IMS Health Q2 2009 Earnings Call Transcript

IMS Health (RX)

Q2 2009 Earnings Call

July 23, 2009 8:00 am ET

Executives

Darcie Peck – Vice President, Investor Relations

David R. Carlucci – Chairman & Chief Executive Officer

Leslye G. Katz – Senior Vice President & Chief Financial Officer

Analysts

Glen Santangelo – Credit Suisse

Lawrence Marsh – Barclays Capital

John Kreger – William Blair & Company

Steven Halper – Thomas Weisel Partners

Presentation

Operator

Ladies and gentlemen, thank you for standing by and welcome to the IMS Health second quarter 2009 earnings conference call. (Operator Instructions). As a reminder this conference is being recorded Thursday, July 23, 2009. I would now like to turn the conference over to Darcie Peck, Vice President, Investor Relations. Please go ahead.

Darcie Peck

Thanks and good morning everyone. Welcome to the IMS second quarter 2009 earnings conference call. With me this morning are Dave Carlucci, Chairman and Chief Executive Officer; Leslye Katz, Chief Financial Officer and Gilles Pajot, Chief Operating Officer. This morning Dave and Leslye will review our second quarter and year-to-date results, discuss the details of the restructuring plan we announced this morning and cover our full year financial outlook then we will open it up for your questions.

As in the past, we've posted slides in our website, and I would encourage you to review those during our remarks this morning. Our presentation includes non-GAAP financial measures and in an effort to provide additional information to investors. All non-GAAP measures have been reconciled to their related GAAP measures in accordance with SEC rules. You will find reconciliation charts at the end and in the form of our 8-K submitted to the SEC.

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

Forward-looking statements represent our views only as of the date they are made and the company undertakes no obligation to correct or update them whether as a result of new information, future events or otherwise. Now let me turn the call over to Dave Carlucci, Dave?

David R. Carlucci

Thank you, Darcie. Good morning everyone and thanks for joining us today. In the second quarter accelerating healthcare market dynamics compounded by the economic downturn have led to a continued decline in our revenue and operating income performance. Revenue for the second quarter was $523 million, down 7% constant dollar, which was below our expectations. The strengthening of the dollar again affected our reported revenue growth, which was down 13%.

Operating income on an adjusted basis declined 32% constant dollar and 28% reported and adjusted earnings per share was up 10% to $0.44 including a tax benefit that Leslye will describe later. Our cash flow in the quarter was exceptional, coming in at a $197 million. That’s a reflection of our business fundamentals, which remain solid and our strong financial position. The marketplace continues to evolve and this morning I will take you through what's changed for both us and our clients over the past several months. I will also spend some time on the decisive actions underway to lower our cost structure and better position our business for a return to growth.

Coming into the year although we knew clients were being more selected with their budgets and we plan for lower growth with them they clearly have intensified their cost management efforts. This has had the greatest impact on our performance in consulting and our ad hoc information offerings. Both were factors in the major markets including the U.S. and both were the result of less discretionary spending by clients. What we've seen over the past year from our clients is a great sense of urgency around finding new growth areas and a need to adjust their business strategies and create new business models.

That has created opportunities for us in emerging markets in specialty, patient and payer insights and in services. We knew there would be trade-offs in their portfolios and we also took potential mergers into account. But the uncertainty around healthcare reform particularly in the U.S. and the sustained economic downturn have accelerated their need to adapt and adjust. And over the past few months this has led to greater scrutiny than ever of buying decisions. I can tell you that we've seen a lot of engagements where we've had agreement to move forward only to be shutdown by higher levels in the organization.

Those projects typically have been driven by sales and marketing teams at the country level. That change is evident in some of the key metrics we used to assess our performance. There has been an increase in the time to close projects. The yield from our pipeline is down and revenue per consultant is lower. Year-to-date our revenue is down 5%, compared with 5% growth for the same period last year. To quantify this shift in absolute growth, we've had about a $100 million swing from $50 million of growth through the first half of 2008 to a $50 million decline this year.

Consulting and services is the major driver of that. Going from double-digit gains last year to a double-digit decline. We have seen that in all of our practices and in all of our regions outside of the emerging markets, a reflection of what's happening across the broader consulting industry. In information and analytics, we had a more mixed performance. We went from 3% growth to a 3% decline year-over-year. Some I&A offerings are performing well for us including those in specialty, patient, and payer spaces. But that’s not enough to offset weaker demand in the major markets where clients are raining in their spending on non-contracted commercial effectiveness and portfolio management offerings.

Another factor on our top line performance is acquisitions. In 2008, they accounted for about 2 points of our growth, but we've had very little activity on this front over the past year. And we are continuing to pursue opportunities that are being more selective in this environment. With that as a backdrop we are looking at the next 18 months as a transition period. We'll continue to get growth from some areas of our business and pressure from others. To improve our financial performance, we announced a restructuring plan today taking steps to reduce our cost structure. The nature of this restructuring is quite different from our actions in 2008, which were primarily focused on a streamlining of our customer delivery and development function and a redeployment of our client facing teams.

This restructuring is a 12 to 15-month program that goes deeper and involves all areas of the business and all regions. It's enabled by investments we've made in our technology and production platforms. For example, we are leveraging our CRM and global finance and human resources applications to enhance productivity and right size our teams across sales, finance, HR and CD&D. We are also reducing capacity of our consulting and sales teams in areas where there is lower demand and aligning our resources to growth areas like the emerging markets.

In EMEA, where the majority of actions will take place, we're right sizing our operations. We intend to downsize the headquarters function and reduce or consolidate the number of operating units. In some mid-size and smaller countries, we plan to move infrastructure and administrative functions out, while maintaining our sales and services presence. We also have opportunities to simplify and standardize support function across the region and we will capitalize on the technology investments that we've made over the past several years to centralize more activities, enhance productivity and focus on more value added work.

These actions will put us on a path towards margin improvement there. While it is never an easy decision, we expect to reduce our workforce by 850 positions over the next 12 to 15 months with approximately a 170 of those in the U.S. Our actions are expected to yield annual savings of $80 million to $85 million by 2011 on top of the $65 million in annualized savings that we generated from our actions in 2008. The restructuring is key to addressing what is a continuing lower growth environment. As you can see from our press release, this morning we are revising guidance for the year to reflect that environment as we reposition and right size the company.

So, overall we know where the challenges and opportunities lie and we are targeting all of those areas. We are moving out quickly to adjust our cost structure and focusing on areas where clients are spending more. We are enhancing our specialty and patient-centered insights and extending our debt with payers and governments. We are investing across emerging markets and taking a differentiated approach in knowledge process outsourcing, as clients look to add variability in their cost structures. So we are continuing to evolve our approach. We will stay focused on our clients and take the necessary steps to adjust for the market realities.

Now, Leslye will walk you through the details of our performance in the quarter, discuss the financial impact of the program, we are announcing today and our expectations for the year. Leslye?

Leslye G. Katz

Thank you, Dave and good morning everyone. Let me start with the highlight of our financial results. In the second quarter we delivered an outstanding cash flow performance turning in our highest free cash flow quarter ever. Preliminary free cash flow in the quarter was a $197 million, up a $109 million, compared to last year a significant contributor to this strong performance was our DSO. In the quarter DSO improved sequentially by a 11 days to 57 days and was 10 days better than Q2 2008. Our focus on cash collection continues to payoff. Year-to-date preliminary free cash flow was $250 million, up $206 million. We remain on track for $380 million or better free cash flow for the full year.

In the second quarter, we also realized tax benefit and recorded asset impairments that we have not previously anticipated. The net tax benefit of $24.2 million related to the favorable resolution of certain prior year tax matters. As a result we were able to reverse related tax accruals. We also recorded a $25.4 million charge for asset impairments and supplier contract related charges in the quarter. These related predominantly to offerings in EMEA that we have determined to be of lower value in the current environment. Due to the unusual nature of these impairment charges we have excluded them from our non-GAAP adjusted results.

Now, let me turn to revenue performance. Second quarter revenue was $523 million, down 13% reported and 7% constant dollar and below our expectation. Our revenue performance was adversely affected by both the weak economy and currency movements. The strengthening of the dollar versus last year against major European currencies widened the gap between reported and constant dollar revenue results this quarter. And our reported revenue growth came in 5.9 percentage points worse than constant dollar revenue growth.

From a regional perspective revenue in the Americas was down 10% reported and 8% constant dollar in the quarter, reflecting a slow down in the U.S. and significantly lower consulting and services demand compared to last year. In EMEA, we posted a 19% reported and 8% constant dollar revenue decline. With weaker performance in the major markets, partially offset by double-digit revenue increases in small or high growth EMEA countries. And in the Asia-Pacific region, revenue was down 4% reported and 3% constant dollar. Strength in the emerging markets was offset by a weaker performance in Japan.

In total, the seven far emerging countries continue to represent a bright spot for us with revenue growth collectively coming in at 11% constant dollar in the quarter. Overall demand for consulting and services soften significantly as clients reduced spending for new engagements in light of the economic pressures. Consulting and services revenues declined 22% reported and 17% constant dollar in the quarter. But to put this in some perspective, C&S revenues did grow $6 million or 6% sequentially over the first quarter.

Information and analytics revenue was down 10% reported and 4% constant dollar for the quarter driven primarily by a reduction in client's ad hoc information purchases. I&A gross margin was 57%, a decline of 20 basis points from Q2 of last year. Consulting and services gross margin was 50%, a 100 basis points lower than last year. C&S utilization was approximately 71%, a point better than last year, but the significant revenue decline made it impossible to hold gross margin steady.

Across the business lines year-to-date, commercial effectiveness revenue declined 6%, while product and portfolio management and new business areas revenue each declined 4% all on a constant dollar basis. From a client perspective, revenue performance across our top 20 clients varies considerably. And collectively declined slightly more than our overall results on a year-to-date constant dollar basis.

We had better performance in the first half across our medium and smaller clients. Throughout the year, we have continued to maintain tight controls over hiring and all discretionary spending. In the second quarter, cost expense was flat compared to last year on a constant dollar basis, bringing year-to-date constant dollar cost expense growth to 0.7%. However, we were unable to offset the impact of the revenue shortfall in the quarter and that showed in our operating income performance.

Adjusted operating income in the quarter was $95 million down 28% reported and 32% constant dollar. Our adjusted operating margin was 18%, a 3.8% decline from second quarter 2008. GAAP operating income included the $25.4 million asset impairments and supplier contract related charges I discussed earlier. Operating income in the first half was well below our expectations. And we are taking the actions necessary to realign our cost structure for this difficult environment.

As you saw from your press release and as Dave covered in detail, we announced a comprehensive plan to streamline our business and reduce our cost structure. We expect to take a charge in the third quarter of 2009 of between a $110 million and $120 million. This charge will consist of approximately a $100 million to $110 million for employee termination benefits and about $10 million for facilities related asset impairments, accelerated depreciation and other charges. When these actions are completed over the next 12 to 15 months, we expect to achieve annualized cost savings of between $80 million and $85 million by 2011.

Turning to the non-operating components of our Q2 performance. Total interest expense net was $8.6 million, down $0.4 million from last year due to lower debt levels and lower interest rates, as compared to the second quarter of 2008. Other income net on a GAAP basis was $4.5 million and $2.1 million on an adjusted basis, reflecting the savings of $2.4 million of foreign exchange hedge gains into subsequent quarters. GAAP EPS for the second quarter was $0.34. On an adjusted non-GAAP basis, EPS was $0.44, up 10% over the adjusted non-GAAP EPS of $0.40 last year.

Turning to the balance sheet. Cash and cash equivalents totaled $240 million at quarter end, an increase of $65 million, compared with March 31, 2009 due primarily to strong cash collection. Debt as of June 30, totaled $1.4 billion, an increase of $30 million, compared with March 31. The increase in debt resulted from the retirement of $100 million of minority interest financing and $30 million of tax settlement payments, all completed in the second quarter.

Our strong free cash flow in the quarter funded a pay down of debt that substantially offset these two large outflows. In terms of capital deployment we spent $27 million on deferred software and capital expenditures in the quarter, down $9 million from last year. We continue to manage cash very effectively to maintain a low cost of borrowing and appropriate levels of cash and debt in an economic environment in which liquidity remains important.

You saw in our press release that we've made changes to our outlook for the remainder of this year. This morning Dave took you through the areas where our clients have significantly reined in their spending, ad hoc information purchases and consulting and services engagements particularly in our major markets have all been cutback. That's reflected in our revenue performance through the first half of '09, which is well below our expectations.

Well our year-to-year revenue growth comparisons get easier in the second half of the year, we anticipate that clients spending will continue to be constrained. As a result we now expect that revenue will decline this year at a constant dollar rate about the same as we experienced in the first half.

Given this full-year revenue outlook and including the net tax benefits we've realized in the second quarter non-GAAP EPS in 2009 could be below our original guidance range. While we will continue our aggressive cost and expense controls and expect to realize some small benefits from the restructuring plan in Q4. This will not be enough to offset the shortfall in the top line.

As we assess the range of risks against the opportunities we can see for the remainder of the year, we estimate that our fully non-GAAP adjusted EPS could be approximately $0.10 below our original range of $1.70 to $1.77. This excludes the $63 million tax benefit we realized in the first quarter from an international reorganization. The $25 million asset impairment charge in the second quarter, and the expected third quarter charge for the restructuring plan we announced this morning. As you know, we have $9.5 million shares authorized and available for repurchase under our Board authorization.

While no share repurchases are specifically assumed in this updated outlook. We do anticipate completing repurchases under this authorization in the next 12 to 15 months. We covered a lot of ground this morning and we acknowledge that there is never sufficient time on these earnings call to get into depths about our business operations, our opportunities, and our strategy. So, over the course of the next few months, we will be holding a series of informal webinars. In these interactive sessions we will feature our key leaders and cover topics such as our growth areas in patient and payer insights, the emerging market opportunity and our capabilities in knowledge process outsourcing.

In addition, we are planning to hold an Investor Day in November to provide further insight into our business performance and our outlook for the future. I hope you will join us for the webinars and Investor Day.

Now, let me turn the call back to Dave.

David R. Carlucci

Thanks, Leslye. To sum up, what's clear is that the industry we serve is going through dramatic change. It's complex and it's only being compounded now by a number of events not the least of which is the global recession. In 2008 we took steps to get out ahead of the marketplace and to adjust our cost structure. And going into this year, we plan for lower growth, but as we look at what's happening with clients as they reset their strategies and define themselves for the future there is a lot of cost cutting in the near-term and we are feeling the impact.

So we are taking steps over the next 18 months to improve our operating performance in this environment. We're confident as we make these adjustments. Our business is resilient and we have the advantage of being the global leader, the ability to generate strong cash flow and the flexibility to invest for future growth. We expect to see improvement in our consulting business as economic pressures ease. And we have clear opportunities to help clients navigate this environment including new capabilities in patient and payer spaces as well as in emerging markets and with KPO.

We have specific strategies in those areas and as Leslye outlined we'll take you through those opportunities in the upcoming webinars and at our Investor Day in November. With that let's open it up for your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Glen Santangelo from Credit Suisse. Please proceed.

Glen Santangelo – Credit Suisse

Yeah, Dave. Just a couple of questions, in your prepared remarks you sort of suggested that we are in this continuing lower growth environment to kind of use your words and I am curious if you could elaborate on that a little bit because I'm trying to get a sense for what you're most concerned about. Obviously there has been a lot of pharmaceutical mergers announced, there was another one on the tape today albeit it a small one, but we are also facing the patent cliff out in 2011 and 2012. I am are you sort of suggesting that we will be in this lower growth environment for years or you think its really just the compounding effect of the current macro environment right now that's kind of making it worse?

David R. Carlucci

Yeah. I think it's more the fact that this environment is making it worse. I mean we've said long-term we think our model looks like a mid-to-high single-digit model and the real question is what's the definition of long-term right now? And in the environment we are in as you can tell by our ability to forecast is very difficult with the number of things that are hitting us right now. And I look out over the next 18 months and I say the most important thing for us is to go through this transition to get our cost in line so that we can take advantage of an upturn when the market turns. So in that case Glen it's very hard to predict we would like to think we're at the bottom, but I am a little gun-shy on forecasting that view.

Glen Santangelo – Credit Suisse

Hey Dave, have you started to evaluate the impact of all these mergers on your business, or you're kind of going through that process now?

David R. Carlucci

Yeah. No, we have the question is announced versus potential, but if we look at how we look at it as it relates to next year, we think it could have about a 2-point impact.

Glen Santangelo – Credit Suisse

Okay. And then I just had a follow-up question for Leslye, you sort of talked about maybe working through that share repurchase authorization in the next 12 to 15 months. If I go back to the 4Q call I think you said pretty specifically that there will be no share repurchases in 2009, kind of given the recent sell-off in the stockyou maybe starting to rethink that position, because certainly if you look at the balance sheet, it doesn't seem like there is a lot of leverage, cash flow continues to be robust, I mean is it a case where you're looking to maybe be more opportunistic at this point?

Leslye G. Katz

Yeah. A fair question Glen, I think what I said at the beginning of the year was I wasn't assuming a share repurchase in the guidance for the year. Certainly, we are continuing to manage really all the elements of our capital structure in the first half, good cash flow, we did pay down a $100 million minority interest, we had to repurchase made $30 million of legacy tax payment. We will begin to fund the restructuring in the second half and that will go into next year, but we continue to share repurchase as one of the components of our capital allocation. And as I said I think within the next 12 to 15 months, I anticipate using the 9.5 million-share availability.

Glen Santangelo – Credit Suisse

Okay. Thanks for the comments.

David R. Carlucci

Thanks Glenn.

Operator

And our next question comes from the line of Larry Marsh from Barclays Capital. Please proceed.

Lawrence Marsh – Barclays Capital

Thanks, and good morning. Just a couple of things, Dave. As you sort of step back here in July I think the restructuring is the, the right thing do on the cost side, challenging times, call for challenging actions certainly, but I know, you addressed this couple of months ago, you felt that you had seen some signs of hope with a better March and some improvement with service offerings. We have a big drop in, revenues in the quarter. What do you think change so meaningfully, given the macro environment, it doesn’t look like it has gotten that much worse in the last couple of months?

David R. Carlucci

Well, I think a couple of things. Larry just to clarify, we had said in March, we saw a little strengthening in our C&S business off of a really weak January and February. It’s not huge, but we did see a $6 million sequential improvement in C&S up about 6% sequentially, said a different way, the percentage downturn in C&S is against a much stronger second quarter of ’08 than first quarter of ’08. The key factors are that that in I&A, our clients are just reducing their discretionary spend ad hoc information purchases to take a single view of any part of the market have dried up. And in C&S, we see still see delaying or canceling of projects due to cost containment.

Predominantly, that impact continues to be in the major markets including the U.S. and as you know the U.S. held remarkably well in ’08 and now looks a lot like the rest of the major markets. And then, just the overall reliability of our pipeline metrics, conversion rates and velocity continues to weaken. Although, as we enter the third quarter again the pipeline is strong even year-to-year. So, the additional factors of the economic environment what’s going on with our clients, I do believe the prospects of healthcare reform in the U.S. have a dampening effect, all of those are issues that at this point we can afford to hope that they will improve or won’t have a significant impact. So we feel its prudent for us to take, decisive steps on the cost and expense side, really facilitated a lot by the investments we’ve made in the last three or four years in infrastructure. So I don’t think the downside impact of that is hugely significant, it is disruptive of course, it's tough to do as you said, but we are much better positioned to do it and in many of the actions associated with that, we were positioned to do even if business was better to improve our bottom line performance.

Lawrence Marsh – Barclays Capital

Okay. And to follow-up with that I know in the last couple of years you’ve been active in growing and acquiring niche consulting businesses, which help fuel your growth obviously now with the downturn its really hurting more that I would have – more than I would have thought. It's sounds like today you're conforming your commitment to that business and you feel confident that there is going to be a rebound in that business. Am I hearing you correctly in that, and would you still feel it's prudent to continue to acquire niche-consulting businesses if appropriate?

David R. Carlucci

Larry, I think you said it correctly. We still feel very, very strongly that this has greatly enhanced our total value proposition to the client. I think that the days of just selling subscription, data, and information are ones that that insist that more insights are able to be derived from it, and especially as we move from primary care insights to a specialty. Specialty is going to have a much more disparate view and capability to access information in general, requires a lot more details and insight and the balance with our consulting team is hugely important in that. That said the advisors we talk to and the services we used to look at what's happening in the market, this is an overall consulting trend. Secondly, they will say this is the worst they have seen in 20 to 30 years. So, I think it's a very important component of our business. That said we will continue to drive utilization efficiency in that business and the right levels of resource to ensure that it provides shareholder return and value. So as we look at what's out there today we have slowed down on the acquisition front in this environment. We've got a lot on our plate relative to delivering on this restructuring plan, but we are not ruling out looking at available assets that could enhance the growth areas of our business.

Lawrence Marsh – Barclays Capital

Okay. And a final quick one on the restructuring, I know you're calling at $80 million to $85 million by 2011, are you giving us any sense of what sort of benefit we could see in 2010?

Leslye G. Katz

Larry, I think that we are still working on our plans and the exact phasing and so forth, but right now we estimate that we should get about 60% of the benefits in 2010.

Lawrence Marsh – Barclays Capital

So, and I would assume more back-end loaded within 2010, Laslye?

Leslye G. Katz

Correct.

Lawrence Marsh – Barclays Capital

Okay. And then finally, I know you don't guide to quarters, but the communication of a $0.10 moderation non-GAAP of $0.44 in the quarter so one would assume and that would imply a fairly noticeable sequential, potential sequential drop in earnings for the third quarter?

Leslye G. Katz

Yeah, I mean I think as you saw we had that tax benefit in the quarter as we look out to the second half of the year I think we see the tax rate likely to be higher in the second half just on balance we had an effective tax of 18% in the first half we are looking at something more like 27% in the second half. So that brings us to the full year rate of around 23% so I think that will be a factor.

Lawrence Marsh – Barclays Capital

So a little bit lower second half tax rate than you had thought before, so 27%. Okay.

Leslye G. Katz

Right, because it brings the full year to 23.

Lawrence Marsh – Barclays Capital

Yeah. Very good. Thank you.

David R. Carlucci

Thank you, Larry.

Operator

And our next question comes from the line of John Kreger from William Blair. Please proceed.

John Kreger – William Blair & Company

Hi. Thanks very much. Just to follow-up on Larry's last question, Leslye the revised non-GAAP guidance for this year that does include the $0.13 tax benefit in the second quarter, is that correct?

Leslye G. Katz

Yes, yes.

John Kreger – William Blair & Company

Okay.

Leslye G. Katz

So again just keeping in mind what we are really seeing here is, the whole range is down both the top and the bottom down $0.10 about $0.10 is what we estimate.

John Kreger – William Blair & Company

Got it. Okay. Just to clarify one of the remarks that Dave made earlier, the 2% hit that you are expecting in terms of revenues from the announced mergers among your clients are you seeing that yet or is that something that you expect to see and when would you expect that to really hit your P&L?

David R. Carlucci

Let me just comment on what we are seeing now I think merges in the past, where we've had a lot of activity between announcement and closure related to positioning for revenue growth opportunity and deployment of resource have really turned to much more of a focus of cost and expense synergy. That said there is kind of a dampening in what we see as some of the potential upside associated with the work going into these mergers, particularly in consulting and services. So we are in a sense seeing some effect of that, but really the orientation that we discussed is counting on the fact that these are going to close near the end of this year and the full year impact in 2010.

John Kreger – William Blair & Company

Okay, great thanks. Flipping to the cost side of the equation, as you have seen some revenue declines across your business what’s been happening on your data cost side are those variable enough that they float down with revenues or is that hurting your margins as you see the top line decline?

Leslye G. Katz

Well, the good news on that John is we are definitely seeing lower data costs year-on-year, but it's not variable sufficiently with revenues. So with the kinds of revenue declines we experienced this quarter it does have an impact on the margin.

John Kreger – William Blair & Company

Okay, great. And then just finally as you talk to clients is it your opinion that their purchasing attitudes are still getting worse or do you have the sense that we are bottoming at this point?

David R. Carlucci

Well, like I said earlier John I'd like to think that we are bottoming, although I am a little gun-shy on this point as we all are as we look at the market, I think at the higher level discussions that I am having with pharmaceutical executives they are clearly focused on the right strategy issues, the right areas that they are going to drive in the future, but in the short-term they have clamped things down very, very tight. I really firmly believe that this will not go on forever there is too much activity around defining their new commercial models around the new launch platforms and launch readiness that's critical to them. But clearly in the short-term here it just seems to be a real lock down around what they are seeing on the top line.

John Kreger – William Blair & Company

All right. Great. Thanks very much.

Operator

Our next question comes from the line of Steve Halper from Thomas Weisel Partners. Please proceed.

Steven Halper – Thomas Weisel Partners

Yeah. Hi Dave. So we've recognized that the company is facing considerable industry headwinds and now you are looking, at a fairly dramatic restructuring. Is this really the best option for creating shareholder value and has the Board discussed other alternatives at this point?

David R. Carlucci

Well every year we do our strategy meeting with the Board, which we just completed and we do a two-day session and looked at the long-term. Certainly, as we approach that I broke this down into the next 18 months, which we think is a period of transition and then the long-term opportunities for the company. We explore all the strategic options I would just say that in – as we view this action as I pointed out we've made a lot of investments that facilitate it. We continue to have significant issues in EMEA in terms of producing margins that are inline with the rest of the corporation. And the bulk of this again is aimed at EMEA and the reason it is, is that we think we're in a position to improve the operating structure there to give us significantly more leverage in the future as things start to come back. But I don't believe that this is an inflection point on the total model of our business and that we remain a very, very strong company in terms of both our market position and certainly if you step back and look at the company like ours relative to being in the information and analytic space coupled with services capability and consulting capability in the healthcare dynamic today be it comparative effectiveness or any of those trends, we are extremely well positioned in that. So we need to get through this transition period and we need to position ourselves to take advantage of better shareholder returns when things start to turn upward.

Steven Halper – Thomas Weisel Partners

Right. But you are asking investors, for basically another 18 months until you kind of put the whole package together again?

David R. Carlucci

Well I don't think we're asking that per se I think what we're doing is, we're taking decisive actions, we do have the ability to return to shareholders through this period through shareholder or share repurchases and we are in an environment that's not vastly different than everyone else in the marketplace. We have a lot of confidence in this business and in this model and yes we appreciate the fact that our long-term investors have looked at our business much the way we've looked at it. And certainly feel that with our cash flows and the strength of our balance sheet we have been consistently somewhat undervalued. So we are very confident as we look forward.

Steven Halper – Thomas Weisel Partners

Great, thanks.

Operator

(Operator Instructions). And we have no other questions at this time. I will turn the call back to you.

David R. Carlucci

Okay. Well I thank everybody I know there is a lot of detail here and there will be a fair amount of follow-on questions. I'm sure Darcie and Leslye and I will be available for those. And we would encourage you to participate in these webinars. So that you can get a detailed view from some of the stars on our team relative to our growth opportunities and we look forward to our November Investor Day to give you a stronger view of the future. Thank you.

Operator

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

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