Earnings Call Transcript - AMN Q4 2022

Operator, Operator

Good day, and welcome to AMN Healthcare Fourth Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the call over to your speaker, Mr. Randle Reece, Senior Director of Investor Relations. Please go ahead, sir.

Randle Reece, Senior Director of Investor Relations

Good afternoon, everyone. Welcome to AMN Healthcare’s fourth quarter and full year 2022 earnings call. A replay of this webcast will be available at ir.amnhealthcare.com following the conclusion of this call. Various remarks we make during this call about future expectations, projections, trends, 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, because of various factors and cautionary statements, including those identified in our most recently filed forms 10-K and 10-Q, our earnings release, and subsequent filings with the SEC. The company does not intend to update 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 ir.amnhealthcare.com. On the call today are Cary Grace, Chief Executive Officer; Jeff Knudson, Chief Financial Officer; Kelly Rakowski, Group President and COO of Strategic Talent Solutions; and Landry Seedig, Group President and COO of Nursing and Allied Solutions. James Taylor, President and Chief Operating Officer of Physician and Leadership Solutions, is unavailable today. I will now turn the call over to Cary.

Cary Grace, CEO

Thank you, Randle, and welcome, everyone. I want to begin by expressing my gratitude for the warm welcome I have received from the AMN team, our board of directors, investors, analysts, and clients since my tenure as CEO began in late November. The past few months have more than confirmed all the reasons why I joined AMN. AMN stands at the nexus of healthcare and talent, where we make an increasingly valuable difference in the quality and timeliness of care. My experience running large client-centered service delivery businesses that combine organic growth and acquisitions positions me well to help guide AMN through its next phase of growth. And though everybody says they have a great company culture, AMN truly has something special. Our entire leadership team is committed to living the AMN difference every day and ensuring that we create great long-term opportunities for everyone in our organization. I'm especially grateful to report good news in my first AMN conference call with outstanding fourth quarter results and a strong first quarter outlook. Thank you to our healthcare professionals and team members for making a valuable impact for our clients in 2022, with more than 250,000 placements as our country managed through the pandemic. I am proud of how we are partnering with clients to optimize their labor costs, reducing bill rates as the urgency of demand moderated, and investing in tech-enabled solutions to help our clients transform care delivery models and manage their workforces over the long term. We remain the preferred partner for healthcare clients with our MSP and BMS programs managing more than $12 billion of labor spend in 2022. AMN is a preferred employer for healthcare professionals and corporate team members, as demonstrated by several recent accolades we received, including the Diversity Equity and Inclusion award from the National Association of Corporate Directors and being named to the Bloomberg Gender Equality Index for our commitment to gender equality and equity for a sixth year in a row. Over the past year, as we managed through extremely high demand, we were looking ahead, anticipating a moderation with the wind down of the pandemic. Our businesses exceeded the expectations we laid out a year ago. Our high level of performance is apparent in our latest financial results and outlook for the current quarter. Fourth quarter revenue was $1.13 billion with adjusted EBITDA of $175 million. Every business segment exceeded guidance in what continues to be a fast-changing market. Nurse and Allied segment revenue was ahead of expectations since the fourth quarter, nearly flat with the third quarter despite lower labor disruption revenue. The moderation of bill rates was somewhat less than we had anticipated, with a segment average bill rate coming in 23% lower than the first quarter peak. As expected, volume in travel nurse was higher than the third quarter, offset by the lower average bill rate. Demand for travel nursing remains above 2019 levels, even after the healthcare sector maintained an impressive pace of permanent hiring over the past eight months. Our Allied business has 6% year-over-year revenue growth with a 3% sequential increase. The team did a phenomenal job pivoting focus from pandemic-related specialties to therapy and other areas. For the first quarter of 2023, we expect revenue in Nurse and Allied Solutions to be stable sequentially, and down 32% to 34% year-over-year against our most difficult comparison of the year. In our Physician and Leadership Solution segment, fourth quarter revenue was slightly better than our guidance. Locum tenens is operating at a consistently high level with four consecutive quarters over $100 million of revenue. Interim Leadership and Search achieved record high revenue for the year. As we expected, demand for Interim Leadership and Search was lower in the fourth quarter as some clients focused on short-term cost savings. In the first quarter, we projected revenue and Physician and Leadership Solutions to be down 10% to 12% year-over-year; excluding pandemic-related business, revenue would be flat to prior year. Demand is well above pre-pandemic levels for locum tenens and physician permanent placement. In Technology and Workforce Solutions, revenue grew 14% year-over-year, better than our guidance of about 10% growth. Our Language Services business was the primary driver of the outperformance. Since AMN acquired the company in 2020, Language Services has doubled its revenue, a great example of how we can add value through acquisition. It is further evidence of our commitment to innovation, supporting quality patient care, and making a positive impact on the communities we serve. In 2022 alone, we enhanced the healthcare experience outcomes for patients in over 15 million interactions. Also in this segment, VMS revenue continued its moderation in line with our expectations. For the first quarter, we expect revenue and Technology and Workforce Solutions to be down 10% to 12% year-over-year due to lower VMS revenue. Now, I'll turn over the call to Jeff for more details about our results and outlook, after which I will return to provide a glimpse at our focus areas for 2023 and beyond.

Jeff Knudson, CFO

Thank you, Cary, and good afternoon, everyone. Fourth quarter revenue of $1.126 billion was 4% above the high end of our guidance range, with all three segments contributing to the outperformance. Consolidated revenue was down 17% year-over-year and 1% sequentially. Excluding labor disruption revenue, consolidated revenue was in line with the prior quarter. Gross margin for the quarter was 33.3%, 140 basis points higher than the prior year and down 50 basis points sequentially. Year-over-year, the margin was higher due to a revenue mix shift toward higher margin businesses. Sequentially, the margin was lower due to the typical seasonal revenue mix shift towards staffing. Consolidated SG&A expenses were $219 million, or 19.5% of revenue, compared with $239 million, or 17.5% of revenue in the year-ago quarter, and $215 million, or 18.9% of revenue in the previous quarter. SG&A expenses were lower year-over-year primarily due to lower employee-related expenses, given less revenue and more normal operating conditions. Higher allowances for credit losses and legal reserve expenses drove the increase in SG&A compared with the prior quarter. Adjusted SG&A, excluding certain non-recurring expenses and stock-based compensation expense, was $202 million this quarter, or 17.9% of revenue compared with $212 million or 15.6% of revenue in the year-ago quarter. The increase in adjusted SG&A margin came from less operating leverage on lower revenue. In the fourth quarter, Nurse and Allied revenue was $825 million, 24% lower than the prior year and slightly down sequentially. Average bill rate was lower by 2% quarter-over-quarter and average hours down 1%, offsetting 3% higher volume. Our travel nurse revenue was down 24% versus the prior year and flat sequentially. Allied revenue was $195 million, growing 6% from the prior year and 3% above the prior quarter. Nurse and Allied gross margin of 26.6% was 40 basis points lower than the prior year and the prior quarter. The year-over-year change was caused by less labor disruption revenue, lower average hours, and higher insurance expenses, partially offset by improvement in the bill pay spread. Sequentially, the margin decreased stem primarily from the favorable workers' compensation adjustments that occurred in Q3. Segment operating margin of 12.7% was 370 basis points lower than the prior year and 120 basis points lower than the prior quarter, reflecting the higher allowances for credit losses. Physician and Leadership Solutions revenue in the fourth quarter was $168 million, 2% higher year-over-year and down 4% sequentially. Locum tenens revenue was $103 million, 4% higher than the prior year or growing by 13%, excluding pandemic-related revenue. Interim leadership revenue increased 4% from the prior year and was down 5% from the prior quarter. Search revenue declined 10% from the prior year and was down 13% sequentially. Gross margin for this segment was 35%, 100 basis points higher than the prior quarter and down 10 basis points year-over-year. The sequential margin increase was primarily due to higher gross margin for locum tenens, partially offset by mix. Segment operating margin was 16.7%, up 510 basis points from last year and up 310 basis points sequentially. The higher profit margin came primarily from a lower allowance for credit losses and a favorable actuarial adjustment. Technology and Workforce Solutions revenue was $133 million in the fourth quarter, growing 14% year-over-year and down 1% sequentially. Language Services stood out with revenue of $58 million, which grew 23% year-over-year and 5% quarter-over-quarter. BMS revenue of $55 million grew 5% year-over-year and was down 9% from the prior quarter as we had expected. Segment gross margin was 73.3%, up 130 basis points over the prior year and down 230 basis points sequentially. The year-over-year and sequential changes track revenue comparisons for the higher margin BMS business. Segment operating margin of 50.2% was up 280 basis points year-over-year and down 250 basis points sequentially. Consolidated fourth quarter adjusted EBITDA of $175 million was lower by 22% year-over-year and down 4% from the prior quarter. Adjusted EBITDA margin of 15.5% was 80 basis points lower year-over-year and down 50 basis points sequentially. We reported net income of $82 million and diluted earnings per share of $1.88 in the quarter. Adjusted earnings per share was $2.48 compared with $2.95 in the year-ago quarter. Day sales outstanding came in better than expected at 55 days, four days less than the prior quarter and two days higher than the prior year. Operating cash flow for the quarter was $115 million and capital expenditures were $25 million. As of December 31st, we had cash equivalents of $65 million, long-term debt of $850 million, and a net leverage ratio of one-time to one. Recapping financial highlights for the full year 2022, we reported revenue of $5.24 billion, a 32% year-over-year increase, and net income of $444 million, which grew by 36% compared with 2021. Adjusted EBITDA was $847 million, up 33% from the prior year. Full-year adjusted EBITDA margin of 16.1% was 20 basis points higher year-over-year. GAAP EPS was $9.90, up 45% year-over-year; adjusted EPS was $11.90, higher than the prior year by 48%. EPS benefited from our repurchases of $577 million in stock during the year. Full-year cash flow from operations was $654 million, which included a $24 million payment of deferred payroll taxes from the Cares Act; adjusting for the Cares Act repayment, nearly 80% of our adjusted EBITDA was converted into cash flow from operations. Capital expenditures totaled $76 million. Since the end of 2022, two events have bolstered our capital strategy: we obtained an expansion of our revolving line of credit, adding $350 million of borrowing capacity to total $750 million, with its tenor extended to 2028. The interest rate for the expanded facility is in line with previous terms. In addition, the Board of Directors expanded our share repurchase authorization by $500 million. Since our last earnings call, we bought back 2.4 million shares of stock for $275 million. The latest authorization gives us a total of $551 million in potential buybacks. Now looking at first quarter 2023 guidance, we project consolidated revenue to be in a range of $1.1 billion to $1.13 billion, down 27% to 29% over prior year. Gross margin is projected to be 32.6% to 33.1%. Reported SG&A expenses are projected to be 18.3% to 18.8% of revenue. Operating margin is expected to be 11% to 11.7%, and adjusted EBITDA margin is expected to be 15.4% to 15.9%. Average diluted shares outstanding are projected to be 42 million, reflecting our recent share repurchase activity. Other first quarter guidance details can be found in today's earnings release. Last quarter, we talked about 2023 returning to a normal seasonal pattern. Our fourth quarter results and first quarter outlook came in stronger than we had expected, with higher bill rates being a key driver. After the Q1 strength, current business trends suggest a decline in Nurse and Allied revenue for Q2 that is greater than normal seasonality. While demand is still above pre-pandemic levels, we have seen some clients pursue near-term cost savings and reduce utilization of contingent staff. Labor market conditions remain very tight with high vacancies and attrition. And we believe staffing demand will go back up over the summer in line with normal seasonality.

Cary Grace, CEO

Thank you, Jeff. While the healthcare sector hired more than 9 million people in 2022, that hiring spree resulted in a net employment increase of less than 800,000. Competition for talent remains intense, and wage inflation is elevated. Voluntary turnover remains at the highest level in more than 20 years, and conditions are most difficult for our clients in acute care. Recognizing these enduring issues, we are focused on four key areas that we believe will drive long-term value for all our stakeholders. First, we will continue to be the preferred partner for healthcare organizations as they optimize their workforce strategy to meet continued long-term increases in utilization. Our solution is comprehensive and differentiated and will be more so with our internal investments and acquisition strategy. We see great opportunity both in better serving current clients and winning new clients. On that path, we will strengthen our ability to go-to-market as one AMN, building brand equity and making it easier for clients and healthcare professionals to work with us. We are already gaining traction on initiatives to improve our speed to deliver while maintaining our industry-leading quality. As demand has receded from its extreme highs, our MSP strategy better positions us to gain share. Second, we are standing our efforts to ensure AMN is the preferred employer for healthcare professionals and team members. These programs include new initiatives on workplace flexibility, ensuring competitive pay and benefits at all levels, career pathing, mentoring, and industry leadership in diversity, equality, equity, and inclusion. Our healthcare professionals benefit from having the largest selection of job opportunities in the industry, easily accessed through mobile technology. Third, we want to keep building our diversified portfolio that is expanding and improving total talent solutions for healthcare. Our strategies to aggressively increase technology enablement in every aspect of AMN. Our plan will allocate approximately 2% of revenue to capital expenditures with a heavy focus on digital innovation. These investments will improve outcomes for our existing solutions and add new technology-led solutions to keep up with the challenge of delivering care amidst a sustained mismatch of supply and demand. We are continuing to invest in Digital First initiatives such as AMN Passport, an always-on connection with more than 170,000 nurses and growing. And finally, we are committed to being good stewards of capital. Our capital expenditures more than doubled over the past three years, enabling us to lead our industry in technology improvements. We have built a company with high quality earnings and strong free cash flows that give us strategic options. With a strong balance sheet and expanded borrowing capacity, we have the framework and flexibility to make attractive acquisitions while also repurchasing stock, which we believe is a great investment opportunity. Now, let's please open the call for questions.

Operator, Operator

Thank you. Our first question will come from Kevin Fischbeck with Bank of America. Please go ahead.

Kevin Fischbeck, Analyst

Great. Thanks. I guess, you're basically flat earnings sequentially, and Q1 speaks to some stability there. But there's always seasonality from Q4 to Q1. And I think the big debate right now is kind of, where the new normal is in your view around healthcare staffing demand? I was really helpful to hear your comments about the seasonal drop into Q2, but has your view on Q2 changed? Is it more about Q1 being higher than it is about Q2 being lower? And I guess, should we be here kind of again? Q2 changed from where you were when you were giving guidance last time?

Cary Grace, CEO

Hi, Kevin, thanks for the questions. Maybe what we'll do is, I'll turn it over to Jeff, who'll talk a little bit about the patterning of Q1, Q2, and then Landry and I can talk a little bit more broadly about demand.

Jeff Knudson, CFO

Yes, Kevin. So, the first quarter guidance is higher than what we would have originally thought, really primarily driven from higher bill rates, and that's partially driven by a mix with some higher rate orders that we'll be rolling off at the end of Q1. So, as a result, we are expecting a higher than normal sequential decline in Nurse and Allied revenue from Q1 to Q2. And if we just step back and think about Q2 going into the year, we would have expected the second quarter to be the lowest revenue and EBITDA margin quarter of the year, and that is still the case. On the Nurse and Allied side, we would normally expect a 6% sequential decline in the second quarter, looking at historical patterns and that is normalized for labor disruption driven by the winter orders winding down. That 6% would be driven by equal declines in both volume and bill rates. So, as the bill rates were higher in both the fourth and the first quarter, we do now expect a high single-digit bill rate decline in the second quarter, again, primarily driven by that mix influence from Q1 and the normal seasonality. And then, we would expect the second quarter sequential volume decline to be higher than our historical seasonality but less than the bill rate declines.

Cary Grace, CEO

Hey, Kevin, if we step back and take the demand question, let me give you a perspective on what we see as the shape of demand and some of the factors around supply that we are seeing. If I go back to the onset of the pandemic, it really accelerated an existing supply/demand imbalance across the healthcare workforce. And as we moderated down from the emergency demand levels we saw during the pandemic, we still have an enduring structural change in the supply of and demand for these healthcare professionals. So the things that we are seeing and continuing to track are continued utilization demand growing, so I think people are pegging it somewhere kind of five-plus percent annually. The new supply, especially of nurses, is not keeping up with these increases, and the already constrained supply of healthcare professionals is impacted by retirement. The same demographics that are driving some of the increases in demand are also driving the accelerated retirement of some of our healthcare professionals. We also continue to see bedside clinicians leaving and taking less stressful jobs in healthcare and elsewhere. Beyond these supply/demand enduring imbalances, we are seeing compensation expectations that have increased across all economic sectors, as high inflation has put upward pressure on wages. And so that really was happening throughout the pandemic. So, the conversations we've been talking to our clients about is how do we help them attract and retain the workforce they need to serve their patients in a cost-effective way. So, enduring structural supply/demand imbalance, continued upward pressure from the pandemic on wages. And I'll turn it over to Landry to talk a little bit about what we're seeing more recently.

Landry Seedig, COO of Nursing and Allied Solutions

Yes. Hi, Kevin. So, we do, as of today, continue to see travel nurse and allied demand that is above pre-pandemic levels. It is down from some of the highs that we saw in the industry during some of those major COVID spikes. But you really have to think about it at the peak, a lot of that demand we would characterize as irrelevant, and it never did get filled by the overall industry. So you had demand spiking because of the extreme needs and the inadequate labor supply that exists. We've been predicting all along that we wouldn't have as high of demand whenever things settle down. Yet, that demand would still be higher than pre-pandemic levels, just due to some of those universal issues on the labor within healthcare. We have seen a couple of reports out there on demand in the marketplace that reflect what others might be seeing in the industry. And while our demand is down, as I just mentioned, our decline has not been as steep as what some of those reports suggest. I think there's a couple of reasons for that. One reason is that we stay true to our MSP customers over the past few years. Also, the AMN team really did not chase any of the short-term business. A lot of our conversations right now with clients are about reducing costs. But the reality is that their facilities remain highly understaffed even today. Bill rates, they've moderated for the most part, so clients are looking for decreases in their order volume to achieve their contingent labor expense targets. Looking at the underlying drivers of supply and demand, we expect the pullback to be pretty short-term, and it's really just overall not sustainable in the marketplace. So, we do expect to see a healthy demand environment as we progress through the year. There are quite a few levers that we're pulling right now, including increasing our MSP fill rates, and also returning our internal capture to historical levels. We saw that dip a little bit throughout the pandemic when demand was really high, and we were heavily reliant on our supplier partners. Lastly, we also have opportunities to focus more on our non-MSPs, which we had previously been over the past couple of years.

Kevin Fischbeck, Analyst

Okay. That's fantastic. And I just do one more. I guess, Cary, whenever there's a new CEO, always looking to see what they're focusing more on now. In your prepared comments, this 'one AMN' thing kind of stuck out to me. Any way to size what you see the opportunity as and how we should think about what that could mean? Thanks.

Cary Grace, CEO

Yes. Let me give you a little perspective at a macro level. As we continue on these calls throughout the year, I'll continue to put color on it. So one AMN, I know there's going to be a very physical representation of that, where you will start to see our brands come together. We will literally look more cohesive and integrated as one company. But a lot of the things that we are working incredibly hard on and will continue to throughout the year is how do we actually make all the parts across AMN work more seamlessly together. There are a lot of implications for work that we are doing to streamline our processes across our 20 solution sets to streamline our platform. A lot of what we want AMN to feel like is to be easier to do business with, both for our clients, for our clinicians, and importantly for our team members. If I gave you an example of what I would expect to start changing in terms of the shape of our financials, as a proxy right now, if you look at our 30 largest clients across our 20 solutions, we have an average of eight. Obviously, if you went much further across our client base and then did the math around our 20 solutions, there's tremendous opportunity for us to penetrate those client relationships. We'll see more success in doing that when we create a real and meaningful value proposition that is compelling to them.

Operator, Operator

Thank you. One moment for our next question, that will come from the line of A.J. Rice with Credit Suisse. Your line is open.

A.J. Rice, Analyst

Hi, everybody. Congratulations, Cary on your first quarter here. Let me just maybe drill down a little bit further on some of the stuff that Landry was saying. So if you look at your MSP accounts, I know at the peak you were having to... you couldn't fill all the orders; the entire industry couldn't fill all the orders, but you were subcontracting out a meaningful percentage. If you look at Q3 to Q4, are you stepping up the percentage that you're filling of those open orders meaningfully? Or is it still a fair number that are being subcontracted and potentially even going among your MSP accounts?

Cary Grace, CEO

A.J., I was going to say, thank you for that. You got our strategy what we were doing throughout the pandemic and also around what we have been doing subsequently. I'll let Landry kick off, and then Kelly can talk a little bit about our broader MSP strategy.

Landry Seedig, COO of Nursing and Allied Solutions

Yes. I'm going to turn that to Kelly, but I was just going to mention, A.J., both Q3 and Q4 are strong. We were living in really high demand in the fourth quarter. So those... you have to look at that as being pretty flat. Right now, our focus is on increasing that as we progress through Q1 and then going into Q2. We are seeing increases on that, but I'll let Kelly provide a little more detail.

Kelly Rakowski, COO of Strategic Talent Solutions

Yes. A.J., just to build on that, certainly favorable trend for us as that demand lowers from Q4 to Q1. We're seeing both increased fulfillment as well as some incremental increases in our internal capture. Our model will remain a combination of AMN's ability to fulfill on behalf of our clients and the strength of our supplier network, which is critical for us to achieve that fulfillment as well as augment our capabilities in regional or specialized areas. We were very fortunate to have the strength of our suppliers throughout COVID as were our clients. So that strategy won't change, although we do have opportunities to grow that. It also creates additional capacity for us, as we're seeing strong demand from a new business and pipeline perspective, A.J. We have been very active in the market. We added a few new MSPs in the last couple of quarters and have a healthy pipeline for us here starting the year. So we will continue to grow our client base, and again, the strength of our network will be a key part of that growth.

A.J. Rice, Analyst

Okay. And then just a follow-up. Another comment you guys were making. When you think about what happened in the pandemic, you had some new competitors come in and grab some marginal share. There was always... like you said, you had to emphasize your MSP accounts and some of the other ones probably got less focus. As you're thinking about having the opportunity to go back after some of that business, how sticky is it with the new competitors? Are people... are you finding that people are willing to come back to you pretty easily? I wondered also whether it might create opportunities on the M&A side. I know traditionally, a lot of your M&A has been adjacent businesses, but I wondered if there were opportunities emerging in the core Travel Nursing, Allied, and Locums business you might look at.

Landry Seedig, COO of Nursing and Allied Solutions

So A.J., this is Landry. I can start with it. We cover the non-MSP business. We never left it. We just deprioritized it and still... nothing changed in our relationships. We were very transparent whether those are direct contracts or where we are a third-party to other MSP or VMS holders in the marketplace. There was nothing that was being hidden. We were trying to find other solutions to help those different types of clients out, whether that was through our VMS system or local business or some other businesses. All those contracts still exist. We still get those orders. We can just prioritize them higher within our order rating numbers. Some of the short-term business that I referred to was just more of the state contracts or some of the facilities that set up for vaccine centers or stand-up hospitals, or FEMA, some of those other programs. Our strategy is staying highly focused on our MSP customers has had and will continue to pay out well for us.

Kelly Rakowski, COO of Strategic Talent Solutions

A.J., just to your last comment around what we're seeing in new business and new strategic relationships, we are seeing early traction as we go-to-market with a more comprehensive solution set and really emphasizing that. Clients are looking for more solutions as they face a challenging market. We have seen one early indicator: the number of service lines per contract is going up with our new business versus in the past, where we started with contracts and grew over time. We expect to see that trend continue as well.

Cary Grace, CEO

Okay, on the M&A side, we expect M&A to continue to be an important part of our growth strategy. You should expect us to have a proactive focus on M&A, especially as ways that we think can help us serve our clients more effectively. We will look at strategic fit, financial fit, cultural fit, and quality of management. We're interested in more traditional staffing assets. Additionally, we will have a focus on tech-enabled solutions. From what we have seen last year, we likely on bias saw more traditional staffing assets. While it is relatively early in the year, we are seeing comparatively more tech-enabled solutions emerge. We are very interested in M&A as a growth strategy.

Operator, Operator

Thank you. One moment for our next question, that will come from the line of Tobey Sommer with Truist. Your line is open.

Tobey Sommer, Analyst

Thank you. I wanted to see if you could spend some time giving us some more color on VMS and MSP trends. In particular, if you could touch on what seems like the rapid adoption of vendor-neutral MSPs and VMS solutions and maybe also speak to any timing of recompetes for your larger MSPs? Thank you.

Cary Grace, CEO

Hey, Tobey. I'm going to turn it over to Kelly in a second, but as a frame for this conversation, we have very intentionally built a broad set of capabilities. We know that clients have different needs and different strategies for how they want to manage their workforce recruiting, retention, and staffing strategies. Think of this as Kelly talks about some of those trends. We really do look at it and start with the client need, and then we work around that to see how we can be helpful to them and how they want to execute that strategy. So, Kelly, I'll turn it over to you to talk about some of those trends.

Kelly Rakowski, COO of Strategic Talent Solutions

Yes. Hi, Tobey. I would say it's pretty typical, and we typically see, on any given year from our mix of business. It changed a little bit during COVID. But looking at our pipeline over the last two years, in 2021, we saw a heavier mix of technology-only solution. Now we start to see that come back. I would say our pipeline today is more heavily weighted towards full MSP programs. We also see, because we have multiple VMS solutions and such a large client base, nearly 500 clients, we'll see some variation from clients who want to take their business in-house and those who want to transition from an in-house solution into our MSP program. We've had both of those play out in our client base. Again, I would say that is pretty typical to what we've seen in the past. We see clients want to add to their ability to have more flexible solutions in their workforce, especially in the use of Travel Nurses, so things like internal flow pool. You did see some internal agency activity where they're using VMS solutions to help accommodate that. We are partnering with them in highly customized ways to meet their local needs. Regarding our outlook for our renewals and contracts, we had a very strong retention rate last year. We have a very typical renewal period, as we look at our contracts coming to terms. We have a strong outlook this year for renewals. In fact, we've got several already in verbal, although it's not contracted yet this year. Nothing is accelerating that or really changing that, and a lot of the catch-up that happened for laser and COVID has played out contracting over the past year.

Tobey Sommer, Analyst

Thanks. For my follow-up, I wanted to see if I could get you to talk about why you think demand rebounds in the summer for Travel Nurses. If that's nearly a reflection of reliance on history, a product of conversations, or what customers are telling you, how do you draw that conclusion?

Cary Grace, CEO

No, I think it really goes back to a combination of some comments that Jeff and Landry are making. From a macro standpoint, and looking at the structural imbalance in supply and demand against the backdrop of... we just published some research on timing and continued delays in access. We know that demand continues to get pent up. As much as clients focus on cost containment, they are also focused on staffing to meet their demand. It's a combination of what we're seeing structurally. Second, we have seen seasonal patterns typically where you get winter orders as you go through the summer. So, it's really a combination of both of those factors.

Landry Seedig, COO of Nursing and Allied Solutions

Yes, Tobey, I would just add. It's just... it's really not sustainable. The lower demand is purely a CFO decision right now. We're not seeing it from CMOs, not from unit managers. It's purely a financial decision. They are still understaffed. Nothing has changed there. Our Q1 volumes are good; it's just the demand has been pulled back. That's the solution they're thinking for cost savings. They haven't felt the pain, right. Our clinicians are still there right now. When those clinicians start coming off, it will get noisy; their internal staff will get noisy, and we'll experience even higher turnover. We've seen it throughout the pandemic, and we've also seen this over the last 15 years. It's just not sustainable whenever there is a shortage within a facility; it's a poor decision not to have the labor.

Cary Grace, CEO

And Tobey, the last part that I would add, particularly over the past 12 to 18 months, is when you look at the fragile state of the workforce. We do a biannual survey of nurses, and we'll publish it in May. The data just came in over the past 24 hours. At a macro level, satisfaction levels for nursing jobs dropped down to 71%; that number has been between 80% and 85% for a decade. So, when you look at the high turnover rate and satisfaction levels going down, there is this balance for many of our clients. How do they find the balance between cost containment and ensuring they provide an environment that will retain their precious staff?

Tobey Sommer, Analyst

Thank you.

Operator, Operator

One moment for our next question, and that will come from the line of Tim Mulrooney with William Blair. Your line is open.

Tim Mulrooney, Analyst

Cary, Jeff, Kelly, Landry, good afternoon.

Cary Grace, CEO

Good afternoon.

Tim Mulrooney, Analyst

There's a lot of moving parts here with the first quarter expected to be stronger, second quarter is expected to be lower than normal. I want to ask it in a different way. Last quarter, you laid out a framework for 2023 of more than $4 billion in annualized revenue and 15% EBITDA margins. Is that still your expectation today?

Jeff Knudson, CFO

Yes, Tim. So you're right. The first quarter guidance is higher than what we had thought. That's primarily driven from higher bill rates, which is also driving our expectation for a lower Q2 and that higher than normal sequential decline we talked about earlier. Given everything that Landry just talked about with demand increasing in the second half, we also believe that bill rates off of that Q2 level will follow a normal seasonal pattern into Q2. If that normal seasonality plays out in the second half, we could see a path to that full-year expectation we laid out in the last call.

Tim Mulrooney, Analyst

Okay. Thanks. The last few years, you've provided an expectation where you think bill rates will ultimately settle as you exit the year. What is your expectation for bill rates as you head into 2023?

Jeff Knudson, CFO

They really haven't. They were higher in the fourth quarter and first quarter when we thought. With that high single-digit decline into the second quarter, they're still exiting the year with where we originally thought they would be; they just weren't there in the fourth quarter and the first quarter.

Tim Mulrooney, Analyst

Okay. Thank you.

Operator, Operator

Thank you. One moment for our next question, and that will come from the line of Mark Marcon with Robert W. Baird. Your line is open.

Mark Marcon, Analyst

Hey, good afternoon, everyone. With regards to just the fourth quarter, just the rearview mirror. You mentioned some credit adjustments with regards to Nurse and Allied in the operating margin for the fourth quarter. Jeff, what was that exactly? What happened?

Jeff Knudson, CFO

Yes. So there was just a reserve for credit losses or bad debt, Mark. There was one specific MSP account that we have concerns about. Given the macro environment, we took a slightly larger-than-normal general reserve for expected credit losses, and that impacted Nurse and Allied, primarily driving those dollars.

Mark Marcon, Analyst

That MSP account is a... one large one? Or is it relatively well contained?

Jeff Knudson, CFO

It's relatively well contained. It's not one of our larger accounts.

Mark Marcon, Analyst

Okay. Great. I appreciate the forward look into Q2. That's extremely helpful. Cary, Jeff, kudos to you for both disclosing what you're seeing now as it relates to that. It sounds like a lot of that is basically the change in terms of the bill rates, and it sounds like in Q4 and Q1, the bill rates were higher due to certain specialties that are being utilized to a greater extent. What specialties are you seeing that are higher bill rate specialties that were a little higher than expected in terms of utilization in Q4 and Q1? Why would that drop off more than usual going into Q2?

Jeff Knudson, CFO

Yes. So Mark, going into the fourth quarter, we expected bill rates to decline in the mid-single digits. They ended up coming down 2% over Q3 levels. The higher bill rate specialties are driven by a number of urgent needs orders that we received carrying a higher bill rate. From a mix standpoint, this drove bill rates up in the first quarter, and those will predominantly roll off as we exit into Q2.

Mark Marcon, Analyst

Great. If I could just cheat and ask one more. How much variance are you seeing in terms of the behavior among your 30 largest clients in terms of how they're treating the need for cost discipline versus managing the workload on the floors?

Kelly Rakowski, COO of Strategic Talent Solutions

Mark, it's Kelly. I'm chuckling a little because we had a lot of variation in the makeup of those 30 across the country, different sizes, different settings, different communities they serve. So, on the one hand, it's difficult to peg consistency. I would say in general, there is that sensitivity around the financials; while the industry, particularly the hospital industry started to see improvement in their bottom line coming out of December, there's still considerable financial strain on the systems. They're looking to their largest line item of expenses to manage going forward. I would say there's still that sensitivity to cost management, largely through bill rates, through urgent needs negotiated. We're seeing them turn to us to help them predictively plan using our permanent resources to help them backfill to bring those vacancy rates to more normal levels. High sensitivity to cost, but at the same time, still a need around fulfillment. Landry mentioned they still need the nurses and allied professionals on the floor, and there are challenges around retention. We hear most CHROs talk about, 'I don't have a recruitment challenge; I have a retention challenge. I need to keep the people I have.' The biggest factor in retaining is creating a safe, positive work environment. They don't want to relinquish the use of contingent staff. Our teams continue to work with them on all fronts, helping them manage those costs in the short term, while also providing capabilities and parts of our solution to help with the long term.

Mark Marcon, Analyst

I appreciate that, Kelly. Thank you.

Operator, Operator

Thank you. One moment for our next question, and that will come from the line of Jeff Silber with BMO Capital Markets. Your line is open.

Unidentified Analyst, Analyst

Hey. This is Ryan on for Jeff. I just wanted to ask a quick question on the tech and workforce. I'm just curious what the drivers are for the segment for the year as you lap some challenging comps and some headwinds in VMS. Do you think the language service business can continue its strong trajectory and really drive the segment going forward? Thank you.

Jeff Knudson, CFO

Yes. Thanks, Ryan. I would say when you look at the year-over-year comparisons for the rest of the year, we would still expect language services to be growing in that high-teens rate as we move through the rest of the year. As you noted, VMS will have some very tough comparisons, particularly in the Q2 – beyond Q1 and into Q2 and Q3 time frame. They will be challenged sequentially in the second quarter as some of these bill rate dynamics that we talked about for Nurse and Allied play out in the front half of the year.

Kelly Rakowski, COO of Strategic Talent Solutions

And I'll just add, Ryan, on Language Services, I mean, you heard Cary mention we celebrated the three-year anniversary with AMN this week. That team just continues to deliver high-quality services and strong retention of clients as well as account growth. We still see organic growth patterns for that business within their existing account base as they increase adoption of the model. We have a strong pipeline and new acquisition opportunities, and still an opportunity to grow within our MSP base. Just a shout-out to that team for their tremendous value. We're thrilled to have them as part of AMN.

Unidentified Analyst, Analyst

Sure. Thank you. Just as my follow-up, given some clinicians rolling off in the second quarter and CFO grumblings about costs. Any room to move rates lower, offer any concessions to ease the financial burden on providers later in the year? Are you expecting normal seasonality to return in the second half?

Jeff Knudson, CFO

The bill rate is a tricky one because we saw bill rates go down on our orders, not necessarily on our placements. The bill rates in the placements did go down, but the orders went down to a level last year that it negatively impacted bill rates because of a low pace. That's why we've got some confidence in where we think the bill rates will normalize. The better thing is to offer more solutions to help with the overall labor problem.

Landry Seedig, COO of Nursing and Allied Solutions

On the seasonality, we expect the second half of the year to play out normally, meaning Q3 would typically be up modestly over Q2, and then stronger growth in Q4 over Q3 levels.

Unidentified Analyst, Analyst

Got it. Thank you.

Operator, Operator

Thank you. One moment for our next question, and that will come from the line of Brian Taji Phillips with Jefferies. Your line is open.

Brian Tanquilut, Analyst

Hey, good afternoon, guys. It's Brian Tanquilut. I guess my question for the team: there's a lot of chatter around the competitive dynamics in the space, where some of your competitors are talking about expectations for a good bit of incremental decline in bill rates going forward or their predictions. Just curious what you're seeing in the market in terms of the competition. What are you hearing in terms of potential price aggressiveness from some players in the market at this point?

Landry Seedig, COO of Nursing and Allied Solutions

This is Landry, Brian. Jeff mentioned that we anticipate a sequential decline in bill rates from Q1 to Q2. There are some pockets of small competitors that might make margin or a bill rate move. It's not something we've seen as of now from any of our large competitors.

Brian Tanquilut, Analyst

Got it. Okay. Awesome. Thank you. That's all I have.

Operator, Operator

Thank you. And speakers, I'm showing no further questions in the queue at this time. I would now like to turn the call back over to management for any closing remarks.

Cary Grace, CEO

Thank you. Before we say our final goodbye, I know we've talked a bit about a couple of our businesses. We didn't talk as much about PLS. I want to give them a big recognition for... as you look throughout 2022, they had a terrific year, especially in the locums business, with four consecutive quarters of hitting over $100 million of revenue. So they deserve a special shout-out. Thank you all for being with us. We appreciate all the questions and all the interest. I'm going to end with how I started, which is I could not be more thrilled to be part of this wonderful AMN team, and I am looking forward to spending time with all of you in the coming weeks and months.

Operator, Operator

Thank you all for participating. This concludes today's program. You may now disconnect.