Syneos Health Inc (SYNH) 2022 Q3 法說會逐字稿

Good morning, and welcome to the Syneos Health Third Quarter 2022 Earnings Conference Call. (Operator Instructions) I would like to hand the conference over to Ronnie Speight, Senior Vice President of Investor Relations. Please go ahead, sir.

Good morning, everyone. With me on the call today are Michelle Keefe, our CEO; Jason Meggs, our CFO; and Michael Brooks, our COO. In addition to the press release, a slide presentation, corresponding to our prepared remarks is available on our website at investor.syneoshealth.com. Remarks that we make about future expectations, growth, trends, anticipated financial results and our expectations regarding the macroeconomic environment because of '19 pandemic and the war in Ukraine constitute forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995, and we disclaim any obligation to update them. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors. These factors are discussed in the Risk Factors section of our Form 10-K for the year ended December 31, 2021, and our other SEC filings.

During this call, we will discuss certain non-GAAP financial measures which exclude the effects of events and transactions we consider to be outside of our core operations. These non-GAAP measures should be considered a supplement to and not a replacement for measures prepared in accordance with GAAP. For a reconciliation of non-GAAP financial measures with the most directly comparable GAAP measures, please refer to the appendix of our presentation.

I would now like to turn the call over to Michelle Keefe. Michelle?

Thanks, Ronnie. Good morning, everyone, and thank you for joining us today. I am disappointed to share that Syneos Health experienced more significant headwinds in net awards, revenue and margins than anticipated during the third quarter, producing results that were well below our expectations and, frankly, unacceptable.

I'm going to briefly cover our third quarter results and discuss our demand drivers, after which I'll walk you through the 4 areas where we are focused in order to address performance and improve visibility while continuing to invest for long-term growth.

Total company year-over-year revenue contracted by 0.9% for the third quarter compared to the prior year. In Clinical Solutions, revenue declined 3.5%, primarily related to reimbursable expenses and the impact of foreign exchange. Excluding reimbursable expenses and on a constant currency basis, Clinical Solutions revenue grew 6.9%, driven primarily by growth in our large pharma business, partially offset by backlog conversion delays and lower revenue from COVID-related projects.

Our Clinical growth was below our expectations, primarily due to the impact of lower net awards and delays in backlog conversion along with customer delays in our FSP business. In our Commercial Solutions business, revenue growth remained strong at 8% compared to 2021.

Commercial growth was primarily driven by deployment solutions, including the contribution from our Syneos-One portfolio and higher reimbursable expenses. Our commercial business continues to perform well, and we have enhanced our digital capabilities beyond our Kinetic offering with the addition of digital learning solutions and advanced technology for patient hub services.

Now I'd like to take a deeper look at demand drivers and what we are seeing in terms of awards and performance for each of our customer segments. As a reminder, our strategic business plan for driving growth in Clinical Solutions is focused on each of our customer segments, driving further large pharma penetration, investing to grow the pre-revenue biotech segment and finally, bolstering our strong position in the small to midsized biotech segment.

First, our existing clinical large pharma preferred provider relationships remain strong, and we are pleased with our continued progress on several new opportunities. Although we continue to see slower near-term awards with our existing preferred provider relationships, we anticipate incremental new awards over the course of 2023.

Next, demand in our pre-revenue biotech customer segment is consistent with our expectations with slowing RFP flow largely driven by the impact of the macroeconomic environment. Our core issues with clinical net new business and revenue growth are primarily with small to midsized biotech customers, where we historically maintained a leading position.

While demand from these customers has been impacted by the macroeconomic factors, we now believe that these headwinds are more specific to Syneos Health. We believe that as we have grown in recent years, our clinical operating model has begun to lose its traditional strength of agility and leadership engagement that was critical to post-revenue SMID customers, which began to negatively impact our opportunities for repeat business.

In addition, we saw delays in award decisions from SMID customers at a higher volume in September than we experienced in June and experienced an unexpected decline in our overall clinical SMID win rate during Q3. As I will discuss in more detail shortly, we are focused on accelerating clinical reimagined and enhancing our business development activities to increase our share of new business opportunities, including repeat business.

Our clinical net awards for the quarter were impacted by these dynamics, which contributed to an unfavorable book-to-bill compared to our updated outlook provided in September. Clinical Solutions book-to-bill ratio was 0.3x for the third quarter, excluding reimbursable expenses, resulting in a 0.98x TTM book-to-bill. The commercial demand environment remains healthy with particular strength in our larger pharma customer segment as we leverage Kinetic and our new digital capabilities to drive new opportunities for growth, we have seen some normalization of RFP flow from SMID customers, attributable to the macroeconomic environment.

The commercial team had a solid quarter of net awards, reflecting our normal seasonality with a book-to-bill ratio of 0.8x for the quarter and a 1.07x on a TTM basis, excluding reimbursable expenses.

Over the last few months, I've spent a great deal of time with our customers to gain a full standing of what is important to them and how we are performing against our expectations. Ultimately, I expect us to be the premier biopharma solutions provider, leveraging our unique product development model and the insights it generates to accelerate success for customers.

However, we are disappointed by our current financial performance and are aggressively attacking 4 focus areas to reach this goal: clinical reimagined, strategic business development, improving visibility and increasing efficiency. First, our SMID customers are clear that they want Syneos Health to continue to deliver therapeutic insights, but with enhanced agility and high-touch leadership engagement. Clinical reimagined was launched in Q1 2022 and is working to reduce the complexity of our full-service operating model, streamline our organization and processes, enhance our customer engagement and infuse innovation and insights throughout our clinical operations. We believe, the result would be an efficient and effective delivery model supported by our technology enhancement,s, designed to build momentum with our projects and customers, leading to improved backlog conversion and net awards, including repeat business.

The upgrades in talent and investments we previously outlined are already addressing these issues. But to put it plainly, it has been more extensive and taken longer than we expected. Most importantly, we have already deployed our new operating model across a number of customers, and we are receiving overwhelmingly positive feedback. Second, we have had a number of leadership and organizational changes within strategic business development over the last 18 months. As a result, we did not evolve our business development capabilities to fully leverage our integrated solutions or effectively engage our customers within the current competitive environment. We now have the right senior leadership in place, and they are driving more proactive, productive customer engagement. We are strengthening our approach with cross-functional regional teams, working to ensure we utilize our full capabilities to design the best delivery strategy for each customer opportunity, enabled by technology and shared insights.

Combined with our more efficient and effective delivery model, we expect these enhancements to improve our win rates and repeat business opportunities across our customer portfolio. We are seeing early signs of success with these initiatives and expect awards from post-revenue SMID customers to begin a gradual recovery during Q4. Third, we must improve visibility into our business and are taking a number of steps to improve our business development, operational and financial systems, and processes. We believe these changes, coupled with the impact of clinical reimagined and our investments in strategic business development will enhance operational insight and lead to improved visibility and performance.

Fourth and finally, long-term margin expansion continues to be a critical component of our value creation plan. We've undertaken a full review of our organization to ensure we have the appropriate size and scope for our current business and will continue to drive longer-term margin expansion. Additionally, through our ForwardBound programs, we are focused on continuing to streamline the structure of our operations and processes. As a bold new step in this transformation journey, I am pleased to announce Project Velocity, which will further catalyze our forward down efforts. We have selected 2 world-class partners to help us accelerate innovation and quality throughout the enterprise and across multiple phases to drive further long-term margin expansion. Jason will provide more detail on this exciting new project. We are intensely focused on executing these activities and investments with accountability from senior leadership.

While we do not expect to see significant improvements in our performance overnight, we will share the key trends that demonstrate our progress in this transformation. We remain confident in our strategy and the breadth of our capabilities and are laser-focused on managing our near-term headwinds while we work to improve performance and best position Syneos Health for long-term success. While we must improve our near-term performance against our business plan and financial targets, our industry, strategy and balance sheet remains strong, and our future remains bright. I will close with some additional color on my broader vision for Syneos Health following Jason's discussion of our Q3 results and updated guidance. Jason?

Thank you, Michelle, and good morning, everyone. Our total revenue for the third quarter of 2022 was $1.34 billion, down 0.9% as reported and up 2.2% in constant currency compared to the third quarter of 2021. Excluding reimbursable expenses and on a constant currency basis, our revenue increased 6.9% compared to the third quarter of 2021. Our Clinical Solutions revenue for the third quarter was $1 billion, down 3.5% as reported or down 0.2% in constant currency compared to the third quarter of 2021. Excluding reimbursable expenses and on a constant currency basis, Clinical Solutions revenue increased 6.9% versus the third quarter of 2021, primarily driven by our large pharma customers, including strength in our FSP business, partially offset by backlog conversion delays and lower revenue from covered related projects.

Our as reported clinical revenue for the third quarter contracted somewhat on a sequential basis due to lower net awards and delays, incremental foreign exchange and a decline in COVID-related revenue. Our clinical growth was below our expectations during the third quarter, primarily due to the impact of lower awards, customer delays in our full service and FSP businesses, and foreign exchange. Total as reported clinical revenue growth includes an 80-basis point contribution from acquisitions and a 750 basis point headwind from reimbursable expenses. Our third quarter Commercial Solutions revenue was $333 million, up 8% or 10.6% in constant currency compared to the third quarter of 2021. Excluding reimbursable expenses and on a constant currency basis, Commercial Solutions revenue increased 6.9%. Growth in commercial revenue was driven primarily by growth in Deployment Solutions, including the contribution from our Syneos-One portfolio and higher reimbursable expenses. This growth was partially offset by headwinds in our communications business, driven by mix.

Commercial revenue for the third quarter was in line with our expectations. Total as reported commercial revenue growth also included a tailwind of 380 basis points from reimbursable expenses. Adjusted EBITDA for the third quarter increased 3.7% to $210 million, representing an adjusted EBITDA margin of 15.7%, an increase of 70 basis points compared to the third quarter of 2021. The increase in adjusted EBITDA margin for the third quarter was primarily the result of lower reimbursable expenses, foreign exchange and ForwardBound, partially offset by a less favorable revenue mix and the impact of our organic investments. Adjusted EBITDA was below our expectations primarily due to the impact of lower-than-expected revenue, partially offset by cost reductions. In addition, unadjusted EBITDA for the third quarter was $200 million, an increase of 15.3% compared to the prior year.

Adjusted diluted EPS of $1.23 for the third quarter increased by 0.8% year-over-year, driven by growth in adjusted EBITDA and lower share count, largely offset by increased interest and depreciation expense. Operating cash flow was $132.4 million for the third quarter, an increase of 173% compared to the prior year. On a year-to-date basis, cash flow from operations increased by 14.7%, largely driven by higher cash net income. DSO increased from the prior year primarily due to higher concentration of accounts receivable with large pharma customers, coupled with timing of collections. Our capital expenditures were $21.9 million for the third quarter.

We ended the quarter with $170 million of unrestricted cash and total debt outstanding of $2.84 billion, resulting in net leverage of 3.2x. During October, we expanded our accounts receivable securitization facility by $150 million, extending the maturity until October 2025 and voluntarily prepaid the same amount of our term loan A. To further manage our interest expense and debt maturities, we are actively pursuing opportunities to extend our credit facilities. Our non-GAAP effective tax rate for the third quarter was 23.5%, consistent with our estimate for the full year 2022.

Turning now to our updated 2022 guidance. This updated guidance contemplates our current view of the estimated impacts of ongoing economic and geopolitical developments and reflects foreign exchange rates as of September 30. We now expect total revenue of $5.3 billion to $5.36 billion, representing growth of 1.7% to 2.8%. Total revenue growth includes an estimated contribution from acquisitions of approximately 50 basis points and an estimated net headwind of 370 basis points from reimbursable expenses.

We now expect our total adjusted EBITDA to range from $800 million to $830 million. This reflects an adjusted EBITDA margin of 15.1% to 15.5%, up approximately 60 basis points from 2021 at the midpoint. Lastly, we now expect adjusted diluted EPS to range from $4.69 to $4.87, representing year-over-year growth of 5.2% to 9.2%.

Our guidance incorporates interest expense of $80 million to $84 million. This range is based upon current market forecast for LIBOR and reflects that 40% of our debt is currently variable rate. Guidance also assumes a non-GAAP effective tax rate of 23.5% and an estimated diluted share count of 103.5 million shares. We expect our net cash outlay for income taxes during 2022 to be approximately $65 million.

Importantly, we remain steadfast in our commitment to driving long-term margin expansion of our adjusted EBITDA margin. We've executed on ForwardBound since its launch in 2019, successfully scaling our Syneos operations network while driving automation, process improvement and workforce management.

Now that we have sufficient scale in these initiatives, as Michelle highlighted, we are taking a bold new step, and we are calling it Project Velocity. We have selected 2 world-class transformation partners to provide foundational business operations' support and to catalyze these innovations going forward. These 2 organizations will leverage the ForwardBound groundwork to accelerate innovation, digital transformation, quality and margin expansion. Project Velocity is expected to help transform our cost structure by optimizing our operational footprint while providing tools and technology that will enhance both, the customer and employee experience. Project Velocity is expected to consist of multiple phases over multiple years.

To the extent we fully execute on all phases, we could recognize up to $1 billion of cost savings over the next 10 years while driving innovation and investments to fuel growth. We will continue to roll out more details in the coming months as the initiatives get fully underway.

Finally, with regards to 2023, given our current demand trends, the macroeconomic environment creating uncertainty in areas like biotech funding, interest rates and foreign exchange, as well as the trends in our net awards and backlog, we no longer expect to achieve the 7% to 10% revenue growth outlined in our prior guidance.

In addition, while we anticipate seeing margin benefits from Project Velocity, we do not currently expect to achieve our targeted 30 to 50 basis points of annual adjusted EBITDA margin expansion in 2023. We will continue to provide updates on our initiatives and investments and anticipate providing formal 2023 guidance early next year as we gain further visibility.

I'm now going to turn it back over to Michelle for some final comments. Michelle?

Following my evaluation of our business and strategy in recent months, I wanted to close by outlining my long-term vision for Syneos Health that will guide our transformation in the coming quarters and years.

I remain very enthusiastic about the strong secular growth of our market and the customer feedback on clinical reimagined, our product development strategy and the benefits we expect from our investments. Our initiatives are designed to address our near-term challenges and further accelerate our strategy, enhancing the scalability and efficiency of our operations and drive new business awards.

We are directly engaged with over 200 of our senior leaders on this transformation, and they are invested and eager to drive the company forward. We must accelerate the full integration of our capabilities to address evolving market dynamics. We will work tirelessly to evolve our organization into a premier biopharma solutions provider, meeting our customers' clinical, regulatory and market adoption needs, with a unique breadth of services supported by technology and a common data platform to share critical insights.

I want to thank all of my Syneos Health colleagues around the world for their energy and collaboration as only together, can we achieve the highest performance for our customers. I am incredibly proud of the culture we are creating at Syneos Health and the positive impacts we are making for patients around the world. This completes our prepared remarks, and we would be happy to answer any questions. Operator?

(Operator Instructions) Our first question comes from the line of Patrick Donnelly of Citi.

Michelle, maybe just on the customer base. Obviously, it seems like SMID slowed down pretty significantly. Can you just talk about, I guess, the conversations there? I mean it was a pretty stark difference from kind of your peers. So just trying to figure out between share shift, a slowdown in the market. You kind of talked about a little bit of kind of stretching out of the trials. Maybe just dive into that segment a little more and kind of try to pull the curtain back on what's happening there.

Thanks, Patrick, for the question. So I want to be specific. Our Q3 surprise was the reduction in awards from post revenue SMID, and we also had a reduction in our normal repeat business awards. And so when we look at the whole market, we feel really good about where we are with large pharma. We have tons of large pharma opportunities with new partnerships coming our way that we're competing for. And the pre-revenue SMID, where we do know there's been some macroeconomic issues, we're performing well there. So -- and commercial business development and new wins are performing really well.

And so when we really looked into, why are we seeing this, and we didn't even see it until September, a couple of things happened. The first was our strike rates that go down in that segment. And secondly, we had more than our fair share of pushes out of Q3 into Q4 in that segment.

We've identified a couple of things, and we've now realigned all of our business development efforts around that. The first is that when we really looked at repeat business, and I went out and talked to customers, the main thing I was hearing is, "We love your therapeutic insights. We want you to be more agile. We want you to work closer with us to really design the best solution." And candidly, we were not integrating all the great capabilities we've developed and acquired over the last 12 to 18 months, consistently into our good defenses and our relationships with those customers.

The good news is, where we have done that, we've had phenomenally overwhelming positive feedback. So I feel confident, we understand what the issue is, and we are already taking steps to improve that from a business development's perspective, as well as our existing project teams working in those customer segments to make sure they understand what those customers expect from us.

Okay. No, that's helpful. And then, Jason, maybe just on kind of the margin commentary. Just trying to kind of hands around the options you guys have here. Can you talk about, I guess, the levers you can pull as growth slows off kind of these bookings as we get into '23, and again, not overly surprising to see you kind of soften on the 7% to 10%. Is there a path to kind of positive growth? I'm just trying to figure out again that this number is a little surprising in terms of kind of that book-to-bill. So maybe just try to kind of put some parameters around what we should expect in '23.

Yes. Thanks, Patrick. So as we've talked about before, we'll obviously always keep the cost base in terms of the cost of delivery aligned to what's right in front of us. So Michael and the team were already on that every day, right, in terms of that focus.

ForwardBound has been very successful for us in terms of delivering our margin accretion targets over the last 3 years. I think, at the midpoint of our guide this year, right, we will have delivered 50 basis points per year since 2019. So ForwardBound has helped us in that area, we have more room on ForwardBound in terms of the Syneos operations network, automation as well as workforce management. And workforce management, think of that in terms of spans and layers and things of that nature, is something that we've really just embarked on in 2022.

So there's more opportunity there. We've talked about our investments and the pacing of our investments and the fact that we will continue to invest in the business because that's ultimately what's going to help us deliver effectively for our customers and to make our employees successful in their growth and development endeavors. But we can pace those accordingly to the revenue as needed.

And then finally, as we talked about today, Project Velocity is going to be really transformational for the company. We're excited about it and the opportunity that we have there. That is going to launch here in the fourth quarter, and we'll be standing that up during 2023 and think about that as leveraging investments in automation and process improvement and systems and innovations that our partners have been investing in for years and years and years and rolling out to their customers. So that's going to be something that's really helpful for us as we continue to think about margin growth in future years over the long term and certainly will help in 2023 as well.

But right now, we're not talking specifics relative to the 2023 margin accretion. That gives some color. I hope that's helpful.

Our next question comes from the line of Dave Windley of Jefferies.

I wanted to first clarify a couple of things. So in the -- in your prepared remarks and in the release, you talked about bookings -- lower bookings that affected the revenue in the quarter and I gues,s, I would think that your bookings up to June, you would have known and set guidance on. So I'm interpreting that you mean lower bookings in the quarter affected revenue in the quarter. Maybe clarify that, if I'm right there and how that happened knowing that the future impact.

So David, I'll start and I'll let Jason jump in. So the Q3 revenue miss, right? Commercial and reimbursables were in line with the prior guide. The lower revenue was due to lower awards and customer delays. So we had some customer delays in full service, some delays in FSP and some of it was FX, and it was partially offset by the reimbursable expense beat.

And the lower EBITDA was due to lower revenue, including mix, partially offset by cost reduction. So remember, we do have some short-cycle businesses as well, right? There's businesses within the tech BU, there's businesses early phase communications business that does sell and deliver in the same quarter. And so that is some of it as well.

And Jason, did I miss anything? We're good, David. I didn't miss anything.

Okay. Sorry about that. The other clarification, I think, I heard a mention of FSP strength, but then also FSP delay. So if you could clarify that. And also, I think FSP contracts are typically paid heads deployed times a rate per month. And so if you could help us understand what an FSP delay looks like?

Sure. I'll start, and I'll turn it over to Michael. So we do have a real strength in FSP. It's an area of growth for us in 2022 over 2021. And -- but we do have some delays that have occurred that were communicated to us very recently, right? So we would get an award, we were given a certain value for that FSP. We're out recruiting for those folks. And then we've been asked to slow down in certain accounts. So I'll let Michael give you a little more color on that.

Yes. Dave, it actually falls specifically within our clinical FSP. And there's 3 major areas that we saw the slowdown. One was, with the new partnership that was awarded to us in Q2, the ramp-up for that has been delayed due to the customers evaluating their portfolio and strategic decisions. We're working really closely with that customer around the plans for when that ramp-up will occur.

So we can ensure that's modeled correctly in our end of year and 2023 forecast. And I really appreciate the level of transparency that customer is giving us. In terms of replacements, our customers basically are holding off on replacements that belong to us contractually. So again, we're working with those customers to understand as they evaluate their portfolio and make key decisions of when can we expect those replacements to resume.

And then with some of the new partnerships that we're pursuing, we've seen some delays on decisions where originally, we thought we'd had Q3 or early Q4 decisions. Those have now been pushed off to the end of this year, beginning of next year.

Got it. Okay. And then my last question is around kind of maybe a follow-up to Patrick's margin question, which is kind of both, fourth quarter and next year. From our couch, it looks like either you're guiding down revenues such that revenue would be down in total sequentially in the fourth quarter, but EBITDA will be up.

And I know in commercial, you typically maybe have some higher-margin performance-based payments that might influence the margin percentage in the quarter, but just looks like you've got to take a lot of cost out sequentially to drive that EBITDA number and then your comments, Jason, on 2023 in general.

I guess the question I have for you is, in light of the things that you're facing, is now maybe a more appropriate time to just cut, either take the hit on EBITDA, make substantial investments in the business now to fortify it for the longer-term future rather than trying to salvage basis points of EBITDA margin in the near term? Are you making enough investment in the business, basically?

David, I'll start and then I'll turn it over to Jason. Are we making enough investment in the business? The answer is yes. We have ensured that we can continue to invest in the things that we've been sharing with you, which is our investment in technology and data and insights. Our focus on getting on 1 platform, which we've called Project Unify, to make sure we are able to have more visibility and clarity around operational metrics. And that really kind of underpins everything we're doing in clinical reimagined as well.

And so we feel really good about our investment thesis, and we do feel that we've given ourselves the room to drive the EBITDA expansion that we've discussed for Q4 as well -- the EBITDA results for Q4, as well as being able to continue to invest in the business so that we are able to drive top line growth. We do feel good about that, but I want Michael to talk to you a little bit about Clinical Reimagine.

Yes, absolutely. So as Jason and I have worked to execute on Michelle's vision, the Clinical Reimagine is a key part of that. And one of the big features for us has been removing redundancies and layers within the organization that we actually believe historically had gotten in the way of exceptional delivery.

So by taking those layers out, it actually enables us to give our customers a much better experience and much better quality and delivery, and it let's me return the savings to Jason for the margin targets that we have. In addition to that, the investments.

So right now, the Clinical Reimagine includes investments in data technology, hiring new leaders, upskilling our talent and also lead us to achieve the financial targets that Jason and I have partnered on.

Yes. Dave, I'll just give a little bit more specifics. So if you think about the Q3 to Q4, typically, Q4 is our best margin quarter. We have things that throughout the year tend to cap out around taxes and things of that nature. That produces that.

We do tend to have, as you highlighted, some areas in commercial where we tend to see utilization really finish strong. In addition, we have some FX benefit from Q3 to Q4. We also had some utilization drags in Q3, frankly, that in Q4, we see that that's going to be a return. So we are investing in the business, I think, is what you're hearing, but there are things that just naturally happen and that we're working on via ForwardBound clinical reimagined, et cetera, that will help drive that quarter 4 step.

Our next question comes from the line of Luke Sergott of Barclays.

Just kind of follow up on the questions that have been asked here. So can you just help us think about what happens to your growth in the near term when you put up 0.18 bookings like that? We've never seen that happen. So it's -- just trying to get a framework of how to think about where growth can go in the, let's say, outside of 4Q?

Sure. I'll start, and then I'll turn it -- I think Jason gave some color on this already, but I'll have him cover some things. So we're very focused on what's right in front of us. As I shared in the prepared remarks, we believe our returns will be gradual on awards, right?

So we do believe that our new awards will gradually grow in the post-revenue SMID grouping over the course of future months, but it is gradual. And so we're very focused on delivering against clinical reimagined, getting our business development team to continue to focus on converting those new awards in SMID, winning our preferred partnerships in large pharma and continuing to have the commercial business perform as the rate it's been performing. And so we're focused on what's right in front of us. And I think Jason did walk a little bit through around the color for 2023 and that we are removing the 7% to 10% because we do want to just focus on getting Q4 behind us and then focus on how we're going to budget for 2023 and just do the things we need to do to get back on track, which we're confident we can do. But Jason, I don't know if there's anything you want to add.

No, nothing to add really other than the margin commentary, Luke, I think we've talked about growth being if you have several quarters of 1.2 or below 1.2 book-to-bill above 1, what that would do to growth for '23. Now we have 2 in the books. And Michelle has given some color around her expectation in Q4. So that gives you a sense of how to think about growth, I think, on the top line and is consistent with what we've been saying.

I think on the margin side, there's opportunity that I've outlined -- we outlined in the prepared remarks. And that's an area we're going to be focused on while we're reinvesting in the business or continuing to invest in the business.

All right. And then on commercial, I think the sort of natural fear is as the -- you're calling out biotech funding and things getting pushed out. And so as those customers are tightening their belt, why wouldn't commercial see that first? Because if you're booking in that commercial side, you want to get your clinical done first and so you're like, "We don't need that commercial piece yet. Let's get the clinical out the door."

Yes, that's a very good question. Thanks for asking. So when we look at our RFP flow, right, in commercial, our RFP flow in commercial is up in large pharma, and it's moderating and normalizing in the SMID. So we are keeping an eye on that. However, when we look at the pipelines, we look at the mix of business -- potential new business between SMID and large pharma, and we look at our hidden strike rate in our book-to-bill and commercial, it still remains very, very strong.

I think, what we're seeing is, you're seeing larger customers build more flexibility into their operating model, so they're outsourcing more and they're thinking about how they can partner with companies like Syneos Health, especially on more complex diseases because it is so complex, and you need the best thinking from within the manufacturer as well as some of the work that we do on our side as a product development company. But we are keeping an eye on it, but it has not impacted our business to date.

Our next question comes from the line of Sandy Draper of Guggenheim.

I guess, the first question for Jason. It looks like when I look at the bookings and the bookings sort of ex reimbursables, it looks like we had, not to the same extent, but a similar dynamics in the fourth quarter. Was there another write-down? Or did you cancel out, I'm assuming more reimbursables? And just trying to understand that dynamic better about what's going on with that and why that happened again.

Yes. Are you referring to the reimbursables in Q3? I just to make sure I understand it.

Yes, I'm looking at the bookings. If I'm reading correctly, bookings total was $182 million and ex reimbursables was $208 million. So it looks like there was another cancellation out of reimbursables.

Yes, yes. Yes. So while cancellations overall, Sandy, when you think about on the direct side of things or excluding reimbursables, were within our range during the quarter, we did have a cancellation that had basically the same amount of reimbursable expenses that it did direct fees.

And if you exclude that from the overall book-to-bill calculation, including and excluding reimbursable book-to-bill would have been exactly the same for the quarter essentially. So there was one cancel in there that had outside reimbursables that caused that discrepancy.

Okay. Got it. That's helpful. One other quick financial question for Jason. I think, I heard you say, you expect now for the year the reimbursables drag to be 370 basis points. Is that for the total business? And if so, am I backing into it right, that suggests reimbursable around [1.45]? Or are you just talking about reimbursables on the clinical side down 370 basis points or having a headwind that much?

The commentary is total company.

Perfect. That's helpful. And then I guess the final is just, when I think about the reimbursable impact on backlog burn, you slowed down a bit. But do you have any thoughts about sort of where you stand today and looking at your backlog as to, are you continuing to see probably that trending down being stable, moving back up? Just any thoughts about sort of the visibility for backlog burn and how that's going to be trending.

Yes. I mean -- so we'll see it tick up a bit in Q4 relative to Q3. And I'm referring on the direct or the excluding reimbursable side. And then if you think about next year, just given the backlog movement and growth or contraction, year-over-year mathematically, right? You're going to have some level of increase just from burning all the awards that have been won in prior periods. So expect to see it tick up a bit in 2023. As you think about that, it's just right now, the extent of that is something that we're not getting into. That said, we haven't seen our weighted average study period move much relative to what we've disclosed in prior periods in that low to mid-60 months.

We've talked about the fact that we have 1 -- some opportunities that are more fast burn, so non-oncology type awards. And we're also growing pretty quickly in FSP, which given our bookings policy, right, helps your growth rate. So -- I'm sorry, your burn rate. So those are a few factors that I would put into it, Sandy, but not getting into the specifics on it yet.

Our next question comes from the line of Elizabeth Anderson of Evercore.

I was saying, if I could talk a little bit about, I think, Michelle, you mentioned some issue about some of your newer capabilities not being fully integrated, particularly impacting the post revenue SMID renewals. I was wondering if you could talk about like specifically what those capabilities are. And then two, if you could potentially help us to size the pushout from 3Q to 4Q in that sector.

Sure. I'll start, Elizabeth. So I think you know, we've made a lot of investments in our capabilities. [RxTS] has been really building out some really great targeting tools around, how do you find the right patients, diverse patients and sites, working with study kick to make sure that we're activating the communities they have in the different therapeutic areas and just ensuring that we consistently bring those capabilities to customers in a very deliberate way.

And so where we are doing that and how that's infused into clinical reimagined and really getting closer to the customer, having really close leadership relationships with our customers as well as being agile to bring that to our customers, we're getting great results. And so that's really where Michael has done a really great job in making that a more standard offering. And now we're very focused on making sure we have business development teams that are focused on the different customer segments that really understand those unique differences and why they're important to those different customer segments. So that's an example of what I mean. And then in regards to the -- I'll let Jason walk you through the push on the awards from Q3 out. Sure.

Yes. Elizabeth, so when we talked about the quarter 2 pushes being 15% to 20% over and above what we had experienced in the past, when we're tracking a similar profile of push during quarter 3, it was 3 or 4x what we saw. And not all of that is getting pushed into quarter 4. Some of that's getting pushed further out, just given what's going on in that customer set.

The majority of that, the profile was a bit different, too. I think it was 80%, 90% SMID and versus -- we did have some other dynamics going on with some of our strategic accounts in quarter 2. So it was quite substantial for us, not all in quarter 4. And it's -- some of it's going to be pushing out into 2023.

Got it. That's helpful. And I know -- I appreciate what you said about 2023 and the sort of volatility there. Are there any changes in terms of your interest rate or interest expense expectations for 2023 at the moment?

So what we've -- we obviously have provided visibility around the debt structure and what we're doing and what we have done. We're continuing to work on what I talked about in the prepared remarks is extending our deal. We're very focused on that. We do have around 40% variable rate debt right now. That moves to 75% variable rate in March of 2023 when our swaps expire.

So looking at where we are and all that, Elizabeth, what we've said is, we anticipate our interest expense in 2023 will be 40% to 50% higher than our interest expense in 2022.

Our next question comes from Justin Bowers of Deutsche Bank.

Hi, good morning. Just want to follow up on the last comments. It sounds like you said, 2Q activity was 15% to 20%. The pushout was 15% to 20% above what you've seen in the past. And then 3Q was 3 to 4x that. So is the interpretation there that the pushouts were 60% to 80% higher than what you saw? And then also, can you give us a sense or is there going to be -- are you expecting some improvement in the awards and bookings sequentially? And I'll pause there.

Sure. So I'll answer, Justin, and then if I miss anything, Jason can walk us through. So if you go back to the Q2 award decision delays, 2/3 of those pushes that we highlighted in Q2 went to decision, and we won half of those, which has been consistent with our normal strike rate and 1/3 still have not gone to decision.

When you look at what happened in Q3, you know our awards cadence is weighted to the last month of the quarter. And we saw an unforeseen drop in the win rate in that post revenue SMID as well as higher award decision delays with that same cohort.

That's the 3 to 4x that Jason mentioned in September versus what had happened back in June. And they were -- and so those have pushed out. And as Jason shared, some of them have pushed up beyond Q4. And so now we have to get a sense of whether those are going to be awarded, whether we're going to win them. We don't have that much visibility into that yet.

We're about 1 month in. So if you go back again, I just want to remind you, it's in the post-revenue SMID customers. And we do believe that we will see a gradual improvement there. Even our RFP flow has picked up slightly in that area over the last 30 days.

And so we're just focused on what comes in, right in front of us, making sure we deliver against clinical reimagined, our new business development approach of just making sure that we have the cross-functional regional teams working to ensure we utilize our full capability set to design the best delivery strategy, and we're just focused right in front of us in Q4 on conversion.

Okay. Got it. And then just one follow-up on Project Reunification. Could you just help us on this, understand the scope of that? And also, some of the milestones that you have and when the targeted completion date is for that based on the current scope (inaudible).

So Project Unify, I just want to clarify.

Yes. Yes, Unify.

Okay. I thought, I'd make sure I have the right question.

You guys had a lot of projects going on right now.

Yes. I'm sorry. I'm a marketer. So you asked Project Unify. I'll let Jason walk you through it because he's really spearheaded that. And it's really around 1 system giving us insights and data to make it easier for our employees to get real data, real time in their fingertips to deliver excellence for customers. So I'll let Jason walk you through the details.

Yes, Jus. So yes, it's Project Unify, it's to basically implement our new ERP system across the enterprise. It includes resource management. It includes HR, and it includes finance and accounting. It's a multiyear project. We are just now wrapping up the target operating model work that we'll do. And then we'll move into a global design phase here over the next several months, and then we'll actually start implementation during 2023.

We have a great partner in terms of a system integrator that we've selected, and we also have a great technology, cloud-based technology that we've selected. So we're excited about it. We do believe, it will help make our employees' lives a lot easier, and it will also provide everybody better visibility, including our customers.

Our next question comes from Eric Coldwell of Baird.

Okay. On -- could you -- gosh, I don't even know where to start with this. Operator, are there any more questions in the queue? Hello. Hello.

Yes. Sir, your line is open.

Yes, can you guys hear me?

Yes, we can now.

I'm sorry. Again, that's Eric Coldwell from Baird.

Can you hear me now?

We can, Eric.

RFPs, I know the number can be somewhat meaningless. But could you give us a sense just a percentage of where that stood versus last quarter, prior year, any metrics around RFP flow. I'm trying to walk through the environment, the opportunity versus the delays versus the cancels versus everything else, can we just start with RFPs and get some numbers?

Sure. I'll start. So our clinical trailing 12-month RFP flow is down a bit. So it is down. Our commercial trailing month -- trailing 12 months RFP flow is up. And we are seeing sequential improvement with clinical SMID, and we're hoping to start to lap the strong 2021 comp.

So we are very focused on -- in our BD -- our strategic BD approach on the clinical side to ensure that with the focus on building better intimacy with our customers and the post-revenue SMID and focusing on repeat business to truly understand what customers are looking for, that we believe that, that will help us improve in that area. Hold on, Jason is going to add something, Eric.

Yes. The only thing that I would add on the clinical side, Eric, is that the RFP flow during late 2020 and during 2021 for us on this SMID side was very strong. And when we talk down, it's down year-over-year. In Michelle's commentary, if you look at our SMID RFP flow in quarter 3, sequentially, it was higher in quarter 2 and it was higher in quarter 3. So it's sequentially moving up, but we haven't yet overcome the really strong RFP flow that we saw in that sector in 2021.

Okay. On the win rate, there was some mention of an unexpectedly low win rate. Could you -- of awards the winter decision, could you give us a sense on just how low that was?

Yes. I mean, when you -- we don't typically disclose the actual rate, Eric. But I would, say when you look at the decisions, and we're talking about customers that were on a repeat business basis predominantly, we were down probably somewhere between 30% and 50% of our normal rate in a quarter.

So it was not inconsequential. I would say, though, when you look at that impact on what we talked about in our September update, that did have an impact to obviously how we finished the quarter and how we performed relative to that target forecast from that update in September. But the bigger piece of it was the items that pushed out that Michelle has talked about that we didn't anticipate.

And then on cancellations. I know there was a comment that overall cancellations were normal, but -- or within the normal range. It's frankly hard to believe that, given that pass-through bookings were negative and overall bookings were basically 1/10 of what you would expect over the last few quarters or what we should have expected. So I mean, can you really say cancellations were 3%, 4%, 5% of backlog, something like that? I mean, it just doesn't feel reasonable.

Well, we have -- the way we think about it, Eric, is, we go back, and we look at the history of quarterly cancels and our way outside of a range of what we've experienced in the past as we move to a full-year number.

And for the quarter, we were at the higher end of the range that we've experienced in the past, but we weren't above the highest end of the range that we've experienced. And when we look at the full year, based on what we know right now, we still anticipate being in and around the full year cancellation number that we typically see. So that's -- that kind of is what it is from our perspective. That gives a little more color on it.

Okay. And then on the -- these comments about nonrenewals, we've heard the other CROs have taken rescue work from Syneos at unprecedented levels. Is this a situation where you won an initial award, got a startup, began the work, thought you would get the next phase or the next program and then that's leaving to go to 1 of your competitors? So it's not necessarily a cancellation per se, but you're not getting the next phase of a project that you already had the beginning phase of.

Yes. So I'll start, and then I'm going to turn it over to Michael. So we don't like to comment on rumors, as you know, or things that we hear that we don't hear directly. But here's what I will say.

Some of our newest awards are rescues from other CROs. So that's all I'll say there. And so I think, it's important that we focus on, this is a new phenomena that we didn't see. We just recognized this in our Q3. We haven't seen a reduction in repeat business until Q3. And so I'll let Michael talk about how we're focusing on our existing customers, but we're not going to comment on a rumor like that.

Yes, Eric, the most important thing is, for our customers to experience the clinical reimagine model that we've created, where we've really restored our culture of "can do, I own it", where all of our leaders and our managers are concluding around our clients and around our deliverables, bringing therapeutic insights and bringing those integrated solutions that Michelle is describing.

A really great example is, 1 of our top 50 repeat customers just last week, said Syneos is a large CRO that doesn't act like a large CRO. And that's exactly what I want them to say. That's how we have to compete in the current marketplace. It is fierce out there. We hear a lot of the same things that here is rumors. But I'm really pleased with how our customers are reacting to the clinical reimagined model. And it's just not onsie-twosies. It's many, many of our customers are saying this is exactly what they want with that agility, the technology and the leaders that we have here.

Okay. Last one for me. On the 4Q EBITDA sustainability, I know, there were a number of factors cited. Is one of those factors, the reversal of bonuses? And if so, how much?

Sure. So I'll address that as well, Eric. As you know, I think, I answered this question for you last quarter. So I'll go again. So we have been accruing -- as you know, we have multiple bonus programs. Let me start there. We have multiple bonus programs for different leaders within the organization, right?

And so they're awarded based on performance and nothing's changed there. And our management incentive plan, which is what you were asking me about in Q2, which is a very specific incentive plan for the senior leaders of this organization. We accrue based on the performance that -- targets that we have given to our individual leaders in that particular plan.

And I think I also shared with you that once the year ends, that's when we true-up, right? Because at the end of the year, we had targets that were tied to these plans, and we true-up at the end of the year.

Through Q3, based on the performance that we're delivering, we are accruing for that management incentive plan. Does that help?

Yes. I'm just curious if you're expecting that to reverse in 4Q?

Based on within the confidence in the updated guide for the rest of the year for Q4, we have -- we believe that commercial and reimbursables are on target. And we do have the lower net awards backlog conversion delays and FSP customer delays baked into that.

So we executed on what's right in front of us, and I'm confident that the team will, it's accrued and it's in there.

Our next question comes from the line of Max Smock of William Blair.

I wanted to follow up on one of Eric's questions around win rate. And I'm just wondering if you can elaborate on some of the feedback that you've got from customers around why they decided to go with some of your competitors?

I know you mentioned being more agile in working with customers, working closely with customers. But any additional insight you can provide around what exactly this entails and how adjustable those issues are here in the near term?

So it's a great question. So I always start with, when we win, why are we winning, right? I think that's the #1 thing that you should focus on. And so we've been laser-focused on understanding that. And so what we have been told when we win, it's some of the things that Michael just shared around that we're really nimble and agile as a CRO, meeting the needs of those post-revenue SMID customers, that we have a high level of quality delivery.

We know that one of our large pharma partners as Jeff shared with us that we have the highest quality delivery of any other CRO partners. So the things that we know make us win are the things that we're now doubling down on, right? The innovation and our capabilities, focusing on technology and data innovation in regards to embedding that into our clinical trial solutions for those customers. And so those are the things that are making us win and those are the things that we are now laser-focused on making sure we bring to customers. I don't know, Mike, if you want to add anything.

Yes. The only thing I would add, I agree with that. When we deploy our integrated solutions with the right project team, our therapeutic insights, we win. We have to deploy that consistently. So with Christian Tucat, enrolls, our Chief Business Officer. He and I have partnered up to ensure that all of our business development team have the tool kits they need to be able to ensure that we're bringing those integrated solutions.

We're working to make sure our business leaders understand how we put these together and how we sell them. And so as we get that fully deployed across our entire organization, we feel very confident. It's not just going to resonate with clients, we're going to win. We're going to be able to deliver on it.

Got it. And just following up here on one of Luke's questions some earlier and not to belabor the point on the outlook for next year. But you mentioned, obviously, you won't hit your top line target next year. But what do you think is actually achievable? Or in other words, maybe what is the worst-case scenario for revenue next year? And then is it fair to think about next year as a jumping off point for giving back to those targets in 2024? Or it sounds like this might take more than a few years here to turn this around?

Yes. So as we've shared, we're very focused on delivering against the Q4 and executing against our strategic business plan and aggressively attacking the things to drive performance and improve visibility. And as we close out the fourth quarter, we'll have much better visibility into what will occur in 2023.

And we're very aware. The better we do in focusing on Q4 delivery, we'll be in a good position to share with you than how we see 2023 playing out.

Our next question comes from Casey Woodring of JPMorgan.

So you said, you feel good about the large pharma business. Just curious what gives you confidence there that you can compete with the larger scale players in that space? And just to clarify, those full service and FSP delays you called out, are those the same delays that you've been seeing over the last several months from the large pharma customers that have been delaying decision-making to the management changes and some of the other reasons that you've called out? Or is this something different?

Sure. So I'll start with why we're excited about large pharma and why we feel we can compete there, and then I'll let Michael talk about some other things. So I think you know, we won our fifth large pharma partnership in Q1 of 2022. And all our large pharma partnerships, we have a very good relationship with the organization, and they're very pleased with our delivery and our quality. We are in a very good shape there.

And so we feel good about those customers giving us repeat business in 2023, probably more -- based on their pipeline more in the second half of 2023. We think we'll see more particular awards. And we also have been in conversations with multiple other large pharma organizations that are looking to either add a new CRO or replace an existing CRO through their processes.

And if you recall, we've always said that we want to win 1 to 2 a year. We won the 1 this year and going into 2023, we feel really confident of the ones that are right in front of us, that we can win that, 1 or 2 a year, and we're laser-focused on doing that. So I think, we have the global scale now. We have the capabilities that customers are looking for. And so we feel, we're more than ready to compete, and that's an opportunity for us to grow share in that particular segment. But I'll let Michael talk a little bit about the delays in FSP. Yes.

Yes. So Casey, the delays that I've been describing are the same ones that we've been discussing earlier, around timing for the FSP replacements and the growth in the full service.

Our next question comes from the line of John Sourbeer of UBS.

A lot of questions have been asked here. Maybe just 1 on the commercial segment. I think, FDA approvals are tracking a little bit light this year. Any thoughts, just on how that might impact the outlook for the commercial segment as we look out? And is that a good leading indicator to look at?

Sure. We've always said that's one of many leading indicators for the commercial business. We also look at many other things, right, which is the fact that we've been having a lot of conversations specifically with large pharma about building more flexibility into their cost bases and their cost structure.

And so I think, we shared, our RFP flow is up in large pharma and commercial. And we think that's going to definitely be an opportunity for us as we move forward. We also think, the complexity of the science of a lot of these new launch products that are coming through are definitely an opportunity for us because you need a variety of capabilities. And a lot of customers as they're getting into some of these new therapeutic areas who want to leverage our expertise. It's also in the mid customer base, there is a good opportunity for our Syneos One and full-service commercial offering because it gives, especially SMID customers, the opportunity to commercialize their assets themselves versus being forced to license them or co-promote them. And so we still think that, that's an opportunity for commercial.

Thank you. At this time, I'd like to turn the call back over to CEO, Michelle Keefe, for closing remarks. Ma'am?

I want to thank the entire Syneos Health team. I'm very motivated and inspired by their commitment to our customer, sites and patients. Despite the near-term challenges, we remain confident in our market position and our strategy and look forward to updating you on our transformation. Thank you for joining us today and for your interest and investment in our company.

This concludes today's conference call. Thank you for participating. You may now disconnect.