PRA Health Sciences, Inc.
Q3 2019 Earnings Call Transcript

Published: 31 Oct 2019

[Operator:]

Ladies and gentlemen, thank you for standing-by and welcome to the PRA Health Sciences Third Quarter 2019 Earnings Release Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions] I would like to hand the conference over to your speaker today, Mr. Tom Byrne, Vice President of Legal Affairs. Sir, please go ahead.

[Tom Byrne:]

Thank you. Good morning, and thank you for joining us for the PRA Health Sciences third quarter of 2019 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 comments, we’ll be available for questions. In addition to our press release, an investor supplement with additional financial information is available in the Investor Relations portion of our website.Before we begin, I’d 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 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 28, 2019. 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 would now like to turn the call over to our CEO, Colin Shannon.

[Colin Shannon:]

Thank you, Tom. Good morning and thank you for joining the conference call covering our third quarter financial results. I’m pleased to report that our third quarter financial results produced solid revenue and earnings growth. Revenue growth for the quarter was approximately 9% year-over-year on an as reported basis. On a constant currency basis, revenue grew 10% year-over-year and 3% sequentially. I’m happy to report that we continue to see gross margin expansion and double digit growth and adjusted EBITDA, adjusted net income and adjusted net income per diluted share.As you are aware, since the adoption of ASC 606 our reporting of new business awards has excluded reimbursement revenue. For third quarter of 2019 we report $669 million of net new business awards, which represents a net book-to-bill of 1.22, continuing our run of consecutive quarters with our net book-to-bill equal to or greater than 1.2. I have been asked a number of times to also provide new business awards, inclusive of reimbursement revenue and that would have produced a book-to-bill of 1.65.The addition of our third quarter new business awards resulted in an increase in our backlog of 13% year-over-year and 3% on a sequential basis, with backlog finishing at approximately $4.6 billion at September 30. Our mix of new business awards remains well balanced with 50% coming from pharmaceutical companies and 50% coming from biotech companies. The environment for research spending and CRO outsourcing remains stable from our perspective and we continue to see a healthy flow of RFPs.Our client base continues to be well diversified with our top five clients representing approximately 39% of revenue for the quarter and no single client representing more than 10% of revenue. Adjusted net income for the third quarter was approximately $87 million, an increase of 17%, versus the third quarter of 2018. Adjusted net income per diluted share was $1.32, a 17% increase versus the third quarter of 2018.Turning now to our Data Solutions segment. As you may have seen in August we announced a strategic Alliance with Close-Up International, a leading Latin American based provider of medical prescription and sales data to pharmaceutical companies. In September, we also announced the launch of a new national market measurement tool called Metys. The Metys platform is a first of its kind and delivers pharmaceutical market, analytics and intelligent capabilities to our customers. These two announcements are significant milestones for the Data Solutions segment and show our commitment to enhancing our service offering and expanding our services internationally.The other major event this quarter was the secondary offering by KKR and have currently purchased of approximately $100 million of stock. We believe that repurchase of our shares that get use of our cash and we continue to have adequate resources to continue to grow the business should an opportunity arise. I would also like to note that just this week we completed the refinancing of our 2016 credit facilities entering into a new credit agreement with a term loan of $1 billion and a revolving line of credit of $750 million. Mike will provide additional details about this later on in the call. As discussed in our press release, we are maintaining our 2019 revenue guidance and updating our GAAP and adjusted earnings per diluted share guidance. Mike will provide additional details about the updated 2019 guidance later in the call.In closing, I would like to thank our entire staff and our clients for their continued commitment to PRA Health Sciences. We have a strong business and believe we are well positioned for the remainder of the year and leading into 2020. I would now like to hand over the call to make Mike Bonello, our Chief Financial Officer, who will go through our quarterly financial results in more detail.

[Mike Bonello:]

Thank you, Colin, and good morning, everyone. The third quarter of 2019, our consolidated revenue grew 9% at actual foreign exchange rates and 10% on a constant currency basis. As Colin stated previously, we reported revenue of $780.7 million for the third quarter of 2019, compared to $717.6 million for the third quarter of 2018.The Clinical Research segment reported revenue of $719 million for the quarter, while the Data Solutions segment reported revenue of $61.7 million, increases of 9% and 2% respectively. Regarding our revenue concentration, we derived 54% of our service revenue from large pharmaceutical companies, 10% from small to mid-sized pharmaceutical companies, 16% from large biotechnology companies and 20% from all other biotechnology companies. These concentration metrics exclude our Data Solutions segment and reimbursement revenue and are in line with what we have reported in previous quarters.Total direct costs were $389.3 million in the third quarter of 2019, compared to $371.4 million in the third quarter of 2018. The increase in direct costs continues to be driven by increased labor costs in our Clinical Research segment as we continue to add staff to support growth in the business, and increased data cost in our Data Solution segment. This increase was offset by a favorable impact of $7 million from fluctuations in foreign currency exchange rates.Direct costs with 49.9% of revenue in the third quarter of 2019 compared to 51.8% in the third quarter of 2018. The decrease in direct costs as a percentage of revenue is primarily due to favorable currency exchange rate fluctuation and increased utilization of our staff.Selling, general and administrative expenses were $95.5 million or 12.2% of revenue for the third quarter of 2019, compared to 12.9% for the third quarter of 2018. The decrease in selling, general and administrative expenses as a percentage of service revenue is primarily related to our continued efforts to leverage our selling and administrative functions.Adjusted net income, which excludes certain items whose fluctuation from period to period do not correspond to changes in our operating results, increased 16.6% to $87.2 million in the third quarter of 2019. Adjusted net income per diluted share grew 17% to $1.32 per share in the third quarter of 2019, compared to $1.13 per share in the third quarter of 2018. The reduction in share count from the stock repurchase contributed to $0.01 of EPS in the quarter.Cash provided by operations was $70.8 million in the third quarter of 2019, compared to cash provided by operations of $111.4 million for the third quarter of 2018. The decrease in operating cash flow was primarily the result of an increase in cash outflows from working capital driven by an increase in our days sales outstanding.Our net day sales outstanding was 27 days at September 30, 2019, compared to 18 days at September 30, 2018. Our DSO was slightly higher than what was included in our guidance. However, as we stated in previous quarters, we’ve always expected our DSO to trend more in line with industry averages. The slight increase during the third quarter was purely timing related and does not reflect the change in our collection dynamics. Consistent with prior year trends, we expect our DSO to improve in the fourth quarter.Capital expenditures for the third quarter of 2019 were $20.3 million, compared to $13.6 million for the third quarter of 2018. As we previously discussed, the increase in our capital expenditures continues to reflect our investment in information technology and the expansion of our infrastructure to support our growth.Our cash balance at September 30, 2019, was $181.8 million of which $56 million was held by our foreign subsidiaries. Net debt outstanding defined as total debt less cash and cash equivalents at September 30, 2019 was $1.2 billion, compared to $1.1 billion at September 30, 2018. The increase in our net debt is due to the $300 million of incremental borrowings required to cover the share repurchase we referenced earlier.As Colin mentioned, on Monday, we finalized the refinancing of our 2016 credit facility. The new $1.75 billion credit facility consists of $750 million revolving line of credit and $1 billion term loan, both of which have maturity dates of October 28, 2024. The proceeds from the 2019 credit facility were used to repay the 2016 credit facility in its entirety. The term loan has scheduled fixed quarterly principal payments of $6.3 million through September 2024, with the remaining balance due at maturity.The 2019 credit facility also has customary representations, warranties, affirmative covenants, and events of default, all of which are consistent with our 2016 credit facility. We were happy to have this refinancing behind us. And I’d like to thank everyone involved for their support of PRA and their hardworking getting this finalized.Regarding our currency concentration, excluding reimbursement revenue and expenses, 84% of our revenue and 62% of our expenses, were denominated in U.S. dollars, which is consistent with prior quarters in 2018 levels. Our Euro exposure continues to be naturally hedged. As we’ve discussed in prior quarters, we continue to have exposure to movements in the GBP as less than 1% of our revenue is denominated in GBP or approximately 6% of our expenses are denominated in GBP.As Colin referenced earlier in the call, the Company is maintaining its 2019 revenue guidance to between $3.02 billion and $3.10 billion, representing as reported growth of 5% to 8% and constant currency growth of 6% to 8%. We are updating our GAAP net income per diluted share to between $3.58 and $3.64 and updating our adjusted net income per diluted share to between $5.7 and $5.12 cents representing growth of 18% to 20%.We continue to estimate our annual effective income tax rate at approximately 24%. And as we previously discussed, our effective tax rate may differ from this estimate, due to among other things changed in the geographic allocation of our pre-tax earnings as well as changes in applicable tax law.It should also be noted that our guidance assumes euro rate of 1.15 and a GBP rate of 1.30. All other foreign currency exchange rates are as of September 30, 2019.That concludes our prepared remarks and now we are happy to take your questions. Operator, you may now open the line.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of David Windley with Jefferies. Your line is open. Please go ahead.

[David Windley:]

Hi. Thank you. Good morning. Thanks for taking my questions. I wanted to focus on revenue. And your clinical, in particular – total revenue in clinical in particular advanced more faster than we expected in the third quarter. So it was attractive relative to our expectations. I think the – our expectation was based on kind of a progressive acceleration through the back half of the year. I’m wondering if those factors that we’re building in the third quarter? And where I think our expectation was that you would get more of a full contribution in the fourth quarter from things like rehiring in your strategic solutions business. If that is still a correct progression to think about, in which case I would think you would kind of err toward the high end of your revenue guidance. So just wanted to kind of understand how that’s progressing through the back half?

[Mike Bonello:]

Yes, Dave. I think all revenue from our perspective was in line with where we thought. It would be – we’ve been able to hire the heads as Collin reference last quarter in strategic solutions. So we’ve been able to generate the revenue we were looking to there. Again, our guidance is consistent in that we think we’re going to be at that midpoint range. But we do expect to see some progression in the fourth quarter from what you saw in the third quarter.

[David Windley:]

Okay. Helpful. And then on Data Solutions, you’ve – over the last, I think six, seven months, been able to make some management changes, I think make some investments in sales force. Collin, you had talked on the last call, how important it was to kind of get those things in place ahead of – enough ahead of the strong fourth quarter seasonal period. What’s your comfort level with the changes you’ve made and how do you think Data Solutions is set up to finish the year?

[Colin Shannon:]

I mean, Dave, obviously, when you make management changes, it takes a little while to get everything working well. But we’re very positive and the fact that we’re seeing progress, we’re feeling well positioned. We’ve got good team in place to continue into Q4. They’re obviously still building and still training going on and they’re making this service offering. So there’s a lot going on. We’ve had actually noticed that a little bit of increase in our data acquisition costs and that’s not fed through internal model yet for pricing. But all of that will be sort of looked forward for next year. So we’ve always saw this year as being like the building block, getting things in place and I think we’re nicely positioned. If we can hit the same, I’ve just elaborate a little bit better than we achieved last year that will be very, very pleased with our achievement.

[David Windley:]

So pleased with a dollar – a similar dollar amount as the fourth quarter of last year. Just to clarify?

[Colin Shannon:]

Today.

[David Windley:]

Yes. Okay. Thank you.

[Operator:]

Thank you. And our next question comes from the line of John Kreger with William Blair. Your line is open. Please go ahead.

[John Kreger:]

Hi. Thanks very much. Collin, just building on Dave’s last question, how do you think about the Data Solutions business trending into 2020? Can it have growth similar to the Clinical business?

[Colin Shannon:]

I think there’s a lot of possibilities with this business, but we’re also finding that it’s allowing us to progress other strategic discussions that we were never able to have before. Much longer cycle times that the discussions have been stopped that may at some point come to fruition in the next year or so. And it could be as soon as next year. It may – because they’re quite dramatic in size and scale. And I think people are being thought safety that the data was just purchased as an ongoing business. It was actually quite instrumental in the way that we are shaping and seeing the way, things are moving forward in the future.It’s helped us continue to excel and managing data and the use of data within clinical trial. And it’s kept us with a good advantage and how actually the data works and what works best and what doesn’t. So part of the assets, I would love to see, the sensitive core piece to continue at good growth and we’ll continue to support that business. We’ll continue to help them with new offerings. We’ll continue to look for new data sources to help round out our offerings. I think there’s some low hanging fruit to actually grow that business and settling the next couple of years, and then, meanwhile, anything about our different strategic nature as icing on the cake.

[John Kreger:]

Thank you. That’s helpful. How has the strategic solutions business going versus traditional? And as you think about your bookings in the third quarter, which was more popular at the moment?

[Colin Shannon:]

All right. I mentioned in the last few quarters is strategic solutions is definitely being flatter than the guide in this. This is showing very low growth in the last few quarters and a lot of that was a swinging away from hires being done and lower cost markets. So we’re finding that that trend had for the last number of quarters, it have been replacing a U.S. based employees, overseas, at particularly, Latin America, Asia and Eastern Europe. That trend seems to shifted a little bit next quarter and it was started by – I mentioned last time that we saw the hiring plan. We are now in the process of hiring. There’s still – the clients have now more looking for efficiencies that ended up bringing in some of the tools and processes that we use within the product registration to help support and optimize productivity and some of these larger clients.So part of it is, how can we help the clients to get more for their money, using some of the tools and developments. So we’ve got obviously, our training programs and various other aspects, but it’s definitely showing a lower flatter growth than expected. We’ll see how things generate for next year when we discuss the clients’ needs as we move forward. Obviously, we’re still pleased with that business, but I was actually at a client meeting held on this week and we got resounding thanks for all the work we did. It’s one of our larger clients. So it’s nice to know that well appreciate and they expect to continue to grow. And although not at the same rate as it’s been with that in past years.

[John Kreger:]

Great. Thanks so much.

[Operator:]

Thank you. And our next question comes from the line of Juan Avendano with Bank of America. Your line is open. Please go ahead.

[Juan Avendano:]

Hi. Thank you. My first question is in capital deployment, I guess, can you talk to us about your M&A pipeline and whether or not you actually see any real attainable deals that you could complete in the near future? And related to that, if you could share with us, what is your long term target in net leverage, absence of any M&A deals and confirm or refute my sense that perhaps, do you foresee doing more share buybacks than you’ve traditionally done in recent history going forward?

[Colin Shannon:]

We’re always looking at little tuck-in acquisitions and we’ve always got something exciting, lots of times, it just don’t make it through diligence. But we’d always working on something, and if that makes sense. And it makes the right – both from a pacing, from a business strategic point of view, is certainly something that we’re definitely looking at. And we’d love to find something that would help us capitalize on our data assets. And we feel that there’s still some untapped potential there. And when you look at what we’ve got with that, both our Clinical 6 platform and Symphony, we feel that there’s something in the midst there that we could maybe acquire that would help be a catalyst to help improve both all of these businesses together. So that’s an ongoing review and we continually meet with banks to discuss opportunities.We’ve never really set a targeted leveraging ratio. We’ve always said that when clients don’t like – anytime, if you’re levered over 5 times, so we’ve got a long way before we’d ever reach anywhere where our clients become a little bit skittish. So from that point of view, I would say, want to just look for what is the best use of cash as it means repurchasing shares, we would do so, but think about what’s best for the shareholders at any given time, we’d releverage, we’re nicely set up for a for a situation for any acquisitions in the short-term, we’re pretty still looking and hopefully, we find something that we can take advantage of in the near-term.

[Mike Bonello:]

And then that’s why we set up with the refinancing a slightly larger revolving line of credit. So we have the flexibility to pay that down, but have it available to do any acquisitions that we needed to do and keep the term A out there if that’s the case.

[Juan Avendano:]

Okay. Thank you. And then my second question is, did I hear you correctly in your prepared remarks that your net book-to-bill, including pass-throughs would have been 1.65? And related to that question, I mean, I’m well aware that the credibility of the net book-to-bill metric has further deteriorated with the inclusion of reimbursable expenses. Have you given any consideration to start reporting backlog metrics, including pass-throughs just like most of the other CROs? That’s it.

[Mike Bonello:]

I guess, to your first question, you’re correct. If we would have included reimbursables, it would have been 1.65 for the quarter. We have not thought about including reimbursable revenue into backlog, mainly because we want to be clear to the investment community on what we feel like the core business is doing. Part of that increase from a book-to-bill perspective, there were a couple of studies in there that had significantly larger than usual reimbursable portions. And we just feel like it’s clearer and easier to understand what’s going on in the business if we keep it on a 605 basis.

[Juan Avendano:]

Thank you. I’ll jump back in the queue.

[Operator:]

Thank you. And our next question comes from the line of Robert Jones with Goldman Sachs. Your line is open. Please go ahead.

[Robert Jones:]

Great. Thanks for taking the question. Colin, I appreciate the breakdown you provide from the contribution from the various bands of clients. Sorry if I missed this, but what was the contribution from the top client? I think it had been trending around 9%. I was curious if that changed at all.

[Mike Bonello:]

No, it was right about that – it was roughly like 9.4%, 9.5%.

[Robert Jones:]

Great, great. And then just over on the bookings, you mentioned that it was a 50-50 split this quarter from biotech and pharma. I think this is more heavily weighted towards biotech than previously. Anything different we should think about from the perspective of inherent risk to bookings given the larger portion from biotech. And I guess related to that, anything different we should think about as far as conversion of these bookings given a bit of a shift or mix balance between pharma and biotech?

[Colin Shannon:]

We always technically be very strong in the biotech arena. And we’ve been highly focused on it in the last couple of quarters. Actually, it was quite the opposite. We’re finding it was the big pharma that we’re actually changing the mind and altering studies. Just about to get started, altering and it was causing us a lot of changes. In some cases, we’ve taken this cancellation because it’s been back as a complete new study. So, we’ve found – once we’ve agreed and then move forward, it’s actually quite robust. And we spent the last couple of quarters actually having a much more heavier focus on biotech. Again, as an area we’ve always been strong and we wanted to get back to our roots.So that’s deliberate focus. It means that when the big pharma starts to come through again, it will give us a much strong book-to-bill, which we’ll anticipating at some point. But our cycles, we’ve been happy with what we’re doing just now taking on the right balance of besties that I have walked here. So I think that’s well calculated. There’s lots of times when we could go after and chase business, but it wouldn’t be at the margins, for the risks associated with it that we would like. So we tried to get that balance very considerably during the quarter.

[Robert Jones:]

Great. So Colin just to be clear, no impact on conversion given this mix shift?

[Colin Shannon:]

No.

[Robert Jones:]

It should be business as usual.

[Colin Shannon:]

Just normal, correct.

[Robert Jones:]

Great. Thanks so much.

[Operator:]

Thank you. And our next question comes from the line of Jack Meehan with Barclays. Your line is open. Please go ahead.

[Andrew Wald:]

Hi, this is Andrew Wald on for Jack. Could you provide an update on your preferred partnerships and specifically have you seen any changes in the structure of any of these partnerships?

[Colin Shannon:]

We try not to talk too much, because we’ve got lots of preferred partners, there’s only one that’s been public and it seems to get an undue amount of attention. So we do have many partnerships that we work with clients. And every client is different phases of work cycles. And we have a large biotech for example, who had a slowish year and all of a sudden is picking up with some good studies coming through towards the latter part of the year.That is a focus as we go through development. But they move fast when it happens. And that’s very positive for us. And they’re changing, a lot of them have been going through mergers and acquisitions and that’s changing the dynamics and speed of outsourcing. All we do is continue to support our client as best we can, offer them areas of advice where we see opportunities for them. W tried to support through that change and make sure that we keep delivering high quality products for them.

[Andrew Wald:]

Great. Thank you. And in the quarter, how did growth compare across full service and FSP? And maybe you could talk a little bit more about how hiring’s going in FSP business. Thank you.

[Mike Bonello:]

Yes. Andrew, we don’t disclose that because it’s all part of one segment, and we don’t want to run a foul of our segment disclosure. So we’ve never disclosed that separately.

[Colin Shannon:]

Now regarding the hiring, we’ve been very positive with that. I’ve been addressing, we’ve still got a substantial amount of hiring to do. But we’ve gone through a great – everybody is being given a thought engine, and we’re hiring a good number and that obviously healthy support, particularly the strategic solutions part of the business.But in our end product registration, in the last year, we’ve actually gone through quite a number of management changes and the new management are now bringing in a lot more of their team and that’s now being taken shape. And just a couple of weeks ago, we actually had a leadership meeting and really pulling our top talent – number of our top talent together and really focusing in on the way forward. And it was an exciting time, because we all feel like we’ve come through like I came up change and we’re ready for the next revolution of our company.

[Operator:]

All right. Our next question comes from the line of Eric Coldwell with Baird. Your line is open. Please go ahead.

[Eric Coldwell:]

Hey, thanks very much. So in your prepared remarks, you defined clients two ways 50% pharma, 50% biotech was the first way. And then you gave a more segmented approach where it sounded like 20% with some bucket of all other that would, I think probably include pre-commercial clients as well as others. I think first question, how many clients would you define in that 50% pharma bucket versus how many clients that you have that are in the 50% biotech bucket?

[Colin Shannon:]

Dave, I don’t have that – or I’m sorry, Eric, I don’t have the number of my – top of my head. I’ll have to get back to you on that one. Because the ones – the 50/50 was MBA, the other was coming out of my prepared remarks and that was around revenue concentration.

[Eric Coldwell:]

Okay. So I guess what I’m trying to get to is, I mean ultimately I don’t think we want people to walk away from the call thinking 50% of your client base or biotech in the Wall Street mindset of biotech is typically more pre-commercial relying on outside capital sources to fund R&D. I mean, my sense is that number for you on these pre-commercial early stage companies without commercial products. My sense is that some number at or less than 20% of your business today, but I’m just hoping to get a finer point on that.

[Colin Shannon:]

I thank you for aliveness to get some clarification, Eric. You’re absolutely right. The biotech that we work with are well funded by techs that have a good robust and development plan in place that we’ve got an agreed protocol that we’re working closely with them and that we add up development on. And obviously the funding part is critical for us and it’s the way we’ve always worked.So that’s why it’s typically faster starting as much more predictable and they are – and a lot of times it might be one of just a few key products they have under development. But we do vary from that type of company all the way through to the very large biotechs, where we get a lot of repeat work from them. So we were talking about 50% of biotech is all solid companies with good, strong cash positions with a good plan in place.And even at some of our larger pharma clients, a lot of that mix comes from our strategic solutions. But we also do a lot of product registration work, and it’s more like where they’ve got sort of biotech divisions, maybe they’ve acquired biotechs and in the past, that we were working with. And so we work in type of that fashion. So yes, it’s no dramatic shift or change from the past, but we have definitely notice that we are targeting more new clients, new biotechs and not doing and growing and growing out our new franchisees for the future.

[Eric Coldwell:]

That’s really helpful. And just a quick different slant here, two of your public peers have in the last few quarters announced some outside cancellations relating to CNS categories like maybe Alzheimer’s and others. I’m just curious can you talk a little bit about your exposure in the CNS category? Is there any abnormally large contract exposure that you worry about these days based on what we’ve seen with some of the gyrations around CNS in Alzheimer’s in particular?

[Colin Shannon:]

We don’t have anything that, I mean we always get surprises. We’ve had a couple this year already, where there’s – we find it typically that there is more modifications and the conduct of the trial as we’ve progressed. They may want to change scope dramatically. We’re seeing a lot more of that. As we’re going through, if we can accelerate in any ways or maybe some change that they may want to either include or exclude certain geographies.And we’re finding a lot of choppiness and just changing their mind. And that reflects in sometimes so many cancellations that we’ve been seeing coming through, if not really from a big category, we’re saying, oh, it’s going to cancel. But a lot of it is in some cases, particularly with a pharma client, we’re finding that they before we even start, they may want to modify and we are always looking at it. This is a cancellation. As a new study they are giving us close enough that we can just actually rerun it.And it was like taking cancellation and we’re always making that judgment. And so – but we do look book of business, we look at any categories, we put things that we think may cancel and to backlog at risk. That’s a category we always watch very, very closely because else determine the risk associated with our backlog conversion to the next quarter. So we don’t really forecast much revenue from anything in that backlog of risk. So we can actually help project to make sure that we’ve got a pathway to have guidance.

[Eric Coldwell:]

Yes, that sounds really good. I’m not quite sure you guys get full credit for the quality of your bookings, but that’s one guy’s opinion. Thanks very much for all the details here and I’ll cede to the next caller. Thanks.

[Colin Shannon:]

Appreciate that. Thank you.

[Operator:]

Thank you. And our next question comes from the line of Sandy Draper with SunTrust. Your line is open. Please go ahead.

[Sandy Draper:]

Thanks very much. Just a couple, hopefully, fairly quick ones. Jumped on a little late, so I apologize, if either of you mentioned this in the prepared remarks. Wasn’t a huge drop, but your backlog conversion dropped down to 12.5% after being stabled 12.7%. Just wanted to see if you guys had thoughts on – if that sort of a new stabilization, although if it goes up or if we’re sort of be – going to be persisting in this sort of gradual downward trend.

[Mike Bonello:]

No, Sandy, this is Mike. We continued to believe that this was kind of the bottom of the trial. If I would have adjusted my revenue to the guidance rates that we used when we issued our guidance after June 30. It has been at 12.6%. So I think we’ve hit that trough and that’s our expectation is that we’ll start to trend up from here. We don’t expect a significant step down going forward.

[Sandy Draper:]

Okay, great. That’s helpful. And then on the margins, and I think I remember you giving a comment back and maybe the fourth quarter about thinking about 20 to 30 basis points of gross margin expansion for this year. Looks like, on my calculation based on a reported basis, I just look at, service revenue and costs – direct costs, you’re actually trending a little bit above that. Is that accurate and sort of what’s going better and how do you think about longer term, where you see gross margin shaken out?

[Mike Bonello:]

Sure. We had said 50 basis points to 60 basis points of improvement was what we had quoted historically. We knew that the first half of this year was going to be slightly ahead of that number. Because if you’ll recall, we had some heads that we had hired back in the end of 2017, had some reprioritization of some big studies and we kept those staff on hand to redeploy them later in the year. But I do expect that you will see margin – continued margin expansion in the remainder of 2019, but it’ll be more in line with what you saw in Q3 as opposed to what you saw in Q1 and Q2.

[Sandy Draper:]

Okay, thanks.

[Operator:]

Thank you. And our next question comes from the line of Erin Wright with Crédit Suisse. Your line is open. Please go ahead.

[Erin Wright:]

Great, thanks. So some just modeling questions here. I guess, can you speak to plans for debt pay down on the back of the repurchase and activity in the quarter in, I guess, quarter-to-date from a repurchase perspective? And what does guidance assume in terms of share count and interest expense. Thanks.

[Mike Bonello:]

Sure. So depending on the acquisition front, I would hope that given how the refinances worked out is roughly $200 million, that’ll be outstanding on the revolver and then we’ll have the $1 billion on the term loan A. I would hope to pay down that $200 million, if possible in the quarter, because we did cut off our Q3 debt payments as a result of entering into the refinancing.On the share count front, I think we’ll probably – I think, we should be in that kind of 60 – let’s say, for the quarter itself, say somewhere between roughly 64,000 to 65,000 shares outstanding depending on where the price moves and the dilutive impact of our outstanding options. And with respect to interest that expected, obviously, to be higher than it was in Q3 and depending on where we – what payments we make on the revolver. I’d say it’s probably going to be somewhere between probably say, $11 million and $12 million.

[Erin Wright:]

Okay, perfect. Thanks. And then on just general trends in the competitive landscape, I should say across the CRO space. Any sort of changes in the pricing environment that you’re seeing, any creative bundling tactics or anything that has come out of the woodwork in the past quarter. Thanks.

[Mike Bonello:]

I don’t think I’ve seen anything from a pricing perspective that’s been any different than what we’ve seen in the last three quarters or two quarters, anything on from your perspective, Colin.

[Colin Shannon:]

I mean, not only thing I would see is that we are – we have no seeing more use of our mobile platform Clinical 6. We’ve seen that it’s been used more and more in our clinical trials and currently we’ve got 30 trials that are end flight at various stages of being and working closely with using the mobile technology, unless decentralized model. So we can continue to expand that. And of course that in conjunction with our Symphony data and the real world evidence, as really I would helping shape where the market is going and we are at the forefront of ensuring that, where they have to support our client as we get through this change.

[Erin Wright:]

Okay, great. Thank you.

[Operator:]

Thank you. And our next question comes from the line of Dan Brennan of UBS. Your line is open. Please go ahead.

[Dan Brennan:]

Great. Thank you all for taking the questions. I wanted to go back just to the Data Solutions business, if you don’t mind. So I know growth in the quarter, I believe is about 2%. So kind of how does that compare to your own expectations? What’s assumed in the fourth quarter guide? And what’s realistic as we move beyond the fourth quarter.

[Mike Bonello:]

It was slightly behind where we thought it was going to be for the quarter, to be honest, there were a couple projects that ended up, because of trying to get the deliverables finalized ended up pushing into the fourth quarter. But, I think overall, we’re still expecting the full year to be in line with where we thought it would be when we reissued our guidance at the end of Q2.

[Dan Brennan:]

And then I know you made several comments about kind of opportunities and the recent deals that you did about, enhancing that product offering, but can you just remind us in terms of how we think about, not necessarily what’s going to be for 2020? But how do we think about the trajectory of the business overtime kind of, what do you aspire to get that business up to or just maybe a range of growth?

[Colin Shannon:]

We’ve actually – we see this as an opportunity that as we have any – a lot of growth potential because we throw in a strong competitor in the field, but we ultimately don’t have a huge amount of market share and we believe there’s a lot of low hanging fruit. And when we actually model, when we acquired it, we thought we’d get once we got it under our belt and getting going, it could easily get to sort away double digit growth. It’s certainly going to be a challenge when throwing out there is that, how do we get to a period of double digit growth year-on-year for the next few years.

[Dan Brennan:]

Okay. And then Colin, I think you were one of the only CEOs a few quarters ago to discuss maybe a pause with some of the customers around drug price concerns. I don’t think that’s come up again. So maybe that was just more of a temporary factor, but how would you characterize the decision making and/or the tone of business? I know vis-à-vis what’s going on in Washington?

[Colin Shannon:]

Well, I mentioned these things because, when I’m talking with the clients they’re obviously got concerns and, part of our whole rationale about we focusing in biotech was this the big pharma that are actually showing them more and concerns with the political landscape and with pricing. And that they’re always preparing for worst case scenarios and that that’s trying to derisk as best as they can. And we’ve seen that impact. We stay close with them. We’ve got large proportions of our business that what closely with leadership team because of the strategic solutions nature of our business. And they’re obviously they take it as like, as a strong concern. Obviously, who knows what’s going to shape up late, but, certainly on their radar big time and we try to make sure that we understand the effect of that and if there’s anything we need to consider to do today.

[Dan Brennan:]

Okay, great. Maybe final one, just on the burn, just wondering how we think about, last quarter you talked about maybe an increase in mix of business ready to burn. So, how do we think about the fee burn?

[Colin Shannon:]

I think, I wouldn’t – I think for fourth quarter, I think as I said earlier, I think it’s going to be in line with what you saw in Q2 and Q3. I think as we push forward into 2020, our expectation is that that will pick up, it obviously will not get back to the levels that you saw in 2017, because I think we’ve talked about that a flu study that we had there in 2017 that we felt like artificially inflated that number. But I do think you should see an uptick going forward. But obviously we’re in the process of preparing our 2020 budget and I’ll be in a better position in February to give you an idea of where I think that goes once we’re done with that.

[Dan Brennan:]

Great. Thank you Mike, thanks Colin.

[Operator:]

Thank you. And our next question comes from the line of Steven Baxter with Wolfe Research. Your line is open. Please go ahead.

[Steven Baxter:]

Hi, thanks. I wanted to ask about gross bookings. When I look back two years prior to 2018, Q4 typically represents the largest contribution to the full year amount, which I assume is driven by the plan and budgeting process at large pharma clients. I was hoping you could discuss your expectations for booking seasonality this year and whether you think this looks more like a normal year or is there some other progression that we should keep in mind then I have a follow-up. Thanks.

[Colin Shannon:]

No. When we’re looking at the quarter, I think we see a pathway for like, getting to the bookings we’re looking for. But there are so many different sites that fall into that, I need to have strong operational teams ready. So we try to pick where the areas that we feel strong and yes, there’s a couple of clients that are giving this somewhat this year, but it’s not typically it ended up business cycle, because when they if really got to get these studies started as and when. And you can’t just wait through that an end of the year. Maybe some things in the past has come out that way and we certainly have a push and some, maybe even biotechs and just want to get it start even and that may be some other metric that they’re doing to get started in the year and that there’s some natural fish, but does nothing on RFP view that seeing that does a spike or anything in Q4? I think there’s – we’ve got a good pipeline that we see and we’ve got pathway to the number that we want to achieve.

[Steven Baxter:]

Got it. Okay. And then just drilling down a little bit on the customer segments. I believe that I heard you right when you said there about 50% of bookings are coming on the biotech side. So even with flat gross bookings at the company level, that would imply biotech bookings are growing at a fairly strong pace. But I guess the other side of that coin is that, it would apply pharma bookings are down and you did talk about some of the challenges there with reprioritization and the like. So, I’m wondering whether we should think about that as widespread within your large pharma customer base or isolated to a smaller group. And then finally, do you have any visibility into when you should sort of flatten out or normalize? Thanks.

[Colin Shannon:]

Yes, that’s interesting because that’s how we felt during this – the whole year there’s been more sort of like flattening off in large pharma and fortunately we got ahead of that by their business development team focusing in on biotech. And we’ve got a lot of new clients this year, spending that time and not treating them and bringing in new opportunities.So, on the last biotech, I mean you’ll recall that last year we won a new preferred partnership where we won study with that new partnership, but which we actually took that to backlog but then big guys were about to start, they wanted to change priority. And actually had to take that out of our cancellation and it was quite substantial, but to get something else redone and would expecting to get the real award, I am a new guy or whatever that’s going to be very shortly.So there’s a lot of big pharmas, where we are finding that they’re going through very carefully reprioritizations, they’re thinking about what steps are going to do and there are other factors that come into play that we just don’t get share the opportunities to discuss with them. So there’s some things comes in about the surprise to us.

[Steven Baxter:]

Okay. Thanks for all the color.

[Colin Shannon:]

You’re welcome.

[Operator:]

Thank you. [Operator Instructions] We do have a follow up question from the line of David Windley with Jefferies. Your line is open. Please go ahead.

[David Windley:]

Hi, I just got two quick follow ups, thanks. Colin and Mike, we had talked about some line of sight that you had, two efficiency improvements from rollout of technology, but one platform last year that’s helping this year and one platform that’s rolling out now implementing now that gives you I think some line of sight to some nice cost deploy in 2020. I wondered if you could elaborate on that, how much of your margin improvement outlook does that give you line of sight to next year?

[Colin Shannon:]

Dave, until we actually put budgeting exercise – but you’re correct, that is the two new systems are one-highs will be rolling out this year and that will really take another year before we get the full effect of the efficiency. The other one has actually been causing us a lot of manual rework. And that will not be implemented till the end of Q1 next year and we’ll be going through that next.I thought, I really expect huge benefits from it next year, but it has certainly paved the way for future. We always look at it as we say for improvements and our margin every year and we’ve got a number of little things that we are looking at to help that improvement. So as we approach and look for guidance we’ll be figuring out how we continue to enhance our performance for delivering an improvement to bottom line.

[David Windley:]

Thanks. And then my second question is you made some general reference to bringing in new leadership. I think in the last just couple of months, Margaret Keegan has gone live with you from IQVIA, I wondered if you could talk about what she’s bringing to the organization?

[Colin Shannon:]

Well, obviously a lot of experience, we are – she’s been in industry a long time. She’s been a senior leader and she had that immediate strong step within our company culture, so we were carrying the baton between the rest of the management team and not only with Margaret Keegan, but with Chris Gaenzle, all of a sudden we are able to have much more attention on their jobs rather than covering all the extra duties.So, Margaret and Chris both commanded and made an immediate impact. It’s taken a lot of burden off of the rest of the management as always to get us more focused, management able to get the hiring done and the discipline. So I think that it’s helped us get to really strong position. That’s why I was mentioning, we hired everybody to get at the tree, and the productivity was just palpable. It was great to hear and see the energy everybody had and we’re starting to see things coming through that’s really positive that we feel is setting ourselves up really nicely for next year.

[David Windley:]

Great. Appreciate the color, thank you.

[Operator:]

Thank you. And we have another follow-up question from the line of Juan Avendano of Bank of America, your line is open, please go ahead.

[Juan Avendano:]

Hi. Thank you for the follow-up. And so this is related to the very first question on the Q&A and so organic growth did come-in ahead of our expectations in 3Q, but yet you said that it was in line with your expectations. And so looking into 4Q we do know that I guess seasonality into data solutions business is typically strong and you’re also all around on the overall company basis you’re facing an easier prior year comp.Can you tell us why you still expect to come in at the midpoint of your organic growth guidance of 6% to 8%. And because that would essentially imply a sequential deceleration from the third quarter, did you have any pull forwards into the 3Q from 4Q?

[Colin Shannon:]

Yes. No, we still want to see the acceleration in the fourth quarter, from an overall dollar perspective from revenue. The thing you’ve got to remember is that there is a lot of vacation and holiday time in that fourth quarter that creates a little bit of fluctuation in the number hours that are available to work. Especially on the product registration side, so I do expect to see growth from a revenue perspective and obviously the pickup that you’ll see in strategic solutions.I think Dave’s question was more – moving us towards the high-end of our guidance and I just wanted to set everyone’s expectation in terms of where we feel that we’re going to fall out is more around the midpoint that may be slightly above the midpoint, but I didn’t want to get everybody’s expectations outpacing reality.

[Juan Avendano:]

Do you expect the gross margin to expand on a year-over-year basis in 4Q as well?

[Colin Shannon:]

I do.

[Juan Avendano:]

Thank you.

[Operator:]

Thank you. And I’m showing no further questions at this time and I would like to turn the conference back over to CEO Colin Shannon for any further remarks.

[Colin Shannon:]

Well. Thank you everyone for participating in our call today. If you have any additional questions, please feel free to contact us. We hope you have a great day. Thank you.

[Operator:]

Ladies and gentlemen, this concludes today’s conference. You may all disconnect. Everyone have a great day.