Cross Country Healthcare Inc (CCRN) 2015 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Cross Country Healthcare conference call for the fourth quarter and full year of 2015. This call is being simultaneously webcast live. A replay of this call will also be available until March 24, 2016, and can be accessed either on the Company's website or by dialing 800-395-7443 for domestic calls and 203-369-3271 for international calls and by entering the passcode 2016.

I will now turn the call over to Bill Burns, Cross Country Healthcare's Chief Financial Officer. Please go ahead, sir.

Thank you and good morning, everyone. With me today is Bill Grubbs, our Chief Executive Officer. Our call this morning will include a discussion of fourth-quarter and full-year results for 2015 as disclosed in our press release and will also include a discussion of our financial outlook for the first quarter and full year of 2016. After our prepared remarks, you will have an opportunity to ask questions. Our press release is available on our website at www.crosscountryhealthcare.com.

Before we begin, we need to remind you that certain statements made on this call may constitute forward-looking statements. As noted in our press release, forward-looking statements can vary materially from actual results and are subject to known and unknown risks, uncertainties, and other factors, including those contained in the Company's 2014 annual report on Form 10-K and quarterly reports on Form 10-Q as well as in other filings with the SEC.

I would encourage all of you to review these risk factors listed in these documents. The Company undertakes no obligation to update any of its forward-looking statements.

Also, comments during this teleconference reference non-GAAP financial measures, such as adjusted EBITDA or adjusted earnings per share. Such non-GAAP financial measures are provided as additional information and should not be considered substitutes for or superior to financial measures calculated in accordance with US GAAP. More information related to these non-GAAP financial measures is contained in our press release.

In order to facilitate a better understanding of the underlying trends, we will refer to pro forma information on this call, giving effect to acquisitions and divestitures as though the transactions had occurred at the start of the periods impacted. As a reminder, we divested our education and seminar business during the third quarter and completed the acquisition of Mediscan in October 2015.

With that, I will now turn the call over to our CEO Bill Grubbs.

Thank you, Bill. Thank you, everyone, for joining us this morning. Before I start my general comments, I would like to address our revenue growth for the fourth quarter and our guidance for the first quarter of 2016. There is a softening of our growth, specifically within nurse and allied. I believe this is specific to these two quarters and is the result of isolated incidents that we do not expect to recur.

First of all, we had a very large nurse project that was originally scheduled for the fourth quarter that was delayed until the second quarter of 2016. Normally that isn't an issue, as we get delays all the time. The issue here is that we had recruited for all those positions before the delay.

So not only did we waste the time to fill the positions, we had to unwind it all afterwards. That took significant recruiter efforts away from filling other positions and affects both the fourth- and first-quarter revenue. The good news is that that project is now on track for the second quarter and we don't anticipate any further delays.

But the bigger issue for Q4 and Q1 was a glitch with external vendors and job sites that limited the applications we were receiving from about mid-November until mid-February. That had a major negative impact on the positions we filled during that time period.

One of these external sites changed how they treated our openings and as a result, many of our positions were not posted at all. This resulted in the loss of hundreds of applications.

Another site did not post -- another site did post our positions, but when you applied to the position, you were directed to a third-party site that stated they would forward the application to Cross Country Healthcare. But we never received any of those applications. This also resulted in the loss of hundreds of applications.

As of mid-February, we believe these issues have been corrected and we don't anticipate any further issues. Applications are back on track and our fill rates are back to where we need them to be.

So these issues reduced our applications in both quarters and ultimately our revenue, but nothing that is ongoing. I feel good about where we are and our ability to achieve our full-year 2016 numbers, as we outlined in our guidance. I'm happy to take some questions on this subject at the end of the call, as I'm sure you have several.

In the meantime, let me get on to our general commentary. 2015 marked my second full year as CEO of Cross Country Healthcare. And although we have more work to do, I'm extremely pleased with the progress we have made over that period of time. In fact, we are ahead of the schedule we laid out two years ago.

At that time, we had set a goal to achieve 5% adjusted EBITDA by the fourth quarter of 2015. We not only achieved that one quarter ahead of schedule, but we exceeded 5% adjusted EBITDA for both the third and fourth quarters. So 2015 was somewhat of a step change that has brought us to a level of financial performance that we've not seen for many years.

Revenue was up 24% to $767 million, with adjusted EBITDA increasing 119% or more than $20 million to $38 million, expanding 210 basis points from 2.8% in 2014 to 4.9% in 2015. Actually, it's great to see that the full-year adjusted EBITDA percentage was essentially as high as the original goal we had set for just the fourth quarter.

As a result of our confidence in reaching an expected adjusted EBITDA margin of 8% by the fourth quarter of 2017, we are now targeting a 10% adjusted EBITDA by the end of 2019. We are looking past the turnaround and recovery plan that we have been executing and have set new goals and initiatives to improve both our gross profit and adjusted EBITDA margins.

That kind of brings me to the Mediscan acquisition that closed at the end of October. Our first two acquisitions in December of 2013 and June 2014 were about positioning us to be more competitive in the market and were part of our recovery plan to improve the financial performance of Cross Country Healthcare. And both of them have proven to be very beneficial in supporting our financial goals.

The Mediscan acquisition is our first strategic acquisition that opens new markets and gives us a growth engine outside of our traditional acute-care and ambulatory customers. Mediscan not only supports our growing staffing services in the Southern California market, but it gets us into the fast-growing healthcare staffing market for public schools and the workforce solutions arena for charter schools.

In addition, school systems tend to attract a different type of healthcare professional, thus expanding our ability to grow incrementally rather than taking candidates away from our traditional customers. Already in 2016, Mediscan is on track for double-digit revenue growth and should meet or exceed the 10% EBITDA margin they experienced in 2015.

The market for all of our services remains strong, demand is robust, and we continue to see shortages of healthcare professionals around the country. Based on demand in the first couple of months of 2016, strong general employment trends, strong managed-care growth, and estimates that over 1 million additional individuals have enrolled into the Affordable Care Act, we expect demand to stay at these levels throughout the year. We believe these favorable market conditions will allow us to grow both volume and price.

We also continue to see positive momentum for our workforce solutions. Let's start with managed service programs. Although we have been adding about two MSPs per quarter over the past two years, we've already won four in the first two months of 2016, providing us a strong start to the year and supporting our goal to win four per quarter going forward. We still see a lot of interest in MSPs in the market as hospitals continue to adapt to market dynamics and streamline their processes.

We are also getting traction with our recruitment process outsourcing, predictive analytics, and optimal workforce solutions services. We signed four new RPO deals coming into 2016. And this is still a small service for us, but we are experiencing high demand, so we continue to build the team in anticipation of increased volumes.

Our predictive analytics service also continues to have a high level of interest from our customers. And we have several large programs ramping up that we believe validate our ability to support our clients' efforts to save cost across their total employee population.

For Optimal Workforce Solutions, we have two new programs with commitments to outsource over 500 incremental positions starting in the second and third quarters of this year. We believe this is a great differentiator for us and allows us to provide significant operating efficiencies and cost savings to our customers. Overall, the investments in Workforce Solutions we made last year are starting to pay off and we expect these services to be a bigger part of our revenue in the future.

For the first time in years, we are going to provide full-year guidance. We have a much stronger management team, better systems, and improved metrics that allow us to have more confidence in a longer-term forecast. I feel it's important to start giving our investors more clarity, not only for this full year, but beyond.

Bill Burns will provide the Q1 and full-year guidance later, but I wanted to make some comments on the full year here as well. For 2016, we expect revenue to be in the range of $820 million to $840 million, an increase of 7% to 9% on a year-over-year basis. Adjusted EBITDA is expected to be between 5.5% and 6%, but this needs further explanation.

This guidance includes additional SG&A of $4 million to $5 million for long-overdue IT investments and investments in other service expansions, with the operating efficiencies expected to be realized in the latter half of 2017.

Although we make investments all the time, these are truly incremental and will cease once the projects are complete. Therefore, our underlying adjusted EBITDA guidance under normal operating conditions without this level of investment would have been 6.0% to 6.5% for 2016.

Since these investments are not included in any of our analyst estimates, we wanted to give everyone visibility to the underlying normalized trends in the business. Looking at our numbers with or without the investments, we expect this to be another year of providing strong increases in shareholder value.

Before I turn the call over to Bill Burns, I'd like to address a question we get all the time. It's regarding the comparison between Cross Country Healthcare's performance and our largest and only other public competitor. Generally, I believe this is a fair comparison, given that we are the only two large full-service national providers of healthcare staffing and workforce solutions, and as I said, the only two public companies in the sector.

While they had solid results, it's important to note that Cross Country Healthcare is still in the middle of its turnaround. We still have process improvements to make, continued consolidation of our corporate functions, and technology enhancements that are needed to help us achieve that level of performance.

But our results and these positive market trends make me feel good about all the things we are doing here at Cross Country. They certainly validate a lot of our initiatives and strategies. It also makes me feel good that we continue to have tailwinds of strong demand and shortage of supply.

We are currently running ahead of the schedule we had laid out two years ago, and we will continue to move forward at our own pace. We have thrust a tremendous amount of change on our organization and I want to make sure we don't add additional risk into the process by moving too fast. We will continue to grow both organically and through acquisition and we will continue to add value to our shareholders, as we have for the past two-plus years.

We believe the goals of 8% adjusted EBITDA by the end of 2017 and 10% by the end of 2019 are the right goals with the right timeline that will add significant value to our investors. Our management team is very strong and has managed through the change process very well. We all remain focused on achieving the levels of performance befitting a company with the history and market position we enjoy.

So let me wrap up my comments. Even though we are only a couple years into our turnaround plan, we have made substantial progress. Run rate revenue has almost doubled in that time frame, and adjusted EBITDA has grown by over $30 million.

I'm very proud of these accomplishments. The market remains strong and supports further improvements in 2016 and beyond. And I'm excited to see our value-added workforce solutions contributing to our overall financial goals. We can now see beyond our turnaround plan and are more focused on our strategy to grow at or above the market and reach our goal of 10% adjusted EBITDA in the coming years.

Let me turn the call over to Bill Burns to review the quarter and full-year numbers in more detail.

Thanks, Bill. As Bill mentioned, we are very pleased with our overall performance this year, having met or exceeded many of the goals we had set for ourselves. As a result of our focus on revenue growth, margin expansion, and improved operating leverage, the full-year adjusted EBITDA margin was 4.9% compared with 2.8% in the prior year.

Throughout the year, we saw continued strength in our largest business, nurse and allied staffing, with demand remaining near all-time historic levels. And we saw year-over-year price improvements in all of our segments.

Turning to the quarter, total revenue was $193.1 million, up 3% from the prior year and down 1% sequentially. The year-over-year increase was driven predominantly by growth in nurse and allied staffing as well as the impact from the Mediscan acquisition, which was partly offset by the divestiture of our education seminar business. On a pro forma basis, revenue was also up 3% from the prior year, led again by nurse and allied staffing, with Mediscan growing by 15% over their prior-year results.

Gross profit margin for the quarter was 26.1%, up 80 basis points from the prior year and down 20 basis points sequentially. The year-over-year improvement was driven by gross margin expansion in both nurse and allied staffing as well as physician staffing. The sequential decline was entirely due to the divestiture of our education business, which had a gross margin of more than 50%. On a pro forma basis, gross margins improved nearly 190 basis points from the prior year.

Moving down the income statement, SG&A for the quarter was $40 million or 20.7% of revenue, representing a decline of 4% year over year and an improvement of 140 basis points as a percent of revenue. The year-over-year decline was largely due to the sale of our education business, partly offset by continued investments we continue to make in our business.

Sequentially, SG&A increased 2%, predominantly due to investments in both revenue-producing headcount across all of our businesses as well as investments in our IT infrastructure as we continue to migrate away from legacy platforms.

Adjusted EBITDA was $10.9 million, representing a 76% increase over the prior year. As a percent of revenue, adjusted EBITDA margin was 5.7%, representing our second consecutive quarter above what we had been -- what had been our fourth-quarter goal of 5%.

Below adjusted EBITDA, we recorded acquisition and integration charges of approximately $200,000, representing costs associated with the purchase of the Mediscan business. And restructuring charges of approximately $100,000 related to actions taken under our 2015 cost optimization project.

We also recorded a $2.1 million impairment charge on intangible assets for our physician staffing business, as revenue declined 5% for the full year. Further, we recorded a $9.5 million non-cash loss on the change in the fair value of the embedded derivative from our convertible notes, predominantly due to the increase in our share price over that time period. As a reminder, every dollar move in our share price results in approximately a $3 million change to the value of the derivative.

Interest expense was $1.6 million, down approximately $100,000 from the prior year and flat with the prior quarter. The year-over-year decline was due to lower rates on our subordinated term debt. Income tax expense for the quarter was $700,000, which is primarily related to the impact from the amortization of indefinite-lived assets, intangible assets for tax purposes.

As a result of the charges I mentioned earlier, we reported a net loss attributable to common shareholders of $6.1 million or $0.19 per diluted share as compared to a net loss in the prior-year period of $20.2 million or $0.65 per share.

Adjusted earnings per share, which excludes such non-cash items as the impairment charge and the change in the value of the derivative as well as items such as acquisition integration and restructuring costs, was $0.18 compared with $0.03 in the prior year and $0.23 in the prior quarter. For the full year, adjusted EPS was $0.54 as compared with $0.09 in the prior year.

Let me next review the results of our three business segments. Revenue for our nurse and allied segment was $162.1 million for the fourth quarter, up 10% year over year and up 6% on a pro forma basis. Consistent with what we saw in the third quarter, about half the growth came from volume and half from price, with bill rates in both travel nurse and our branch-based business up 4%. On a sequential basis, segment revenue was up 3% due to the impact of the Mediscan acquisition.

We averaged 6,792 field FTEs for the quarter, up 7% from the prior year and up 2% sequentially. Revenue per FTE per day was $259, up 2% year over year and up 1% sequentially. Segment contribution income for the quarter was $15.1 million, representing a 9.3% contribution margin, up 170 basis points year over year and down 100 basis points sequentially.

Turning next to our physician staffing segment, revenue was $27.2 million, down 10% from the prior year and down 12% sequentially. Both the year-over-year and sequential declines were entirely due to the lower volume of days filled across most specialties.

Our advanced practices, which includes physicians' assistants and nurse practitioners, continued to see significant growth, with volume up 39% year over year and 4% sequentially. The advanced practice specialties have a lower bill rate, and as a result, revenue per day filled declined year over year and sequentially. Overall pricing in our other specialties remain strong, with revenue per day filled near all-time highs within each specialty.

Segment contribution income for the fourth quarter was $2.7 million, representing a 9.8% contribution margin, up 150 basis points from the prior year and down 50 basis points sequentially. The year-over-year improvement was primarily attributable to improved pricing and lower operating costs.

Finally, revenue for the other human capital management services segment, which now only includes our search business, was $3.8 million, representing a decline of 64% over the prior year and 49% sequentially. Both the year-over-year and sequential declines were primarily due to the divestiture of our education business in the third quarter.

On a pro forma basis, search revenue declined 7% year over year, primarily due to lower physician-retained search revenue. Our search business is now lapping some very high growth periods as it had grown more than 30% in each of the prior four quarters. We continue to believe this business will grow in the low double digits for the foreseeable future.

Segment contribution income was approximately $100,000 or 3.8% of revenue as compared with $600,000 in the prior year and $400,000 in the prior quarter. The decline in contribution margin was primarily due to a lower gross profit margin for this segment, driven by lower retained physician search revenue.

Turning to cash, we ended the quarter with $2.5 million of cash and $63 million in outstanding debt at par. During the quarter, we used approximately $600,000 in operating cash as a result of increases in working capital. Our days sales outstanding was 70 days, which was 11 days higher than the prior quarter. The increase in working capital and DSO were primarily driven by lower collections, which were down nearly 7% over the prior quarter.

Additionally, DSO was adversely impacted by the divestiture of our education business and the acquisition of the Mediscan business, which resulted in approximately a two-day sequential increase in DSO. It's important to note that there's not been any significant change in the payment terms being offered to our clients that should have driven the increase in DSO we saw this quarter. We continue to believe our DSO should be in the mid-50-day range and it is a significant focus area in 2016 as we work with our clients to ensure they are paying to terms.

For the first nine weeks of 2016, average weekly collections are up 12% over the fourth quarter. For the fourth quarter, capital expenditures were approximately $600,000, in line with our expectations. We used the majority of cash at the end of the third quarter as well as incurred some borrowings under our asset baseline to fund the acquisition of Mediscan.

We paid $28.8 million in cash, net of cash acquired, and included in that amount was an estimate for net working capital, which was subject to a final adjustment in early 2016. As a result, we received approximately $300,000 from the sellers in the first quarter. Total borrowings under our senior credit facility were $8 million as of the end of the period, leaving approximately $40 million of availability.

This brings me to our guidance. As Bill mentioned, we are giving both our usual quarterly guidance as well as full-year guidance for revenue and adjusted EBITDA. After meeting or exceeding guidance for most of 2015, we have a degree of confidence that our business is performing in line with our expectations to be able to give a full-year perspective. Additionally, we believe it's important to set expectations for our business, given the level of investments we expect to make throughout 2016 to optimally positioned the Company for long-term success.

Before turning to the numbers, I'll spend just a minute on the investments we're making. Over the last 18 months, we have been methodically working to upgrade our IT application infrastructure and migrating away from legacy platforms that served us well, but have outlived their utility.

We are now at the juncture of having to make rather significant investments to continue following our IT roadmap. Over the next 18 months, we expect to spend between $4 million and $6 million on these IT projects, with the majority of that expense incurred for our travel nurse and allied platform. Since these systems are mostly cloud-based, we are unable to capitalize the development and migration costs, and as such, they will impact our adjusted EBITDA performance.

In addition to our IT investments, we'll also be continuing to invest heavily in growing our business by hiring additional revenue-producing individuals such as recruiters, workforce solution specialists, and account managers. We have seen unprecedented interest in our workforce solutions and feel that by making these investments in 2016, we will best position the Company for the longer term.

For the first quarter of 2016, we expect consolidated revenue to be in the $195 million to $198 million range, which assumes a year-over-year growth rate of 5% to 6% on a reported basis or 2% to 4% on a pro forma basis. While we don't provide specific guidance for segments, we expect that the year-over-year growth will come from organic growth in nurse and allied in the mid-single-digit range as well as our recently acquired Mediscan business, which is growing in the low double digits.

Turning to margins, consolidated gross profit margin is expected to be between 25% and 25.5%. The sequential decline is primarily driven by the impact of the annual payroll tax reset of between 60 basis points and 70 basis points at the gross profit level.

Adjusted EBITDA margins is expected to be between 3.7% and 4.2% for the quarter. The sequential decline is driven by the annual payroll tax reset, which impacts not only direct operating expenses, but SG&A as well as the impact from incremental investments we're making in the business.

For the quarter, we are expecting to make incremental investments of approximately $1 million. Excluding the impact from the payroll tax reset and those incremental investments, the adjusted EBITDA margin would approximate 5% to 5.5%, more in line with the trends we experienced in the second half of 2015.

Additionally, we expect adjusted earnings per share to be between $0.06 and $0.08, assuming a diluted share count of 32.3 million shares. The sequential decline is due to the same reasons as the adjusted EBITDA margin as well as higher amortization for intangible assets acquired in the Mediscan acquisition.

Turning to the full year, we are expecting revenue to be in the $820 million to $840 million range, representing a full-year growth rate of 7% to 9% on a pro forma -- on a reported basis or 4% to 7% on a pro forma basis. Finally, we expect adjusted EBITDA margins for the full year to be in the 5.5% to 6% range, representing a 60 basis point to 110 basis point improvement over 2015.

Again, the full year will include the effect of these investments, which are expected to be $4 million to $6 million for the full year of 2016. Excluding these investments, our adjusted EBITDA margin would've been approximately 50 basis points higher or 6% to 6.5% for the full year.

This concludes our prepared remarks. At this point, I would like to open up the lines for questions. Operator?

(Operator Instructions) A.J. Rice, UBS.

Maybe just first to explore a little bit of what happened in the [local tenants] business. Is that, as you are describing it, Bill, is that that the vendor somehow dropped the ball? Did you guys drop the ball in not picking up those orders somehow? Give us a little bit more background on how -- what happened, happened.

That wasn't for the locum tenens business. That was for the nurse and allied business.

Oh, really? Okay.

The issues we had with applications was for the nurse and allied business. And it was kind of twofold. One was regarding jobs that weren't getting posted, and we probably should have seen that earlier.

We started to see a slippage kind of around the Thanksgiving time frame. There wasn't a step change. It was kind of gradual, but we always have a little bit of noise and a little bit of change during the holiday season. It wasn't really until after Christmas that we realized that this looked like a sustained drop in number of applications, and it took us two or three weeks to figure out what the heck was going on.

So it just happened at a time of year where the noise of the normal trends kind of got in the way of us seeing it. We do track it on a regular basis. But we have put some additional controls in place to make sure that we see it more now than we had.

We will have a weekly audit process that we'll have someone go check every site that has a job posting from us and make sure the process works correctly. I was already in the process of hiring someone, for the lack of a better title, as Chief Recruiting Officer that will spend their full time on candidate attraction and the application process.

And we -- there is a third one I have in here as well and I can't remember what it is off the top of my head. But we've put several things in place to make sure that we stay on top of this and monitor it going forward. The good news is our application levels are back to where they were beforehand.

Okay. And so to the extent there were -- the problems with the applications, is there any way to translate that into how much actual business you may have lost or you perceive you don't --?

Well, it's a lot of business. And we have not finished all the analysis because our focus was to get it back on track again. So we have several consultants on board reviewing what happened and why it happened.

I don't know what happened to those applications, which is part of what we want to find out. Where did they go? Did they just go disappear into the Ethernet? Do they still exist somewhere? Can we capture them back again? But we haven't translated.

We do know our conversion rate. We do know generally how many applications it was. We could extrapolate that into a revenue number. We haven't finished that work yet.

Okay. Then since it was more than nurse staffing, and I misunderstood that. The locum tenens business or the physician business where you are down sequentially and I know you made some management changes there, too, can you tell us sort of what your assessment is? My perception is the market is doing better than you're doing. So can you -- do you have a sense of what the issues are there and what needs to be addressed?

Yes. You are right: the market is doing better than what we are doing. And it was interesting because I felt pretty good about all the actions we had taken about restructuring the team and how we were going to market and changing out some of the people and upgrading the management team.

And I was kind of at a loss as to why we weren't seeing the results. I went up there at the beginning of the fourth quarter and was reviewing metrics and numbers. And it jumped out at me that our productivity was at an all-time high. And it's kind of a strange thing to look at, because the team was almost happy that the productivity was an all-time high.

The problem was it was about 10% higher than we've ever seen it before. And although maybe that's good in some ways, it's not a recipe for growth. It means we weren't going to squeeze another 15% or 20% out of people from what we've historically been able to get.

So it showed to me that we were under-invested in this business. We had not been adding people along with the demand we had seen in our ability to fill all the jobs we had. So this is not a silver bullet to solve all the problems in this business. I obviously decided I needed a leadership change as well, but I think this goes a long way to explaining why we weren't getting some of the growth we were getting.

We've now added -- I don't know if you have the percents?

Yes, more than 10%.

More than 10% additional recruiters into the business since the beginning of the fourth quarter. And I think that's -- and we are up to the level we expect to be at now that would be able to drive growth. We've actually had decent -- I shouldn't say decent -- we've probably have the best-booking two months that we've had in maybe five or six quarters in January and February of this year.

It hasn't translated yet into the revenue and it probably won't until the second quarter going forward. But I feel like we've addressed at least a couple of the big issues here and that we should get this back on track. We're looking at -- we're not looking at a huge growth in physician staffing in order to achieve our full year of guidance this year. We are looking at kind of a probably still down year over year in the first quarter, flattening out in the second and third quarters, and a little bit of growth in the fourth quarter. Kind of a flat year-over-year kind of number.

I hope to do better than that, but I've already burned and I'm already three or four quarters behind where I expected to be. So we are not planning on a big step change, but I do believe we've addressed several of the issues.

Okay.

AJ, this is Bill Burns. I'd just add one more comment to Bill's remarks about the locum's business in the fourth quarter. The other thing that it's impossible to quantify, but we did change their front-end systems out during the fourth quarter.

In the fourth quarter.

So they are now off their legacy system that they had been on and have now migrated. So there was --

There was a disruption.

There was some disruption to it for visibility, etc. But that's now behind us and the team is now working solely on the new platform.

Okay. Maybe I'll throw out one last question. On the IT investment, you're calling out there the $4 million to $5 million. Is that specific for this year or is that a new level of run rate that we should think about going forward; you are just going to be spending $4 million to $5 million more because of this new system.

And is there any -- I know you said this was the amount you are expensing, given cloud-based focus, etc. Is there any incremental capital dollars that are being allocated to this project as well?

Well, let's start with capital. There is not a lot of capital increases in 2016 that we are planning on. This is almost all cloud-based systems that will hit our P&L. No, the reason we wanted to outline them -- if they were ongoing, it's like our recruiter investments. We make recruiter investments all the time. We're not trying to spell those out specifically because we'll continue to invest in recruiters every quarter as long as the market remains strong.

And so you can't kind of pull those out and say well, our underlying performance. Those are normal business-type investments. These are exceptional -- I hate to say one-time. But they are very specific project-based investments that will end when we convert the systems over to the new system, and they will not be ongoing.

So we could not do it and we would do $4 million or $5 million more of adjusted EBITDA this year. But we've got a 30-year-old technology system that has to be upgraded. And at some point, I have to do it. I've waited 2.5 years because I wanted to make sure the Company was in a better place and financially strong to do it.

And it's going to take about 18 months to get it done because we don't want to disrupt the business and put a lot of risk into the operation. So it will take us about 18 months, and after that time, that will stop being spent.

That's right.

Okay, thanks a lot.

Jeff Silber, BMO.

Thanks so much. Wanted to shift gears towards some of your longer-term goals. You mentioned you think you will still be on track to hit adjusted EBITDA margins of 8% at the end of next year and then continue on at 10% the end of 2019.

What kind of revenue growth are embedded -- is embedded, excuse me -- in those kind of forecasts? And will we see more of the leverage on the SG&A side? Or you expect gross margins to go up as well? Thanks.

We are expecting kind of the 7% to 8% high-single-digit growth in order to achieve the 8% and the 10%. The 8% we believe we can achieve without a lot of improvements in gross profit, although it will make it easier and maybe bring it forward a little bit if we can see that improvement.

In order to get to the 10%, we will need to see a gross profit improvement. We're going to lay that out in our new investor relations presentation that will be put up next week on our website that shows the levers that we need to pull in order to get to the 10%.

And increasing our gross profit will be partly through pricing and a lot through mix. We have businesses that have a significantly higher gross profit than our average gross profit for the Company. And in particular, our local allied business is over 30% gross profit. It's only $40 million, $45 million today. We want to grow that faster than our other businesses.

Our search business has a 60% to 65% gross profit. We believe we can grow that at double digits and that will help our overall gross profit. Part of the Mediscan business and particularly the charter school business has well over 30% gross profit. We expect that to grow faster than our other businesses.

So there's several things we need to do, but generally, it will be through about 7% to 8% revenue growth and some gross profit improvement. The 8% we'll get there without the gross profit improvement, but we expect to have some between now and then as well. And the 10% will require some gross profit improvement.

All right; that's great. I'll take a look at that presentation when it's up. I know there have been concern or some concern in the market about the potential tapering affect from ACA. Are you hearing any of that from your customers?

We are not so far. We have not seen any slowdown in the level of demand from our customers. They -- the official numbers are I think 1 million or 1.1 million new people have come into the Affordable Care Act this year, but we have not seen the trends -- and our particular hospitals trend downward either on their hospital admissions or their ambulatory and outpatient services.

So no, we have not heard that at all. I hear the concern out there in the market from investors and from analysts, but I have not seen it in our customers yet.

Okay, great. And then just some numbers-related questions. For 2016 overall, what should we be modeling for depreciation and amortization, interest expense, tax rate, share count, and capital spending?

That's a very good question and I'm going to let someone else answer that one. (laughter)

So at this point, I wouldn't change much on the interest expense from what we saw in the fourth quarter. It would continue along that trajectory, borrowing us doing some kind of a refinance.

And it has been something we've talked about. We continue to look at. We do think that we can bring our overall interest cost down, but right now, we run at about $1.6 million per quarter. That's kind of the level I would expect going forward through 2016.

Our depreciation and amortization for the fourth quarter is a pretty good indication for what you would expect through the next four quarters, though I would say you probably have to top it off by a couple hundred thousand dollars for the Mediscan acquisition, as we only had two months of amortization in the fourth quarter.

And then I'm sorry, tax rate and capital spending?

Yes. So the tax rate is one we've said -- a rate is impossible to give you at this point in time. We have a full valuation allowance that is still in place, so the only thing that -- there's three items that affect our taxes. It's this amortization of indefinite-lived intangibles. It's state, local taxes that that aren't based on income necessarily, and also some international taxes.

Overall it's between $700,000 and $1 million a quarter. We happened to close Q4 at $700,000, but I've seen it -- I expect it will be in that $700,000 to $900,000 range per quarter.

Then I'm sorry, capital spending?

For CapEx, again, we don't have any major planned investments other than -- I would have to -- actually, I should point this out. We don't have any big IT investments planned that relate to the system migration that we talked about. We're doing our normal PC refresh, etc.

So in a normal basis, our capital expenditures are between $2 million to $2.5 million on an annual basis. This year, though, there will be some anomalies in how it gets reported on the statement of cash flows. We have our new corporate facility here in Boca that we'll be building out over the next two quarters. So I would expect to see some additional CapEx related to the leasehold improvements.

But the interesting thing is a lot of the money comes from our landlord from tenant improvement incentives.

But it shows up in our capital incentives.

Right. So it will be effectively a gross up on the income statement. So I can't give you that, but we may have to advance the money to -- for the construction before we receive it back from the landlord. But overall for 2016, it should be pretty much a wash I would expect at this point.

So the real underlying cash capital expenditures will be about what they were last year. But the actual reported capital expenditures will look higher because of these real estate moves.

Yes. And there is a chance that we'll spend a little more than the tenant improvement allowances. So maybe I would model up to $1 million above our normal spend of $2.5 million just for this year.

Okay, makes sense. And share count: keeping it flat with 1Q levels is the way to go or --?

Yes. Except you have to remember there is an annual vest date that hits right at the end of the quarter. So there will be -- going out into the subsequent quarters, there will be several hundred thousand more shares at the end of March that will weigh into the full quarter for Qs 2, 3, and 4.

Okay. Well, thank you so --

It will go up a little bit, yes.

Tobey Sommer, SunTrust.

Thank you. I'm curious. You said that the slippage in the external sites kind of materialized around Thanksgiving. Was it -- is this a VNS kind of related issue and do you plan to continue to work with these external sites? I'm curious what triggered it, what happened? Something on their end?

Yes. It's actually two different job board aggregation sites. One of them we have a very strong relationship with. And once we discovered what was going on, they've been very cooperative. And we figured out what the issue was and we got it back on track. Once we discovered it -- and I could argue along with you guys that we didn't discover it fast enough, regardless of the noise that normally happens around the holidays. But that's pretty straightforward.

The other one is one that we don't work with as much. And that's the one where the applications kind of went into the ether. We don't know where they went, and they were redirecting to a third-party site. We have not been able to talk to the third-party site yet. We don't know what happened to those applications. The company has been very cooperative, though, and they have got it back on track again and we are now getting those applications.

And so I don't have all the answers as to what happened with that side of it. And we're still exploring that, but they've been very cooperative and they got us back on track again and we are getting the applications. So I don't believe we'll have an issue going forward.

I don't know if it's a third-party site issue or this aggregator issue or just a broken process. We just don't know yet. So I don't want to speculate too much until we finish the investigation and find out what the whole story was.

Okay. But this was you sort of posting your job, so in the act of recruiting. Not necessarily submitting an application for a job already.

One was about job postings, that we didn't get them all posted. And that got fixed pretty quick. The other one was about applications. So the first one was about posting.

The second one was about applications. And when you'd click, you'd apply. You'd fill out the normal application. It looks like you are applying. It says thank you for applying to Cross Country Healthcare. We will forward this to the Company. And then it went nowhere. Well, I don't know where it went. It didn't come to us.

Thank you. I appreciate it. Will the IT investments that you're making mitigate these issues and maybe other potential issues as you kind of like think about troubleshooting processes? And have prior systems in your assessment restrained growth?

Because it does seem like you are adding some infrastructure, like the chief -- the person that's going to monitor this kind of stuff on a weekly basis. And I'm just trying to get a sense for what the goal is of the new IT systems [and what they achieve]. Thanks.

The goal is severalfold. But no, it's not that the current systems are inhibiting our growth. They actually do a very good job; they do everything we want them to do. The issue is that because they are 30 years old and they are a green screen system, they are just not as efficient.

So first of all, the IT support required maintaining that homegrown system from 30 years ago is significantly higher than it would be when we change it out to another cloud-based system. Secondly, we have to have several manual processes built around an old system like that in order to interface with current media and do things the way we want them to. And we believe we'll get some operating efficiencies by converting from this 30-year-old system into a system that has better processes, interfaces with social media better, posts jobs more efficiently, and keeps track of things better.

So no, I don't think it's inhibiting us. It actually is a good system. Does everything we want it to, but it's very expensive to maintain, and we have manual processes built around it that we'd like to get rid of. So those are really the goals.

And look, a 30-year-old system just isn't sustainable long term. I need to get ahead of it before it breaks on us. It doesn't look like it's going to break. It works very well and we have great people here maintaining it, but in the end, it needs to be changed.

Okay. Thank you. Just a couple of numbers questions for me. What are the trends like in your fill rates of MSP contracts? I'm kind of interested if this switch impacted your performance there. And I was wondering if you could remind us what the organic growth was in 2015 and in 4Q. Thank you.

MSP fill rates -- it's interesting. As the market got really hot, our fill rates -- well, you have to look at fill rates in two different ways. Our fill rates from our customers' perspective have remained the same, at some high 90% level. Because we filled the jobs for the customer, whether we fill them or we subcontract them. But those levels are based on service level agreements have been the same either before or after the high level of demand has come in.

But partially what we fill at the MSPs certainly went down as the market got tighter. And some of that is on purpose. We have some places where we can put a nurse that is more financially beneficial to us. And so sometimes, we'd rather sub certain positions at our MSPs so that we can put our nurses somewhere else that makes more sense to us.

So it did go down quite a bit. Maybe 10 percentage points after the market got really, really tight. They've actually gone up over the last couple of quarters a little bit again as we've put a little bit more focus on them and started to make sure that we maintain a certain level of market share at our MSPs. But overall, it's reduced from before the market got hot, but it's been about steady since then.

You want to --?

Then to your second part of the question on the underlying results for the business. If you were to look at our business on a strictly pro forma basis, which were to include Mediscan for the full year and exclude our education business for the full year, we would have been a little north of $785 million in revenue, which is about a 4% increase over the prior-year period had the full year of Mediscan been included in the full year's education been excluded.

And just some color on that. That implies the organic growth on the nurse and allied segment is in the mid to upper single digits. Our search business would've grown at about 22%. And again, physician bringing down the overall average with a high-single-digit decline year over year.

Thank you.

Bill Sutherland, Emerging Growth Equities.

I'm curious on Mediscan. I know they have a seasonality that is pronounced in terms of a lower, I think, calendar third quarter. So is that going to be noticeable in your quarterly phasing?

They certainly do. During the summer months, obviously, when you do a lot of business at school systems, you'll see a slowdown. So half of their business is in schools that we will see a slowdown in the summer. I'm not sure it's going to be a huge, huge impact. Bill -- do you?

Yes, I mean, right now, it's roughly half the Mediscan business service is the education space. So there will definitely be a seasonal impact in the third quarter. I'd just point out that that also happens to be the quarter that is seasonally the strongest in our physician business. So overall to the combined Company, I don't think we'll see a dramatic change in seasonality from quarter to quarter.

Okay. And then on the Mediscan growth that you all called out, looking for low double-digit in Q1, is kind of the same kind of rate that we'd expect for the full year?

Low double-digit growth, is that what you said?

Yes.

Yes, we expect them to grow at double digits. And it's driven a lot right now by their public school and their charter school business. But even their healthcare staffing we expect to have decent growth from as well because we have other services that they didn't have before and there's some cross-selling opportunity. So we are pretty bullish on their ability to grow at double digits.

Great. And then on Workforce Solutions, I know it's early to call it out, but can you give us some feel on the size and impact that it could start to have in the 2016 model or maybe looking a little bit further out?

Yes, so winning four MSPs at the beginning of the year is a second-half revenue thing. So I know people may be a little bit concerned that we are guiding to not great revenue in Q1, but we are still looking at $820 million to $840 million for the year, which applies some pretty good sequential growth throughout the year.

And some of that is driven by some of these new wins. A couple of these MSPs we won are pretty large and we expect them to have a decent impact on the second half. The one that you can extrapolate a little bit better is the 500 incremental positions we expect to outsource through our OWS. And that's -- I don't know if we want to get a range on that. That's probably a $5 million to $10 million improvement in the second half of the year just from those two projects alone.

The RPO is less of an issue. It's hundreds of thousands of dollars a quarter. It's not millions of dollars. The two big ones will be the new MSP wins and the Optimal Workforce Solution wins.

Okay. And then -- this is just a clarification. Maybe I didn't hear correctly how the search results in the Q4, because it sounded like they were soft and but you called -- but you directed us to think about low double-digit growth going forward.

Yes, I'm a little disappointed that when we got into the second and third quarter of 2015, I had pushed management to make sure that -- we knew that when we got to the fourth quarter of this year, we were lapping either a 38% or 40% year-over-year -- 40% year-over-year growth. So I pushed them hard to get their investments in place and make the plans so that we could continue to grow even as we lapped that 40% year-over-year growth.

You notice we did really, really well in the third quarter last year. Part of the reason we did is we did not get the investments in the MDA the way we should have and we didn't get investments into our search business the way we should have. So they just didn't get the investments in soon enough.

The business is much better run. There's good demand there. We just didn't get the people in quick enough. So we saw a little decline in Q4. We'll see a little bit of softness in Q1, but it will bounce back again. It just took us a while to get the investments in.

Okay, thank you.

Randy Reece, Avondale Partners.

First of all, I wanted to make sure I understood your EBITDA margin targets. When you say 8% by 2017, 10% by 2019, are you talking about a fourth-quarter number in those?

We are talking about a fourth-quarter number. There is a chance the 8% for the fourth quarter of 2017 may come a quarter early because we were a little bit ahead this year on the run rate basis and the projects that we are doing, the investments we're making, will make an impact in the second half. But right now, we are sticking to the fourth quarter of 2017 and the fourth quarter of 2019. So these are run rate numbers for that whole quarter.

And on the subject of job board aggregators, it would be natural if your share of leads and share of applications from aggregators had risen over the last couple of years. I was just wondering if you could give us a feel for how much your lead flow might have shifted away from other sources and coming from aggregators over the past couple years. Just to get a sense of why a disruption would be significant.

I don't have those numbers. I don't know what the total jobs are through aggregators. And so I don't know what my market share is. I don't think I have that -- any of that information.

And I don't have data in front of me on the mix of our source of apps, whether it's online versus -- I think word-of-mouth and referrals are the highest, but I don't know the exact percentages.

I'm sorry, Randy. We don't have that handy with us.

So was there a disruption in your feed to an aggregator from your own job boards or -- I'm trying to get a better understanding of why your job listings would've disappeared from that aggregator.

No, we feed one of those companies the jobs directly. And there was no disruption on that. It was just about how they got posted and what the kind of algorithm was from a quality of duplicate standpoint. We got that kind of back on track again fairly quickly. That was an easy one to fix. It just took us longer than we should have taken to figure out what the problem was.

The second one was more about the application process, and I still don't know what happened. It looked very reasonable. Our jobs are there. Our logo is there. You click apply. It looks like you are applying. It says we are forwarding this to Cross Country Healthcare and then we never get it. So we don't -- that's fixed now, but I just don't know what happened during that time frame when we weren't getting those applications.

All right. Thank you.

Matt Blazei, Lake Street Capital Markets.

Thanks for taking my question. Again, I am following up on the search business again, which has been growing, as you said, 30%. I think you are hoping to see that business do -- previously you were hoping to see that business do $16 million to $18 million in 2016.

It's a pretty precipitous drop off to go from plus 30% to negative 7%. And obviously you are concerned; you are saying that's going to continue into Q1. What should we think of in terms of the growth rate of that business going forward?

It should be low double-digit growth.

Double digits.

And it should be able to maintain a 15% to 20% contribution level. Even if it has a slower Q1 than I'd like it to have, it's -- there's always a little bit of lumpiness in search anyway. It's not quite as trendable as the staffing business is, but it's well run. It's got a good team there. We see the demands. It will bounce back again.

And I would just point you back. If you look back to 2014, when we began making more significant investments, it was about a two-quarter ramp. It took about two quarters to get the growth. So that's why we are saying Q1 for this year will be a little bit softer.

Yes, the current leader of that business started in the second quarter of 2014 and by two quarters later got the growth back to that double-digit -- actually to 40% year over year. So again, just getting these investments in later than we anticipated, it is kind of a couple of quarter process.

And just to again clarify with your guidance, in say the midpoint of your guidance for Q1, you are looking for about $10 million in year-over-year revenue growth. I would assume that that -- the Mediscan acquisition alone accounts for at least that much, if not more, given their growth rate.

Yes, but you lose the education business, though.

Right. So your guidance -- I think you had said pro forma was up 3% to 6%?

2% to 4%.

2% to 4% [growth] guidance. Okay. And can you talk at all about your expectations for free cash flow in 2016?

Yes. We've obviously said that our free cash flow we believe should approximate EBITDA minus cash interest, cash taxes, and CapEx. So I think we've kind of given you the CapEx we expect for the year. The interest -- I think our cash interest is about $300,000 less than the reported -- $300,000 or $400,000 less than the reported interest because of the amortization of debt issuance costs and original issue discount. So we probably have about $1.2 million to $1.3 million of cash interest per quarter that you would model in there.

And then as far as cash flow from operations, if you look at 2015, we generated about $18 million on $37 million, $38 million of adjusted EBITDA. So a little behind, but we did have a slippage in our DSO. And so that's become a very big focus for us, and as I mentioned in the earlier portion of the call, we believe we've got that back on track now. It has been a much more concerted focus on driving collection. So I would expect us to bring the DSO back in line with sequential improvement.

We expect pretty strong cash flow this year. If we -- our guidance for the full year estimates approximates another $10 million of adjusted EBITDA for the year into the high $40s million to $50 million. So we should have a very decent cash flow year.

And with these incremental IT expenses, should they -- should we expect that to be a one-time 2016 issue? Or is that going to continue to be a stairstep in SG&A costs in 2017 as well?

There will be a tail to this into the early part of 2017. Right now, we are thinking this is an 18-month project. There's some projects that will wrap up sooner in 2016. So in again earlier in the call, I referenced the total spend for IT of $4 million to $6 million on these projects. We said about $4 million to $5 million will be spent this year. So you can kind of extrapolate there's maybe $2 --

There's $1 million, $1.5 million in 2017.

Right. $2 million in 2017 may trickle through.

I see. Okay. Thank you, guys.

Mitra Ramgopal, Sidoti.

First, I know you can't quantify the potential loss of business regarding the project delays and the vendor issues. But your best sense, would that have gotten you to sort of the high end of your guidance for the fourth quarter as you look back at it?

Actually, the revenue guidance miss in Q4, to answer if we had done what we wanted to in physician staffing, we would've been above the consensus. But yes, there was still -- I do think that the loss from the lack of applications in nurse and allied may have also gotten it.

If we had gotten both, if we had gotten physician staffing on track and the revenue we would've gotten from the additional applications, we would've exceeded consensus in the fourth quarter.

Thanks. And if you can remind us again, coming back to the glitches with the vendors. I mean, roughly how many vendors you use and how comfortable you are that something like this would not sort of happen again.

With the controls we are putting in place, I feel pretty good that it won't happen again. But it looks like it really is an isolated incident that it's just a weird set of circumstances that I don't see happening again, especially with some better controls and monitoring of what's happening with our jobs and with our applications.

So no, I don't anticipate it happening. I feel pretty good that we have everything in place that we need to to ensure it doesn't happen again.

Thanks. And if you look at the end of the year in terms of MSP, roughly what percentage of your business is that? And the rate of getting four a quarter in terms of the goal, where do you see that being, say, by the end of 2017 when you're looking to get that 8% EBITDA margin?

For the fourth quarter, our MSP business represented about 30 -- almost 34% of nurse and allied and 27% of total consolidated revenue.

And I do think that will probably start to go up a little bit. As we've now exited our education business, which had nothing to do with the MSPs, and brought on Mediscan, which may be part of some of the MSPs, I expect those percentages will certainly increase over the next couple of years.

Okay, thanks. And then finally, looking at the expectation of getting from 8% to 10% in terms of margins by the end of 2019, how much of that really is going to be more of an internal operational improvement, etc., versus being able to grow the top line and mix?

We need some operational improvements, which is why we are investing in these technology changes. But most of this is about revenue growth, leverage from revenue growth, and improvements in our gross profit, either through pricing or mix. That's really where it will come from.

Okay. Thanks for taking the questions.

Okay. Thanks, everyone. We appreciate it. Thank you for joining us this morning. We will update you with our first-quarter results in early May. Thank you.

Thank you. A replay of today's conference will be available through March 24, 2016. You may access the replay by dialing 1-800-395-7443 or 1-203-369-3271, and please use the passcode 2016. Thank you for joining. You may now disconnect.