PRA Health Sciences, Inc.
Q4 2017 Earnings Call Transcript

Published: 22 Feb 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2017 PRA Health Sciences Incorporated Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the conference over to our host for today, Mike Bonello, Senior Vice President and Corporate Controller. You may begin.

[Mike Bonello:]

Good morning and thank you for joining us for the PRA Health Sciences fourth quarter of 2017 earnings teleconference. Today Colin Shannon, our Chief Executive Officer; and Linda Baddour, our Chief Financial Officer, will discuss our fourth quarter and full-year 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 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 included in our Annual Report on Form 10-K filed with the SEC on February 23, 2017. Our risk factors may be updated from time to time in our filings with SEC. Please note that we assume no obligation to update any forward-looking statements. Certain financial measures will be discussed 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 viewed 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 Relation portion of our website. I would now like to turn the call over to our CEO, Colin Shannon.

[Colin Shannon:]

Thank you, Mike. Good morning. I’d like to thank you, all, for joining the PRA Health Sciences conference call to discuss our fourth quarter and full year 2017 financial results. I am pleased to report that the fourth quarter of 2017 was another strong quarter with double-digit revenue, adjusted net income, and net new business growth. Service revenues for the fourth quarter were approximately $569 million which represents an increase of approximately 38% year-over-year at actual foreign exchange rates, and 36% on a constant currency basis. Service revenue excluding Symphony increased approximately 20% year-over-year at actual foreign exchange rate and 19% on a constant currency basis. Adjusted net income for the fourth quarter was approximately $69 million, an increase of approximately 50% of the same period last year. Adjusted net income per diluted share was $1.04, a 47% increase versus the fourth quarter of 2016. Net new business increased approximately 10% when compared to the fourth quarter of 2016. We had a record of $647 million of net new business awards, representing a net book-to-bill of 1.3 times our service revenue and this is despite unusually high cancellations of $132.6 million during the quarter. The addition of our new awards has resulted in our backlog increasing approximately 4% on a sequential basis and 20% year-over-year, finishing at approximately $3.5 billion. We will not be including our data solutions segment and reported new business awards and backlogs due to the short-term nature of these contracts. The diversity of our new business awards continues to be consistent with previous quarters with approximately 60% of our new awards coming from the pharmaceutical sector, and approximately 40% coming from the biotechnology sector. Our client base also continues to be well diversified with our top five clients representing approximately 37% of our total revenue for the quarter with our largest client representing approximately 9% of total revenue. Our full-year 2017 financial results continued the trend of consistent and strong growth. We reported solid revenue growth and improved our overall operating margins. We have got our full-year service revenues of approximately $1.9 billion, representing growth of approximately 23% on an actual and constant currency basis. Revenue growth excluding Symphony Health was approximately 18% at actual rates and approximately 17% on constant currency basis. During 2017, we made significant investments on our business and expanded our service offerings. We believe that we have established a foundation that will allow us to provide long-term sustainable growth and believe we are well positioned to offer a wide variety of services to our clients. On acquisition of Symphony Health has gone very well and I am delighted with their performance. We look forward to the continued opportunities that this strategic acquisition will provide in the future. During Q1 2018, we’ll be formally finalizing our integration plan and we’ll be working on completing the integration by the end of 2018. Using our solid performance in 2017, we are anticipating our 2018 diluted adjusted earnings per share to be between $4 per share and $4.15 per share. As discussed in our press release, this guidance includes the impact of adopting the new revenue standard, the impact of the enactment of the Tax Cuts and Jobs Act, and updated foreign exchange rates become estimates. Linda will provide additional details about our 2018 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 are delighted with our strong financial results and believe we are well-positioned for strong growth in 2018. I would now like to hand over the call to Linda Baddour, our Chief Financial Officer, who will go through our quarterly and full-year financial results in more detail.

[Linda Baddour:]

Thank you, Colin. Good morning, everyone. For the fourth quarter of 2017, our consolidated service revenues grew 37.5% at actual foreign exchange rates and 35.9% on a constant currency basis. We reported $568.8 million of service revenue for the quarter, compared to $413.6 million for the same quarter last year. As Colin mentioned earlier, PRA revenue excluding Symphony Health increased 20.2% year-over-year at actual foreign exchange rates and 18.6% on a constant currency basis. Revenue by segment for the fourth quarter of 2017 was $497.3 million for the Clinical Research segment and $71.5 million for the Data Solutions segment. Revenue concentration, excluding our Data Solutions segment revenue in the fourth quarter of 2017, was consistent with prior quarters. We derived approximately 56% of our service revenue from large pharmaceutical companies, approximately 14% from the small to midsized pharmaceutical companies, approximately 16% from large biotechnology companies and approximately 14% from all other biotechnology companies. Total direct costs were $368.9 million in the fourth quarter of 2017 compared to $274.4 million in the same quarter last year. The increase in direct costs was primarily related to an increase in the labor-related cost in our Clinical Research segment as we continue to hire billable staff to support our current portfolio of studies and our future growth. Our Data Solutions segment reported $40.2 million of direct cost in the fourth quarter of 2017. Total direct costs were 64.9% of service revenue in the fourth quarter of 2017 compared to 66.3% in the same quarter last year. The decrease in direct cost as a percentage of service revenue is primarily due to the higher gross margins in our Data Solutions segment service offerings compared to our clinical research service offerings. On a constant currency basis, total direct costs increased by $86.6 million year-over-year. This increase in our cost base included an unfavorable foreign currency effect of $7.9 million when compared to 2016. SG&A expenses were $92.2 million or 16.2% of service revenue for the fourth quarter of 2017 compared to 17% of service revenue for the same quarter last year. The decrease in SG&A as the percentage of service revenue is related to our continued efforts to effectively leverage our selling and administrative functions. During the fourth quarter of 2017, we incurred transaction-related expenses of $75.9 million which were primarily related to changes in the fair value of earn-out liabilities associated with our acquisition. During the fourth quarter of 2016, we also incurred $13 million of transaction-related costs. These costs were primarily related to nonrecurring stock-based compensation expense and the vesting of certain performance-based options related to our November 2016 secondary offering. Adjusted net income, which excludes certain items which fluctuation from period to period does not necessarily correspond the changes in our operating results, increased 49.9% year-over-year to $68.8 million in the fourth quarter of 2017. Adjusted net income per diluted share grew at 46.5% to $1.04 per share in the fourth quarter of 2017, compared to $0.71 per share in the same quarter last year. For the 12 months ending 2017, our consolidated service revenues grew approximately 23% at actual foreign exchange rates on a constant currency basis. We finished the year with approximately $1.9 billion of service revenues compared to $1.6 billion in the comparable prior year. PRA revenue, excluding Symphony Health, increased approximately 18% year-over-year at actual foreign exchange rates and approximately 17% on constant currency basis. Cash provided by operations was $102.6 million for the three months ended December 31, 2017, compared to cash provided by operations of $93.3 million for the same period of 2016. For the 12 months ended December 31, 2017, cash provided by operations was $220.4 million compared to $160 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 payment and optimization of our working capital. Our net days sales outstanding was 20 days at December 31, 2017 compared to 19 days at December 31, 2016. Capital expenditures were $22 million for the fourth quarter compared to $7.5 million for the same period of 2016. Capital expenditures were $61.3 million for the 12 months ended December 31, 2017 compared to $33.1 million for the 12 months ended December 31, 2016. The increase in our capital expenditures versus 2016 reflects our continued investment in information technology, enhancing our current facilities, and expanding our infrastructure to support our growth. Our cash balance was $192.2 million at the end of fourth quarter, of which $63.6 million was held by our foreign subs. Net debt outstanding, defined as total debt less cash and cash equivalents at December 31, 2017, was $1.16 billion compared to $691.8 million at December 31, 2016. The overall increase in our net debt is attributable to borrowings related to our recent acquisition. During the fourth quarter of 2017, we were able to call and retire our senior notes which will reduce our interest expense in 2018. In addition, in January 2018, we entered into two new interest rate swaps in order to minimize our exposure to variable rate debt. Regarding the geographic concentration of our revenue, 62% of our quarterly service revenues were earned in North America. At December 31, 2017, 82% of our service revenue were denominated in U.S. dollars and 63% of our total expenses were denominated in U.S. dollars which is consistent with prior quarters and consistent with 2016 levels. Our euro exposure continues to be naturally hedged. We currently do have exposure to movements in the GDP at approximately 1% of our revenue is denominated in GDP, while 6% of our expenses are denominated in GDP. We are currently working on ways to reduce this exposure. Now, let’s turn to our guidance for 2018. As discussed in our press release, effective January 1, we are adopting the provision for ASC 606. ASC 606 requires that we apply percentage of completion accounting to service revenue, reimbursement revenue and investigative grants as one performance obligation. The inclusion of reimbursable out-of-pocket cost and investigator fees and the calculation of revenue may create a timing difference between the amount we are entitled to receive from our customers and the amount of revenue we recognize in our financial statement. The variability and magnitude of this timing difference compared to our current accounting is dependent on the progress of the service portion of our project compared to the progress of the investigator fee and the reimbursable out-of-pocket cost relative to the respective forecast cost over the life of the project. Although, the adoption of ASC 606 will have a material impact on a reported revenues, we do not expect the adoption to have a material impact on our GAAP net income, adjusted net income or related earnings per share. Should actual results differ from our current expectations, we will update our future guidance. We are estimating service revenues between $2.84 billion and $2.95 billion representing as reported growth of 46% to 51% and constant currency growth of between 18% and 20%, excluding the impact of ASC 606. As Colin mentioned, we had unusually high cancellations in the fourth quarter of 2018, which were mainly due to one of our large pharma client reprioritizing their drug development plans. Unfortunately, these studies were due to start at the beginning of 2018 and had a negative impact on our revenue growth for the year. Despite these cancellations, we are still projecting constant currency organic revenue growth of 10% to 12% excluding the impact of ASC 606. As Colin mentioned our strong book-to-bill during 2017 has set us up nicely to deliver double-digit revenue growth in 2018. We are anticipating diluted GAAP earnings per share between $2.80 per share and $2.95 per share and diluted adjusted earnings per share between $4 per share and $4.15 per share. Our diluted earnings per share estimate, $0.46 of benefit from reduced interest expense related to the retirement of our senior notes, $0.03 to $0.05 of additional depreciation expense due to increased levels of CapEx during 2016 and 2017, and a full year of Symphony Health depreciation, $0.03 to $0.05 of costs associated with anticipated investment to be made in Japan and China, and $0.08 to $0.12 of tax benefit as a result of the changes resulting from the Tax Cuts and Jobs Act, this is offset by $0.08 to $0.10 of unfavorable foreign exchange impact primarily related to the GBP. We anticipate our annual effective income tax rate will be approximately 24%, which incorporates the changes expected from the Tax Cuts and Jobs Act which was enacted in the fourth quarter of 2017. Our effective tax rate may differ from this estimate if the geographic dispersing of our pre-tax earnings change from what we have estimated, or if there are changes in the interpretation, analysis or if additional guidance is issued related to the Tax Cuts and Jobs Act. Regarding Q1 2018 guidance, we are estimating service revenues between $688 million and $708 million representing, as reported growth, of 61% to 65%, constant currency growth of 28% to 30% excluding the impact of ASC 606, and constant currency organic growth of 12% to 14% excluding the impact of ASC 606. We are anticipating dilutive GAAP earnings per share between $0.49 and $0.55 per share and diluted adjusted earnings per share between $0.81 and $0.86. Similar to our full-year guidance, we are anticipating our annual effective income tax rate will be 24%. Consistent with 2017, we are including Q1 guidance to ensure that expectations around sequential quarterly earnings growth are in line with our expectations. This guidance includes the impact of enhancing our staff to meet our current workload, an increase in depreciation expense as previously discussed, the seasonality in our Data Solutions segment, and the negative impact of first quarter recurring expenses such as payroll taxes and employee benefit, and expenses incurred related to internal organizational meetings. Finally, our guidance assumes a euro exchange rate of 1.25 and a British pound exchange rate of 1.37. All other foreign currency exchange rates are as of January 31 2018. Our process for determining exchange rates is consistent with prior years where we use several bank resources to evaluate expected rate movements for the next 12 months. This concludes our prepared remarks, and we are now happy to take your questions. Operator, you may open the line for questions.

[Operator:]

[Operator Instructions] Our first question comes from David Windley of Jefferies. Your line is now open.

[David Windley:]

Colin, your comments around - both of your comments around the higher cancellations, I am wondering if you can provide any color around those. Were those studies that you had assigned some risk adjustment to as your practices typically do? And then broadening out a little bit, as you think about potential M&A among your client base, how might you be able to protect yourself against some added volatility or heightened volatility if this type of activity continues?

[Colin Shannon:]

Obviously, we are not immune to cancellations, but that’s actually was more about the client doing a reprioritization where the one was change and the conduct of the study and what those regulatory are. And it looks as if it will be coming back later on in the year. We just don’t know when, and we prudently take a cancellation. There was another one where they decided to do a different study within our portfolio and reprioritize. So that’s changing again. It will be coming back in the future. We also saw a little bit of trend. There were a few strategies as we were going through Q1, and so we wanted to reflect prudent in our forward-looking, particularly in Q1, because we don’t expect a few other studies to be up and running much, much more quarter. Dave, I think the best protection we can have is continuing to have a well-diversified portfolio. We have got a significant number of clients. Typically, we have been fortunate enough that when things are - selecting other things that are accelerating. And just in the last quarter, things were all going in the one direction which was a little bit more on the negative side. And I’d say not, we felt very good about everything. It has allowed us to be careful in hiring and actually go through and address like areas where we have got a lot of stuff and go about trailing. So, all in all, we have taken advantage of that situation. And so, roughly what we feel is very strong growth.

[David Windley:]

If I could ask one follow-up on one of the last points you made on staff and how some of the slippage and cancellations might impact labor utilization. I think in the prepared remarks, you talked about continuing to hire to support your growth rate. Could you get a little more precise about hiring pace and levels of utilization and how we should think about how quickly you’re hiring in light of the fact that this creates a little bit of slack in utilization?

[Colin Shannon:]

Well, actually, what we have noticed in the last number of quarters is not our attrition rate has actually slowed down. And normally, we are always hiring, but the way of hiring has just been changing a little because of our attrition rate. When we try to hire our heads, we never know exactly which country are going to be utilized, what’s therapeutic area of expertise, and so we try to obviously look at the portfolios and try to make sure that for all of our key clients, we’ll get the right people in the right places at the right time. Sometimes, that gets a little bit out of sync and then we address that periodically. Obviously, there’s a little of bit of slippage here. We have had some cancellations and some projects waiting. That’s given us the opportunity to just reassess. Our resolve is to get the highest with new studies coming on board, and a lot of these people that were hired will be earmarked for later on. We’ll just actually adjust the team number and size so that we could when - we’ll be ready for starting when the clients are ready.

[Operator:]

Our next question comes from Tim Evans of Wells Fargo. Your line is now open.

[Tim Evans:]

Linda, just with all the moving parts on revenue, I was trying to triangulate on what we should be thinking about for EBITDA margin and kind of how that compares to 2017. And what I was coming up with was an EBITDA margin under ASC 606 of something like 15% to 16% for the full year with that being materially lower in the first quarter and then stepping up meaningfully through the year. I guess, A, is that the right way to look at it? And then if not, could you maybe help us out with kind of what you’re thinking about for interest expense in some of the other below-the-line items, any other expense that might be factored into the model that would help us triangulate better on what the EBITDA margin is going to look like?

[Linda Baddour:]

On your EBITDA adjusted margin, you are right on point. It’s somewhere between 15% and 16% for the year. It’s close to the 15% for the year, but it moved, as you said. It begins - the Q1 is down, and then it builds all the way to 16% and almost 17% in the fourth quarter. So, that’s where - the best way to look at it. And below the line, we have got our - nothing unusual except for the fact the depreciation expense is much increased over last year. And so it’s closer to $40 million for the year.

[Tim Evans:]

And just on kind of the ramp on EBITDA margin to the year, the Q1, is that because of the dynamics that you just talked about with Dave, or is there really some seasonality in the business? I know we saw this same phenomenon last year.

[Linda Baddour:]

It’s primarily related to the seasonality. We have got these two enormous meetings that we do which we think are extremely valuable to the business. We do a corporate-wide meeting in January that we combine with a sales meeting, and then we also have an R&D summit where we invite all of our clients to. But they both pay off dividends throughout the years, so it’s very, very important to us. And then, of course, you’ve got your PTO accruals that kick in, your payroll taxes, and we are at 89% payroll expense at our company. So, any time you have a big movement in that in the beginning, it affects your profitability. And then, finally, we are actually, as Colin mentioned, we still have to hire up in certain areas of the business, and then in other areas, we may have - to a lesser extent, we are evaluating maybe looking at slowing down the hiring. But, again, the profitability in Q1 is primarily - and also with our Data Solutions segment, there is a very slow quarter for that particular business unit.

[Tim Evans:]

Last question, real quick on EBITDA margin. At some point, I think you were saying maybe we would get some color on the Data Solutions EBITDA versus the core CRO EBITDA. Have you decided to basically just stick with the consolidate EBITDA going forward, or were you going to get some segment breakout at some point?

[Linda Baddour:]

No, I don’t recall saying that we would ever get new segment breakout of our…

[Colin Shannon:]

I think, Tim, all we did see is that for the first year, you would see some information when we publish and about we don’t intend to short time to EBITDA because we are consolidating everything. And we are saying that it’s going to be very much integrated with the way we run our business. And obviously, just for the reporting requirements for the first year, there will be a breakout. And I’ll give you some idea, but there’ll be nothing else going forward.

[Mike Bonello:]

And, Tim, you’ll see when we file our 10-K that we’ll have segment disclosures broken down to gross margin for both of those separate segments.

[Operator:]

Our next question comes from Eric Coldwell of Baird. Your line is now open.

[Eric Coldwell:]

On Symphony, I think we have addressed this in different ways, but I’ll be more direct. They did about $72 million in the quarter. You had guided to $60 million at the midpoint, so obviously pretty massive upside. My question is how sustainable is that in 2018? Should we model growth off this space for the fourth quarter of 2018 or maybe step up our quarters throughout the year? Honestly, I am just not sure what can we make of that given that, it’s not such [ph] a big quarter, but they also had a pretty massive earn-out they were shooting for. So, I am just trying to figure out how sustainable that is on a full-year basis. Thanks.

[Colin Shannon:]

Eric, this is a very seasonal business. The best months are the last month of every quarter, and the best quarter is the fourth quarter of the year. Obviously, we are very pleased at their outperformance. How sustainable is it. Well, you can take fourth quarter and multiply by it four, that’s for sure. It ramps up during the year, and we try to gauge to that. It was very seasonal. Our clients typically will be buying at most of the data towards the end of a year. And so you’re not going to see that fourth quarter outperformance all the time. Obviously, this is our first year of operating with them and you know we have got a reasonably good budget for going forward, but it should ramp up pretty steadily throughout the year and hopefully we can see the same impact in Q4 next year, but obviously we are excited to see the prospect of that. And we are working through integration plans, we are going to see how we can help them even accelerate over time. 2018, as we said, was always a year of - I saw a turnaround now, we saw a lot - maybe more tentative and before we actually get the full synergies the following year.

[Eric Coldwell:]

And Colin, can you give us any additional detail on how you plan to integrate the business? Maybe what the steps are over the next four quarters as we think about you bringing this more closely aligned to your clinical operations?

[Colin Shannon:]

Well, step one was as of January 1, we took over running the financials. By the end of Q1, we do revenue recognitions all. We got all pieces have taken over January 1. The revenue pieces just a little bit slower as we are rebuilding our models in the PRA’s traditional models. Then we are just working with a number of different groups as we look through for opportunities. I mean this was never a synergistic cost-cutting savings. This was always about synergies by creating new opportunities. And we can see that we can leverage a lot of our data analysts to help produce more consultancy and pace of revenue with big pharma and even biotech. We were looking to see how we can utilize our data better over streamlining some of our data costs, we’ll be utilizing a lot of their capability to actually save the whole company to make extra cost. So during the year, we’ll be looking at these very stages. Obviously, I don’t want to interfere with that earn-out which is why we are going to be taking it a little bit slowly during the year and doing it in a much more deliberate fashion. We have capacity to accelerate that, we will, but we’ll be very cautious with it, and that’s why we are just up now that we want it complete by the end of the year but obviously just treading slowly in that one.

[Operator:]

Our next question comes from Michael Baker of Raymond James. Your line is now open.

[Michael Baker:]

As a follow-up to the last conversation, I was just wondering at this point if you’ve identified specific customer deliverables from uniting Symphony with the core CRO business?

[Colin Shannon:]

There have been, yes, because we are able to leverage our book of business, and some of our clients are going to be switching over to getting data from Symphony. So, we are excited with that. And we have not been actively going out and selling that yet, but it’s something that is part of our integration plan how we do our approach. So, yes, we are very pleased that we have been probed by some of our clients to say, well, since we are - got closer relationship with you, we want to start using Symphony’s data. But other than that, we have not really, as I’ve said, pressed the marketing on it yet.

[Michael Baker:]

And then in your prepared remarks, you kind of indicated that you’ve expanded some of your service offerings. Can you give us some color on what’s occurred or happened on that front?

[Colin Shannon:]

Well, obviously, with the data, we are offering a wider service. It helps us move into more real-world evidence and health economics, and those becomes leased out type of models. There’s other capabilities that we have added like when we acquired Parallel 6, which has given us mobile access to patients and a platform to collect data. So, we are obviously offering that expansion, and it gives us a complete end-to-end solution for our clients. And so, we’d be working with that. So, yeah, overall, we feel pretty good about our new service offering using and embracing our technologies.

[Operator:]

Our next question comes from John Kreger of William Blair. Your line is now open.

[Courtney Owens:]

This is Courtney Owens. I am on for John Kreger. So, our first question, if you can kind of just speak to kind of what are your goals for leverage kind of by the end of 2018? That’ll be great. Thanks.

[Colin Shannon:]

We are expecting to make - obviously, we have mandatory payments that we have to make, but we are hoping to make somewhere in the range of - somewhere between $225 million and $250 million worth of debt payments during the year.

[Courtney Owens:]

And then just kind of jumping back over to kind of hiring. So, have you seen any pick-up in kind of wage inflation or anything like that or any kind of different trends that you’ve kind of seen over the past like 12 months or so? Thanks.

[Colin Shannon:]

Nothing that we felt was excessive. There’re obviously some countries that we have to watch and be very careful where there’s high inflation, particularly in Latin America where, obviously, you’re seeing that you get 25%, 30% increase in salaries, which we have got to adjust. So, other than not, which we model and we obviously would for all of the inflation indices for all of the 80 countries we work in and we monitor that. Our goal is to make sure that we retain our staffs. We have got to watch every country’s inflation rate and take appropriate actions. And we have not saw anything that has been a significant change. In fact, we have been quite pleasantly surprised that the wage inflation is not as high as it has been in the past.

[Operator:]

Our next question comes from Jack Meehan of Barclays. Your line is now open.

[Jack Meehan:]

So, I want to follow-up on Symphony, now that you’ve had it in house for six months, I was wondering if you could weigh in on just some updated thoughts on how you intended to grow this segment and your level of desire to continue adding through M&A to this business?

[Colin Shannon:]

We are very excited as you can imagine there, it would be acquisition. We are only just getting to the point of looking at how we are going to grow and we have got lots of plans, we want to go internationally, we want to increase our service offerings and we are just starting the integration plan because, obviously, at the word of mouth, we got to allow them to continue to manage the business without distracting them. But they’re excited to actually start the integration planning goes well. So, it seems a natural time through the Q1, we are through the start to the year’s planning and I know we are looking forward to bringing and combining the talents of both of the organizations and streamlining and producing something more effective and a better offering to our clients. So, we are very pleased with the way it’s going and if there’s opportunities to add, we’ll certainly be looking at it.

[Jack Meehan:]

And just on the new business front in the quarter. Were there any trends you noticed in terms of either full service versus FSP and just any qualitative commentary would be great.

[Colin Shannon:]

Typically, when we look at our book of business - our RFP volumes, Q1 is normally a little bit lower than the rest of the year. It picks up as we go through. So, compared with last year, it’s so very comparable. And so, we are seeing nothing there that is different. Most of the RFP volume we are seeing is in the product registration traditional model. We are seeing good progress in sales for our early development services. And we are seeing - we have always got a couple of opportunities that are slow bumps in our strategic solutions. They happen over a period of time and that is quite a long consultative sale process. But there’s always a couple of nice interesting opportunities. But across the board, we are seeing very much similar to what we have been seeing in the last couple of years, actually.

[Operator:]

Our next question comes from Derik de Bruin of Bank of America. Your line is now open.

[Unidentified Analyst:]

This is Swann [ph] for Derik. Would you be willing to provide revenue guidance under the old revenue standard for 2018 and 1Q 2018?

[Colin Shannon:]

We will be providing that Swann. We are required because we are adopting on a modified prospective basis to include that disclosure in our financial statements. So, you will be able to see that.

[Unidentified Analyst:]

So, you’ll be providing that in the filing?

[Colin Shannon:]

Yes, we’ll be including that in our disclosures, in our 10-Q and our 10-K. Not the one we are filing today, but in our future filings.

[Unidentified Analyst:]

And I guess a different way of expressing this question is, would you give us details on perhaps the magnitude or seasonality or cadence of reimbursable expenses throughout the year? How should we think about those?

[Linda Baddour:]

If you listen back to my remarks from today, you’ll see that my guidance that I provided did exclude the impact of ASC 606. Were you on the call earlier? Because I did provide constant currency organic growth of 12% to 14% excluding the impact of ASC 606 for Q1. And so, I gave you the growth. Obviously, you should be able to calculate that from our results from last year. And then that was for just the Q1 guidance. Yes. It’s 10% to 12% for the full year. So, that was also excluding ASC 606. You should all kind of be able to calculate that.

[Unidentified Analyst:]

Thanks for the clarification. And how should we think about…

[Linda Baddour:]

And just to reiterate, there is a requirement that during 2018, all companies provide that analysis, so that you can be able to tell what your revenue would have been under the old method.

[Unidentified Analyst:]

And how should we think about the net interest expense for 2018 given that you’ve paid down a little bit of debt and also refinanced some aspect of it?

[Colin Shannon:]

I would think that it should be roughly between $45 million and $50 million in total.

[Operator:]

Our next question comes from Erin Wright of Credit Suisse. Your line is now open.

[Hong Tran:]

This is actually Hong on for Erin. Thanks for taking our question. Just a quick one. Can you talk about sort of your capital deployment priorities heading into 2018, whether that be sort of in the way of further IT investments, tuck-in acquisitions, or in addition to some deleveraging that you mentioned earlier?

[Colin Shannon:]

No, there’s - obviously, we just continued our investment in IT. We are at a point where we want to see some implementation of some systems in the middle of this year. As you know, we had to delay some of the impact of these systems because of our growth, and we had to slow things down a little bit. But other than IT and like new office equipment and furniture and new offices, that’s the bulk of our capital expenditures that we have got earmarked. Regarding M&A, we are obviously always looking to initiate it into our business and prove our service offerings where we can or where we can see potential to utilize some of the tools that we have got internally and should deliver a better offering. We have got a couple of interesting ideas, but nothing of massive scale. But there’s a few things that are exciting to it that maybe come to fruition. But starting off at the beginning of the year, it’s hard to see whether that will happen or not. If nothing happens, we’ll just continue to be down there as Mike mentioned.

[Hong Tran:]

And then just a quick follow-up for Linda. Did you by chance, disclose what you expect FX impact will be on the year? Thanks.

[Linda Baddour:]

No, we did not. We gave you the rates that we are assuming, but we did not provide them. I am sorry, $0.08 to $0.10.

[Colin Shannon:]

$0.08 to $0.10 of unfavorable foreign exchange impact, Linda mentioned.

[Operator:]

[Operator Instructions] Our next question comes from Donald Hooker of KeyBanc. Your line is now open.

[Donald Hooker:]

So, a lot of questions have been asked. So, just I was interested and I think one of you mentioned about increasing investments in Japan and China and I was particularly interested in China, kind of can you give us an update where PRA is in China in terms of how established you are there. I mean, do you have relationships there with domestic drug companies and how do you see growth there kind of playing, obviously, I know there’s a lot going on there. So, curious of your view and PRA’s positioning? Thanks.

[Colin Shannon:]

Well, as you know we had a great joint venture with WuXi before and then they changed direction and they went private. Our clients have been insisting that they want for us to have our own operation in China. So, we have been building that out. We do have a few hundred people there. But we would like to have a stronger infrastructure. And so, we just added a new leader for our Chinese operations and that’s going to assist in the growth of our China region. We are still looking if we can find the right opportunity to - we’d acquire something as long as that met our cultural meets - needs, et cetera. But we are - there’s not a lot there that we would identify has been an opportunity. However, if that arise is something out to look at. Otherwise we’ll just continue to invest and build organically. And then in Japan as you know we have taken over the - was able to get a JV with Takeda. We have actually brought an additional experienced people with a CRO experience, so that will help transition, as we have touched that, working with other clients within Japan. We still use some other business partnerships there that we use within Japan to meet our current needs, and we see that happening for the foreseeable future, where we continue to sort of build out our own infrastructure. But that’s an anticipated investment that we intend to happen during 2018.

[Donald Hooker:]

What is the nature of the - last quick follow-up, just interested - the nature of sort of the competition in Mainland China domestically versus, obviously, in the international drug companies, you’re there with the other major CROs? But when you get into China, I mean, do you see a change in the competitive environment, anything notable? Just curious and thank you for your comment.

[Colin Shannon:]

We are really looking to build out - instead of then doing local work within China, we are more concentrating on working with large global clients needing China as part of the solution. And so, we have got to make sure that they meet the international capabilities and standards. It’s a different type of build, and we probably wouldn’t be able to compete on the lower-cost type of environment where - for the local type of work. We want everybody eventually speaking the English language and working in an English-language environment, which is always difficult when you’re such a big country. As you can imagine, it’s got lots of difficulties there. But we are excited with the prospect that we have got an opportunity to build out on our own way, and we have talked to a couple of companies that - out of some interest. But whether there’s something that we can get together where, but we don’t know. In the meantime, we have got a solution that we’ll continue to just pursue by organic growth.

[Operator:]

And we do have a follow-up question from David Windley of Jefferies. Your line is now open.

[David Windley:]

I wanted to come back to a question on mix and on that I am - I guess thinking about several different threads. The primary is FSP versus full service, and Colin, you kind of commented on that. I guess I am remembering that you talked about maybe a fairly large FSP renewal and wanted to understand if that was a fourth quarter event or a first quarter event and how much that might have influenced bookings in the fourth quarter. And then, also the dynamic of FSP being more popular among large pharma and full service more popular in the - of the smaller or mid-biotechs and the strong financing that has flowed to biotech. I mean, just trying to think about how all those issues are influencing the demand that you’re seeing and what you think will progress from here. Thanks.

[Colin Shannon:]

Dave, it was a fourth quarter event where we had a large client renewal. But as you know we only take 12 months of it, so nothing materially affects our bookings. And the swing factor in our bookings is really the product registration piece of our business. That’s where we are really getting out the strong RFP flow. And the strategic solutions, new opportunities are typically within account clients. And then, there’s that case of view that as I mentioned occur much more slow bond and that’s consulted to sale, that takes quite a while to materialize. Looking across the board though I don’t really see…

[Linda Baddour:]

Well, the growth in 2018 is primarily related to the full service growth. And we still have growth in our Strategic Solutions division, but the growth primarily is from there.

[Colin Shannon:]

I was looking to Linda to see what I could say on this.

[David Windley:]

So, my diligence suggests that a number of large pharma companies are in fact moving toward FSP. And so that could - within large pharma, could create a mix shift toward FSP. But then on the other hand, there’s more funding and more R&D spending growth from your small and mid-clients that are more inclined to drive full service, and so I was trying to figure out what the equilibrium was between those two kind of opposing trends. And it sounds like full services is perhaps winning or slightly stronger tailwind of those two. Is that fair?

[Colin Shannon:]

I would say that’s pretty fair. And I think that we just feel in a good position where we have got strong offerings in both elements and allows us to get the right mix for our individual client. So, we really work with them assess their needs, and if they need a hybrid approach, we can help them realign. So, there is no one size fits all or all eggs in one basket type of situation. We can actually flex it for them. And we can talk to them about what do they really want to achieve, and then with what kind of OpEx to get there.

[David Windley:]

And then last question. You clearly are continuing to post very strong bookings. It would seem that your competitive position is very good. I am wondering if you are seeing any changes in the competitive landscape in light of changes in competitors, go-to-market strategies, or if things still feel pretty much of the same?

[Colin Shannon:]

Difficult to see any trends at this point, Dave. Obviously, it’s something we watch. And I am not seeing anything that’s filtering through from the type of RFP volume or anything that’s a discernible trend. Our win rate is still pretty consistent, so I am not seeing any substantial change. So at the moment, I mean, we never underestimate our competition, but we are not seeing anything that’s…

[Linda Baddour:]

Threatening or no unusual pricing or anything like that.

[Operator:]

Thank you. And ladies and gentlemen, this does conclude our question-and-answer session. I would now like to turn the call back over to Colin Shannon, President and CEO, 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 rest of your day. Thank you.

[Operator:]

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone, have a great day.