ICON PLC (ICLR) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter three 2006 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 today's conference. (OPERATOR INSTRUCTIONS). And as a reminder, this conference is being recorded for replay purposes. Now I would now like to turn the presentation over to your host for today's call, Mr. Ciaran Murray, Chief Financial Officer. Please proceed.

Good day, ladies and gentlemen. I would like to thank you all for joining us on this call covering the period ended September 30, 2006. On the call today beside me I have Dr. John Climax, our Chairman, and our Chief Executive Officer, Mr. Peter Gray.

Before I hand the call over to John, I would just like to note that this call is Webcast. There are slides available, and the comments will follow the slideshow. I will now 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 conditions 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.

Today's commentary refers to our calendar quarter, quarter three, ending September 30, 2006. Please note that the comparable period is the quarter ended August 31, 2005. In the following commentary, the U.S. GAAP financials for 2006 have been adjusted to exclude the non-cash stock compensation expense and the effect on diluted shares of the adoption of FAS 123(R). We are excluding these as they do not feature in the comparative numbers, and we wish to ensure we compare like for like.

It should also be noted that one-time charges of $11.3 million, primarily relating to the recognition of an impairment of the goodwill associated with the central laboratory business and lease termination and associated exit costs in the U.S., have been excluded from quarter one of 2005.

Finally, ICON recently completed its bonus issue of shares, effectively a share split. The number of weighted average shares in this presentation reflects the share split in both the current and comparative figures.

With that said, I would like to hand the call over to John.

Thank you, Ciaran. Good day, ladies and gentlemen. Quarter three was another excellent quarter for ICON. Net revenue was $120.7 million, representing a growth of 40% over the comparable quarter last year, of which 38% was organic. Excluding acquisitions, growth in the U.S. was 47% and 26% in Europe and the rest of the world.

On a year-to-date basis, revenues were $326.6 million, representing growth of 28% over last year. Excluding acquisitions, growth in the U.S. was 37%, and Europe and the rest of the world was 15%.

Operating income increased by 63% over the comparable quarter last year, from $8.4 million to $13.6 million. Year-to-date operating income of $37 million represents growth of 70% over last year.

The group operating margin for the quarter were 11.3%, up from 9.7% for the comparable quarter last year. Year-to-date, margins improved to 11.3% from 8.5% in the same period last year.

Core margins in our clinical business was 12%, a decrease of 70 basis points over the comparable quarter last year. We incurred significant costs in the quarter in relation to the hiring and training of a further 400 staff, bringing our total staff in excess of 4000.

In addition, our Phase I unit had a disappointing quarter, which contributed to the lower margin. Year-to-date, clinical margins were 12.4%, an increase of 90 basis points over last year.

Our central laboratory business further improved its performance, contributing $700,000 in operating profit on net revenues of $12.9 million. This represents an increase of $5.7 million in revenues or 78% and an improvement of $2.3 million in operating income over the comparable quarter last year.

The central laboratory margin's operating margin improved sequentially from 3.5% last quarter to 5.6% in quarter three.

Net income rose to $11.1 million from $6.4 million in the comparative quarter, representing a 74% growth. EPS grew from $0.23 per share to $0.38 per share, a 65% increase over last year. The effective tax rate for the quarter was 23.5% compared with 28% for the same period last year.

Year-to-date, net income grew 72% to $29.9 million from $17.4 million last year. EPS grew from $0.61 per share to $0.103 per share, a 69% increase over last year. The effective tax rate for the nine months was 24% compared with 23.7% for the same period last year.

Cash flow generated from operations was $2.6 million in the quarter. We invested $6.5 million in acquisition and $8.4 million on capital expenditure of which $2.3 million related to the extension of our Dublin facility. Year-to-date, cash flow from operations was $33 million, and capital expenditure was $19.3 million.

It should be noted that two weeks ago, ICON invited tenders for the sale and leaseback of the Company's Dublin facility. This sale and leaseback is expected to be for both the existing buildings and the extension. The estimated total cost of construction of the facility extension will be in the region of $60 million, which will be funded from cash flow. Of this, $11 million has been spent to date. The first phase of the expansion project will be ready for occupancy in mid-2007, with the second phase expected to be ready in mid-2008.

Through the sale and leaseback, ICON expects to recoup its entire investment in the site and to realize a material profit, the size of which will not be determined until after tenders has been evaluated.

At the quarter-end, net cash and short-term investments were $90.7 million, up from $77.5 million in December 2005. DSOs for the quarter were 57 days from 70 days for the comparable quarter and 51 days in the previous quarter.

Gross business awards for the quarter to September 30, 2006 were again very strong, reaching a record $193 million. Cancellations were $36 million or 19% of gross awards. Accordingly, net business wins for the quarter were $157 million compared with $122 million in the comparable quarter. This represents an increase in net awards of 29% on last year and a strong book-to-bill of 1.3.

Year-to-date, bookings are $568 million compared to $348 million in the prior year, a 63% increase. While cancellations are averaging 13%.

As a result, our total backlog at the end of September 2006 was $815 million, a 43% increase over the comparable quarter. Of that, we expect almost $400 million to be earned over the next four quarters, a coverage of approximately 76% of market expectations.

Market conditions continue to show strength with our year-to-date RSP volume up 17% and value up 49% compared to the same period last year. We, therefore, continue to have confidence in the outlook for 2006 and into 2007.

I would like again to express my thanks to our management and staff for their dedication and hard work to help us achieve this significant acceleration in growth. 40% revenue growth does not come easily. We very much appreciate the enormous efforts our teams have made to make this possible. Thank you.

Michelle, we can move to the Q&A.

(OPERATOR INSTRUCTIONS). Christopher McFadden, Goldman Sachs.

Congratulations on the results. I would be interested in your comments on two areas. Firstly, you talked about it sounds like a very strong hiring quarter for you. I am just wondering if you could just comment in more detail in general on how you sort of see the labor environment, where you sort of see some of the -- that perhaps if there is any strain in the labor environment, what you are doing operationally to sort of address those, and if you are making any modifications either to program design or hiring strategies to try to account for that.

And then the second question, we continue to see it as I will call it a bubbling up of activity in terms of organizations, just thinking about how they want to perhaps participate in growth in the southern Asian marketplaces. And could you talk in a little more detail about how you see that market evolving and what things you think ICON bring to the table to be able to take advantage of any future growth or opportunities in those markets? Thank you.

Peter here. I will certainly take the first one of those. I might ask John, given that he is from southern Asia, I might ask him to respond to the second part of your question.

On the hiring side, you are absolutely right. It was again a very strong quarter of hiring. As John has mentioned, we hired over 400 people again in the course the quarter. That means we have hired over 1000 people in 2006.

The interesting thing, and I suppose the short answer to your question is that we have not found particular strains in finding people and bringing people into the organization, despite the strength of the hiring that we are doing, and we have not changed our practices in any way. And that is I suppose the short answer.

In giving it a little bit more color, obviously we pay a lot of attention in an environment where we are hiring this number people, we pay a lot of attention to how we retain our quality. And to that extent, I think it's important to point out we have 48 offices around the world, and the growth in staff is happening across the globe. So in any one location, we're not dealing with an overwhelming influx of new people. It is quite manageable. We have a very well-organized hiring, training and mentoring process in place in the Company and systems developments that we are doing currently are all helping us with this. We are currently -- we have just gone live with the new SOP management system -- that is standard operating procedure -- management system which makes access to procedures faster and more intuitive for our staff. We are also in the process of rolling out an e-learning system at the moment that will enhance the delivery of training to our staff, enable us to monitor the competency of staff on an ongoing basis.

So I suppose, again, that is the long answer. The short answer is we're not changing anything. We are finding it reasonably straightforward to hire good people. It has always been ICON's policy to mix a balance of experienced people and inexperienced people and train the inexperienced, and that is what we are continuing to do. There's no change even in that balance.

Peter, one clarification, if I could. Of the roughly 1000 people, which is obviously a pretty remarkable number, any broad back of the envelope breakdown of where you think you have sourced, in other words, from competitors, from life sciences firms, from, as you say, people new to the industry that you have sort of developed and given the skillset internally? Again, more just from reference than specific point estimates.

I think the answer to that, Chris, is all of the above, which does not really help you at all. But I do not have a breakdown or analysis of whether, again, there has been any particular bias in that regard. But again, when you think about it, it is spread over 30 countries in 48 offices, it is very broadly based, and it would be from all of those areas.

I understand.

On the East Asia question or southern Asia question, John, maybe you would like to comment.

As you know, Chris, The ROW region is divided into Asia, Japan, South Africa and Latin America and Canada. But looking into just southern Asia, we have seen increased level of activities over the last number of years, and we have responded to it by not only hiring people in these places, but also putting very good infrastructure in place. We are continuing to open more offices. At the moment, we have about a dozen offices in the South Asian region.

To sort of get all these offices together and people together and working as a single unit going forward, we will be in the coming months trying to decide and establish a regional headquarters within the Asia Pacific region, and that should provide much more support to our people out there.

So you are quite right. There is a bubbling of activity, and we are taking that very seriously.

That is helpful. Thank you. And one final clarification, then I will hop off. When you think about sort of the opportunities that are emerging, if you had to sort of say how much of it is rest of world business that is -- in which your customers are suggesting or asking the question about the opportunity to move projects to that portion of the world versus a home-based organizations who are just growing organically and are drawing in external expertise like your own to help them manage again more locally based organizations trying to drive a clinical development in those markets?

I am not understand exactly the latter part of what you said, but let me try to answer what I think you're asking. The bubbling up and the interest in rest of world is really driven by the globalization of clinical trials, which we have talked about a lot in previous calls. And it is driven by clients' desire to spread the nest as wide as possible to find patients for some of the complex indications diseases that new drugs are being developed for today.

So our experience is and our growth outside of the United States and Europe is driven by an additional component being added to studies that are also being executed in the U.S. and Europe in as we call it rest of world, which would include Latin America, Africa and Asia. We do not go -- we traditionally have not looked for stand-alone work in somewhere like South Asia. We tend to operate on the basis of providing a global service, and therefore, we -- our business development teams are looking for global opportunities where rest of world is involved. Although we are seeing and believe that this will develop over time, Japanese companies are increasingly doing clinical research in Japan and including some of the Asia region countries in those clinical trials where traditionally they have done those trials only in Japan. So there may be opportunities going forward for trials that are Asia-based with the drive coming from Japan.

Very helpful. Thank you very much.

John Kreger, William Blair.

My question is about the longer-term sustainable revenue growth that you think the organization can sustain. I obviously had very substantial numbers in the quarter both in clinical and in the lab. Can you just talk as you think out to next year and maybe even longer term, what is the pace that the organization can really increase at before you start to worry about quality issues?

That is why on the previous question, John, I took the opportunity to give a little spiel about how we are keeping a close contact on -- a close concern about quality. I do not think 40% is something that we expect to sustain. It is a spike, I suppose, in the current quarter. The long-term sustainable rate of growth that we believe is possible and that we are comfortable with is somewhere between the high teens and the low 20s. That is what we would be targeting, for example, for next year, and what we would be expecting would be our rate of growth for next year.

A little bit more specific question on the lab, Peter. Where do you think you stand now? You guys have made great progress there, especially on profitability. Can you continue to move that number higher, or do we need to think about taking a pause for some added infrastructure and automation to be added? And knowing what you know now, do you still think you can get this to a 15% type of operating margin in the next year or two?

The answer is yes to the last part of the question. We still think we can get the margins of 12 to 15%. I think we have previously said by the end of 2008, and I will stick with that.

In terms of a pause from here, no, I do not anticipate a pause from here. I think the rate of growth, obviously, has been spectacular. I think it is likely to slow a little, but we do expect growth to continue. The bookings in the lab in the quarter that we have just reported was just over $20 million. So they continue to build their backlog and continue, therefore, to put themselves in a position to grow those revenues up into the kind of numbers that we have indicated in the past, that sort of $15 million per quarter to $18 million per quarter, perhaps. But again, it is going to take several quarters to get up to that sort of level, so the rate of growth is going to slow.

Jack Gorman.

Peter, you touched on part of my first question just there in your last answer. I just wondered if you could give us a flavor as to your standard breakdown of business wins and cancellations, and for the quarter, maybe across division and across different sizes?

And then separately, just wanted you, if possible, to give a little bit more color on the Phase I experience that you had during the quarter and how that is being addressed, and how it will affect numbers going forward.

Sure. Well, the business wins color I think John gave, the gross wins at 193, the net wins at 157, a slight upward uptick in the cancellation rate this quarter. Nothing significant in there, quite a broad number of projects involved that were canceled for one reason or another. Because I know it is a matter of interest, I think it is interest in what further cancellations have been heightened in the current quarter. I pulled out a few metrics. And of our cancellations, about 15 million of them were related to safety or efficacy issues where the compound is concerned, and they were four projects that would have fallen into that category. $10 million of the cancellations that we know of were related to budget prioritization issues, where the client decided to redirect budgets into different areas. (multiple speakers)

Sorry, is there someone else online? Are you hearing me okay, Jack?

I can hear you perfectly, yes. It's not my side.

As I say, about $10 million of the cancellations would have been related to budget prioritization. There were about three projects that we are aware of, but that was the case, and then the balance would be small in a variety of issues. We would not necessarily have visibility in all the variety of issues.

The reason I gave you that detail is to say there's nothing as far as we are concerned that is new or unusual or troubling in what is going on in the marketplace that has been impacting upon cancellations in any way.

In terms of the color of the divisions and so on, as I said, the lab had just over $20 million of bookings, and the rest of the regions had pretty good bookings right across the board, and the largest single project in the awards was over $15 million and less than $20 million. And the next largest was over 10 and less than $15 million, and then there is a very broad range of other awards in there.

And that is labs of just over 20, that is a net figure, presumably, of your net wins?

That is a net figure, yes. Now, moving onto your Phase I question, Jack, if you asked what is the Phase I experience -- well, as John said in his comments, we were disappointed with the performance in Phase I, and I think we have alluded to this a couple of times over the last while. The Phase I business is not delivering for us anything like the performance that we would like to see from it. They are strenuously making changes within the business, both on a business development level and an operational level, and are making progress in that regard. This quarter was a little disappointing because their backlog had been building. We had expected better performance, but some of the projects that they had scheduled or believed that would be scheduled for the third quarter got pushed into the fourth quarter.

So their performance in the third quarter, needless to say, was disappointing. We are expecting improvement in the Phase I business in the fourth quarter and further improvement in the first quarter of 2007.

I think improvement is the important word here. We are not yet expecting that the Phase I business is going to get to the kind of margins we believe it should get, at which we will be 15% (indiscernible). But progress is progress, and we are anticipating progress over the next couple of quarters, and hopefully we will continue on from there.

Peter, there is no sense that you have changed your view on us in terms of it being a vital component of the overall service offering?

Absolutely not. We are continuing to pursue the search for a Phase I unit in the United States, and we would be optimistic that we will be successful in that search.

Stephen Unger, Bear Stearns.

Just to follow-up on that, Peter, on the Phase I clinic, is the Phase I clinic a drain on profit at this moment?

I presume that question means, does it lose money?

Right.

It lost money in the third quarter, yes.

Are you expecting it to flip to profitability, then, in the fourth quarter?

Probably not in the fourth. It might get to break even in the fourth, but certainly by the first quarter of '07, we would expect it to be back at least to breakeven, if not in profit.

And then could you comment, it looks like the backlog for you, which is converting into revenue a little faster than others in the industry, in terms of most other companies we see are experiencing either delays or slower backlog conversion? Why does your backlog seem to be burning a little bit faster?

Steve, you are the analyst. I am only looking at our numbers and getting the figures and looking at the figures. The answer is really it depends on the types of awards that one is getting, what phase they are in, how big they are, and what the duration is, and particularly what the duration of the project is. And, you know, because I know you have been tracking this for years, that the duration of our backlog was steadily lengthening over the last year or so, and if it has -- if the duration has slightly shortened over the last quarter or two, it is really just through the balance of the projects that we are winning are faster burn projects, and next quarter or two, we could find that that reverses again. There is nothing significant in there that I am aware of.

And then moving to mix of business that you are winning today, how has that changed relative to year over year? Are you doing more studies to support regulatory filings at this point?

Yes, I think we have been alluding to this all year, that pipelines in our view, in our experience, seemed to be strengthening across the board, and the balance of business that we now have from Phase II/Phase III studies that are genuinely targeted at regulatory filings, regulatory approvals, has shifted positively, meaning we have more Phase II/Phase III studies and a lower proportional revenue than Phase III-b type studies than we had had, let's say, five years ago. That is a very positive sign from our point of view because it means pipelines are getting stronger, which means there is going to be plenty more business where that came from.

And then finally, how are you finding enrollment for clinical trials at this moment?

Enrollment of patients?

Yes.

Enrollment of patients is always the indicator of success or challenge in any clinical trial. It has always been so; it continues to be that way.

Your question is obviously predicated on, is it getting tougher. I think the indications that are being tested these days are more esoteric and more challenging indications, which makes patient recruitments more challenging. But that is why globalization is taking place; that is why the net is spread wider, the objective of which is to accelerate recruitment.

I am very carefully here not answering your question, I am sure you are noticing. We are not seeing, and I would not be aware within our organization, of any change in terms of the ease or difficulty in patient recruitment. But you have to remember when I make that statement that every trial is unique, every protocol is different, and the challenges associated with those is different in every single case. So it is hard to generalize, but certainly there is no sense in our Company that somehow or other patient recruitment has gotten much more difficult this year than it was in previous years.

Great. Congratulations on a great quarter.

David Windley, Jefferies & Co.

Peter, I wanted to follow up on staff-related issues, and I am wondering if you think that ICON has any relative advantages vis-a-vis your competitors in pursuing staff. And I am thinking advantages other than just offering them more money. Are your locations in places where there are not a lot of competitive offices, or is there something about the culture of ICON that you put forth the people that you think is attractive, or things of that nature? Is the ramp in the stock price something that these folks are savvy enough to look at and think is attractive? Are there any -- can you add any color to that?

Well, first of all, Dave, I am surprised you even asked the question. I thought you would know we are the nicest guys in the industry. So that has got to be a big reason. I don't think we have any advantage in location. I think if you think about it, our biggest location in the world is in Pennsylvania, which is right in farmer belt, and there are a number of our competitors within -- certainly within dart-throwing distance of us. So I don't think where we are located gives us any great advantage.

I think our reputation is a very good reputation. I think there is a good culture within ICON. I think our focus on trying to ensure that people are only working on one project at a time is probably an attractive feature for people. A variety of things -- very hard to pin down what it is.

Do I think we have an enormous -- do I think the stock price influences this? No, I do not. Perhaps the stock price rising or just general positive vibes about a company does influence people into thinking about whether that is a good company to join or not. But that is more than a stock price -- I don't think a stock price rising in itself is an attractor. It is in a general aura around a company, and part of that is the culture of the Company and whether people perceive the culture of the Company to be good.

I think our reputation for quality is an attractor. I think people feel that they are joining a solid company and a company that cares about what it is doing. I think that is in attractor. But I'm not going to suggest that that makes -- we are hugely different to others in that regard. I am sure all of our competitors would say that they care about what they do, and they are trying to do an excellent job for clients. I think it comes down to culture. It certainly does not come down to location.

On the cancellation front and getting to kind of John's question on the sustainability of revenue growth, is there -- I guess the first part of my question is, when does short-term outperformance of your high teens to low 20s range turn into long-term, which is a heavily nuanced question? But, in other words, how many more quarters could we possibly see this above that range?

And secondly, on the cancellation front, I heard your comments on nothing that stands out in particular, but will these projects -- ramped projects such that we do need to account, even if it is slight, for the redeployment of staff into new projects and the revenue and margin impact that that might have from a utilization standpoint in the near-term?

You just asked me a very complex set of questions, and I am struggling now to a), remember what you asked me, and b), understand what the question is? Would you give me last one again and then --

The last one is just to say your cancellations in the quarter were a little higher -- certainly not what I would call an unhealthy number, but a little higher than they have been in the past. Is there a utilization hit due to the redeployment of the staff that might have been involved in those projects that we should be accounting for as we think about fourth quarter?

No. No is the short answer. When the net bookings are 1.3 to 1, you can be pretty confident that the redeployment is taking place on a seamless basis.

Right. Okay.

And also, Dave, some of those cancels where the products or where the project is already running and has patients recruited into it, don't always come to an end immediately. There has to be a wind-down process in staff transition off that project and onto other projects. So it makes it very manageable.

The first part of your question, then.

The first part is really your revenue growth in the quarter was much higher than the range that you are saying you expect to be sustainable, and I guess why shouldn't I expect that it is going to be similarly high in the fourth quarter, because I presume if I go back -- and I am on the move this morning, but if I go back to my model, the third quarter is going to be higher than my projection for the fourth quarter.

Certainly we are not modeling that our revenues will decline sequentially on a quarter-by-quarter basis. So if you were to assume some modest increase in revenue in the next quarter and in subsequent quarters and comp that back to the year prior quarters, you would actually see fairly quickly what the percentages would do. I haven't done it. I am teaching my grandmother how to stock eggs here in telling you how to do the analysis. But you know what I am saying.

I know exactly what you mean. That answers it for me very well. Thank you.

Eric Coldwell, Robert W. Baird & Co.

Peter, I was curious if we could get an update on some of the smaller sub-units that have not been talked about today, for example, the staffing business, imaging business, some of those smaller one-offs.

As you know, we don't break them out. We have broken with tradition in the last couple of quarters in terms of talking about our Phase I business because we have been disappointed with the performance, and it has been holding back our overall clinical margins.

But I don't necessarily want to get into detail on those. Suffice to say, the staffing business has been making good progress and is growing. Having gone through a difficult period over the last couple of years, this last year 2006, it has made significant progress and is back growing as a business, and we are very pleased with how it is now performing. But it is a very small part of our business.

The second one, in relation to Beacon, well, being the good analyst that you are, you will go and look at the income statement, and you'll see the minority interest line there, and from that a minority interest line, knowing that we own 70% of that business, you will be able to extrapolate it to the fact that the imaging business made something over $200,000 on a pretax basis in the quarter.

So it is doing well. It is growing above our trend rates -- sorry, so far this year, in the quarter in question, it probably grew at a similar pace to the rest of ICON. It was pretty close to 40% growth. But over time, we would expect it to grow at a faster pace than the range that I was indicating earlier of 18 to high teens to low 20s. We would expect that business to grow in the '30s probably for the next several years.

Thank you very much for that additional color. I noticed that really the only businesses you seem to call out sometimes are the ones that are not working, like lab or Phase I. So I was hoping for some detail on the others.

We are good Catholic boys here and we will tell our sins.

Well, we appreciate that on our side of the table. The revenue growth for the quarter year-to-date numbers have been very strong. If I extrapolate from your current calendar '06 guidance and subtract out the first three quarters, it suggests a pretty wide range and also, frankly, downside versus the street. I have you're not trying to intimate that perhaps fourth-quarter sales are going to slow down, or have you simply left the wide range out there and we will see what happens?

Eric, it is Ciaran. Yes, we have simply left the wide range out there, and we will see what happens. Looking at the numbers for the three quarters and the outlook for Q4, I would imagine that revenue will more than likely be at the top of or slightly in excess of the top of our range. Earnings per share will be around where guidance is, probably towards the top end of the guidance. So I mean I think that is clear enough from where we are at the moment.

I would there certainly think so from the tone here, yes.

Yes, but not significantly so that we would issue new guidance.

Fair enough. Foreign currency impact in the quarter, did you deliver that?

None. If you restate our numbers and look at last year, there was virtually no impact in foreign currency.

I am curious, one of your tasks or goals having joined the Company, was to make some systems investments, back office financial systems. I think you had some Hyperion investments, etc. I am curious if you can give us a sense where you are with that. You have done a fairly decent job on blocking and tackling in terms of DSO and collections, but I think you had signaled in the past that there were some opportunities to have perhaps some better technology work for you instead of simply dialing for dollars each quarter. So could you tell us where you stand on that?

Yes, I stand a little confused now. I was not aware that was very high in my priorities. We have no Hyperion investment. What we have recently started was an analysis to put in Oracle financials. We are pretty good at financial systems here, albeit they are here eight or nine years, and with the growth in the Company, and you know our outlook towards the medium-term in the future we decided it was time to upgrade our financial systems.

So we're not doing anything particularly leading-edge on the financial side. But we are bringing in Oracle financials. We are moving over all of our ledgers for all of the other reasons, a probably more modern platform to support future growth, and for hiring and using a system that is popular in the market and that is well supported. So nothing -- there is no rocket science here. It is just a routine step-up of our capability from where it was originally installed.

Okay. Perhaps I was just fantasizing that DSOs would be moving down into the '40s. Do you have a goal on where you're going to be with those?

Yes. You must have some great fantasies there, Eric. We must share them over a beer sometime. I am very happy that you asked me this because I have been dying to talk about DSOs for the last two quarters. I am glad, if you go back a year, we were at about 70 days on DSO. So I am happy to post 57 this quarter, and 57 is about where we forecast. We posted 51 last quarter, but that was a good number. It was better than we expected, and I didn't expect to repeat it in Q3 for a number reasons that are really about timing when you look at DSO. Timing on business model. That DSO number is a function of payment milestones, billed revenue to be collected, unbilled revenues, prepayments on contracts. So there is a lot of moving parts there that have the started the quarter we look at and see how they are going to go.

This quarter, we could see that we were growing revenues, growing strongly. We were moving a lot of revenue out of the unbilled into the billed column, which is a good thing, but we were not moving it out in time to collect it for quarter-end. So I would see -- when I talk about business model, we have traditionally been a higher DSO Company. A lot of our contracts -- we're in the middle of contracts. So if you wanted to alter your terms and conditions, you had to wait until you run out of your book. We have also established a business relationship with your customers over many years and a way of doing business, and it is not that easy to suddenly -- having had a long and fruitful and profitable and growing relationship with somebody to say, well, we want more upfront payments or we are going to be harder on our credit terms, or we're going to adjust our milestones structure.

So I would say we are on a bad target for DSO. We did not like it at 70, and I do not like it particularly at 60. But I would be happy if in a good quarter, when the timing was favorable, it was 50 or maybe 49 in the quarter where the timing was not to our favor or some payments did not come in that would be 57 or 59. So I really see it in that range.

That is good color. Thanks very much, and nice execution in the quarter. Thanks, guys.

Ian Hunter, Goodbody Stockbrokers.

I have a couple of questions here, one on hiring and one on the new business wins again. On the hiring side, we have seen two quarters where the margins have been impacted because you have had to hire quite a large number of staff within a three-month period. Do you see that coming through in any of the other quarters, the next couple of quarters or so, when you look at the forward business demands, first of all?

Secondly, just gave me an idea -- maybe I am not quite sure of the timeline between hiring staff and then becoming active revenue generators. Is it a question of weeks or a month or so for the training process, etc. does it bring them into the systems, and then they are out there actually generating revenue? That is on the hiring side.

And then on the net new business wins, again, I was wondering if you could give us just a kind of indication of what the wins have been in terms of the client type, i.e., the biotechs, the specialty pharma large to midcap, and the indications, whether are you seeing any specialization? Oncology is strong at the moment, or it is just across the board?

I will take the first one in relation to hiring. We expect the pace of hiring to slow down a little over the next couple of quarters. Obviously, it has been very strong over the last two quarters, and we would expect that would slow down, which in turn would take some of the pressure off the recruitment and training costs. So we would hope to see some of that pressure on margins alleviating in the next couple of quarters.

In terms of timing and hiring, when we bring people in, it really depends on their level of experience. Anyone who joins ICON gets a certain amount of ICONization. But good, experienced people -- that might be as little as a few days or a week. By for obviously inexperienced people, it could be several months. So there are a variety involved. But generally speaking, on average we would expect people who join us to be participating in billable activity within a month at least.

Okay, thanks.

And on the second piece you have asked, in our new win, how does that break out? John, do you want to take that one?

I will take that. In terms of client concentration, if I look at year-to-date numbers, top five clients represent 35% versus 37% last year. If we go to the top 10 clients, 52% versus 54% last year. Top 25, 72% versus 73%. None of our clients are over 10%.

When I look at biotech versus big pharma, biotech accounts for about 31% of revenues, and the rest comes from big pharma. Business wins from biotech, approximately about 38% of our net business wins this year came from biotech companies.

In terms of indication, no real exposure. It is very much what the market is out there. Numbers from last year suggest that 19% -- no, 26% of our revenues came from cardiovascular and so on and so forth. If I look at our backlog this year, our backlog this year, what is in the backlog, 21% of our backlog represents oncology, 15% CNS. Basically, it reflects the pipeline in the marketplace. Nothing -- it is not skewed into any one -- it is not polarized at all.

Maybe just a quick follow-up here, in an area that has not been covered at all, maybe because I am sitting here in Dublin. For the sale and leaseback of your facilities in Dublin, I was just wondering if you can give us an idea what the time scale for that would be, and how you are looking to account for it? Is it going to be run through as CapEx as it goes through in the development phase, or is it a work-in-progress within the working capital side of things?

Timing, we have commenced construction on two of the four blocks that we are going to build out. They will come onstream in spring of 2007, Blocks A and B, Blocks C and D will then follow-on about 12 months after that, and we will move into them if and when they are ready.

Accounting -- we are accounting for that as a work-in-progress and funding to that of cash flow until we execute on the sale and leaseback.

Okay. And then the sale and leaseback, is the process going on concurrently with the development of Phase I, or is it going to be at the end of each phase?

We will see. We have put the project to tender. It will get tendered then towards the end of November. We will spend a while evaluating them, and a lot will depend on what makes the most financial sense and what demands there are at any given time on our cash. We have reasonable flexibility, and we will choose the option that is best from a financial point of view.

Doug Tsao, Lehman Brothers.

Nice quarter. Question I had is if you could provide some commentary on what you are seeing from your large pharmaceutical clients. Obviously, there seem to be some signs of increased outsourcing by them, but at the same time, we have heard from some of your peers some project delays as they sort of are trying to rationalize their costs, which has led to some sort of reprioritization of their drug pipelines, and they may be pushing off lower priority projects. So I was wondering if you could give us some commentary of what you are hearing from them and their sort of feelings as far as their pipelines and what they want to do as far as outsourcing in the future?

I think, again, a very general answer here, because there is a no trend; there is no specific change that we can discern in the marketplace. We definitely have more indications of increased outsourcing than less in the large companies. We definitely have indications that our pipelines are better than they were and continue to improve. The challenge that creates for them is they have to prioritize and they have to -- they have not got unlimited resources and unlimited money to spend in development, and therefore, they have to choose between the products that are most promising in their pipeline. Sometimes that means they change their mind or they get some data that suggests to them they should change their minds.

But that has always been the case. In an environment where the pipeline is weak, perhaps troubling or less than convincing data does not cause reprioritization because there are not other choices. But I think at present time, there may be other choices, and therefore, you do get more shifts and changes and reexaminations of pipelines.

We are not seeing a huge amount of that I have to say. In the color I gave on cancellations earlier, I said that of the $36 million of cancellations that we saw in the last quarter, $15 million of them were to do with safety and efficacy issues, and only about $10 million that we could identify was related to budget reprioritization issues.

ICON does not perceive that there is anything new or different happening there other than there's more outsourcing taking place, and pipelines seem to be improving.

And then another question I have is that the gross margin was down a little bit this past quarter, which has sort of been -- seems to have been a trend over the last few quarters, whereas the operating margins have actually been sort of going in the reverse direction. And I was wondering if you could provide a little bit of color as to what might be going on there?

I think the color of what is going on is that our Phase I business has disappointed us in a slow down margin, and that is affecting us on the gross margin line. The cost of --

Hello? Hello?

Ladies and gentlemen, please standby. We are experiencing some technical difficulties.

This is the ICON conference call. Who is that?

This is me, Doug Tsao.

Hey, Doug, how are you? Sorry, I do not know what happened. The line dropped on us here.

No problem.

Can you go back to the question? We're not exactly --

So I guess I was asking just a little bit about the function of what was leading to the gross margin coming down while we are seeing the operating margin -- the gross margin come down in recent quarters while we are seeing the operating margins coming up -- going up in the opposite direction.

Good SG&A management, I suppose. But one part of that -- as I said, the impact on rapid hiring is that some of that comes through on the gross margin line. The Phase I business is part of it. We have in the past alluded to the fact that we are making investments in Japan, and we talked about it earlier on the call. The variety of costs that we are taking on that are not necessarily generating revenues at this time are, as I say, we had disappointing revenues in Phase I, which in turn have an impact on the gross margins. Nothing particular -- nothing particularly troubling there, and our expectation is that it will improve, and it will be that improvement that will start widening the clinical margins going forward.

Great. And then can you provide a little commentary on the performance of the U.S. business this quarter?

Very good. Again, it has been -- as John said, in his opening comments, it grew at 47% compared to the comparable quarter last year. Obviously it is growing very rapidly. But to the others growing very rapidly, it is also bearing the brunt of very rapid hiring. Its margins did improve a little this quarter, and we would expect them to continue to improve in the quarters ahead.

Great. And then one final question. One of your major competitors spoke a little bit about seeing some pricing competition in this past quarter, and no one else seems to have seen it and I certainly have not heard much about it, but I do sort of feel obligated to ask you guys about what you have seen, if anything.

We have not seen any evidence of price pressure, and to be honest, given the strength of the market, we would be surprised if we did see it there. Our internal tracking, we have an internal tracking of projects that we do not win, and one of the reasons for a loss would be recorded as pricing, we are not seeing any uptick in the proportion of projects where the reason given is pricing. So there is nothing in our data that suggests any change in that regard.

Great. That's what I thought. Thank you very much.

Thanks. Sorry for the hitch there.

No problem.

Craig Leighton, Lord Abbett.

Just two quick questions. I realize it is getting late. But firstly, if you could provide a little bit more quantification on the operating margin improvement in the fourth quarter that I think you talked about qualitatively, Peter. Specifically, I think last quarter, you said you hired about 400 people and cost you about $1 million or 80 or 90 basis points for just the hiring -- sorry, the training and recruiting. And I'm wondering if there was a similar number this quarter, and if we start to see a reduction in that, and maybe we get to over 13% in the core clinical business in the fourth quarter.

Do you want to take that, Ciaran?

No, I do not believe we will get over 13% in the fourth quarter. Hiring in Q3 cost us in excess of $1 million again, I suppose similar to what we thought in quarter two. And really depends on how many people we hire this quarter. We have started out the quarter with a pretty robust pipeline of RSPs. So it is really something we just have to take. As it comes, we hire in line with growth and in line with business awards to fulfill the contracts. So if we were to hire another 400 people in Q4, I would not foresee much improvement in margin. So I do not expect it to be that robust, but that is just the dynamic of how the equation works.

I think you are referring back to earlier in the year, we did indicate that we had expected that we would exit the year at margins in the core business of an excess of 13%. But the Phase I business disappointment has probably been a major influence on our scaling that back and not expecting to be over that 13% level by the end of the year, but hopefully, as the Phase I business improves, we will see that achieved during 2007.

Was the Phase I detraction to the operating margin or the lost generating Phase I over 50 basis points of operating margin?

Ciaran, you're the mathematician around here.

It was about that, yes.

Great. Well, not great, but thanks. Okay. Terrific.

That was the key driver of the change in margin between Q3 and Q2.

And just back to the Bristol-Myers business that you took over, I know it has been awhile and it is a fairly small business, but I am just interested in your ability to utilize that capacity and how you have been able to go and win business to create some profits there?

Again, this one always seems to cause a bit of confusion. We did not really acquire capacity. We took over the safety lab associated with the Phase I unit of the company that you refer to. We are providing service to them and their Phase I business, and that is all we are doing. They wanted to outsource the safety lab work for that Phase I unit. So the activity that takes place in that location is all determined by how much Phase I activity that Company is carrying out in its Phase I unit. Where we are chasing capacity growth, and where we are chasing growth in our lab business, we want it all to be in Long Island. We do not want to be trying to build and expand another lab, if we can avoid it down in New Jersey. So that was a specific piece of facilitation that we did for a client in the expectation that it would help enhance our relationship with that client.

Sorry about that. My mistake. And then just lastly, of the 400 people, how many of those were revenue generating people?

I would say in excess of 80% -- probably 80 -- mid-80.

Our percentages improved in the quarter because it's really still between billable or fee earning and non-fee earning. So I would say it was well ever 80%, maybe 85%.

Terrific. That is all I have. Thank you.

Steve Unger, Bear Stearns.

I just want to follow-up on your discussion on guidance. Peter, you're expecting revenues to sequentially improve in the quarter. I get the impression -- or in the fourth quarter. I get the impression that you're expecting the operating margin to expand a little bit in the fourth quarter as well. Does that mean that you are expecting earnings EPS sequentially to expand in the fourth quarter?

You almost sound reluctant asking that question. What is in your model for --

Do you have an answer in mind there?

What is in your model for fourth-quarter EPS? Excluding FAS 123, because that is the way we think here?

Excuse me?

What is in your model for Q4 EPS?

I am looking for a sequential increase in the fourth quarter.

We would expect to have a sequential increase in the fourth quarter as well. We traditionally have not shown sequential declines in EPS except in periods when we have had some sort of a problem in the business.

And then in terms of the tax rate going forward, since your U.S. business is doing better, does this mean that your tax rate is going to start creeping up?

No, it doesn't. There are a lot of complex issues around the tax rate, such as the U.S. business and the proportion of income that falls there. And the performance of the lab -- I mean, we have not been able to utilize losses on the lab in the past. It is turning around, so that is having a benign impact that would offset some of the U.S. increase, and also the fact that more and more of the trials are being globalized, and they are falling into different parts of the world with different tax jurisdictions. So there are a lot of moving parts there, and that has a lot of tax strategies that international corporations can avail of. So I do not expect the tax rate to increase.

So it has been bouncing around a bit. Should we be expecting 24% like before going forward?

Yes, I think we started the year guiding around 27.5% or 28%. We have been posting around the 24%, plus or minus 1%, depending on timing. I would expect it to stay around the 23%, 24% for the year-end.

Rob Ammann, RK Capital.

Nice quarter. Just wondered if you expect any seasonality to bookings in the December quarter, given that this is the first I guess normal calendar fourth quarter that you have seen and what sort of seasonality we might expect there?

Peter here. We have analyzed this and looked at bookings -- our bookings patterns in the past across what used to be our old quarters and do not expect that we are going to see any material seasonality. There is a tendency that we can see that in this quarter, in this period up to the end of the year, the clients are freeing up or allocating budgets that they have had, and there tends to be a reasonably good level of activity in this final quarter. So we certainly would not expect any negative seasonality.

And to support long-term growth of high teens to low 20s, what sort of hiring rate would you expect to support that growth rate? Would it be similar or hopefully slightly less and you get some leverage there?

Leverage is difficult to achieve in this business. Revenues grow -- when revenues grow, it is because you've got -- you have to have more billable people there. On the margin, there might be an opportunity to increase utilization levels or recovery levels from our billable staff, but we certainly would not budget for that, because we are achieving good and high utilization in recovery levels currently.

So the rule of thumb as far as we are concerned is a linear relationship between headcount growth and revenue growth. And obviously, we have been running at a very high level of revenue growth and, therefore, a very high level of hiring during the current -- during 2006. We expect that to modulate over the next year.

Orla Hartford, NCB.

Just if I could ask a question on the Dublin facility. As I understand it, the existing facility is on two acres. Is there any redeveloping potential there that could drive up the price that you could get for the sale?

I suppose the deep level of detail for our international friends to have to listen to. The tender we've sent out does offer the option for someone to look at the existing building and determine that by knocking it down and redeveloping it, they might be able to achieve a higher value for themselves and, therefore, pay us a higher value for the property.

So we are exploring that as a possibility. We will wait and see as to whether anyone sees that. Our own analysis of it is that it is not likely that that will be an outcome, but we have allowed potential bidders to consider that as an option.

So if these are excluding that option, the gains -- the base gain that you're looking at there?

Is what -- you're asking me what is it?

Yes, is it around $20 million?

As we said in the press release, it is going to depend on what the tenders come in at. But I would imagine somewhere in the region of $25 to $35 million.

David Windley, Jefferies & Co.

I just wanted to ask one more follow-up. Over the last several quarters, as the question of Electronic Data Capture has been occasionally asked, I think year after years of saying you didn't put much credence in it, and said that it hasn't, in fact, has started to pick up, and that is only a lead-in to say, are there things like EDC, but not necessarily specifically EDC, that could begin to provide some productivity enhancement to clinical research staff such that you could actually get some leverage in a clinical business that has historically not been a very leverageable operating model?

A couple of comments there. I never said I was indifferent to EDC or whatever your terminology was.

I was putting words in your mouth. I apologize.

I was merely, during the dot-com boom, I was not as convinced that EDC would take off rapidly, and I crow here and say and I was right. But I did predict it would gradually take off, and that is exactly what we have been seeing.

You're now giving me an opportunity to do a great plug for our prowess in EDC, because we have in the last 21 months closed 14 EDC databases for clients. We have currently 40 active EDC projects running for clients. We are working with five different EDC systems from five different vendors. 15% of our RFPs a year ago asked for EDC, but in the first three quarters of this year, 34% of RFPs wanted to talk about, at least, EDC. So definitely there has been an acceleration in the interest in EDC.

Are there other technologies that can enhance productivity in clinical research? None that I think would make any material difference. Of course, we are all trying to use technology and Internet-based technology particularly, to improve our efficiencies and our quality. I alluded to our e-learning system that we are rolling out at the moment, which we think is going to be a very helpful tool to us in maintaining quality and enhancing quality going forward. But not necessarily productivity, although if our people are better trained and get refreshed on their training regularly, hopefully that will make them more efficient over time. But there is no magic bullet that I can see coming down the track in terms of technology that will enhance productivity.

The one thing I would love to see, our people spend a lot of time traveling. So if we could get a Star Trek type of "beam me up" technology, that would help us get people to and from sites a lot faster, and that would certainly enhance productivity.

Might be cheaper on operating expenses, too.

Indeed, indeed. Our clients would love it, too.

But in terms when you apply EDC, do you find that monitoring visits can be reduced, or I mean, what are the metrics that you track to show whether that is having an efficiency enhancing effect on delivery of clinical studies?

Well, there is no question that EDC in the right -- when used in the right circumstance can deliver productivity enhancements itself because monitoring frequency can be reduced, more monitoring can be done remotely, time on-site can be reduced. There's a variety of efficiencies that EDC can help deliver. Not in every case, but in the appropriate cases, it can do so. Typically, it would be in larger trials where the efficiencies would manifest. In smaller trials, the cost of the technology would offset the efficiencies that the system can deliver.

And, sir, you have no further questions at this time.

Ladies and gentlemen, I really need to thank you and compliment you for the great staying power. This is one of the longest conference calls that you have stayed on. And also, thank you very much for your patience when the line fell some minutes ago.

In summary, the third-quarter to September 2006 has been excellent. Our central lab made further solid progress. Our clinical segment has shown exceptional growth this year, our net bookings of $157 million and a strong business flow continuing. And because of all this, we are very confident for the outlook for the rest of 2006. Thank you very much.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.