昆泰 (IQV) 2016 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Quintiles IMS fourth-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded Tuesday, February 14. I would now like to turn the conference over to Andrew Markwick, Vice President of Investor Relations. Please go ahead.

Thank you, Jennifer. Good morning, everyone. Thank you for joining our fourth quarter and full-year 2016 earnings call. With me today are Ari Bousbib, Chairman and Chief Executive Officer; and Michael McDonnell, Executive Vice President and Chief Financial Officer.

Today we'll be referencing a presentation that will be visible during this call for those of you on our webcast. This presentation will be also be available following this call on the events and presentations section of our Quintiles IMS investor relations website at IR.QuintilesIMS.com. Before we begin, I would like to caution listeners that certain information discussed by management during this conference call will include forward-looking statements.

Actual results could differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with the Company's business, which are discussed in the Company's filings with the Securities and Exchange Commission, including our quarterly report on Form 10-Q filed on November 3, 2016 and subsequent SEC filings. In addition, we will discuss certain non-GAAP financial measures on this call which should be considered as a supplement to and not a substitute for financial measures prepared in accordance with GAAP.

A reconciliation of these non-GAAP measure to the comparable GAAP measures is included in the press release and conference call presentation. I would also like to point out that as with other global businesses we have been impacted by foreign exchange. And, therefore, we will discuss many of our results in constant currency to improve comparability.

I would now like to send the call over to our Chairman and CEO, Ari Bousbib.

Thank you, Andrew, and good morning, everyone. Thank you for joining our fourth quarter and full-year 2016 earnings call. This is our first call reporting earnings for the combined Company and on this call we will provide results for 2016 as well as guidance for 2017.

Our fourth quarter was very active for the Quintiles IMS team. We delivered on our financial commitments through solid operational discipline. Our integration teams continue to drive execution of their integration plans, implementing best practices and process efficiencies across the organization. Changes were made to our Management structure as we look to fully leverage the talent across both legacy organizations.

And specifically, we began to leverage the legacy IMS operating infrastructure and implemented organizational and sales force changes at the country level. We started the process of integrating data into our site identification and patient recruitment processes and we are beginning to see great traction with clients. We also repurchased $1 billion of our stock during the quarter and I am pleased that our Board of Directors just approved an increase in our post-merger share repurchase authorization from $1.5 billion to $2.5 billion, leaving us with $1.5 billion remaining authorization.

Let's review the financial results. Year-over-year comparisons are obviously impacted by the merger. We are making comparisons more meaningful by discussing results on a combined Company basis, that is, as is the merger took place January 1, 2015.

Fourth quarter revenue was about $2 billion on a combined Company basis. And adding back the merger-related deferred revenue adjustment we discussed last quarter, growth would have been 4.2% of constant foreign exchange rates.

The legacy IMS business grew 6.9%. The new commercial solutions segment also includes legacy Quintiles commercial businesses which declined year-over-year. And so in aggregate commercial solutions grew 4.9%. R&D solutions growth was 6.6% and integrated engagement services declined 8.4% during the quarter, and this is all at constant FX.

Revenue growth on our reported basis was impacted by some headwind from unfavorable currency movements during the current quarter. In aggregate, we lost about $10 million of revenue to our guidance of three months ago due to adverse effects, nearly all of which was in our commercial solutions segment. All in all, we performed in line with our revenue guidance at constant currency in all three segments.

Fourth quarter adjusted EBITDA was $541 million which was $34 million higher than our midpoint guidance three months ago. Adjusted EBITDA growth was 14.5%, again at constant currency and on a combined Company basis. Fourth quarter combined Company adjusted EBITDA margin was about 27% when you exclude the deferred revenue adjustment.

We had strong margin expansion of about 300 basis points. And this was primarily driven by operational improvements and good margin expansion in the commercial segment, mostly the legacy IMS commercial business, as well as operational improvements in the R&D segment and, to a lesser degree, from the favorable currency mix in the delivery costs of our CRO work. The commercial solutions segment continues to see success in the market. I'd like to give you some color and a few examples of a few recent wins.

A top five pharma client signed a global multi-year, multi-million dollar tech deal for our life science cloud-based master data management, or [MDM] app. The client already uses a number of our SaaS-based apps and will benefit from our integrated suite. In this case, the win was driven by our proven track record and expertise in the MDM space combined with our global deployment and support capabilities.

Another win, this time with a specialty pharma company, who selected Quintiles IMS to be the single supplier supporting their entire commercial operations. This is a $60 million deal combined technology and services from our commercial solutions segment as well as sales rep deployment from our integrated engagement services segment. The R&D solutions business saw good progress as well with a turnaround of our booking trends which I remind you we now report on in as contracted basis.

We finished the year with about $9.5 billion in contracted backlog. And that is stated as at the end of year currency rates and we had about $4.3 billion in LTM contracted net new business. You will recall that our integration teams are working hard to drive a productionized data-enriched R&D operating which we expect to take to clients in the second half of 2017. We have a large fulltime team working to integrate the legacy IMS data with the CRO business.

But are not waiting. We're already engaged with over 30 clients on opportunities to leverage this next generation of clinical development offering. In fact, we had already over $100 million worth of awards in the quarter for this next gen clinical development and we are working over $1 billion worth of opportunities where data enabled site ID and patient recruitment can be leveraged.

For example, in a recent such win, which was for an ophthalmology trial, we were able to use our data assets, predictive analytics capabilities and expertise with biosimilar development to identify the right sites with both the appropriate patient density levels and the required investigator therapeutic expertise -- in this case, intraocular injection. In the traditional approach, 3,000 potential sites would have normally been identified as having the relevant patients that would qualify for the trial.

However, using our data and analytics we were able to target and pinpoint the 261 most optimal sites from the get-go. The use of the IMS data saves considerable time and resources with the design of the trial, the identification of sites and the targeting of eligible patient populations ultimately help the client deliver their product to market faster.

With that, I'd like to turn it over to Mike McDonnell, our Chief Financial Officer, to take you through the financials in more detail.

Thank you, Ari, and good morning, everyone. As Ari mentioned, Q4, our first quarter as a combined Company, was a strong quarter for Quintiles IMS and we hit the ground running. Let's review the details.

On a reported basis the year-over-year numbers are not meaningful as this is our first quarter as a combined Company and IMS results are not included in prior periods. I will not read them out but they are in the tables and many of them will be in the 10-K for review. I would like to call to your attention the more meaningful comparisons in the center of the page.

Fourth quarter revenue was just over $2 billion, an increase of 4.2% at constant currency and 3.5% recorded on a combined Company basis and adding back deferred revenue. You will recall the deferred revenue adjustment we highlighted on our last call. This non-cash adjustment is the result of purchase accounting rules which at the time of the merger requires the elimination of IMS Health deferred revenue which would have converted to revenue in the fourth quarter.

Adjusting for deferred revenue and on a combined Company basis, commercial solutions revenue improved 4.9% at constant currency and 4.2% reported. The commercial solutions growth rate was dampened by a decline in the Quintiles legacy commercial business of about $12 million. Excluding this drag, legacy IMS commercial solutions grew 6.9% at constant currency and 6.1% at actual foreign currency.

R&D solutions service revenue grew 6.6% at constant currency and 5.4% at actual FX rates and integrated engagement services declined 8.4% at constant FX and 6.7% reported. Turning now to profit, adjusted EBITDA was $541 million, increasing 14.5% at constant FX and 16.7% of reported FX rates on a combined Company basis.

Adjusted EBITDA margins, when adjusting for deferred revenue, expanded about 300 basis points versus the fourth quarter of last year on a combined Company basis. As Ari mentioned, this strong margin expansion was primarily from operational improvements in the commercial and R&D segments as well as, to a lesser degree, from a favorable currency mix in our R&D solutions cost.

Moving down to P&L, fourth quarter GAAP net loss was $178 million and GAAP loss per share was $0.74. The loss was primarily due to a one-time deferred tax charge from changing our research and regarding most of our 2016 and prior foreign earnings whereby we will no longer permanently reinvest those earnings overseas.

As a result, in the fourth quarter of 2016, deferred taxes were recorded on these earnings at the higher US income tax rate. The total P&L charge as a result of this change was $252 million. It is important to note that we intend to assert that our foreign earnings after 2016 will be indefinitely reinvested overseas. Therefore, we do expect to return to normal tax levels in 2017 and subsequent years.

Adjusted net income was $266 million. You will recall that our adjusted net income was calculated using an adjusted book tax rate which was 34% for the fourth quarter. You should note that our cash tax rate is much lower and in the fourth quarter was only 4.8%. Adjusted diluted earnings per share was $1.9 in the fourth quarter using the adjusted book tax rate.

Now lets turn to full-year revenue. For the full year, once again the reported numbers are not comparable as this is the first quarter we are reporting results as a combined Company. I will not going into detail on these numbers during the call but as I mentioned previously they're in the table and many of them will be in the 10-K for review.

Full-year revenue increased 7.8% at constant currency and 7.4% reported on a combined basis and adjusting for deferred revenue. For our segments and on this same basis, commercial solutions revenue grew 9.1% at constant currency, 8.5% reported. The commercial solutions full-year growth rate was also impacted by decline in the legacy Quintiles commercial business. Excluding this drag, legacy IMS commercial solutions grew 11.3% at constant currency and 10.5% at actual FX.

R&D solutions grew 10.6% at constant FX rates, 9.9% reported and integrated engagement services declined 7.9% at constant currency, 5.8% at actual FX rates. Turning to R&D solutions, net new business and backlog. You will recall that last quarter we began reporting our net new business and backlog metrics on an as-contracted basis, meaning that we will not recognize the value of a client award until we have receipt of a written binding commitment or executed contract.

We believe this is a more conservative practice and precise approach compared to the traditional industry practice. For the 12 months ended December 31, 2016, R&D solutions bookings were about $4.3 billion resulting in an ending contracted backlog of approximately $9.5 billion.

This end-of-year backlog is stated at end-of-year exchange rates and the number, therefore, includes an adverse FX impact. We expect to convert approximately $2.9 billion of this backlog into revenue over the next 12 months. Now, contracted bookings were stronger this quarter than last quarter and we are pleased with this development.

I do want to remind you this is a long cycle business and quarterly bookings can ebb and flow. This is why you should focus on overall backlog and LTM metrics rather than the book-to-bill in a given quarter. Adjusted EBITDA for the full-year was $1.956 billion, an increase of 9.1% at constant FX and 12.6% reported on a combined Company basis.

Let's spend a few minutes on the balance sheet. At December 31 cash and cash equivalents totaled $1.2 billion and debt was $7.2 billion resulting in net debt of $6 million. Our gross leverage ratio was 3.7 times trailing 12 months adjusted EBITDA.

Net of cash, our leverage ratio was 3.1 times. Cash flow from operating activities was $447 million in the fourth quarter. Capital expenditures were $86 million and free cash flow was $361 million for the fourth quarter.

A quick update on share repurchase. You'll recall that on our last call we announced a $1.5 billion share repurchase authorization. Share repurchase is our preferred method of returning capital to shareholders and we also see our shares as an attractive investment.

As a result, we repurchased $1 billion of our stock representing almost 13 million shares, which is about 5% of our shares outstanding. As Ari mentioned, our Board has also approved an increase in our post-merger share repurchase authorization from $1.5 billion to $2.5 billion, leaving us with the remaining authorization of $1.5 billion. Before we move to guidance let's take a minute to discuss foreign currency.

As you are aware and as depicted on the chart, following the end of the third quarter and the US election results, the US dollar strengthened significantly, especially against the Japanese yen, the euro and the British pound. As a result, this impacts our full-year 2017 guidance at actual FX rates which assumes rates remain unchanged through the end of 2017.

To help you best understand the impact of currency fluctuations on our revenue, I will provide you with a rule of thumb for a hypothetical scenario where the value of the US dollar changes 1% versus our entire basket of securities. Of course, we do business in over 60 currencies and not all will move in the same direction by the same amount at the same time.

Therefore, the purpose of providing this rule of thumb is not to predict exactly what will happen as currencies move but simply to help you understand the potential impact of movements. Based on our current mix of currency, if the dollar changes 1% versus our basket of currencies there would be about a $30 million impact on full-year revenue. The euro what account for about $14 million of this full-year revenue impact, the yen would account for approximately $6 million and all other currencies combined would account for approximately $10 million.

Now, we will attempt to mitigate the foreign currency impact on adjusted EBITDA through cost reductions and the potential to leverage favorable currency mix based upon where we perform R&D work. You should also note that our euro-denominated interest expense provides a natural hedge that reduces the impact from foreign exchange fluctuations on adjusted diluted EPS by about one-third. Now lets turn to guidance.

Our revenue outlook for 2017, assuming FX rates held constant in 2017 versus 2016, would be $8.125 billion to $8.225 billion. The difference between where rates are today and where they were on average for 2016 results in a foreign currency headwind of approximate $125 million. Therefore, our full-year 2017 revenue guidance is $8 billion to $8.1 billion, assuming currency rates remain at current levels for the rest of the year.

From a segment perspective, commercial solutions revenue is expected to be between $3.6 billion and $3.65 billion, research & development solutions revenue is expected to be between $3.655 billion and $3.69 billion and integrated engagement services revenue is expected to be between $745 million and $760 million. Similar to last quarter, this guidance again includes an estimate for deferred revenue which is expected to reduce the commercial solutions segment revenue and Quintiles IMS revenue by about $7 million in the first quarter of 2017.

For full-year profit we expect adjusted EBITDA be between $2 billion and $2.1 billion and adjusted diluted EPS to be between $4.40 and $4.55. For our tax rates we expect adjusted book tax rate to be approximately 30% for the year, adjusted cash tax rate to be approximately 16% and GAAP tax rate to be approximately 25%. Now, remember the timing of tax payments can be lumpy so you may see the cash tax rate vary by a few percentage points in any given quarter.

As discussed on our last call, we will also provide quarterly guidance going forward. As you know, for legacy Quintiles and legacy IMS the first quarter is seasonally lower than other quarters. So you should not expect a linear progression throughout the year. For the first quarter of 2017, assuming today's FX rates remain constant through the end of the quarter, we expect revenue to be between $1.89 billion and $1.925 billion.

From a segment perspective, commercial solutions revenue is expected to be between $850 million and $865 million. Research & Development solutions revenue is expected to be between $855 million and $870 million. And integrated engagement services revenue is expected to be between $185 million and $190 million.

This revenue guidance includes the expected $7 million deferred revenue adjustment I just mentioned. For profit we expect adjusted EBITDA to be between $450 million and $465 million and adjusted diluted EPS to be between $0.93 and $0.97. In summary, we had a strong quarter.

We delivered solid operational and financial performance. Operational integration is moving forward as expected. We saw an uptick in our R&D booking trend.

The early client success we are seeing for our next gen clinical development is encouraging. We repurchased $1 billion of our stock under the existing $1.5 billion authorization and our Board approved an increase to this authorization by another $1 billion to a total of $2.5 billion. And we look forward to delivering another year of strong financial performance in 2017.

With that, I would ask the operator to please open the lines for Q&A.

(Operator Instructions)

Jack Meehan, Barclays.

Hi. Thanks and good morning. I wanted to ask about the new authorizations in the quarter. It looked like the trailing 12-month data was pretty solid at [124]. And I think you mentioned in the fourth quarter you saw an uptick. Is there any other data you can give just to give us a little more visibility on how the integration is affecting those numbers? Thanks.

Well thank you for your question. Look, we cautioned you in the past not to focus too much on quarterly bookings. Once again, this is a long-cycle business and we ought to focus on at least the last 12-months booking trends. Now we did mention in the Q3 earnings release call that bookings has been weak in the [third] quarter -- the last quarter of Quintiles standalone existence.

And frankly there had been ups and downs in the prior 12-month period. So we were pleased to see that weaker trend reversed in the fourth quarter. And in aggregate, again, the last 12 months we had strong bookings again on a contracted basis which is what we want to focus people on. The data I did mention in my introductory remarks that we actually won over $100 million of awards which we believe can be traced to the leveraging of the data and I gave an example of how that helped us.

We have a large pipeline of opportunities where we are already leveraging the data even though, as I mentioned, we've not yet fully productionized. And we expect to be productionized in the second half of this year. Thank you.

Great. And I just wanted to follow up on that point, Ari. In terms of automating the process, could you just talk a bit more about the systems build out and what should we be expecting to see as you look to integrate the process and make the data recruitment part of the package that you offer?

So, again, you bring up (inaudible) systems -- there's lot of technology, specifically data mining tools and the way data, our data bases are constructed. So there's a lot of work by our data scientist that is being done at the moment focusing on the top most significant 15 therapeutic categories. So that's going well.

And we have a large full-time team with, again, data scientists, bio statisticians, epidemiologists and clinicians working on this. We also are leveraging our OneKey assets which is over 15 million healthcare professionals around the world, the massive database which, again, traditionally and historically have been used by IMS to support commercial activities. And we are redirecting this significant data asset to be used in clinical trials and in [eye] sight identification and the ability to convert some of those physicians into investigators for specific trials.

So a lot of work is being done. And, again, how we expect to see this happening in our commercial activities is we obviously want a higher win rate. That's what we are targeting and we are trying to, as we mentioned earlier, unlock large accounts that had been previously not significant clients of legacy Quintiles R&D business.

We also frankly are looking at the burn rate. I'm sure you've observed that the industry generally is experiencing slower burn of their backlog. And that is due to the increased complexity of the trials and of the highly specialized nature of the drugs that are being developed and narrower patient populations and the difficulty to enroll those patients. So all of that leads to lower burn rate of the backlog. Not so for us.

We've thankfully not experience that and we believe it is because we are leveraging the data. And the fact also that we now look at our backlog and our bookings on a contracted basis is much more precise. And therefore we should see, for both reasons, the fact that we have a more precise backlog, more correct backlog, more accurate and the fact that we are leveraging our data should lead to a backlog conversion that's improving over time.

Thanks, Ari.

Tim Evans, Wells Fargo.

Thank you. Mike, would you be willing to tell us how much acquired revenue in the last 12 months contributed to the growth in the commercial segment and the R&D segment?

That's something that we typically -- we obviously had a transformational transaction between Quintiles and IMS. But as far as the tuck-in strategy that IMS has utilized very successfully for an extended period of time, we typically don't break that out in great detail. I think that overall when you look at the rate of growth, I think the important highlight is that on a constant currency basis the business grew 6.9% which is right in line with what we said before.

I'm going to supplement that. We've historically on the IMS side guided to a couple of points of our growth being from those tuck-in acquisitions and the same is true for 2016. On the Quintiles side, on the R&D side very, very little. After you accounted for the Q2 -- the Q-square rotary had half of the year was earlier in the year. But other than that, it's basically rounding.

Okay. Just curious, did you do a number of small tuck-in acquisitions in Q4 that maybe didn't rise to the level of a press release?

No, not that I'm aware.

Nothing material, no.

Okay. Thank you.

Garen Sarafian, Citigroup.

Good morning. Thanks for taking the questions. I wanted to touch on the combined sales force. In the past you have discussed working and selling together. In the prepared remarks there was some examples cited. But could you just comment on where you are in terms of how the sales force is evolving as a combined entity and when you expect the new and improved or combined sales force to really start to gel, just to get a sense of how long that takes?

Historically the R&D segment, the legacy Quintiles position, has a highly centralized account management and sales management activity. We have decided to leverage both the existing centralized account management and sales force of Quintiles as well as the historically decentralized and close-to-the-customer approach that IMS has utilized. So we've reorganized our Company to have more of a hybrid approach.

Account management, obviously for probably the top 50 clients, has to be one account management approach. And frankly, even if we did want to have clients themselves approach us, we have most of the large clients have approached us to -- we have now become one of the most significant providers to them and across a suite of offerings from R&D to commercial. And we welcome those conversations. We have actually an Account Management Team under Paul Spreen who works on what we call total cost of ownership and makes the rather compelling case to our clients that if they work with us, soup-to-nuts, it brings a lot of advantages.

We have the scale, the level of innovation, the investments that enable them to get best-in-class offerings across the board and certainly at the compelling cost level. So we're having those conversations and for those, obviously, there has to be a unified account management approach.

So have all those leaders been identified, those team leaders? And I'm trying to get a sense of when it would start to gel in the marketplace.

So in some cases, yes, and in some cases we're still transitioning. Again, there's cases where we have two very, very good account leads on both legacy organizations and for now they are working together as we are reallocating. And there are clients that frankly neither organization had dedicated full-time Account Management Team because they were not large enough for either of us.

But in the present situation they have become when we put together the two accounts, the two legacy accounts. So in those cases we are still putting together an Account Management Team because neither of the organizations had one. So in transitioning, I believe that by the middle of the year, again, everything would be in place. But we've made very, very good progress.

Thank you very much.

Greg Bolan, Avondale Partners.

Things for taking the question. So I guess as I think about some of your larger peers, it feels like there's a little bit of disarray among several for varying reasons. And if you think about the integration of IMS with the CRO business -- the smarter CRO, if you will -- and traction you're getting there from a standpoint of a win rate perspective, I'm assuming win rate probably ticked up in the fourth quarter. And then in addition to that just what's going on whether it be a sales process for one of your competitors, another competitor obviously dealing with their own skeletons. How do you feel about, Ari and the team, your win rate as we think about 2017 specifically on the CRO business? But also if you'd like to talk about just the legacy IMS business that would be great too.

Thanks, Greg, for your question. Look, we said it many times, we are very excited about this combination. We are going about it in a very methodical and rigorous manner. We are not going to be distracted by what's happening around us and every competitor, whether it's on the commercial side or on the R&D side, has their own issues. We are focusing intensely on our merger integration and on developing what we believe are compelling solutions to resolve some of the most critical issues in healthcare.

We believe that transitioning to more data intensive, more process-focused type of approaches to clinical trial, more technology enablement is the right way to go, be less dependent on the human error and paper processing and that's how general revision here for the merger. And we find very receptive ears among our clients. Obviously it's a long cycle business. On the clinical trial side you come into a win rate, it's, for smaller trials, we are able to see already better trends.

It's hard to have enough numbers to call it a firm trend. And as I said before, this is a long cycle business. So not to get too excited about good news in the quarter, nor to be too depressed about not so good news in another quarter. Let's look at least 12 months. This is a long-term business, a long cycle business and we are here for the long term. But certainly what we've seen so far is very encouraging.

And for smaller trials we definitely know that we are winning because we have these data and because we've been able to demonstrate a different approach to declines. In fact in a couple of cases we've recovered from what I feel the organization had believed was a loss. But we reintroduce a new approach and were able to save the day, so to speak. So we know it works. It's very compelling and we have bright eyes around the table when we demo what the data can do.

That's great. And looking forward to watching that win rate pick up over time, I'm sure. Thanks so much.

Thank you

Robert Jones, Goldman Sachs.

Thanks for the question. Just a couple around the cadence. I guess first on the guide on R&D solutions for 1Q, it looks like you are calling for revenue of about 3%, full-year 6%. Just wanted to get a better sense of that implied ramp. I know the comps get easier but do you have line of sight into specific projects that will drive that acceleration throughout the year? And then just off the topic of the next generation clinical development offering, I'm curious how much of the implied ramp is coming from that new offering as well.

I think I'll start. This is Mike. I think on the implied ramp and so forth, it continues to be -- it's a great backlog business. I think that the fact that we now only include in backlog what's under contract gives us good visibility, good line of sight. And we did talk about seasonality in the results and I think that if you look at legacy Q, not quite as seasonal on the top line as maybe legacy IMS. And so I think that the way we've staged the guidance, I feel like we've got good visibility when you look at what's in our backlog and we progress throughout the year.

Okay. I guess just one on the overall EBITDA cadence as well. I know you mentioned seasonality but it does seem like a little bit more than usual looking at the businesses independently of a drop off in 1Q from 4Q based on the guidance. Just curious if there's anything worth calling out beyond the normal seasonality that might help explain the drop-off from this quarter to next quarter.

I might just, for those not familiar with the IMS business, generally the first quarter is slower. Budgets tends to still be firmed up among our clients. There usually is a rush in the fourth quarter to get things approved internally and then, therefore, stuff is deferred. We also have a significant portion of the IMS legacy business that is subscription-based.

And so this is renewal season, so to speak. And so a lot of the contracts are still being renewed. So all of that has an impact but with respect to EBITDA and specifically this year we have in addition the integration going on. So a lot of restructuring driven by the merger, a lot of reorganization and project costs that are included there. And therefore there is a ramp before you start seeing some of the benefit and the project cost going down towards the back end of the year. That's perhaps what accentuates the trend this year.

That's very helpful. Thanks, Ari.

(Operator Instructions)

Tycho Peterson, JPMorgan.

Thanks. Ari, can you talk a little bit more about the drivers of softness in integrated engagement services down 8%. Where do you see that bottoming out and what do you think on timelines for a recovery?

Thank you, Tycho. Look, this is a business that it comes in big chunks. It's very lumpy. It's a business that has very little deal flow. This is not like we're looking at the big pipeline. There's a one-off deals; you can have a year where you do extremely well and then I think the case -- that was the case in 2015 were the business grew nicely. And then you have a year like 2016 were business wasn't great.

For 2017 we're not seen any major ups or downs. We see more stability, hopefully. And with ebbs and flows with the needs of pharma and our clients that decide that they want to internalize and some others decide that they want to outsource. So it's hard to predict this business. It's not -- none of us likes unpredictability but look it's a single-digit EBITDA business; hard to see. I'm in the margin-expansion business, I've been all my career. And so I look at this business and I keep -- I'm struggling with how do you actually grow in this business and it's very hard to do that.

We are going to put in place some actions to improve it. We have to try to also data-enable it, by the way. We're trying to make it more differentiated, equip our CSO sales force with technology and so on. But boy, it is not an easy margin expansion story. And even if you do everything right, it will be maybe a point or two better of margins. I don't see this as a big grower top line and I don't see it as a big contributor profit-wise.

Again, it requires no capital investments. It's there. And I cited an example in my introductory remarks of a case where a smaller specialty pharma company basically outsourced their entire commercial activities with us, so, including the sales force. So here it is for the first time we sold the full package, the full suite of data and services from the IMS legacy business and technology CRM, et cetera, plus the IES capabilities.

So I think in some cases, and we have more and more demand for such bundled services when a company considers outsourcing their entire commercial operation. Sometimes even we're adding data with larger pharma in specific geographies with Central Europe, Latin America, where they really don't have the scale to make this a profitable business. So it can be helpful with the rest of our business.

And then similarly, CSO within commercial; that was down mid-teens. Do you have a view on when that can start to improve?

That's tied primarily or in part to the Encore business. We talked about that previously and booked an impairment charge on that in the third quarter. And it's just a business that hasn't been performing to expectation. So it's very small in the scheme of the combined Company. It's not material. But as you look at it in isolation in the commercial business, it's a little bit more of an impact which is why we called it out separately.

Okay. And then just one last one, are you able to give us an organic growth number for legacy IMS in the quarter?

I answered the question earlier. I said it's similar to prior quarters. And that is, again, when you factor in, if you recall, we had made a large acquisition called Cegedim and that's now largely out of the numbers. They had their legacy CRM business that is essentially dying product line and when you factor that in, the drag was about a point. And if you adjust for that drag, the legacy IMS organic growth was same as usual at 4%

Okay. Thank you.

Ricky Goldwasser, Morgan Stanley.

Hi. Good morning. So when you look at the guidance for 2017, it seems than about one-third off the EPS growth; a little bit more than that is coming from buybacks. So can you just walk us through the cadence of the buybacks? You have about $1.5 billion remaining authorization. How should we think about the timing first half versus second half?

Ricky, just to clarify your question, you mentioned that you said the share buyback accounts for one-third. Is that what you said?

For 2017, just when you think about the EPS year-over-year growth.

Right. You have to offset the benefit of the share buyback with the cost. Because we -- the financing cost is significant. If we use the $1 billion of cash, which could at least theoretically be used to reduce the debt, plus we used the revolver, we repatriated cash from overseas, that's how we finance that $1 billion of repurchase. And it was done largely within a few weeks after the November authorization and obviously we stopped doing that before the end of the year. So I think in aggregate it's more like your (inaudible).

Yes. When you look at 2017, exactly. You have to realize that we have $1 billion more borrowings than we otherwise would for buying those shares back. So when you factor that in, it's a much less impactful in 2017. Obviously as earnings grow in future years it becomes more.

Right. For future years it's certainly very accretive. And that's why we did it. And we think that the shares are a very attractive investment where they sit today. With respect to the $1.5 billion additional remaining authorization, we are looking at several scenarios now on how to execute that. And in the normal course of events, we could see it continue to repurchase in the market. We also have large sponsors still and investors complain to us when we meet with them about the -- what they call the hangover.

And so over time, obviously that should disappear. And so we might take advantage of this repurchase to reduce that hangover as well. But, again, we are committed certainly by the end of the year to do the balance of the $1.5 billion so another $500 million. And obviously the earlier we can execute this repurchase, the better.

Okay. And then one follow-up in response to one of the questions. Ari, you talked about the improving backlog conversion rate that you expect to see as your data capabilities resonate more in the marketplace. So how long will it take until we see these improved conversion rates? Are you seeing it already? Is this a factor in your 2017 guidance range or is this something that we should think about as more mid- to long-term benefit?

As I said before, it's a long cycle business. So it's more midterm benefit. But, look, I think that two things, one, we changed how we look at our backlog in terms of our -- and we focused on contractors. Again, we believe that the traditional approach in the industry was not conservative enough and a lot of awards there that may or may not -- maybe should or should not have been in the backlog and as a result you'll see conversion that's much slower.

That may be one of the explanations why the industry is experiencing a lower burn rate. The second one is, again, as I said before, the trials are more and more complex and it is more difficult to find the right patients and to enroll them. And therefore revenue burns at a slower rate. Now because we have converted to a contracted basis backlog measurement, we believe we won't have that first issue, or less of it.

And because we are using data to identify the optimal site, we believe we will accelerate rather than delay backlog conversion. And therefore we need to get those (inaudible). In fact, if you look at our burn rate, our burn rate is essentially flat to better. And our fourth-quarter burn rate was actually better. We do believe that it is the result of those two differences versus the rest of the industry. We would expect the burn rate to accelerate over time.

Okay. And just will you provide in your filing the margins per segment?

There will be information on segments that will be in our 10-K. And we'll have some separate profit information. It won't necessarily be at the adjusted EBITDA level but there will be some helpful and usable margin information by segment.

Right. Although, again, the compares are difficult because of allocation and merger. Very good.

Okay. Thank you.

Thank you, Ricky.

Okay. Thank you very much for taking the time to join us today and we look forward to speaking with you again after our -- on our first-quarter 2017 earnings call. Matt Pfister and I will be available to take follow-up questions you might have. Thank you.

Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a good day, everyone.