ICON PLC (ICLR) 2016 Q3 法說會逐字稿

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

Good day, ladies and gentlemen. Thank you, Gail. Thank you for joining those on this call, we'll cover the quarter ended September 30, 2016. Also on the call today, we've got 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 broadcast 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. Investors are cautioned that forward-looking statements are not guarantees of future performance. The Company's filing with the Securities and Exchange Commission discuss the risks and uncertainties associated with the Company's business.

This presentation inspected 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 Statement, 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.

(Caller Instructions)

I would now like to hand the call to our CFO, Mr. Brendan Brennan.

Thank you, Simon. In quarter three we achieved gross business awards of $572 million, cancellations were $62 million, resulting in net awards of $510 million, a net book-to-bill of 1.21. Our total backlog of business grew by 11.8% year-on-year to circa $4.25 billion. This included $115 million of backlog from the ClinicalRM acquisition, which closed in the quarter. Excluding this, backlog grew 8.9% year-on-year. Net revenue in quarter three was $420 million. This represented year-on-year growth of 6.4%, or 6.8% on a constant currency basis.

On a constant dollar organic basis, year-on-year revenue growth was 4.3%. Our client concentration continued to improve in the quarter, with our top clients representing 25% of revenue, compared to 31% for the full-year 2015. Our top five clients represented 44% compared to 49% last year. Our top ten represented 57% compared to 63% last year, while our top 25 clients represented 76% compared to 78% last year.

Following the acquisition of ClinicalRM, we ended quarter three with close to 12,600 staff an increase of approximately 300 from the end of quarter two. Group gross margin for quarter three was 42.1% compared to 42% in quarter two and 42.6% in the comparable quarter last year. Our global business services model continues to deliver operation efficiency and as a result SG&A in quarter three was 19.3% of revenue, compared to 19.5% last quarter and 20.9% in the comparable period last year.

Operating income for the quarter, before nonrecurring charging was $81 million, an operating margin of 19.3%. This compared to 19% last quarter and 18.1% in the comparable quarter last year. Net interest expense for the quarter was $2.8 million, the same as [last] quarter and up from $647,000 in quarter three 2015. The effective tax rate in the quarter remained unchanged at 14%.

Net income for the quarter, before nonrecurring charges, was $67.4 million, a margin of 16%, equating to earnings per share of $1.19. This compares to earnings per share of $1.14 last quarter and $1.02 in the comparable quarter last year, an increase of 17%. DSOs in the quarter were 50 days, compared 46 day last quarter and 46 days in quarter three 2015.

During the quarter, cash generated from operating activities was $52 million and capital expenditure was $9.5 million. We closed the acquisition of ClinicalRM for an initial cash consideration of $52.4 million. As a result, at September 30, 2016, the Company had net cash of $98 million, compared to net debt of $97 million at June 30, 2016, and net debt of $31 million at the end of September 2015.

Also, during the quarter we incurred a $4.1 million restructuring charge as part of our 2016 restructuring plan to enhance the efficiency of our operating model. With all of that said, I would now like to hand the call over to Ciaran.

Thank you, Brendan. During the quarter, we continued to see good demand in the market as our customer continue to invest in R&D pipelines and outsource more of their development. By executing on our strategic vision of being a CRO focused on operational excellence enabled by market-leading innovation and having the right range of service capabilities, we delivered another strong quarter of business wins.

The $510 million of net awards we achieved was a new record for ICON and represented a net book-to-bill of 1.21. As a result of this, outlook grew by 12% year-on-year. It's particularly encouraging that, not only did revenue grow by 6.4%, but revenue outside of our top [10] grew 15% over the same quarter last year. Consequently, our revenue concentration with the largest customer reduced to 25% in the quarter, that's the lowest level since quarter two 2013

We will continue to drive future revenue growth by further enhancing our service capabilities and entering new markets. As part of this strategy we closed the ClinicalRM acquisition during the quarter. ClinicalRM brings to ICON deep expertise on how to operate within the market for government and NGO-sponsored research and they will lead ICON's efforts to further penetrate this market segment.

Alongside target M&A, we are deploying capital to return value to shareholders through share repurchases. Last quarter we received approval to buy back shares of up to circa $400 million. And since commencing the current program on October 1, we have repurchased shares worth approximately $28 million.

Through a combination of revenue growth, operation efficiency and use of our balance sheet, we grew quarter three earnings to $1.19, which is an increase of 17% over this time last year. As we look forward to the end of the year, I want to take this opportunity to reaffirm our full year guidance. We expect 2016 earnings to be in the range of $4.60 to $4.80 and revenue to be in the range of $1.665 million and $1.68 million.

You will have also seen today that we've announced a planned succession of executive leadership. An important factor in ICON's success over past number of years has been the work we have put in to develop an industry-leading management team. This team has driven our continued progress in winning new business, growing our backlog and diversifying our customer base. ICON is well positioned for the future so I feel that now is the right time for me to step into the role of Chairman and for Steve Cutler to take over as Chief Executive Officer of the Company.

This transition will be complete on the March 1, 2017. Under these circumstances I'm looking at Steve I would like to ask him to say a few words.

Thanks, Ciaran. I'm delighted to have been given the opportunity to take on the role of CEO at ICON. I'm fortune to work with a great team of people here at ICON and we will remain focused on executing the strategy that's helped us to be successful as we continue to grow the business and enhance our position as the CRO partner of choice. I'm very much looking forward to working with Ciaran and the rest of the Board during the transition period and beyond. Thanks.

Thank you, Steve. Before we move to our Q&A, I'd like to take this opportunity to thank the entire team at ICON. It's their hard work and commitment everyday that delivers the results that we deliver in quarters like this. So thank you, everyone, and we are now ready for questions.

(Operator Instructions)

Ross Muken, Evercore ISI. Please go ahead.

Good morning, gentlemen, and congrats to both, you, Steve, and Ciaran. In terms of the end-market environment, obviously the book-to-bill was quite good. Could you just give us a little more color on RFP activity in general and how you're feeling about overall the non-Pfizer momentum? It seems certainly like the growth rates within maybe emerging pharma continue to be quite robust. And so maybe just give us a little bit of feel for how you think things have progressed or if you've seen any changes whatsoever in the end market?

Hello, Ross. How are you? It's Ciaran here. We are feeling good about the end market, and our funnel and funnel of business and business opportunities is strong. And our deal flow is good. We have a number of exciting and interesting conversations with potentially new accounts and with existing accounts about doing things differently.

So I would characterize the tenor of the overall market as being very healthy, and very encouraging. It has not fundamentally changed compared to what we've been looking at for some time now. We have seen a pretty balanced amount of activity across large biopharma and mid-size, small emerging companies. And then the overall market that we see, we have seen that probably over the last 6 to 8 quarters.

We like the balance of our businesses broadly -- is about half, or just over half large pharma, and the rest split between the other markets. We like that. So that is looking well. We are happy with that.

You mentioned the momentum of the non-Pfizer business. That's doing good. We have been adding accounts and broadening our customer base and booking decent awards for eight quarters now.

The niche of this work -- and that work was coming from new accounts across large, medium, small. The nature of the work was a bit slower to burn out of backlog once it was in there because it was complex, and there was a lot of new technologies and combination therapies and interesting stuff like that, that's just a little bit harder to get up and running. I particularly like this quarter, and that 15% growth rate outside of our top account, we're starting to see the stuff that we expected to come through, come through.

And we had a good quarter with our top customer as well. As you know, we renewed the MSA in the first half of the year, so there's a lot of focus on that. And things are going well there. Business is flowing and the relationship is good.

We expected it to mature for some time now. We have seen that pattern. I think we've seen that we have been able to offset any leveling off (inaudible) with growth outside of it. Looking at the forecast, I'm comfortable that we're probably getting close to -- Q3 or Q4 should see us close to the run rate on our top account, which is encouraging as well. So that, taken together with the business wins and the backlog, understanding the market and I think position us well as we look towards the future.

Anything you want to add to that, Steve? I've spoken for far too long.

I think that's right. I think we've certainly seen a solid funding environment within the Biotech space, so that's starting to -- we've seen some improvement there. Devices, some interest in the devices area, not just some large opportunities from a project basis, but also some alliance opportunities out there as well, which is obviously something we're very focused on. So all-in-all, a pretty positive sort of business environment at the moment, Ross.

And maybe just, Brendan, quickly on the gross margin line, to us it looks generally what we should expect for the second half and maybe going forward. How content are you with the margin level there and confidence or the ability to get operating leverage mainly from the SG&A line?

Hey, Ross. We are happy with where we are at in gross margin terms at the moment. You saw it peak up a little bit, and it'll obviously, from quarter to quarter, it'll dip up and down a little, but that 42% range is -- we're kind of happy at the moment. And that is a range where we can continue to strive towards.

We obviously saw, again this quarter, good leverage on our cost base. And that obviously popped up to 19.3% on the op margin, mainly due to good leverage from the cost base in terms of the SG&A percentage.

I think that is something we have been working on for years now. Taking you back to the five years ago when myself and Steve and Ciaran stepped into the roles we're in currently, it was closer to 27%, 28%. You now got 19.3% SG&A.

So it's an ongoing story. It's something we focus on every quarter, every year. And it's an area where we'll look to see a benefit in the future.

Excellent. Thanks, guys.

Tim Evans, Wells Fargo Securities.

Thank you. Ciaran or Brendan, either one, it looks to me that, on a year-to-date basis, your working capital investment has been maybe something like $150 million drag on your total free cash flow. That would be an unprecedentedly large number for you guys.

Can you just talk about what's going on there? Perhaps there is multiple factors? I would just like to get a better sense for that. What do you expect for working capital needs going forward?

Hi, Tim. This is Brendan here. I'll take that one. Listen, it's primarily in relation to our DSO management. It's been, obviously you saw in this quarter it going up to 50 days. That's obviously quite a move.

And it's a fairly significant -- every day is a fairly significant chunk of dollars. On an annual basis, it's in the mid-teens in terms of impact. That's been the big driver there.

We have seen commercial terms, on contracts that we are negotiating, putting billing points later into the revenue cycle. We have seen both the billing points getting later into the actual revenue generation, and we've seen the actual number of days that folks are asking for, from a billed debt perspective, elongating.

That puts us in a range -- we have a target range there of about 45 to 55 days. We are happy that the 50 days is in that range. And I think that is where we will see it going forward.

Tim, I'd add that we see this as possibly an area of competitive advantage and almost differentiation in an industry where the top CROs are always challenged to differentiate each other. As you know, we have very low levels of debt. We have an environment with low cost to capital. We're the only publicly quoted CRO with investment grade debt from Moody's, and Standard and Poor.

It gives us an opportunity when we sit down and when we do deals for the customers to look at exactly what we want to do with commercial terms. And in times like this, if it means that DSOs are 50 days rather than 45, we're comfortable enough with that. But as Brendan says, we are probably in the middle of our expected range at the minute.

Okay. And just to follow on the gross margin question quickly, some of the comments you've made in the past have suggested that you did expect a little bit of gross margin pressure going forward that would offset some of the SG&A leverage that you would get. How much of the SG&A leverage would you expect to actually flow through to the operating margin? Is it half? Give us maybe just some directional sense there.

It depends on the circumstances to some extent, Tim. When we're modeling, looking forward, we're pretty much modeling around the basis where we are now, 42%-ish gross margin. It might go up a little bit, a few bps either side of that on a particular quarter. The 19% and a bit SG&A.

What it allows us to do as we look forward, again, it's that balance between revenue and margin and gross and what you want to do with the business. If we feel there are circumstances where we are seeing pressure on gross margin or we want to take a position, we'll fund that out of SG&A. So none of it will fall through to the bottom line, and operating margin will stay around that 19% to 20% level where we're at now, or half of it will fall through. So it's hard to give you a very precise number.

But what I'd say, in directional terms, it's the lever we'll use to drive growth in the Business. And without being too specific, we'll see a number [10s of bps] upside through SG&A leverage hitting the bottom line, which keeps us in that margin range of somewhere between 19% and 20%, depending on exactly what we want to do with the Business.

Thank you.

John Kreger, William Blair.

Hi, thanks very much. I'm not sure we're doing the math right, but it looks like your clients 2 through 5 had some nice growth year over year in the quarter for the first time in several quarters. Are you starting to see growth from those accounts or is there maybe some cycling of new relationships into that top five bucket?

No, we're starting to see growth there. I think what we've been seeing for the last number of quarters and our commentary has been around the fact that we have been happy with the level of business wins with our top customers, 2 to 5, and that we've been happy with new relationships we have added. But that the niche role has been a bit -- it's been sitting in the backlog a little bit longer than we'd have liked.

I think what we've seen this quarter is stuff start to come through right across the range of our accounts 2 to 5. They are performing well, broadly. I don't think that the top five has changed this quarter. And I'm looking at Brendan here.

So there's no recycled new into that top five so we're seeing the growth from there.

Great. And, Ciaran, thank you. I'm sure you probably don't want to talk too much about 2017 at this early stage. But just curious, what is your view about what's a reasonable, normalized organic revenue growth number is for ICON at this point in its lifecycle? And when do you think you can achieve that given the revenue transition that you've been going through?

I'm happy. Look, I think -- I was expecting you to ask me this, John. Every year on this call you manage to ask me three different ways to try and give guidance earlier than I'd like. So this is not guidance, but I will give you some broad views about my view, and I'm happy to give them because I can look at Steve now and I can say whatever I want (laughter).

The way we look at this, we're sitting in 2.5 months from the end of the year. And the way we would characterize next year in terms of revenue growth, initially I'll talk about that. Trailing book-to-bill is 1.18. We've come off a solid quarter of 1.21 net book-to-bill, net of $510 million, which was a record level of net business for us. Q2 was a record level of net business at that time at $502 million.

It's broadly based work across our client bench. As we say, we have seen good wins coming through from our top accounts this quarter, as we would have expected after we worked through the MSA stuff. So the great variable is a lot of this is complicated stuff so -- and we're looking forward and what we're looking at the burn rate conversion of the backlog.

My sense on it, certainly looking into Q4, it should be around 10.4% again, certainly in the earlier part of the year that we can see at this stage. It might go down, 10% or whatever, later in the year. But for now it is looking pretty solid at that 10.3%, 10.4% level as we look forward.

So you take that with the business wins that we've got. You take that with the fact that we're seeing stuff flow through in Q3. You take that with the fact that, looking at our largest accounts, it's kind of approaching run rate now we've -- that expected transition from that account where it matured and declined a bit. We're coming to the end of that. We have a quarter where we won more business from that account than we've booked in revenue and things look solid there. So, Q4-ish, I'd say it's around run rate.

So I think you take all of that together, we would be looking at revenue growing in the mid- to high-single digits next year. ForEx and things will be variables in that. But that's the sense that I have off it this year.

And then combine that with our expected leverage that Tim just asked about on SG&A, the share buyback, and using our balance sheet. I would suggest that we'd expect earnings growth to be in the low- to mid-double digits next year. So we think it is set in for decent revenue growth, a little bit more in earnings growth.

And then, of course, we still intend to pursue our policy of string of pearls or bolt-on acquisitions to find new services and new things that make us more attractive in new markets. So we'll expect, to the extent we are able to forecast the timing of that and execute on that, that will be incremental to anything I've just spoken about.

Very helpful, thank you.

Eric Coldwell, Robert Baird.

Personally, I really like John Krieger's questions so I hope he keeps them coming. Congrats on everything. Dr. Cutler, well deserved. Ciaran, congrats to you.

My first question really is, always a tough one when the future -- or Chairman of the Company is still sitting in the room, but Dr. Cutler, what are you going to do differently in terms of your style, your strategy? Where would you say that maybe you have a different vision or view of the world than perhaps Ciaran has had over the last five years?

Good afternoon, Eric, good morning. Thanks for your comment. I think at this stage, nothing is going to happen that's going to be too much different. We still have a 4- to 5-month period until the change actually happens.

I've obviously been in the Organization for about five years now and I know the Organization well. I think there are still things we have to do and still opportunities we have to improve the Business and to grow the Business.

But the fundamental, underlying strategy is sound. We want to be the best partner in the industry. We base our efforts on being operationally very sound and excellent. That's what we're trying to do. We're looking to develop our people, enhance capabilities.

We are a full-service, clinically focused organization. Nothing in that [kite] key, fundamental area is going to change. It'll be more of the same.

I will fine tune a little bit here and there. There will be some aspects. I think we have, as I said, some opportunities to push on a little harder and to drive the Business a little more.

But it is steady as she goes, Eric. Really I think the fundamental strategies worked well for us over the last five or six years since Ciaran and I have been with the Business and we don't see that changing any as a fundamental matter, in certainly the short to medium term.

I would tend to add there, Eric, too. You know us. We all know each other a long time. One of our, I would say, defining characteristics in ICON and then what makes us good with customers in our long customer relationships, and relationships we've built, we are a collaborative Organization. There's also the fact that we're more [Irish than] European, so we don't have so much of this cult of the big man that you can see in other cultures and other places.

So I would say our strategy over the past five years, certainly since I took over, and I think, but I don't know if everyone will agree, but I certainly felt the strategy reflected the combined input of what's a great Management Team here at ICON. Steve and I have worked very closely for a long time. And it certainly wouldn't have been overly influenced by anything that I thought I was bringing to the table.

And so I do not see a tremendous shock. Steve will do things his own way and that is great. I think that's a good thing about transition. I believe every organization needs frequent, or certainly regular, refreshing at the top.

But I think as a company, what you would see here is a smooth and orderly transition based on the fact that we have been behaving collaboratively for a long time. And I've always taken the view that this day comes, and you may as well plan for it. Plan in the interests of the shareholders and the Company and the staff, and it's not really about one person. So that's all I would add to that.

That's great. If I could be allowed one more question. Shifting gears a little bit, and I know this is a tough one and I really don't want to put too fine of a point on it, but we've spent the last 3 to 5 years talking about one client in particular quite often. And you have made some comments today that you are getting closer to a run rate.

It sounds like your book-to-bill was positive in the quarter with your biggest client. And you're getting close to a run rate here in the third or fourth quarter. To me, run rate means that something in the ballpark of $100,000 a quarter continues for an extended period of time. To be fair, that's a lot higher than I was thinking coming out of the Investor Day back in May.

I'd just hate for this to be an ongoing controversy into 2017. Am I thinking about this correctly, that something plus or minus, say, 5% on what you did this quarter is where you see this revenue trending over the next several quarters? Is that a fair interpretation?

I would see it lower in this quarter. As I say, Q4, I think I mentioned, would be lower than Q3. But not significantly, maybe 5% or 7% or something like that. There's still a lot of moving parts there.

So when I say, yes, we're approaching the run rate, you're thinking about it correctly. Whether that is $95,000 or $93,000 or something like that, I think that's probably what we're seeing at the minute.

But the great variable then is the level of business. It's very strong in Q3. And it could be strong again in Q4. There's a lot of business with this customer so that's -- if we sound less precise than you would like, it's because the great variable is how much you win, not just in Q3, but in Q4 and Q1 and Q2 next year.

But my sense looking at it is that the business wins are approximating that [$100 million] mark. But I would expect it to be a little bit less than that, and that's where we'll settle down, and a run rate somewhere in the mid-$90,000s or thereabouts.

That's very helpful. Again, congrats to everyone. And I'll cede the floor now. Thanks.

Robert Jones, Goldman Sachs.

Thanks for the question. This is Adam Noble in for Bob. Could you give us an update around the strategic partnership with IBM Watson, understanding it's still pretty early? But how is that being used or impacting your win rate and conversations with pharma sponsors so far?

Adam, Steve Cutler here. We're using, and we're still building that partnership with IBM Watson. I would say it's had a modest impact at this stage. I think it's still fairly early. We got into that whole partnership, early on it was a -- and it's evolved quite significantly, really, as we've gone along.

But the fact is, we're using the partnership. We're including it. We're talking to our -- particularly our strategic alliance partners about it.

It has been helpful more on a tactical level on a number of projects, but I wouldn't say it's making a material difference to our Business right at the moment. I think that remains to come as we go forward. We continue to fine tune and to evolve. We will see over the next probably 12 months that will start to really have the impact we're looking for.

Got you. That is super helpful. Just to sneak one more in, I know it wasn't official guidance, but thinking about 2017, your comments around mid- to high-single-digit revenue growth. I just want to confirm, does that include some of the benefit from ClinicalRM or is that excluding it more on an organic basis?

No, that would include any of the benefit from ClinicalRM, but would not include any further acquisitions that we might do.

Got you. Thanks.

David Windley, Jefferies.

Good afternoon to you all, and congrats, and my congratulations to you on the continuity and transition. Thanks for taking the questions.

I wanted to focus on backlog conversion rate, not overly focused on that, but, or to use Eric's terms, not to put too fine a point on it. But I think you've talked in the last quarter or two that, because the Pfizer backlog had been well established, that the higher revenue, the running toward the 26% of full-year revenue, seeing a little bit more revenue come through from Pfizer was reflective of a slightly faster backlog burn rate from them, which would then suggest that the rest of the book of business due perhaps to the complexity that you mentioned, Ciaran, has been burning off more slowly. Should we think about those two converging and the non-Pfizer business kind of normalizing back up to a higher number, if I have my math right?

And then, how do I think about that? Ciaran, you said 10.4%, 10.3% next year? Could there be an upward bias to that? I guess I'm just trying to figure out how the dynamics are playing out with complexity and some of the studies moving forward.

Yes. You're thinking about it in the right way, Dave, in broad terms. And what I can say is, I would not expect it to go up, to answer that part of the question.

I think we're happy at 10.4%, but as you say, it burns towards 10.3%, and that's what we can see at the moment. Because what we are seeing -- you make the point that some of the Pfizer stuff was converting quicker, and some of the new stuff was converting more slowly.

But I think maybe to add more complexity to how you'll think about this, it's not just the nature of the work that affects the conversion rate. The new, more complex work takes longer to start up. But it can get to a point where the conversion starts to speed up for a while. When you recruit and when you finally get through recruitment and site initiation, all the things you do at the start.

So what we've seen probably in Q3 is the complex starts that we put into backlog maybe four quarters ago, starting to burn a little bit quicker. So that's bringing that rate up, up a little bit. But I do not see, because of just the way the backlog is structured, I don't see that going up any more.

The sort of thing that would bring it down, and remember backlog, there's also good news in lowering the conversion. Business wins would have been particularly good and be budgeted over a number of quarters. We'd be piling stuff into the backlog that if it's the current therapeutic profile and complexity, then we will be stuck for a while before it comes out again four quarters later. And that could temporarily bring your burn rate down. So that is why I'm being appropriately cautious about it.

And think of it as 10.4%. I can certainly see that, in the foreseeable future. I don't see a lot of upside to it. And then depending on the profile of next year's business wins that we look forward to, it could be 10.3% or 10.2%, but I think we're in that territory for a while yet.

Okay. I guess if I think about a backlog growth rate of 12%-ish and a burn rate that remains within 10 or 20 basis points as you're talking about, relatively stable, it seems that, that would suggest to me that organic revenue growth could very well be in the high-single digits, if not pushing double.

Is the missing link there something like the average duration of a trial, therapeutic area, rotation or things like that, average duration of a trial going into backlog is just longer? And that's kind of a forever phenomenon in this industry?

I'm always [loathe] to say forever, but it certainly is the current trend, is that stuff is taking longer. I think we are comfortable looking at the backlog [of flagging] the mid- to high-single digits at this point because just the -- it's early in the year. We're not giving guidance. We have work to do.

There's a bunch of projects in there. There's a bunch of complexity. And, yes, these projects are live, and just because they sometimes get a good place and start to burn, then you have to factor into your thinking they might slow down again, they might hit a glitch, there might be signals in a study that slow it down and slow down recruitment when our customers are thinking of safety or efficacy issues.

And so my point is that there is just a ton of moving pieces that have to pull together. And we try when we give numbers like that to be as appropriately prudent as we can and to factor for the unknowns that will pop up in the course of next year.

Got you. Last quick question (multiple speakers).

Dave, sorry. We're just trying to keep it to one follow up, if you can.

All right, fine (multiple speakers).

So if you don't mind, I'll pass it back on to the next question.

Go right ahead.

Jonathan Groberg, UBS.

Great. Thanks a million, and good morning. I might've missed it but with all the moving pieces around FX, can you quickly comment how that impacted the quarter for you guys?

Yes. It's Brendan here. We said we had a bit of a -- it pulled down our year-on-year growth a little bit. We were 6.4% in terms of revenue growth. That would have been 6.8% in a constant-currency environment.

So it was a little bit of a headwind, I'd say there were [240] bps in the quarter. Not a huge amount of impact further down in the P&L account; EPS may have been affected to the tune of -- at the bottom line on op income by 10 or 20 bps, but something of that ilk.

Okay. Great. And then one other follow-up, just details: Were there any changes in bad debt levels? And also in the quarter, there have been some more therapeutic failures recently in the market. Are there any that you specifically are looking at that make you concerned or expect to impact you?

Jonathan, Steve Cutler. We had, I think we reported $62 million in cancellations, so we had some cancellations. One or two failures based on -- I think one was safety and one was efficacy. But nothing class-orientated, that we were able to pick up anyway. So nothing of any overt concern from our point of view on that front.

And bad debt? Bad debt levels?

Jonathan, sorry. Brendan again here. No, in fact, our bad debt level has actually decreased or our provisions decreased in the quarter. So there's nothing to get concerned about.

Great. Thanks.

Sandy Draper, SunTrust.

Thanks very much, and I will just echo my congrats. Ciaran, to you, it has been a real pleasure. And, Steve, I'm looking forward to working with you going forward.

Maybe just two quick questions, one internally focused. There was some commentary early in the year, I'm not sure if it's necessarily as much specific from you guys, about the potential for wage inflation and maybe seeing a little bit more competition around wages. Just wanted to get any update there.

And then the follow-up would be, when you talked about the pipeline of interesting things, Ciaran, I wasn't sure if you were talking about M&A activity or deals, but just thoughts on the types of things you're looking for, where generally pricing is and how you guys are different as you're looking at things? You're differentiating yourself as a buyer, and why someone may be more inclined to sell to you guys than, besides just price, than to any of the other CROs? Thanks.

I'll take the first bit of the question, Sandy. And thank you for your kind remarks. And then, I'll ask Steve. It's probably more appropriate if he talks about the M&A and deals and what makes us special. Though I think it's what you pay still, but let Steve talk about that more fully.

And, no, we weren't the people that were talking about wage inflation and we're not seeing anything out of the normal, from what we've seen. Every year there's some market that's hot and there's some market that's slow and there's some kind of [degree of staff] across your workforce of 13,000 people in some case that might be more in demand than other. But it generally all washes out and balances towards our reasonable, normalized levels. We are expecting the same to continue in the future.

And then we're proactive, too. If you go over the years, we have very successfully managed our cost base and where we locate our resources and where the growth is and deploy technology to get the best out of a diffuse and devolved work force. So it's not an issue that we are expecting to materially overhang, or overhang in any way, in our numbers next year. There's nothing worrying me there. And then on the M&A pipeline --?

Yes. Sandy, thanks for your comments. We, as I think Ciaran mentioned, we'll focus on continuing our strategy around string of pearls, around identifying assets that we think bring value-add to us where we are a little sub par or bring a capability to us that we don't have.

In terms of our specific advantage, on that one I think we feel we can provide a vision and a strategy that is aligned with many of the organizations we're going after. We align in that clinical space. Some of our competitors have seemed to have moved away from that, gone into other areas, and I think we're able to outline a strong vision and strategy around the clinical space and how in particular opportunity can bring value to that focus. I think we feel being focused in that area is a real strength and a real advantage at the end of the day.

That was, as Ciaran said, the price is a major driver and this is -- the other things are more add-on or additional around the price. You need to be able to pay it and we see there's certainly good assets. The price is probably more at the high end than at the low end at the moment. Certainly the competition around many of the assets -- many of the good assets on the market is high. There's plenty available that we're not interested in, and we don't see it brings much value.

We work pretty disciplined in our approach that we just don't want to get into vanilla stuff. We want to get into stuff that really brings something to our Business and to our shareholders. So that's our focus and we think we can provide a pretty good, as you say, vision of alignment for those assets.

Great, very helpful comments from both you guys. Thanks.

Erin Wilson, Credit Suisse.

Thanks. Can you describe the mix of new business wins? I believe you previously mentioned sponsor size and type, but anything you can say about therapeutic category of the new business wins? And are you seeing any sort of meaningful shifts in therapeutic focus, generally speaking?

No, there's no real shift between. We are strong in the oncology area. We're strong in the cardiovascular area. I think you've seen us.

And the wins we have had over the last quarter and year to date are very much in line with that sort of business. [In fact, we'll] be strong in all of those areas, and we don't see any major shift in the marketplace or really from a therapy basis.

And contributions from CRM expected in the fourth quarter -- basically what I want to know here is, is everything still on track? Have there been any changes in underlying trends across that business that we should be aware of?

No, I'm happy to say there have been no changes in the underlying trends and we're still on track.

Great, thank you.

Greg Bolan, Avondale Partners.

Congrats, Ciaran. I remember marketing with you, wet behind the ears. My first marketing trip many years ago as you -- when you were a new CFO, so great move upward in the ranks.

The one question I have is just on hit rate. As you think about, we have not talked about this in a while, but I think at one point it was kind of in the low 30%s, upwards of mid-30%s for you guys.

As you think about when you walk into RFP bake-offs, a lot of you guys -- a lot of the CROs now, the top-tier CROs seem to have like-for-like services. And I just wanted to see what seems to be a determining factor in your win rate these days versus, say, five years ago?

Maybe I'll say something then let Steve give you his view. And thanks for the comments, Greg. Yes, it seems like yesterday. It's all gone so quickly.

But the fundamental win rate hasn't changed much over the years. It can go up or down quarter on quarter. It can sometimes be a bit distorted by a disproportionately large win or something like that. But it's holding in that 30% something, low 30% something mark, generally.

And the differentiators are kind of the same as they've always been for us. I think it is fair to say that the top couple of CROs in the world are good companies and do good work for their clients. We all have, to varying degrees, the same strengths. So what it really comes down to is, a lot of it is the strength of your track record and your relationship with the client, trust. These are complicated trials.

It's not just about cost, I'm happy to say. While people are still careful with money and want to maximize the investments, I think it's fair to say that everyone appreciates this is complicated, high-knowledge, value-added work with big sticks and [for the end of it] that somewhat dwarf the cost of any trial. It's trust, it's knowing that when you work together and you hit the rough spots that you'll all collaborate and get through it and deliver the best quality projects, on time and close to time and close to budget.

It's sometimes just the -- you might be lucky enough to turn up on a given Friday for an RFP with a team that have just finished. There's nothing very strategic about this. With a team that has finished similar work that places you ahead of your competition.

So one week you might lose to competitor A and the next week you'll beat them and it will come down to very fine, fine things like that. I would say, it has always been thus in the 12 years that I have worked here and nothing has changed there. I don't know if Steve has any different [comments].

I think that is right. I would say, Greg, the third is about right. One third, low 30%s, mid- to low-30%s is about -- but it does vary depending upon the segment of the market, particularly when we're talking about alliance partners. It's much higher in the alliance partner area, as you'd expect. And we're seeing some opportunities in that part of the Business.

And we're also seeing our business development people doing a nice job in bringing us more opportunities. Our funnel is improving and is growing. We have the opportunity to win that work. It's being brought to us and we're working hard on making sure our hit rate stays in the right percentages and even increases, so plenty of opportunity here at ICON.

That's great. Thanks. What I'm trying to get at to some degree is, it just seems like our checks come back almost consistently that you guys seem to have some of the better, higher, if you want to call it the net promoter scores, whatever you want to call them, client satisfaction among your peers. And I just -- if I think about your market share gains over the years, does it feel like, specifically among the top tier, call it the top five clinical CROs, does it feel like you guys have seen your share maybe accelerate a little bit over some of your like-for-like peers? Just in terms of size or, I guess to your point, Steve, win rate is pretty much steady and nothing really new to share there?

I'd say maybe a little bit. If I go back, say, to 20 quarters ago. I just picked that number out of my head because it was my first quarter as CEO. Yes, our Business that year was about $956 million for 2011, for the full year.

This year we're guiding $1.665 billion to $1.68 billion or whatever. And so, the numbers would suggest we probably, over that period, outgrown a number of our competitors. Some of that, that was skewered by success in a limited number of accounts so I think it's always hard to say you're taking market share because I think every CRO has a slightly different portfolio, a slightly different list of top customers where there's strategic preference and long-standing relationships.

And the generality of the market can move one way, but if our top three or four customers have all got robust pipelines at that point in time and are investing, well then our market is going up while one of our competitor's customers might be on freeze. And then that will turn. And that will happen to us.

I'm always reluctant to say we're taking market share because I think the market is so bespoke in many ways for the top CROs. But the numbers would suggest we've probably outgrown a number of our larger peers over that period.

That's great. Thanks. Congrats, Ciaran.

Donald Hooker, KeyBanc.

Good morning. I guess people were trying to focus a lot here on backlog burn. I know you guys have a pretty sizable and successful functional outsourcing business, which I always think of that as being sort of a booking that plays out over a longer period of time. Is there maybe more demand there around more functional projects? Is that fair to think that might impact the backlog burn over the next 18 months?

Donald, it's Steve Cutler here. I think we talked about this on the last call and I think at that time I said it was too early to call it a trend. I'm probably going to defer again to that statement, in that we're certainly seeing some nice growth within that business. I think we are taking some market share within that business.

But easily becoming a much more significant proportion of the [axis], but I'm not sure I'm quite ready to say that yet. And we're certainly seeing interest, and as you well know, there are a number of companies who operate that model and who continue to operate that and who are very committed to that model. And we're very happy to work with them and we have been successful with a number of those companies over the last couple years.

Our DOCS business has done well and we're looking to expand the opportunities to do functional service provision within that group. But more data management stats area as well. So there's -- we see it as a growing market. We see us doing well, but I don't know that it's necessarily a huge trend in the market.

I think full service still remains the dominant outsourcing mode, if that's the right way to put it. But FSP is certainly there and it's certainly keeping pace.

Maybe just a quick, quick follow-up then, in terms of the bookings. I think you all mentioned briefly that there was some pent-up demand around Pfizer. Can you share maybe -- quantify a little bit maybe what that might have been, if I heard you correctly? In the past, you helped us understand book-to-bill outside and inside of Pfizer.

It seems like if revenues -- from your discussion around the outlook of revenues from Pfizer, the bookings might've been lower. I'm just trying to jive that together. Maybe if you could share that? Thanks.

What I said was that they were bigger than revenue. And they weren't -- I think that 1.2 that we have today, we tended to share that in the past to try and emphasize the point that we were going very quickly in a way that we were confident we always allowed the Company to continue to grow the top line to expectation, while reducing concentration, which it's a fair trick. And we've managed to do that.

So we shared that number then to emphasise that point. This quarter we did not share it because it was pretty much 1.2 for both of those categories, so it was a good quarter all around.

That's helpful. Thank you so much.

Tycho Peterson, JPMorgan.

Thanks. I'll add my congrats as well. I want to go, actually, back to the question Greg asked on the hit rate and the funnel. And obviously, the numbers speak for themselves. But has the nature or tone of your discussions changed at all with the Quintiles IMS merger out there? Are those discussions evolving at all to the point you have to counter detail some of what they've been talking about?

No, is what I'd say in the short answer. Steve might have a longer answer than that.

I don't actually. No. It's not something we've spent much time with. We worry about our own Business, Tycho, rather than what they're doing. So we've seen some opportunity that maybe we wouldn't have seen otherwise. But I don't think I can quantify that at this stage.

It's a bit early yet, but nobody's really talking about it, no, Tycho.

Okay, that's helpful. And then a quick one on some of the acquisitions you've done. With PMG, part of the value proposition there was accelerate the start-up times. Can you maybe just talk, now that you've had it almost a year, whether that's actually played out as expected?

It's not quite a year. I think we got them on board earlier in this year, so February I think they came on. So we're starting to see some progress in terms of start-up times. We're certainly seeing some interest from our customers in terms of our operating model there and the fact that we're getting much closer to sites. Sorry, it was December. So it's getting close to the year.

And we're driving patients into that model and bringing those patients into it, so certainly some of our customers are really buying into the whole integrated SMO network model. It remains a key part of our strategy. Again, it's a little slower than I would like it to happen, Tycho, but the underlying model we believe in, we believe is right, and we're starting to see some benefits, albeit with projects that are typically in the non-oncology space. And that's an area we're working on. But we're starting to see those benefits flow through.

Okay. And then just lastly on ClinicalRM, from a funding perspective, is the funding locked in there? The [United States] has been pretty soft, in particular for the last month. I assume because you're dealing with longer-term [problems] you do not have a lot of volatility there, but can you maybe just address that?

I think Simon was trying to say we're out of time. I'll address it. No, we're not seeing any fundamental change in the funding at the end of the pipeline from where we are. We've seen a lot of funding going to the sector over the last couple of years.

We've had a lot of customers in that sector. They tend to be fully funded and ready to go and have the money in place for the trials. So there's been no change at the moment in our outlook there.

Okay, thank you.

Michael Baker, Raymond James.

Thanks a lot. I know you have a number of initiatives under way to address increasing trial complexity. I was wondering if you could just highlight some of the ones that are seeing earlier payoff?

We do have a number of initiatives, Michael, under way. But in terms of payoffs, I think to some extent I find it hard to characterize that in a project. These initiatives all form interlocking pieces of the jigsaw that goes to make up the whole clinical trial that we do.

And what we really deal with is trying to solve certain patient -- certain problems. It's the speed of patients, it's getting sites up, it's data monitoring, and risk-based monitoring and quality of data and those things. These initiatives, you invest to pull together an offering which makes you relevant to your customers in terms of, we do the best projects that will deliver results, we enable it with the best technology. And this is what we're going to do.

And the way you measure payoff in these, none of them are particularly capital intensive. There are initiatives around thoughts, around innovation, around defined innovation. And the object is to get at a better trial that you can sell.

The payoff to us is that we continue to grow our Business and that we are attractive. And we've done that this quarter, that we are attractive to our existing customers that keep giving us work and repeat business. That happened. That we add new customers who find the offering that we have attractive, and that happened.

I can't give you a payoff in a specific way, linked to a specific initiative, but what I can say is that the feedback we're getting from our customers is very good. That our offering is pretty much there at the leading edge and they like it. And they're happy to buy it. And that's what we're seeing.

Thanks for the color, and congratulations to you and Steve.

I would like now to turn the call back to Mr. Ciaran Murray for any closing remarks.

Thank you, everyone, for listening in today. We're very pleased with our performance in quarter three. We're looking forward to working hard for the rest of the year as we continue to enhance our position as the CRO trusted partner of choice in drug development. Thank you, everyone. Good day.

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