ICON PLC (ICLR) 2015 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the ICON Q3 conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Simon Holmes. Go ahead sir.

Thank you, Rhonda. Good day, ladies and gentlemen. Thank you for joining us on this call covering the quarter ended September 30, 2015. Also on the call, we have our CEO, Ciaran Murray, our CFO, Mr. Brandon Brennan, and our COO, Dr. Steve Cutler. I would just like to note that this call is webcast and the slides are 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. 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 certain 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 substitute for the comparable GAAP measures, we believe certain non-GAAP is more useful to investors for historical comparison purposes.

We will be limiting the call to one hour and ask participants to keep the 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 Q2 was $395 million, up 1.8% for the same quarter last year and 1.6% on last quarter. Year on year constant dollar revenue growth was 7.5% and constant dollar organic growth was 4.1%.

We are pleased to report that we have made further progress in improving client concentration. For the quarter, our top clients represented 31% of revenue compared to 34% in the comparable quarter last year. Our top five clients represented 49% compared to 54% last year. Our top 10 represented 62% compared to 66% last year while our top 25 represented 77% compared to 80% last year.

We added around 400 staff during the Q3 and as a result ended the quarter with approximately 11,700 staff. We continued to see good gross margin expansion driven by efficient management of our global project teams. For Q3, group gross margin increased to 42.6% compared to 42.1% in Q2 and 40.7% in the comparable quarter last year.

SG&A in the quarter was 20.9% of revenue the same as last quarter and 90 bips lower than the 21.8% achieved in the comparable period last year. Operating income for the quarter was $71.4 million and operating margin of 18.1% compared to 17.5% last quarter and 14.3% in the comparable quarter last year.

The net interest expense for the quarter was $647,000, and the effective tax rate was 13% percent. We still expect our full-year effective tax rate to be circa 14%.

Net income for the quarter was $61.5 million, a margin of 15.6%, equating to earnings per share of $1.02. This compares to $0.95 last quarter and $0.79 in the comparable quarter last year.

DSOs in the quarter were in line with our expectations at 46 days, compared to 45 days in Q2. During the quarter we generated $74 million of cash from operating activity, had Capital expenditure of $12.2 million and bought back $230 million of shares, as part of the $400 million share repurchase program announced in July. As a result, at September 30, 2015, the Company had net debt of $33 million compared to net cash of $132 million at June 30, 2015. With all of that said, I would now like to hand you over to Ciaran.

Thank you, Brendan, and good day everyone. Q3 was another strong quarter for ICON. We continue to win business across all customer segments and as a result delivered a book to bill of 1.2 and grew our back log year-over-year by 8%. Our operating margin expanded to 18.1% which meant we reported $1.02 of EPS which was a 25.9% increase over the same period last year which is the first time that ICON exceeded $1 of earnings any single quarter.

Overall, market demand remains healthy, with R&D spending growth remaining in the low to mid single-digits and outsourcing penetration continuing to increased across all market segments. Large pharma customers continue to look to ICON's innovation to help them reduce development time and cost, and we are benefiting from the trend of mid- tier pharma and biotech firms reducing the supply base through partner type models.

Demand from smaller biotech, and especially pharma firms also remains healthy as they leverage the global footprint and the breadth of capabilities that ICON can provide. By continuing to target growth in these sectors, in Q3 ICON posted gross new business awards of $518 million and net new business awards of $475 million. That is a net book to bill of 1.2.

As a result of these bookings, our backlog increased 8% over last year to over $3.8 billion. Of these business wins, a high proportion comes from new customer relationships and this will continue to drive reduction in customer concentration which for our top clients reduced by 300 bips year over year. Over that period, revenue growth outside our top customer has increased 8% in constant dollar organic terms.

Icon's differentiation across our technology and services platforms is helping us to deliver this growth. Through our market leading ICONIK, ADDPLAN and Firecrest technologies we are driving the adoption of risk-based monitoring, adaptive trials, and real-time site and patient engagement. These solutions are enabling our customers to reduce both the time and cost of development.

We are building market leadership in the application of data to address key development challenges including investigative site selection and access to patients. During the quarter we announced a partnership with IBM Watson through which ICON is leveraging Watson's cognitive computing power to help identify patients for inclusion in selected oncology trials. In addition, we are in discussion with several other groups to secure access to key data assets to drive continued improvement in clinical trial delivery.

A very positive feature of this year has been the performance of our central lab. By strongly integrating the lab with our clinical processes and expanding its offerings in therapeutic areas such as oncology and anti-infectives, we have added a number of significant new customers.

Revenue in the quarter was $395 million, this was an increase of 4.1% over last year in constant dollar organic terms and up 1.6% in Q2. We are beginning to see the work awarded earlier in the year convert to revenues and expect this trend to continue in Q4.

We continued to make good progress in expanding our operating margin through a combination of gross margin expansion and disciplined SG&A cost management. Our operating margin in the quarter increased to 18.1% which is a 60 bips increase from Q2 and a 280 bips increase from Q3 2014. This delivered earnings of $1.02.

Capital deployment is an important part of our strategy to create shareholder value and during the quarter we completed $230 million of our buyback program, and we now expect this program to be substantially completed by the end of Q4. We also remain focused on executing our string of pro-strategy to acquire capabilities that can enhance and broaden our service offerings.

Before moving to Q&A I'd like to thank the entire ICON team for their hard work and commitment during Q3. Thank you everyone, and we are now ready for questions.

(Operator Instructions)

John Kreger, William Blair.

Hi, thanks very much. Ciaran, you mentioned a few minutes ago that you are starting to see awards convert that you had earlier in the year. When do you think the backlog conversion rate will start to climb, based upon what you are seeing in your current backlog?

I think we will see it start to climb a little in Q4. I suppose the question is, how far does it climb compared to historic rates? I think if you look at the profile of our backlog in terms of the length and complexity of the projects in the various therapeutic areas, I don't think will see it back at the 11.8, 11.9 rates we saw a year or two ago. But we will see it start to tick up again in Q4 and Q2 back towards, very gradually toward that high 10% mark.

Great. Thanks. Any early observations you can give us about 2016? I'm guessing you're not through your budgeting process yet, but for example, as we lap some of the pressures in the dollar would it be reasonable to assume a bit of a pickup in organic revenue growth?

It's really a bit early to say. We are right in the middle of budget. I would expect broadly -- it's hard to know where the dollar is going to go to be honest, John, looking at it. I will expect we will continue to see organic growth rates in that mid to high single-digit range. That's certainly what the shape of things look like at the minute, albeit. We refine that as we go through the process and then of course we can see the pattern that we see every other year -- some modest bolt on accretive acquisitions. It's kind of hard to give you too much color other than to say that's how it feels generally.

Great. And one last one -- as you look across your workforce, are you seeing any signs of a pickup in wage inflation or any difficulty in recruiting and hiring?

Depending I suppose on the kind of staff you're looking at, and the region you are in, there were always some challenges. I think it's fair to say the market is tight for some staff in certain areas and there you tend to see a little bit of wage inflation. At the same time we operate in 40 countries and you can kind of mitigate and hedge these things by where you do work and where you locate support functions. And so in specific cases we are seeing that but nothing that would translate into a change in the shape of our profile of our cost base.

Great. Thank you.

Tim Evans, Wells Fargo.

Hi. Thanks. Ciaran, by my calculation, this is the first quarter since early 2012 that you saw your headcount grow year over year faster than your constant dollar revenue growth. Just wondering why the pickup in hiring there? What we should think about in terms of your pace of hiring going forward and what impact that might have on how we think about gross margin expansion?

What you are seeing there, Tim, you are right is good news. We are ahead of the curve to execute future revenue. I think what you are seeing is during the course of this year we have been seeing since the end of Q3 last year we added a significant number of customers and we win a lot of business outside of our top couple of accounts and that has continued to be the case. We saw the revenue pickup in quarter three over the last couple quarters where it was for various reasons, around FX and other things, but it was not growing as quickly. You're seeing us gear up for the revenue that we expect to see over the next quarter or two.

And that sort of pattern is not different from the past and it won't be different in the future as we do our forecasts and I think we are saying that our business outside of our top customer grew 8% year on year. On the last call, I talked about the fact that our book to bill was outside our top number of traditional accounts was 1.4. We are kind of seeing that pattern continue.

As we forecast each quarter's growth, we probably see that we are adding heads in Q4, maybe into Q1. But it doesn't mean anything for gross margin, because we have it well under control in terms of resourcing and bringing people on, the timeline between training, so it won't fundamentally alter the margin picture because we are seeing the revenue come in, and we're seeing the cost go up. We have a reasonable handle on it.

And maybe if I could throw one at Brendan. Can you help us think about the foreign exchange impact on your operating margin this quarter?

Wasn't meaningful, Tim. We had an average rate of about a 109, 110 last quarter. This quarter was a little higher, it was 111, but it didn't have a meaningful impact. I think it was a couple of hundred thousand dollars of a hit to the P&L account in the quarter but not any worse calling it out separately.

Okay. Thank you.

Sandy Draper, SunTrust.

Thank you very much. Just a quick question. I know it's probably early, Ciaran, to make any definitive statements but one of the concerns or issues out there is from biotech and with the biotech market pulling back. Just curious as you're having discussions with the biotech companies have you just noticed any change in their behavior and how they are thinking about the business?

Any commentary along those lines would be great, recognizing it's really early so you probably haven't seen specific impact but just curious what your sense of in talking with those customers, has their mind changed due to the overall pullback in the market and potential lack of funding there? Thanks.

I think the first comment to say is that everybody is wondering to what extent this is going to have a real impact. The customers we are talking to, tend to be fully funded. Their compounds are moving into later phase and that and so that's probably less pressing in the medium term. I think everyone is just adopting a wait and see argument. A lot this has been politically driven commentary that's looked at it. It's election season and that's going to be going on for a while. So I think the feeling here is that there will probably be some volatility for the next while but it's too early to say exactly what it means. But it's to say we're talking to a cohort of people that are more advanced than certain other companies in the market.

Great. That's really helpful. Thanks for the answer.

Robert Jones, Goldman Sachs.

Thanks for the questions. And I guess related to Sandy's question -- you guys mentioned obviously having a lot of success outside the Pfizer account. That momentum is obviously evident in the book to bills you have been sharing. Ex-Pfizer. Within that mix, can you give any more insight into what the customers are as far as small and emerging biotech versus, Ciaran, some of the mid-pharma client you have been talking about?

We don't really look at it in that way, because to us they are the same; it's the same development channel and challenge. It's the same kind of staff and profile, the technologies you deploy. But there's nothing significant about it that would lead us to stratify it any more than we look at large pharma. We look at our kind of biotech midsize specialty pharma in the same bucket, because that's how it's managed and controlled and executed.

Got it. I guess just one follow-up on the IBM Watson collaboration that you mentioned, interesting relationship there. Could you maybe give just a little more perspective or details around the collaboration, what your vision is of how this could help with trial startups and other things? Just any more perspective on the scope of that relationship would be helpful.

Robert, it's Steve Cutler here. In terms of the IBM Watson, what we are doing is focusing on the oncology space, and what it is going to allow us to do is to identify patients much more easily for clinical trials. Clnical trials tend to be a matchup of patients' medical records, what disease they have, with the protocol and what patients you're looking for in the protocol. That can be a manual exercise. What the IBM Watson technology allows us to do is make that a much more automated exercise through the cognitive computing, allowing us to look at physicians' notes and writings, and actually match that up with a clinical trial. So we see the opportunity to bring patients into clinical trials, albeit at this state at a relatively limited number of key centers in the US and bring those patients -- bring the trials to the patients and have every patient who comes through the door at those key centers be a candidate for our trials.

We think it will be an exciting opportunity to increase and make much more systematic the approach to patient recruitment with our trials, which is the area that gives us most opportunity for being more efficient, faster, better, cheaper, basically. So it's a part of what we will be doing over the past six months or so in a number of key oncology indications. Oncology only at this stage. We think it will give us a lot of horsepower going forward to recruit our trials faster.

Thanks. Steve, is it exclusive?

It is at this stage. But as the product gets rolled out, IBM will be, I'm sure, selling it across the market. But we have what we call the first mover advantage in terms of doing the pilots and moving things off exclusively at least for the pilot stage.

Okay. Got it. Thank you.

(Operator Instructions)

Donald Hooker, Key Bank.

Good morning or good afternoon. I just want to be clear, did I think somebody mentioned that the book to bill outside of Pfizer was 1.4 times, was that the number you all threw out?

1.4 times outside our kind of top traditional large accounts, not just Pfizer.

Okay. Got you. Just a follow up, you made the acquisition of MediMedia earlier this year, and my impression was it's a nice little business but there's potential cross sell or revenue synergies potentially between sharing relationships between the two companies. Is that playing out or is that a bit early now? Can you talk about the cross sell opportunities in the growth of that company?

It's probably a bit early. I'd say we are very happy with that acquisition. Its integrating very well. We understand you can [through a lot of hard] integration. Introducing customers, aligning things. So too early to have any concrete numbers for you but sufficient to say we are happy with the progress and it's hitting the milestones that it's supposed to hit as part of the post acquisition integration plan.

I'd just say that certainly working with a number of different customers and so they represent an opportunity. As Ciaran said it's too early to say and it's too early to have taken advantage of the potential there is there to engage with new customers. Potential, but we will give it a little more time.

Okay. And then maybe, can you elaborate a little bit on the growth of that area? Particularly MediMedia, what the trends are, year over year growth? And now that you have a couple quarters under your belt kind of thinking about over time what we should expect from that portion of your business that you just bought into?

We see that market growing nicely. In the sort of low double digits. We see significant opportunity to take that forward. The MediMedia guides, as we've said, we're just really integrating them. It's too early to sort of say we've taken huge advantage of that, but I think we bought ourselves a good company. They are coming into the organization well. They are contributing, they've given us access to new contacts and new customers and we feel optimistic about what they can bring us. It will be another 6 to 12 months before we can say what they have been able to bring in, what those growth rates are.

Got it. One last one to follow up. In the medical device area, you had commented in previous quarters that's an interesting new area that you all are exploring. I was curious if you could elaborate as to what your exposure is to that area, and maybe give us a sense to how growth there compares to the clinical trial area, the traditional pharma kind of area?

Yes, Steve again. Again we see strong growth in that market in terms of double digits. And great opportunity. Again it's a smaller market but with some of the regulatory changes that are happening and are starting to flow through we are seeing customers increasingly look towards organizations like ours to do that work. We are having good discussions with a number of customers around more strategic relationships on the device side. That is always, we are moving it forward. This was a group that came in through our Aptiv acquisition and we have been able to bring that in, to consolidate it, to bring some revenue forward with it. It's again still relatively early, and the market isn't moving as fast as we always like it to, but we see again significant opportunity in that devices space, particularly with the regulatory changes and interest from customers.

Okay. Thank you very much.

Eric Coldwell, Robert W. Baird.

Thanks very much. I think most of the topics have been covered. I just want to run quickly through Central Lab; didn't hear a lot of that on the call today. The largest player in this space is showing a nice recovery in their growth, others seem to be pretty upbeat about the market. I'm curious if you give us an update on your labs and perhaps talk a little bit about if you've seen any changes in the environment, given the two big partnerships announced over the last year? Thanks very much.

Hi Eric, its Ciaran here. I suppose we might have said a little bit more about the lab than we've said recently. Because of the way we operate it in such an integrated fashion over the last couple years. We have been very encouraged by what we have seen in the lab. We took a position here where we have gone from a model which had the lab very integrated into the clinical processes. It's very customer-centric and focused on high level of customer delivery over some high quality testing.

I think we specifically said we had added to our range of oncology and anti-infective. We have very good offering there in that brings the data across to and from our clinical trials. We have seen very strong performance in the lab this year. I think it would be fair to say in the nine months to date our book to bill for that sector of just the central lab is well over 2X which is well in excess of its target now. It won't be like that every quarter in the future but it's still very significant and it reflects that we have been successful in adding a number of new customers.

I think if we look at the broader market, it has come down to two very large players. We feel we have got a very strong, I wouldn't want to use the term niche because it's bigger than that, but a very strong tailored customer-centric offering and we've been getting a lot of positive feedback from it. We have added a number of significant new customers and I think that reflects the fact there is a lot of space in the market for what we are bringing to the party. So all and all, we are very happy with this. Want to add anything Steve?

No, you said it perfectly.

That's pretty impressive on the bookings. My follow up would be, over the years since you made the first investment back in 2000, there was always the sense that the lab would have to hit a certain scale level of volume of kits, what have you, before you would really get aggressive on automating and I'm curious where you are at that point?

Are we looking at some point down the road and some CapEx to do more automation in the lab versus human involvement in kit ascension and in packing and things of this sort? Or is it not quite at that level yet where you would want to go out and make a big investment in automation?

I think I'm happy to say that since the [data] is a little more challenged in the labs. They have been performing pretty well now for two or three years. They are kind of -- gross margin is up, they're close to targets, it used to be spiky, and at times, as you remember, low. But they've been performing at kind of 40% on a very consistent basis for a long time. Over the last two or three years we have taken a number of initiatives around automation, efficiency improvement. Some things you mentioned around kit assembly we outsource, and so all of these things help drive it to a much better place.

The short answer I suppose is it's going very well and we are very encouraged but we don't foresee a particularly heavy or unusual level of CapEx over the next couple of years, other than what we have been spending on the last few, which you've seen reflected in the numbers. So no, there's no big bolus of CapEx that's going to be needed to make a transformational shift in the lab. And the scale of it's quite good. If you remember too, over that period, we integrated our Central labs, their bio analytical labs and we have done a lot of work in gaining efficiencies and broadening integration between those parts of the business with each other and then with the broader clinical business as well.

That's all very encouraging. Thanks very much for the details.

Steven Valiquette, UBS.

Thanks. Good afternoon. A lot of the good questions have been asked already, but one thing might be worth checking in a little bit is, from what I recall historically I think among the various CRO partners with your largest customer there was maybe a spirit that this large customer was going to perhaps ration out a fairly amicable split of business over time among some of the CRO partners. And just curious if this is still perhaps the spirit of that agreement, and whether this is something you guys still pay attention to or is this simply not relevant anymore now that we are four plus years into this relationship and now it's just a meritocracy. But just curious if this is something you focus on at a high level? Thanks.

Hi, Steven. I think you summed it up when you said it is four years in and it's sort of not that important anymore. Various assets are awarded based on capabilities and merit to various providers and [ofocos]. And you tend to stick with developing those assets so that isn't something that concerns us. I think it would be fair to say we have been very happy with the business we have won in the last four years and if anything, the extent of that we've seen in the concentration numbers, where it peaked last year, in this quarter last year 34%. We've certainly taken at least our fair share of the business, but it's not something that would be at the top of how it's divided up, it's not something that would be at the top of my list of things to do each week.

That's helpful to get that color. Thanks and congratulations on the results

Dave Windley, Jefferies.

Hi, good afternoon. Thanks for taking my questions. A follow up there, Ciaran, I'm wondering if you would be willing to comment on whether renewal negotiations have begun with the top client? How you would expect that to play out? And maybe as a corollary how has ICON competed with PPD in relation to Bristol-Myers Squibb since Bristol-Myers swapped Parexel for PPD in that relationship? I'm thinking that's an interesting parallel to what this other might be?

Hi David, how are you? I think in our business when you're working with a client, renewal negotiations begin on the first day of every contract because you are pretty much having to prove yourself and every project and every time to do the work. Then you get down to the more formal aspects. Yes, we have active discussions. We have been through a number of these renewals before in the past and you can kind of point to that past experience. This one is very much following that.

I should go on through the years of a contract, everybody learns things and you get to that point where we are sitting down together with a customer and trying to capture the learnings, trying to look forward to the future and see what can be done better, where new efficiencies can be gained, how the shape of things should happen. So all of those discussions we have on a regular basis. The contract is due up in the middle of next year and past experience has always been that formal renewal, if it has occurred, it usually occurs around renewal date. It doesn't happen earlier, sometimes it happens a couple weeks later even by the time the lawyers get together and dot i's and cross t's. All of those dIscussions are happening at that level. They will play out over the next six months. We've done a good job, the relationship is good. I can't say more than that but it's going as we expected it to go.

As regards to the PPD and BMS, I suppose I don't really know, it's not something that's -- Steve, you are closer to that.

We feel we are in a very good place with BMS. As you know, they are going through and have gone through a number of organizational adjustments and changes over the last few months, and so they have been looking at their portfolio and looking at that. We were recently renewed there, and we feel we are in a good spot with the BMS relationship. It's all go from here for us. I can't comment specifically on what they do and where they are with PPD and Parexel, but as far as ICON is concerned we feel we have a good partnership, a good relationship and we're looking forward to continuing that.

Great, and if I could ask a follow up on the mix in the portfolio more broadly? And I apologize if something along these lines has been asked, but a fair amount of consternation about the pressure on the equity capital markets activity for smaller cap drug developers. And you've commented about that small cap area and the funding flowing to them being a nice stimulus to your backlog. We are also aware that the large 25 to 50 clients make up a vast majority of global R&D spending, so I was wondering if you could help us with perspective on what your mix of business looks like and how dependent you are on the recently funded biotech environment or client base.

Yes the recently funded biotech environment has been a good place to win business. I think that funding goes from the smaller companies right up. It's a healthy environment; there's a lot of confidence in that sector. There are a lot of good compounds in development.

If you look at our traditional business, Dave, over recent years you would probably, as a [shop] we've split 65% to 70% times with large pharma, 30% with specialty and biotech. Some of those biotech are big companies as well. When we look at the way our business fits, our growth has been higher as you would expect in this market over the last number of quarters in what we call a kind of nontraditional base. But that's a range of large biotech companies and specialty pharma smaller ones. And the smaller ones we deal with tend to be funded by the time they get to us. They have the money in place, they are starting their programs.

Our business is probably split about 50-50 between large pharma and the rest, and within the rest, most of that would be larger biotech and solid mid-pharma companies that are adopting partnership models and some specialty and some new ones. It's nice to work in these exciting therapies. I don't feel we have particular exposure to that kind of smaller fundraising sector and the people we have on the roster [at the minute] and the ones we are talking to have money at this point. We are just going to have to wait and see how that plays out. It's very early to say and everybody is just watching that space with interest. The current exposure is nothing that's keeping me up at night.

Okay, thank you.

Ross Muken, Evercore ISI.

Good afternoon, guys. Just curious on the capital allocation side, for yourselves, can you maybe characterize sort of the tuck-in environment in terms of breadth and opportunities? And how you are prioritizing that versus the substantial share repo you have out there? And secondarily, a lot of debate in the industry on consolidation as a whole amongst the bigger players? Any change in thought regarding what could happen from an industry structure perspective and how you think about your role in that?

Hello, Ross. You have asked me so many questions there. All running together. I will try to answer them but feel free to put me on course if I wander off.

Tuck-in environment versus a [kind of string of pearls] versus our share buyback. We have a healthy enough pipeline of smaller deals that add capabilities. Our M&A strategy has always been look at things that are good businesses on their own but have -- more than that, they bring something to the whole of ICON. They expand the capabilities or the geography in the past or the technology that we have at our disposal.

So we are looking at a couple of things there in the areas where we have always kind of said are growth areas for us. And that kind of price range of $50 million to $150 million to $200 million. I think if you look at MediMedia last year was $120 million or thereabouts, Aptiv was approximately $140 million the year before. And they were the two largest deals we have ever done. So we are kind of in that kind of space and we are looking at very targeted things that will either bring a new technology or a new skill or capability that we don't have that will add to our customer offering.

I wasn't aware that there was any more [shout] on consolidation in the bigger players in the industry over the last while. No, we are pretty much of the view that based on our experience in consolidation amongst large players, it is a good thing to destroy shareholder value if that's what you want to do. That's still the integration challenges and risks and the time that it would take to put things of that complexity together. Have a lot of downside. I don't know what it adds significantly in terms of upside.

If you look at our own company and the larger players, they have good suites of offerings for their customers. I don't think there's anything that we would get that would help us with the customer by engaging in some of the consolidation that you talk about. It comes with too much risk. Customers like choice.

Our lab is a good example where we have by far, a record level of business wins in a year when choice in the market has been reduced by some of the activities around the lab market. I think looking at the CRO space, certainly the top three or four companies have enough scale and enough financial firepower without being engaging in risky strategies that have been unproven at that level in the past.

That's pretty much been our view, that we can drive more shareholder value by focusing on the customers, by focusing on new technology, by improving our service offering, by helping customers take time and cost out of trials, and improve all the bits that go into that. That strategy has served us well over the last sort of four or five years, probably over our history of 25 years, and we think we have the plan and resources to make sure it serves us well in the foreseeable future. That's what we think about it.

As always, Ciaran, you outperform. Thanks for answering the questions.

Greg Bolan, Avondale Partners.

Thanks for taking my questions. Could you talk a little bit about the DOCS business, how that's performing these days? Has there been an increase in demand among your larger pharma or even newer larger pharma or clients to bring to outsource or rebadge some staff there?

Greg, it's Steve Cutler. I can comment a little on the DOCS business. We are seeing strong demand for our DOCS resources and DOCS solutions. It's a business that we invested in a couple years ago when we bought Cross Country in the US and that's given us some firepower in terms of being a global organization allowing us to take advantage of a market that we see is growing. We are getting interest from not just smaller customers but large customers as well. Not just in terms of contract placement, but more FSP, functional service provider type relationships. And our revenue in that business has been progressing nicely over the last year or so, certainly from the start of this year. So we see further opportunity there.

We see further opportunity for gaining synergies across our Q3 business as well. As that DOCS business also provides resource on a contractual basis to our ICON clinical research business. Which we think has nice synergies and nice operational advantage for us as well. All in all, it's a business where we are seeing lots of opportunity, more on the FSP area going forward and revenue opportunities and growth going forward is something we feel good about and feel like we can benefit from.

Thanks. That makes a lot of sense. And Brendan, just thinking about FTE utilization, to the question earlier about headcount growth, where would you characterize utilization today?

Hi, Greg. We don't really talk about it in percentage terms but I think we still have capacity there to continue with our plans as we outlined earlier on, to bring in [those staff] and to still see cross margin develop over time as we have said before. We don't split out the percentages of absolute utilization but we still feel we have capacity.

So to that point, is it fair to say without calling out the numbers that given the growth and headcount as of late there is still some room for upside in terms of utilization and therefore one of the drivers of gross margin expansion going forward?

I think headcount and utilization of headcount will always be a driver of gross margin in this [service-driven] industry. That is definitely part of the puzzle all right. Not the only part but certainly one of the levers we will pull as we go forward.

Okay great. Thank you.

Tycho Peterson, JPMorgan.

This is Tejas on for Tycho. Just one quick housekeeping one for me, there is no mention of guidance in your press release or in your prepared remarks. Should we assume that what you said previously about $1.570 billion to $1.600 billion and $3.90 to $4.00 in EPS is still the right way to think about it?

Absolutely. When we don't comment on guidance it means the guidance that we gave on the last call is still what we are looking at.

Okay. And then just a quick follow-up on the IBM Watson partnership for you. How long do you think it will be before we begin to see some of that reflect in the backlog conversion rate? Because that's been a trend that's been declining; seems to have been bottomed out a little bit this quarter but still sequentially down 10 bps. Will IBM play a role there? I assume it will. And how long do you think it will be before it has a meaningful impact?

I don't know. I am struggling to see the IBM Watson relationship specifically would tie to backlog conversion. Backlog conversion is a function of how quickly projects that we have across all therapies and all geographies and all customer sub segments are executed and convert to revenue and that's dependent on things such as how far in advance the studies start up. You book a study, then the regulatory process, you go through the protocol designs. It's a complex equation. And what we have seen is it's gone down in recent years. But that's been a function of having a very large complex backlog of increased duration. A slower back log burn rate isn't necessarily a bad thing because it means your backlog is going to last longer in the future. It means you've won longer term projects. It's about consistency and if you look at our backlog in terms of the market and other companies it's pretty much buying in the middle. It's not significantly off.

What we said about the backlog is that we have seen a considerable amount of new work for new customers this year there has been a lot of therapies there. It is going to get a little bit higher over the next quarter or two, but the IBM Watson deal has absolutely nothing whatsoever to do with how the whole totality of our [$3.2 billion] backlog converts to revenue. With the IBM Watson deal does do is very specifically around giving us access to data assets which will improve some of our trial execution and, Steve, maybe you can reinforce that point.

I think potential within those therapeutic area within the four indications we are doing with oncology can help us speed up those trials. I think as Ciaran says, that's a relatively small part of the overall backlog. I don't think IBM Watson specifically will change that 10.6% as it was last quarter. Within oncology we can get some benefit within those specific indications. I think we just have to be careful on expectations.

Got it. Thanks guys.

That will conclude the Q&A session. I would now like to turn the call back to Mr. Ciaran Murray for concluding remarks.

Thanks for listening in, everyone. Q3 was another strong quarter for ICON and we are looking forward to working hard for the rest of the year, what remains of it, and we continue to enhance our position as a CRO trusted partner of choice in drug development services. Thank you, everyone.

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