IMS Health Inc. Q3 2008 Earnings Conference Call Transcript

IMS Health, Inc. (RX)

Q3 2008 Earnings Call

October 23, 2008, 8:00 AM ET

Executives

Darcie Peck - VP, IR

David R. Carlucci - Chairman and CEO

Leslye G. Katz - Sr. VP and CFO

Analysts

Larry Marsh - Barclays Capital

John Kreger - William Blair

Presentation

Operator

Ladies and gentlemen, thank you for standing-by, and welcome to the IMS Health Third Quarter 2008 Earnings Conference Call. During the presentation all participants will be in listen-only mode. Afterwards we will conduct a question-and-answer session. [Operator Instructions]. As a reminder, this conference is being recorded Thursday, October 23, 2008.

I would like now to turn the conference over to Darcie Peck, Vice President, Investor Relations. Please go ahead.

Darcie Peck - Vice President, Investor Relations

Thank you, operator. Good morning everyone and welcome to the IMS third quarter 2008 earnings conference call. With me today are Dave Carlucci, our Chairman and Chief Executive Officer; Leslye Katz, our Chief Financial Officer; and Gilles Pajot, our Chief Operating Officer. Dave and Leslye will discuss highlights from our third quarter 2008 results and then we will open it up for your questions.

As in the past, we've posted slides on our website and I encourage you to view these during our prepared remarks this morning. Certain statements we make today are forward-looking within the meaning of the U.S. Federal Securities Laws. These statements include certain projections regarding the trends in our business, future events and future financial performance.

We caution you that these statements are just predictions and the actual event or results may differ. They can be affected by inaccurate assumptions, or by known or unknown risks or uncertainties, consequently no forward-looking statement can be guaranteed. I call your attention to our third quarter 2008 earnings release issued earlier today and our full-year 2007 report on Form 10-K which describe the factors that could cause actual results to differ materially from those contained in forward-looking statements.

Forward-looking statements represent our views only as of the date they are made and the company undertakes no obligation to correct or update them whether as a result of new information, future events or otherwise. Certain of the financial measures we'll talk about today are on an adjusted non-GAAP basis. These may include for example operating income, net income, EPS and free cash flow. Detailed reconciliation to results on a U.S. GAAP reported basis are in our press release and I encourage investors to review the notes in our press release further describing adjusted non-GAAP measures.

Now let me turn the call to over Dave Carlucci. Dave?

David R. Carlucci - Chairman and Chief Executive Officer

Thank you, Darcie. Good morning everyone and thanks for joining us. Our third quarter results demonstrate the strength of our global business model as we delivered double-digit net income and earnings per share growth. While we did see more moderate revenue growth this quarter in the phase of an uncertain economic environment, we still have very strong fundamentals.

We generated excellent cash flow in the quarter. We've been very effective at managing our cost and expenses and our balance sheet and liquidity position remain very strong. In the quarter, revenue was $574 million, up 6% reported. On an adjusted basis, operating income rose 9%, net income grew 11% and earnings per share was $0.43, up 19% over last year's third quarter.

Now let me give you my prospective on the quarter and what's changed since our last call. First, our clients have accelerated their cost cutting in this uncertain economic environment. The improved growth we saw in our Consulting and Services business in the second quarter has fallen back to single-digit growth in the third quarter. Year-to-date we're at a 16% reported growth.

As the quarter progressed clients delayed or didn't move forward with more tactical sales force effectiveness engagements and that hit us in both Consulting and our Sales Force Effectiveness business line. As a result, we'll continue to provide the tactical solutions and put more focus on moving upstream to help our clients design and implement new commercial models.

We've been streamlining our consulting practices and business lines to establish broader capabilities under commercial effectiveness. We believe this will position us to drive larger engagements. With all of these factors considered, I'm even more pleased with the decisions and decisive actions we took at the end of last year with our restructuring, which puts us in a much better position to manage in this challenging environment.

I'm confident that we're taking the necessary actions to make adjustments to our business and our teams are executing well, and our restructuring actions are ahead of plan. And this is resulting in margin improvement and strong cash flow.

As it relates to our business lines, SFE moderated in the third quarter and was up 9% reported year-to-date. We talked to you last year at this time about a major win back we have in the U.S. and that also had an impact on our year-to-year compares.

Portfolio Optimization was up 6% reported year-to-date with a strong performance in the midsize and emerging markets and with generics clients. And Launch, Brand and other grew 18% reported for the first nine months with a very strong performance in our consumer health, managed markets and health economics and outcomes research offerings.

Looking at our regional performance, in the Americas we posted 2% reported revenue growth in the quarter and a 6% increase through the first nine months of the year. The SFE competitive win I just mentioned, impacted our year-over-year growth in the region. But as we look at our growth drivers, we've had several competitive wins with exponent weekly.

While cash for new information business with our LifeLink and anonymised patient-level data offerings including a recent win with the FDA as they look to understand patient behaviors; and using the same IMS information our pharma clients use. And our managed markets offerings continued the double-digit growth pace that we've seen all year.

The EMEA region grew 11% reported in the quarter and 14% year-to-date. Our clients are targeting the major European markets as they implement tighter spending controls in each country. For us the midsized markets continue to perform well, led by strong performances in our Portfolio Optimization and Consumer Health businesses.

In Asia Pacific, revenue rose 10% reported in the quarter and 14% year-to-date. This reflects good demand for our Consulting and Services offerings in Japan. We also had strong overall growth in the emerging markets as clients look to those countries for new growth opportunities.

So, the third quarter represented a more challenging environment. We're seeing clients much more focused on cost control than value and return on investment. Based on that, we're lowering our full year constant dollar revenue guidance to 3 to 4%.

However, I am pleased that we remain on track to achieve our 2008 guidance for EPS and cash flow. We'll continue to effectively manage our cost and expenses as top-line growth moderates and leverage an operating model that's increasingly flexible and responsive.

So now I'll turn the call over to Leslye, who will give you more color around our financial performance. Leslye?

Leslye G. Katz - Senior Vice President and Chief Financial Officer

Thank you, Dave, and good morning everyone. This morning I'll cover our third quarter financial performance and share with you can my prospective on the full year. In addition, I'll discuss what we see at this point in the year as we look ahead to 2009. Let me start with the third quarter revenue.

Despite a revenue slowdown, I am pleased that we were able to deliver better than balance operating income growth, double-digit EPS growth, excellent free cash flow and significantly improved DSO. We remain very focused on our execution in these critical areas of our business.

I am also happy to report that our financial strength and liquidity remain outstanding with plenty of flexibility of very attractive debt maturity tables and a continued low cost of debt.

Now for the details of the quarter. Revenue in Q3 was $574 million, up 6% reported and 3% on a constant dollar basis. The narrowing gap between the reported and constant dollar growth rate reflects the recent strengthening of the U.S. dollar. If this stronger dollar is sustained through the fourth quarter, our constant dollar and reported growth rate will be inline with each other in Q4.

At the end of Q2, when revenue growth had slowed to 4% constant dollar, I said that we could still achieve the low end of our guidance range of 6% for the year. However, in the third quarter, we experienced a deceleration in our Consulting and Services business. And I believe that the factors that led to slower C&S growth in the third quarter are not likely to change between now and the end of the year. As Dave said, we now expect full year constant dollar revenue growth of 3 to 4%.

Turning to our regional revenue performance. The Americas grew 1% constant dollar in the quarter and 5% year-to-date. Revenue in the EMEA region grew 4% constant dollar in the quarter, 3% year-to-date. And Asia Pacific revenue grew 4% in the quarter, 5% year-to-date.

In the third quarter, information and analytics revenue grew 6% reported and 2% constant dollar, an improvement over the second quarter. Year-to-date revenue growth for I&A offerings was 9% reported and 3% constant dollar. Consulting and Services revenue in the third quarter grew 7% reported and 4% constant dollar. Year-to-date C&S growth was 16% reported and 10% constant dollar. Both of our revenue streams, I&A and C&S have experienced a lot of variability throughout this year.

From a business line perspective, year-to-date constant dollar growth for Sales Force Effectiveness was 2%, Portfolio Optimization was flat and Launch, Brand and other growth was 12%. All of the business lines were impacted by the slowdown in Consulting and Services this quarter.

Cost and expense in the quarter was $450 million, up 7% as reported. This includes a $3.7 million charge related to our Government Solutions subsidiary in the U.S., which we described in our Q2 10-Q filing.

In August, we voluntarily disclosed to the U.S. Government, the existence of billing irregularities in our Government Solutions business. These irregularities existed higher to our acquisition of the business in May 2005. We've investigated them thoroughly and rectified them.

We recorded this expense in SG&A in our Q3 GAAP results based on the estimated liability to the government for correcting these billing matters. Given the pre-acquisition nature of this issue, we have excluded this $3.7 million expense from our adjusted results.

Therefore, on an adjusted basis, cost and expense grew in the quarter 6% reported and 2% constant dollar. SG&A growth on an adjusted basis in the quarter was flat. And this is the second quarter in a row with SG&A growth below revenue growth.

Despite a lot of variability in C&S revenue growth, C&S gross margins improved sequentially quarter-to-quarter in Q2 and again in Q3, another important contributor to our bottom-line performance. This was accomplished by closely tracking and managing our staff deployment, utilization and pace of hiring.

Utilization in the third quarter averaged in the mid-60s, down four points from Q2, but up four points from last year. The benefits of our restructuring program also helped to keep constant dollar cost and expense growth to very modest levels in the quarter. The restructuring actions are well underway and on track to achieve the savings that we laid out for you at the beginning of this year.

When the restructuring plan is completed, we still expect 2009 full year savings of 55 to $60 million. However, because we are executing ahead of plan, we now expect to realize approximately 60% of those annualized savings in 2008. That is more than the 45% we had estimated earlier.

Clearly, this year we were well prepared for more variability in our revenue growth. Through very effective cost expense management, we delivered 9% adjusted operating income growth on a reported basis this quarter and 4% on a constant dollar basis, a solid better than balanced performance. This is also evident in our adjusted operating margin which was 22.3% in the quarter, an improvement of 40 basis points quarter-to-quarter and up 50 basis points compared to the third quarter of last year.

Continuing with the non-operating portion of the Q3 P&L, total interest expense net was $9 million, an increase of $1 million compared to the third quarter of 2007 and flat quarter-to-quarter. On a GAAP basis, other expense was $5 million, a year-to-year decrease of $5 million, primarily driven by FX hedge losses.

In the third quarter, we received a ruling and a legacy tax dispute allowing us to reverse a portion of the previously established tax reserve. As a result, we now expect our full year GAAP effective tax rate to be approximately 31%, down from the 32% we projected at the beginning of the year.

In addition, in order to reflect a year-to-date effective tax rate of 31% in our adjusted results, we have phased into the third quarter $4 million of tax benefit we expect to realize in the fourth quarter. This phasing adjustment yields a third quarter adjusted tax rate of 28% and as explained in detail, in the notes to the financial tables in our press release.

On a GAAP basis, net income was $76 million, up 33% in the quarter. After adjusting for the phasing of foreign exchange hedge losses, the tax phasing I just mentioned and the government solutions charge, adjusted net income was 79 million, up 11% year-over-year.

Our GAAP EPS was $0.41, up 41%. Adjusted EPS in the quarter was $0.43, up 19% over the third quarter of 2007. That $0.02 difference between GAAP and adjusted EPS consists of $0.01 from the charge related to the Government Solutions business and another cent from the net phasing of tax and foreign exchange hedge losses.

Turning now to cash flow. Preliminary free cash flow in the quarter was very strong at $115 million, up $29 million sequentially. On a year-to-date basis, preliminary free cash flow was $156 million, an increase of $45 million over last year.

Year-to-date cash flow includes $38 million of cash payments for the restructuring plan. DSO was 61 days in the third quarter, six days better than the second quarter and 10 days better than the third quarter of last year. All our regions performed well and we delivered exceptional performance in EMEA and the Americas.

In terms of capital allocation, we repurchased 500,000 shares in late September and early October. Through today, we have repurchased 10.5 million shares this year at a total cost of 238 million. That leaves 9.5 million shares authorized and available for repurchase under the December 2007 board authorization.

We continue to view share repurchases as an important component of our capital allocation. However, with the recent unprecedented premium put on liquidity, we have been cautious about our share repurchases in this very volatile environment.

But we emphasize, however, that this should not be interpreted as the change in our long-term approach to share repurchase. We will continue to evaluate share repurchases, balancing this and other uses of cash consistently as we have done in the past.

Another important component of our cash allocation is acquisitions. We completed one acquisition in the third quarter, RMBC, a pharmaceutical market research company in Russia that expands our capabilities in this important emerging market.

Last week we completed our fifth acquisition of the year with the purchase of the professional services portion of Schera [ph] Corporation. Schera [ph] operates in North America and Europe providing business process, business intelligence and systems implementation services to lifescience clients. Throughout this year, we have seen continued robust growth in our services business, as we help our clients improve their productivity and to increase their cost variability across several key functions.

Schera [ph] is an excellent fit and expands our growing capabilities in the area of business process outsourcing services. The acquisition of Schera [ph] brings our year-to-date acquisition spend through to-date to $42 million.

We also spent $23 million on deferred software and capital expenditures in the third quarter, a decrease of $23 million from Q3 of last year. Year-to-date spending on software and CapEx was $82 million, down approximately 33 million from the first three quarters of 2007.

Cash and equivalent totaled $229 million at quarter end, an increase of $8 million compared with June 30, 2008. Debt as of September 30th totaled $1.4 billion. A decrease of $74 million compared with June 30, 2008. With the heightened focus on the global credit crisis, let me spend a few minutes to update you on IMS's liquidity position and capital structure.

Our company is extremely well positioned to weather the current credit crisis. We have no significant refinancing events until mid 2011, and our debt maturity table is very well balanced with three, five, seven and 10-year maturities out on the horizon.

We are managing our interest rate risk in this volatile environment with a 50-50 fixed floating rate debt portfolio. And 50% of our debt is denominated in Yen at an average interest rate of 1.4%. Yen interest rates have remained very stable even while dollar LIBOR rates have fluctuated widely.

So, IMS has no liquidity issues. With $229 million of cash and $364 million of credit, immediately available on our current $1 billion revolving credit facility, we are positioned extremely well in this turbulent credit market.

So to summarize on the full year, as I mentioned earlier, we anticipate that the factors that led to lower and more volatile Consulting and Services revenue growth will persist for the foreseeable future. As a result, we expect to end the year below the low end of our original revenue guidance range in the range of 3 to 4% constant dollar revenue growth.

Obviously, I'm not happy about having to adjust our revenue guidance for the year, but I remain very pleased with the way we have adapted to changing market and economic conditions both short-term and long-term.

With the excellent progress we have made this year implementing our restructuring plan and effectively managing a strong program of cost control, we expect to deliver adjusted operating income growth that is balanced or close to balanced with revenue growth. We also expect to deliver full year adjusted EPS within our guidance range of $1.70 to $1.76, although likely at the low end of that range.

And finally, I expect that we will achieve full year free cash flow within our guidance range of 300 to $325 million, again likely at the low end of the range.

Moving to a longer term view, we just completed our three-year strategic plan, including a longer term financial outlook for the company. In this process we considered many factors including the dynamic changes affecting the pharmaceutical and healthcare landscape, the fixed and variable aspects of our cost and expense structure, the investment required to continue to provide high value innovative offerings for our clients, the adoption rates and yields from our current investment plate and our capital structure.

Out of this work, we concluded that our longer term revenue outlook is for growth in mid to high single-digit. Our cost and expense structure can deliver balance for better than balanced operating income growth within this revenue growth range. And the longer term model can also produce continued strong flow through of net income to free cash flow.

However, given the current turmoil in the global economy, the uncertainties this brings to companies across many industries and the specific business transitions our clients are facing, we are approaching our 2009 budget with the assumption that the factors that are impacting our performance in the second half of this year are likely to persist into next year.

This means we are planning for constant dollar revenue growth in 2009 that is similar to the constant dollar revenue growth we will achieve in, recognizing that we may fall below our longer term outlook. At this point in the budget cycle, it is too early to provide specific guidance for all the components of our 2009 financial performance. But we remain very focused on managing our cost structure with the objective to generate bottom-line results that far within that longer term outlook.

The great news is that our balance sheet is very strong. We have adorable and diverse business mix and we have the financial flexibility and capital structure to invest in high value offerings for our clients and provide strong returns to our shareholders.

Now let me turn the call back to Dave.

David R. Carlucci - Chairman and Chief Executive Officer

Thanks Leslye. All on all we are managing well in a tough market. We've taken the right steps over the past 15 months to manage our business for lower growth. That includes better cost and expense management and improving our cash flow, all while continuing to innovate for clients.

We're positioned very well. We're the undisputed market leader with a diverse portfolio, global reach and tremendous financial strength. We're at the heart that's helping our pharma clients implement new strategic and operating models, whether its growth strategies in emerging markets, new commercial models or evaluating the value of medicine.

And we're driving growth in new clients segments including generic companies, governments, payers and consumer health audiences. So, as we look at our broadening clients set and extensive capabilities, this gives us confidence in the long-term model Leslye described of revenue growth in the mid to high single-digits, balanced or better than balanced operating income performances and continued strong cash flow.

With that, let's open it up to your questions.

Question And Answer

Operator

Thank you. [Operator Instructions]. And our first question comes from the line of Larry Marsh of Barclays Capital. Please go ahead with your question.

Larry Marsh - Barclays Capital

Hi, thanks, and Dave good morning. Thanks for the update. Dave, really just a bigger picture update from you. We talk about sort of tone in the quarter; is it any way to differentiate what you saw earlier in the quarter versus maybe anything you saw differently, say, end of September, so far in October, especially as you think about your merging markets. And I'll just have a follow-up for that.

David R. Carlucci - Chairman and Chief Executive Officer

Okay. Well I'd say the emerging markets remained consistently a growth driver for our clients and for us. As I mentioned, I think, Larry, the overall environment for our pharma clients in terms of their market opportunity remains very much the same as its been for the last 15 months. All of the areas we called out that were leading to lower growth are manifesting themselves. And real new news is the issues everyone's wrestling with on current economic environment.

So, a bit of a shift to making it harder to sell value and return on investment and more shift to all the things that are just cost cutting from an orientation point of view on part of our clients.

Larry Marsh - Barclays Capital

Okay. And just a follow-up for that. I mean, I know this is sort of less than last year, so just everybody's expectations are too optimistic. Given we're in a global recession and it really even some of the comments that some of your key customers have made just in the last two weeks, why wouldn't you be having the face or tell us if you would have to be facing even another downsizing in your business as you think about 2009. And it seems like the last time we were in this sort of modest top-line for you guys was early 03, and then you were showing sort of low single-digit earnings. I think Leslye communicated a little bit higher growth.

So, maybe comparing to trash today versus what you saw then and then again why is it that some of these announcements aren't much worse than you would have thought as you go to 2009.

David R. Carlucci - Chairman and Chief Executive Officer

Sure. Well first of all, I think the major contrast for us from 03 is we have a much broader portfolio today. And so, as we look at the opportunities in other areas like generics and biotech and payer and government, it changes that picture a bit.

From a restructuring point of view, we took a fairly sizable chunk of our resource out this year and we still have ways to go in the fourth quarter. And I think as we look at that we got a fair amount of questions of why were we cutting so deep. We did it in anticipation of perhaps dealing in a lower revenue environment.

So, I think we get much more pinpointed as we move forward relative to what are some of the areas that may or may not have the growth perspectives that we see right now in the business. But, I think if you look at the U.S. marketplace we have said it would grow somewhere in the 2 to 4% range. Its closer to 1 to 2%. And we expect more of the same next year. If you look at our performance in the U.S., we had a pretty significant impact on the year-to-year off of our significant win last year, and would have put them kind of more in line with their full year performance.

So, we're already moving our focus towards emerging markets, just as our clients are and towards to the areas that they are very, very focused on and one of those is specialty. We've recently done an exclusive agreement with Caremark Therapeutic Services for specialty data. We have one of our large pharmacy chains in the U.S. where we've expanded and broadened our longitudinal prescription data.

So, lot of the investments we've made to move towards where our clients are going to take advantage of the significant biotech growth in areas like oncology, are manifesting some of the investments we've done. And so, we expect to see improved performance in some of those areas where we actually have a much stronger set of capabilities for the clients.

So, that's in our planning, although we are very, very focused on our cost and expense management, and are prepared to take steps to make sure that we can produce what Leslye took you through in terms of being better balanced or better than balanced going forward.

Larry Marsh - Barclays Capital

Okay. And finally just a clarification from Leslye. Looks like your stock compensation estimates or accrual for the quarter was a little bit lower than the first two quarters. I assume that's given the market environment. Do we think of that as a decent amount lower next year versus this year? And then on the tax rate, I know you're sort of announcing 31% for this year, but as you sort of think about the next three or four years and we back in that sort of 32 to 32.5% range or do you think 31 to 32 is a better ballpark.

Leslye G. Katz - Senior Vice President and Chief Financial Officer

Let me start with the first, Larry, if I can. As far as stock come for accrual, it does have some impact from the current stock prices. It's very hard to predict where that's going to go next year, and we certainly haven't made any decisions yet for next year as to what our future grants might be. So I can't give you a good outlook on that at this point.

As far as the tax rate, as I explained on the call, we got favorable ruling related to our legacy tax matters, gave us the ability to bring the rate down this year from 32 to 31. But again, I'm not able to give guidance for the tax rate for next year; factors that are going to affect it are not unlike the factors that affected it this year, with respect to settling an audit or getting a favorable ruling. I think what I have said is we see our tax rates in the low to mid-30s. I certainly don't see that changing.

Larry Marsh - Barclays Capital

Okay. And then finally just, 42 million acquisitions year-to-date. I know in the past, before all this you have said 70 to 100. I assume that's lower expectation now for 08.

Leslye G. Katz - Senior Vice President and Chief Financial Officer

Yes, I mean I think given the pace that we're on; we may not get to that 70 to 100. But our overall philosophy on acquisitions really hasn't changed. So, we continue to focus on getting the right strategic fit and the pace is going to vary year-to-year.

Larry Marsh - Barclays Capital

Okay. Very good.

Leslye G. Katz - Senior Vice President and Chief Financial Officer

We're very happy with the two recent ones we just closed as well. I think those will be very good additions to the portfolio.

Larry Marsh - Barclays Capital

Okay. Very good. Thank you.

David R. Carlucci - Chairman and Chief Executive Officer

Thanks Larry.

Operator

Thank you very much. And we'll proceed to our next question from the line of John Kreger of William Blair. Please go ahead with your question.

John Kreger - William Blair

Thanks very much. David, you talked a bit about the cut backs, the new cut backs you're seeing out of your clients. Can you just expand a bit more as they look to cut some of the work they are doing with you, what are the types of products and services being cut or are you seeing it across the board. And similarly, are there any particular geographies that stand out as apparently venerable.

David R. Carlucci - Chairman and Chief Executive Officer

Well, it's primarily focused in the tactical and of sales execution segmentation and sales execution areas. So, it really predominately has hit the SFE space. And it is a combination in some instances of data, but more the case in our consulting business. And so we're seeing strength in pricing and market access and portfolio strategy. We're seeing it in services and managed markets. But more of a weakness in the large markets in the SFE area.

John Kreger - William Blair

And has your strategy in responding to this to hold price, but to look for areas to cut for the client or to try to keep all the products and services but for perhaps cutting price.

David R. Carlucci - Chairman and Chief Executive Officer

No, I think in this period it's very important that we manage our price points and that if clients have to make selective decisions on value or assets that they want going forward, we can help them make those decisions. But this is not a situation where we're going to chase it on price.

So, the other key piece, I think is that we're not loosing the competition. And all you can hope to do in this period of time is follow the client, be responsive. They may delay more than anything else. But in the end, we're going to manage on the basis of providing more value to them as they assess where they are. We actually had a couple of very key wins in our I&A business in the U.S. in this past quarter. And so our competitive record remains strong.

John Kreger - William Blair

Great. Thanks. And then lastly, Leslye, a capital structure question for you. I appreciate the detail on your debt. What is your current thinking on debt leverage ratios? Where are you in that range of comfort?

Leslye G. Katz - Senior Vice President and Chief Financial Officer

Well, our leverage ratio, I'm comfortable with, certainly where it is right now. The two to three times EBITDA range which is a pretty wide range is something I think we can operate within very comfortably. But I'm certainly very comfortable with where it is right now, John.

John Kreger - William Blair

Great. Thanks very much.

David R. Carlucci - Chairman and Chief Executive Officer

Thanks, John.

Operator

Thank you very much. [Operator Instructions]. And our next question comes from the line of Randall Stanicky from Goldman Sachs. Please go ahead with your question.

Unidentified Analyst

Hi, good morning. This actually Agiana [ph] on behalf of Randall. I mean you mentioned that the slowdown is coming from basically your larger clients. Is that the tailor towards a specific geographic region? Or you're seeing that across the board?

David R. Carlucci - Chairman and Chief Executive Officer

Well we didn't say we sow the slowdown from our larger clients, we said we saw from our major markets. Consider that the top pharma markets across the globe. We actually saw six of our top 20 clients grow in double-digits. So, yes, the large clients are not growing at historical rates, but I wouldn't characterize it as that.

Unidentified Analyst

And my next question is regarding the restructuring plan. Now that you are actually bringing, expecting about 60% of the cost savings in late 08 implying 4Q. Also implying more modest savings for 09. When are you guys targeting to provide 09 outlook, so we can have a more visibility on 09 kind of -- and how to look in the company growth for 09.

Leslye G. Katz - Senior Vice President and Chief Financial Officer

Okay. Well, just to be clear, we are not generating more modest savings in 2009. We're going to generate the same savings we anticipated from this plan which is 55 to $60 million in 2009. We just happened, because we successfully implemented it more quickly, we were able to get more of that in this year. But, the plan remains well on track.

Historically, what we've done typically is provide some more guidance for 2009, when we announce our 2008 earnings. So that's what I would anticipate.

Unidentified Analyst

Okay. This is helpful. Thank you.

Operator

Thank you very much. And our next question comes from the line of Chitra Chandola [ph] of Kohinoor Capital [ph]. Please go ahead ma'am with your question.

Unidentified Analyst

Thank you. Firstly just looking at sort of sequentially Q2 to Q3 and some of the breakdowns you all have given, it would appear that the constant currency growth in the I&A piece actually seem to improve marginally. It was 2% in Q3 versus being flat in Q2.

But the sharp drop off seem to come in Consulting and Services. So if I'm correct at that, it sort of makes the question as we go into Q4, should we be expecting another round of restructuring because the challenge then seems to become our long-term basis if you are seeing mid to high single-digit revenue growth regardless of what's likely to happen in 09.

The challenge is going to be growing operating income if you'll plan faster than that. And that would make for a very consulting investment thesis. So, how you would all go about that and what would sort of be the next lag of sort of restructuring that one might perhaps expect as we go into 09.

David R. Carlucci - Chairman and Chief Executive Officer

Well you can see from our performance in the quarter that we obviously manage our utilization rates extremely closely. In Consulting and Services, we look at whether we fill or don't fill open positions. And of course, its still a growing business. What we saw was a fall off in closure rates in that business. So we saw our pipeline extend by about five days in the period and we also saw about a 25% degradation in the amount of businesses that was in the final sales cycles closing in the quarter.

Obviously we see some flip over into the four, but we'll watch very closely what happens in the fourth quarter. And basically we're planning and anticipating for more of the same in that business. That said, we have some variability and some levers that we think we can manage in this environment. And I'll have Leslye comment on further financial actions, but we have a pretty good handle on where we see things today. Of course it's quite volatile out there with what we're seeing in the global economy. But we think we have a pretty good handle on this business.

Remember that Consulting and Services continues to be an area that we see in combination with our information and analytics differentiates us in the marketplace, and has been important to our competitive record also in the last several years. Leslye, you want to...

Leslye G. Katz - Senior Vice President and Chief Financial Officer

Yes, just to elaborate a little bit I think we have continued to focus throughout 2008 and as we build our plans for 2009 we will continue to focus on some of those key elements of the growth in cost and expense. So those elements are data cost and talked about the fact early this year that we saw our data cost growth coming down in 2008 versus 2007 and we're on track to achieve that. The restructuring and as Dave mentioned, we did a very broad restructuring covering a large percentage, frankly of our employee population.

But, having said that, we are in the midst of building our more detailed plans for 2009. While I don't see something of that magnitude recurring, we certainly are looking again, across all the cost and expense elements of our business that continue to enhance the variability, manage our pace of hiring, manage our discretionary expenses.

So, I think that we remain very, very focused on being able to manage in this more variable environment. And I think we've demonstrated good work with that in 2008, and continue to focus on it for 2009.

Unidentified Analyst

Thank you. If I could follow-up. That is all fantastic, but as investors, the piece that's a little puzzling is, is the leverage or the operating leverage quite that dependent on revenue growth? Or is there something outside the revenue growth that you all can do on the cost side without cutting, obviously into the muscle of the organization.

And relatively in that big restructuring that did occur, does that leave much room or further reductions in cost without cutting into strategic projects and strategic plans. Or is it fairly limited at this point?

David R. Carlucci - Chairman and Chief Executive Officer

Well, I think we're getting a little bit ahead of ourselves. You have to remember that, in the last five quarters, the business has been much chattier. So, as you pointed out, we had zero growth in I&A. In the second quarter, we had 2% constant dollar growth. In the third quarter, we're dealing with quarter-to-quarter compares in many other businesses and of course our C&S business is getting much larger than it was five years ago by a long shot.

We haven't been discussing acquisitions as a component of this and the mix. And we do know that we are going to be moving as our clients are moving to investing in emerging markets and looking very closely at the larger markets that are seeing moderate growth. So, I think this is a very tactical approach on our part and I really wouldn't make broad based statements about variability in parts of the model as we go forward. I think we just have to remain very nimble and I think that's what Leslye indicated that we're committed to be.

Unidentified Analyst

That's great. And lastly you've talked about some data points on Q3, namely in terms of the fall off and closure rates and the degradation in business so forth in the final phases. So, how has that appear to trend as we've gone through what little of October we have seen?

David R. Carlucci - Chairman and Chief Executive Officer

Well, clearly that was a statement on Consulting and Services. And traditionally in this period and as is the case now this is the period where we start to see the pipeline build early in the quarter. We're seeing that phenomenon. But again it will all be what do we see from a trajectory on closure rates and it's very early to tell on that right now.

Unidentified Analyst

Okay, great. Congratulations on handling these very difficult times quite well. Thank you.

David R. Carlucci - Chairman and Chief Executive Officer

Thank you very much.

Darcie Peck - Vice President, Investor Relations

And Tony I think that's it for questions. Why don't I turn it back to Dave just to wrap up.

David R. Carlucci - Chairman and Chief Executive Officer

Okay. Well, I appreciate very much for your time and attention. Obviously the environment is challenging for all industries. But we feel very good about where we're positioned as a company. We feel good about the industry we serve and we very much look forward to closing out the year and speaking to you again after that. Thanks for your time.

Operator

Thank you very much. Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines and have a great day everyone. .

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