IMS Health Inc., Q1 2009 Earnings Call Transcript

IMS Health Inc. (RX)

Q1 2009 Earnings Call

April 23, 2009 8:30 am ET

Executives

David R. Carlucci - Chairman and Chief Executive Officer

Leslye G. Katz - Chief Financial Officer

Gilles V. J. Pajot - Chief Operating Officer

Murray L. Aitken - Senior Vice President, Healthcare Insight

Darcie Peck - Vice President, Investor Relations

Analysts

Lawrence Marsh - Barclays Capital

John Kreger - William Blair & Co.

Randall Stanicky - Goldman Sachs

Eric Coldwell - Robert W. Baird & Co.

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the IMS Health first quarter 2009 earnings conference call. (Operator Instructions). I would now like to turn the conference over to Darcie Peck, Vice President of Investor Relations.

Darcie Peck

Good morning and welcome to the IMS first quarter 2009 conference call. With me today are Dave Carlucci, our Chairman and Chief Executive Officer; Leslye Katz, our Chief Financial Officer; Gilles Pajot, our Chief Operating Officer; and Murray Aitken, our Senior Vice President at Healthcare Insight. Dave and Leslye will discuss highlights from our first quarter 2009 results, and then we’ll open it up for your questions.

As in the past, we have posted slides on our website, and I would encourage you to view those during our prepared remarks this morning. Our remarks today and our presentation include certain non-GAAP financial measures in an effort to provide additional information to investors. All non-GAAP measures have been reconciled to their related GAAP measures in accordance with SEC rules, and you can find these in the notes section of our press release this morning.

Let me remind you that certain comments made in this presentation may be characterized as forward looking under the Private Securities Litigation Reform Act of 1995. Those statements involve a number of factors that could cause actual results to differ materially. Additionally, information concerning these factors is contained in our filings with the SEC and copies are available from the SEC, from the IMS website, or from us in investor relations.

Forward-looking statements represent our views only as of the date they are made, and we undertake no obligation to correct or update them whether as a result of new information, future events, or otherwise.

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

David R. Carlucci

Good morning everyone and thanks for joining us. In a quarter characterized by an extremely challenging marketplace, we delivered EPS growth and generated strong cash flow, but saw weaker results in revenue and operating income. For the first quarter, revenue was $527 million, down 2.8% constant dollar. With more than 60% of our revenue generated outside the US, the strengthening of the dollar had a significant impact on reported revenue which declined 8% in the quarter.

Operating income declined 20% constant dollar and 13% reported. At the same time adjusted earnings per share was up 3% to $0.38. We had an exceptional cash flow performance in the quarter. We improved year on year by $34 million, driven in part by very strong DSO, down 9 days. On top of that we had a very positive one-time tax benefit of $63 million. Our balance sheet and liquidity position remain very strong.

With that as a backdrop, let me give you a sense for some of the business dynamics that we saw last quarter. In the first quarter we’re always very focused on contract renewals. We made it a priority to reinforce the client the value of what we deliver and the significant investments we’ve made, and we were successful in achieving modest price increases on our base contracts. However, with the cost pressures on clients they had to be more selective and that led to some cancellations of primary care therapy areas. We saw this in our large accounts mostly in the major markets.

Overall their decisions to cut some information purchases did lead to a decline in our I&A growth in the quarter. That mostly impacted sales force information offerings contributing to a weaker performance in commercial effectiveness. That said, clients are spending more with us in certain areas. Pockets of our I&A offerings are performing well. We continue to see good growth in our MIDAS global measurement services, patient level insights, specialty information, and in emerging markets. This shift in spend is not a new phenomenon for us. We’ve been highlighting these areas of growth for some time.

From a consulting and services perspective, revenues were down 3.5% constant dollar and 9% reported in the quarter. We experienced a significant slowdown in demand for management consulting in the US as clients’ productivity initiatives have quickly turned from a focus on ROI to pure cost rationalization. Clients are re-scoping projects, taking longer for approvals, and in some cases making decisions to work on their projects internally. This was borne out by our analytics we use to assess our business. We had a higher percentage of smaller engagements and the number of days to close projects was up. Our management consulting practices got off to a slow start. Activity in January and February was light; in March we started to see a pickup, but it’s much too early to call it a trend.

What we can do in this environment is manage the consulting business closely and we’re doing just that, taking the right actions to adjust our non-billable headcount and to redeploy our billable resources to practice areas in geographies where demand is the strongest. We’ve adapted our engagement approaches for the areas where we know our clients need help; that’s in emerging markets with launches and with implementing new commercial models.

It’s a much better story in services where our business continues to grow in double digits and where we can help clients improve the variability of their cost structures. Acceleration of services is a focus for us for the remainder of the year where we are expanding our services capabilities geographically and winning new business in knowledge process outsourcing.

So, there are a number of areas where clients are spending, on both I&A, and consulting and services offerings. We’re continuing to build our capabilities in areas like managed markets, patient and specialty insights, and emerging markets, and will continue to deploy resources to capitalize on those growth opportunities, but right now these aren’t of sufficient scale to offset what’s happening in other parts of the business.

I’m confident that we’re focused on the right priorities, but the macroeconomic environment is having an impact on our performance and our clients. Yesterday we issued a press release providing an update on the overall pharmaceutical market and our global forecast. The downturn is affecting market demand and as a result we lowered our 2009 market forecast to 2.5% to 3.5% growth this year; that’s 2% points lower than our forecast last fall. This is a rapid and significant change and that’s why I asked Murray Aitken to join us today and to answer any questions you might have on how the economic conditions are weighing on the pharmaceutical market.

Now let me quickly take you through our business line results. As I mentioned on our last call, we have adjusted our business line structure and you can see that in our press release this morning. In the first quarter, commercial effectiveness revenue declined 4% constant dollar and 9% on a reported basis. Clients are switching their purchasing to offerings like LifeLink, enhanced long-term care, specialty, and services offerings which continue to yield good growth for us, and as I mentioned earlier, they are doing this at the expense of sales force information for primary care therapy areas and that’s a main contributor to the overall decline here. We expect continued pressure in the major markets, but as we look to the rest of the year, compares get better for us.

Product and portfolio management declined less than 1% constant dollar and 6% reported. We’re about where we expected to be here. We’ve had fairly consistent demand for our MIDAS offerings, which led to some growth in our information and analytics offerings in TPM. There was a pickup in demand for forecasting and competitive intelligence services, not surprising at all in this environment.

Revenue from our new business areas which include pricing and market access, managed markets, consumer health, payer, and government declined just under 2% constant dollar and 9% reported. The decline here was a result of fewer consulting engagements in pricing and market access. The other areas of this business line continue to perform well with solid growth in consumer health, government, and payer.

So, overall we saw a continued slowdown in our eight major countries with US growth more in line with what we’ve been seeing in other large markets. From a portfolio perspective the decline in management consulting was the most significant factor from what we saw at the end of last year. So we’re going to continue to shift our resources to the high-growth areas I discussed earlier, stay focused on cash, and maintain our strong financial position.

Now let me turn it over to Leslye who will take you through the details of our results.

Leslye G. Katz

Good morning everyone. Let me start by highlighting a few important elements in our Q1 performance and then I’ll provide more detail on all of the key quarterly results. Revenue in the first quarter was $527 million, a decline of 2.8% on a constant dollar basis and 8.2% reported. As Dave mentioned, our revenue performance was adversely affected by both a weak economy and currency movement. The strengthening of the dollar against major European currencies significantly widened the gap between reported and constant dollar revenue results in the quarter, and our reported revenue came in 5.4% points worse than constant dollar revenue. Despite this revenue decline we delivered very strong free cash flow and DSO. I am pleased with our track record of focused and consistent improvement in this area.

In the first quarter we also recognized substantial tax benefit from two transactions. The results of these are; first, our estimated full year adjusted effective tax rate is now approximately 29%, down from the 31% we projected in early February; his lower tax rate helped our bottomline this quarter; and second, as a result of an internal reorganization executed in the first quarter, we realized a one-time tax benefit of $63 million which was recorded in Q1 GAAP results. We have excluded this tax benefit for adjusted purposes. The tax benefit from this reorganization will help us to drive free cash flow this year of at least $380 million stronger than we had originally projected. Our revenue and EPS guidance remain unchanged.

Now, for more details on our results in the quarter beginning with a regional perspective on revenue growth; our performance in the quarter was driven by weakness in the eight major markets where revenue collectively declined by 5% constant dollar. In contrast, revenue in the 7 for emerging markets continued to grow in double digits with China, Brazil, and Turkey leading the way.

Coming off a strong start to last year, revenue in the Americas region declined 3.7% constant dollar and 6.3% reported. Weakness in the US management consulting business particularly among large clients pulled down our revenue performance in the region. In response, we’re deploying resources to capitalize on consulting opportunities in mid-size and smaller accounts as well as Latin America, and I&A opportunities in areas such as patient-level insight, specialty, and long-term care. Services continue to perform well across the region.

EMEA revenue declined 3.2% constant dollar and 14% reported. Three of the five major markets in EMEA declined. Our mid-size countries have started to feel the impact of the downturn and that’s also affecting our overall growth. We’re tightly managing our costs and expense across the region including shifting consulting resources to further improve utilization.

Asia-Pacific posted revenue that was up 1.8% on a constant dollar basis and 4% reported. Japan delivered a good performance in the quarter especially in consulting.

Moving to a client perspective; the uncertain economic environment is having an impact on the speed of decision making processes and the magnitude of discretionary spending. While there was considerable variability client by client, revenue from our top 20 clients overall declined 5% constant dollar. Revenue from mid-size clients grew in the low single digits while revenue from small and specialty clients decreased very slightly. The small specialty client group includes financial services companies and many of these clients disappeared or severely curtailed spending in the quarter. However, revenue from other clients in this group including governments and payers continued to grow well.

Total information and analytics revenue was down on a constant dollar basis by 2.6%. I&A gross margin was 59.3%, an improvement of 160 basis points over Q1 of last year driven by restructuring savings in customer delivery and development costs. Total consulting and services revenues decreased by 3.5% constant dollar. C&S gross margin was 42.8%, 80 basis points better than the first quarter of last year. Utilization was approximately 66% below our target but ahead of last year. However, the weakness in management consulting demand resulted some excess capacity and this increased consulting expense. This was the primary driver behind the increase in SG&A expense as a percent of revenue in Q1 ’09 versus Q1 ’08.

As you know we remain very focused on tightly managing all levers of our cost structure. We have maintained a disciplined hiring approval process and tight controls around discretionary spending. We completed the implementation of our restructuring plan. These actions help to keep costs and expense growth to under 2% on a constant dollar basis in the quarter; however, even with modest cost and expense growth, the revenue decline in the quarter led to lower operating income and operating margin. First quarter operating income was $101 million, down 20% on a constant dollar basis and down 13% as reported. Operating margin was 19.1%, down 110 basis points compared with the first quarter of 2008.

Turning to the non-operating components of Q1 performance, total interest expense net was $8 million, down $0.2 million from last year, primarily due to lower debt levels in the first quarter of ’09 as compared to the first quarter of ’08. Other income on a GAAP basis was $5 million and $3 million on an adjusted basis reflecting the phasing of foreign exchange hedge gains into subsequent quarters.

As you see in our press release, we are now separately identifying our after tax income attributable to non-controlling interest as required by SFAS 160. This represents the after-tax cost of our minority interest which we previously reported on a pre-tax basis in the other income expense line. For modeling purposes, this after-tax minority interest expense was approximately $1.5 million per quarter in 2008.

On a GAAP basis, net income was $133 million including the $63 million one-time tax benefit from our internal reorganization. On an adjusted non-GAAP basis, net income was $69 million, an increase of 1% over Q1 2008. We have provided the complete line item reconciliation between GAAP and non-GAAP results in the notes section of our press release and outlined the differences in our earnings slides on our website this morning.

As I mentioned earlier, we recognized a tax benefit from a transaction in the quarter that reduces our full year adjusted effective tax rate to approximately 29% down from the 31% we originally projected. We now expect a first half tax rate of about 31% and a second half rate of about 28%.

GAAP EPS for the first quarter was $0.73. On an adjusted non-GAAP basis, EPS was $0.38, up 3% over adjusted non-GAAP EPS of $0.37 last year.

From a cash flow perspective our performance was very strong. We typically have negative free cash flow in the first quarter, and excluding the one-time $63 million tax benefit, preliminary free cash flow was negative $11 million. Last year’s first quarter cash flow was negative $45 million. This represents a $34 million improvement year over year. Our DSO in the first quarter was a key contributor to this cash performance. DSO improved 9 days versus first quarter last year coming in at 68 days. Including the $63 million one-time tax benefit, preliminary free cash flow in the quarter was $52 million, $98 million better than Q1 ’08.

Cash and equivalents totaled $175 million at quarter end, a decrease of $41 million compared with December 31, 2008. Debt at March 31^st was $1.33 billion, down from $1.4 billion at December 31^st. Our debt to EBITDA ratio was 2.1 times. Total debt capacity as of March 31^st was $1.79 billion and $461 million of our debt capacity was unutilized and immediately available. No shares were repurchased during Q1 ’09, a total of 9.5 million shares remain authorized and available for repurchase under the December ’07 board authorization. In terms of capital deployment, we spent $22 million on deferred software and capital expenditures, unchanged from last year. We did not complete any acquisitions in the first quarter.

Looking at our overall performance in the quarter in the face of a very challenging market environment, we responded well by continuing our focus on managing cost expense, generating EPS growth, delivering strong free cash flow, and improving DSO. Our focus in these areas remains intense and will continue throughout the year.

Now let me turn the call back to Dave.

David R. Carlucci

To sum up, as the market continues to experience a lot of change we continue to make adjustments to our business. Clients need to get more from their product launches, build out their strategies in emerging markets, and implement new commercial models. In the first quarter, we had been adapting our approach to engaging around these platforms; bringing our breadth of capabilities together, going after broader opportunities, and positioning IMS as a more significant player in our clients’ decision making. Another important trend that we’re responding to is the increasing number of client mergers. This will require us to continue to evolve our approach.

As I meet with clients who are in the midst of a merger process, they tell me that they’re not only significantly enhancing their portfolios, but that they also need help with productivity and cost savings. We’re working on all of these areas including developing portfolio strategies, driving their productivity, and helping them put more variability into their cost structures. By tightly integrating our information and consulting offerings with our services, we will more closely embed our capabilities into our clients’ new structures. It’s why we build out offerings to help reorganize sale forces, integrate market access strategies, and outsource business processes.

One thing that’s also clear from these discussions is that IMS is playing an integral role in helping them navigate this challenging environment. Our business is resilient and I’m confident in our team’s ability to remain extremely nimble and focused on our clients’ needs while at the same time tightly managing our cost structure.

So with that let’s open it up for your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Lawrence Marsh - Barclays Capital.

Lawrence Marsh - Barclays Capital

How much as you think about this accelerating weakness from this quarter would you really define as just market specifics or things that are somewhat outside your control versus what you would attribute to any company specific issues around execution or product misses after some of the execution issues that you called out in the fourth quarter in EMEA?

David R. Carlucci

Larry, I think it starts with the compare. We had 6% growth in the first quarter last year; that was our strongest quarter, and if you look at the US getting more in line or I should say the Americas more in line with other large geographies, last year we had 7.3% growth in the Americas. So, I think that’s one element of it. The second element of it is there’s a number of significant changes going on with our clients and some of those are creating elongated sell cycles for us. We did see our pipeline days to closure increase. I would say from an execution point of view obviously we can always execute better. The big picture for us on that is to be more holistic in our approach. We’ve got engagement platforms around new commercial models, around emerging markets, and around launch where we’re really trying to pull together the more provocative consulting view with our information and analytics with our services to be able to help clients look differently at what they have to do in this market, and we’ve had some success there. We had a big commercial win with a top 17 client for a large multi-country engagement, and that was over a 5 million engagement that will play out over the first half. In emerging markets we’ve had several million-dollar or bigger wins on engaging multi-country strategies in those emerging markets and the same with launch. So, I don’t look at any one area where I felt execution fell down. I would also say it’s very clear that management consulting in the industry in general is under significant pressure downward and we experience the same phenomenon.

Lawrence Marsh - Barclays Capital

Just a followup briefly; in the last quarter I asked you about stress testing that constant dollar growth expectations for the year and I think at that time you had said that you felt like that was a pretty reasonable point of view. Obviously fast-forwarding a couple of months, it is getting worse, that 0% to 3% now looks a little bit more aggressive. Is there something there particularly you can call out that could help give us confidence that that’s an attainable number?

David R. Carlucci

I think the biggest issues are the compares and obviously as we said as you look at this start to the year it makes things fairly challenging; however, 0% to 3% is a wide range, and I think we’re still in reasonable position. The main areas that give me a feeling that we’re in reasonable shape is the up-tick of our new offerings. We’re not seeing everything atrophy in this market. Secondly, our services build-out continues to accelerate and we had double-digit performance in services. So, I think that it’s still very early to call. We knew we were up against a tough compare in the first quarter and we reconfirm our guidance.

Lawrence Marsh - Barclays Capital

Having Murray on the phone gives us some perspective on the clients’ standpoint; maybe if he could elaborate on the customary action in this economy, and maybe, what has surprised him of late in terms of reaction and then just what’s driven such a significant takedown of global growth expectations from the fall?

Murray L. Aitken

Certainly our customers are feeling the impact of the economic pressure as the pharmaceutical market around the world is slowing in growth. This is really adding another level of pressure to what’s already a difficult environment for them based on the longer term trends that they’ve been dealing with for some time. So, we are seeing more action being taken whether it be reevaluation of their commercial models and really implementing new commercial models, whether it be pursuing the growth that is still robust in the emerging markets, and also strengthening our approach to building and demonstrating the evidence that the medicines that they are bringing out into the market are creating value for payers and for healthcare systems around the world. We’re also seeing more tactical responses in the United States. For example, there are parts of the country where the impact of the economic crisis is more pronounced, and so with using this sort of capability that we can help them with, more localized tactical responses, the use of copay couponing, and things of that type. So, I think we’re definitely seeing an uptake in the level of activity both at the tactical level as well as some of the more strategic moves that we’ve been watching this quarter.

Lawrence Marsh - Barclays Capital

Is there anything in particular to pricing, Murray, last 3, 4 months?

Murray L. Aitken

Largely it’s more of the same. We also did a lot of modeling at the beginning of the year on how we thought the economy would play out and it’s impact on the market, and it’s more or less playing out the way we expected, both in terms of the way that those markets were with high out-of-pocket spending, the way patients are changing their behavior, and in the single payer markets and policy responses are being made based on the broader economic slow-down.

Lawrence Marsh - Barclays Capital

And finally, just if you could give us an update on some of the data of restriction initiatives at the state level, I know you filed an appeal in the Supreme Court on the first circuit decision, anything of note happening in the last month or so?

David R. Carlucci

Not significantly, Larry, on any of those three states that had passed legislation in the past; Maine has continued to hold the implementation of their law until the appeals are all dealt with, and we have appealed to the Supreme Court. We have the trial in Vermont in late July, early August, and we’re still waiting for that ruling, just to remind you that Vermont’s in the second circuit and New Hampshire and Maine are in the first; and then since that decision, we’ve seen 23 states introduce data restriction legislation, in 7 states those efforts have already failed and no state has passed the data restriction bill until this year.

Lawrence Marsh - Barclays Capital

Okay, and one final quick thing, Leslye, the tax rate, obviously you’re now saying 29%, so it sounds like with the guidance going into the first half, it sounds like we could have a negative compare Q1 to Q2 given a much higher tax rate in the second quarter, did I hear that right?

Leslye G. Katz

Yes.

Operator

Our next question comes from the line of John Kreger - William Blair & Co.

John Kreger - William Blair & Co.

Another question for Murray, can you give us a little bit more expansion on where the slow-down is happening in the global market, are you seeing particular areas or regions where things are decelerating?

Murray L. Aitken

We’re seeing it play out in different ways in different parts of the world, both based on the magnitude of the economic slow-down in different countries and then given the structure of the pharmaceutical system. So, in some of the emerging markets, China and India, their GDP reductions while still significant are less than in many of the developed countries as well as some of the other emerging countries; therefore, the amount of new pressure coming from that downturn might be a little less, and also in countries where the healthcare system is largely government funded, in some cases there are stimulus programs that are actually providing some upside to the pharmaceutical market, in other countries there have been some short-term actions to apply some price cuts or other mechanism to reduce pharma growth. So, we’ve been tracking sustained markets and it is different in everyone. The big news I think is that the US market is going to be declining 1% to 2% in 2009, and that’s the first time we’ve ever seen the US market decline in absolute terms. So, that’s where it’s hitting the hardest and the most.

John Kreger - William Blair & Co.

And then Dave, can you talk a bit more about consolidation, perhaps refresh our memory about the impact of past large mergers on your business, do you think it will be similar this time around or perhaps different given the unusual circumstances, and finally, are you seeing any of that impact influence your business yet given the timing of these recent deals?

David R. Carlucci

Yes, we haven’t seen something that we could measure from an impact. We do know every time these large mergers are announced, there’s a little bit of a slow-down in decision making in these accounts as they begin the plan for the future, but it really varies by merger, and as you said, John, we have a lot of experience with this. I do think it’s more important in this area that we engage very differently, and so for the major ones that have been announced, we put up our project office in place in the company and you know that that encompasses people from consulting and services as well as I&A to really look at the areas that we can have an impact in merger preparation as well as post-merger. From a post-merger perspective, as you will recall, we generally see a short-term hit in our market research area where they don’t need two subscriptions, but as they try to build out the portfolios, we don’t see as much a hit on the commercial effectiveness side because generally they’re complementary in the growth of therapy area focus. So, that’s kind of the traditional approach. I think the new twist in this is how they’re going to have to re-think the way they do business on a broader basis, how they get more variablized cost structure in place moving forward, and certainly all what we do is an attempt to make them more product, and I think it’s important that we’re in there upfront as we have been to drive that level of thinking, and I’ve met with several of these leaders around the world and had those discussions, and I think they do center around the excitement of the merger, but the pressure and approach on doing things differently in the combined company, and certainly on the commercial side, they’re looking to us to help.

Operator

(Operator Instructions). Our next question comes from the line of Randall Stanicky - Goldman Sachs.

Randall Stanicky - Goldman Sachs

Dave, if we just step back and we look at Q1 revenue down on a constant currency basis, we look at your own market forecast that has ’09 down, can you just talk about what we’re implying for the back half to hit the top-line range, just as a followup to Larry’s question, I mean are you anticipating a back half recovery at this point?

David R. Carlucci

Again, if you look at last year, we were 6% in the first quarter, 4% in the second, 3% in the third, and flat in the fourth. We clearly think we have opportunity going forward to see better performance in the back half of the year, no question about it; that will take a lot of coordination, a lot of work around capitalizing on the opportunities that we see out there that are a function of what Murray discussion that this market is changing; keep in mind a lot of that decline that Murray talked about is related to FX, to currency, and Leslye can give you some sense of how that plays out over the course of the year, but we see that we should have a little easier haul in the second half of the year than in the first half of the year.

Leslye G. Katz

If I can just comment a little bit also on the FX, obviously, I can’t forecast where the FX rates are going, but just to help give a perspective, we had said on our call back in February that if rates had stayed where they were, then we thought we’d have a 1 to 2 point downward push between constant dollar and reported; as it turns out as you see what happened today at the rates that happened in the first quarter, we ended up with a 5.4-point downward pressure on reported versus constant dollar, and if we just took today’s rates and played them out for the rest of the year, then there would be a 4-point spread, not a 2-point spread. So, for example, whatever constant dollar rate you are projecting, you need to reduce that by somewhere in the range of $90 to $95 million to get to full year revenue, and that spread is going to be really wide in the first half of the year, it will narrow a bit in the second half. I know it’s complicated and it’s something Darcie can certainly help elaborate on, but it is a factor when you’re looking at the dollar model of your building.

Randall Stanicky - Goldman Sachs

Let me ask it a different way, if we just keep it even more generally, you talked in your prepared comments about delays, longer closings were somewhat going inhouse, is that getting worse as we look at March and into April than it was late in the year and earlier in ’09?

David R. Carlucci

We really saw a significant slow-down in January and February and a very nice uptake in March including very good utilizing. I just would be very reluctant to call that a trend. I think it’s important to remind everybody that we’re a high value player in the market that with our leadership position, that is the positioning of the company and that’s very important to us; so, we’re not the price leader, we’re seeing some price leader activity for some point offerings, we’re trying to maintain the value through this, and for the most part, that’s why we’re moving to the broader engagements, the more holistic approach to the market, and frankly, the teams are extremely engaged and activity is quite high but decision making is a lot slower and it’s very hard to predict going forward how that’s going to play out.

Randall Stanicky - Goldman Sachs

And then, Leslye, given the asset values obviously globally have come down, has that changed your view from an M&A perspective, particularly as you think about the back half of the year?

Leslye G. Katz

We remain extremely interested in acquisitions, we’ve had a fairly low level of activity last year and certainly nothing in the first quarter this year, but our approach to acquisitions really hasn’t changed, we look for the right level of bit with our business and look for an attractive net present value from a cash flow standpoint, and we’re not seeing a tremendous change in that environment.

Randall Stanicky - Goldman Sachs

And then, my last question, stock obviously like the rest of the market has pulled back, share buy-back is nothing in Q1, can you just talk about thoughts around buying back shares going forward?

Leslye G. Katz

When we put the plan together for the year, we did say we were not planning for a share re-purchase and we were going to be particularly prudent with our cash and focus heavily on cash which has been very good, but the first half of the year is typically a low cash flow, second half is much higher cash flow; we continue to evaluate share re-purchase, I expect that it will continue to be a part of our capital deployment, but it’s not in our planning right now and we’ll continue to evaluate as the year unfolds.

Operator

Our next question comes from the line of Eric Coldwell - Robert W. Baird & Co.

Eric Coldwell - Robert W. Baird & Co.

Just a couple of quick ones, first off on the other expense/income line negative 1.5 million, we were anticipating something more in the neighborhood of plus 5, did some of the restructuring change how you account for your minority interest stake in that line and/or what happened with the hedging that was so much different than the guidance that was delivered in January?

Leslye G. Katz

So, a couple of things, because of the requirements of SFAS 160, we did have to move our minority interest out of that line, it used to be in that line on a pre-tax basis, now we have to put it on an after tax basis and isolate it on its own line; and then secondly, because of the strengthening of the dollar, because of the hedges that we have in place, we generated a hedge gain in the quarter, but for adjusted purposes, we phased those a little bit, so that’s one of the differences between our GAAP and adjusted; we took some of those hedge gains for adjusted purposes and we pushed them out; and I think Darcie will be able to walk you through the details of that other income and expense line.

Eric Coldwell - Robert W. Baird & Co.

I think I’ve got it; I just wanted to make sure I was clear that that minority interest line had been pulled out so that normal $8, $9 million will be elsewhere in the model now, correct?

Leslye G. Katz

Yes.

Eric Coldwell - Robert W. Baird & Co.

Second question, if we could get a quick update on the restructuring where you are in the process and are you still on track to realize the annual savings that you anticipated going into 2009 and how much of that capture do you have at the moment?

Leslye G. Katz

We did finish the restructuring; we had a few left actions that we finished up in the first quarter. We finished very successfully. We are on track to get the benefit, and I think that as we expect to get incremental benefit this year versus last year in the $20, $25 million range, which is in line with what we have expected, and part of that helped us get the I&A gross margin up in the quarter because of savings in CD&D.

Eric Coldwell - Robert W. Baird & Co.

Sometimes when companies go through a process like this, they actually uncover new opportunities as well, and given the market environment, I’m just curious whether you have kind of tripped across some other opportunities in the same way of what you’ve done over the last year and a half.

Leslye G. Katz

We continue to evaluate opportunities for cost and expense savings on an ongoing basis. One of the key areas we’re focused on is as we look at our consulting business and closely evaluating both the capacity and the utilization as well as looking at our non-billables, those are certainly areas that will be continuing to pursue throughout the year; that’s something we do in the normal course.

Eric Coldwell - Robert W. Baird & Co.

And then finally, I think in the prepared comments, if I heard correctly, it sounded like some of your larger clients in the major markets were canceling their primary care therapy data, can you just tell us a little bit more what was implied there, what was said, and if they’re canceling these contracts, what exactly are they doing instead of buying those data sets from you?

David R. Carlucci

I think there are a couple of key tenants here; one is that we’ve invested very heavily in data assets, particularly in the area of patient insights and payer insights going forward, one of the very important things that we want to do is we continue to enhance longitudinal views in whatever to make sure that we drive the value from those. So, first and foremost, it was important that we establish that in on our base business so that we get some modest price increases. As a result, that forces the client to make some trade-off decisions as they’re looking at cutting their costs and focusing on certain areas. So, where they’ve either declined dramatically in sales force or de-focused in therapy areas, we saw specifically in the primary care area some therapy class cancellations, primarily in those 8 major markets, again, just out of necessity to get to some of the newer stuff. I would say, however, that obviously the newer stuff didn’t offset in total because they had to come down in their costs on all fronts, and as reported to me, they took some pretty hefty cuts in other areas of their commercial business, these considered by the client to be fairly modest. A typical renewal for us is a master contract that has the Ts and Cs and prices included in that, and then they choose therapy areas they’re committed for for the year. So, to your question, what are they going to do now where they don’t have any insight on an ongoing contractual basis? The opportunity for us is ad hoc where they’ll ask for a data view at some point and to have our consulting and services teams in there to try to help them navigate through the additional knowledge they need, but that’s kind of the characterization of what we saw.

Eric Coldwell - Robert W. Baird & Co.

And then, a final question, when I look at consulting and services revenue, would you care to may be either quantify or directionally talk about the sides of the services component which you mentioned as growing in the double digits at the moment.

David R. Carlucci

Well, we had characterized that last year as about a third, obviously based on the performance in the first quarter where we saw strong growth in services and continued weakness accelerating in management consulting, it would be larger than that; but, it clearly is over-shadowed at this point by the size of management consulting.

Darcie Peck

I don’t see anyone else in queue, so let me turn the call back to Dave for just a few closing comments.

David R. Carlucci

As you all know, you’ve been listening to all the reports and you heard from Murray this continues to be a very challenging environment for our clients. We’re trying to make sure that the capabilities that we built over the last 5 years to transform this company are fully engaged and utilized to help our clients get through this period. I am encouraged by the level of activity; I am encouraged by the level of dialogue. We certainly like to see sales cycles improve, but I think we’re fairly well positioned going forward to help our clients through this period, and we’ll update you again at the end of the second quarter. Thanks very much.

Operator

Ladies and gentlemen, that does conclude our conference call for today. We thank you for your participation, and ask that you please disconnect your lines.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: [e-mail]. Thank you!