue base.

Okay. Last year between the December and the September quarter, it looks like the seasonality was not as profound as it's going to be this way -- or this year, rather, in the nurse and allied healthcare segment. Does that have to do with California? Are you still experiencing the weakness that you alluded to in the call? Is that what's driving that seasonality, or is there some other area?

It has contributed a bit, knowing we were coming into the fourth quarter at a relatively lower point than we would have expected to and with a little bit less momentum due to a few key states such as California. We certainly increased traveler count in October and November, as we would have expected to, but maybe not to the magnitude that you might in a kind of normal seasonal pattern.

But remember, last year we actually increased our short-term traveler count in the fourth quarter, which is very unusual. Usually you have a normal seasonal downtick. So we sort of have the double whammy of slightly slower momentum this fourth quarter, but significant momentum last fourth quarter, and that was largely due to a very strong supply surge that we were getting in the second and third quarter of '06.

Only thing I would add to that is [you're at] the revenue drop. The seasonality, it's in nursing primarily, also a little bit to locums. We alluded a little bit to that last year. As Susan had suggested, we started this quarter, third quarter, with a smaller base, which is exactly what we talked about in our guidance, and so there's that carry forward effect into the nursing.

In locums, there are less government days typically in the fourth quarter, and so we saw that trend last year as well. And then you're seeing a little bit of seasonality again, which appears to be very typical in their private business as well.

Okay. With respect to hospital admission rates, you didn't spend as much time on that, from my point of view, this quarter than you have in the past. Are you seeing some relief there, except in some of the key states that you referred to? So are you starting to see that some of your acute care hospitals are experiencing any relief in hospital admission rates, or is that still the single -- the thing that's single-handedly holding back the industry?

Well, two ways to look at it. One is what do we hear in terms of admissions and census, and we probably hear primarily the same thing you do, which is across the country admissions are relatively flat. There are anecdotes of states, such as California, where you hear that they might be running at slightly lower census levels. But what we look at is how is that affecting our orders and our demand. And we definitely are seeing pockets where demand is growing in many states across the country.

So I think that's an important message here that while admissions seem to be reported flat across the country, what we're experiencing is areas where demand is surging, in some cases 100% growth in orders year-over-year, and other areas where orders have dropped on a year-over-year basis. So it's a little bit more of a mixed bag in how that nationwide flat admissions have translated into demand.

Okay. And then last question --

Let me just point out we actually saw, for example, from the second to third quarter -- while we talk about California, I don't want to discount California because it's very important to us. But we actually saw 32 states where we increased our number of travelers on assignment. So there definitely is growth and momentum out there. It's just not in the typical key states that we've seen in the past.

Okay, thank you. And final question is on the immigration side. You gave us a good outline, David, of you could go as low as 100 nurses from your current run rate. But I also -- while that carries a higher gross margin, it also carries higher costs. Would you be able to offset on the cost side of the equation if you're not getting any relief from the government and who knows when you can get it? Would you be able to offset any gross margin reduction by a reduction in the costs associated with recruiting those nurses?

We would. We're basically -- when I refer to the fact that we would take the charge and be reflected in our fourth quarter guidance, it's already assumed. There's a couple of decision points, and without dwelling too much, again, we've said there's two parts of this. But reducing the size of our infrastructure, and that would likely take the form of a charge either in November, possibly later in December. If those two decision points were negative and if it was the latter, there would be a small amount that would carry into Q1, so we would. We would recalibrate, I'll say, our infrastructure to make the profitability more -- less impactful.

Okay. Is that charge included in your $0.24 to $0.26 outlook?

Yes. That's what I was saying. It is included in our --

Oh.

-- guidance range.

Oh, okay. Very good. That's helpful. Okay, thank you.

Sure.

Thank you, sir. And the next question is from Michel Morin of Merrill Lynch. Please go ahead.

Yes, good afternoon. Two questions. The first one, Susan, I was wondering could you remind us what's driving the softer demand environment in California? You might have mentioned it, but I might have missed that.

And then secondly, on the locums business, what's changed over the last six months? If we look back to last year's results there, I think we had all been a bit disappointed. Maybe it was just kind of integrating the acquisition. But I'm wondering if you can -- if there's anything that you would point to that's led to the improved results over the last couple of quarters? Thank you.

Sure, Michel. First, regarding California, I think we had discussed this on our last call as well, and what we're hearing are really the same things, which is slightly lower census than expected in many of the regions within California. Also, hospitals hiring more new graduates, both in med/surg, which tends to be a larger specialty demand area for us, an important one within California, and just overall ramping up their efforts on their own permanent recruitment and retention.

It's interesting, if you look nationwide, the number of healthcare job openings and job quits continues to be at a relatively high level. But as I said earlier regarding demand, there are pockets, maybe such as California, where the hospitals are being more successful in their own recruitment and retention efforts. One speculation is that California is the largest subprime market, and workers are tending to work more hours and stay put in their jobs in fear of their mortgages going up and needing to make sure that they're increasing their income or have a stable income in -- kind of in the face of possibly having higher housing costs.

Regarding the locums business, we feel we still have not fully penetrated the market. While the industry's been around for 20 years, it's really a less mature industry than the travel nursing industry. So the growth that they're experiencing is being driven by the team and driving more marketing efforts to drive more demand.

If we look at our days available, which is kind of like the orders for that business because it's what we'll book into the future, that's up double digits. So it's ensuring that you have the marketing team in place to go out and get that business and get the days available and then making sure, of course, you have the recruitment team and the placement team to place into them.

So I'd say that the growth this year relative to last has been more about building the team. You might recall in the third and fourth quarter last year we actually talked about the fact that we were ramping up our staff. It was one of the reasons the SG&A in the locum tenens business was higher than usual because we did a pretty significant hiring and training effort, and now we're seeing the benefit from that.

Great. That's very helpful. Thanks, Susan.

Thanks, Michel.

Thank you, sir. And the next question is from Tobey Sommer of SunTrust Corporation. Please go ahead.

Thanks. Just wanted to actually go over two things that have already come up on the call, but I failed to get the numbers down precisely. David, could you rehash the discussion regarding traveler count currently, what it would be at the end of the quarter and then hypothetically what the outcomes could be for '08?

With the O'Grady Peyton, our international?

International business?

Yes.

It was -- at the beginning of '07, it was 575 for international nurses. At the end of '07, we would end at about 400. If the legislation passes soon and we have -- are able to start processing visas, we could be back up to that 575 range. It actually could be kind of a range around that, but it's conceivable we could definitely be back up to that level. If it does not pass and we're kind of dead in the water next year, then it could go down to 100, yes.

So that's the worst-case scenario for 2008. So we want to be clear on that point.

Right. Thank you. And then I was wondering with the potential charges or recalibration that you discussed --

Right.

-- what kind of numbers are we talking about? And then roughly what sort of distribution would you envision between the fourth quarter and first?

Our worst estimate that's in our guidance is basically about $0.01 per share that's in there for this charge. Now that would be an earlier decision point if we heard that we didn't get through committee that we'd basically be able to do that. If we don't reach -- until we get to the second bill, which is pretty much in December timeframe, due to the nature of how the accounting works, we probably would have $200,000 of charges and maybe $400,000 worth of charges in the first quarter. Same $600,000 roughly. It would just split differently between Q1 and Q4.

Okay. And then I wanted to ask another business question. Thanks for revisiting those issues. On the locums business, seen some reports recently that the amount of time it's taking to fill permanent positions is lengthening, and I'm wondering if you're seeing that manifest itself in the form of lengthening assignments within your locums business. Thank you.

I don't think we've really seen that trend play out in terms of the duration of the assignment. It might be, though, that our assignments are very, very variable in terms of the duration. It can -- a locum can work literally a week or eight weeks, or it could be a year assignment. So I think we have enough variability in there that it would take a while for us to see a significant trend change. But we have not seen that to date.

And then I wanted to ask an internal question regarding your recruiter headcount in the different business lines. I was wondering if you could comment about what it was in the quarter versus a year ago and maybe comment on any attrition levels within the different business units. Thank you.

Okay. In terms of our nursing business, today we are up in terms of the number of producing recruiters we have on the floor versus a year ago. We're pleased with where we are. However, we would like to continue to add to that for the future. So we'll continue to focus on recruiting and training the staff, both to build it, but also to continue to upgrade our sales talent.

Within the physician staffing businesses, we are also up on a year-over-year basis in both locums and in our permanent placement business.

And, Susan, would you expect the growth to be significant, or is it modest and the kind of headcount additions that can also be accompanied by margin expansion?

I would say modest to normal. We definitely need to continue to add staff, sales staff, to drive growth in revenues. It's also just building a stronger team for the future. But it's not a significant investment that we need to make, so we don't expect it to have any significant impact in margins in any particular quarter or over the year.

Thank you very much.

Thank you, Tobey.

Thank you, sir. And the next question is from Michel Morin of Merrill Lynch. Please go ahead.

Yes, just a quick follow-up. Susan, you mentioned use of cash going forward. Is there any appetite for another buyback in there as well possibly?

Let me answer. We don't have any other buybacks authorized. It's certainly in the realm of possibilities, but our priority, I think as Susan said in the beginning, is really to focus on doing acquisitions and that's been our priority. We continue to pay down debt and we'll continue to do that as well, as that is facilitating our ability to do acquisitions as well. So wouldn't say it's out of the realm of possibilities, but we have none authorized, and I would say our more urgent priority is to do acquisitions.

Sounds good. Thanks.

And thank you, sir. And there are no -- excuse me, we do have a question in the queue. It's from Jeff Silber of BMO Capital Markets. Please go ahead.

I'm sorry, a quick follow-up regarding cash flow. I think you had said that you would expect capital expenditures to be roughly in line the second half of '07 as it was the first half of '07. Is that somewhat comparable? What are you targeting for CapEx for the year?

Basically we said it would be still around the 1% of revenue or less. So it's on our run rate to be under $10 million this year.

Okay, great. Thanks again.

Thank you, sir. And at the moment there are no questions in queue. Ms. Nowakowski, we'll turn it back to you.

Thank you so much. I'd like to thank everybody for joining us today and for your continued support. We look forward to providing you with a further update on our performance during our fourth quarter earnings call.

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.