ICON PLC (ICLR) 2013 Q1 法說會逐字稿

Good day, and welcome to the ICON plc first-quarter results 2013 conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Simon Holmes. Please go ahead, sir.

Thank you, Sara. Good day, ladies and gentlemen. Thank you for joining us on the call covering the quarter ended 31st of March, 2013. Also on the call today we have our CEO, Mr. Kieran Murray, and our CFO, Mr. Brendan Brennan.

I would just like to note that this call is webcast and there are slides available to download on our website to accompany today's call. I will now make the customary statement in relation to forward-looking statements.

Certain statements in today's call are or may constitute forward-looking statements concerning the Group's operations, performance, financial condition and prospects. Because such statements involve known and unknown risks and uncertainties and depend on circumstances and events that may or may not occur in the future, actual results may differ materially from those expressed or implied by such forward-looking statements.

Given these uncertainties, and as forward-looking statement are not guarantees of future performance, 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.

This presentation includes selected non-GAAP financial measures. For a presentation of the most direct the comparable GAAP financial measures, please refer to the press release statement headed Consolidated Income Statements, Unaudited, US GAAP. While non-GAAP financial measures are not superior to or a substitute for the comparable GAAP measures, we believe certain non-GAAP information is more useful to investors for historical comparison purposes.

We will be limiting the call today to one hour and would therefore ask participants to keep their questions to one each, with an opportunity to ask one related follow-up question. I would now like to hand over the call to our CFO, Mr. Brendan Brennan.

Thank you, Simon. Net revenue in the Quarter 1 2013 was $317 million. This represents year-on-year growth of 26%. On a constant dollar organic basis, year-on-year growth was 23%. For the quarter, our top client represented 21% of revenue compared to 18% for the full-year 2012. Our top five clients represented 51% of revenue, up from 48% for the full-year 2012. Our top 10 clients represented 66% of revenue compared to 63% for the full-year 2012, while our top 25 accounted for 81% of revenue compared to the 76% that we had in 2012.

To support our continuing revenue growth, we added 200 new staff members in quarter one. The acquisition of the clinical trials division of Cross Country Healthcare added a further 500 heads, which meant that overall we closed the quarter with 10,200 staff, up from 9,500 at the end of 2012.

In quarter one, Group gross margin was 36.1%, which compared to 36% in quarter 4 2012 and 35.7% in the comparable quarter last year.

We continue to leverage our SG&A, which was 23.9% of revenue in quarter 1 2013 compared to 24.4% in Q4 and 26.8% in Q1 2012.

Operating income for the quarter was $27.6 million and operating margin was 8.7% compared to 8.1% in Q4 and 4.7% in the comparable quarter of last year.

The net interest charge in the quarter was $180,000 and the effective tax rate was 18.4%. Net income in the quarter was $22.2 million, equating to EPS of $0.36, which compared to EPS of $0.15 in Q1 2012. DSOs were 33 days compared to 37 days in the same quarter last year and 40 days at the end of 2012.

At the end of March 2013, net cash was $201 million compared to $190 million at December 2012. CapEx for the quarter was $9.4 million, and we spent $52 million related to the acquisition of CTS, the division of Cross Country Healthcare. All that said, I'd like to hand over to Ciaran now to talk more about our performance in the quarter and the business environment.

Okay, thank you, Brendan. I am pleased with the results in quarter one. I believe we've made an encouraging start to 2013, building on the momentum which we generated in 2012. Gross bookings for the quarter increased to $481 million. Cancellations were $59 million. So that all resulted in net bookings for the quarter of $422 million, which was a book-to-bill of 1.33.

Our backlog increased 17.5% to $2.9 billion. This backlog gives us 77% forward coverage of the next 12 months' revenue expectations and is a solid foundation upon which to build during the remainder of 2013.

While we continue to win significant levels of new business, we remain focused on delivering greater operational efficiency, and in the quarter, we continued to manage our cost base well, reducing our SG&A costs to 23.9% of revenue.

Overall, we are happy that during the quarter we saw further progression against our plan, and so I would like to take the opportunity to comment on how we are doing across our individual business units.

We are very pleased with the progress we are making in the Central Lab business. I talked in the last call about our desire to balance revenue growth and steady margin improvements in the lab during 2013, while making sure that we continue to invest appropriately in the quality of the lab and to reduce its client concentration risk. During this quarter, we succeeded in adding three new lab-preferred provider arrangements, we secured $28 million of gross new business awards and grew revenue 4% over quarter 4 2012 and 24% over the same quarter last year.

In addition, our focus on balancing our client portfolio resulted in an operating margin of 7% in the quarter compared to 4% in quarter 4 2012. We anticipate margins to continue in the mid- to high-single-digits range for the remainder of the year.

In our Early Phase business, revenues took longer to flow through than anticipated, resulting in a breakeven quarter. This still represents significant progress when looking at past performance back in 2011 and early 2012.

However, we've taken steps to optimize the capacity of our US Phase I business, closing our Omaha site, the cost of which we took in this quarter, and consolidating the Phase I CPU operations in the US into our San Antonio site in Texas. We expect that this business will remain around breakeven for the remainder of the year as we continue to execute this restructuring.

The Late Phase business continues to grow in line with expectations. It recorded a particularly strong level of new business awards in quarter 1, which gives us a good platform to continue to grow to plan for the rest of the year.

DOCS, our staffing and FSP business, had another solid quarter. It performed in line with our expectations, and the integration of the Clinical Trials division of Cross Country Healthcare is proceeding to plan. This acquisition positions DOCS as a global leader in the clinical staffing and FSP fields and significantly expand DOCS's US footprint.

Our Clinical business had another strong quarter. We continue to develop new client relationships and have positive discussions with our existing clients around the adoption of new outsourcing approaches that can deliver further efficiencies in their development programs. Clinical operating margins continue to improve, leading to further improvement in our Groupwide margin, which increased to 8.7 this quarter, up from 8.1 at the end of 2012.

Our continued margin improvement, coupled with a healthy business environment, positions us well to deliver on our plan for the remainder of 2013.

Before we move on to Q&A, I'd like to thank all of the ICON team worldwide, whose continued commitment and dedication has enabled us to make this encouraging start to 2013. So, I'll ask for the Q&A, please, Sara.

(Operator Instructions) Sandy Draper, Raymond James.

Thanks very much, and congratulations on a good quarter and good start off to the year. Two quick questions. One, first, Ciaran, just wondering -- we were down at Partnerships earlier, and you guys and PAREXEL and Pfizer did a presentation. Some of the commentary is around -- it sounded like the relationship is going very well. And the comment came out, but there was higher expected expenses, or expenses were taking longer or staying at a higher level longer. I would assume that is all built into the guidance; that wasn't a new piece or new stepup. Just want to make sure what you've been communicating about Pfizer is already in the guidance.

I'm not familiar with that comment, Sandy. Maybe you could you give me some color. What was it that was said?

They just said that as the strategic partnership roll out that the initial stepup in expenses had to stay around longer for the buildup in expenses, which obviously happened as you guys saw the drop in margins. I wanted to make sure there is not another stepup in expenses coming in the back half of the year, something like that.

I think it might be a context issue. I imagine that was a presentation at Partnerships for the Partners of the Year Award, and looking back on two years of moving towards the partnership and the pioneering and partnerships model. It wasn't a financial commentary. That comment would have related probably to sometime in the initial year of the contract (multiple speakers).

That's what I figured. I just wanted to make sure of that.

Which has been our experience, and not just at ICON, but all of the strategic (inaudible). But no, the partnership's up and running, and that phase has been moved through in the waves, and it has settled down to the cost base that it has. And of course, all of that will be baked into everything that we say about our forward-looking statements.

Great. That's what I figured, and just wanted to make sure. And it certainly sounded like the partnership was progressing well in terms of the results. That's nice to hear.

Second question, and I'll jump back in the queue. One thing I am sort of trying to reconcile -- and this may be some type of a math issue -- your burn rate was nicely up or you're pulling out of backlog is improving. It's nice to see that. But when I look at your backlog earned in the next 12 months, when I do the calculation, it looks like you are actually projecting a lower percentage of backlog earned in the next 12 months.

Is that really just an indication of the length of the business you are signing question, any slowdown? I'm trying to reconcile the faster burn rate that you've been seeing in the past couple quarters; when I look at your expected next 12 months revenue coming out of backlog, you are actually taking a lower percentage. I'm just trying to match those two numbers up.

I know it's not your fault, Sandy, because you are an analyst, but you might be overanalyzing here. But if you look at our conversion rate, say, over the last six or eight quarters, it tends to move about in the range of sort of 11% to 11.5%. I think one or two quarters not so long ago, or one quarter certainly, I think it was 10.8%.

And it is really just a function of -- we have 800 or 900 significant projects in our backlog across four or five distinct business units. We forecast them in a very great level of detail and granularity ourselves. And a lot of what you see when you look at it is just there are assumptive about how quickly certain studies will start up. There are studies of different therapies that take longer than other studies, and things that start slowly and then suddenly go a lot quicker. So all you are really seeing is that I think this quarter we had -- was -- I'm looking at Brendan -- 11.4, 11.5?

11.5%.

11.5% burn rate. That was stronger than we've seen in a while. A couple of things went faster than we expected. When we look forward, we just make the forecast on a study-by-study basis.

So I wouldn't try and read too much into that in terms of that it is signifying some fundamental change in anything. It is just our best guess of what the remainder of the year looks like when it comes to how things will start up and progress and translate into revenue.

Okay. Fantastic. Again, congratulations, and I'll jump back in the queue.

Eric Coldwell, Robert Baird & Company.

Okay. Maybe three quick ones. First off, you mentioned the Central Lab concentration mitigation. I'm just curious if you can maybe give us some color on where you are with client concentration in the Central Lab, and maybe given the new preferred provider deals, where you see that trending over the next year.

Our concentration of Lab has been high for a number of years, and I think we've talked about that before. And it is still higher than you would ultimately like. So one of the objectives that we took was to start a bunch of new strategic against the lab. We've added three fairly significant ones this quarter. Obviously, we won't see the benefits of that, and start to really accrue until a couple of quarters pass and significant business comes in, as trials are started and samples -- and patients are recruited and samples come and the revenue flows to the lab. And the lab tends to be a little bit slower than other parts of the clinical business.

So I think we are happy with the progress. Exactly where it leads ultimately in numbers, I can't say at this stage. But it will lead to having a much better balanced portfolio of customers in the lab. We've already seen the start of that, and we'll see that continue.

Okay. Second one is -- and of course I am loath to ask questions about specific clients, so I will keep it anonymous. But there has been a couple of press releases by your peers about working with one of your known customers. And it has raised a lot of turmoil in the market about your preferred provider with a specific account, and what is going to happen on the Clinical side of that as well.

I'm curious if you can give any kind of broad stroke comments on where you stand with preferred providers, strategic relationship deals, renewals and expectations for customer attrition or retention as you look at 2013.

I think we stand well. I saw those press releases as well. They were really very specifically in relation to the lab, which is sort of a different business, you know, and ultimately not a particularly significant part of our business.

Our existing client relationships are good, they are strong. We continue to work successfully with them, and try and challenge ourselves and them to keep making a difference and looking at new ways to improve the quality of what we do and take time and cost and add value.

We have a couple of specific clients up for renewal this year. I am very optimistic that those negotiations are proceeding, as you would expect at this stage. With one of those clients, we are very close to finalizing -- we're at the draft of the final extension of the MSA, so that's encouraging. But of course, these are commercial negotiations, so I'm not going to negotiate in a public forum.

But we're in good standing. We are working well. I think substantially our relationships are solid, albeit that this is clinical research. There are always plenty of times when there are challenges and moments that we all have to work through and test the strength of our partnerships and relationships.

But sort of to what you're alluding to on the renewals, I think we're in good shape. We have a process to go through, as you would expect, to sign things off, and when we send them off, we will be happy to tell you we signed them off.

Okay, last one, and I'll jump off. Cross Country Healthcare, public company before, part of one. And the analyst forecasts for that segment appear to be fairly higher than what you've put into your next 12-month outlook, which I believe $40 million this year, $52 million for the 12 months.

So I'm just curious -- Wall Street was forecasting high $60 million of revenue for that business; you are saying it is at a $52 million run rate. Is there something about that that you are building in cushion or you had a subcontractor relationship or maybe you're just modeling some attrition to be safe. I'm just curious what the delta is there. And then any color on the margin progression with Cross Country, which I know for years had come down, but looked like it was maybe on the cusp of heading back to higher levels. So any additional details on that would be great.

It's Brenda here. I think what we put out initially was -- you will recall we put out two sets of the guidance, once this year without Cross Country and the other with. And that range of revenue is still where we are comfortable with. So I think you're referring to the midpoint of that range, but there is also an upper end of that range that we could get to. But we are still comfortable with our overall revenue guidance, so that's probably where we stand on that one.

In the quarter, they've come in well. In this quarter, they -- it was only since the 15 of Feb., so they haven't had a huge impact on the quarter. But somewhere in the rage of $6 million for this quarter, and their margins are about 6% to 7% for this quarter. We'll see obviously a bigger revenue contribution as we go out through the rest of the year from them. And the margins, I would imagine, will be still remaining in that ball park, to somewhere between 6% to 9% for the full year.

Okay, thanks. Good result. I'll drop off.

John Kreger, William Blair.

Thanks very much. My question is about client concentration. If we look at the stats in the first quarter versus last year, the top client concentration with revenue is continuing to creep up. If you look at the business that you signed in the quarter, would that imply that concentration will continue to trend up throughout the rest of this year, or perhaps start to go back the other way?

I suppose it depends, John, on how quickly the newer stuff starts off. We've been booking significant amounts of business during the course of last year and this year, outside of the top client relationship. But, you know, these are big trials and some of them don't kick in.

I think it has moved very rapidly over the last year, that concentration metric. It might tick up another little bit, looking at the forecast, but it shouldn't tick up -- my expectation is it won't tick up significantly. And then we'll start to see it, either later on in the year or early next year, start to move back as new business kicks on.

I think it's fair to say that performance in that account has exceeded the original forecast that we gave back at the start of the relationship. So we've been very successful in onboarding a lot of business, so it will just take a while to unwind. So I wouldn't expect it in the next quarter or two, but we should see that start to move back towards the end of the year.

Great. Thank you. And then a second question, totally unrelated. Back at your analyst day, there was a lot of discussion about Firecrest and some of your new technology offerings. Can you just give us a quick update? What sort of traction are you seeing those offerings gain with your clients?

Well, it is good. I suppose at a higher level, you'd say that it is one of the factors that has led to the kind of trailing book-to-bill -- you know, our 12-month trailing book-to-bill is 1.4, something -- nearly 1.5 -- or it was last quarter, and probably closer to 1.4 now.

So these offerings have been gaining traction gradually. With each passing quarter, we deploy more of it. We expose more of it to our existing clients, to new ones, to more people within the client. So we are very happy with the progress it is making.

Excellent. Thank you.

Dave Windley, Jefferies.

Good morning -- or good afternoon. Thanks for taking the questions. Ciaran, I was also at Partnerships. A couple of things, a couple of themes that I'd love for you to comment on. One, around strategic partnerships, the discussion was about the magnitude of investment, the magnitude of commitment by both sides; and therefore, really the stickiness of the relationship. So I'd love for you to elaborate on how you see kind of the tighter and tighter marriage between the sponsor and the CRO.

And then secondly, that -- call it the Partnership 2.0, these renewals that we are headed into, are perhaps likely to focus more on operational process and taking unnecessary steps out or things like that, maybe technology enabled things, as opposed to continuing to squeeze down on unit costs. I'd be curious if you could comment on that as well.

I suppose on the first one, there is nothing new in what we've been saying about the potential stickiness of strategic partnerships. If we look at our experience over the number that we've done, which is pretty significant over the last few years, the investment is significant in terms of dedicated management resource and oversight models, much more senior executives than in the past talking to each other -- it's significant on both sides.

Alignment of SOPs, which SOPs to use between the client and sponsor. Sometimes the amendment of both sides exist in SOPs, and that takes time and effort. Aligning technology platforms and metrics and how we measure things. And so all of those steps take a lot of time. The big change, as I say, it is as much about change management as clinical management at the start of these things. And you find that people being people, it takes a good while to get things up and running.

The first year, it tends to be fairly frantic. People are learning to work with each other, you're firefighting with all those kind of process changes, getting things aligned. And over time, you do get to a point where the relationship is sticky for a number of reasons. If it is working well, it is sticky because there is good, quality work being delivered, relationships importantly have been built, people understand how each other thinks. So it's easier to exceed your client expectation and enhance the relationship as you learn more about their behavior patterns, and vice versa for the sponsor then, with the CRO.

So these are all things we would have expected, I think, to come from strategic relationships. They are part of what made them attractive to us and why we geared our strategy towards it. And I think it is just a natural cycle of the change management process. You get to a point where there would be an awful lot of unraveling. It's not impossible, I'd say that, but there would be an awful lot of backing out in terms of realigning systems and SOPs and things like that in particular.

So I think it works to everyone's benefit. And then what it allows both sides to do is it allows you to put a platform in place, and that probably leads into your second question. And once you've have that platform in place that takes the first two or three years or whatever, then really, yes, the focus is now on significant change in terms of basically how do you take out chunks of cycle time. How do you improve quality of data? How do you get to go/no go decisions more quickly and the level of transparency? And how do you take out layers that are duplicated between -- as trust builds up, you don't need that kind of matching concept of layers between the sponsor and the CRO, so you get a more seamless interface. And it is almost as if everyone begins to act as one. That is hard stuff to do, but we see it happening. It just always takes a little longer than you might like.

So I think if we look at what we are doing, initially, if you take a client -- hypothetical client, you are getting studies on board, you're getting things up and running. And as you move through that, then you can put it on your own platform; some of our platforms are quite advanced. Then it's a question of saying, well, look, you can take all of these sites -- and if I use Firecrest as an example, we are working on a new version of that with much better data capture capabilities then traditionally, which will take out time that was traditionally lost, say, at the investigator site, improve the quality, reduce the error content data.

You can take a couple of weeks out there if you get it -- to another point -- if you get the systems -- either us and the sponsor on a common platform, or else we spent the time getting our platforms to talk together, how much time can you take out in data processing and things of that. So it is really just, I think, you build a platform, the first phase -- what I would call strategic partnership Phase I. By Phase II, you have a platform there and it is just about the evolution of process improvement based on working together, based on trust, based on being able to align more closely your common objectives.

And then you put the technology platforms in place and time comes out, and if time comes out, cost comes out. If time comes out, it can also have the benefit of leading to data that will help you decide not to proceed with the trial more quickly than you would and then deploy resources elsewhere. So those are the kind of benefits that we see. Probably been a long way of saying we are seeing these benefits evolve through the time that you will work together at the strategic level.

That's very helpful. I appreciate that. If I could ask a shorter follow-up, on Central Lab, you've added three new preferred providers in the quarter. Was that a net three? Is that -- did you end the quarter with three more preferred provider arrangements than you started?

That is three really live, breathing clients, Dave.

And no losses, is the implied question there.

No significant losses, no. I mean, look, business goes up and down with any customers at various points in time. But we are still working with all the clients at the end of the quarter that we were at the start of the quarter.

Great. Thank you.

Ross Muken, ISI Group.

This is (inaudible) in for Ross. Congratulations on the nice quarter. Just wanted a quick housekeeping question. Could you comment on what the organic growth rates were for the segments, the Lab versus Clinical Research?

Well, I suppose we never really break out the organic piece on just the Lab versus the rest of the segment. But obviously, we don't acquire businesses in the lab business, so it is all organic. What we did say is that 23% was across the Group, and that is a decent readthrough for both segments.

Got you. Thank you. I was just curious on cancellations -- this has been coming in at the low end of your historical range for the last few Qs now. What is the readthrough from those numbers have been coming in (inaudible) below (inaudible) now? Does this mean that the industry has sort of -- are we entering a phase of stabilization where passed through those periods when we saw five-plus kind of cancellation rates? What is driving this?

It is too early to say. Our history of cancellations has built up over 21 years. We've seen a few quarters with lower cancellations; before that, we've seen some quarters with higher rates. I don't think there is any fundamental change. Some of it is just timing. Some of it might be that one of the advantages of strategic relationships is that we all have a lot more visibility in how things go.

So it is perhaps -- and I say perhaps because it is too early to conclude -- but perhaps we are seeing that when things go into the backlog under a strategic arrangement, they are less likely to be canceled. But that doesn't preclude -- I mean, things get cancelled for a number of reasons. And sometimes it is about the failure of a compound in terms of safety or efficacy as the data comes out and that risk is harder to legislate for.

So I wouldn't read too much into the low rate. We still continue to model out our historical average because we've no reason to change that at this time.

Thank you. I'll hop back in the queue.

Todd Van Fleet, First Analysis.

Ciaran, wanted to get your sense as to how you feel about ICON's presence in the Asia Pacific region, and maybe just your general thoughts on how key that part of the world remains in terms of overall industry growth, and I guess the growth of ICON specifically. Thanks.

We are a service provider, Todd, so we tend to follow the market and follow where our customers go. At the minute, we have over 1600 people in Asia-Pac. We've done a lot of work in building up our footprint there organically. We are working off about, I suppose, 18 different sites. We have lab capability there in India and in Singapore and in China. We have the clinical offices and the clinical footprint in 15 or 16 countries. We made the acquisition of BeijingWits last year, which brought a high level of talent. We've operated in Japan for a very long time. We continue to invest resources in that business and continue to look how to develop it. So I think we are appropriately positioned for where we are now in Asia.

But if you look at the development of the way that our customers' plans are going in terms of how they execute on clinical trials, due to, I suppose, principally, patient availability and factors like that, we'll see the number of patients that are enrolled in global trials in that region increasing over the next few years. As that increases, we will scale up our resources as we do.

So it is going to be an important growth area. We are well-placed to participate in it, and have a good, solid foundation there. But undoubtedly, we will have to grow it as the market grows. But it is very much -- we've seen this before when Eastern Europe started to grow back in the early, mid years of the last decade, and we are using the same model there. You build a certain platform, probably a little bit ahead of growth. You grow into it. So in Asia-Pac, we built it out. We've grown into it. And as business there develops, we will be able to scale up to follow it.

Okay. I guess that was really the kind of genesis of my question is is the investment in that region in advance of realizing the revenue? My guess would be -- my suspicion is that some of your strategic partners are asking you to do more work in that region. I don't know if you can confirm that, and maybe just qualitatively characterize the investment. Will it be significant more investment in advance of realizing revenue or work in that region?

No, it won't. I mean, look, it is not just our strategic partners. All of our customers who are doing development in Asia ask us to put resources there. So I wouldn't overemphasize that it is in some way related to the requirements of strategic partners. It's the requirements of the market in general. It's the way the development is going.

And I think the hardest bit of getting into a region or getting anywhere are those early years, where you are starting to -- you have to start from zero, build up an infrastructure, build up local knowledge, build up regulatory knowledge, knowledge of who is in the market and recruiters and all this kind of stuff. Once you have a significant platform in place, it is much easier to scale it up. So it is really just a question of adding heads. And there is no reason to think that significant amounts of heads would be added in advance of revenue. You might put in a few managers or some oversight or governance, but they are certainly not in any way significant enough to move the needle on the numbers.

Okay. Thanks.

Timothy Evans, Wells Fargo Securities.

Hi, thanks. I wanted to follow up on Eric's question regarding the contract renewals. Understand that you feel like you're in good shape on the renewals in general. Could you -- again, speaking broadly, not about specific clients -- but as you extend these MSAs, do you anticipate having any headwinds to deal with at all in the terms of the agreements, whether it be pricing or additional investments that you need to make? Anything that you could see might kind of slow your momentum as we go into 2014/2015?

No, there is no reason at this stage to believe they will be fundamentally different in terms of [keys] and fees than what we've done so far. I think the key is that what we all want to do -- because these are partnership arrangements -- are make our working relations closer so that between the sponsors' efforts and ours, the time and cost comes out of the development effort. You get more drugs to the market quicker. But, no, in specific terms, there is nothing there that concerns me.

Okay. And for your strategic partners with whom you do both Central Lab -- or for whom Central Lab and Clinical are part of the agreement, can you speak to just the differences in how that works? Why should your arrangement in Central Lab not necessarily correlate to the arrangement in Clinical?

It depends what you do -- how define strategic partners, Tim, across those two. They are two different businesses. You have different buying groups in different parts in various customers. I would say that some of our strategic relationships have allowed us to cross-sell our Lab services into the same customer. That is cross-selling more than a strategic offering that is joined at the hip. There are two very different kind of processes, two very different markets.

So I wouldn't overemphasize the connectivity in those terms. What I would say is that having strategic relationships and building up trust with people can allow cross-selling opportunities. But it is no more than that.

Great. Thank you.

Douglas Tsao, Barclays.

Good morning. Ciaran, just to follow up, do you see an inherent strategic value or strategic necessity to being in the Central Lab business?

There are advantages to being in the lab business. I think it fills out your service offering for those customers that do want to minimize the number of providers. Well-run labs can generate good margins when you get to them to a certain level of scale, so it's an attractive part of our business.

And increasingly, with the big data agenda and harnessing the part of data to try and get some level of predictability into how a trial might perform or the effect on patients or investigators' performance, the more data sources that you have, the better that is. So there are very strong reasons for us to stay in the lab business; whether I'd call it a strategic imperative of that, I don't know. As you know, Doug, I'm not really given to hyperbole at the best times.

So I think -- but I think there are good reasons to stay in it, and we are very happy that as we grow the scale of the lab that it's growing the top line and as we add customers and preferred provider arrangements, it will help support future growth. We are increasingly finding that we are more consistently delivering profit from it and predictability. I think I'm happy with the progress it's making and certainly wouldn't be considering not being in the lab business.

Okay. And then just turning to the margins, we saw very nice improvement in terms of the operating margin for the business. It seemed to largely be driven by leveraging your SG&A spend, with some improvement in the gross margin, but that certainly has been more modest.

As we look forward and you consider your operating margin target, will that be driven largely by continued leverage on the SG&A line, or do you anticipate to see some kind of inflection point on the gross margin side to get back to the sort of high 30%s, even 40% level that we saw just a few years ago?

I think it is a bit of both, Doug. I think there is still more leverage that will be gained from our SG&A line. But I am looking forward to improvement in the gross margin line.

I think what you're really seeing there -- the gross margin line is really about the direct operating costs of the business. They haven't increased -- gross margin hasn't increased quite as quickly as I might've expected, but then I didn't think we continue to be reporting these 20% plus growth rates when I thought that.

So if you looked at the past, what tended to happen when revenue grew too hot, gross margin actually went down. So I think the fact that we've performed the trick of growing the top line significantly while getting leverage off SG&A and modestly improving our gross margin, I think it shows we're making fundamental changes there that we will get leverage from as they mature and as the business goes forward.

So I'm happy enough. Ultimately, yes, I would like to see the gross margin in the higher 30%s. That would be our aim in the medium term. But we will be working towards that very gradually.

Okay, great. Thank you very much.

(Operator Instructions) Jack Gorman, Davy Research.

Thanks for taking the question, guys. It's a broader question really. Cash generation in the quarter was extremely good. You know, net cash increased, notwithstanding the acquisition in the period. Just wondering, Ciaran, if you can give us just your latest thoughts on, I suppose, on capital allocation, the investment opportunities or the strength of the M&A pipeline that is in front of you today. Your thoughts and your updated thoughts in terms of the value return, maybe buybacks, et cetera. And I suppose maybe whether you are still -- philosophically still stuck with maintaining a net cash position, or would there be an opportunity or a scenario where you would see yourselves moving into net debt at any point in time? Thanks.

Nothing has changed, Jack. Our primary concern here is driving shareholder value. We've said that we see significant opportunity to grow still in the market, with the change in the outsourcing market and future outsourcing penetration growth, the consolidation of market share to more limited strategic providers. We said we are committed to being one of the top-tier strategic providers.

We embarked on an investment program around filling in our gaps over the last few years. The growth in Asia, I talked about earlier. Our investment in differentiating capabilities with consulting. And Late Phase offerings, our enhanced FSP offering, our informatics and technology leverage. So none of those things have changed.

We've added infill acquisitions such as the Cross Country one as well recently to build things out. We look at an M&A pipeline. There is quite a lot in the market at the minute. Some of it might suit us, some of it might not. We will analyze it. We will make the decision based on whether we think in the medium term we can generate the return from it and make sure that we keep our offering fresh in terms of maintaining our position and being able to give the full range of services and the full range of therapies and geographies for a customer.

And what it takes to do that, it takes to do that; we are not philosophically hung up on having a net cash position. I don't think we ever were philosophically hung up. We will be happy to take debt when it is appropriate towards the ends that we want to get to and towards our consideration of the primacy of shareholder returns.

So nothing has really changed, and we will monitor the market and adapt to the market as we find it.

Just one detailed follow-up. You obviously incurred a charge in the quarter. Do you foresee any further restructuring associated with the Early Phase in the near term and should expect further charges in the next quarter or two?

No, there will be no charges related to the Early Phase in the near-term. That is the charge that is sufficient to do what we have to do there.

Got it. Thanks, guys.

Robert Jones, Goldman Sachs.

Good morning. Thanks, guys, for the questions. I guess I should say good afternoon.

Just thinking about the near-term margin progression, if I look at the quarter, obviously, the conversion was quite strong. It sounds like that is not the run rate expectation. Is there any implications as we think about the ebbs and flows of the margin progression over the next several quarters relative to the spike in revenue growth or conversion this quarter?

No.

Great, okay. Thanks for the long answer.

-- no implications. I don't want to waffle on. But, no, we're going to see more of -- just maybe reiterate what we said before -- we'll see more of the same. I mean, at six quarters now, we've got a steady evolution in the margin. And looking out towards the rest of the year, I think we said we expected to exit the year approaching 10% or thereabouts. I think we are on track for that and we will continue to see that. And within those forecasts, we've factored in the revenue growth it takes to get us to what we guided.

I'll just say that conversion rate does tend to fluctuate a little bit quarter-on-quarter looking forward. You can see one quarter out fairly clearly. I would expect it will be 11.3% or 11.4%, or something like that. So no, there is no implications to worry about on that front.

Great. Most of my questions have been answered, but I guess just one bigger picture question on Phase I. Obviously, you mentioned closing the Omaha facility. It just seems like for the last several years in the industry, Phase I has been kind of in a secular decline. I was wondering, Ciaran, if you wouldn't just opine on kind of the state of clinical pharmacology and where you see that phase of development progressing over time.

It is hard to look too far over time, Bob. I think we can look back and see that, yes, you're right, in the last couple of years things have tightened up a little bit there. I think everything has its cycle. At a more general level, you are seeing more work in clin pharm around using biomarkers and science to try and minimize the amount of work that will be done and tailor it and get good go/no go decisions earlier. We've seen smaller trials and things like that, more use of all the technology that goes around medicine.

So I mean, there is a longer-term trend in that direction. There is also a cyclical trend that I think we saw, if you looked at our customers and the challenges they faced with patent cliffs and back a couple of years to the funding crunch. I think there was sort of a decision to move through compounds more aggressively that were further up the development pipeline, so we have seen softness in markets maybe in preclinical and a little bit in Phase I.

But the cycle will turn, and as these compounds move through, I think you'll see some switch back to more focus on the earlier phase. But that is speculation on my part. Time will tell.

Right. Got it. Appreciate the question. Thanks.

Thank you. As there are no further questions in the queue, I would now like to turn the call back to Mr. Murray for any additional or closing remarks.

Okay, well, thank you, everyone, for listening in today. We are pleased with the start we've made to 2013, and we are looking forward to working hard through the remainder of the year to continue to position ICON as a global CRO partner of choice for the industry and then delivering the best-in-class information and solutions and performance. Thank you, everyone. Good day.

That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.