INC Research Holdings' (INCR) CEO Alistair Macdonald on Q4 2016 Results - Earnings Call Transcript

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INC Research Holdings, Inc. (INCR) Q4 2016 Results Earnings Conference Call February 28, 2017 8:00 AM ET

Executives

Ronnie Speight - VP, IR

Alistair Macdonald - CEO

Greg Rush - CFO

Analysts

Robert Jones - Goldman Sachs

Tim Evans - Wells Fargo

Dave Windley - Jefferies

Erin Wright - Credit Suisse

Tycho Peterson - JP Morgan

Courtney Owens - William Blair

Greg Bolan - Avondale Partners

Michael Polark - Robert W. Baird

Operator

Good morning, ladies and gentlemen. And welcome to the INC Research Fourth Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only-mode. Later, we will conduct a question-and-answer session and instructions to follow at that time.

I would like to hand the conference over to Ronnie Speight, Vice President of Investor Relations. Please go ahead, sir.

Ronnie Speight

Good morning, everyone. The purpose of this call is to review the financial results for INC Research’s fourth quarter and full year 2016. With me on the call today are Alistair Macdonald, our Chief Executive Officer; and Greg Rush, our Chief Financial Officer.

In addition to the press release, a slide presentation corresponding to our prepared remarks is available on our website at investor.incresearch.com within the Events and Presentations section. An archived version of this webcast will be available for replay on website after 01:00 p.m. today and there will also be a telephone replay available for the next seven days.

Remarks that we make about future expectations, plans, and prospects for the Company, including those implied by our backlog and pipeline, constitute forward-looking statements for purposes of the Safe Harbor Provisions, under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors. These factors are discussed in the Risk Factors section of our Form 10-K for the year ended December 31, 2016 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. While we might update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so.

During this call, we will discuss certain non-GAAP financial measures, which exclude the effect of events we consider to be outside of our core operations. These measures should be considered a supplement to and not a replacement for measures prepared in accordance with GAAP. We believe that providing investors these measures helps them gain a more complete understanding of our financial results and is consistent with how management views our financial results.

For a reconciliation of the non-GAAP financial measures with the most directly comparable GAAP measures, please refer to slides 18 through 22 in our presentation. As we will be limiting 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?

Alistair Macdonald

Thank you, Ronnie. Good morning and thank you for joining our fourth quarter 2016 earnings call. After completing my first full quarter as CEO of INC, I wanted to provide progress report on our financial performance and progress against our strategic initiatives.

First, we had a strong performance in many key financial metrics. We grew our net service revenue by 9% during the current quarter and by approximately 13% on a full year basis compared to 2015. We grew our adjusted EPS by approximately 24% for the quarter and 30% for the full year. We also achieved two key milestones during the year, crossing $1 billion in net service revenue for the first time and ending the year with approximately $2 billion in backlog.

While we are certainly proud of these accomplishments, net awards for the quarter and related backlog billed for 2017 were weaker than we expected. Specifically, our net awards for the quarter were down 3% to $289.6 million compared to $297.4 million during the fourth quarter of 2015, primarily due to a slight decline in new business awards, resulting in a book-to-bill ratio of 1.1. For the full-year, growth in net awards was 4%, resulting in a book-to-bill ratio of slightly less than 1.2 for the year. Our gross new business awards for the quarter did not achieve our expectations particularly given the pipeline we had entering the quarter. The weakness in net awards for the quarter and the year were primarily due to lower awards within the top 55 pharma companies, particularly those in the top 20, as gross awards from small biopharma continued to grow year-over-year by over 20%. While we experienced the weaker sales quarter, we believe many of the opportunities are still in play for us, as the decisions were delayed by our customers.

While we were disappointed with our new business awards and are expected 2017 revenue growth rate which Greg will discuss in more details, we continue to be optimistic about our long-term growth prospects, given a robust pipeline for the next 90 days and for the year, a strong win rate during 2016 fiscal and the continued investments we are making to help further penetrate the top 20 biopharma and strengthen our offerings to the entire top 50.

With regard to the investments we are making, I’d like to provide a progress update relative to our strategic growth initiatives. During 2016, we expanded our FSP offerings to and within several key top 50 biopharma companies, resulting in revenue from this offering now to run rate of over 7% of our revenue. We believe broader scale [ph] in these services should support the continued expansion of our market share with large pharma customers in the future, given their propensity to utilize more diverse outsourcing models.

In addition, we are adding depth in the areas of real world evidence in late phase, one of the fastest growing sub segments of our market. Lastly, we are further investing in other operational therapeutic and business development resources that support our customer proposal process and expect these investments will better position us to achieve our long-term growth target.

From a therapeutic perspective, our presence remains strong in areas where clinical trials are particularly complex, which represents the 74% of our backlog as of December 31, 2016. In demonstration of our therapeutic focus and expertise in oncology, we are proud to have been selected by the Leukemia and Lymphoma Society to manage the Beat AML Master Trial. We believe this novel umbrella trial marks the first time a non-profitable organization is working with multiple biotech and pharma sponsors to conduct the study. The trial approach [ph] goal consists of upto 10 different treatment types, seeking to create targeted therapies for acute myeloid leukemia.

Wrapping up, I wanted to take a moment to thank all of our employees, which now total approximately 6,800, for their hard work and dedication during 2016.

Let me now turn it over to Greg Rush for more comments on our financials. Greg?

Greg Rush

Thank you, Alistair, and good morning, everyone. As a reminder, we are presenting our results on an adjusted or non-GAAP basis and have further normalized certain metrics to improve comparability. The normalized amounts are presented on slides 3 and 4 and the adjusted amounts along with the detail of the normalizing adjustments are presented on slide 17.

We grew our net service revenue by 9% to $263 million during the fourth quarter, up from $241.4 million for the fourth quarter of 2015. This was net of a foreign exchange headwind of $3.1 million, resulting in a constant currency revenue growth of approximately 10%. On a full year basis, we grew our net service revenue by 12.6% to $1,030.3 million for the 2016. Excluding the foreign currency headwind of $11.7 million, our revenue grew by nearly 14% compared to 2015. For both, the quarter and the full, year net service revenue came in at the lower end of our previous guidance range, primarily due to the following factors.

Cancellations and delays had a higher than normal impact on revenue in the fourth quarter of 2016. Despite the overall [ph] dollar value, cancellations have been down in 2016 compared to 2015. And secondly, the impact of FX from the significant strengthening of the U.S. dollar post-election which negatively impacted revenue by approximately $2 million compared to our previous guidance in October.

Turning to gross margin, our gross margin remained relatively flat at 40.9% during the fourth quarter of 2016 compared to 2015. The fourth quarter 2016 included a foreign exchange benefit of 140 basis points. For the full year 2016, our gross margin declined from 40.3% to 39.7%, including a foreign exchange benefit of 85 basis points. The decline in gross margin on the full year 2016 was primarily due to the increased use of contract labor associated with the accelerated work we highlighted throughout 2016, partially offset by a favorable revenue mix.


SG&A expenses decreased slightly from $42.3 million in the fourth quarter of 2015 to $42.1 million in the fourth quarter of 2016, declining from 17.5% to 16% of net service revenue. SG&A expenses declined on a year-over-year basis primarily due to the benefit from lower foreign exchange rates, which accounted for decline of $1.8 million; lower incentive compensation for business development personnel, resulting from lower achievement on gross awards targets compared to 2015; and lower outside services which can vary significantly from period to period.

On a full year basis, SG&A expenses increased from $154.9 million to $164.9 million, a decline from 16.9% million to 16% of net service revenue. On a year-over-year basis, the growth in SG&A expenses in absolute term was driven primarily by increased headcount to support the overall growth of our business. This growth was partially offset by a benefit of $4 million from lower foreign exchange rates, representing an impact of 20 basis points on SG&A margin. Compared to our expectations, SG&A for both the quarter and full year were at lower level due primarily due a slower than expected ramp in headcount to support new business acquisition along with the factors discussed previously.

Our adjusted income from operations for the fourth quarter increased from $52 million in 2015 to $59.3 million in 2016 with the associated margin increasing from 21.5% to 22.5%. For the full year, adjusted income from operations increased from $195.5 million in 2015 to $223.2 million in 2016 with operating margin improving from 21.4% to 21.7%.

Adjusted EBITDA for the fourth quarter grew by 15.5% from $56.6 million in 2015 to $65.4 million in 2016, the associated margin improving from 23.4% to 24.9%. For the full year 2016, adjusted EBITDA increased by 14.4% to $244.5 million, up from $213.7 million for 2015 with related margin increasing from 23.4% to 23.7%.

Foreign exchange had a positive impact of $4.3 million on adjusted EBITDA for the fourth quarter of 2016, representing an impact of 190 basis points on EBITDA margin percentage. On a full-year basis, foreign currency had a positive impact of $8.1 million on adjusted EBITDA or 105 basis points on EBITDA margin percentage.

Adjusted net income increased to $36.9 million for the fourth quarter 2016 from $31.4 million for the fourth quarter of 2015 and increased to $139 million for the full-year from the $115.2 million in 2015. Adjusted EPS grew about 24.1% from $0.54 in the fourth quarter of 2015 to $0.67 in the fourth quarter of 2016 and by 30.2% for the full-year to $2.50 from $1.92 in 2015.

Slide 7 provides key metrics related to our cash flow and leverage position. During the fourth quarter of 2016, our operations produced $14.2 million of cash as compared to $63.6 million for the fourth quarter of 2015. Cash flow from operations for the full-year of 2016 was $109.3 million, a decrease of $95.4 million compared to 2015. The decrease in cash flows for both the fourth quarter and the full-year were primarily driven by the increase in our DSOs to 24 days as of December 31, 2016 along with the other changes in working capital. Our DSO has continued to elongate due to customers’ increased focus on milestone billing terms along with the timing of achievement of those milestones during the fourth quarter, which were backend loaded.

We ended 2016 with $102.5 million in unrestricted cash and total debt outstanding of $500 million. We did not complete any new purchase of our common stock during the fourth quarter. Accordingly, we have $85.5 million in capacity remaining under the $150 million share repurchase plan that was authorized by our Board in the third quarter of 2016.

Before discussing our backlog coverage on slide 8, I wanted to first establish the appropriate context for providing our revenue guidance for 2017, which is presented on slide 9. Keep in mind that our guidance takes into account a number of factors including our existing backlog, current sales pipeline, and importantly, our expectations of net awards for 2017. Please note that net awards during the first half of the year are particularly important as they typically contribute a greater amount of revenue for the year in later awards. Further, our guidance is based on current foreign currency exchange rate, current interest rate, and our expected tax rate.

We expect our net service revenue for the full year 2017 to range from $1,030 million to $1,100 million, with the note point of $1,065 million. This range represents flat to approximately 7% growth. This takes into account a foreign currency headwind estimated at approximately $15 million, which would have a negative impact to our full year growth rate of approximately 150 basis points. Accordingly, our constant currency growth rate is expected to be between 1.5% and 8.2%.

As we mentioned in the past, backlog coverage is one of the most important leading indicators of future revenue growth. As the bottom of slide 8 indicates, our backlog schedule for the next fiscal full year was $844 million at December 31, 2015 compared to $872 million at December 31, 2016. In each of the previous three years we have added over $100 million to our backlog coverage during the fourth quarter compared to an addition of only $15 million during the fourth quarter of 2016. Therefore, despite our backlog coverage for the subsequent fiscal year being up over 12% at September 30, 2016 compared to September 2015, our backlog coverage only grew by approximately 3% from December 31, 2015 to December 31, 2016. The lower than normal growth in backlog coverage during the fourth quarter is due primarily to the unusually high impact of cancellations and study delays that I mentioned earlier. This trend continued in early 2017 as we experienced additional project delays further impacting backlog coverage and thereby creating an additional headwind to 2017 revenue growth.

Also contributing to the lower backlog available, the year-over-year decline in new awards during the fourth quarter and a relatively lower contribution of 2017 backlog from new awards compared to previous years. Finally, since September, we have lost approximately $10 million of revenue for 2017 due to changes in FX rate, an impact of approximately 100 basis points on our growth rate.

In evaluating the revenue guidance that I provided earlier, it is important to note that our current backlog coverage would favor the lower end of the range. To exceed the growth rate that backlog coverage suggests, it is critical that we deliver very strong net awards during the first and second quarters.

Turning to the rest of our guidance, we expect to earn a $1.94 to $2.10 per share on a GAAP basis. Lastly, we expect our adjusted diluted earnings per share to range $2.53 to $2.75, representing growth of 5% to 10%.

We based our adjusted earnings per share guidance on among other things an expectation that interest expense will range between $11.5 million to $12 million, an effective tax rate of approximately 32% and adjusted EBITDA margins of approximately 23% to 24%. We expect our weighted average share count for the year to be approximately 55.7 million shares outstanding, although it will vary on a quarterly basis.

Although we typically don’t provide quarterly guidance, I’d like to provide some additional color on our expectations for the first quarter. Given the recent study cancellations and project delays, we expect first quarter revenue to range from $245 million to $255 million. Since we will need to retain staff until the delayed projects start, we expect our adjusted EBITDA margin to be between 22% and 23%. We expect to earn $0.57 to $0.63 in adjusted diluted earnings per share during the first quarter. Our guidance for 2017 excludes the potential impact of any share repurchases that we may make in the future with the remaining capacity in our existing equity repurchase plan.

This completes our prepared remarks. And we’d be happy to answer any questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Robert Jones with Goldman Sachs. Your line is open.

Robert Jones

Great, thanks for the questions. Greg, you laid out several components that impact the 2017 revenue guidance. But, I wanted to just kind of go back and see if you could help us think through the major pieces to bridge what -- you seemed pretty comfortable with when you updated us with 3Q, the long-term 10% to 12% top-line. And then, what you’re guiding to today, obviously markedly lower than that. Could you maybe just isolate the major moving pieces that what changed from when you updated us on 3Q to the update today?

Greg Rush

Yes, happy to do that, Bob. As I mentioned in the call, there is really everything, every component of our guidance to go one way or the other, went against us in the fourth quarter, to be honest with you. The first is cancellation and delays hurt us by -- sorry, cancellations hurt us by over $15 million from what we thought, and that’s despite cancellations being down. So, as you know, cancellations have various impacts. So, you have to look beyond just the absolute dollar value.

The other thing is as we had some delays that are still within our backlog that don’t impact net book-to-bill, but they probably hurt us by another $20 million. And then, the last couple of components, FX headwind, there is $15 million of headwind compared to what we said in October, so that’s a 0.5 growth rate, that alone. We do have a tailwind from that and EBITDA but from the revenue perspective that hurt us probably about $15 million.

And lastly, it’s hard to break it out separately but new awards were below our expectations for the fourth quarter for sure. And then, the second component is the new awards that we actually did receive, they contribute -- are contributing to a lower amount of revenue in 2017 than they typically do in a fourth quarter setting. Part of that is because several of the studies don’t start until mid-year in 2017 and typically a study will start within 60 to 90 days of an award. And if your awards are front-loaded in the quarter, they could be starting right at the beginning of 2017 and if they are backend-loaded, they should be starting by end of first quarter or early second quarter. So, a lot of our big, new awards in the fourth quarter are not starting until early in the second half or even late in the third quarter. So, their contributions to 2017 revenue is not as big as normally is.

Robert Jones

Greg, I guess just to follow up, it seems like your success in the first half of 2017 is critical to you achieving your guidance. I guess could you talk a little bit about the pipeline? And as you talk about delays or awards being less than you had expected, is it people just not making decisions or are you actually losing on bids that you thought you would win to competitors?

Greg Rush

A little bit of both. And I’ll answer you it’s more of the delays than it is the losing to competitors. But, there were two large binary decisions in the fourth quarter, one went against us and we did not win it; the other, we’re still on play; we effect to hear on that win in the next month or so, hopefully earlier than that. But, it was a delayed decision. And as I think Alistair mentioned, business is particularly strong in the top 50. Within the -- below the top 50, we actually had really strong growth, our pipeline is up substantially in aggregate and particularly up amongst the top, I mean the companies below the top 50. So, we’re seeing a strong demand for our services, particularly against our -- the customers that are in our heritage, the small biopharma and biotech. And we’re making the investments that Alistair mentioned to try sure up and reenergize growth in the top 50.

Alistair Macdonald

Bob, this is Alistair. We’ve had some good success in the FSP realm. Investment that we started to make last year in the area is enabling us to give more of a hybrid approach to bigger pharmas that top 50 you look for, that hybrid rather than just full service or just FSP. So, we continue to work on that. And I think it’s worth pointing out as well that the cancellations and delays we’ve had are based on either reprioritization of spend in pharma or the actual performance of the drug. I think we are delivering good quality work. We remain very-focused on service levels to our customers, making sure we get out and provide the right quality. And I think if we care on doing on, like Greg said, the pipeline is pretty robust, I think we get back to the performance that we expected. And those binary decisions that went against us in Q4, we hope to be on the right side of those.

Operator

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

Tim Evans

Thanks. Just to follow up on some of that. So, you talked about $15 million of cancellations and $20 million of delays. Can you talk about how widespread those are? Is it two or three clients or is it broader than that? And then, were those big pharma clients and were they small biotech? Any sort of like general profile you can give us would be helpful.

Greg Rush

The delays in terms of things that were in our backlog were broad-based; it wasn’t just one or two large studies that we did see multiple delays. I can’t say five or six; I don’t have that data in front of me today. It was more than a few customers; so, it was multiple delays that just added up with regard to cancellations. There is nothing really unusual in that one, Tim. We didn’t see a spike in cancellation rate. Our cancellations, as I mentioned, were down. They weren’t down substantially; they were just down slightly, I believe. But, the mix, back in 2014, we had a cancellation on June 29th that immediately too out $20 million of revenue for the rest of the year, because of the study that was supposed start in July. Typically, when you have a cancellation -- that’s an example of the large study cancellation that had an immediate impact. Most of the time you get a cancellation, the bulk of the impact of the cancellation is in outer years. And this time, many of these studies were right on the verge of starting and so they have unusually high impact in terms of revenue being lost. And in addition, you don’t have much of a wind down on some of the studies. So, it’s not like you get a burn of three to six months of shutting study down. Many of these cancellations just hadn’t really started yet and then studies get cancelled due to reprioritization, as Alistair mentioned.

Tim Evans

I guess what I’m trying to get at to that point, right, you’ve got bunch of studies that are getting cancelled for reprioritization, is this a big decline of yours that’s doing this and disproportionately affecting your backlog or is this a big macro trend that we need to be attune to?

Greg Rush

I do not believe it is a big macro trend, because we’re not seeing a significant dollar value of cancellations. And no, it’s not one large customer. As I said, it’s broad-based. A lot of these studies are from customers in our core that are smaller studies. So, the impact -- I’m fairly confident given that the cancellations in aggregate were not up year-over-year; in fact, we’ve seen a declining amount of cancellations. You think about it, our backlog is bigger, substantially bigger than it has been historical terms. And the absolute dollar value of cancellations, not the cancellation rate as a percentage of backlog but the absolute dollar value of cancellations is actually down. So, I do not believe there is some macro trend. I do think that we’ve just got hit hard by the types of cancellations that we were receiving versus the aggregate dollar value.

Operator

Thank you. Our next question comes from the line of Dave Windley with Jefferies. Your line is open.

Dave Windley

I’m, Greg, trying to look through, Greg and Alistair both probably, trying to look through some of the trends in your pie chart. And your large biopharma revenue composition in 2016 declined, by our math, I think actually even declined in absolute dollars; that was accompanied by a decline in repeat customers, which is also a decline in absolute dollars and not as much change in your kind of top client revenue composition. But, I guess I’m trying to read tealeaves here and I’m wondering if the primary issue is that in one or two of your top clients, you are losing share of wallet. And I’m wondering what is the cause of that; is it just need for FSP and you’re little late with those clients to develop that or what competitively is causing you to lose traction in large pharma.

Alistair Macdonald

I think that comment is fairly accurate and that we are late to the FSP market. Some of our larger clients last year that I think they would have declined, if we look closely at those individual clients in more static. I know certainly one of the bigger clients that we have the idea [ph] with; we were pretty much flat with them, based upon their own outsourcing pattern. So, they’ve been bringing some work in-house, using FSPs of which we do some burden [ph] and also full service. So, they are in a true hybrid. I think we actually looked at it once and we work in the 11 different models with them effectively. But I think we need, as we told everybody at the Investor Day last August that we needed to invest in FSP that we were going to invest in FSP and we have done that and we continue to do that and we are having some early success with it. So, I think as we start to address the top 20 and the top 50 maybe even, we have to have that capability; we have to have it at some reasonable scale. That’s why we are investing in it; that’s why we are investing in new awards evidence as well. We think that’s very important, particularly for the larger pharma. We go on to commercialize their own products and they’re both investments that we are making now, and we expect them to pay off in the longer term.

But I think that your statement, are we slightly late to the FSP game? Yes. I mean, we’ve looked at FSP assets in the past and weren’t successful on them. But, we were aware of that and aware of its kind of benefit in that top 50 sector and that’s what we were addressing now.

Greg Rush

Other thing I think that you see it in the revenue, but to give you a forward-looking thing and we always look at forward trends. I think historically, the top 50 has been mid-50s revenue. And in 2016, we certainly had expectations that it would be over 50% of our new business awards. And I believe rough generalization, two thirds of our awards or little less were from below top 50 in 2016. And as Alistair mentioned in this prepared comments, most of our shortfall regarding expectations in new business awards were -- not most, all of our shortfall was amongst the top 50. And I think the bulk of that is two factors. Factor number one is, many of our customers that are our existing customers where they are under development cycle was lower; and we expect to see a rebound in those customers in 2017. So, it’s not a loss of wallet share. But in certain of our customers, they certainly like a hybrid mix and their portfolio in our specialty areas, particularly CNS, are rotating more to a flexible model or a fee model that we don’t have a strong offering as some of our competitor at this stage.

Dave Windley

Yes. So, my follow-up is maybe a multi-part. But, you commented in your comments about SG&A that the SG&A was I believe you said lower because of delayed decisions or delayed filling on some hires, and I think particularly in business development. So, I’m a little curious about -- it would seem like that is an area that you would need to have redoubled effort on. And then, second, you talk about delayed decisions. We’re two thirds of the way into the first quarter. By now, you ought to have pretty good visibility on things that were kind of on the precipitous at the end of the year. What does the bookings activity look like in two thirds of the way through the first quarter? Thanks.

Greg Rush

We historically don’t give that number, at this stage, as you know. But, I would tell you that those decisions are still open. So, we have not seen as many of the closes we had liked but those decisions have not been made on the positive side. So, it’s still a large pipeline at this stage.

With regard to SG&A, you are right. One of the things that we believe that may pressure, EBITDA margins in my guidance, that’s why I think it could be down, more likely down in 2017 versus 2016. We have to make those investments; we didn’t make many of those investments in the sales and BD and operations people to support bit defensive. All of those investments have not been made as of yet but we did make many of those and did bring those people onboard midway through the fourth quarter. But it takes a while for them to build their pipeline and relationships and name recognition within INC as many of them are veterans of the industry. But we’ve got to allow them their time to soak in INC. So, those investments will take a little time to pay off but we are making those investments. And we did bring many of those heads, particularly in the BD area onboard in the fourth quarter.

Operator

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

Erin Wright

Great, thanks. I have follow-up to that question. Can you speak to your capital deployment strategy more broadly, any particular areas of focus for you from an M&A standpoint? And generally, how much of your focus on a daily basis is on potential M&A opportunities at the moment? Thanks.

Alistair Macdonald

I won’t answer them out of time, Erin, because if I answer, I spend 90% today and then next quarter I’d say 10% if an acquisition’s closed. But that was a good try.

Acquisitions are clearly our top focus. The areas that we’re focusing on are FSP as an example, particularly outsourcing of the monitoring aspect of the FSP, which we do none of today. All of our FSP effort today is around data management, safety, investigator payments and those areas. We’ve got to add capabilities that allow our larger customers that want to do studies in health, a flexible option on monitoring to help supplement the workforce. That’s a big area of real-world late phases and other area’s quite harder to do acquisitions but we’re certainly making investments in that’ capital deployment with internal investments, multi-million dollar investments that are planned in 2017 to do that. So, those are the areas where our capital deployment is first and foremost. It’s -- in the short term, we’re probably going to focus on debt repayment next versus share repurchases because we want to make sure we have a big enough wallet to go out and do the acquisitions. We feel like that we certainly will see that pick up in the next 12 to 18 months.

Erin Wright

Okay. That’s fair that you guys try. Can you also discuss the dynamics around the working capital accounts that are you seeing longer payment times? Some customers are shorter payment terms to investigators and were there any anomalies impacting DSOs in the latest quarter?

Greg Rush

There was a little bit of anomaly. We had a customer -- you’ve got to look at, a typical contract has two different tracks. It has revenue milestones that could often times don’t necessarily line up perfectly with billing milestones. We did achieve several key revenue milestones late in the fourth quarter that did not allow us to bill until early 2017. We had other milestones that we achieved late in the fourth quarter that allowed us to bill. And those receivables I think have terms of 60 to 90 days. And those two examples I’m thinking of particularly are both the top 50 pharma. The biggest trend, we’ve seen over the last 12 months is customers are focusing less on the days, the invoices due from the date; so, whether it would be 30, 45 to 60 days. Those terms aren’t changing dramatically. The biggest term we’re seeing is milestone payment terms where the customer wants a certain number of pages claimed or a certain number of patients enrolled, different milestones that elongate the payment cycle. So, we did have unusually despaired impact in the fourth quarter. I do we expect the DSO to stay in the 20s over the next few quarters, hopefully it will decrease little bit. But, I don’t see a significant expansion over the next couple of quarters from where it was. And we do get hit a little bit negatively by those terms in the quarter.

Operator

Thank you. Our next question comes from the line of Tycho Peterson with JP Morgan. Your line is open.

Tycho Peterson

I wanted to maybe dig into the delays. I appreciate the color you provided for forward cancellations and it’s understandable how portfolio reprioritization that’s out there can impact cancellations. But can you maybe give us a little bit more color on what drove the delays and what’s the risk ultimately these projects don’t come to fruition?

Greg Rush

Delays come from a variety of factors. I wish I could say it’s factor one and it distinguishes itself, but part -- a lot of it is delays with giving the protocol from the sponsored nail down; things are more complex and the sponsor is changing the number of times it reiterate the protocol and you got to get that finalized, so you can really get the study up and moving. And part of it is in the country for dealing with, regulatory approvals have resulted in delays; and to a far lesser extent, some of it is our own operational delays. But, the vast majority of it is with the sponsor or with regulators.

Tycho Peterson

And then, can you maybe touch on the pricing environment? And what are your comments around net awards being below expectations; are you seeing more pushback on price from customers?

Alistair Macdonald

No, I don’t think we are. I think we’re seeing people -- like Greg said, the complexity of some of the trials now is also, and the algorithms that we used to put the prices together on those drives out the same way as it always has done. We don’t get -- we obviously monitor reasons why we lose projects. We haven’t seen any appreciable kind of difference in that percentage over the whole of 2016, not alone Q4. So, I don’t think it’s surprise to show I think the general behavior of all the larger CROs on price is good, it comes down to operational solution as well. Your price is reflective of how efficiently you can get the projects planned and then executed. And I know INC has always had a very strong reputation for that, and we continue that. We understand the complexity in these trials, and we know the best way to get to them. We have good access, the data for sites and patients and how we access them. And we use that on our every chance that we can get. Our goal is to get in front of the customer with the best operational solution and the price is a result of that. So, I think we’re still doing that. We’re bringing in more talent around the therapeutic areas that we discussed earlier, and to help us to produce better and better operational solutions. So, I don’t think we’ve seen any real -- there is no price war going on out there. It’s fair price for fair project, so.

Greg Rush

Yes. And the way I would tell, within the top 50 in particular, and I want to be careful; I don’t know this is a trend and don’t take this as a trend, but certainly, the environment at the end of 2016 with the political environment, as you know there is a lot of uncertainty there. And I think that created a focus on the pipeline. So, I do think that overall in the market you may have seen a little bit of pressure from the demand from the top 50 across sector. Whether that’s a temporary blip, I don’t know. And I do think there is a focus amongst the bigger pharma to make sure that they evaluate the number they’re involved.

And so, as we try to penetrate new customers in particular, it seems to be a little bit more difficult as the bigger CROs sort of circle their wagons to protect their base. They seem to be doing that a little bit better than they may have done 18 months ago. And if you look into some of the other CROs’ comments at JP Morgan, they certainly seem to be indicating that they are going to be much more aggressive in taking market share. And I think we are seeing many of the bigger CROs, maybe because of that pressure in the top 50 in our core. They are coming down market more so than we’ve seen them in the past. So, we are seeing a lot more of the big guys in our bids with below top 50 than we did 12 months ago. Again, I don’t want to call out a trend to say that is going to continue to happen. One quarter doesn’t make a trend; two quarters don’t necessarily, but after a year, you talk to me at the end of the year and I’ll tell you this is trend or not. It’s early days.

Tycho Peterson

Okay. And then two quick ones. Is the rotation out of CNS that you’re seeing on the part of your customers, do you think this is transient or maybe a longer term issue?

Alistair Macdonald

No, I do not believe it’s a lot of term issue. We’ve actually seen a spike in demand. I think our gross awards were particularly strong but we also probably suffered the largest impacts on cancellations in that group. I don’t have that in front of me to prove that out. But I believe when we talk operationally, we had a really good year in new awards in CNS. We also had a few cancellations. One of the cancellations was -- one of the larger cancellations within CNS was not due to protocol or reprioritizing. Our customer had a great win with the FDA. The FDA said the drug and this other indication is performing well, safe. And the cousin of that indication doesn’t need to go through a clinical trial. You are good. And so, the trial that we had won and we are getting ready to start was canceled. And it was a fair -- over $10 million study; so, one of our larger recent wins that never got off the ground.

Tycho Peterson

Okay. And then just lastly, we’ve seen some of your peers change backlog definition, adopt a more conservative approach there; any thoughts from your perspective as to whether that might make sense?

Alistair Macdonald

I don’t necessarily agree that is more conservative. So, I would tell you that it’s different. And you need to ask a question why they changed it, which is a different question altogether. But in managing a people business, you’ve got to understand what -- typically, after you are awarded business within 30 to 90 days, that contract goes assigned. And if you wait to sign to engage in higher people to the contract assigned, you are not going to satisfy your customer. So, in managing your business, you’ve got to evaluate and ensure that you have staff ready to go and planned and backlog covered for what we would call south backlog that’s not gone to contract. If you are not managing that business, while you are ultimately not going to satisfy your customers, so I guarantee you, every one of our competitors have changed that policy, managed their business with that south backlog. So, why they don’t tell you what that number is, you need to ask them.

Operator

Thank you. Our next question comes from the line of Courtney Owens with William Blair. Your line is open.

Courtney Owens

So, my first question is from a macro broader demand perspective. Are you seeing or hearing concerns from clients that’s more so related to the broader healthcare policy uncertainty that we are experiencing right now? Thanks.

Alistair Macdonald

Certainly in my conversations with customers that hasn’t come up. I’m sure that in -- I think it would be different by different customer sets. So, the customer set that we tend to deal with and deliver work for, as you know is predominantly outside of the top 50. I think their development plans pretty baked today, aren’t -- maybe aren’t the customers that will commercialize the product themselves, which I think creates a difference in a way that they look at their macro healthcare environment. But that conversation doesn’t come up. We are hearing more from customers about commercialization in general, how we plan -- help them plan for that. I think the work that we are doing in real word evidence, it’s been key in that where we can actually help them deliver a lot of their evidence package through the deployment of the clinical trial rather than having to build it as they approach commercialization milestone. So, we do have -- we do see a lot more conversation in that area, and that’s why we started the investments in that area in 2016.

There is concern out there; I think some of the large customers that we deal with, that concern is very relevant to them, but the majority of our customers that -- we don’t see that. I don’t know whether kind of the political environment is causing the delays that we’ve seen a little bit in that sector, it could be, but I’m not political commentator. I don’t really get that connection yet between that political environment and the sector that we play in.

Courtney Owens

Okay, great. Thank you. And then, also kind of changing focus a little bit, from a therapeutic perspective, are you seeing any pick-ups in areas outside of oncology and CNS right now?

Alistair Macdonald

It’s very cyclical I think outside of those areas. They are always pretty robust obviously; oncology and CNS are pretty robust areas. I think in 2016, we saw a lot of infectious disease work pushing on and we were very competitive in those areas. We’re seeing a lot more interest in real world evidence, not a therapeutic area, but it’s an area of strong business for us as we invest in that. And I think our information in immunology area was pretty strong last year, kind of mid-year. And we evaluate those pipelines all the time. We are constantly looking at what work is coming in, what therapeutic area, and then actually what sort of therapeutic area, because these projects get more and more complicated as they target kind of specific patient groups and those groups get smaller and smaller; you have to kind a really drill down into some therapeutic areas. So, it’s a constantly shifting landscape.

Operator

Thank you. And our next question comes from the line of Greg Bolan with Avondale Partners. Your line is open.

Greg Bolan

Hey, thanks guys. And I appreciate all the candor on this call. I guess firstly, on customer loyalty, Greg, I guess just going back to some past slides, just looking at that repeat customer number, seems to be dropping 92% in 2014 and 86% in 2015 and now 80% in 2016. Is that just growth outside of kind of the installed legacy customer base or is there something else to take note of?

Greg Rush

I think it’s mainly the mix of customers that you’re seeing. Customers outside of the top 50 usually are one compound companies. And so, what you’re seeing is increased -- I think I mentioned to one of Dave Windley’s call that half, between half and two thirds of our new business awards were from customers outside the top 50. By definition, there is a high probability that those customers are not going to be repeat customers in the future, unless let’s say this compound is successful and they a second indication. So, I think that’s the bigger impact. The second is several of our large customers that are historically in the top 10 in our backlog, we just did not win business with them this year [ph] either because of their portfolio or because of their rotation to more of a hybrid model away from full service.

Greg Bolan

Got it. And then, I guess going back to I think Tycho’s question on backlog recognition, I mean, you guys have one of the highest backlog burn rates in the industry. And I think honestly that’s indicative of a very conservative backlog recognition pattern. As we think about your guidance for revenues for 2017, obviously you’ve pointed out first half is going to be very important. But, is it fair to say that from a constant dollar perspective, the level of coverage that you have, the level of I’m just going to say a conservatism in this guidance range, is it about in line kind of where you guys have been this time beginning of each year for the past few years as a publicly traded company, is a little bit higher just given a little bit of the uncertainty with regards to some of these more binary decisions that are seeing to be forthcoming? Any color on that would be great. Thanks.

Greg Rush

Yes. As I mentioned in our prepared remarks, our backlog coverage is not where I wanted to be, to be honest with you. And I think I even pointed people to the lower end of the range of the guidance. I do think our backlog policy is conservative. But, if you think about last year, we had $844 million of backlog and we talked about that customer that asked us to accelerate work out of 2017 into 2016. So, if you look at that, the fact that we had a report of 44 I think of backlog coverage coming into 2016, couple of the facts that we actually got the benefit in 2017 revenue from that acceleration of work. We had a backlog coverage of 872 at December 31. And as I mentioned in prepared remarks, we actually had further delays in January and early February to actually lower that number. So, I don’t believe that my guidance is conservative or aggressive. I think that for us to reach the top end of that range, we have to have a very strong Q1 and Q2 new business awards and we have to avoid a repeat of Q4 in terms of impact of cancellations. If those two factors happen, we can hit the top end of the range. If they don’t, we’re going to be at the bottom end of the range.

Operator

Thank you. Our next question comes from the line of Michael Polark with Robert W. Baird. Your line is open.

Michael Polark

Hey, thanks for taking the question. This is Mike Polark on for Eric Coldwell, this morning. I have two questions. First, I was hoping if you could just comment generally on the labor market, access to direct staff, trend in compensation, any therapeutic categories that are particularly tight? And then, related, curious if you are seeing any opportunities for direct staff or upper level management -- mid or upper level management, driven by some of the transitions that your large competitors are going through right now? And then the second question, what’s the adjusted tax rate in the 2017 guidance? I might have missed it in the slides. Thank you.

Alistair Macdonald

I’ll take the first multifaceted question, and Greg can take the one at the end. So, talent, the talent marketing in 2016 was interesting. It was tied at the beginning, kind of opened up in the second half. I think we have been able to recruit well into that both at senior levels, so bringing in what we call CREs, Customer Relations Execs, so that’s that kind of EDs, VPs, senior VPs in the therapeutic areas. We’ve been able to successfully attract and secure those folks. And there, I think it was Dave’s question about SG&A and the impact of those, those people are either joining now or will be joining throughout Q1, Q2, depending on non-compete, non-solicits et cetera. So, we bring those onboard and they’re actively engaged with us now. The CRE market opened up a little bit I think in 2016. I think a lot of CROs including ourselves put a lot of effort over the 2015, 2016 period when it got really tied to develop our own CREs and I think those programs have gone well. We are using the IOCR accreditation pathway so we’re training the CRE to come out and then accredited. So we know we can get quality from them and we’re able to deploy them quickly.

So, I think the labor market has eased a little bit. I think we are seeing, as y -- the question around some of the disruption in our bigger [indiscernible]. Yes, we are seeing some impact from that; yes, we are able to recruit well seasoned, good talent from those organizations and bringing them in. And I think INC has always been about our ability to attract talent and deploy it and put that talent in front of opportunities and build relationships with customers. And that’s certainly what we’ll continue to do.

Greg Rush

On the tax rate, we mentioned 32%, that’s an approximate; it could be vary up or down 100 basis points. But, the midpoint of our expectation is around 32.

Operator

Thank you. And we have a follow-up from the line of Dave Windley with Jefferies. Your line is open.

Dave Windley

Hi, thanks. I just wanted to come back to Greg your backlog recognition. I think you’ve effectively made the point in the past about relatively conservative bookings and backlog recognition policy. And my sense has been that you’ve pretty strictly adhered to a -- not so much whether it’s contracted or not contracted, I agree with you that makes less of a difference but more of a difference as to how long it is from the time it’s awarded to when you think it’s going to start.

And I think there is also some elements of as you grow as an organization and see a broader, say portfolio of opportunities and the size of those opportunities changes, may also have an influence on this timing to start in the backlog burn rate. So, my question to you is as you grow and new projects are coming into your backlog and you’ve made the comment in your remarks that some of this revenue is now starting until say mid to late third quarter, is it worthwhile to revisit your policy and tweak the policy to match what you’re seeing coming in, i.e., tightening up the timeframe from award to revenue starting and what you recognize in backlog?

Greg Rush

Dave, I don’t think so because again, I used that in my guidance and tried to be consistent. What I do try to do, to your point, is try to be very transparent with you and our investors as to if there is a change in mix. So, I was very purposeful in calling out the fact that some of those awards are starting later than normal, because obviously from a perspective, are those awards themselves more risky than an award that’s going to start generally, absolutely. And so, I try to give not just quantitative information as to what our new awards are and backlog and book-to-bill all of that, I’ve got to give you all color as to some of the qualitative factors. And do we think these awards are solid? Absolutely. I wouldn’t have booked the, if I didn’t. But by definition, if they’re starting later in the year, they are riskier. And that’s the color commentary I try to give you so that you all can understand that dynamic.

Dave Windley

So, let me ask it just a slightly different way. I think one or two years ago, coming out of the IPO, my sense, and I could have been wrong but my sense was that you believed that your backlog booking policy was something that helped to establish difference between your burn rate and the burn rate at some of the larger peers that seemed maybe somewhat more generous and what they put in the backlog. Your burn rate has now dropped 100 basis points in the last six or seven quarters. And if I’m right, it’s going to drop again in the first quarter. So, is the goal to put in backlog what will burn out at a consistent rate or is it to grow the backlog into a larger number?

Greg Rush

The goal is to be first consistent with how we’ve always done it. So that’s the first thing. So, we are not changing anything from what we’ve ever done in backlog. The goal is always to fit into backlog, has always been, particularly before we went and afterwards is to use backlog to manage the business and determine when to hire people, what resources are needed and which functions et cetera. That is why we do backlog. We disclosed all those other metrics because they’re industry standard metrics, bookings and backlog. I think we set the trend in the industry of backlog coverage. I think many of our competitors are starting to provide that number now.

But, you are right. We do believe backlog burn is a measure of the quality that goes into backlog and also a measure of how efficiently you are executing on that backlog. And I think our backlog has dropped a little bit and that’s reflective of the delays. I think that’s a bigger impact on the backlogs and what’s the quality going into it. In the fourth quarter, we did have some awards that went in that are starting later than normal. But, we’ve had put similar awards to the similar profile. We’ve always disclosed that our policy is that it’s going to start within a year. The vast majority of our works historically have started within 90 to a 120 days and many of those even earlier than the 90-day mark. In the fourth quarter, we had several large studies that are starting later and we wanted to call that out.

Operator

Thank you. And I’m showing no further questions at this time. I would like to turn the call back to Mr. Macdonald for closing remarks.

Alistair Macdonald

Okay. Thank you. Well, thank you, everybody. Thanks, ladies and gentlemen for your attendance today and for your interest and investment in our Company. I wish you a very good day. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone, have a wonderful day.

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