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PRA Health Sciences, Inc. (NASDAQ:PRAH)
Q2 2019 Earnings Call
August 1, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day ladies and gentlemen and welcome to PRA Health Sciences Second Quarter 2019 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will be given at that time. Should anyone require assistance during the conference, you may press *0 on your touchtone phone. As a reminder, this conference is being recorded. At now lecture the call over to your host, Tom Byrne, Vice President of Legal Affairs. Sir, you may begin.

Tom Byrne -- Vice President of Legal Affairs 

Thank you. Good morning and thank you for joining us for the PRA Health Sciences Second Quarter 2019 Earnings Teleconference. Today Colin Shannon, our Chief Executive Officer; and Mike Bonello, our Chief Financial Officer, will discuss our quarterly financial results. Following our opening comments, we'll be available for questions. In addition to our press release, and investor supplement with additional financial information is available in the Investor Relations portion of our website.

Before we begin, I'd like to remind you that are remarks or responses to questions may include forward-looking statements. Actual results may differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with our business which are discussed in the risk factors included in our annual report on Form 10K filed with the SEC on February 28, 2019. Our risk factors may be updated from time to time in our filings with the SEC. Please note that we assume no obligation to update any forward-looking statements.

Certain financial measures we will discuss on this call are non-GAAP financial measures. We believe that providing these measures help investors gain a more helpful and complete understanding of our financial results and is consistent with how management views our financial results. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measure, calculated and presented in accordance with GAAP is available in the earnings press release and investor supplement included in the Investor Relations portion of our website. I would now like to turn the call over to our CEO, Colin Shannon.

Colin

Thank you, Tom. Good morning and thank you for joining the conference call covering our second-quarter financial results. I'm pleased to report that our second-quarter financial results are largely in line with our expectations. Revenue came in as planned we continue to generate improving margins. Adjusted EBITDA adjusted net income, and adjusted net income per diluted share continue to grow at double-digit rates. The second quarter of 2019 produced a satisfactory level of new business awards. We reported $671 million of net new business awards, representing a net book to bill of 1.24 times revenue continuing our run of quarters with the net book to bill equal to or greater than 1.2 times our revenue. The addition of our second-quarter new business awards resulted in a backlog, increasing approximately 3% on a sequential basis and 14% year-over-year, finishing at approximately $4.5 billion.

Overall, the CRO environment remains stable. We continue to see a steady flow of RFP volume in the concentration of our new business awards continued to be well-diversified. Total revenue for the second quarter was approximately $763 million, which represents an increase of approximately 6% year-over-year at actual foreign exchange rates and 7% on a constant currency basis. Our client base continues to be well-diversified with our top five clients representing approximately 39% of revenue for the quarter with our largest client representing approximately 9% of revenue. Both metrics exclude reimbursement revenue. Adjusted net income for the second quarter was approximately $83 million an increase of approximately 24% versus the second quarter of 2018. Adjusted net income per diluted share was $1.22, a 22% increase versus the second quarter of 2018.

Regarding our Data Solutions segment, we continue to make progress. Revenue grew 5% versus the second quarter of 2018 and 10% on a sequential basis. The leadership changes we made in the first quarter continue to take shape, and we are adding more talent to the team daily. We continue to focus on the buildout of our commercial team and [inaudible]. We also continued to evolve the business by investing in new offerings, enhancing integration with the Clinical Research segment, and lifted opportunities to expand internationally. As discussed in our press release, we are revising our 2019 revenue guidance in updating our adjusted earnings per diluted share guidance. Mike can provide additional details about our updated 2019 guidance away from the call.

In the last few quarters, our [audio cuts out] growing at the same rate as our Product Registration business and client demands have shifted away from North America to geographical locations where labor rates are lower and hiring cycle times are much longer. Our expectation was that our Product Registration business would've been able to cover the shortfall in Strategic Solutions revenue. However, during the second quarter, there were studies that failed and had to be taken his cancellations, which impacts our revenue in the second half of 2019. In addition, as we have discussed in prior quarters, we continue to experience more ramp-up in our new awards, and that has also contributed to reducing backlog coverage in the second half of the year. With that, are Product Registration business is still growing at double-digit rates, and we have the highest level of headcount needs in our Strategic Solutions division since May 2017.

We have successfully completed the buyout of our Japanese joint venture with Takeda on 31 May 2019. PRA Development Center KK is now a wholly owned subsidiary of PRA Health Sciences and is accepting work from existing and new clients. The new Japanese office grand opening was last week and was attended by a number of dignitaries, including a senior leader from Takeda welcoming our new organization. In closing, I'd like to welcome our new Japanese colleagues and think the rest of our PRA colleagues for all our efforts and supporting PRA. I would now like to have the call over to Mike Bonello, our Chief Financial Officer who will go through our quarterly financial results in more detail.

Mike Bonello -- Chief Financial Officer

Thank you Colin, and good morning everyone. For the second quarter of 2019 are consolidated revenue grew 6% at actual foreign exchange rates, and 7% on a constant currency basis. As: stated previously, we reported revenue of $763.3 million for the second quarter of 2019, compared to $722.8 million the second quarter of 2018. We continue to see some volatility in the amount of reimbursement revenue that is being recognized quarter to quarter. However, your today, the amount of reimbursement revenue recognized was in line with our expectations. We also looked at ways of refining our forecasting process to reduce this volatility. However, as we previously discussed, the types of studies we are awarded, and our customer preference on the amount of pass-through activity that we'll manage continues to be a factor in the amount of revenue that is being recognized and the amount of revenue that will be recognized in the future.

The Clinical Research segment reported revenue of $702.2 million for the quarter while the Data Solutions segment reported revenue of $61.1 million for the quarter, increases of 6% and 5% respectively. Regarding our revenue concentration, we derived 55% of our service revenue from large pharmaceutical companies, 11% from small to midsize pharmaceutical companies, 16% from large biotechnology companies, and 18% from all other biotechnology companies. These concentration metrics exclude our Data Solution segment and reimbursement revenue and are in line with what we have reported in previous quarters.

Total direct costs were $386.2 million in the second quarter of 2019, compared to $381.7 million in the second quarter of 2018. Consistent with prior quarters, our increase in direct cost was primarily related to an increase in labor-related costs in our Clinical Research segment as we continue to hire staff to ensure that our staffing levels are appropriate for current studies and our future growth. This increase was offset by a favorable impact of $11 million from fluctuations in foreign currency exchange rates. Direct costs were 50.6% of revenue in the second quarter of 2019, compared to 52.8% in the second quarter of 2018. The decrease in direct costs as a percentage of revenue is primarily due to favorable currency exchange rate fluctuation and increased utilization of our staff.

Selling, general, and administrative expenses were $98.8 million, or 12.9% of revenue for the second quarter of 2019, compared to 12.6% for the second quarter of 2018. The slight increase as a percentage of revenue is primarily related to an increase in stock-based compensation. As we previously discussed, the increase in stock-based compensation expenses related to the initiation of our annual grant program and the expansion of our employee stock purchase plan and is consistent with trends that we've seen in the past few quarters. Adjusted net income, which exclude certain items whose fluctuation from period to period do not correspond to changes in our operating results increased 23.8% to $81.8 million in the second quarter of 2019. Adjusted net income per diluted share grew 22% to $1.22 per share in the second quarter of 2019, compared to $1 per share in the second quarter of 2018.

Cash used in operations was $45.8 million in the second quarter of 2019 compared to cash provided by operations of $52.6 million for the second quarter of 2018. The decrease in operating cash flow was primarily the result of the final Symphony earn-out payment of $83.2 million made in April as well as an increase in cash outflows from working capital driven by a slight increase in our DSO. Our net day sales outstanding work 24 days at June 30, 2019, and 19 days at June 30, 2018, and were in line with our expectations.

Capital expenditures for the second quarter of 2019 were $21 million compared to $12.7 million for the second quarter of 2018. As we previously discussed, the increase in our capital expenditures continue to reflect our investment in information technology and expansion of our infrastructure to support our growth. Our cash balance at June 30, 2019, was $141.9 million of which $52.1 million was held by our foreign subsidiaries. Net debt outstanding, defined as total debt less cash and cash equivalence at June 30, 2019, was $974.6 million compared to $1.2 billion at June 30, 2018.

Regarding currency concentration, excluding reimbursement revenue and expenses, 85% of our revenue were denominated in US dollars, while 62% of our total expenses were denominated in US dollars which is consistent with prior quarters and 2018 levels. Our euro exposure continues to be naturally hedged. As we discussed in prior quarters, we continue to have exposure to movements in the GBP as less than 1% of our revenue is denominated in GBP, while approximately 6% of our expenses are denominated in GBP.

As Colin referenced earlier in the call, the company is updating its 2019 revenue guidance to between $3.02 and $3.10 billion representing as reported growth of 5 to 8% and constant currency growth of 68%. We are also updating our GAAP net income per diluted share to between $3.60 and $3.70 and adjusted net income per diluted share to between $4.98 and $5.08 representing growth of 16% to 19%. We continue to estimate our effective tax rate at 24%. As we previously discussed, our effective tax rate may differ from this estimate due to, among other things, changes in the geographic allocation of our pre-tax earnings as well as changes to interpretation of the US tax cuts and jobs act. Please note that our guidance assumes a euro rate of 1.15 and a GBP rate of 1.30, all other foreign currency exchange rates are as of June 30, 2019. That concludes our prepared remarks, and now we are happy to take your questions. Operator, you may now open the line.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, at this time, if you have a question, please press *1 on your touchtone phone. If your question has been answered or if you'd like to remove yourself from the queue, you may press #. To prevent any background noise, we asked that you, please place your line on mute once a question has been stated. Our first question comes from David Windley of Jeffries; your line is open.

David Windley -- Jefferies -- Analyst

Hi, good morning, gentlemen. Thanks for taking my questions and thanks for the information this morning. Colin, I wanted to follow-up on your comments about the environment. Your bookings have remained very solid, above 1.2, as you highlighted. I think throughout most of last year, certainly the second half, and the early part of this year you been pretty enthusiastic about a new MSA that you inked in the fourth quarter, kind of in one of your large clients getting back into its groove after the closing of a large merger. I just wanted to get your qualitative commentary around the momentum of some of your bigger opportunities and are they flowing into bookings in the early part of the year as expected, or is that kind of feathering in over a longer period of time?

Colin Shannon -- Chief Executive Officer

It actually looks as though it's coming in much later and the one that we mentioned, that was a new[inaudible] to last year. We had recent meetings with the senior leaders there, and interestingly they were making sure that they were earmarking us for stronger flow, and they've got a couple of nice studies identified for later on in the year. So, we're actually starting to see things happening on some of the new partnerships who have signed up. So, all in all, I think that there's been nothing unusual which actually probably would've helped to get stronger at [inaudible] had we been successful in actually getting some of the other steadier type of work coming through. So, most of that has been our new business flow of RFPs and basically just our normal type of flow from our typical pick of business. So, we've been pretty pleased with where we are and obviously the expectations that we can improve with some of our longer-term clients giving us more work in the future.

David Windley -- Jefferies -- Analyst

Right, so, that's helpful. So, to emphasize the point, it's not that any of those larger opportunities have gone away, failed to materialize at all, but rather primarily a timing issue?

Colin Shannon -- Chief Executive Officer

A lot of it is just timing, yes.

David Windley -- Jefferies -- Analyst

Okay. You mentioned some cancellations that hit in Q2 that had some influence over your full-year revenue guidance. Could you quantify those for us at all? Outside the norm?

Mike Bonello -- Chief Financial Officer

Yeah, as you see, there was almost $110 million in cancellations in the quarter, and that resulted in approximately $20 million of revenue dropping out the back half of the year.

David Windley -- Jefferies -- Analyst

Okay, $20 million, great. And then finally, your margin performance has been ahead of certainly my expectations, and I think ahead of the basic 50 basis points per year that you had talked about is a general structure. Does that influence your continued ability to expand margin, have you essentially pulled anything forward or can we view this as a base on which you can continue to grow? Expand?

Mike Bonello -- Chief Financial Officer

Yeah, we haven't pulled anything forward Dave, we're just continuing to manage our costs and make sure that we're utilizing staff effectively and we believe that we can grow slightly on that. I wouldn't say it will be in increments that you've seen over the last two quarters, but we do expect it to be positive.

David Windley -- Jefferies -- Analyst

Great, thank you.

Operator

Thank you, our next question comes from John Kreger of William Blair; your line is open.

John Kreger -- William Blair -- Analyst

Hi, next very much. Hey Colin, just building on your comments about the transaction in Japan, can you just give us a broader update on your buildout of the operations in Asia Pac overall? Is that where you wanted to be or is that still a point of investment? Thanks.

Colin Shannon -- Chief Executive Officer

Thanks, John. It still a lot of investment there. We're really pleased obviously. The venture that we started with Takeda, we'll now get 450 people in Japan and it's quite unique in that obviously a lot of them have transitioned over from Takeda so they've got a lot of really strong drug development experience and is very appealing as a strong Pharma partner and we're going to be supporting them with some of our new technologies, particularly our C6 platform, we see that with a great opportunity for them to leverage that in Japan and we'll be looking for building that out in the next number of quarters. So, overall, we're getting a lot of strength there. We're still obviously growing in lots of other countries, and we've got over 2 ½ thousand people there now in Asia. We still feel like there's room to grow we're still experiencing a lot of demand, and we'll continue to invest and build that out. I was very, very pleased with our new offices in Japan, they're setting a new standard, not only the timeline that we got it done in but it's working really, really smart. So, we are very, very pleased at the new office opening last week.

John Kreger -- William Blair -- Analyst

Great, thanks. And then follow-up, if you think about the next one or two years across the business, where do you see the biggest opportunities for growth from here? Existing relationships, new relationships, large clients versus small, the data business versus the clinical business; just where do you think the biggest opportunities are for PRA?

Colin Shannon -- Chief Executive Officer

We are still working to be innovative, and we're working on how to utilize the virtual platforms, and we're at the moment using it in a hybrid fashion to augment the traditional methodology of clinical trials. It's showing very, very good indication, it's improving compliance, and we can see that continue to advance. The use of data is becoming really of paramount importance, and we're actually starting to think about using synthetic arms, etc. for development. We are nicely positioned to take care of that the future. We're still building out and using digitalized adaptive monitoring and with hired new resources to really optimize that solution. We continue to look at technologies and ways of doing things faster.

Obviously, there's still a lot of resistance in some of our clients where they still want to use their own site mix, their own KOLs, and their own SOPs and procedures, but we're finding a lot of the biotech are really very innovative and I want to take advantage of what we can bring in some of the offerings that we have. So, overall, from a client mix, we'll continue to support, obviously, all of the clients that we work with over the years. We continue to add new clients all the time, particularly in biotech. Our goal is to make sure that we can get drugs to market as quickly as we can and it's obviously always a shame when we have worked hard, and a drug fails, but it's the nature of our business, and it's always unfortunate. It hurts our team just as much as it hurts the Pharma because they're all working diligently on it and sometimes for a long time. So, I see a nice mix going forward. It's been a great environment, and we're still seeing a very strong RF pre-fall and lots of opportunities.

John Kreger -- William Blair -- Analyst

Great, thank you.

Operator

Thank you, and our next question comes from Donald Hooker of KeyBank Capital, your line is open.

Donald Hooker -- KeyBanc Capital Markets -- Analyst

Great, good morning. So, maybe just diving into Symphony Health. It sounds like you have some fairly good ambitions there building out those commercial teams, investing in software and whatnot. What is the typical -- how do you think about margins for that business? What is your target for let's say gross margin for that business for the revenue line going forward?

Mike Bonello -- Chief Financial Officer

Donald, thanks for the question. We've typically been kind of in that 27% to 28% range first Symphony. Obviously, there's peaks and valleys there depending on how the revenue comes through because obviously, they're backend loaded toward September and Q4. But our expectations have been in that 27% to 29% range in terms of where we see their margins.

Donald Hooker -- KeyBanc Capital Markets -- Analyst

So, if that drifts higher than that, it sounds like you're going to be reinvesting back to grow that even more so, it'll sorta stabilize at that level for the next year or so, is that fair?

Mike Bonello -- Chief Financial Officer

That's correct.

Donald Hooker -- KeyBanc Capital Markets -- Analyst

Great, super. And then, again, understanding Symphony Health because that's a new element to the story, the seasonality there is tough for us on the outside to sort of track. How is the seasonality this year, do you think, comparing to last year? Yeah big fourth quarter last year, I think you normally have a big fourth quarter, but should we see sort of a similar pattern or how is that sort of setting up?

Colin Shannon -- Chief Executive Officer

So far, projecting forward we're seeing no difference to last year and we are expecting to see a similar type of effort made. And in the meantime, the team is stopping working to see how we can normalize some of that revenue stream over the year so that we don't have such volatility toward last quarter and so they're working diligently to look at some other types of transactions where the revenue is spread more evenly. But that may take some time to develop, but they've certainly been working on that, and so far we've been looking to provide some color around the rest of the year. We feel really pretty strong about the business we think that is looking very good and there's no reason why we can't achieve exactly what we did last year.

Donald Hooker -- KeyBanc Capital Markets -- Analyst

Super. And maybe the last question for me and then I'll hop off and let others in, you might've mentioned this in the prepared remarks, but I think I missed the audible. In terms of sort of the shift mix shift from functional service provider to full-service outsourcing, what are sort of the comparable growth rates between those two models? Is the shift toward full-service continuing, can you maybe quantify that a bit?

Colin Shannon -- Chief Executive Officer

Yeah, I'll give you some color on it. We've been mentioning the Strategic Solutions has been through less growth, and actually a lot of our former clients are going and our rebalancing their staffing model between the permanent staff and the flack staff as we get through this exercise, we're really looking to see where the gaps are, and we know it's quite a shift moving away from North America to the rest of the world, and it's taken quite a time for them to go through that analysis and only recently are we now getting all the demands for new jobs and proceeds from the rest of the world. So, it's been slower growth, and we are actually seeing that obviously the strong dollar, meaning that were moving through countries where they're getting more inexpensive labor.

And a lot of these countries it's taken a longer cycle to fill the jobs with notice periods and finding, etc. It's just taking a lot longer. So, there's been a sort of gap between -- and we notice that staffing at the beginning of the year, we thought it would actually ramp up a lot faster but it's only recently that we've actually started to get all of these job requirements to be filled. So basically, we're seeing that there's minimal growth within the Strategic Solutions for the year but worsening product registration still going well over double digits.

Donald Hooker -- KeyBanc Capital Markets -- Analyst

Yeah, that's helpful. Thank you very much.

Operator

Thank you, and our next question comes from Ross Muken of Evercore ISI, your line is open.

Ross Muken -- Evercore ISI -- Analyst

Hey, guys, it's Luke on for Ross this morning. I just wanted to follow up on the guidance and basically if you could just walk us through ultimately what changed from when you issued it, was it more of -- and the guide down, I guess is it more of just being overly optimistic in having to have those projects come in to hit your guide or is it more something going on in the overall market environment?

Colin Shannon -- Chief Executive Officer

No, it was actually more -- we could've been -- there was a number of pathways that had just bad things broken out, that would've been different we would've been able to continue with our guidance as such. With surprise cancellations, that's one thing but had we been able to ramp up the stock up with some of our studies the way that we would traditionally see them going with good coverage, but when we're looking through it, we wanted to make sure that we are representing what were seeing and what the backlog coverage was showing and with some of the changes in other areas we just couldn't compensate the product registration to cover everything.

So, when we did our analysis, we looked hard because the last thing we want to do is to just guidance and then find out that we got everything ramped up faster. And so, we had a lot of debate over should we wait, and we actually wanted to give investors color and let them see what we're seeing. The good thing is that most of the issues were all related to some more margin type work. So, you can see that we've really held up our earnings well and we're still not really changed much from that, so we're feeling pretty good that despite reducing revenue, we're actually still projecting really good quality earnings.

Ross Muken -- Evercore ISI -- Analyst

That's great, thanks. And then lastly on the margins and GoForward, we had some pretty big moves in FX since you're basing your guidance, how should we think about how those pace for the rest of the year and the flow-through of FX through the model?

Mike Bonello -- Chief Financial Officer

Sure, we obviously had a couple cents of FX help in the second quarter but with running the rates through the way we've run them and given the fact that that we're in a significant number of countries, we're only expecting maybe a penny of benefit for the remainder of the second half of the year. So, we don't have a lot of FX benefit built-in.

Ross Muken -- Evercore ISI -- Analyst

Okay, great, thanks.

Operator

Thank you. Our next question comes from Sandy Draper; your line is open.

Sandy Draper -- SunTrust -- Analyst

Maybe one just clarification. First, on the way you guys report book to bill, you're essentially reporting it still more on a 605-type basis, is that correct? So, you're not including pass-throughs in either the revenue or the bookings?

Mike Bonello -- Chief Financial Officer

That's correct.

Sandy Draper -- SunTrust -- Analyst

So, thinking about comparing your book to bill versus most of the other peers who are, I would assume your book to bill would be higher if you would include the pass-throughs.

Mike Bonello -- Chief Financial Officer

That's correct.

Sandy Draper -- SunTrust -- Analyst

Okay, great, I appreciate that clarification. And then maybe back when I think about the cancellations and appreciate you calling that out, as I'm looking back at the past sort of six, seven quarters, I think there've been four of the last seven quarters over $100 million. Is there anything going on in terms of the type of therapeutic trials are getting, is it just -- I mean part of it you're getting bigger, but I'm just trying to get a sense for should we be thinking about cancellations maybe at this higher dollar level going forward or do you think it could start to move back down toward the sub-$100 million? Thanks.

Mike Bonello -- Chief Financial Officer

We look at that very closely, Sandy. We're continuously monitoring what's going on from a study perspective, and I think as we talked in the past, we have kind of a bucket that we call backlog at risk, so we make sure that we understand what's going on there. In this particular quarter, as Colin referenced, we had some cancellations because of the failure of a drug which we weren't expecting, obviously. So, that had a little bit bigger of an impact from a revenue perspective. So, I would expect -- I'm hoping that cancellations are very high and certainly I'm hoping that the studies we are working on would probably be in line with historical levels.

Colin Shannon -- Chief Executive Officer

I mean there's no classification or general characterization that we are seeing that there's a concern. We don't have a high concentration that we can see that this would be something significant. Obviously, we always look at class of drugs and make sure that if we're doing anything in the similar vein, we can expect maybe that would be at risk as well, but there's nothing like that. It's something we do watch; we try our best to determine whether there's any risk. Obviously, until results happen, you can't tell whether a drug works or not and when there's an interim analysis, we always watch it because you never know what the results will show. It's just unfortunate that we get pretty well down the road, and then it doesn't show efficacy, and it's bad news for everybody.

Sandy Draper -- SunTrust -- Analyst

Okay, that's helpful. And then my final question relates to the hiring and trying to find the people, is there any -- trying to find the people, is it more a competitive dynamic where you in several other CROs are chasing the same people, so it's hard to get them because the wage inflation is out there or certain pockets or are being split above multiple CROs? Or is it just a function of your getting people you want it just takes longer because you're going into geography where maybe you don't have the HR infrastructure to actually find the people, but once you find them and can identify them, you can hire them pretty quickly? I'm just trying to get a sense of is there risk of wage inflation because you try to resolve the hiring issue you're gonna have to start paying more? Thanks.

Colin Shannon -- Chief Executive Officer

It's a bit of everything you said there actually because each market is slightly different. In fact, even in North America, there's different pockets. So, in each area, we've got a treat slightly differently, and we've got a talent acquisition group that their focus is they're best at identifying the needs. And part of the problem is that it's now kind of transient workforce and we've had a lot of success in training people, and the experiences they've had, their highly sought after and a lot of other competitors are paying significantly higher to attract some of our team away. So, we're always fighting the retention battle and also hiring new staff. So, we always look when there's openings that we obviously want to fill it with the best people possible, and we are making sure that we maintain a high standard.

Sandy Draper -- SunTrust -- Analyst

Thanks, Colin.

Operator

Thank you. And our next question comes from Erin Wright of Credit Suisse; your line is open.

Erin Wright -- Credit Suisse -- Analyst

Great, thank you. I'm curious, are you seeing any changes in the broader pricing environment or is the competitive landscape more aggressive, less aggressive from your vantage point and what can you do in terms of bundling and leveraging the Data Solutions component in the bidding process or the pricing process at this point? Thanks.

Colin Shannon -- Chief Executive Officer

You know, one of the things about using the data is that it's giving us a good analysis of really getting a true handle on enrollment rates, and we have noticed in the past some of the competitors have been a little bit more bullish in enrollment rates, and we tried to obviously show to the clients that we are supporting it with strong data. But when they're getting fixed-price contracts there comes a balance of how aggressive we want to be in knowing and seeing the data and try to get a balance of the risk versus reward here, I think we've been standing by our principles of we've done a lot of work, we've been using and supporting all of our analysis with data. And over time, it's proven that that ultimately is a better option. We've mentioned in the past, we see one-off types of pricing situations, and that still happens from time to time, whether its people being aggressive on enrollment rates or whether they may be using less hours, we never know the mix, all we know is that we try to be as competitive as we can. We know our rates are very comparable with the rest of the industry, and it's really all how best to structure and optimize each bid that comes into play.

Erin Wright -- Credit Suisse -- Analyst

Okay, that makes sense. And there was some new headlines I guess yesterday from -- this is talking about a drug pricing standpoint, but in terms of potential new drug importation initiatives and just given kind of broader drug pricing scrutiny, are you hearing any sort of feedback from customers on this front residual to early or I'm curious what your hearing from the sponsor perspective? Thanks.

Colin Shannon -- Chief Executive Officer

Yeah, I mentioned that last time that there's always that type of pressure on our clients with that environment but in the short term it may impact a little bit, but over the longer term, we do feel that it will ultimately cause our larger Pharma to reduce their workforce even more and allow CROs to produce more flex labor and give us more opportunities in the future. So, we see that ultimately as being a positive, although it may be a little painful in the short term.

Erin Wright -- Credit Suisse -- Analyst

Okay, great, thank you.

Operator

Thank you. At our next question comes from Jack Meehan of Barclays, your line is open.

Jack Meehan

Thank you. Good morning. I just had a few model related questions to clean up. I guess the first is related to the revenue reduction guidance. Caught $20 million related to the cancellations you talked about, could you just walk us through the moving pieces on some of the other things that you flagged and how you quantify those?

Mike Bonello -- Chief Financial Officer

Yeah, certainly, Jack. I think if you look at the midpoint were down roughly $85 million. As I said, there's 20 million that's related to the cancellations that we discussed. There's roughly $10 million around the study delays that we are experiencing from how we would've expected it to run. Roughly $30 million worth of pass-through movement as a result of some of these changes. And then about $20 million-$25 million related to the Strategic Solutions discussion that we had earlier.

Jack Meehan -- Barclays -- Analyst

Great. And then turning to the cash flow, we've heard from a couple of companies so far related to kind of the increase in DSOs that we've seen, can you walk us through just maybe the payment turns and whether you think that construction will normalize again in the back half of the year?

Mike Bonello -- Chief Financial Officer

Yeah, the second half of our year is typically where you see improvements on our DSOs, I think if you look at historically. Our DSO was a little bit better in the first quarter than I thought it would be typically you see a drop off in the fourth and then a movement backup in the first. I think we're a little bit flatter in the first quarter than I would've expected, but our second quarter was not higher than that level that we would've expected in the first. Some of our clients and I think we referenced this in the past, where we are seeing some extension on the terms that they're looking for but I don't anticipate that our DSO would be any worse at the end of this year than it was at the end of last year, maybe a day but not more than that.

Jack Meehan -- Barclays -- Analyst

Great. Final cleanup I guess. As I run my math, I have you exiting 2019 with net leverage closing at around 1 ½ turns, so out I was just curious as you look at the deal environment today and you stack up the different opportunities, just how you feel about the opportunity to maybe continue to add as you look over the remainder of the year?

Mike Bonello -- Chief Financial Officer

Well, I'll let Colin comment on that, but I will tell you that in our current forecast, assuming that a transaction doesn't happen, we have $200 million worth of term debt payments built-in.

Colin Shannon -- Chief Executive Officer

We've got nothing in the pipeline just now. Obviously, if something -- I've always felt that it would be great to add to hours is more real-world evidence and get something core to build on our data component. We feel that that's very complimentary and there's a lot of growth there, and we are seeing our competitors exploit that market very strongly. It's an area that we've always seen as a great growth for our future and would like to move more aggressively in there, and we've been watching and looking at some opportunities. As you're probably aware just now, the organizations that have been up for sale are looking for really premium values, and we just don't really want stretch that far at this point time so we are continuing to look and see what opportunities are there that we could take advantage of.

Jack Meehan -- Barclays -- Analyst

Thank you, Colin.

Operator

Thank you. And our next question comes from Dan Brennan of UBS; your line is open.

Daniel Brennan -- UBS Group -- Analyst

Great, thanks for taking the questions. Could you maybe speak to just kinda the big picture on kind of the bookings growth that you've seen over the last say couple of years? I know it's continued to turn down here, gross bookings kind of flatter share the last couple of quarters obviously. You talked about some of the opportunity with the big customer that likely you'll see a big pickup going forward. But can you just characterize how much of the environment, how much of it is PRA? Obviously, you sound really positive your overall competitive positioning, but I'm just trying to kind of tease out what we've seen in kind of where we go from here.

Colin Shannon -- Chief Executive Officer

We're always in the mix of looking for developing new relationships and new clients, and sometimes it can take a lot longer than expected. We normally have to go to a couple of [inaudible] or get close a couple of times before we can make breakthroughs into new relationships. We've got a good number of core clients that give us work, but it's been cyclical when we're working on a number of different activities, they tend to wait and as things evolve before there's a next raft of new studies that come out. So, it's quite choppy in that fashion, and so our business development team continuously is looking at all the leads and looking at where we're gonna be focusing in on.

So, in any given quarter, we will identify the targets, the shortlist where we've gotten, and our goal is to try and optimize the winning of these targets. And obviously if we miss that, that can be slightly less than where we expected, but we've gotta keep focused because if we go after everything, we'll end up not being successful. So, we target where we need to every quarter and look at opportunities that we think we can win and where we are, and obviously we give a lot more focus on to our incumbent clients because obviously, we want to ensure that we remain good partners to them and make sure that they get first opportunity to take advantage of all that we can offer.

Daniel Brennan -- UBS Group -- Analyst

Okay. Great, thank you. And then I think in the prepared remarks, and maybe throughout the Q&A, you did mention the continued elongation and kind of revenue conversion from backlog just given probably the dynamics of some of the business. Can you just give us a little more color there and kinda what's baked into guidance now in terms of conversion?

Mike Bonello -- Chief Financial Officer

We have tailored back, obviously, our sales model as we look at how MBAs coming in. I don't have an actual quantifiable number that would say here's what it was before and here's what it was after, but we have slowed it down to make sure that we take into affect what we're seeing in the studies that we're winning. So, we have slowed it down, and I would expect. Obviously, it to be in line with how our forecast is showing currently.

Daniel Brennan -- UBS Group -- Analyst

Okay. And then maybe final one, just back to Symphony. So, it sounds like you continued at capabilities and people and I think you said you're still not at the point yet where the Symphony business or the data capabilities are fully integrated with any kind of PRA offering. How do we think about the evolution of that going forward? I know you had basically hesitated from giving us any formal strategy, if you will, as you put new management in place and kinda had to do a deep dive on that business. So, how do we think about the evolution of really weaving in some of what Symphony can offer into the core of PRA clinical offering that could potentially help you drive better growth? Thank you.

Colin Shannon -- Chief Executive Officer

Well, that's actually already started so the teams have been working much more collaboratively and we do see a lot of synergies there and proving new opportunities and new revenue opportunities. So, we continue to look at how we can continue to develop that and take advantage of the strengths of the core parts of the organization. It's an ongoing work in progress, but it's more -- it's not about cost saving, this is all about creating new revenue opportunities, either collaboration between the two different groups. It's well under way. It started early in February and were still working through it, and we continue to evolve it as we go through and improve relationships and see new opportunities because of the relationships.

Daniel Brennan -- UBS Group -- Analyst

Great, thank you.

Operator

Thank you. And our next question comes from Stephen Baxter of Wolfe Research; your line is open.

Stephen Baxter -- Wolfe Research -- Analyst

Hi, thanks for the question. I wanted to follow-up on the conversionary question. So, I'm trying to understand the relationship between burn rate and the revised guidance. So, it looks like the burn rate has stabilized on a sequential basis, which seems like a pretty good outcome. But that seems to conflict a little bit with the comments around elongation you guys are making about starts. And it looks like from here the revised guidance roughly requires it to stay consistent throughout the balance the year. So, I'm hoping you can maybe kinda help us square those things, help us think about what was embedded in the original guidance for burn rate progression and if I'm right about the setting that from here your confidence level that you can hold it flat just given the comments that you've made about start-ups getting pushed. Thank you.

Colin Shannon -- Chief Executive Officer

Yeah, as Mike mentioned in previous quarters, we were actually starting to envision a slight pickup in our conversion rate during the year and you're correct that highs kinda flattened off, so we didn't get the benefit of seeing that improvement because we've actually are flat or been an inning elongation on the ramp up and it's been taking a little bit longer. So, we continue to sort of feign turn our models and working with his team to continue to improve our forecasting in that factor. It's been a change that's happened over the last year, so as you're aware we continue to sort of look at how it's ramping through and maybe Mike, you want to add?

Mike Bonello -- Chief Financial Officer

Yeah, and Stephen, you will see a little bit of a decline in the burn rate in Q3 and Q4. As Colin said, we had originally thought that we would see a little bit of flattening and kind of Q1 and Q2 and that a pickup in Q3 and Q4. I think it might be just a slight step down in Q3 and it may be just a slighter step down and Q4.

Stephen Baxter -- Wolfe Research -- Analyst

Great, thanks, I'll keep that in mind. I appreciate the color.

Operator

Thank you. As a reminder lives and gentlemen, that's *1 to ask a question. Our next question comes from one Juan Avendano of Bank of America; your line is open.

Juan Avendano -- Bank of America -- Analyst

Hey, thank you for the questions. Only one for me on FX. It seems like your guidance is based on an exchange rate of 150 for the euro in 130 for the pound, currently the spot rates are below that and so if you could tell us why you're basing your guidance on those spot rates and then also what embedded in the guidance, given your assumptions on what the impact or benefit of FX to the margins on day adjusted EPS?

Mike Bonello -- Chief Financial Officer

Yeah sure, Juan, I think we talked about the past our process for how we look at our exchange rates that we use in our guidance. We take surveys from I think it's roughly 11 banks and we look at what their forward rates are suggesting. The forward rates are suggesting what we guide to as opposed to what the spot rate on those two currencies are today. So, that's why we've kept them where they are. So obviously if the rates come in actually a little bit lower than that guidance, we get a little bit of benefit. I don't have FX broken out between margin adjusted net income, but I will tell you that given some rate movements in other countries, in the back half the year all that we're expecting to see is roughly given the rates we have in here currently, is a penny of benefit and we bake that into our guidance.

Juan Avendano -- Bank of America -- Analyst

Okay, that was it for me. Thank you.

Operator

Thank you. At this time, I have no other colors in the queue; I'd like to turn the call back over to Mr. Colin Shannon for any closing remarks.

Colin Shannon -- Chief Executive Officer

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

Operator

Ladies and gentlemen, thank you for your participation in today's conference, you may now disconnect. Everyone have a wonderful day.

 Duration: 51 minutes

Call participants:

Tom Byrne -- Vice President of Legal Affairs 

Colin Shannon -- Chief Executive Officer

Mike Bonello -- Chief Financial Officer

David Windley -- Jefferies -- Analyst

John Kreger -- William Blair -- Analyst

Donald Hooker -- KeyBanc Capital Markets -- Analyst

Ross Muken -- Evercore ISI -- Analyst

Sandy Draper -- SunTrust -- Analyst

Erin Wright -- Credit Suisse -- Analyst

Jack Meehan -- Barclays -- Analyst

Daniel Brennan -- UBS Group -- Analyst

Stephen Baxter -- Wolfe Research -- Analyst

Juan Avendano -- Bank of America -- Analyst

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