ICON PLC (ICLR) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the ICON's quarter one results 2014 conference call. Today's conference is being recorded. At this time I would like to turn the conference over to Simon Holmes. Please go ahead.

Good day, ladies and gentlemen. Thank you for joining us on this call covering the quarter ended 31st of March, 2014. Also on the call today we have our CEO, Mr. Ciaran 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.

Certain statements in today's call will be forward-looking statements. Actual results may differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with the Company's business and listeners are cautioned that forward-looking statements are not guarantees of future performance. The Company's filings with the Securities and Exchange Commission discuss the risks and uncertainties associated with the Company's business.

This presentation includes selected non-GAAP financial measures. For a presentation of the most directly 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 quarter one of 2014 was $350 million. This represents year-on-year growth of 10%. On a constant dollar organic basis, year-on-year growth was 6%.

For the quarter our top client represented 29% of revenue compared to 26% for the full-year 2013. Our top five clients represented 53% compared to 53% last year. Our top 10 represented 65% compared to 64% last year, while our top 25 clients represented 81% compared to 78% for the full year 2013.

Our headcount remained steady during the quarter and we ended the quarter with approximately 10,300 staff.

In quarter one Group gross margins were 38.2%, which compared to 37.7% in quarter four of 2013 and 36.1% in the comparable quarter last year.

SG&A for the quarter was 22.6% of revenue, which compared to 23% in quarter four and 23.9% in the comparable quarter last year.

Operating income for the quarter was $43 million and an operating margin of 12.3%, which compared to 11.2% in quarter four and 8.7% in the comparable quarter last year.

The net interest income for the quarter was $91,000 and the effective tax rate in the quarter was 16%.

Net income for the quarter was $36.2 million, equating to earnings per share of $0.57, which compared to earnings per share of $0.53 in quarter four and $0.36 in the comparable quarter last year.

DSOs in the quarter were 35 days, which compared to 32 days in quarter four and 33 days in the comparable quarter last year. At the end of March 2014 we had net cash of $364 million compared to $321 million at the end of December 2013.

With all that said, I would like to hand over to Ciaran now to talk about our progress against our strategic plan and the outlook for the remainder of 2014.

Thank you, Brendan, and good day, everyone.

We've made an encouraging start to 2014 building on the progress that we made last year in 2013. Our gross bookings for the quarter were $494 million. Our cancellations in the quarter were $67 million. This gave us net bookings of $427 million, which is a net book-to-bill of 1.22. Our backlog increased 11% year on year and now stands at over $3.1 billion, which gives us a solid foundation to build upon during the remainder of 2014.

We've continued to develop new client relationships and to explore opportunities with existing customers around novel outsourcing approaches. And as we develop this new business, we also remain focused on margin improvements and operational efficiency. During the quarter we made good progress in both of these areas. Our Group margin for the quarter increased to 30.2% at a gross margin level as e continue to efficiently deliver high-quality projects.

We also saw improvement in our early phase business as the changes we made last year begin to take effect. Our combined laboratory business made encouraging progress in the quarter as we continue to see the benefits of the integration of our labs within clinical services. We also continue to manage our cost base well. And by leveraging our global business support model we were able to deliver further operational efficiencies in the quarter, reducing our SG&A costs to 22.6% of revenue.

As a result of all of this, the improvement in gross margin and our cost base leverage, we were able to increase our operating margin this quarter, which rose sequentially 110 bps to 12.3%. This margin performance was ahead of our expectations for Q1 and is the main driver of our updated guidance, which I will discuss shortly.

Alongside of financial progress we continue to execute on our strategic plan. On our last call we commented that during 2014 we will continue our strategy of targeted M&A to ensure we have an organization with the appropriate capabilities to deliver high-quality differentiated solutions to our customers. During the quarter we announced that we had signed an agreement to acquire Aptiv Solutions and we expect to close this transaction in the coming weeks. Aptiv's adaptive trial capabilities, combined with our existing technology platforms such as ICONIK and Firecrest, will further differentiate our services and help our customers to take time and cost out of their development process. Aptiv's presence in Japan and medical device capabilities will also broaden our offerings in these markets.

As a result of our strong performance in the quarter and the acquisition of Aptiv, we are raising our 2014 guidance. We now expect revenue to be in the range of $1.48 billion to $1.54 billion and our earnings per share to be in the range of $2.30 to $2.40 for the full year 2014.

Before I move to Q&A I'd like to thank everyone on the ICON team whose hard work and commitment has contributed to this encouraging start to 2014.

We are now ready for questions.

(Operator Instructions). Jeff Bailin, Credit Suisse.

Thanks and good morning. Ciaran, maybe to start, given all of the recent news amongst the client base around the potential for some merger activity and I think a perception in the marketplace of the disruption that can cause, can you maybe offer your view of this emerging trend and maybe how things are different today than past cycles?

Good morning, Jeff. Thanks. Yes, it's certainly been an interesting couple of day in the markets. I mean, the way I look at this -- I mean next year I'm 10 years at ICON so this is probably at least the third time that we've seen this kind of thing where there's been a flurry of consolidation or potential consolidations amongst the customer base and then we've seen the reaction in the market.

And if you look back on our past experience, I mean the short answer here is that it always leads to more outsourcing, to increase an outsourcing penetration and to more business for CROs. And ICON in particular has been a winner through these cycles in the past. I mean, if I remember the first time I experienced this, we were running a company which had revenues of something like $350 million or $400 million a year and now we're looking at it again as a company which is guiding something like $1.5 billion in the coming year. And the driver of our growth, the sector growth over all of those year, has been change; changed behavior in our client base; basically more outsourcing of more kinds of services to fewer CROs. So that trend isn't going to change and, if anything, it will continue to accelerate outsourcing penetration.

And if you look at the past, too, there has always been the discussion around what uncertainty does this bring into the marketplace and what's going to happen. I don't know that anything's particularly different this time, because when I look at the past, while there's a period of customers integrating, history would point to the fact that substantially pipelines are advanced, development goes on. There might be decision around specific projects or compounds, but our experience has been that there hasn't been extensive disruption in what's going on and the vast majority of work that's already in progress continues in progress. And there may be the scope for some refinement of strategy, but certainly, based on past experience, we haven't experienced extensive short-term disruption; maybe minor delays in projects, maybe discussions around strategy.

So when we look at this we're sanguine about how it goes. We're encouraged by the opportunity it provides for us in the future. We have good relationships with our customers; perhaps stronger relationships than we had 10 years ago. And as decisions progress we feel we'll be in a position to participate in the discussions. But at this stage, of course, it's much too early. Nobody knows anything so I can't really say more than point to the fact that we haven't been overly troubled by this in the past and we're looking forward to the opportunities it brings us in the future.

Great. Thanks for all that color. And maybe just one to follow up off that. Given the uncertainty this has introduced in the market, I believe the Company has about $24 million to $25 million left on your repurchase authorization. And you've had a preference, I think, towards M&A for capital deployment, but has management or the board kind of discussed the view around alternative capital deployments and buybacks specifically?

I talked at some length, Jeff, on the last call about capital deployment and since then I've spent $144 million or something so we might just a pause and reflect on that at the moment. There's no fundamental change in our capital deployment strategy and we're always open to looking opportunistically at buyback opportunities and we continue to do that. But at the moment we'll pause a little bit and work on the Aptiv, closing the Aptiv transaction.

Great. Thanks so much, guys.

Eric Coldwell, Robert Baird.

Thanks and good afternoon to you. Backlog from Aptiv. I'm just curious if you could give us some sense of what their model looks like right now. Obviously, you're taking the guidance up mostly on core operations and the margin profile, but also some inclusion from Aptiv. Trying to get a sense on what you're thinking for revenue and profitability on that acquisition once it closes for the rest of the calendar year. If you could offer anything on that it would be great.

Sure.

I'm sorry (multiple speakers). I'm happy to. Hi, Eric.

As we look at our revenue going out, obviously the reason why we're updating guidance on that is primarily Aptiv's -- it's only a quarter. We're only two months since we actually gave that initial guidance on revenue, so we're thinking in the ballpark for the remainder of year of $65 million to $75 million of additional revenue from the Aptiv acquisition and that's what's modeled into the guidance from a revenue perspective. On the earnings side of things then, we still have to close the deal but at this stage, kind of looking at it, we think it'll probably be in the ballpark of an accretive $0.06. So you can see on the earnings side of things it's good margin progression that's driving that significantly and Aptiv coming in for a smaller part of that pie.

Great. And when we think about your backlog number next quarter, you'll be bringing in the backlog from Aptiv so how should we think about the inclusion of that? And if you could give us any general sense on what that number might be, it would be helpful for modeling backlog conversion rates.

I think at this stage it's probably a little early to go into a huge amount of detail on that. I want to get my head around it first. You will have seen on our revenue coverage that we're at 74% and that revenue coverage obviously includes the updated guidance for Aptiv. So that probably gives you an indicator of the total uptake that we expect to see in the next 12 months' revenue.

Ciaran, would you like to--?

I would. Yes, Eric, we want to -- we've done a good deal of diligence on this and we're comfortable with it. But as we move towards integration there'll be specific things we want to look at and specific bits of things that you might want to top and tail. So by the time we get to the next earnings call we'll have firm numbers and what comes in on the backlog.

Great. Thanks very much, guys.

Ross Muken, ISI.

Hey, guys. This is Vijay in for Ross and thanks for taking my question. Maybe one big picture one. Given the disruption in the equity markets, particularly with biotech taking a beating, how should we think about disruptions to sort of the CRO landscape in general. I'm not talking about the large cap, I mean, which are well capitalized; more from the perspective of public IPO markets and early stage. We see biotech companies coming to the market. Like is that -- does that even make sense? I mean should we think of any disruptions in that market at all?

I'm not really sure that's relevant to what we do. Certainly we wouldn't dwell overly on that. The biotech market is important to us in that when funding comes in to it, it increases the funding available for clinical trials which flows through to CROs. But beyond that, I don't see much correlation between us and the disruption in their equity markets.

Gotcha. (Inaudible) thanks for the clarification. Then the second one, just given the solid gross margin, can you just comment on the business mix and what kind of surprise here leading to that sort of fast step up?

It's really the same mix as we've seen over the last couple of years in margin progression. But last year we took a number of productivity and efficiency measures in how we do some of our core business trials work and those benefits just flowed through a bit more quickly, earlier in the year than we expected. And then we also got a boost from the fact that we've done significant work around our early phase offering last year and we combined some of our laboratory facilities and we made some changes there and integrated it more into the clinical business. So, those benefits that we had expected to come and results from that work just came more quickly than we had expected and the margin went higher sooner.

Tycho Peterson, JPMorgan.

Hey, guys, this is (inaudible) in for Tycho this morning. First, just one question on the Aptiv numbers that you gave out. You said about $70 million in revenues and an EPS impact of roughly $0.06. So just doing some back-of-the-envelop math, does that mean that the margins for the Aptiv business are significantly lower versus company average? And if so, how do you see that evolving over time?

I wouldn't say they're significantly lower. They're a little bit lower. And of course, in the initial year there'll be various integration costs and things like that, so I would tend to point to what -- to next year's expectations. And there's not a significant difference in the margins if you take a normalized year. And of course, as we work to integrate the business then we'll get certain economies of scale and in certain places we'll see the margin profile increase towards the Company margin. But really what you're looking at there is just a timing difference in that it's the first year so there are going to be some investment costs and some integration costs that are depressing them in the shorter term.

Okay, great.

This is Brendan. Just to add to that as well, just to bear in mind as well, of course, when we talk about the accretion there it obviously does take into account the impact of the intangible asset valuations that we'll have to do on acquisition, which would be dilutive.

Okay, got it. And just (multiple speakers). Yes, go on.

The cash EPS will be a couple of sense higher than that.

Yes. Yes.

Oh, okay. Alright, thanks. And just one quick follow up more related to the M&A activity. Some of the CROs had stated earlier about the difference between restructuring versus consolidation and how consolidation in the client base is potentially more detrimental to your business. I mean, what's your take on that and is there such a distinction you feel?

I'm not sure what you mean by that distinction. It's not--.

I mean just internal restructuring efforts in terms of cutting R&D versus acquiring other pharmaceutical players.

No, I wouldn't see a distinction if I were to look at outcomes because what we've seen with restructuring is that as internal resource is eliminated there's more outsourcing, so that's the outcome there. When it comes to consolidation between companies what we've seen in the past is that while there may be changes to the way it's done with the individual businesses, it has ultimately resulted in increased outsourcing penetration. So, I don't think there's a difference in outcome. It just comes down to the specifics of each deal, exactly what it means. But as I said in my long-winded comments at the start, our experience over the number of times we've been through this is that, ultimately, it provides opportunity and it increases outsourcing penetration, it increases business for CROs.

Great. Thank you.

John Kreger, William Blair.

Hi. Thanks very much. Ciaran, given the very strong margin improvements you guys have delivered of late, can you just kind of give us an update on where your longer-term targets are for operating margins? And are the recent gains sustainable, particularly if your revenue growth kind of picks up to the 10% and 12% range? Thanks.

Yes. I mean the short answer is we were working off the 10% to 12% target. And I did say when we got there we'd set a new target, so (laughter). The new target starts at 12%. And really, what we're targeting over the next sort of 12 to 24 months is to continue gradual improvement in the margin in the 12% to 14% range. How we'll get there is doing what we've been doing successfully over the last couple of years, incremental improvement in how we do business, and efficiency, carefully managing our customer relationships. So that won't change. So to the extent that what we've seen happen so far, it is sustainable.

Some of those margin improvements have come from the efficiency measures that we've taken around how we've structured our labs, the work we've done in early phase, certain sort of restructuring and reorganizations within our core business. So, all of those things are ongoing. And I think it is sustainable through 10% revenue growth. If you look over the past couple of years we've grown -- traditionally, you're right; margin was impacted by revenue growth because of the investment costs. And while that fundamental principle hasn't changed, we've pretty successfully managed over the last couple of years to grow revenue quite significantly while improving margin. So, I would see that revenue growth in the high single digits or low double digits still allows us the opportunity to make that a continuing modest incremental improvement in margin as well.

Great, very helpful. Thank you. I think your guidance implies at least a small step down in margins over the next couple of quarters. Should we interpret that to be just sort of the impact of rolling Aptiv into your numbers?

I think to -- Brendan here, John. I think what I've always said about guidance is, yes, if you model the high end of EPS and the high end of revenue and the low end and the low end, it would kind of indicate somewhere kind of in the high 11% to 12%, something in that kind of range. As you know, John, over the years people don't do ranges in their actual results, so I think what people should bear in mind is that what we're saying is that there's potential to develop our margin over the coming year and still -- so to perform well on earnings regardless of what the revenue range might be over the course of the next year. So, I think we still see and hope for margin progression over the remainder of the year.

Great. Thanks, Brendan. And then maybe one last quick one. This time next year, based upon the backlog that you guys have, do you anticipate any change in the -- let's say the top five client concentration stats?

No is the short answer, John. I think we've very successfully developed our largest relationship and it has ramped up significantly over the last couple of years. That's sort of at a fairly mature phase. So while things can change from quarter to quarter, specific awards, I don't expect to see the same extent of change in the top 5 percentage that we've seen over the last 24 months, so it should be about the same is how we would look at it. And of course that could change a little bit based on quarterly wins patterns but not by a lot.

Great. Thank you.

(Operator Instructions). Tim Evans, Wells Fargo Securities.

Thank you. Ciaran, just to follow on that last question, are you still winning 50% of your new wins from your top five clients as well?

It changes from quarter to quarter, Tim, but yes, broadly our wins follow that pattern.

Can you comment on what's going on in the smaller biotech -- small pharma space there for you guys?

Nothing different I think from the last couple of times we've commented on it. We've seen some funding flow into some of the smaller biotech companies over the last while and they're coming to the market with significant trials and we're looking at significant opportunities there and we've had a number of good wins, developed some good relationships there over the last 12 months. Mid-sized pharma, some of them are tending to look a little bit at the kind of models that large pharma used and reducing numbers of CRO vendors and we've had some good discussions in there, but no fundamental change. Both of those sectors are healthy and we've been performing well in them. We're happy with our performance broad based across. Certainly compared to two years ago we're probably happier with our performance in the mid-sized and in the biotech sector. And we're still continuing to work the pipelines with our large strategic accounts. So, it's a fairly broad-based number with no real outliers or nothing different or unusual there.

Okay. A quick housekeeping question for Brendan. Can you split out the foreign exchange versus acquisition revenue in the quarter?

Sure, yes. So we were 10% on an absolute basis, so we were 8% on a constant currency basis and 6% on an organic constant dollar, so 2% and 2%.

Thank you very much.

Sandy Draper, SunTrust.

Thanks very much. A lot of my questions have been asked. Maybe as I'm doing a little bit of catch-up here, Ciaran, looking at the Aptiv acquisition and about -- and Aptiv trials, when you think about trying to get ahead of where the customer is going to want to be versus customers demanding it now, where do you think we are in terms of that demand cycle and customers recognizing the benefits? I mean, do you feel like you are out in front and need to lead the horse and teach them, or are they really demanding, hey, if you have this capability we'll take it today?

That depends on the customers. So yes to both, Sandy. Some people are very engaged in this. Some of our existing customers, a couple of them are already working with Aptiv and they're very engaged in it. Other customers are less so at this point and we have the opportunity to wrap this into our service offering and provide them with something I think they're going to find useful. So, it'd be a mixture of the two.

Okay, great. And then maybe one just quick follow up for Brendan. You've I think addressed most of the financial questions on Aptiv, but just one quick one. Is there any significant difference between sort of their gross margin profile versus SG&A that would just change anything in terms of (inaudible)? You've talked about the operating income and the accretion, but I'm just trying to think is there anything in terms of -- from an accounting perspective that would push more costs up to cost of goods or more down into SG&A? Thanks.

No, no, there's nothing there, Sandy, that will shape our margin profile, be that gross margin and op margin significantly different on the integration of that business.

Okay, super. Thanks.

David Windley, Jefferies.

Hi. Thank you. I joined a little bit late, so I apologize if you've touched on this, but I wondered if you would be willing to talk to us about exposure to AstraZeneca. I know you don't like to talk about individual clients. We clearly know Pfizer is your largest client. Would you be willing to tell us if AstraZeneca is a meaningful client, if it's in your top five or other color that you could give us?

There's not a lot of -- we work with AZ. We work with them principally through some of our smaller divisions, so they are not a significant customer, Dave, and they are certainly not in our top five, so de minimis exposure there.

Okay, thank you for that. As you think about your own growth, Ciaran, and the potential for the client base at large to continue to get bigger, how do you think about growing ICON's platform to be able to service your big, strategic clients at the same pace or faster than they get bigger? To what extent do you need to repeat Aptiv type acquisitions to keep up with that?

No, we don't need to repeat that. I mean, if you look at how we've grown the organizations over the last couple of years with some of our new strategic accounts, it's just been -- it's good resource planning, it's communication with the customer, it's getting the right resources in the right place, which is all about earlier planning and better planning and better communication. So there's been nothing new and nothing invented to do that. And so to the extent that we grow the business with more strategic accounts, it'll just be a question of more of the same. The advantage is that acquisitions like Aptiv bring -- it's not so much to bring scale. Aptiv are a good company. We really like what they do. We like their technology approach, specifically, around adaptive trial design, which we felt was a good match for our existing platforms. More of a -- this is more about a differentiator and value added and helping customers and adding value rather than scaling up for growth.

On top of that, then, they had a customer base that was a bit different from us. They had a great presence, a very good company in Japan, which is attractive and fitted in with us. And they had some pockets of skills sets and highly skilled people which will add to our capability, but more in terms of just adding to the value we can bring into our capabilities rather than being an engine to help us cope with growth. We feel we can cope with the growth that is in the market through our existing way of doing business and just our existing way of adding resources and onboarding and training and orientation.

Gotcha. Appreciate your views on that. And my last question, you've talked about your top client being relatively stable in terms of revenue year over year. You're obviously, with the 29% in the first quarter, off to a very strong start. I guess I want to make sure that that is still the view, that it'll be flat in terms of total dollars. And the implication would be that it will drop off fairly dramatically over the balance of this year, and just your thoughts about if that is correct in how you balance that decline with other growth.

No, we wouldn't -- I think the comment we made was that this has grown very quickly and quicker than expected over the past two years and now is reaching maturity. But we have a considerable backlog of work that we're working on that will continue in the foreseeable future. And I think someone else asked do they expect that concentration to change materially. No, not in the foreseeable future and so we don't expect any fundamental change in how things are going with our top clients over the period that we're forecasting.

Okay, thank you.

Douglas Tsao, Barclays Capital.

Hi. Good morning. Thanks for taking the question.

So sort of stepping back and just sort of thinking about a lot of what's going on broadly across healthcare. And obviously you guys have the luxury of having always been based in Ireland, but just curious how you view your sort of Irish -- being domiciled in Ireland and the tax rate that it has; and what kind of strategic advantage -- and certainly from a business development standpoint that potentially offers you in terms of bidding for assets like Aptiv and other deals that you have done over the recent years and sort of how that -- what kind of lens that allows you to look at deals versus some of your competitors who are generally based in the US.

I think the scale of the deals that we're doing, Doug, we'll have to be honest and say it doesn't provide significant strategic advantage. I mean we have a good effective tax rate here because we're based in Ireland, but that's only coincidental because we're Irish and this is where we grew up. You we get some tax synergies when we do various deals, but the kind of deal scale that we've traditionally done, the bolt-on acquisitions and things like that, it doesn't provide -- it wouldn't be a reason to do a deal or not to do a deal.

We're kind of old fashioned people when it comes to doing our business and we do things on does it make sense in a business case. Is this a capability we need? Is it something that our customers want or will want or that will ultimately help and improve the quality of clinical trials and take out time and cost of the clinical development spectrum? If there happens to be a small tax advantage, so be it, but it has never been a factor which has decided us either to do or not to do a deal or even upon what to pay for it. We pay market valuations and we look at it, but we don't kind of do any financial engineering around our tax structure to soup-up any deals or valuations. So, it's a sort of a non-factor for us so far.

And then in terms of -- as you sort of continue to see the operating leverage and the margins, the cash flow for the business should continue to be very strong. How do you see -- do you see plentiful sort of business development opportunities, or at what point do you start to look at your stock and say perhaps my best investment is in myself and the consideration for share repurchases?

We talked about this a bit, I think, on the last call and nothing's changed since then. We still see over the next few years this growth in the market. There's a lot of change as we're seeing at the minute and potential change in how our customers do things. We see that outsourcing penetration is going to increase so there's going to be more stuff outsourced over the next few years, a broader range of services going to be outsourced in more geographies. So we have an opportunity to participate in that growth and at that point it will require investment.

So I think what we've said is that we want to put our cash to work and the best way to drive shareholder value. That's principally, as we've shown with Aptiv, in looking at opportunities to grow the Company, to add to our capabilities to make sure we remain a top-tier CRO in the future and have all the services that our clients want globally. But we're also open to opportunistically looking at share repurchases and we continue to monitor that. This quarter we spent a considerable amount of our cash, $144 million out of the $360 that's on the balance sheet, and we're going to pause and digest that.

Okay, great. Thank you very much.

Steven Valiquette, UBS.

Hi, thanks. Good morning, guys. I got on the call here a little bit late, so I missed some of the commentary. But I guess the question I have around your largest customer, since obviously it's fairly topical right now, is I forgot if you guys have disclosed any details about whether or not your run rates have business with them right now, whether you're sort of -- you're cruising along around the guaranteed minimum amounts of business that you have contractually with them or are you overachieving by a pretty good clip on the amount of business that you're doing versus those guaranteed minimums? And also, do those guaranteed minimums step up over time within the contract? Just curious. Just any color around that. Sort of give us a framework, for lack of a better phrase, downside protection during these potential delays during integration, etc., if these other mergers that are contemplated ultimately go through. Thanks.

I mean, what we've said, since you came on late, is that having watched this for almost 10 years we've seen that pharma consolidation always results in increased outsourcing and more business for CROs. As I said earlier, the first time I went through this, watching this, we a $400 million company. Now we'll be a $1.5 billion company and it's a result changed, more outsourcing, outsourcing more services.

So questions about minimum levels of the business in a big customer, they're really not relevant. As we've always said, we don't work off guaranteed minimums with customers. There are indications in contracts that we use and algorithms for pricing, but if you get to a relationship with one of your top customers and you start arguing over contractual provisions that's not really a good place to be. We have long and fruitful relationships with our customers that are built on trust and maturity and behaving in a hugely beneficial way.

So, there's no point in looking at it in terms of upside or downside protection. What we can say is that we do much more business than we initially expected because more work was outsourced as the model gained traction. And that has grown over the last two-and-a-half years. I said earlier in the call that it's probably reaching more of a maturity point, but I also said to a previous question that we're forecasting that it should continue in and around those levels for the foreseeable future. That's what's built in our forecast and, really, that's the way that we look at it.

Okay. So the bottom line is you're feeling pretty good about your positioning there and maybe your sense is that investors, if they're nervous about this, they're probably more nervous than you are is what it sounds like.

Well the bottom line is -- and you shouldn't put words in my mouth (laughter). So the bottom line is I said what I said. And I will emphasize the point that, yes, we've seen this before a number of times over the last time and we've seen the markets react like this before. But if you look at -- of course the old cliche past experience does not guarantee future performance. But if you look at the number of times this has happened, it's always resulted in more outsourcing. And the short-term disruption, while there's potential for it, our experience has been that the bulk of work goes on, pipelines continue to be develop, work continues to be done. Maybe somebody changes their mind or tweaks a study or two; maybe decisions are a little bit slower but it hasn't had a disproportionate effect in the past. At this point what's happening is still conjecture in the market so we'll all see when we see, but we are feeling more sanguine about it based on having seen it before.

Okay. Alright. Thanks for the additional color. Thanks.

Greg Bolan, Sterne, Agee.

Thanks for taking the question. So, Ciaran, I guess just to kind of follow up on a couple of these questions around concentration and M&A and what that can do, obviously it's all conjecture. But when you were a $400 million company, and now you're somewhere around $1.5 billion or on a run rate for $1.5 billion, I mean, isn't it fair to say, though, that outsourcing penetration at that point was say 20% and now we're probably well ahead of that. And so doesn't that kind of change the dynamic of how you're impacted if, in fact, some of your larger customers merge?

I think that's not really the point, Greg. It's true to say that that is what the outsourcing kind of creation was and it's also true to say that nobody knows. However, our concentration hasn't changed significantly in that time. So, when we were businesses of a certain scale and outsourcing penetration was less, our top five has always accounted for something like 40% to 50% to 60% of our business, depending where we were on our growth curve so that's not unusual. And so I don't see that that's a factor that would particularly come into play.

Okay, that's fair. And then on the adaptive trial design market, obviously Aptiv, SiTEL, kind of the market leaders there. Have you guys kind of looked at what the addressable market is? I mean, obviously, if you go back to 2006, 2007 out of Raleigh it was kind of a concept and now it's become a very real business and a very exciting business in drug development in my view. But have you kind of looked at what the addressable size is for that market?

We look at these things but it's hard, as you know, Greg, to get sort of reliable numbers. What worked for us, really, most was the potential not just of this as a standalone product, but of wrapping it around a full sort of integrated technology platform that's going to take and make difference to end-to-end clinical trials. So, the adaptive market's in one part of the change. We think (inaudible). It's really about that end-to-end service and we think it's got exciting potential with what we have and bringing to customers to help them do better trials and make better decisions.

Great, thanks. Congrats on good results.

Thank you. Yes, cheers. Thanks.

Robert Jones, Goldman Sachs.

Hey, guys. Thanks for taking the questions. Obviously, a lot of them has been answered.

I guess, Ciaran, just maybe a big picture question. Now that you've already or are at least nearing cycling some of these large strategic relationships, just curious; any noticeable adjustments to the relationships or arrangements? Any opportunities to gain significantly more business as you've renegotiated or are in the process of renegotiating? And I guess on the flipside, any risk to seeing additional providers brought into any of these relationships?

I suppose both, Bob, is the answer. Our experience to date on the ones that have been renegotiated is that it tends to work well. You've built up trust over the years and better understanding and everyone has better information, better knowledge of each other, so you tend to get the opportunity to add services beyond the original scope. But you do tend to get that opportunity through the life of a contract, it just doesn't happen at the end, towards the renegotiation.

So our experience is that these things start up and there's investment required and there's challenges and people have to learn to work together. There are change management issues. Everyone works through those. The benefits of the model become clear. We tend to offer more services in those relationships. So, that's worked well.

As they come up, I mean the bringing in or taking out of vendors, that really depends on how much work is available. There is a natural limit, I think, to how much work you want to have with one customer. If we look at some of our bigger deals, they've tended to result in more outsourcing than was foreseen at the time. And there have been situations where we've been more than happy to sit down with the customers when they've said, look, we're going to do considerably more than was foreseen. You guys have already made an investment and this is a considerable account. We're thinking about a backstop provider, an additional provider. That happens from time to time in our relationships. It's a very valid way for our customers to behave and I actually encourage it. It gives choice and resource and backup for our customers and it doesn't put too much pressure and too much concentration for ourselves. So, it's a kind of a win/win situation for me.

No, it makes sense. And I guess just two quick ones. Adaptive, a nice timely acquisition given the focus on adaptive clinical trial design. I'm curious if there's anything you can share on their customer mix, specifically thinking about what portion of their current customer mix business is actually coming from other CROs? Any risk there?

And then I guess just a final thought on upcoming Analyst Day, Ciaran. Anything we should be focused on? Anything you guys prepare in advance as far as topics we should be thinking about for the Analyst Day? Thanks.

To take your first question, no, the customer mix in Aptiv, there's no significant exposure to other CROs. They have a good book of customers and they're good people. They've done a good job with that company, so -- but there's nothing there that would lead to anything usual or unforeseen.

As for the Investor Day, now, we want to keep it as a surprise, Bob. I'm not going to reveal my cards. To be honest, if you asked me about themes last Friday compared to today, some of them have changed. As I said, (inaudible) in the market. So I think we're going to watch what the world goes and we have some interesting themes around where we expect growth to come from in the future and the role of technology and of course adaptive trials and some of the scientific changes and things like that. But, no, nothing specific. And we can talk a little bit about where the whole world and bigger picture is in terms of the market landscape.

Great. Look forward to it. Thanks.

Okay, thanks. Bye-bye.

Todd Van Fleet, First Analysis.

Hi, guys. Good morning. I thought I heard you mention earlier in the call that some of the outperformance from a margin perspective in Q1 was attributed to the lab space businesses, but I'm not quite sure if I heard that right. The reason I ask, because I'm trying to assess how to think about the labs based businesses generally in terms of either contributing to margin outperformance or underperformance over the course of the year give the changes that you've made and so forth and give him the relative size, I guess, of those businesses now. So, I think it'd just be helpful for me, if nobody else, if you could kind of tell us how you think about the contribution or the opportunities that exist within those businesses as they -- as you look to kind of continue to improve the margin track. Thanks.

I mean we made changes because at that point in time we felt the profile -- the March profile of those businesses could be brought to the Group target. What we've seen is the changes that we've made have resulted in them coming broadly in line with the target. That would have been in our forecast this year as the target, we just got there a little bit earlier. So, I don't foresee any significant thing for you to model there. It sort of is or it isn't. And the margin profile is going to track close to in or about what it's expected to do. So, I don't see any kind of change from that in the future.

Ciaran, just a follow up on that then. So the -- I think it was -- what was it, 12.3% that we saw. Was it 10, 20, 30 basis points of benefit to Q1 as a result?

I mean we don't disclose those separately and that's as much detail as I'm able to give you, Todd.

Alright, thanks.

Thank you. As we have no further questions, I would like to turn the call back to Ciaran Murray for any additional closing remarks.

Okay. Thanks for listening, everyone. We're pleased with the start we've made to 2014 and we're looking forward to continuing to work hard for the remainder of the year and to continue to position ICON as a global CRO partner of choice for the industry and delivering the best in class information, solutions and performance. Thank you very much, everyone.

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