AMN Healthcare Services Inc (AMN) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the AMN Healthcare second quarter 2012 earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and the 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 our host, Vice President of Investor Relations, Ms. Amy Chang. Please go ahead.

Thank you, Laurie. Good afternoon, everyone. Welcome to AMN Healthcare's second quarter of 2012 earnings call. A replay of this webcast will be available until August 23, 2012, at amnhealthcare.com/investors. Details for the audio replay of the conference call can be found in our earnings press release.

Regarding our policy on forward-looking statements, various remarks, and characterizations we make during this call about future expectations, projections, plans, prospects, events, or circumstances constitute forward-looking statements. Forward-looking statements are identified by words such as believe, anticipate, expect, intend, plan, will, should, would, project, may, variations of such words, and other similar expressions.

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 31st, 2011, and our other filings with the SEC, which are publicly available.

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 Developments subsequent to this call may cause these statements to become outdated.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.

This call may also contain certain non-GAAP financial information. We make available additional information regarding non-GAAP financial measures in the earnings release and on the Company's Website.

On the call today are Susan Salka, our President and Chief Executive Officer, as well as Brian Scott, our Chief Financial Officer. Joining us during the Q&A session will be Ralph Henderson, our President of Healthcare Staffing, and Bob Livonius, our President of Strategic Workforce Solutions.

I will now turn the call over to Susan.

Thank you so much, Amy. Good afternoon, everyone, and welcome to AMN Healthcare's 2012 second quarter earnings conference call.

As we pass the midpoint of 2012, we're pleased to report solid performance, with second quarter revenue, gross margin and adjusted EBITDA margin all exceeding the Company's guidance. These results reflect the outstanding efforts of our team and everyday execution in our core staffing businesses, as well as our continued progress as the innovator in healthcare workforce solutions.

In the second quarter, we saw sequential revenue growth and gross margin improvement across all business segments. This is a good indicator of an improving market and demand trends.

Second quarter consolidated revenue of $236 million exceeded our guidance range, and was up 7% year-over-year and 4% sequentially.

We also achieved a consolidated adjusted EBITDA margin of 7.7%, which was better than anticipated.

Consolidated gross margins were 28.4%, higher than our expectations, and higher than prior year and quarter.

Our performance was driven by several key factors. First, it is clear that the evolving sophistication of our clients is translating into greater differentiation of our capabilities in the market. While AMN has long been recognized as the leader in traditional healthcare staffing, we are now also recognized as the leader and innovator in delivering workforce solutions.

The strategic workforce solutions we provide include managed services programs, recruitment process outsourcing, electronic medical records, implementation staffing and other workforce consulting services. These enable clients to manage their clinical talent pool and provide better patient care at a lower cost.

In the second quarter, approximately a third of our Nurse and Allied revenue was from MSP clients, who are relying upon us to manage and fill their clinical staffing needs. This MSP model is already migrating into advanced practice and the physician space as well.

In the second quarter, we continued to win new MSP and RPO contracts due to the strength of our offering, and our ability to deliver higher fill rates to our clients. In a recent staffing industry analyst report, AMN Healthcare was named the Nation's Top Healthcare MSP Provider with three times the gross spend under management as the next largest clinical staffing company in this space.

A second key contributor to our strengthening results is our constant focus on everyday execution, coupled with investments in our future. Our integration activities last year and the improved gross margin management have begun paying off as we continue to experience operating leverage through revenue growth.

At the same time, we are making investments in marketing spend and building innovative recruitment approaches to drive more candidate supply. We feel quite confident in the demand growth expected over the next few years and we believe these increased investments are needed to ensure that we have the quality and the quantity of clinicians available for our clients.

Despite the slightly higher level of SG&A spending from these initiatives, we still anticipate continuing to improve operating leverage and we believe we are on track to achieve our 10% adjusted EBITDA margin target.

Now, let's turn to our results by business segment. Second quarter Nurse and Allied revenue was $159 million, up 13% year-over-year and 3% sequentially. This growth was slightly better than expected, driven mainly by the Travel Nurse business, where revenue was up 19% year-over-year and 3% sequentially. The growth was driven by strong fill rates, rebook rates, and an increased supply of nurse applicants. While orders were softer at the beginning of the year, in the second quarter, they grew consistently, and today, orders are up slightly year-over-year. The stronger demand was nationwide and came from both MSP and traditional client accounts.

Clients with orders and clients with clinicians on assignment were also both up year-over-year and sequentially, which is always a good sign of a healthier client and order base.

Going into the third quarter, July orders are up in the double-digits over the second quarter and we expect to see our third quarter travel account volume up in the mid-teens year-over-year.

Now, turning to local staffing, second quarter revenue was down 11% compared to prior year, and 1% sequentially. Revenue was impacted from lower demand in certain markets, as well as candidate supply constraints and the disruption from operational changes. As planned, our New York office opened in April and our Philadelphia office recently opened to support two large MSP clients we implemented during the last year.

Second quarter Allied revenue was up 14% year-over-year and 8% sequentially. The growth was experienced in our therapy business as well as the imaging, respiratory and lab specialties. The Allied team continues to invest in marketing spend to drive more candidate supply. They also continue to experience strong rebook rates and improvements in sales productivity. In July, order levels have remained relatively steady and we anticipate third quarter revenue to grow modestly on a sequential basis and in the mid-single-digits year-over-year.

Locum Tenens second quarter revenue was $68 million, down 5% year-over-year and up 6% sequentially. This year-over-year decline was due mainly to continued volume and pricing decreases in radiology. Without radiology, segment revenue would have been roughly flat. The sequential growth is the strongest that we've seen in two years and was due to improvements in both volume and bill rates. The sequential volume increase was due to higher days filled within behavioral health, ER and anesthesia.

Second quarter Locum's gross margins improved by 240 basis points year-over-year and 80 basis points sequentially. This was due primarily to improved bill rates and bill pay spreads, resulting from the margin enhancement changes we put into place at the end of last year.

Days sold in the second quarter were sequentially flat and going into the third quarter, overall Locums revenue is expected to be flat sequentially and down year-over-year in the mid single-digits.

We believe our Locums business has significantly more opportunity for improvement in volumes, pricing and margin management. The team is making good, steady progress towards our target of a double-digit EBITDA margin for this segment.

Over the past two years, physicians have been swiftly moving over to the hospital employment model, and we may be seeing some signs of the dust settling, as more hospital facilities begin to have a higher level of ongoing replacement, recruitment and coverage needs for physicians who leave or are on vacation. To this point, the demand for hospitalists, ER physicians and other hospital-based specialties has been rising at a faster pace.

In Physician and Permanent Placement, second quarter revenue was $10 million, up 1% year-over-year and 6% sequentially. The growth in the second quarter was due mainly to higher placements from the increase in new searches. In the second quarter, new searches were up sequentially with the largest increase being in family practice. However, some of these contracts contain a larger number of searches which are activated over a longer period of time and have less near-term impact on placements. As a result, we are conservatively anticipating our third quarter Physician Perm revenue to be flat sequentially.

Over the next few years, demand for both traditional healthcare recruitment and staffing and innovative workforce solutions is expected to grow significantly. Every week, new articles are published about the severe shortages that are anticipated in the nursing, physician and allied professions. The shortages will be fueled by the aging clinical labor force, which will begin retiring in greater numbers. At the same time, demand for healthcare services will accelerate due to the broader access to health insurance and the growing medical needs of the aging population.

In anticipation of these looming severe shortages and the impacts of healthcare reform, healthcare executives more than ever are looking for new, innovative solutions to deal with their challenges of delivering excellent patient care at a lower cost. As a result, they are seeking highly capable partners who they can collaborate with and trust to deliver on their core staffing needs and develop new solutions.

AMN has a proven track record of delivering in this more demanding and differentiated market. Our strategy is clear and it seems to be right in line with what our clients need and want from a workforce partner. We will also continue to evolve and invest in opportunities that will enable AMN to be a valuable partner for our clients in the future as their operating models continue to shift.

The solid results we are reporting today, and the continued progress on our workforce solutions strategy, is a direct reflection of our outstanding team. Every team member at AMN has an impact on our ability to help our clients and clinicians achieve their goals. I would like to recognize and thank our team members for their continued solid execution and passion for delivering excellence. It is this level of talent and engagement, combined with our clear differentiated strategy, that has set us apart in the marketplace and ultimately enables us to deliver more shareholder value.

I will come back to you in our Q&A section, along with Ralph and Bob, to help answer your questions, but, for now, I will turn the call over to Brian.

Thank you, Susan. Good afternoon, everyone. Second quarter revenue was $235.8 million, up 6.9% from last year and 4.1% from last quarter.

Our gross margin for the quarter was 28.4%, up 110 basis points from last year and up 50 basis points from last quarter. The year-over-year and sequential increase was due to improvements in the bill to pay spread in both the Locum Tenens and Nurse and Allied segments significantly more than offsetting direct cost pressures from higher housing rent and travel costs.

SG&A in the quarter totaled $50.3 million or 21.3% of revenue compared to 21.8% in the same quarter last year and 20.8% in the prior quarter. The year-over-year improvement was due to the absence of integration-related expenses, and improved SG&A leverage, partly offset by higher processional liability cost and increased spending on candidate supply and workforce solutions initiatives. The sequential increase resulted from the prior quarter, including the $2 million refund received from the California Employment Development Department, more than offsetting the operating leverage improvement.

We expect total SG&A expenses in the third quarter to increase sequentially by about $1 million, driven in part by investments we made in our strategic workforce solutions and new recruitment and candidate supply initiatives.

Our Nurse and Allied segment revenue increased 13.3% from the prior year and sequentially by 3.1% to $158.6 million. Volume grew 8% year-over-year and 3% sequentially to 5,592 average healthcare professionals on assignment. Revenue per day was up 5% year-over-year and less than 1% sequentially on higher bill rates and a year-over-year increase in hours worked.

Nurse and Allied gross margin increased year-over-year by 90 basis points and sequentially by 30 basis points to 26.7%, with improved bill pay spreads exceeding the higher housing cost.

Second quarter Nurse and Allied operating income was $18.4 million or 11.6% of revenue. The operating margin was 130 basis points higher than the prior year and 50 basis points higher than the prior quarter from the improved gross margin and SG&A leverage.

Our Locum Tenens segment revenue of $67.6 million was 4.9% below prior year but up 6.4% from the prior quarter, with a sequential increase reflecting a 1.7% increase in days filled and a 4.7% increase in revenue per day filled on higher average fill rates.

Gross margin of 27.9% was up by 240 basis points from the prior year and sequentially by 80 basis points, due primarily to improved bill pay spreads.

The Locum Tenens segment reported operating income of $6.1 million or 9% of revenue, 130 basis points higher than prior year and 200 basis points better than prior quarter.

Within our Physician Permanent Placement segment, revenue increased year-over-year by 1.1% and sequentially by 6.2%. Excluding the prior year adoption of a new revenue recognition accounting standard, revenue was up year-over-year by 10% on growth and new searches and placements. Physician Permanent Placement operating income for the second quarter was $1.9 million or 19.7% of revenue.

Interest expense in the quarter included the write-off of $8.6 million of non-cash deferred financing and original issue discount, and a $1.2 million prepayment penalty associated with extinguishing the previous credit facilities. Excluding these debt refinancing costs, interest expense in the quarter was $3.8 million which compares to $5.5 million last quarter and $5.6 million last year. For the third quarter, we expect interest expense to be approximately $3.9 million.

Our tax rate in the quarter was 83%, which was significantly impacted by the true-up of the year-to-date tax rate against a small pretax loss. Excluding the impact of the debt refinancing, our second quarter and full year projected tax rate is approximately 45% which is lower than our previous estimate of about 50%. Our total cash taxes paid this year are expected to be $1 million to $2 million, resulting in a cash tax rate of less than 10% due in large part to continued utilization of tax benefits from the Medfinders acquisition.

On a GAAP basis, diluted earnings per share from continuing operations was $0.00 for the second quarter. Excluding the impact of the debt refinancing cost in the current quarter, and the Medfinders integration expenses in the prior year, our diluted earnings per share was $0.11 this quarter, which compares to $0.07 in the prior quarter and $0.03 in the prior year.

Operating cash flow for the quarter was $21 million and capital expenditures for the second quarter were $1.2 million. Days sales outstanding, excluding the retained home healthcare accounts receivable, were 53 days compared to 56 days in the last quarter and 54 days in the same quarter last year.

As of June 30, our cash and equivalents totaled $15.5 million and our total debt outstanding, net of discount, was $194 million.

Our debt to adjusted EBITDA leverage ratio, as calculated per our credit agreement, was just over 3 times. The Company made $4 million in voluntary debt prepayments during the second quarter and has made an additional $20 million in voluntary debt prepayments thus far in the third quarter. This brings our undiscounted debt balance as of today to $176 million. Based on this lower debt balance, we expect our leverage ratio to be under 2.75 times at the end of the third quarter.

Now, let's turn to our guidance for the third quarter. Consolidated revenue is expected to be between $236 million and $240 million representing year-over-year revenue growth of 3% to 5%. This guidance is based on anticipated sequential growth of 1% to 2% in the Nurse and Allied segment, with revenue essentially flat sequentially in our Physician business segment.

Gross margins are expected to be approximately 28% to 28.5%.

SG&A expenses as a percentage of revenue are expected to remain consistent with the prior quarter. This includes approximately $1 million in costs related to the strategic initiatives to grow our future candidate supply and enhance our Workforce Solutions.

Adjusted EBITDA margin is expected to be approximately 7.5%.

And with that, we'd like to open up the call for questions.

(Operator Instructions) Our first question from the line of AJ Rice with UBS. Your line is open.

Hi, everybody, just a couple of questions maybe if I could ask -- you referenced in the release, and then in your comments a couple of times, the favorable bill pay spread, the higher bill pay spread, both in the Locums and the Nurse and Allied. It sounds like some of that you're attributing to the initiatives that you guys yourselves have taken. I wondered if you thought any of it might be market-related, a better time in the market, but just maybe spend a little -- a few minutes just expanding on what you're seeing exactly.

Sure, thanks for the question, AJ. I think you may have heard us mention in the last couple of calls that we believe we had opportunity to improve both our pricing, as well as our gross margins based on market information that we've seen through some of the Locums organization. So we think that we have more room than what you've even seen. I would say that our increases are more our coming up to the market level, as opposed to maybe the market itself increasing.

With that said, I do believe that you'll continue to see pricing opportunities, particularly within the fast-growing specialties, such as hospitalist and ER, those areas that are expected to be driven even more by healthcare reform as we see more and more demand in those areas and more severe shortages. And I'll let Ralph maybe comment on some of the details of the specific things that they've been doing to help drive those improvements.

Sure, AJ. This is Ralph. On the Locums side first, about two-thirds of that increase is from our own internal initiatives to get pricing moving back up to market levels. The team has done a great job, I think, of taking a look at what's happening in the marketplace and working with our customers to get those prices back at the right levels. You have a little bit of an impact of mix there as well, but not a lot.

On the Nurse and Allied side, we've been talking about our price increase initiative there now for, I think, four quarters and the team there has executed very well as well -- a big shift on our Travel Nurse business and in our local business towards higher prices. Allied has had some success there as well, but they have benefited from a mixed shift, but they've moved more towards physical therapists and a little less in the PTAs or the physical therapy assistants. And so that's been beneficial to us, but from a market perspective, having the demand up slightly higher than it was in Q1, I would say that did help our internal initiatives take effect.

Okay. And if I might ask you about the $1 million of expenses running through SG&A for the strategic initiatives around future candidate supply and new Workforce solutions, is -- and maybe I should remember this, but has that been a recurring expense that you've been incurring or is that -- do you think that'll stay in the second half or is that going away? And maybe expand a little bit about what you're exactly doing there.

Sure, AJ. Those initiatives are relatively new. We had a little bit of activity in the second quarter, but they're really ramping up more in the third and the fourth quarter, so I'd expect the third quarter to be again that incremental million and the fourth quarter to be even a little bit more than that, and having that taper off as we go into 2013. Now, we do have revenue expected to be associated with those investments.

I would put them into three categories. The first and the most impactful, is around digital transformation. Our work to really improve the experience that our candidates have with us on the internet, through mobile media and to ensure that our jobs are anywhere and everywhere they want to be looking for employment opportunities. And so we think it'll be a great opportunity to help increase supply somewhat short term but even more so, quite honestly, it's a longer term investment to make sure that we have the supply available as we expect demand for all clinicians, quite honestly, to be ramping up pretty strongly over the next couple of years.

The other two initiatives are around Workforce Solutions. I'll have Bob speak to that. And then the third is around ramping up and accelerating growth in areas where we're already seeing growth, so there are really more exiting staffing and recruitment businesses where we see some momentum and expect those trends to continue. And so we are building up our sales force and our marketing today in anticipation of driving more revenues in 2013. So Bob, I'll have you chat about the Workforce Solutions piece.

Yes. On the new Workforce Solutions -- this is Bob -- new Workforce Solutions for our clients, we're looking to enhance some of the service offerings we already have, but what's exciting for example, we just announced a new service called Locums Billing. It's revolutionary in the marketplace. It's the first time in the industry that we've ever been able to help our clients actually bill for their Locums services that they provide onsite for hospitals.

They have challenges in doing that. We think we've finally cracked the code and now have an ability to help our clients in a way that no one else in the industry does. It's exciting. It's not huge on its own and the revenue impact is relatively small. The benefit though to our clients and our ability to deliver our Locums is going to be a great example of these kinds of investments that Susan is talking about.

We also are, as Susan pointed out, enhancing and accelerating some of our existing businesses, both on the MSP side and the RPO side, and we've chosen to add some additional sales resources and infrastructure resources to help us be more effective even in penetrating more wins in the marketplace. We think we've got some momentum and we feel like if we can capitalize on that momentum in the short term, with some of these investments, it will really pay off for us over the coming year.

Okay. Thanks a lot.

Thanks, AJ.

And our next question from the line of Gary Taylor with Citigroup Investment Research. Please go ahead.

Hi, good evening.

Hi.

Just a couple of questions and I missed just a couple minutes right in the middle of the call, so refer me to the transcript if I'm asking you to repeat anything. The first question I had was the gross margin was obviously better than your guidance and as we look back, every other quarter, every third quarter or so, that gross margin over the last couple of years has come in better than expected. So I guess kudos for giving conservative guidance, but my question is what's kind of the factor driving that upside to gross margin versus your expectations? Is there a consistent factor that generally has come in better over the last couple of years or are there different reasons for it?

I think it's been different reasons that it either happened a couple of quarters. You go back to the first quarter of last year, we had a Workers' Comp actuarial adjustment, so those are kind of -- we don't really know those until they occur, but if you look at the results we had in the second quarter -- this is Brian, by the way -- it really had more to do with really good execution by the team.

I think in Locum Tenens particularly, we were probably being a little bit conservative just making sure that the initiatives we put in place really were going to translate into results. And it did come in even better than we had expected, so the team's done a great job of really executing on that initiative overall. We talked about our ability to manage our direct costs and have those bill rate initiatives in the Nurse and Allied come to fruition is really a driver. There were no unique items in the quarter that drove that margin.

It sounds like the bill rates are firm and improving. On the pay side, what's the trend there? Are you seeing -- I mean, you're obviously seeing improving spreads. Are you seeing higher pay levels or is that holding steady?

This is Ralph again. I'll handle that one. We have seen upward pressure on Physician and Travel Nurse compensation, but we've been able to manage it within the range that we've been able to get from our customers in terms of price increases. That's why -- and a little bit better on a spread basis than our overall margin, so that's added a few pennies here and there.

We are seeing quite a big increase in our applicant supply. I think we're up 34% year-over-year on applicant supply, so you're getting people who are more interested in returning to travel and that helps. The more candidates we have, the better we're able to manage the healthcare practitioner pay.

And what do you think is the major factor on that supply being up? I guess maybe historically, we would have thought it would take a little stronger macro job environment to see the travel supply picking up. Do you think there's a different dynamic this cycle?

Susan might want to comment on the prior cycles. On this one, I think a couple of things. I think we've done quite a bit of fine-tuning our process over the last couple of years and so our marketing is just far more targeted than it used to be and it's converting at higher rates, almost double what it was in kind of the peak of the market in 2008.

We also have been able to use technology better than we ever had in the past and when Susan talks about the digital transformation, I think there's even greater opportunities to do so in that area, like the mobile devices, which will increase our conversion and our supply trends as well.

And then just kind of disproportionately investing in our recruitment resources -- so the demand market began coming back and we invested a little early in adding additional recruiters in all of the businesses and that's helped as well, so just pure out recruiter execution and recruiter productivity. So I don't know about the prior cycles and it's my first comeback out of a recession, so --

Probably the only thing to add -- I think Ralph hit on all the key points. The difference between this cycle and the prior two that we've seen is the duration of the contraction and the suppression in demand and that probably created a longer suppression in the supply. And so you have some pent-up supply that has been wanting to come back, or come into the travel industry.

And so as a percentage, yes, we are seeing more applicants come in, but remember, it's off of a smaller base, so we're still not back to the weekly new candidate flow that we were at in our peak level. So while we're very pleased to see it improving and at the pace that we're seeing, and we're doing all that we can to accelerate that and drive it, we still have a ways to go to get back to the historically high levels of new supply, but that's why we're investing in the digital transformation project, our recruiters and all those things that we think can help us accelerate at a faster pace.

The other thing that benefits us are the MSP relationships that we have and being able to convert more of that new supply that comes in the door because of the productivity and efficiency that we have in getting those people placed. And the word of mouth that comes from that, I think helps feed on itself as well.

That's interesting and helpful. My last question -- can you just touch on housing costs a little bit? I know periodically, particularly in certain markets, Florida, etc., that's kind of crept up and created some pressure on margins. Can you kind of just give us your state of the rental market, I guess, right now, where your thoughts are?

Yes. I think as most people know, and what you read and we experience the same, rental costs are going up across the country, and it's certainly worse in certain markets versus others, but unfortunately, we're in the more attractive larger MSAs where the rental costs are the most challenging. So we've felt the same trends. Some of the statistics are nationwide rent costs are expected to continue to go up 5% per year for the next few years and I'd say that's in line with what we're seeing. We've generally seen kind of a 3% to 5%. So our team is doing a really good job staying within, or maybe slightly under, the national averages, but we have to work hard to make sure that we don't let that get out of hand.

But that's where the pricing increases also become important. We talk about bill rates being important for driving compensation, but we also need them to cover rising housing costs. In addition to the lease costs themselves, you also have the need to manage vacancies. Vacancies are at an all-time low for the nation's apartment property managers and so we need to make sure that we keep our vacancies low as well so that we don't have idle space sitting there that we're paying for.

There again, our team has done a really good job of reducing our vacancy days, rooms that are sitting there without somebody in them that we're billing for, and so I think we've got it well managed today, but it's something that we're going to have to be vigilant about for the next couple of years. It's not going away anytime soon.

Okay. Thank you.

Thanks, Gary.

And we have a question from the line of Paul [Condra] with BMO Capital Markets. Please go ahead.

Great, thanks. I just want to get caught up on your interest expense expectations. I think you said $3.9 million in the third quarter. Is that kind of what you expect or can you just give us the annual run rate you're expecting?

Yes, for this year, it's going to be $3.9 million. I think I said -- I mentioned the second quarter,excluding the debt refinancing cost, is $3.8 million.

Okay.

And because we're making those voluntary payments, it accelerates the non-cash amortization of referred financing costs, so our cash interest is going down obviously, as we pay down the debt, but the larger the payments we make, as you take a bigger interest hit, non-cash interest in that quarter. So $3.9 million is our estimate for the third quarter and then about $3.5 million for the fourth quarter.

Okay. Is it fair then in that $14 million, $15 million range for 2013 or --

Yes. That's probably in the right range.

Okay. And then I know you mentioned for the Nurse and Allied of 1% to 2%. Did you say sequentially, is that right, in the third quarter?

Yes.

Yes.

All right, great. And then also, I just want to clarify on SGA, you were talking about maybe going up more than $1 million in the fourth quarter. Is that relative to the third quarter or the second quarter?

That's more the spending on these initiatives.

Okay, got it.

It'll be a little bit more in the fourth quarter than in the third quarter.

But would you expect SGA to come down in the fourth quarter compared to the third?

Not necessarily. It'll be relatively consistent. I would think, if anything, with that extra spending, you'd have some offset if you just measure cost, but I wouldn't expect it necessarily to go down in the fourth quarter.

Okay. And then just lastly, you purchased some shares in the third quarter -- or in the second quarter -- sorry. What's your share count expectation for the third quarter?

We have not purchased any shares.

Oh, okay.

But our share count in the -- you said was 46 -- the list share count was 46.4 in the second quarter. It'll be about 46.6 in the third, 46.7 in the fourth quarter. So the full year average will be about 46.5. And that's the fully diluted share count including the common and the preferred shares.

Okay, great. Thank you. That's all I had.

Okay.

Thanks, Paul.

And we have a question from the line of Tobey Sommer with SunTrust Robinson Humphrey. Please go ahead.

Hi. I wanted to talk a little bit about radiology. It's been a little bit of a drag for a while. Just what is -- can you remind us the size of the business at this point and do you see any opportunities for that turning? And then secondly, can I just get thoughts for stock comp for the year?

Sure. This is Ralph. Is this Tobey?

This is actually Frank in for Tobey.

I thought it was Frank. I wanted to make sure. Hi, Frank.

Hey.

It's roughly about 7% of our total revenue -- our Locums revenue now. So it's down considerably. I think it was about 10% at the same point last quarter, so --

It was 22% at the peak.

Yes. So you can see that it's come down considerably and it's less impactful to us now because it's becoming a smaller and smaller percentage. I don't think that we have any signs that we would see some improvement in this market. I mean, I think I called this out on our last call as -- what was our biggest strength for so many years, right, has become our greatest weakness over the last few quarters, as that business -- because of reimbursement rate changes just changing dramatically, as well as new technologies in the industry and other things that just made that -- the work more efficient and so they needed fewer radiologists.

What we have done -- the team has done, I think, a really good job, have begun shifting those resources into more opportune specialties, like emergency room medicine, hospitalists, advanced practice physicians and behavioral health. So I think that those things will start to result in some growth.

It's going to be a little lumpy because as you move people out of one specialty and into another, their production isn't as high and so that's why you see us kind of forecasting flat growth on a quarter-over-quarter basis. So give me a little bit of time to turn that and get people aligned on the right specialties, but after we rebalance, we expect to see industry-level growth rates in Locums very soon. Did that cover everything you wanted on radiology?

Yes. The other was the stock comp for the year.

Yes. It'll be consistent with the second quarter about $1.6 million in the third and the fourth quarter.

All right, great. Thank you very much.

Okay.

And we have a question from the line of Mark Marcon with Robert W. Baird & Company. Please go ahead.

Good afternoon. I was wondering if you could talk a little bit more about the trends that you're seeing in terms of the nurse applicants and specifically, I was just wondering what the percentage increase that you're seeing, and how much of it would you attribute to your efforts? I know it's hard to separate, but your efforts relative to just the number of people who are considering traveling again, generally speaking.

Mark, this is Ralph. I guess I'll continue on my roll here. On just the Travel Nursing side, the applicant increase is about 24%, so I talked about 34% was the Nurse and Allied combined.

Right.

24% just on the Nurse side. I do believe that a lot of the supply that's coming into the market is supply that has gotten more comfortable with the demand levels. I think we mentioned on the last call that close to half of our people going out on assignments were people who hadn't been on an assignment in more than a year, so we're seeing that trend continue, and that certainly shows strength in the business.

Our efforts, our increased marketing efforts, are making the process easier for people to apply and all of that probably contributing kind of (inaudible) allocated maybe two-thirds of it, us, and one-third of it feeling better about the marketplace.

One of the things that we haven't talked about in a while is kind of the number of active clients that we have and we did some research on this just prior to the call. And I think it's probably worth sharing. At the peak of the industry in 2007 and 2008, we had about, on any given day, about 2,500 active clients and we just got back up over that level again.

Now, the number of orders we have at each of those clients is still down about half of what it was at the peak of the industry, but the number of active clients has increased. And again, these are probably things that our supply hears. They hear about orders, they see travelers coming back, and that makes them more comfortable leaving their permanent positions and moving into travel positions.

And this is where I think we also should have an advantage in our ability to grow our supplier faster because we do have almost -- probably twice as many travelers working as any other competitor out in the field. And they're telling their friends and family about the opportunities and where they're working and that's like having that many more recruiters out there generating supply for you. Word of mouth referrals grew significantly for us in the first half of this year and that's important because word of mouth referrals also have the highest conversion rate to actually becoming travelers.

And so in addition to our increased marketing spend, which we think is absolutely essential to be reaching out to those people who don't know existing travelers, we have the benefit of having this strong workforce out there that creates its own self-driving recruitment efforts.

Great. And was there any nurse disruption revenue in the quarter?

No, there wasn't, nothing significant. There were some EMR implementation projects, as there are every quarter, and we like that business and we're known as being either the leader, or one of the absolute top leaders, in providing that service, but it is a somewhat lumpy business in that you may have several implementations in one particular quarter and just a few in the next. And I would say second quarter was a nice quarter for us for EMR implementations. We're expecting more in the third and fourth quarter, but they may not be quite at that same level.

How much were the EMR implementation revenues?

We don't really call out the specific number or revenue because it is small, less than $5 million in a quarter, so we wouldn't want to get into, I think, reporting on that --

Yes.

-- [every] quarter.

Great. And then with regards to MSP wins, can you talk a little bit more about the pipeline in terms of hospitals that are putting in place --

Actually, I think in MSPs, I hate to say we're hitting on all cylinders, but I have to feel pretty strong about what's going on there. We've had -- I think the advantage in many cases of actually winning many MSPs in the same market -- we're starting to see a pattern where within a particular concentration of a market, we might get one and then two and then three and then four in the same market, and we're actually seeing that that works for us because it actually attracts more candidates to the market.

We have clients who oftentimes can't use all our nurses all the time, so we can keep those especially local nurses busy with other MSPs when they're not busy at another MSP. So having that exclusive relationship where you're seeing all the orders all at the same time is really powerful in terms of being able to very target the recruiting efforts to those markets.

But now, our competitors have actually been trying to sell against that a little bit by going into that last hospital that happens to be in the market that we don't have as an MSP and talking about that as a disadvantage. But we actually feel like that we can overcome that and Ralph, I think you've got an example of where -- actually did some study on that.

Yes. In one market in southern California we have, I think close to seven MSP clients, and there was kind of a hypothesis that if you had too many, that your fill rates might decline slightly because you wouldn't have enough nurses to cover all of, I guess, the demand for the marketplace. So we did a correlation analysis to take a look at what happened to fill rates when we added MSPs in a market. Lo and behold, we found out that actually our internal fill rates went up the more MSP business we added to the overall portfolio. And just in case you thought that would hurt our traditional business, it didn't.

Right.

The traditional business, fill rates actually jumped up at the same time as well, so it was great evidence that the market is ready for one single large provider and doesn't have to be fragmented in order to operate effectively.

Just another -- this is Bob again. Just I think the other driver on this MSP is that the whole quality aspect -- I don't know if you saw the article in "Modern Healthcare" talking about hospital-borne infections and the impact it's going to have on quality if you don't have enough nurses covering the patients that you have. It's a great article for our industry, talking about why it's actually less expensive for you to bring in more nurses than it's going to cost you for the infections that are created by not having enough -- a pretty powerful story.

And as clients move more and more into this sophisticated model of getting paid for performance and quality, they're beginning to really recognize the value of having a partner that can make sure that when they have needs, that the orders are filled. And that's the uniqueness, I think, of the MSP model because we don't fill them all ourselves. We fill a high percentage of them, but we rely on over 600 different providers as our subcontractors, the largest by three and four times than others. But we really feel that that has enabled us to be much more effective in our MSP program. So the short answer is our pipeline is very strong.

Great. And then can you just -- you're very close to all the dynamics that are occurring with the hospitals. What are you hearing from them just in terms of how they're thinking about cost pressures or reimbursement rates and how they're going to deal with it?

Mark, what we're hearing is that they're starting to recognize that healthcare reform is going to have an impact on their workforce and they're going to have to think differently about how they manage that workforce. And we've seen that translate into a desire to have stronger partnerships and therefore, contracts such as an MSP relationship or RPOs, relationships that they may not have considered just five years ago.

They're wanting to be proactive today to try to get their arms around their spends, yes, for today, but even more so, they're thinking three to four years out, and how do they make sure that they can have their arms around their costs, reduce their overall spending and yet still maintain the quality and quantity of clinicians that they need, going back to what Bob said.

They recognize it's going to get harder to recruit clinicians across the board with the aging clinical population coupled with an aging population and healthcare reform, the shortages across all clinical specialties are expected to be really severe. I'm sure you saw the front page article in the "New York Times" talking about the physician shortage and how severe that's expected to be due to healthcare reform.

Sure.

So this is really resonating with clients today, and so I think that's driving more of the appetite for partnerships and arrangements such as MSPs. They're trying to think more into the future and less about just how do we manage things today.

Great. I appreciate the color.

Great. Thanks so much for the question.

Thanks. And we'll turn it back to our speakers for any closing remarks.

Okay, great. Well, thank you, everybody, for joining us today. We do appreciate your continued support of AMN and we look forward to updating you on our progress next quarter.

Thank you. Ladies and gentlemen, this will conclude our conference for today. We thank you for your participation and for using AT&T Executive Teleconference and you may now disconnect.