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Executives

Jill Baker - Vice President of Investor Relation

Josef Von Rickenbach - Chairman and Chief Executive Officer

James Winschel - Senior Vice President and Chief Financial Officer

Analysts

Todd Van Fleet - First Analysis

Charles Rhyee - Oppenheimer

John Kreger - William Blair

David Windley - Jefferies & Co

Randall Stanicky - Goldman Sachs

Eric Coldwell - Robert W. Baird

Douglas Phil - Barclays Capital

PAREXEL International Corp. (PRXL) F1Q09 Earnings Call October 28, 2008 10:00 AM ET

Operator

Good morning ladies and gentlemen. Thank you for standing by. Welcome to the PAREXEL International First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. (Operator instructions). And as a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Jill Baker, Vice President of Investor Relation. Please go ahead.

Jill Baker - Vice President of Investor Relation

Thank you and good morning everyone. The purpose of this call is to review the financial results for PAREXEL’s first quarter of fiscal year 2009. With me on the call today is Josef von Rickenbach, our Chairman and Chief Executive Officer and James Winschel, Senior Vice President and Chief Financial Officer. Thank you for joining us.

We would like to begin by stating our standard Safe Harbor disclosure language. Various remarks that we may make about future expectations, plans and prospects for the company constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors. These factors are discussed more fully in the section entitled Risk Factors of the Company’s Annual Report on Form 10-K for the quarter ended June 30, 2008, as filed with the Securities and Exchange Commission on August 28, 2008, and in our earnings press release issued yesterday.

In addition, any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our estimates change, and therefore you should not rely on these forward-looking statements as representing our views as of any date subsequent to today.

During this call, we will refer to certain financial measures, which have not been prepared in accordance with Generally Accepted Accounting Principles. When discussing numbers or margins related to revenue, direct costs, selling, general and administrative expenses, income from operations, income taxes, net income, and earnings per share, we may refer to adjusted results. These adjusted results may exclude the impact of unusual positive or negative items including those related to foreign exchange, acquisitions and divestitures, special charges, restructuring reserves, adjustments to restructuring reserves, and certain tax items.

As always, our discussions today concerning growth rates and margins will be based upon service revenue and related costs, and will not include revenue and costs related to reimbursable out-of-pocket amounts.

A reconciliation of the non-GAAP financial measures with the most directly comparable GAAP measures is available in the press release we issued yesterday which may be found in the Investor Relations section of our website at parexel.com or will be discussed during the course of this teleconference.

We would like to bring to your attention some improvements that we made with respect to the way we report backlog in an effort to provide greater clarity to our backlog reporting. We previously reported gross new business wins and netted out the positive or negative impact from foreign exchange in that line item. We are now reporting the impact from foreign exchange as a separate line item.

We feel that this is the appropriate way to present the information because the impact of foreign exchange really has no relation to the new business that was won during the quarter. In stead it relates to the backlog that existed at the end of the previous quarter and how that has been impacted by exchange rate during our course of the current quarter.

We are also now reporting additions to the backlog that came from acquisition as a separate line item. None of these changes impact the interim backlog number in this period or in prior period, but it does impact the way in which we report gross and net new business as well as book-to-burn ratios.

On our website, we have provided current period and two years of historical data reflecting this change to business and backlog in order to assist investors. You can access a PDF report titled Q1, 2009 additional financial in the additional financial portion of the Investor Relations section at parexel.com.

I would now like to turn the call over to Mr. Von Rickenbach.

Josef Von Rickenbach - Chairman and Chief Executive Officer

Thank you, Jill. I would like to review some details for the quarter and then Jim will provide more information on the financials. After that we will open the call to any questions you may have.

For the quarter ended September 30, 2008, service revenue was $263 million compared with $208 million in the same quarter of the prior year, an increase of 26.4%. Excluding the positive impact of foreign exchange of $9 million in the quarter, revenue increased about 22%. The net impact of acquisitions and divestitures equated to $18.2 million in revenue in the current quarter and $2.5 million in the first quarter of the prior year. Excluding FX and the net impact of acquisition and divestitures revenue grew 14.7% year-over-year.

On a sequential basis, revenue in the September quarter was down 3.4%. Compared with prior expectations, the revenue short fall in the quarter was primarily attributable to the negative impact of exchange rates and to lower performance by Perceptive Informatics.

For the first quarter of fiscal year 2009, the Americas represented 38.9% of service revenue versus 38.5% one year ago. Europe, the Middle East and Africa represented 53.4% versus 54.2% in the first quarter of fiscal year 2008. And Asia-Pacific was 7.7% of revenue as compared with 7.3% one year ago.

During the quarter, the largest client represented 8% of revenue; down from 9% in the September quarter one year ago, the top 5 clients represented 27% down from 31% one year ago, and the top 20 represented 54% down from 56% in the September quarter last year. As a percentage of total service revenue, operating margin was 8.4%, up from 7.9% in the September quarter one year ago. In dollar terms operating income was up about 33%.

In the first quarter, diluted earnings per share came in at $0.23 versus $0.17 in the first quarter one year ago, an increase of 35.3% year-over-year. The $0.17 in the September of 2007 quarter is adjusted to exclude a prior period net tax benefit as noted in our press release. The current quarter's result include a $1.65 million charge related to the unwinding of interest rate hedges and the write-down of fees associated with the company's line of credit. Without those charges EPS would have been $0.25.

I would now like to walk you through the new business and backlog performance for the quarter. Given the quarter gross new business wins were $347 million and cancellations reduced backlog by $83 million, which represented 4% of last quarter's ending backlog. The quarter's net book-to-burn ratio, which we defined as gross new business, less cancellations divided by service revenue was approximately 1.

During the quarter, we have in addition to backlog of $117 million from the ClinPhone acquisition and a negative impact to backlog from foreign exchange of $116 million. Our ending backlog totaled $2.061 billion.

In terms of new business we were disappointed with the level of wins in the quarter. Normally, we expect a drop in gross new business wins in the summer months of July and August and then they pick up in September. However, it didn’t workout this way this year. We started the quarter with a strong portfolio having proposals and also had a good level of proposal flow during the quarter. We believe that more aggressive sales competition prevented us from achieving our sales targets and our hit rate declined. We intend to reclaim our market share and have taken action to regain sales momentum.

I know that there have been a number of questions and concerns recently about what is happening in the small biopharma segment with regard to funding. On that topic, I would like to simply say that we have not experienced a pullback from our small biopharma clients during in the first quarter.

Shifting tracks now, I have to say a few words about ClinPhone. The acquisition has proven to be a great strategic fit and we have received positive feedback from clients. However, some short-term acquisition related challenges prevented us from achieving our revenue and sales target in the Perceptive business in the first quarter. We believe that these issues are also mostly (inaudible) but we are now strongly focused on sales and growing the business.

We continue to feel very positive about the many benefits that ClinPhone has brought to the company in terms of leadership, employee talent, product and services, and belief that we are now well positioned with regard to our technology portfolio. At the current time, we are also pleased with the progress that we are making with the integration of ClinPhone including the realization of the protective synergies.

I would like to say a few words now about our forward-looking guidance for future performance. Given that approximately two-thirds of the company's service revenue is generated outside of the United States. We have been significantly impacted by the dramatic changes in foreign exchange rates and more specifically the substantial strengthening of the US dollar versus the Euro or the British pound. In light of these factors it is not surprising that we have to revise our expected performance for the second fiscal quarter and for the fiscal year overall.

Jim will take you through the details of the guidance in a moment. However, I would like to point that approximately 70% of the expected reduction in service revenue is driven by the movements in foreign exchange rates. But it is very difficult to manage the company, especially a global company at time of such significant currency volatility, I want to assure investors that profitability remains a key focus for us.

Now I would like to take a step back for a moment and take a much broader global view. These are clearly challenging times as evidence by the tremendous upheaval in the worlds markets. PAREXEL like many other companies has been impacted by the swings and the uncertain political environment in the United States. I do believe however, that the longer term fundamentals of the industry and our company are sound. More than ever the revitalization of the biopharmaceutical industry requires strong biopharmaceutical services company support provided by companies like PAREXEL.

Importantly, we have several parts of specific advantages that will help us to navigate these uncharted waters. These advantages include our industry-leading technology offering, which will help us to continue to improve product development and reduce process inefficiencies for both our company and our clients. We'll also be in a position to increasingly take advantage of the significant investments we have made over the past years in our global foot print. [Variety] has become critical for our clients as the overall their approach to drug development and for our company as we manage our own internal costs.

And finally, I firmly believe that the refinements that we're making to our business model across the company, but most notably in the CRS business will translate into a significant competitive edge.

With that all said, I would like to turn the call over to Jim, who will provide more detail on our financial results.

James Winschel - Senior Vice President and Chief Financial Officer

Thanks, Joe, and good morning, everyone. During the first quarter, CRS service revenue increased approximately 27% compared with the prior-year quarter, driven by strength in the Phase II through 4 portion of the business.

CRS same store or constant currency service revenue growth was a strong 18.5% in the quarter on a year-over-year basis. This excludes the APEX acquisition, which contributed approximately $6.7 million in the current period and [$2] million in the prior year period in the $9.5 million positive impact of foreign exchange movements in the current quarter. Compared with the fourth quarter of fiscal year 2008, CRS service revenue was down $9.2 million or 4.3%. As a result of a normal seasonality and the impact of the stronger US dollar, partially offset by a much improved performance in Phase I.

CRS gross margin was 35% during the first quarter, up 4-10ths of a point from 34.6% one year ago and up from 33.7% in Q4 of fiscal year 2008. The year-over-year increase in Q1 occurred as a result of improved productivity and efficiency. The sequential increase of 1.3 points was reflective of a rebound in capacity utilization in the company's Phase I business.

Quarterly service revenue at PCMS was essentially flat year-over-year. During the first quarter, growth in PAREXEL Consulting was offset by a decline in medical communications related in part to the disposition of Barnett Educational Services and targeted withdrawals from certain unprofitable service lines.

On the same store, constantly currency basis, PCMS service revenue was up 1.7% in the quarter somewhat impeded by signature delays in the consulting business. During the quarter, PCMS gross margin at 33% increased by 1.6 points compared with last year, but was down 2.5 points sequentially. The year-over-year improvement was the result of stronger results in both the consulting and medical communication businesses. The sequential decrease resulted from the normal seasonal decline in medical communication, but was also impacted by the reporting of some severance costs in the PCMS segment.

Quarterly service revenue in Perceptive Informatics was up 64.8% year-over-year. Excluding $1.5 million in revenue from ClinPhone and a small negative impact of foreign exchange, same store constant currency service revenue was $19 million, up 4% on a year over year basis.

The low growth rate was partially due to signature delays and some disruption to the business associated with the ClinPhone acquisition. It is important to note that the acquisition of ClinPhone has been approached as a merger where Perceptive and ClinPhone will be and are being operated as one entity. As a result it will become increasingly difficult to meaningfully segregate the results of these operations into their original component parts as we go forward.

Perceptive's gross margin in the quarter was 35.9%, down 4.2 points from the prior-year quarter and down very significantly from the level achieved in the fourth quarter of fiscal year 2008. This decline resulted from several factors, including a big unfavorable swing in contract signature activity, onetime expenses related to the termination of a contract with a pre-acquisition Perceptive supplier for work that will no longer be required, and severance costs for a small number of former Perceptive employees.

On an overall company basis, gross margin for the quarter was 34.9% compared with 34.6% last year with strength in CRS and PCMS being partially offset by the decline in Perceptive Informatics. During the second quarter of fiscal year 2009, we expect to see a small increase in gross margin.

SG&A spending in the first quarter was 21.9% of revenue, down from 22.6% in the September quarter one year ago and down from 22.1% in the June quarter. In dollar terms, SG&A spending was up 22.5% in the year-over-year basis due to the $6.7 million impacted of the ClinPhone acquisition, $1.4 million related to the APEX acquisition, $1.7 million from foreign exchange movements, and other costs incurred to support strong revenue growth.

The sequential decrease in SG&A was caused by several factors including lower employee related cost and decrease in professional fees, these decreases were partially offset by the inclusion of ClinePhone SG&A expenses throughout the half of the quarter. During the second quarter of fiscal year 2009, we expect SG&A as a percent of revenue to increase from Q1s level and then to decrease for the remainder of the year.

For the quarter depreciation expense equated a 3.8% of service revenue up from 3.6% during the first quarter of last year. Amortization expense was eight-tenths of 1% of service revenue in the quarter versus four-tenths of 1% one year ago. Amortization of intangibles related to the ClinPhone acquisition totaled approximately $870,000 for the partial quarter. Amortization as a percent of service revenue will increase during Q2 with the dollars of ClinPhone amortization doubling to reflect the full quarter's impact.

Operating margin in the first quarter was 8.4% of service revenue, up 50 basis points from 7.9% in the September quarter one year ago. We expect operating margin to be in the 7.4 to 7.8% range during the second quarter, but still expect to be in the 10% range for the full fiscal year. We believe that we can achieve much higher levels of operating margin performance during the second half of the fiscal year in conjunction with more aggressive cost control measures and the projected improvements in Phase I with Perceptive Informatics and medical communications that we have been describing for sometime now.

Other expense was $223,000 in the quarter with net interest expense of $2.7 million being offset by foreign exchange gains. The $2.7 million of net interest expense included $1.65 million in onetime charges related to underlying and debentures great hedges and the rollout of un-amortized loan fees related to the company’s old line of credit, if you are forecasting approximately $1.5 million of other expense during Q2.

PAREXEL's first quarter tax rate was 35.4% compared with an adjusted 38.7% in the prior year quarter. At this time, we are projecting a cash rate of approximately 39% for the second quarter of fiscal year 2009 and approximately 36% for the full fiscal year. Based upon current projections we will have an increase in non-benefit able loan losses during the second quarter, which will temporarily drive our tax rate higher.

Net income of $13.6 million compared favorably with $9.9 million in the first quarter of fiscal year 2008 up 37.8%.

Moving on to the balance sheet net receivables stood at $262.1 million at the end of September. Taking into account gross revenue of $364.7 million for the quarter, DSO splitted 66 days an increase of 9 days from the September quarter one year ago and an increase of 3 days from the June quarter. The sequential change in DSO is mainly driven by a reduction in gross revenue.

During the quarter cash flow utilized by operations totaled $6.3 million. Other cash outflows included $185.3 million for the acquisition of ClinPhone, $19.2 million for capital expenditures mostly related to hardware and software purchases and leasehold improvements and $4.3 million from foreign exchange movements.

Cash inflows included $208.6 million in additional borrowings under the company’s line of credit and $2.7 million in proceeds from the issuance of common stock in conjunction with the company’s stock option plan. Netting the inflows and outflows resulted in [increase] in cash of $3.8 million from the end of June leaving us with the balance of $48.2 million.

With respect to the company’s borrowing we had $274.6 million outstanding as of September 30, 2008 under our new line of credit. For the $150 million tranche of this debt we have an interest rate hedge in place and now in cost of approximately 5.3%. For the second tranche of about a $125 million we have a current all-in interest rate of 5.5%. At the present time we are comfortably in compliance with our loan covenants and based upon the guidance which we released yesterday expect to continue to be in compliance.

Finally, with regard to the earnings guidance, which is contained within our press release, we reduced both the low and high end for the fiscal year 2009 revenue guidance by a $115 million. Taking into account recent exchange rate levels some market headwinds and recent net new business wins.

As Joe noted the majority of the change were approximately 70% which related to the substantial strengthening of the US dollar. Full year EPS guidance was also reduced taking into account that the majority of the profits are earned outside of the US. While were able to offset a significant portion of the foreign exchange translational impact on our earnings, the FX movements have been dramatic and precipitous. As a result we were forced to take our expected performance down for the second quarter, but believe we have effectively mitigated the impact in the second half of the year.

Rachel, at this point we are ready to begin the question-and-answer period.

Question-And-Answer Session

Operator

(Operator Instructions). And the first question comes from the line of Todd Van Fleet with First Analysis. Please go ahead.

Todd Van Fleet

Good morning guys. I want to give a chance to elaborate a bit more on the sales slowdown that you said you had seen that was kind of unanticipated in the September quarter? And given the revenue performance I guess in PCMS and Perceptive Informatics, if you could provide us a little bit more detail as to whether the slowdown was observed across business segment if it was just proportionate in CRS, what the issues where and why we shouldn’t have broader concerns I guess, regarding demand out there in the marketplace. Thanks?

Josef Von Rickenbach

Hi Todd, Sorry, you said what? Revenue in PCMS and what was the third part of the question?

Todd Van Fleet

Well, with respect to the general the unanticipated slowdown, I guess in bookings activity so the book-to-bill ratio one, in the first quarter here obviously problematic below what we have seen in the peers and below I think we would have expected for you guys. So, one, where was that weakness, was it in CRS? Was it across the business lines? And then, can you talk about that in the context of demand that you are seeing out there in the marketplace just broadly speaking?

Josef Von Rickenbach

Yeah. Okay, so, in terms of PCMS, I will take them out of the picture in this respect. I would say they were pretty normal and pretty much what we expected. And in CRS and in Perceptive, we had lower bookings than what we expected. As I said, this was sort of an interesting happening defense that we usually expect a slower period in the beginning of the summer quarter which would be July and August and we expect especially this time because we have a very strong fourth quarter and probably some of the contract that might have possibly been in the first quarter, not into the first quarter, but I am sure, that’s happening in the couple of instances. And then we expected a strong September. We had a very good flow of proposals. We had a very good beginning portfolio of proposals for, actually for both businesses. And then in the end there was also somewhat disappointing. So I hate they basically was lower than what we expected and there is a variety of reasons for them, there is not just one reason. So basically that’s kind of a pattern.

Todd Van Fleet

First to understand that a little bit better Joe then, so what you are saying is, you haven’t really seen any diminishment in terms of the demand for PAREXEL services either within Perceptive or within CRS. And again I don’t want to put words in your mouth, I just want to be clear as to what we understand the story to be that there is not a diminishment in demand for services its just that for a variety of reasons, your hit rate fell of the table to a certain degree?

Josef Von Rickenbach

Well I don’t call it falling off the table. I mean it was just lower. And I will take you though the first quarter that probably was true the way you put it.

Todd Van Fleet

Thanks.

Operator

And the next question comes from the line of Charles Rhyee with Oppenheimer. Please go ahead.

Charles Rhyee

Yeah. Thanks for taking the question. You know, I would to maybe touch on that a little bit more, I mean you are talking about the revenue guidance -- in relation to the revenue guidance. You talked about 70% of your change in the revenue coming from FX, can you talk about what the other 30% is related to? And then secondly, in general if you could talk about -- you mentioned that the FX swings or definitely impacting 2Q, but you feel that you can mitigate that for the back half of the year? Can you just explain a little bit more what steps you are taking and how that works through your P&L?

James Winschel

Yeah, so as we said 70% of the guidance change on revenue is related to FX, so at least 30% and we would say that roughly half of that is derived from the new business performance in the beginning part of the year and about half of that is rollout revenue expectations for Perceptive Informatics.

Josef Von Rickenbach

Yeah Charles, with respect to the EPS situation and everything as you know, the foreign exchange rates change very dramatically, just over about the last month or so and I guess the decline had started to some extent at the beginning of August, but seemed to have really pickup momentum. And as a result of that it was a little bit more difficult for us to react to the magnitude of the change here in the second quarter. However, with respect to the third and fourth quarter we of course have more lead time and so we can look out there and see opportunities to differ SG&A higher into hold often some facilities expansions to accelerate our move into low cost country activities. We are also quite benefiting from things like the rollout of our tax rate and beyond that I could just add a few other thoughts which is that we did have some cushion in our forecast which we had to use to offset some of this and of course we over achieved in the first quarter by a couple of pennies and so a few other things like that that I could mention and I have actually a long list of things, but that sort of gives you a sense of other things.

Charles Rhyee

Okay. So just to be clear, what you are saying here is, we couldn’t react to the magnitude of the FX change in the current quarter, but really its not going to give function where we are hedging out some of that risk with it through sort of hedging contracts on the foreign exchange is really a function of pulling back on some expenses and heading into some cushion we might have dealt in previously?

James Winschel

Well Charles, I will just point out, FX of course also affect costs in a big way. In other words you know the costs outside of the United States also go down. And so you know ultimately it sound like the profitability from outside of US they get impacted by the profits. So there is basic built in hedge through the cost infrastructure that we have outside of the Untied States.

Charles Rhyee

No certainly, I understand that. Okay, thanks. Thanks for the comments.

Operator

And the next question comes from the line of the John Kreger with William Blair. Please go ahead.

John Kreger

Hi, thanks very much. Joe just to expand a bit on the kind of the tone of demand that you are seeing, as you talk to your clients, I know you said that the RP flow was pretty good in the quarter. It sounds like it was about what you expected. What's the sort of commentary you are seeing out of your clients right now, as they think about their coming here and how they plan on their budgets and how much they are out sourcing? Are you seeing an increase or decrease in activity and where are your expectations there?

Josef Von Rickenbach

I would say, at the current moment, I think there is a little more turn than normal, which is to say I believe that a number of our clients are looking towards the New Year and probably in which they have to operate. And as a result are making some decisions in and out. So I feel that many of them are more deliberate and more strategic in the way they out source, but others are also making some adjustments in their portfolios, you know, getting ready, I guess, for a potentially changed environment.

John Kreger

Okay. And you made the comment that it sounded like you are suggesting that your hit rate declined at least in part due to pricing from some of your competitors. And you said you've made some adjustments to respond to that. What does that mean? Does that mean you or willing to perhaps sharpen your pencil and price a bit more aggressively to get the hit rate back up?

Josef Von Rickenbach

Yeah. I mean, I would say, in the past, we know we have often obviously had this discussion and my answer often has to be normal. You know, things have to be normal in this quarter, I would say prices has been a big factor than normal. Having said that, it was not actually, certainly the most important factor and you need to kind of keep that balance for sure. And I also believe that as I said in my commentaries, we have a number of competitive advantages that we have to balance over the last several years actually, you know, that will allow us to be really competitive and we will be as competitive as we can to basically make sure that we don't lose market share.

John Kreger

Okay. And then just one last question. You talked about some weakness in Perceptive, can you just give us a little bit more there, was that weakness on the ClinPhone side of things or the legacy Perceptive and how comfortable are you that those issues have been resolved as you move into the December quarter?

Josef Von Rickenbach

Yeah. To the extent that there were issues I would say they were more on the ex Perceptive side. I mean generally things with ClinPhone are basically pretty much what we expected. And I would say maybe in [hind site] some of the, you know, less than ideal ramps that we have seen might have been expected. I do feel at the moment that we are in a good spot and is good leadership and particularly been happy with the leadership that Steve Kent is providing to the business and I believe we are on a good track now.

John Kreger

Great, thanks.

Operator

And the next question comes from the line of the David Windley with Jefferies & Co. Please go ahead.

David Windley

Hi, good morning. Thanks for taking the questions. I wanted to try to understand a little bit better Jim on the FX. You and I have discussed this already once. But as I looked at fiscal 2008, it appeared that the benefit to Parexel's revenue from FX for the year was out sized or proportionally larger than the negative hit to he cost lines. Said differently, the margins were actually skewed up so not only the profit dollars, but the actual margin was skewed up by FX in fiscal '08. So what I am interested in maybe why that was perhaps hedging strategies in fiscal '09 are different than what was in place in '08. But barring that as we look at the strengthening dollar in fiscal '09, why shouldn’t I then assume that that will have a negative impact not only on profitability, but on profit margin that will create a headwind on profit margin, help me to understand that please?

James Winschel

I think I have mentioned to a number of people over the last few months with respect to this issue is that last year as we saw the benefits of the weakening dollar, it did create some additional profit opportunity. And you have to remember when you look at Parexel's profile we have a very strong presence in places like Asia, in places like Eastern Europe, South America, South Africa, where we do have cost advantage. And so that certainly helped. But at the same time, we took the opportunity with the higher levels of profitability, to accelerate some of the productivity and efficiency programs that we were working on. Now as we go into this new fiscal year and a different environment. By the way just go back to the first quarter for a second. We had about $2.5 million of foreign exchange gains on the other income line and actually had a benefit I think around $2.5 million on the operating line in this particular quarter. So it was -- even though things were moving it was still a good period for us. Now as we go forward into this new fiscal year though, the remaining nine months of this fiscal year, we need to do the counter of things that we have done in the slow down some of our projects and push off some of the facilities that we were planning to expand and those kind of things in order to offset the impact that now foreign exchange will have back in the other direction.

David Windley

Okay. So a couple of question, I guess first, so had in aggregate something on the order of $5 million in FX benefit in the first fiscal quarter?

James Winschel

Well, that’s true. But then we also, if you remember took $1.65 million charge related to the unwind of the fees and reported that on our GAAP basis. And so that helped us in reality, we came in $0.02 a share I guess better than expectations because of the GAAP expectations were down around 21 or so.

David Windley

Right

James Winschel

I know (Multiple Speaker)

David Windley

Go ahead, sorry.

James Winschel

Over and above that we took another, I don’t know $1 million or so in costs and fees for the write-off of this supplier contract in Perceptive Informatics, about $500,000 in costs for the severance costs that we had in the quarter and another $200,000 related to the ClinPhone acquisition this also appears in other income related to the write-off of in process R&D. So there were a number of things that went back in the other direction. I don’t (inaudible) that we just had the windfall and there wasn't stuff going the other direction.

David Windley

Right. It seems clear there are several different things in there. I guess what I'm not following is, is it just because you have so many different currencies that the movement and the proportional movement at revenue and cost lines are going to vary a lot?

Josef Von Rickenbach

I mean its very, very complex, and I'm not sure people always appreciate this. But for example, in the first quarter on a year-over-year basis, the U.S. dollar strengthened versus the pound, but weakened significantly versus the Euro. And so we have had sort of things going in both directions there. And right now even as we speak and we see a huge strengthening of US dollar. If you look at the end it's just the opposite type of experience. So we're doing business right now in 52 different countries and it’s a complex operation.

James Winschel

And then we will have a benefit on the other income line, I believe, based on where we're at today in the second quarter, for example.

David Windley

Okay. And then the second, I guess, looking at your comments around productivity, is it possible to quantify or approximate the amount, call it additional discretionary spend that you pulled forward as a result of the FX tail wind? And then what kind of productivity benefits will those investments produce, and when do you expect to start to see those?

Josef Von Rickenbach

David the clarification that we have provided is in the EPS guidance that we gave, and so you can do your calculations and figure out what you want in terms of what the estimated FX, detriment would be and what, would need to happen. I also mentioned, however, that we did have some cushion in our forecast. And so one of the first steps they take is, that we are okay, I'm going to offset some of this with the cushion, and et cetera.

David Windley

Right. Okay. And then in Perceptive, the integration-related issues and the write-off of the vendor contract, was that vendor contract, was that a ClinPhone contract, or was that on the Perceptive side? It's wasn't clear from your comments whether, the integration-related issues were within ClinPhone or if they were Perceptive's?

Josef Von Rickenbach

I understand. So if we were to write-off a ClinPhone contract, that item would go into purchase accounting. In this case it's an old Perceptive contract and therefore, has to go into operations.

David Windley

Okay. Thank you.

Operator

(Operator Instructions). And the next question comes from the line of Randall Stanicky with Goldman Sachs. Please go ahead.

Randall Stanicky

Great. Thanks. I just have two brief questions. First Joe can you just clarify the John's question when you talk about pharma making adjustments are you effectively saying delaying decisions?

Josef Von Rickenbach

Well, basically I would say two things to that. I want to emphasize that I think, currently speaking, I think they have crossed the line to really be more strategic in that out sourcing. We see this in many cases now. And I actually really have seen this number of times before, but certainly seemed to hard to talk. I actually really believe that this is not happening. But I also believe that in the short-term some portfolio management is happening.

Randall Stanicky

I understand that. I understand the strategic. I just don't understand so portfolio management, does that effectively mean that they're taking longer to decide on contracts?

Josef Von Rickenbach

They're taking longer to decide on some contracts.

Randall Stanicky

Okay.

Josef Von Rickenbach

They are accelerating some contracts. They're also canceling some contracts. There is more turn than normal, I would say.

Randall Stanicky

Okay. And then the second question, when you see more aggressive sales competition, can you just clarify, is this from one company, or is this from several perhaps smaller companies who are looking to drive increased backlog activity or bookings activity over a short period of time?

Josef Von Rickenbach

Well, it's argued to answer that question definitively. You know, since we basically compete on a broad basis across the world. So I would say that the comments relate generally to the marketplace. Having said that, our normal competitors most of the time are roughly names that you would well know. So in other words, no, we don't tend to usually compete with little companies.

Randall Stanicky

Right. You've talked historically about I think by your numbers the top 7 or so make up slightly less than half of the market. So clearly a fragmented market so as we think about your talking points or your discussion around increased sales competition, is that competition from the other half of the pie or the pie that you sit in?

Josef Von Rickenbach

I would say it's probably both, to some extent. So I wouldn't kind of separate it out. I mean, as I said, I have also no information or indication that it's set, that it's different between the two.

Randall Stanicky

Okay. But you're not seeing any pricing deterioration based on that increased sales competition at this point?

Josef Von Rickenbach

No, not per say. But I think, as I said price has come up more often as a topic than would have been the case in prior periods.

Randall Stanicky

Understood. And then my last question, there's been a little bit of discussion around this topic. I'm still a lot confused. As we think about marketplace headwinds, that phrase, can you just rank, what are those headwinds? If we think about pharma adjustments or delay decisions, we think about biotech customer base we think about sales competition. Can you rank first top three or four as PAREXEL sees it in terms of market headwinds in the marketplace right now?

Josef Von Rickenbach

Yeah. And I'd say I think it's a direct follow on to the answer that we just had. I think there is more turn in that sense, a little more uncertainty. For instance, actually, we're experiencing a very good demand environment right now for Phase I. And as the comments I made before were relating mainly around the Phase II and III business, dynamics of Phase IV are again a little different. The dynamics around Perceptive are again different and we have already commented a lot on those. So it really you know, it's more uncertain environment. That's what I would say, than would have been the case six months ago or nine months ago.

Randall Stanicky

Okay. Thanks a lot.

Josef Von Rickenbach

You are welcome.

Operator

And the next question comes from the line of Eric Coldwell, please go ahead.

Eric Coldwell

Thanks just a few things. The first is on head count. We're looking at head count this quarter, I think, in the press release it says 9,180 people. I know ClinPhone brought in, my best estimate would be 750 or so. You would still have shown a pretty dramatic increase in head count quarter-to-quarter during the September period. Can you tell us what's happening there, what where was the massive hiring coming from; and frankly was that a mistake given the book to bill, and is that something that we can hope to see a slowdown in staffing in front of a slower top-line growth rate?

Josef Von Rickenbach

Yeah. Eric, the ClinPhone acquisition brought about 750 plus employee maybe somewhere around 60 and. So it was not a huge increase beyond that, but it was a significant increase, and I would say the single largest increase came from Asia-Pacific region. And I'm also happy to say that our turnover is coming down, so as a result, obviously recruitment, just from that factor would slow down, and I would also expect that over and above, that given our revenue outlook and growth, outlook is a little less our hiring has also come down somewhat.

Eric Coldwell

With the slowdown in demand for Perceptive and some of the, I think you used the term headwinds that that popped up there. Was ever rated to what -- I think most people on Wall Street feared would happen, in other words a reduction in demand from CROs that were using ClinPhone's products and services or was it something outside of your competitors now having to choose on whether or not to use PAREXEL as a vendor.

Josef Von Rickenbach

Well on that note actually Eric I'm very pleased with the way the situation adopt and how we have handled it. I think actually we believe we will retain most of those clients, although it required some discussion. But as I said heading really in a very good direction, but if I had to kind of comment on it, I would say overall, it would happen actually a number of times when these kinds of mergers happen. I didn't expect it maybe to the degree that it did in this instance, but I think clients for a while, a few weeks, and that’s really all it takes, kind of take a wait and see perspective, and they wait maybe talked to, they want to understand exactly what this means. And a few weeks or a month or two go by very quickly, and of course, this makes all the different. And I think once clients understand what's happening and how we are moving forward and what the benefits are to them, I think they're really excited. And we're also starting to see that now in the traction. So I think it was a just a little bit of a delay if anything and I would say those are mainly the headwinds in our summary.

Eric Coldwell

Okay. I personally, I am not sure, there is lot of value in data point but the market is seems to be very interested in hearing about RFP volumes in the average contract size. A couple of your peers have commented on that. Would you be able to provide any color beyond your early comment that marketing activity was fairly strong at least to start the quarter?

Josef Von Rickenbach

Well the average contract size has barely changed in the first quarter. It's basically, and in term of what we propose its almost exactly the same, so that’s ticked down that’s very little. So basic remains the same as it has been actually for two or three quarters and most of the fiscal year '08.

Eric Coldwell

And the volume of RFPs, Joe?

Josef Von Rickenbach

The volume of RFPs therefor in the first quarter was basically pretty normal.

Eric Coldwell

Okay. Jim, on the comments on cushion and the guidance, which allowed you to really-- despite the pretty severe revenue reduction for FX, which I think most of us expected, the initial headwinds on ClinPhone and the booking in the quarter. Despite all of these things, you're only taking earning down a few cents. The question at this point would have to remain, is with your new guidance, have you still a cushion for a further strengthening of the dollar, and that was not clear to me, is whether you've eaten up all of the cushion for the dollar strengthening such that where we had to see an additional move. We might be going through this in an iterative process for the remainder of the fiscal year. In other words each quarter the dollar strengthens and we have to come back and cut our numbers, or have you a little lot of cushion left such that we might have a little wiggle room today?

Josef Von Rickenbach

Eric that piece of the cushion is used up. However, our people are certainly mindful of this possibility, and we are continuing to look at all opportunities to counter whatever, you know, we might experience going forward.

Eric Coldwell

But, Jim, thank you. And what day did you set your new guidance at? In other words, in September you told us that you used the dollar rate at the end of August. What dollar rate against the pound and the Euro, what day did you synchronize it?

James Winschel

It was last Friday.

Eric Coldwell

Great. Final question, just a clarification in the prepared remarks there was a comment about PARAXEL expecting a small increase in the grandchildren in the fiscal second quarter. I wasn’t sure if that was related specific to Perceptive or if that was overall for the firm despite Perceptive’s challenges?

James Winschel

Well, I think we'll see an improvement in gross margin in Perceptive for sure, but not only Perceptive.

Eric Coldwell

Also for the firm?

James Winschel

Yes.

Eric Coldwell

Okay. Thanks very much.

Operator

And the next question comes from the line of Douglas Phil with Barclays Capital. Please go ahead.

Douglas Phil

Hi, good morning. Jim, I was hoping if you could sort of walk me a little bit or provide us a bridge in terms of the diagrams for the second quarter, numbers looking at neutral point, the dollar has obviously strengthened subsequent to in the first quarter, so obviously you have obviously experienced a very significant headwind there as well as the fact there is the bookings shortfall. I understand that you should get a full quarter from ClinPhone. But it still seems to me a little bit of a stretch to have revenues come up sequentially. So I was just wondering if you considered growth around how you see certain pieces falling into this range. What’s the sequential effect headwind, how much sort of it will impact in terms of CRS revenues on a sequential basis as far as on the add back for a full quarter of ClinPhone?

James Winschel

Well, I think you have to keep a few things in mind and first of all is that the first quarter is normally a season down of quarter for a variety of reasons and we did see that happening again this year. So that was a factor. In terms of foreign exchange impact on the old guidance versus the new guidance, it was about in the 15 to 20 million range. And yes, a full quarter's effect of ClinPhone in the numbers; and by the way, I did mention this I think, in my comments. It's going to become more and more difficult to sort of break out what's the ClinPhone piece versus the Perceptive piece, but certainly is a big chunk going the other way, but then we also have some further benefits in some of the businesses.

Douglas Phil

Okay. And then in terms of the Perceptive business, Joe, I wonder if you could provide some comments on how clients have responded to some of the legacy Perceptive product especially things like IVRS or do you anticipate that to be almost largely cannibalized by the new ClinPhone product?

Josef Von Rickenbach

Part of the decisions that we have to make – well, I actually go back and pick up where Jim left off and that is to say we have now merged these companies and so they are mapped together and the functions have been merged and the sales force has been merged and one of opportunity for synergies obviously is also the merging of technologies, the selection of technologies, where it is appropriate. In certain areas we will retire technologies, the IVRS, where ClinPhone tied to the merger (inaudible) primarily that technology going forward. So eventually our old system in Perceptive is going to be retired.

Douglas Phil

Okay. And how is that rationalization taking place?

Josef Von Rickenbach

It’s in the work right now. Obviously there are legacy installations. They will be fully served, are being fully served. And so there is no fully served. And so there is no detriment to clients and projects that are currently using that technology, but on a forward basis that streamline will have happened. Once again, when you go through the mechanics of these kinds of changes, it’s not only easy actually on the ground to pull them off. Not just exactly the way you want, but I think generally right now and specifically I would say we're in a good spot. And I think the team did a great job in getting us to the point where we really are able to move forward and benefit some of the synergies. These include by the way also growth synergies we hope to see.

Douglas Phil

Okay. And then what percent of your overall business comes from small emerging biotech companies? I mean you have given sort of top five and top 10 clients who I presume are largely to 30 drug companies in the world? But if you were to sort of think of the smaller emerging companies what percentage of your total revenue base does that represent?

James Winschel

The way we are breaking it down and are looking up at the world, so we are basically looking at, as you said, the large pharma companies as one group and sort of everybody else on the other side. And it’s interesting that both the fourth quarter and for the first quarter, this split was about 40/60, meaning 60% being the large pharmaceutical companies.

Douglas Phil

Okay. So within this top 40, the other 40 I imagine that some of them are fairly sort of – fairly large biotech companies or mid-cap biotech companies that specialty pharmaceutical companies that are self-sustaining on revenues and other companies that are dependent on the capital markets. So I'm curious as to what your exposure is on companies that are still in the developmental stage and require access to capital in order to continue funding their R&D operation?

James Winschel

I don't have the exact details on that, but obviously it would be less than 40%, and we are right in that 40% -- 40 percentage point category in all of the groupings which you mentioned and it just changes also from quarter to quarter. But I would say, as of the first quarter, there wasn’t really any other evidence that this would season anything other than normal. It may change beginning forward. But as of, let's say the end of September, and this is where I really have detailed specifics and statistics. I would say it was pretty much what we have expected.

Douglas Phil

Okay. And then finally not to be the dead horse, but obviously you've been asked questions about pricing and you sort of commented that it’s came up more frequently in conversations with clients. I mean, are you seeing – are you getting the sense that some of your competitors are pricing lower or is it just simply that your clients are more sensitive to it and they are trying to push back and you are trying to stretch their R&D dollars? Or are they coming back and saying, we are seeing it from X, Y and Z CRO at least 10, 15% than it is, so you need to adjust price if you are going to have a shot at this project?

Josef Von Rickenbach

Well, I don’t have to kind of circumspect when you talk about pricing. But actually in terms of these more strategic discussions, this comes up somewhat less clearly if you have truly a strategic relationship then you engage on a long-term path and on the long-tomorrow journey and you want to make sure that both partners basically have a good future. And so, price by the way, of course, is always a factor, always one of the factor. And I think it always has been, as I pointed out many times, one of the top four or five reasons for winning. I would just say in this past quarter, it probably didn’t kick in a little more than before.

Douglas Phil

Okay. Thank you very much.

Operator

And you have a follow-up question from the line of Todd Van Fleet with First Analysis. Please go ahead.

Todd Van Fleet

Joe, I just want to clarify with respect to the contribution from the small emerging biotech, you said you didn’t really see an impact in Q1. Can I just ask what kind of expectation have you built in with respect to your outlook on fiscal 2009 in terms of demand from that market segment?

Josef Von Rickenbach

As I pointed out, right now, there is probably a little more uncertainty than would normally be the case. And my expectations and our expectations that there is going to be a, I don’t want to say decline, but it’s probably less demand than what has been and that’s certainly within what we are expecting. Having said that, that may not – in the end, everything is fine. Meaning, you can have four or five specific opportunities with four or five specific companies that may be very well funded and you may win those projects and the impact could skew the statistics. They are still absolutely still out there that. There are still very good opportunities with small companies right now, and actually, I can tell you, I have just coincidentally visited with a number of CEOs of these small companies and there is a whole grouping of these companies that continue to be completely determined and are well funded and can completely pull through with that development program. So I think it would be really overstated or it would be too cautious to assume that this is just going to wither.

Todd Van Fleet

Okay, thanks for that. And if I can just follow up another way approaching this pricing discussion, I think you had said that -- I think you just said that the – you view price to be less of an issue, the more strategic the relationship becomes, is that right?

Josef Von Rickenbach

Yeah, I will say that.

Todd Van Fleet

Okay. And so while we are working through this period of uncertainty and again we are just trying to get our arms around, how do we define this period of uncertainty? Is it delays on the part of your customer base while they decide how strategic to take these relationships. So I will just – if you can think forward may be over the course of the next 12 months, is it your expectation that more decisions on the strategic nature of these relationships start to play out so that the decision start to get made perhaps end of this year, beginning of next year and the strategic nature of these relationships will kind of come to the fore and you would expect pricing to be less of an issue at that point? Again, I am just trying to think about where we are at in terms of this period of uncertainty here.

Josef Von Rickenbach

Well, I'll tell you a lot of the decisions have already been made and are now basically playing out. Of course, they take a while to really come fully into their own. So to your point – and it may be in ways of clarification, I believe towards the end of this fiscal year, we will be well through that period. I think we will have a clarified environment, and I believe that outsourcing and clinical outsourcing in particular actually will thrive. Between now and then, I think it's going be a little more choppy as we will see exactly where the small companies are going to shake out, how the big companies exactly are going to ease into these bigger relationships and exactly how much they're going to outsource. But, all of you have seen the big announcement that some of these companies have made, and I think this is going to be an indication that they're really serious about changing the way they do business, and I think we, specifically Parexel family, we and our industry is part of that solution and so actually once we get through maybe a six month period, I think we will have a lot more clarification, I think we will come out in a very good spot.

Todd Van Fleet

Thank you.

Operator

And there are no additional questions at this time. Please continue.

Todd Van Fleet

Okay. So at this point, I would like to thank everybody for their interest in Parexel. We look forward to update in the next call. Bye bye.

Operator

Ladies and gentlemen, that does conclude our conference call today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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Source: PAREXEL International Corp. F1Q09 (Qtr End 9/30/08) Earnings Call Transcript
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