PRA Health Sciences, Inc.
Q1 2020 Earnings Call Transcript

Published: 1 May 2020

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the PRA Health Sciences First Quarter 2020 Earnings Release Conference Call. At this time, all participants lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]I would now like to hand the conference over to your speaker today, Mr. Chris Gaenzle, Chief Administrative Officer. Thank you. Please go ahead sir.

[Chris Gaenzle:]

Good morning, and thank you for joining us for the PRA Health Sciences first quarter of 2020 earnings teleconference. Today, Colin Shannon, our Chief Executive Officer; and Mike Bonello, our Chief Financial Officer, will discuss our quarterly financial results, following our opening statements we will be available for questions.In addition to our press release and investor supplement, with additional financial information is available in the Investor Relations portion of our website. Before we begin, I would like to remind you that our remarks and responses to questions may include forward-looking statements. Actual results may differ materially from those stated or implied by forward-looking statements, due to the risks and uncertainties associated with our business, which are discussed in the risk factors included in our annual report on Form 10-K filed with the SEC on February 21, 2020.Our risk factors may be updated from time-to-time in our filings with the SEC. Please note that we assume no obligation to update any forward-looking statements. Certain financial measures, we will discuss on this call are non-GAAP financial measures. We believe that providing these measures helps investors gain a more helpful and complete understanding of our financial results and is consistent with how management views our financial results.A reconciliation of these non-GAAP financial measures to the most comparable GAAP measure, calculated and presented in accordance with GAAP is available in the earnings press release and investor supplement, included in the Investor Relations portion of our website.I'd now like to turn the call over to Colin. Colin?

[Colin Shannon:]

Thank you Chris. Good morning and thank you for joining the conference call covering our first quarter financial results. Before I begin discussing our financial results for the quarter, I'd like to thank all of our staff for their efforts and support during the COVID-19 pandemic. I also want to especially thank a number of staff who either volunteered or were called up to support the front line. Their knowledge was also invaluable in assisting our crisis management team and helping our team manage their workforce. So, a big thank you there.The crisis brought our teams together across geographies and departments as truly one PRA, and this synergy led to some amazing achievements, as we supported our clients with innovative solutions. In one instance, we were asked to do a COVID study, just about a month ago, four days after receiving a protocol, we activated our first site. Yesterday was day -- since we got the protocol and we had activated 182 sites in 19 countries and enrolled 1,000 eligible patients. This was a fantastic achievement with our team and the client's team working in total unison.As you're aware, we invested in a mobile health platform about three years ago, when we acquired Parallel 6. We had anticipated that it would be an increasing need for more virtual styles, and we wanted to get ahead of the heavy learning curve. We have now had 40 trials in the platform, and over the last few years, have continuously refined and optimized the technology.Recently, we started the industry's first truly virtual site with direct-to-patient registrational, interventional drug trial in heart failure. It was great to hear about the clients celebrating, enrolling patients during a pandemic. As you're aware, the [indiscernible] conducting trials is great, and we look to utilize our Mobile Health Platform to create a solution.We want to help states to do all their competing work and still provide the necessary oversight to ensure patient safety and to continue the critical work of providing novel medications to patients. We have created a module on our Mobile Health Platform called Virtual Study support that offer sites a light weight, virtual technology which is 21 CFR Part 11 compliant, and can be rapidly implemented to ensure patient safety and study continuity, enabling investigators to maintain and document in an audit compliant way, the responsibility for the ongoing oversight of the study conduct and care of their patients without the need for site visits.We have already gained approval to deploy our solution on both small biotechs, as well as large strategic client portfolios and we continue to engage in conversations with numerous interested clients. When we acquired our mobile health platform, we needed to find a way to work with connected devices, and at that time we announced a deal with Intel. Intel eventually spun out this small division into a company called Care Innovations, and we acquired this company in January.We have a remote patient monitoring platform, which has been deployed in over 100,000 patients. It allows PRA to expand our reach from purely clinical trials and to healthcare by engaging in direct to patient, remote patient monitoring and our proprietary Health Harmony platform. The platform is routinely deployed by healthcare networks, hospitals, providers and peers to facilitate in-home patient disease management and monitoring.For COVID-19 allows those providers to provide in-home hospital services for remote patient monitoring, using connected diagnostic monitoring devices. Our COVID-19 monitoring app was developed on the Health Harmony platform and was one of the first COVID-19 remote patient monitoring apps deployed. The app allows patients to monitor in home for COVID-19 symptoms and they use our centralized nursing call center to help patients with healthcare decisions related to the symptoms.We have deployed the app to some of the world's largest retailers to support our ability to allow employees to monitor for COVID symptoms. We have also deployed app to government agencies outside of the US to manage their COVID response, as well as to US healthcare systems. To-date, we have over 10,000 people enrolled and have orders up to 50,000. The next deployment of the COVID-19 monitoring app will be focused on a return-to-work module to help employers monitor their employees, to establish safe return to work models via symptom and COVID status monitoring.Our mobile health platform is unique, in that it incorporates not only the direct to patient, bring your own device app-based platform, but it includes a pro-library of connected device capabilities via Care Innovations and integrates with our own EDC system and our Symphony Health -- via proprietary encryption key. The first quarter started on a very strong note with the pandemic impact in the latter part of the quarter. We closed most of our offices worldwide, and have been working under the stay-at-home orders issued by country-specific authorities.Firstly, most of our workforce is able to work remotely, so we have been able to continue to operate effectively. During March, we began to experience significant lockdowns and site closures, both here in the US and abroad. We were able to mitigate the impact for lockdowns and site closures had on our operations through the effective use of our mobile health platform, and our remote monitoring technology.From a new business perspective, the first quarter of 2020 had a record RFP volume. But, in the last few weeks of March, decisions were delayed and we carried over approximately 4 times the normal amount of pending decisions. We are confident that decisions will be made as the economy starts up again, and we will continue with the strong momentum we were building.Revenues for the first quarter was $784 million which represents an increase of approximately 9% year-over-year, adjusted net income was approximately $67 million and adjusted net income per diluted share was $1.05. Our client base continues to be well diversified with our top five clients representing approximately 38% of revenue for the quarter, with one client representing more than 10% of our revenue. We reported $605 million of net new business awards, excluding reimbursement revenue representing a net book to bill of 1.10. And including reimbursement revenue, we would have reported net new business awards of $956 million on a book to bill of 1.32.Our first quarter new business awards metrics were impacted by the pandemic, particularly latter in the quarter when business development priorities began to slow with bid-defense meetings and study awards decision being postponed, as stay-at-home orders were put in place. Position of our first quarter new business awards resulted in an increase in our backlog of 9% year-over-year, and 1% on a sequential basis, with backlog finishing at approximately $4.7 billion at end of March. Our Data Solutions segment was slightly impacted by this pandemic during the first quarter. For the first two months, we were ahead of target. However, in March the business was impacted, as decisions were deferred due to the impact of the pandemic and customers' work needs.I'd like to point out that the Data Solutions segment is less exposed to the impact of the COVID-19 pandemic due to the high proportion of recurring license revenue. However, there is still some disruption due to the lack of in-person meetings, the cancellation of many industry meetings and events and the re-prioritization of discretionary spend by customers. In terms of the underlying trends, we continue to invest in the segment, adding head count to credit propositions, adding new data sources and enhancing integration with the Clinical Research segment.With all the uncertainty of how this pandemic will unfold, it is extremely difficult to estimate the impact to our financial results. We do believe that Q2 will likely be the trough, but we do believe it is prudent to withdraw our full-year 2020 guidance until there is more certainty surrounding the impact of the COVID-19 pandemic. We have carefully planned our work schedule for the second quarter of 2020. We anticipate we will achieve revenue between $705 million and $740 million, and expect adjusted earnings per diluted share between $0.75 and $0.90.Mike, will provide additional details about our second quarter 2020 guidance, later in the call. In closing, once again I'd like to thank our entire staff and our clients for their continued commitment to PRA Health Sciences during these challenging times. I'd also like to thank everyone that is helping the world get through this global pandemic.I would like to now hand over the call to Mike Bonello, our Chief Financial Officer who will go through our quarterly financial results in more detail.

[Michael Bonello:]

Thank you Colin, and good morning everyone. For the first quarter of 2020, our consolidated revenue grew at 9% both at actual foreign exchange rates and on a constant currency basis. As Colin stated previously, we reported revenue of $783.7 million for the first quarter of 2020, compared to $722 million for the first quarter of 2019. Foreign currency exchange rates and the COVID-19 pandemic negatively impacted our first quarter revenue by approximately $7 million.The Clinical Research segment reported revenue of $726.1 million for the quarter while the Data Solutions segment reported revenue of $57.6 million increases of 9% and 4% respectively. During the quarter, we derived 56% of our service revenue from large pharmaceutical companies. 10% from small to midsized pharmaceutical companies, 16% from large biotechnology companies and 18% from all other biotechnology companies. These concentration metrics exclude our Data Solutions segment and reimbursement revenue, and are in line with what we reported in previous quarters.Total direct costs for the quarter were $403.9 million, compared to $377.9 million in the first quarter of 2019. The increase in direct costs continues to be driven by increased labor costs in our Clinical Research segment, as we add staff to support current and future business needs, and increased data cost in our Data Solutions segment, as we add more data assets and as we see increases in renewal rates on current data contracts. The increase in direct costs was offset by a favorable impact of $6.5 million from fluctuations in foreign currency exchange rates.Direct costs were 51.5% of revenue in the first quarter of 2020 compared to 52.3% in the first quarter of 2019. The decrease in direct costs, as a percentage of revenue was driven by favorable foreign exchange rates and increased utilization of our staff. Selling, general and administrative expenses were $107 million or 13.6% of revenue for the first quarter of 2020, compared to 13.4% for the first quarter of 2019. The slight increase in SG&A expenses as a percentage of revenue is related to increased stock-based compensation expense.Adjusted net income, which excludes certain items whose fluctuation from period-to-period, do not correspond to changes in our operating results decreased 8.1% to $67.3 million in the first quarter of 2020. Adjusted net income per diluted share decreased 4.5% to $1.05 per share in the first quarter of 2020, compared to $1.10 per share in the first quarter of 2019. Both adjusted net income and adjusted net income per diluted share were impacted by the COVID-19 pandemic, and were in line with guidance ranges we provided in February.Cash provided by operations was $60.6 million in the first quarter of 2020, compared to cash provided by operations of $41 million in the first quarter of 2019. The increase in operating cash flow was primarily the result of an improvement in working capital, driven by an improvement in our days sales outstanding. Our net days sales outstanding was 18 days at March 31, 2020 compared to 20 days at March 31, 2019. Capital expenditures were $21.5 million compared to $19.9 million in the first quarter of 2019.The slight increase in capital expenditures during the quarter continues to reflect the investment we are making in information, technology and the expansion of our infrastructure. Our cash balance at the end of the quarter was $150.8 million, of which $68 million was held by our foreign subsidiaries. Net debt outstanding, defined as total debt less cash and cash equivalents at March 31, 2020 was $1.1 billion compared to $909 million at March 31, 2019.We believe our current cash position along with our $642 million of borrowing capacity, position us well to weather the challenging economic conditions that we may continue to face throughout the remainder of 2020. We are currently in compliance with the covenant requirements included in our credit facility and we expect to maintain our compliance with those covenants.In light of the current situation, we have also initiated proactive cost management strategies. These include the delay of non-essential hires, a reduction in our reliance on third party contractors, the deferral of our annual merit, in the management of non-essential discretionary spend. We have also implemented proactive cash conservation initiatives, including delaying non-essential capital expenditures and eliminating voluntary debt repayments, until further notice.Regarding our currency concentration, excluding reimbursement revenue and expenses, 81% of our revenue and 61% of our expenses were denominated in US and our euro exposure continues to be naturally hedged. We continue to have exposure to movements in the GBP as less than 1% of our revenue is denominated in GBP while approximately 6% of our expenses are denominated in GBP.As Colin referenced earlier in the call, due to the uncertainty surrounding the impact of the COVID-19 pandemic on our results of operations, the company is withdrawing its previously issued full-year 2020 guidance. We are, however, providing guidance for the second quarter of 2020.We're estimating revenues between $705 million and $740 million. GAAP net income per diluted share between $0.32 and $0.46 and adjusted net income per diluted share of between $0.75 and $0.90.Our revenue guidance assumes that our current portfolio of studies continues as anticipated and that new awards start as outlined in the agreed upon budgets. In addition, our second quarter guidance reflects the impact of keeping our workforce in place, even though they may not be fully utilized during the quarter. Our rationale for keeping our workforce intact was to ensure that we have staff available, once full business operations resume.We expect this decision to impact gross margins by roughly 50 basis points to 150 basis points and impact adjusted margins by roughly 100 basis points to 200 basis points. Consistent with the guidance we issued in February, we anticipate that our annual effective income tax rate will be approximately 23%. Our effective tax rate may differ from this estimate, if the geographic distribution of our pretax earnings changes from what we have estimated, or if there are changes in interpretations analysis or if additional guidance is issued by regulatory bodies.It should be noted that our guidance assumes a Euro rate of 1.15 and a GBP rate 1.30. All other foreign currency exchange rates are as of March 31, 2020.That concludes our prepared remarks, and we are now happy to take your questions. Operator, you may open the line.

[Operator:]

[Operator Instructions] Our first question comes from Juan Avendano with Bank of America. Your line is now open.

[Juan Avendano:]

Hi, thank you for taking my questions. I have two. My first question is not really PRA specific, but it pertains to the whole CRO industry. It seems like CRO management teams and analysts are tracking the percentage of site closures and re-openings as the main approach to evaluate the extent of clinical trial delays, but just because cruise ships has started reopening, it doesn't mean that all tourists will rush back to take vacations and when movie theaters reopen, people may or may not go to watch movies.So, even when sites reopen, I'm curious about how fully compliant patients will be with -- when you relate to medical adherence, the clinical trials. So, given this, I mean my question is, can you share with us metrics on patient leakage for sites that had remained open or have reopened during this pandemic. And also what tools and initiatives can you implement to manage patient behavior in site, as this is also an important variable in this whole situation.

[Colin Shannon:]

I'm sorry, I went through in great detail. Our whole system that we prepared on virtual study support, where with [indiscernible] site to help manage their patients remotely and allow us to get the continuation of the trials. So, that's one of the aspect we're doing. That's actually been -- as we mentioned been -- already been taken up by a number of our -- both biopharma clients -- biotechs and pharma, that's one aspect. I know people have been looking and hearing numbers banded about access to sites. Obviously, there's a difference between access by telephone or by physical presence. We're assuming the latter, which, as the latter it varies by country, but so far we're seeing depending on the country somewhere at the region between 65% to 80% availability. So, that's where we are seeing it going.And obviously I'll add when we get despite to work, we'll be looking at all sorts of ways to model -- how we actually effectively utilize our trials. The reason we are able to provide the quarter's guidance is, we are looking hard to build up a very solid plan of how we are going to achieve our revenue targets and what we needed to do. We stratified all our clients' activities and all the studies we're working on. We work with clients to understand what their needs were and together with prepared schedules to enable us to conduct this work over the quarter. So, obviously looking at the quarter, we know the circumstances pretty much, so we feel pretty good about giving you a good guidance.So, I hope that covered your question.

[Juan Avendano:]

Okay. Got it. And my follow-up is, it's an FSP and is specific to PRA. Can you remind us what percentage of total revenue FSP represents? How much did strategic solutions grow in the quarter, and how resilient is the FSP mode of business may or may not be during the pandemic and whether or not that has any bearing as to how your second quarter revenue guide was a little better than expected?

[Michael Bonello:]

Yes. Juan, we don't break that out separately because that's part of the clinical research segment. But, I will tell you that it grew at a nice pace in the first quarter -- over the first quarter of last year, and we're not expecting to see too much of an impact as a result of the pandemic for Q2 over Q1.

[Juan Avendano:]

Thank you.

[Operator:]

Thank you. Our next question comes from Stephen Baxter with Wolfe Research. Your line is now open.

[Stephen Baxter:]

Hi, thanks. Just wanted to follow-up a little bit on some of the Q2 questions. So, appreciate all the detail, how much you're doing on the technology side of things. We have heard some others talk about some sites that just are not up and running, when it comes to remote monitoring and certain percentage which is still kind of fully inaccessible, sort of whatever percentages you put around physical access to sites. I was wondering if you have something that you'd be able to quantify for us there.And then, I guess sort of the follow-up you mentioned something about proceeding upon agreed upon budgets, are those budgets been confirmed by the customers or those budgets that are agreed to before the outbreak intensified? And then last, just going to ask about pass throughs; seemed like they were a lot higher than I might have expected for the first quarter, wondering where you expect them to be in Q2 from a year-over-year growth rate? Just trying to understand the dynamics around that and if that is enabling the guidance to hold it better for the top line in Q2 that we might have expected? Thanks.

[Colin Shannon:]

Thank you. Yes there are some sites where it's just difficult to obviously get access, if there's nobody coming up to saying obviously, it makes it very difficult. We've obviously -- we're tracking that very closely and we're trying our best to obviously contact these sites and get data as best as we can. So, as we've mentioned we've got technology options, but we do -- we use and apply remote monitoring and we utilize all the necessary tools available. We've been quite successful in achieving that.Now, we're still currently working for most of our study budgets though. There's lots of partial units that we can complete during the period, and we're looking at how best to achieve them. We're obviously making sure first and foremost, patient safety. We're looking to protect primary endpoints for our client studies. And so, we're stratifying the real core needs, and we have bonded into various groups and drawn up a schedule of attack, so that we can really focus on the most important areas. So obviously, we're at this critical stage that we can't access -- obviously, we're trying our best to obviously get some sort of communication going, so we can get some things moving. Otherwise, things can be deferred, but overall it's been a good steadfast motion, and hopefully we can start seeing some of the restrictions lifted over the next few months.

[Michael Bonello:]

Yes. And as it relates to the pass-through, certainly our pass-through revenue was slightly higher than we had anticipated coming into the quarter, but it was in line with the percentages that we saw in Q3 and Q4, but I have brought that number down for Q2 obviously with travel being included in that number. We're anticipating obviously with the State Home orders that are in place right now that travel for the quarter will be down. So, as you look at it sequentially, I'm expecting it to come down a good chunk and be down versus Q2 of last year. We're anticipating somewhere between I'd say 27% and 29% of service revenue.

[Stephen Baxter:]

Great. Okay, thank you.

[Operator:]

Thank you. Our next question comes from Robert Jones with Goldman Sachs. Your line is now open.

[Robert Jones:]

Great. Thanks for taking the questions. I guess just two on bookings. Colin, you mentioned I think seeing 4 times the normal amount of RFPs pushed out. So, I guess just curious if you could share -- if you think most of that work will be awarded near-term such that it was a timing issue, just between one quarter and second quarter or is this something that could be pushed out longer in this environment? And then, I guess the follow-up would just be, any comments about your win rate and how that's trended in the quarter? Anything changed there relative to your peers? Thanks so much.

[Colin Shannon:]

Yes. Thank you. Well, firstly we have had some of these awards come through subsequently, yes. There's others where our clients have actually done quite a bit of pivoting and been focused on getting some COVID work done, that we're working with them on. And that doesn't mean that they're not going forward with these other studies, but they have certainly deferred them for a little bit. So, typically we would expect that our normal win rate and it was -- has been very, very steady and it was again -- the win rate was very, very steady again this quarter. So, if we get our fair share of the substantial amount that -- and it was a very soft close this time. We didn't do our normal pushing that we'd on the close down. It was like a February close, rather than an end of a quarter close. And we knew that there's lots of studies that just want to start and they're happy to wait.We phoned at biotechs, we're actually -- a lot more eager because they want to get in the line to get the study start-up, moving as fast as they can. So -- we're signing that also in that April period as well -- sorry, our first month of the quarter. So -- and again what started off the quarter was again another strong RFP volume. So, we're seeing a lot of new studies and a lot of them were looking for hybrid solutions, including our Virtual Trials software. So, we're -- our departments are very, very busy and active and keeping up with the work volume.

[Robert Jones:]

Great. Thank you.

[Operator:]

Thank you. Our next question comes from Elizabeth Anderson with Evercore. Your line is now open.

[Elizabeth Anderson:]

Hi. Thanks for taking the question guys. One question, you mentioned sort of your cost cuts and sort of -- how do you see -- your efforts to balance the upcoming growth versus obviously the current situation. How are you guys thinking about it, if the situation sort of gets better or worse. How do you think about sort of titrating that?

[Colin Shannon:]

At the moment, we've done our best to retain our workforce, and we want obviously our full force to move forward to continue with the trials in the latter part of the year are going well. Obviously, if things change -- if there is a new wave of the pandemic and things alter, we may have to take a different course of action. We were prepared to see this period of time, and I think it was a good move. A lot of our clients have really supported us and thanked us, and they're glad that we're retaining our staff and keeping them happy, because they know that as soon as things start to move better, they want the same teams involved and so we've done our best to manage that and maintain it. So, really a lot of it is with our control.What we've looked forward for the next couple of months and we see it very containable, that's why we've issued some guidance there, and we will take it one quarter at a time until we see more evidence of when things get back to some level of normality.

[Elizabeth Anderson:]

Okay. That's helpful. And then on Symphony, you mentioned sort of sales -- sort of being above plan, in beginning of the quarter and then sort of tapering off. Were there any particular areas or was it sort of just like cost -- new sales or renewals or could you provide any additional color there?

[Colin Shannon:]

Yes. It was really, actually -- really more current data needs that -- there was -- obviously with the pharma companies closing down, they had to defer and getting that work done, so there was a slippage of few million dollars that we just -- has been deferred, and there was no need to do the work until they've got the workforce that they can actually capture the data and utilize. So, it was just a number of small contracts. So, it was tracking really well for a really nice quarter that was actually going to be -- it was going to be our internal budgets as well.So -- it was a bit disappointing because we were tracking really well, but we're still seeing good activity there and continue to build up strong team. Our hiring in general has been going well. We've actually had a significant flood of new CVs coming through. So, we're well positioned to take advantage of that, and continue our hiring to meet our growing demands.

[Elizabeth Anderson:]

Yes. So that sounds like it's more like a push out versus just sort of a collapse in demand?

[Colin Shannon:]

Potentially. I mean, you never know sometimes that may have been an urgency that may not come back. So, these things, we think is [indiscernible] but we never know for 100%. I don't want to mislead you in anyway.

[Elizabeth Anderson:]

Okay, got it. Thank you very much.

[Colin Shannon:]

You're welcome.

[Operator:]

Thank you. And our next question comes from Patrick Donnelly with Citi. Your line is now open.

[Patrick Donnelly:]

Great. Thanks guys. Colin, maybe just one for you on the biotech side, particularly the smaller biotechs. Have you seen any change in tone in the conversations with clients there during this period of uncertainty, where maybe funding is a little less accessible. You feel like the tone is shifting a little more conservative in terms of the appetite from new spend. I know it's been a big access for you guys to increase your presence there. So, was just wondering how the conversations have gone?

[Colin Shannon:]

I've mentioned this in numerous calls that the time we work with biotechs -- latter stages, they have harder funding in place for a long time. The companies we work with are well-funded, and is not a prerequisite before we even respond to an RFP. Our volume has been very high. We've been getting a great amount of volume from our biotech clients and we're seeing a lot -- across-the-board, we're getting very, very strong RFP volume. And so, I've not seen any change. I have read -- others may have -- I got some issues with some of the smaller biotech in the earlier phase parts, but we've not seen anything where we're looking.

[Patrick Donnelly:]

Okay. And maybe just to follow-up. I think it was Bob's question on kind of the pending decisions that have been carried over. Do you guys have better visibility into those ones than you typically do, given the carried over than you probably had, increased conversations with the customer base? Has that allowed you to kind of give that a little better than expected 2Q guidance or are you feeling more confident it's the most pending decisions converting over versus your standard amount of backlog there?

[Colin Shannon:]

Yes. I mean, a lot of the -- one, no is -- really going to impact the latter part of the year. Obviously getting studies all started et cetera, which is exactly why there was no pressure to really push and drive hard -- a hard close at the end of the quarter when you can't really get a lot of things moving. So, everybody knew that, they were putting trials on hold; everything was. So, we were just working closely with the client and we went through all the things we needed to do. We were -- we've been exceedingly busy though. Although, we are not doing physical bid-defenses, there was a lot of virtual bid-defenses and we're finding that maybe at last, some of the things we've been doing may change the way of the future. It was more of -- sort of virtual bid-defenses, and more use of technology and maybe will speed up things getting done and clinical trials. All the investments, we've been making, anticipating this would happen, seems to be have actually accelerated with the pandemic, so maybe there is light at the end of the tunnel.

[Patrick Donnelly:]

That's helpful, thanks guys.

[Operator:]

Thank you. Our next question comes from Erin Wright with Credit Suisse. Your line is now open.

[Erin Wright:]

Great. Thanks. I have a follow-up on the Data Solutions business. Just, more broadly, how we should be thinking about the performance across that business in this sort of environment. I know, you mentioned it's recurring in nature, but is the vast majority of that business recurring in nature or what percentage of it, and do you anticipate further kind of volatility there. I'm just curious. Thanks.

[Michael Bonello:]

Yes. Erin, we have baked in some volatility. As Colin said, in his prepared statements, the majority of that is recurring license revenue. Obviously, we're always out there trying to generate new leads with different data assets, and different uses of the data that we currently have. We have built in, I guess from what we would have -- when we guided to when we issued our full year guidance, obviously, we built in a little bit of less revenue than we had then and our target because of what happened in the first quarter.So, we're pretty confident as Colin said, based on the discussions that we're having with clients. But, we did bring the revenue down to make sure that we had a good range in there for the Q2 guidance.

[Erin Wright:]

Okay, great. And then on the opportunity, potentially with change orders or extended enrollment time lines, I mean, do you think that, that is an opportunity for you, and when does that essentially kind of flow through. I think you're having these discussions already with sponsors. Thanks.

[Michael Bonello:]

We are having these discussions with clients. Those are typical discussions quarter-to-quarter. It really all depends on the particular change order, and what you're trying to recapture. Obviously, it could be a time line extension, it could be something else. The time line extension would obviously have a back end impact in our rev rec, if it's for work that we've been performing, that we've been in discussions with them about that change order and it just hasn't gone through administratively, it could have an impact. But, that's something that we deal with quarter-to-quarter and historically we kind of view change orders as an offset to any cancellations that might come through. But, we are looking at change orders and having discussions with clients.

[Erin Wright:]

Okay, thank you.

[Operator:]

Thank you. Our next question comes from Dan Brennan with UBS. Your line is now open..

[Daniel Brennan:]

Thanks for the questions. I'll ask one question on bookings and one on margins. So, maybe just on bookings I know there's been a couple of questions asked, but if you wouldn't mind, is there anything unique about your customer base possibly or your therapeutic areas of focus or your approach, you think from what you're seeing from others that would have led to lower closure rate that you've seen versus peers because thus far you seem to me, although the peers that didn't seem to have the same level of close rates, and kind of issues with book-to-bills as we -- or excuse me bookings growth, as we got to the end of the quarter?

[Colin Shannon:]

I actually, I don't know. I've looked at all the reports, and when we compare our 606, everybody else is competing we're in the middle or if not better. I think the range is between 1.2 to 1.4 book-to-bill, and we have 1.32. I'm sorry. So what's your point, here?

[Daniel Brennan:]

I'm sorry, I was wondering on 605 basis

[Colin Shannon:]

Oh, sorry. How would you know because nobody else is giving that. I'm actually trying to be transparent, so you get an understanding of what really drives the business. I mean, if you don't want me to give that anymore that's fine. I mean like, obviously it causes a distraction and people seem to be unsure of what's driving business. But certainly, we've managed to produce 9% growth over the year. Best quarter coming up, the major impact actually has been our phase one clinics, because obviously people can't get to volunteer and can't do their work. So then, what we're doing is some COVID trials that we're doing on site. So, it's been the one that's most heavily impacted. Other than that, we've been doing very, very nicely.

[Daniel Brennan:]

Okay. Maybe a question, Mike on kind of Q2, and how we're thinking about kind of costs and kind of decrementals. So, I know you gave qualitative comments on cost cuts, did I miss it? Did you give a number or any kind of aggregate dollar amount, in terms of the level of cost cuts, and I know you've given Q2 non-GAAP earnings. How do we think about -- from an operating margin basis, like what the implied decrementals are in that? So, maybe any color you can provide in terms of magnitude of cost cuts, and how you're thinking about kind of the decremental margins and ensuring that you're balancing cost cutting at the same time being prepared for a return to growth? Thank you.

[Michael Bonello:]

Yes. I didn't give an absolute dollar amount, but I did referenced that if you look at on a sequential basis, where Q1 margins came into that we expect there to be an impact of roughly 50 basis points to 100 basis points on gross margin, and 100 basis points to 200 basis points on our adjusted EBITDA margin. So, obviously, you -- I know you've got to run your miles, you can drop that in.

[Daniel Brennan:]

And in terms of how you're thinking about like -- there's this obviously focus on protecting the bottom-line, but at the same time not cutting too much so that you're prepared as these trials come back online. I guess, maybe a question related to that like how much -- any thoughts on your ability, if this persists longer or the impact drags on? How do we think about your ability to take more cost out, kind of, what are you planning for on that front? Thanks.

[Michael Bonello:]

Yes. Like Colin stated earlier, we've prepared our guidance based on what we expect to see in Q2. If things change, we are going to have to pivot. So, we haven't necessarily gone through and tried to say, hey, if things don't return to where we think they're going to be, here is what we're going to take out. But, as you know, we always spend a lot of time on making sure that we're managing costs, and we're being most efficient as possible in the cost structure of the business. We'll continue to look at that.The majority of our costs as you know are labor cost, and if the revenue for whatever reason -- if things don't change and it doesn't materialize, we will pivot and we will figure out what we need to do from a workforce perspective, to make sure, that we're able to maintain some semblance of a bottom line that everyone would expect.

[Daniel Brennan:]

Great. Okay, thank you guys.

[Operator:]

Thank you. Our next question comes from Donald Hooker with KeyBanc. Your line is now open..

[Donald Hooker:]

Great. Good morning. So, I am sure it's small. But just to clarify, your acquisition of Care Innovations in January. What is the contribution there in terms of revenue, and is this one of these high growth sort of virtual care companies that's burning a lot of cash? Is this going to impact your cash flow even though it's small?

[Michael Bonello:]

Yes. It's honestly material -- it's not even, we're not going to disclose it, but it is very small, I'll tell you that and it did not burn cash in the quarter.

[Donald Hooker:]

Okay. I just wanted to clarify that. I'm sure that was -- most people were assuming that, but just good to hear. Secondly, I'd love to hear, you guys seemed very excited last quarter about some opportunities in your government contracting area. I am not sure if that was delayed or whatnot. Would love to hear kind of some of your investments there, I think you were trying to get some prime contractor work that seems interesting. Can you elaborate on that business. How big is that business as well?

[Michael Bonello:]

It's not very large right now. We were making the investment to expand. We were -- as we said on the year-end earnings call, we had been doing some sub-contract work and did want to get into this prime status. So, we have been -- we did incur the costs during the quarter to continue to make sure that we were in a position that when this new business comes through, we are compliant. We have seen RFPs come through, and we have seen some delays there too obviously because of what's going on with the pandemic.So, everything is encouraging with that sector right now, and we're continuing to invest to make sure that we're in a position to -- for when those RFPs are awarded that we're in the right spot, from a prime perspective.

[Donald Hooker:]

Okay. Thank you very much.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from Dave Windley with Jefferies. Your line is now open.

[David Windley:]

Hi, good morning. Thanks for taking my questions. Colin, I wanted to reframe a couple of earlier questions. One around bookings. I hear you saying that RFP flows were a record in the first quarter. Some of the competitors have actually been talking -- kind of talked positively, but about -- they seem encouraged that RFP flows have kind of been stable with last year. So, if I'm interpreting correctly, your RFPs are growing and I would think -- I would ask you to what do you attribute that? And is it at all related to some of the biotech pivot that you made in 2019?

[Colin Shannon:]

That's exactly what happened. We seem to have a lot more coming through from biotech. But, there has been a lot across to board. If you recall, we had one of our strategic partners that we had been waiting and signed up a long time ago. We started to see a lot of volume coming through to bid on from that. So, that was encouraging -- very exciting because we've been waiting patiently for quite a while, and I think you've asked questions about that in the past, Dave, so I'm pleased to see...

[David Windley:]

I'm probably guilty of that. Yes.

[Colin Shannon:]

But, it's nice [indiscernible] coming through, but we've had awards and it's nice to see that going in such positive direction. We've put a lot of really good client interactions, and a lot of different clients giving us a lot of new work. Obviously, some of the new tools and technologies that we have available, we're finding a lot of our new opportunities on how -- some bidding component with some virtual trial, hybrid type of solution. So, it's nice to think a bit more innovatively, and we're seeing clients being much more receptive to thinking out the box, and doing things non-traditional. So, it's an exciting development, and long way, it continue.

[David Windley:]

That's a good segue into another question, I wanted to ask, which is around the acquisition. You had prior to -- I think prior to the end of the year launched this fully virtual trial with J&J, which would -- and I'm afraid I'm probably maybe glossing over nuances -- but would seem to suggest that you had a lot of capabilities, in house already to do some very digital enabled virtual activity, if you were standing up that trial. What does this acquisition, specifically add, to the capabilities that you already had, to support a very sightless type trial?

[Colin Shannon:]

Thanks, Dave. You're absolutely right. That was announced, and it was a trial that I alluded to -- I don't like to put the name of the client in there, but it was the heart failure study that we're doing which is the first fully virtual state with registrational trial. So, it was an exciting start, but it was actually awarded, and actually just restarted enrolling patients, just in the last number of weeks, so it's been exciting. But, one of the things is that we use connected devices while every component, and every trial that we've done has always had some level of connected device, and we were always working with Care Innovations on these connected devices.So, it seemed just a natural fit that we then have now in-house the full end-to-end offering. So, I think that puts us completely unique in the CRO having that offering available that is in-house and propriety technology.

[David Windley:]

Okay. And while we're on this topic, one of the commentary -- one of the pieces of commentary that I've heard from at least one other competitor is around ability to access or tap into site level electronic medical records to be able to kind of enhance source data verification when your monitors can't get access. Is that part of your technology platform? Is that a capability embedded in this?

[Colin Shannon:]

Actually, a number of years ago, if you recall we bought a company called Nextrials. Nextrials has a link, that takes any electronic health records and takes it straight through it bypassing any EDC, so that we can have source information, straight from source. And that tool is available, we have been working more to get more availability. We're finding though that a lot of the straight EHR records lack a lot of the detailed information, particularly when it comes to unstructured data. And so, typically we've been looking to augment it with some e-source type, where we're collecting and using AI tools to really get the unstructured data -- look at -- like all the notes and things that are being taken by the doctor, and have it and convert it into some structured format.But yes, we have got Nextrials, and we are seeing a lot of activity there. We are looking to see if we can enhance that significantly. We've always thought that was a great way forward and -- for getting that information straight from the HR directly. We will continue to pursue that, and there will come a point where that will be the new standard.

[David Windley:]

Okay. Last question from me, and a clarification. Another thing that seems a little different in your approach and reaction to the COVID impact than maybe the peers is, what I hear you saying is keeping -- it sounds like keeping the billable workforce completely intact. What -- I mean, it seems like to some degree that's probably a strategic decision. Can you help us understand how much of that is say obligated by trials that you have in place or client demands and what element of that is kind of say -- taking a strategic position of, we can use this to our advantage to win business, if we think we come out of COVID relatively quickly?

[Colin Shannon:]

There's zero client piece of that. It is all being done by the company's decision. And there's a couple of comments here; one we did prefer entry fees, and so we did look at how to make sure that this doesn't feel right, giving entry fees when millions of people are being made redundant, and however, we felt -- look, we've always said staff and our employees are our most important asset. There's a time and a place when we've got to stand up behind them. I'm hoping that with [ph] our VPs in space when it comes to the latter half of the year, when I need them to go and get all of these studies back on track. So, it's something that we're doing because we want to put our money where our mouth is. We believe in our people and we want to stand up and be that way.

[David Windley:]

Got it. Thank you. I appreciate the answers.

[Operator:]

Thank you. Our next question comes from Sandy Draper with SunTrust. Your line is now open.

[Sandy Draper:]

Thanks very much. A lot of questions obviously asked and answered, maybe just a quick accounting follow-up on that last question. In terms of the actual bonus deferral, are you still -- when -- you're hoping for the day one does get paid out, because things are better at that point. But then, is that a new expense or are you already accruing for that, that's sort of the first sort of question?

[Michael Bonello:]

Well Sandy, we were referring to merit. So, our typical merit cycle has been, historically in July. We had planned to move that up to April, and what we did was just defer that again. We'll re-evaluate it obviously, but we've deferred that to the third quarter or the beginning of the third quarter. And as we get closer, depending on how the pandemic pans out, we will make an evaluation of whether we implemented it in the third quarter or if we have to make a decision to maybe defer it a little bit longer.

[Sandy Draper:]

Okay, great. So I appreciate the clarification. I misunderstood. Second, and maybe for both of you guys, when I think about or when you look at the -- obviously, a lot has changed about the business; the way you're running it, the way you're doing it. It sounds like Colin, a lot of what you're doing now is already stuff you'd put in place. But, have you identified areas where longer term you're thinking, hey, maybe we don't have to bring this cost back in, we've taken it out now, but we don't need to bring these costs back in, we can do things differently, and there are opportunities for longer term savings.You've talked about the opportunities about doing that definitely, but are there other things that you start to identify I guess, that maybe longer-term there's a structurally lower cost that you're starting to think about? Thanks.

[Colin Shannon:]

Thanks, Sandy. Well yes, I mean, first of all, with our global infrastructure, we were able to quickly have everybody work from home. I do think some people are missing coming to offices, but it certainly was doable. We saw a lot of savings obviously on the conduct of bid defenses where we used to be flying people from all over the world, to meet with clients and they've been going well over the virtual networks, but that's a huge saving and that's one area we're seeing the uptick of and more use of technology to help change and maybe drive the clinical trial in a faster, more inexpensive manner and that's always encouraging. I mean, there's a lot of press obviously about clinical trials now, and importance of having good data.So, it's all about getting the speed and performance while having robust data, and I think that we're starting to see ways that we can actually achieve that. I think that there's lots of encouraging steps that the whole industry could actually do things better. It's something that we've always wanted to lead the charge on, and it's exciting that this may actually be the time where change is going to happen.

[Sandy Draper:]

Great, Colin. I really appreciate the comments

[Operator:]

Thank you. Our next question comes from John Kreger with William Blair. Your line is now open.

[John Kreger:]

Hey, thanks very much. Colin, if you look across your various geographies, are you seeing any good examples of regions opening up and how that might translate into easier operations for you? I'm just looking for any insight into how -- kind of a recovery in the second half of this year could play out?

[Colin Shannon:]

Yes. We're still seeing in Asia that things are opening up better there that's where we've got higher access to sites. So, we're starting to see movement there, and I think there'll be a -- sort of the move towards that over the rest of the world, as we start to get through the peak of the pandemic. So, we're hopeful I think it's going to be different for a while, and there's obviously -- we're working on a number of clients that are doing COVID -- whether it's a vaccine or other therapeutic, exciting. We -- it's going to be great when we see more opportunities get that they can help cure this virus. But, we're obviously making the best use of it, but John we never know, if it starts back up again or what's going to happen.So, we're being cautious, we're trying to forecast carefully with proper discipline over our approach for the next few months. And again, that's why we really don't want to go to the end of the year when really it's anybody's guess what's going to happen in the latter part of the year.

[John Kreger:]

Understood, thanks. And maybe just a follow-up on that same point. If you think about an award that you got maybe in February or January, sort of pre-crisis I'm guessing, you'd probably in a normal course, be sort of moving towards activation in the second quarter. How are you approaching that again for a non-COVID type study? Is that just sort of getting put on hold until we see less growth and infections or are you able to sort of push ahead with start-up and site activations? Thanks.

[Colin Shannon:]

We're able to get a lot of the documentation and prepare us in advance and ready to go. We've really, really streamlined our study startup over the last year. As I've mentioned, we did a lot of changes, last year, in our infrastructure. We knew and felt that things were much, much stronger as we were starting the beginning of the year. We saw that convert into really great momentum at the first couple of months. So no, we feel very good about where we are, and as I mentioned to you -- a lot of our biotech clients are really sort of wanting to get awards to us quickly, so they can start getting all of the paperwork ready so that when things are back, we can immediately start pushing for site activations, as quickly as possible.

[John Kreger:]

Great. Thank you.

[Operator:]

Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Colin Shannon, CEO for any closing remarks.

[Colin Shannon:]

Well, thank you everyone for participating in the call today. If you have any additional questions, please feel free to contact us. We hope you have a great rest of your day, and thank you.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.