Earnings Call Transcript - AMN Q1 2025

Operator, Operator

Good day, and thank you for standing by. Welcome to the AMN Healthcare First Quarter 2025 Earnings Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Randle Reece, Vice President of Investor Relations.

Randle Reece, Vice President of Investor Relations

Good afternoon, everyone. Welcome to AMN Healthcare's first quarter 2025 earnings call. A replay of this webcast will be available at ir.amnhealthcare.com at the conclusion of this call. 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 with me today are Cary Grace, President and Chief Executive Officer; and Brian Scott, Chief Financial and Operating Officer. I will now turn the call over to Cary.

Cary Grace, CEO

Thank you, Randy, and welcome to our first quarter conference call. The AMN team showcased its energy and resource units in the first quarter, resulting in revenue and profit margins that exceeded the high end of guidance. Revenue of $690 million topped the high end of guidance by $10 million due to strength in our labor disruption, Locum Tenens, and Allied businesses. Our other businesses, on balance, were in line with our revenue forecast. The company reported $64 million in adjusted EBITDA and another quarter of robust cash flow and debt reduction. Thank you to our healthcare professionals and the entire AMN team for delivering a solid start to the year. For the second quarter, our outlook for revenue and earnings compares well against consensus estimates, with continued upside from labor disruption, locum tenens, and Allied staffing revenue. We received $39 million in revenue from two labor disruption events in the first quarter, with continued activity anticipated in the second quarter. Increasingly, labor disruption has become a differentiated solution that supports crucial client needs. We have built leading event management technology and strengthened our capability to manage labor disruption activities without interrupting the strong service quality in our core business. These differentiating capabilities have been met with a series of client wins and a large pipeline of opportunities, which could offer upside potential this year and next. Bookings for locum tenens picked up significantly in the first four months of the year. We expect locum tenens to have sequential revenue growth this quarter, with good momentum extending into the rest of the year. Demand for our Allied business has grown in the mid-teens year-over-year. We continue to see healthy Allied demand into this quarter and strong execution from our team. In our schools business, bookings for the next full year are trending towards year-over-year growth driven by strengths in orders and candidate submissions. For our travel nurse business, revenue volume and bill rates were in line with our projections for the first quarter. Our second quarter revenue outlook for Travel Nurse calls for relatively normal seasonality, and we continue to see both intense competition to fill orders and some orders priced at levels that no one is filling. We made strides year-to-date in stabilizing gross margin, which came down across our industry last year. Consolidated gross margin was 28.7% in the first quarter, slightly better than the high end of guidance. Nurse and Allied Solutions gross margin of 22.7% was 90 basis points better than consensus. Our gross margin performance benefited from some process changes that have enabled improved internal execution, and we just rolled out new technology that enhances recruiter productivity and speeds up submission. We continue to invest in technology to improve our speed and fill rate, including AI tools that reduce costs and improve how we deliver our services. Our market-leading app for healthcare professionals, AMN Passport, has now been rolled out to locum tenens. The app has the potential for valuable improvements to our physician engagement and support. Passport allows locum physicians to submit their shift work in the app, which we expect will greatly speed the submission process, reduce errors, and enhance physician satisfaction. We will continue to enhance Passport to expand its capabilities and extend into other AMN service lines. AMN is also gaining momentum in enterprise sales. The company signed five new MSP and vendor-neutral wins last quarter, reflecting improved win rates, and we are experiencing strong client retention rates. While the selling environment remains highly competitive, we are seeing interest in solutions that combine technology and services to help clients build and sustain a high-quality and cost-effective workforce. We will complete the rollout of ShiftWise Flex to our client base next month. This powerful and versatile technology is a cornerstone of our new worldwide staffing management, engagement, and optimization platform. Workwise has received a positive reception from new and existing clients. Workwise is another example of how our diverse set of solutions is positioned to serve clients and healthcare professionals across the spectrum of care. This diversification also allows AMN to maintain operating leverage that is superior to our competitors and generate cash flow to invest in the business while also reducing debt. We are pleased to receive industry recognition for innovation that measurably improves the quality and efficiency of care. Modern Healthcare recognized Workwise and AMN Passport in its 2025 Innovators Award. AMN is the only talent solutions company to make this year's list of 15 innovative healthcare organizations. Congratulations to the AMN team, from those who develop and deploy our technology to everyone who has integrated these market-leading tools into our solutions to the benefit of healthcare professionals and clients. In the first quarter, the company generated $93 million in operating cash flow, enabling us to reduce our revolving credit balance by $60 million and add $45 million of cash to our balance sheet. We do not control all the factors that will determine the trajectory of our businesses after our solid start to the year. Demand has not recovered to pre-pandemic levels in several of our businesses such as travel nurse, interim leadership, and search, and the ongoing low demand in nurse staffing also affects our VMS revenue. Cost consciousness among hospitals and health systems is not a new condition. We continue to focus on winning new clients, expanding our relationships with current clients, and improving our fill rates in direct and vendor-neutral channels. Across our businesses, competitors continue to grapple with the proposition while serving a universe of cost-conscious clients and GPOs. We are seeing heightened competition in language services, where industry consolidation has resulted in some large arrivals, and price competition has intensified. On the other hand, we have already seen some clients who chose other vendors but, due to quality issues, returned to AMN. We hold a distinct advantage with our high-quality, cost-competitive solutions. After two years of extraordinary growth, slower growth in Spanish language volume may indicate some impact from the current political and regulatory environment. Our sales activity in Language Services is healthy, and revenue growth could improve later in 2025 as new wins emerge. Across the spectrum of care, from preventive to urgent acute and post-acute, we seek clients with varying degrees of exposure to changes in tariffs and federal healthcare policies. Healthcare providers continue to focus on cost containment and workforce sustainability amid continued growth in patient volumes. We have improved AMN's ability to help clients find and implement the best solutions for optimizing labor versus quality, supply, and cost. I am confident that our focused expertise, diversified solutions, and high-quality service delivery will be increasingly valuable in the future as healthcare demand grows faster than supply. Now I'll turn the call over to Brian for the details of our latest results and outlook.

Brian Scott, CFO

Thank you, Cary, and good afternoon, everyone. First quarter consolidated revenue was $690 million, above the high end of guidance driven primarily by better-than-expected performance in labor disruption, locum, and Allied. Revenue was down 16% from the prior year and down 6% sequentially. Consolidated gross margin for the first quarter was 28.7%, 10 basis points above the high end of our guidance range. Year-over-year, gross margin decreased 270 basis points while sequentially, gross margin was down 110 basis points. Consolidated SG&A expenses were $148 million compared with $175 million in the prior year and $159 million in the previous quarter. Adjusted SG&A, which excludes certain expenses, was $136 million in the first quarter or 19.7% of revenue compared with $162 million or 19.7% of revenue in the prior year, and $145 million or 19.8% of revenue in the previous quarter. The year-over-year SG&A decline was primarily due to lower employee headcount and variable compensation, along with reduced consulting and bad debt expenses. The sequential decrease was mainly a result of lower compensation expense and favorable bonus and related accrual adjustments. First quarter Nurse and Allied revenue was $413 million, down 20% from the prior year, primarily from lower volume and rates, partially offset by increased labor disruption revenue. Sequentially, segment revenue was down 9%, mainly driven by lower labor disruption revenue from a modest volume decline in two fewer days. Year-over-year, segment volume decreased 22%. Average rate was down 5%, and average hours worked were down 1%. Sequentially, volume was down 2%, and the average rate and hours worked were both 1% higher. Travelers revenue in the first quarter was $215 million, a decrease of 36% from the prior year period and 6% from the prior quarter. Allied revenue in the quarter was $147 million, down 13% year-over-year and 1% sequentially. Nurse and Allied gross margin in the first quarter was 22.7%, a decrease of 240 basis points year-over-year, mainly driven by higher housing and per diem reimbursements. Sequentially, gross margin was down 110 basis points due mainly to favorable sales adjustments recorded in the prior quarter. Segment operating margin of 7.8% decreased 250 basis points year-over-year and 80 basis points sequentially driven largely by the lower gross margin. Moving to the Physician and Leadership Solutions segment. First quarter revenue was $174 million, decreasing 8% year-over-year, driven by lower volume across all businesses, partially offset by bill rate growth in locum. Sequentially, revenue increased 1% due to growth in locum. Locum tenens revenue in the quarter was $141 million, down 3% year-over-year and up 3% sequentially. Interim leadership revenue of $24 million decreased 21% from the prior year period and 9% sequentially. Search revenue of $9 million was down 29% year-over-year and 8% sequentially. Gross margin for the Physician and Leadership Solutions segment was 27.3%, down 430 basis points year-over-year, attributable to a lower bill base spread in locum tenens and an unfavorable revenue mix shift. Sequentially, gross margin decreased 120 basis points, mainly due to an unfavorable revenue mix and lower margin in the Interim business. Segment operating margin was 8.3%, which decreased 350 basis points year-over-year, primarily due to lower gross margin and the deleveraging of SG&A expenses, partially offset by lower bad debt expense. Technology and Workforce Solutions revenue for the first quarter was $102 million, down 9% year-over-year as growth in Language Services was more than offset by decreases in BMS and outsourced solutions. Sequentially, revenue was down 4%. Language Services revenue for the quarter was $75 million, an increase of 5% year-over-year and down 2% sequentially. VMS revenue in the quarter was $19 million, a decrease of 33% year-over-year and 14% sequentially. Segment gross margin was 55.5%, down 440 basis points from the prior year period, primarily due to lower revenue mix from BMS and outsourced solutions. Sequentially, gross margin declined 180 basis points, mainly driven by a decline in Language Services and an unfavorable revenue mix shift. Segment operating margin in the first quarter was 34.5%, a decrease of 480 basis points from the prior year period, driven primarily by lower gross margin. Sequentially, the operating margin declined by 320 basis points due to lower gross margin and a higher corporate expense allocation. First quarter consolidated adjusted EBITDA was $64 million, down 34% year-over-year and 15% sequentially. Adjusted EBITDA margin for the quarter was 9.3%, down 260 basis points from the prior year period and 90 basis points sequentially, driven by the lower gross margin. First quarter net loss was $1 million, compared with net income of $17 million in the prior year period and a net loss of $188 million in the prior quarter, which included a $222 million goodwill impairment charge. First quarter GAAP diluted loss per share was $0.03. Adjusted earnings per share for the quarter was $0.45 compared with $0.97 in the prior year period and $0.75 in the prior quarter. Day sales outstanding for the quarter was 55 days, which was nine days lower than a year ago and flat sequentially. Operating cash flow in the first quarter was $93 million, and capital expenditures were $10 million. As of March 31, we had cash and equivalents of $56 million and debt of $1 billion, including $150 million on our revolver. During the quarter, we reduced our revolver balance by $60 million, and we will continue to use free cash flow to reduce the balance. We ended the quarter with a net leverage ratio of 3.1x to 1. Moving to second quarter guidance. We project consolidated revenue to be in the range of $645 million to $660 million, down 11% to 13% from the prior year period. This guidance includes an assumption of $16 million of labor disruption revenue. Gross margin is projected to be between 28.5% and 29%. Reported SG&A expenses are projected to be 23.2% to 23.7% of revenue. Operating margin is expected to be between -0.7% to 0%, and adjusted EBITDA margin is expected to be between 7.8% and 8.3%. Additional second quarter guidance details can be found in today's earnings release. And now let's go back to Cary for some closing remarks.

Cary Grace, CEO

Thank you, Brian. This week is National Nurses Week, and May is National Nurses Month. The theme of Nurses Week this year is the Power of Nurses, and we are extremely grateful for the profound difference that nurses make in the health of all Americans. I encourage everyone to share our appreciation for nurses everywhere, including the thousands of nurses who are part of the AMN family. Our 2025 RN survey showed that 8 in 10 nurses want to see improvement at their workplace in three areas: patient-to-nurse ratio, flexible scheduling, and administrative burdens. We at AMN are continually working on innovative and flexible talent solutions to support nurses' physical and mental well-being and improvement of work-life balance to combat burnout. Our business depends on the quality of people we bring to serve the steadily growing demand for healthcare. So far in 2025, we have been thrilled to welcome top talent from across the industry onto the AMN team. These superb professionals have joined us in client-facing and key leadership positions. Our dedication to quality and innovation is making AMN a prime destination for the best people in the business. In further demonstration of our dedication to the highest quality, AMN again has received certification from the Joint Commission on the Accreditation of Healthcare Organizations. AMN was the first healthcare staffing company to receive this certification, and we have continuously maintained it since 2005. Before we move to questions, I want to take a moment to acknowledge the recent passing of Healthcare's founder and long-time CEO, Alan Brenan. On behalf of AMN Healthcare, we extend our deepest condolences to Allan's family, friends, and the entire IA team during this difficult time. Alan dedicated himself to growing the healthcare staffing industry, and he leaves a lasting legacy. Operator, please open the call for questions.

Operator, Operator

Thank you. Our first question is from Mark Marcon from Baird. Your line is open.

Mark Marcon, Analyst

So good afternoon and thanks for taking my questions. Cary, that was a nice thing for you to say, obviously. I don't know the family or friends, but obviously, condolences; tragic and puts things in perspective. Can you talk a little bit about the VMS wins that you had and the MSP wins that you had? It sounds like you've got five. How big are they? Are they new to using an MSP or VMS? Or were they competitive wins? Any sort of color there would be appreciated.

Cary Grace, CEO

Yes. A couple of things. One is, as you think about just the wins overall, they're reflective of a very intentional strategy we've had to accelerate our go-to-market, particularly to broaden our positioning across the entirety of the market, where we had been MSP-centric for some period of time. And so, Mark, a lot of the wins that we are seeing now are manifestations of strategies we put into place over a year ago, just given some of the lead times. For those wins, I'd characterize them as small to medium wins. But the names underneath them carry even more weight in a couple of cases, and what their spend under management would indicate, and they were competitive wins. A broader comment that I'll say about what we're seeing is that we've seen healthy pipeline growth in our sales pipeline from Q4 to Q1. We had been seeing for, I'd say, probably two years coming out of the pandemic, a bias in the pipeline toward vendor-neutral. We are just starting to see some swing back, so we're still seeing strong interest in vendor-neutral, but we're seeing some swing back in growth in our pipeline in MSP.

Mark Marcon, Analyst

That's great. Do you have a size in terms - I mean you said they were small to medium, but when we consolidate them all, like what sort of revenue contribution could they ultimately end up generating at once the...?

Cary Grace, CEO

If you look at year-to-date, we're in a net client win position. So, think of it as that would help us from a net revenue standpoint as we go deeper into the year.

Mark Marcon, Analyst

Okay. Great. And then can you talk a little bit more about language services and some of the dynamics there? We haven't - historically, it has been a growing space with really healthy margins. Just wondering about what you're seeing from a competitive perspective, and how you would expect that to unfold over the quarter and the year ahead?

Cary Grace, CEO

Yes. So in Language Services overall, we continue to see healthy growth. You will see that in the second quarter, and we expect that to continue as we progress throughout the year. From a competitive standpoint, we have seen particularly over the past 12-plus months some consolidation in the space. So, you've seen that consolidation, particularly among kind of two or three players, occur over 2024 and parts of 2023. That's putting a bit of pressure on margins. We still see this business as a high-growth, high-margin business and it is very attractive. We are very well positioned with our solution set of video and audio, and can offer both a high-quality solution, and given the efficiency of how we deliver our services, it also is a cost-effective solution for clients. So we believe we are very well positioned even in a competitive environment.

Mark Marcon, Analyst

So would you expect the margins, the gross margins on that part of the business to basically stabilize at these levels? Or how are you thinking about that?

Brian Scott, CFO

Yes, Mark, this is Brian. I think that's a fair characterization. We've seen a little bit of a decline as we called out. But we are working internally on always improving the quality of the service as well as how we think about the utilization of interpreters, in the mix between permanent and use of contracts, onshore, and offshore as well. So we're already making some adjustments that will help bring down some of our costs, without impacting the quality of our service, which we know is a differentiator. So at this point, we feel like we've got some good actions that will help stabilize, even if there's a little more pressure on the price side with some of the competitors. So we're feeling good that this is a good stable point.

Cary Grace, CEO

Mark, one thing I'll note, just building on one of Brian's comments is, it is a differentiator. Both our video capabilities and our onshore/offshore, for some clients having the ability to have onshore interpreters is crucial to them; not every competitor offers that option. So that differentiation is important to a number of clients and/or prospects that we engage with.

Mark Marcon, Analyst

Great. And can I squeeze one more in? Just on travel nurse bill rates. It sounds like they were only down a little bit year-over-year. Do you feel like that's pacing out? I know that there's still some orders out there that aren't competitive. But do you feel like we're starting to see some real basing and a point where we can start building again?

Cary Grace, CEO

Yes. If you look at the bill rates, we've really seen stabilization from the back half of 2024. So, even though we're down 6% year-over-year, it was a stabilization that we talked about in the past quarter as well. Currently, we are at a premium spread of contingent cost to permanent labor of about 11%. Pre-pandemic, you would have seen that range more in the mid- to high-teens. As we've discussed over the past couple of quarters, in light of the stabilization in bill rates, we have also seen signs indicating some stabilization; unfilled orders are relatively where they were last quarter, maybe a slight uptick. Moving forward, if there's an immediacy for some of these clinicians, you would expect some of those bill rates to increase to ensure that they can fill that need.

Mark Marcon, Analyst

That's great. Thank you very much.

Brian Scott, CFO

Thanks, Mark.

Operator, Operator

Thank you. Our next question is from Trevor Romeo with William Blair. Your line is open.

Trevor Romeo, Analyst

Hi, good afternoon, everyone. Thanks so much for taking the questions. I want to thank you also for providing the slide deck this quarter. That's extremely helpful for us, so I appreciate that. Maybe I'll just pick up on the unbillable order topic. I had a question on that. It definitely appears that order volumes are picking up across the industry still. I think Cary, you talked about continuing to see orders priced at levels no one's filling, but the margins - gross margins seem a bit more stable this quarter. So, two questions on that. One is, are you starting to see competitors taking less of those low-margin orders? And then two, what do you think it will take for clients to move those bill rates higher so that they can be filled?

Cary Grace, CEO

Yes. So on the first one, I think the unfilled orders are reflective of a rationality among competitors of not filling orders that don't make economic sense. What we have seen in terms of those unfilled orders getting filled is that it typically is a client going back and recognizing the immediate requirement to get that filled and increasing the bill rate to a price that will reflect current market conditions, considering geographic or specialty factors. A part of the challenge over the past three or four quarters has been that while you got in 2024, we really started to see bill rates stabilize. However, the underlying labor market still faces wage increases. So, there is a market matching condition that has to align around the bill rate to reflect where clinicians are willing to accept assignments. It is client-specific, and as we see more of those needs becoming immediate, we would expect some of those bill rates to change.

Brian Scott, CFO

Yes. In terms of competitive behavior, it seems it's been pretty consistent. We're seeing on-field percentage that may be the same or slightly increasing, indicating that clients with low rates have kind of tapped out their limits, and may have gone too far. Some competitors may be filling some orders, but they're not filling those with rates that simply don't make economic sense, and that dynamic hasn’t changed. As we move through this year, if there's a greater need, or competitors realize this situation is unlikely to change, you may see some players exit the industry, which would be healthy over the longer term. Clients may realize that the rates they've been pushing for are not attracting clinicians, and they’ll have to adjust accordingly. Again, that's largely client-by-client based, but we're seeing that increasingly across the industry.

Cary Grace, CEO

One other point to add, based on Brian's insights: looking at improvements within the healthcare system, we’ve observed a return to pre-pandemic retention rates and the reestablishment of their permanent base through accelerated hiring. These improvements represent significant progress in the stability of their workforce. Now you've got a very cost-effective contingent labor force combined with the completion strategies—this will likely look different than it did 18 months ago when the premium spread was in much higher ranges.

Trevor Romeo, Analyst

Got it. That makes a lot of sense. Thank you both. And then, for my follow-up, I wanted to ask on the labor disruption piece. It seems like it’s coming ahead of your expectations over the last couple of quarters. Cary, you talked about the pipeline. I think some of the recent capabilities you’ve improved in that area. Is the underlying amount of labor disruption growing? Or is it more about that internal focus and execution? Either way, is this an area where you could see a more consistent revenue cadence going forward?

Cary Grace, CEO

It’s more related to our internal focus and how we operate. As we reviewed the total CBAs in the market last year versus this year, the number was higher last year. However, our pipeline and the clients we support are seeing expansion because we have been intensely focused on it. We've mainly aimed at two pivotal fronts—supporting our clients and technology and automation improvements in our processes. We’ve made significant amenities for the last 12 to 18 months that position our support capability effectively without compromising the high service quality of our business model. From a modeling standpoint, it’s a great question. We still forecast around $5 million of revenue a quarter. It’s just not as predictable, but we do have a solid pipeline and more upside than we have experienced recently in some of these events.

Brian Scott, CFO

But it does have the potential to be lumpy, as we might have an organic agreement expiring, yet that doesn’t necessarily mean that the next day a strike will occur. There may be an existing agreement still in place. We are carefully planning for it, but the timing remains somewhat uncertain and difficult to predict. The key takeaway here is that we have a robust team capable of delivering service and leading with technology backing us for these situations.

Trevor Romeo, Analyst

Yes. And if I could just sneak in one quick follow-up on that, Brian, regarding the incremental margins on that business. Can you remind us what you typically see there relative to your other businesses in that segment?

Brian Scott, CFO

Yes. It’s a fair question, and there are many variables at play. If there is work preparation leading to a labor disruption, that can drive a higher margin. Yet, as we've noted in recent quarters, when we've generated revenue from these events, the gross margins generated aren't materially different from the segment margin. We see more flow-through at the EBITDA margin, although there are still incremental costs involved; that team is already in place, so we incur travel costs and other logistics support as well. The EBITDA margin flows nicely, but the gross margin impact for our nurse and allied segment is relatively consistent with our core business. We're pleased with the recent developments.

Trevor Romeo, Analyst

All right, thank you very much. I appreciate it.

Operator, Operator

Thank you. Our next question is from A.J. Rice with UBS. Your line is open.

A.J. Rice, Analyst

Hi everybody. Maybe a couple here, some of which require clarification on previous comments. Just to make sure I understand, Nurse and Allied bill rates, especially nursing, are stabilizing. You've indicated that in the last two quarters, but you've also noted an uptick in labor disruption revenues. Are you seeing stabilization in a pure apples-to-apples basis, putting labor disruption aside, or is that factor affecting your overall rates?

Brian Scott, CFO

Yes, thanks for the question. To clarify, the labor disruption revenue, those rates are excluded from the bill rates we discuss regarding core travel nurse and travel allied businesses. We’re talking about stability in those rates. The rates on labor disruptions can vary significantly; thus, they don't impact our core metrics.

A.J. Rice, Analyst

Okay. That's helpful. And then going back to language services, I understand your comments about the competitive landscape, but you also mentioned in the prepared remarks a bit of weakening demand for Spanish translation services that may be potentially impacted by some of the dynamics out of Washington. How much of an impact is that? How significant is Spanish translation services for your business? And if I think about it from what's going on with immigration at all, is that primarily related to emergency rooms or admitted patients?

Cary Grace, CEO

We haven’t seen a major impact; Spanish remains the number one language for interpretation, which isn’t surprising. What we've observed is a modest downturn in Spanish as a percentage of our total language mix. It’s something we’re monitoring. Historically, we have seen strong growth in this sector, and currently, we expect that to continue into the second quarter and throughout the year. We haven't noticed any slowdown in interest or client demand.

A.J. Rice, Analyst

Okay. And then just one last one. I think in the prepared remarks, you mentioned experiencing some pressure in bill pay spread in locum tenens. I know there can be volatility depending on the specialists in demand at any time, but I don’t recall hearing you call out pressure on the bill pay spread before. What are you seeing there?

Brian Scott, CFO

Yes, I think we may have mentioned it previously in some contexts. Competition can exert some pressure overall; recently, we’ve seen spreads affected, including our CRNA business which has demonstrated growth but has a margin profile that’s lower than average, impacting the overall spreads. The year-over-year impact is more notable, but recently, sequentially, the impact remains smaller. We’re optimistic about the coming quarters, and we’ve seen good momentum in various specialties now; we’ve been building up internal expertise in areas like internal medicine, psych, and surgery—those specialties carry better rate and margin profiles.

A.J. Rice, Analyst

Okay, thanks a lot.

Operator, Operator

Thank you. Our next question comes from Brian Tanquilut from Jefferies. Your line is open.

Meghan Holtz, Analyst

Hi, this is Meghan Holtz on for Jack Slevin, and thank you for taking the question. So just a bit deeper and beyond the Spanish commentary. Are you seeing any apprehension from clients in taking on full-time hires given the current macro situation and policy uncertainty? Or is it too soon to tell?

Cary Grace, CEO

Generally, it's too early to tell. Clients are monitoring the fluid environment around healthcare policy and engaging in scenario planning. What we have seen, particularly over the last two weeks from some healthcare systems, is that they are still witnessing healthy increases in patient demand. For AMN, we had a strong start to the year, and we remain focused on how we can enhance our efforts to capture more of the available market demand. The only behavioral aspect we've noted in recent weeks is a slight slowdown in client decision-making, which isn't new; it’s something we’ve observed intermittently over the last two years.

Meghan Holtz, Analyst

Okay. And then, just a follow-up. Can you share any updated thoughts on the progression of the international business throughout the balance of the year?

Brian Scott, CFO

Yes. As we discussed previously, there are no major changes. We anticipated a sequential decline from Q4 to Q1, down by about $3 million to $4 million. We expect similar trends into the second quarter, predominantly due to retrogression, meaning more nurses are coming off their contracts than we can place. This trend should stabilize, and we anticipate a shift to positive performance in the second half of 2026 as visa dates continue to advance. There’s continued interest from clients in bringing international nurses, and it largely hinges on the progress of visa approvals so that we can place more nurses from our pipeline to the U.S.

Cary Grace, CEO

To build on Brian's point, there's widespread bipartisan support for the need for international clinicians, especially in non-urban settings that have difficulty attracting and retaining talent.

Meghan Holtz, Analyst

Got it. Thank you for the insight.

Operator, Operator

Thank you. Our next question comes from Jeffrey Silber with BMO Capital Markets. Your line is open.

Unidentified Analyst, Analyst

This is Ryan on for Jeff. Just wanted to refresh on the capital allocation priorities at this point in time. Is taking leverage ratio down first and foremost? Any thoughts on repurchases or M&A?

Brian Scott, CFO

Sure, it's Brian. As I mentioned in our prepared remarks, our primary focus right now is to continue using free cash flow to pay down debt. That priority will remain unchanged this year. Our capital deployment on CapEx is expected to fall between $40 million and $50 million for the year—over half of what we expended in 2024. We adjusted our capital expenditures to allocate more toward debt reduction while still investing in innovation and AI. Our spending is crucial to enhancing service delivery speed and fulfillment. We're excited about what we're bringing forward, even as we balance investments and debt repayment.

Unidentified Analyst, Analyst

Got it. Thank you. Just a follow-up on one of the earlier questions, curious about any trends as you exited the quarter. Did you notice any incremental hesitance from clients following DOGE or tariff announcements?

Cary Grace, CEO

No. We continue to see strong demand. Across our businesses, we are witnessing strong demand across allied, locum, strike, school bookings, and language services. For nursing, we are still up mid-teens year-over-year through April. While we did observe a slight pullback in April, we remain up 15% year-over-year. So, overall, we are seeing continued demand across our array of business units. One notable point is the slowdown in decision-making processes from clients, particularly around candidate presentations or extensions.

Operator, Operator

Thank you for your question. Our next question comes from Joanna Gajuk from Bank of America Securities. Your line is open.

Joanna Gajuk, Analyst

Hi, thanks so much for taking the question. I am curious about your guidance. I don’t think I’ve heard about some of the metrics that you usually cover. Can you provide some clarification on the nurse and Allied volumes in Q2? Also, what about the bill rates and gross margins for nurse and allied in Q2? I recall you mentioned 22.7% in Q1, which was better than expected. Could you walk us through your assumptions?

Brian Scott, CFO

Yes, I don’t think we’re going to disclose that specific detail right now. In our prepared remarks, we noted that we expect to see normal seasonality in nursing, similar to previous years. There is a typical decline in volume from Q1 to Q2 as winter assignments conclude. For Allied, we also anticipate good demand, particularly in our core Allied business schools, and a decrease as we head into summer. On the rate side, we expect stable bill rates moving from Q1 to Q2.

Joanna Gajuk, Analyst

Regarding overall gross margin in Q1, you noted that it was better than your guidance. What contributed to that outperformance? And for your Q2 guidance on overall gross margin, do you expect it to increase sequentially?

Brian Scott, CFO

There weren't any major drivers for that outperformance in Q1. We had a favorable workers' comp actuarial adjustment of about $1.5 million, which had about 20 basis points of impact. We also had better performance in our VMS revenue, which is high-margin search. So it was a combination of several smaller factors that drove our Q1 gross margin outperformance. Our guidance for Q2 suggests a potential decline, primarily driven by that one-time workers' comp adjustment not recurring. Overall, we see stable margins with no notable changes expected from Q1 to Q2.

Joanna Gajuk, Analyst

Thank you.

Operator, Operator

Thank you. Our next question is from Tobey Sommer from Truist. Your line is open.

Tyler Barishaw, Analyst

Good afternoon. This is Tyler Barishaw for Tobey. You mentioned in the prepared remarks some changes to your gross margins due to process improvements with technology. Could you provide more details on those improvements?

Cary Grace, CEO

Yes. Part of what we've been doing is that we've just rolled out a new gross margin tool after development in the back half of the year. We have been focused on creating both automation and improved efficiency in our technology investments. That has been well-received and is expected to yield about a 4% average productivity improvement for our recruiters, which is immensely helpful for attracting and retaining top talents. Another aspect of our technology has been in AI matching. We implemented AI matching capabilities in our Locums business during the fourth quarter, which has significantly contributed to our year-over-year locum sales growth, and this tech enablement is a key factor.

Brian Scott, CFO

Our technology investments enable new enhancements on a daily and weekly basis. While we can't disclose all updates from a competitive standpoint, it's important to note that our internal teams are responding positively to our ongoing investments. We are continuing to enhance AMN Passport for clinicians to streamline onboarding, job searches, credentialing, and to create a more cohesive platform between ShiftWise Flex and our internal tracking system. That's all aimed at improving speed and experience for clients, clinicians, and our internal teams.

Tyler Barishaw, Analyst

Got it. And could you address the competitive environment? Has competition eased at all in the past couple of months, especially with a peer being acquired?

Cary Grace, CEO

The competition remains very intense. The acquisition Cross Country acquisition is not completed yet, so they still serve as competitors. The competitive environment will likely stay the same. There remains more pressure regarding demand, and we anticipate rationalization and consolidation among competitors in the coming years. Despite that, we believe we are well-positioned in this competitive landscape given our capabilities including platforms, a broad solutions portfolio, and our talented team.

Tyler Barishaw, Analyst

Thank you.

Operator, Operator

Thank you. I'm showing no other questions at this time. I would now like to turn it back to Cary Grace for closing remarks.

Cary Grace, CEO

Thank you all for your interest in AMN and for tuning into our conference call. I want to give a shout-out to our AMN team members, who propelled us to a strong start for 2025, and specifically share our gratitude to every nurse out there as we celebrate you throughout this month. Thank you.

Operator, Operator

This does conclude the program. You may now disconnect. Have a good day.