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Good morning, ladies and gentlemen, and welcome to the Syneos Health First Quarter 2018 Earnings Conference Call. [Operator Instructions]
I would now like to hand the conference over to Mr. Ronnie Speight, Vice President of Investor Relations. Please go ahead, sir.
Good morning, everyone. With me on the call today are Alistair Macdonald, our Chief Executive Officer; Jason Meggs, our Chief Financial Officer; and Michelle Keefe, our President of Commercial Solutions.
In addition to the press release, a slide presentation corresponding to our prepared remarks is available on our website at www.investor.syneoshealth.com. Remarks that we make about future expectations, plans and prospects for the company, constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995 and we disclaim any obligation to update them.
Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors. Including the impact of the changes to the revenue recognition account standard. These factors are discussed in the Risk Factors section of our Form 10-K for the year ended December 31, 2017, and our other SEC filings. In addition, any forward-looking statements represent our views as of today and should not be relied upon as representing our views as of any subsequent date.
During this call, we’ll discuss certain non-GAAP financial measures, which exclude the effects of events and transactions we consider to be outside of our core operations. These non-GAAP measures should be considered as a supplement to, and not a replacement for, measures prepared in accordance with GAAP. We believe that providing investors with these non-GAAP measures and the combined company presentation helps them gain a more complete understanding of our financial results because management uses such measures for operating, budgeting and financial planning, decision-making and reporting. For a reconciliation of the non-GAAP financial measures with the most directly comparable GAAP measures, please refer to the Appendix of our presentation.
As we will be keeping today’s call to one hour, we request that participants limit questions to one each with an opportunity to ask one follow-up question.
I would now like to turn the call over to Alistair Macdonald. Alistair?
Thank you, Ronnie. Good morning, and thank you for joining our first quarter 2018 earnings call. Before we begin, I’d like to start by congratulating Jason Meggs as the now permanent CFO of Syneos Health. I know many of you have already had a chance to meet and speak with Jason over the last few months. In Jason, we have someone with two decades of financial expertise and a deep understanding of both our clinical and commercial businesses.
Jason and I have worked together closely for several years in various positions, and I look forward to continuing that relationship. He will spearhead value creation and SG&A initiatives while also driving financial engagement at all levels of the organization. So again, congratulations to Jason.
Now turning to our performance. Our first quarter results were within our guidance range, but below the midpoint. Despite some temporary headwinds impacting us in the first quarter, our momentum continues to build. The development of the Syneos Health brand and our unique Biopharma Acceleration Model is progressing well, creating opportunities with existing and new customers.
Today, I will focus on our continued progress during the first quarter and how we are continuing to strengthen the business for the long-term. A few key highlights: first, despite the commercial headwinds we outlined for 2018 in previous calls, Commercial revenue for the first quarter was essentially flat on a sequential basis compared to the fourth quarter. We also had a strong first quarter net awards of $322 million for a book-to-bill of 1.4 times. Combined with the strength in the overall market and our pipeline in both Commercial and our Integrated Solutions Group, these net awards position us well to begin steadily growing this business once again. Together with Clinical, our consolidated net awards were $872 million, resulting in a solid book-to-bill of 1.15 times.
Second, we have seen a good start to second quarter awards in our Clinical business. Our pipeline of opportunities has continued to grow, particularly since late in the first quarter. Although our first quarter results in Clinical were below the midpoint of our guidance range, this was driven by lower-than-anticipated revenue from customer contract modifications. That being said, we expect to book the majority of these modifications in the second and third quarters.
Third, we have delivered against some of our key goals to further manage our debt structure and related costs while taking a balanced approach to capital deployment. This progress includes our recently announced term loan re-pricing amendment. We have also repaid additional debt and repurchased $37.5 million of shares under our previously announced share repurchase program.
In the Commercial segment, we continue to see strength in the macro environment, along with increased market activity. Proposal volume and new business wins continue to be strong and our selling solutions pipeline remains ahead of last year’s levels. I believe we are well positioned to capitalize on these opportunities given our scale and unmatched breadth of capabilities.
As we highlighted last quarter, we have been working toward providing additional leading indicators of performance in our Commercial business. Accordingly, this quarter, we are providing net awards and book-to-bill for the total Commercial Solutions segment as well as backlog and related coverage for our selling solutions business. Selling solutions represents approximately 60% of our Commercial segment revenues and typically, has the longest duration contracts within our Commercial solutions business. Therefore, selling solutions is the most critical driver of backlog across the entire Commercial segment.
Now, moving to our Clinical Solutions segment. First quarter net awards were $550 million under ASC 605, representing growth of 6.2% and resulting in a net book-to-bill ratio of 1.04 times for the quarter, while maintaining a ratio of 1.21 times on a trailing 12-month basis. This award pattern is not unusual, as the first quarter is often seasonally lower contest compared to other quarters.
I’m also pleased with our RFP flow and the growth in our pipeline of opportunities, particularly since late in the first quarter. This pipeline has reached its highest level since the closing of our merger. Our level of engagement in discussions with larger pharma companies regarding preferred provider arrangements and other strategic opportunities also remains high. Although the sales cycle is longer for these arrangements, this increased activity validates the scale, breadth and capability of Syneos Health.
Next, I’d like to provide updates on some of the strategic investments we highlighted last quarter. We have continued to strengthen our Commercial solutions leadership in order to faster increased cross-selling, expanding our business development team and adding a Chief Strategy Officer to drive stronger engagement across media, digital and commercial insights. Additionally, we have implemented a dedicated commercial project management office to deploy new Trusted Process module to support Commercial and ISG delivery excellence.
We are also expanding our Integrated Solutions Group to capitalize on the full potential of our Biopharma Acceleration Model. This group identifies and capitalizes on any cross-selling opportunities for clinical and commercial services, particularly in the small to midsized market. Specifically, we are expanding the client engagement team and adding product development strategists to ensure we are optimizing value for our customers throughout the lifecycle of their assets. We are already beginning to see the development of cross-selling opportunities to multiple services outside of ISG throughout our other business development teams, regardless of their primary area of focus.
In terms of our strategic road map, we also finalized our collective data inventory, evaluating each legacy organization’s data assets and are refining our strategy to optimize how data and digitization fuel our Biopharma Acceleration Model. Consistent with our overall strategy to be nimble and capital efficient, we will combine our robust data with our advanced analytics and partner with the most relevant data and technology partners to design exactly what our customers need. Our goal is to activate enriched data that when coupled with our deep behavioral insights, commercial know-how and data science, deliver the right patient-oriented solution to optimize relevancy, efficiency and speed.
We also continue to aggressively drive our integration activities, making significant progress towards our strategic objectives by applying the project management discipline of the Trusted Process. Our transition management office is managing all of our key milestones in systems and process consolidation, resource management and facilities optimization. We remain on track to achieve expanded and accelerated synergy totals we outlined last quarter of $65 million to $70 million in 2018, with approximately $15 million realized in this quarter alone. This is a great start towards our total commitment of $125 million annually by 2020.
Beyond the ability to attract top talent, we are also very pleased with the integration process from an employee retention perspective. Both our voluntary clinical and total company employee attrition rates continued to trend favorably relative to recent quarterly averages. We believe our focus on employee empowerment, a collaborative environment and an inclusive approach to developing the Syneos Health culture will continue to be key in attracting and retaining talent across the organization.
In closing, let me express my sincere gratitude to my 21,000 Syneos Health colleagues worldwide who make all of this progress possible, while remaining focused on delivering value to our customers.
Let me turn it over to Jason for more comments on our financial performance. Jason?
Thank you, Alistair, and good morning everyone. Let me remind you that our results are on an adjusted or non-GAAP basis as if the merger closed at the beginning of the earliest period presented as defined on Slide 2.
On January 1, 2018, we adopted the new FASB revenue standard ASC 606 on a modified retrospective basis. Since prior periods are not restated, we also provide current period results under the previous revenue standard, ASC 605 in order to facilitate the period-to-period comparisons in our commentary. For these comparisons, we will be discussing adjusted service revenue, excluding reimbursable expenses consistent with historical period reporting and our existing 2018 guidance.
For reference, on Slide 3, we have included a comparison of the key differences between these revenue standards, along with a reminder of the expected impact of adoption. After discussion of our first quarter results, I will review our guidance under the new ASC 606 guidelines.
But first, it’s important to point out that our first quarter revenue and adjusted EBITDA were within our ASC 605 guidance range, but below the midpoint, solely due to two temporary issues unrelated to the growth in our core business.
First, our Clinical segment experienced less favorable revenue mix due to lower-than-anticipated customer contract modifications, which negatively impacted our revenue and adjusted EBITDA by approximately $7 million. However, we expect to book revenue related to these modifications during the second and third quarters.
Second, as Alistair mentioned, the current environment as well as our pipeline and strong first quarter awards indicate that our Commercial segment is well positioned for growth. However, adjusted EBITDA for Commercial was negatively impacted by $3.7 million due to a customer bankruptcy, which prevented us from recognizing revenue and require related expense accrual.
At this time, we expect to recapture at least half of this impact in the second quarter once the bankruptcy court issues their final ruling. We believe this bankruptcy is a company-specific situation, and we have not seen any leading indicators that point to an elevated level of bankruptcies going forward.
Now, on to reviewing our first quarter results. On Slide 4, we show our results under both ASC 605 and ASC 606, but I’ll begin by discussing results under ASC 605. Our adjusted service revenue for the first quarter of 2018 was $761.5 million, down 3% compared to $785.9 million for the first quarter of 2017.
This includes a foreign exchange benefit of $10.9 million. The decline in adjusted service revenue was driven by 14% decline in our commercial segment, which fell from $266.8 million in 2017 to $230.6 million in 2018. This is primarily due to the impact of cancellations and customer downsizing during 2017 along with lower new business wins in 2017.
As I highlighted earlier, during the first quarter, we also experienced a customer bankruptcy, which reduced commercial revenue by approximately $1.5 million. In addition, we experienced less favorable Commercial revenue mix in the first quarter. Despite the 2017 headwinds, our Commercial revenue was relatively flat sequentially compared to the fourth quarter. Regarding our newly reported Commercial net awards and book-to-bill, I would highlight that it will ultimately be best to look at these awards on a trailing 12-month basis due to their seasonal profile.
This is because communications, which represents approximately 30% of our commercial segment, typically sees a significant portion of annual awards in the first half of the year due to annual budget allocations and renewals. In addition, awards in the selling solutions business can vary significantly on a quarter-to-quarter basis. Therefore, as we accumulate quarterly awards data, we will begin reporting these metrics on a trailing 12-month basis only starting in 2019.
Our Clinical segment saw a 2.3% adjusted service revenue growth, up from $519.1 million in the first quarter of 2017 to $530.9 million in the first quarter of 2018. As I said earlier, clinical adjusted service revenue was below the midpoint of our guidance, solely due to timing of revenue from customer contract modifications, which was approximately $7 million, lower than anticipated.
Adjusted EBITDA for the first quarter decreased from $146.8 million in 2017 to $132.7 million in 2018 with the adjusted associated margin declining from 18.7% to 17.4%. However, when normalized for the $8.6 million negative impact from foreign exchange and $4.9 million of non-recurring benefits in the first quarter of 2017, which were primarily in our Commercial segment.
Adjusted EBITDA and related margin were relatively flat. The benefits of revenue growth in our Clinical segment, realized synergies and lower SG&A expenses were offset by decline in volume in Commercial as well as the less favorable revenue mix in Clinical as previously discussed. Further, the EBITDA margins in our Commercial segment were negatively impacted by the aforementioned customer bankruptcy as well as unfavorable revenue mix in our selling solutions business.
For the first quarter of 2018, adjusted EBITDA includes the realization of $15 million in synergies, net of our strategic reinvestments to drive growth. Adjusted net income increased to $60.7 million for the first quarter of 2018 from $55.3 million for the first quarter of 2017. Adjusted net income increased despite the decline in adjusted EBITDA primarily due to lower interest expense stemming from the partial redemption of the inVentiv senior unsecured notes as part of our 2017 merger financing.
Adjusted diluted EPS grew by 9.4% from $0.53 in the first quarter of 2017 to $0.58 in the first quarter of 2018. This was above the midpoint of our guidance driven primarily by the reduction of our non-GAAP tax rate from 31% to 27.5%. For completeness, I do want to summarize our results under the new ASC 606 standard, which are also included on Slides 4 and 5.
Adjusted total revenue for the first quarter, which includes reimbursable expenses, was $1.061 billion. This is comprised of adjusted total revenue of $790.2 million for Clinical and $270.8 million for Commercial. Total adjusted EBITDA was $128.7 million, approximately 3% lower than ASC 605. Adjusted net income was $57.8 million for the first quarter under ASC 606 resulting in an adjusted EPS of $0.55.
Moving to Slide 6, we have provided additional backlog metrics for Clinical Solutions and now also include the Selling Solutions component of our Commercial Solutions segment. You can see that our clinical backlog coverage for the full year 2018 is at 88. 9% under ASC 605. In an effort to improve visibility into our Commercial segment, we are also providing backlog and backlog coverage for the Selling Solutions component, which represents approximately 60% of the revenue from this segment.
Selling Solutions also has the longest duration contracts within Commercial, and is therefore the initial component for which we are reporting backlog. The backlog coverage for Selling Solutions is 87.2% under ASC 605. Slide 7 provides key metrics related to our cash flow and leverage position. During the first quarter of 2018, our operations used $47 million of cash on an as-reported basis.
Our combined net DSO for the quarter was 48 days under ASC 605. The lower cash flow from operations for the first quarter and resulting increase in DSO were largely driven by a temporary delay in billing and collections associated with our integration activities, primarily consolidation of our financial and billing platforms and the offshoring of certain functions as well as the transition to ASC 606.
We anticipated lower cash flow in the first half of the year in our forecast and expect our cash flow from operations to return to normal levels over the course of the second and third quarters. Once normalized, we expect our DSO will continue to vary quarter-to-quarter due to normal fluctuation in collections and billings and to range from the low to mid-40s over time. We ended the quarter with $186.7 million of unrestricted cash and total debt outstanding of $2.95 billion.
Turning to Slide 8, I want to provide you with an update on a variety of initiatives we have undertaken as a part of our continued focus on debt management and a balanced approach to capital deployment. I’m pleased to report that we have recently amended the pricing structure of our credit facilities, whereby we lowered the variable rate on both of our term loans by 25 basis points.
This will reduce annualized interest expense by approximately $6.3 million based on current debt levels. We expect this to mitigate the impact of expected increases in LIBOR during the remainder of 2018, which have begun to outpace our initial assumptions. We are continuing to work proactively on strategies to manage our capital structure and interest costs.
In addition, during the first quarter, we repaid $31.3 million of our term loans, bringing our total debt reduction since the closing of our merger to $83.3 million. We intend to continue utilizing a portion of our available cash flow from operations to reduce our overall leverage in order to achieve our target of approximately three times by the end of 2019.
We also repurchased $37.5 million of our outstanding shares during the first quarter under the program we announced last quarter. $212.5 million remains authorized for discretionary repurchases through the end of 2019. We remain committed to a balanced approach to capital deployment, including both debt repayment and share repurchases as determined by available cash flow and market conditions. We also continue to review potential tuck-in acquisitions that we believe will enhance our ability to execute our long-term strategy and drive shareholder value.
Lastly, we have continued to work with our advisers to evaluate the latest interpreted guidance related to the impact of the Tax Cuts and Jobs Act. Based upon this ongoing analysis and continued refinement of their related estimates, we now expect our non-GAAP effective tax rate for 2018 to be approximately 27% to 28% or approximately 400 basis points lower than our previous estimate. We also now believe that our cash tax rate for 2018 will be approximately 10%.
Turning now to our guidance as outlined on Slide 9, we’ve taken into account a number of factors, including our existing backlog, current sales pipeline, trends and cancellations and delays and our estimated merger synergies net of reinvestments. Further, our guidance is based on current foreign currency exchange rates, expected interest rates following our re-pricing transaction and our updated tax rate expectations.
Our guidance is also based upon our estimated diluted share count, excluding any share repurchases subsequent to the first quarter. We have provided an updated view of our full year 2018 guidance and growth rates under ASC 605, solely to facilitate comparison to the guidance we originally issued on February 28. As you can see, we are maintaining our revenue and adjusted EBITDA ranges and raising the resulting adjusted EPS guidance due to the improvement in our expected tax rate.
Slide 9 also includes our new guidance under ASC 606. Under this new standard, we expect our adjusted total revenue for 2018, which includes reimbursable expenses, to range from $4.4 billion to $4.55 billion. This includes revenue for clinical Solutions ranging from $3.25 billion to $3.35 billion and revenue for Commercial Solutions ranging from $1.15 billion to $1.2 billion. This guidance is consistent with our previously communicated expectations of 1% to 2% negative impact on total revenue from the adoption of ASC 606. Under ASC 606, we expect our adjusted EBITDA to range from $580 million to $620 million for the full year 2018.
Lastly, for the full year of 2018, we expect adjusted EPS to range from $2.52 to $2.80. Under ASC 606, reimbursable out-of-pocket expenses are not only included in revenue, but also impact the calculation of revenue on a percentage of completion basis. These expenses can fluctuate from period-to-period based on the timing of program initiations or closeouts, and the mix of program complexity and do not necessarily change in direct correlation to fee revenue.
I want to provide some directional color on the second quarter. We expect to see modest sequential growth in revenue, accompanied by high single-digit growth in adjusted EBITDA. We based our updated adjusted EPS guidance for the full year on, among other things, an expectation that interest expense will be approximately $128 million and adjusted EBITDA margins of approximately 13% to 14%. Remember that EBITDA margins are lower under ASC 606, primarily due to the inclusion of reimbursable expenses in our revenue.
Our guidance also considers the impact of our expected merger synergies of $65 million to $70 million, net of the related strategic reinvestments. We expect our fully diluted weighted average share count for 2018 to be approximately 105.5 million shares, which will vary by quarter.
Now, I would like to turn it back to over to Alistair for some closing comments before we take your questions. Alistair?
Thank you, Jason. As I have expressed, I continue to be incredibly excited by the opportunities ahead for Syneos Health and our ability to deliver on our goals for the remainder of the year, reflected in the strength of our pipeline, the most robust since the merger and our success in creating new opportunities for customers, who have recognized the differentiated value proposition of our platform. We remain keenly focused on realizing our integration milestones and synergies.
As we continue to build a stronger Syneos Health, we take pride in our collaborative culture and our commitment to our talented employees, who I want to once again thank for their continued excellence. We are pleased with a pace of our progress and continue to be confident we are positioning Syneos Health well for the long-term.
This completes our prepared remarks, and we would be happy to answer any questions. Operator?
Thank you. [Operator Instructions] Our first question comes from the line of Robert Jones with Goldman Sachs. Your line is now open.
Great. Thanks for the questions. And Jason, congratulations on the permanent appointment. Guys, just looking at the clinical bookings, I know you said they’re seasonally lower in 1Q. I think I get that, but it does seem like they were a little bit later relative to the results of many of your peers on the clinical side. Any reason why maybe your cadence would be different than others? And then I’m just curious, along those same lines, are you seeing anymore competition than you did historically in certain cohorts? And I’m thinking maybe specifically in emerging biotech.
Hi, Bob. Good morning. Yeah, a theme that’s rolling through the numbers a little bit for us here is, we had a lower yield, I guess, in Q1 of contract modifications coming through, particularly across a few – across two customers. With that executed, it would have made a difference obviously to overall bookings as well as that revenue and EBITDA cascade that we talked about. I think in terms of competition, it is and has always been a very competitive landscape.
I think we are seeing other CROs take the small to mid sector a lot more seriously now. It is a very competitive space. It is an area, where we can unlock tremendous value with your model, but we’ve always run into those folks in that space anyway. You never get kind of a free shot on goal with when you get one-on-one with the customer very often in that sector. We do get some noncompete awards in there, but it has always been a very competitive space. But I think the large CROs are coming down into that space and as we said, the pipe grew through Q1. We saw a real uptick in that kind of late in the quarter and then into Q2, it’s been very strong from all sectors. So we’re pretty pleased with the how that’s shaping up right now.
That’s helpful. And I guess just one quick follow-up on the comments you made about some of the clinical revenue softness coming from contract modifications. Could you share just a little bit more on what exactly drove those modifications? Is this kind of normal course of business or something unique? And then if I heard you correctly, do you expect to book those in 2Q and 3Q? And when would we expect to see you bill those bookings?
Yeah. We expect to book them Q2, Q3. I mean, it is normal course of business, and we worked on one of the contract modifications pretty much for the majority of Q1, and continue to work on that into Q2, very large, good customer of ours, very large and significant contract modification where they’re struggling I think a little bit to actually identify the scope for the future. We got very close to begin to execute, and they come back, said look we need to change that again and there’s no point executing one scope and then immediately have the team rush after a different scope, so that kind of pushed through the end of the quarter. That would have been doing all well and good, but you don’t want to burn a relationship for the sake of jamming somebody into the end of a quarter when you’re going to pick that work up in Q2, Q3 anyway. And the billings of those are – there are some retrospective as you see from the number the Jason talked about, but also there’s revenue and backlog for the future in that in a significant way as well.
Great. Thank you so much.
Thanks, Bob.
Thank you. Our next question comes from the line of John Kreger of William Blair. Your line is now open. Again, John Kreger, your line is now open.
Maybe lost or maybe it’s unmute.
Please check your mute button. All right. Our next question comes from the line of Dave Windley of Jefferies. Your line is now open.
See if line works. Can you guys hear me?
Hi, Dave.
Hi, Dave.
Hi. Good morning. So, I want to kind of stick on the same. On the contract modifications, I think, Alistair, you’ve answered to Bob, gets a some of the question I want to ask, but it’s around kind of reliance on contract modifications, and how much of that is perspective. How much would you normally expect in your guidance? I guess – to hear you describe that the number was light, because you didn’t get the contract modifications you hope to get sounds a little aggressive I guess, but as you’ve described to Bob, it sounds like those were ongoing activities that you kind of knew about and were tangible as opposed to just open-endedly expecting some amount of them. I want to get clarification on that.
There’s always a part of contract modifications baked into the business. As you know, you design a clinical trial, you get after it, the environment changes or the inclusion and exclusion are too tight or – and those contract mods come through or work gets expanded or a project gets shortened up. So it’s always a natural piece of our business. It’s always been there and will always be there, and you expect a certain percentage of your total awards to come in a quarter from that contract modification room. And I think we have a very robust process, a very good mechanism to deal with that through finance operations and the BD team.
On this occasion, I think we didn’t get what we normally expect. I don’t think we give out that information what percentages we would expect for that. But we didn’t get what we would expect and pushing it too hard where the customer would have burned a piece of that relationship, we don’t want to do.
So, we’ll pick that up in Q2, Q3, the revenue will still burn in the same profile effectively. We’ll have some retrospective to pick up obviously as well when that comes through, but you still got the same revenue across the same profile. It’s that quarterly cadence that it affects, nothing more than that. It doesn’t change the pattern that the revenues don’t change, how it filters into guidance. Jason, do you want to add to that?
Yeah. I would just add that this specific circumstance that Alistair just referred to, just resulted in the overall level that we look at and track. It being down and, therefore, that’s – that was the impact to the performance, and we will see that come back through in quarter two. It’s likely, but it could be quarter three and then we’re back to where we would be expect to be year-to-date.
And the numbers on that, if you had gotten that scope modification signed, it would have added $7 million to the first quarter, but then because I understand this to be like you said, the revenue profile of this would continue more dollars, but in a similar curve I guess, so the total dollar value of the modification is bigger than $7 million, correct? Can you give a number to that?
No, I don’t think so, because we want to wait for that to fill through into bookings, but it’s significantly higher than $7 million, I think.
Okay. And then to clarify, so obviously I’m asking that to get back at the kind of the clinical book-to-bill, and you’ve called out for Syneos that the first quarter has a slower cadence, but Syneos’ first quarter cadence has to Bob’s question been notably lower than peers. Like the seasonality in your bookings is not common in the industry that we’ve seen now these last couple of years. Is there something about perhaps sales force incentive structure or something like that, that causes a rush and a pull forward at the end of the year that is maybe even more than other companies would try to do and leaves you with kind of an air pocket in January and February when you come back? I mean 1.0 book-to-bill is not what anybody strives for in this business in any quarter of the year, and I just want to understand why you’re seeing that be so low?
I think that’s a fair comment. I mean we don’t strive for 1.0 at any time. but we’ve looked today, we’ve had it three times in five years, I think where we’ve had a lower book-to-bill in Q1. I don’t see any rhyme or reason to it in terms of incentive structure or packaging in the BD team. I mean we just saw a lower pipe coming out through December and January, and we have to rebuild that pipe, typically in Q1 and then execute on it to get to the numbers.
So we’ve looked at it for a few times. We don’t see any rhyme or reason for it. There is not – we don’t see that. I mean the execution in Q1 include but also some larger FSPs, which some of the bookings policy get pushed. So, 1.04 is – overall booked – overall award number under our current bookings policy. Bear in mind we push out anything that doesn’t start within six months. So, on the FSP side, we just take the first year. So I think people are – our book-to-bill, although lower than competitors, does include a sizable piece of FSP for the future and that bookings policy where we don’t book anything that’s going to start within Q – within six months of the award.
Got it. Okay. Thank you.
Thank you. Our next question comes from the line of Tycho Peterson of JPMorgan. Your line is now open.
Hey, thanks. Alistair, I’m going to shift over the Commercial. Can you maybe just talk on how much of that 1.4 of book-to-bill was driven by the 3-year multiwins – multiyear wins? And then, any comments on the pricing environment for Commercial and then EBITDA margins in Commercial were like there even beyond FX, I’m just wondering if you could talk a little bit more about the revenue mix issue with selling solutions?
Yeah. Thanks, Tycho. We’re very pleased with where we are shaping up in Commercial, let’s just start with that. We’ve added Michelle to the team. Michelle’s here and I’ll hand you off to Michelle for more insight and Jason on the EBITDA as well. We’ve added experienced leadership to that team. We have implemented an appropriate business development structure, and I think we saw a good result from that in Q1. Still early days, and we have the ISG group is also feeding work into Commercial, that’s up and running, started very well.
Now, I think we have to be careful, don’t get kind of too high on a 1.4 book-to-bill for Commercial. It will have seasonable – seasonal variation within that number. There will be swings in the selling solutions number. As Jason said in the prepared remarks, a lot of the communications awards happen in that first half.
So we expect there to be variability with that as we build up the experience on book-to-bills. throughout the remainder of 2018, we’re going to switch to trailing 12 maybe just to clear trend pattern on that business. But a part of the commitment we made to JPM and also in the first quarter, in the Q4 earnings call, to give you more insight, to give you more flavor of what we see in Commercial and how that’s development side. Michelle, you want to address?
Sure, a couple of things. So first, I want to thank the Commercial team for the phenomenal performance they had in Q1. One of the things I think that’s been a real benefit of us being Syneos Health is the collaboration between Clinical and Commercial in regards to a couple of things. First, the fact we are now able to talk about book-to-bill overall and specifically, our backlog policy for just selling solutions currently, really with the collaboration between the Clinical and Commercial team to really get us some good KPIs to measure the business.
I think that’s one of the things that I’m the most excited about the Commercial business is we now have a clear line of sight to what is going to take to achieve our financial target. So you can quickly identify where the opportunities are. You can quickly double down where you believe you can really drive results and where maybe things are going a little sideways, you can quickly course correct. And I think that’s been a real benefit of this new organization of us now having that policy, which is really helping us with our KPIs and helping us run the business much more in a focused way.
As we said, the communications business gets the majority of their annual awards in Q1, which is attributed to the high book-to-bill ratio, which is exciting the communications business is performing at a nice rate going into 2018. And as we’ve discussed before we believe that, we’ll return to sequential quarter-over-quarter growth in Q2 of 2018 and we’ll get to mid-to-high single digits through 2019 and beyond. So we really feel we have good visibility into what it’s going to take.
The second thing I would add is that our pipeline is stronger than it’s ever been, specifically overall, our pipeline’s stronger, but our selling solutions pipeline is stronger than it’s been year-over-year at the same timeframe. So that also was encouraging for us from a perspective of us achieving our financial targets for 2018. And I’ll turn it over to the new CFO to answer the question about financials. Jason?
Yes. Thanks, Michelle. So, hey, Tycho. So yeah, on the year-on-year EBITDA and we laid it out on Slide 5. We did have the bankruptcy that hit us in quarter one that prevented us from recognizing approximately $4 million of revenue and EBITDA, $1.5 million on the revenue side and then the difference on the expense side. So that was a headwind and then also coming out of 2016, when we had the large cancellations in the selling solutions business, as you sort of wrapped those up and reconciled them, et cetera, there are termination fees that you captured. So it’s a Q1 2017 benefit that we didn’t experience again in Q1 2018, so that also is a headwind of 230 basis points.
Okay, that’s helpful. And then a follow-up for Alistair on the data strategy. Can you just comment on what you have and what you’re seeking to obtain via partnership? I guess should we be expecting some sort of big data partnership?
So, our historic policy of kind of partnering with companies that are a bit more nimble, agile and focused on a specific sector than we are. We had a long relationship with metadata, we view sort of the technologies in and around that. as the data platform, we’ve never invested in our own kind of bill to technology, because we’re not very good at that. We’re good at execution. We prefer to use somebody else’s technology. We’re looking at the adherence data, the adherence patterns that we have, which help us drive that kind of focus within selling solutions that inVentiv always – the legacy inVentiv always used it for.
We finished the inventory of that and what we had on the INC side and how that all fits together, and how we can use it in our standard kind of used cases, searching for patients for clinical trials, and we’ve always done that. We’ve always had access to kind of the partners like [indiscernible] et cetera, and the information that they can bring.
What we’re looking at now is, how do we – what does the future look like for us in terms of digital and in a couple of ways, transformation as well as kind of optimization internally of processes. And we’ll be looking and are working with companies now and partnerships that give us access to things that we need to deliver. We don’t feel like we need to own all the data. The data is available through specialist data companies. We’ve been talking with organizations that provide, as they call it data as a service. You think about that as software as a service, what we want to do is, partner with people, give us the data that enables us to build a solution that’s the right solution for a challenge to one of our customers has, whether that’s Commercial or Clinical.
Like I said, I don’t think we need to own all that data. I think we can access that data from other sources and use the right data for the right solution at that time. So we’ll be working on that. I think you’ll see things coming out from us over the next – well, for the remainder of the year as we start putting those things together, but the first step to that was really to find out what we had and then go on from there.
Okay. Thank you.
Thank you. [Operator Instructions]. Our next question comes from the line of Eric Coldwell of Baird. Your line is now open.
Hey, thanks very much. And first off let me just say really great to have all this data, I think you guys are definitely pulling it together here and frankly, pretty happy with these results. So congrats on showing some traction. The second quarter guidance, if I heard you correctly, you said low single-digit revenue, high single-digit EBITDA. I just want to confirm, is that quarter-over-quarter or year-over-year? And did I get those numbers, right?
Hey, Eric, it’s Jason, appreciate those questions and comments. So modest revenue growth, so we didn’t quantify that and it is sequential and then the EBITDA, you have that correct.
Okay, great. And then Michelle, you gave a lot of data on the Commercial group, the bookings, the pipeline, the growth targets. I was hoping to get more into just the specifics of the business right now. Are you seeing more shots on goal getting better hit rates, because the team has new momentum or a new approach? Maybe is some of the opportunity coming from, I don’t know, disruptions at the peer group? Kind of interested on how the bookings are coming in and why you’re showing this momentum now. Is it just the fact that we’re getting more drug approvals?
And then with the Commercial business, are these dedicated teams, syndicated teams, are you pulling an integrated sales like medical science liaisons, what’s the nature of the opportunity in front of us? Because I think a lot of people have been concerned with more specialty drugs getting approved that the sales forces would actually be quite small, so the pipeline could look better, but the amount of people you would be dedicating to these programs would be small and that would be a revenue headwind. So I’m just curious for a little more color on the actual fundamentals and I’ll leave it there. Thanks so much.
Well, thanks for the question, Eric, I appreciate it. And it’s a little bit of all the above. So I’ll try to address that in the succinct manner. So, I think one of the key things that’s occurring in Commercial is there’s a high level of interest, whether it’s large pharma or small-to-mid pharma in our new model. They really are taking to the idea of having this true biopharmaceutical acceleration model and where you can take clinical insights to feed Commercial, Commercial insights to feed your clinical trial design and the interest level is very high from customers across-the-board and really understanding how they can partner with us.
So, I think this approach to the market is a big reason for a lot of the meetings, which is then driving us to be able to put integrated solutions together. That would be number two. It’s very integrated. It is rare today that we are selling one service, right? It’s truly integrated. It’s multichannel and really thinking about what is the mix of the right channel for the right customer for the right avenue to achieve your goals within pharma. That’s been a big, I think, acceleration in what we’re seeing in our pipeline. I also think, we have the ISG that’s really driving these high-level conversations across Clinical and Commercial. The early ISG awards have driven a lot of Commercial business in consulting and med comms and to your point, MSLs, nurse educators, to a very important point you’re making is it’s not traditional sales reps. Yes, a part of the solution might be specialty reps or sales representatives, but it’s a much broader solution around clinical support, reimbursement specialist, communications, net ad, consulting, market access, et cetera. So, I think that’s a big difference in the types of business that we’re seeing in Commercial, and I think the pipeline is growing, because of that as well.
So I would say it’s a little bit of all the above, and it is a unique thing that we’re offering in the marketplace. Nobody else has all the capabilities that we have, and I think our customers and the marketplace is recognizing that and is very interested in what we’re doing and how we can partner with them.
Thanks very much. I’ll leave it there and congrats on the momentum.
Thank you.
Thank you. Our next question comes from the line of Erin Wright of Credit Suisse. Your line is now open.
Hi guys. This is actually Charlie on for Erin. Thanks for taking our question. Can you talk a little bit about the nature of the new bookings over the broad-based across smaller, large biopharma and that they skewed toward any particular therapeutic category?
This is Alistair. Charlie, pretty much across the – pretty evenly spread across small, large and across therapeutics areas. I don’t think we saw any skew in Q1 really to anything, pretty broad-based.
Okay, thanks. And what does your guidance imply for FX for the balance of the year from a top-line perspective?
So, it’s Jason here. Year-on-year, the guidance has a $25 million benefit, $26 million benefit.
Okay. Thank you guys.
Thank you. Our next question comes from the line of John Kreger of William Blair. Your line is now open.
Hey, thanks. Can you hear me at this time?
Hey, John. Yeah.
Yes. Hello.
Hey, sorry about that before. Jason, a question for you. You talked earlier on the call, but you had a bit of a billing cycle delay, can you just give us an update about where that stands now, when it was resolved and maybe, more broadly, what your cash flow expectations are for the year?
Yeah. So we have – one of the things that we did look at coming into the year was that moving the clinical businesses together on to the same platform at Oracle ERP was going to cause some delays as well as we were doing some offshoring of sort of centralization of functions that are able to be centralized and a low-cost jurisdiction. So we did plan for some of this. We have planned our DSO to go up to about 45 days. It actually was more impacted by the adoption of ASO 606 than we anticipated and that is the actual mechanics of adopting that and the project managers and the finance team, et cetera, having to work on that, and therefore, we lost an additional three or four days. We have come out of that now, and we’re catching up on the billing and the collections. And as I said in the remarks, we expect to be caught up and back to sort of that 40 days to 45 days during the third quarter of this year. So that sort of what happened where we are and we’re on track to get back.
Great, thanks. And would you be willing to give us a full-year operating cash flow target?
Yeah. I don’t think we’ve – I don’t think we’re prepared to give that at this point.
Cool. And then maybe, one last quick question, Michelle, thanks very much for the Commercial bookings. That is really helpful. As we think about where this business is headed, can you just talk a little bit more about some of the policies around it? Did these tend to be kind of one-year awards or are we talking about year awards with multiple years of duration, just sort of how you’re going to be approaching, what actually gets put into backlogs and bookings for Commercial? Thanks.
Yeah. I think the bookings policies consistent with what we’ve done in Clinical, where we – anything that starts within six months kind of in that, if you like full-service flow in Commercial and anything that’s multiyear; we just booked the first year. So pretty much we want to make it standard across the organization, John, so that you guys get a better picture of where we’re at across both groups. You don’t have to kind of chop and change where we’re at.
Great, yeah. Absolutely.
All right. Thank you.
Thanks, John.
Thank you. Our next question comes from the line of Jack Meehan of Barclays. Your line is now open.
Thank you. Good morning. I wonder take one more cut at the Clinical side of the business. Is it possible that break out how the trends have been at legacy INC versus inVentiv or maybe thought of another way, the full-service versus the FSP?
Not really, I mean, FSP by its nature, the scale of those things makes things lumpier. So, you’re going to get a little bit of lumpiness in the number of those FSPs, which is why bookings policy wise, you want to take just a year of those at a time and as they evolve, you’ve got to look at them from year-to-year to see what the structure is and the value and that kind of thing. So, no real difference, I don’t think, between legacy INC and legacy inVentiv in terms of overall booking trends.
Great. And then Jason, congrats officially on the new role. Could you comment a little bit on the synergy trajectory through the rest of the year and specifically, I’m looking at the SG&A line, it was a lot lower than we are expecting. Is more of it pulling in through there versus COGS? Just any color would be great.
Yeah. So the synergy, we talked about the $15 million in quarter one and that is slightly ahead of what we had anticipated. So that is pulling forward a bit. The synergies continue to be across SG&A and our direct costs, cost of sales. When you look at the SG&A line, we, obviously, are managing that and trying to leverage it and their – but there is a feature of that in quarter one, just where projects and things that we might doing across the different functional areas, didn’t ramp as quickly or didn’t start as for what we expected, so we will see that up a bit sequentially, but nothing else really of that note.
Great. Thank you, Jason.
Thank you. Our next question comes from the line of Michael Baker of Raymond James. Your line is now open.
Yeah. Thanks a lot. I was wondering Alistair, if you’re seeing any changes in competitive dynamics, either pricing or approach to contract terms?
I think the pricing behavior is normalized again, which is good to see. And I think the slight differences now you see in the different model, our model versus Covance, IQVIA drives a different operational solution, which drives a different price point, but for the value it unlocks the competitive space, I don’t think we’ve seen any real change in the competitive spaces. As you guys know, it’s a fiercely competitive market. So we’re competing against one of – one or two of another four or five very able global competitors every time we go out, so there’s no –there’s been no real change in that dynamic.
Thanks for the update.
Thank you.
Thank you. Our next question comes from the line of Donald Hooker of KeyBanc. Your line is now open.
Great. Good morning.
Good morning.
Good morning.
You guys mentioned, I wanted to ask just one question on the revenue synergies kind of over time and that as the largest CRO now, just from the CRO side, you commented around conversation around larger strategic relationships with Big Pharma. It’s like how long are those conversations going? When we look ahead over the next several years, is – when would we hope for like a big deal, like with a larger pharma company? 2019, 2020, how do we think about that?
Well, Don, I will tell you that the conversation always feels too long at any stage. But they are longer, because they are bigger and they are more complex. We’re engaged in several of those conversations right now, and they’re all at different stages. So we are – I think the scale that we’ve created, the different approach that we have is driving a lot of interest from current partners as well as potential new, and we’re getting through doors that we certainly – in my history in leading INC, we’re getting through doors we were never allowed through before and we’re getting conversations we never had before, and they take time. So we – I’m not going to give you any kind of guidance on when we expect to see a big partnership come through, but just to say, I’ll tell you that they are longer conversations, they are more complex and we’re working on it.
Got it. And then for the Commercial Solutions book-to-bill, what’s the normal book-to-bill ratio there in your mind to get to like high single-digit revenue growth just to get my bearing?
Yeah. Hi, it’s Jason here. So, the way that we’re thinking about it, as I mentioned in the prepared remarks is to really view it on a trailing 12-month basis and when we look at that, it’s around a one, one lower than the clinical, because of the shorter duration and faster burn that you can get in a trailing 12-month period to drive that sort of mid to high single-digit growth.
Thank you.
Thank you. And our next question comes from the line of Justin Bowers of Bloomberg. Your line is now open.
Hey, good morning and definitely appreciate the 605, 606, comparability. Just starting with clinical in the backlog, was there any – if you look at your new bookings in this year versus last year, was there any difference between composition of full-service, versus FSP, and then was just hoping to get a little color on integrated offerings and how that kind of progressed during the quarter?
Well, let me start with integrated offerings, and I think Jason will look at the mix of awards. I don’t think there was a big difference in that mix, but just check. On the integrated side, happy with the progress. I think we said that would be lumpy, we’re not going to have big ISG awards every quarter. That team continues to work in that sector and continues to drive work into the Commercial business as well as some into Clinical. So we were able to take some of that booking – some of that – some of those awards into bookings in Q1 on both sides. We’re expanding that team. We seem to be in good resonance with the small to mids in that kind of end-to-end platform that we want ISG to drive. So, I’m encouraged by their activity. We’re expanding that team in the U.S. now bringing in product strategists that can help people think about how their – how the lifecycle of their product from, whether it’s in clinical or already being commercialized, how it plays out. So they have a clear picture, and we use a lot of adherence data for that kind of analysis as well. So Jason, anything on the differences in Q1 bookings?
Yeah. So, there’s – Justin there’s nothing there is materially different than what we’ve seen in the past in terms of changing the profile of our awards or our backlog for the future.
I will add one thing that I think is a learning from Q1 and that is that our business development function on both the Commercial and Clinical side is working holistically around how do we do these integrated solutions just organically outside of the ISG, going out and finding these great opportunities that have been brought to us. We’re seeing it happen in the day-to-day business development function, which to me is really exciting; because that means that we have a team of folks that get the larger opportunity that pharma can take advantage of in partnering with Syneos Health. So, let’s move beyond ISG and it’s now becoming a behavior of our full business development function.
Got it. That sounds great. And just in terms of the synergies I know you booked 15 in the first quarter, you’re aiming for what…
65 to 70.
Yeah. 65 to 70 this year.
Yeah.
Just on the cost side of that, where are you guys in terms of the transaction and integrated – integration costs related to that? How much more of that is there either this year and for the rest of the program?
Yeah. So we didn’t – we gave an update on that in quarter one, and we are in line with that. We are through the higher amount of retention bonuses. We’re through the clinical ERP integration et cetera. But we certainly still have more costs to incur in 2018. So that’s – we’re broadly in line with that, and we think that in 2019, and we’re looking at this actually, as we speak, as I’m coming in permanently to make sure that comfortable with it, but it looks like it will be about 50% of what we said that we believe 2018 will be.
Okay. Thanks for the update.
Thank you. And I’m showing no further questions at this time. I’d like to hand the call back to Alistair Macdonald for any closing remarks.
Okay, thank you. So hopefully you heard today we’re making great progress and driving momentum with Syneos Health. Congratulations, Jason, on the appointment to CFO. Very pleased to be able to confirm that and have you work with us to drive the organization. Commercial, great start to the year, driving hard with ISG and Commercial business development, the way that starting to lift is very encouraging. Clinical pipeline, per conversion is as strong that we seen it since the merger, very encouraged by that and that internally, obviously, synergies into integration progress, I think the fact that we are exceeding our expectations on that front shows that the whole team is pulling hard together.
For me, just a big thank you to the whole of the Syneos Health team once again their dedication and commitment to what we’ve been doing has been quite outstanding. And again, I would just want to thank everybody for being on the call today. Thanks for your attendance and your interest and investment in Syneos Health. Thank you, and have a great day.
Ladies and gentlemen, thank you for participating in today’s conference. That does conclude today’s program. You may all disconnect. Everyone, have a great day.