ICON PLC (ICLR) 2014 Q2 法說會逐字稿

Good day and welcome to the ICON Q2 results 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, Wanda. Good day, ladies and gentlemen.

Thank you for joining us on this call covering the quarter ended 30 June, 2014. Also on the call today we have our CEO Mr. Ciaran Murray; our CFO, Mr. Brendan Brennan; and our COO Dr. Steve Cutler.

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 associate with the Company's business.

This presentation includes selected non-GAAP financial measures. For a presentation of the most likely 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 the dispensed 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 revenues in quarter 2 2014 were $376 million. This represents year-on-year growth of 12.5%. On a constant dollar organic basis year-on-year growth was 7%.

For the quarter our top client represented 28% of revenue compared to 29% in quarter 1 2014. Our top 5 clients represented 51% compared to 53% last quarter. Our top 10 clients represented 63% compared to 65% less quarter and our top 25 clients represented 78% compared to 81% last quarter.

We completed the Aptiv Solutions acquisition during the quarter, which meant we ended the quarter with approximately 11,000 staff. The gross margin expansion that has been a consistent trend over the past number of years continued in quarter 2. [Group] gross margin for the quarter was 39.6% which compared to 38.2% in quarter 1 of 2014 and 35.9% in the comparable quarter last year.

SG&A for the quarter was 23.3% of revenue compared to 22.6% in quarter 1. For the remainder of the year we expect SG&A as a percentage of revenue to be in line with quarter 1.

Looking beyond that we expect the good progress we are making in leveraging our cost base to continue. As a result of the expansion of gross margin and ongoing SG&A management operating income for the quarter was $48.3 million and operating margin of 12.8%. This compared to 12.3% in quarter 1 and 9.3% in the comparable quarter last year.

Net interest expense for the quarter was $41,000 and the effective tax rate was 15.5%. Net income for the quarter was $40.8 million, a margin of 10.8%, equating to earnings per share of $0.64 which compared to earnings per share of 57% in quarter 1 and $0.43 in the comparable quarter last year.

DSOs in the quarter were 40 days which compared to 35 days in quarter 1 and 33 days in the comparable quarter last year. The end of June 2014 we had net cash of $175 million compared to $364 million at the end of March, 2014. The decrease in cash balance during the quarter was a result of the acquisition of Aptiv, the increase in DSO and the share repurchase of circa $11.5 million.

With all of that said I would like to now hand over to Ciaran to talk about the current performance and our future business outlook.

Thank you, Brendan and good day, everyone. Our strong start to 2014 has continued into quarter 2.

Gross bookings for the quarter were $521 million, cancellations were $63 million given us a net booking number of $458 million, which is a net book-to-bill of 1.22. These business wins combined with $200 million of opening backlog from Aptiv means our backlog now stands at over $3.4 billion, a 20% increase year on year.

During the quarter we were encouraged by the expansion of an existing strategic customer relationship and the development of a number of new partnerships. We expect these new relationships to move from the planning stage in the second half of the year and to begin delivering revenue next year.

We have also seen the gross margin continue to expand in quarter 2. Since quarter 3 2011 the gross margin percentage has expanded by 540 bps and at the same time we have leveraged our cost base to reduce our SG&A percentage of revenue by 640 bps. All of this, taken together, has resulted in an expansion of our operating margin to 12.8% in quarter 2 2014.

With a strong margin performance in the first half of the year and better revenue visibility, we are increasing our full-year EPS guidance from a range of $2.30 to $2.40 to a range of $2.62 to $2.68 and narrowing our revenue guidance to a range of $1.49 billion to $1.53 billion. Our revenue guidance implies that we will exit 2014 with operating margin towards the upper end of our existing target margin range of 12% to 14%. So beyond 2014 we are now targeting operating margins in the region of 14% to 16%.

We will continue to pursue our strategy of seeking targeted M&A opportunities that will further expand and enhance our existing capabilities. And through the combination of our global scale, medical and scientific expertise and differentiated technologies, we increasingly return on investment of our customers' R&D spend.

Before I moved to Q&A I would like to thank everyone on the ICON team whose hard work and commitment has contributed to our performance in the first half of 2014. We will now take questions, please.

Thank you. (Operator Instructions). Ross Muken, ISI Group.

Hi, this is James Clark in for Ross. Just a quick modeling question. I was wondering if you could give lab versus clinical revenues and also operating margins for these segments, please?

No, they are not segments anymore and we have discussed this a number of times in past calls. When we reorganized the business the benefits, I think, of what we are seeing through our margin performance, the performance of the lab is rolled up into clinical and it is treated in the clinical segment.

Okay, and then I guess maybe you could give some sort of qualitative comments on the early phase business? I think you said that it was up sequentially? Maybe you could just talk about capacity utilization, pricing --?

I'm not sure where you are going, James. We didn't comment on the early phase business, specifically. Help me out here?

So maybe you could talk about your different pieces of business, the large strategic players versus sort of more middle-market -- what you are seeing from --?

I think, if you look at the market we talked about our customer concentration. So strategic business is about half of our total business, so we continue to perform in both of those market segments.

And I think we did specifically note that during the quarter we had a very exciting expansion of one of our existing strategic relationships. And on top of that we've developed a couple of new partnerships which will drive revenue into next year.

Okay. Thanks very much.

Sandy Draper, SunTrust.

Thanks very much. Just one quick modeling question, as well. Brendan, I missed -- I heard it but I didn't get it down, you gave a constant dollar number and I was trying to get that and the split between the acquisition impact and FX impact.

I did. It's 7% on a constant dollar organic basis. And then if you just take out the FX elements and just have the -- sorry, if you leave in the FX elements and just take out the acquisition it was 9%.

Okay, perfect. Second question. First, also congrats on a great quarter and really nice to see guys executing so well.

When you look at the improvements you are making in gross margins, how much of this is really just your visibility now with these strategic partnerships and lining up your expenses to better match revenue, or are there -- are you trying to find lower-cost locations to do stuff? What are the impacts because obviously you are doing phenomenally well on that.

I'm just trying to understand what is driving such improvement in that? That would be helpful. Thanks.

It's kind of all of those things and many more things, Sandy. It's sort of a cocktail of levers that is growing the gross margin. And I think I would probably say we are seeing the benefit of probably almost three years of work that we've been doing targeting gross margin and structure.

So some of it's around productivity and the deployment of technology and making our people more efficient and getting them out to sites and doing the work more. Some of it's improvement in the capabilities of our project management group and an element of visibility from strategic accounts that would help the margins there. Some of it is that over time our portfolio, our mix of larger studies within our portfolio has changed.

There are more larger studies than there were in the past. And they give more visibility and certainty and staff stay on them longer.

And then we are seeing the benefits of the reorganizations that we've made over the last year when we collapsed the lab segment and integrated it more closely into the existing clinical business. And then in the course of this year the reorganization we talked about where we have pulled all of our smaller business units under a consolidated operating structure to get synergy benefits across customers and revenue and selling as well as costs.

So I think a cocktail of all of these things is driving the margin. And looking at Steve here to see if there's anything he wants to add color to that.

I think you have mentioned them all. Just blocking and tackling. Execution.

Okay, great, thanks so much. And again, congrats. I will jump back in the queue.

John Kreger, William Blair.

Hi. Thanks for a much. Ciaran, I think historically your gross margin has topped out around 44%.

Now with a different structure of the Company, a lot more strategic relationships do you think that is a number that you can get back to? Or should we be thinking about something a bit lower than that longer term as a goal?

I'm not sure, John, historically how far back you are going to get to 44%. So I suppose if I said in the fullness of time over centuries to come there is no limit to the target that you can set, would it answer your question in kind?

We made a lot of progress in gross margin and we intend to continue to make progress in that. We are always very conscious of managing the levers and the cost structure and things change in the future and technology changes and work practices change. So I suppose what I'm saying is we will always drive for improvement but I wouldn't be saying 44% is our shorter-term target.

We've seen a good lift in gross margin. We expect it to continue to expand. And that's reflected in our guidance modestly over the course of this year.

And beyond this year we continue to plan for gross margin expansion. But it would be quite some time, I think, before we see the 44% because a lot has changed since those days when we posted that margin. You are right, the different pricing models, some of the strategic deals and the way they are structured would be where you are trading off gross margin for the benefit of increased leverage and at the SG&A level.

So if you look historically at that period where you were seeing 44% in a gross margin, you were probably seeing 29% or 30% SG&A. I use that as an example. I'm not sure of the exact figures and what period you are talking about.

Over time then one of the benefits of scale, some of the benefits of strategic partnerships are around bringing scale and bringing visibility and bringing the ability to plan you're kind of able to offer better pricing and do more risk sharing, or limit change orders and that kind of thing because you know you are going to get it back on the bottom line. It's really the operating margin, that's what we look at. It is the balance between those two factors of gross and SG&A that have changed with the changing nature of the business in the years.

And I think if you look at our operating margin at the minute, it compares favorably to some of our historic highs. It's either close to them or at them depending on how far back in time that you go.

Great. Thanks. One other unrelated question.

If you think about the revenue that you reported this quarter versus the bookings, are you seeing any interesting shifts that you would expect to play out over the coming year in terms of maybe where you are seeing growth across your geographies or client type, or even sort of top 5 clients versus your other clients? Any interesting shifts there?

No. Nothing that's really worthy of particular note. We feel we have a nice -- over the past year or two we have a nicely balanced portfolio of where our revenue and our bookings come from. And we're in that 50% to 60% split large versus the balance in biotech and mid-sized pharma specialty.

If we were to go back a few years we were probably loaded more towards the large end of things. So we've been fairly happy with how we have grown other market segments. But there's nothing in the backlog or the business wins that we are seeing over this quarter or more recent quarters that will fundamentally alter the shape of how that backlog burns to generate future revenue.

Great. Thank you.

Tim Evans, Wells Fargo Securities.

Ciaran, if I think about your business holistically on many metrics you are one of the largest, most mature companies in the industry. Your new operating margin target puts you at kind of the high-end of where CROs operate.

But the one metric that seems to be a legacy of a less mature company is balance sheet, specifically no leverage there. And I understand that you tend to take a more conservative view of your leverage, but is zero leverage the appropriate target here, or is it time to consider some degree of leverage for whatever purposes, whether it be additional M&A or share repurchases?

Looking at it holistically, our job, Tim, is to push shareholder value and return. And we do that through a variety of ways.

We've held very firmly to the view that over the years, 25 years ago we had five people working in a prefabricated building on the outskirts of Dublin. And over that time we've made a number of investment decisions and choices and expanded the Company. And we have done that by a combination of good organic growth, which we believe is very high quality growth, supplemented by the acquisitions that we needed to fill in our range of services in our geographies, ultimately with the aim of being a top-tier service provider that helps their customers return -- increase their return on investment in R&D.

So we've pursued that strategy and we believe it has worked. And as we look at the future, shareholder return is still paramount in our thinking. And we certainly have no objection to looking at leverage but for us it comes down to what are we going to do with the money, what does it do to shareholder return?

We still believe as we look forward and talk to our customers and look at the technological changes in the industry, the changing demands of customers as they outsource more, as they run down their own internal capacity, their need for higher levels of expertise from CROs than perhaps they had in the past, we see opportunities to build up and continue to build up our technology offering, our scientific and therapeutic expertise across a broader range of services that we provide, new and adjacent services. So to the extent that we will continue to execute the plan that we believe deliver shareholder value. And we will take leverage when we need to do it and when it provides -- when we have the M&A targets that we want to buy.

So really it's something we just monitor on an ongoing basis and we are happy with that. It's working at the minute. Over the past number of years we have made about 12 bolt-on acquisitions.

We believe that's a good strategy we prefer to large risky value-destroying acquisitions. And we have a list of things we are looking at that we think will add to our value and continue to enhance our delivery of value to shareholders. So long way of saying, sure, I don't disagree with anything you say but it will be dependent on the circumstances in front of us at the time.

All right. Thank you very much.

Eric Coldwell, Robert W. Baird.

Thanks, and good morning. When you acquired Aptiv we thought that perhaps it would actually have a slightly dampening impact on the tax rate, a negative impact. In fact, you came out I think slightly below your goal for the year of 15.5% this quarter.

I'm curious if you have an update to where you think the effective tax rate will be for the remainder of the year, a long-term outlook at this point? And what drove the slight improvement here? And then secondarily, I want to come back to a follow-up on Aptiv.

I think you have to look at our tax rate in totality and Aptiv certainly for the quarter wouldn't be a big enough part of the P&L account to really move the dial in terms of the efficiency of the tax rate. It was a little lower, dipped a little lower below the 16% we had indicated but wasn't hugely off the mark, 15.5%. I expect actually for the remainder of the year we will be probably closer to that ballpark than 16%.

So we will see a little bit of upside as we go through the remainder of the year. But I still kind of hold to the longer-term 16% as we look forward out beyond the current year. So we have a very good look at our tax on a quarterly basis and as I said, Aptiv really didn't move the dial in terms of its impact this quarter.

Okay. Thank you. And then Aptiv, I think you said that the backlog was $200 million, which frankly is a little better than I expected. Are there any nuances in the duration of that backlog that would change your burn rate going forward based on different business mix type of business?

And then are there any early takeaways from the integration, or just getting to know the Company better now that it's part of the fold? Any early surprises or takeaways that anyway change your thinking on the deal and what it brings to ICON? Thanks very much.

In terms of the burn rate, no we don't see a very different profile in terms of their contracts to the traditional ICON contracts. So we see the burn rate not being impacted dramatically, or at least really at all in terms of how it rolls out.

In terms of surprises, no, no major surprises in terms of the integration of the company. We feel they are a solid company, a very strong company in a number of areas.

Obviously the adaptive technology, the adaptive design is an area of the business that we are seeing a lot of interest in from customers and we have some real experts in the business now that can drive that, so we're very enthusiastic about that. We are developing our device expertise and pushing that forward.

We have also been able to uptick our business in Japan. We very strong group out there in Niphix. And we are working through bringing all of those groups as well as the larger clinical business from the Aptiv Group into the organization, orientating them, getting them comfortable with where we are, getting them into the ICON culture.

We are finding a lot of receptivity from the Aptiv folks who are doing really well. So we feel good about where we are in that integration. There are some areas we are working through, as always, with these things.

It's never perfect. But there's no surprises and we feel like we are really going to be able to add significantly to our expertise, which is really the whole rationale for doing this sort of deal, as Ciaran said.

That's great. Thanks very much.

Douglas Tsao, Barclays.

Hi, good morning. Thanks for taking the questions.

So obviously the margin performance this quarter was very strong. Just curious a little bit along the lines of, I think it was Eric's question earlier, if we go back historically, how much further room do you think there is to take up margins, or at what point do you start to bump up against the ceiling in terms of how efficient you can operate your business?

Without sounding trite, it all depends. It all depends how far you look into the future. It all depends on the way that the trial execution goes and technology gets deployed.

It depends on, I think I pointed out when John asked the question, that the balance between your gross margin strategy and your leverage and your SG&A strategy delivers operating margins. I suppose we have said on the call we have recalibrated the operating margin target beyond 2014 to the 14% to 16% range. That will be driven as it was in the past by a mix of improved gross margin and improved leverage and SG&A as the Company continues to grow at the top line and reap those benefits.

Where the top lies, who knows? It wasn't that long ago on this call I kind of said our operating margin target, I think the first one we talked about was 8% to 10% at a time when it was pretty close to 1%.

We got there and we reset it at 10% to 12% and we got there and we reset it at 12% to 14%. We've got there and we have reset the target.

So I suppose what I would say to you, Douglas, we will talk in about a year or 18 months. And as we have made progress to that target we are not the kind of people that quit or stop. We will always be looking for other ways to generate the value in the business and get it to the bottom line and get it to the shareholders.

So there's room to go yet. I think it's a positive signal. I'm upbeat about it.

I'd say it's more in the current circumstances a mix of gross margin and cost control rather than the old traditional model. That's working well for us and I think it will continue to work well.

And you can rest assured we will not quit and every ceiling becomes a floor. So we have set a target for the medium term and we will do what we do and try and achieve that and then we will look again and see where the next ceiling lies.

Okay, great. And then in terms of your backlog conversion rate it seems to have picked up a little bit recently. Do you think that that is something we should consider on a go-forward basis, or do you think new business wins are going to be the predominant driver of top-line growth?

I think it's bounced about in the 11.25 to 11.5 range and it can do depending on the flow of business in the actual duration of the particular contracts that are rolling through revenue there. So I would anticipate it not moving dramatically. So I would say that the revenue growth is really more a story around business wins than it is in absolute revenue conversion terms.

Okay, great. Thank you.

Todd Van Fleet, First Analysis.

Hi, guys. Just thinking about even the risk to the nice guidance beyond 2014 on the margin of 14%, I think you said 14% to 16%? As we have seen the operating margin for the business overall move up nicely over the past couple of years, has that changed you think about your M&A strategy?

It seems to me that it will kind of raise the bar a little bit and maybe perhaps narrow the pool a little bit of what you might be willing to consider given the improvements in the margin profile for the business? But just let me get your thoughts on that.

We have always been fairly selective about the companies that we acquire. And we want to make sure there's a good return on investment for our shareholders. So you are always buying something that you think you can work to the margins of the group and that's the way we will continue to do that over time.

So I don't think it's any change of strategy, really, from that perspective. So it's really just making sure that you continue at scale. And we are saying we are going to continue to do that nice bolt-on acquisition strategy that we think creates more value over the longer term.

And we find too, Todd, in a way the bigger we get the easier these things are compared to the past. And we have very good infrastructure in the Company in terms of our global support services, professional services model and then our operational support groups.

Scale has brought the ability to invest in technology and process and state-of-the-art stuff. So every time we do a bolt-on it gets a little bit easier and there are more opportunities to get leverage on both the operational support structures and the classical support functions like HR and finance and stuff like that. Have you have any views on that, Steve?

No, I think that's right. We are becoming pretty good at this. We work at a pretty hard and I think we see it as a core competence, really.

So we have people and I think a whole management group who are very focused in on making decisions, making the right decisions fast so we can get the benefits of these acquisitions. I think the Aptiv one has been a good example.

I think we've done that as well as any of them and the Cross Country one a year or so ago was also one we did well. So I think we are getting better and better at this end of something we are very focused on.

Great. Thanks, guys.

Greg Bolan, Sterne Agee.

Thanks, guys. Obviously [FT] utilization is high, Ciaran, I guess as I think about your expanded targets here, is it safe to say that this backlog growth moderates, hiring moderates that maybe FT utilization has another leg up just in terms of reaching that mid-80% level which is where you guys were at years past, maybe that's where you are at today. But then maybe talk about how FT utilization has to play into this next leg up as it relates to margin expansion.

Sorry, Greg, you are kind of breaking up a little bit here. So just to clarify, you are asking about the revised target of 14% to 16%, or did you mention numbers beyond that?

No, just the 14% to 16% expanded margin goal and how much FT utilization play into that. Presumably it is a high level today but just as you think about backlog growth, stabilizing, slowing down, hiring slows down, it would seem to me that the utilization is going to be one of the larger drivers of that new goal, that 14% to 16%.

I think that there may well be some opportunity to push a little on that area. We have made some progress in the area and there is certainly some groups around the Company where utilization is probably a little lower then we would like it to be in the longer term.

But I have to say I'm not sure that is going to be the major driver of that push towards greater efficiency. I think there's some opportunity but I think it is somewhat limited.

We watch that very carefully and we are conscious of the fact that our retention of our employees has moved in the right direction. We are under 15% turnover, over 85% retention.

And that's a mark we look at very carefully and I think if you push too hard sometimes on the utilization you have some downside on the retention area. So it's an area we try to balance carefully in terms of how we work with our employees.

You also see, Greg, too some of the efficiencies that we get in scale in terms of the more centralized function supporting clinical trial and the benefits of remote and risk-based monitoring and what that does to the cost profile and the ability to use people. The fact that the certain scale we are at, we pretty much have as many offices as we need maybe in the world, so you can get more people per office and more people per site.

So it's that whole mixture thing. And yes, you are right, utilization is one of them but we wouldn't want to overplay that as the only one. And even in the context of you talking about backlog and revenue, our backlog is up 20% year on year.

Our trailing book-to-bill is 1.2, which traditionally supports that certainly high single-digit growth number. So in the framework in the timeline that we are looking at that margin expansion target, we are looking at a healthy backlog, a decent trailing book-to-bill and a good tone in the market with some of those new relationships and partnerships that I mentioned that will go through the planning phase this year and develop revenue next year. So our target is within that context.

That's great. Thanks, guys. I want to echo the congratulations on the margin performance, thanks.

Sean Dodge, Jefferies.

Thanks and congratulations on the quarter. Following up on Eric's earlier question, was there any contribution to bookings from Aptiv during the quarter and if so how much?

There was a contribution, a good healthy contribution to target from Aptiv. But we don't disclose the bookings numbers and parse it down for individual bits of business. But suffice to say it is what we expected it to be within the context of the scale of that business.

As we move forward we are not parsing it to be difficult. Aptiv integrates into the business, their people become our people, it becomes part of our business. So it's part of our business and there is no number to split out.

So maybe asking a little bit different way, has your bookings concentration changed at all during the last quarter or last couple of quarters? And specifically are you starting to see a growing contribution from the non-Pfizer base?

It's fair to say that I think Brendan your commentary was that revenue concentration from the top client had reduced the quarter to 28% from 29% and so, yes, adding new business reduces concentration. Over patterns from recent quarters -- some quarters goes up, some quarters goes down, Sean, and it would be hard for me to honestly give you a pattern.

There are a lot of big trials that you win from bigger customers. It's just a question of in one quarter the timing of the award and the planning of the trial is such that a large amount -- we have seen amounts of $100 million, $150 million, or $200 million come into the backlog at a particular time from large customers.

Then none might come in the next quarter. So quarter on quarter it's not really a fundamental change in your concentration.

I think you have to look at that over a number of quarters historically. So I would say there has been no fundamental shift over the last number of quarter in our bookings concentration.

Understood. Thanks again.

Steven Valiquette, UBS.

Hey, thanks, guys. It's actually Jonathan Jung on for Steve. Just going back to some of the expandable relationships, would you say that Aptiv may or may not have helped you gain some of those relationships when you were pitching them?

No, no these would have been stuff that's been in progress a long time. And we have been working on over many months and years and stuff like that. So no Aptiv came too late to influence those, but we look forward to that capability influencing future decisions as we go forward.

Great. And then I guess on the pricing side, was the pricing pretty much similar to prior contracts and relationships that you guys have had?

It is, yes.

Okay, great. Thanks a lot.

Robert Jones, Goldman Sachs.

Hey, it actually Adam Noble in for Bob. I just wanted to ask around the long-term operating margin guidance that you guys put out.

It seems like given the performance from today and your guidance for SG&A to be relatively flat over the course of the year that most of that expansion would be coming from gross margin. But just any thoughts about potential areas of SG&A leverage and what those might be and where over time you could bring that percent of revenue down to?

I think what we said, just to clarify it, was that the new operating margin target is for beyond 2014. We said that we expected, for the remainder of this year, that SG&A would stay in line with what was in Q1.

But that looking beyond that we expected good progress that we are making in leveraging the SG&A cost base to continue. So that target that we set our self for the future is the combination of continuing to improve the gross margin as we have seen in the past but also continuing to get more leverage of SG&A as that cost base grows more slowly than the Company grows. And I think the second question, which I have forgotten --what was that?

Just specific areas of SG&A leverage. It seems like you guys are kind of indicating slower growth of SG&A dollars but any other potential areas of the cost structure that you think you could take out?

We've done a lot of work on this over the last few years. And it is kind of more of the same stuff, watching your cost base, watching where you locate your resources. As the Company grows making sure the resources are aligned with them.

We have invested quite heavily in technology and ERP and other systems. We have refreshed those investments and make sure that we increase the scope of where they go in the organization. But there is no significant initiative that differs in any way from what we have been doing over the last three years.

That makes sense. And just to ask around general R&D, it seems like some encouraging R&D spend by your largest biopharma partner. I was just hoping you could comment on the general appetite of some of the larger pharma companies with regards to their R&D budgets and what type of R&D growth you think is needed to drive that high single-digit top line over the next few years?

I don't think we see any particular changes in R&D budgets in the last couple of quarters and even going forward. I think we see low single digits continuing at about -- that's where everyone feels we are at.

There are certainly some companies -- we see the biotech sector perhaps funding more of their trials in later stages and we feel we are the beneficiaries of that in circumstances. So there are number of biotech companies who move their compounds through and work into the particularly Phase II, Phase III area.

Perhaps more so when the funds are available to them, they are able to access that capital. But in terms of R&D spend from the larger companies, low single digits.

I think we still see the increase in penetration being the major driver to growth in our market and growth in the numbers, the high single digits that we have been talking about. So it continues to be that. It continues to be penetration.

We are seeing some perhaps different models come into the industry in terms of venture capital funding and other virtual pharma companies who access capital markets and are playing in the space, which is a segment of which we are seeing a little bit of. But really as I said, low single digits on the R&D spend, increase penetration and we are good.

Great. Thanks for the questions.

Tycho Peterson, JPMorgan.

Hi, guys. This is Tejas Savant for Tycho. Thanks for taking the question.

Just wanted to follow up quickly on Aptiv. Can you give us some color on some of the cross-selling opportunities that you guys have identified when you did the deal in terms of limited client overlap? Have you made any progress there in terms of selling Aptiv into your current client base?

Yes, in the three months that we've had it we are happy with the progress that we have made so far. It's appropriate to our plan. And we are integrating, as Steve said, brings the guys in with hours and we are introducing to our clients.

So yes, we've made a lot of progress on that front. It will then bed into our business and over time we will see the benefits accrue into the future. So far we are very happy with where it's at.

Okay, and then just a little bit of a longer-term question. What do you think about the glide path in terms of increasing your gross and operating margins? Obviously there's bound to be some volatility quarter to quarter but can you help us think through what might be the key drivers of that volatility if there is some, and then how do you think about the trade-off between top-line growth and margin expansion over the next two to three years?

I'm not sure how to answer that because you are making a presumption of volatility that we haven't really seen for a while. And as we look through the position of the backlog, the trailing book-to-bill, the business opportunity pipeline in front of us it leaves us, as I have already said, to reset our margin target and we have talked a bit about managing productivity and cost base while outgrowing the business modestly.

In the past relationship between top line and bottom line is that at very high rates of growth you have to invest more quickly and you have to load up staff and training more quickly. And we've seen that trade-off in the past and that volatility.

And if you go back a number of years but that was usually associated with growth rates of sort of 20%, certainly 15%-plus, 20%, those kinds of numbers. I think in an environment where we are seeing that our organic growth is delivering high single-digit growth and on top of that our history of adding to our service offering with targeted quality bolt-on on acquisitions brings our growth rate to, what did we see this quarter, top-line 12.5% or whatever and that kind of double-digit number.

It's easier for us to manage the trade-off between top-line growth and the investment in business. We've also got changes compared to the past in the way that we deploy technology, more sophisticated systems. We have a level of scale that provides the backbone to support trials and ramp up.

We have a very expert recruitment engine that is able to deliver people to the frontline faster than in the past. And so a lot of those factors, we have better systems and control and metrics and operating metrics that look at that individual performance on sites in productivity. So all of those new tools compared to say the past -- all of those new tools combined with more modest revenue growth levels that are in our expectation would diminish the chance of volatility.

Should, however, your query, should however at some point in the future things change and growth recovers to nosebleed 20%-plus rates. Then it will become more challenging but for our outlook at the moment for the time horizon that we are looking at and for the support behind our new target, we are seeing good growth but modest and manageable with the tools at our disposal.

Thanks, Ciaran. That's helpful and congrats on the quarter.

Jeff Bailin, Credit Suisse.

Thanks and good morning. Maybe take a look at customer concentration again for a moment.

You look at the first two quarters of 2014 have been very strong, year-on-year growth in revenues for your largest client. And if you step back and strip that out and strip out Aptiv it seems that the growth for the rest of the legacy clients maybe is a little bit slower if our math is correct.

Is there anything timing related that you could discuss around the revenue trends outside of your largest clients thus far in 2014? And maybe what has been impacting that?

Not too specifics because you know for obvious reasons we don't go into that kind of stuff. But I think I would point to my earlier comments and say we have expanded one of our existing strategic accounts in terms of scope and we have had a number of new partnerships. And I think I said in the comments that while that will not impact so much on this year the new relationships will kick next year and revenue will kick in in the future and that will help concentrate some of that.

So we are kind of happy -- we were very happy with the growth that we've got from our largest customer. And we always said it was a structure of a deal that involved a very hard, fast ramp up and that it would get to a level that would mature.

A deal of that size is almost like doing a big acquisition, so obviously it's got a good deal of focus. We looked after the rest of the business and we thought well -- it still continued to grow.

It wasn't as if we took on one account and neglected the rest of our business, or excluded opportunities. But you are right to say that that bit didn't grow as quickly as the new bit.

But it grew at pretty healthy rates of mid to higher single digits, if you carve it out, our mid single digits. So that was good; now we are in the position where we've added some new business.

Our book-to-bill is healthy. And we are happy with the mix of it. And I think that as we look forward we are not uncomfortable where we will go.

And as our largest relationship matures, we think the thing is in place to get to that growth target that we talk about. The $1.2 trillion book-to-bill will put us in the high single digits.

Okay, great. And maybe just one follow-up. While a lot of the client M&A chatter has simply died down since we all spoke last quarter there still seems to be a decent amount of activity amongst the pharma and biotech players.

On the positive side of the ledger can you discuss your experience or any examples as your larger clients are acquiring small and midsized biotech? Are you finding that your partners are asking you to get involved with these acquired entities?

Yes, that's been happening for a long time. There is nothing new there. We tend to find that after the period of initial integration and strategic review that the pattern tends to be that we get involved in new projects from companies that are acquired by our key customers.

Great. Congrats on the quarter.

Thank you. That will conclude today's Q&A session. I would now like to turn the call back to Mr. Ciaran Murray for any additional or closing remarks.

Okay. Thank you, everyone, for dialing in today and listening.

We were pleased with the progress over the first half of 2014. And we look forward to working hard for the remainder of this year as we continue to position ICON as the global CRO partner of choice for the biopharma industry. Thank you, everyone.

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