Phase Forward, Inc. Q4 2009 Earnings Call Transcript

Feb. 4.10 | About: Phase Forward (PFWD)

Phase Forward, Inc. (PFWD) Q4 2009 Earnings Call February 4, 2009 5:00 PM ET

Executives

Tim Dolan- Senior Managing Director of ICR, Inc.

Robert Weiler - Chief Executive Officer

Chris Menard - Chief Financial Officer

Analysts

Steven Crowley - Craig-Hallum Capital Group

Richard Close - Jefferies

John Kreger - William Blair

George Hill - Leerink Swann

Richard Davis - Needham & Company

Bret Jones - Brean, Murray

Nabil Elsheshai - Pacific Crest Securities

Donald Hooker - UBS

Charles Boorady - Citi

Raghavan Sarathy - Dougherty

Sean Wieland - Piper

Steve Halper - Thomas Weisel Partners

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter 2009 Phase Forward, Incorporated earnings conference call. My name is Keisha and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

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

Tim Dolan

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

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

Robert Weiler

Thanks, Tim, and thank all of you for joining us on the call to review our fourth quarter results, which were a strong finish to a successful year for Phase Forward. In addition to delivering strong fourth quarter revenue growth and margin expansion that was consistent with our guidance, we also won a number of highly competitive EDC evaluations, experienced continued rapid growth with the IRT offerings, signed the first multi-million dollar agreement related to our clinical development center offering from Waban, and made progress bringing our late-stage ePRO solutions to market.

During 2009, we took major steps to evolve Phase Forward from a leading EDC vendor to the first end-to-end provider of an integrated clinical research suite, expanding EDC, IRT, data and statistical analysis platforms, safety and ePRO/late stage solutions. We were fortunate to have a strong balance sheet to execute our strategy when we did, as we are already starting to realize benefits, and as I will discuss later, we see our target market increasingly shifting in our direction.

Taking a look at the summary results of our fourth quarter, total non-GAAP revenue came in at 59.4 million, a sequential increase of 10%, year-over-year growth of 21% and toward the high end of our guidance. From a profitability perspective, non-GAAP operating income of 8.7 million was at the high end of our guidance, with margin expansion from last quarter taking us to a 14.7% non-GAAP operating margin level exiting 2009. This led to non-GAAP EPS of $0.13.

The highlight of the fourth quarter was the breadth of our success across our integrated clinical research suite. We hosted our 8th Annual International User Conference in Boston, Massachusetts shortly after announcing our third quarter results, and later in the quarter hosted our Annual Users Conference in Japan. We had over 100 companies in attendance at these combined events, including a near doubling in attendance at Japan’s User Conference as we officially launched our end-to-end ICRS offering and strategy.

As we look ahead to April, we will be hosting our European User Conference in Budapest. Customer response and significant expansion in our value proposition has been extremely favorable, and many of the largest life science companies in the world have provided feedback that our product strategy is aligned with a long-term vision.

Our market research continues to reinforce our belief that customers prefer and will ultimately adopt an integrated clinical research suite on an incremental basis. We are already seeing this happen within our customer base. In addition, it is always helpful to have a broad suite of best-of-breed solutions so that we can compete successfully in the broadest array of deal opportunities.

As an example, during the fourth quarter, our Phase Forward IRT offering enjoyed continued strong orders on a standalone basis. And we again saw customers interested in placing combined InForm/IRT orders. Last quarter we commented on OncoGenex and LungRX doing so, and during the fourth quarter we saw customers such as Dow Pharmaceuticals move ahead with similar combination orders.

In addition, we continue to see many informed customers on either commitment or enterprise contracts moving forward with or evaluating Phase Forward’s IRT for ASP-based trials. If we look at Phase Forward’s IRT related trial sales in the second half of 2009, approximately 75% were sold either in conjunction with our EDC offering or on a standalone basis to one of our existing EDC customers.

During the fourth quarter, our IRT business grew 137% on a year-over-year basis , and it was the fastest growing segment of our business. We expect strong momentum to continue into 2010 based on our pipeline of opportunities and a recent Phase Forward IRT 5.0 release, which provides seamless data and workflow integration between our Phase Forward IRT and EDC solutions, including a consistent user interface in addition to major functional enhancements.

We are also encouraged by the progress of other components of our end-to-end ICRS offering, such as our clinical development center solution based on the technology acquired from Waban. During the fourth quarter, we signed our first multi-million dollar order for this solution with Roche and we closed follow-on contracts with customers like Genzyme and Lundbeck.

We are still early in the process of ramping sales efforts related to the ePRO in late stage solutions acquired from Maaguzi. However, the strength of their technology and interest levels from customers is evidenced by the growth in the number of opportunities that we are pursuing. During the fourth quarter, one of our largest EDC customers placed an initial order for Outcome Logix. And PRA, the first CRO to sign a preferred vendor agreement relative to Outcome Logix, also moved ahead with trial orders. We expect the early momentum we are currently seeing relative to Outcome Logix to be realized more fully beginning in late 2010.

In the EDC area, we continue to reinforce our market share leadership position. During the fourth quarter, a top 25 pharmaceutical company expanded their relationship with Phase Forward by signing a new multi-year, multi-million dollar ASP commitment for our InForm GTM Solution.

Other customers reaffirming their commitment to Phase Forward during the quarter included Abbott Vascular, as well as Forest Research and Eli Lilly, both of whom renewed multi-year, multi-million dollar agreements related to InForm GTM.

We also won a number of highly competitive EDC engagements during the fourth quarter. For example, a top 30 biopharmaceutical company signed on for several ASP trials and selected Phase Forward’s InForm GTM after evaluating several EDC suppliers that were in use at multiple departments within the overall company.

Our unique ability to manage the largest, most complex and global trials also played an important role in winning large ASP trials with companies such as Trivascular2, Inc., Regeneron Pharmaceuticals and BioMarin.

Even in cases where Phase Forward is not an incumbent vendor, we continue to have success competing for and winning evaluations for trials with these characteristics. With release of InForm GTM in 2009, delivering what we believe is the industry’s easiest to use and most scalable user interface, we believe we increased our competitive advantages in customer evaluations.

Since we first entered the EDC market, Phase Forward’s EDC solutions have been used by customers to manage over 3,600 trials. In addition we ended 2009 with approximately 1,090 active trials under management at Phase Forward’s data center, which represents an increase of 18% over last year. Keep in mind, this figure does not include trials based on our EDC solutions that are hosted by our customers at other data centers. It is also worth noting that approximately 70% of our studies in production have been successfully designed and built by our customers themselves, which is evidence of ease-of-use which the customers can build knowledge in-house and leverage our study designs and set up solutions.

Finally, in the area of safety analysis, we continue to see customers, such as Boehringer Ingelheim, Perdue Pharma, UCB Pharma, renewing their commitment to a range of safety solutions, including Empirica Signal, WebSDM and Empirica Trace. We also continue to sign new customers, such as Ferring Pharmaceuticals, who signed on for a seven-figure license related to our Empirica Trace solution.

In addition, our businesses with CROs continue to be healthy. We’ve spent considerable time, effort and resources in building close relationships with service providers. The success of our efforts can be seen in the fact that during the fourth quarter our CRO related non-GAAP revenue of 13.6 million grew 30% on a year-over-year basis. Moreover, for the full year 2009 our CRO related non-GAAP revenue grew 43% on a year-over-year basis and represented 22% of our total revenue.

Across the breadth of our integrated clinical research suite, we added approximately 50 customers that were new to Phase Forward during 2009. And as I mentioned at the outset, Phase Forward was fortunate to have the balance sheet strength to execute the M&A strategy when we did. Not only were we able to attract best of breed technology innovators who shared our vision, such as Clarix, Waban and Maaguzi, but we were able to get a head start integrating the industry’s first true end-to-end ICRS offering in advance of the next stage of a market opportunity.

Equally important, we believe that we have more than doubled our addressable market opportunity with the expansion of our product offerings. We do not believe the macro environment is much different today than it has been in the recent quarters, and we do not expect major changes in the quarters ahead. That said, we do believe our market’s evolution has accelerated. As we begin 2010, we expect Phase Forward to deliver solid financial results, characterized by low to mid-teen revenue growth and a continuation of the recent trend of margin expansion towards our longer-term operating model.

From a detail perspective, we expect the shift in the underlying drivers of our growth to accelerate in 2010 as they are for the entire ICRS market. For those of you who have not just seen it, IDC published a health industry insight report yesterday in which they stated that the EDC segment of the market has seen a more rapid adoption than previously predicted. For example, they estimate that adoption rates in the four phase III sweet spot for EDC exited 2009 at over 80%. They also estimated growth for the EDC segment of the market in the seven to 8% range for the next couple of years.

The growing maturity of EDC also means that early adopters have or are completing the transition away from first generation systems that streamlined paper-based clinical data entry, such as Phase Forward’s Clintrial solution. With many of the largest companies in the pharmaceutical industry further down the path from an EDC adoption perspective, it will be increasingly important for vendors to be able to deliver a true end-to-end ICRS offering. This view is also reinforced by the just mentioned report from IDC, in which they stated that they expect bundled eClinical solution offerings will provide the next stage of industry growth.

During 2010 and even more so in future years, we expect areas complementary to EDC to be the fastest growing segments of the overall ICRS market. As an example, our phase forward IRT offering was by far the fastest growing segment of our business during 2009. As we look to 2010, we expect our EDC growth to be in the high single digits to 10% range, which is consistent with or better than the overall market and we expect continued rapid growth of our Phase Forward IRT and clinical development center offerings, albeit on smaller basis.

We believe it will be these areas as well as the ability to deliver an end-to-end ICRS offering that customers will increasingly evaluate to determine which vendor they want as their strategic long-term partner. With market share lead in EDC and status as the only ICRS vendor at this time, we believe that Phase Forward is well positioned for the long term.

With that, let me turn the call over to Chris to review our financials in more details. Chris?

Chris Menard

Thanks, Bob. Let me provide some further detail on the fourth quarter and full year 2009 financial statements, and then I will close with our first quarter and full year 2010 guidance. We’ll review our numbers in both a GAAP and non-GAAP basis. Our reconciliation between GAAP and non-GAAP results is contained in our earnings release, which is posted on our website at phaseforward.com.

Our non-GAAP result exclude non-cash expenses associated with FAS 123R, the amortization of intangibles associated with acquisitions, the write-down of deferred revenue, and backlog associated with certain acquisitions, restructuring and impairment expenses.

Beginning with the P&L; GAAP revenues for the fourth quarter of 2009 were 58.8 million, an increase of 22% year-over-year. Non-GAAP revenues were 59.4 million excluding the $597,000 purchase accounting adjustment to the fair value of the deferred revenues and backlog of Clarix and Waban. Within total revenue, EDC-related license, application hosting and other related revenues were 41.6 million, representing 70% of total non-GAAP revenue and increasing 18% on a year-over-year basis.

Non-GAAP revenue related to our IRT solutions came in at 5.4 million, which is up over 130% from 2.3 million in the year-ago period, primarily as a result of the strong growth related to our solution based on Clarix’s technology, in addition to contributions related to Covance’s IRT offering, which we acquired in August.

Non-GAAP gross margin was 57.8% in the fourth quarter of 2009 compared to 59.6% in the same period a year ago and 57.7% in Q3 of 2009. Our non-GAAP services margin was 43.3% in the fourth quarter compared to 44.6% a year ago and 41.9% last quarter. The year-over-year decline in both the overall and services gross margin is a result of a dilutive impact from the recent acquisitions as discussed last quarter. We continue to expect both gross and service margins to expand back to pre-acquisition levels of the first half of 2009 by the fourth quarter of 2010.

From an operating expense perspective, total non-GAAP expenses in Q4 were 25.6 million, leading to non-GAAP income from operations for the fourth quarter of 8.7 million, representing a non-GAAP operating margin of 14.7%.

The non-GAAP tax rate for the period was 33.3%, which led to a non-GAAP net income of 5.9 million, or $0.13 diluted earnings per share, which was at the high end of our guidance of 12 to $0.13. Looking at our fourth quarter result on a GAAP basis, GAAP net loss was $68,000 or breakeven on an EPS basis compared to $0.06 diluted earnings per share in the same quarter of 2008.

Our fourth quarter 2009 GAAP results included a $2.3 million impairment charge related to writing down the value of the Clarix trade name and an additional $669,000 in amortization expense related to the acquisitions closed during 2009.

The charge relating to the Clarix trade name resulted from the branding of our IRT offering to Phase Forward IRT 5.0 at the time we launched our most recent major version. This change is in no way a reflection of the success we’re having with the growth of our IRT business, which as Bob and I mentioned has been quite robust.

The effective tax rate for the year was 40.1%, which required booking to a rate of 109.2% in the fourth quarter. The increase in the annual effective tax rate is primarily due to an adjustment to the deferred tax assets for our issues, which were originally recorded at a higher stock price compared to the stock price at the vesting date.

From a full year perspective, we delivered non-GAAP revenue of 216.3 million, representing an increase of 26% on a year-over-year basis. Our full year non-GAAP operating income was 33.6 million. This represented an increase of 21% on a year-over-year basis and a non-GAAP operating margin of 15.5%. Our full year non-GAAP EPS came in at $0.52 with GAAP EPS of $0.18.

Moving to the balance sheet. Total cash, cash equivalents and investments were 135.5 million at the end of the fourth quarter, a decrease of 11.7 million from 147.2 million at the end of last quarter. Positive cash from operations of 15.1 million were more than offset by capital expenditures of 12.9 million for the fourth quarter, which related to the build-out of our new office in Pennsylvania, and additional storage and software solutions for our hosting facility, as well as $14 million used to repurchase shares as part of the $40 million share repurchase program that our Board of Directors approved during the quarter.

At the end of the quarter, our accounts receivable balance was $56 million, which was down from 60.4 million at the end of the prior quarter. At the same time, our non-GAAP revenue increased by 10% on a sequential basis. This resulted in a 16-day sequential reduction in our DSOs to the 87-day level at the end of the quarter, and we expect further reduction in DSOs during the first half of 2010, bringing DSOs back within our normal range of 70 to 80 days.

Deferred revenue was 98.4 million at the end of the quarter, a decrease of 5.3 million compared to the end of last quarter, but up 11% compared to the end of the fourth quarter of 2008.

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

Starting with our thoughts on the full year 2010. Internally we have used similar techniques to estimate 2010 revenues as in prior years, such as forecasting the conversion of our backlog based on discussions with customers regarding the timing of planned trial starts plus a forecast of anticipated new bookings, based on reviews with customers as well as expectations for potential RFPs and other future business.

As Bob discussed, we currently expect non-GAAP revenue growth to be in the low- to mid-teens for 2010. This includes rapid growth in our Phase Forward IRT in clinical development center offerings and growth in the high-single-digit to 10% range related to our EDC offerings, which we believe is consistent with the growth in the market based on the latest estimates we reviewed from IDC.

We also expect to see a year-over-year decline of approximately four to $6 million related to our Clintrial solution, which is related to a legacy solution that predated the availability of EDC solutions, such as our InForm offering. Several customers still running Clintrial have substantially completed their move to electronic data capture, and as such they have a lesser need for renewing their Clintrial licenses.

With that as background, we expect total non-GAAP revenue to be between 240 and 248 million, an increase of between 11 and 15%. We expect just over 80% of our 2010 revenue to come from existing backlog entering the year. From a profitability perspective, we are forecasting non-GAAP gross margins to be between 58 and 59%, services margins to be between 44 and 45% and operating expenses to be between 41 and 42% of revenues.

Within operating expenses, we expect sales and marketing to be approximately 14% of our revenues, R&D expense of approximately 15 to 16%, which is consistent with 2009, and G&A of approximately 12 to 12.5%, down from 14.1% in 2009. As a result, we expect non-GAAP operating income to be between 36.5 and 40.5 million, which represents a full year operating margin of between 15.2 and 16.3%.

By Q4 we expect to return to pre-acquisition operating margins achieved in the first half of 2009. We’re currently forecasting interest income of between one and 1.5 million for the full year 2010. During 2010 we will use our statutory tax rate of 38% for non-GAAP reporting, while our non-GAAP cash tax rate is expected to be between six and 7%. Finally, on a non-GAAP basis we expect full year 2010 EPS to be between 54 and $0.60.

On a GAAP basis, 2010 revenues including the write-down of deferred revenues and backlog from our acquisitions are expected to be between 239 and 247 million. Our anticipated GAAP book tax rate is expected to be approximately 37 to 38% with the GAAP cash tax rate expected to be approximately 11 to 13%.

We expect full year GAAP EPS to be between 26 and $0.32, which includes stock-based compensation expense of approximately 13.5 million and amortization expense of approximately 5.6 million. We expect to spend approximately $11 million in capital expenditures for the full year 2010.

Turning to our expectations for the first quarter, we expect non-GAAP revenues of between 56 and 57.5 million, a year-over-year increase of between 13 and 16%. We anticipate gross margins will be between 55 and 56% and services margins to be between 40 and 40.5%.

These estimates assume a projected decline in consulting revenue of approximately $1.2 million due to the timing of certain engagements, which completed in the fourth quarter, coupled with incremental investments and services as we prepare for our strong anticipated demand really to our Phase Forward IRT and CDC solutions.

We expect non-GAAP operating income to be between 7.3 and 8.1 million, or a non-GAAP operating margin of between 13 and 14% for the quarter. Non-GAAP EPS is expected to be between 11 and $0.12 for the first quarter. We expect GAAP revenues to be between 55.7 and 57.2 million for the first quarter, with GAAP EPS expected to be between three and $0.04, which includes stock-based compensation expense of approximately 3.6 million and amortization expense of approximately 1.5 million.

From a summary perspective, we are pleased with the company’s performance in the fourth quarter and the full year 2009. As we enter 2010 we feel good about our strategy and the long-term opportunity associated with our end-to- end ICRS offering and we believe our differentiated value proposition will increasingly distance Phase Forward from our traditional competitors.

With that, we will begin the Q&A portion of the call. Operator, we will now take questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Steven Crowley with Craig-Hallum Capital Group. Please proceed.

Steven Crowley - Craig-Hallum Capital Group

A couple of questions here. You mentioned that you added 50 new customers in 2010. Can you give us a little more color in context meaning what do you think that number was ballpark in 2009? Where did those customers tend to come in the door? Was it with IRT, some of the other new products or predominantly EDC?

Chris Menard

Hi, Steve. This is Chris. We probably were in the mid-to-high 20s for new customers the year before, and the new customers in 2009 were pretty much scattered across a lot of different products, probably mostly in terms of EDC and IRT.

Steven Crowley - Craig-Hallum Capital Group

Okay. My follow-up question relates to what you were talking about in terms of a slowdown in the growth rate of the EDC business. I know the IDC report just came out, but your business must have been or must be telegraphing the same phenomenon for sure. When did that become obvious? How has that become obvious in customers’ planning? Is it raw number of trials? Is it start dates? Is it just the fact that there is not as much growth I guess in existing customers and there aren’t as many new guys to go get it? Maybe you could put a little more meat on the bones of what’s going on in the EDC marketplace.

Robert Weiler

Sure, Steve. This is Bob. Essentially, since 2004 we went publicly we’ve been showing IDC charts and actually been mapping closely to EDC hitting an adoption rate that would be moving from 50, 60, 70 to 80 and so forth. What we started seeing in probably mid-2009, particularly with CROs and with customers, that many customers were already achieving 100% of all new trial starts hitting EDC. And that is why when the IDC health report came out yesterday, we were not surprised to see them talk about Phase III trials being 80% at the end of 2009. We thought it might have been a little bit lower, but their research showed that it was 80%. But we’d been feeling it in the market as we saw that a lot of our customers were essentially at the end of their adoption curve and we were relying more and more on new trials that were growing within that customer base

The second thing that’s happened in addition to the adoption is that everyone has followed what’s going on in the industry. You not only have the merger and acquisitions of six companies over the last 15 months or so. You’ve just recently probably saw that GSK, Pfizer, Sanofi-Aventis, AstraZeneca to name a few have announced major restructurings in R&D and reduction of R&D costs. While many of them are shifting focus and we expect these trials to come back in the future, it is clearly I think caused a pause in some of the portfolios. I think that is also illustrated when you listen to the kind of positive words from CROs. They’re seeing a kind of resurgence. They’re seeing their pipelines get bigger. They’re seeing their backlogs get bigger. But those are for future and we forecast what we see.

So rather than put in anything for turnarounds, upsides, we forecast what we see. We see that the market has reached an adoption curve. That said, we are very glad that we implemented our strategy because now those same customers that are fully adopted are the very first ones that are moving toward an ICRS strategy. They’re moving on to the next integration issue, which is now the suite and it’s those same customers that picked up many of our products.

Also I made another comment in my comments that 75% of our IRT sales were into our EDC customers or in combination of EDC and IRT. One of note or color we can provide that that we’re pleased with is that was over many, many new customers. So it wasn’t that we had growth because we had one or two customers or a high customer concentration that all of a sudden bought a whole lot of IRT. What it was, was many of these customers doing their first, second or third IRT trials and actually just beginning the process of adopting that product and adopting the ICRS strategy.

Steven Crowley - Craig-Hallum Capital Group

Thanks for taking my questions. One clarification, on the market share front in EDC or the competitive front, it doesn’t seem like you’re talking about anything having shifted against you there. Thanks again for taking my questions.

Robert Weiler

Yes. Thank you for bringing that up. I would add that from a day-to-day competitive cycle standpoint, we haven’t seen a shift in really any material direction from historic competitive position.

Operator

Your next question comes from the line of Richard Close with Jefferies. Please proceed.

Richard Close - Jefferies

Yes, thank you. Congratulations on a very solid year. Just maybe, Chris, if you could touch on the EDC growth for the fourth quarter. I know based on your Q, you were at about 18% EDC growth in the third quarter and just was curious where that ended up in 4Q.

Chris Menard

Yeah, sure. For the fourth quarter it’s 18% I guess year-over-year.

Richard Close - Jefferies

Okay. And then, so when we think about the high single digits, maybe 10% type of growth in EDC for the year, are we talking that it’s going to ratchet down from this 18% and then go into the mid single digits by the end of the year to sort of get us at the year average of call it 10% growth year-over-year? Or are we thinking about the 18% immediately goes to 10%? I mean, it falls off quite a bit. Just can you walk us through that?

Chris Menard

Yeah, it’s going to be the latter. I think it’s going to drop into the single digits to about 10% starting in the first quarter. And one of the big reasons for that, in my prepared remarks I talked about some consulting work that we finished off in the fourth quarter that wasn’t going to repeat itself in the first quarter and a lot of those consulting contracts were related to EDC.

Richard Close - Jefferies

Okay. All right. I mean, obviously you guys are doing extremely well on the IRT side of it. I think you said 75% of the business was in conjunction with your existing clients. How should we think about that 130% type of growth number throughout the remainder of the year? Did you specifically say what kind of growth on the IRT side of the equation?

Chris Menard

Yeah, we talked about rapid growth, but to be a little more clear I think the IRT business could double next year.

Richard Close - Jefferies

Okay. So still pretty stout over the 2009 achievements. And then I guess when we think about your cash, you’ve done a share repurchase, and you have the suite of products. Are there any reasons why you need to go out and buy additional products or add to the suite, Bob? Maybe if you could talk about that. Or do you feel you’re completely where you need to be in order to take the company to the next level here over the next couple of years?

Robert Weiler

Hi, Richard. Yeah, I think we are where we need to be. First and foremost, we have our products, and I would characterize 2010 a year of consolidation and absorption of our companies and not so much on the integration because much of that is already done, but really on evangelizing the message, bringing the message to our customers, working with our customers. We have many, many of our customers now, much more than even 90 days ago that we’re going in for not three hour, four hour, one day sessions, but two and three-day sales cycle sessions, because our customers are asking to see all of our products working together and providing an integrated solution. So we’re extremely encouraged by that. And when we do those presentations, particularly with our Waban and SCE product or our clinical design center product, we pretty much are covering all the gaps.

That said, never say never about any acquisitions, but I will say pretty strongly no dilutive acquisitions. And we probably wouldn’t ramp anything up to look for accretive acquisitions that would be in ancillary markets or opportunities until late 2010.

Operator

Your next question comes from the line of John Kreger with William Blair. Please proceed.

John Kreger - William Blair

Hi. Thanks very much. Just would you mind expanding a bit on the new customer add number that you gave? I think you said 50 looking back over the last year. Did that sort of expand the client spectrum? Did you see that concentrated in any particular type of client? And then along with that, was that a net or a gross number? And how are the cancellations in the quarter?

Chris Menard

Yeah, this is Chris. I will start with the second half of the question. Normal cancellation rates during the quarter we had a handful and they generated less than $400,000 worth of revenue in the quarter. And in terms of the new customers, we sell predominantly to the pharmaceutical companies and that’s where most of the new customers landed. It were again both mostly I would say EDC and IRT related. And the way we defined new customers, we did pick up a couple through the acquisitions we did throughout the year, but otherwise there were customers who did their first booking with Phase Forward during 2009. And we’ve counted our number of customers based on customers who either generated revenue in the fourth quarter or did a booking in the fourth quarter. So it’s a snapshot in time. Think of it as a balance sheet.

John Kreger - William Blair

Okay, great. Thanks. And then just another follow-up question on your view of the EDC market and where it stands now. If you kind of look across your client base, what’s your perspective on what their penetration rate is at this point?

Robert Weiler

I think from a market leadership position where we have been for the last eight years or so, I think our customer base represents the high end of adoption. One of the things that we always did presentation on to our customers was that we could point to our customers going from zero to 100% of adoption very, very quickly, and that actually has been one of our competitive advantages over the years. So I think we may be leading the market a little bit on our adoption rate may be being higher than our competitors because we’ve gotten our customers up to speed very, very fast over the last couple of years.

That said, I think that clearly we felt this market, predicting the market, and when the IDC came out yesterday pretty much saying what we felt, we felt that with everything going on that we’re probably right on with the adoption rate for Phase IIIs being at about 80%, maybe a little less if you include all the overall phases.

John Kreger - William Blair

And when you say 80%, are you thinking 80% of new starts or total trials ongoing?

Robert Weiler

New starts. Actually they’re reporting what we believe is that – and I’m only talking about Phase IIIs here because that is the sweet spot, that ending 2009, roughly and probably in the last quarter, that 80% of all new trial starts were using EDC.

John Kreger - William Blair

Got it, okay. And then a final question, Bob. As you talk to your clients that are going through or have gone through this restructuring process, are you seeing any pattern emerge? How are they going about sort of rethinking the way they’re trying to bring new drugs to market and how does this sort of filter down to you? What are the new services or capabilities that they are asking for?

Robert Weiler

Well, I think the services and capabilities, which is kind of interesting and actually we’ve seen this in a couple of customer situation where they are in fact looking more to licensing deals. I think a number of the companies have realized that to build it here and invent everything here hasn’t worked. I think we spent $480 billion over the last 10 years in R&D and I think there’s been approximately 85 drugs approved during that timeframe, so clearly their models haven’t been working. And because of that, you’re seeing more and more of in-licensing, you’re seeing cooperation between the pharmaceutical companies, you’re seeing restructures from certain therapies to other therapies. You’ve seen Pfizer and GSK actually switch focus from different therapies and you’re seeing biotech companies working more and more with them, and the trials now are being done at biotech companies. And as example is we’ve had a number of biotech come to us who have come to us because the large pharma has said go use Phase Forward, that we might not have gotten otherwise.

The temporary, I guess, downside of that is that within the companies we’re talking to, portfolio management has stalled. We have seen an uptick in trials in general where they’re going, but we aren’t seeing this real bolus of trials kicking in yet and that’s what the CROs are waiting for, because the number of trials that will be there are sitting in backlog, but they’ve been yet to be released until these companies re-shift, get their portfolios squared away and get on a clear direction. And I think we’re going to face that for the next couple of quarters. I wouldn’t be surprised if by the end of 2010, when this all settles out, the companies have restructured, the merged companies have figured out what they are doing that they start releasing the trials in their direction and we’ll see an uptick.

John Kreger - William Blair

Great. Thanks very much.

Operator

Your next question comes from the line of George Hill with Leerink Swann. Please proceed.

George Hill - Leerink Swann

Hey, guys. Good afternoon. Thanks for taking the call. Chris, maybe to start, you had mentioned briefly the split between the pharma-based and the CRO-based revenue. Could you give us an update on what the breakdown is and what portion of the company’s revenue comes from big pharma and what portion of the company’s revenue comes from what we’d just call other?

Chris Menard

Yes, I would estimate that approximately 60% of our revenues come from pharma.

George Hill - Leerink Swann

Okay.

Chris Menard

We’re very small, as you know, in biotech. We do have some medical [device] in government.

George Hill - Leerink Swann

Okay. And couple of other market subsegments. What did you say the government exposure was?

Chris Menard

It’s a small percentage. I would say it’s less than 10%.

George Hill - Leerink Swann

Okay. So then I guess with the proposed clampdown on discretionary spending by the government, which could flow through the NIH, you guys don’t see much risk for exposure there to the top line?

Chris Menard

No, and most of the work we do with the government goes through our safety group.

George Hill - Leerink Swann

Okay.

Chris Menard

And they’re more on the small consulting arrangements.

George Hill - Leerink Swann

Okay. And maybe, Bob, with respect to the government’s ePro, the recent PRO guidance, do you guys see that as an opportunity, a risk, a threat, given how you’re positioned with your product?

Robert Weiler

Yes, we do look at that as an opportunity, and even in the new budget, I believe there is about another $100 million that the FDA has put in to focus on safety and post-market evaluation. There is clearly a risk evaluation model that the pharmaceutical companies are adopting, that the FDA is pushing for, and it clearly plays into the Phase IV space. In fact, if you look at other studies, they show the Phase IV opportunity is probably going to be the fastest growing segment of the EDC market and we believe we are very, very well positioned there now with Maaguzi. And the fact that, as you heard my script, one of our major large pharmaceutical companies took their first Outcome Logix contract with us is indicative of the type of things that we think we can do in the market. So yes we think it is a very good opportunity for us. But like anything with pharma and the FDA, it doesn’t happen in the first quarter; it’s going to take probably three or four quarters. That’s why our comments were in the latter part of 2010.

George Hill - Leerink Swann

Yeah. And you brought up Maaguzi and you’ve also brought up the part about your customer base probably being the furthest along to the right with technology adoption. As we think about the integrated suite with Waban, Clarix and Maaguzi offerings and you look into your customer base, in what portion of your clients do you think that this is a greenfield opportunity for the additional product? And in what portion of the clients do you need to displace somebody else’s technology or a homegrown piece of technology, recognizing that we both know there is a fragmented space from a technology perspective, and there are lot of one-off spenders in homegrown stuff that’s floating through a lot of the customer base?

Robert Weiler

Well, that’s kind of an all encompassing question, George, but let me just take the Waban part of it. The Waban area is something that’s new and very exciting. There are about 40 companies in large pharma that already have a product from either Oracle or from SaaS with their SBD product and that’s about where I would consider the existing market, where people are fairly entrenched. And to remove any of those from those strategies and everything, probably would be difficult. And actually probably not time well served by ourselves, because trying to replace someone as we and our competitors all know is a much longer, more difficult sales cycle and generally with not fruitful returns.

So if you take those 40 companies out – I’m not saying the top 40, many of the larger ones like we sold Roche didn’t have it and was a greenfield. Many of those companies are just beginning their evaluation on what they’re going to do to collect all of this mountainous data that they’ve been collecting over the last number of years and how to manage it. So we believe essentially the whole market is a greenfield accepting the Oracle SaaS customers, which we think number about 40 that needs a very, very vast market.

That said we have more of an out of the box solution, which is really geared towards both large companies like Roche, but very, very small biotech companies where they can buy one or two or three seats to begin the process. So I think we scale in certain cases from a very, very small to the very, very large. So we think the opportunity is immense.

Operator

(Operator Instructions). Your next question comes from the line of Richard Davis with Needham & Company. Please proceed.

Richard Davis - Needham & Company

Maybe you can help me out with the math on 80% penetrated comment. So in the June Analyst Day I think you said you had there was 4,200 active trials that were relevant to EDC, and I think you guys have like 1,090 active trials. Now that may not be every single trial you have, but by my math 1,100 divided into 4,200 is something in the neighborhood of 26%. And if it’s 80% penetrated, who are all these other people doing the trials?

Robert Weiler

Well, first off you do have the competitors, clearly. A number of years ago there were almost 50 EDC vendors that were doing onesie and twosie and three trials. In addition, you have CROs that are doing trials that are sometimes used in their own actually non-big EDC environments. They clear a lot of the trials. And we said there were 4,200 that were EDC eligible, not being done in EDC and EDC eligible means that they were interventional studies and what we felt were targets of the market that people could use it. So if you take the math down of the 4,200, you might be able to take anywhere between 700 and 1,000 out of EDC eligible that are still not using EDC. So that’s where the math and as we go through the math and try to reconcile with IDC and reconcile with .gov, and then you look at trials that are – let’s take Pfizer for example. A number of years ago [Pfizer and IDC] signed a large, large deal that are unlimited trials forever. So you have to take companies like that that have unlimited trials that are using EDC and take that right out of the market, because they’ve just been using them year-over-year. So you get 26% to 35%. You can probably get it up to the 35% or the 33% by taking out the trials that haven’t been started.

Richard Davis - Needham & Company

Would you view the firms that are doing onesie, twosies, as addressable markets that from which you could take market share or are those locked in? Because it would seem to me with your recent rewrite, you have a pretty good product. Gosh, if I was a salesman I think I would want to kind of try to knock those guys out. Am I missing something there or what’s up with that?

Robert Weiler

Nom you are right, Richard. I think if we look at the two players, essentially in the EDC market, the two of us, Medidata and ourselves, the market has consolidated around the two of us. The smaller players, which I don’t need to name, have really, really been giving up the trials to ourselves. So much of our growth and much of Medidata’s growth has been coming from the smaller companies as these trials run out are making the selections to move forward. I can think of 10 companies in our pipeline right now that are from smaller companies that were using smaller players that now have to move. So you’re right. We certainly are going after that.

Richard Davis - Needham & Company

Got it. Okay. Thanks.

Operator

Your next question comes from the line of Bret Jones with Brean, Murray. Please proceed.

Bret Jones - Brean, Murray

Thank you for taking the question. My question really gets around again on the market penetration. And when you talk about your growth or your penetration of customers with EDC has been higher than the market on average, it would seem that your above market growth is tied to the penetration of your customer base. And I guess, the question is really will you be able to achieve or maintain that above market growth. I know you’re projecting 10% versus the market of seven without taking significant share and I guess that leads to where is the share going to come from and is it enough to just feed off those small vendors out there.

Robert Weiler

Well, no. First and foremost, it’s just not getting new customers. Remember, we have a subscription model that we get renewals of existing customers. We are planning and we are hoping, and if you look at the trial data, there will be more trials coming into the market in general. There’re going to be more trials coming into the market. So even your existing customer base, as they do more trials going forward, can give you a large portion of that growth. So it’s not just having to go after competitive, it’s not having to go after small customers. The market growth which everyone talks about is in that six, seven, 8% range as well. So if you’re the market leader and your customers are growing at that rate, we don’t have to do anything what I would consider outrageous or major market share shifts to be able to obtain the growth rates we’re projecting and foreseeing.

On the other issue, and sorry to barge in on your time here a little bit, but I was working the math here with Richard’s question earlier. Remember, the topic that we’re talking about, EDC and the trials you’re talking about, 80% was the Phase III only segment. Other sectors have a lower adoption rate. Not much, but a little bit lower adoption rate and you’ll have to get the report to figure out what that is, what IDC view is. So I believe that the market growth is going to come from the trials that are already in the pipeline and should move forward and then the competitive landscape pretty much stays the same. The smaller players and those that haven’t made decisions, the big players will be divided in the historic ratios that we experienced over the last number of years.

Bret Jones - Brean, Murray

Okay. So the market growth really being tied to your comments earlier about it starting that portfolio management has sort of stalled out the release of trials and you think the new trials will come on over the next couple of quarters. So over the let’s call it the first half of the year, you are not expecting much in terms of market growth, but it would pick up in the back half. Is that fair assumption?

Robert Weiler

Yes. Yes, exactly.

Bret Jones - Brean, Murray

Okay, perfect. Just in terms of some of your success, you talked about IRT. I was wondering if you could talk about Waban and what kind of contribution that had in the quarter. And I just want to make sure I understand the Waban contribution is a licensed deal that’s spread out over the multi-year. It’s the same way you do a license deal with EDC, is that correct?

Chris Menard

Yeah. So the term-based license arrangements are taken ratably over the license and maintenance period. It’s actually a very small contribution to revenue in the fourth quarter. It’s about $500,000. And some of the larger deals we’ve announced recently like the Roche arrangement won’t start to generate revenue until the back half of 2010 due to some consulting things that need to be done with the product.

Bret Jones - Brean, Murray

Okay. And so I was wondering if you had an update on what you thought the mix between license and ASP would be now that you’re starting to see some success with Waban, do you think that that mix is going to change back? Obviously, it’s been shifting towards ASP. Does it revert back a little bit or is it too small still?

Chris Menard

No, I think Waban is going to grow a lot in terms of a percentage. But as Bob mentioned in his prepared remarks, it is on a very small base. I think the revenue mix for 2010 is going to be approximately 26% license and 74% service.

Bret Jones - Brean, Murray

Okay, great. Thank you very much.

Operator

Your next question comes from the line of Nabil Elsheshai with Pacific Crest Securities. Please proceed.

Nabil Elsheshai - Pacific Crest Securities

Hi, guys. This is Nabil. I was wondering if I could get the revenue breakdowns plus the hosting services support, and then also EDC, IRT and so on and so forth.

Chris Menard

Sure, Nabil. Do you want the fourth quarter or the year?

Nabil Elsheshai - Pacific Crest Securities

Fourth quarter.

Chris Menard

ASP was 58%, consulting was nine, customer support was six, and on the product side IRT was nine, CDMS was 10, Safety was 11 and EDC was 70.

Nabil Elsheshai - Pacific Crest Securities

Great. And then I was wondering if you could really talk about the mid-market and with the overhaul of the user interface in the most recent major release. I was wondering if that had any impact on going down to the mid-market and maybe improved your success rate there.

Robert Weiler

Yes, it has. I think that particularly in the mid-market where sometimes the size, scale, benefits of our message didn’t matter as much. In that mid-market area, user interface, ease of use, investigator response is very, very critical. And clearly the impact we’re getting right now from our customers is that they believe we have the newest looking, easiest to use, best workflow product in the market. We are thrilled with the rewrite and the work flow, and particularly the user interface of the product, and we’re seeing that in our competitive wins.

Nabil Elsheshai - Pacific Crest Securities

Okay, great. And then I haven’t seen IDC report, but maybe if you could update us on pricing. And I don’t know if they had any commentary on there, but I’ve heard a lot of commentary from industry analyst folks about pricing pressure in IDC or in EDC. I was wondering if you could comment on that.

Chris Menard

Our pricing for an individual ASP trial is still in approximately the (inaudible) per study range. And our Clarix pricing has remained relatively the same at about 200,000 per study.

Nabil Elsheshai - Pacific Crest Securities

And do you think that will remain going into next year or do you think that will change going forward?

Chris Menard

As I evaluate the pipeline right now, our pricing is similar in the pipe today to what we have sold historically.

Nabil Elsheshai - Pacific Crest Securities

Okay, great. Thank you very much.

Operator

Your next question comes from the line of Donald Hooker with UBS. Please proceed.

Donald Hooker - UBS

Hey, great. Thank you. Pretty much lot of what needs to be asked has been asked, but maybe just a couple of detailed questions. Did you all talk how do we think about stock comp? I always try to model on that. Going out, it seems to move around a bit. What are you assuming for that?

Chris Menard

Don, do you want the first quarter or the year?

Donald Hooker - UBS

Yeah, both.

Chris Menard

Both. About 3.6 million for Q1 and about 13.5 million for the year.

Donald Hooker - UBS

Okay, great. You know what, that’s all I got for now, so thank you.

Operator

Your next question comes from the line of Charles Boorady with Citi. Please proceed.

Charles Boorady - Citi

Hi. Thanks. Good evening. First question, just following up on a comment made by a CRO regarding very strong results in the late stage offset by challenging environment and early development, and also just signaling caution over drug manufacturer consolidation. I’m just curious what you are seeing if you heard those comments and agree with them and just remind us how exposed you are to late stage versus early development?

Robert Weiler

Sure. Most of our business is Phase II to Phase III in EDC. We do Phase Is. We do Phase IVs. But the bulk and size of revenues that come from essential all the EDC vendors, the large complex trials are generally in the Phase II and Phase III space. So while over the last couple of years, the pharmaceutical companies, while they are trying to get drugs to market fast have really focused on a lot of the late stage to get the information out.

And with that you see the spikes up and down in early stage trials, and actually some of those early stage trials now are starting to bubble back up and we’re starting to see those move forward. But it’s very hard to get your arms around because as I mentioned earlier, so many of these companies are re-aligning their portfolios and the area they're focused on and new drugs they're bringing to market and what they’re trying to finish to bring to market.

The Phase III, Phase II areas have been relatively flat. But we do think that based on the backlogs that the CROs have, which is 22% of our business, that they feel that these late stage trials are going to start hitting sometime in 2010. We don’t see it, so we don’t forecast it. But we think the exposure is much less than being totally reliant on just early stage.

Charles Boorady - Citi

Got it. And then my second question just on ICRS sale, and when you talk about the opportunity for ICRS and end-to-end. How much of the opportunity do you see is a up-sell or a cross-sell to your existing customer base, and is there a potential ? Have you had an experience where your end-to-end ICRS offering was used to fully replace an existing competitor or in-house solution?

Robert Weiler

We haven’t had any that have fully replaced, but if I can give you the cycle of what’s happening now it's beginning at safety, it's beginning at IRT at --.

We have many, many entry points, and we have many, many coverage points to our customers. So where in history before we always entered with just EDC, and then tried to expand out. We find now that we're being called in by the data management group, who knows we have an EDC product, but that’s not why we’re entering.

So first and foremost, we have a lot of coverage. Second, we have many, many different entry points into this new customer base and many of our sales in the last quarter were into customers that are our competitor is the primary vendor for EDC, as an example.

So in the new world you start-off by selling one of the products and as you go into that product and they look at it, it's called "the best of breed solution," we very, very quickly move them to the benefit of an ICRS product and that cycle moves into looking at all of our products and how they integrate.

That doesn’t mean when the first contract comes in they buy everything. What we’re seeing now our customers are buying a product with the strategy and implementation vision in front of them over the next two years.

Charles Boorady - Citi

I see. And as they do that, should we expect to see the 450,000 and 200,000 for first time that you referenced earlier, should we see those numbers maybe come down if there was a discount for buying the entire ICRS end-to-end solution or do you think you can maintain that same level of pricing even while selling an end-to-end solution.

Robert Weiler

So I think when customers continue to buy on the trial-by-trial basis, the 450 and the 200,000 will probably hold. A customer who brings in the entire ICRS suite is probably going to be a licensed customer, and they'll bring InForm in-house, which means they're going to start to build some of their own studies. Now it's priced on a trial-by-trial methodology, but you're not going to see it as $450,000 per EDC study, because they're going to do some of their own design and build for those types of customers.

Charles Boorady - Citi

Right. Okay. So we shouldn’t be surprised if we see pressure on those statistics? We shouldn’t read that as price competition or price pressure? It's more a reflection of product mix?

Robert Weiler

No. Because I don’t think you're going to see the number change from an absolute dollar standpoint. It's because people who used to buy on an ASP trial-by-trial basis will start to bring the software in-house.

Charles Boorady - Citi

Got it.

Robert Weiler

So they're not going to be part of that metric anymore.

Operator

Your next question comes from the line of Raghavan Sarathy with Dougherty. Please proceed.

Raghavan Sarathy - Dougherty

Good afternoon. Thanks for taking my questions. I've got a few questions. First for Chris. Chris, can you give us the revenue contribution from safety products for 2009, and what was the growth rate and what is the assumption for 2010?

Chris Menard

Yes. So for the year safety revenue made up 11% of total revenues.

Raghavan Sarathy - Dougherty

All right.

Chris Menard

And I didn’t guide for every product for revenue growth by category.

Raghavan Sarathy - Dougherty

All right. Can you give us the reason I'm asking is you had a pretty strong growth. And I was wondering how we should think about?

Chris Menard

Yes. Somewhere in the roughly 10% range.

Raghavan Sarathy - Dougherty

For the growth?

Chris Menard

For the growth in safety products, yes.

Raghavan Sarathy - Dougherty

So if I have my numbers, right, it's going to go from nearly 40% to 10%?

Chris Menard

I’m sorry, 40%?

Raghavan Sarathy - Dougherty

Yes, in terms of safety growth, and –

Chris Menard

No, so let me go back. Safety made up about 11% of total revenues for 2009.

Raghavan Sarathy - Dougherty

Right.

Chris Menard

And I think that can grow by about 10% in absolute dollars during 2010.

Raghavan Sarathy - Dougherty

Right. So the growth rate was 39% in 2009. I want to make sure I'm looking at the right numbers here. And you are saying that’s going to go down to 10% in 2010?

Chris Menard

Yes, I’m saying I’m forecasting about 10% growth from our safety products in 2010 in absolute dollars.

Raghavan Sarathy - Dougherty

Right. So why are we going to see such a deceleration in safety products?

Chris Menard

Well, the safety market is fairly saturated. If you think about first the Clintrace product, it's based on the number of users. It's not ratcheted like a trial-by-trial model. So people aren’t adding a lot of incremental people within their safety organizations, it doesn’t grow at the same pace.

In terms of the Lincoln products we have seen very significant growth over the last couple of years and that will start to stabilize. So I think, 10% for the entire safety market is about right for 2010.

Raghavan Sarathy - Dougherty

All right. And then so maybe what drove this hyper growth in 2009?

Chris Menard

We were very successful in signing on some additional customers. We grew within some of the existing customer bases. And we announced some very large deals related to our Lincoln tools with people like the Department of Defense and the FDA. So we had a lot of incremental consulting revenue within the safety segment.

Raghavan Sarathy - Dougherty

All right. Thank you. And then with regards to EDC, kind of breaking this down, can you give us some color on what type of EDC revenue growth you have seen among Phase I, IIs, and IIIs last year, and then this high single digit to 10% growth, what sort of assumptions that go into that growth in terms of Phase I, IIs, and IIIs?

Chris Menard

Yes, I’m sorry. We don’t break the EDC revenues down by the type of trial.

Raghavan Sarathy - Dougherty

Okay. All right. Thank you.

Operator

Your next question comes from the line of Sean Wieland with Piper. Please proceed.

Sean Wieland - Piper

Hi. Thanks. Can you talk about why it is you can’t drive more leverage in the model? Your guidance implies really a deleveraging in the model, and what the plans are to reaccelerate the revenue growth and drive more leverage?

Chris Menard

Yes, so Sean, let me start with just reviewing the long-term model again. I've been saying for a long time that I think in the long term on an annualized basis, we’re going to get to 18 to 21% operating income, and I still feel that that's very possible even with the slowdown in the EDC revenues.

And so in terms of the leverage that’s still a ways to go from what we ended 2009 with. I think you'll continue to see some leverage within G&A and also some of the other operating areas, and we’re continuing to increase services margins throughout 2010 and probably a little beyond that.

Robert Weiler

And I think the discretionary part that Chris mentioned is that we were going to keep R&D at roughly about the 15% level. And that’s clearly because we've acquired all these companies and we have a very, very aggressive roadmap to essentially build what we believe is going to be the most comprehensive individual product, but integrated suite in the marketplace. And we've made major steps towards that.

It was illustrated in the integration of IRT and InForm IRT 5.0, InForm GTM which had seamless integration, seamless workflow between the two systems. It's not bridges, it's not passing data. It is a single environment, and we plan on taking that strategy to the rest of all of our products.

So we believe that it's absolutely the right course. And that leads us to the second part of your question is, what are we going to do to accelerate the growth? I think, a couple things to accelerate the growth, some macro environments may come into play, as I mentioned earlier on the previous answers about doing that.

But the whole strategy since 2004 has been that markets moved to a suite. And they go that way and when they go that way, they gain market share. They have growth. They increase their revenue opportunities. They have more coverage to sell into their different customers. And we just really officially launched our suite in its entirety last fall in the fourth quarter at our two user meetings in the United States and Japan, both with tremendous reception. But the market takes a little while to absorb. They are educating it. We're extremely encouraged by the reception, the hearing we’re getting from our customers, and as I mentioned in my earlier comments, that our customers are telling us that this is exactly where they want to go.

So I think that in due course through the normal adoption, when we will no longer be talking about EDC so to speak, we’re going to talking about the ICRS market. And when we look at the ICRS market, we think we’re a strong leader. And we think when that market starts to grow and adopt we’re going to be in the best position to take advantage of that and have accelerated growth.

Sean Wieland - Piper

Okay. One quick follow-up, any thoughts on timing on achieving that 18 to 21% operating income margin?

Chris Menard

Yes, I think, if you think about the 18 to 21, when I do that presentation I say that will be the margin for the entire year. So I think it’s about two to three years out.

Operator

Your next question is a follow-up from the line of Steven Crowley with Craig-Hallum Capital Group. Please proceed.

Steven Crowley - Craig-Hallum Capital Group

Hey, guys. Thanks for taking my follow-up. I just want to walk through one thing and get your reaction to it. Coming out of last year, you gave us initial guidance of 200 million to 205 million, and talked about 76 to 79% of that guidance being in starting backlog. Earlier this afternoon or tonight you mentioned that of your starting guidance for 2010 over 80% of that guidance is in starting backlog.

The math says that your backlog has grown therefore over 20%, and maybe noticeably over 20%. So the implication is that your guidance is driven by an extremely conservative view of new order prospects or that guidance this year is much more conservative than starting guidance last year, maybe you could comment on that scenario and if I’m missing a variable in the equation?

Chris Menard

Yes, so I guess first in terms of the backlog, I wouldn’t try to reverse engineer into the backlog balance too much. To try to correlate the revenue we're anticipating taking from backlog in 2010 to the actual balance and how it grew over 2009. We did say, it’s around 80% coming out of backlog, so just that’s in the low 80s. It’s not like it's 89% or anything like that. So in terms of our forecasting methodology and conservatism, we actually use the exact same methodology we've used over the last two or three years. We have been very lucky over the last couple years that we’ve really executed and we’ve beat the guidance and be able to raise the guidance over the course of each year. But our methodology remains the same in that, we are bottoms up. We’d go to a lot of individual customer by customer, and we’re only going to forecast what we can see in the fields. And that’s the approach we’ve used the last couple of years and it’s similar to the approach we used this year.

Steven Crowley - Craig-Hallum Capital Group

But clearly you have some better coverage just on a percentage basis of your starting guidance?

Chris Menard

Yes, that’s absolutely true. The percentage of revenue coming out of backlog at the start of this year is a little bit higher than it was last year.

Steven Crowley - Craig-Hallum Capital Group

So is your conservative nature with this guidance driven by what you fear happening in the order book going forward or what’s recently transpired and the backlog numbers would seem to imply that this is caution over what could happen in the future?

Robert Weiler

Yes. I mean, Steve, we really do, as Chris mentioned, a grounds up deal by deal, sales rep by sales rep, market by market forecast. We then take that and we test it with external macro level events. So some of those macro level events are that the CROs have been forecasting that their backlogs and everything were going to be released, they started in Q3 last year, then they said it's Q4, they then said it was going to be first half. We haven't seen it yet. So we're not going to forecast it. While they may or others may, we tend not to do that. The second part is that we do see this swirl that’s going on with all the R&D and while all the intentions are to bring these trials to market, it clearly affects the timing of some of these trials between in these large companies. So until we see that stabilize, until we see the macro level environment be one that we can see the growth and count on the growth, we take in our feelings and then actually the forecast everything were done before the IDC report came out, which came out yesterday. But that was in line with our thinking by an independent source.

We feel that our guidance is appropriate and our guidance to be in the mid teens of revenue, margin expansion are growing faster than revenue for next year. It will give us a solid year, because we are almost feeling like in many cases a startup all over again, launching many products into a brand new much, much larger markets than EDC was. So for the long-term, we’re extremely encouraged. We believe we are in a great position. We think that the macro environment is going to cause a little pause here in our higher than growth that we've had in the past, but we're very excited about the prospects of the company.

Steven Crowley - Craig-Hallum Capital Group

Thanks a lot for the extra color and taking my questions.

Operator

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

Steve Halper - Thomas Weisel Partners

Hi. Just to clarify, did you say CapEx for 2010 is going to be $11 million?

Chris Menard

Yes. That’s the forecast for 2010.

Steve Halper - Thomas Weisel Partners

And why the dramatic reduction from 2009?

Chris Menard

Yes. 2009, we had a couple things going on. First, we did have to build out an office in Pennsylvania for the Clarix team. The cost in the fourth quarter alone for that was about $5 million. We also made some purchases early. By early, I mean, we did a handful of purchases in December to take advantage of year end discounts that normally would have fallen into the first quarter, and because of those purchases coming in we kind of inflated the numbers for the fourth quarter of 2009, and they’re coming out of our 2010 operating plan. So I’m very comfortable with the $11 million for 2010.

Steve Halper - Thomas Weisel Partners

So do you think CapEx should grow in line with revenue growth over the long term, or should that moderate?

Chris Menard

Yes, it's not exactly linear, because we do try to take advantage of lots of all you can eat type arrangements, whether it is Oracle databases, VMware, and things like that. I think in a typical year, a normal run rate for us is somewhere between 14 and 17 million.

Steve Halper - Thomas Weisel Partners

Okay.

Chris Menard

But it's going to be less next year because of the pre-purchases we did.

Steve Halper - Thomas Weisel Partners

You mean 2010?

Chris Menard

I’m sorry, yes, 2010.

Steve Halper - Thomas Weisel Partners

Yes, okay. So one other question, did you say your actual cash tax rate is going to be six to 7% in the year?

Chris Menard

6 to 7% if you're using the non-GAAP results. If you're using the GAAP results, it's going to be closer to 12 to 13%.

Steve Halper - Thomas Weisel Partners

So six to 7% on non-GAAP.

Chris Menard

Correct.

Steve Halper - Thomas Weisel Partners

And your actual cash taxes would be that six to 7%?

Chris Menard

Correct.

Steve Halper - Thomas Weisel Partners

Okay. And when do you get the step up in your cash tax rate, because we were assuming that the cash tax rate would start to pick up in 2010?

Chris Menard

Yes. So it’s actually going to be somewhere I think the back half of 2011.

Steve Halper - Thomas Weisel Partners

Okay.

Chris Menard

It is a little bit of a moving target but we're definitely covered for all of 2010.

Steve Halper - Thomas Weisel Partners

Okay. Because we had assumed a full tax rate in 2011 already, so we can push that out. And my final question is on the reconciliation, there's $2.3 million impairment that's backed out. Could you just tell us what that is?

Chris Menard

Yes. What happened is when we did the Clarix acquisition back in 2008 we recorded an asset for the trade name, and the way the accounting rules worked it was not being amortized. So it was just hung up on the balance sheet. When we changed the name to Phase Forward IRT 5.0, we re-evaluated the value of that trade name and we wrote a portion off with the remainder going back to amortization expense over the next couple of years.

Operator

Your next question is a follow-up from the line of Richard Close with Jefferies. Please proceed.

Richard Close - Jefferies

I’m all set. Thank you.

Operator

There are no further questions at this time. I would now like to turn the call back over to Mr. Bob Weiler for any closing remarks.

Robert Weiler

Thank you for joining us in the call. We are excited about the acceptance of our ICRS strategy. We are excited about our margin expansion. We are excited about that we are going to be able to maintain solid growth to implement our ICRS strategy for 2010 and looking forward to talking to you next quarter. Thank you.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect your lines. Good day.

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