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PAREXEL International Corporation (NASDAQ:PRXL)

F2Q10 (Qtr End 12/31/09) Earnings Call Transcript

January 26, 2010 10:00 am ET

Executives

Jill Baker – VP, IR

Josef Von Rickenbach – Chairman and CEO

James Winschel – SVP and CFO

Analysts

Greg Bolan – Wells Fargo

David Windley – Jefferies & Co.

Todd Van Fleet – First Analysis

Douglas Tsao – Barclays Capital

Steve Unger – Lazard Capital

John Kreger – William Blair

Eric Coldwell – Robert W. Baird

Robert Jones – Goldman Sachs

Sandy Draper – Raymond James

Eric Kelly [ph] – Works Capital [ph]

Operator

Good morning. My name is Monica, and I will be your conference operator today. At this time, I like to welcome everyone to the PAREXEL International second quarter fiscal year 2010 earnings conference call. (Operator instructions). Thank you. Ms. Baker, you may begin your conference.

Jill Baker

Good morning everyone. The purpose of this call is to review the financial results for PAREXEL’s second quarter of fiscal year 2010. With me on the call today is Josef von Rickenbach, our Chairman and Chief Executive Officer; and James Winschel, Senior Vice President and Chief Financial Officer. Thank you for joining us today.

We would like to begin by stating our standard Safe Harbor disclosure language. Various remarks that we may make about future expectations, plans, and prospects for the company constitute forward-looking statements for purposes of the Safe Harbor 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 September 30, 2009, as filed with the Securities and Exchange Commission on November 6, 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 like to note that we have provided expanded [ph] financial information on our web site in order to assist investors. You may access our report titled Q2 fiscal year 2010 additional financials in the additional financials portion of the investor relations section.

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

Josef Von Rickenbach

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

For the quarter ended December 31, 2009, service revenue was $284.7 million compared with $275.8 million in the same quarter of the prior year, an increase of approximately 3%. Excluding the positive impact of foreign exchange of $14 million in the quarter, revenue decreased approximately 2%.

On a same accounting, same-store constant currency basis consolidated service revenue grew approximately 1%. For the second quarter, the Americas represented approximately 38% of service revenue in contrast to 44% one year ago. Europe, the Middle East and Africa represented 50% versus approximately 48% one year ago and Asia-Pacific was 12% of revenue as compared with approximately 8% one year ago.

We continue to expect that the Asia-Pacific region will be our fastest growing region this calendar year. During the quarter, the largest client represented 8% of revenue, the same as the December quarter one year ago, the top five clients represented 26%, which was down from 29% in the December quarter last year, and the top 20 clients collectively represented 54% versus 55% a year ago.

During the second quarter, Clinical Research Services (NYSE:CRS) represented 70% of the company's total revenue, PAREXEL Consulting and Medical Communications Services (PCMS) comprised 10%, and Perceptive Informatics was approximately 12% of the total. On the operating margin front, a combination of top line leverage and strong cost controls enabled us to achieve an operating margin of 9.5% of consolidated service revenue in the second quarter. We expect further improvements in the coming quarters as the benefits of the restructuring activities and improvement initiatives begin to take hold.

I would now like to walk you through the new business and backlog performance for the quarter. Gross new business wins added $501.7 million, and then $284.7 million of revenue was subtracted in the December quarter. Cancellation totaled $98.9 million and foreign exchange resulted in a gain of $33.9 million. All of this left us with an ending backlog on December 31, 2009, of approximately $2.3 billion. The net book-to-bill ratio in the quarter was 1.41.

Cancellations, which were 4.6% of the quarter’s beginning backlog were on the higher end of the range, but still within our expected range of 3.5% to 5% of beginning backlog. Cancellations were broad-based as there were no individual cancellations of significant size. With regard to new business, our hit rate was very strong with gross new business wins up almost 56% sequentially, and up about 9% as compared to the December quarter one year ago.

All three reporting segments had healthy new business wins, and the wins were geographically well distributed and were led by strong gains in oncology. For the company overall, proposals sent to clients in the quarter in dollar terms were flat sequentially and still down as compared to last year. The average cycle time, which is the elapsed time from when we send a proposal to a client to when a decision is made has increased in the quarter partly as a result of this, the value of the pending portfolio of proposals has increased.

We expect many of these proposals to be decided in the current quarter, and we anticipate another positive result with respect to new business wins for PAREXEL in Q3. To provide you with a bit more color with regard to the results of the quarter, I would like to point out that there was a confluence of events that have helped us to achieve our goals. In CRS, the new business performance was strong and Asia-Pacific was a positive differentiator for us. We are winning a healthy number of clinical trials from Asian companies, and are also winning global studies from non-Asian companies, who are choosing to conduct an arm of their global clinical trials in the Asia-Pacific region.

Another very bright spot in the quarter was Perceptive Informatics. We are again pleased with Perceptive’s new business performance as well as the increase in synergies that we see between this business and CRS. Clients are embracing our integrated e-Clinical Suite, which we launched in June and we foresee many more opportunities for our operating units within Perceptive, including randomization and trial supply management, electronic data capture, medical imaging and electronic patient reported outcomes.

In the PAREXEL Consulting and Medical Communications business segment, improved new business wins were achieved in both business units. Highlights were wins related to drug development and strategic compliance expertise. As we enter calendar year 2010, our backlog is strong and we have a growing pipeline of potential new projects that are awaiting decisions from clients. We feel that the overall market for our services are starting to improve and there has recently been a higher quality and less volatility of RFPs in the system.

There are promising signals in the broader market as well, and I would now like to mention a few of them. To start with, the majority of large pharmaceutical company merchants that were announced last year have now closed. As we’ve mentioned on prior occasions, it appears that the recently closed mergers have been completed expeditiously and effectively, and as a result we anticipate a return to a more normalized business environment going forward.

On another front, the paradigm shift in R&D and consequently in outsourcing is opening the door to truly strategic partnerships by a number of clients. We expect that these increased partnering activities combined with outsourcing penetration rates that are projected to continue to tick-up a percentage point (inaudible) for the foreseeable future could help us to gain additional traction.

Other possible factors that should favorably impact PAREXEL and our industry is the return of funding to mid and small biopharma clients, and our clients’ heightened focus on moving promising compounds through the later stages of the development process. In summary, we're quietly and consciously optimistic that our markets have stabilized and we will continue to gradually improve. We are pleased that we have been able to use this down cycle to better streamline and position the company, and we feel that we are ready to capitalize on improving market conditions.

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

James Winschel

Thanks Joe, and good morning everyone. Before discussing the operational details of the company's financial results, I want to take a moment to discuss the restructuring and related charges, which totaled $14.3 million on a net pre-tax basis in the second quarter. We incurred $3.6 million in severance costs, $5.7 million in costs associated with the closing or downsizing of facilities, and $6.1 million for the impairment of an investment in a French lab, which had struggled during the world financial crisis.

This latter amount was a non-cash, non-tax deductible item, which caused the EPS impact of the overall restructuring activities in the second quarter to be $0.20 per share rather than the previously estimated $0.15 per share. Lastly, we have a recovery totaling $1.1 million related to Cogentis, a small biopharma clients that defaulted on its obligations to us one year ago.

Going forward, we expect to incur approximately $14 million in additional restructuring charges, which are built into our third quarter forecast and relate mainly to severance costs and abandonment or downsizing of facilities. The remaining EPS impact is expected to be approximately $0.14 per share. The improvement in our business prospects is reflected in the current quarter’s new business numbers has led us to reduce the number of target in employee reductions from the original 4% estimate to somewhere between 2% and 3%.

We now anticipate the full-year benefit of the restructuring charge to be $0.20 per share starting in the first quarter of fiscal year 2011. During the second quarter, CRS service revenue increased 10.3% when compared with the prior year quarter with improvements coming from all operating units. Growth was especially significant in the European and Asia-Pacific regions. Excluding the $12.6 million positive impact of foreign exchange, CRS service revenue would have been up 4% over the prior year quarter.

On a sequential basis, service revenue increased by 9.6% with solid increases in all operating units and geographic regions. CRS gross margin was 37.2% during the second quarter, up 2.3 points from 34.9% during the same period one year ago and up 1.1 point sequentially. The increase in gross margin was primarily the result of strong performances in the Asia-Pacific and European regions, the continued effectiveness of cost controls and improved productivity and efficiency. Both early phase and late phase improved on a year-over-year and sequential basis.

Service revenue in PCMS was down approximately 7% compared with the December quarter one year ago. The decline was driven by a lower level of HelpLine [ph] business, and the impact of exiting continuing medical education activities. Excluding the $832,000 positive impact of foreign exchange in the quarter, PCMS service revenue declined by 9.5%. On a sequential basis, PCMS revenue grew 3.2%.

During the second quarter, PCMS gross margin at 36.2% increased by 1.2 points year-over-year as a result of productivity and efficiency improvements, mainly related to the strategic marketing portion of the business due in part to the shedding of certain unprofitable service lines.

In Perceptive Informatics, quarterly service revenue of $33.4 million was down 22.2% year-over-year in the quarter. There are two important factors that one should keep in mind when analyzing Perceptive’s second-quarter service revenue numbers. First is the $558,000 positive impact of foreign exchange in the current quarter, and second is the need to reduce the prior year as reported service revenue by $7.6 million to reflect the second-quarter portion of the accounting adjustment that was reversed out of revenue in Q4 of fiscal year 2009.

Adjusted prior year quarterly revenue would have been $35.4 million. On a constant currency, same accounting basis, Perceptive’s service revenue was down 7.2% on a year-over-year basis. On a sequential basis, however, Perceptive service revenue was up 16.8%. The business has continued to win substantial amounts of new business while achieving a very high hit rate during the second quarter.

Perceptive’s gross margin in the quarter was 39.9%, down one-tenth of a point from the prior year quarter. Taking into account the impact of the accounting adjustments of $7.6 million in service revenue and another amount in direct costs on the prior year quarter’s results, Perceptive’s gross margin would have been up 8.3 points. Going forward, we expect Perceptive to report increases in both service revenue and gross margin on a sequential quarterly basis.

On an overall company basis, gross margin for the quarter was 37.4%, up 1.7 points as compared with the December quarter last year. During the third quarter of fiscal year 2010, we expect the company's gross margin percentages to be up slightly on a sequential basis. SG&A spending in the second quarter was 22.7% of revenue, up from 22.5% in the second quarter one year ago. 3.9% increase in year-over-year spending levels resulted mainly from higher labor costs and the impact of a weaker dollar.

The 6.9% sequential increase in SG&A spending was caused higher labor costs, increased professional fees and movements in foreign exchange rates. During the third quarter of fiscal year 2010, we expect SG&A as a percentage of revenue to be down slightly on a sequential basis.

For the quarter, depreciation expense equated to 4.4% of service revenue, up from 4.1% during the second quarter of last year, primarily as a result of increases in capital expenditures over the past 12 months. Amortization expense was approximately nine-tenths of one percent of service revenue in the second quarter, the same as one year ago.

Operating margin in the second quarter was 9.5% of service revenue, up from 8.2% in the December quarter one year ago. The prior year quarter’s operating margin, including the impact of the previously noted accounting adjustments, would have been 6.6%. Foreign exchange had a positive impact on operating income of about $2.1 million on a year-over-year basis. We expect operating margins to be in the 9.5% to 10% range during the third quarter, excluding the impact of any restructuring charges.

Interest and other expense was a negative 3.8 million in the quarter, driven by net interest expense of $2.4 million and foreign exchange losses of 1.4 million. We expect other expense to be in the range of $4 million to $5 million during the March quarter.

PAREXEL’s second-quarter tax rate was 34.5% compared with 48.2% in the prior year quarter. The lower rate was driven primarily by improved profitability in the United States. At this time, we are projecting a tax rate of approximately 36% for the third and fourth quarters of fiscal year 2010, and tax rate of approximately 34% for the full year. All projected rates exclude the impact of the restructuring charges.

Net income for the quarter of $15.1 million was up from net income of $13.1 million in the second quarter of fiscal year 2009, an increase of 15.2%.

Moving on to the balance sheet, net receivables stood at $211.2 million at the end of December and taking into account gross revenue of $388.7 million for the quarter, DSOs stood at 50 days, a decrease of 5 days from the December quarter one year ago, and a decrease of 8 days from the September quarter. We are targeting DSO to be in the range of 50 days at the end of March.

During the quarter, cash flow generated by operations totaled $57.3 million. Other cash inflows included $1.6 million from foreign exchange movements and $1.3 million in proceeds from the issuance of common stock in conjunction with the company's employee stock option and employee stock purchase plans.

Cash outflows included a $14.4 million for capital expenditures, and $23.7 million in repayments under the company's line of credit. Netting the inflows and outflows resulted in an ending balance of $118.8 million, up significantly from the September quarter as a result of higher collections and improved profitability.

To reiterate a few comments with respect to the guidance included in yesterday's press release, we utilized recent exchange rates with respect to key currencies, and the guidance also takes into account actual and new business for the second quarter and reflects savings from the restructuring charge beginning in the third quarter.

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

Question-and-Answer Session

Operator

(Operator instructions) And your first question comes from the line of Greg Bolan with Wells Fargo.

Greg Bolan - Wells Fargo

Thanks for taking the question. Joe is it safe to say that the company has recently won a sizeable or possibly several meaningful strategic deals during the quarter such that this quarter’s bookings were somewhat concentrated?

James Winschel

Hi, Greg.

Greg Bolan - Wells Fargo

Hi, how are you?

James Winschel

Good. As we have been talking about for actually quite a long time now, we have been talking to a number of clients about strategic partnerships. We have entered into several of them over the last several quarters or even couple of years. And it is correct that we have gotten some traction on some of those in the quarter. There is probably one, where I would say a little out of the ordinary in size, but other than that it was fairly broad-based as far as the wins are concerned.

Greg Bolan - Wells Fargo

That is helpful. Thanks, and then, it certainly sounds like the push within Perceptive is towards an integrated suite of applications, delivered via software and service, and I'm wondering how this push might affect the revenue dynamics for Perceptive. So, I guess what I mean is by moving away from traditional software sales, do we see a more stable recurring revenue trajectory for Perceptive?

Josef Von Rickenbach

Yes, I think that is probably a fair assumption, you know, I mean, like the typical classical software business from a profitability point of view, it is a little lumpy, whereas the service model is more steady and is more aligned also with the rest of our company and our business, and actually most of the new business wins that we’ve had this quarter and in prior quarters were more on the service side.

Greg Bolan - Wells Fargo

Okay, that is great, and I guess, (inaudible) next question and how should we think about contributions from SAS enabled applications versus traditional software. I mean, I think it is probably safe to say the contribution margin from software sales are much higher than the corporate average, but would that also hold true for SAS as well?

Josef Von Rickenbach

Ultimately, the SAS revenue are also depending on a relatively high R&D spend. So, yes, from a gross margin perspective, I would continue to expect that the gross margin delivered by the Perceptive business would be higher than average in the company.

Greg Bolan - Wells Fargo

Thanks Joe, and congratulations on truly impressive results.

Josef Von Rickenbach

Okay, thanks Greg.

Operator

And the next question comes from David Windley with Jefferies & Co.

David Windley - Jefferies & Co.

Hi, good morning. Thanks for taking the questions. I will second Greg’s compliments on your quarter. Relatively simple one to start off with, Jim can you comment on how much FX might have contributed to the EBIT line?

James Winschel

Yes, David, it was approximately $2 million.

David Windley - Jefferies & Co.

Thank you, and then on that, kind of follow on to Greg's question, Joe are you seeing clients right now purchase technologies, whether it be more service-oriented or underlying software in integrated packages. I'm wondering how that sourcing pattern has evolved.

Josef Von Rickenbach

Yes, Dave. Yes, as we -- as Greg just pointed out, and I confirmed, we’ve issued a version of an integrated package of a number of our products, and this has been well received. We are selling those as much as the services of anything. Probably still our most classical software vertical would be our impact product, the CTMS product. The balance is very often now purchased by companies as part of their clinical trial program.

David Windley - Jefferies & Co.

So, on that vast point, so clients that are primarily pursuing you for your CRS services that are also reaching through and buying Perceptive technologies?

Josef Von Rickenbach

Yes, that is happening more and more and as a result obviously, for instance, our EDC business is doing very well, because it gets an increasing amount of traction from business that we are running in CRS. So that would be a good example of that.

David Windley - Jefferies & Co.

And then on CRS, it sounds like your new business was strong there, strong across the board, are you winning -- is the growth being driven by global programs that have allocations to all your regions or are you seeing disproportionate growth in your emerging markets because of work that is specifically directed to those areas, is it regional versus global is the essence of the question.

Josef Von Rickenbach

Yes, I would say it is more the global studies that have been driving the wins in this quarter. I can tell you it is really -- I mean our sweet spot really are Phase III studies, registration driven Phase III studies. You know, they would make up probably half of our wins this quarter, and most of those are global and most of those would have an arm in Asia, for instance. But having said that, we are also winning business in Asia from Asian companies, of course, and you would also find on occasion projects that we win, if you want in the west for execution in Asia.

David Windley - Jefferies & Co.

Right, okay, and perhaps one last question, in your wins and on Greg’s question about the size of some of these wins, could you give us a flavor of some of the strategic deals that you’ve added. You know, are they more functional, are they broad-based, are they Phase I, you know, a number of those different things that flows around out there, I wondered if you could give us a sense of the flavor of those?

Josef Von Rickenbach

Yes, as I’ve mentioned a number of times. Actually, I kind of thought of reset the stage [ph] a little bit, we have been talking about this for a while now, and I think in some ways, I feel like we have been overheard to some extent that we actually are entering into these agreements. Of course, the question then would be, why aren't there any announcements. Well, generally when you get into one of these agreements, nothing actually happens right then and there. It is just an agreement that you will pursue. Then as the partnership unfolds, eventually obviously you get the business, but sometimes there is a significant lag.

And since we’ve now entered into a number of those several quarters ago, they are starting to now get traction. And generally speaking, two or three of them are relatively broad-based, although more heavily focused on late phase. We also have a number that are more vertical, meaning let us say, early phase or even functional in some instances as well. So, it is pretty much across the board that these discussions are taking place, and where we are also scoring.

David Windley - Jefferies & Co.

Okay, great. Thank you. Congratulations.

Josef Von Rickenbach

Thank you.

Operator

And your next question comes from Todd Van Fleet with First Analysis.

Todd Van Fleet – First Analysis

Good morning guys. Great quarter. Joe wanted to give you an opportunity to talk about the (inaudible) business and what you are saying in that area, opportunities where we are in terms of kind of ramping up and just performing a little bit better. Thanks.

Josef Von Rickenbach

Hi, Todd. Yes, so -- we were really pleased with our new business results across the board, and I would have to say with the exception of early phase, this was a little bit of a disappointment this quarter, and also to me somewhat surprising because we had a relatively good run, and frankly, I didn't really anticipate this, looking at the trends and looking at -- basically all the metrics. So, somewhat of a mystery right now as to exactly why this happened, meaning why it was less good than the rest given that the number of trials and the overall activity seems to come back, but if I look at it what we saw was relatively high cancellations, certainly relative to the wins that we had, although not higher particular than in prior quarters.

And also it seems like there has been an elongation of decision-making -- to make a long story short, we have a relatively strong jumping off points from a proposal portfolio perspective in early phase, and as long as the proposals hold and the win rates hold, we should have a pretty good quarter now in the third quarter. So, sorry, a little complicated but all this happened and as I said it's sort of the only spot in the company, where the new business performance was less than great.

Todd Van Fleet – First Analysis

Okay. I guess just to try to amplify that a little bit. There is, you know, obviously a bit of portfolio you know, reallocation I guess, amongst the customer base. Did you happen to notice any particular themes in the cancellations for the Phase I business, was it you know, they were in certain therapeutic areas or was it because of your customer concentration do you think within clinical pharmacology or can you maybe calibrate or help us understand maybe, just trying to understand the higher levels of cancellation activity, whether we can draw any broader conclusions on that for kind of molecules that are in early-stage or is this something that is just particular to PAREXEL do you think or just trying to understand that a little bit better.

Josef Von Rickenbach

Well, remember what I said it's -- the cancellations are actually not entire relative to prior orders, okay. So, I wouldn't really read anything in the magnitude of the cancellations, and looking at the cancellations they were pretty normal. So, meaning there is nothing particularly, it is not any particular signal that kind of jumps out where you would draw conclusions. So -- but it's really, you know, -- and by the way as I should also say the hit rate, you know, the win rate was actually pretty good as well. So, it was just I think that the -- you know, the decision cycle has expanded somewhat and hopefully will help us in this quarter.

Todd Van Fleet – First Analysis

Okay. Let me ask one more then on the expense savings from the restructuring. I think Jim you had said that maybe it's going to yield $0.20 of savings starting in fiscal 2011. Is that right?

James Winschel

That's correct.

Todd Van Fleet – First Analysis

Okay, and are we starting to see some savings. I'm just trying to think about the March quarter and then the June quarter, and then so in 2011 should we be thinking about fiscal 2011 as a $0.20 step up kind of on an absolute basis from these savings vis-à-vis 2010. So, even though you might get some savings in the March and the June quarter from these actions that this is going to be $0.20 in addition to that or that's what you see in the March and the June quarter kind of hid into that $0.20 so to speak?

James Winschel

Sure, Todd. I believe that in the third quarter we’ll see about a penny of benefit part of what's happened here obviously is that the timing that we had originally anticipated got stretched out mainly because of the regulatory requirements that we see outside of the United States and that that number would then pick up to maybe two or three cents in the fourth quarter, and by the time we get to July 1st of fiscal year 2011, we should see about $0.05 a quarter of savings related to the restructuring charge, you know, going forward.

Todd Van Fleet – First Analysis

Okay, so maybe thinking about the step up in 2011 versus 2010, maybe it's kind of in the range of you know, $0.16, $0.17 incremental.

James Winschel

Yes, it's correct.

Todd Van Fleet – First Analysis

Okay, great. Thank you.

Operator

And the next question comes from the line of Douglas Tsao with Barclays Capital.

Douglas Tsao - Barclays Capital

Thanks. Good morning. Joe, I'm just curious if you could provide some detail in terms of the effect of the Asia business more broadly. Are you generally winning global studies that include an Asia component or you are benefiting from companies giving you the Asia arm of a particular clinical program?

Josef Von Rickenbach

Yes. Okay. Hi, Doug. So, I would say that we are generally now experiencing an Asian arm with most global studies. So, even if we sell a global program in the United States or in Europe they would have an Asian arm associated with them. In some instances, we also are winning in these geographies work, which is to be done exclusively in Asia-Pacific. At the same time, the Asian outsourcing opportunity itself is actually quite exciting at the moment as well. So, this would be companies in Japan, in Korea, in China, in India and even other parts of Asia Pacific as well, you know, who are concentrating their outsourcing in that geographic area.

Douglas Tsao - Barclays Capital

Okay, great. And then Jim, I just want -- can you provide detail in terms of the ClinPhone business, specifically was that up or down on a year-on-year basis?

James Winschel

Well Doug, it's really a hard question to answer. You may recall that earlier on we talked about the fact that you know, the ClinPhone was really -- the Perceptive combination was really a merger of those two businesses. So, it's very difficult to go back and take a look at you know, what was ClinPhone and what was Perceptive separately. I don't think I can answer that question.

Douglas Tsao - Barclays Capital

Okay, and then just finally and I'll drop out. You know, Joe when you think about the eClinical suite that you have, you know, especially with a lot of supermarket leadership in the ClinPhone business, as well as the (IMPACT) product. Are there segments for this, you know, perhaps EDC in which you feel you need to strengthen your particular offering, and I'm not trying to suggesting that so that you can make an acquisition because this could obviously be done organically from our internal development you know, organization as well.

James Winschel

Yes, I mean in the suite that we have right now, meaning the breath of our products and services in Perceptive, we feel that we have relatively speaking what we need at the moment. So, it's -- to us right now it's less of a question of having "best in class" and more you know, that we have the leadership from an integration perspective. You know, this makes the purchase and the administration you know, and just also the look and feel for the customer and the user much simpler, and it also reduces cost when you look at the fast model that we are now increasingly employing. So, I'd say generally speaking, it's less the question of "strengthening," you know, a particular area. Having said that, there are also still verticals that we don't have and eventually may add.

Douglas Tsao - Barclays Capital

Okay, and what particular verticals would those be?

James Winschel

I don't know that I want to go into that in any sort of great detail right now, but you know, if you kind of look at the map you know, it's relatively easy to see what we don't have and other companies obviously have.

Douglas Tsao - Barclays Capital

Okay, great. Thank you very much.

Operator

And your next question comes from the line of Steve Unger with Lazard Capital.

Steve Unger - Lazard Capital

Hi, good morning. Just a quick question on the bookings, I couldn't tell from your comments whether you're seeing an up-tick from the small and midsize customers. Could you give us some color there?

Josef Von Rickenbach

Yes. Hi, Steve. It's interesting you know, the vast majority of wins in this quarter were from large pharmaceutical companies, and while we have watched you know, the unlocking of the capital markets and you know, and really a continuing flow of funds into the sector, we are not really seeing yet the full benefit of that in terms of RFPs, and you know, that's one of the things that I'm hoping you know, that we will benefit from later in this year, but certainly in the December quarter you know, the absolute you know, overwhelming majority was large pharma companies.

Steve Unger - Lazard Capital

Great, and then you also mentioned that your hit rate was strong. I was just curious if this is from -- is this new business within existing relationships or is this the impact of new relationships with large pharmaceutical companies?

Josef Von Rickenbach

Steve, it's a question -- it's an interesting question. We have worked obviously almost for everybody, and so you know, it would be almost unusual to say that we have really an entirely new relationship, but I would just say it's mostly repeat business and, you know, the majority of the work is from companies with whom we have worked for many years and in some cases decades and -- so, I guess I'll leave it at that.

Steve Unger - Lazard Capital

And then is there anything you're doing differently I guess to drive that hit rate or is that just a function of your lining up well in terms of your capabilities relative to what their pipeline is or how their pipeline is developing?

Josef Von Rickenbach

Well, I think it is a confluence of factors. I think our people have done a great job also this quarter. Obviously, we did not at all like our performance in the September quarter and so I also believe that our offering is lining up well with the demands and the needs of our client base, and I'd also say that our client base is you know, feeling more comfortable you know, with moving forward with a number of these projects. You know, a number of these projects have been in the works and has been talked about now for a while and you know, so you know, it looks like now things are moving you know, more normally than they have in you know, for a good part of '09.

Steve Unger - Lazard Capital

And, Jim I just wanted to ask you a quick question on the tax rate. I see that we were starting to come down a little bit with US profitability. Is there still further to go over time with this tax rate or is it somewhere in this 36% range. Is that where we -- where you sort of have planned on it going?

James Winschel

Steve, with the changes that we made to our transfer pricing model about a year and a half ago, we should continue to see a downward trend in our tax rate over time. We believe that we can get down into the low 30s over the next two or three years, but there should be steady movement in a downward direction I would say. You know, I did indicate in the guidance that we gave today that we thought we'd be at about 36% during the next two quarters, but actually if you extended that out to what my model looks like in terms of calendar year 2010, I have kept the 36% rate across that period.

Steve Unger - Lazard Capital

Now, it would be upside than further -- further reduction in the tax rate.

Josef Von Rickenbach

Beyond that -- below that rate correct.

Steve Unger - Lazard Capital

Yes, okay, Wonderful. Congratulations on the solid quarter. Thank you.

Josef Von Rickenbach

Thanks Steve.

Operator

And next question comes from the line of John Kreger with William Blair.

John Kreger - William Blair

Couple of questions about the environment. What are you guys seeing with pricing currently, is it stable or any improvement?

Josef Von Rickenbach

Hi John. I would say pricing this quarter was stable, which is to say not great, not better, not worse. It's a -- you know, I wasn’t much in that sense of a factor. Certainly we are determined to hold on prices at the current level. So, I mean it's not a lot of forgiveness anymore and so yes, hopefully from here on now we'll have a little more opportunity in the other direction.

John Kreger - William Blair

Great, thanks. And then another one, Joe, I don't know if you're getting this sort of visibility with what your clients are doing, but to the extent you're seeing clients that are looking to cut their R&D spending budgets, do you have a perspective on where those cuts are going? Do they tend to be more concentrated in earlier stages, later stages and similarly are they concentrated in their internally run programs or more in externally run and outsourced programs?

Josef Von Rickenbach

I think it would be too early at this moment to say anything about that, meaning we don't have the information where we could answer that in any sort of definitive way other than in my view, you know, a late stage program that is promising you know, we'll get funded. I'm sure of that you know, because it would be difficult to defend you know, a different approach. So, but I really can't -- really comment on the other patents to the extent there are any.

John Kreger - William Blair

Okay, great. And then a final question, probably for Jim. It seems pretty clear that your geographic is shifting to nine US locations. Is that going to matter in terms of the profitability of the firm, or put another way is Asia and Europe more profitable than the US?

James Winschel

Well, in fact, Asia and Europe are both more profitable than the US. So from that standpoint it will help us, but we believe that we will start to see growth in the US market as well and that will also help us.

John Kreger - William Blair

All right. So, if we see shifts in geography continue, is that a margin driver in your view or not really?

James Winschel

It's a complicated question, but you know, in general I think we would probably benefit from that kind of movement.

John Kreger - William Blair

Okay, great. Thanks.

Operator

And next question comes from the line of Eric Coldwell with Baird.

Eric Coldwell - Robert W. Baird

Thanks and good morning. I'm pretty much done with my questions, but I just wanted to ask a little bit about the PCMS unit. You've done a good job of expanding gross margin over the last three years or so, but revenue has basically been stuck in a flat line for the entire decade, and you know, quarterly revenue here is about the same as where it was seven, eight years ago plus. When do we get past the point of shedding these small marketing units and small, small divisions and actually could expect the division to start to move forward on the top line?

Josef Von Rickenbach

Yes, hi Eric -- you know, you're correct. The focus in PCMS has been profitability for a long time. As you know, we were, you know, below where we needed to be especially in the medical communications business. This has now started to change and we believe we have made the necessary changes in that unit and you know, we expect that you know, new services and new opportunities are going to help us drive more growth. I would also say, you know, this comment is and this dynamic was, as I said, driven by MedCom, not by PAREXEL consulting, which actually has generally grown throughout and also has had you know, very decent margins as well. So -- but hopefully going forward we are going to start to see this change in strategy.

James Winschel

Eric, as to Joe's comments there, I would expect that we would see sequential improvement in both revenue and profitability as we go through the rest of the fiscal year.

Eric Coldwell - Robert W. Baird

Now, correct me if I'm wrong, but I think a couple of years ago there was an announcement on one of these calls that you were looking to expand some of your services into Europe that historically you've been more concentrated in the US. Could you give us an update on how that's progressing and whether you have traction with that initiative?

Josef Von Rickenbach

This is -- the PCMS specifically?

Eric Coldwell - Robert W. Baird

Yes, on the medical communications side, I believe.

Josef Von Rickenbach

Well, I just know that PCMS overall numbers. So, generally actually Europe now is our largest geography and you know, a sort of our vanguard if you want is Asia. We are expanding our services there and also in Latin America. So, generally from a geographic diversification perspective, you know, it's happening -- has happened and, you know, hopefully as Jim said, you know, we are now going to start to see these efforts also you know, more readily reflected in the top line going forward.

Eric Coldwell - Robert W. Baird

Got it, final question is recently there was some FDA guidance out on ePRO, and we're curious if that has been a contributor to some increased demand if you are seeing that or if other regulatory changes such as increased focus on imaging is helping with your marketing or is this really just a shift of clients looking to you from -- to be their full service provider combining the applied technologies with the CRO activities?

Josef Von Rickenbach

It's difficult to parse [ph] out anyone action Eric like that, but I think the overall environment is helping us in the sense that let's take the FDA or other regulatory agencies, they now know that these tools and these capabilities exist, and so obviously they are more prone to ask for them, which then also drives you know, more demand.

Eric Coldwell - Robert W. Baird

Thanks very much.

Josef Von Rickenbach

You're welcome.

Operator

And your next question comes from the line of Robert Jones with Goldman Sachs.

Robert Jones - Goldman Sachs

Yes, thanks for the questions. It's that one for Joe and one for Jim. Joe, if we go back to the comments you made on the new business wins, I was little unclear, can you just give us your perspective on how much of the new business wins you think was attributable to the overall market picking up versus PAREXEL’s hit rate going up. That is maybe you have been taking business from other CROs that you might not have gotten in the past?

Josef Von Rickenbach

If you want to parse this out you know, really analytically and quantitatively, it must be difficult to do that, but as I pointed out we had, you know, a really very respectable hit rate in the quarter, significantly up from the last, actually couple of quarters, but also generally there is a better tone to our, you know, to the opportunity overall to the demand pattern, RFPs are you know, more stable. We have less cancellations of RFPs, which is to say a higher proportion of the RFPs that we get are actually awarded to somebody. And so it really is a combination of both.

Robert Jones - Goldman Sachs

Okay, and then just Jim on the calendar 2010 guidance, it looks like revenues being projected about 11% to 15% up year-over-year, can you walk through how much of that you are kind of attributing to organic growth or FX?

James Winschel

Yes, I would say that it's around 5% coming from FX with the remainder coming from organic growth. You also have to remember that we had substantially low revenue in the June 2009 quarter as a result of the accounting adjustment. So that is also part of the story.

Robert Jones - Goldman Sachs

That's right. That's helpful. Thanks.

Operator

And next question comes from the line of Sandy Draper with Raymond James.

Sandy Draper – Raymond James

Thank you very much. Pretty much all my questions have been asked and answered, but maybe just one way to sort of reframe, Joe your look on the market, last quarter's call you expected the business to be I think you said better but not hugely better than what we've seen and that it was a little bit later that you saw a stronger recovery, and I would certainly expect that this quarter was better than what you thought you would see talking last quarter. I'm just curious, you know, any color in terms of what change here -- was it the win rate was better, the environment was better. You know, what do you think changed that allowed you to come in with such a solid quarter?

Josef Von Rickenbach

Yes. So, it's actually interesting in the sense that we already started to feel better about our environment in the September quarter even though this was not reflected in our wins. And actually ironically the October, you know, the October month was not a great month. So that didn't help in terms of us being more bullish during that phone call. But the year ended very strongly. Some people have talked about a (inaudible) or sort of year-end effect. I don't believe that happened actually, and the reason why I'm saying that is because, especially in the CRS business, we have actually experienced a significant delay or elongation of decision-making cycles.

So, while a lot of decisions have been made, our portfolio actually looks pretty good, and a lot of the RFPs that we have written in the quarter have been carried over into the future periods. So, an interesting dynamic and I think the beginning of this already was in the fall.

Sandy Draper – Raymond James

Okay great. Thank you very much.

Josef Von Rickenbach

You're welcome.

Operator

And your next question comes from Eric Kelly [ph] with Works Capital [ph].

Eric Kelly - Works Capital

Hi, thanks for taking the call. Just a quick one, I don't know if you said this earlier, and I apologize if you did, but do you have an outlook for CapEx for the reminder of the year?

James Winschel

Yes, we expect CapEx at this point to be somewhere in the $70 million range for the full year.

Eric Kelly - Works Capital

Okay, thanks, and then just longer term, how you view the budget in CapEx, should it sort of grow along with the growth opportunities you see, or was anything upsized here in the past year or two?

James Winschel

Well, there has been some significant investment in various productivity and efficiency initiatives over the last year, and I would expect that as we go into fiscal year 2011, we're just in that budgeting process now that we are probably going to be somewhere in the $60 million to $65 million range in terms of CapEx.

Eric Kelly - Works Capital

Okay, great. Thanks.

Operator

And there is a follow up from the line of Todd Van Fleet with First Analysis.

Todd Van Fleet – First Analysis

Hi, just wanted to see if you could disclose the book-to-bill for Perceptive in the quarter?

James Winschel

Hi, Todd, as you know, we don't put out book-to-bills for specific segments, but I can just tell you that it was really strong, and has been now for several quarters, and we continue to have a strong pipeline, and actually frankly I'm anticipating another stellar quarter here in the march timeframe, and significantly higher than the company average.

Todd Van Fleet – First Analysis

Great. Thank you.

James Winschel

You are welcome.

Operator

And there is a follow-up from the line of David Windley with Jefferies & Co.

David Windley – Jefferies & Co.

I will sneak one more in there. Joe is there any change in the competitive set of companies that you are seeing in your significant opportunities as RFP flows are starting to improve again, are you seeing different competitors or perhaps fewer competitors at these takeoffs?

Josef Von Rickenbach

Yes, generally we tend to see the same cast of characters pretty much. What I would say is that in both directions into the larger and smaller directions, there was a little more intensity this time around than we might have seen in prior periods.

David Windley – Jefferies & Co.

Intensity meaning, more numbers, more competitors?

Josef Von Rickenbach

More competitiveness, more activity, more visibility.

David Windley – Jefferies & Co.

And I am just curious, what I'm kind of fishing for here is the thesis around pharma companies narrowing their vendor lists and trying to consolidate their work around a limited number of players, and obviously some of the strategic deals achieved that goal. I'm just wondering what some of the signs beyond that would be to confirm for us that there are actually following through on that intention.

Josef Von Rickenbach

Well, I think that is happening with these kinds of partnership deals, but like everything else in our business, this happens gradually. We have now been talking about these partnerships for quite a while, and once again for quite a while not much happened. Then eventually it starts to happen, and I would also say that that will be the case with the outsourcing penetration. I think it will continue to pick up, and I also believe that over time, you know there's going to be more activity in terms of the players with whom they work.

David Windley – Jefferies & Co.

Okay, great. Thank you.

Operator

And there are no further questions at this time.

Josef Von Rickenbach

Okay. Thank you very much for participating on our call, and I thank you for your interest in our company, and we look forward to updating you on our next call. Bye-bye.

Operator

Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.

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Source: PAREXEL International Corporation F2Q10 (Qtr End 12/31/09) Earnings Call Transcript
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