ICON PLC (ICLR) 2005 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Quarter 1 2005 ICON PLC earnings conference call. My name is Michelle, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be conducting a question-and-answer session towards the end of the conference. (OPERATOR INSTRUCTIONS).

I would now like to turn the presentation over to your host for today's call, Mr. Sean Leech, Chief Financial Officer. Please proceed, sir.

Good day, ladies and gentlemen, and thank you for joining us on our first-quarter fiscal 2005 conference call covering our results for the quarter ended August 31, 2004. Joining me on the call today we have Dr. John Climax, our Chairman, and our CEO, Mr. Peter Gray.

Before I hand the call over to John, I would just like to make the customary statement in relation to forward-looking statements. Certain statements in these opening remarks constitute forward-looking statements concerning the Company's operations, performance, financial condition and prospects. Because such statements involve known and unknown risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Given these uncertainties, investors and prospective investors are cautioned not to place undue reliance on such forward-looking statements. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

With that out of the way, I would like to toss the call over to John. John?

Thank you, Sean. Good day, ladies and gentlemen. Thank you for joining our conference call covering the results for the first quarter ended August 31, 2004.

Net revenue in the quarter was $78.3 million, an increase of 14 percent over the same period last year. Of this, net revenues in the U.S. increased by 3 percent on the comparable quarter, while Europe and the rest of the world increased by 33 percent over the same period. Excluding the impact of acquisitions, our overall net revenue growth was 8 percent.

Turning now to our costs, direct costs were $42.5 million for the quarter, representing 54.2 percent of net revenue compared to 54.7 percent in the comparable period. SG&A and D&A costs were 33.7 percent of net revenues for the quarter, compared to 34.2 percent last year. As a result, our operating income for the quarter grew by 24 percent over the same quarter last year, from $7.6 million to $9.5 million.

Our operating margin was 12.1 percent for the quarter, compared to 11.1 percent in the same period last year. Our clinical business performed well in the quarter with net revenues of $71.8 million and operating income of $10.3 million, giving an operating margin of 14.4 percent.

Our central lab business, however -- due to delays and slow study startups -- performed below our expectations with net revenues for the quarter of $6.6 million and an operating loss of $800,000. Net new business wins in the lab were $6.9 million for the quarter after cancellations of $1.5 million. The business environment continues to be positive and as we indicated previously, we expect the performance in the lab to improve over the coming quarters.

Taxation was 24.1 percent of pre-tax income for the quarter, compared with 26.9 percent for the comparable period last year. As a result, net income for the quarter was $7.3 million, or 52 cents per share, compared to $5.6 million, or 44 cents per share last year.

Turning now to our balance sheet, capital expenditure in the quarter was $4.5 million, and we paid $9.9 million or a 70 percent interest in Beacon Biosciences, which we announced in July. Our DSOs were 59 days at the end the quarter, compared to 60 days at the end of fiscal 2004. As a result of these factors, net cash at August 31, 2004, was $65.6 million.

We were awarded gross new business of $93 million in the quarter. However, we suffered an exceptionally high level of cancellation at $47 million, $25 million of which we had already highlighted on our last conference call. All these cancellations were either due to regulatory or pipeline prioritization issues. As a result, we currently have over $224 million of the next 12 months' revenue in booked and awarded business. We estimate that this represents approximately 67 percent of current market forecast.

We remain comfortable with the guidance given on our last conference call despite higher-than-anticipated level of cancellations. Business opportunity flows continue to be strong, and we expect to benefit from these over the coming quarters.

That ladies and gentlemen, concludes our remarks, and we now open the call to questions.

Thank you. (OPERATOR INSTRUCTIONS). Jack Gorman of Davy Stockbrokers.

Thank you very much. I just have two main questions really, please. Firstly, on just the nature of the additional cancellations that you saw in the quarter, as you said, 25 of the 47 had already been flagged by yourselves, and I just wanted to get a sense of what the other 22 was, whether it was one large contractor or a number of small ones.

Secondly, I just wanted to see how the organic revenue growth in the quarter of 8 percent tallies with your previous guidance I think for 10 percent for the full year. Maybe the difference is the impact from acquisitions.

Jack, on the cancellation, the makeup of the subsequent cancellations (inaudible) the conference call, since the last conference call, was a number of midsized projects. There were four in particular that would have been over 4 million in value, each over 4 million in value; that would've been the main contributors to it. Then there were a number of either downsizing of projects or cancellations of smallish projects.

Had work begun on those, Peter?

Yes, on a number of them -- on some of them, work had begun. I think on two -- of the four I mentioned, on two of the four, work had not begun and on two of the four, work had begun.

To give a little more color to it, obviously and just generally the comment on cancellation, we showed -- for those of you who might have been able to see the slide show that we were showing on the Web as John was doing his comments there, the level of cancellations that we saw in the last quarter is exceptionally high, as John said. In fact, the graph on the webcast that shows just how out-of-sync the cancellation level was in the last quarter. It's probably important to say, we don't think that it's likely to be something that would be repeated, if history is anything to go by, and we've lots of (indiscernible) around this business who tell us that a spike like this is unlikely to be repeated. So we feel reasonably confident that we've had an unusual quarter. It has been a painful one for us, but we don't anticipate that it will be repeated.

Peter, just on that point, in terms of how we can read the spike, is it in any way linked to the way the business mix has shifted over the course of the last number of years towards an increasing proportion of business coming from the biotech sector or indeed specialty pharma?

No. Certainly one wouldn't read that into the cancellation pattern, Jack. Large pharma companies were more involved in the cancellations than small.

Sean, would you like to take the question on the (inaudible)?

Sure. As we said, yes, organic growth in the quarter was 8 percent. I think guidance, Jack, if I'm not mistaken of 10 percent was total revenue growth over the year. Obviously, the lab, as John has indicated, also slightly underperformed. So (indiscernible) the two but ultimately the overall guidance, Jack, was 10 percent overall growth for the year as a whole.

Can I take it that the 2 percent differential, if I can call it, there will be some incremental from acquisitions that you would include in your full-year figure?

Correct.

John Kreger of William Blair.

Two questions -- John, I think you said towards the end of your remarks that the environment continues to be quite strong, which gives you comfort in the guidance you gave us three months ago. Could you just expand upon that, and perhaps give us some metrics?

Then secondly, can you give us some sense of comfort around these cancellations not being in any way company-specific or performance-related?

On the metrics (indiscernible) RFP volume continues to show up very strongly. Volume overall was up 43 percent in the U.S. and 12 percent in Europe. In value terms, the volume was 14 percent up in the States and 17 percent up in Europe, and that's in the quarter that I'm referring to.

There is an interesting piece of statistical occurrence again in this quarter -- that while the value is up 14 percent in the U.S., we have excluded an unusually high level of RFPs that we also processed. Where the decision was made in the end that the project would not go ahead, so they were never decided, there were never awarded to anyone. If one had included that in the statistic, the value would have been up I think it's over 50 percent --.

Close to 50 percent.

So in terms of the RFP activity, it was very, very strong, albeit a significant amount never went anywhere, never got awarded as business, and isn't likely to be awarded as business in the future. It seems like some companies were out on fishing trips or budget-planning trips or whatever it may have been. But still, the underlying trend, when you take all of that out, was a good increase in value and a 14 percent increase in -- sorry, a good increase in volume and a 14 percent increase in value in the U.S. and a 17 percent increase in value in Europe.

During the summer -- and remember the months we're talking about here are June, July and August -- that's pretty good.

Great. Peter, could you just review for us, as I said in my other question, give us some comfort that there's not a performance issue or a quality issue with ICON? Then also perhaps, can you give us an update on where you think the lab stands?

On the cancellations, I can give you comfort that there were no performance issues involved, John. All of the cancellations that we encountered in the first quarter were either, as John said in his comments, regulatory related issues -- and we went through some of those and gave some detail on some of those on the last conference call. The ones subsequent to that were not regulatory-related. They appear to be changing priorities in Company pipelines and projects that were to go ahead. They decided not to go ahead with them because they were doing something else or there was another division doing something, etc., etc., but there was nothing. It's hard particularly to be responsible on a performance basis when the project never started. But for those projects that had started, there were no performance issues. (inaudible).

These cancellations that we have had, the prime concern working rather proactively with us to give us other opportunities (ph). We welcome that and we understand that this has been a rather unusual decision that they have made after having given the studies to us. So we are very comfortable that some of these will come home to roost in the coming quarters.

Sorry John, there was a second part. Oh yes, the lab. The overall picture on the lab I think is a disappointing quarter. Sean tells me we've seen disappointing quarters at this time of the year in the past, that summertime seems to be slow for patient accrual and studies. Therefore, the volume of tests coming into the lab can dip, particularly in the month of August. That's exactly what we saw. Therefore, we're not reading too much into the disappointing performance in the quarter concerned.

The macro picture -- I think we still need to stay focused on the macro picture, which is that in the last -- I think in the last seven quarters in the lab, the book-to-bill ratio has been in excess of one and in fact has averaged somewhere around 1.2 to 1.4. In the quarter just ended, the book-to-bill was only 1.1 but again, the lab was unfortunately party to some of the cancellations that we suffered, and that's why their book-to-bill is a little weaker.

Going into this quarter, the quarter we are now in, again the business environment or the wins environment looks very positive for the lab. I think the backlog in the lab is growing and continues to grow. The translation of that into revenues in the lab has been disappointing slow for us, and we don't take any satisfaction from that. But we do take comfort from the fact that as the backlog grows, somewhere down the line it's got to turn into revenue. We are expecting that in the coming quarters, as John has said, we are going to see the performance of the lab improve significantly. Predictions as to which quarter that's going to happen in, I think we've probably -- we've been the prophet crying in the wilderness now for a long time about when it's going to happen. I won't make a rash prediction but we do believe in the next two or three quarters we should see significant improvement in the lab's performance. If the business trends mean anything and if the growth in backlog means anything, that's what it must mean.

David Windley of Jefferies & Company.

On the issue of cancellations and what they may signal, you clearly said you think this was an anomalous quarter. What percentage of the cancellations come from budgetary decisions versus, say, scientific decisions or compounds that are deemed not worthy to be taken forward because the compound really doesn't work or doesn't match up to expectations internally from a scientific standpoint? And one of it is just squeezing down on the Phase II, Phase III budgets.

I think very few of them are to do with any issues of compounds. The one that we spoke about on our last conference call, which was FDA had asked a particular company to go back and repeat some earlier phase work before they gave them the green light to go into later phase work, obviously is an exception to that. Although the compound hasn't failed, the FDA wanted more clarity in the data.

The others are not to do with the compounds; they are to do with, as I said, I think changing priorities in the pipeline. Again, one of the last ones we spoke about on our last conference call was as a result of some feedback from the FDA saying the study they did not believe was necessary, so the study was discontinued, but the FDA advised that another study would be worth doing, and the client we understand is in the process of designing that. We expect to have an opportunity to propose and hopefully win that piece of business.

In the other, each one has its own characteristics. I don't think any of them would represent evidence of a screwing down of the budgets. In one case, there was a very -- and I can't be more specific than this -- in one case, there was a very crass error made in the calculations by the people who were designing the trial as to pertinent factors associated with the trial, which impacted on the cost. When they saw what the cost of that was -- and wasn't associated with our services -- when they saw what the cost of that was, they realized that they had not got the budget to do it. To be honest, if I was running the company, they wouldn't have had the budget to do it either because there was a very significant sideline cost to the study that would've made this a very expensive, a very expensive project.

So I'd don't think -- it's a long way of answering your question, but I don't think there is evidence in what we're seeing that says pharma is screwing down its spending to some significant extent or more so than in the past.

Okay. I believe, when we spoke last, the $25 million number that were the cancellations up to that point were largely or exclusively U.S. I was wondering if the subsequent -- it looks like about $22 million or so -- were also largely or exclusively U.S. cancels?

Yes. The short answer to that is yes, although the 25 -- of the 25, about two-thirds of it was U.S. and one-third of it was non-U.S.

Of the subsequent -- again, I would say probably two-thirds to three-quarters U.S., one-third to one-quarter non-U.S. So the burden, the brunt of this has been borne in the United States.

You mentioned that there were four contracts in the subsequent group that were -- I guess make up the lion's share of the dollar value, and two of those were up and running or beginning to ramp and two were not. Help me to understand a little bit how you replaced the revenue of the two that were up and running such that, again getting back to John's comments about sticking to guidance -- and then, when were those other two going to hit?

How do we replace it? We win more business, Dave, and we get going quickly on that additional business. The indications, the RFP flow that I'd indicated, the value of that RFP flow that I've indicated shows that the pipeline of opportunity is pretty good. The indications in the first few weeks of this quarter we are in now, in the fourth week of this quarter, the indications are quite positive. So, we have, I suppose, sufficient going on around us at the moment that gives us comfort that we can replace the revenues both from the ones that have been discontinued and the ones that were due to start. The ones that were due to start would have been pretty quick; they would've been started in this quarter.

Then there's a final question. Given the impact in the U.S., what are your thoughts about staffing levels? You clearly had already said that you would shut off the hiring spigot. Is there a need now to resize headcount to lower business levels in the U.S.?

No. In the short term, we may have some capacity, but as we've said on previous calls, in a growing market -- and again, the RFP statistics can speak for themselves -- in a growing market with plenty of opportunity out there, it would be very imprudent of us and very short-term in nature to reduce headcount for one quarter only to want to replace it again in the subsequent quarter, if that were indeed necessary. We anticipate, as we've said, that we are comfortable with guidance and that taking drastic measures of that nature are not required.

Eric Coldwell of Robert W. Baird.

I know that you don't give this every quarter but could you possibly quantify client concentration? As an adjunct to that, could you tell us whether the majority or a large number of the cancellations came from your larger clients, or were these more from your smaller and newer clients?

Eric, in terms of client concentration, our top five clients accounted for 43 percent in the current year, compared to 47 percent last year. If I take the top 10, it contributed to 60 percent in this period, compared to the comparable period last year was 62 percent. Again, I always say you have to take this into context. Of the 43 percent, it translates into 80 studies with 46 drugs, so it's fairly well-diversified. Again, if you look at the revenues that these people are contributing, 80 percent of the revenues that are coming from the top five clients all are associated with Phase IIIb type of studies, where the drug is already on the market. So there is a very little chance of it getting pulled.

That's great. Thanks for the detail. Could you possibly give us your top one client, please?

The top one client?

Top one, please?

The top one is Astra Zeneca.

Just as a percent of revenue though?

14 percent.

14 percent, and that's for the year, not the quarter?

It's for the quarter.

Oh, it is for the quarter?

Yes, for the quarter.

Thank you very much. If I can shift gears quickly, I'm curious what the FX impact was in the quarter, both top and bottom line.

Bottom-line operating income, we gained $100,000 (indiscernible) Eric, so the FX impact was small and we gained -- if you retranslated the results of last year's numbers, we gained about $2 million year-on-year, so it supplemented the growth by about 2 percent.

Plus 2 percent on the growth.

Effectively, the bottom line was zero, obviously, because obviously you are translating both revenue and costs -- (multiple speakers) -- so the net bottom-line impact is very small.

Okay, great. If you could perhaps quantifying Beacon Biosciences in the quarter, contribution to top and bottom line?

It's a fairly small transaction. It contributed in line with what we expected, but it's not a big company, Eric, so it's -- (multiple speakers) -- particularly meaningful.

Finally, just if there's any update on Phase I and what you're seeing as well, not only in terms of the robustness of the business but if you are seeing any -- you mentioned a little bit of an impact possibly last quarter from the clinical trials directive. I'm curious if you can give us any status of that. Thank you and I'll drop off after that.

On the Phase I, Eric, the (indiscernible) is yes -- (technical difficulty) -- some impact from the clinical trials directed last quarter, as we expected that we would see because RFP flows had lagged a little in the preceding quarter. We are anticipating that this quarter, the quarter that will end in November, will similarly be a bit softer than we would have been -- normally we see the business (indiscernible) pick up. It looks to us as if the noise around the introduction of the European Wyeth (ph) clinical trials directive has a basis, people have seen that it isn't the end of the world as they know it or as anyone else knows it for that matter, and the business flows in medival (ph) in our Phase I unit in the UK have picked up very significantly in the last couple of months, which we expect will translate into much more robust levels of business going forward in quarter three and quarter four (indiscernible).

As an aside, just a general comment on the Phase I market, clearly the United States is enjoying an extremely robust Phase I environment currently. Because medival (ph) are getting inquiries from U.S. companies who have been unable to place business in the U.S. in reasonable timelines. So one of the benefits and one of the things that's probably helping them overcome quickly the impact of the clinical trial directive is the strength of the market in the U.S. and the fact that capacity is possibly constrained now, and that's forcing companies to go back over across the sea to Europe.

You asked another question I think before that, did you?

My question was the -- (multiple speakers) -- cancellations.

You asked about the cancellations and as to whether they came from smaller, newer clients or from (inaudible) somewhat earlier -- (Multiple Speakers) -- newer clients are from our more established clients. It's actually a mixture. A couple of the cancellations came from one large pharma client that we had been working with for a long time, wouldn't appear in our top two but would appear in our top five or six. Another of the cancellations came from a client that has been growing for us and is again in our top 10. Another of the more significant cancellations came from a relatively new client onto whose preferred provider list we were recently placed. So again, no pattern to it.

David Marshall of NCB.

Good afternoon, guys. If I could just ask, in terms of the backlog mix and kind of how that's translated into geographic revenue mix moving forward, we've got -- I supposed you've moved from 70 percent U.S. towards 64, 65 percent U.S. now. Moving forward, will that kind of largely come back or maintain at that level with the U.S. in terms of RFPs accelerating again? Just in terms in the pickup of RFPs and the strength you're seeing there, is there any particular segment which is a big driver in terms of major specialty or biotech?

Perhaps in terms of the win rate, is the win rate which you reported in the past of maybe 30, 33 percent -- is that still intact or is there a wider trend of that win rate or success rate (indiscernible)?

The backlog mix, first of all, as you say, revenues are now about 65/35. Some of that has been influenced by acquisitions on both sides of the Atlantic; that's one of the factors that has driven change. Obviously, over the last I think three quarters, Europe has been growing more rapidly than the United States, so that is partly what has contributed to it. I don't think I would make a prediction as to how this will develop over time. We have seen pretty consistently, since we went public, that the balance between Europe and the U.S. has been 60 to 70 percent U.S., 30 to 40 percent Europe. I think it's going to stay within that range. I think, from year-to-year, it will fluctuate and if the market is strong in one area at a time -- and you know, we spent three years where we were looking for our European business to perform more strongly. It is performing very strongly now but coincidentally, the U.S. is going through a much tougher time. One of these days, we might actually get both of them working strongly at the same time.

To answer your question, I don't think we are expecting any particular pattern to it, all other things being equal. I would imagine it's going to stay somewhere in the 65/35 range but it could fluctuate around that by 5 percent either way.

On your second question, I wasn't quite sure what your second question was so if you could repeat it for me, I would appreciate it.

I think that in terms I think it was that the RFP win rate, is there any overall reduction in the success rate you are having?

I don't think so. Now, we haven't run some recent metrics on this, but one interesting factoid out of the quarter is that we had 50 million of growth wins in the U.S. in the quarter, but most of the cancellations occurred in the U.S., so the (indiscernible) picture was pretty poor. If you ignore the cancellations but of course, one can't from a financial perspective, but from a win rate perspective if one ignores the cancellations, the win rate in the U.S. is actually very good in the quarter. So I think our 30 percent or thereabouts win rate is intact. It can depend on what you include or don't include in the numerator and the denominator to see what number you come up with. One argument that we have internally is should RFPs (indiscernible) to you that you price but the business never gets placed it, either with us or anybody else, should that be included in the metric? We don't include that in the metric. So if one does not include that in the metric, which we have never done, the win rate remains as I say around the 30 percent level. So we're not concerned that we are declining in our success rate.

The other question was, in terms of the pickup in RFPs and just the strength, is being driven, is it across the board I suppose across specialty and major and biotech? Maybe just to follow-up in terms as opposed to geographic mix, are you seeing a large move kind of ex-U.S. and the European trials in terms of companies looking for treatment-naive patients in some of the more popular indications?

In the trend on the RFPs, no, there's no particular trend in favor of particular segments. In terms of therapeutic areas, as would expect, because everyone knows the shape of the pipeline. Oncology is very strong (inaudible) and cardiovascular continues to be important areas, as are anti-infective and anti-viral. But that is a feature of, A, the size of the market for those types of drugs, and B, the number of products that are known to be in the pipeline in those particular therapeutic areas.

Geographically, it has been a feature of the CRO (ph) business as long as we have been in it that clients continue to push the boundaries in terms of where are patients available, where can faster recruitment be achieved, and how can we therefore capitalize on patient populations in Eastern Europe, in Southeast Asia, in South America? That trend hasn't changed. It possibly is one of the factors that is contributing to the fact that our European business is strong, our rest of world business, which is every part outside of the United States and Europe, is very strong the. Certainly, that has been helped by the fact that more trials are (indiscernible) globally and wanting sites to be involved right across the different geographies. So that has been a trend. That's not a new -- (technical difficulty) -- there. As we say, (inaudible) as long as we've been in the business.

Your next question comes from Chris McFadden of Goldman Sachs.

It's Randall Stanicky for Chris. Thanks for taking my questions. Just to be clear, Sean, when you expressed your metrics or forecast targets last quarter, are you still comfortable with top and bottom line by quarter and for full year from what you gave us last quarter?

Absolutely. (indiscernible) various ranges within that, which are very comfortable with us.

When we looked at your coverage, your revenue coverage last quarter and the drop there and the necessitation for an adjustment, I think, John, you mentioned you're at 67 percent. Would you ascribe that or the lack of changing an outlook to a firming environment, or what is giving you confidence in your targets going throughout the year?

I think it's the general environment, Randall. As I said, the volume and value flows in the quarter that ended at the end of August were strong and robust; it continued to be robust into this quarter. The indications -- and they are soft indications, but the indications that we have of opportunities that are heading our direction, leaning in our direction are pretty positive and they all give us the confidence to say that despite the higher level of cancellations that we anticipated, we're still comfortable with the guidance.

Did you mention, of the 22 million, did you mention what was going to be booked over the next twelve months? Was that additional 22?

I think we have that number there. We didn't mention it. It's about $12 million -- (multiple speakers).

Okay, great. Additionally, I guess just following up on David's question on headcount, if you're not going to change headcount, would it be fair to say that, from a cost perspective, we should look for roughly it to continue to be flat throughout the year on the direct cost line?

I wouldn't take that because obviously our European business, Randall, is obviously still growing. Again, we gave guidance (indiscernible) numbers last quarter that obviously has within that growth taking place and improvement taking place within our European business. So I don't think it's going to be significant in terms of the overall business, but the direct cost will creep up sequentially as our recruitment progresses in Europe.

Okay. Just finally, can you just comment briefly on (indiscernible) as to what you are seeing from that customer segment? Has there been any change recently?

We haven't identified any significant change. Our relationship was with (indiscernible) and continues. Our contacts and relationship continue to be with the Phenoke (ph) people that we've always dealt with. It seems to be business as usual. We haven't seen any either slowdown or acceleration in activity that was from that particular client and so far, it seems to be invisible to us.

Peter, congratulations on your Board appointment.

Thank you.

Steve Unger of Bear Stearns.

Good morning! A quick question -- first, the gross bookings, how did that stack up against your internal forecast? I mean, do you consider that a good number?

I think a number of 250 would be a really good number, Steve! And 150 would be a great number. 93 -- anyone looking at the graph would say we have -- we've plateaued a little over the last number of quarters in terms of the gross bookings. That's why our backlog coverage isn't as strong as it perhaps was a year and a half ago.

We would like it to be stronger and we will be working very hard to break the 100 barrier in the quarters ahead and move on from this level. So the short way of answering your question is it's not bad but I would like it to be better.

Okay. These preferred provider relationships that you've been entering in over the last couple of years, have those relationships been slower to develop in generating meaningful wins? You know, steady wins?

The short answer to that is yes. We recently, in one of the clients, we were told, when asking why the flow of wins was disappointing -- the flow of opportunities has been good but the flow of wins has been not as good as we would like it to be. We were told we were the newbees (ph). We hadn't been an established player with the people within that company; they weren't familiar with us. They needed to go through some familiarization and therefore there was a getting-to-know-you period and a proving period that we would have to go through. We were prepared to accept (indiscernible) and where there are established relationships and established confidence in other suppliers, it's going to take awhile for us to get our name known and to get accepted. With one or two of the companies that we are on the preferred provider list of, where we have been on that list for a number of years, that's exactly what we experienced. It took us a year or two years to begin to break through but once we broke through, the volumes became very interesting, so we are anticipating the same pattern from the others.

In terms of your competitive position versus others in the industry, I mean, have we seen competitors then improve their service quality to the point where, within these preferred-provider relationships, it's taking a little bit more sales effort?

I think, obviously in the process of being selected for a preferred provider, there are certain minimum service levels and minimum standards that are required. Therefore, anybody who is in a preferred provider relationship has to have a certain capability and standard of quality. That does mean that winning the business is much more now focused on specific expertise, having the right people available with the right level of expertise for the given opportunities to turn up. But we've been saying that for years. When people have been asking us about price pressures, etc., etc. in the market, we have consistently said that the winning of business, whether it's in preferred provider relationships or otherwise, is really around the quality of the people that you can put forward, the consistency of your track record, and the relevance of the experience that you are putting forward to the specific opportunity that is put before you on that particular day. Matching those up isn't always possible, which is why win rates aren't 100 percent or 50 percent. That's why win rates are around 30 percent.

Okay. I know this is kind of a strange year, with the disruption in terms of cancellations. Could you comment on what your -- meaning management's -- performance goals are for the year? Is it just hitting your guidance, or is there some other factors (sic) involved here?

(LAUGHTER). You're asking me if I'm going to earn my bonus this year. The answer is no! The performance goals are well above guidance and always have been in ICON. Those goals are always stretched and they're always challenging and we are always striving to meet them. Meeting guidance is what we need to do to keep you guys happy but it doesn't keep my Board of Directors happy.

Okay, thanks.

Robert Brisbourn (ph) of Marion (ph) Brokers.

I just had a quick question really in terms of you said that the RFP growth was higher for volume than it was for value but that your own contracts are increasing in size. If that because you're fishing for the larger base of business or is there some other underlying reason?

The underlying reason I think is that, as we expand our sales force and as we expand our services, we are pitching for pieces of business perhaps that we have not pitched for before. Some of them stand-alone small services like for example IVRS, interactive voice response systems, where the value of a particular opportunity might be $150,000. The highest value would be less than $1 million typically in an IVRS project. Therefore, the volume of those opportunities can somewhat distort the numbers.

Our average contract value for clinical contracts continues to rise. The volume increase in clinical contracts is still, in the last quarter, higher than the value increase, but in the previous quarter, it was the other way around; the volume was lower and the value was higher. So one quarter's data does not make a trend and I think the overall picture is both volume and value are growing.

Okay. In terms of, I guess as your own average contract size increases, should we -- obviously this is rather an exceptional quarter but do we have to expect a slightly greater volatility in cancellations, going forward?

I don't think so, because we're growing larger as well and the growth in project size, average project size, is not so significant that it is disproportionate to the rate at which the size of the Company and the rate in which we are growing. No, we would not expect volatility to become greater due to some significant change in size contract.

(OPERATOR INSTRUCTIONS). Jack Gorman of Davy Stockbrokers.

Thank you for taking my follow-up questions. I just had two very small ones for you. Firstly, I just note some increase among those revenues on a quarter-on-quarter basis. I'm just wondering if there are any issues or is that of any significance in the overall context?

Secondly, I know you are only three or four weeks, Peter, into the quarter, but can you dare give us a sense of what cancellation trends have been like so far this quarter?

(LAUGHTER). Sean can answer the first one while I compose myself -- (Multiple Speakers) -- for the second one!

Nothing unusual, Jack. A large component (indiscernible) of our own builds is actually pass-through costs. If I can jump around a little bit on you, it generally doesn't get highlighted in terms of the overall financial performance. We don't make any money on it, but it does have an impact on our days outstanding. So, a lot of it is just timing and an actual fact -- if you look at the absolute numbers, the unbilled fees in the quarter are actually down and it's the (inaudible) pass-throughs that are up, so no specifics in (indiscernible) about. Ultimately, our overall lever of DSOs is actually down from last quarter, which, given the European (indiscernible).

Great.

The second part of your question, now that I've composed myself -- three weeks into the quarter, or four weeks into the quarter, as far as I'm aware, we've had no cancellations.

Fair enough!

Philip O'Sullivan (ph) of Goodbody Stockbrokers.

Operating margins rose by 1 percent to 12.1 percent, which was slightly ahead of expectations. Is this likely to continue, going forward, in the context of a better economic outlook?

In terms of the guidance, and I know we didn't get into specific details of the guidance, but actually the midpoint in my guidance for operating margins was 12.1, which is broadly speaking where we came out. Obviously our lab did perform slightly weaker in the quarter but our clinical business performed slightly stronger, so it pretty much came out as a wash.

In terms of the margin performance, going forward, obviously our clinical business has been performing well. Obviously, we do expect some decline next quarter of the impact of the acquisitions, which we've previously guided. (indiscernible) cancellations, sorry, which we've previously guided. (indiscernible) ultimately should start picking up back in Q3 and should be back to these type of levels in Q4, supplemented probably by the turnaround in our lab where we would expect to be obviously back in the black there, so the core margin will start to come through and the overall margin of the lab has improved (inaudible) back end of the year.

That's great. Thank you.

Michelle? Hello?

Yes, sir. At this time, we have no further questions. I will return it to you for closing remarks.

Ladies and gentlemen, we are pleased with our performance in our first quarter of fiscal 2005. Our operating margins were strong, earnings per share increased by 18 percent over the prior year, and we made further progress on our strategic development with the acquisition of 70 percent interest in Beacon Biosciences. While the high level of cancellations in our first quarter was very unusual, we enter our second quarter with a satisfactory level of backlog coverage. We therefore remain confident that fiscal 2005 will be another successful year for ICON.

With that, ladies and gentlemen, thank you very much.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.