PAREXEL International Management Discusses Q2 2014 Results - Earnings Call Transcript

Jan.30.14 | About: PAREXEL International (PRXL)

PAREXEL International (NASDAQ:PRXL)

Q2 2014 Earnings Call

January 30, 2014 10:00 am ET

Executives

Jill L. Baker - Corporate Vice President of Investor Relation

Josef H. Von Rickenbach - Founder, Chairman and Chief Executive Officer

Ingo Bank - Chief Financial Officer and Senior Vice President

Analysts

Jeffrey Bailin - Crédit Suisse AG, Research Division

Douglas D. Tsao - Barclays Capital, Research Division

Ross Muken - ISI Group Inc., Research Division

Timothy C. Evans - Wells Fargo Securities, LLC, Research Division

Robert P. Jones - Goldman Sachs Group Inc., Research Division

David H. Windley - Jefferies LLC, Research Division

Steven Valiquette - UBS Investment Bank, Research Division

Todd Van Fleet - First Analysis Securities Corporation, Research Division

Gregory T. Bolan - Sterne Agee & Leach Inc., Research Division

George Hill - Deutsche Bank AG, Research Division

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the PAREXEL International Second Quarter Fiscal Year 2014 earnings call. [Operator Instructions] I would now like to introduce your host for today's presentation, Ms. Jill Baker, Corporate Vice President of Investor Relations. Ma'am, you may begin.

Jill L. Baker

Good morning, everyone. The purpose of this call is to review the financial results for PAREXEL's second quarter fiscal year 2014. With me on the call today is Josef Von Rickenbach, our Chairman and Chief Executive Officer; and Ingo Bank, Senior Vice President and Chief Financial Officer.

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 in the Risk Factors section of the company's 10-Q report as filed with the Securities and Exchange Commission on November 4, 2013, 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. 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, 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 foreign exchange, special charges, tax items and restructuring reserves and adjustments to those reserves.

In each instance, a reconciliation of the non-GAAP financial measures with the most directly comparable GAAP measures may be found in the press release, in the Additional Financials portion of the Investor Relations section of our website, or will be discussed during the course of this teleconference.

I would like to note that we have enhanced the information that we post on the website in the Additional Financials section. I encourage you to take a look at the PDF presentation that we have posted there with regard to our second quarter earnings and outlook for the company. [Operator Instructions] I would now like to turn the call over to Mr. Von Rickenbach.

Josef H. Von Rickenbach

Thank you, Jill, and good morning, everyone. I would like to start today by providing some commentary on our results for the second quarter and then discuss our outlook for fiscal year 2014. Following that, Ingo will provide more detailed information on the financials and we will then open the call for questions.

In the second quarter, we delivered a strong increase in revenue and healthy gross and operating margin expansion. GAAP diluted earnings per share of $0.49 were within our expected range. Operating cash flow of $149.5 million was solid, driven in part by a 10-day reduction in days of sales outstanding from the September quarter. On the new business front, we achieved a net book-to-bill ratio of 1.34.

Now I'd like to make some comments about each of our businesses. In our CRS segment, we drove our fourth sequential quarter of gross margin improvement. On a year-over-year basis, gross margin grew 550 basis points. Sequentially, gross margin improved by 150 basis points. We continued to achieve operational improvement as a number of our initiatives progressed. Examples here include process improvements, quality enhancements, increased productivity of recent hires and further capitalizing on our global footprint. These initiatives are still ongoing and we expect them to continue to bear fruit in the coming quarters. We also further reduced the use of contract staff. With regard to this metric, we have achieved our objectives and are now at a normalized level. Within CRS, Early Phase demand has picked up somewhat, especially in the patient portion of the business. The business has performed well and the initiatives, as I just described, contributed to an improved overall operational performance. In addition, capacity utilization improved during the quarter, we're pleased with how the business is progressing, and I'd like to note that Early Phase was also a contributor to margin improvement this quarter.

In other news for CRS, we recently strengthened our senior management team as Thomas Senderovitz joined PAREXEL as Senior Vice President, Clinical Research Services, based in Berlin, Germany. Thomas has extensive drug development expertise and joins us from Grünenthal pharmaceutical company and prior to that, UCB, both international research-based pharmaceutical companies. We're very pleased to have Thomas on board.

Moving to PCMS now. The business performed well in the quarter with year-over-year revenue growth of approximately 13%. Gross margin declined a bit in the quarter but overall, we remain pleased with margins that are in the 40% and above range. The expertise that PCMS provides to clients is an important element of the company's strategy, and we believe that the business opportunity for PCMS remains solid.

Turning now to Perceptive Informatics. The business achieved strong revenue growth year-over-year, gross margin improvement of 510 basis points and healthy new business awards. As we have stated previously, our path to improved profitability in Perceptive built in part on achieving scale as we're better able to leverage the investments that we have made in R&D. This quarter's results were very positive in that regard. Demand for products and services in CRS and Perceptive are creating cross-selling opportunities and are driving the businesses closer together. Some of the key differentiators for Perceptive Informatics products and services are the breadth, depth and scalability of our MyTrials platform which allows us to continue to add features and create value for clients. The integrated one-stop technology offering that we provide is very appealing to clients. They know that our technology platform is well regarded and robust. As we continue to evolve our eCRO model, technology will become an even stronger competitive differentiator for the company.

With regard to client concentration, the largest client in the December quarter represented 16% of revenue as compared to 17% in the second quarter 1 year ago, and 15% in the September quarter. The top 5 clients represented 46%, that's compared to 51% 1 year ago and the top 20 clients were 77% as compared with 80% 1 year ago. We feel privileged to work with the vast majority of companies in the biopharmaceutical industry, representing a deep and diverse client base.

A few words now about headcount. During the quarter, we added 125 employees, bringing us to an employee base of 15,100. Year-over-year headcount grew approximately 8%, while revenue growth in the quarter was 15.4%. As productivity from recent hires continues to ramp up, headcount growth going forward is expected to be moderate.

Moving on now to new business dynamics. Backlog of $4.8 billion at the end of the second quarter was up 5.9% year-over-year and up 3.9%, sequentially. Cancellations came in at 3.9% of beginning backlog. A rolling 4-quarter average cancellation rate is 4.3%, right in the middle of our expected cancellation range of 3.5% to 5%. The net book-to-bill ratio for the quarter was 1.34. Wins were broad-based across our businesses and came from a variety of client segments. We are pleased with our portfolio of strategic partners and with the new business we won from small and emerging companies as well. Our BioPharm unit is contributing to growth and provides us with client diversification.

Looking ahead, our outlook for new business remains positive. We bid on a near-record level of proposals in the second quarter and we ended the third quarter with a high level of proposals pending. Our long-term target net book-to-bill ratio remains at 1.2. In this context, I want to highlight that quarterly fluctuations can and do occur as we just experienced in the first half of this fiscal year. Including the results from the second quarter, our rolling fourth quarter average net book-to-bill ratio is 1.16, close to our target of 1.2.

I would now like to make some comments about the client marketplace. Recently, we've been asked about the impact that pharmaceutical company restructurings could have on our business. In our experience, restructurings and pipeline reprioritizations can sometimes, in the short term, decrease the level of clinical development outsourcing from a particular client. However, it appears at the current time that demand for clinical research outsourcing is solid. Encouragingly, as we have seen from the past, when clients tighten their business models and consolidate and streamline activities, the productivity of the abrupt development efforts can improve and outsourcing penetration rates may well increase.

Looking to the broader industry, I believe that the global pipeline for drug development is healthy. When the back pipeline is eventually owned by big pharma, specialty pharma, biotech, public or private equity or venture capitalists, outsourcing of clinical development activities has clearly hit its stride, leading to many new business opportunities.

In summary, we were pleased with the results of the second quarter and believe that we are on track to achieve our operational and financial goals for fiscal year 2014.

So with that, I would like to turn the call over to Ingo, who will provide more detail on our financial results.

Ingo Bank

Thanks, Joe, and good morning, everyone. Going right to our financials. So let me start the discussion with our revenue growth dynamics in the second quarter. Total revenue for the December quarter grew a strong 15.4% to $487.1 million, with our 2 recent acquisitions, HERON and Liquent, contributing 3.2 percentage points. The overall effect of foreign currency translation in the quarter was, on balance, neutral. Year-over-year revenue growth was driven by all of our businesses. CRS grew by 13.5%. Part of the growth was related to the signature revenue that shifted out of the first quarter into the December quarter. Adjusted for the negative impact of foreign exchange, comparable growth was at 13.7%. All of our client segments contributed to the growth.

PCMS grew by 12.7%, with the acquisition of HERON contributing 6.5 percentage points. Adjusted for the positive impact of foreign exchange and acquisitions, PCMS grew by 5.5%, helped by good performance in the core consulting service line. Perceptive Informatics recorded another strong quarter, growing revenue overall by 29.7%, of which 19.8 percentage points were contributed from Liquent. Adjusted for the positive impact of foreign exchange and Liquent, Perceptive revenue increased by 9.3%. Growth was particularly strong in our EDC and Medical Imaging businesses.

Moving on to gross margin. We are pleased that we delivered another quarter with strong margin expansion. Compared with the same quarter of fiscal year '13, gross profit grew by close to $42 million, with gross margin expanding by 480 basis points to 33.4%. Sequentially, overall gross margin increased by 90 basis points, driven by higher revenue and continued productivity improvements. The benefit of signature-related revenue shifting from the September quarter into the December quarter was, to some extent, offset by the annual merit increase in our payroll.

Taking a look into the gross margin development in each business, let me start with our largest business, CRS. In the second quarter, CRS gross margin significantly improved by 550 basis points year-over-year, coming in at 29.9%. This translates into a total gross profit increase of more than $30 million compared with the same period in fiscal year '13. As Joe mentioned, we drove this margin expansion by increasing productivity of the employees who recently joined us and making good progress with respect to operational efficiency programs targeted at increasing utilization and billability. CRS gross margin also increased on a sequential basis by 150 basis points.

Turning to our PAREXEL Consulting and Medical communications business. Gross margin declined by 210 basis points to 40.2% and was down by 140 basis points sequentially. The decline was largely related to a less favorable revenue mix and overall lower utilization of resources as a result of the holiday period.

Perceptive Informatics. Gross margin reached 46.8% in the quarter, a significant increase of 510 basis points compared with the same period in fiscal year '13, and sequentially, up by 30 basis points. We drove this improvement by economies of scale and also by leveraging the global footprint, including an increased usage of low cost countries.

This quarter represented another big step for Perceptive Informatics toward achieving our longer-term goal of a gross margin that exceeds 50%.

Let's now take a look at some more financial details. All of the numbers I will be referring to will be on an adjusted basis. SG&A as a percentage of revenue was up by 260 basis points compared with a year ago, coming in at 19.4%. Similar to the prior quarter, we have reinvested some of the margin improvement to expand our facilities and also increase our selling and promotion expense to drive future growth. In addition, it is important to understand that about 23% of the absolute year-over-year increase in overall SG&A spend for the company, or $5.4 million, reflects the acquisitions of Liquent and HERON. Sequentially, SG&A was slightly up as a percentage of revenue as a result of continued IT investments, higher commissions related to the strong level of new business awards and increased marketing spend. Over time, we expect SG&A to trend down as a percentage of revenue. Moving on to operating income.

The combination of revenue growth and gross margin expansion helped us to grow operating income substantially by $15.6 million, an increase of approximately 48.5% year-over-year. As a result, the company's operating margin expanded by 220 basis points to 9.8%. Sequentially, operating margin improved by 50 basis points. Excluding purchase accounting and integration cost effects of Liquent and HERON, the company's earnings before interest and amortization was 10.4%, up almost 200 basis points compared with the second quarter of fiscal year '13. As I discussed during last quarter's earnings call, this metric is an important operational profit measure for us. It better helps us to understand the underlying structural profit margin of our business without the distorting effects of purchase accounting.

If you then look further at results below the operating income line, other expense net came in at $3.7 million, driven by net interest expense of $2.5 million, foreign currency results recorded in other income and expense were a negative $1.6 million this quarter.

The December quarter tax rate was 33.8%, unchanged from the September quarter but up compared to 23.3% a year ago. The year-over-year increase was primarily driven by a less favorable mix of pre-tax profitability with a higher proportion of income here in the United States. In addition, in the December 2012 quarter, we benefited from the release of valuation allowances which were absent in the second quarter of fiscal year '14. For the full year, we expect our tax rate to be at the higher end of the previously guided range of 32% to 33%. Given the strong improvement in operating margin, we delivered another quarter of significant growth in EPS. Second quarter diluted earnings per share increased to $0.51. This compares to $0.41 in the same quarter a year ago, representing a 24% year-over-year increase.

Let's now move on from profitability and look at cash flow and our balance sheet. Operational cash flow for the quarter was solid, representing an inflow of $149 million. This performance was driven by strong collections and the benefit of increased deferred revenue, translating into DSO of only 36 days, lower than the prior year and prior quarter. CapEx for the quarter was at $19.8 million and in line with plans and at the same level as the second quarter of fiscal year '13. Net debt was at $82 million compared to $97 million in the same quarter of fiscal year '13.

Return on invested capital was strong at 15.8%, as a combination of high working capital turnover, combined with operating margin expansion, delivered a substantially higher return than our weighted average cost of capital.

Let's change perspective now and take a look forward. We've included our forward-looking guidance for the third quarter of fiscal year '14 as part of the earnings release that we issued yesterday. For the third quarter, we expect operating margin to be largely in line with the second quarter. Operating margin for the full fiscal year is expected to be around 9.8%. As noted in the earnings press release, we've increased the midpoint of our revenue and adjusted EPS guidance for fiscal year '14. You may have noticed that we have not issued specific calendar year guidance, different from past practice. This is the result of a policy decision I made. I believe that guidance should be provided in the context of the operating rhythm of the company which, in our case, is a June fiscal year end. At the same time however, I believe it is important that investors are provided with information regarding the mid to long-term underlying drivers of value creation.

To that end, as Joe mentioned at the beginning of this call, we have enhanced our quarterly earnings presentation that you find posted on our website. I'm sure that you will find it to be useful. As you will see from the slides on the website, our overall targeted mid- to longer-term financial objectives remain unchanged. We still target to grow revenue in the 10% to 12% range per year on average, to expand margins, on average, between 100 and 120 basis points annually and to deliver double-digit EPS growth. Our expectations for the first 6 months of fiscal year 2015 will continue to support these long-term targets.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question or comment comes from the line of Jeff Bailin from Crédit Suisse.

Jeffrey Bailin - Crédit Suisse AG, Research Division

Maybe we could start on Perceptive. We're continuing to see some pretty nice margin expansion with 2 quarters in a row of 46%-plus segment margin. Now how much of this would you attribute to some of the mix benefit potentially from Liquent versus the organic improvement in segment profitability? And maybe how should we think about timing around the ramp towards your targeted margins for that segment?

Josef H. Von Rickenbach

This is Joe. We were actually quite pleased with the margin expansion in Perceptive, overall. And probably the biggest contributor to margin expansion in Perceptive is just scale. We have been at this for a while now. And I'm really pleased to see that the growth that we have had in general, including Liquent, of course, is really driving the benefits that we hope for. Specifically in some of the details asked, maybe Ingo can address that.

Ingo Bank

Thanks. That's a good question. So as Joe said, we're very pleased with the notable improvement in gross margins in our Perceptive business. To your question, Liquent certainly is accretive to our margins in that segment, and we continue to believe that also, going forward, we will make notable steps in margin improvement. At this time in -- point in time, it's scale but also, as we said during the JP Morgan Conference, Perceptive, clearly, is making big strides also to shift activities into low-cost countries. You all know that we have a fairly sizable shared service center in India and Perceptive is starting to benefit from that. So overall, I think we're on a good track here with that segment.

Jeffrey Bailin - Crédit Suisse AG, Research Division

Okay. Maybe just one follow-up for Ingo. Looks like during the quarter, the net debt came down pretty significantly sequentially as you paid some of that down. Could you just talk a little bit about your ongoing capital deployment priorities? I know you don't have a share repurchase authorization really out there at the moment. So kind of how you think about that and maybe the M&A pipeline.

Ingo Bank

Yes, sure. Indeed, we had -- I think we had a great quarter, actually, on cash flow. We did fantastic on collections. There was a lot of discipline, also, with clients to pay their bills, and we benefited from a significant amount of prepayment in our deferred revenue. So -- and obviously, we used that to the extent we could to pay down some of the debt. Obviously, this is an exceptional quarter from a cash flow perspective. And I don't necessarily expect this to be the same in the next quarter to the same magnitude. From a capital deployment perspective, our views have not changed compared to what we said before. At this point in time, the priorities for us are clearly to look into M&A that can help us to further grow the business, and we continue to use the cash flow and the capital that we have for CapEx to basically improve productivity in the company and also expand facilities so that we can drive future growth.

Operator

Our next question or comment comes from the line of Douglas Tsao from Barclays.

Douglas D. Tsao - Barclays Capital, Research Division

Just -- if we think about the revenue progression through the balance of the fiscal year and then the calendar year, obviously, you continue to target double-digit revenue growth. How should we think about it in the context of both the fact that we saw slower bookings through fiscal year 2013? There was obviously a recovery this last quarter, as well as this quarter obviously had a lot of strength related, to some extent, to sort of a bolus of revenue from signatures getting signed, as well as the additional acquisitions. I mean, should we see some shift in terms of the consolidated revenue away a little bit from CRS in the near term, and then have that tick up as bookings -- as you sort of rebuild some of the near-term momentum from new business wins? Or do you think that we should see sort of pretty steady growth across all the segments?

Josef H. Von Rickenbach

For the progression of our growth, overall, it's essentially working pretty much the way we anticipated. Now we had a very high growth revenue year in fiscal year '13, and we anticipated that the growth would come down into fiscal year '14, which it has now -- which has now occurred. And especially in the second half, it's probably going to ebb even a little more then. And then beyond that, I think it's going to normalize again. In part, of course, these are also -- just that the comparables are relatively tough. But generally, we are pleased with our new business momentum and we're also pleased with the conversion levels that we're experiencing from backlog. And so in combination, overall, we believe that we can achieve our targets as we outlined them early this morning.

Douglas D. Tsao - Barclays Capital, Research Division

Okay. And then 2 just quick follow-ups. First of all, on the Early Phase business, you noted you saw an uptick in terms of patient studies. Could you make a sort of directional comment on how those compare from a margin standpoint versus the healthy volunteer studies? And then also, I think it was in the last quarter, you referenced -- or in after Q1, you referenced the hit rate with small companies was lower than what you would expect and hope for. I'm just curious, when you think about how that trended in the second quarter and sort of how you're seeing things so far pan out in the -- through the first month of the year?

Josef H. Von Rickenbach

All right, there's a number of questions there, Doug. Okay. So in Early Phase, in terms of the profitability between the 2 businesses, the operating units, you could say, meaning in-unit and patients, in terms of profitability, I'd say it's still early days in the patient business area. This is a relatively recent growth area for us and it's still ramping. But my view is that the potential is certainly there for substantial profitability. And in particular, the fixed cost investments are not as high as they are in -- on the in-unit side, where you have to build, basically, units, meaning essentially, clinics. And whereas on the patient side, we can use either existing units or hospitals, pretty much similar to what would occur in the later phases. In terms of the win rates, when it comes to small and emerging companies, generally, as I pointed out in my comments, the win rate was pretty solid and significantly up from the last quarter. And -- but it was also broad-based. We performed well in terms of new business across the company, and both strategics and large companies, small companies, it was a pretty good performance.

Operator

Our next question or comment comes from the line of Ross Muken from ISI Group.

Ross Muken - ISI Group Inc., Research Division

I guess I want to stay on sort of the bookings topic. Just in terms of the competitive landscape and what you've seen in sort of hit rate, win rate, all the sort of key things. I mean, sequentially, or Q-on-Q, what has sort of changed, more so amongst the larger customers? And then, where are you in some of the discussions with some of your key partners on those relationships relative to either broadening them out or revisiting sort of where we are in sort of the life cycle of the prior contract?

Josef H. Von Rickenbach

Okay. So in terms of win rate, as I just pointed out, in this quarter, in the second quarter, I would point out that we were pretty much on track. Sometimes, we could have had higher win rates but in terms of what expectations realistically would be, this was probably pretty much it. So I think we performed well. I also -- when it comes to strategics, remember, in the first quarter, we pointed out that the business awards from strategic partners can be relatively lumpy. And in the second quarter -- I wouldn't say it was a particularly over-the-top strong quarter but it was basically a normal quarter. And so we've benefited more from that source than we would have in the first quarter. In terms of partners and renewals, we are pleased with where we stand with our discussions. As we pointed out earlier, some of these contracts are under discussion right now. But we feel relatively good about where we stand, certainly from a performance point of view. And some of these companies are also rethinking their own strategies, as I pointed out in my comments. Meaning, when I say strategies, in this case, not just outsourcing strategies, but really strategies for their own companies and even business models. And so, of course, it stands to reason that as a result of this rethinking, that there might also be some changes. But overall, we feel pretty good about where we stand and what our competitive situation is.

Ross Muken - ISI Group Inc., Research Division

Maybe one other quick thing, just on sort of the tenor of R&D in general. I found it interesting, one of your key partners sort of surprised The Street this week with a much stronger R&D budget than some had predicted. I guess, in that, in general, I mean, do you get the sense, particularly given some of the success rates we've had and with where pricing has been in the market and we're kind of coming to the end of the generic wave, that maybe, as you said, while some of the key players are kind of revisiting their model in general, that some of the players that have gone through these restructurings the last several years and have come out on the other side of it are actually refocusing back on kind of pipeline. And maybe our assumptions on what R&D growth in general, which has been sort of tepid, is maybe a little bit conservative. And I guess what I'm getting at is how do you -- how should we interpret things like that where there is a better budget in terms of the percent flow-through when you do have a role already with that player?

Josef H. Von Rickenbach

Well, to this whole discussion, I would add that it probably was never quite as bad as some people made it out to be. But it's probably also not -- we're not at a point where I would call a new spring or kind of a difference in terms of growth rate. So I think the assumptions that are out there are pretty right. But it's certainly not a half -- a glass half empty kind of environment. And one of the observations that we have pointed out is that interestingly so far, in these reorganizations that are going on right now, the portfolios actually have been fairly stable, counter to prior versions. And I would take from that, that the purchase in the portfolios have pretty much occurred. And there's probably more stability out there than some people assume.

Operator

Our next question or comment comes from the line of Tim Evans from Wells Fargo Securities.

Timothy C. Evans - Wells Fargo Securities, LLC, Research Division

Joe, what happened in the last 2 weeks since you gave guidance that necessitated raising it a little bit?

Josef H. Von Rickenbach

So when we preannounced, we hadn't, of course, closed our books completely. It was early days. But we felt strong enough about where the business was at, that we decided to basically go out and share that with our shareholders. And as we went through the close and all the details came in, it was just a little better. And I'd say that's reasonable and not -- there was nothing really more to it than that.

Timothy C. Evans - Wells Fargo Securities, LLC, Research Division

Okay, that's fair. And I was wondering, Ingo, would you be willing to quantify the foreign exchange impact to operating income in the quarter?

Ingo Bank

We -- so as I said in the prepared remarks, we had some -- a loss of $1.6 million in -- under operating income and expense. Some headwinds there that we had. But overall, and you see also from -- on the other side, above the operating margin line that we were benefiting some -- on some of the lower costs we have in a number of geographies because on general, on balance, the dollar strengthened which is positive for us. So overall, the impact for foreign exchange was beneficial for us in the quarter.

Timothy C. Evans - Wells Fargo Securities, LLC, Research Division

Are you able to quantify that?

Ingo Bank

We manage foreign exchange on an integral basis. And I think that's the right thing to do. We had -- if we have headwind, we manage it. If we've got tailwind, we manage it as well. For instance, if you compare the foreign currency results for the first quarter, the second quarter was less favorable in that respect. We also had, compared to the same quarter a year ago, an unfavorability from foreign currency exchange. We had a gain last year, we had a loss this year. But I don't refer to it because we still manage our margin in an integral way and we've managed to come in better. So I think that's the best way to look at it.

Timothy C. Evans - Wells Fargo Securities, LLC, Research Division

Okay, and if I may just slip one more in. I noticed you gave an ROIC metric, is this something you're going to be focusing on going forward?

Ingo Bank

Yes. Thanks for the question. I think return on invested capital is a very, very important metric for value creation, particularly if you then compare it with the weighted average cost of capital that you carry, and it's definitely something that is very close to my heart, that's on top of my radar screen. It's important when we make capital decisions here in the company, when we look at M&A. So yes, it's an important metric.

Operator

Our next question or comment comes from the line of Robert Jones from Goldman Sachs.

Robert P. Jones - Goldman Sachs Group Inc., Research Division

Just wanted to go back to gross margin in CRS, a nice step forward there. I was hoping you could give us a little bit more detail around what drove that specifically. I know you guys mentioned a portion of that being from a reduction in contract staff. And it also sounds like the timing of the contract signatures also helped revenue and gross profit in the quarter. Just trying to get a better understanding of what moved the margin there so we can forecast it better going forward.

Ingo Bank

So as you look at CRS, as Joe said, we are now at a level where the contract staff that we still have is sort of at the right target levels. So that still gives us the amount of flex that we want and that we need going forward, but we're there, where we want it to be. Clearly, you can also sense that the productivity of the new hires has increased substantially. So if you look at labor dollar productivity, that is really moving in the right direction for CRS. Next to that, we have improved the number of operational processes and then all of it basically helps to drive CRS margin up plus the, obviously, the leverage we get from an operational perspective. Overall, I think the best way to look at operating margin for us at this point in time is if you take the first half of fiscal year '14 where our adjusted operating margin is at 9.6%, which is sort of 200 basis points above last year. And that takes all the pluses and minuses of the first quarter and the second quarter into account. And I think it's sort of the right run rate to think about right now.

Robert P. Jones - Goldman Sachs Group Inc., Research Division

Okay, that's helpful. And then, Joe, you mentioned again reinvesting some of the margin improvement back into the business. Just curious if you could share any more specifics around those investments. And maybe timing around when those investments might start to moderate.

Ingo Bank

Sure. I think if you -- and I presume you are referring obviously to SG&A. I think what we need to realize is that we're coming out of a period of very substantial growth. And so there were a few catch-ups we needed to do on IT and facilities and procurement. We've also stepped up our investments in marketing and sales and also a little step-up in R&D in our Perceptive business. Clearly, we're keeping a very close eye on it, and basically, the target is to drive this further down in the future. We're going through our budgeting and strategic planning process right now. We've set some targets for corporate functions on the basis of external benchmarks. So I'll keep a very close eye on it.

Operator

Our next question or comment comes from the line of David Windley from Jefferies.

David H. Windley - Jefferies LLC, Research Division

To focus in or come back to bookings. Joe, you made some comments, on the one hand, that your proposal flows are near records. On the other hand, you kind of seemed to caution that bookings, as we kind of know intuitively, bookings can be volatile from quarter-to-quarter. And then finally, the point you made about kind of rolling four-quarter book-to-bill at 1.16, kind of below your 1.2 target by just a little. I guess what -- I'm trying to read the tea leaves on all that and understand. Do you need really high levels of proposal flow just to get to the 1.2? Is it realistic that, that will continue? And I guess the basic question here is how Herculean of an effort is it to get to your 1.2 target?

Josef H. Von Rickenbach

Well, at the moment we -- taking everything you said and everything I said into account, we feel that 1.2 is still the right target. I think, to interpret my comments properly, I'm going to have to say that what we just experienced in this quarter is probably above what I would expect we would see in a regular quarter. And so remember, coming into this quarter, into the second quarter, we also had very good proposals. And I mentioned them at the last call and it turned out to be really a very good quarter for us. But of course, you can't always expect that. We don't know how much it's going to slip or exactly what's going to happen in the quarter, and so I just want -- don't want to -- people to believe that this is now the new normal, okay? There is variability as we found in the first quarter. The timing makes a big difference and so on. But what is really important is that, generally, the pipeline is solid and that we see opportunities and that there is fluctuations from quarter-to-quarter. But the 1.2 over time is a good number.

David H. Windley - Jefferies LLC, Research Division

Got it. Okay. Thanks for that. And then as a follow-up on revenue, kind of dialing in on that a little bit. You were -- the rate at which you took revenue down in -- or took backlog down into revenue in this quarter jumped up a little bit. I think I remember that you've made some comments that, that burn rate might rise. I guess I'm interested in your views on the puts and takes on the burn rate metric in light of the fact that some of your quick-burning work from Pfizer is probably going to run off over the next quarter or several quarters, which might have a negative impact on burn rate and then some other factors that you've commented on that would have a positive impact on burn rate. Could you balance those for me?

Josef H. Von Rickenbach

Sure. So I mean just for background sake, what we're talking about is basically the conversion rate from backlog into revenue. And we've seen a slight pickup in this quarter from about 9.7% in the first quarter to, I think, it's about 10.5% this quarter. And first of all, I'd say that there is a normalization happening. The backlog is now relatively balanced, meaning, the number of projects that are in start up, the number of projects that are in sort of mid-production and in wind-down are pretty much where one would expect. In the -- during the time when we won so much business from partnerships, this basically tilted to the left. The left, meaning, the start-up area. Notwithstanding the fact that we got the transfers started from Pfizer. And I'd say that metric, basically, if you could picture that, has now moved to the middle again into the kind of mid-operational area. And I really believe that it would take a lot to move that one way or the other, given that we have $4.8 billion in backlog. And so there is probably going to be some stability and a slow approaching of our pre-partnership era conversion rate. If you could kind of look at that on an annual basis, which is what we do, you can see that for several quarters now, in fact, 3 years, really, we have seen a relative stabilization, around 42% on an annual basis. And if you take the guidance forward, that would still be roughly in that area as well. So relatively stable, and I don't believe that any particular cohort or studies or client will greatly influence that as far as we can tell right now.

Operator

Our next question or comment comes from the line of Steve Valiquette from UBS.

Steven Valiquette - UBS Investment Bank, Research Division

So you guys gave some color on the improvement in early stage development, but just curious, are we talking about double-digit sales and profit growth in early stage across your various segments? Or is it not quite that robust? And also, would you say that the improvement, is this mainly volume-driven or is there some potential for the pricing environment to improve as well within early stage?

Josef H. Von Rickenbach

Just to clarify, we're not talking about early stage as in preclinical, this is Early Phase clinical research, okay? That these are basically Phase I studies, Phase II B and Phase II studies, to some extent. And so this business segment went through a relatively tough time over several years. I think what we have found is a bottom in the -- on the in-unit -- in the in-unit market segment. Most of the growth actually is occurring in the patient -- on the patient side. But overall, the climate seems to be somewhat better.

Steven Valiquette - UBS Investment Bank, Research Division

Better to the level of double digit or is it you just don't want to give that much clarity?

Josef H. Von Rickenbach

Well, it's a relatively small part of our overall CRS segment. And we are not actually breaking out the details. But it's a good growth rate overall.

Operator

Our next question or comment comes from the line of John Kreger from William Blair.

[Technical Difficulty]

Operator

Our next question or comment comes from the line of Todd Van Fleet from First Analysis.

Todd Van Fleet - First Analysis Securities Corporation, Research Division

You had a bit of commentary, Joe, at the beginning about Perceptive and how comfortable you were with the market positioning there. And just looking at the organic growth rate of Perceptive in the quarter, 9.3%, we've continued to see CRS's level of organic growth kind of outpace, I think, Perceptive, if my recollection serves me there. I'm just wondering, how do you think about the growth rate over the intermediate term for Perceptive. Should it be something that outstrips CRS potentially? Or should they kind of be more in tandem, given how close those segments are in terms of the sales process at this point?

Josef H. Von Rickenbach

Well, it's a relatively -- it's an interesting question. And at the -- while at the same time, the businesses are really tied at the hip, they also have slightly varying demand patterns. And one other thing I'd add is that Perceptive now is also at scale, as we pointed out, which is benefiting us on the profitability side. But it's, of course, harder to grow that in the 20% range or even in the high-teens rate. But having said that, we are relatively happy with our growth opportunity that we have for Perceptive. Our platform is getting traction. That's really a catalyst in terms of adoption and eventually, kind of unlocking another growth cycle potentially, even. But at the same time, we're also seeing more and more opportunities with Perceptive and -- sorry, with CRS. And they're coming together more and more as CRS has and is adopting all these technologies and really powering that business going forward. So -- and one point I want to make, not that you wouldn't know that, but just for the sake of completeness, remember, we have relatively significant deferred revenue accounting in Perceptive. And so to the extent that we have a ramp in growth, the deferred revenue portion actually goes up and kind of taking down the actually declared revenue and therefore, growth.

Operator

Our next question or comment comes from the line of Greg Bolan from Sterne Agee.

Gregory T. Bolan - Sterne Agee & Leach Inc., Research Division

Joe, just wanted to ask about the competitive environment for the Phase III CRO market. I guess, as I think back, last quarter win rate was a little disappointing. Obviously, come back strong -- had come back strongly in the December quarter. And, I guess, as I understand last quarter, it sounds like there was maybe some deals that you had thought you were going to win but you were displaced at the last minute. Is that -- are we starting to see enhanced -- I mean, I know this market has always been competitive and always will be, but have you seen any signs of enhanced competitive tactics by some of your larger peers, call it the Tier 1 top 5 Phase III CROs?

Josef H. Von Rickenbach

Yes. Hi, Greg. Remember, we actually talked about that in -- during the last phone call. In the first quarter, probably some of that occurred but in the second quarter, the competitive environment in the second quarter was pretty normal. I was -- I would have to say an orderly competitive environment. I mean, it's competitive, of course, no question, but that has always been the case in general. It's probably more competitive in the -- with the small companies. But once again, that's no surprise, as I have mentioned multiple times, because that's basically the open market, if you want. But it was a good quarter for us. We -- the business we won, we won fair and square with attractive margins, basically. And so overall, rather if anything, moving a little bit in the other direction.

Gregory T. Bolan - Sterne Agee & Leach Inc., Research Division

Okay, that's fair. And then just thinking about Perceptive here for a minute. The move towards a more SaaS-based type offering, the full front with all 3 of the offerings that you're now out there with, how -- I mean, as I look at Perceptive margins, obviously, extremely impressive, the improvement here, how large has this moving to the SaaS-based model been as a driver of incremental profitability for the Perceptive unit?

Josef H. Von Rickenbach

Well, actually as we move to SaaS -- originally, I would say it was actually the opposite. It was a -- it put pressure on margins. This was now several years ago. But we are now pretty much fully on SaaS with our offerings. And -- most of the comments that I already made about the Perceptive margins would apply. But I don't believe that the SaaS conversion really is effective anymore for us. That's really an issue that we dealt with several years ago.

Gregory T. Bolan - Sterne Agee & Leach Inc., Research Division

Okay, and then just slip one last one in here. The top -- the largest client had a -- about a $10 million increase, sequential increase, in revenues from that client. Was that due to any transfer of existing trials? Or is that behind us? Is that -- I guess, getting back to your point, is that -- are we now more in a state of normalcy for this client?

Josef H. Von Rickenbach

Well, we're certainly approaching that in that the transferred studies are starting slowly to exit the system and as a result, what has come in over time and it is coming in, is essentially a normal flow of business. And I would just say to that, that basically means or even exceeds the discussed levels. And so generally, we feel that this is normal and expected.

Operator

Our next question or comment comes from the line of Mr. George Hill from Deutsche Bank.

George Hill - Deutsche Bank AG, Research Division

Most of my questions have been answered. I guess, Joe, maybe could you talk about what you're seeing with respect to, I'll call it, trial complexity and kind of price per trial? And kind of what do the bookings in the segment look like there, and kind of what's the expectation going forward?

Josef H. Von Rickenbach

So overall, over a relatively long time, several years, the so-called trial complexity probably has somewhat increased. Trial complexity being defined as more procedures, more data points being studied, et cetera. And also, over time, the average client -- trial size has probably started to come down somewhat. Although not necessarily the median. And so what does this all mean? It probably means that we are seeing a reflection of our most important therapeutic area, which is oncology, and -- which is a reflection of the overall global pipeline, and also a move away from the very large blockbuster-driven kinds of trials. And while these trials are smaller, they are also, relatively speaking, more complex. So some of that is playing out, I'd point out, not bad for us. As these trials get smaller, more of them, of course, are getting done. And so it's not a surprise here and basically, a pretty much expected development.

George Hill - Deutsche Bank AG, Research Division

Okay, and then maybe just a quick follow-up. Either Joe or Ingo, if we want to think about that kind of longer term, if we've got trial complexity going up, the trial size or number of trial participants in general are coming down, more trials getting done. With, probably, price per data point still kind of flat to net down, I guess, how do we put that in context of the company's longer-term guidance, and think about that?

Josef H. Von Rickenbach

Well, this is very important to understand, and I explain myself a little more from what I just said before or in more detail. More trials will be done. It's not -- we just heard from commentaries earlier in the -- on the call. The overall spend on R&D is not declining. It continues to go up and so, basically, as that happens, obviously, you can afford more trials to be done. If you look at the pipeline and especially the drugs that got approved recently, there are many in there which would be relatively "small products." Small being defined as orphan products or very -- targeting very specific disease areas. And -- but that's a good development. And hopefully, this will then eventually -- and I would already actually claim now, in our pipeline, actually this is reflected and clients are running more trials. The hurdle at which profitability or an attractive return can be earned is coming down somewhat. And so overall, if anything, this probably has a positive effect on demand.

Operator

I'm showing no additional audio questions in the queue at this time. I would like to return the conference over to Mr. Von Rickenbach.

Josef H. Von Rickenbach

Okay, thank you. So in summary, I would just say that during the first half of fiscal year '14, we achieved strong results with service revenue growth of 14.6% compared to the first 6 months of fiscal year 2013. Adjusted operating margin for the first 6 months of fiscal year '14 came in at 9.6%, as Ingo pointed out before, which is up 200 basis points compared to the first half of fiscal year '13. So that sets us up for another year of strong operating margin expansion and we're obviously happy about that. So thank you for your interest in PAREXEL, and we look forward to updating you on our next call. Bye-bye.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.

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PAREXEL International Corporation (PRXL): FQ2 EPS of $0.51 beats by $0.02. Revenue of $574.23M (+36.1% Y/Y) beats by $94.74M.