PRA Health Sciences, Inc.
Q2 2017 Earnings Call Transcript

Published: 12 Aug 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to the PRA Health Sciences, Inc. Second Quarter 2017 Earnings Conference Call. [Operator Instructions] And as a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Mike Bonello, Senior Vice President and Corporate Controller. Sir, you may begin.

[Mike Bonello:]

Thank you, James. Good morning, and thank you for joining us for the PRA Health Sciences Second Quarter 2017 Earnings Teleconference. Today, Colin Shannon, our Chief Executive Officer and Linda Baddour, our Chief Financial Officer, will discuss our second quarter financial results. Following our opening comments, we will 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 Web site. Before we begin, I'd like to remind you that our remarks and responses during this teleconference 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 section of our Annual Report on Form 10-K filed with the SEC on February 23, 2017. Such risk factors may be updated from time to time in our filings with the SEC. We assume no obligation to update any forward-looking statements. Certain of the 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 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, are available in the earnings press release and investor supplement included in the Investor Relations portion of our Web site. I would now like to turn the call over to our CEO, Colin Shannon.

[Colin Shannon:]

Thank you, Mike. Good morning, everyone. I'd like to thank you all for joining the PRA Health Sciences conference call to discuss our second quarter 2017 financial results. I am delighted to report that the second quarter of 2017 was another strong quarter for PRA with double-digit revenue, earnings and net new business growth. Service revenues for the quarter were approximately $458 million, which represents an increase of approximately 16% year-over-year at actual foreign exchange rates and on a constant currency basis. Adjusted net income for the second quarter was approximately $52 million, an increase of 28% over the same period last year. Adjusted net income per diluted share was $0.79, a 25% increase versus the second quarter of 2016. New business continued to be robust and increased approximately 22% when compared to the second quarter of 2016. We recorded $603 million of net new business awards, representing a net book-to-bill of 1.3 times of service revenue. The addition of these new awards has resulted in our backlog increasing approximately 6% on a sequential basis and 23% year-over-year, finishing at $3.3 billion. Our new business awards continue to be well diversified, with approximately 70% of our new awards coming from the pharmaceutical sector and approximately 30% coming from the biotech sector. Our client base also continues to be well diversified, with our top 5 clients representing approximately 42% of total revenue for the quarter, with our largest client representing approximately 11% of total revenue. We continue to have healthy growth among all of our top five clients. The concentration of our customers from small development stage biotech to large biopharma remains well diversified, and clinical trial activity amongst our biotech customers continues to be steady. I would now like to tell you about two recent acquisitions. The first is Parallel 6, which was completed during the second quarter of 2017. Parallel 6 is an innovative technology company that has developed a mobile clinical platform designed to recruit, enroll, engage and manage patient clinical trials. The acquisition of Parallel 6 provides, PRA with an end-to-end platform with a turnkey clinical trial technology stack that puts the patients at the center of the trial and weave the trial into the lives of the patient. Parallel 6 technology allows PRA to seamlessly improve communication between patients, caregivers and the health care providers regardless of setting of care or treatment. Parallel 6's suite of products includes disease management, trial performance analytics and screening, collaboration tools and personalized action plans, remote patient monitoring, robust data integration, wellness and self-care trackers and action notifications like medication reminders and appointment allows. We believe that coupling Parallel 6's technology solution with PRA's clinical service offering allows us to have competitive advantage over other providers while unlocking new opportunities for revenue with both structural and hybrid trial configuration. This was a small acquisition. And due to speciality, we did not previously announce it publicly. The acquisition was funded partly with cash from our balance sheet and funds that remained available under our accounts receivable securitization. With respect to our 2017 earnings, we don't expect the acquisition of Parallel 6 to have a material impact on our earnings. The second acquisition we announced last night is the acquired Symphony Health Solutions, a leading provider of integrated health data and analytics delivered as cloud-based solutions. As many of you are aware, PRA has been a sophisticated user of data for almost 10 years, helping us identify rich data insights into patients that we use to help our clients optimize our clinical trial recruitment. Our use of data has been rising exponentially over the last few years, and it became vital that we secured a strong, dedicated data supply. Additionally, our data platform was becoming stretched and needed substantial investment to cope with our growth. Firstly, we were working closely with Symphony Health and quickly realized that we were very culturally aligned, sharing the same passion for data and having a desire to use data in innovative ways that helps our client. Symphony Health had recently revamped their IT infrastructure that is very scalable, and being on one platform gives them the agility and nimbleness to provide customized data solutions. Their team is also very experienced with a great deal of expertise in many therapeutic areas, and they also recognized PRA sophistication in the use of data. And we both realized that together, we could bring together a very powerful synergistic combination. We are delighted to have both Parallel 6 and Symphony Health join our company, and I would like to welcome their teams to the PRA family. In closing, I would like to thank our entire staff and our clients for their continued commitment to PRA Health Sciences. We are delighted with our strong financial results this quarter, and we continue to be well positioned for the remainder of 2017. I would now like to hand over the call to Linda Baddour, our Chief Financial Officer, who will go through our quarterly financial results in more detail.

[Linda Baddour:]

Thank you, Colin. Good morning, everyone. For the second quarter of 2017, our consolidated service revenues grew 16.2% at actual foreign exchange rates and 16.5% on a constant currency basis. We reported $457.9 million of service revenue for the quarter compared to $394.2 million for the same quarter last year. As Colin mentioned earlier, our client concentration continues to be well diversified. We derived 52.3% of our service revenue from large pharmaceutical companies, 17.4% from small to midsized pharmaceutical companies, 16.2% from large biotechnology companies and 14.1% from all other biotechnology companies. Direct costs were $300.6 million in the second quarter of 2017 compared to $254.9 million in the same quarter last year. Direct costs were 65.6% of service revenue in the second quarter of 2017 compared to 64.7% in the same quarter last year. The increase in direct cost as a percentage of service revenue is primarily related to our continued hiring of billable staff to support our current portfolio of studies and our future growth. On a constant currency basis, direct costs increased about $48.9 million year-over-year. This increase in our cost base was offset by a favorable foreign currency effect of $3.2 million. SG&A expenses were $76.2 million or 16.6% of service revenue for the second quarter of 2017 compared to 17.4% of service revenue for the same period last year. The decrease in SG&A as a percentage of service revenue is primarily related to our continued efforts to effectively leverage our selling and administrative functions as we continue to grow. Adjusted net income, which excludes certain items whose fluctuation from period to period does not necessarily correspond to changes in our operating results, increased 27.6% year-over-year to $51.7 million in the second quarter of 2017. Contributing to the adjusted net income growth were increased service revenues and lower interest expense. Adjusted net income per diluted share grew 25.4% to $0.79 per share in the second quarter of 2017 compared to $0.63 per share in the same quarter last year. Cash provided by operations was $26.7 million for the 3 months ended June 30, 2017, compared to cash provided by operations of $3.7 million for the same period of 2016. The increase in operating cash flow was the result of an increase in our operational performance, reduced interest payments offset by an increase in working capital, driven by an increase in our days sales outstanding. Our days sales outstanding was 35 days at June 30, 2017, compared to 21 days at June 30, 2016. As we have mentioned in prior quarters, we expect our days sales outstanding to increase over time, closer to the industry average. However, during Q2 2017, our days sales outstanding was slightly higher than we originally anticipated. The unanticipated increase in our DSO was driven by two specific client issues that pushed the payment of outstanding balances into the first week of July. The delayed receipt of outstanding balances had the impact of increasing our DSO for the quarter by seven days. Had we received the outstanding balances as anticipated, our DSO would have been in line with our expectations. Capital expenditures were $14 million for the quarter compared to $9.4 million during the same period of 2016. Our capital expenditures reflected our continued investment in information technology and our expanding infrastructure to support our growth. Our cash balance was $113.4 million at the end of second quarter, of which $51.6 million was held by our foreign subs. Net debt outstanding, defined as total debt less cash and cash equivalents, at June 30, 2017, was $727.4 million compared to $804.5 million at June 30, 2016. The overall reduction in our net debt is attributable to repayments made and an increase in the amount of cash on hand, offset by an increase in the outstanding balance in our accounts receivables securitization, which, as Colin mentioned, was used -- we used our remaining available funds to purchase Parallel 6. The initial cash outlay was $39.5 million net of cash acquired, and we expect this acquisition to be slightly accretive to earnings this year, just slightly. Regarding the geographic concentration of our revenue, 59% of our quarterly service revenues were earned in North America. At June 30, 2017, approximately 84% of our service revenue were denominated in U.S. dollars, and 61% of our total expenses were denominated in U.S. dollars, which is consistent with the first quarter of 2017 and consistent with 2016 levels. Our euro exposure continues to be naturally hedged. Regarding our 2017 guidance. We are updating our service revenue estimate of between $1.825 billion and $1.855 billion, representing constant currency growth of between 15% and 17%. We are also updating our adjusted net income per diluted share to between $3.11 per share and $3.20 per share. And our diluted GAAP earnings per share estimates is between $2.17 per share and $2.26 per share. We expect our acquisition of Symphony Health to be accretive to our earnings. However, our guidance update excludes any earnings impact related to this transaction, which we anticipate to close during the third quarter. We will provide further guidance updates once the transaction is complete. Finally, we continue to anticipate an annual effective tax rate of 27%. That concludes our prepared remarks. At this time, we would be happy to take your questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Dave Windley with Jefferies.

[Dave Windley:]

I wanted to start on kind of core business here around your margin improvement sequentially and particularly, kind of labor -- your utilization levels in labor. I know you had hired ahead of the curve, kind of getting ready for significant amounts of new business wins. I just want to understand, where your utilization levels are, what the labor market looks like and kind of what allowed the margin to improve so much sequentially.

[Linda Baddour:]

Thank you, Dave. Well, as we had mentioned in previous calls, we had -- over Q4 and Q3 and Q1 of 2017 -- Q3, 4 '16 and Q1 of '17, we had been hiring ahead for our partnership. And as we mentioned on the last call, these people were starting to get to work, and that's what has happened in Q2. We're very pleased with our utilization. We still have a bit of a bench in a couple of areas. And we still, of course, had a great book-to-bill for Q2, so we also had to hire additional help for that. But the labor market seems pretty good. The -- we just completed our round of merit adjustments, and it went very well. And we have been -- it's not -- I wouldn't say it's a wide-open market, but it's not been difficult to hire certain positions, unless you get specific around, for example, as we've always said, oncology CRAs.

[Dave Windley:]

Right, okay. And then for follow-up, I want to pivot over to the Symphony acquisition. Colin, I appreciate your comments there. You talked about kind of being at a point where you sounded like you needed to make a step-function investment internally and also, interested in strategically securing data source. I suppose I was just interested in any more color that might have driven the timing. And then also, kind of what your thoughts would be for Symphony's further expansion of its data sourcing activities and investments that might be required in that post-acquisition.

[Colin Shannon:]

Thanks, Dave. Yes, no, obviously, we are very excited about this acquisition. They -- we had a great cultural fit with the team. We actually both are very like-minded in working with data, as I mentioned. But it also gives us another division that we can actually have, where we can use different client mixes and new business opportunities. And they have been solely concentrating on building it within the U.S. So we see that as a great opportunity, as do they, for expanding geographically. I mean, it's not going to happen overnight. We're going to have a careful plan about how we'll actually tackle this. But we can leverage off our global footprint and allow them to really build a strong business. They have been growing a nice rate, and they are upper teams and same as ours, which -- saw as a nice growth story. And I think we can actually help them accelerate that growth over the next few years, so we feel very good about that. And as you mentioned, a lot of it was just actually to look after our longevity. I mean, we had to have a safety net of having a secured data supply. Everybody was, as people have mentioned, buying data assets and finding ways. We knew that after working with data for so long what some of the real and important aspects were. And fortunately, Symphony invested in all the things we need. They had built a great platform. So they're not siloed into 2 product lines, et cetera, they can have agility and nimbleness. It's very scalable. They have kept important aspects with the identification key, which helps linking data. And it's going to be a very, very powerful use the way -- in combination with Parallel 6 as well. So we see all these components coming together as we build in new offerings. So we are, as you can imagine, very, very excited about this new acquisition.

[Operator:]

Our next question comes from John Kreger with William Blair.

[John Kreger:]

Colin, just to keep on the Symphony topic. Can you talk a bit about what their data assets are? I think of them primarily as a script tracking service. Can you just give us a sense about what they have beyond that? And do they have a plan in place to expand internationally? Or are you going to just try to maybe do that through further tuck-ins down the road?

[Colin Shannon:]

Actually, there's -- we're going to formulate a close plan for international because it's something that we're going to work together. They do have, and I'd note that we were obviously going to be careful about how we invest in this and not distract them too much from continuing their growth. I mean, we'd be very happy for them to continue to achieve what their goals are for 2018. And we did want the capability of expanding geographically, and we're going to have this figured out together once we close the transaction. But they have a large wealth of health-based assets, providing longitudinal history of over 280 million anonymized patients. Obviously, we use their health data management platform, the identification linking software to put that altogether. It's all HIPAA-compliant. We actually got an external company to come in and look at how they've built their technology platform and get a scoring mechanism, and they scored very, very highly in all the main things that concerned us. There's a development, a compliance, a HIPAA. All of these areas, where it's very important in health care, they scored very highly. So it was something that we thought was really great. Obviously, there is more opportunity to continue to expand access to data. We'll continue to work with them in looking for opportunities. But they're growing well, and I think we can actually help accelerate that growth.

[John Kreger:]

And a quick follow-up. Can you comment on the profitability of the asset, maybe what their EBITDA margin is?

[Colin Shannon:]

Want to join in?

[Linda Baddour:]

Yes. I mean, basically, they're at about 20% right now, yes. They've been making quite a bit of investments, and we'll see that go higher because they won't -- unlike our business, they won't have to add a lot of personnel to grow the revenue.

[Operator:]

Our next question comes from Garen Sarafian with Citi. Your line is open.

[George Kasiaras:]

This is George Kasiaras on for Garen. I just wanted to get a sense of how the recent M&A duty within the CRO sector has impacted your business, particularly in regard to new client trends. Any color will be appreciated.

[Colin Shannon:]

We've been analyzing our RFP volume, and as I've mentioned in the last few quarters, we've been seeing a very strong, robust RFP flow. We are still seeing that. I can't determine if there's anything happening as a result of M&A activity, but suffice it to say that we're in a strong position of seeing a lot of good RFPs and very pleased that we're seeing a very sound basis. Obviously, M&A has its downfalls as well. People -- the integration can take efforts and -- cause this unrest with staff and things like that. It can sometimes lead to advantage. We'll certainly be there to ensure that we have a stable -- PRA is a stable provider that can jump in, if need be.

[Operator:]

Our next question comes from Erin Wright with Crédit Suisse. Your line is open.

[Hong Tran:]

This is actually Hong on for Erin. Just a quick question for you guys. Can you give any commentary on how much Takeda and other strategic partnerships added to this quarters bookings and how that compares to sort of underlying demand trends excluding those partnerships?

[Colin Shannon:]

As I've mentioned last quarter, we are not giving that detail out. I used it -- because it was new partnerships. But since it's no longer new partnerships, our information will not be forthcoming.

[Hong Tran:]

And then a quick question on Symphony again. Are you guys going to be breaking out Symphony into a different segment or including it within your service revenue?

[Colin Shannon:]

We will be looking to keep it separate. As I -- we don't see this is a synergistic move. This is a growth -- a complementary business, so there is not -- we are not bringing it on board to merge together. We are going to obviously have to look carefully about how we do this from an accounting perspective, but we expect to have their leader running the business and continue to grow it and -- with the assistance of our team. So we see this as a very, very nice complementary business, of which we get a lot of benefit from and hope that we can reciprocate these benefits as well to the Symphony team.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from Derik De Bruin with Bank of America Merrill Lynch. Your line is open

[Derik De Bruin:]

So I realized that you haven't included Symphony in the overall guide yet, but could you just break out what the embedded -- for the deals that you've already done, is embedded in -- for M&A in the 15% to 17% constant currency growth target for this year and what was it for the quarter?

[Colin Shannon:]

Nothing.

[Linda Baddour:]

We -- nothing. We haven't closed on Symphony yet.

[Derik De Bruin:]

No, I know you haven't, but I'm just saying what's the embedded one for -- what the deals have already done? What's the contribution within the 15% to 17%?

[Colin Shannon:]

From P 6. It was immaterial.

[Linda Baddour:]

Yes, P 6, it was immaterial, yes. Basically, all of our growth is organic.

[Derik De Bruin:]

And I guess 20% EBITDA margin on Symphony, I think we expected that to be a little bit higher just given some of the peers that are out there. I guess could you just talk about what sort of investments they've been making and then how that margin is sort of going to expand going forward?

[Colin Shannon:]

Well, as I've mentioned to you, they have just recently built out all their technology platform and are still acquiring more data and building out new business opportunities. Obviously, they're still growing very, very fast, and that comes, obviously, with a price, so they're still having to hire ahead. So I get the point, where, obviously, they can take the benefit of having their core team and will be adding new lines and opportunities without actually adding headcount. As Linda mentioned earlier, that's when we'll see it growing. But obviously, we see that we can help them enormously to help further that growth. For example, the use of our sales team. We've got relationships with all of the large pharma and biotech companies, that we can help them talk about the partnerships and give them the opportunities, basically, on like real-world dividends and AGOR types of studies that could help enormously grow the business in the short term. And in the longer term, we'll be looking to invest in the geographical improvement so that we can actually offer on a more -- data on a more global basis.

[Operator:]

Thank you. Our next question comes from Tim Evans with Wells Fargo Securities. Your line is open.

[Rob Amparo:]

This is actually Rob on for Tim. Just to stay on the Symphony again. That 20% margin that you called out, is that put on the same basis as you're on at the moment or excludes stock comp?

[Linda Baddour:]

Yes, it is.

[Robert Amparo:]

And again on Symphony, I know that you guys are going to provide guidance once it closes, but I was wondering if you could tell us a little bit about how to think about what the revenue growth trajectory is at the moment.

[Colin Shannon:]

Well, I've mentioned earlier on that they've been growing, and it's sort of like mid- to high teens. So I would take that as an example of where we anticipate until we come up with our planning.

[Operator:]

I show no further questions in queue, so I'd like to turn the conference back over to Mr. Shannon for closing remarks.

[Colin Shannon:]

Well, thank you, everyone, for participating on the call today. If you have any additional questions, please feel free to contact us. Have a great day, everyone.

[Operator:]

Thank you. Ladies and gentlemen, that does conclude today's conference. Thank you very much for your participation. You may all disconnect. Have a wonderful day.