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PAREXEL International Corp. (NASDAQ:PRXL)

F3Q09 (Qtr End 03/31/2009) Earnings Call

April 28, 2009 10:00 am ET

Executives

Jill Baker – Vice President of Investor Relation

Josef von Rickenbach – Chairman and Chief Executive Officer

James Winschel – Senior Vice President and Chief Financial Officer

Analysts

John Kreger – William Blair

David Windley – Jefferies & Company

Eric Coldwell – Robert W. Baird

Charles Rhyee – Oppenheimer & Co., Inc

Todd Van Fleet – First Analysis Corp

Randall Stanicky – Goldman Sachs

Douglas Phil – Barclays Capital

Greg Bolan – Wachovia Capital

Alexander Draper – Raymond James

Operator

Good morning, my name is (Dixie) and I will be your conference operator today. I would like to welcome everyone to the PAREXEL International Third Quarter Fiscal Year 2009 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to our host speaker, Jill Baker, Vice President of Investor Relation.

Jill Baker

Good morning everyone. The purpose of this call is to review the financial results for PAREXEL’s third 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 today.

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 provision 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 December 31, 2008, as filed with the Securities and Exchange Commission on February 9, 2009 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 termination and associated costs, foreign exchange acquisitions and divestitures, special charges, restructuring reserves, adjustments to restructuring reserves and certain tax items. The reconciliation of the non-GAAP financial measures with the most directly comparable GAAP measures is available in the press release, we issued yesterday, which maybe found in the investor relation section of our website at parexel.com or it will be discussed during the course of this teleconference.

On our website of parexel.com, we have provided some pertinent financial information. You may access the report title Q3 FY ’09 additional financials, in the additional financial portion of the Investor Relation section.

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

Josef von Rickenbach

Thank you Jill and good morning everyone. I’d like to review some details for the quarter. And then Jim will provide more information on the financials. After that we’ll open the call for any questions you may have.

For the quarter ended March 31 2009, service revenue was $264.5 million compared with $245.3 million in the same quarter of the prior year, an increase of approximately 8%. On a sequential basis, revenue in the March quarter was stand about 4% from the December quarter, excluding the negative impact of foreign exchange of $35.7 million in the quarter.

Revenue increased approximately 22%. The net positive impact of acquisitions in divestitures equated to $17 million in revenue in the current quarter and $900,000 in the third quarter of the prior year. Excluding both foreign exchange and the net positive impact of acquisitions and divestitures in both periods, revenue grew 15.8% year-over-year. Looking at the geographic distribution of revenue for the third quarter of fiscal year 2009 the America is represented approximately 43% of service revenue versus 41% one year ago. Europe the Middle East and Africa represented 48% versus 52% in the third quarter of fiscal year 2008. And Asia-Pacific was 9% of revenue as compared with 7% one year ago.

During the quarter, the largest client represented 9% of revenue, which was the same as the March quarter one year ago. The top five clients represented 28%, down from 29% one year ago, and the top 20 have represented 52%, down from 53% in the March quarter last year.

During the quarter, Clinical Research Services, or CRS, represented approximately 76% of the company’s total revenue versus 78% in the same quarter of the prior year. PAREXEL Consulting and Medical Communications Services, or PCMS, comprised 11% compared with approximately 14% in the prior year quarter. And Perceptive Informatics was approximately 13% of the total versus 8% one year ago.

Operating income was up about 16% on a year-over-year basis in the quarter, as a percentage of service revenue operating margin was 10% up from 9.3% in the same quarter last year mainly, due to a determined focus on cost control.

In the third quarter, diluted earnings per share came in at $0.25, which was the same in the third quarter one year ago. With regard to cash flow, we generated strong operating cash flow of approximately $51 million in the quarter, given the uncertainties of the current environment, we are being appropriately careful with regard to managing our cash position.

We close the quarter with a backlog of $2 billion and $36 million. During the quarter, we had an addition to backlog of $427.3 million from new business authorizations. Cancellations of $95.8 million and the negative impact from foreign exchange of $37.4 million. One cancellation accounted for approximately half of the total. The quarter’s net book-to-bill ratio was 1.25.

With regard to cancellations, our cancellation rate came in at 4.8%, which is within our projected normal range of 3.5 to 5% of the quarter’s beginning backlog. The average cancellation rate thus far in the 9-month of this fiscal year, is about the same, 4. 9% even including the large cancellation that we reported last quarter related to client default.

I’d like to make a few comments now about new business dynamics. In our late phase CRS business proposal volume declined both on a sequential and year-over-year basis. The value of typical proposal also declined over the same periods. Overall, it appears clients currently have a preference for more streamlined trials, which may have contributed to a drop in the value of proposals sent. However our hit rate in the third quarter improved, and we were successful in winning a number of complex global trials. As a result gross new business wins were more than 9% than in the third quarter last year.

There is no doubt that competition in the marketplace is at risk. But I would like to point out that we achieved these results while maintaining pricing discipline across the board. We feel that an orderly marketplace is at the highest importance in our industry especially within so many of our contracts are multiyear engagements.

There are a number of factors that I believe that have helped us to achieve positive new business results. First our dedication, expertise, and high quality work of our employees. Second is the fact that we are one of only a few companies that can effectively plan and manage large scientifically complex technology enable trials virtually anywhere in the world while complying with regulatory requirements and delivering high quality results.

Third it’s a diversity of our worldwide product and service portfolio, which I believe is a standout in the industry. Last, but certainly not least is the long history, the strong relationships, and trust that we have established with our clients. This point is further underscore by the fact that we have won several preferred provider agreements with large client recently and have more under discussion.

In the smaller company segment things appear to have come down a bit. For non-revenue generating clients some financings are once again taking place the flow of RFPs or request for proposals from our smaller clients are stabilized or slightly improved

However, we are continuing to closely watch this client segment and have taken proactive measures to protect our financial interests with clients who maybe at risk from a financial standpoint.

Turning now to our clinical pharmacology business, which by the way we have renamed early phase RFP flow was encouraging. In addition, there are a number of strategic discussions underway in the early phase business as well. With clients who want the global capabilities and flexibility that PAREXEL can provide. We expect the net effect of these activities to result in an increase in new business awards over the ensuring year in this unit.

With regard to the new business trends in Perceptive Informatics, the news has generally being positive after some initial hesitation following the acquisition. Clients are once more fully engaged in the new business performance for the quarter would appear to indicate continued revenue growth in the future. While RFP flow has generally been encouraging in the segment and we are achieving healthy win rate,s there are still some parts of Perceptive that have further room for improvement.

I would like to change subjects now, and look at the bigger picture for a moment. On a promising note, at last report recently issued by our PAREXEL consulting business unit showed that commercial (inaudible) filed with the FDA in the 2008 were up 19.5%. I knew this as a promising signal, which should both well for the future clinical development pipeline.

In summary, I'm pleased with our result in the third quarter overall, I think we did a very good job of managing costs, collecting cash and winning new business all despite a challenging environment. Looking forward, we expect to continued or be at some with lower revenue growth and probably with improvement.

So at this point I would 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 third quarter CRS service revenue increased approximately 4.2% compared with the prior year quarter as weakens in early phase and the negative impact of a much stronger dollar were more than offset by growth in the late stage portions of the business. On a constant currency basis excluding the $25.7 million negative impact of foreign exchange movements, CRS service revenue increased 17.6% over the prior year quarter.

On a sequential quarter basis CRS service revenue was down marginally with the $6 million negative impact of foreign exchange more than offsetting strength in phases II to IV. Same-store and constant currency service revenue was up 2.4% on a sequential basis. CRS gross margin was 36% during the third quarter up 2.1 points from 33.9% one year ago and up from an adjusted 34.9% recorded in Q2 of fiscal year 2009.

The year-over-year increase in Q3 occurred as a result of improved productivity and efficiency and a better business mix partly offset by a decline in early phase and the negative of foreign exchange movements.

Quarterly service revenue and PCMS was down 12.9% year-over-year withcdeclines in both PAREXEL consulting and medical communications. The year-over-year revenue decline resulted from several factors including the disposition of Barnett Educational Services, which contributed approximately $500,000 in the year-ago period targeted withdrawal from certain unprofitable service lines and the $5 million unfavorable impact of foreign exchange movements on a same-store constant currency basis PCMS service was up 3.6% in the quarter on a year-over-year basis.

During the quarter PCMS gross margin at 38.9% increased 5.1 points compared with last year and 3.9 points sequentially. The year-over-year improvement resulted from the continued excellent performance of the consulting business and the affects of improving processes and shedding unprofitable business lines in Med Com. The sequential increase in gross margin was driven by both PAREXEL Consulting and Medical Communications.

Quarterly service revenue in Perceptive Informatics was up 75.6% year-over-year. Excluding $17 million in service revenue from ClinPhone and a $5 million negative impact of foreign exchange, same-store constant currency service revenue was up 16.5%, on a year-over-year basis.

Perceptive's gross margin in the quarter was 43.6%, up 5.4 points from the prior-year quarter and up 3.6 points from the second quarter of fiscal year 2009.

The year-over-year increase resulted primarily from the substantial increase in IDRs business activity and continued success of integration efforts. On an overall company growth basis gross margin for the quarter was 37.3%, compared with 34.3% last year an improvement of 3 points. Working ahead with the fourth quarter of fiscal 2009, we expect gross margin to be slightly above the current quarter level.

SG&A spending in the third quarter was 22.3% of service revenue up from 21.5% in the March quarter one year-ago. And down from 22.5% in the December quarter. In dollar terms SG&A spending was up a 11.7% on a year-over-year basis. Due to the $9.5 million impact of the ClinPhone acquisition, higher facilities cost and other cost incurred to support revenue growth, which were partly offset by the favorable $9.9 million impact of foreign exchange. On a sequential, basis SG&A costs were down $3.1 million or 4.9% driven by a favorable $2.3 million impact of foreign exchange movements, in a continued and effectiveness of the company’s costs control actions.

During the fourth quarter fiscal year 2009, we expect SG&A as a percent of revenue decrease slightly from Q3’s level. For the quarter depreciation expense equated a 4% of service revenue up from 3.3% during the third quarter of last year. We expect depreciation as a percent of service revenue to increase slightly in Q4.

Amortization expense was 1% of service revenue in the quarter versus five-tenths of 1% one year ago. The increase was primarily attributable to amortization of intangibles associated with the ClinPhone acquisition. We anticipate that amortization as a percent of service revenue will decline going forward.

Operating margin in the third quarter was 10% of service revenue, up seven-tenths of point from 9.3% in the March quarter one year ago. We expect operating margin to be in the 10 to 10.5% during the fourth quarter. Other expense was $4.7 million in the quarter and consisted primarily of interest expense and foreign exchange losses. We are forecasting other expense of approximately $3 million to $4 million in Q4.

PAREXEL's third quarter tax rate was 34.1% compared with 37.2% in the prior year quarter. As a result of improved profitability in certain Asian countries, we were able to reduce valuation reserves, which drove down the estimated tax rate for the full year and required a catch up in Q3. At this time, we are projecting a tax rate of approximately 38% for both fourth quarter and the full fiscal year.

Net income of $14.2 million was essentially flat with the third quarter of fiscal year 2008. foreign exchange had a negative impact and net income of approximately $4 to $5 million in the quarter.

Moving on to the balance sheet net receivables stood at $186.1 million at the end of March. Taking into account gross revenue of $355.7 million for the quarter, DSO stood at 47 days a decrease of 12 days from the March quarter one year ago and a decrease of 8 days from the December quarter. We are continuing to target DSO in the 45 to 50 day range.

During the quarter cash flow generated from operations totaled $50.9 million. Other cash inflows included $8.2 million in borrowings under the company’s line of credit and $100,000 from other sources

Cash outflows included $16.7 million for capital expenditures mostly related to hardware and software purchases and leasehold improvements and $6.7 million from foreign exchange movements. Netting the inflows and outflows resulted in a overall increase in cash of $35.8 million from the end of December leaving us with the balance of $99.5 million.

With respect to the company’s borrowing we had $281.4 million outstanding under our line of credit at the end of the quarter, up from $273.3 million at the end of December Finally, with regard to the earnings guidance, which is contained within our press release, we have taken the actual Q3 results in account and refined our model to reflect other known fact including current foreign exchange rates the implied level of same-store constant currency service revenue growth is about 12% for the calendar year

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

Question-and-Answer Session

Operator

We are now opening the call up for Q&A. (Operator Instructions). Your first question comes from John Kreger with William Blair. John, please go ahead.

John Kreger – William Blair

Thanks, very much. Jim, just a quick clarification question on your guidance. Its looks like you are taking a fiscal guidance up by $0.01 to $0.03 for the calendar guidance down $0.01 to $0.02. Can you just sort of help us to understand, how those two are moving in opposite directions?

James Winschel

Well, John, as you know the world is still a little off kilter, at the current time and while we have very clear visibility to the fourth quarter we certainly also aware of the reports of some of our competitors and wanted to just be cautious as we went into the latter half of the calendar year.

John Kreger – William Blair

Okay, great. So, we should take from that conservatism as to opposed to visibility on any specific negative developments in the next couple of quarters is that right?

James Winschel

That’s correct John. Okay, and secondly, your tax rate. Could you quantify the tax that catch up that you realized in the March quarter?

John Kreger – William Blair

Well, essentially that the full year tax rate was estimated. I think previously at around 40% and so, we brought the full year rate down now to about 38% and you see the catch up, then for the first half of fiscal year being reflected in the third quarter, as well as the more normalized 38% rate for the quarter. So its about four points.

John Kreger – William Blair

Thanks and then finally, can you just, Joe, maybe expand a bit more on your comments about Perceptive? Where are you seeing weaknesses in that unit, and should we think of that as being tied to ClinPhone or distinct areas?

Josef von Rickenbach

Hi John while generally as I said we are actually pleased with the progress that we have made with the integration of ClinPhone. And particularly, we were encouraged by the fact that new business have started to fall again and also with the costs control that we successfully implemented in the business. Where we have some challenges is actually in the medical imaging part of the business, which is in the, if you want legacy Perceptive part of the company and actually was not particularly involved in the integration at all. So I think that has to do more with the specific trends and market specific trends perhaps.

John Kreger – William Blair

Great, thanks very much.

Josef von Rickenbach

You’re welcome.

Operator

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

David Windley – Jefferies & Company

Good morning. Joe, on the comments around CRS, it does appear, if I understood your numbers correctly, that your proposal volume and value were flat to down, but wins were up nicely. So obviously suggest your win rate improved you said you did maintain pricing. Wondered if you could add some, some additional detail around, what factors you think, if not pricing, drove the improvement in win rate?

Josef von Rickenbach

Yeah, I think, you understood correctly basically describing the dynamics in the way you have and indeed our hit rate went up, and I think we will contributing that was basically I would have to say good execution. I think we really obviously tried hard and succeeded in brining our advantages to the table from our global footprint to our technology offering to the expertise that we have available within the company. And also I really have to make a put in a plug for our employees I think, in my opinion ultimately nothing sells like an eager team and I think the team that the execution if you want from a selling perspective at the team level is really great.

David Windley – Jefferies & Company

Okay great, you mentioned as part of that global footprint PAREXEL in terms of revenue mix does have perhaps the most significant percentage of revenue generated outside the United States, are you seeing in terms of client’s interest a significant move outside the U.S. I don’t. Well you gave it, but I am have a chance to calculate kind of what the growth rates look like geographically on, but there is a lot of talk about in U.S. being satiated, over-trialed whatever; I’m just wondering if there are some even noticeable trends of trials moving more aggressively outside the U.S. and benefitting your global business.

Josef von Rickenbach

Well, I think there is no doubt that our global footprint is a competitive advantage, but having said that, the foreign exchange rate movements are also greatly distorting the picture. I would say in this quarter, in the case of PAREXEL, we actually have performed well in the U.S. from a new business perspective. It is my view that actually the rate of exporting trials if you want to put it that way, is not particularly accelerating.

David Windley with Jefferies & Company

Okay

Josef von Rickenbach

But if there is a trend, there is clearly more activity in Asia and also within Asia, if you want Asia for Asia that’s clearly, in growing albeit from a small base, relatively speaking.

David Windley with Jefferies & Company

Okay. Jim, I think you made the comment in your March about CRS benefiting from better mix in third quarter. If you can add any color to that, that will be great and how much you expect to continue?

James Winschel

Yeah, John. We had a functional service provider contract that expired early in the quarter and so, we tend on those functional service provider transactions to get a lower margin and so with that out of the mix we saw a nice improvement.

David Windley with Jefferies & Company

Okay and then finally, on Leap, it appears that you got some nice traction from some of those initiatives in the quarter. The press release mentions, still quite a few projects on going and opportunity in the future, is it possible to add some detail around that or\ quantify what you anticipate might be the impact from Leap over the next several quarters?

Josef von Rickenbach

Yeah, Dave. We are still in full implementation of Leap. Clearly there have been some benefits Leap but also the level of investment is still actually very high. So, I actually believe, if you net out the benefits and the costs right now, it’s probably still a net costs for the foreseeable future even but nevertheless, very strong promise and we’re in full implementation right now. And by the way that includes also the implementation of several of the technologies that we really have in Perceptive. And so it’s a relatively big undertaking and, it’s really somewhat exciting actually to see that happening.

David Windley - Jefferies & Company

All right thank you for the answers. Good luck with that.

Josef von Rickenbach

Thank you.

Operator

Your next question comes from the line of Eric Coldwell with Baird. Eric, please go ahead.

Eric Coldwell – Robert W. Baird

Thank you. I missed the comment on RFP trend heading into April. Could you just repeat those please?

Josef von Rickenbach

Sorry, I didn’t get the question.

Eric Coldwell – Robert W. Baird

RFP trends heading into April, I’d might have missed that, if you stated on the call?

Josef von Rickenbach

So if you look at the overall proposal pending level right now. It’s down from last year actually quite substantially down but it’s about the same or slightly up from the beginning on the March quarter

Eric Coldwell – Robert W. Baird

Okay and then on the Perceptive Informatics. You made some prepared comments that there were some areas, that still weren’t tracking to plan or meeting your expectations. Could you talk about what those areas might be and what the drivers that the lower than desired performance are in those areas?

Josef von Rickenbach

Well as I pointed out before. One area that comes to mind is medical imaging and we had some challenging in medical imaging area. I thought to say exactly, what the sources of that would be but clearly I would say it’s not related to the integration because that business actually “was not integrated” because it had no counterpart in the ClinPhone acquisition. And I think it had to do, or has to do impart with the market and perhaps in the current environment, not in every case that prior that we might have included a medical imaging component is now also including medical imaging components meaning has trials get to be more scrutinized for costs. We may not always have an opportunity to also run a medical imaging component. And so there maybe have been a sort of a one time effect there.

Eric Coldwell – Robert W. Baird

How about electronic data captured at the EDC business.

Josef von Rickenbach

The EDC business is off to a relatively slow start, albeit from a very small base also. Actually its probably, growing quite nicely. Actually, I have to give you nice growth numbers but at the same time this is from a small base. We are now doing a proactive and much better job in integrating these kinds of technologies into the CRS platform and I would expect going forward with that and other improvements that we’re making in the functionality of the products, that this will get better and broader traction.

Eric Coldwell – Robert W. Baird

Final question, there has been some commentary that in the phase I, the early phase side of the market that customers are delaying temporarily discretionary projects, maybe doing those projects on the critical path that pushing out additional studies like food interaction or even QT studies et cetera, until later dates. Are you experiencing that and what’s been your view of the early phase market in terms of the nature of work clients are asking you today?

Josef von Rickenbach

The early phase market has been challenged, for awhile now. And let’s say for awhile at least a year, and I haven’t said that actually in this quarter, we started to see a turn around. Demand has improved, proposal flow has improved and now looking into the future, I actually, I'm rather of the opinion that this improvement will continue and our new business performance also improved and so, I think actually this from a demand perspective, I would look at this as as one of the brightest spots, right now.

Eric Coldwell - Robert W. Baird

Okay and I guess, and as stated I do have one more follow up, when we look at the revenue guidance, which is come in not that surprising. I’m just curious how much of your adjusted revenue, it’s based on foreign currency. Is any of the adjustment is FX related versus other factors that are leading you to be more conservative on that topline forecast.

Josef von Rickenbach

Sure, Eric. I would say that with regard to the adjustments that we’ve made to our revenue forecast about roughly half is foreign exchange related. And the other piece would be related to delays in projects and I would say those delays have occurred across our business, not concentrated in any one area.

Eric Coldwell - Robert W. Baird

Okay, great. Thanks very much.

Operator

Your next question comes from the line of Charles Rhyee with Oppenheimer & Company. Charles please go ahead.

Charles Rhyee – Oppenheimer & Co., Inc

Hi, I just had a couple of follow-up questions, just to clarify, Jim, I think you gave for the Perceptive side and for the, medical communications and consulting business the FX impact. I don’t know did you give that for the CRS business, or is it simply just tracking a ten out of the 35 total.

James Winschel

Hi, Charles we did mention that, it was $25.7 million in CRS.

Charles Rhyee – Oppenheimer & Co., Inc

Okay, so what is the balance. And then also in the – the net interest expense, did you give the split between then interest expense and the FX loss?

James Winschel

Interest expense was about $3.1 million. And then the foreign exchange loss was in the $2 million to $2.5 million range.

Charles Rhyee – Oppenheimer & Co., Inc

Okay.

James Winschel

And then there was some small others favorable stuff with that happens in that line too.

Charles Rhyee – Oppenheimer & Co., Inc

Okay. Perfect. And then just, lastly for Joe, you talked about, the overall business climate and just for your last comments here on early stage or you’re becoming a little more optimistic, clearly over the last week or so, we are getting sort of mixed commentary from some of your competitors. And also even more positive comments this morning from your other ones. Can you give is there any sort of a, sort of split occurring in the market, or is that maybe a difference in clients having different priorities and it’s just our client mix that could be affecting that, because your cancellation rate compared to some of the others, doesn’t seem as dramatic and I’m just trying to get a sense on, where sort of this difference of opinions might be coming from?

Josef von Rickenbach

It’s hard for me to speak obviously of our prior competitors it's, much easier for me to speak to what we are experiencing. And I think our various strategies are starting to maybe pay off as I said before our global footprint is in fact very attractive. And we’re also executing now across the world, with that I believe that our various technologies are attractive, and both as the standalone proposition as well as bundled with the with the CRS business. So, I think that’s, attractive as well. And we also have the kind of the right expertise in the right areas. And from a therapeutic area perspective in many other aspects as well. And I having said that, I think in the marketplace the dynamics are turning, I would say meaning it’s really it’s a challenging environment. Some things are heading nor some crush wise and some down. And you have to be really very agile to make sure that you kind of catch the right one at the right time.

Charles Rhyee - Oppenheimer & Co

Okay great thanks a lot for the comment.

Operator

Your next question comes from the line of Todd Van Fleet with First Analysis Corp. Todd please go ahead.

Todd Van Fleet – First Analysis Corp

Nice quarter. Am I coming through okay? Hello.

James Winschel

Yeah go ahead. Hi Todd.

Todd Van Fleet – First Analysis Corp

Last quarters you had talked about your strategy of kind of maybe trying to move away from the smaller and to the market; small biotech, small pharma because of the financial woes that fall of that customers setting and maybe focusing a little bit more on the large pharma sector. More recently that’s seems to be were a lot the I guess uncertainty resides with respect to RFP flow and I think we’ve heard some indications that you haven’t that there are in certain circumstances large pharmas deciding to just pull projects, pull our pieces and keep the work in house to preserve jobs and I'm wondering how you feel about the strategy of shipping your efforts and focusing more on large pharma at this point and a propensity of large pharma to perhaps maybe look to preserve jobs., I guess first let you respond to that?

James Winschel

Well, first of all, I would like to correct this perception. We haven’t really move the way from the small company clients at all just they were struggling with funding and in some ways we had no choice, but actually on a brighter side, as we pointed out in our remarks, financing has started to happen. And I wouldn’t say it’s a gusher by any means but its also clearly more than one or two that have received financings. And so, generally, I would actually say that the picture there is somewhat better than I would have expected by now. And now of course, we need to see how this continue butit remains actually, an important segment as well. On the larger company side, again there is relatively significant amount of churn. In some cases there is basically no change, and very active outsourcing, there is let so, and there is no cautious. If I had to look at the whole quarter my observation would be that things have somewhat improved across the quarter. January was still very challenging, by the way one of the challenges that we have experienced especially in the December quarter and early in this quarter, is that an unusual amount of proposals what canceled. Meaning they were never awarded and this seems to have now returned to at somewhat basically normal level. So, going into this quarter meaning into the June quarter, hopefully, we have that behind us, and our things in that sense would be hopefully, more normal.

Todd Van Fleet – First Analysis Corp

Any understanding as to the reasons those proposals weren't ultimately awarded that they were pulled back. Is it portfolio reconstruction on the part of the customer base or is it, they deciding they want to insource versus outsource?

James Winschel

I believe that it probably has less to do with the outsourcing decision, since its coincides completely with the broader economic picture. I think thats where he impulses came from. And obviously there was a huge shock to the systems and this helpfully has now washed through. And clients are more determined and more affirm in terms of what they actually want to do. And what they want to take forward. And hopefully, even that maybe at a lower level. We, from a proposal pending perspective, we hopefully have a more stable environment now.

Todd Van Fleet – First Analysis Corp

I could ask you one, the – it’s really Phase I business, you have talked about expecting kind of an uptick I guess, or improvement in that environment. As we work through the year here. There is been talk a number of preferred provider RFPs out there. I'm wondering if, is the reason that you’re more optimistic in the outlook for that, that business. Does it have more to do with the percentage of, or rather perhaps the penetration of outsourcing in that market segment versus perhaps a number of molecules that are out there. And if maybe if you could provide some commentary on what these preferred provider relationships. What they are looking for, is it more the first in man capability, you guys, obviously have a large number of beds, a large number of beds throughout the globe, if you could talk a little bit to that what the customers are looking for in that regard. Thanks.

James Winschel

Okay so if you look at the earned base market dynamics, actually both factors, which you mentioned are improving. I would call the first one to spot market meaning and our company that just come and have, want a few “Early Phase” trials that actually is improving as well compared to prior periods, or certainly did improve in this most recent quarter and it look like that carries now certainly into this quarter as well. But also the second area, which you mentioned is also generally exciting right at the moment. I think there one could say several clients who are considering significantly increasing the amount of outsourcing that they have in mind for this area and. So in these instances this actually covers pretty much to whole range of studies all the way from first demand through proof of concept and they all they’ve just in a number of instances actually considering lower in the amount of activity that would be done in house by fairly substantial amount.

Todd Van Fleet – First Analysis Corp

But these, or these opportunities can you bundle them is there an opportunity I guess bring another services apart still has to offer in addition to the Phase I is the part of this kind of preferred provider relationship?

James Winschel

Yes it might be, certainly on not so much perhaps with this more strategic outsourcing, but certainly on the other side this is often bundled with PAREXEL Consulting, because many of the smaller companies also need advise in terms of how to approach a clinical program and how to write the protocol and how to your restrictions to prioritize et cetera. And so that would be actually a normal case.

Operator

The next question comes from the line of Randall Stanicky from Goldman Sachs. Randall, please go ahead.

Randall Stanicky – Goldman Sachs

Good afternoon calling for Randall. I sorry I think missed it. But, can you guys just give us an update on your thoughts around, for authorizations in with to booking them at 20% discount?

Josef von Rickenbach

If I understood the question correctly, it has to do with verbal awards and the 20% discount that we apply to those global awards, prior to putting them in backlog. And I would say that we’ve see no change in that scenario. We still and it’s not so much that verbal awards get canceled. If that the scope is sort of broadly defined at the initial stages and then as we go through the negotiations, we see the size shrink a little bit. And so when we put these things into – into backlog, we take that 20% shrink into account and it’s seems to work pretty well for us.

Randall Stanicky – Goldman Sachs

Okay thanks and then I guess really, can you just give us an idea of how of much the recent business wins came from verbal awards?

Josef von Rickenbach

I would say it’s normal. As there are no change, either on a year-over-year basis or on a sequential basis?

Randall Stanicky – Goldman Sachs

Okay, thanks. And I think, I guess written a scrub with – of your backlog and really try to fill out what’s active and what’s – what you think may not be active?

Josef von Rickenbach

We do every quarter, we do a scrub of the backlog and so, we would say that the backlog that we reported is high quality.

Randall Stanicky – Goldman Sachs

Great, thanks a lot for answering the question

Operator

Your next question comes from Douglas Phil with Barclays. Douglas, please go ahead.

Douglas Phil – Barclays Capital

Good morning. I just hoping to focus in for a moment a little bit on Perceptive. So, to the back of the envelope math that I did indicated that ClinPhone revenues were down sequentially from the $20.5 million in the December quarter to around $18.7 million in this quarter. That math right, and if could provide a little color, because that doesn’t reconcile in my mind with the progress that you’ve spoken about.

Josef von Rickenbach

Yeah, hi, Douglas. On a nominally, they were down but from a – if you include the FX impact they would actually be up and the impact overall was about $17 million.

Douglas Phil – Barclays Capital

So, what would ClinPhone revenues been in the quarter on a constant dollar basis. It would have been up sequentially?

Josef von Rickenbach

We believe, it would have been up, I mean I haven’t actually done the calculation but just knowing what’s happened with rates and things I would say that’s the case, yes.

Douglas Phil – Barclays Capital

Okay.

Josef von Rickenbach

Okay

Douglas Phil – Barclays Capital

And then given your comments about imaging business being soft, I was wondering if you have done any analysis to suggest that part of this is a function of where research is being done, the therapeutic classes are seeing a lot of research and perhaps. They are – have need for imaging services. Or is it simply that imaging is view’s as a luxury and not a necessity in terms of putting together NDA?

Josef von Rickenbach

It's a good question, Douglas and of course difficult to parse this out exactly and perhaps it's a mixture of a number of factors in the marketplace, including a couple of the ones you mentioned. From a therapeutic area perspective, together with everything else, there is a relatively lower, although proportionally roughly the same demand for oncology studies. Oncology studies generally have a high proportion of imaging associated with them so, that would just come down. As I said proportionately we would expect that to some extent in a number of instances in the past. I wouldn’t say this was luxury, but can you do a trial without medical imaging, sure and get good result absolutely, and so that would probably was a little bit of an impact from that perspective you have in all sort of more, I guess more of this heavy environment versus luxuries environment and to be clear about that. But I think we can also do better job, I believe also there are some internal message that we can take to improve the situation as well and so I don’t know just completely attribute, the softness to the external environment

Douglas Phil - Barclays Capital

Okay great and then, Jim, looking at the tax rate. How should we think about on tax rate and I know you don’t want to get too far into sort of fiscal ’10 guidance, but just certainly, for the rest of the calendar year what kind of tax rate do we see, sort of stabilizing at the 38% range or coming back up to the sort of 40% range. I guess there’s been so much volatility in recent periods it’s little hard to gauge?

James Winschel

It’s always a little difficult for us to quantify the tax rate on a calendar year basis, since we file our returns on a fiscal year basis. So, for the second half of the calendar year, I did in fact utilize a 38% tax rate, however there is some opportunity as we go forward with the improvements we’ve made with our transfer pricing to get that number lower, but we are right in the middle of the fiscal year 2010 budgeting process and once we have completed the budgeting process we can then run those numbers through the tax model and we’ll have a better insight into what the tax rate would be for fiscal year 2010.

Douglas Phil - Barclays Capital

Okay, great. Thank you very much.

Operator

Next question comes from the line of Greg Bolan of Wachovia Capital. Greg, please go ahead.

Greg Bolan – Wachovia Capital

Thanks. Just digging a little deeper into Dave’s earlier question on bookings in the U.S. versus actually ex-U.S. So relative to your revenue exposure by geography, how would you describe bookings exposure, during the March quarter?

James Winschel

Relatively places for the company overall we had more of our bookings achieved here in the Americas than overseas. Especially in the European world things were a little soft for us on a relative basis and a pretty good and pretty strong in Asia.

Greg Bolan – Wachovia Capital

Okay thanks for that, and then appreciate the color Joe on the RP flows late as of late I was hoping you might give us a little bit more details around any significant differences you are seeing in terms of RFP flows by geography.

James Winschel

From an RFP flow perspective, this would be during this March quarter. it’s pretty better balanced, than the booking were in the March quarter which is to say the RP flow and therefore the pending proposal backlog for going into this quarter improved in Europe and is still pretty healthy in Asia. So, overall I think it’s going to be more balanced going forward, albeit it overall at a lower level as I said compared to last year.

Greg Bolan – Wachovia Capital

Sure, it makes sense. And then lastly, with regards to median dollar size of projects in the backlog have you seen any material change over the past several quarters since I think Joe you called out around mid to high seven figure median dollar size of projects in the backlog.

James Winschel

Yes, I'm would ever commentary. I'm going – I going to make are specific to late phase CRS.

Greg Bolan – Wachovia Capital

Correct, yes.

James Winschel

Right, okay just to be clear and actually the difference in the median sized contract from the December quarter into the March quarter was a tick down. Not much. But substantially down compared to last year.

Greg Bolan – Wachovia Capital

All right, well. Thank you, I appreciate it.

James Winschel

Okay, you’re welcome.

Operator

(Operator Instructions). You have a followup question from Dave Windley of Jefferies & Company. Dave please go ahead.

David Windley – Jefferies & Company

Hi thanks for taking the followups. Jim on the FX question, I think it was Doug’s question, on just trying to understand the relative, the allocation of the $5 million of FX hit to Perceptive between the acquired revenue and the legacy revenue if ClinPhone where to be up sequentially, that would suggest that if my numbers are right something like $3.5 million or more of the FX was a ClinPhone effect, is that correct?

James Winschel

I think that's roughly correct, Dave, ClinPhone headquarters obviously are in the U.K. and they have a substantial amount of revenue that's a emanating from that location.

David Windley – Jefferies & Company

Sure and so, then by backing in, then that the legacy business you’ve talked about the medical imaging softness, does that account for the majority of the sequential decline in that portion of Perceptive or are there other factors that are equally impactful in the legacy business.

James Winschel

Oh, Dave you may remember that we had an IDRS platform in the legacy Perceptive business and then we acquired a platform from ClinPhone and so what we have been doing is continuing to run out the old trials and the Perceptive legacy system, but not adding any new trials to that particular technology and putting the new business on to the ClinPhone platform.

David Windley – Jefferies & Company

Okay I understand that operationally, I don’t quite understand how that would have an impact on revenue. I mean wouldn’t that just increase the revenue on the Perceptive platform?

Josef von Rickenbach

Well the revenue for IDRs that we are recognizing is being recognized in form of ClinPhone entities.

David Windley – Jefferies & Company

I see, so required revenue

Josef von Rickenbach

Dave, I think you may remember back in October. We started to talk about the fact that these are really a merger of these two companies as apposed to an acquisition. And as a result of that, it becomes increasingly difficult for us segregate the activities.

David Windley - Jefferies & Company

Right okay understand the point. On the Joe, on the early Phase, I guess you are calling it now. You’ve talked in some presentations about these most strategic deals you commented on to an earlier question. In terms of timing I think you previously said that you expected fiscal 4Q calendar 2Q decision on one or more of these deals, is that still likely to be the case.

Josef von Rickenbach

Well it’s hard to exactly time these decisions, because just a very nature of these discussions are somewhat fluid from an end point perspective, but I would have to say given the activity that we would certainly expect decisions to be made in this calendar and I would not be surprised if one or two would happen in the June or September quarter.

David Windley - Jefferies & Company

Okay, all right and then finally in regard mostly smaller client activity, but I guess it wouldn’t have to be limited to that, I have heard some commentary about sponsors breaking up a program or maybe even a trial into smaller pieces and awarding work, I guess on smaller common denominator business. The point being funding being more limited, venture capitals fund sources perhaps telling clients to progress in smaller increments, and funding those smaller increments one of the time. Are you seeing any evidence of that and is that perhaps one of the factors that’s driving yhekind of medium proposal size down a little bit here in the short run.

Josef von Rickenbach

I would not believe that the case. I’m not aware I totally, actually, interestingly I have an exact opposite example. A small company client that I was directly involved with and they did exactlywhat you just said David, meaning they did about two years ago with actually very mixed results.

David Windley - Jefferies & Company

Okay.

Josef von Rickenbach

Because they have know, multiple pieces which they have to manage and fit together, and they might have gotten a slightly better price on those. Of course again we are stuck with they are picking together with the amalgamation and announces of these pieces .And actually they are now of thinking about going forward with an other big trial. And are considering to do before we integrated global trial just because it not not really completely meet their expectations the way they approach this

David Windley – Jefferies & Company

Okay that's helpful thank you.

James Winschel

You’re welcome.

Operator

Your next question comes from the line of Sandy Draper of Raymond James. Sandy Please go ahead. Sandy your line is open.

Alexander Draper – Raymond James

Hello could you hear me sorry about that.

James Winschel

Yes. Go ahead.

Alexander Draper – Raymond James

Sorry I had you on mute, maybe from a bigger picture perspective Joe, as most of my near-term question have been answered, obviously there is been some weakness on the preclinical side of the business, you’ve been around that the industry for a long-time, how much do you watch what’s going on and that the really early stage preclinical and how long would that have to stay weak before you would start to get concerned that eventually that has to cause some type of more prolonged slowdown in late stages not necessarily economically related?

James Winschel

I think it's a great question Sandy. And actually obviously we spend a fair amount of time on these kinds of questions and, trying to get answers and if you contrast what’s going on right now with the last downturn, I think it's very different in nature, last time around I think it had to do actually with pipeline issues, and as they in they weren’t enough compounds coming up and into the pipeline. But I think today that's not the case at all. I think actually there, the preclinical pipelines and early phase pipelines are pretty full and it's a question of funding and ultimately also maybe reimbursement on the other side, that has to be answered. And so frankly I am not that concerned about the implications on the, in the clinical environment, as a consequence and as a follow on to what’s going on in the preclinical world right now.

Alexander Draper – Raymond James

Great thanks Jim.

James Winschel

You’re welcome. And I guess we have time for one more question.

Operator

There are no further questions in queue at this time. I would like to turn the call back over to Josef von Rickenbach, Chairman and CEO for closing remarks.

Josef von Rickenbach

Great thanks (Dixie) and thanks everybody for participating in the phone call and your interest in PAREXEL. And we look forward to updating you on our next call, bye bye.

Operator

Thank you ladies and gentlemen. That does concludes your conference call. We do thank you for joining while using Intercall Teleconference. You may now disconnect. Have a good day.

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Source: PAREXEL International Corp, F3Q09 (Qtr End 03/31/2009) Earnings Call Transcript
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