Cross Country Healthcare Inc (CCRN) 2003 Q3 法說會逐字稿

Welcome to the Cross Country Healthcare earnings conference call for the third quarter of 2003. (OPERATOR INSTRUCTIONS). This conference is being recorded. At this time, I would like to introduce your host for today's call, Mr. Howard Goldman.

Good morning. This is Howard Goldman, director of Investor and Corporate Relations for Cross Country Healthcare. Thank you for listening into this conference call, which is also being Webcast, and for your interest in the Company.

With me today are Joe Boshart, President and Chief Executive Officer, and Emil Hensel, Chief Financial Officer. On this call, we will review our third quarter 2003 results, for which we distributed our earnings press release after the close of business yesterday. If you do not have a copy, it is available on our website at www.CrossCountry.com. Replay information for this call is also provided in the press release.

Before we begin, I would first like to remind everyone that this discussion contains forward-looking statements. Statements that are predictive in nature that depend upon or future events or conditions, or that include words such as expect, anticipate, intend, plan, believes, estimates and similar expressions, are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results and performance to be materially different from any future results or performance expressed or implied by these forward-looking statements. These factors were set forth under the forward-looking statements section of our press release for the third quarter of 2003, as well as under the caption Risk Factors in our Form 10-K for the year ended December 31, 2002. Although we believe that these statements are based upon reasonable assumptions, we cannot guarantee future results. Given these uncertainties, the forward-looking statements discussed on this teleconference might not occur. Cross Country Healthcare does not have a policy of updating or revising forward-looking statements, and thus, it should not be assumed that our silence over time means that actual events are occurring as expressed or implied in such forward-looking statements.

Now I will turn the call over to Joe.

Thank you to everyone listening, and for your continued interest in Cross Country Healthcare. As reported in our press release issued last evening, our revenue for the third quarter of 2003 increased by 15 percent year-over-year to $184.4 million. Net income increased 16 percent to $6.8 million, or 21 cents per diluted share. We also continued to generate strong cash flows from operations during the third quarter of 14.9 million, a 6 percent increase over cash flows from operations in the year ago quarter. However, putting the quarter into perspective, the increase in revenue was solely due to our recent acquisition of the Med-Staff business.

It clearly continues to be an increasingly difficult environment for the services we provide to our acute-care hospital customers. We believe the causes of this unfavorable operating environment are threefold -- first, nurses continue to be willing to offer more hours of service directly to hospitals at the wages hospitals want to pay, because of weak national job markets have left their spouses unemployed, underemployed or simply worried about future; second, hospital inpatient admissions have been lower than expected for much of 2003, which affects our clients' utilization of our service; and third, our customers have had a very strong focus on recruiting and retaining staff nurses while reducing their reliance on outsourced nurse staffing labor. This focus has led them to make decisions that appear suboptimal. For example, the latest issue of Nursing 2003 magazine reports that hospitals have increased staff nurse wages nationally by an average of 14 percent. Other sources would put the increase around six to eight percent year over year. In any event, to put this increase into perspective, we estimated increased hospital nurse staffing annual budgets by 3 to $8 billion in order to achieve a reduction of 1 to $1.5 billion of outsourced nurse staffing labor.

It is also noteworthy that this September is the first time in my 10 years with the Company where we did not experience a sequential uptick in volume from August to September. This abnormal outcome leads us to believe that the fourth quarter of 2003 will also yield unusually soft volume, resulting in lower than expected revenue and earnings from what we projected last quarter. While these are the realities of our current operating environment, and we cannot say that we have found the bottom for our level of contract booking activity, we are encouraged by the continuing improvement and the number of open orders for positions which we received from our hospital clients.

Historically, the best predictor of future contract booking activity was the number of new nurse applicants and our internal recruitment capacity. In the current demand-constrained environment, however, the best predictor of contract booking activity has become the number of open orders. At present, while the number of open orders is up, bookings are not. We believe the disconnect is primarily related to a reduction in our renewal rate of nurses obtaining a subsequent contract at the same facility. This is a result of a reduction in the chronic nursing shortages that our customers experienced in recent years, which encouraged them to keep our nurses on contract for an extended period of time, and we believe the primary catalyst for changing this dynamic will be a sustained period of higher than expected census in the future.

On the other hand, we are also encouraged that for the first time in 18 months, we saw a sequential improvement during the third quarter in our conversion rate of applicants that we send to our clients into actual contract bookings. While still well below year ago levels, a bottoming of this important metrics would also inspire some confidence. Additionally, from an execution standpoint, we have been successful in obtaining exclusive vendor status at clients that are large users of nurse staffing services. Partly because of our success in obtaining preferred or exclusive status with our clients, we believe we have done a better job of maintaining our gross margin than many of our competitors have.

Looking at our newly acquired Med-Staff business, it has performed in aggregate within the range of estimates developed during our due diligence, though at the lower end of the range. While the travel staffing component of the Med-Staff business has been weaker than expected, the per diem and military staffing components have performed at or above our expectations. We are actively working with the Med-Staff management team to identify opportunities to leverage account relationships and to achieve operating synergies going forward. We remain highly confident in our future, but recognize our short-term trends are likely to have more downside than upside. However, with growing evidence of a strengthening economy, which we firmly believe will translate into improved job creation nationally, there is increasing light at the end of the tunnel for us. We just cannot predict the exact inflection point. In the meantime, we remain operationally focused on executing our strategy, and have every confidence that we will emerge from this downturn in demand as an even more formidable competitor than we entered it as. As in the past, our shareholders can continue to expect our candid assessment of trends in our market as we navigate this reduced demand environment.

Before handing the call over to Emil for a more detailed discussion of our financial results, I want to address the legal matters that were disclosed in our press release last evening. First, two of our subsidiaries doing business in California have been named in class-action lawsuits alleging violations of certain sections of that state's labor code, unfair competition and breach of contract, among other things. As we stated in our press release, this lawsuit is in the very early stages and we are not able to assign a monetary value to any exposure we may have as a result of this suit. It is also important to note that at this point, the suit against us has not been certified by the court as a class-action, and we intend to vigorously defend this matter. Further, we pointed out that the same law firm that filed this action against us also filed similar class-action lawsuits against other nurse staffing companies in Superior Court in Orange County. To our knowledge, there has been no resolution to any of these other cases against companies in our industry, which were initially filed as much as 13 months ago.

And secondly, our new Med-Staff subsidiary and the predecessor Med-Staff Company are subjects of a lawsuit filed by the National League for Nursing, a not-for-profit Company, in connection with certain NLN testing products, as well as certain tests developed by the predecessor Med-Staff Company. We are indemnified by the sellers for any losses associated with this lawsuit, and we will also vigorously defend this matter. While we feel it's important for our investors to be aware of the existence of these lawsuits, I need to stress that they are ongoing legal matters and that we cannot provide any additional details or comment beyond what limited information I have been able to discuss with you today. That means we will not be able to answer any of your questions today related to these lawsuits, and that going forward, any material change in the status of these ongoing legal matters will only be addressed via our public disclosure filings.

With that, I will hand the call over to Emil.

Thank you Joe, and good morning everyone. First, I will go over the results for the third quarter, and then review our revenue and earnings guidance that we provided in last night's press release.

As Joe indicated, Cross Country Healthcare reported third quarter revenue of $184.4 million, up 15 percent from the prior year quarter and 11 percent sequentially. The revenue growth was due entirely to the acquisition of Med-Staff. Excluding the contribution from Med-Staff, third quarter revenue declined by eight percent from the prior year and five percent sequentially, reflecting the weaker demand for our services that Joe referred to earlier. Our gross profit margin was 24.3 percent as compared to 25.4 percent in the prior year and 24.7 percent in the second quarter. The decline in margins is largely attributable to the higher mix of staffing businesses, which operate at lower gross profit margins than our other human capital management businesses. Gross profit margin in our staffing segment was flat year-over-year and up 30 basis points sequentially.

SG&A expenses in the third quarter were up 90 basis points as compared to the prior year quarter, and represented 15.8 percent of revenue. The primary driver of the increase in SG&A was the substantial expansion of our hospital-focused sales and marketing organizations. On a sequential basis, SG&A as a percent of revenues was down by 10 basis points. Income from operations was 12.7 million, down 16 percent from the prior year but up eight percent sequentially. Interest expense was 1.6 million, up 61 percent from the prior year quarter, primarily as a result of the re-levering of our balance sheet to finance the Med-Staff acquisition, partially offset by lower effective interest rates. Net income was 6.8 million, or 21 cents per diluted share, as compared to 5.9 million, or 17 cents per diluted share in the prior year quarter, which included a 2.9 million, or 9 cents per diluted share, after-tax loss related to discontinued operations.

Our balance sheet and cash flow generation remains strong. We ended the third quarter of 2003 with a debt to total capital ratio of 27 percent and a current ratio of 2.9 to 1. Our $75 million revolver remains undrawn. DSOs were 55 days in the third quarter versus 53 days a year ago. This 2 day increase in DSOs reflects in part our business in the northeast, where we tend to have more slower paying accounts. As receivables due from certain accounts have aged, we thought it appropriate to increase our reserves for bad debt, which resulted in a pre-tax charge of approximately $800,000 in the third quarter. At September 30, we had 18.1 million of cash, up 3.9 million from the beginning of the quarter. Cash flow from operations for the third quarter was 14.9 million, for which 800,000 was used for capital expenditures. We also repaid 6.3 million of senior debt, which included an optional prepayment of 4.7 million. During the third quarter, we repurchased approximately 282,000 shares, pursuant to our previously announced $25 million share repurchase plan. These purchases were at an average cost of $14.32 per share. We have approximately 13.1 million remaining for share repurchases under the current authorization.

Let me drill down next on our two reporting segments -- health care staffing, which comprises our travel nurse and per diem nurse staffing, allied health staffing and clinical trial staffing businesses, accounting for 93.5 percent of revenue in the third quarter; and the other human capital management services segment, which is comprised of our education and training, health care consulting and (indiscernible) businesses. Revenue for the health care staffing segment was $172.4 million, 17 percent higher than the prior quarter. The average number of FTEs was 6396, also up 17 percent from the prior year quarter. The segment's revenue and volume growth was entirely due to the acquisition of Med-Staff. Excluding the contribution from Med-Staff, volume would have been down nine percent year-over-year and six percent sequentially, reflecting the more cautious buying process by our hospital clients that we have noticed since the second quarter of last year. The segment's revenue excluding Med-Staff would have been down eight percent versus prior year and five percent sequentially. This organic decline in revenue was due to the aforementioned nine percent decline in volume and to a higher mix of lower revenue generating mobile contracts, which was partially offset by improved pricing.

The average bill rate for the third quarter in our core travel nurse staffing business was up three percent on a year over year basis and up 50 basis points sequentially. Mobile contracts, where the nurse is on the hospital's payroll, accounted for three percent of our volume as compared to one percent in the prior year quarter. Health care staffing contribution income as defined in our press release was $20.6 million in the third quarter, as compared to 20.5 million in the prior year quarter and 19.3 million in the second quarter. While gross profit margins were essentially flat as compared to prior year, the contribution margin for the segment was two percentage points lower than in the prior year quarter. The decline in contribution margin was due in large part to expansion of our hospital-focused sales and marketing team, along with investments aimed at improving applicant conversion rates.

Turning now to the other human capital management services segment, third quarter revenue was $12 million, down nine percent from the prior year and three percent sequentially. The year-over-year revenue decline is attributable primarily to weak demand for physician search and lower revenue from our physician consulting practice. Contribution income for the segment was $600,000 versus 1.5 million in the prior year quarter. The shortfall is primarily due to higher operating expenses in our consulting and educational seminars businesses.

Which brings me to our guidance for the fourth quarter of 2003. The following statements are based on current management expectations. These statements are forward-looking and actual results may differ materially. These statements do not include the potential impact of any future mergers, acquisitions or other business combinations, the repurchase of any of our common stock or the pending legal matters. As Joe indicated, demand for travel nurse remains soft. Our bookings in the third quarter were approximately 14 percent below prior year, excluding Med-Staff. Based on these booking trends, we expect the average field FTE count to be in the 5800 to 6000 range in the fourth quarter. We expect average staffing revenues per FTE per week to be down 2 percent from prior year, due to the combined effects of a 2 percent increase in bill rates in our core travel nursing business, and is expected to be offset by two mix related factors -- first, net debt having a lower average bill rate than our core nurse staffing business; and second, a two percentage point higher mobile mix versus last year. Gross profit margins in the fourth quarter are expected to remain consistent with the margins achieved in the third quarter. Based on these dynamics, we expect fourth quarter revenue to be in the 166 to 172 million range and EPS per diluted share to be in the 13 to 15 cents range. For the year as a whole, we expect revenues to be in the 677 million to 683 million range and EPS per diluted share from continuing operations to be in the 77 cents to 79 cents range, including a 2 cent charge per diluted share for the write-off of certain royalties in the second quarter. In addition, we expect our cash flow from operations to be in the range of $1.45 to $1.55 per diluted share.

This concludes our formal comments. Thank you for your attention. And at this time, we will open up the lines to answer any questions you may have.

(OPERATOR INSTRUCTIONS). Jim Janesky, Janney Montgomery Scott.

Joe, can you put a little bit of historical perspective on the current demand environment? Give us an idea of when you last experienced this type of a decline in demand, and then talk about the time frame that it lasted and any differences in areas such as the supply environment, the competitive environment, and the way that the customers are acting?

That's probably an important point. We last went through a period like this in the early 1990s, which in hindsight was a combination of two factors -- we believe the most important factor was the impact that managed care had on the behavior of our customers; and secondarily, if you recall there was a recession and a modestly jobless recovery in the early 1990s, both of which affected our business. The behavior -- that period lasted approximately from 1991 through 1994, what we would view as constraint demand. The behavior of the customers, however, is very different than the current period, which gives me confidence that the fact that it was a three year downturn in the past does not necessarily mean it's going to be a three year downturn currently. Because in that period, the customer really believed that not only was there not a nursing shortage, that there was a nursing surplus. Many hospitals were laying off nursing professionals and it actually -- it clearly contributed to what became a very robust supply-constrained market in the late 1990s. Today, if you call most of our hospital customers, very few if any would tell you that they believe there is a nursing surplus. Almost all will tell you that there is a nursing shortage, and that shortage is likely to get worse in the years to come. And as a result, their interactions with Cross Country Healthcare are very different than they were in the early 1990s, when it was more of an adversarial relationship. Today they are getting their needs met. Nurses are knocking on the door, offering hours of service, but they know they're going to need us in the future and they're looking for ways -- and they are looking to us to provide services to them that increase the value that we bring to the table, and also integrate our service more into their temporary nurse staffing acquisition process. While this is a very tough environment, and I hope we made that clear in our comments, there's also some big upsides to our long-term that will result from having gone through this process.

What about on the competitive front? A lot more providers today -- one of the trends you had mentioned there toward more preferred contracts. Were those types of services offering, so to speak, from staffing providers even around at that time?

Not to the degree they are today and hospitals were not looking for them. Again, they felt in the early '90s that the logical outcome was that they wouldn't use any of our service. And today, that is not what they view as a logical outcome. So they are looking for a more coherent and well thought out process than they have gone through for the last three or four years. An important distinction is in the early 1990s, you had a lot of small competitors. I should say, certainly smaller than they are today. No company approached $100 million in revenue. There were at least five that we viewed as material competitors whose pricing behavior could have influenced our decision at specific accounts or even nationally. And today, we have in the core travel nurse thing business, really only one competitor that matters. And our experience has been that that competitor has managed their business very rationally. They have not sought to try to gain market share at the expense of margins in order to achieve better leverage on overhead. I think both companies, both of the 2 premiere companies in the space realize that this is a period we're going through, it's a difficult period, but that it serves no one to become irrational on pricing. We did see one competitor, one of the smaller second-tier companies, become much more aggressive in the third quarter on the compensation package to nurse. And it did allow them to grow sequentially, but when you looked at their potential sequential gross profit performance, I think it hammered home the lack of merit in trying to buy market share in this environment. I think we just need to get through it, continue to act rationally and continue to look for opportunities to partner with our hospital clients. And to -- again, to come out the other side of this tunnel as a much stronger vendor than we entered it.

If I can just add (inaudible) the perspective of 10 years ago when we went through this period, hospitals were looking to eliminate vendors. In this environment, they are really trying to rationalize their vendors and to have fewer vendors that provide traditional value-added services. And this kind of behavior actually favors the larger competitors.

As a follow-up more on near-term demand, other than the renewal rates, why in your opinion would hospitals -- why is there the big disconnect between an increase in orders but a decline in bookings? Why are these orders not turning into bookings, in your opinion?

I think a lot of it just relates to the psychology of our business. Again, our customer who takes on our service is generally caught between a medical director and the CFO. And if in the early part of this year -- and I think everyone at this point understands that census was lower than most hospital operators expected it to be throughout the country in the early part of 2003 -- and by taking on contract nurses which clearly have at least a three month commitment for getting that nurse enough hours, our customer ended up having to sometimes send home their own nurses because they were obligated to keep our nurses working. It just created a very bad internal dynamic, and I just think the psychology today is that our customer is more willing to be caught short than they are willing to be caught overstaffed. And you know, wouldn't that always be true? It isn't true. After a period of having gotten caught short for an extended period of time, they start getting beat up by other constituencies in the hospital. And that has been our experience over a 10 year period, that you have periods of surging growth followed by periods of consolidation or a lower trajectory of growth. And I believe we need a higher -- a period of higher-than-expected census to pull out of this negative psychology, which is not allowing bookings to mirror physicians as, frankly, we would expect it to do. Particularly in view of the fact that our conversion rates, while still not where we want it to be by any stretch of the imagination, appear to have hit a bottom in the second quarter and improved slightly in the third quarter.

H. A. Rice (ph), Merrill Lynch.

It's actually Chris Briggs (ph) for H. A. The thing that you had touched on a little bit -- but I guess you're saying that your spread between what you are paying the nurse and what you're getting from the client has held relatively stable, and that you think your biggest competitor is being rational on the pricing. At what point do you think, or maybe there is no point, that pricing could start to fall, at least in the core staffing business, if volumes don't pick up?

This is actually a really important point. First of all, the spread between bill and pay for us has actually increased in the last year. Let me start out by saying that. Obviously, there's other aspects of our compensation package that have grown at a higher rate, such as professional liability insurance. But the bill/pay spread is more favorable today than it was a year ago. And as it relates to pricing and how that impacts our business, particularly in a situation where we're the preferred or exclusive vendor, you have an opportunity -- in certain markets that are desirable for nurses to come to -- to lower price, which is a benefit to the client, because you're then able to offer a lower compensation package. Lowering price does not necessarily translate into lower margins in this business, because we focus on a spread of gross profit. And when we lower price we want to maintain that spread, something has to give in the compensation package and it's typically wages. In this environment, where you don't have a free-for-all of nurses shopping other companies against your offering to them, you find yourself with the ability to bring competition down if pricing comes down. But as Emil just described, in the short term, that's not been our expectation. Pricing actually was up sequentially. It, clearly, is getting to the point where it's going to be flat year-over-year. But we don't believe that that's going to result, in and of itself, in a reduction in margin in the absence of our primary competitor engaging in irrational behavior, which has never been their behavior in the past. I am comfortable we can navigate this as it relates to margin. The great disappointment to us today is the level of volume of nurses in the field. Margins are not keeping me up at night, the volume of the business is a concern for me.

One follow-up. I guess you guys have been in this perfect storm of all these negative things in the demand environment. When you look at your core hospital clients, if we were to -- even if we saw stabilization, which we are hoping for, at least on the volume side and (indiscernible) on the acute-care side, in the acute-care business -- you would think that you need to at least start to see a sequential -- or you need to see an uptick in census before you are really going to start to come back in terms of volumes?

I think that's a fair statement. Again, even in a soft census environment we are seeing higher levels of ordering, which I have to believe -- and if you look at our business, it's the strongest correlation in a demand-constrained environment to higher levels of contract activity. But clearly, there's been a bit of a disconnect, and partly it's the fact the customer may have an order out there, but they are just not as committed to filling it as we would like them to be. So I believe that we need to see some upside surprises in census to really change the behavior that gives the reason for the medical director to come into our customer's office and start pounding the table about getting more nurses for that facility. I would like to tell you differently, but I believe that's the case.

Mark Allen, SunTrust Robinson-Humphrey.

You had mentioned that Med-Staff was generally performing well, but that I guess per diem had been a little more on track than travel. My question is, have you had enough time with it under your belt to try and cross-sell the per diem services that they offer into some of your existing long-term travel clients?

Yes, we have, and we have had some success with that. I also want to make clear when we say it's performing in line with our expectations, which doesn't mean it's performing well, we expected the business to decline and it has declined year-over-year. And it's not a surprise. We could see that, as you looked at the metrics of the business, that it was going to soften, converse on the travel side. Conversely on the per diem side, it's up year-over-year and flat sequentially, which is, I think, a pleasing performance in this kind of environment.

The next question would be relative to your unit which provides foreign-trained nurses to U.S. hospitals. Maybe give us a little bit of an update on that, just as to why customers are using that service? If there is not as much of a supply constrain, would that be an example of how you're partnering with them on their sourcing strategies, long-term?

It would be, but also, if you recognize that we have far fewer nurses working through that division of Cross Country than we anticipated at the current time, but we're getting traction. Each quarter, we have more on assignment. Clearly, the duration of the initial assignment may be somewhat shorter than in our business planning when we started up the division, which is reflective of the current environment. But we are bringing them in. Recognize, these are highly qualified nurses with a lot of experience in English-speaking countries. So they are good nurses that are filling vacancies. We have vacancies. Sometimes they're in areas of the country that just aren't that desirable for what historically is our core travel nursing constituency. So it does give us an opportunity to fill some of the harder to fill positions. You can't look at it as they are undesirable. Clearly, all things equal, 2 nurses with the same experience -- one trained domestically, one trained in a foreign country -- the domestically trained nurse will be more desirable. But it is rare in our business that all things are equal.

Final question, Joe, would be the geographic differences. One competitor commented recently they were seeing, I guess, sort of stronger demand Northeast and kind of weaker in the Southeast. I was wondering if you were seeing differences by geography, and maybe more specifically, why would the Northeast be strong? And what are the issues in Florida, for example?

I think it all comes down to a census and the availability to find nurses in those markets willing to work at what you want to pay them. I think we have been saying for a number of quarters that the Northeast has been an area of relative strength. I would say the area has narrowed somewhat. Massachusetts is not as strong as it was. New York remains strong. Pennsylvania remains strong. Ohio is a relatively strong state. We've seen some strength in the Northwest, as well. The Arizona market, I think, has a pretty good winter season -- better, relatively, than we've seen in Florida. Florida has been a pretty big disappointment for us this year. It is highly unusual for us to not have a seasonal uptick in our business because we are so strong in Florida. I think we are dominating Florida to a greater extent than we ever have, but there's just not a lot of orders. There certainly are far fewer orders than we expected coming into this season.

Joe, (indiscernible) do you think that's a function of admissions activity in Florida?

I think it's a combination of admissions activity and the availability of nurses that, again, are going directly to the hospital and offering hours of service.

Charles lynch, CIBC World Markets.

Looking at the -- looking more internally as you go through the winter and into next year, can you talk a little bit about your G&A expenses and what you might be able to do in terms of cost savings there? For example, if I look at the absolute dollar amount that was in your results for the second and third quarter, is there room to bring that down over the next several quarters, particularly following the Med-Staff acquisition?

Let me try to answer that. First of all, when you look at our SG&A numbers, you have to recognize that there is some negative leverage in our business, particularly in our (indiscernible) staffing businesses. But we have been scaling sown our SG&A expenses in certain areas; for example, our FTE counts are down 8 percent from the beginning of the year. But at the same time, we are also investing in other areas, such as our sales and marketing organization and our hospital quality assurance functions. So at the end of the day, our personnel costs are down year-over-year, but not down the same 8 percent as the FTE count is. And in relation to the revenues, it's down at a lower rate. Revenues are down 8 percent whereas personnel costs are down 3 percent. There are other factors that have contributed to the increased SG&A. We had some incremental marketing expenses in our seminars business. And we also have just higher insurance costs, which it's a hard insurance market that we've been living with for the last couple of years. Having said that, we do have opportunities for reducing SG&A costs. We have been careful not to cut expenses to the bone and impair the Company's performance once the market turns. But if we continue to see a soft demand environment, there are additional areas where we can affect some SG&A expense reductions.

Just to say a little bit and add to Emil's comments. We are -- as you said, our net FTE count is down about 8 percent and we were looking at a 6 percent reduction in -- a year-over-year reduction in bookings organically. In the second quarter that seemed like the right number. Again, we've added in certain areas and we've clearly cut back in areas that are more linear to the headcount in the field that we employ. We did not anticipate the kind of bookings trends that we saw in the third quarter, which were far more unfavorable than we anticipated it. It just was a very disappointing market and outcome for us. So clearly, if we are in an environment of kind of midteens down year-over-year, that expenses have to be more aggressively reduced to bring them into line with that performance.

One more question, just looking very near-term. As you look at your expectations on overall staffing volumes in the fourth quarter, can you talk a little bit about the inter-quarter trend that you're seeing maybe coming out of September, and how you would view that as -- what kind of level you would foresee going into 2004 versus fourth quarter, on average?

I'm (indiscernible) comment on the fourth quarter, but we're not really prepared at this point to give you specific guidance for the first quarter. Generally as we'd come out of the summer, we always have seen an uptick in our volume between August and September. As Joe indicated, for the first time in the last decade, we have not seen such an uptick. Basically, the September volumes are roughly even with what they were in August. And we project October and November to be roughly in line with what they were in September. And then we have a very predictable seasonal decline that occurs in December, as nurses schedule their assignments to end before the holidays, and typically take three to four weeks off before they start up their assignments again in January. What is somewhat of a question at this point is exactly where December will end up. Because as the quarter unfolds, we still have an opportunity to add to the December numbers, particularly to the December numbers. But we have taken a conservative view and we expect a larger than historical decline in our FTE count in December. Going into January, typically what happens is that January, those nurses that go off assignment in December start new assignments in January. Because January is typically very comparable to December.

Can you give any kind of -- and if this is too detailed that's fine -- but can you give any kind of historical sense of what that percentage impact is on vacation, absences and the like, in December versus November?

The average drop historically in December, on an average basis, has been in the 8 to 10 percent range. If you just look at the second two weeks of December, the drop is much more significant than that; it's maybe 20 to 25 percent for the last two weeks. But when you average out the month, it historically has been in the 10 percent range, 8 to 10 percent range.

David Berlander (ph), Bass-wood Partners.

Would you characterize what's going on with your guidance, the revenue guidance of 1.68 to 1.72 -- would you characterize this as a continuation in the weakness that you have experienced over the past several quarters, or is this a new level of weakness? Has there been some development over the past several months that would explain the sequential drop to the degree that we are seeing in the topline, such that it's some -- I guess a new development in the competitive environment?

The fundamental driver of our revenue forecast is bookings. And as we indicated, our bookings in the third quarter were down 14 percent year-over-year. When we previously forecast out the fourth quarter, we were looking at a booking trend that appeared to be down, but down only in the high single digits. And now we're looking at booking trends that are well into the double digits, and that's really the driver in our volume forecast and our revenue forecast.

But would you say that the weakness in the business is accelerating? This, from even what you were expecting, this is a -- the industry has reached a new level of weakness. Is that a fair characterization?

I would say that we have some mixed signals on the booking front. I think that's a correct statement, that as the quarter unfolded, we have seen additional weakness in bookings that we did not see at the beginning of the quarter. It got worse as the quarter unfolded. On the flip side, we have seen a stabilization, and actually an increase in the number of positions (indiscernible) conversion rates. Which, long-term, should be a good leading indicator for increasing bookings. But those bookings haven't yet materialized.

To follow-up on Emil's comment. Directionally, we are more pessimistic than we were a couple of months ago. That level of booking activity is really disappointing when you are starting to see some positive movement in what we view as key metrics. So we don't want to be overly optimistic. It's a tough environment, and that environment is reflected in our bookings and in our guidance.

Moving down the income statement, if I take your EPS guidance and try to back into an operating margin, I am coming up with something like 5 percent. Number one, is that correct? Secondly, I would think there would be more variability in your cost structure, such that you could have maintained the operating margin a little bit more. And I may just be mistaken there. And if it is five percent, given the new revenue level, can you get that operating margin back up into the higher single digits? Or is this kind of the new run rate until the business comes back?

I just want to clarify, David, (indiscernible) operating margins, do you mean EBITDA margin?

Yes. No, operating margin.

Meaning net income --?

Including amortization, or EBIT margin.

EBIT. What we tend to focus on the management standpoint is typically our EBITDA.

Okay. So you can speak in terms of EBITDA.

And those numbers are significantly north of the 5 percent that you're quoting.

So what's the implied number for the fourth quarter?

We expect our fourth quarter EBITDA numbers to be in the high single digits, on the nine percent range.

That's more or less consistent with the past several quarters -- is that correct?

Right.

By final question is with regards to the --?

I'm sorry. That was not correct, I was looking at the wrong line. It's probably more in the 7 percent range.

7 to 8 percent, exactly. Which is down. It's down directionally but not materially.

With regards to the lawsuits, the language in the press release is (indiscernible) sections of California labor code, unfair competition, breach of contract. Is there any more color that you can give us on what exactly you are accused of doing wrong?

As Joe indicated in the call earlier, we are not in a position to be able to comment on the lawsuit. There will be additional disclosure regarding the lawsuit in our 10-Q, which will be filed shortly. But beyond that, I really cannot provide you any additional information.

(OPERATOR INSTRUCTIONS). Matthew Cohen (ph), Clovis (ph) Capital.

I'm sorry, I missed your guidance on the revenue line for the fourth quarter and for the full year. Would you just repeat that please?

The revenue guidance for the fourth quarter is 166 to 172 million, and for the year as a whole, it's 677 to 683.

At this time, gentleman, we have no further questions.

If that is the case, we want to thank everyone for participating in this call and joining us this morning. And we will look forward to updating you on our performance for our fourth quarter. Thanks very much and goodbye.