On April 25, 2018 PRA Health Sciences, Inc. ("PRA" or the "Company") (NASDAQ:PRAH) reported financial results for the quarter ended March 31, 2018 (Press release, PRA Health Sciences, APR 25, 2018, View Source;p=RssLanding&cat=news&id=2344607 [SID1234525698]).
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For the three months ended March 31, 2018, revenue was $701.8 million, which represents growth of 43.9%, or $214.1 million, compared to the first quarter of 2017 at actual foreign exchange rates. On a constant currency basis, revenue grew $198.3 million, an increase of 40.7% compared to the first quarter of 2017. On January 1, 2018, the Company adopted Accounting Standards Codification Topic 606, "Revenue from Contracts with Customers," or ASC 606, using the modified retrospective method for all contracts that were not completed as of January 1, 2018. The prior periods were not restated under this guidance and remain as previously reported. The primary impact of applying this new guidance on our statement of operations is that (i) we now recognize reimbursements from our customers for payments to investigators as revenue, whereas these payments and costs were previously recorded on a net basis, and (ii) we include all reimbursed costs in the total project costs when measuring our progress under our research contracts instead of recording these amounts on a separate basis.
Excluding the impact of the adoption of ASC 606 and reimbursement revenue, revenue increased $132.8 million, which represents growth of 31.1% at actual foreign exchange rates and 28.5% on a constant currency basis. Organic revenue growth, excluding the adoption of ASC 606, reimbursement revenue and $56.8 million of revenue attributable to our Data Solutions segment, was 17.8% at actual foreign exchange rates and 15.2% on a constant currency basis.
Net new business for our Clinical Research segment for the quarter ended March 31, 2018 was $650.3 million, representing a net book-to-bill ratio of 1.29 for the period. Our calculation of the net book-to-bill ratio excludes the revenue impact of adopting ASC 606, excludes reimbursement revenue and excludes revenue from our Data Solutions segment. Net new business during the quarter contributed to an ending backlog of $3.8 billion at March 31, 2018.
"We are off to another solid start and our first quarter results were in line with our expectations" said Colin Shannon, PRA’s Chief Executive Officer. "We continue to execute across the business and I was really pleased with our double-digit revenue and earnings growth and our 1.29 book-to-bill ratio. We are focused on client deliverables and our key strategic objectives, and we look forward to delivering strong results for the rest of 2018."
Direct costs were $381.4 million during the three months ended March 31, 2018 compared to $287.5 million for the first quarter of 2017. The increase in direct costs was primarily due to an increase in labor-related costs of $50.9 million in our Clinical Research segment as we continue to hire billable staff to ensure appropriate staffing levels for our current studies and our future growth. In addition, our Data Solutions segment resulted in $40.6 million of incremental direct costs when compared to the first quarter of 2017. We also had an unfavorable impact of $14.0 million from fluctuation in foreign currency exchange rates during the three months ended March 31, 2018. Excluding the impact of the adoption of ASC 606 and reimbursement revenue, direct costs were 68.1% of revenue during the first quarter of 2018 compared to 67.3% of revenue during the first quarter of 2017. The increase in direct costs as a percentage of revenue was primarily due to the aforementioned increase in salaries and related benefits.
Selling, general and administrative expenses were $91.7 million during the three months ended March 31, 2018 compared to $74.3 million for the first quarter of 2017. Excluding the impact of the adoption of ASC 606 and reimbursement revenue, selling, general and administrative costs were 16.4% of revenue during the first quarter of 2018 compared to 17.4% of revenue during the first quarter of 2017. The decrease in selling, general and administrative expenses as a percentage of revenue is primarily attributable to our ability to continue to effectively leverage our selling and administrative functions.
Transaction-related costs represent changes in the fair value of contingent consideration related to our recent acquisitions. During the three months ended March 31, 2018, we recorded an $11.6 million reduction in the fair value of the earn-out liability associated with the Symphony Health acquisition, which reflects updates to the current estimate.
GAAP net income was $39.0 million for the three months ended March 31, 2018, or $0.59 per share on a diluted basis, compared to GAAP net income of $25.2 million for the three months ended March 31, 2017, or $0.39 per share on a diluted basis.
EBITDA was $98.8 million for the three months ended March 31, 2018, representing an increase of 70.9% compared to the first quarter of 2017. The increase in EBITDA was driven by lower foreign currency losses and the revaluation of the acquisition-related earn-out liability discussed above. Adjusted EBITDA was $95.7 million for the three months ended March 31, 2018, representing growth of 38.2% compared to the first quarter of 2017.
Adjusted net income was $56.2 million for the three months ended March 31, 2018, representing 39.1% growth compared to the first quarter of 2017. Adjusted net income per diluted share was $0.85 for the three months ended March 31, 2018, representing 37.1% growth compared to the first quarter of 2017.
A reconciliation of our non-GAAP measures, including EBITDA, adjusted EBITDA, adjusted net income, adjusted net income per diluted share and our 2018 guidance, to the corresponding GAAP measures is included in this press release.
Guidance
The Company is reaffirming its full year 2018 service revenue guidance to between $2.84 billion and $2.95 billion, GAAP net income per diluted share to between $2.80 and $2.95 and Adjusted Net Income per diluted share to between $4.00 and $4.15. We anticipate an annual effective income tax rate estimate of approximately 24%, which includes the expected impact of the Tax Cuts and Jobs Act enacted in the fourth quarter of 2017. Our effective tax rate may differ from this estimate, due to, among other things, changes to estimates of the geographic allocation of our pre-tax income as well as changes in interpretations, analysis, and additional guidance that may be issued by regulatory agencies as it relates to the Tax Cuts and Jobs Act.
Our guidance assumes a EURO rate of 1.25 and a GBP rate of 1.37. All other foreign currency exchange rates are as of January 31, 2018.
Conference Call Details
PRA will host a conference call at 9:00 a.m. ET on April 26, 2018, to discuss the contents of this release and other relevant topics. To participate, please dial (877) 930-8062 within the United States or (253) 336-7647 outside the United States approximately 10 minutes before the scheduled start of the call. The conference ID for the call is 2471729. The conference call will also be accessible, live via audio broadcast, on the Investor Relations section of the PRA website at investors.prahs.com. A replay of the conference call will be available online at investors.prahs.com. In addition, an audio replay of the call will be available for one week following the call and can be accessed by dialing (855) 859-2056 within the United States or (404) 537-3406 outside the United States. The replay ID is 2471729.
Additional Information
A financial supplement with first quarter 2018 results, which should be read in conjunction with this press release, may be found in Investor Relations section of our website at investors.prahs.com in a document titled "Q1 2018 Earnings Presentation."