etrials Worldwide Inc. Q4 2008 Earnings Call Transcript

etrials Worldwide Inc. (ETWC)

Q4 2008 Earnings Call

March 5, 2009 4:30 pm ET

Executives

Dennis Connaghan - Chief Executive Officer and President

Joseph F. Trepanier, III - Chief Financial Officer

Chris Sakell - Director of Marketing

Michael Mickens - Vice President of Sales and Client Services

Analysts

Steven Silk - C. Silk and Sons, Inc.

Presentation

Operator

Welcome to the etrials Worldwide Incorporated fourth quarter and yearend conference call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will hold a question-and-answer session. (Operator's instruction) As a reminder, this conference is being recorded today, March 5, 2009 and a replay will be available on the Company's website. I would now like to turn the conference over to Chris Sakell, etrials' Director of Marketing. Please go ahead sir.

Chris Sakell

Thank you. Good afternoon and welcome to the fourth quarter and yearend earnings conference call for etrials Worldwide. With us delivering prepared remarks are Dennis Connaghan, President and Chief Executive Officer and J. Trepanier, Chief Financial Officer. Additionally, Vice President of Sales and Client Services Michael Mickens is in attendance.

Before starting today's call, I would like to remind everyone that some of the comments made today will be forward looking and are made under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected or implied due to a variety of factors.

For a more detailed discussion of the risks that could impact the Company's future operating results and financial conditions, we refer all of you to etrials’ recent filings with the Securities and Exchange Commission including the risk factor section of the Company's upcoming Form 10-K as well as the earnings press release.

With that, I will turn it over to CEO of etrials Worldwide, Dennis Connaghan. Dennis?

Dennis Connaghan

Thanks Chris and thank you for joining us on the call to review our fourth quarter and yearend results. I will begin the call by saying that while fourth quarter performance was reassuring in terms of new project bookings, backlog, shop reduction and operating expenses, overall results for 2008 were mixed with revenue being a disappointment.

With that said, we regard etrials' performance in the fourth quarter to be an encouraging finish to a challenging year of operational investments and transitions in leadership and strategic focus. During 2008, etrials invested in the business in order to enhance technologies, optimize our processes and as a result, more consistently deliver quality and excellence through our customers on the strength of the Company's balance sheet and cash positions.

Since my appointment to CEO in mid November, I have taken a number of steps designed to realign the organization to more effectively service customers and capture future growth opportunities. In December, I laid out my strategy to increase accountability, expedite decision making and create a more customer centric culture while leading in next generation eClinical technologies and driving on an operational scale.

I am happy to report that we believe that we are making good progress in each of these areas and have created a solid operational foundation on which to succeed. With each new customer engagements to study project implementations through individual accountability, we are driving customer confidence in our products and services. I am also encouraged by significant reductions in our expense run rate which were attained and driven by achieving greater levels of efficiency through improved processes and organizational focus.

The Company is now [Inaudible 3.39] ensuring all management is closer to the customer and the operations. Doing so has made us much more nimble clinical trial solution provider and better equipped to respond quickly to constantly evolving customer climates and market conditions. Our customers are telling us that unfavorable economic conditions have given rise to a [Inaudible] and a reassessment of overall priorities in terms of a number of studies they will run or maintain.

To patrol cost, many of our customers are devoting resources to those compounds that have the greatest and most immediate likelihood to success delaying further work on the others. This is confirmed by what the industry observed as the same. As a result, we are being very conservative in our plan and approach, still our customers, the majority of which have used a number of our systems, tell us our products are strong both individually and when use in concert.

Our solutions also allowed sponsors to reach no-go decisions much faster than they could otherwise a much needed trait in today's economy. This is why we do not believe the market potential for our offerings will contract in an alarming rate. The most significant and obvious reason for this is the fact that our products and services account for a very small percentage of a studied overall budget. Yet, when properly implemented, are proven to result in a significant reduction in study-related expenses.

These facts are confirmed by some of the most recent third-party market research available which indicates that eClinical solutions can have a considerable positive effect on sponsor's bottom line providing companies with substantial cost and time savings playing a vital role in changing the research process for the better. Most notably, a report published by the UK research group, Datamonitor, in late 2008 revealed an EDC in electronic control management systems are saving some life science of pharma companies up to $15 million a year just in mailing and protocol distribution cost.

Another recent study conducted by the clinical research industry analyst at CenterWatch showed that study side operates the demanding and even greater use of EDC technologies in order to reduce study times and boost recruitment. The president's economic stimulus creates another interesting prospect for etrials in our market. The stimulus provides the opportunity to fundamentally offer the way we capture, store, use and share information in the healthcare process including clinical trials. This should then enable improvements and efficiency and quality of outcome to a degree simply not previously realized by a majority of new clinical trials.

Separately, under the stimulus package, the US National Institute of Health or NIH, the nation's medical research agency would have its budget increased by 34% to $39 billion and while the details are not yet available on specific funding, it is clear that NIH scientists will have the ability to provide greater levels of leadership and financial support to researchers to federally support its clinical research. This is an island of opportunity that we are watching closely.

While we are confident in our products and their capabilities, let me be clear that we are not content to remain idle in our current state, especially in today's environment. Even in a downturn, the market may offer additional opportunities for etrials. I believe the shifting sands in the market will open to some unchartered areas of growth previously underserved. As such, we are laying the ground work to become more opportunistic, cautiously seeking new innovative and viable ways to drive revenue quickly.

I have confidence that etrials people are up for the challenge. We have most of the talent necessary to maintain our service focus on current customers and engagements but our plans include selectively hiring people with needed skill sets that added different dimension to our gain, expanding our coverage and fortifying our resources.

Now turning to the highlights to summarize our fourth quarter performance. While we had some significant awards during 2008 including $5.5 million in the fourth quarter, project delays and cancellations adversely affected revenue reducing an 88% over 2007 to $15.1 million. Cancellations for the year rose to $3.9 million compared to the $2.7 million in 2007. In spite of these factors, we still achieved a 30% year-over-year growth in total available backlog of $25.1 million at December 31st. This was driven by new awards for the year of $24.9 million.

The new award additions in 2008 included multiple client expanding global pharmaceutical, biotech, medical device, CROs and academic sectors and they range from the smallest to some of the largest life science companies in the world. Our proven track record that delivering highly scalable and complex deployments for companies of all sizes and ability to offer consolidated expertise was a key driver for the etrials' selection. We continue to see success combining our EDC and IVR integrated solutions and together, they are increasingly becoming the products of choice to small and midsize sponsors.

Once implemented, our EDC solution with the teams of use; import, export and reporting capabilities along with their responsive and experts support team is quickly becoming a favorite among clinical team in investigative types alike. In addition, we are experiencing resurgence of our eDiary offerings providing one of the industries' broadest electronic patient reported outcome suites available whether it is by devices, the web or by phone. We are confident that our diaries in particular will gain greater acceptance as new and more innovative capabilities are released helping our customers obtain greater degrees of data quality, program efficiency and patient's safety.

GAAP operating expenses totaled $6.4 million for the first quarter of 2008 and $9.2 million for the fourth quarter. However, excluding non-operating and severance related cost; operating expenses for the year were down dramatically from $6.4 million in the first quarter 2008 to $4.6 million in the fourth quarter of 2008, a 28% decline. J will give you a reconciliation of these GAAP to non-GAAP numbers in a minute.

Our cash burn rate also declined in the fourth quarter of 2008. During the year, we added a total of 95 new projects. Moving forward, the way in which we define projects more accurately reflects the actual number of studies they implemented regardless if they are using multiple technology within the same study or not. On an apple-to-apple comparison, we actually added one more study than we did last year.

In summary, we are encouraged by what the Company was able to achieve given a year marked by great deal of turbulence and change. Today, we are managing on a more granular basis closely monitoring our business against a very conservative plan. We have more stringent management of new business from the time of the award through the project initiation or closeouts. Our cash selection has improved substantially. Our cash burn rate has declined quarter-over-quarter, and also important, our voluntary employee turnovers greatly reduced. At the same time, we continue to renew engagements and deepened our relationships with customers of all sizes across our target market.

While today’s economic conditions cause us to be very cautious for 2009, we are optimistic about our long-term growth potential. It is important to remember that the new project bookings did not immediately translate into revenue. Delays and cancellations directly impact our revenue outlook and that is why we are taking a very conservative approach.

In fact, very recently, a large global pharmaceutical customer notified us with their decision to discontinue one of their drug programs which resulted in a significant cancellation. Let me be clear though that this was not a result of any fault of etrials but a reflection of current economic conditions and impending client side M&A transactions. The environment has caused some of the world's largest drug companies to take a closer look at their clinical study pipeline and associated R&D spending.

Cancellations notwithstanding, my outlook on 2009 is of conservative confidence. Make no mistake; I am encouraged by the Company's progress, direction and opportunity given the economic state of affairs. I would also like to take this opportunity to thank all of our many talented employees for their hard work and dedication.

Now, let me turn it over to J who will get to the financial details. J?

Joseph F. Trepanier, III

Thanks, Dennis. Net service revenues in the fourth quarter were $3.6 million versus $4.9 million in the same quarter a year ago and compared to $3.7 million in the third quarter of 2008. The decrease from 2007 is primarily due to having fewer active studies throughout the fourth quarter of 2008 as compared for the same quarter in 2007.

In the fourth quarter, we incurred approximately $1.6 million in cancellations on studies that had already started and were generating revenue. This and the fact that we had roughly six fewer active studies during Q4 of 2008 as compared to the fourth quarter of 2007 significantly contributed to the decline in year-over-year revenue. Cost of revenues were $2.2 million for the quarter compared to $2.6 million in the fourth quarter of 2007 and $2.6 million in the third quarter of 2008. The decrease from the fourth quarter of 2007 reflects lower personnel expense as well as reduction in overall project related direct expenses.

The decrease from the third quarter of 2008 reflects primarily the absence of last quarter's $246,000 charge related to inventory impairment and also decreases in personnel expenses. In total, GAAP operating expenses were $9.2 million in the fourth quarter of 2008 compared to $8.3 million last year and $10.1 million of third quarter.

Included in operating expenses for the fourth quarter 2008 was the $4 million goodwill impairment charge, more than $350,000 in severance cost and nearly $280,000 in expenses due to increasing our total reserve in response to today's economic environment. Adjusting for these items, the Company's operating expense run rate as of the end of the fourth quarter 2008 was down to $4.6 million. This equates to a $1.8 million reduction in our operating expense run rate from the first quarter of 2008. This is the result of our ability to more closely manage the business as well as the implementation of strategic resource planning efforts.

Gross margin in the quarter was 41% versus 48% a prior year period and 31% in the third quarter. Sales and marketing expenses were $1 million compared to $1.2 million for the same quarter last year, and compared to $1.1 million for the third quarter 2008. In the fourth quarter of 2008, the Company cutback and controlled both expenses to better manage overall spending.

General and administrative expenses were $1.4 million compared to $1.6 million last year, down 13% reflecting significantly lower personnel related expenses. Compared to the third quarter of 2008, general and administrative expenses were down 19.1%. We experienced an operating loss in the fourth quarter of 2008 of $5.5 million compared to $2.6 million in the same quarter last year and $6.1 million in the third quarter.

The unfavorable variance from the fourth quarter of 2007 was the result of lower revenues as well as a goodwill impairment charge which was partially offset by lower other operating expenses. The net loss for the fourth quarter was $5.5 million or $0.50 per share versus a net loss of $2.5 million or $0.24 per share in the fourth quarter of 2007 and compared to the third quarter's net loss of $6.1 million or $0.56 per share.

Turning to the full year results, net service revenues were $15.1 million, down 17.5% from net service revenues of $18.3 million in 2007. Although we had substantial awards in 2008 more than 50% of those awards had delayed starts. Our cancellations throughout 2008 exceeded those of 2007 by nearly $1.3 million which also had a negative impact on revenue. Overall, GAAP operating expenses increased approximately 10% in 2008 over 2007 going from $29.4 million to $32.3 million. This was driven by the $8 million of 2008 expense related to goodwill impairment charges as well as approximately $1.8 million of severance expense incurred throughout 2008.

Excluding those two items from 2008 as well as the roughly $1 million in severance expense incurred throughout 2007 from last year's expenses, the Company's other operating expense decreased year-over-year by more than 20% or $5.9 million. It is important to note that the Company had now written off the entire amount of goodwill that was on the balance sheet at the beginning of 2008.

Gross margins for 2008 were 35% compared to 49% in 2007 reflecting a significant decrease in year-over-year revenue. G&A related expenses declined by approximately $900,000 as compared to 2007 reflecting lower cost for professional fees, legal expenses, audit tax charges as well as reduced personal expenses.

The Company reported a net loss of $15.8 million or a $1.45 per share for the year as compared with a net loss of $6.2 million or $0.57 per share in 2007. The decline in year-over-year revenue as well as the $8 million of goodwill impairment and nearly $800,000 of additional severance expense incurred in 2008 was the primary reasons for the significant increase in year-over-year net loss.

Moving on to the balance sheet, at yearend, we had cash and cash equivalents of $10.7 million, working capital of $8.5 million and minimal debt. Our fourth quarter reduction in cash was approximately $1.5 million which was nearly $300,000 lower than third quarter 2008. Included in the fourth quarter cash payments was more than $220,000 patient repurchase stock, roughly $200,000 in severance payments and one time expense of approximately $200,000 to purchase our new financial system.

Excluding these items, our fourth quarter reduction in cash would have been less than $900,000. Our net decline in year-over-year cash was approximately $4.5 million and was primarily due to our operating loss partially offset by positive results from improved focus on collections. It is important to point out the substantial contributing factor to our quarterly cash burn as it relate to more than $300,000 in severance payments through the second quarter of 2009. The majority of those severance expenses will be eliminated by the end of July of this year.

We continue to focus on controlling our expenses and maintaining our strong cash position in overall balance sheet. This is evidenced by the significant decrease in our adjusted operating expense run rate as I have discussed earlier. We remain focused on driving towards our open goal of sustaining profitability by continuing our trend and decreasing overall operating expenses, managing the business on a more granular basis, focusing on service deliver excellence as well as increasing a number of active studies generating revenue.

Before walking you through the backlog, I will remind you the backlog includes only those projects by which we have received written award confirmations from customers providing first patient in-dates indicating studies will start within six months of receiving the written award. Total awards in the quarter were $5.5 million, of which, $3.7 million were included in our reported backlog. Also in the fourth quarter, $1.5 million was moved from pre-backlog into our reported backlog for two studies expected to start within six months. This resulted in a total 2008 ending backlog of $20.8 million compared to $19.2 million at the end of 2007 for a year-over-year growth increase of 8%.

In addition to ending the year with $20.8 million in our backlog, we have $4.3 million pre-backlog. Pre-backlog is defined as those in awards that are scheduled to begin beyond six months. This resulted in a Company ending 2008 with $25.1 million in total available backlog. Since there was no pre-backlog category in 2007, our total available backlog increased by 30% year-over-year. While we consider this a major accomplishment, our focus remains on ensuring that project work begins during 2009 and as a result, revenue was generated.

Cancellations for the fourth quarter totaled $1.6 million and $3.9 million for 2008 compared to $2.7 million in 2007. As I stated earlier, these fourth quarter cancellations had a significant impact in our fourth quarter decline in revenue. During the quarter, the Company repurchased 252,400 shares of common stock under the 1 million share repurchase plan authorized through June of 2009. This brings our total repurchase shares during 2008 to $364,504.

With that, let me turn the call back to the operator so we can take your questions.

Question-and-Answer Session

Operator

(Operator's instruction) Your first question comes from the line of Steven Silk - C. Silk and Sons, Inc.

Steven Silk - C. Silk and Sons, Inc.

My first question has to do with the shares repurchased from the buyback. Sometimes, you rate a $1 million stock for purchase and now you just had a million shares repurchase. What is the plan?

Joseph F. Trepanier, III

This year, the plan is actually $1 million worth of shares.

Steven Silk - C. Silk and Sons, Inc.

Okay, so what do you pay for the 252 average per share?

Joseph F. Trepanier, III

Well, actually we purchased some back throughout the buying back period and it fluctuates depending on the price.

Steven Silk - C. Silk and Sons, Inc.

I realized that. So, what was about the average, about $1?

Joseph F. Trepanier, III

A little less than that.

Steven Silk - C. Silk and Sons, Inc.

Okay good. So, the severance related cost toward the end of fourth quarter?

Joseph F. Trepanier, III

Severance related cost in the fourth quarter?

Steven Silk - C. Silk and Sons, Inc.

Yes and you said additional $300,000 through the first two quarters so we are talking about a $150,000 for each of the next two quarters.

Joseph F. Trepanier, III

The $300,000 was actually the cash for the next two quarters.

Steven Silk - C. Silk and Sons, Inc.

Okay, I am just trying to get a handle on what will your run rate would be and where do you think you need to be revenue per quarter to breakeven with it? I commend you on the cutting of the costs and getting new bookings so I am just trying to get an idea of where you think your revenue needs to be to be breakeven.

Joseph F. Trepanier, III

I guess I will answer that by saying that we reduced our adjusted operating expense run rate down to $4.6 million as we pointed out and we are continuing to focus on managing those expenses to trim that down and we are focused on continuing to try to breakeven and be profitable but as far as providing a number so where that will be, we do not have that exact number to provide you. I mean, it will happen when it happens.

Steven Silk - C. Silk and Sons, Inc.

Okay and within, let us say, the cost of good sold, I would assume that there is some fixed cost where if revenue could return a little vague, if you would be able to put some of the fixed cost over in increasing margins a bit?

Joseph F. Trepanier, III

That is correct.

Steven Silk - C. Silk and Sons, Inc.

Okay. So, the new project booking is really kind of I guess vapor. It is really hard to understand how it turns into revenue and when it starts but it really could be somewhat considered an asset of the company the fact that you have this potential amount of revenue within a year's time, right?

Joseph F. Trepanier, III

I would agree with you and it becomes revenue when the study starts. We recognize revenue as a percent complete. So as the study starts, revenue is recognized throughout the life of that study.

Steven Silk - C. Silk and Sons, Inc.

And so even though it is $25 million or so and the projects might start, let us say a project starts that is in backlog today starts in July, the total dollar amount which might take two years to realize is really what is included. So if you look at the backlog number, it is something that could be recognized within a year to 18 months even.

Joseph F. Trepanier, III

Correct. It depends on the size and the length of the contract.

Steven Silk - C. Silk and Sons, Inc.

Okay, so it could go for a while. What is the, how would you, after being here for about three to six months, what is your opinion of the Company and how will you differentiate yourself from your competitors? Why does somebody go to etrials?

Dennis Connaghan

Well I think what we are; I think we are one of the only vendors out there that have the three modalities. We have the IVR, the EDC and the eDiary products. They are integrated giving them; we actually have customers who have or using old free technologies in their studies. I think that differentiates us. I think that is, and I think we have individually, all three of those technologies are competitive in their own right too as well as being integrated. I think that makes us that cut us apart from the others.

Steven Silk - C. Silk and Sons, Inc.

Okay and so for me, my final question really is to tie in all my previous questions, you would hire an investment bank or somebody to take a look at strategic alternatives. I would assume that the backlog to somebody is an asset; a differentiation of a product which I would assume you think is as good as anybody else’s could also be an asset. We are not really seeing that asset being valued in the price of the stock. What your investment bank come back and told you and really how much time do you want to give yourself until you feel you need to do something more drastic as far as having the Company continue because typically you have to have a somewhat of a solid balance sheet in absolute numbers so that people are going to need to rely on you if they are going to start to study that that takes three years that etrials is going to be there in three years.

Dennis Connaghan

Well, I think there are multiple set of questions based on this but we continue to work with emerging growth. We are obviously rather engaged almost six months ago to evaluate ways to enhance sales and the value and obviously with economy, the way it is, a lot of that is changing. So there are a lot of opportunities that we have seen and we are confident on multiple fronts that are a little different today than they have been. I think you are right. I think we see the asset to this business not only being the business we have with our customers but we feel very strongly about the assets of the technology. We feel very strongly that that is a great asset.

But as far as going forward, I think that 2009 is going to be a tough year for everybody. I think that we are running the business very conservatively. As we said before, we are running on a very granular basis and we know it is going to be a tough year and so we are sort of backing down the hedges and so I think that that is way we are going to approach this year.

Operator

(Operator's instruction) There are no further questions, sir at this time.

Dennis Connaghan

I would like to thank everybody for joining the call. It seems like there is a good number of people on here. We really appreciate your interest in etrials and we appreciate you keeping an eye on us as we go forward. Thank you very much.

Operator

Thank you. This concludes today's conference call. You may now disconnect.

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