Cross Country Healthcare Inc (CCRN) 2007 Q3 法說會逐字稿

Welcome to the Cross Country Healthcare third-quarter 2007 earnings conference call. All participants will be able to listen only until the question-and-answer session. This call is being recorded. If you have any objections, you may disconnect at this time.

Now, I will turn the meeting over to Mr. Howard Goldman, Director of Investor and Corporate Relations. Sir, you may begin.

Good morning. Thank you for listening to this conference call, which is also being webcast, and for your interest in the Company. With me today are Joe Boshart, our President and Chief Executive Officer; and Emil Hensel, our Chief Financial Officer.

On this call, we will review our third-quarter and year-to-date 2007 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.crosscountryhealthcare.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 refer to future events or conditions or that include words such as expects, anticipates, 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 2007, as well as under the caption Risk Factors in our 10-K for the year ended December 31, 2006, as well as our quarterly reports on Form 10-Q issued during 2007.

Although we believe that these statements are based upon reasonable assumptions, we cannot guarantee future results. Given these uncertainties, the forward-looking statements discussed in 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, Howard, and thank you to everyone listening in for your continued interest in Cross Country Healthcare.

As reported in our press release issued last evening, our revenue for the third quarter of 2007 was $185 million, up 14% from a year ago. Our net income in the quarter was $7 million or $0.22 per diluted share, up substantially from the prior-year quarter, which included a charge of $0.17 per diluted share related to the settlement of a lawsuit. Cash flow for the third quarter was $8.7 million.

The significant improvement in our results in the third quarter reflected top-line growth and margin expansion in our Travel Nurse Staffing business, substantial contributions from the three Clinical Trial Service acquisitions made since August of 2006 and organic growth in our Clinical Trial Services business. While we anticipated that the Clinical Trial Services segment would show strong performance in the third quarter, benefiting from more clinical trial activity and a greater focus on drug safety, the results of this segment exceeded our expectations.

To provide a better understanding of our Clinical Trials business, I should point out there are four pieces -- traditional staffing, which accounts for more than two-thirds of this segment, and the remainder is divided among clinical research outsourcing, drug safety monitoring and regulatory consulting, which, by the way, gives us important visibility on upcoming trials. Thus, with three recent acquisitions, we have established a significant geographic footprint in the US and have a presence in the European market as well. Moreover, we have a more complete range of contract staffing and outsourcing services to offer global pharmaceutical and biotech customers.

Through a combination of acquisitions and strong organic growth, we have essentially doubled the size of this business segment in the past 12 months. We remain very excited about the opportunities in this market, and believe we have a very capable management team, experienced and qualified to execute our strategy for growth. Given our strong balance sheet and cash flow, we expect to continue to be opportunistic in seeking additional strategic acquisitions in this area where we have found good value.

At the same time, we are very pleased with the improved performance of our Travel Nurse Staffing business in the third quarter. Margin improvement arose from an increase in the bill pay spread, elimination of the costs associated with a comarketing relationship, better efficiency in the inventory of apartments we rent and improvement in the pace of payments from certain slow-pay accounts. We expect continued margin improvement in our Travel Nurse Staffing business in the fourth quarter.

While we expect margins to continue to trend favorably, we have seen a slowing of contract booking activity, particularly in California, Florida and Arizona. The softness in the normally strong seasonal markets of Florida and Arizona is disappointing but not completely unexpected, given the unusually warm winter a year ago and the delay of migration of snowbird residents to their winter homes. Furthermore, we believe hospital admission trends remain weak, though we have seen pockets of strong demand in markets such as Texas, New York and other states in the mid-Atlantic.

Turning to our other businesses, per diem staffing showed consistent sequential improvement in the third quarter and appears poised for favorable year-over-year comparisons in the fourth quarter. Our Education and Retained Search businesses both showed renewed top-line growth in the third quarter. However, each incurred higher operating expenses, reflecting higher direct-mail costs in the Education and Training business and higher legal expense in the Retained Search business, related to a specific case that concluded in the third quarter of 2007. As a result, contribution income for our Other Human Capital Management segment was down 25% from the year-ago quarter. On an encouraging note, both of these businesses are trending favorably in the fourth quarter, and we remain very committed to growing these attractive businesses in the future.

With that, I would like to now let Emil update you in more detail on our financial performance.

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 for the fourth quarter that we provided in last night's press release.

Consolidated revenue in the third quarter was $185 million, up 14% versus the prior year and up 6% sequentially. Approximately 47% of the year-over-year increase was due to the Clinical Trial Services acquisitions. The remaining 53% of the growth came from organic increases in our Travel Nurse Staffing, Clinical Trial Services and Education and Retained Search businesses, which was partially offset by decreases in our per diem and travel allied staffing businesses.

Our gross profit margin was 24.8%, up 160 basis points from the prior year and up 110 basis points sequentially. The margin improvement is due to a combination of a higher mix of revenue from our Clinical Trial Services businesses, which have higher gross profit margins than our Nurse and Allied Staffing businesses, and continued improvement in the bill-pay spread in our Travel Nurse Staffing business.

SG&A expenses in the third quarter represented 17% of revenue, up 60 basis points from the prior year but down 10 basis points sequentially. The year-over-year increase is primarily due to a higher mix from our Clinical Trial Services segment, which operates with a higher SG&A burden than our Nurse and Allied Staffing businesses.

Interest expense was $808,000, up $535,000 from the prior-year quarter and up $279,000 sequentially, reflecting the additional debt incurred to finance the Clinical Trial acquisitions.

The effective tax rate in the third quarter was 38.8% and 38.4% on a year-to-date basis. Going forward for modeling purposes, we expect our tax rate for the remainder of the year to be approximately 38.5%. Net income in the third quarter was $7 million or $0.22 per diluted share, as compared to $122,000 a year ago, which included a charge related to the settlement of a lawsuit of approximately $5.4 million after tax or $0.17 per diluted share.

Our balance sheet remains strong. We ended the quarter with a debt-to-total-capital ratio of 10% and a current ratio of 3 to 1. DSOs at the end of the third quarter were 61 days as adjusted for the timing of the most recent acquisition, up one day from the end of the second quarter.

We generated $8.7 million of cash from operating activities during the quarter. Our debt increased by $15.1 million during the third quarter, net of repayments. $[90] million of cash was used to fund the Assent acquisition, $3.2 million for capital expenditures and $1.8 million for share repurchases. We repurchased approximately 116,000 shares of our common stock during the third quarter, at an average cost of $15.78 per share.

Let me drill down into our three reporting segments. Our Nurse and Allied Staffing segment, which accounted for 79% of third-quarter revenue, consists of our Travel and Per Diem Nurse and Travel Allied Staffing businesses. Our Clinical Trial Services segment accounted for 14% of the third-quarter revenue and consists of our legacy ClinForce business plus three recent acquisitions -- Metropolitan Research, acquired in August of last year; AKOS, acquired in June; and Assent, acquired in July. Other Human Capital Management Services forms our third reporting segment, and is comprised of our Education and Training and Retained Search businesses, accounting for 7% of the quarter's revenue.

Revenue for the Nurse and Allied Staffing segment was $146 million, up 6% versus the prior year and up 2% sequentially. We averaged 4,999 field FTEs in the third quarter, up 2% versus the prior year but down 1% sequentially. Travel Nurse Staffing volume was up 4% over the prior year. Partially offsetting this increase in Travel Nurse Staffing volumes were year-over-year decreases in two of our smaller business lines. Per Diem Staffing volume declined 8%, due primarily to the loss last year of a military contract that was rebid as a small businesses set-aside for which we did not qualify. Travel Allied Staffing volume declined 9% due to weaker demand for contract respiratory therapists and radiology techs.

Bill rates, as measured by revenue per hour in our core Travel Nurse Staffing business, increased by 4% year over year, continuing the favorable trend in this metric. Nurse and Allied Health Staffing contribution income, as defined in our press release, was $14.3 million in the third quarter, up 6% versus the prior year and up 11% sequentially. Segment contribution margin was 10%, up slightly from the prior year and up 85 basis points sequentially. We expect further sequential improvement in the fourth quarter.

Revenue in our Clinical Trial Services segment was $26.2 million, up 97% from the prior year. Approximately $10 million of the $30 million year-over-year revenue increase was due to acquisitions. At the same time, organic revenue grew by 19% over the prior year. Since the acquisitions have broadened our service offerings beyond the ClinForce base of pure clinical trial staffing to now include more drug safety, clinical research outsourcing and regulatory services, field FTE counts are no longer as meaningful a metric within this segment.

Contribution income for the Clinical Trial Services segment was $5.1 million, up 191% from the prior year. Segment contribution margin was 19%, up 600 basis points from the prior year, due primarily to the impact of the acquired businesses, which operate at a higher margin than our legacy staffing business, as well as organic improvement.

Turning now to the Other Human Capital Management Services segment, third-quarter revenue was $13.2 million, up 15% from the prior year and up 5% sequentially. Both our Retained Search and our Education and Training businesses contributed to the year-over-year revenue growth. Segment contribution income was $1.6 million, down approximately $0.5 million from the prior year, primarily due to increased direct-mail costs in our Education and Training business and higher legal expenses relating to our Retained Search business.

This brings me to our guidance for the fourth quarter and full year 2007. 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 and other business combinations, significant legal proceedings or significant repurchases of our common stock.

Travel bookings were down 7% year over year in the third quarter, reflecting the relatively soft seasonal demand that Joe referred to earlier. Based on this, we project the Nurse and Allied average field FTE count in the fourth quarter to be in the 4,875 to 4,925 range, down 3% to 4% year over year. Additionally, it is important to note that many staffing contracts in our Clinical Trial Services segment experienced lower productivity and profitability in the fourth quarter, due to a slowdown of activity during the holidays, which coincides with a normal reduction of activity in the pharmaceutical industry.

Revenue for the fourth quarter is expected to be in the $179 million to $182 million range. For the year as a whole, revenue is expected to be in the $715 million to $718 million range, up 9% to 10% over the prior year. We expect our gross profit margin in the fourth quarter to be approximately 25%. EBITDA margins are expected to be in the 7.5% to 8% range, reflecting margin improvements in our Travel Nurse Staffing business, offset by moderation in the Clinical Trial Services business that is largely due to seasonality. Interest expense is expected to remain flat sequentially.

Based on these assumptions, EPS per diluted share is expected to be in the $0.21 to $0.23 range and includes approximately $200,000 of FAS 123 compensation expense for equity [grantings] issued in October. For the full year, EPS per diluted share for 2007 is expected to be in the $0.74 to $0.76 range.

As a brief reminder for those of you looking ahead to your financial models for 2008, historically, the gross profit margin in our Nurse and Allied Staffing business typically declines sequentially in the first quarter, due to the reset of payroll taxes as well as two less days than in the fourth quarter.

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

(OPERATOR INSTRUCTIONS). Tobey Sommer, SunTrust Robinson Humphrey.

I'd like to start off by asking a question about the Clinical Trials business. One of your businesses, you highlighted, gives you a little bit more visibility into the pipeline of clinical trials, and I was wondering if you could share with us what the outlook is, based on that insight.

In speaking with the management of those businesses, we have a lot of optimism for that business segment in 2008. Again, there's some seasonality that will result in sequentially lower profitability from the business in the fourth quarter. To a lesser extent than the Nursing business, there is a reset of payroll taxes in that business in the first quarter, relative to the fourth quarter.

But overall, the pipeline of activity that we are looking at is very attractive. The number of projects that we are bidding on is growing, and because of the acquisitions, we find ourselves eligible and a more credible provider or vendor to the pharmaceutical industry than we were prior to the acquisition. So, for a number of reasons, we have a lot of optimism for that business heading into next year.

So is it that you're able to get some more share and just have credibility for larger projects because of the critical mass that you have, or is it an acceleration of the availability of work within the segment?

It's probably a little bit of both. Clearly, we have a broader range of services that we offer, again, starting at a very early point in the process, as they look to navigate the drug regulatory processes in various countries including the US, which, again, that is the early visibility that I talked about, to the opportunity to either staff or outsource, have a turnkey solution or true outsourced solution for pharmaceutical companies, than through the drug safety issues that companies face as the drugs get closer to market.

So it is a different business than it was about 15 months ago. We always felt it was an attractive segment. We continue to be pleasantly surprised by how effectively the businesses have come together and how each of the businesses, the managers that we have acquired with those businesses, see themselves more credible participants in bidding processes for large projects that, candidly, they couldn't have really gone after in whole or even in part, in some cases, previously. So again, it has really worked, and that's why we continue to look for additional opportunities to add onto the platform that we have today.

Shifting gears to the core Travel Nurse Staffing segment, I was wondering if you could describe what the pricing and bill-pay rate spread expectations are as we head into the snowbird season, and maybe if you could comment on what the order flow looks like at this point, relative to prior years.

Two parts to the question. We still view the pricing environment as relatively attractive. What we have said all year is mid single digits. We continue to view ourselves as being able to get 4% to 5% price increases as we head into 2008. We've gotten some fairly large increases at some of our larger accounts, so hopefully that will help with the mix as we go forward.

Having said that, the environment is -- well, clearly, the seasonal environment wasn't strong going into the fourth quarter, and that -- if you reset your expectations to 3% to 5% as opposed to 4% to 6%, that probably wouldn't be imprudent as you look to your 2008 model.

Where we are today, even though the fourth quarter was disappointing, as I looked at the order count, starting this week we were up almost 30%, just under 30% from where we were when we reported in August. It's kind of a good news/bad news story. A year ago, we had very good momentum coming into the fourth quarter. Nurses were starting assignments in September and October, so it increased the volume of activity in the fourth quarter. But the bad news is we didn't get that this year, but we do clearly have a seasonal opportunity as we head into the first quarter.

Now, when you get positions late in the winter, later than you typically would, those positions are harder to fill. Nurses generally, all other things equal, would rather go home for the holidays than be committed to working over the holidays.

So the good news story is the demand is there. The negative aspect of getting those positions so late is that they are tougher to fill, all other things equal.

I'll ask one other follow-up question on the growth in orders. It is unlikely to be driven by flu-related admissions at this stage of the game, and I know hospitals generally don't like to staff up for that, anyways. Is there any kind of added color you could give us regarding the flow of orders, perhaps on a geographic basis? Any pockets of strength or weakness?

In our prepared comments, we talked about Texas as being, I would say, of the large states that we serve, particularly strong. Now, again, it's maybe uneven, even within the States. But we're very encouraged by what we see in Texas, New York and some other states in the mid Atlantic are showing very favorable trends.

Even taking a step back, if you strip out California, Florida and Arizona, we're up in positions year over year. The business -- I don't think there's anything fundamentally wrong with the environment. The seasonal business has specific issues, and I think California has some specific issues. But we are relatively comfortable in our long-term view and in our short-term view of the business. We didn't come into this quarter saying the market was great. The market was okay, and I think the market is still okay. We expect to make more money in 2008 than we did in 2007. We have recaptured the margin that we gave up by going to a free-shared housing offering to our nurses, so we are beginning the year at a much stronger platform of profitability in all the placements that we make. Now, the challenge to our management team will be to grow the volume in that business at this higher level of profitability.

But even though we have focused more on margin than market share and volume in the last several quarters, the good news is I think we're getting a margin, but it also looks like we're taking market share in this relatively soft environment, and hopefully we can continue doing that in 2008.

Elliot Fruchter, Merrill Lynch.

Can you please quantify the year-on-year gross margin improvement in the business, the different components that drove that? Also, if you can comments relative to your expectations going into the quarter?

As I indicated in the prepared remarks, our gross profit was up 160 basis points year over year and 110 basis points sequentially. It really was a combination of two factors. A change in our business mix certainly helped, but also the widening of the bill-pay spread had a significant effect.

Just for perspective, when we look at the gross profit margins of our three segments, the Nurse and Allied segment has the lowest gross profit margin, while the Human Capital has the highest, and Clinical Trials kind of falls in between the two. It was the relative growth of Clinical Trials that impacted that mix. It went from 8% of revenues a year ago to 14% of revenue this year.

But the real encouraging part is that we were able to achieve gross profit improvement in our core business, due primarily to the widening of the bill-pay spread but also due to a moderation in the housing cost increases that we have been seeing, for the reason that Joe outlined before.

Just to follow on, while we don't really drill into the gross margin of the different segments, for a variety of reasons, I would say the Clinical Trials business carried the bulk of the load in the third quarter, the sequential improvement in the third quarter, and the sequential improvement that we guide to in the fourth quarter will be largely driven by the Travel Nurse Staffing business, where we have seen very attractive trends. The management team has executed very well in our desire to improve that bill-pay spread without losing significant market share, and I think that you'll see that in the fourth quarter.

Would it be possible to quantify the bill-pay spread impact versus the mix impact?

I'm not sure I have that for you right now. I can tell you that on a year-over-year basis, the mix was probably somewhat larger than the bill-pay spread, although they are both significant.

Switching gears a bit to the Search business, the legal case that finished up in the third quarter -- can you tell us, quantify the expense related to that case and maybe what kind of margins we should be looking forward to in the Other Human Capital business going forward?

Well, the case that we're referring to really was an enforcement of a noncompete. It had a substantial cost and the third quarter, probably on the order of about $400,000, and also had -- it's a case that kind of dragged on throughout the a year, so it was depressing the margins of our Retained Search business.

Thankfully, it's behind us. We prevailed, and going forward we will not have that cost burden. So we do expect the margins for our Other Human Capital segment to improve probably on the order of about 300 basis points sequentially.

Frank Atkins, BMO Capital Markets.

I'm in for Jeff Silber. I wanted to ask you about the recruiter growth trends and any trends in recruiter turnover.

If we look at where we are today versus the beginning of the year, we're probably flat. We did see some turnover and attrition during the first couple of quarters of the year, but we recaptured that in the third quarter, and we're very comfortable with where we are in the overall recruiter count, which is right around 160 recruiters in the Travel Nurse Staffing business, Travel Nurse and Allied Staffing business.

I wanted to ask, has the acquisition of these clinical businesses impacted the Nurse Allied segment, in terms of both financial but also just business strategy and a larger kind of stepping back view?

The quick answer is, probably not. When we first got into this business in 2001, we saw two potential synergies. One was that we could retool registered nurses to be higher-value staffing professionals that could work on clinical trials, and I would say that has been largely unsuccessful, for a variety of reasons. We may have more success in the future, but I'd rather not get into it today, for competitive reasons.

Where we have had some success is when we bought the business, there was a relatively low level -- even though about 20% of clinical trials are conducted at hospitals, ClinForce had a relatively low penetration of those trials. We've seen -- ClinForce has had an ability to piggyback. The hardest part of working with hospitals is getting a contract with a hospital, and they have been able to piggyback and put a pricing addendum on the Cross Country contract at hospitals, which has allowed them to increase their opportunity to make placements at trials conducted at hospitals.

Taking a bigger step back, we have -- today, as we look at our acquisition strategy, we have seen lower multiples and better returns and better overall growth characteristics in the short term in the Clinical Trials area. Again, these tend to be smaller acquisitions, but we have gotten what I think is very fair pricing and good returns on the acquisitions we've made, whereas the nursing business, which has gone through a tough period since 2002, the pricing is still very high on private transactions. So it is likely we will continue to use our core business as a cash generator where, again, we're going to focus on profitability and maximizing cash flow from the business, so that we can redeploy the cash into what we believe are, in the short term, higher-return opportunities in the clinical trials, as well as other things that we're looking at that are very interesting to us today.

I wanted to turn to bad debt for a little bit. You had talked about the US Virgin Islands account. I just wanted to know how that was progressing, as well as what your expectations for bad debt are going forward.

We're making excellent progress. We are able to reduce the outstanding balances in the accounts that we have there. In fact, this quarter, we did not have to book any bad debt expense, largely because of our success in collecting on some of these old receivables.

What is the share count for the guidance number?

I would use a 32.4 million share count.

Matt Ripperger, Citigroup.

I wanted to see if you could comment a little more on the broader outlook in terms of healthcare staffing. To date, the recovery over the last couple of quarters and years has been really driven by the tight labor market, and not so much by hospital admissions picking up. It seemed from your opening comments that you are modifying the growth expectations a little on the volume side, by about a percent for next year. I just wanted to see if you could comment a little more on whether that's because of a change in the labor environment or a further deceleration in hospital admissions, and what is really factoring into that commentary?

I want to make sure -- I don't think I provided volume guidance. I want to make sure I understand your question. I think when I was speaking before, I was talking about pricing expectations are, I would say, somewhat more subdued. But I wouldn't describe it as materially lower, going into 2008.

I guess I just would reiterate, we had a disappointing fourth-quarter seasonal market in Florida and Arizona this year, just because clearly, last year was so warm; this year has obviously been pretty warm in the Northeast. We haven't seen people chase down into the warmer climates, which has driven the businesses directly.

I don't think my view of our opportunity in 2008 is really much changed. I would say the market felt better in August, really, because of the opportunity to get those seasonal orders in. They didn't come in as quickly as we had hoped. But, as I said earlier, from where we were in August to where we are today, we're up almost 30% on the number of orders, where if you look at a year ago, the order count was roughly flat.

So there is some momentum in the business. We're still down somewhat from a year ago in the aggregate number of orders, but that gap has close.

So as we go into 2008, I guess my characterization of the market probably hasn't changed. It's good enough to grow the business. It's not great like it was in 2000 and 2001, but it's good enough to grow the business. Because of the better margin profile that we have on this business going into 2008, I have every expectation we'll be able to make more money on the volume that we do achieve in 2008, and then I'm very optimistic about our Clinical Trials business. We think there's a lot of opportunity that we didn't have before in that business, and there's still some acquisition opportunities that are out there for us to focus on. Obviously, you can't count on acquisitions to grow the business at the very attractive multiples that I think we have been able to achieve so for, but there's certainly potential to grow that business, both organically and through acquisition. And our Other Human Capital Management, those two businesses, which are very fine-profit businesses, have more top-line momentum today than they had in the first half of this year.

So overall, I feel pretty good about the business. Like I said, I don't want to pound the table about our prospects, but we feel very good about our ability to grow top line and bottom line going into 2008.

I'm assuming that your current view of 2008, even though you're not providing specific commentary, is based upon the current trends of hospital admissions?

Yes. Hospital admissions haven't driven the business for the past five years, and we do not expect that to change in 2008. It's really about the labor market dynamics. Obviously, we're sensitive to the overall job numbers that come out each month, issued by the Labor Department. They continue to show incremental job creation, and we think, as well as real wage gains.

So as long as household income continues to be psychologically sound, we don't expect nurses to offer more hours as they age; we expect nurses to offer less hours, on average, as the population of registered nurses in this country ages. So I expect that to be a favorable trend in 2008, and I expect hospital admissions to be neutral, because I'm not sure they can be worse than they are today.

Let's hope not. In terms of the Healthcare Staffing business, could you provide a little color in terms of the contribution, in terms of revenue from Travel versus Per Diem versus Allied?

Sure. I would say, looking at it in terms of percentage of total consolidated revenue, the Travel Nursing business accounts for roughly two-thirds of our -- roughly 67% of our consolidated revenues. Travel Allied and Per Diem account for roughly 6% each.

In terms of the decline in Allied because of the RT and the rad tech issue, can you give a little commentary about what really happened there, and whether that's something that you think could reverse itself pretty quickly?

Well, I don't think the -- the rad business has been in a second or decline for a couple of years now. That really hasn't been a strong growth opportunity. I think what happened there is the market -- it was a relatively small category of employment within hospitals. The opportunity, of course, of not having these people in place, operating a couple of million dollar MRIs or x-ray machines that generate revenue for hospitals was very high.

So I think the market responded, and I think hospitals figured out, if we double wages, we're probably better off than not filling these positions. So historically, x-ray techs and ultrasound techs made less than nurses, and in a lot of cases today, they make more than nurses. So it actually attracts nurses out of nursing into running these pieces of equipment.

The ramp-up time to train somebody to be a competent tech is relatively short. So the market, I think, responded in those areas.

Respiratory is a bit of a mystery to us, because that has been kind of our Steady Eddie category of employment over the last 10 years. Every year, as the RSV virus and flu season head into the winter months, you would expect to see a ramp-up in respiratory therapists. We just didn't see it in the fourth quarter.

Again, we are hopeful, given the overall uptick in order activity, that we will see that in the first quarter, but that was a bit of a surprise. Candidly, I don't really have a coherent explanation. It's not a very large category; it's roughly 100-plus professionals.

So if it went away, it wouldn't necessarily be that significant to us. But to the Allied business, it's about a third of that business. It hurts that segment or that business for us to not have the normal seasonal ramp-up that we have seen year in and year out in my 14, 15 years with the Company.

Just to add to that, there's a third piece to our Allied business, which is our rehab. That business is growing nicely, so we have one segment that's growing and two that are (inaudible) declining.

Rehab is still the largest?

Yes, it is.

On Per Diem, when are you going to anniversary the military contract that you lost? Will Per Diem start to show positive comparisons, once you anniversary that?

We lost that contract, I believe, in September of last year; August-September, it ramped down. So it is our expectation, given the current trends in Per Diem, although it could change, given the nature of Per Diem. But we have seen good, positive sequential momentum in that business -- again, not spectacular, but it's positive. Given where we are today and that dynamic, we expect to show positive volume trends in Per Diem year over year in the fourth quarter, for the first time in a number of years.

When you look at how you want to allocate capital, from your comments it sounds like the priority is still on tuck-in acquisitions. Given where the stock is, is there any kind of change in thought about a larger share repurchase or anything along those lines?

Clearly, the lower the stock price, the more attractive it is to us. You saw where we repurchased shares in the second quarter. I think our average price of the [1 point] -- from almost 2 million shares we repurchased since November of 2002 is above where we are today. So we would view this as a very attractive price to repurchase shares. I don't know, Emil, if there's anything you want to add to that?

I think it's just fair to say that we constantly look at what is the optimal use of our excess cash that builds shareholder value, and we still would rank strategic acquisitions to the very top of the list, and then we will use the excess cash, when those opportunities don't present themselves, to either repurchase shares or repay debt. We've done both in the quarter, and we intend to do both in the next quarter. But at this point, we don't have any plans for a large share repurchase. I think we are more likely to be opportunistic.

Bruce Ackermann, Sand Hill Equity Research.

I just wanted to ask about vendor management services for a minute. Could you comment on any developments there, and also specifically whether your arrangements have any performance guarantees and any impact those might have?

To date -- I'll answer those in reverse order -- we don't have any performance guarantees, other than if we don't perform, we don't typically get to keep the contracts. There's generally an out on both parties' part to -- the hospital wants to get its needs met. So we have to perform in order to maintain that relationship.

We have several new prospects that we think are very attractive accounts that are in our pipeline. We expect this business to continue growing for us. There's continued interest on the part of large users of Travel Nursing Service and Travel Allied Services to create a much more efficient intake model than they currently operating. Our ability to demonstrate and deliver very solid client references grows with each quarter.

So we expect this to be a continued part of our strategy going forward. Again, it's not something we want to offer to everyone. We want to focus on those users that are either currently or have the potential to be very large accounts for the Company.

Do you have employees physically on-site at all of these clients?

I would say it's the exception that we have employees on-site.

Tobey Sommer, SunTrust Robinson Humphrey.

I apologize if you've dealt with this already, because I've had to bounce off for a second. In terms of new supply and new applicants for Travel Nursing, any changes in either demographics, age, et cetera, or any kind of color you can give us as to the composition of those new applicants?

We don't collect that information. Some would argue and our position is we can't collect that information. We can't ask how old somebody is. We do surveys and hope to collect the information, try to figure out when they graduated. But even there, you can't assume that a new graduate is in her early 20's, because the average age of new nurse graduates is in their early 30's.

There has been, clearly, an uptick in graduation rates at nursing schools. It is our expectation that this will allow us to have an adequate pipeline of prospects and applicants going into the future, but there's really no additional color that I can offer to you about where they are coming from, who they are, what demographics. It is likely that they are younger single women than is the profile of the average nurse, because that is just generally who we have attracted historically.

Then I guess I would ask a question about the gross margins. Now that you have, as you stated, largely restored them, is there an opportunity for you to expand them beyond the prior highs? Not just on a blended basis, perhaps, with a different revenue mix contributing to that overall gross margin expansion, but on an apples-to-apples basis, do you think there is an opportunity for gross margins within your different lines of business to exceed prior peaks?

Absolutely. We are very encouraged by the trends in our Travel Nursing business. Every week, we plot the bill-pay spread as we analyze the payroll and the billing statistics for that week. It's very steadily increasing on a weekly basis, so we are on an upward trendline. We [should assure] continued expansion of our gross profit margins.

Any kind of order of magnitude, in terms of the ability to exceed beyond prior peaks, that you could share with us?

Well, I would say that at the rate we're going, I wouldn't be surprised at 100 basis point improvement is realistic in the next year. But I don't want to give a guidance on this. I'm just saying that, based on the trendlines, we are continuing to expand. The housing is also a -- we saw the strong headwind to our ability to expand margins is now starting to abate. So with the combination of the bill-pay spread and the housing cost moderation, we should be able to see -- 100 basis point improvement next year would be a very realistic target.

Just to follow on, I think there's two elements. One is, as Emil indicated and I agree, that there's probably, to get back to where we were, 100 basis points of margin in our Travel Nurse business. But also, there's a shift in the mix as the Clinical Trials business grows more rapidly than the Nursing business, which is our continued expectation going into 2008, you'll get a mix shift benefit, because the Clinical Trials tends to be a higher gross profit margin business.

Just to clarify -- there's a lot of useful information in there, but just to make sure I understand, Joe, did you say there's 100 basis points of margin expansion left to restore the Travel Nursing margins to their prior levels? Because the way I understood Emil's response, I thought we were getting at going above and beyond those prior peaks.

I was just trying to give you a sense of the sequential improvement. But we definitely haven't reached yet the levels that we have had historically. If you go back four or five years, we're at a higher level than we are today, or will be, based on what I told you, next year.

(OPERATOR INSTRUCTIONS). Milind Parate, Banc of America Securities.

Most of my questions have been answered, but I had just one quick one, which I'm not sure if I missed any comments on this. With respect to the Clinical Trials Services business, you mentioned that a significantly increase of it was organic revenue and obviously, the acquisition revenue. Is there any way you could sort of -- I don't happen to have this information. Is there any way you could break that out and let us know what percent or dollar amount was organic versus acquisition?

Sure. As I mentioned in the prepared remarks, the organic business grew 19% year over year.

That's organic business in the Clinical Trials Services segment?

(inaudible).

If I heard it, it was about $13 million in total, of which $3 million (multiple speakers).

$3 million was organic and $10 million was acquisitions.

More broadly speaking, from sort of a macro perspective, what sort of (inaudible) or challenges would you say you're facing directly from the hospitals in any of the markets that you're serving? Just the way I guess we sort of understand it or see it is that hospitals are going to try to take initiatives upon themselves to perhaps bypass the use in some instances of healthcare staffers. But is there anything specific that you could talk to, or that you might be seeing or any challenges in that regard?

Of things that might keep me up at night, that's not one of them, to be honest with you. There's not a hospital that can deliver nurses to their door as efficiently and as cost effectively as we can, as well as the industry can, just because they just don't have the opportunity to keep nurses working when they come off contracts. A lot of systems that have a number of hospitals may try to move nurses within the hospital system. Those that want to go from Tennessee to Florida -- they can keep their tenure and move to a sunbelt location or a warmer climate in the winter.

I'm aware of a system in Arizona that is a very attractive location that has a travel program. Generally, those are not the biggest competitive threats that we look at going into those markets. It's the usual suspects. Our largest competitor is AMN Healthcare, and we expect them to be our largest, most effective competitor going into the future, not our customers.

It's really one of the things that we focus on when we look at our pricing and our margins. We don't want to get to the point that our average customer believes it would be cost-effective for them to compete with us. When you look at the logistics of this business, keeping apartments open, keeping apartments filled with nurses working at your facility, there's not a system in the country that can compete with us, as it relates to efficiency, and keeping nurses in inventory that are willing to go to the locations that we have. So that's not a big threat. Maybe to someone, it's just not -- I don't view it as one.

One last quick just housekeeping question, which I'm sure would be just as well -- I could find it in your Q when it comes out. But the total debt, the long-term debt portion -- is there any way you could just break it out between -- I suspect that part of it is the capital lease obligation and part of it is the revolver?

Sure. The total debt is $44 million. The capital leases, I think, account for a little less than $2 million out of that. There's some arbitrariness in terms of current versus long-term. The reality is, we have a revolver. We can draw on that revolver at any time, and there's no obligation to clear out the revolver. So the reality is that it really is long-term financing. The revolver has quite a few years left before we have to repay it.

Elliot Fruchter, Merrill Lynch.

As the international nurse supply becomes constrained, do you see that benefiting the demand for your services headed into early 2008?

We would like to recruit overseas ourselves. We do have a pipeline of nurses we're trying to get into the country. But on balance, Cross Country is probably better off to have that source of recruitment in the short term. In the longer term, we may build a very robust pipeline, but in the short term, we're probably better off from a demand perspective to not have the hospitals able to bring large quantities of foreign-trained nurses into the country. So I think it's clearly an upside as we go into 2008 for us.

Tobey Sommer, SunTrust Robinson Humphrey.

I just wanted to ask you a question about the Per Diem business. You said that I guess the fourth quarter, you probably will show some growth there, I think, if I heard correctly. Do you have an expectation that the market is okay enough for the Per Diem business to grow in 2008?

The big headwind that we faced in the Per Diem business was the loss of the military contract, which was a pretty substantial contract to us. Given the dynamics that we have, that we have seen really probably for the last six months, we feel pretty good about it. We are getting some price. To take a step back, it can be market-specific to a much greater degree than the Travel Nursing business is, where we are in approximately 17 markets and the storyline for each market is a little bit different. But, given what I know today, it is my expectation that we will have modest growth in the Per Diem business in 2008.

At this time, I'm showing no other questions.

Thank you, and thank you to those listening in and calling in. We look forward to updating you on our fourth-quarter results in February. Take care.

Today's call has concluded. All parties may disconnect.