PAREXEL International Management Discusses Q3 2014 Results - Earnings Call Transcript

| About: PAREXEL International (PRXL)

PAREXEL International (NASDAQ:PRXL)

Q3 2014 Earnings Call

April 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

Steven Valiquette - UBS Investment Bank, Research Division

Ross Muken - ISI Group Inc., Research Division

Garen Sarafian - Citigroup Inc, Research Division

Jeffrey Bailin - Crédit Suisse AG, Research Division

David H. Windley - Jefferies LLC, Research Division

Eric W. Coldwell - Robert W. Baird & Co. Incorporated, Research Division

John Kreger - William Blair & Company L.L.C., Research Division

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

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

Operator

Good day, ladies and gentlemen, and welcome to PAREXEL International Corporation Third Quarter Fiscal Year 2014 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call may be recorded.

I would now like to hand the conference over to 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 results for PAREXEL's third 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 January 31, 2014, 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 Financials Information section 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 Financials section. I encourage you to take a look at the PowerPoint presentation that we have posted there with regard to our third 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 in our results for the third 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 to questions.

In the third quarter, we delivered revenue in line with guidance and strong gross and operating margin expansion. GAAP diluted earnings per share of $0.60 were above our expected range, driven largely by strong improvement in gross margin, particularly in the Clinical Research Services segment. Operating cash flow of $76 million was solid, driven in part by a 3-day reduction in days of sales outstanding compared to the December quarter.

On the new business front, we achieved a net book-to-bill ratio of 1.16. Overall, we were pleased with our performance in the third quarter.

Before I dive into some comments about the financial results of each of our businesses, I'd like to note that we've refreshed our brand during the quarter. Our new brand promised your journey, our mission, describes our commitment to helping clients achieve their objectives. Simplification of drug development for clients remains our goal.

Now I'd like to make some comments about each of our businesses. In our CRS segment, we achieved revenue growth of 9% and drove our fifth sequential quarter of gross margin improvement. On a year-over-year basis, gross margin grew 370 basis points. Sequentially, gross margin improved by 170 basis points. We continue to achieve these operational improvements as our ongoing strategic initiatives advanced according to plan. We are pleased with the progress that we've made in driving profitability in CRS and believe that further improvements are ahead of us.

Another news for CRS, we further strengthened our senior management team with the recent addition of Roland Andersson, who joined PAREXEL as Senior Vice President, Clinical Research Services. Dr. Andersson has extensive experience leading businesses in the biotechnology, pharmaceutical and medical device sectors. Prior to joining PAREXEL, he was a Managing Director at Accenture. He played a pivotal role in the creation of the Transcelerate industry group, which aligned many of the world's best-known biopharmaceutical companies to address common drug development challenges. We're pleased to have Roland on board.

Moving on to PAREXEL Consulting. Revenue grew 2.5% and gross margin improved year-over-year by 150 basis points. Revenue growth was lighter than expected as a result of a nonperformance related cancellation of work in progress. New business performance in PAREXEL Consulting continues to be solid, and we anticipate the resumption of sequential growth going forward.

During the quarter, we announced the launch of PAREXEL Regulatory Outsourcing Services within PAREXEL Consulting. This offering broadens our portfolio of regulatory information management services. Regulatory outsourcing is becoming increasingly important to clients as they deal with the complex task of managing their regulatory needs. Through our new offering, clients can now outsource significant portions of their regulatory activities to a trusted partner in a cost-effective manner. This offering also leverages the regulatory outsourcing IT tool that we acquired through Liquent.

In PAREXEL Informatics, we achieved a strong year-over-year revenue growth and grew margins by 60 basis points. As bio-pharmaceutical companies increasingly seek to combine clinical solutions from a single service provider, we have more closely integrated our technology-enabled solutions with our clinical development and consulting services. To reflect the tighter integration that we now have, we changed the name of Perceptive Informatics to PAREXEL Informatics. We believe that this approach provides us with a powerful competitive advantage, especially as compared to standalone technology providers.

With regard to client concentration, the largest client in the March quarter represented 16% of revenue as compared to 20% in the third quarter a year ago. The top 5 clients represented 49% as compared to 52% one year ago, and the top 20 clients were 79% as compared to 81% one year ago. Over time, we expect to see less client concentration as revenue from strong recent wins in the BioPharm unit starts to ramp up.

A few words now about headcount. During the quarter, we added 230 employees, bringing us to an employee base of 15,335. Resource management continues to be a focus for the company as we continually seek to balance supply and demand. We also continued to utilize our global infrastructure and add headcount in low-cost countries when possible.

Moving on now to new business dynamics. Backlog of $4.93 billion at the end of the third quarter was up 9.4% year-over-year and up 2.3% sequentially. Backlog conversion rates continued to be in the normal range. Cancellations came in at 4.3% of beginning backlog. Our rolling 4-quarter average cancellation rate is 4.1%, right in the middle of our expected cancellation range of 3.5% to 5%.

The net book-to-bill ratio for the quarter was 1.16. Our new business performance was solid across all business segments. We were particularly pleased with the small company segment and our BioPharm unit posted record new business results. Our recent success in winning significant levels of new business with the small and emerging client companies demonstrates our ability to adjust and adapt to evolving market conditions and dynamics.

We have a long history of successfully working with clients of all sizes, and we will pursue new business opportunities wherever they may be.

Opportunities in the marketplace continued to be robust in all market segments. As a result, proposals sent in the quarter were up significantly compared with a year ago, and our proposal portfolio at the end of the quarter was strong.

Now a few words about the balance sheet. With regard to uses of capital, we continue to have a focus on M&A. We apply a rigorous approach in our evaluations, always keeping shareholder value in mind. The M&A targets we assessed so far this fiscal year have not met our strategic and financial criteria, but we are evaluating opportunities on a regular basis.

M&A continues to be an important part of our growth strategy. We also regularly review the balance sheets and our overall financial strategy to determine the best uses for cash deployment, including M&A, stock buybacks and further investments in the company through CapEx.

Turning for a moment to the tax rate. Our adjusted tax rate in the March quarter was higher than planned as a result of a delayed tax ruling in one of our operating countries and strong revenue growth and profitability in the high tax jurisdiction of the United States. Ingo will address this topic further in a few minutes. We are working diligently on assessing our tax strategy to address this challenge and expect to see improvements in the course of fiscal year 2015. Our long-term target is to achieve an effective tax rate that is within the industry average.

Looking now to industry dynamics. In recent months, several biopharma companies have reported that they are engaged in various strategic repositioning activities. While big pharma M&A activity in the past has occasionally caused short-term disruption, in the long run, it has consistently led to higher outsourcing penetration rates for our industry. Successive waves of biopharma consolidation have had less and less of a disruptive impact on us, partly because our backlog has become an increasingly larger stabilizer.

In addition, the quality of our clients' portfolios has improved. We are in close communication with our clients, and we feel that the benefits of outsourcing are increasingly evident to them. Combined with continuing strong opportunities from small and emerging biopharma companies and potential market share gains for the top CROs, we believe that prospect for our business continue to be quite positive.

Looking ahead, our strong backlog and solid new business performance give us confidence to expect that sequential revenue growth will accelerate in the fourth quarter. We believe that a number of our most important initiatives continue to yield tangible operational results and productivity improvement, which will lead to further operating margin expansion.

In summary, we continue to be committed to creating shareholder value through successful execution of our clients' project and our ongoing margin expansion initiatives. In this regard, I'm very pleased and proud of the results that we have achieved so far this fiscal year. For the 9-month period, this includes revenue growth of more than 12%, operating margin improvement of 220 basis points, and growth in earnings per share of 41% versus the comparable prior year period.

We are focusing on creating a more seamless and integrated products and service offering, and the increased integration between PAREXEL Informatics and our other businesses is an example of this.

We are driving a high-performance culture in the company overall, which we believe will continue to yield positive results for clients and investors alike. We continue to have a keen focus on driving shareholder returns and maximizing shareholder value. We believe the market opportunity remains compelling, and I'm confident about our short-term and long-term strategy. And I'm particularly pleased with the infusion of new talent into the organization, who I will expect to make a strong contribution to the company.

In closing, we hope that you will be able to attend our Investor Day, which will be held in New York City on June 25. Several members of our extended management team will make presentations about industry trends, PAREXEL competitive advantages, opportunities for revenue growth and margin expansion and our outlook for the future. I hope to see you there.

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

Ingo Bank

Thanks, Joe, and good morning to all of you on the call today. Overall, as Joe pointed out, we delivered a very good quarter with a strong set of financials.

Let me start my comments with our revenue growth dynamics in the third quarter. Total revenue for the March quarter grew 8.3% to $492.4 million, with the HERON acquisition contributing 0.5 percentage points. Excluding the effects of foreign exchange and the acquisition of HERON, comparable revenue growth was 7.4%.

Year-over-year revenue growth was driven by all of our businesses. CRS grew revenue by 9% to $373.2 million. Adjusted for the positive impact of foreign exchange, comparable growth was at 8.7%. All of our client segments contributed to the growth.

PAREXEL Consulting grew by 2.5 percentage points, with the acquisition of HERON contributing 4.9 percentage points to the year-over-year growth. Adjusted for the positive impact of foreign exchange and acquisitions, PAREXEL Consulting revenue declined by 3%. The main reason for the decline, both year-over-year, as well as sequentially was a nonperformance-related contract cancellation in the quarter in our Strategic Compliance business that had an immediate impact on revenue generation.

PAREXEL Informatics grew revenue by 9.4% to $67.3 million, delivering a very similar revenue level when compared to the December quarter. Adjusted for the positive impact of foreign exchange, revenue increased by 8.5%. Growth was particularly strong in our Medical Imaging business and our market-leading offering of Randomization and Trial Supply Management, RTSM.

Moving onto gross margin. We continued to deliver another quarter with strong margin expansion. Compared with the same quarter of fiscal year '13, gross profit grew by close to $27 million, with gross margin expanding by 300 basis points to 34.4%. Sequentially, overall gross margin increased by 100 basis points, driven by continued productivity improvements.

Let us take a look into the gross margin development in each business, starting with CRS. In the third quarter, CRS gross margin continued to improve and increased by 370 basis points year-over-year, coming in at 31.6%. This translates into a total gross profit increase of more than $22 million compared with the same period in fiscal year '13. We continued to see the benefits of our operational efficiency programs, translating into better utilization and higher availability.

In addition, our shift of activities into low labor cost countries is paying dividends. Furthermore, we saw ongoing gross margin improvement in our Early Phase operating units on the back of revenue growth and good cost management. CRS gross margin also increased on a sequential basis by 170 basis points.

Turning to our PAREXEL Consulting business. Gross margin improved by 150 basis points to 41.4% and was up 120 basis points sequentially. The year-over-year improvement was largely related to a more favorable revenue mix. Compared to the December quarter, margin improvement was driven by a higher utilization of resources.

PAREXEL Informatics gross margin reached 44.3% for the quarter, up by 60 basis points compared with the same period in fiscal year '13. Sequentially, gross margin declined by 250 basis points, largely due to a timing effect related to the amortization of deferred costs. Revenue mix was less favorable compared to the December quarter. Moving forward, we expect PAREXEL Informatics to gradually continue its path of gross margin improvement.

Let's now take a look at some of the other financials for the March quarter. All of the numbers I will be referring to are adjusted. SG&A, as a percentage of revenue, was slightly up by 30 basis points compared with a year ago and unchanged from our December quarter coming in at 19.4%. The percentage increase, relative to the same quarter of fiscal year '13, was driven by the acquisition of HERON. We continued to invest in IT to drive resource productivity in our facility infrastructure in support of our growth. Investments in sales and marketing delivered a good return by looking into our new business wins this quarter, particularly for our BioPharm units.

With the efficiency initiatives set in motion for a number of our support functions, such as IT, HR and finance, we expect that SG&A, as a percentage of revenue, will decrease over time and thereby, contribute to our overall objective of ongoing operating margin expansion.

Moving on to operating income. The combination of revenue growth and gross margin expansion helped us to grow operating income substantially by $15.9 million, an increase of approximately 42.5% year-over-year. As a result, operating margin expanded by 260 basis points to 10.8%. Sequentially, operating margin improved by 100 basis points.

We are pleased to have crossed the 10% operating margin mark, an important milestone in our journey towards delivering our longer-term operating profitability goal in the 12% to 14% range.

Excluding purchase accounting and integration cost effects, the company's earnings before interest, taxes and amortization of 11.5%, up 225 basis points compared with Q3 in fiscal year '13. As I discussed during previous quarters' earnings calls, this metric is an important operational profit measure for us. It helps us to better understand the underlying structural profit margin of our business without the distorting effects of purchase accounting.

If we then look further at results below the operating income line, other expense net came in at $2.6 million, driven by net interest expense of $2.1 million. Foreign exchange currency results recorded in other income and expense were immaterial this quarter. The March quarter effective tax rate on a GAAP basis was 30.3%. The non-GAAP tax rate was 36.1%, 230 basis points up from the December quarter, mainly due to the delay of a tax ruling.

When comparing the current quarter's non-GAAP tax rate to the March quarter of fiscal year '13, we need to remember that a year ago, the company benefited from a retrospective reinstatement of the look-through provisions of the U.S. tax code and a significant release of valuation allowances. In addition, we now have a much higher share of pretax profitability here in the United States compared to just a year ago.

For the full fiscal year, we expect our tax rate to be between 34% and 35%, slightly up from previous guidance, driven by a delay of a tax ruling that I just mentioned. We've already set actions in motion that support a path towards a lower and more competitive tax rate.

Given the strong improvement in operating margin, we delivered another quarter of double-digit growth in EPS. Third quarter diluted earnings per share increased to $0.56. This compares to $0.50 in the same quarter a year ago, representing a 12% year-over-year increase. On a GAAP basis, diluted EPS grew 20% year-over-year.

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 $76.4 million. Our DSO improved by another 3 days from the December quarter, driven by strong collections and the benefits of increased deferred revenue. CapEx for the quarter was $15.6 million, in line with plans and lower than Q3 fiscal year '13, as well as lower as our second quarter of the current fiscal year '14.

Net debt was approximately $12 million compared to $82.4 million in the second quarter of fiscal year '14 as we used part of the operational cash flow to pay down our revolver.

Return on invested capital was strong at 16.1% as a combination of good working capital management combined with operating margin expansion delivered a substantially higher return than our weighted average cost of capital, demonstrating our ongoing commitment to create shareholder value.

Let me now change the perspective and take a look forward. We've included our forward-looking guidance for Q4 fiscal year '14 as part of the earnings release that we issued yesterday. For the fourth quarter, we expect operating margins to be slightly ahead of Q3, benefiting from the expected sequential increase in revenue in Q4 and ongoing initiatives.

For the full year of fiscal year '14, we've also raised our revenue and EPS guidance when looking at the midpoints. With the revised guidance, we anticipate our adjusted operating margin for the full fiscal year 2014 to be around 10%, which would result in another year of significant margin expansion.

In summary, we delivered a strong quarter of revenue growth and operating margin expansion, with the latter showing the results of our ongoing focus on increasing efficiencies across all of our businesses. Combined with a strong operational cash flow, we improved our return on invested capital, driving shareholder value creation.

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

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Steven Valiquette from UBS.

Steven Valiquette - UBS Investment Bank, Research Division

I got a, I guess, just 2 questions. First, you kind of confirmed what happened on PCMS in the quarter, where things were kind of slight out trend line. But just to confirm, should we assume now that, that will have a sort of a snapback to the growth pattern that we saw in the upcoming fiscal fourth quarter? That's kind of the easy question. And the other question is, it seemed like CRO stocks are doing okay this morning, and then one of your peers who shares your -- let's say, one of your largest customers made some comments about how they feel bullish around the overall situation there, obviously, in light of this proposed mergers and everything else. But they made some commentary around the fact that there could be some minor delays on projects around an integration of a large merger. I'm just curious to kind of get your thoughts on this topic that, obviously, is going to come up on this call, whether I bring it up or somebody else, but just to kind of throw it out there, just on your thoughts around what's happening with the -- some of these proposed large pharma mergers.

Josef H. Von Rickenbach

Yes, so on PCMS, we had a cancellation there of a project, which was ongoing. Not related to any of these mergers, by the way. This was actually well before that and as I said, totally unrelated, also geographically unrelated. The good news, basically, is that we have a good pipeline and a good new business performance, and we really believe that the business will benefit from that and will resume its growth path going forward. As far as the mergers are concerned, obviously, this is a topic that has been very concerning to the market overall. And I'd just repeat what I said in my prepared comments, and that is, first of all, and maybe most importantly, this is not the kind of activity that we experienced 15 years ago when this all started. In the interim, most of these large pharma companies and in the industry overall for that matter has really purged their pipelines. And the name of the game is not so much anymore a question of taking out projects and calling the portfolios, but much more, if you want, other strategic elements are probably overriding. And so what that means for us, specifically, is that the safety, if you want, of our project and our work is much higher than it used to be in the past. And so our view is that even if this were to happen, that the positives are actually higher because the experience has been that every time an event like this happens, actually, eventually outsourcing gets bigger. But the projects that are going -- ongoing right now are very high priority for all of these companies. And I would be very surprised, in fact, I would be shocked if there were delays in that. In fact, maybe the exact opposite may happen because they may rely on us to make sure that things stay on track. And so our view is not a one-off concern actually that much, and rather one of a situation where we can make potentially a positive contribution to keep things on track.

Steven Valiquette - UBS Investment Bank, Research Division

Okay. I guess just a quick follow-up. Generally speaking, would you say that there's probably more, I guess, safety, for lack of a better phrase, that they have more concentration on late stage trial, where it gets opposed to early stage? Just kind of curious to get your thoughts if we try to sort of break down the market that way, if there's any additional color.

Josef H. Von Rickenbach

Well, as I said, I think my commentaries really relate to the entirety of the portfolios. But for sure, they relate to the very late phase kinds of projects that we tend to typically be engaged in because that is ultimately the work that separates you, maybe a year or 2 from revenue. And so that's the last project that you want to touch. And so you may have a point there. But as I said, I feel, meaning to the good, in the sense that our specific project portfolio is probably even better positioned. But overall, I think it's just, still to -- my comments are still to that the -- these portfolios are in much better shape and in -- are more attractive than they used to be.

Operator

Our next question comes from Ross Muken from ISI Group.

Ross Muken - ISI Group Inc., Research Division

Maybe I'm going to just stick to that same topic. So historically, in the case of these events, obviously, driving synergies in terms of pharma M&As is key. And Joe, you talked about driving opportunity ultimately. In the case that those involved, the kind of key partners, at what point do they come to you as a source of helping them, kind of provide some of that help to hit the synergy target, just in the context that -- or at least engage you in discussion. Because I guess the question is, if the street, right now, believes that there is no visibility here, irrespective of sort of what the public commentary is. At what point historically within a process do you feel like you get engaged enough to where you can give the harder numbers or frame things so people can have a sense for the actual risk reward here in terms of how much trial could be at risk and then how much business could be won.

Josef H. Von Rickenbach

Ross, it's, of course, premature to go into these kinds of details because there's not even a deal really established. And so first of all, you have to sort of handicap that. But also, there is -- there has been up a lot of commentary around the motivation of this deal. And I don't believe that was actually primarily driven towards these portfolios. In other words, as far as I can evaluate, this is not a cost play primarily at all, actually. And so -- but as I also said before in my comments, we are in close contact with our clients. One of the benefits of our Strategic Partnerships is that we have basically an intimate discussion with them about these things. And as of right now, we have been completely reassured that things are on track and in some cases, actually, for quite a while, okay? So while this discussion is going on, it's of course, important for us to also know how to plan. And so in the -- I guess now, what one -- what is now the long-term, in Wall Street terms, I don't really see a big disruption for us.

Ross Muken - ISI Group Inc., Research Division

Sorry, it's a little bit of a complicated question. So I guess the other thing, stocks fall back 20% in the last month or so around this. So you still have a relatively, particularly as your margins come up, pretty attractive balance sheet. I mean, how much, given your long-term view and the comments you made, how much impetus do you think there is to maybe revisit the level of buyback? Again, I know you've done it strategically before. I would think you see your shares more attractive here than they here when you probably liked them $7, $8, 10$ ago. So I'm just trying to get a sense for the flexibility and how you're thinking about what the market is maybe giving you as an opportunity.

Ingo Bank

Thank you. Basically, the way we look at this is, obviously, we want to make sure that we create shareholder value and that we drive an efficient balance sheet. And unchanged to what we've said in the past, our priorities are really around M&A because M&A is also part of helping us to drive growth going forward on top of our current business that we have. As we said in the past, CapEx is a very important part of how we deploy capital. And then we're also, of course, regularly reviewing other means of using our capital. But overall, in that regard, we have not really changed our view. Again, it's important for us to have an efficient balance sheet, and we're constantly looking into this.

Operator

Our next session is from Garen Sarafian from Citigroup.

Garen Sarafian - Citigroup Inc, Research Division

Congratulations on exceeding the 10% mark in operating margin. And my question was more about in upcoming quarters. I know you can't share guidance for calendar '14 or fiscal '15 just yet. But how should we conceptually think of the levers that will increase the operating margins further? And if you could just order them maybe by significance, so that we have framework in mind.

Ingo Bank

Thanks, good question. Obviously, yes, we're very happy with having crossed the 10% operating margin mark. I think that's a big achievement of the company. And I would say it's the result of a number of factors, a number of initiatives. So it's not that there's 1 or 2 magic wands that basically are driving this. There's a lot of initiatives in the company to drive this going forward. If you look at what happened in CRS, particularly this quarter, I think what you see paying off is the fact that we've basically helped the organization to improve its workflows. And as a result, our utilization availability has gone up in that part. We have now a higher share of activities in low-cost countries than just a year ago. And as I said also in my prepared remarks, clearly, we see better results coming out of our Early Phase unit, which is part of the CRS segment in our reporting, on the back of good growth that we see there and -- but also, really, good structural cost management undertaken in the past. So those, I would also see as the prime drivers also from a gross margin perspective going forward. You see -- you saw that also PAREXEL Consulting margins improved quarter-over-quarter and also year-over-year. We said before that in PAREXEL Informatics, we should be moving over time to a gross margin closer to 50%. There was a little bit of a catch-up related to deferred cost in the quarter, so I expect that going forward, we will also see there a gradual improvement. And then, of course, if we look at longer-term SG&A, we have had now period where we caught up a little bit from an investment perspective. I talked about IT. I talked about facility build-outs and the like. But we've also announced plans in motion for our G&A functions, including finance for that matter, where we should see some of those benefits also coming and certainly, during the course of our fiscal year '15. So there's a number of things that are still moving for us. I don't think that we're at the end of this improvement. And again, the good news is there's not 1 or 2 magical things here that drive this.

Garen Sarafian - Citigroup Inc, Research Division

Got it. So it sounds like there was quite a lift. So it sounds it's not a few things in particular but it's across the board gradual improvements, is that safe to say?

Ingo Bank

That's a fair statement.

Garen Sarafian - Citigroup Inc, Research Division

Got it. And then my follow-up is just on a different twist on the M&A in the pharma client base, you mentioned in the prepared remarks M&A is a part of your growth strategy. So I'm curious to see what you guys are thinking in terms of how the possibility and M&A thus far in the client base is impacting how you view your own M&A and the pace in which you implement that.

Josef H. Von Rickenbach

Yes, good question. As of right now, it wouldn't really affect our own M&A strategy. Now once again, I mean, if you kind of actually look at what actually has happened versus what is being talked about and being speculated, in the big scheme of things, maybe this doesn't really change maybe much of anything actually, and certainly, not negatively. I mean, overall, as I kind of pointed out before, we view this actually probably more with an optimistic approach. I think the benefits outweigh the potential balance I'd see here, and for us, that's specific for PAREXEL. And as of right now, we don't really see a need that we would change our M&A strategy. I think we're well prepared to support our partners, and they know that. And we wouldn't need M&A to supplement that or come into play in any way that's not already planned.

Operator

Our next question comes from Jeff Bailin from Crédit Suisse.

Jeffrey Bailin - Crédit Suisse AG, Research Division

Joe, it sounds like you guys have been pretty pleased with the trends within your BioPharm unit. I guess, lately, we've seen maybe a little softening in the biotech market, maybe for new IPOs and certainly in the equity markets there. Can you just talk about a little bit what you're hearing from that client base and maybe how a slowdown could kind of potentially impact the momentum there?

Josef H. Von Rickenbach

Well, certainly, through the end of March, the funds flow was very strong and very good. And bear in mind how much capital has been raised over the last several years, okay? And most of that capital is still waiting to be deployed. So there is a tremendous overhang of opportunity that is still coming our way. And so our small and emerging biopharma company opportunity is probably at an all-time high. And we've done well on -- in this area in this past quarter, and we continue to see a lot of opportunities going forward. So now you're talking about maybe weeks. And I don't really think that, that would be, so far, certainly, an indicator of anything -- of a turn that would have impacted our opportunity on the ground.

Jeffrey Bailin - Crédit Suisse AG, Research Division

Got you, very fair. And maybe just a shift over to the Informatics business for a moment. The gross margins took a step down and it sounds like that maybe has a little bit more timing than anything else. But as you talk about a 50% target over the long run, what do you kind of need to see in terms of maybe top line growth or other drivers to push you towards that long-term target?

Ingo Bank

Thanks, Jeff, for the question. I think similar to what I said about CRS, also in PAREXEL Informatics, I think we have clearly an opportunity to shift more activities into low-cost countries. Part of the reason why PAREXEL Informatics gross margin has improved is part of that. But I think there is more runway there still for this business. So that's part of that. And then indeed, revenue growth is important. We have invested in the last couple of years and quarters into creating a scalable platform in our IT offering that, obviously, then benefits from creating a leverage from a higher revenue level. But it's not just revenue driven. It's also, like in all the other business, we are in the process of making sure that we perform our activities in locations where they're most cost-effective. And again, that's also a driver in PAREXEL Informatics.

Operator

Our next question comes from Dave Windley from Jefferies.

David H. Windley - Jefferies LLC, Research Division

On the last question, Ingo, would you be able to put -- to give us a little more sense of time frame? So it sounds like you still have some runway on these off-shoring activities. To an earlier question, you mentioned G&A still is an area that seems relatively new and in attention to off shoring. What kind of timeframe are you thinking? And any other quantification you can put on that would be appreciated.

Ingo Bank

Sure. Dave, thanks. So you will appreciate that, obviously, we do have already a significant presence in our shared service center in India, right, as a total company, which hosts not just some of the G&A functions, like finance and HR, but also more of the business support functions as well. So that's -- and we have there, right now, approximately 2,000 employees or so. So that's already fairly significant presence. Like with all the businesses that we have, we are in the process of establishing the budgets for next year. And again, also there on the agenda is how we can further increase the share of our activities there. So I don't think we're at the end of the runway, neither for the businesses nor for the G&A activities that we have. As to the pace with which we get PAREXEL Informatics closer to the 50% mark, I think that it's -- it would be too premature to consider that it would be happening in the very short term. We have to do some more work there. We're on the right path. But it will take us, certainly, beyond fiscal year '15 to get to that level.

David H. Windley - Jefferies LLC, Research Division

Okay. Switching gears to revenue mix. As I look back through some old, old notes, there was a point in time when -- kind of before the crisis, when small company funding had been very strong and that demand from that client segment had also been strong for the industry, and PAREXEL quantified revenue from, say, small and emerging biotech-type clients that -- as high as 20% of revenue. I wondered if you could put numbers on that today. Give us a sense of where that mix is today, large versus small or large, medium and small, something like that, and where that might go.

Josef H. Von Rickenbach

Dave, so in this particular quarter, we've had a really good run, a good performance in terms of getting new business from the smaller company clients. And I said this, most of our revenue is still driven by business that is in backlog. The backlog composition is still heavily biased towards the larger companies and towards the partner companies. But over time, as you saw already, the client concentration is coming down a little bit and we probably will continue to see that. We, I think, did well and I'm proud of the fact that we have won in a very competitive environment, the business that we have won from the smaller companies where clearly, there is market demand and where the wind is blowing. And I think as we move forward, all else being the same, the percentage of revenue coming from that segment should go up.

David H. Windley - Jefferies LLC, Research Division

So maybe as a follow-up and then I'll jump off. I know that you have structures in place to do, for lack of a better phrase, credit checks on the wherewithal to pay analysis on smaller companies as you evaluate their proposals or their RFPs. When they are engaging you, and on the heels of this run, a significant capital raising by biotech, can you give us a sense of how much of that -- how much of their balance sheet -- how of their cash balance are they spending when they are engaging you? And other way to look at that would be how many years worth of demand might they have on the heels of having raised a lot of capital?

Josef H. Von Rickenbach

It depends in each company. But let me just, first of all, make it clear, just confirming what you said, and that is, yes, in each case, before we engage with a client, unless it's completely obvious, we do a credit check and we make sure that the liquidity is there to actually also pay for the work. If there's one lesson that we learned in the financial crisis, it's that, that we need -- can make sure that we are covered for the work we have. Now to your bigger question in terms of -- the way I understand the question is that you kind of aggregate the balance sheet of these smaller companies. How much is dry powder relative to what they have already committed to ongoing works? And I would say, it's of course, a complete estimate. But there is still a lot of cash out there, a lot of capital out there to be still allocated. So there -- just as I indicated before, even if there's a small blip in terms of the fund flow into the segment, there is still a lot of opportunity there for us for a new business to come, probably through this calendar year, I would say, at least.

Operator

Our next question comes from Eric Coldwell from Robert W Baird.

Eric W. Coldwell - Robert W. Baird & Co. Incorporated, Research Division

Ironically, my line of questioning was very similar to that last question from Dave. But I guess I'll ask it a different way. Roughly, in a given year, how many clients does PAREXEL work with?

Josef H. Von Rickenbach

Eric, it would be thousands, okay? Don't forget we -- the question is how do you define the clients? So if you define a client as everybody who sends us a check, it would be thousands. But if you kind of look at the median-sized clients, it probably would be hundreds.

Eric W. Coldwell - Robert W. Baird & Co. Incorporated, Research Division

Okay. So let's go with hundreds to be conservative. Your top 20 are 79% of your revenue. Is it safe to assume that there are very few small pre-commercial biotechs in your top 20 list?

Josef H. Von Rickenbach

Yes, I think that's a safe assumption.

Eric W. Coldwell - Robert W. Baird & Co. Incorporated, Research Division

Okay. So hundreds, or maybe even thousands of clients make up the other 21% of your revenue?

Josef H. Von Rickenbach

That would be then the case, correct.

Eric W. Coldwell - Robert W. Baird & Co. Incorporated, Research Division

Okay, got it. So we can probably put the biotech financing thing to rest, fair enough?

Josef H. Von Rickenbach

Yes, it's good reasoning and it completely applies.

Operator

Our next question comes from John Kreger from William Blair.

John Kreger - William Blair & Company L.L.C., Research Division

Joe or Ingo, can you just give us, maybe some early thoughts on fiscal '15, any sort of key issues or drivers that you think would put you either above or below those -- some of those longer-term growth targets you articulated at your last Analyst Day?

Ingo Bank

Thank you. So, obviously, we're still in the process of looking into the budget for fiscal year '15. As we said in the past, our long-term goals are -- is to achieve a revenue growth of between 10% to 12% on average per year, and ultimately, get to an operating margin of anywhere between 12% to 14%. And that perspective, obviously, also is helping us in the budgeting process. And our current expectation is that, that perspective has not changed.

John Kreger - William Blair & Company L.L.C., Research Division

Okay, great. And no specific comments on '15. Ingo, when would you expect to give us more official guidance for next year?

Ingo Bank

We have -- we're looking, but we haven't decided this yet. Because again, we have -- we are looking into the budgeting process right now, but I'm sure we will let you know once it's decided.

John Kreger - William Blair & Company L.L.C., Research Division

Okay. And a quick follow-up. PAREXEL has typically not been able to hold a double-digit operating margins historically. Any perspective given your relatively short tenure at the firm, what you've been able to do to sort of get there and to the degree to which you think it's sustainable?

Ingo Bank

Well, I think we need to take a few things into consideration here. As I said before, there's a number of initiatives in the company across-the-board both in the businesses, as well as in the support functions. So this is a broad-based work that started before I came and where we added a few things since I've arrived. And I think we have bigger momentum to help us improve margin, so there's not one trick or so. The other thing is that the company certainly came out of a period of, what I would probably call, hypergrowth. And we're now seeing type of growth rates, as we said, somewhere between 10% to 12% in the long term, which gives you the time to actually look into where you want to perform certain activities and at what cost levels. And surely, that will help us also going forward to drive further cost efficiencies into the company. So it's a bit on focus. It's making sure that some of these plans are quantified and everything. But there's a lot of initiatives going on across the company, and I'm actually very pleased with that.

Operator

Our next question comes from Tim Evans from Wells Fargo Securities.

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

Sorry to dwell on this, but given the unprecedented size of a potential merger between Pfizer and AstraZeneca, one of your competitors this morning was able to -- was willing to give us some qualitative color on exposure to AstraZeneca. I was wondering if you would be willing to do the same? Are they a top 10 customer for you?

Josef H. Von Rickenbach

Yes, we're not quite as ready to talk about specific clients. But let's just say, what I already said, Tim, and that is we don't really feel that whatever our client composition and our portfolio is, that we are particularly exposed here. If anything, as I said, we take an optimistic view and look at this essentially as an opportunity for us. And it just came to pass. Frankly, I was a little surprised about the reaction and why -- because I think as a company, we are very well positioned to support these clients going forward, either way, whatever happens. And so actually, I feel that the bold case hasn't been made as much as it deserves.

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

Great. And then a quick follow-up for Ingo. I noticed your deferred revenue ticked up quite a bit this quarter. What should we make of that metric when we think about that in context of your Strategic Partnerships?

Ingo Bank

Basically, that's just the function of receiving an increased amount of prepayments from our clients. So when we enter contracts with our clients, depending also on the client mix, a little bit then we asked at times also to start the work with prepayments. And it depends -- it's different per client. And in those periods, and we -- in this period, particularly, we then benefited from an increase of the balance that we already had in the December quarter.

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

So it wouldn't be indicative of maybe the burn rate increasing in the near term or something like that?

Ingo Bank

No, I wouldn't say that. It's really more of a sort of our normal business. Maybe more of it is reflective of a client mix that we have, but not really indicative of burn rates in that regard.

Josef H. Von Rickenbach

I just want to add to that, Tim, and in line with the question that was asked before, especially with the smaller clients, we want to make sure that we don't have an exposure. And so part of our checks are to make sure that the down payments and ultimately, the overall, that we have the visibility, to make sure that these smaller companies can also pay. And so it's really not a surprise to see that go up in the quarter where we have had a good run with the small and emerging clients.

Operator

Our next question comes from Robert Jones from Goldman Sachs.

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

Just want to get back to bookings and revenue. Joe, if I look at the bookings, trailing 12-month book-to-bill now with the 1.16 you did this quarter, it looks like it's coming out about 1.15, a little bit below the stated goal of 1.2. Just curious if maybe you could call out what specifically, from a segment perspective or market perspective, for that matter, is creating a little bit of a drag, relative to your long-term goal. And I guess as it relates to revenue, any change -- it doesn't sound like it, but any change in the assumption as you look out to the potential double-digit revenue growth going forward, just in light of the book-to-bill trending slightly below your stated goal?

Josef H. Von Rickenbach

Yes, actually, I'll answer the questions in reverse. The revenue is driven as much or more, actually, by what's in backlog versus what we win in the quarter. So the book-to-bill ratio is very immediate and it's basically very near term. But 80%, or take a number, a relatively high number of our next quarter's revenue comes out of backlog. And so to the extent that any of those dynamics change, you can have higher or lower revenue. And so a lot of the growth, actually, is driven by our very high backlog. Don't forget, we have nearly $5 billion in backlog, which is a very important point for revenue, but it's also a very important point for overall stability. And very different, let's say, from 10 years ago. Now as it relates to your first question, which is relating to the book-to-bill, yes, it's true that we had and have a 1.2 net book-to-bill as a target. But having said that, you all know that the increment above 1 in the net book-to-bill, basically, is growth. So if we have a 1.2 forever, we would grow at 20%, and that's not our growth target. Our growth target really is, as Ingo just said, roughly in the double digits, 11%, 12%, let's say. And if all else stays the same, conversion stays the same, we could -- our book-to-bill could be as low as that, 1.12 or 1.123 maybe. The reason why we needed the 1.2 was because we had erosion in our conversion rates over a long time. But as I'm sure you have observed, over the last 3 years or so, the conversion has basically plateaued and maybe even come up a little bit. And so as that happens, the net book-to-bill above 1 and the growth rate are now starting to align much more. And so, with that, we're actually not that worried about the net book-to-bill being a tad lower, although, of course, we're still striving higher. And as I also pointed out in my comments, we have a good proposed portfolio. The fourth quarter, from an opportunity perspective, looks pretty good.

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

Got it. And then I guess just one specific on the revenue in the quarter. It did look like the Asia Pac growth was maybe a little bit less than what we were looking as far as revenue growth. Just curious, relative to your own internal expectations, how you think you faired there. Maybe what sort of the major dynamics are within that market, that'll be helpful.

Ingo Bank

Let me first say that if you look at the revenue disclosure there by geography, we need to remember that it's a transfer price driven metric that we publish here. And sometimes, this metric is sort of impacted by incremental [ph] pricing changes that is more internal than anything. For instance, in this March quarter, we redesignated some existing contracts out of Asia into Europe at the request of a client, that has nothing to do with the growth dynamics per se in the Asia region. So I think what we need to look into is probably more what the year-to-date growth numbers are year-to-date Asia Pacific is growing at around 6.3%, and that's in line, pretty much, with our expectations. But maybe Joe, you want to add to your outlook on Asia for us?

Josef H. Von Rickenbach

Well, I'll just say, aside from the comments that Ingo said, which basically, is if you want sort of the financial reflection of revenue in our statements, on the ground and on Asia, continues to be a very good geography for us. We have a great presence there. It's clearly a competitive advantage for us. And the positive dynamics that we have experienced now for a while are continuing. And so there's a little bit of a disconnect in the way that Ingo explained between what's actually happening on the ground and what is reflected in the statements.

Okay. Thank you. And with that, I'd like to thank everybody for participating on our phone call and our earnings call, and I appreciate your interest in PAREXEL. And we look forward to updating you in our next call. And also, hope to see, hopefully all of you, at our Investor Day in New York. Thank you, and bye-bye.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program. You may all disconnected, and have a wonderful day.

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