AMN Healthcare Services, Inc. (AMN) Q4 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to AMN Healthcare Fourth Quarter and Full Year 2019 Earnings Call. At this time, all participants are in a listen-only mode. And later you will have an opportunity to ask questions. Instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Randy Reece. Please go ahead.

Good afternoon, everyone. Welcome to AMN Healthcare’s fourth quarter and full year 2019 earnings call. A replay of this webcast will be available at amnhealthcare.investorroom.com following the conclusion of this call. Details for the audio replay of the conference call also are in our earnings release issued this afternoon. Various remarks we make during this call about future expectations, projections, plans, events or circumstances constitute forward-looking statements. These statements reflect the company’s current beliefs based upon information currently available to it. Our actual results may differ materially from those indicated by these forward-looking statements as a result of various factors, including those identified in our most recent Form 10-K and subsequent filings with the SEC. The company does not intend to update the guidance or any forward-looking statements provided today prior to its next earnings release. This call contains certain non-GAAP financial information. Information regarding and reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are included in our earnings release and on our Financial Reports page at amnhealthcare.investorroom.com. On the call today are Susan Salka, Chief Executive Officer; Brian Scott, Chief Financial Officer; Kelly Rakowski, President of Leadership and Search; Ralph Henderson, President of Professional Services and Staffing; and Dan White, President of Workforce Solutions. I will now turn the call over to Susan.

Thanks so much Randy. And welcome everyone to our fourth quarter and full year 2019 earnings call. The team at AMN is very excited to be entering this new decade in such a strong position and in a promising market. We continue to see the effects of an unprecedented demographic change, resulting in increased demand for health care services and significant workforce shortages. We help health care organizations successfully navigate this high demand era, with our total talent solutions. At the same time, the AMN commitment to social responsibility and good governance aligns with our clients and other stakeholder’s initiatives and enables us to make a greater positive impact in our communities. Our team has worked hard to become the most trusted innovative expert in total talent solutions. Working together with health care organizations and professionals, we are always ready when our clients and their patients need us most. Our strategy progressed in 2019 with the June acquisition of Advanced Medical, an innovative provider of therapy and nurse staffing to both health care facilities and schools. This acquisition provided us important capabilities and capacity to address the growing labor needs of our clients across multiple settings. Eight months into the integration things are going very smoothly. And we continue to be impressed with the talent that has joined the AMN family. Allied Staffing was a standout performer in 2019 reaching $323 million in annual revenue, 29% higher than the previous year. Other high performing, but smaller businesses included international nurse staffing, rapid response, labor disruption and our predictive analytics and scheduling business. Our other Workforce Solutions segment revenue reached a record $477 million in 2019, reflecting AMN’s focus on increasing our strategic workforce solutions capabilities. Within this segment, we consolidated our interim leadership and permanent placement businesses into an integrated leadership solutions division. This move strengthened our go to market strategy and bolstered support of our key brands. In January of 2020, we announced the signing of an agreement to acquire Stratus Video, the leader in providing remote video healthcare interpretation services. We are pleased to share that earlier this week, we received regulatory approval for this acquisition and we expect to close tomorrow. Qualified healthcare interpretation, which is mandated by federal and state regulations is a service that many healthcare organizations do not have the resources to provide for themselves. This acquisition helps further AMN’s ability to deliver quality, compassionate patient care, and to increase efficiency. It also aligns with our commitment to equality and inclusion by supporting greater access to care for limited English proficient patients, death and hard of hearing individuals, along with their families. In our market leadership position, we feel a responsibility to develop more ways to help our clients deal with the intensifying challenges of labor supply and complex health care demand. Some of our new capabilities and solutions will come from internal development. For example, we are working with health care professionals to develop mobile applications, designed to create a personalized experience. Our team is also providing ways for clinicians to seamlessly interact with us across multiple channels around the clock. For clients, we are enhancing their access to richer data and insights and we are leveraging our investments in VMS, credentialing, scheduling and predictive analytics to create a more integrated platform. To further broaden our workforce technology solutions, we recently acquired b4health, a technology innovator with an integrated float pool management solution and VMS for healthcare facilities. These are just a few examples of how AMN’s strategy guides our decisions and execution. Over the next year, we certainly have a lot of work to do to translate these investments into the expected benefits for our clients, candidates, patients, team members and our shareholders. Fortunately, we have an incredibly talented and committed team and we feel extremely confident in our ability to meet our high expectations. Now, let’s take a few moments to look in the rearview mirror and discuss our strong results for the fourth quarter. We reached another record high in revenue at $587 million. Gross margin was 33.6% and adjusted EBITDA was $75 million or 12.9% of revenue. Our Nurse and Allied segment posted revenue of $389 million, 18% higher year-over-year with 6% organic growth. Segment revenue beat expectations on exceptional results in our labor disruption and rapid response nursing businesses. Our largest business travel Nurse staffing grew revenue 9% year-over-year. Demand remained very strong in the fourth quarter and the strength has carried into 2020. Lately hours and bill rates are also improving, but not quite enough to accelerate new supply into the industry. Allied reported 45% revenue growth in the fourth quarter, including our acquisition of Advanced. Organic growth for the quarter was 7%. As we previously noted and expected, demand in Allied Staffing was tempered by a slowdown among our skilled nursing clients due to reimbursement changes. This has been offset by growth in other specialties, particularly speech therapy, imaging, respiratory and lab professionals. In the first quarter, we expect Nurse and Allied revenue to be up 14% to 16% year-over-year with a combination of organic growth and the benefit of our Advanced acquisition. In the Locum Tenens segment, fourth quarter revenue was $78 million. Volume was roughly in line with our expectations, but revenue was impacted by a higher mix of lower rate specialties and a negative sales adjustment. Recently booking trends have been favorable and we believe Locum's revenue will be flat to up slightly year-over-year in the first quarter. Our Other Workforce Solutions segment recorded fourth quarter revenue of $120 million, up 2% year-over-year. Our Leadership Solutions division makes up more than half of this segment's revenue and had a very solid quarter of performance growing revenue at 7% year-over-year. Our Technology Workforce Solutions which include our Vendor Management Systems and workforce optimization performed well again and grew double-digits year-over-year in the fourth quarter. The one business that was down year-over-year in this segment is revenue cycle solutions. This was due primarily to disruption created by some organizational changes we made throughout 2019. As we begin the New Year, we expect gains in most of the businesses within this segment and are projecting the Other Workforce Solutions segment revenue to be up 2% to 3% year-over-year on an organic basis. With the addition of b4health and Stratus, the other Workforce Solutions revenue is expected to be up 15% to 16% year-over-year in the first quarter. Overall, we are very pleased with our latest results and the outlook for 2020. As importantly, we are proud of the impact and commitment to AMN’s purpose shared by our extraordinary team members every day. I am inspired by the talent and passion exhibited by my colleagues through both our work with clients and health care professionals and in our communities. I can never say enough just how grateful we are for all they do. In a few minutes Kelly, Ralph and Dan will join us for the question-and-answer session. On future calls, we're going to mix things up a bit and we'll include one or two different leaders to discuss particular aspects of our business. For example, we expect to have one of the Stratus' leaders join us on our next earnings call. We hope this will provide our investors and analysts with a broader and deeper view into the business. Now I will turn the call over to Brian, who will provide more insights into our financial results.

Thank you Susan and good afternoon everyone. Fourth quarter revenue of $587 million was above the high end of our guidance range. The outperformance came from our Nurse and Allied segment with about $10 million more than expected revenue from labor disruption activity in the quarter. Reported revenue grew 3% sequentially and 11% year-over-year. On an organic basis, revenue was up 3% both sequentially and year-over-year. Gross margin for the quarter was 33.6%, up 100 basis points from last year and 10 basis points from last quarter. The higher year-over-year margin resulted from an increase in the high margin labor disruption revenue in the Nurse and Allied segments along with a favorable business mix shift within our Other Workforce Solutions segment. Fourth quarter Nurse and Allied segment revenue was $389 million, 18% higher than prior year and up 7% sequentially. On an organic basis, segment revenue was up 6% over prior year driven by the increase in labor disruption revenue this quarter. Our rapid response in international businesses grew double-digits over the prior year. The average travel nurse bill rate was up from the prior year by about 3%, reflecting an increase in rapid response assignments and some improvement in contracted bill rates. Nurse and Allied gross margin of 28.6% was 140 basis points better than prior year and up 70 basis points from prior quarter, due mainly to the higher-margin labor disruption and rapid response revenue. With this higher gross margin, segment's EBITDA margin of 14.3% was 50 basis points higher than prior year and up 120 basis points sequentially. Fourth quarter Locum Tenens segment revenue of $78 million was 5% less than the prior year and down 7% on a sequential basis. As Susan noted, the quarter included unfavorable sales adjustments of about $1 million. Gross margin of 26.5% was 70 basis points lower than the prior year and 100 basis points down sequentially. This decline was a result of these higher than normal sales adjustments in the quarter, which had about 80 basis points impact on the margin. Segment EBITDA margin was 7.9% with a lower gross margin offset by a $900,000 favorable malpractice reserve adjustment recorded in SG&A. Other Workforce Solutions segment revenue was $120 million in the fourth quarter, up 2% year-over-year and down 1% sequentially. Segment gross margin of 54.3% increased 260 basis points year-over-year, due mainly to a favorable business mix shift. Consolidated SG&A expenses were $133 million or 22.7% of revenue, compared with $111 million or 21% of revenue in the same quarter last year. The year-over-year increase includes about $7 million of SG&A from the Advanced and Silversheet acquisitions, $5 million from an adjustment to the Advanced earn-out reserve and $8 million higher employee-related expenses to drive our growth strategy. Fourth quarter adjusted EBITDA of $75 million was 14% higher year-over-year. Adjusted EBITDA margin of 12.9% was 30 basis points higher than higher year-over-year and up 70 basis points sequentially. EBITDA margin in the quarter was above our guidance in large part from the higher than expected labor disruption revenue. We reported net income of $27 million and diluted earnings per share of $0.58 in the fourth quarter. Adjusted earnings per share was $0.85 compared with $0.81 in the year ago quarter. Our GAAP income tax rate in the quarter was 28% and was 30% on an adjusted basis. Our tax rate is expected to be 30% in the first quarter. Cash provided by operations was $79 million for the quarter and $225 million for the full year. Days sales outstanding at quarter end was 55 days, a nine-day improvement from the same quarter last year. At December 31st, our cash and equivalents totaled $83 million. Capital expenditures in the fourth quarter were $10 million. At quarter end, our total debt outstanding was $625 million and our leverage ratio was 2 time to 1. As Susan mentioned, we are expecting to close the Stratus Video acquisition tomorrow for a purchase price of $475 million. We intend to fund the purchase using a new five year $250 million term loan, a $175 million draw on our revolving credit facility, and $50 million from cash on hand. The interest rate on both the term loan and revolver are calculated using a LIBOR rate plus a spread based on our leverage ratio and will be at approximately 3.5% assuming a pro forma leverage ratio of 3 point 3 times to 1 at closing. Now, let’s turn to first quarter guidance. The company expects consolidated revenue of $598 million to $605 million, up 12% to 14% year-over-year. This includes $15 million of revenue from Stratus Video from the date of acquisition. On an organic basis, consolidated revenue will be up 2% to 3%. Gross margin is projected to be 33.3% to 33.5%. SG&A expenses as a percent of revenue are expected to be 23.1% to 23.3%. Adjusted EBITDA margin is expected to be 12.3% to 12.5%. Included in SG&A is stock-based compensation expense of $5.3 million and acquisition, integration, and other external expenses of about $8 million. Other first quarter 2020 estimates include the following; interest expense of $9.8 million, depreciation expense of $7.5 million, and amortization expense of $12.1 million. Diluted share count is expected to be 47.6 million shares. A couple of other items to note. We are just starting the intangible valuation analysis for Stratus. So, the quarterly amortization expense is subject to change. In addition the depreciation, amortization, and interest expense amounts only reflect the impact of having Stratus in our results for half the quarter. And now we’d like to open up the call for questions.

[Operator Instructions] Our first question comes from the line of Tobey Sommer from SunTrust. Please go ahead. One moment please. Please go ahead.

Thanks. I was wondering if you could comment on what you think is required to start to drive bill rates sufficiently higher such that draws new supply into the nurse staffing market?

Hey, Toby. This is Ralph. Thank you for the question. We did see some improvement in the quarter. I think we called that out up about 3%. And we are - our Q1 guidance actually has it strengthening just a little bit. We're not back to 2017 levels. So, I would guess that’s probably another two or three points from where we're at, at the end of first quarter. So, it would be very helpful in terms of getting that supply to come back into travel nursing as well as our Allied in our Locum businesses to where pricing has been pretty tepid over the past three years.

So, if you have the bill rate strengthening a bit in the guidance is almost all the revenue growth just from price?

No. It's not. I think it's - and Brian might know the exact mix. I think some of it is from price, some of it's from volume. But we also have some headwinds in the - if you're talking about the Allied business for example, our skilled nursing facilities business is off quite a bit in the first quarter and being offset by increases in other areas of the business.

Okay.

This is Brian. On the traditional Travel Nurse business we're still working through some of the heads we've talked about in 2019. But that gap is narrowing significantly. So there's a little more price in the first quarter, but we're still seeing growth in our international business. We talked about the rapid response and now we’re seeing that the traditional Travel Nurse improve month by month as well.

Okay. I wanted to ask a question on the Locum Tenens space. Could you just kind of talk about the competitive positioning of the business in the market where you see the industry growth rate? And then I'm interested in the VMS in the Locum space. There have been some strategic moves in the industry. And I'm curious on your perspective there too?

This is Ralph. I'll take the first shot. And if anyone else has anything else to add that would be great. On the market growth rate, we - it has slowed. We generally said it was probably in the 3% to range over the past several years, but because of pretty significant decreases in emergency medicine and hospitalist. It's probably closer to flat to up slightly, and almost all growth probably they're driven by bill rate. The VMS marketplace has begun to change. I think now all of the top providers have some sort of anchor in the VMS world as previously, I think when we launched Locum’s MSP six years ago now. We were probably one of two players in that marketplace. Now there are more in the market. And there was a third part to that question, which I want to make sure - so just our positioning in the market. We've gone through our kind of the difficult period of getting to kind of a one firm look as opposed to three separate businesses. We have technology in place that allows us to execute better than we were able to as three separate businesses. And so I think we're starting to see some return to growth. If you take out those take out those two specialties for example. In the fourth quarter, if you took at hospitals emergency medicine our growth would have been 9% across the other specialties up year-over-year.

And Tobey just a little bit more insight on our strategy as it relates to positioning of Locum. We very deliberately have been working with our MSP partners both those MSP partners that might only use locums but even more so those that want more of a whole house total talent solution provider, who can provide not just Locums but nursing and Allied and perm as well as contingent. And in some cases, they want us to bring in non-clinical partners. And so we’ve very deliberately been focused on those kinds of more system types clients that might use multiple solutions and services it might be an MSP and might be of VMS, which we can also support through our Medifast platform. And so I think you’re seeing more of the competitive landscape change so that others that are sort of mid to larger size also are seeing that they need to have those kinds of capabilities, because it's what the clients want. They need the analytics. They need to get their arms around what they’re spending. In some cases they want a single provider, a single partner that can provide all of those solutions. So I’m not at all surprised to see some of the competitors that have been resistant to Workforce Solutions, and VMS now start to change their positioning a bit.

Okay. Last question for me Susan. Could you comment about where we are in your kind of position in being poised to update us on long-term financial goals and targets for the firm?

Sure. It's really an interesting time Tobey, as we reflect back even over the last decade just for a moment. When we were coming into 2010, I think 2009 our revenue was around $750 million. And here we are today more than three times that size. We've also increased our market cap of course significantly probably more like ten times over that period. And that's been done through this evolution of Workforce Solutions. And starting with MSP, but then adding in VMS and all of the other businesses that we've added into the organization in order to serve our clients better, but also as you can imagine to create a better financial profile. And you’ve been there every step of the way along with us. So I don't need to go through it all with you. But I bring that up, because I see 2020 as another major step in AMN’s evolution as we position ourselves to be that total talent solution partner for clients. Quite honestly, we’ve already surpassed our previously stated goal of hitting an enterprise value of $4 billion. We had hope to get there by more like 2022, and here, we are today. So I think that's a really good sign that we can lay out goals and achieve them. One of those goals as you recall, was also around margins and EBITDA margins in particular. We certainly have made some good progress in some of our businesses, but because of the lack of growth that we expected in some of our staffing businesses and with Locum’s taking a bit of a step back that held us back in achieving it. I do think that the demand environment that we have today and the progress that we're seeing in bill rates could provide for that kind of an environment to achieve those types of margins. And certainly, acquisitions like Stratus Video go a long way in giving us a bigger step towards that. We'll add about 80 basis points to our EBITDA margins on an annualized basis just with that acquisition. So we’re still very focused on those goals. We aren’t prepared to set out a date for that quite yet. But hopefully, it gives you an idea of kind of where I think we are and the opportunity that still lies ahead of us.

Thank you.

Thanks, Tobey.

Question comes from the line of A.J. Rice from Credit Suisse. Please go ahead.

Yes. This is Caleb Harris on for A.J. Just wanted to touch on demand a little bit more. I think last quarter you said that the fourth quarter is expected to be a little bit weaker than usual with winter assignments coming later in the season. Can you comment on that on what you're seeing on your orders for the first quarter? And then anything around the flu, if that's causing any increase in orders?

Hi, Caleb. This is Ralph. Thanks for the question. We have seen positive demand trends across all of our businesses. So I’ll start higher level, our nursing or Allied, and our Locums business, they’ve all seeing an increase in demand overall. Our Q4 demand was above prior year. And I think on our last call, we talked about that being in the neighborhood of 20% above prior year. But you're right, our winter needs particularly those from one of our larger customers got pushed to start a little bit later in January. And so we have seen those needs. And we have done a good job of meeting those requirements, for those winter needs customers. So Q1 demand remains about the same as Q4 in terms of year-over-year acceleration to demand. On the flu season, we haven't seen very much activity, a very small amount of activity related to the flu. Although, the incidences of flue occurring are higher, whether or not that sends somebody into one of the environments that we staff. It doesn't seem to be having an impact, just a very, very small impact. And that doesn't mean that it won't come. Maybe tomorrow something changes. And we've been surprised before by that. But at this point, we had no flu in our guidance. And no incremental flu expected.

And Caleb, this is Kelly Rakowski. I'll just chime in a little bit on what we're seeing on the leadership and perm side as well. On the physician perm we saw a significant increase in demand. Sequentially, over the last couple of quarters and significantly, over last year. And we continue to see that particularly as larger systems have demand for primary care, behavioral health and medical specialties. And we're seeing their behaviors change as Susan mentioned more to a total talent partner, and a strategic partnership where we're working side-by-side with them and our interim leadership, highest level of assigned interim leaders in the last quarter although, we did see a little bit of softness in demand. And we think that is tied to some of the nursing trends that Ralph just mentioned as well. But we're starting to see that come back, now as we start the year.

Okay. Great and I wanted to touch on the before health acquisition that you mentioned was that - how sizable was that sort of financial impact? And I know you mentioned they had some sort of VMS solution? Were they a key competitor in that area? And what was sort of the strategic and/ or financial rationale there?

Sure, Caleb. This is Susan. I'll take that. So the revenue that they'll be bringing into the quarter is a little over $1 million, a quarter. They're growing very nicely. They have a very innovative team and technology, that's focused in a few different areas. One is the, float-pool management solution that I mentioned. They've really done a fantastic job of building a tool that helps clients create efficiency, in the way that they manage their internal float-pools which as you can imagine for any individual hospital. But even more for large systems, is a very complex and burdensome part of their staffing equation, but more than just a tool to manage that. They have integrated it into other workforce systems including other VMSs. So that the system itself through setting up particular rules, can do a great job of ensuring that, if jobs aren't filled by the internal staff floating it's quickly related to staffing partners. So they have some fantastic clients. We've been certainly asked for this type of solution from other AMN clients. And we have other things in the works. But this will accelerate our ability to really go-to-market with a solution that is -- have a widespread need. And we'll again create a lot of efficiency and optimization of the limited staff that's out there. In addition, they also have a fantastic VMS tool that can be used by facilities who want to manage their staffing vendors in-house or it can be actually utilized and is utilized by other MSP providers. They have some fantastic MSP clients within the industry. So we think it's a great team, a great technology, and they’re already working very well with the AMN team overall.

Okay. And then just one more sort of similar to Tobey's question on the Locum side, more in the nurse the Travel Nurse specifically in travel and Allied, Nurse and Allied more broadly. What do you view as the market growth rate at this point? Sort of the 2% to 4% that you guys were talking about in travel? Or is it something different than that?

Well, I would look at it first more – I’ll start with nursing and I'll ask of course Ralph to chime in here if I leave something out. But I would think of travel nursing is all-encompassing of very short-term assignments, maybe six to eight weeks plus the more traditional assignments of 13 weeks and our international assignments can -- which can span 18 to 24 months, because they're all contracted multi-week or multi-month assignment. And they’re serving in some cases a similar need in terms of short term contingency. But also they're often filling in for permanent staffing in the case of international. I'd say the vast majority of them are converting to permanent staff. So, I would look at those more in totality as opposed to just each individual segment. And if you do that, you can get to some really nice growth rates. In fact international and rapid response, were growing double-digits last year. Collectively, if you combine that with the travel business the traditional 13 week travel business it brings it down into the single-digits. But hopefully that gives you a little bit of a glimpse. The 13 week traditional travel business has plenty of demand to be growing double-digits. Demand is not the challenge there as we've been discussing the last several quarters. Supply has really been the constraint. So if we continue to see bill rates rise, as we have if we continue to see some incremental supply come into the market, we ought to be able to get that traditional 13 week business up into the mid - even high-single-digits and quite honestly it could go higher than that if the supply would begin to roll. And Allied is a little bit more of a mixed bag because of the various disciplines. The therapy business is very strong. Although in skilled nursing, we've had that headwind because of reimbursement changes. But imaging, respiratory and lab has been where the biggest growth has been. In fact, it's really quite amazing to look at how that particular business has grown over the last decade. So Ralph, anything else you want to add?

You covered most of it. The diversity of the Allied business has actually been a positive, because the skilled nursing being down. And then, as Susan mentioned, the imaging, respiratory lab, specialties and the schools, also growing at a fast rate. I think our schools business is up about 50% year-over-year.

Okay. That’s helpful. Thanks a lot.

Next question comes from the line of Jason Plagman from Jefferies. Please go ahead.

Hey, good afternoon. So going back to travel nursing, I believe last quarter you mentioned that the premium - you're seeing some pickup in the premium at business and you've obviously called out the rapid response. But any comments on what percentage of that - of your total mix the premium assignments represented in Q4? And kind of what that trajectory is heading looking like heading into 2020?

Yes. Jason this is Brian. You said as we mentioned it has picked up again. I think what's -- we're shifting away from just talking about that exact percentage if that's the only determinant of how our clients utilize our services. We're finding more often. They're pulling on different clinicians when they need them. If it's -- they may have a traditional order in. If it becomes a more urgent need, they may flip to more of a rapid response, but really having that spectrum of opportunities. As I mentioned all the way from six to eight weeks, all the way to two-year assignment for the national business really allows us to meet the need of the client at that time. So that percentage has gone up. We're not going to give the exact number every quarter. We're not back to the levels we were a couple of years ago, but we're definitely off of the bottom we saw in 2018. It's been steadily rising through the back half of last year, not surprising with demand going up so quickly and not seeing that underlying pricing growth the -- more of our clients have had to kind of go back and forth between traditional and more of the rapid response or critical staffing rates. So it likely will go up a little bit more in the first quarter. But hopefully that's also the good foundation for conversations with clients about the opportunity to increase those standard rates to bring more permanent supply back into the industry to fill more jobs as well.

Great. That's helpful. And then any comment on the demand from your largest client. Is that -- should we expect that to continue to be a headwind in Q1? Or has that flattened out or how is that progressing from what you're seeing from the order flows and assignments in Q1?

Yes. Good news on that one. While it did impact Q4 about the same as it had in the prior quarters last year. In Q1, we expect that it will be on par with prior year.

Okay. Great. And then switching gears a little bit, I wanted to ask on the OWS segment, you're expecting 2% to 3% organic growth in Q1. Any items that could accelerate that closer to mid-single digits 4% to 5% as you progress through 2020? I know you'll start to lap some maybe easier comps in the rev cycle, but how should we be framing the trajectory in 2020 for the OWS segment?

Jason this is Brian. I'll just kick it off and then Kelly give some color as well. I think for the next couple of quarters, it's more likely to look pretty similar to the guidance we gave for Q1. We are stable now with the revenue cycle business but stable at a lower level. The team's done a really nice job of replacing some of the turnover that they saw and really starting to build the foundation. But it will still be a negative comp for the next two to three quarters I think. So that part is kind of a baseline starting point as we go into Q2 and Q3 if the opportunities are probably more in leadership solutions. I'll let Kelley give some color on that.

Yes. And Jason I'd say, we are seeing good steady volume. There's a couple of places where we could see some acceleration, RPO, as we continue to strengthen our RPO capabilities and more closely tie our RPO solutions to our MSP clients as they move to more of that total talent solution. Those are the kinds of relationships that can bring in revenue faster. Also our predictive analytics where we've had several new signings each of the last couple of quarters in both consulting as well as our smart square scheduling technology solutions and a very strong pipeline there and so we can scale up very quickly particularly on the technology side. So there are some areas where we could see some acceleration.

Got it. And last one for me. Just an update on MSP contract activity in Q4? And what's the pipeline, how that's looking for 2020 if we should be thinking that you can match your last two years of both the record years. How is that looking for 2020?

Thanks, Jason. This is Dan. I’ll take that one. So, as you mentioned, 2019 ended up being our best MSP sales year ever with about a 20% year-over-year improvement. We also had - just a color about an 11% year-over-year improvement in the gross spend over management, which reflects contracts not only signed, but when they go live and how they grow. That's now a little bit over $2.6 billion in total. Another nice trend that we're seeing is that, we're getting contracts that are renewing at five or more years more than really ever before also. One of the things you’d asked me about is how is Q1 going. We've started off very well. We have a number of client contracts that have already been signed. We have $70 million in contracting today. All of that stuff gives me great confidence that 2020 will continue to be a strong year for us. I think maybe even more important than just the base contracts though is our ability to cross-sell. If you look at our top 40 accounts, the number of added service lines in 2019 grew by a little over 35%, which gives me great confidence that we can take things like Stratus or B4 Health or some of these other additions to the portfolio and bring them into our clients more quickly.

Great. Thanks.

[Operator Instructions] And we do have a question from the line of Mark Marcon from Baird. Please go ahead.

Good afternoon, everybody. I was wondering with labor disruption, how much was the total revenue? I know it was $10 million more than you were expecting. What was the total and both for the quarter and the year?

Yes, it was closer to $15 million for the quarter, which is -- some of that we already have built into our guidance. We had some maturity -- third quarter call. For the full year, it was a little over $30 million, pretty similar amount in both 2019 and 2018 at kind of low 30s. So two record years by the way. So I don't want to assume that's going to happen. Actually as we're sitting here kind of halfway through the first quarter, we really don't have any revenue at this point. And it's not certain whether we'll have any at all for the remainder of the quarter which just speaks to the reason why we don't always call that out too much because it's - we call it out specifically because it's -- it can be pretty variable quarter-to-quarter. There will be more activity through this year, but Q1 has been pretty quiet so far.

Okay. And how would you think about or how should we think about like the number of providers on assignment sequentially just in terms of typical sequential flow and what we ended up seeing in the fourth quarter.

So a normal - like from Q3 to Q4 you mean?

Yes.

Yes. I say -- we gave the guidance we talked about the fourth quarter for travel nursing particularly being a little bit softer than we normally see. Some of that being tied to the timing of the winter starts. So, it came in generally in line with our expectation. But below what we'd normally see from Q3 to Q4. Now, as we are looking into the first quarter, I mean considering the amount of strike revenue end up having in Q4 to see our guidance excluding Stratus looking pretty flat. That's actually a really nice performance and reflective of the growth we've seen sequentially in the underlying volume of the business both -- and that's really true in nursing, as well as – even in locums, where the typical seasonality would be, kind of, maybe, down a little bit from Q4 to Q1. We're actually expecting to be up a little bit, based on that guidance. So seeing good trends as we're going into the first quarter.

Okay, great. And then, can we take a look at the EBITDA guidance in terms of 12.3% to 12.5%, but you've got half a quarter of benefit from Stratus which is higher. How should we think about that in terms of the – what the puts and takes are from a year-over-year perspective adjusting for Stratus.

Yes. The – what I'd say is just that, Stratus, as Susan mentioned, adds about on a full quarter basis, closer to 80 basis points. So with that and essentially with the expectation of closing tomorrow, we're picking up about 40 basis points of EBITDA margin in the first quarter. So that would push you back down to about 12%, which is similar to the guidance we gave for Q4. So the, kind of, underlying organic business performance is still operating in that 12% range. And then, you add in Stratus into Q1. And so, as you think about the second quarter, you would just add, again, obviously, a full quarter impact from Stratus.

Great. And then…

As we move through the year, obviously, we'd expect to see improvement in the margin we would as we see the growth continue, we would start to pick up more operating leverage. As we move into the third and fourth quarter. But I think that should give you a decent line of sight for Q1 and Q2.

So orders are really high. Demand is really high. What's stopping some of the healthcare systems from raising the bill rates to a level where you can actually get more supply? I mean, I'm sure that they've heard from you and others how tight it is. When would that breakthrough?

Well, we are seeing progress, as we've said, we saw some nice underlying increases in the fourth quarter in that 3% range. It's improved even more than that, going into the first quarter. And I'd say, as you exit the first quarter, it's accelerating. So I think you find them being appropriately cautious about how much they need to increase those rates to get the supply. Now, when they use more and more rapid response clinicians, that's usually a sign that the underlying regular bill rate needs to increase. So that perhaps they can fill those jobs with more traditional lower-cost travelers, rather than having that urgent need at the higher-bill rate with rapid response. So, I'd say, we are actually making nice progress. They're just being very thoughtful about how that progresses.

Okay. I mean, how much of a step would it take like more of a 5%, 6% change, 7%? I mean when - I'm sure you've looked at elasticity, you've got all sorts of data.

We have. We have, Mark. But as you would expect, there's always multiple inputs and variables…

Sure.

That feed into that analysis. So I would be hesitant to call a particular number and say things are going to break loose if we hit that number. But, certainly, if we start to get above 5%. That would be a very good sign. I'd say, even at the levels we're seeing now, we are more optimistic about supply improving and rebook rates, which remain very strong. And so, I think, we're getting close.

Great. And then, I remember having a conversation many years ago with you and Ralph, with regards to float pools. And before is a really interesting - it seems intuitive to me. How many of your clients are currently using them? And what's their position relative to that kind of solution because that's a really - that's clearly a trend.

Yes. I agree. I love this business and the technology. And again the team there is just so innovative. So thank you for recognizing that. We actually don't have as much overlap as you would think because they are a newer business and they have some really fantastic prestigious impressive clients that also happen to be our clients in other ways. But the fact that we can have some referenceable accounts that they bring to the table I think gives us that much more capability, but also credibility to be able to go to our other large strategic clients in and show what is possible. So we think there is a lot of opportunity here with our existing clients. And quite honestly there's not been much innovation in this space beyond what b4health has done. There are certainly legacy scheduling technology companies that have some capabilities, but not to the extent that b4health [ph] has created in terms of it being cloud-based, mobile enabled, integrated with other systems that's really where sort of the secret sauce comes in, is that it doesn't just standalone in a silo. It's very well integrated with the hospital systems but also with their other staffing providers.

That's great. And then revenue cycle, it sounds like things have stabilized and we're in a decent shape going forward?

Yes. I think that's a great way to put it. It's been a stable position. There are certainly bright spots within the business, but then there are others such as the CDI and coding parts of the business where we've felt a little bit more of a contraction. Again we think it's more a factor of disruption. And the changes that we've made over the last year which we feel were very much needed in order to set the stage for the business to grow in a healthy way moving forward. We also brought together two brands Peak and MedPartners and when you do that there's always a bit of disruption. So we feel that we are through that and poised to begin to grow as we go into sort of the middle part of the year is probably a reasonable timeframe.

Great. And then can you just talk about the pace of delevering and the cash flow from operations that you're envisioning over the next year to two? And my assumption is you definitely wouldn't do an equity raise to pay down any of the debt, but just wanted to - just absolutely confirm that.

Sure. No. This is Brian. We don't intend to at this point. We've got a very solid debt structure with a blend of both long-term unsecured debt and now mixed in with the credit facility that we'll be drawing on tomorrow for the acquisition. Again as I mentioned, it's a 5 year term loan resetting the revolver also for a new 5-year basis and we've got plenty of room within our covenants. So with the pro forma leverage expected to be 3.3 times at closing, we'll be able to - all of that debt will be pre-payable. So we're able to take our cash flow and immediately start paying down. If you look at our full year operating cash flow in 2019 of $229 million. So - on a free cash flow basis, you're up just a little under $200 million. So it gives you a sense of the kind of cash flow that we expected to generate this year on a quarterly basis between kind of $40 million and $60 million. And so, we'll be able to use that to delever as well. So as I mentioned, even when we had the call when we announced the transaction, we would expect to be below three times leverage by the end of this year. So we feel really good about our position on the balance sheet.

Terrific. Thank you.

Next we have a question from the line of Tim Mulrooney from William Blair. Please go ahead.

Good afternoon. Thanks for taking my questions. I wanted to ask Mark's question a different way on Stratus. What's baked into the first quarter guide from Stratus? On the bottom line. If you did - if you just kind of take the numbers you gave us from last year, I'd assume $9 million maybe about $9 million for a full quarter. So given it's about half a quarter does about $5 million seem right?

Pretty close. It's probably more in the 4.5% range. So as I mentioned, it's running at about a 28% EBITDA margin. So if you take the $15 million at the 28%, it should give you a pretty good sense of expectation for the quarter.

Perfect. Thank you. And in the Other Workforce Solutions, gross margin was up 260 basis points I think you said due to the favorable mix shift, maybe it's just -- because I'm newer to the story, but I'm not sure what's exactly was driving that? So what are those mix shifts specifically? And how do you see that carrying through the next several quarters?

Sure. Within OWS. Yes. So part of it is the revenue cycle business being downed.

Yes.

It has a lower gross margin than the other business lines. So just purely by that business being down relative to some other ones, that has a favorable impact on the gross and EBITDA margin. And then on top of that, we saw a nice growth in our leadership search business. We've got particularly strength in the physician perm business, which is a higher margin -- slightly higher margin than average as well as in our -- the technology businesses VMS, Avantis were both up nicely year-over-year and those carry a higher-than-average margin for the segment as well. In terms of expectation, I mean it would be pretty similar then as you roll into the first quarter because they were pretty similar expectation now. It will be influenced now going forward with Stratus as we -- as you think about the higher-margin profile of that business as well.

So is there a point at which this dynamic - excluding Stratus this dynamic lapse itself. Did this start to happen several quarters ago or would you expect basically that to carry through 2019 - or 2020, excuse me.

So again, we would expect to see the revenue cycle business start to improve as we move through the year, but we would also will see growth across the other businesses. So it's unlikely that margin profile will change significant. And I mentioned Stratus -- actually the gross margin on that business is closer to 45%. So actually a little bit lower, but EBITDA margins are higher as well. So those will - that will have an influence a little bit of a downdraft in the segment going forward. But I don't think you're going to see a big change from where we are other than that Stratus being added in for a full quarter.

Okay. Okay. Thank you. And one more for me. Brian, given the acquisitions of Advanced Medical and now Stratus Video, can you give us an update on the capital allocation strategy for 2020? Should we expect a pause in M&A, while you digest these acquisitions with cash applied towards deleveraging the balance sheet? Or how should we think about it overall?

Sure. Maybe I’ll start with that. So I guess the short answer is yes. There won't be a complete pause. We still certainly have capacity and should be looking at things that could be tuck-in opportunities or strategic additions to our Workforce Solutions, perhaps if they're technology solutions in particular. But we’ll be very focused on not just paying down debt but also making sure that we are aligning our resources to the successful integration of advance, which has gone very, very well but we still have some things to finish there. And then of course Stratus, I will say with Stratus, there's not as much integration as there might be if it were a staffing organization because they have very different systems and platforms, so there's not as much to integrate on the front office. Certainly there might be a few back office things. But even then if they are heavily interwoven with their front and back office we may not be integrating as much there. So it's probably quantity a lighter lift from an integration standpoint.

Okay. Thank you, Susan.

And our next question comes from the line of Henry Chien from BMO. Please go ahead.

Hey, good afternoon, everybody. So there's a couple of moving parts. I just want to make sure I understand some of the trends. So I guess first from the organic standpoint, the growth in EBITDA, what was sort of the change there? Just to understand like the core profitability of the business excluding acquisitions?

In the fourth quarter?

Yes in the fourth quarter. Yes.

Yes. I don't know if we really break out the EBITDA. I mean the margin profile of – I mean advance would have been the most kind of notable impact. To the quarter and they run at just a slightly higher EBITDA margin than the core business. So it would be a pretty similar underlying margin. We talked about a 12% EBITDA margin ex this the impact we saw from the strike. So again that was a bigger influence in the fourth quarter. But if you move the impact of that of the strikes on the margin. It's generally not different with kind of an organic or on a reported basis in Q4. Again we talked about the impact with now this recent acquisition of Stratus that will have a more meaningful impact going forward.

Okay.

Q4 it's not a big influence other way.

Okay. All right. That makes sense. And then just like the underlying volume trend, so I understand that travel volume is doing quite well and Allied is having some impact from reimbursement changes just sort of the step down in organic growth from or not stepped down I should say but just some of the slowing from the mid single-digit range to the 2% to 3% range. Is there anything else going on just to be aware of? And I guess, we'll be keeping out for any other potential payment changes throughout this year?

No I don't think there's anything else that you're missing. There was PDGM introduced at the beginning of the year, we knew about it last year but that was a reimbursement change that's affecting the home health industry. We don't of course build directly and receive reimbursement that our clients do. And so it can affect how they utilize in this case therapy resources and so that hit in the first quarter, again we were anticipating it. So we began to redirect many of our resources to other disciplines or other settings and have been fairly successful with that. And in fact, there's been so far a bit of an offset where some of the home health providers have increased their utilization of nurses. And so I think we still want to kind of wait to see how much of an impact that will be it's actually a fairly small part of our overall business which is why we don't really call it out, but that would be another moving part in there. That still probably needs to play out a little bit.

Okay. Got it. All right. Thanks, guys. Thanks, everyone.

Thanks, Henry.

And there are no further questions in the phone queue at this time.

Okay. Wonderful. While we really appreciate everybody joining us today. Thank you for your patience at the beginning of the call as we work through some technical difficulties that really glad you could join us. And we wish you all a wonderful Valentine's Day tomorrow. I know we'll all be celebrating with our loved ones, but that also now includes the Stratus team that will be joining the AMN family. We're very excited about that. So everyone have a great evening. Thank you.

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