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Michael McKelvey - President and Chief Executive Officer

Keith Schneck - Executive Vice President and Chief Financial officer


George Hill - Leerink Swann

Unidentified Company Analyst - Doherty & Co.

Raymond Myers - Emerging Growth Equities

Eugene Mannheimer - Auriga USA

Mitchell Randalpaul (ph) - Sidoti

eResearch Technology, Inc. (ERES) Q2 2009 Earnings Call July 30, 2009 5:00 PM ET


Good day and welcome, ladies and gentlemen, to the Second Quarter 2009 eResearch Technology Conference Call. My name is Audrey and I will be your conference coordinator today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of today's conference. (Operator's Instructions) As a reminder, ladies and gentlemen, this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. Michael McKelvey, President and Chief Executive Officer. Mr. McKelvey, you may proceed, sir.

Michael McKelvey

Thank you, Audrey, and good afternoon. Thank you for joining us on ERT's Second Quarter 2009 Earnings Results Conference Call. Our press release announcing the second quarter 2009 results was released this afternoon and is available on the ERT and most financial websites. Joining me today is Keith Schneck, Executive Vice President and Chief Financial Officer.

Prior to beginning the call I would like to read the forward looking event statement. Certain statements in today's call may constitute forward looking statements concerning the company's operations, performance, financial condition, and prospects. Because such statements involve known and unknown risks and uncertainties, actual results may differ materially from those expressed or implied by such forward looking statements.

Information about factors that could cause actual results to vary is disclosed in the press release announcing our results and in the risk factors section of our 2008 Form 10-K report.

Guidance is based on management's good faith expectations given current market conditions, but continued our further deterioration of general economic conditions in addition to other factors cited elsewhere, could result in the company not achieving the revenue and diluted net-income per share figures provided in our guidance.

Our forward looking statements speak only as of the date made. We do not undertake and expressly disclaim any obligation to update forward looking statements to reflect events or circumstances after the dates of these statements, except as required by law. You are cautioned not to place undue reliance on our forward looking statements.

I will now give highlights for the quarter and details on new bookings and for our operations. Keith will then discuss the detailed financials for the quarter and provide guidance for the third quarter of 2009 and the full year 2009. I'll then give some general reflections on our business and then open up the call to questions.

The second quarter of 2009 was in line with our expectations. The quarter continued to show signs of the delayed decision making and push outs and trial starts experienced across the CRO industry that we discussed on previous calls. This is a reflection of the current economic and financial environment. We offset some of these effects by taking proactive management actions which soften the impact on the bottom line, which we hope will increase our revenue leverage in the future. We did see sequential growth in revenue, bookings, and margins.

Revenues for the second quarter of 2009 were $24.2 million, down 31.8% from the second quarter of 2008, but up 1.6% from the first quarter of 2009. The decline in revenue continued to be largely centered in the Thorough QT area, which accounted for the majority of the revenue decline compared to the second quarter of 2008.

Sequentially, Thorough QT revenue continued to decline in the second quarter, but was more than offset by increases in routine revenue and site support revenue. As a re minder, Thorough QT trials are relatively large and have quick revenue burn off periods. They can be run anytime after phase one in the drug development spectrum. Although the timing of when Thorough QT trials are performed are within the discretion of the sponsor, regulatory guidance ultimately requires that they be performed prior to the submission of an NDA.

What we have seen over the last few months is that some pharmaceutical and biotechnology companies, especially the smaller ones, are postponing the signing of Thorough QT contracts, and the start dates of some of these trials in order to preserve cash.

Our gross margin percentage was 52.3% in the second quarter of 2009, down from 57.0% in the second quarter of 2008, but up from 50.4% in the first quarter of 2009. Operating income margin percentage was 20.0% in the second quarter of 2009, down from 30.3% a year ago, but up from 14.0% in the first quarter of 2009.

Diluted net income per share was $0.05, down from $0.13 in the second quarter of 2008, but up from $0.04 in the first quarter of 2009. In the second quarter of 2009 we continued to generate strong cash flow. In the quarter we generated $10 million of cash flow from operations, down slightly from the $10.4 million in the second quarter of 2008, but up from $9.1 million in the first quarter of 2009.

Our free cash flow was higher in the second quarter of 2009, $9.1 million, than the $6.6 million recorded in the second quarter of 2008. Over the past four quarters we have generated over $32.8 million in free cash. We ended the quarter with $67.7 million in cash and cash equivalents.

In the quarter we continued to be very focused on expense-management efforts, while maintaining our ability to respond to anticipated increase in transactions as the economy recovers. As previously announced, we integrated our call center operations into Philadelphia. We sold our EDC operations. We have practiced prudent cost-control measures in all parts of our business and we used our enhanced technology platforms to implement productivity improvements.

New bookings for the second quarter were $35.7 million. New bookings were down from $49.0 million in the second quarter of 2008, but up from $31.2 million in the first quarter of 2009.

Cardiac safety bookings consist of two parts; routine or phase one through four, and Thorough QT trials. As in the first quarter of 2009, the decline in bookings was mostly centered in the Thorough QT trial area. In the second quarter of 2009, 7% of our bookings were in Thorough QT trials. This compares to 34% in the second quarter of 2008 and 9% in the first quarter of 2009.

The good news is the routine bookings were actually higher in the second quarter of 2009 than in the second quarter of 2008. All of the decline in bookings were of Thorough QT trials. Routine new bookings in the second quarter were also higher than in the first quarter of 2009.

As usual, phase three bookings accounted for the largest percentage of new bookings, but we did see a significant year-over-year increase in the percentage of new bookings in phase one and phase two. In the second quarter of 2009, 44% of new bookings were in phase three or four compared to 38% in the second quarter of 2008 and 42% in the first quarter of 2009.

In the second quarter of 2009, 28% of new bookings were in phase two, compared to 16% in the second quarter of 2008 and 28% in the first quarter of 2009. In the second quarter 2009, 20% of new bookings were in phase one compared to 9% in the second quarter of 2008 and 18% in the first quarter of 2009.

We are encouraged by the increase in phase one and phase two bookings as this is typically a leading indicator of potential increases and thorough QT studies in the future.

The quarter saw an increase in bookings from smaller to midsized pharmaceutical and biotechnology companies. In the second quarter, 36% of bookings were from smaller to midsize pharmaceutical and biotech companies, compared to 21% in the first quarter of 2009.

This does provide a slight indication that some smaller to midsize companies are starting to spend more. We're not sure whether this is a trend or not, quarterly bookings by size of firm have significant volatility.

We continued to see a slight increase volume in proposals in the second quarter of 2009 compared with the first quarter of 2009, and even compared to the second quarter of 2008. Early indications are that new business development activities remain robust into the current quarter. Our business development group has indicated to me that we are off to a good start in July.

The pricing environment continues to be competitive, but rational. This is a reflection of the cost pressures that many pharmaceutical companies are exhibiting, as well as the fact that the US economy is in the 19th month of a recession. We continue to seek quality of service as still the number one decision criteria in our sponsors' mind. We feel that we continue to be the market leader in this key criteria.

We were pleased with the gross book to bill ratio in the second quarter of 2009 from 1.5, up from 1.4 in the second quarter of 2008 and up from 1.3 in the first quarter of 2009.

The cancellation rate declined in the second quarter to an annualized 16.1% compared to 18.1% in the second quarter of 2008, and 22.4% in the first quarter of 2009. The cancellation rate we report is a fully-factored cancellation rate that consists of the actual value of study cancellations plus the value of studies that are completed at amounts under the original contracted value, all divided by the beginning period backlog.

Our backlog at the end of the second quarter 2009 was $153.7 million. This includes the elimination of the EDC backlog associated with the sale of these operations.

In terms of the new business environment, we have seen different trends between large pharmaceutical companies and smaller to midsize pharmaceutical and biotechnology companies. Large pharmaceutical companies are still spending, albeit a slightly lower pace, while engaging their suppliers in more strategic outsourcing discussions.

As we reported on the last call, we have engaged several large pharmaceutical companies in strategic outsourcing discussions. In the second quarter we signed long-term partnerships with two additional large pharmaceutical companies.

In June we announced that we divested our EDC operations to Omnicom. We have been involved in EDC operations for many years and have developed a loyal customer and employee base. However, it is clear that a more significant and focused investment is required to be successful in today's EDC market and we feel that the economics of our cardiac safety and our ePRO operations are more attractive.

Some smaller to midsized pharmaceutical companies are experiencing funding issues that make them more cautious in committing scarce cash to certain compounds, especially those compounds that are not as promising.

However, as I mentioned, we have seen some increases in bookings for these smaller pharmaceutical companies. We find that our reputation for quality and our strong financial position are especially important in these uncertain times. Compound sponsors are focusing on outsourcing their key development programs to companies that will not be around in the next few years and that have substantial accumulated experience in helping get drugs approved through regulatory agencies.

ERT's leadership position in the market in quality, scientific and medical leadership, project execution and use of advanced technology, gives our clients a strong reason to continue to utilize our services.

We continue to see increased interest in our ePRO business, driven by interest in our suicidality monitoring system and patient diaries. This reflects emphasis by the FDA on prospective assessments of suicidality on products under the auspices of the division of psychiatry products.

I will now turn the call over to Keith for some more details on our financials for the second quarter of 2009, and guidance for the third quarter and full year 2009.

Keith Schneck

Thank you, Mike. First, you will notice that due to the sale of the EDC operations we have reformatted our revenue categories into three items; EDC license and services revenue which relates to the EDC operations which were sold, services revenue which primarily includes cardiac safety ECG revenue, and also the cardiac safety consulting and ePRO services revenues.

Site-support revenue remains unchanged and includes EGC machine rental and associated support and logistics fees.

Previously we had licensed services and site support and the EDC operations were included within license and services.

Second quarter revenue was $24.2 million, a 31.8% decrease from the $35.5 million in the second quarter of 2008, and a 1.6% sequential increase from the $23.8 million in the first quarter of 2009. The $11.3 million year-over-year revenue decline is primarily due to the following, in their order of significance: one, the decline in Thorough QT revenue; two, a runoff of the CCSS acquired backlog; and three, a decline in routine revenue. We also had slightly lower sight support revenue and EDC revenue.

For the second quarter of 2009 our service revenue was $16.2 million compared to $26.8 million a year ago, and up slightly from the $16.1 million in the first quarter of 2009. Site support revenue was $6.9 million compared to $ 7.2 million a year ago and $6.3 million in the first quarter of 2009.

Our EDC license and services revenue was $1.1 million compared to $1.5 million a year ago and $1.4 million in the first quarter of 2009. Obviously going forward, EDC revenue will be zero.

Gross margin percentage for the second quarter of 2009 was 52.3% compared to 57.0% a year ago, and 50.4% in the first quarter of 2009. Gross margin percentage is significantly impacted by volume which was down commensurate with the revenue level change. The negative impact of volume on the gross margin percentage compared to the prior year's quarter is partially offset by the elimination of legacy costs associated with processing the CCSS backlog which we acquired last year. Lower depreciation and amortization, and some assets are now fully depreciated, and other cost reduction actions taken over the past several months including lower staff levels.

Operating expenses for the second quarter were $7.8 million or 32.2% of revenue, compared to $9.5 million or 26.7% of revenue a year ago and $8.7 million in the first quarter of 2009.

The current quarter operating expense includes a $530,000 gain on our sales of the EDC operations which I will talk about in a moment, which was partially offset by a $325,000 severance charge.

Excluding the EDC gain and severance charge, our operating expenses still were down year over year due primarily due to the elimination of the transition costs related to the CCSS, which totalled about $944,000 in the second quarter of 2008. Lower bonus and sales commissions given lower revenue and profit levels and the initial impact of other cost reduction efforts implemented so far in 2009 to reduce operating expenses.

In the second quarter of 2009 our fulltime employee base was 52 lower than in the December 2008 level, due to the elimination of the EDC operations, consolidation of several functions into our Philadelphia operations center, and limited replacement hiring.

I will now cover the sale of the EDC operations which was concluded on June 23rd, 2009. We received 8.1 million shares of Omnicom stock which is recorded in the balance sheet as investment in marketable securities. Given that we are restricted in selling this stock for one year, under accounting rules we valued this at a discount.

Our gain of $530,000 reflects the net discounted value of the stock, less the net carrying value of assets sold, less expenses of the transaction, and also the impact of our $1.1 million cash payment which was offset by Omnicom on the assumption of certain liabilities of this operation, including the value of deferred revenue.

$409,000 other expense line item in the P&L relates primarily to foreign currency transaction losses, on the portion of our accounts receivable that is denominated in non-US currency which was caused in fluctuation of the currency from the time of billing to collection.

Let me now move to the balance sheet. ERT ended the quarter was $68.7 million in cash and investments compared to $65.5 million as of March 31, 2009. For the quarter, net cash provided by operating activities was $10 million which included the impact of reduction in accounts receivable due to focused collection efforts on older items.

During the quarter purchased 741,267 shares of ERT common stock at an average price of $5.43 for a total cost of about $4 million under our stock buyback program. This brings our total recent stock repurchases which began in December 2008, to 3.1 million shares at a total cost of $16.6 million. As of June 30, 2009, we have authorization to purchase up to an additional 5.2 million shares.

Accounts receivable was $17.4 million at June 30, 2009, down from $21.7 million at March 31, 2009, and $29.2 million on December 31st, 2008.

DSO were 65 days, down from 82 days in the first quarter of 2009 and 87 days in the fourth quarter of 2008. The reduction in DSOs is due to our focused efforts on improving collection and billing processes.

I should note that the way we calculate DSOs is different than that reported by some CROs. In particularly, we do not include the amount of deferred revenue in the calculation of DSOs, which some CROs do, and they include that as a reduction of the AR amount which will then result in a lower DSO reported by those CROs.

Given the uncertain economic environment we continue to perform a more detailed review of credit risks and evaluation of collectability of individual amounts . We do consider our receivable balances to be a good quality. We do not have undo concern with collectability from our customers.

Moving to guidance for the third quarter of 2009 and for the year-ending December 31, 2009. As we indicated in the press release in our past two quarter calls, we continue to see several factors that have negatively impacted our business, continuing into the near future, including cautious and delayed decision making, a decline in Thorough QT bookings, and delays in starts of Thorough QT trials. And they [Author ID1: at Mon Aug 3 15:07:00 2009

]a [Author ID1: at Mon Aug 3 15:07:00 2009

]shift to a large percentage of phase three bookings which will take a longer period to turn into revenue.

For the third quarter of 2009, ERT anticipates net revenues of between $23 million and $25 million, and diluted net income per share of between $0.05-0.07. For the full year ending December 31, 2009, we anticipate net revenues of between $96-102 million, and diluted net income per share of between $0.20-0.28. Our revised guidance takes into account the elimination of the EDC revenue as these operations were sold in June. The lower level of Thorough QT bookings in the second quarter of 2009 and the normal slowdown due to summer vacations which typically reduces study activity in the third quarter.

We are tracking a large number of Thorough QT studies, several of which could be booked and completed within the next six months.

The lower end of the guidance assumes continued low levels of bookings in Thorough QT studies, the upper end of the range assumes closure of several additional QT studies in 2009 that could be completed by year end.

Our routine business provides a strong foundation given the present backlog and new customer relationships established in the latter half of 2008 and into 2009.

As I previously indicated, we have made spending cuts in selected areas including staffing where we've been selective in replacing employees who have resigned, consolidated some o [Author ID1: at Mon Aug 3 15:09:00 2009

]f [Author ID1: at Mon Aug 3 15:09:00 2009

]our operations within our Philadelphia center, and negotiated lower costs from service providers and outside consultants.

Offsetting this is slightly higher marketing and IT costs as these have been a focus area for investment into 2009. Overall we expect our quarterly operating expenses will be up slightly over the next two quarters compared to the June '09 quarter, excluding the $507,000 gain on sale of EDC operations and the severance costs.

Our overall effective rate over the past six months was 41.5%, compared to 37 .8% for the fiscal year 2008. 2008 annual rate was lower as it was impacted by several favor tax adjustments that reduced the 2008 effective rate which did not occur in 2009. And the 2009 reflects higher revenue palpable to the US which carries a higher tax rate.

I will now turn the call back to Mike.

Michael McKelvey

Thank you, Keith. We are currently operating in a difficult economic and financial environment. While we are starting to see some signs of stabilization of the economy and the industry, the potential echo effects of the first [Author ID1: at Mon Aug 3 15:10:00 2009

]truly global recession in the 19-month and counting depth of the recession make forecasting a risky venture. We believe that the fundamentals of our sector and it[Author ID1: at Mon Aug 3 15:10:00 2009

]s sector [Author ID1: at Mon Aug 3 15:10:00 2009

]secular [Author ID1: at Mon Aug 3 15:10:00 2009

]trends continue to be attractive. While we believe that the second half of the year will be better than the first half of the year, we are cautious in our outlook for 2009.

We continue to position ERT for future growth in earnings. We mentioned[Author ID1: at Mon Aug 3 15:10:00 2009

] in the last quarter's call, our increased expenditures on marketing and on sales. As an example, the number of client leads generated in the recent DIA Conference in San Diego, was over three times what it was in last year's DIA in the face of a decline in attendance at this year's DIA . The client reaction to our new seminars on cardiac safety and oncology and the use of ePRO for assessing suicidality of new drugs has been very encouraging.

The investments that we made at the beginning of the year and expanding our direct sales force also have begun to pay off in the second quarter.

We continue to feel that 2009 will be a good opportunity to increase our market share and increase the market penetration of ECGs centrally collected in clinical trials. We have taken some steps in this direction that we believe will bear fruit throughout the year. We feel that in difficult economic and financial times, innovative market leaders can prosper and position themselves for increased growth in the future.

We believe that we have good opportunities to favorably impact the two growth drives of our businesses under our direct control. One, increase centralization of ECGs, and second, increase in market share.

The case for centralization of ECGs is as strong as ever. We believe that digitally collected centralized ECGs are of higher quality, are more timely, and are more capable of being integrated into electronic health records than our decentralized ECGs.

We also believe that centralized ECGs are more cost effective than decentralized ECGs, and documenting this will [Author ID1: at Mon Aug 3 15:12:00 2009

]be a major focus over the next year.

We continue to see regulatory authorities focused on key cardiac safety issues. A good example of this is that the FDA has recently focused on cardiac safety issues associated with Darvon and other drugs containing propoxyphene, a drug that has been on the market for 52 years. Another is the December 2008 guidance issued by the FDA that requires sponsors to evaluate the cardiac safety risk of all anti-diabetic therapies for type two diabetes. We have already signed several new contracts associated with this guidance.

The success of winning strategic outsourcing relationships with sponsors and a continued increased use of global sites and clinical trials which require a raw class global logistics function, give us hope that we can continue to increase our market share.

In closing, we believe that we are well positioned to work through the current and economic and financial environment, and come out a stronger company. Give that revenue declines in the first half of the year, we feel good that we have been able to keep our margins up. We have a strong debt-free balance sheet, we are the market leader in the industry, we have an enhanced reputation for project management quality, and we continue as the thought leaders in the industry. These factors position us well to take advantage of the current regulatory and development climate that seeks to enhance safety determination of new drugs.

We find that in today's uncertain economic climate that our clients are more determined than ever to work with established partners who have proven track records of implementing tried and true solutions with proven substantial experience submitting data to regulatory authorities.

With that we will now take any questions. Operator?



Thank you. (Operator's Instructions) And our first question will come from the line of George Hill representing Leerink Swann. Please proceed.

George Hill - Leerink Swann

Hey, Mike. How are you? Quick question for you just a couple of housekeeping items first and I jumped onto the call a few minutes late. With the EDC deal done from a financial perspective assume that that was not generating much at the operating one?

Michael McKelvey

On the operating line if you go to the rough numbers they generated as a[Author ID1: at Mon Aug 3 15:14:00 2009

]the[Author ID1: at Mon Aug 3 15:14:00 2009

] revenue piece — give me a second. This quarter you had $1.083 million of revenues, you had 397 of direct cost of sales and then there was some costs of R&D and sales and marketing and so forth. So you had a couple of hundred thousand dollars (inaudible) [Author ID1: at Mon Aug 3 15:15:00 2009

]operating income and then in addition you have the $530,000 gain?

George Hill - Leerink Swann

Okay. And I guess what is the divesture of the EDC business? Does the ePRO business still strategically make sense.

Michael McKelvey

Yes. We believe it makes a lot of sense. They are not really related in that sense to the EDC business. We find the interest in suicidality and some of the diary areas are gaining a lot of interest these days. So we are very focused to on growing business from a small base to where it is now to a large base in the future.

George Hill - Leerink Swann

Okay. And you said the pricing environments remained rational. Some of the up and coming competitors in this space that are working on automated solutions appear to be making some noise again, gaining market traction. I guess anything from your side with respect to pricing and demand by the industry to move towards a more automated solution?

Keith Schneck

George, we haven't see any of that. It may be out there, but certainly it hasn't been seen within our client base and we don't face that on a daily basis — the movement to automated.

George Hill - Leerink Swann

Okay. And then just last question, you guys have build up a pretty sizable war chest on the balance. Updates on uses of cash?

Michael McKelvey

As we consistently say, we have been active in the last several months in purchasing stock at values where we think it is appropriate. We still want to keep a certain of cash on our balance sheet for working capital and then from there, to the extent that we have available ash for potential M&A transactions if we find something that is attractive and synergistic that is into how we see going forward.

George Hill - Leerink Swann

Okay. I will hope back into the queue. Thanks for the color.


Our next question will come from the line of (Inaudible) representing Doherty & Co.. Please proceed.

Unidentified Company Analyst - Doherty & Co.

Good afternoon and thanks for taking my questions. First of all, Mike, it seems like the Europeans bookings increased year-over-year in the second quarter. Do you see a turn in that business? And then on the Thorough QT trials, is there any sort of difference between the large pharmas and small-mid pharmas? It seems like there is not much implement there.

Michael McKelvey

Right, thank you. In terms of the routine business, that is our bread and butter that generally recounts for about 75 or 80% of our bookings in the longer term. So we see that as very healthy and especially the small increase in percentage of bookings in phase one and two that once you get into the phase one area then if those drugs are successful then you are then primed to go into a Thorough QT. So we think that that is evasive business that continues to grow strongly and we are happy with that trend.

In terms of Thoroughs, there really is not a differentiation between large and small pharma right now that we can see. In both cases the demand for Thoroughs are pretty weak or something[Author ID1: at Mon Aug 3 15:17:00 2009


Unidentified Company Analyst - Doherty & Co.

Alright, and then for Keith. Can you help us understand the downward revision to the revenue. How much of that is due to selling the EDC operations so it is just (inaudible) the weakness in the Thorough QT bookings?

Keith Schneck

Well, from the standpoint of revenue expectations on the EDC operations, you can assume that it has been relatively flat the last several quarters so we were not expecting a whole lot coming form that so obviously whether that's a million or 1.5 million a quarter, that would obviously come off the ends of the forecast. The rest of it would be attributable to what our expectations are in the core business.

Unidentified Company Analyst - Doherty & Co.

Alright, and then you said that it was 530 gain from sale of EDC operation included in OpEx, is it included? What line is it included?

Keith Schneck

It's included in G&A.

Unidentified Company Analyst - Doherty & Co.

Okay. And the severance cost or charge is across the board, is that included?

Keith Schneck

So the severance cost is also included in G&A.

Unidentified Company Analyst - Doherty & Co.

In G&A, okay, thank you.


Our next question will come from the line of Raymond Myers with Emerging Growth Equities. Please proceed.

Raymond Myers - Emerging Growth Equities

Keith, I was hoping you could be a little more clear to me about your statement in your comments. You said operating expense would increase slightly for the next two quarters, excluding the adjustments to Q2? I guess you and an OpEx gain of $530,000 and then 525 in severance so you have about a net gain of $200,000?

Keith Schneck


Raymond Myers - Emerging Growth Equities

So when you say the operating expense will be increasing, is it because of the $200,000 or apples to apples they are still —

Keith Schneck

We are going t be making investment both in the sale to marketing area and also in the IT area.

Raymond Myers - Emerging Growth Equities

Okay. So those increases would come on top of the $200,000 increase just from —

Keith Schneck

Correct. If you adjusted — the total OpEx was 7793 which is the Q2 number and you add in the 500 — take the gain out of that so you increase OpEx. Take out the severance and then compared to what we are you looking forward.

Raymond Myers - Emerging Growth Equities

Okay, good. And then you had also made a comment about 944,000 costs for CCSS?

Keith Schneck

Yes, that was costs that were included in our Q2 numbers of 2008.

Raymond Myers - Emerging Growth Equities

Okay. So that is just for comparables.

Michael McKelvey

It was just a comparison back to 2008.

Raymond Myers - Emerging Growth Equities

Okay. Got it, great. And it was kind of addressed by the first questioner, but what is your competitive response if customers begin to seek automated solutions?

Michael McKelvey

Well right now we do not see much demand for automatic solutions. We have talked about this on several calls in terms of where the automatic algorithms are today. In the future should there be a demand for that, we will respond appropriately with either the algorithms that we have today which are the Matar (ph) and the GE algorithms. The Matar, the ones that are used in the FDA warehouse, or we will work with other vendors who provide algorithms. We're not an algorithm provider ourselves so we would respond appropriately in that sense.

Raymond Myers - Emerging Growth Equities

Okay. Thank you.


Our next question will come from the line of Gene Mannheimer with Auriga. Please proceed.

Eugene Mannheimer - Auriga USA

Hi, good afternoon. Just a couple of followups to the other question. You talked about pricing in general, could you comment on how it has held up specifically as it relates to Thorough QT studies?

Michael McKelvey

I think they are probably some of our more price competitive areas and I think that there is two aspects at once. Certainly with large pharma they are utilizing their buying power and the fact that they are looking at cutting their costs. And then with some of the small pharma we have some of our competitors who are also looking at some fairly aggressive pricing. And so we think that is still in the rational stage but I think there is probably more price competition in the Thorough area then there would be [Author ID1: at Mon Aug 3 15:20:00 2009

]i [Author ID1: at Mon Aug 3 15:20:00 2009

]n the routine area.

Eugene Mannheimer - Auriga USA

Okay. That makes sense. And can you talk a little bit about, perhaps Keith, what type of cost savings do you anticipate as a result of the closure of your Bridgewater office?

Keith Schneck

Well, we are not closing that office. The EDC group was operating out of there and then we had our call center that we moved. We still have our R&D and our IT groups still in Bridgewater.

Eugene Mannheimer - Auriga USA

Okay, sorry, my mistake on that. Do you also have a cardiac safety lab in Bridgewater?

Keith Schneck

Not any longer. That's all moved into the Philadelphia officer.

Eugene Mannheimer - Auriga USA

Okay. And then can you remind us what your previous revenue and EPS guidance was for the full year?

Keith Schneck

The prior guidance, you meant?

Eugene Mannheimer - Auriga USA

Yes, the prior guidance.

Keith Schneck

The guidance we issued at the end of our first quarter was revenues of $100-115 million and EPS of $0.20-0.35.

Eugene Mannheimer - Auriga USA

Okay. So you are essentially narrowing to the lower end of your prior range. And then last question, you talk about backlog at $154 million, but that excludes the EDC backlog, can you disclose for us what that EDC backlog was?

Keith Schneck

The amount that we took out of the backlog was 8.5 million.

Eugene Mannheimer - Auriga USA

Okay, great. Thank you.


Our next question will come from the line of Mitchell Randalpaul (ph) with Sidoti. Please proceed.

Mitchell Randalpaul (ph) - Sidoti

Yes, hi. Good afternoon, guys. Just wanted to come back again to the new guidance of the 96 to 102 and if you can give us a sense in terms of your assumptions for a pickup in terms of power bookings or routine steel rods business you kind of think you are seeing out there?

Michael McKelvey

Well as Keith mentioned in his remarks that the guidance came down for two reasons, one because we have lower Thorough QT in the second quarter bookings than we had anticipated, and the other is the sale of EDC business.

Now going forward we have talked many times on these calls about the fact that the Thorough QT bookings are a little bit difficult to project because both their timing of where you are in the economic and financial environment, and also the fact that they are very large and they can be completed within two to three months so they have a significant impact.

So we are tracking a large number of Thoroughs, as Keith had mentioned in his remarks, but the accrual forecasting of when those bookings happen and they actually get done, whether that happens in the third or the fourth quarter or 2010, is a little bit tricky. And that is why we've provided the guidance and been very clear about what the top and the bottom ends of the range of the guidance are based on.

Mitchell Randalpaul - Sidoti

Okay. So I guess there is some caution in the event that one or two of the bookings you 're expecting doesn't come through. It's a guidance that's fairly conservative.

Michael McKelvey

We're trying to give you the best guess that we can on both the bottom and top end of the range, yes.

Mitchell Randalpaul - Sidoti

Okay. And then coming back to the investment on the sales and IT, how far along are you in that process?

Keith Schneck

We were about halfway done with the IT. We are looking at a [Author ID1: at Mon Aug 3 15:22:00 2009

]new s[Author ID1: at Mon Aug 3 15:22:00 2009

]ales information system that we're just about to look [Author ID1: at Mon Aug 3 15:23:00 2009

]roll [Author ID1: at Mon Aug 3 15:23:00 2009

]out. We've completed the development of that. We're now looking at some significant upgrades, hopefully in the financial and other areas. So we have made, I think very good progress in that area. In terms of the sales and marketing, let me bifurcate that into sales and then marketing. At the beginning of the year we hired five new sales people on our direct sales force, and as I mentioned in my remarks, we are starting to see some nice results that came out of that already in the second quarter which his earlier than we expected.

Marketing we're probably halfway done with our investment in the marketing area and we've come out with many more ads, many more articles, many more seminars and I think as I explained that if you just look at our presence at the DIA this year, it was substantially enhanced over last year, just as an example.

Mitchell Randalpaul - Sidoti

Okay. Thanks again, guys.


And, gentlemen, we have a followup question from (Inaudible), Doherty and Company. Please proceed.

Unidentified Company Analyst - Doherty & Co.

Thank you . Question for Keith, I am trying to get some sense for operating expenses going forward. Given that you sold off the EDC business, how many people did you transfer that you also consolidated their virtual customer support, but you 'are still expecting operating businesses to build from these levels.

Keith Schneck

Well keep in mind, most of those people were up in the cost of sales line so they were operating[Author ID1: at Mon Aug 3 15:24:00 2009

] [Author ID1: at Mon Aug 3 15:24:00 2009

]operations [Author ID1: at Mon Aug 3 15:24:00 2009

]people both on the EDC and a lot on the call center.

Unidentified Company Analyst - Doherty & Co.

Okay. So the cost savings we should see and [Author ID1: at Mon Aug 3 15:24:00 2009

]in [Author ID1: at Mon Aug 3 15:24:00 2009

]the gross margin then.

Keith Schneck


Unidentified Company Analyst - Doherty & Co.

Can you give us some sense how —

Keith Schneck

We don't put a number out there right now.

Unidentified Company Analyst - Doherty & Co.

Okay, alright. Thank you.


And at this time there are no further questions. I would now like to turn it back over to Mr. Michael McKelvey, President and Chief Executive Officer.

Michael McKelvey

Thank you, Audrey. Thank you all very much for your attention today and your involvement in ERT. We appreciate your vote of confidence and Keith and I and the other members of the ERT management team and the board are deeply committed to this company and to continue momentum and progress going forward. Have a great evening and a great rest of the week, thank you.


Ladies and gentlemen, this does conclude your presentation. At this time you may all disconnect and enjoy the rest of your day.

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Source: eResearch Technology Q2 2009 Earnings Call Transcript

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