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Executives

Jill Baker – Vice President of Investor Relation

Josef H. Von Rickenbach –Chief Executive Officer

James F. Winschel, Jr. –Chief Financial Officer

Analysts

David Windley – Jefferies & Co.

John Kreger – William Blair

Todd Van Fleet – First Analysis Corp

Greg Bolan – Wells Fargo Securities

Sandy Draper – Raymond James

Bob Jones for Randall Stanicky – Goldman Sachs

Douglas Tsao - Barclays Capital

Eric Coldwell – Robert W. Baird

Stephen Shankman - Natixis Bleichroeder

PAREXEL International Corp. (PRXL) F4Q09 Earnings Call August 11, 2009 10:00 AM ET

Operator

I would like to welcome everyone to the PAREXEL International fourth quarter and fiscal year end 2009 Earnings Conference Call. (Operator Instructions)

Jill Baker

Good morning everyone. The purpose of this call is to review the financial results for PAREXEL’s fourth quarter and fiscal year 2009. With me on the call today is Josef von Rickenbach, our Chairman and Chief Executive Officer, and James Winschel, Senior Vice President and Chief Financial Officer. Thank you for joining us today.

We would like to begin by stating our standard Safe Harbor disclosure language. Various remarks that we may make about future expectations, plans, and prospects for the company constitute forward-looking statements for provisions of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors. These factors are discussed more fully in the section entitled Risk Factors of the company’s quarterly report on Form 10-Q, for the quarter ended March 31, 2009, as filed with the Securities and Exchange Commission on May 8, 2009, and in our earnings press release issued yesterday. In addition, any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change and therefore you should not rely on these forward-looking statements as representing our views as of any date subsequent to today.

During this call, we will refer to certain financial measures, which have not been prepared in accordance with generally accepted accounting principles. When discussing numbers or margins related to revenue, direct costs, selling, general and administrative expenses, income from operations, income taxes, net income, and earnings per share, we may refer to adjusted results. These adjusted results may exclude the impact of unusual positive or negative items including those related to contract terminations and associated costs, foreign exchange, acquisitions and divestitures, special charges, restructuring reserves, adjustments to restructuring reserves, and certain tax items. A reconciliation of the non-GAAP financial measures with the most directly comparable GAAP measures is available in the press release we issued yesterday, which may be found in the Investor Relation section of our Web site at parexel.com or it will be discussed during the course of this teleconference.

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

Josef H. Von Rickenbach

I would like to review some details for the quarter and the fiscal year and then Jim will present more information on the financials. After that we will open the call for questions.

I would like to start off by saying that this past year turned out to be a challenging one for both the company and the industry, and despite this difficult year we basically stayed on track and I would like to thank our employees for their efforts and achievements in this regard.

With that in mind, the difficult situation with respect to the accounting changes related to ClinPhone were spectacularly disappointing for us. Jim will provide more detail on that topic in a moment.

For the quarter ended June 30, 2009, service revenue was $247.4 million compared with $272.2 million in the same quarter of the prior year, a decline of 9%. Excluding the negative impact of foreign exchange or $32.9 million in the quarter, revenue increased 3%. On a constant currency same store basis revenue increased by approximately 2%.

For the fiscal year, revenue was approximately $1.05 billion compared with $964.0 million in fiscal year 2008, a year-over-year increase of 9%. Excluding the negative impact from foreign exchange of $78.1 million, revenue increased 17% for the year. Excluding both the negative impact of foreign exchange and the net impact of acquisitions and divestitures, which equated to $59.2 million in revenue in fiscal year 2009 and $5.0 million in fiscal year 2008, revenue grew 11.5%.

For the fourth quarter the Americas represented 36% of service revenue, Europe, the Middle East, and Africa represented 53%, and Asia/Pacific was 11% of revenue.

For fiscal year 2009 the Americas represented 41% of service revenue, up from 39% in fiscal year 2008, Europe, the Middle East, and Africa represented 50% versus 54% in fiscal year 2008, and Asia/Pacific was 9% of revenue as compared to 7% a year ago. We are pleased with our continued rapid growth in Asia.

During the quarter the largest client represented 10% of revenue, down from 11% in the June quarter a year ago. The top five clients represented 31%, down from 32% in the June quarter last year, and the top twenty clients were 63% versus 58% a year ago.

For the full fiscal year the top client was 9% of service revenue, the same as a year ago. The top five represented 28%, down from 31% a year ago, and the top twenty comprised 52% of the total, down from 55% a year ago.

During the fourth quarter clinical research services, or CRS, represented 81% of the company's total revenue versus 78% in the same quarter of the prior year. PAREXEL Consulting and Medical Communications Services, or PCMS, comprised 12%, the same as one year ago, and Perceptive Informatics was approximately 7% of the total versus 10% one year ago.

I would now like to walk you through the new business and backlog performance for the quarter. Backlog, as of March 31, 2009, was $2.04 billion. We added gross new business wins of $316.6 million to factor $247.4 million of revenue for the June quarter.

Cancellations netted out $48.5 million. Foreign exchange and other adjustments netted a gain of $119.3 million, which left us with an ending backlog on June 30, 2009, of approximately $2.2 billion.

The net book to bill ratio in the quarter was 1.08.

Cancellations were a bit lower than our expected range this quarter, at 2.4% of the quarter's beginning backlog, however, we did experience a high level of intra-quarter cancellations, that is business that was awarded in the quarter and then cancelled in the course of the quarter before any work was done on the project. Most of this was related to companies that are currently in merge activity.

According to our policy, these wins don't get counted as new business or cancellations. I point this out because the results of our sales efforts were actually somewhat better than they appear on the surface, mainly by about $90.0 million.

On an annualized basis, cancellations came in at 16.9% when measured at the percent of the fiscal year 2009 beginning backlog. This equates to a quarterly average of 4.2% and is right in the middle of our expected cancellation range of 3.5% to 5% per quarter.

Year-over-year, for the full fiscal year, net new business decreased 15.5%, backlog increased almost 6%, and the net book to bill ratio was 1.14 for the year. I would like to point out that while foreign exchange had a positive impact on backlog in the quarter, for the year overall it negatively impacted backlog by $146.0 million.

With regard to new business trends involving smaller biopharma clients, it appears that more financings are happening. Nevertheless, proposal activity from the segment is still down as compared to historical levels for us. As the flow of funding into the small biopharmaceutical sector starts to return, hopefully to normal levels, CROs like PAREXEL should be prime beneficiaries.

I would now like to mention a few fiscal year 2009 highlights.

Of note, the CRS business unit improved gross margin by 190 basis points during the course of fiscal year 2009 and we are targeting additional expansion in gross margin as the benefits of the Leap initiative start to kick in and utilization and earnings base starts to improve.

We are also pleased with the turnaround of the med com business and the overall performance of the PCMS segment in the year.

On the M&A front, we completed the acquisition of ClinPhone last August and successfully merged that business into the Perceptive Informatics business segment. The timing of the closing of the acquisition turned out to be somewhat challenging, given what happened to the global economy last fall. However, I believe that the acquisition was a pivotal and essential component to move us closer to the realization of our e-clinical vision. The expanded portfolio of products and services that we now offer to clients has helped to solidify our leadership position in the e-clinical space.

I would like to underscore on important point. Despite the changes in accounting for ClinPhone, which were discussed in our earnings release, the Perceptive Informatics business had excellent traction in the marketplace this past quarter and actually achieved record new business levels.

As we entered our new fiscal year, I firmly believe that the core fundamentals that drive our company and our industry remain intact. Although the growth rate of biopharma R&D spend has moderated, the rate of outsourcing amongst our clients continues to be robust and is expected to increase, creating additional opportunities for PAREXEL.

We saw promising signs in this regard with respect to the total value of proposals that we sent out to clients during the June quarter. Although still down as compared with one year ago, the value of proposal thinned. It increased by nearly 30% sequentially.

In summary, we are pleased with the progress that we made as a company during fiscal year 2009. As we look into the future, we remain optimistic but also cautious. The proposal pipeline is gradually improving and at the same time biopharmaceutical clients seek to develop deeper, strategic partnerships with global experienced and trusted partners like PAREXEL.

So at this point I would like to turn the call over to Jim, who will provide more detail on our financial results.

James F. Winschel, Jr.

Before discussing the general results of the quarter, I want to say a few words about the ClinPhone adjustments within Perceptive Informatics that were described in yesterday's earnings press release.

Late last week we identified accounting errors with respect to certain revenue and direct expenses in conjunction with start-up work related to Interactive Voice Response, or IVR, projects. Previously, we had been recognizing this revenue as we completed various milestones within the start-up phase of these projects, while related expenses were recognized as incurred.

Going forward, we will need to recognize revenue generated and direct the expenses incurred during the start-up periods over the projects hosting period, including the original contractual period, in an estimate of average contract extensions periods. These revenue and direct expense amounts then began to be recognized once a project goes live and the hosting period begins.

Under purchase accounting rules, we cannot recognize start-up revenue for projects which were start-up activities for whom start-up activities were completed prior to the ClinPhone acquisition. While this approach appears counter-intuitive, we have concluded that it is, in fact, the appropriate treatment under current accounting rules.

As a result, the company's as-reported financial results for the fourth quarter and the full fiscal year include a reduction in revenue and expense totaling $16.9 million and $4.9 million respectively. There is no impact on cash resulting from these entries.

And one other note—isolating the fourth quarter impact of these changes would result in a negative $4.4 million impact on service revenue and a $3.3 million negative impact on gross and operating margins.

As we worked toward finalizing purchase accounting for the ClinPhone acquisition, it became apparent that we had overstated revenue during the first three quarters of fiscal year 2009. Emerging Issues Task Force Issue 01-3 prohibits inclusion of deferred revenue on the opening balance of an acquire unless you will actually perform services to earn that revenue. While we were aware of these requirements both going into and coming out of the acquisition process, a misapplication resulted in the over-recognition of certain revenue.

The net result of correcting the revenue had an approximate $4.0 million negative impact in the fourth quarter. There was no impact on cash as a result of this change.

Now I would like to make some comments regarding our three reporting segments.

During the fourth quarter, CRS service revenue declined by approximately 5% compared with the prior-year quarter, as weakness in early phase and the negative impact of a much stronger dollar were more than offset by growth in the late-stage portions of the business.

On a constant currency basis, excluding the $23.7 million negative impact of foreign exchange movements, CRS service revenue increased 6% over the fourth quarter of the prior year.

For the full fiscal year, CRS revenue was up approximately 8% compared with fiscal year 2008 and was up 14.4% on a same store constant currency basis. This excludes the positive impact of $6.7 million from the acquisition of APEX and the negative impact of $52.5 million related to foreign exchange movements in the period, and a $2.5 million impact of acquisitions and divestitures in the prior period.

CRS gross margin was 36.9% during the fourth quarter, up 3.2 points from 33.7% during the same period one year ago. For the full year, gross margin was up 1.9 points, to 35.7%. The fourth quarter increase in gross margin was primarily the result of strong performance in the Asia/Pacific region, cost deferrals, improved productivity and efficiency, and lower compensation-related expenses, partly offset by the impact of severance payments and settlement of a supplier dispute.

Quarterly service revenue in PCMS was down approximately 8% compared with the June quarter one year ago and declined by 6% for the full fiscal year. On a same store constant currency basis, excluding the negative impact of $4.0 million related to foreign exchange, PCMS service revenue was up 5% in the quarter. On a full year, same store constant currency basis, excluding the negative impact of $12.4 million of foreign exchange, as well as the positive impact of $2.5 million related to divestitures in the prior-year period, PCMS service revenue increased by 5.4%.

During the fourth quarter, PCMS gross margin of 36.4% increased by 0.9 of a point, as a result of productivity and efficiency improvements. On a year-over-year basis fiscal year 2009 gross margin in PCMS improved 2 points to 35.8%, driven mainly by improved productivity and efficiency related largely to the divestiture of certain unprofitable business lines.

On an as-reported basis, quarterly service revenue in Perceptive Informatics was down 40.4% year-over-year in the quarter and was up 40.4% for the full fiscal year. On a same store constant currency basis, Perceptive's quarterly service revenue declined by 31.6%. This calculation excludes the $2.8 million negative impact from the acquisition of ClinPhone and the $5.2 million negative impact of foreign exchange movements on a year-over-year basis.

Further exclusion of the $21.0 million ClinPhone accounting adjustment would have meant an increase in service revenue of 37.8% for the fourth quarter.

On a related note, the prior-year quarter included the benefit of $1.4 million in above-average contract signature activity as well as a high level of software license sales.

On an as-reported basis, Perceptive's gross margin in the quarter was 10%, down 41.1 points from the prior-year quarter, due in part to the $16.1 million net unfavorable adjustment to gross margin related to the revenue and direct cost accounting corrections discussed previously, partly offset by the favorable $1.4 million settlement of a customer dispute. Excluding these items, gross margin would have been 43.7%.

For the full fiscal year, Perceptive's gross margin was down 8 points to 36.2%, due largely to the fourth quarter's accounting adjustment, coupled with a less-favorable business mix.

On an overall company basis, gross margin for the quarter was 35.1%, down 0.6 of a point as compared with the June quarter of last year. For the full fiscal year, gross margin of 35.8% increased 1.1 points over last year. In both periods improvements in CRS and PCMS were offset by declines in Perceptive Informatics.

During the first quarter of fiscal year 2010, we expect the company's gross margin percentages to be up sequentially due to the impact of normalizing the quarter for Perceptive, partly offset by the seasonal decline in the other two business segments.

SG&A spending in the fourth quarter was 21.6% of revenue, down from 22.1% in the fourth quarter one year ago. The lower year-over-year spending levels resulted from reduced compensation-related costs and a lower level of expenditures for professional fees, partly offset by severance and related costs in the $7.9 million impact of the ClinPhone acquisition.

For the full fiscal year, SG&A was 22.1% of service revenue compared with 21.9% for fiscal year 2008. In dollar terms, SG&A spending grew 9.9% compared with fiscal year 2008, driven mainly by the acquisition of ClinPhone.

During the first quarter of fiscal year 2010, we expect SG&A as a percentage of service revenue to increase slightly as a result of normal seasonality and higher internal project costs.

For the quarter, depreciation expense equated to 4.7% of service revenue, up from 3.3% during the fourth quarter of last year. For the full year, depreciation was 4.1% of service revenue compared with 3.4% in fiscal year 2008. These increases are reflective of the company's higher level of capital expenditures during the past two years.

Amortization expense was 0.9% of service revenue in the fourth quarter versus 0.4% during the same period one year ago. For the full year, amortization expense was 0.9% versus 0.5% one year ago. These increases were the direct result of the ClinPhone acquisition.

Operating margin in the fourth quarter was 7.9% of service revenue, down 200 basis points from 9.9% in the June quarter one year ago. For the full year, operating margin was 8.6% compared with 8.9% one year ago, down 30 basis points.

For fiscal 2010 we expect to achieve a full year operating margin in the range of 9% and we expect the operating margin to be in the 8% range during the first quarter.

Interest and other expense was a negative $9.2 million in the quarter, driven by foreign exchange losses, interest expense, and an approximate $1.0 million loss in connection with a joint venture. For the full year, interest and other expense was $10.9 million, driven primarily by interest expense and certain miscellaneous expenses mainly incurred in the second quarter of the fiscal year, partially offset by net foreign exchange gains.

PAREXEL's fourth quarter tax rate was 41.5% compared with 36.6% in the prior-year quarter, mainly driven by the lower level of pre-tax income. For the full year the tax rate was 39.7% compared with an adjusted 38.3% in fiscal year 2008.

At this time, we are projecting a tax rate of approximately 38% for the first quarter of fiscal year 2010 and for the full year.

Net income for the quarter of $6.3 million was down substantially compared with net income of $16.3 million in the fourth quarter of fiscal year 2008, due mainly to the ClinPhone-related accounting adjustments. For the full fiscal year, net income decreased by 8.1% as compared with fiscal year 2008.

Moving on to the balance sheet, net receivables stood at $214.9 million at the end of June and taking into account gross revenue of $342.9 million for the quarter, DSOs stood at 57 days, a decrease of 6 days from the June quarter one year ago and an increase of 10 days from the March quarter.

Billing was somewhat back-end-loaded in the quarter, contributing to the higher DSO number. The good news continues to be that our billed receivables are very much under control with very few collections problems.

During the quarter, cash flow generated by operations totaled $19.6 million. Other cash inflows included $4.0 million from foreign exchange movements and $1.4 million in proceeds from the issuance of common stock in conjunction with the company's employee stock option and stock purchase plans.

Cash outflows included $18.0 million for capital expenditures, $9.2 million for repayments of borrowing under the company's line of credit, and $1.0 million for other uses.

Netting the inflows and outflows resulted in an overall decrease in cash of $3.2 million from the end of March, leaving us with a balance of $96.4 million.

With respect to fiscal year 2010 guidance, as reflected in the press release, we have made the following additional assumptions:

Overall market growth of 5% to 6%; a book to bill ratio of approximately 1.2; end of June 2009 exchange rates and other income loss of $15.0 million for the year; capex of $75.0 million to $80.0 million; DSO in the range of 50 days; and free cash flow of approximately $40.0 million.

At this point ,we are ready to begin the question and answer period.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from David Windley – Jefferies & Co.

David Windley – Jefferies & Co.

Jim, at the risk of getting into technicals, the accounting changes, as I read them, for the ClinPhone, at least as they relate to the forward-looking treatment of not recognizing revenue during the start-up period of a contract, would seem to be something that would just kind of pick up revenue and push it out, push it into later periods. And so what I didn't quite follow is how some almost $17.0 million comes out of 2009, which would seem to flow into 2010, or perhaps even later, and yet the net effect to 2010 is still a decent size negative number. I was hoping you could help us to understand why 2010 continues to suffer negatively on revenue in EPS.

And also, in that, compared to what? Negative compared to what pre-established comparison?

James F. Winschel, Jr.

I certainly understand the question. The start-up period for an IVR study is about 5 months, and then the average duration of a study is 20 months and then we also have to take into account some estimate of an average extension period. And so with respect to start-up activities, about 30% of the revenue on an IVR study comes from those very, very important start-up activities. And you now have to take that revenue and recognize it over—first of all, you don't start recognizing it until the start-up activities are completed and then you have to recognize it over that 27 months period. I guess it's an additional 22 months period. And so there's a disproportionate impact from that.

Now the other thing about our IVR business, of course, is that it's a terrific business that is growing rapidly and we're very good at that particular work. And the combination of the fact that the business is growing along with the fact that all of the ClinPhone-related start-up activities that were completed prior to August 14 of last year, we're not allowed to take any of that revenue to offset those prior periods.

So normally, if this hadn't been an acquisition situation, we would have been getting revenue from start-up activities related to 2007, 2008, and 2009, and now with the acquisition of ClinPhone, it almost starts all over again. And that was what has caused the issues.

David Windley – Jefferies & Co.

So am I right that there are revenues that you're pulling out of 2009 and pushing into 2010? That is correct?

James F. Winschel, Jr.

That is correct.

David Windley – Jefferies & Co.

And then to get to the negative impact that you state in the press release, in the $16.0 million to $18.0 million, am I to understand that there is—

James F. Winschel, Jr.

There is an incremental pushing out of revenue. So we get additional revenue for sure during fiscal 2010. But there is an incremental $16.0 million to $18.0 million of revenue that still continues to get pushed out. That's a net impact.

David Windley – Jefferies & Co.

So a gross number is like double that? It's like $34.0 million to $35.0 million.

James F. Winschel, Jr.

Something like that. Yes. Now, if at some point in the future there was a slowdown in activity here, you suddenly see the revenues start to increase because you wouldn't be in a deferral situation, if the business has leveled off. Or net deferral position.

Now, we don't want that to happen, either. So we're very happy with the way that this business is growing at this point.

David Windley – Jefferies & Co.

Is it the case that ClinPhone has contracts that have already been awarded for which start-up periods don't start until like the second half of fiscal 2010?

James F. Winschel, Jr.

Well, this is an ongoing process, of course. Every month we're winning lots and lots of new contracts, and so it just continues. And as I said earlier, it takes about 5 months to complete the start-up activities and the 30% of revenue from an IVR study that we had previously assigned, is now going to be recognized out in those later periods.

And as long as the business continues to grow at a rapid rate—it gets a little better as you go on and the business is sort of established and everything, but purchase accounting really mucked up the waters here as far as this particular issue is concerned.

David Windley – Jefferies & Co.

On the EBIT margin, on the non-GAAP presentation, so looking at the actual EBIT dollars of $35.0 million and change, that margin on the non-GAAP revenue looks exceedingly high, but then conversely, or maybe similarly, the other expense line is also very high. And the other expense line is in fact higher than the GAAP and the non-GAAP. So I'm wondering are there related items in there that maybe we should look at those together to get to a more representative number?

James F. Winschel, Jr.

As I've always talked to you in the past with respect to foreign exchange, when the U.S. dollar is strengthening, we tend to see a decrement to operating margin and gains on the other income line with respect to foreign exchange gains. And as we go back in the other direction, this starts to reverse itself. So there is some element of what you just mentioned.

And I think the foreign exchange losses in the quarter were around $5.0 million.

David Windley – Jefferies & Co.

And when you give us guidance for first fiscal quarter of 2010, at 8%, is that assuming that you don't have the inflated EBIT margin and then the high FX loss below the line, and are you looking at those on more of a combined basis in that 8%?

James F. Winschel, Jr.

One of the big elements of the other expense line, of course, is interest expense and you may remember that a year ago we didn't have this huge amount of debt that we now have on the books. So I think the interest expense amount included in my guidance for next year is in the $10.0 million to $12.0 million range. So I think that's one thing that everyone has to realize, that that is there now and yes, we'll be repaying portions of the debt but we'll still have a fairly sizeable debt amount outstanding going forward.

But for example, when we gave guidance back in April, we're not assuming that there are changes that are going to be happening with the U.S. dollar. And of course, during the quarter, the U.S. dollar weakened and while we got some benefit of that, if you remember the guidance that we gave, for example, for revenue for the fourth quarter, I think we had talked about something like $270.0 million to $278.0 million. And ended up on this sort of adjusted basis at about $268.0 million.

Well, you would have normally expected that as a result of the foreign exchange movements, that we would have actually come in at the high end of the range for the quarter, which we did not. And that would be related to some project delays that we had in the business. And I think all related, in part, to this sort of uncertain environment that we're in right now.

Operator

Your next question comes from John Kreger – William Blair.

John Kreger – William Blair

Just to continue on David's question. On a net basis, what was the bottom line impact of foreign exchange fluctuations in the June quarter?

James F. Winschel, Jr.

On which line?

John Kreger – William Blair

Bottom line. Or EPS.

James F. Winschel, Jr.

Well, the impact on EPS was approximately $0.03 or $0.04 a share positive.

John Kreger – William Blair

Relative to the March quarter, right?

James F. Winschel, Jr.

I was comparing that to a year ago.

John Kreger – William Blair

What sort of tax rate are you assuming in your 2010 guidance?

James F. Winschel, Jr.

I have assumed 38%, although we certainly have all the mechanisms in place to begin to drive that rate down. We had a couple of unusual things happen to us during fiscal year 2009 with respect to the Cogentis issue back in December, and then this change in accounting that occurred in June, which drove the rate up.

But there's going to be a crossover point at some point where this rate heads down towards the low 30s and just haven't reached that. And we would have reached it sooner had we not had some of these issues that we've been dealing with in this quarter and the December quarter.

John Kreger – William Blair

And given those issues, what is your current thinking about when you can realize the tax rate benefits? Are we talking two or three years?

James F. Winschel, Jr.

No, I would say at the latest you would start to see that impact in 2011 and we may start to see it in 2010 but I have not reflected that in my guidance.

John Kreger – William Blair

If we look beyond all of the accounting issues related to Perceptive and just kind of go back to the CRS business, can you just expand a bit more about the flow of business as you've seen it play out in recent months? It seems like you're fairly optimistic about the environment now, although the bookings numbers were lukewarm. So can you give us a little more gel about what is it that gives you a greater sense of optimism as you look into 2010?

Josef H. Von Rickenbach

The March quarter was a difficult quarter, from a new business perspective, in terms of flow in particular. Actually, I think the overall net performance for our company was actually okay. And this continued into this quarter. Actually from a competitive point of view, I would have to say this probably was one of the most difficult quarters in a long time. And I will tell you, we held our own but it was a slug.

And having said that, towards the end of the quarter things started to ease. Proposals started to flow better. I don't particularly expect that the first quarter is going to be particularly better yet, but then going beyond that, we feel that the proposal flow and just the discussions we are having indicate that things should start to improve.

John Kreger – William Blair

And you mentioned in your remarks, I believe, that you did think you saw some impact of the mergers on your cancellations and flow. As you look out in the next three to six months, do you think that impact will get bigger or smaller?

Josef H. Von Rickenbach

That's hard to predict. It could cut both ways, but my net expectation is that it will be a net gain for us.

John Kreger – William Blair

Net gain for you over the next several months.

Josef H. Von Rickenbach

Well, next several months or next several quarters.

Operator

Your next question comes from Todd Van Fleet – First Analysis Corp.

Todd Van Fleet – First Analysis Corp

On the adjustment for 2010 related to the accounting issues, from an EPS point of view, you said it is $0.13 or $0.14 for the full year?

James F. Winschel, Jr.

That's correct.

Todd Van Fleet – First Analysis Corp

Is that ratable across the year or are we seeing a greater impact of that in any given quarter or quarters?

James F. Winschel, Jr.

It's a good question. I believe, as I looked at the numbers, that the impact was fairly consistent, maybe trending down a bit over the course of the year.

Todd Van Fleet – First Analysis Corp

Joe, let me follow up on your commentary regarding the new business environment. I just want to go back to what you had said in your comments that the new business activity—well, a couple of things. One, if you could go into a little bit more detail on the pipeline for Perceptive Informatics because I guess if you add back all the revenue that was stripped out because of the accounting, Perceptive Informatics' revenue kind of held up relatively well, relative to what we were expecting. But if you could comment more about the new business activity in that segment.

And then secondly, you said that your new business activities in the quarter overall were masked by the tune of $90.0 million or so related to something. I couldn't quite grasp what that was. I'm hoping you can go over that for me.

Josef H. Von Rickenbach

In the Perceptive business, I would say we actually had a pretty strong quarter, in terms of new business. We had a record win performance overall. In the various segments in various businesses that we have, I think we had the best book to bill performance in Perceptive, indicating obviously relatively good future opportunity there. And also good momentum in pipeline.

So generally, if you look at that Perceptive business over the course of the year, notwithstanding some of the annoying changes that had to be made, after an initial kind of tempered response, it started to pick up and I think we have now good momentum and are going into the new year with a fair amount of strength I would say.

On the point of the gross new business adjustment, the way we book new business internally, in terms of our own policy, if in a quarter we get an award, don't do any work on that project, and it gets cancelled in the quarter, we completely net it out. We don't count it as new business, nor as a cancellation. But of course we still have to make the effort and competitively win that business. And I think in that sense it understates our performance relative to gross new business won. And in that way we've lost, if you want, about $90.0 million of awards.

Todd Van Fleet – First Analysis Corp

And were those proposals that were out there for an extended period of time?

Josef H. Von Rickenbach

You have to assume that they were normal so they would have been out there roughly the same amount of time as the average portfolio.

Todd Van Fleet – First Analysis Corp

So you won them and then they promptly cancelled them?

Josef H. Von Rickenbach

Correct. Within the quarter. The fact that they may have been awarded, for argument's sake, in April and they would have been cancelled, let's say in June.

Todd Van Fleet – First Analysis Corp

How many different RFPs are we talking about in that $90.0 million? Is that a handful or is two?

Josef H. Von Rickenbach

It's probably less than a handful. They were fairly sizeable jobs.

Todd Van Fleet – First Analysis Corp

And based on those cancellations then, these awards that were made, roughly cancelled, does that give you more optimism or less optimism about the prospect of new business coming out of that fewer than handful of clients moving forward. I mean, is there a possibility these would be reissued, in any sense, or is the business just gone?

Josef H. Von Rickenbach

I don't believe that the business is just gone. I mean, these particular projects are probably gone. But these are clients with whom we have very good relationships and I actually believe, all in, this cluster of clients should be a good opportunity for us into the future. It may not be particularly this month or next month, but certainly over time, and I mean over the course of the fiscal year, that should be an opportunity for us.

You mentioned another point which I also want to elaborate on a little bit and that is one of the phenomena that we have seen earlier in the year is that clients came in with a lot of proposal requests, only then to actually cancel those before awards ever really were made. And obviously that is also tedious because you have all the costs of preparing the proposal and so on and actually they don't ever get to award and that has started to normalize also.

So in particular, already in this quarter, I would say for all intents and purposes, there has clearly a normalization of proposal flow and dynamics of new business flow.

Todd Van Fleet – First Analysis Corp

In terms of the RFP activity and the types of opportunities that you're seeing, have you seen an increase, a decrease, no change, in the number of, for lack of a better term, asset transfer-, human capital transfer-type opportunities that are out there?

Josef H. Von Rickenbach

That's actually a good topic because these asset transfers tend to get the huge amount of publicity. And having said that, in our view, they're actually a relatively small opportunity and often not particularly attractive, from a number of points of view.

And so when I say not particularly attractive, this is for our business mix and for our targets. And if you look at this opportunity over time, over a relatively long time, they've actually been there for a relatively long time. Going back even into the 90s. And I would say more recently, in the last couple of years, we have picked up a little compared to the prior five years or so. I expect that we probably will see more.

I would also say, as I said, they're not particularly attractive to us because we're not a facility company basically, meaning we don't really own assets so to speak, or manage assets. And from a core business perspective, especially from a clinical research perspective, often when partnerships are entered into, you don't have a lot of facilities that are attached to them.

And of course, we are bidding for them and we are involved in these discussions, but at the same time we are always careful not to get into [inaudible] that are not optimal for us.

Operator

Your next question comes from Greg Bolan – Wells Fargo Securities.

Greg Bolan – Wells Fargo Securities

Joe, during the last conference call you mentioned RFP activity in the early phase business was encouraging and you spoke about a number of strategic discussions you were having with clients. Could you give us an update on those conversations and where you stand at this point?

Josef H. Von Rickenbach

Yes. To the first question, the proposal activity defined as the amount of dollars of proposals sent to clients for early phase, in the quarter, they roughly held, from sequentially they were about the same, and year-over-year maybe down a little bit but not a huge amount.

And in terms of these more strategic discussions, they are ongoing, have been going on, and decisions have also been made. And so basically pretty much the pattern as I described during our last phone call, is still in place.

Greg Bolan – Wells Fargo Securities

Are you seeing a greater prevalence of, call it large pharma sponsors, evaluating PAREXEL for potential preferred provider relationships relative to the last few quarters, or versus this time last year?

Josef H. Von Rickenbach

It's difficult to answer precisely because there are always, of course, discussions going on, but my sense is that if anything, it's more.

Greg Bolan – Wells Fargo Securities

And Joe, with regards to the increase in RFP values for which PAREXEL has recently responded, are you seeing a noticeable change in the mix in terms of sponsor ties, so more or less activity from biotechs or even pharma sponsors, relative to what you have witnessed over the last few quarters?

Josef H. Von Rickenbach

Generally in the quarter and for the year overall, compared to prior years and periods, we have had more upper shift toward large pharma. In the very recent time, meaning the last few months, we have started to get more activity again from the smaller companies. And also, of course, we are watching, like everybody else, what the capital flow is into the segment and it seems to be rather better than not. And not to call it a spring, but certainly the companies that we had on our list that we were concerned about in terms of financings, they pretty much have actually received financings and pretty much actually paid up and in some cases also anted up again with new trials and new activity.

So my sense that that segment might start to revive in the course of fiscal year 2010.

Greg Bolan – Wells Fargo Securities

Jim, just trying to understand a little bit better, on the account error, relative to SAB 104 and the revenue recognition for ClinPhone, is the major difference here that ClinPhone is just an acquisition? Because I would have thought the accounting would have been the same for your legacy IVRS business.

James F. Winschel, Jr.

Certainly the purchase accounting impact of not being able to recognize the prior start-up activity of ClinPhone was devastating to our numbers. And so that was really the issue. As we looked at Perceptive Informatics and those prior periods, there was not a material impact from this change.

I think we probably, in some ways, added to our problem, however, because we have shifted all of our old Perceptive work over to the ClinPhone platform, and so I think that probably also exacerbated the problem for us a bit.

Operator

Your next question comes from Sandy Draper – Raymond James.

Sandy Draper – Raymond James

Is there anything you could have differently in terms of structuring the transaction or is this really just a situation that after the fact you realized that and there was nothing you could have done differently?

James F. Winschel, Jr.

I made no less than five different suggestions as to at least how we could handle this business going forward and every one of those suggestions ended up back at the same spot, that purchase accounting for ClinPhone was a problem. So that was there.

But with respect to the methodology of recognizing these start-up activities for the ongoing business and having to recognize that over the hosting period, there does not seem to be a way out. For example, you can't do one contract with a start-up activity and one contract with a hosting activity and solve this problem. The accountants come back and link them together.

So I think that we will continue to look at that and see if there might be something to do but nothing's been identified up to this point.

Sandy Draper – Raymond James

Then going forward, there's not going to be a point where after two or three quarters, you step back up quickly to an old previously reported level of ClinPhone revenue. We're sort of setting a new base here, although not a cash basis from a GAAP perspective, we're sort of having to reset the base now and go from there?

James F. Winschel, Jr.

The situation gets better as you go forward but as long as that business continues to grow rapidly you'll always have some element of a problem until if it leveled off at some point then you would start to see a much higher level of profitability, but that's that fact of the matter.

Sandy Draper – Raymond James

We have 2009, the full year. Are you going to give us the prior quarters, or when do we get the prior quarters, the first, second, and third quarters of 2009, when do we get the restatement there, what they look like?

James F. Winschel, Jr.

This issue, of course, for us is just really come to the surface five, six days ago, and I would say, at a minimum, when we go out to report the results for those quarters, we will give you the information but I can just tell you that the impact on revenue was between $4.0 million and $6.0 million a quarter for fiscal year 2009. Maybe a little bit less in Q1 because you remember, we acquired ClinPhone in the middle of August and so we only had them on the books for six weeks.

Sandy Draper – Raymond James

Is there a connection there in terms of not reaffirming or giving any comment for calendar year 2009 guidance, you've just sort of go back and do the work for the March quarter? Or will you give an update on what you think calendar year 2009 would look like?

James F. Winschel, Jr.

Typically, what we have done, in the entire time that I have been with the company is once we give out the new fiscal year guidance, we've discontinue the practice of giving out the calendar year guidance. And so we won't give calendar year guidance out again until the January call.

Sandy Draper – Raymond James

And that will be for calendar year 2010?

James F. Winschel, Jr.

That's correct.

Operator

Your next question comes from Bob Jones for Randall Stanicky – Goldman Sachs.

Bob Jones for Randall Stanicky – Goldman Sachs

I wanted to go back to something you mentioned about the high intra-quarter cancellations. I believe you said these were related to some of the ongoing mergers. Is there anything that gives you more comfort that we won't see more merger-related cancellation as we move through these deals closing?

Josef H. Von Rickenbach

It's difficult to answer this question, of course, definitively because this could always happen. But having said that, for one, we're getting relatively close and we are relatively well aware of the projects at hand. Of course, it depends always specifically on the project. So I pretty much hope, and maybe believe, that the news is in. And so that we are not negatively affected by that going forward.

Don't forget, these are not projects that were actually started. So from that point of view, they were less painful for sure than if they had been, let's say, halfway done.

Bob Jones for Randall Stanicky – Goldman Sachs

You had described the RFP environment getting better. How would you describe the competitive pricing environment recently?

Josef H. Von Rickenbach

In this past quarter it was tough. It was as tough as it has been, as I said, for quite a long time. But we held our own. I would also say that. And we won fairly and squarely and I'm proud of our guys. Actually I would say that. And as hopefully as the environment eases up a little bit this will also normalize again. I won't predict to say it was [inaudible], I would not say that. But it was really competitive.

Operator

Your next question comes from Douglas Tsao - Barclays Capital.

Douglas Tsao - Barclays Capital

I was hoping on the non-operating income line for this quarter, could you provide some sort of break down in the mix relative between losses related to hedges and balance sheet adjustments?

James F. Winschel, Jr.

I don't have that number at my fingertips. I'm sorry, I have the number but I don't have it with me right now.

Douglas Tsao - Barclays Capital

Could you provide some, just given the numerous moving parts, related to the perceptive business right now, could you provide us some sort of revenue guidance? I mean the range we should we looking for in the first quarter?

Josef H. Von Rickenbach

For which business is that?

Douglas Tsao - Barclays Capital

Perceptive business. Just given so many moving parts, from where we were this quarter, obviously being suppressed, you had given the adjustments and then on the go-forward basis with the new accounting treatment, it's a little hard for me, at least, to sort of model out the different segments in the next quarter.

Josef H. Von Rickenbach

As you know, we don't really actually usually give specific guidance in terms of our particular business segments.

Douglas Tsao - Barclays Capital

I understand that. But this is a little bit of extraordinary circumstances.

Josef H. Von Rickenbach

Jim, I think, indicated what the impact would be due to the accounting changes for the various periods and so obviously that would then come out.

James F. Winschel, Jr.

So I would suggest taking whatever you had previously and deducting in the at $4.0 million to $5.0 million range would make sense.

Douglas Tsao - Barclays Capital

And then in terms of your guidance, you've suggested a book to bill of a 1.2 for the basis of your guidance. And then Joe, you indicated that you expected the first quarter to remain somewhat challenged in terms of the environment, so is it that you would expect a similar book to bill to what we saw this quarter in the first quarter and then sort of a progression as we move through the year, to get to that full year 1.2 number?

Josef H. Von Rickenbach

Yes, that's probably a pattern that we would expect to see.

I will say one other thing, which I think is also important to point out and that is obviously the reason why we have needed these relatively high book to bills ratios in the past was because there was an erosion of conversion rates of the backlog into future periods.

And it appears that in this quarter, meaning in the June quarter of this year, we may have hit the low point and then actually the conversion rates start to improve.

And the question, of course, is why would that be. And I think in the last several quarters the reason why we had seen a relatively significant erosion actually was due to the movement of foreign exchange. And as the dollar amount starts to turn around, actually I think we're starting to get the benefits of that also in the backlog conversion.

So the reason why I'm point that all out is that we may not need these much higher book to bills anymore in order to have the growth that we are envisioning.

Douglas Tsao - Barclays Capital

And in terms of the impact on your business from the merged entities, obviously you suggested that you were seeing some cancellations. Was this isolated to one company or was it spread across pretty much all the companies that are undergoing mergers?

Josef H. Von Rickenbach

I don't want to go into a lot of details but it's more than one company.

Douglas Tsao - Barclays Capital

And did you see this, not just in terms of cancellations, but also seeing a lower RFP flow from these companies, as well?

Josef H. Von Rickenbach

I don't want to get into very specific details on that. But as I said, in general, the RFP flow, I described in some detail, net-net I would in the last three months, and I specifically say that because a lot of the easement and sort of normalization in the June quarter actually happened towards the end of the quarter, and I also know how in this quarter it is relatively more normal certainly than we have seen for the last three quarters.

Douglas Tsao - Barclays Capital

On these improved business flows, or proposals that you've seen recently, are these largely for clinical trial starts for enrollment to begin in the next calendar year? So that would be 2010?

Josef H. Von Rickenbach

I think that would be fair to say.

Douglas Tsao - Barclays Capital

Do you think a part of the mechanism is that clients are looking ahead to seeing perhaps better R&D budgets next year and that they are basically laying the groundwork for higher levels of clinical trial starts next year?

Josef H. Von Rickenbach

It is always difficult to judge the psychology of the market and the clients but it may that the year, the calendar year, may not have turned out quite as badly as maybe some thought. Maybe the second half, that reason might be somewhat better in terms of old budgets and also of new budgets coming about. So you may be absolutely right, that that might have an impact.

Operator

Your next question comes from Eric Coldwell – Robert W. Baird.

Eric Coldwell – Robert W. Baird

I'm not sure how to really ask this so I'll just kind of blurt it out. Why did it take 12 months to understand that there were accounting misapplications? Why was this not discovered until five or six days ago?

James F. Winschel, Jr.

It's a great question. As a matter of fact, we engaged one of the Big Four accounting firms to convert ClinPhone's historical financial statements into U.S. GAAP and I can tell you, disappointingly, this was not identified as an issue.

And so as we were completing our own purchase accounting reviews and things and working with our auditors, this came to the forefront. And I have to tell you, a week ago at this time, I was fairly relaxed and the numbers were looking good and then the last five calendar days have been tough. I don't know what else to say about it.

Eric Coldwell – Robert W. Baird

I don't know if you go into this, but it sounds like you paid somebody professional fees for professional services and got unprofessional results, so it sound like there could be some recourse there.

James F. Winschel, Jr.

We haven't gone down that path at this time and it would not be appropriate to comment there.

Eric Coldwell – Robert W. Baird

Getting to the fundamentals, the [inaudible] Perceptive bookings are obviously encouraging. That business has four or five separate units of some note within it and I'm curious whether the broad based booking strength or demand that you say, was that primarily related to IBRS and IWRS or was it also encompassing EDCM and imaging and some of the other solutions?

Josef H. Von Rickenbach

I don't want to go into a lot of detail in terms of business mix other than to say that we feel that we have a particular strength in the IVR area. That was one of the certainly attractive features that ClinPhone had. Remember, the comment that Jim made before is a really important one, and that is that our platform, the legacy platform, Aladdin, was relatively getting a little tired and actually the new platform, on which we are now running our IVR, meaning Synapse, from ClinPhone, is a very competitive and very strong platform and we're very happy with that and so are our clients.

And in the other business areas, we are making significant investments right now in terms of R&D and there have been actually a number of announcements in terms of milestones and kind of new breakthroughs for products that are about to be launched and so I think that's more of a future story.

Eric Coldwell – Robert W. Baird

In Phase 1 or the early phase businesses, would you hazard to guess what percent of your current revenue stream is locked up in long-term contracts? Even things like minimum guarantee awards versus stuff that you have to kind of go out and win hand-over-fist, quarter-to-quarter?

Josef H. Von Rickenbach

It seems to me the way that business works, even when you have these kinds of partnerships, it's not particularly guaranteed as much as it is kind of captured, meaning the trend seems to me that a number of these companies are narrowing down the number of providers that they work with. Or get themselves more out of the business, even, or cut down on their own internal work and so these are still basically competitive awards but among a far smaller group of contenders than used to be the case.

Eric Coldwell – Robert W. Baird

So for example a large pharma could come to you and say you're one of three providers of Phase 1 services and we'll give you a third of the work that we have during the course of the year but there might not be a minimum guarantee associated with that. Is that fair?

Josef H. Von Rickenbach

Yes, that's fair. And actually in some cases when that occurs they may even say, let's say, six months into a year, and let's say the shares don't kind of pan out, they would want to why and maybe make sure there's a balance.

But still, on an individual award basis, you still have to compete.

Eric Coldwell – Robert W. Baird

I've certainly seen in the trade rags and heard from some consultants recently that the FDA seems to be getting a lot more aggressive on site inspections and regulatory compliance initiatives. You guys have a fairly decent practice there. I'm curious what you're seeing on the consulting side. Because during your prepared remarks you mentioned that med com was doing better but you didn't spend lot of time on the consulting piece of PCMS.

Josef H. Von Rickenbach

You're right, although I did say that we were pleased about the performance of our PCMS segment and as far as the overall profile is concerned is mainly driven by consulting. Generally I agree with you and what resources you cited that there is clearly a pickup in demand for these kinds of services, compliance kinds of services.

I think there is a good chance that there's going to be more enforcement, specifically on the manufacturing side, which is a strong suite of ours. And so I think that business is going to benefit from that trend.

Operator

Your final question comes from Stephen Shankman - Natixis Bleichroeder.

Stephen Shankman - Natixis Bleichroeder

Joe, in your comments in the press release, you reference being able to continue to increase market share, I guess due in part to your global footprint. What I'm curious about is where are you actually that share from? Is it from the smaller private players? And are there any metrics such as win rate that you could speak about to help us understand this market share shift?

Josef H. Von Rickenbach

It's a good question. Obviously, as I pointed out, in such a competitive market it's not always easy to see how market share shifts, but I would have to say if you are a medium-sized or smaller, let's say, domestic-oriented provider, at this point in time, I think it's a tough existence.

And because of our global footprint, we can actually also compete globally, meaning historically, if you go back a while, most of our business used to be won here in the U.S. Eventually we expanded that also into Europe, and now we are really winning business across the globe.

And I would to believe that only very few of our competitors actually can match us with their competitive approach.

So partly this is perhaps business that was never out before. So it's sort of incremental market share versus actually head-to-head but given that the industry is not growing as much anymore, that our actual real losers and wins is out there.

Stephen Shankman - Natixis Bleichroeder

And on the metrics front, anything you can point to specifically?

Josef H. Von Rickenbach

In terms of market share metrics?

Stephen Shankman - Natixis Bleichroeder

Yes, win rate or—?

Josef H. Von Rickenbach

Of course it varies from business to business but on the whole our hit rate has basically held. We had an excellent win rate, as I pointed out, in the March quarter. Generally, the March quarter for us was very strong from new business perspectives, given the environment, and that was mainly because of a great hit rate.

In the June quarter this has come back to I would say more normal levels but it's respectable and kind of what we would have expected and what we have seen over a relatively long period, I would say 12 quarters or so.

Stephen Shankman - Natixis Bleichroeder

The hit rate might be, a range of percentages or something like that?

Josef H. Von Rickenbach

I'm hesitant to point this out for competitive reasons and also because it depends a lot on the definition of exactly what this is. And generally, when I talk about hit rate, I talk about what we would call competitive rate, meaning talking about projects that actually are getting awarded to somebody, versus which just kind of die on the vine before they actually get awarded to anybody.

But specifically, generally, we have not disclosed this number.

Josef H. Von Rickenbach

Thank you and I would like to thank all of you for your interest in PAREXEL and we look forward to updating you on our next call.

Operator

This concludes today’s conference call.

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Source: PAREXEL International Corp. F4Q09 (Qtr End 06/30/09) Earnings Call Transcript
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