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Syneos Health (SYNH) Tops Q1 Earnings Estimates, Margins Down

Zacks Equity Research

Syneos Health Inc. SYNH reported first-quarter 2020 adjusted earnings per share (EPS) of 68 cents, which beat the Zacks Consensus Estimate by 9.7%. The metric also improved 15.3% from the year-ago figure.

Reported EPS was 32 cents, marking a significant improvement from the year-ago net loss of 29 cents per share.

Strong top-line growth along with lower interest expense resulted in a significant bottom-line improvement in the quarter under review.

Revenues in Detail

Revenues in the quarter totaled $1.16 billion. The top line rose 4% year over year on a reported basis (up 3.8% on an adjusted basis and up 4.4% on a constant currency adjusted basis), beating the Zacks Consensus Estimate by 2.1%. Adjusted revenues include revenue eliminated as a result of purchase accounting.

Segmental Details

The Clinical Solutions segment recorded revenues of $874.8 million in the first quarter; up 8.7% year over year on a reported basis (adjusted revenues were up 9.2% at CER). The upside resulted from net new business growthand faster growth in reimbursable out-of-pocket expenses. However, an adverse impact of foreign currency fluctuation offset revenue growth.

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 $288.5 million in the reported quarter, down 8.1% year over year (adjusted revenues moved down 8% at CER). The decline was caused by unfavorable revenue mix and slower growth in reimbursable out-of-pocket expenses.

Margin Details

Direct cost (excluding depreciation and amortization) rose 4.2% to $924 million in the quarter. Gross margin contracted 18 basis points (bps) to 20.6%.

Selling, general and administrative expenses rose 4.3% year over year to $117.9 million.

Adjusted operating margin (excluding depreciation, amortization, transaction and integration-related, and restructuring and other expenses) contracted 21 bps from the year-ago quarter to 10.4%.

Financial Details

Syneos Health exited the first quarter of 2020 with cash and cash equivalents, and restricted cash of $335.9 million, compared with 113,117at the end of 2019. At the end of the first quarter, operating cash outflow was $38.6 million compared with $13.3 million a year ago.

COVID-19 Impact on Business

Within Clinical Solutions, the company is experiencing limitations accessing investigative sites due to the impact of COVID-19. As of mid-April, approximately 10% of the company’s clinical trial sites were inaccessible. However, the company noted that at the sites that remain accessible, 80% to 90% are allowing limited remote working activity.

Within Commercial Solutions, the Deployment Solutions field teams faced limitations in physically visiting healthcare providers, delays in existing projects, and travel restrictions. However, these teams made a rapid transition to virtual operations, and by mid-March, 90% of field teams had moved themselves to a work-from-home environment.

Guidance Withdrawn Earlier

On Apr 7, the company announced thatthe coronavirus-led uncertainties compelled it to withdraw its 2020 financial guidance.

Our Take

Syneos Health exited the first quarter of 2019 on a solid note. We are upbeat about the strong year-over-year revenue growth at the Clinical Solutions segments. The company has been strengthening its unique end-to-end market position by consistently innovating and expanding its Syneos One product. Strong RFP flow, a diverse portfolio of clinical and commercial initiatives and sustained customer interest in Syneos Health’s integrated offerings inspire optimism.

However, the coronavirus impact resulted in inaccessibility of several of its clinical trial sites. Also, contraction in gross and operating margin and decline in Commercial Solutions revenues are causes of concern.

Zacks Rank & Key Picks

Syneos Health currently has a Zacks Rank #4 (Sell).

Some better-ranked stocks in the broader medical space are Aphria Inc. APHA, Biogen Inc. BIIB and Eli Lilly and Company LLY.

Aphria reported third-quarter fiscal 2020 adjusted EPS of 2 cents in contrast to the Zacks Consensus Estimate of a loss of 4 cents. Its net revenues of $64.4 million outpaced the consensus estimate by 14.6%. The company carries a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Biogen currently carries a Zacks Rank #2. It reported first-quarter 2020 adjusted EPS of $9.14, surpassing the Zacks Consensus Estimate by 18.1%. Its revenues of $3.53 billion outpaced the consensus mark by 3.2%.

Eli Lilly delivered first-quarter 2020 EPS of $1.75, outpacing the Zacks Consensus Estimate by 12.9%. Its first-quarter revenues of $145.3 million surpassed the consensus estimate by 6.3%. The company currently sports a Zacks Rank #1.

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