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Syneos Health (SYNH) Q3 Earnings Top Estimates, Margins Up

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Zacks Equity Research
·5 min read
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Syneos Health Inc. SYNH reported third-quarter 2020 adjusted earnings per share (EPS) of $1.04, which beat the Zacks Consensus Estimate by 15.6%. The metric increased 19.5% from the year-ago figure.

Reported EPS was 60 cents, marking a 7.1% improvement from the year-ago figure.

The year-over-year increase in adjusted earnings was the result of the company’s cost management strategies, including ForwardBound, lower reimbursable out-of-pocket expenses, and lower interest expense.

Revenues in Detail

Revenues in the quarter totaled $1.09 billion. The top line declined 6.6% year over year on a reported basis (down 6.8% on an adjusted basis and 7.5% on a constant currency adjusted basis). It also missed the Zacks Consensus Estimate by 1.9%. Adjusted revenues include revenues eliminated as a result of purchase accounting.

The year-over-year declinewas due to dull performances by both Clinical Solutions and Commercial Solutions. Revenues were less than expected in the quarter due to the decrease in reimbursable out-of-pocket expenses.

Segmental Details

The Clinical Solutions segment recorded revenues of $829.2 million in the third quarter; down 4.4% year over year on a reported basis (down 5.4% at CER adjusted). The downside resulted from the impacts of COVID-19, including the related decline in reimbursable out-of-pocket expenses, and the second-quarter divestiture of the company’s contingent staffing business. This was partially mitigated by the positive impact of fluctuations in foreign currency exchange rates.

Syneos Health, Inc. Price, Consensus and EPS Surprise

Syneos Health, Inc. Price, Consensus and EPS Surprise
Syneos Health, Inc. Price, Consensus and EPS Surprise

Syneos Health, Inc. price-consensus-eps-surprise-chart | Syneos Health, Inc. Quote

Commercial Solutions revenues were $269.8 million in the reported quarter, down 12.8% year over year (adjusted revenues moved down 13.2% at CER). The decline was caused by the impact of COVID-19, including a disproportionate decline in reimbursable out-of-pocket expenses as well as delays in new project starts.

Margin Details

Direct cost (excluding depreciation and amortization) declined 10.2% to $820.2 million in the quarter. Gross margin expanded 299 basis points (bps) to 25.4%.

Selling, general and administrative expenses were up 1.1% year over year to $111.1 million.

Adjusted operating margin (excluding depreciation, amortization, transaction and integration-related, and restructuring and other expenses) expanded 222 bps from the year-ago quarter to 15.3%.

Financial Details

Syneos Health exited the third quarter of 2020 with cash and cash equivalents, and restricted cash of $248.9 million, compared with $343 million at the end of the second quarter. At the end of the third quarter, cumulative operating cash outflow was $311.2 million compared with $157.9 million a year ago.

Guidance

The company updated its full-year 2020 guidance.

Full-year revenues are expected in the range of $4,370 million to $4,440 million (a decline from the earlier range of $4,470 million to $4,570 million) while adjusted EPS is expected in the band of $3.33 to $3.46 (an improvement from earlier-range of $3.16 to $3.38).

The current Zacks Consensus Estimate for 2020 revenues is pegged at $4.51 billion while the same for adjusted EPS stands at $3.23.

Syneos Health initiated its full-year 2021 revenue outlook in the range of $4.9 billion to $5.1 billion. This excludes the acquisition of Synteract. The Zacks Consensus Estimate for 2021-revenues is pegged at $5.05 billion.

Our Take

Syneos Health exited the third quarter of 2020 with better-than-expected earnings. However, revenues lagged estimates as well as declined on a year-over-year basis. The company registered significant sales decline in both of its business segments due to slower recovery in reimbursable out-of-pocket expenses across both segments. This was due to an increase in virtual operations and a slower recovery in patient enrollment. The drop in 2020 revenue guidance is also concerning.

On a positive note, there was solid strong sequential revenue growth in the reported quarter with Clinical Solutions revenues showing the strongest sequential recovery during the quarter. Margin improvement was also significant year over year. The company has increased its adjusted EPS guidance for 2020.

Zacks Rank & Other Stocks to Consider

Currently, Syneos Health carries a Zacks Rank #2 (Buy).

Some better-ranked stocks in the broader medical space are West Pharmaceutical Services WST, Thermo Fisher Scientific TMO and Align Technology. ALGN.

West Pharmaceutical reported third-quarter 2020 adjusted EPS of $1.15, beating the Zacks Consensus Estimate by 13.9%. Net revenues of $548 million outpaced the consensus estimate by 7.2%. It currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Thermo Fisher, a Zacks Rank #2 company, reported third-quarter 2020 adjusted EPS of $5.63, beating the Zacks Consensus Estimate by 28.8%. Revenues of $8.52 billion outpaced the consensus mark by 10%.

Align Technology reported third-quarter 2020 adjusted EPS of $2.25, surpassing the Zacks Consensus Estimate by a stupendous 281.4%. Net revenues of $734.1 million exceeded the Zacks Consensus Estimate by 38%. It currently carries a Zacks Rank #2.

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