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PAREXEL International Corporation (NASDAQ:PRXL)

F2Q09 (Qtr End 12/31/08) Earnings Call Transcript

January 27, 2009 10:00 am ET

Executives

Jill Baker – VP, IR

Josef von Rickenbach – Chairman & CEO

James Winschel – SVP & CFO

Analysts

Todd Van Fleet – First Analysis

John Kreger – William Blair

Dave Windley – Jefferies & Company

Randall Stanicky – Goldman Sachs

Eric Coldwell – Baird

Douglas Tsao – Barclays Capital

Sandy Draper – Raymond James

Greg Bolan – Wachovia Capital

Operator

Ladies and gentlemen, thank you for standing by and welcome to the PAREXEL second quarter earnings conference call. Now 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) As a reminder, today’s call is being recorded. Now, your hosting speaker, Jill Baker, Vice President of Investor Relations. Please go ahead.

Jill Baker

Good morning, everyone. The purpose of this call is to review the financial results for PAREXEL second 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 quarterly report on Form 10-Q for the quarter ended September 30, 2008 as filed with the Securities and Exchange Commission on November 7, 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 contract terminations and associated costs, foreign exchange, acquisitions and divestitures, special charges, restructuring reserves, adjustments to restructuring reserves, and certain tax items.

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.

I would like to note that we have provided some trend financial information on our website in order to assist investors. You may access a report titled Q2 FY2009 additional financials in the additional financials portion of the Investor Relations section.

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

Josef von Rickenbach

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 December 31, 2008, service revenue was a record $275.8 million compared with $238.7 million in the same quarter of the prior year, an increase of approximately 16%. Excluding the negative impact of foreign exchange of $25.9 million in the quarter, revenue increased 26.4%. The net positive impact of acquisitions and divestitures equated to $20.5 million in revenue in the current quarter and $1.5 million in the second quarter of the prior year. Excluding both foreign exchange and the net positive impact of acquisitions and divestitures, revenue grew approximately 19% year-over-year.

Looking at the geographic distribution of revenue for the second quarter of fiscal year 2009, the Americas represented 44% of service revenue versus 39% one year ago. Europe, the Middle East and Africa represented 48% versus 54% in the second quarter of fiscal year 2008. And Asia-Pacific was 8% of revenue as compared with 7% one year ago.

During the quarter, the largest client represented 8% of revenue, down from 9% in the December quarter one year ago. The top five clients represented 29%, down from 35% one year ago, and the top 20 represented 55%, down from 58% in the December quarter last year.

During the second quarter, Clinical Research Services, or CRS, represented approximately 73% of the company’s total revenue versus 76% in the same quarter of the prior year. PAREXEL Consulting and Medical Communications Services, or PCMS, comprised approximately 12% compared with 14% in the prior year quarter. And Perceptive Informatics was approximately 15% of the total versus 10% one year ago.

Operating income was up about 11% on a year-over-year basis in the quarter. As a percentage of total service revenue, operating margin was 8.2%, down from 8.6% in the same quarter last year.

In the second quarter, diluted earnings per share came in at $0.23 versus $0.20 in the second quarter one year ago, an increase of 15%. We closed the quarter with a backlog of approximately $2 billion. During the quarter, we had in addition to backlog of $459 million from new business authorizations, cancellations of $121 million, and a negative impact from foreign exchange of $117 million.

The quarter’s net book-to-bill ratio was approximately 1.2 and would have been approximately 1.4 had it not been for the termination of the contract with the client who defaulted.

I’d like to make a few comments now about the client contract termination that we’ve reported on January 12, which impacted the results of the second quarter. The client has now filed for bankruptcy protection. As a major creditor of the company, we will consider our options with respect to recovery. Separately, we have conducted an extensive review of the projects that we have in backlog and which are sponsored by non-revenue generating clients.

We are comfortable that we do not currently have a material exposure of a similar nature. In light of the current financial market environment, we are monitoring the financial health of our non-revenue generating clients even more closely. Going forward, we are requiring that these clients remain in a net positive cash position with regard to project work.

During the quarter we saw an improvement in our hit rate as compared to the first quarter and we are pleased with our new business performance. A meaningfully larger proportion of our new business wins came from big pharma clients this quarter, and we had a nice geographical mix.

I’d like to share some observation now about the overall dynamics in the marketplace. Proposal flow through the end of December was generally good, largely meeting our expectations. However, in the second quarter, we saw an abnormally high level of pending proposals being withdrawn. As a result, the backlog of pending proposals at the end of December was a bit lighter than we would have expected. And while the March quarter usually tends to be strong with regard to new proposal flow, this year it seems as though some clients are taking a bit longer to make up their minds.

In general, going forward, I do expect that a higher proportion of the demand of our services will come from the large pharma client segment as compared to the smaller clients. In fact, we have already started to see the shift in the first half of our fiscal year. PAREXEL has always had a strong base of business with the large pharma segment, and we are actively increasing our focus on this important group.

We have continued to make good progress in expanding relationships with many of these large clients and expect outsourcing penetration rates to increase in this segment as many clients look to outsource more strategically than they have traditionally done in the past.

Along these lines, I’m very proud to note that PAREXEL was named the Best Contract Research Organization by Scrip World Pharmaceutical News at the Scrip Awards ceremony, which was held in December. This award recognizes the crucial role that PAREXEL has played in drug development and the management of all aspects of clinical trials, the company’s consistent achievement in exceeding client expectations, the truly global nature of our business and our positive impact on advancing worldwide healthcare.

Additionally, the award also recognizes PAREXEL for demonstrating excellence based on the whole range of services that we provide and the quality of the relationships we have built with clients. I’m very proud of the work of our employees who have earned this award.

Shifting tracks now, I’d like to say a few words about ClinPhone. We are very pleased with the progress of the integration at this point. While clients’ reaction to the acquisition was good from the very beginning, there was a bit of a wait-and-see attitude on the parts of certain clients in the first quarter. This is behind us now and we are enjoying a good flow of proposals for Perceptive's products and services. The operating performance of the segment has significantly strengthened and we expect more improvement going forward.

So at this point, I’d like to turn the call over to Jim who will provide more detail on our financial results.

James Winschel

Thanks, Joe, and good morning, everyone. During the second quarter, CRS service revenue increased approximately 10% compared with the prior year quarter, driven by strength in the late stage portion of the business, partly offset by the impact of foreign exchange fluctuations and weakness in early stage. CRS same store constant current service revenue growth, excluding the $18.3 million negative impact of foreign exchange, was a very strong 20% in the quarter on a year-over-year basis.

On a sequential quarter basis, CRS service revenue was down marginally with strength in late stage being negatively impacted by $20.5 million in foreign exchange fluctuations. Same store constant currency service revenue growth was up 9.2% on a sequential basis. CRS gross margin was 34.9% during the second quarter, up two points from 32.9% one year ago and essentially flat with the 35% reported in Q1 of fiscal year 2009. The year-over-year increase in Q2 occurred as a result of improved productivity and efficiency in late stage, as well as favorable signature activity with respect to contracts and changes in scope, partly offset by a decline in early stage and the impact of foreign exchange movements.

Quarterly service revenue at PCMS was down 1.9% year-over-year. During the second 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 a same store constant currency basis, PCMS service revenue was up 14.2% in the quarter. During the quarter, PCMS gross margin at 35% increased by eight-tenths of a point compared with last year and 2 points sequentially. The year-over-year improvement resulted from the continued excellent performance of the consulting group as well as favorable signature activity, both Consulting and Med Com contributed to the sequential increase.

Quarterly service revenue in Perceptive Informatics was up 83.6% year-over-year. Excluding $20.5 million in service revenue from ClinPhone and the $3.7 million negative impact of foreign exchange, same store constant currency service revenue was up 11.9% on a year-over-year basis.

Perceptive's gross margin in the quarter was 40%, down 4.7 points from the prior year quarter, but up 4.1 points from the first quarter of fiscal year 2009. The year-over-year decline resulted from the recording of a reserve for a customer dispute in the amount of $3 million and the negative impact of foreign exchange, partly offset by the impact of favorable signature activity. Excluding the just mentioned reserve, gross margin would have been 47%, up both year-over-year and sequentially. On an overall company basis, gross margin for the quarter was 35.7% compared with 34.2% last year. Looking ahead to the third quarter of fiscal year 2009, we expect gross margin to continue to improve.

SG&A spending in the second quarter was 22.5% of revenue, up from 21.5% in the December quarter one year ago and up from 21.9% in the September quarter. In dollar terms, SG&A spending was up 20.7% on the year-over-year basis due to the $9.3 million impact of the ClinPhone acquisition, higher facilities costs including $580,000 charge to exit a lease facility, and other costs incurred to support revenue growth, partly offset by the $8.1 million favorable impact of foreign exchange movements.

On a sequential basis, SG&A was up 7.5% driven by incremental ClinPhone related costs, higher expenses for commissions and facilities, partly offset by favorable exchange rate movements. During the third quarter of fiscal year 2009, we expect SG&A as a percent of revenue to decrease from Q2’s level.

For the quarter, depreciation expense equated to 4.1% of service revenue, up from 3.5% during the second quarter of last year. Depreciation as a percent of service revenue should increase slightly in Q3. Amortization expense was nine-tenths of 1% of service revenue in the quarter versus six-tenths of 1% one year ago. The increase was attributable to the ClinPhone acquisition. Amortization as a percent of revenue should decline going forward.

Operating margin in the second quarter was 8.2% of service revenue, down 40 basis points from 8.6% in the December quarter one year ago. If you look at operating margin on an adjusted basis, excluding favorable signature activity and unfavorable items like the facility closing and severance cost of about $900,000, somewhat higher bad debt expense and the reserve for the Perceptive customer dispute, then operating margin would have been 9.2% for the quarter. During the quarter, foreign exchange adversely impacted operating margin by one full point. We expect operating margin to be in the 9.0% to 9.5% range during the third quarter.

Other income was $3.2 million in the quarter, with foreign exchange gains of $12.2 million being offset by a net interest expense of $3.3 million, cost associated with the settlement of a contract dispute in the amount of $2.8 million, and the write-off of an impaired asset totaling $2.3 million. Large piece of the foreign exchange gain or $7.2 million was related to former ClinPhone legal entity. We have now permanently locked in a large portion or $5.7 million of that gain through further structuring of the acquisition and therefore do not expect to see this magnitude of FX gain or loss going forward. We are forecasting other income to be a negative $2 million in Q3.

PAREXEL's second quarter tax rate was 47.2% compared with 41.3% in the prior year quarter. The second quarter tax rate and full year projected rate were negatively impacted by the $15 million write-off, certain other non-deductible costs and the need to record valuation reserves in one Asian country. At this time, we are projecting a tax rate of approximately 40% for both the third quarter and the full fiscal year.

Net income of $13.1 million compared favorably with $11.5 million in the second quarter of fiscal year 2008, up 13.9%.

Moving on to the balance sheet, net receivables stood at $222.7 million at the end of December. Taking into account gross revenue of $372.7 million for the quarter, DSO stood at 55 days, an increase of 3 days from the December quarter one year ago and a decrease of 11 days from the September quarter. Excluding the 3-day favorable impact on DSO of this quarter’s large write-off, DSO would have been 58 days.

During the quarter, cash flow generated from operations totaled $45.9 million. Other cash inflows included $700,000 in proceeds from the issuance of common stock in conjunction with the company’s employee stock option and stock purchase plans. Cash outflows included $21.4 million for capital expenditures, mostly related to hardware and software purchases and leasehold improvements, $3.7 million for acquisitions, $1.2 million in repayments under the company’s line of credit, and $4.7 million from foreign exchange movements. Netting the inflows and outflows resulted in an overall increase in cash of $15.5 million from the end of September, leaving us with a balance of $63.7 million.

With respect to the company’s borrowings, we had $273.3 million outstanding under our line of credit at the end of the quarter. And finally, with regard to the earnings guidance, which is contained within our press release, we have taken the actual Q2 results into a pound and refined our model to reflect all other known facts. With respect to calendar year 2009, we have assumed service revenue growth in the 8% to 11% range, improved margins, other expense between $11 million and $13 million, and the tax rate in the mid-to-high 30.

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

Question-and-Answer Session

Operator

(Operator instructions) We have the first question from the line of Todd Van Fleet, First Analysis. Please go ahead.

Todd Van Fleet – First Analysis

Good morning, guys. I’d just ask you three quick ones if I could. First, Joe, I guess with respect to you decision to focus more on large pharma, if you could talk a little bit more about the strategic thinking in that area.

Josef von Rickenbach

Yes, hi, Todd. I guess in a why it’s driven by demand, meaning we are of the opinion that some of the smaller companies, especially the non-revenue generating biopharma companies are going to have a harder time to fund the kind of programs that they have been funding over the last three or four years. And we also believe that more or less coincidentally I would say that some of the outsourcing patterns of the large pharma companies are going to improve from our perspective, which is to say increase. And so it kind of naturally makes us focus on that segment.

Todd Van Fleet – First Analysis

Okay. Maybe that’s a lead into the next question I had and it was, given what has happened on the financing front, the molecule development with respect to biotech and the number of molecules perhaps coming into the – under the landscape, how do you see that impacting potentially your Phase I operations? So I guess a question on Phase I, how well did it perform in the quarter? And then what’s your outlook for Phase I, given what we see happening in the preclinical side of things?

Josef von Rickenbach

Yes. It’s an interesting question actually. And obviously we have spent a lot of effort to understand the dynamics there. And I say it’s interesting because actually turned out that the demand from the smaller companies continue to be holding up actually quite well in our early stage business. And ironically and interestingly, the demand from the larger companies has declined actually now for several quarters. So we were thinking about why this would be, and I think it is in part because we have seen a portfolio re-organization and reprioritization in the large pharma companies, especially in the early stages, and expect that this would actually change going forward. And we have already seen some signs that that actually will occur.

Todd Van Fleet – First Analysis

Okay, thanks.

Josef von Rickenbach

That demand will come back up.

Todd Van Fleet – First Analysis

Lastly then on the Leap initiative that you talked about I think several quarters ago, how is that progressing? And have you started to see any benefits from that on the clinical development side?

Josef von Rickenbach

The Leap initiative is continuing on plan. We believe that it will – we continue to believe that it will have a very big impact on our – especially on our late stage clinical development business. And we are right now in the middle of implementation, meaning people on the ground are actually being retrained on new processes and new technologies, and systems are being implemented literally while we speak.

Todd Van Fleet – First Analysis

Thanks.

Josef von Rickenbach

You’re welcome.

Operator

And our next question is from the line of John Kreger, William Blair. Please go ahead.

John Kreger – William Blair

Hi, thanks very much. Joe, can you just refresh our memory as you look back over the years in your business? What has the impact been from pharma consolidation? And if you’d be willing, can you talk about what you think the combined Pfizer Wyeth entity would represent as a percent of your backlog going forward?

Josef von Rickenbach

Okay, John. Hi. So – generally we are reluctant to comment directly on specific clients, but this being kind of a really big situation and a big deal, I would say that we don’t expect this to adversely impact – with what we know right now, adversely impact our future. And overall, as I look back over basically the decade, obviously we have seen merger activities happen. And I have to say first of all on the good side, longer term we have actually benefited from these changes even though in the short-term they can be disruptive, but almost not. I’d say in most cases eventually, they have led to higher outsourcing eventually. And in some cases, we have greatly benefited from post-merger integration and kind of companies going forward in a merged fashion.

John Kreger – William Blair

Great. Would you be willing to quantify if the combined entity would be less than, let’s say, 10% of your backlog or less than 5%?

Josef von Rickenbach

I would – I don’t have that specifically in my head right now, but I would guess yes. Yes, you’d be right.

John Kreger – William Blair

Less than 5%?

Josef von Rickenbach

Less than 10%.

John Kreger – William Blair

Okay, great. Thank you. And then just a follow-up question on another topic. The client that filed for bankruptcy, which prompted the reserve, can you just let us know what’s the size of your overall receivable with this client? Have you fully reserved if – or would be looking at perhaps another charge if you don’t receive any fund – any more payments from this company?

James Winschel

John, this is Jim Winschel. The size of the receivable is $12.8 million and it is fully reserved. In addition to that, we have put a reserve in place for $2.2 million to cover the orderly wind-down cost of this trial. We have to ensure that patient safety is in the front of our mind here and these patients need to have an orderly wind-down of the trial.

John Kreger – William Blair

Great. Thank you, Jim. And that was actually my final question. I’m guessing that the investigators in this situation are not happy and then presumably they also have a receivable. How are you thinking about that as a company? On the one hand, I’m guessing you don’t really have a legal obligation, but on the other hand, I would assume it could be a bit of a PR problem if you just walk away from those financial obligations. How are you planning on handling it?

Josef von Rickenbach

Well, John, we’re going through an orderly wind-down right now. Obviously these are all questions that are coming up. Actually at this point, I kind of prefer not to comment on any of the specific details on all of this. But we are right in the middle of all of this. And as Jim pointed out already, we are going to try to do this as best as we can, and first and foremost making sure the patients are safe and this happens all in a professional manner.

John Kreger – William Blair

Great, thanks very much.

Operator

Your next question is from the line of Dave Windley, Jefferies & Company. Please go ahead.

Dave Windley – Jefferies & Company

Hi, good morning. Thanks for taking the questions. Jim, you made some detailed comments around operating margin. And in terms of some of the kind of one-time type costs, facility charge and so forth, I believe you said excluding all of those things, 9.2%. Did that also – was that also adjusting for the FX impact or was that a separate item?

James Winschel

That did not include an adjustment for foreign exchange. Let’s say, all things being equal, we would have seen – in terms of foreign exchange rates, we would have seen a 9.2% operating margin. But obviously, foreign exchange rates were what they were. Separately, if you factored out both the favorable and negative sort of unusual items in the quarter, we would have also been at 9.2%, but that would have been with the actual exchange rate.

Dave Windley – Jefferies & Company

Right, okay. So each of those buckets, I’ll call them, is worth about 100 basis points?

James Winschel

That’s correct.

Dave Windley – Jefferies & Company

Right, okay. The project – the undertaking that you pursued after working through the issue with this particular client that filed for bankruptcy, perhaps you could, Jim, walk us through the steps that you’ve taken to assure yourself of what that exposure is, and maybe similar to John’s question, you could give us a sense of what your bad debt reserve is currently in the aggregate or as it relates to that exposure – that remaining exposure.

James Winschel

Sure, John [ph]. Well, we went through a worldwide review of each of our clients who had at least $100,000 in either backlog or net receivable exposure. Now, obviously there is a number of our clients who are large pharma companies and that we exempted them from this particular review, but more we’re focusing on the companies that were not as well financially established. And we got information from every conceivable source, which would include DMV, it would include information on the web, it also included having detailed discussions with these companies as to what their cash positions were, what their sources of cash would be and to determine what our risk might be. And in most cases, we were talking to the CEOs and the CFOs of these particular companies. And we did over the course of the quarter record probably another, I don’t know, $2 million in bad debt expense as a result of the changed financial situation in the world. But for the most part, we were able to get ourselves comfortable that our clients had the sources of cash or cash on the books right now to be able to handle their obligations to us. And we are going to be updating this review on a regular basis to make sure that we don’t get any surprises.

Dave Windley – Jefferies & Company

Okay, great. And how is that $2 million of additional – how is that compared to a normal quarterly accrual?

James Winschel

I’m sorry, what was that, Dave?

Dave Windley – Jefferies & Company

The $2 million of additional expense that you indicated you accrued during the quarter, how much of that – how much does that exceed if it does the normal quarterly accrual?

James Winschel

It’s always short of a certain level of churn that goes on there. So some are between $1 million and $1.5 million that was incremental this quarter than most quarters.

Dave Windley – Jefferies & Company

Okay. And did I understand in the prepared remarks that four companies that are non-revenue generating, you are requiring them to maintain a positive cash position with you, is that that you want to see in order to do business with them, they need to have positive net cash or that they need to be prepaid on their account with you?

James Winschel

With many of our clients we have a credit policy that’s been put in place that would keep them in a net positive cash position with us. So we would have a positive cash position with those companies.

Dave Windley – Jefferies & Company

Okay. All right. Last question –

James Winschel

And this didn’t just start in the last quarter. I mean, we’ve done this in many cases historically as well.

Dave Windley – Jefferies & Company

Okay, thanks. Last question, on the shift, Joe, toward large pharma, does that shift inherently bring on any other dynamics like differences in therapeutic area of focus perhaps or geographies where large pharma wants to do business that might be different than where biotech wants to do business – or wants to do trials is what I mean by that?

Josef von Rickenbach

I would say from a therapeutic area point of view, we probably wouldn’t bring big shifts. And I’d say that mainly because we’re already pretty much working in pretty much all relevant therapeutic areas. From a geographical point of view, generally speaking, large pharmaceutical companies tend to also be fairly global and they are very comfortable with that approach. And so I think it fits relatively well with our footprint and with our culture.

Dave Windley – Jefferies & Company

And so they tend to be more global than the biotech or did you mean that that’s the same?

Josef von Rickenbach

Yes. Well, they are more global than the biotechs for sure and they are also comfortable running their programs on a global basis, and in many cases actually now, especially with the emerging geographies, are very eager actually to have a presence in those countries and geographic locations.

Dave Windley – Jefferies & Company

Okay, super. Thanks for the answers. Appreciate it.

Josef von Rickenbach

Sure.

Operator

Your next question is from the line of Randall Stanicky, Goldman Sachs. Please go ahead.

Randall Stanicky – Goldman Sachs

Great, thanks. Joe, you previously talked about an interest in possibly entering the preclinical area if the asset prices were right. And given that clearly asset prices are more right than they used to be, does that still – is that still an area of interest that you guys have?

Josef von Rickenbach

Yes, hi, Randall. Actually I can’t recall that particular comment. It must be a long time ago. But in any case, right at the moment I would say we are from an M&A perspective more focused on making sure that the integration of the deals that we have recently completed is working. And I don’t believe that we have a sort of an immediate or even medium term interest in doing anything new.

Randall Stanicky – Goldman Sachs

Got it. Okay. And then in terms of the bookings that you talked about this quarter, can you just give us a sense of how much of that came later in the quarter and perhaps later in December?

Josef von Rickenbach

Yes. It was actually an interesting quarter to use a somewhat euphemistic word, in the sense that October was a really big challenge from a bookings perspective. And as a result, the quarter was heavily back-loaded from – ultimately from a results perspective. So December obviously was very strong and also the end of November. So – but overall, it was back-loaded.

Randall Stanicky – Goldman Sachs

So, has that continued into January if you’ve seen a slowdown from here? I guess I’m just trying to get a sense of – you’ve put up a book-to-bill of just over 1.2 for the December quarter. I’m just trying to get a sense of what your March quarter thoughts are in terms of bookings.

Josef von Rickenbach

Well, as I said, it’s – as I said in my comments, we would like to see a slightly higher proposal backlog going into the quarter. And having said that, usually the March quarter tends to be a good quarter for new opportunities. So far that has been relatively less robust than we would have liked to see it. But having said that, we also hear some good murmurs in terms of new business coming out. So once again, I think it’s probably going to be more of a situation where it’s going to more back-loaded than not. But generally speaking, I’d say it’s sort of cautious optimism.

Randall Stanicky – Goldman Sachs

So, Joe, is there a budgeting process that we’re waiting for? Is there some sort of lever or trigger at pharma that you think will give us better visibility into their thoughts on outsourcing or bookings at this point?

Josef von Rickenbach

Yes. It’s a good question, of course, and we are watching this very carefully also. Most pharma companies are calendar year companies. And so, for them, this quarter, meaning the March quarter, it’s the first quarter where the new budgets are now in place. And one would have to believe that this reflects to some extent the happenings in the financial markets of last year. And so as a result, this is sort of the first time that we will see what the new reality would be. And as I said, it seems like it’s taking a little longer for them to come out basically and start to reveal their intents and their budgets. Having said that, it usually happens right about now or – so it’s not very late, but we’re obviously eager to know what’s coming.

Randall Stanicky – Goldman Sachs

Got it. And then just one last question. Your headcount up-ticked a little bit from last quarter. Can you just talk about what you are doing on the hiring front? Is there any particular part of the business that you’re adding or eliminating spots in?

Josef von Rickenbach

Yes. So – we have added a few – relatively little staff in the quarter. Partly that is also, by the way, because our turnover has declined markedly. In fact, I think we’re probably at the lowest point that we have been in a very long time. Overall, one has to of course bear in mind that we’re still a growing company. And we’re still on a net-net basis growing well into the teens. So I think the productivity overall has improved in this quarter. And I’d also say that generally the competition in the labor market has abated significantly. So at this point we don’t have any big concerns overall at all in terms of hiring or, for that matter, retaining our talent.

James Winschel

Randall, one other factor is, of course, just because there has been a big movement in foreign exchange rates doesn’t mean that the amount of work that our people have to do has decreased. It cost us less I guess for those people, but the amount of work is still significant.

Randall Stanicky – Goldman Sachs

I understand. Great, thanks guys.

James Winschel

Thank you.

Operator

And our next question is from the line of Eric Coldwell, Baird. Please go ahead.

Eric Coldwell – Baird

Thanks. I’m going to attack this biotech failure in a slightly different way. I can understand how you would be comfortable financing structure of Cogenis [ph] given that they had a $63 million capital commitment less than a year before the subsequent bankruptcy. Obviously, it was a very massive study. I’m not worried as much about your work currently on making sure that your customers are in a net cash position or well financed. I’m a little more concerned about how you look at trials in terms of the potential success or failure of the outcome. Aetna in September published a public record stating that it saw serious efficacy and warning about risk on the combination of Plavix and Prilosec. Medco followed up in November and did the same thing. The FDA is now requiring that Bristol and Sanofi go back and study these drugs looking for potential contraindication themes. How do you have your teams think about what business they are bringing onboard in terms of whether these studies actually can go to fruition? And how do your respond when safety or efficacy parameters change on the studies that you’re working on?

Josef von Rickenbach

Eric, normally our job basically – or our purpose, if you want it, to make sure that we run an excellent clinical trial, which eventually gives our clients the results that they have – that they desire – desire in the sense that they can be either positive or negative. We don’t actually have a direct interest in the outcome. And as you know, most drugs don’t work. Okay? So, most of our trials will show negative results. And that certainly true in the early stages of clinical research and unfortunately it’s also true for a fairly large number of late stage clinical trials. So this is not in that sense unusual. And our focus is not so much whether or not ultimately the drug works. Our focus is that we make sure that the regulatory requirements are met, that we are patient in our work, that we are professional in our work, that we meet the standards that are in place, the patient safety is guaranteed, the budgets and milestones are met. The other risk that you’re talking about essentially is the client’s risk.

Eric Coldwell – Baird

But in this situation, it became your risk because you chose to continue funneling money into the project, into early January when they were public documents and nothing more than a simple Google search would suggest that this trial was at risk. And I just want to know how your scientific teams in your breadth of global exposure to consulting and thought leaders, both in your internal services as well as the work that you are doing for the global industry, how you married the two such that you can understand when a trial was becoming a riskier trial and then adjust accordingly if you do run into a situation where funding might be an issue?

Josef von Rickenbach

Right. I mean, not to go into the forensics of the situation that actually I’d take the issue with your point about funneling cash into the trial post January. In fact, that was clearly not the case. And I’d also say that this trial was not even affected by any of the issues that you raised. It was truly a victim of the financial crisis. And yes, it may also have been true that other factors also have surfaced, which is not unusual in the course of a number of trials. And I would have to say normally these trials go to the end. I think this trial would have ended without any problems had the funding crisis not occurred.

Eric Coldwell – Baird

I do appreciate all of the comments, and I guess just as a follow-up to that topic, you did show an improvement in the December quarter versus September, given the follow-on information about your more focused approach in making sure that the smaller clients are in a net cash position, could we or should we expect DSO to improve further in the March quarter?

James Winschel

Eric, the collections have certainly been very strong during the month of January this far. And we are certainly focused on continuing to improve our DSO performance. I have a task force that’s started last summer also focused on this particular issue and even going so far as to make changes to our contracts and we work with the legal guys and the contracting guys. We’re working with projecting managers and we’re working even more closely with these companies. And I would hope that we could continue to improve.

Eric Coldwell – Baird

Great. Last question, different subject. The gross authorizations in the December quarter were actually pretty good. And absent the backlog cancellation, you would have had a very good book-to-bill. I’m curious if you’ve changed your process or thoughts on how you book verbal authorizations. I think that you at one point said that you book about 80% to 90% of verbal into backlog in a given quarter. And I’m curious whether you’re maintaining that philosophy or whether that’s been adjusted given the current environment.

James Winschel

Eric, we put verbals in the backlog still with a 20% discount, and just recently gone back and reviewed that again and it appears to be continued to be a valid amount to discount.

Eric Coldwell – Baird

So no change in that process or the accounting for that. Okay, thank you.

Operator

The next question is from the line of – one moment please – Douglas Tsao, Barclays Capital. Please go ahead.

Douglas Tsao – Barclays Capital

Hi, good morning. In terms of ClinPhone, obviously they are – you indicated and I believe that when you gave guidance in September you were looking for between $95 million and $105 million in revenue. Does that still seem to be on track even adjusting for FX?

James Winschel

Doug, I think if you – certainly if you adjusted for FX, we would be back in that kind of a range, but this is a company that was based in the UK. And I know everybody has seen what’s happened to the British pound over the course of the last several months.

Douglas Tsao – Barclays Capital

And so just along those lines, because if I sort of add what we would have sort of expected from ClinPhone to what the Perceptive – you know, legacy Perceptive business was doing, the number from the quarter is a little light, would you think that most of that sort of shortfall, if you will, is coming from FX then?

Josef von Rickenbach

I mean – Doug, let me just –

Douglas Tsao – Barclays Capital

(inaudible) I guess sort of – Joe, I’m just sort of trying to see, you know, has there been perhaps a little more cannibalization of some of the Perceptive legacy businesses than you might have expected?

Josef von Rickenbach

Let me maybe make a couple of general comments on Perceptive overall. First of all, I’d say that the integration is going actually very well to date. And so going forward, it will be also difficult to parse these two entities apart because they truly had merged. And we have made some decisions along the way as to what platforms we’re going to use for certain technologies. So, for instance, on the IVR side, we are going to use the ex-ClinPhone platform. And so obviously as a result, you would expect that our old platform, which is Aladdin, would decline. And I wouldn’t call that cannibalism. It was just a planned event. And so – but overall and perhaps more importantly, the question is, how is this going. And while it was true that in the first quarter right out of the gate it didn’t progress perhaps as well as we might have hoped. This really had started to turn around quite nicely in the second quarter. There had been a lot of headwinds like FX, for instance, but more importantly, on the ground in terms of proposals and opportunity that we have, I think this has picked up a lot. I can fairly say that. And I believe that eventually this has a lot of potential. And I’d also say that a lot of clients who had a little bit of a wait-and-see attitude in the beginning have now stepped up with a plate and are really interested in getting involved.

Douglas Tsao – Barclays Capital

Okay. And then, Jim, I was just hoping – I might have misheard you, but I think you gave us sort of same store constant dollar revenue growth for the CRS business. I was hoping if you could just give us that number for the whole company. I don’t know, I might have missed that.

James Winschel

It’s 18.6%.

Douglas Tsao – Barclays Capital

Okay. And then finally, just one more question. I remember, I think it was in 2005, it might have been 2006, you talked about needing to do some realignment of the incentives with the sales force in terms of increasing their sort of pursuit of small clients. Given your comments that seem to indicate you think that the market opportunity perhaps is a little greater with the large companies again, do you think that you need to perhaps tweak the sort of incentives for the sales force to sort of go after that customer base again? Or do you feel that with the adjustment that you sort of struck a good balance?

Josef von Rickenbach

Well, Doug, commission plans are an ongoing and never ending projecting. And we are actually looking at them certainly annually if not more frequently to make sure that we have the right incentives in place and to make sure that we are competitive, to make sure that we achieve our goals basically. And I’d also point out that yes, it’s true, there is a little bit of a shift, as we pointed out before, but at the same time these are never absolute. But it’s just directionally going now towards the large pharma more than the smaller companies, but that’s still also a very important segment. So I feel that our incentive plans have worked well. I also believe that our people have done a good job. And so there is no reason to believe that we won’t continue these practices in a good and professional way.

Douglas Tsao – Barclays Capital

Okay. Thank you very much. Thanks for taking the questions.

Josef von Rickenbach

Sure.

Operator

Okay. Our next question is from the line of Sandy Draper, Raymond James. Please go ahead.

Sandy Draper – Raymond James

Thanks. All of my questions have been asked and answered, thanks.

Josef von Rickenbach

Thank you.

Operator

Okay. Our next question is from the line of Greg Bolan, Wachovia Capital. Please go ahead.

Greg Bolan – Wachovia Capital

Good morning. Talking about the net DSOs for the quarter, the 11-day sequential drop looks to have been largely driven by an increase in deferred revenues. So this appears to be actually the largest increase in deferred revenues in at least I guess about three years. Jim, can you walk us through the drivers or driver of this move? And then when can we expect net DSO improvement as a result of decline in billed AR?

James Winschel

Well, Greg, while it’s true that we see a shift here, what actually happens is that the accounts that are listed here as unbilled are all the clients who are in a net unbilled position and the – of that balance here that’s shown for deferred revenue is all of the clients that are in a net deferred revenue position. And so we had achieved a very – a record level of billing during the December quarter, which helped us to shift I think more of these accounts into a net deferred position. And that’s really what’s happening there. As far as the billed accounts receivable go, we’ve had very good collections in both November, December and on into January, and we continue to work these clients on a daily basis to get this money collected. We certainly suffer from the fact that many of the clients have terms that are 45-day payment terms. And so that in and of itself has raised the billed accounts receivable number from a – to a level higher than I would have preferred, but that’s just the way it is.

Greg Bolan – Wachovia Capital

Very helpful, thanks.

Operator

Okay. Our next question is from the line of Todd Van Fleet, First Analysis. Please go ahead.

Todd Van Fleet – First Analysis

I have a couple quick ones for Jim hopefully. Jim, operating cash flow, did I miss that number? Did you provide it? If you could provide it, that would be great. Secondly, on the SG&A, you said that they would be down or that expense item would be down sequentially for Q3. Can you – you mentioned the $900,000 in severance expense. Are there any other one-time or more or less one-time related expenses for the bankruptcy?

James Winschel

Not for the bankruptcy, Todd. And the operating cash flow was $45.9 million in the quarter.

Todd Van Fleet – First Analysis

Okay. And just one another one, Joe, couple weeks ago you had announced the hiring of the new Chief Information Officer, and just wondering if – since that hiring, you know, it’s only been a couple weeks here, but do you anticipate that some of the priorities or things that might have been a priority from an IT standpoint, again along the lines of perhaps the Leap initiative, some of the things that were a priority previously might be shifted around or the priorities might shift a little bit with the hiring of the CIO. I’m just wondering if the benefits related to things like Leap are being pushed out now as you introduce some new kind of decision-maker, I guess, into the process?

Josef von Rickenbach

Well, first of all, we’re very happy that Jo Hoppe joined the company. She is bringing a lot of really good leadership and experience and background to the company. At the same time, in terms of priorities, as we have been talking now – for many years actually about technology and using information technology, a number of these projects are well underway now and are in implementation and in advanced stages of getting done. So I don’t really see in the short-term that we would have a big reprioritization. I think that’s certainly what’s in (inaudible) right now. We will see to fruition. But having said that, we are of course setting our sights to new horizons. Information technology continues to be very exciting and has a lot of promise over and beyond the projects that are currently being implemented.

Todd Van Fleet – First Analysis

Thanks.

Josef von Rickenbach

You’re welcome.

Operator

Your next question is from Dave Windley, Jefferies & Company. Please go ahead.

Dave Windley – Jefferies & Company

Hi, just one follow-up, Joe, on ClinPhone and thinking longer-term forward-looking cross-selling opportunities, to what extent – I mean, you have Mark who came up through Perceptive is now running CRS and I guess maybe has responsibility for both of – both or all three of the units. But is the cross-selling of the technology business with your clinical trial late stage business going to continue to increase? And kind of what level are we starting at now? And where do you see that going over the next, say, three to five years?

Josef von Rickenbach

Yes. I mean, there is of course a lot of interaction between Perceptive and between CRS, and – not just because of the management, of course because of that too, but also because of what’s happening on the ground. In the United States now, I’d say 80% plus of all clinical trials that we start certainly are using EDC, for instance. And many trials are also using other technologies, and I think we’re migrating basically sort of into a world of one could call – what one would call eCRO. And we want to be clearly at the forefront of that development. I think this will have huge opportunities for efficiency improvements, some of which we will leap through Leap, but others are still to be had. And so the interaction between Perceptive and the synergies between Perceptive and our Clinical Research businesses – and I say businesses because it’s both early stage and late stage and also (inaudible) kinds of activities will continue.

Dave Windley – Jefferies & Company

Okay, great. Thank you.

Josef von Rickenbach

You’re welcome.

Operator

Okay. And at this time, we have no further questions in queue.

Josef von Rickenbach

Okay. Well, thanks everybody for participating and for your Q&A and your interest in PAREXEL, and we look forward to updating you on our next call. Bye-bye.

Operator

Thank you. And ladies and gentlemen, that does conclude your conference. We do thank you for joining and for using AT&T Executive Teleconference. You may now disconnect. Have a good day.

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Source: PAREXEL International Corporation F2Q09 (Qtr End 12/31/08) Earnings Call Transcript
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