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Executives

Timothy Dolan - ICR, Investor Relations

Robert K. Weiler - Chairman, President and Chief Executive Officer

Christopher Menard - Senior Vice President and Chief Financial Officer

Analysts

Steven F. Crowley - Craig-Hallum Capital

Richard Close - Jefferies & Company

Richard Davis - Needham & Company

Nabil Elsheshai - Pacific Crest

John Kreger - William Blair & Company

Raghavan Sarathy - Dougherty & Company

Raymond A. Myers - Emerging Growth Equities, Ltd.

Phase Forward, Inc. (PFWD) Q1 2009 Earnings Call April 28, 2009 5:00 PM ET

Operator

Good day, ladies and gentlemen. And welcome to the First Quarter 2009 Phase Forward Incorporated Earnings Conference Call. My name is Melanie, and I will be your coordinator today. At this time, all participants are in a listen-only mode, we will conduct a question-and-answer session at the end of this conference. (Operator Instructions). As reminder today's call is being recorded for replay purposes.

I would now like to turn the call over to Mr. Tim Dolan with ICR. Please proceed, sir.

Timothy Dolan

Thank you. Please note that various remarks today consist of forward-looking statements for the purpose of the Safe Harbor provision under Private Securities Litigation Reform Act of 1995. These statements including management's forecast of financial performance and management's plans, objectives and strategies are subject to a variety of risks and uncertainties, which could cause actual results to differ materially those discussed today. These risks and uncertainties are contained in the company's public filings with the Securities and Exchange Commission.

With that let me turn it over to the CEO of Phase Forward, Robert Weiler. Bob?

Robert K. Weiler

Thanks Tim. And thank you for joining us on the call to review our first quarter results which was a strong start to 2009. From a revenue operating profit and EPS perspective, our results were better than expected and demand was broad based across our suite of solutions and target markets.

We remain optimistic about the company's outlook for both 2009 and from a long-term perspective. As a result, we are increasing guidance as Chris will describe in more detail in a moment.

Now, let me take you though a summary of our first quarter results. And then I will take you though a few of the business highlights of the quarter.

Total non-GAAP revenue came in at 49.4 million, representing a 30% year-over-year growth, from a profitability perspective non-GAAP operating income came in at 9.1 million well above our guidance, up 42% on a year-over-year basis, and representing a record quarterly non-GAAP operating margin. This lead to a non-GAAP EPS of $0.15 which was $0.02 above the high-end of our guidance range.

We continue to closely monitor general market conditions, and since our last call we've not seen any further change with respect to how today's market environment is impacting our business with pharmaceutical and biotech companies.

Specifically, the number of trials and cancellations has played out according to our original 2009 expectations and our first quarter results are evidence that Phase Forward's business momentum remain strong.

Turning to the highlights of our first quarter performance, let's start with the broad based nature of our success. We closed our first combined EDC/IRT sales, we saw a successes with our standalone Clarix IRT offerings, we closed seven figure deals in the safety area, our InForm business continued to be robust and our business with CROs is also strong.

Among our more important wins during the quarter were our multi-year, multi million dollar agreements with InSite and an another biotech company for our InForm EDC and Clarix IRT offering.

At time we require Clarix, and in our recent conference calls we highlighted the fact that EDC and IRT are the two major application categories that life science companies are highly interested in purchasing and deploying in an integrated fashion.

In just a couple of quarters since the acquisition of Clarix, we not only achieved these milestone wins for these offerings but we've also made great strides in integrating our solutions and have a number of live trials running with InForm Clarix integration.

Our momentum selling standalone IRT solutions also remain quite strong during the quarter as we had follow on orders from two top pharmaceutical companies as well as multi million dollar business from our IRT related channel partners. We believe the Clarix acquisition is proving very successful and expect our IRT solutions to deliver strong growth during 2009.

Turning to our safety solutions, Estelus (ph) another leading global biopharmaceutical company signed on for seven figure contracts involving our Lincoln safety group's safety analysis solutions. And we enjoyed continued commitment to our Empirica, suite of solutions, as evident by the Saudi Food and Drug Authority signing a multi-year agreement for Empirica signal licensees, and hosting services.

During the first quarter, in addition to the combined EDC/IRT sales I mentioned, we expanded our EDC customer base and significantly expanded our InForm ASP relationship with one of the top ten pharmaceutical companies in the world, and added trials and hosting services with existing customers such as Lilly and United Therapeutic.

We also expanded our EDC relationships with CRO such as Quintiles, The George Institute for International Health and Parexel among others.

This contributed to a 52% year-over-year growth in revenues to 11 million from CROs during the first quarter. We are particularly pleased to see Quintiles, one of our largest CRO partners achieve a CRO industry milestone by starting their 400 EDC trial which was for Astra Zeneca. With the milestone study using Phase Forward's InForm as their EDC solution of choice.

As I mentioned at the outset, the demand that we say in the first quarter was broad based, across our solutions and target markets. I would like to finish my prepared marks with some exciting developments that relate to the future direction of Phase Forward both of which reinforce the reasons we are so optimistic about our ability to maintain and extend our industry leadership position.

First; we recently announced the acquisition of privately held Waban Software, which addresses one of the key areas of interest that we have highlighted and opens up a new and emerging market area for Phase Forward to address.

Waban, a leading provider of platform solutions for the automation and compliance of clinical data analysis and reporting. They have an established customer base of over 15 companies, including a handful of top 50 pharma, as well as a top five biotech company.

While this statistical computing environment and clinical data repository SCE/CDR solutions provide automation, traceability and control of the key activities involved in the integration analysis and reporting on clinical trial data. This has become an increasing focus for life science companies as there is greater level of choice scrutiny to ensure results produced or reported are high quality and fully traceable.

This is also a natural downstream test with Inform and enables a comprehensive end-to-end solutions across the whole clinical trial process from study set up through analysis and submission.

We believe this provide us with the industry's broadest and most comprehensive clinical data solutions to the market and continues to differentiate us from point solutions, EDC competitors. From a longer term perspective, Waban solutions are synergistic with the vision of our clinical data integration, and critical data warehousing strategies.

The second move that we believe will help further entrench Phase Forward's leadership position is the pending launch of InForm global trial management or InForm G for short, which is our next generation EDC solution.

We have been investing aggressively in R&D though we have been purposely quiet about this solution for competitive reasons this is a significant release for us and is building upon the established acceptance of InForm will further distance us from our competition.

We are officially launching InForm G at the DIA show in June. InForm G is a complete e-data management suite with a new next generation user interface and full global trial management capability. We believe InForm G will represent the industry's most robust set of integrated capabilities out of the box. Central designer, coding, our standards face adaptors. All of these and more will be tightly integrated.

Another very key aspect of the InForm G is it's significantly enhanced global trial management capabilities, including increased multi-lingual support. Clinical trials are increasingly becoming a global process and Phase Forward has lead the industry in automating the most scaleable and complex global trials. We believe that InForm G will set the industry standard for an end-to-end integrated global trial management system.

In summary, our first quarter results were strong and there are many reasons for us to be excited about Phase Forward's long-term market position and opportunity. We continue to lead the EDC market. We are set to launch InForm G, the industry's next generation EDC solution. We are gaining traction with our Clarix IRT offerings. We are experiencing continued success with our safety solutions and we continue to extend our solution breath and leadership position with the acquisition of Waban.

I would now like to turn the call over to Chris Menard for the first time as Phase Forward's CFO.

On last quarter's call, we announced that Roger was transitioned to an advisory role within Phase Forward, and Chris was taking over as CFO. Chris joined Phase Forward in 2001, and most recently served as out VP of Finance.

The final stages of this long transition process went very smoothly, which enabled us to complete the process of multitude quicker than the originally planned. So, let me thank Roger for his efforts throughout his transition process. And we look forward to beginning our next chapter with Chris. We'll now go over the financials in more detail. Chris?

Christopher Menard

Thanks Bob. And let me share my excitement for beginning my new role. I look forward to continuing to help Phase Forward capitalize on market opportunities and working directly with our investors and analysts, many of them I've already had the pleasure of meeting or speaking with.

Now let me provide some further detail on the first quarter financial statements. And then I will close with our second quarter and full year 2009 guidance, before turning it over to the operator for Q&A.

We will review our numbers on both the GAAP and non-GAAP basis. A reconciliation between GAAP and non-GAAP results is contained in our earnings release, which is posted on our website. Our non-GAAP results exclude non-cash expenses associated with FAS 123R, the amortization of intangibles associated with acquisitions and the write-down of deferred revenue and backlog associated with the Clarix acquisition.

Beginning with the P&L, GAAP revenues for the first quarter of 2009 were 48.8 million, an increase of 28% year-over-year. Non-GAAP revenues which exclude a $628,000 purchase accounting adjustment to the fair value of the deferred revenues and backlog of Clarix were 49.4 million. This was above our guidance of 47 to 48 million and represent a year-over-year increase of 30%.

Within total revenue, InForm license, application hosting and other related revenues were 36.4 million, representing 74.6% of total revenue and increasing 26.2% on a year-over-year basis.

Non-GAAP revenue from Clarix came in at approximately 1.9 million, which is down from 2.3 million recorded in the fourth quarter of 2008 due to a lower volume of change orders and faster service revenue. Most important as Bob pointed out, we enjoyed strong orders of our IRT offerings during the quarter, and we are targeting significant annual growth for Clarix.

Non-GAAP gross margin was 60.4% in the first quarter of 2009, an increase compared to 58.9% in the same period a year ago, and 59.6% in Q4 of 2008. Our services margin was 45.8% in the first quarter, up from 40.4% a year ago, and 44.6% last quarter.

From an operating expense perspective, total non-GAAP expenses in Q1 were 20.8 million, a 30% increase from 16 million in the same period a year ago. Our non GAAP income from operations for the first quarter was 9.1 million, which was well above our guidance of 7.3 to 7.8 million. This also represent an increase of 42% on a year-over-year basis and a record non-GAAP operating margins of 18.4%.

Interest income of 640,000 was down from 1.9 million in the year ago quarter, and 1.1 million last quarter, resulting from a decline in interest rates.

Our non-GAAP tax rate was 34.3% in the first quarter, leading to a non-GAAP net income up 6.7 million or $0.15 diluted earnings per share, which was above the high end of our guidance of 12 to $0.13. These are increases from 5.2 million and $0.12 per share respectively in the same quarter of 2008.

Looking at our first quarter 2009 results on a GAAP basis, GAAP net income was 4.1 million or $0.09 per diluted share, consistent with the first quarter of 2008.

Moving to the balance sheet, total cash, cash equivalents and short-term investments totaled 156.3 million at the end of the first quarter, a decrease of 3.1 million, compared to a 159.4 million at the end of the prior quarter.

Long-term investments increased 3.8 million to 21.8 million. Accounts receivables increased by 2.5 million from the end of the prior quarter to 42.5 million. Just like the DSOs of 78 days at the end of the quarter, consistent with the end of the prior quarter and down from 98 days at the end of the same quarter last year.

Deferred revenue was 95.8 million at the end of the quarter, an increase of 7.2 million, compared to 88.5 million at the end of the prior quarter.

For the first quarter, the company generated 6 million in cash from operations and 800,000 after capital expenditures of 5.2 million. We continued to expect the company to generate strong cash flow on an annual basis as we have seen in recent years, while the quarter-to-quarter cash flows will be skewed based on the timing of when some of our larger invoices are issued and collected.

With that, let me now turn to guidance. The following statements are based on our expectations as of today. And we assume no further obligation to update or confirm them. As a reminder, our non-GAAP references exclude the amortization of intangibles associated with acquisitions, deferred revenue and backlog write-downs associated with the Clarix and Waban acquisitions, and FAS 123R stock-based compensation expense.

Before beginning, I'd like to review the financial profile and expected impact of the recently closed Waban acquisition. On a standalone basis, we estimate that Waban generate approximately $4 million in revenue during 2008, and we estimate that they were approximately breakeven in operating profit. In prior years, Waban sold both perpetual and term licenses.

Going forward, our intents to offer their solutions primarily on a term license basis. On a non-GAAP basis for the remaining three quarters of 2009, we expect revenues between 2 to $3 million and a dilutive impact of between 1 and $0.02 per share. We expect that within four quarters, Waban will be accretive to our bottom line.

Now, let me turn to Phase Forward's overall guidance, including the impact of Waban and starting with the second quarter of 2009. We are targeting non-GAAP revenues between 51 and 52 million including a contribution between 500,000 to 750,000 from Waban. This represents an increase between 25 to 27% over 2008.

We expect GAAP revenues to be between 50 and 51 million. We expect non-GAAP operating income to be between 7.9 and 8.4 million. Non -GAAP EPS is expected to be between 12 and $0.13. This includes a dilutive impact of approximately $0.01 related to the Waban acquisition.

GAAP EPS is expected to be between 5 and $0.06, which includes stock-based compensation expense of approximately 2.9 million and amortization expense of approximate 1 million. The anticipated amount of amortization expense may change as the final purchase price allocation relates to the recent Waban acquisition is in the process of being finalized.

The expected EPS reflects an estimated tax rate of approximately 37%. For the full year 2009, we are increasing our total non-GAAP revenue guidance to 207 to 212 million from our previous guidance of 200 to 205 million, representing growth between 21 and 24% over 2008. We are now targeting GAAP revenues of 204 to 209 million, an increase from our previous guidance of 198 to 203 million.

On a non-GAAP basis, operating income is expected to be between 33 and 36 million. Non-GAAP EPS is expected to be between 51 and $0.54 using an estimate of stock-based compensation expense of approximately 11 million and amortization of intangibles associated with previous acquisitions of approximately 4 million.

We expect GAAP EPS to be between 26 and $0.29 including the purchase accounting adjustment to record the assumes Clarix and Waban deferred revenues and backlog at fair value, non-cash expenses associated with stock-based compensation expense, and the amortization of intangible assets. The expected full year EPS reflects an estimated book tax rate of approximately 36 to 37%, while our cash tax rate is expected to be in the 4 to 5% range.

To put our full year guidance in final perspective, Waban's expected impact on our full year 2009 guidance is as follows. Approximately 2 and 3 million in non-GAAP revenue, approximately 1 and 2 million in GAAP revenue and a dilutive impact of 1 to $0.02 to our non-GAAP EPS and between 4 and $0.05 to our GAAP EPS. This means that excluding the effects of the Waban acquisition, we effectively increased our core full year Phase Forward revenue guidance by $4 million at the high-end and between 1 and $0.02 in non-GAAP EPS.

In summary, the company delivered strong first quarter results and we have increased our core Phase Forward outlook and our overall outlook for the year. Our acquisition of Waban was a strategic move for the company. We expect the strong growth of their solutions to continue throughout 2009 and beyond, which will lead to an accretive of non-GAAP EPS impact in 2010, after we move beyond the transition from upfront revenue recognition to ratable revenue recognition.

With that, we will be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question come from the line of Steven Crowley with Craig-Hallum Capital. Go ahead.

Steven Crowley - Craig-Hallum Capital

Good afternoon gentlemen.

Robert Weiler

Good afternoon, Steve.

Christopher Menard

Hey Steve.

Steven Crowley - Craig-Hallum Capital

First of all congratulations on a great quarter. Couple of questions. You mentioned in the press release and then your dialogue that you have some success here with the bundle of EDC and IRT. What have been the biggest drivers because it's a bit sooner for this phenomenon to take place then maybe you would led us to believe previously, is it a function of the environment, is it a function of the sales proposition that you brought help us understand the ingredients that's brought us together? I guess related to that, could you give us an update on expectations for the IRT business for this year as a whole, I don't think that was part of your prepared commentary?

Robert Weiler

Well, essentially you never can totally predict sales cycle. So, when we gave guidance for how long this is going to take, we clearly has number of items in the pipeline, whether they are going to close or not, we were not really sure of on our last call. But I think what is clear is the drivers of IRT and EDC that it is just a very, very natural integration of the product in a product requirement.

The Clarix product is an excellent product to combine it with InForm and the benefits that are getting readily apparent. So as we made this proposition to companies, as they're going through the evaluation, just as we hope would happen they really saw the benefit of an integrated suite solution not just from technology, but dealing with one customer, the investigators having one help desk, the ability of the service project management and bills coming under one umbrella, combining the best of breed of the service people from Clarix with the best of breed that we have on InForm and understanding the products is a very, very compelling offering. You combine that with when you buy them together you get cost synergies as well we believe that this is just going to be the first few of many that we expect over the next years.

Steven Crowley - Craig-Hallum Capital

Okay. Just as my follow-up, really two prongs, was there a nature to the customers that have gone to this bundle early on, are they established existing customers of the InForm that are adopting Clarix or vice versa? And then somewhat unrelated but important to us, your CRO channel, and CRO business had a very good quarter in the context that I think is confusing and where there have been some issues presented by some companies and not by others, what can you tell us about your success on the CRO side of the equation, and how you're making that work for us or work for you and is there anything anomalous in the results related to the CRO partners? So and then I'll get back in the queue, thanks for taking my questions.

Robert Weiler

Thanks Steve. I've never heard of a single follow-up having two prongs, but well we'll let you get away with that one this time.

Essentially on one of the deals, it was a existing InForm customer, one of the other deals was a brand new customer that was kind of going through the evaluation of the typical EDC and are actually markets they had multiple valuations going on and they recognized early on that it made a lot of sense, so a little bit of both on that one.

On the comments of the CROs, CROs both success and sometimes stumbled I guess the best way to say it is can be very specific to that CRO. A CRO may have a large cancellation that puts a view that they have that the market is changing dramatically and another CRO may not have any of those and be performing quite well. And that can change from quarter-to-quarter. And one of things that CROs live with is that any one point in time they may get a call or they may have a large cancellations they hadn't known about.

What we are seeing however, is that it seems that with most of the CROs that they are seeing market be pretty indicative of what they thought. They are starting to see a little pick up in some RFPs. They are seeing that trials are being managed much more closely and it's just not that they are cutting trial. The pharmaceutical companies are looking at pressure from reimbursement situations that are causing them do to the cancellations, that they just -- there might be buyable drug, but they're just not going to get their money back on it.

So all of this is what is the CRO space. So we continue to work with many of the CROs and our growth was the enjoyment of many of the same EDC trials that they have been using and still riding a adoption curve hasn't affected our business as dramatically as they may have effected maybe one singular or two CROs, while we still see many other CROs actually having strong results and having strong pipeline.

So for us it's a matter of making sure that EDC is still the focus of adoption. Many of the trials that are being cancelled generally are not being done may not have been EDC trails at all. So I think we're still on a good position. We don't think it's an anomaly, and we continue to see the adoption rate grow and with that we continue to see our position in CRO market be very, very strong.

Next question please?

Operator

Our next question comes from the line of Richard Close with Jefferies. Go ahead.

Richard Close - Jefferies & Company

Yes, just a follow on to the last question, I believe in the fourth quarter you noted that the service margins did get a benefit from a cancellation where as the third quarter when you had improving margins on the service line, there wasn't any cancellation of a trial to sort of point out to that improvement. How about in this first quarter obviously good performance on the service gross margin, was there anything unusual with cancellations in that?

Christopher Menard

So in all quarters we have a handful of cancellations and historically what we saw in the first quarter wasn't different than the last couple of quarters or even going back a year and a half or so. What we had said is in the fourth quarter was we had some unusually large cancellations and that's one of the reasons why the services margin had spiked up. We didn't have anything that was abnormal or unusual in the first quarter.

Richard Close - Jefferies & Company

Okay. And then I'll try the two prong follow-up there, with respect to Bob, you just mentioned and if you can clarify the commentary of a pick up in RFP. Some of the CROs have talked about RFPs maybe, a similar number of RFPs but maybe down in dollar value? And then I guess the second prong would be what are your thoughts on big pharma trying to -- or well just cutting R&D year-over-year in some cases, and how that impacts Phase Forward?

Robert Weiler

Well, I think part of what the reason is that we re seeing in some cases. I'm not saying all CROs. In some cases that we're seeing there is pick up for RFP, but down in dollar volume is that you are seeing some of the process of getting the smaller drugs to market. Not requiring as many of the big, big, big mass of trial.

So while they are seeing our piece out there for some of the smaller drugs that the pharmaceutical companies are trying to bring into market, they're seeing a study there, but some of the big ones just aren't being there and that's really CRO dependant.

So the activity is still healthy, it's not clearly where it was a year ago. But if you listen to commentary and in my conversations many of them, they are feeling that we saw a lot of cancellation in 2008, there still maybe a few ahead of us, but that the pharmaceutical companies are rationalizing their pipelines and they are pretty much done with that, they know the products that they are trying to bring to market and that they're expecting -- some of them are expecting an uptick in the second half of the year.

As far as the R&D questions being cut back, they are trying to as I mentioned earlier, there are several important reasons and competitive reimbursement environment for the products to reach the market is clearly one of them. They are really going to be killing drugs or killing candidates for market reasons not for reasons of whether the drug is going to be effective or not.

So what we're seeing is that they are managing the trial, the smaller biotech companies are managing their cash. Many of them have cash situations where they might be out of cash in two years. So they are spreading their trials out, they are concentrating on fewer. Those that might be more risky trials, they are not doing.

But the overall R&D spend is still the life blood to these companies and getting the drugs to market is still life blood of these companies and they are just trying to do more with less spending and I think that's why you're seeing this kind of adjustment period for the CROs.

Richard Close - Jefferies & Company

You don't have any apprehension about the commentary that they are saying as it relates to your business. You feel your business is as healthy here as we progress through '09?

Robert Weiler

Yes and the reason is that we -- when the trial is done it can either be done directly with the pharmaceutical company or biotech company and we have an opportunity to get that trial.

So whether it's outsourced or insourced, we still have the benefit of that. CROs only have the benefit of the outsourced trials. So they have volatility, a little more volatility than we have. So if a company has a trial and they decide to do that with insource, we still maybe getting that trial. If they decide not to outsource it, well to the CRO, it looks like trials were down.

But we tend to see the trials that are both insourced and outsourced so I think the impact is less for us. And as we've made commentary before, that a cancellation or one or two trials down for us doesn't have the impact that it has for CRO that may have already staffed up to that trial, it maybe a $50 million trial for them, for us, it may just be the average ASP price of $450,000.

Richard Close - Jefferies & Company

All right. Thank you very much.

Operator

Our next question comes from the line of Richard Davis with Needham & Company. Go ahead.

Richard Davis - Needham & Company

Hey thanks, could you talk about the pricing environment, some people were worried about that. I picked a little bit of pricing commentary from some people, if you could just talk about how when you come up with renegotiations and new contracts out of that plan?

Robert Weiler

Well clearly, the pharmaceutical companies are having cost cutting measures and they want to pass that on. And that goes to our comments of how can they do more for less. So in our view for renewal, they will come to us with a number or trials that they plan on doing for the next couple of years. They know they paid in the past. And we work with them on how to try to reduce their overall total cost ownership by doing things, by maybe taking some of the functionalities that they outsourced in doing it internally or figuring out that -- that experience in certain areas. And that's how we deal with the price issue.

So while they don't beat us up just for pure prices, and say well that's just too expensive and we want 20 - 30% discount because of that, they're really looking at price and total cost issues, not just price issues. I think that is one of the reason that our integration story is playing out so well, because integration is one of the highest costs that the IT departments have, keeping the systems in sync with each other. Two different companies to deal with, two different systems to deal with. That gets costly. So we can go and show them dramatic cost savings by an integrated solution. That resonates well and that's how we deal with the price issue.

Richard Davis - Needham & Company

Got it. And then Q, Waltham's breakout in the Qs and stuff, the breakout of application consulting and support, do you have that or are you going to do that in future?

Christopher Menard

If I can give you that, I can give it to you as a percentage of revenues.

Richard Davis - Needham & Company

Yes, that will be fine.

Christopher Menard

So ASP made up 55% of total revenues. Consulting was 10%, support was 6.5%, and just rounded out license was 28.5.

Richard Davis - Needham & Company

Got it, superb. Thank you very much.

Robert Weiler

Thank you, Richard. Next question please.

Operator

Our next question comes from the line of Nabil Elsheshai with Pacific Crest Securities. Go ahead.

Nabil Elsheshai - Pacific Crest

Yeah, I was wondering if you could talk a little bit about the safety market. It sounds like you had a couple of big deals there. I think that's disappointed a little bit historically in terms of the take offs there and then may be comment on acquisition of Relsys by Oracle, and how that might impact the market?

Robert Weiler

Well, we had a good quarter in safety. And you're right. It has been slower growth than I think we and many have anticipated. I think that the Lincoln products that we have, and our Empirica trace product, particularly with the Saudi government regulatory agencies are really shows that the market is not totally saturated. But we still believe that it's slower growth than EDC or IRT or probably even our new data warehousing piece. But it continues to grow, it continues to be healthy, but it just doesn't have the rates that I think we originally saw.

And I think a couple of reasons. First, is the pricing model difference, when you sell safety products, you're priced by the end user, not by the trial or number of patients or by the investigators. So I think that limits the size of the market. The market is much smaller, but we're very thrilled with the fact that through a couple of valuations that we are nicely competitive. How we are able to win those and we're seeing a really some pick off in our Lincoln technology group with a number of wins that we reported over the last two quarters. So the business is growing. It was a great quarter. We hope it continues, but it clearly is a smaller market than the others.

On the question of Relsys being acquired by Oracle, we have seen that as software market matures, it tend to be a consolidation. Oracle has a product in the safety space. And now I believe that with Relsys, the way we view it is Relsys have some capabilities that allows them to go over into more of the electronic medical records and healthcare, data mining type of space, and at least that kind of the commentary. And that's clearly an area Oracle has put priority on getting products.

So, I think that even though they had their own safety product Relsys were more probably had functionality taken through what I would call the offset side of the house over to medical records and try to figure out how this strategy is going to above mining and tracking safety information in that space.

Nabil Elsheshai - Pacific Crest

Okay, great. Thank you.

Operator

(Operator Instructions). Our next question comes from the line of John Kreger with William Blair. Go ahead.

John Kreger - William Blair & Company

Hi. Thanks very much. Could you give us a update on pharmaceutical industry consolidation? I'm guessing that didn't really impact you in the first quarter, but if you could just clarify that. And then move broadly as those deals move towards completion and integration, how that might filter into your business?

Robert Weiler

Well, on the core part, I mean in the Merck and Schering-Plough announcement, it's really don't want me to comment on these, because we really don't know which ones are going to take place. We had GSK and acquisition of Biotech Company really run. And our view is that if you're the market leader, you're covering the lot of areas, the first thing that's going happen is you're not going to have an overnight transition. The company that are being acquired overnight just not going to switch. Their trials that are running, so it's going to be a multi-year process, if there is going to be any change at all.

If there is going be change, you're still combining the number of trials. So when you come up for renewal and as these companies come for renewal, they are generally not buying these companies and doing less trials. So, let's just take example of Merck and Schering-Plough. They both have the number of trials that they are doing. I believe that they are talk, they were going to begin, even doing more trials eventually.

So, our pricing models based on the number of trials. So if there are customers it doesn't change. If they are not our customers, it would be a two or three year impact whether we would receive the benefit of more trials of a new one, or it would be somebody else that would lose trials. So, industry consolidation doesn't have the immediate impact. I think that some would either applaud or fear.

So, and then the comment on potentials, all I can say is that we pretty much looked at every potential that everybody else has and feel that we would be okay depending upon how those turned out.

John Kreger - William Blair & Company

Great, thanks. And my follow-up, can you just give us an update on the competitive landscape within the EDC and IRT space? Are you seeing any changes there?

Robert Weiler

No. It's been fairly consistent for last three years.

John Kreger - William Blair & Company

Thank you.

Operator

Our next question comes from the line of Raghavan Sarathy with Dougherty & Company. Go ahead.

Raghavan Sarathy - Dougherty & Company

Good afternoon, and thanks for taking my questions. First on the InForm revenues. If I recall correctly, when Roger gave the guidance, he was expecting 15 to 20% growth in InForm business, factoring in delays and cancellations as such. The performance is pretty strong, 26% growth. Was that performance due to probably fewer delays and cancellations or originally you had anticipated maybe a strong growth in the first half, maybe growth slowing down in the second half of the year?

Christopher Menard

So, I guess we did overachieve in just about all of our revenue segments during the first quarter. And so our... the way InForm performed, we overachieved in areas like ASP, consulting as well other areas.

At the beginning of the year, we did provide thoughts and some guidance to individual product line revenues. But that wasn't something that we had to planned to update on a quarterly basis.

Raghavan Sarathy - Dougherty & Company

And then the follow-up on Clarix. I believe you said Clarix did about 2 million. So on annualized basis that's running below your previous guidance of 13 to 15 million. Can you update us on what's your expectations for that?

Christopher Menard

Yeah. So, one of the reasons why we were under in the first quarter compared to the fourth quarter was the volume of change orders was not what we had experienced in the fourth quarter. And also the pass through revenues were not as high as what we had seen at end of the year.

Like the InForm revenues, I know we did provide some guidance and thoughts at the start of the year, but we're not going to updating those on a quarterly basis. But more importantly as Bob pointed out in his prepared remarks, we were very happy with both the volume of orders related to IRT solutions and also the dollar value of those orders.

Raghavan Sarathy - Dougherty & Company

But do you still anticipate Clarix to meet expectations?

Christopher Menard

Yeah, we're still forecasting significant growth, but we're not going to be guiding to an actual revenue number for the year.

Raghavan Sarathy - Dougherty & Company

All right. Thank you.

Operator

Our next question comes from the line of Raymond Myers with Emerging Growth Equities. Go ahead.

Raymond Myers - Emerging Growth Equities, Ltd.

Thank you. Good afternoon. My first question is regarding market consolidation. As it relates to InForm GE, I wondered if you could comment on what you're seeing in terms of consolidation of vendors and the consolidation of functionality?

Christopher Menard

Sorry. I'm not really sure... consolidation of vendors, I mean our competitive space vendors.

Raymond Myers - Emerging Growth Equities, Ltd.

Yes, as well as you yourself making two acquisitions recently.

Christopher Menard

Yeah. I mean we are clearly in a mode that we're trying to implement the strategy that we started about creating a suite and our customers want an integrate suite and that's clearly what we're seeing.

I think from a competitive standpoint, you're going to be seeing the competitive environment here between those that offer fully integrated solutions and point solutions. That said, you cannot ignore your point solutions and InForm GE, it's something that's going to I think make us more competitive.

Essentially, we've invested in R&D for a number of years, people sometimes wonder what we're spending it on. And our products is one that has proved in the market, but you have to update your products. So, now we have a brand new user interface. We have tightened integration between central coatings, our adaptor technologies, our designer products is tightly integrated with InForm. We worked on some of the architecture to make things not just from usual interface look better, but navigation and recording to be much easier and much more powerful.

So, essentially we have a leading product that we've enhanced and coming to the market and we think that that's going to be well received. The customers that have looked at it are really thrilled and excited about the changes we made and the power that it has. And we talked about the global aspects of it as one more and more trials going global to be able to have Unicode support to allow different languages at all layers, office system is really important. And we belief that it's going to be a tremendous product and we're really excited about interest in the DIA.

Raymond Myers - Emerging Growth Equities, Ltd.

Great. Well, now that you have a more competitive, well integrated suite of products, I wonder how that fits with your plans you announced with the fourth quarter results to expand the sales force 20% this year and increased sales?

Christopher Menard

Yes. So, we're still trying to increase the sales force, I think at the end of the first quarter we were in the mid-to-high 20s. And in terms of reps that we're projecting at the end of the year, it's going to be in the low to mid 30s.

Raymond Myers - Emerging Growth Equities, Ltd.

And where do you stand now on that?

Christopher Menard

Yeah. So right now we are in the mid-to-high 20s in the number of sales reps.

Raymond Myers - Emerging Growth Equities, Ltd.

Great. Thank you.

Operator

Our next question comes from the line of Raghavan Sarathy with Dougherty & Company. Go ahead.

Raghavan Sarathy - Dougherty & Company

Hey. Just a quick follow-up. On the recent acquisition because you gave the revenue guidance, is about to going to be on the license line?

Christopher Menard

No, they are actually... they have a fair amount of services revenue as well.

Raghavan Sarathy - Dougherty & Company

So can you give us sort of the split as well as what sort of gross margin that business has?

Christopher Menard

Yeah. So first to help you out. I think the split between license and services are probably, approximately 50% -- 50%. And their gross margins are going to ramp up overtime, because as we take them off of the perpetual revenue model on their licenses and moving for a ratable model, it takes some time for that revenue stream to build up. Overtime, I anticipate that their gross margins are going to be in line with our gross margins and eventually their operating income will reach the high teens as ours has also.

Raghavan Sarathy - Dougherty & Company

What is the expectation now for the gross margin for that business?

Christopher Menard

The gross margin, the period coming up now?

Raghavan Sarathy - Dougherty & Company

Yeah.

Christopher Menard

Somewhere approximately 60%.

Raghavan Sarathy - Dougherty & Company

Okay. Great. Thank you.

Operator

And ladies and gentlemen, I show no further questions at this time. I'd like to turn the call back over to management for any closing remarks.

Robert Weiler

Thank you. As you can see, we are excited about our results for the first quarter. We are exited about our opportunities in the future. We are excited about announcing our new product at DIA in June at San Diego. And we are really exited about the fact that we're getting traction in our acquisitions and we expect that the Waban acquisition that we just did really brings new level of not just having point products, but having a platform to really bring the e-clinical suite to reality.

So with that, we will be working through this quarter and talk to you at the next conference call. Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. That does conclude the presentation. You may now disconnect. Have a wonderful day.

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Source: Phase Forward Q1 2009 Earnings Call Transcript
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