IMS Health Holdings' (IMS) CEO Ari Bousbib on Q2 2014 Results - Earnings Call Transcript

Jul.24.14 | About: IMS Health (IMS)

IMS Health Holdings Inc. (NYSE:IMS)

Q2 2014 Earnings Conference Call

July 24, 2014 9:00 AM ET

Executives

Tom Kinsley – Head, IR

Ari Bousbib – Chairman and CEO

Ronald Bruehlman – CFO

Analysts

Suzanne Stein – Morgan Stanley

Andrew Steinerman – JPMorgan

Andre Benjamin – Goldman Sachs

Manav Patnaik – Barclays Capital

David Larsen – Leerink Partners LLC

John Krueger – William Blair & Co.

Operator

Ladies and gentlemen thank you for standing-by. Welcome to IMS Health’s Second Quarter 2014 Earnings Conference Call. During the presentation all participants will be in a listen-only mode. As a reminder this conference is being recorded Thursday, July 24, 2014. I would now like to turn the conference over to Tom Kinsley, Head of Investor Relations. Please go ahead.

Tom Kinsley

Thank you. Good morning everyone. Thank you for joining us today to discuss the 2014 second quarter performance for IMS Health. With me today are Ari Bousbib, the Chairman and Chief Executive Officer and Ron Bruehlman, Senior Vice President and Chief Financial Officer. We will use a presentation on the call today that is available on the events and presentations section of our Investor Relations website easily found in the top right hand corner of our imshealth.com.

Before we begin our prepared remarks I’d like to remind you all of you that some of the information contained in this presentation may constitute forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may include comments about our guidance, our pending transaction with Cegedim, expectations and prospects and are based on our view as of today July 24, 2014. Any such statements and projections reflect various estimates and assumptions by management concerning anticipated results.

Whether or not any such forward-looking statements or projections are in fact achieved will depend on future events, some of which are not within the control of the company. Accordingly actual results may vary from the projected results and such variations maybe material. We undertake take no obligation to correct or update these forward-looking statements whether as a result of new information, future events or otherwise.

During this presentation we will refer to certain non-GAAP measures including adjusted EBITDA, adjusted net income and unlevered free cash flow. We believe these non-GAAP measures provide additional information regarding our performance. In addition management believes that these non-GAAP measures aid in assessing our operating performance trends by excluding certain material non-cash items, unusual or non-recurring items and certain other adjustments we believe are not reflective of our ongoing operations and performance.

These non-GAAP measures are not presented in accordance with U.S GAAP and our computations may vary from those used by other companies. These non-GAAP measures have limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results reported under U.S GAAP.

As you all know on April 4th we began trading on the New York Stock Exchange under the Ticker symbol IMS. Today we will review our financial performance for the second quarter and the first half of 2014. Although we publicly released earnings for the first quarter the second quarter of 2014 is our first quarter as a public company.

Now I’ll turn it over to our Chairman and CEO, Ari Bousbib.

Ari Bousbib

Thank you Tom and good morning everyone. I’d like to thank you all for joining us for the second quarter earnings call. As Tom reminded this is our first quarter as a public company. We had a strong second quarter of 2014. Our reported revenue growth in the quarter was 6.17% in the quarter, in fact all four categories of our technology services grew double digits. In the quarter our [tech and apps] business continued to build a strong backlog. We had six new wins in Nexus Marketing, two new in Nexus sales and two new wins in Nexus performance with some of our biggest and most important clients.

Similarly we were pleased to see that growth was broad-based across geographies. At constant currency emerging markets grew about 10% and developed markets grew 4.5%. Our profit performance was similarly strong with continued margin expansion as adjusted EBITDA grew at 9.2% in the second quarter.

As you recall in June we announced the proposed acquisition of certain of Cegedim’s information solutions and CRM businesses for EUR 395 million or approximately $520 million assuming an exchange rate of $1.35 per Euro. We continue to anticipate the deal to close sometime in the early part of 2015 following [awards] counsel information and consultation requirements, Cegedim Board of Directors’ approval, regulatory views and other customary closing conditions.

Again the proposed transaction is entirely consistent with our strategic direction of expanding value-added services built around our traditional data business. Cegedim’s information solutions and CRM businesses nicely complement and expand IMS’ offerings in both information and technology services. In total the businesses we intend to acquire generated $573 million of revenue and a $686 million of adjusted EBITDA in ‘13, again assuming an exchange rate of $1.35 per euros.

As I said during the conference call a month ago when we announced the Cegedim transaction we really love this deal. The fit is great, the price is right and we’ve got great upside synergies if we execute properly. Of course we have and we will continue to make smallish tuck-in and/or capability adding acquisitions. In fact in May we acquired Forcea, a Belgium-based business specializing in business intelligence applications and analytics for hospitals and life sciences organizations in Europe. Forcea will become part of our intelligent cloud-based platform and will deliver our hospital based technology including data warehousing implementation, benchmarking and mobile solutions.

Now I’d like to turn it over to Ron Bruehlman, our Chief Financial Officer to take you through the financials in more detail.

Ronald Bruehlman

Okay, thank you Ari and good morning everyone. As Ari mentioned we had a very good second quarter. Revenue increased 6.1% to $662 million or 5.4% on a constant currency basis and this as you know was against a difficult compare in last year strong second quarter. Our revenue performance was driven by 12.7% increase in technology services offering or an even 12% in constant currency. Information revenue grew 1.8% reported and 1.2% constant currency. The second quarter revenue growth in technology services build on our strong start in the first quarter and as Ari mentioned we again achieved double-digit growth across all four of our offering categories which is a reminder our technology and application, work flow analytics, real-world evidence and consulting services.

Growth in developed markets was 5.5% or 4.4% constant currency and this was driven by low double-digit growth in technology services and flattish growth in information. Revenue in emerging markets increased 8.7% at actual currency or 10.1% in constant currency or mid-teen growth in technology services and high single-digit information growth.

Adjusted EBITDA for the quarter of $226 million increased 9.2% or 9.3% on a constant currency basis compared with the second quarter of 2013. This reflected both drop through on our higher revenue and continued improvement in our cost structure. Our adjusted EBITDA margin grew 97 basis points to 34% in the second quarter despite the negative mix impact of the higher growth rate in technology services. On a constant currency basis adjusted EBITDA margins expanded even more improving by a 123 basis points over last year.

Now as you know we had a very unusual quarter and as a result we reported an unusually large number of one-time charges. So I want to just spend a few minutes taking you through a schedule we prepared to help you understand this guidance. We completed our IPO on April 4, and as a result we incurred $72 million fee to our sponsors upon termination of our management services agreement. We also made a $30 million payment to sell our non-executive phantom stock option grants vested due to the IPO. Finally we recorded $219 million of costs associated with the redemption of high coupon debt in conjunction with the IPO which consisted of a $151 million of make whole premium and a $68 million non-cash write-off of deferred debt issuance cost and original issued discounts.

Now in addition to these IPO-related items we took a couple of other charges in the quarter. There was a $49 million charge related to revaluation of our Venezuelan Bolivar assets and liabilities. The [inaudible] for this revaluation was the recent introduction of a three-tier exchange rate system by the Venezuelan government. And these three exchange rates are the previous official rate of 6.3 bolivars to the dollar which is limited to essential needs, those as defined by the government. And the SICAD I exchange rate of 11 bolivars to the dollar which is available mainly to local companies in selective industries and finally the third rate is the SICAD II exchange rate of approximately 50 bolivars to the dollar which is more generally available to foreign companies.

In consultation with our outside counsel we assessed our eligibility to access these various foreign exchange rate mechanisms and based on this analysis we made a decision to remeasure our Venezuelan Bolivar account benefit from the previous official rate of 6.3 to the SICAD II rate of 50. This resulted in a $49 million pretax charge which principally impacted our cash and marketable securities balances in Venezuela.

And now the second other unusual item that I referenced in the quarter, other than the IPO-related items was $27 million of restructuring and related charges and these reflected actions we’re taking to further lower our cost structure. So as you can see there was a quite a bit of noise in the second quarter GAAP net income and as a result of these various special charges we recorded a net loss of $220 million in the quarter compared with net income of $8 million last year.

Now the good news is that these non-recurring charges were partially offset by our stronger operating performance, a favorable change in our income tax provision and lower interest expense. The unusual number of non-recurring items in the quarter distorted GAAP net income which underscores why we provide adjusted net income as an alternative metric to analyze our earnings trends. And as a reminder this metric excludes non-recurring charges such as those I just detailed and also excludes amortization related to purchase accounting while it includes cash taxes in place of book taxes.

Adjusted net income in the second quarter was a $134 million, which is up 40% compared to $96 million in the prior year with the improvement due to the $20 million increase in adjusted EBITDA and a $25 million reduction in interest expense. Our diluted loss per share was $0.67 in the second quarter compared with earnings per share of $0.03 in the prior year. Adjusted diluted earnings per share were $0.39 in the second quarter compared with $0.33 in 2013.

Briefly on our year-to-date results these show a picture consistent with the second quarter. First half revenue was up 5.7% to $1.3 billion or 6% on a constant currency basis. And the first half growth rates and our offerings in our geographies were quite similar to those in the second quarter. Adjusted EBITDA for the first half was $443 million, up 8.2% in actual currency, 9.4% in constant currency. Adjusted net income in the first half was $204 million compared with a $172 million in the prior year. And finally adjusted diluted earnings per share was $0.55 in the first half versus $0.60 in 2013.

I’d now like to turn to the balance sheet. As of June 30, 2014 cash and short-term investments totaled $266 million and debt was $4.0 billion. This resulted in net debt of $3.7 billion. Our leverage ratio at the end of June was 4.6 times trailing 12 months adjusted EBITDA which is a turn and half above the year end 2013 number and of course this decline was due mainly to retirement of debt using IPO proceeds and cash.

Operating cash flow was negative $126 million in the second quarter compared with positive $126 million last year. It was a decline due to our one-time IPO-related cash payment. That is the remainder of the $70 million fee to our sponsors, a $30 million paid to settle the non-executive phantom stock option grant and the $151 million of debt make-whole payment.

Now as you know the principal measure we track is unlevered free cash flow which we define as operating cash flow less CapEx in addition to deferred software and then we adjust that to a pretax, pretax interest basis and take out the same non-recurring items that’s in adjusted EBITDA to make it comparable. Our unlevered free cash flow for the second quarter was a $189 million compared to a $197 million in the same quarter of 2013. And the decline reflected increased investment to generate future growth including higher spending for software development, a [bid out] of our new global delivery center in Bangalore and increased investments in data.

Okay, let’s conclude with guidance, our medium-term guidance remains unchanged at revenue growth of mid-single-digits and adjusted EBITDA growth of 1.5 times our rate of revenue growth. Now for 2014 specifically we’re reaffirming our full year guidance of 5% to 6% revenue growth and 7.5% to 9% adjusted EBITDA growth. Now it’s important to note that we’re doing this despite significant FX deterioration versus what we’ve previously communicated. Specifically the Venezuelan Bolivar devaluation will trim about $10 million from revenue and $6 million from adjusted EBITDA in the second half. So if you include this Bolivar, this ongoing Bolivar impact we now expect FX to reduce full year IMS revenue growth by about a 0.5 percentage point and adjusted EBITDA growth by a 1.5% versus last year. And this assumes that FX rates remain constant versus those that were prevailing at the end of the second quarter.

Now moving down the P&L we continue to project 2014 adjusted net income growth of 15% to 20% reflecting both our adjusted EBITDA growth and lower interest expense. Turning to the balance sheet our previous guidance call called for unlevered free cash flow drop to a 80% of adjusted EBITDA plus or minus a few percentage points and this excluding of course the unusual investment for our new global delivery center in Bangalore.

Now however given the customer demand we’re seeing for technology services offerings we’re investing more than we had anticipated in software development to accelerate product releases. We’re also seeing higher growth in our accounts receivable due to higher sales volume. So based on this we’re going to keep a close watch on our third quarter cash flow performance and may update our previous unlevered free cash flow guidance if needed.

So in summary, we had a very good quarter. Revenue and adjusted EBITDA grew in line with our guidance despite a tough comparable to the last year. We continue to execute against our strategy, again achieving double-digit growth in technology services. This growth was broad-based across geographies around the world. We continue to reduce our cost base generating another percentage point of EBITDA margin expansion in the quarter and of course we’re very excited about the pending Cegedim acquisition which as Ari said is a great fit at the right price.

So with that I’ll ask the operator to open the lines for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And our first question comes from the line of Suzy Stein from Morgan Stanley. Please go ahead.

Suzanne Stein – Morgan Stanley

Hi. Can you give us an update on how far you are through your cost savings initiatives and what you did this quarter and what’s left to do?

Ari Bousbib

Okay. First of all thank you for your question Suzy. Cost reduction is not a one-time event. So that’s the first answer I’d like to give you and that really is in the context of our previously discussed cost reduction program that we had launched about four years ago after the company was taken private and a new management was put in place. That cost reduction program we said a few months ago we were about two-thirds through that. So we are a little bit more than that if you will, 70% or so. We anticipate that towards the end of this year we will be little over three-quarters through that original cost reduction program. But since then we’ve of course identified new cost reduction activities.

I, along with my management team conduct three operating reviews on sites of our 10 geographic business units. That’s 30 operating reviews and at those operating reviews one of the things we do is well how can we do things faster, cheaper, better and all of those inevitably lead to identifying new opportunities for cost reductions. So some of the restructuring charges that you see – you saw in this quarter are related to those new cost reduction opportunities that we’ve identified. And again the goal of this is to continue to create margin runway well into the future because as you adjust your cost structure down you create an opportunity not just by taking the cost out but also as the revenue continues to accelerate you create leverage well into the future.

Suzanne Stein – Morgan Stanley

Okay. And then just maybe a quick one on emerging markets. So emerging markets grew 10% this quarter versus I think 15% last quarter constant currency and I think it’s a tiny blip over the long-term average that you mentioned last quarter of 11%. Were there any specific areas that were slow or should we not read into is it just going to be a little bit – quarter-to-quarter?

Ari Bousbib

Suzy I think it was a good observation. But the latter of your commentary in your question is correct. I don’t think we should pay much attention because quarter-to-quarter it fluctuates. Look the difference between the nearly 15% rate in the first quarter and the 10ish% we have this quarter is really somewhere within $3 million and $4 million, right. So it’s very jumpy, it’s going to bounce around somewhere in that zone between 10% and 15%. And the reason for that is there are lot of small countries involved. We got Latin America with all of the countries in it, we got Eastern Europe, we got Russia, we got Southeast Asia, we got China, India. So a lot of small countries and any small events here and there can make it bounce around.

Now it happens to be that last year Brazil was very strong in the second quarter. So a little bit of a tougher compare in Brazil which is significant piece within our emerging markets. And then at the same time we had again it’s a tiny issue but it does represent about a third of the delta, first or second quarter sequential difference in growth rate. In Mexico this past quarter there were less sales by manufacturers in general, due to a large distributor chain in Mexico had liquidity issues and as a result of that they bought less product and as a result of that our clients bought. So a little bit of an issue in Mexico. Again it’s a very tiny number but the combination of those mostly Latin America that account for that sequential difference. But again I would encourage you not to pay enormous attention it will bounce around and when we had issues in China with the GSK fraud investigation and so on so China’s growth rate slowed a little bit from the over 20% to more of a 10% in given quarter this was a year or two ago. And so again this will happen inevitability in each of the markets and in aggregate but we feel very, very good about our guidance for emerging market it will be a good double-digits.

Suzanne Stein – Morgan Stanley

Great, thanks for taking my questions.

Ari Bousbib

Thank you, Suzy.

Operator

Our next question comes from the line of Andrew Steinerman. Please go ahead.

Andrew Steinerman – JPMorgan

Good morning. Ron you were good to point that that the second quarter you had just reported would be tougher comparison to a year ago when you reported your first quarter. Could you just you know kind of give us a little more color where you saw the tougher comparisons specifically I know Ari just mentioned Brazil but maybe by service line and then more specifically how does the company see the year-over-year comparisons in the second-half?

Ronald Bruehlman

Yeah, Andrew the toughest compare in the quarter for us was the Japan. Japan had a very strong second quarter last year. They were a large number of new product introductions and with that comes a lot of service related work by segmentation and targeting work so forth. So that was the biggest issue or event there in Brazil as well which was the smaller issue. So yeah that trimmed a little bit out our organic growth rate in the quarter but it was all anticipated.

Going forward for the second half I would expect that you would see growth rates to return closer to what we saw in the first quarter.

Ari Bousbib

Yeah, and just want to add Andrew Ron is correct Japan was the main issue for us, tough compare again a lot of new launches last year with a lot of the strong data sale. There is also an issue you may want to know about for the future, Japan, the government of Japan issues pricing guideline for drug manufacturers and every other year there are price discounts that are imposed. Lots of complex regulatory aspects to it but what this means is that our clients every other year face pricing pressures due to regulatory constraints and we happen to be in that year right.

So again next year they will be free to grow prices again and in ‘16 Japan will again – so you’ll we’ll have to – we have just independently of the new launches that Ron referenced last year we are going to have this you know every other year Japan will be one year will be favorable and other year will be unfavorable comparison.

Andrew Steinerman – JPMorgan

Great. And is that in the information division you just…

Ari Bousbib

Yes, Andrew.

Andrew Steinerman – JPMorgan

Product status, okay. Perfect, thank you.

Ari Bousbib

Yes.

Operator

And our next question comes from the line of Andre Benjamin from Goldman Sachs. Please go ahead.

Andre Benjamin – Goldman Sachs

Hi, good morning. In the past you have talked a bit about four businesses within technology services there is tech and app for full solution, Nexus in consulting, I feel like a lot of the conversations been kind of focused on the Nexus and tech and apps out the portion of the business. Would you mind providing a bit of color on how some of the other ones are growing, particularly workflow and real evidence? Are you still seeing double-digit growth there any material new wins emerging? Just little more color on how those parts of the business are doing?

Ari Bousbib

Well Andre thanks for your question. We again very pleased with the 12% plus growth rate in the quarter in fact. So I think as Ron referenced we had essentially double-digit growth in every one of the four buckets that comprise our technology services business. The first tech and apps is where we have the Nexus suite as well as our Midas and syndicated analytics products which all are essentially are SaaS based licensing fee type of business models and they grew very nicely well into our double-digits consistent with prior growth rate.

The second bucket is work flow analytics which is our commercial operational analytics that are outsourced to us. It’s all of the traditional segmentation work and how many reps to employ, which are the best doctors to target and so on and so forth. It’s actually answering question of day-to-day operations the commercial side of pharma needs to answer and because it’s standardized and in many ways we have got some proprietary methodologies to do that we outsource it as you know we have been moving this offshore increasingly because we are focusing on standardized work flow processes, happens to be that we have some very strong wins in forecasting analytics in the quarter and work analytics also grew double-digits.

Now this kind of tends to bounce around, sometime it’s more in the high single-digit growth rates as but we believe I think as we indicated to you earlier that as we continue to growth and accelerate as pharma seeks to lower their costs and more and more is willing to continue to outsourcing this workflow analytics which historically they consider to be more strategic to their activity then today to recognize that this is we have the scale and the facilities and the people and the expertise to do this at lower cost and deliver the answers they need. So this quarter we were better than we had anticipated in work flow analytics, and other accounts a little saw the somewhat over performance.

Real world evidence is the third bucket in tech services. Here we sell analytics and tools and it’s a mix of our outsourced analytics as well as you know health economics and outcomes research and again we had a strong quarter in the sort of 11% to 12%ish type of rate in real world evidence, three big wins in real world evidence, with major customer, you remember building on the well-publicized AstraZeneca work that we do in real word evidence and we are taking these, we have productionized this work and we now would be taking on the roll, we have a very, very large pipeline. We are doing work literally for – we are either already doing the work or proposing work to virtually every single large pharma company around the world because as you know this is the future. So there has been nice growth there.

And consulting again we would tend to bounce around. We have said in the past, that in the past years this grown more in the sort of with the industry the mid-single-digit, let’s say on average bouncing around. Happen to be we have the nice quarter as well and there was also double-digit. But again this is more and it’s you know somewhere in the 10%ish of the total tax services business.

Andre Benjamin – Goldman Sachs

Thanks for the detail. If can just get one short follow-up in, do you have any updated thoughts on how you think about the impact of consolidation which I know you get asked about a lot, particularly thinking less on a negative side but if you think outside the box are there any opportunities on the positive potentially in services as companies pursue M&A for different strategic reasons?

Ari Bousbib

Well you know that’s a very good point Andre. We discussed at length in last in the first quarter earnings release then what we thought would be a sort of worst case scenario impact for us on our revenue growth and as you know since then some of those mergers have moved off the table at least for now and we have had some new ones. So on the positive side we see a lot of opportunity. In fact we actually – I wasn’t planning to discuss this but we have our senior leadership, we have three annual large weeklong senior leadership meetings that focus on strategy and longer term growth and we had two weeks ago our second quarter one in New York and one of our afternoon sessions was fully dedicated to discussing how we could accelerate opportunities, even anticipate and excite opportunities in the context of these mergers and you know examples, is obviously operationalizing the sales force integration around the world.

It’s a huge complicated effort which is very difficult to do internally, especially even before a merger optimizing sales force is our bread and butter, if you will but in context of a merger its more complicated and in many cases these are – these will be to existing clients of ours so we know them well and so we are in a particularly good position to bid that work and to do it on a global basis from an operational size point. So sizing and integrating sales force is a piece of this typically is not exactly traditional consulting work though we have piece upfront of consulting and then it leads into a typical workflow analytics and more traditional outsourcing work.

The second big area that we identified is in the tech and apps area. Again where we have had conversations with each of the two merger partners about our tech and apps and as they do these mergers as you know, I mean let’s be honest these mergers are done or historically were done because of the science or they were done because of cost synergies and increasingly the taxing version is the primary reason. These are highly profitable companies and in a sense it could come out to a disadvantage to be completing on the overall scene with companies that have a much lower tax rate and that’s a big, big driver you speak to our clients. I know you will you will we know you do that and you know that this big driver of the current wave of mergers.

Now we can help them demonstrate and achieve much greater cost synergies that would actually on their own justify the mergers in a more compelling way if you will and potentially create the greater synergies then just a tax reduction and so for that you need to really re-think the way you do the business entirely and we believe we are at an advantage with our full suite of technology and applications. So we think it’s a great opportunity and we have effort under way which we launched two weeks ago globally to actually market and productionize how we can deploy our technology and applications for the benefit of a newly merged entity.

So that these are the two areas. Again outsourcing to us in the context of the merger, primarily in the sale force side and secondly, tech and apps.

Andre Benjamin – Goldman Sachs

Thank you.

Operator

And our next question comes from the line of Manav Patnaik from Barclays. Please go ahead.

Manav Patnaik – Barclays Capital

Yeah, good morning gentlemen. First, thanks a lot for all the details thus far on the call. Two quick ones for me. So first just one the gross margin side of things in information I guess it came in a little weaker than we expected. Is that should we think about that similarly as in the – just tough comp and some of the seasonality in the second-half of the year that should sort of head back in the high-50’s to 60’s?

Ari Bousbib

Yeah, I think you should, Manav I think you should think the information business being a high 50s sort of business on an ongoing basis, yes.

Manav Patnaik – Barclays Capital

Okay. And then you obviously gave a lot of the color on the tech services side just to top that up a little bit earlier in the call you talked about a very strong pipeline and because of that you are going to invest some money and maybe free cash sometime. I just wanted to get a sense of how when you talk about pipeline like how far out do you see it, like are we talking a couple of years, is this more you know near-term demand coming in for some specific reason?

Ari Bousbib

Well, you want to take it? Yeah, look. No, these are not – when we talk about the pipeline we are not talking about an impact the next day right even to the examples of the significantly higher win rate that we had in this quarter on our Nexus suite versus last quarter. Again no surprises but I think we are seeing a good uptake and so that you know this in implementation phase it’s going to take in some cases three months, in some days up to six months to deploy this new technology and then it’s typically three up to in some cases five year licensing contract which let’s say if we – if some of these wins that we – they will start producing revenue and profit in ‘15-’16-’17 right so that’s where we see the impact of the recent wins.

The pipeline itself we don’t know when and if we will sell. But there is a larger and faster than we expected uptake, again no surprises. Perhaps we were a bit conservative. We expect it to happen, it’s happening a little faster than we thought which has incurred – which has led us to accelerate some of the software development that we have in our plans over the next 12 months. So we will accelerate some of that and we will probably continue to spend a little more than we thought on CapEx and [deferred] software as a result of that which essentially is the commentary you alluded to that Ron made

Manav Patnaik – Barclays Capital

Yeah.

Ari Bousbib

Made on our cash flow you know in the quarter we were good along with our guidance. We were at 84%-85% I think unlevered free cash flow comment on EBITDA, is that correct Ron. And but we think that we are spending we are spending more, right.

Manav Patnaik – Barclays Capital

Yeah.

Ari Bousbib

I mean if you look at our CapEx, if you look at our CapEx over the past five years we have spent on CapEx and on deferred software together we spent between a $100 million and $120 million right it’s been bouncing around within $100 million and a $120 million approximately. So in average that’s still $110 million. And again I would not be surprised if we spend say maybe 30% more than that $110 million this year potentially even more this year. And again no surprises. We expected to ramp up our CapEx in the first half where due to our accelerated growth in technology services but it’s happening a little faster and we are kind of in the midst of making decisions here in terms of our development programs and whether we should spend more.

Again we want to grow the business and I know you want us to grow the business too. So we won’t hesitate I know you’ve heard me often in the past complain that I didn’t have enough CapEx opportunities and now we’re finding them. So we’re happy about that.

Manav Patnaik – Barclays Capital

Okay, and then just one last one I know in the past you said your M&A pipeline is pretty healthy and earlier you said you’ll continue to do tuck-in deals, I just wanted to get a sense of your appetite for larger deals like Cegedim, is the philosophy to wait to integrate deleverage at certain level and then acquire or is there appetite to do another one if it comes – if the right – if everything works out right let’s say tomorrow?

Ari Bousbib

Yeah Manav this is hard to predict you know the acquisitions are – it’s a binary type of process, happens or it doesn’t happen. I am not of course saying we are doing debt reduction and once we’ve done that then we’ll worry about acquisitions. We don’t do acquisitions for the sake of acquisitions. We’re not going to do acquisitions for size, we are happy doing what we do with zero acquisitions but of course we’re constantly looking for opportunities to enhance our portfolio of technologies. We’re constantly looking for opportunities to make value adding acquisitions in the sense that they help us enhance our revenue growth by penetrating clients more, by gaining share of wallet with our clients or and often times it’s both, it’s and/or generating significant cost synergies.

I mean Cegedim is a text book case example in my view of an acquisition that meets all of these criteria. It enhances our revenues, it increases our presence with our clients, in terms of share of wallet and penetration with those clients, especially in an area, technology services where we want to grow. It brings complementary products and it affords us significant opportunity to merge back office infrastructure, go-to-market costs that again will help us generate runway for our EBITDA growth.

So again what does the size have to do with this, not very much. That could be true for a $5 million revenue company or it could be true for $500 million or $600 million company as the case – as is the case for Cegedim. I don’t really know many large acquisitions within our space like Cegedim. I would say this would have been the only one. I don’t know of any other within our broad space. Now stepping outside of our very core business of serving life sciences, as you know, we’ve often talked about redeploying our data management, analytics and tech services capabilities into adjacent markets, serving other customer. The payer provider market seems to be such an opportunity. And that’s a fast evolving market especially in the context of healthcare reforms around the world.

It’s one where many people seek participation, whether they are traditional software houses supplying provider, hospitals or other or new entrants coming from different spaces. And we are contemplating looking at considering a variety of possibilities, we’ve look that for a while. We are not going to do something that makes no sense, in terms of valuation or real revenue enhancement or real cost takeout. But that’s a space where you do find more sizable opportunities.

Again size per se is not really relevant for us, except that markets where we are not really a known entity meaning in payer provider, if we did an acquisition it would help if it had some scale. By some scale I don’t mean to say multi-billion dollars it could be a few hundred million dollars, but again there’s nothing on the horizon, there’s nothing on the table, there’s nothing even with the telescope we don’t see it in the cosmic space so I don’t want to falsely hold anything.

Manav Patnaik – Barclays Capital

No I appreciate that, thank you again for the detail.

Ari Bousbib

Thank you Manav.

Operator

And our next question comes from the line of Jamie [Starklin] from Wells Fargo. Please go ahead.

Unidentified Analyst

Hey good morning, thanks for taking my questions. I guess maybe the first one, Ron, the unusual items that you guys are backing out, were any pieces of those run through cost of services?

Ronald Bruehlman

Yeah the one that would have gone through cost of services would be a portion of the phantom stock option termination of $30 million. But there wasn’t a large amount that came through that, most of it came through other income and deductions, below the gross margin line.

Unidentified Analyst

Do you have a rough number and…?

Ronald Bruehlman

About a third of it.

Unidentified Analyst

About a third and then would it have most been in information services or would it have sort of [inaudible]?

Ronald Bruehlman

Yes no, it would have been in information.

Unidentified Analyst

okay, all right, that takes care of that. And then maybe just a couple of other clarifying ones, it sounded like from your commentary earlier that consolidation as a team within the pharma space feels like it’s relatively constant. It hasn’t really decelerated or accelerated is that an accurate description?

Ari Bousbib

Yeah, I mean you see cycles, right. I went back decades to understand these phenomena and they always are cycles. What’s interesting and I think I made that comment in the last quarter’s earnings release is that despite the waves of mergers that are coming on in pharma the degree of concentration in this pharma industry has gone down over whether you look five years, 10 years, 20 years, it has gone down and not up. And the reason for that is that they have been many new entrants and growth, very rapid growth of small pharma companies around the one compound or two that eventually became the mid-size or larger size. The share of life sciences industry worldwide held by the top 20 or so has actually gone down.

Unidentified Analyst

Okay and then maybe my last question on the higher spend for capitalized software. It didn’t seem like it picked up too much this quarter but it sounds like going to in the future periods, is that third party spend or is that we’re hiring a lot more developers to try to get this work done faster?

Ari Bousbib

No the vast majority of this is internal spend. Okay we are hiring out software developers around the world, we’re also spending more in software development just because of how it is in this type of business you need to have new releases, new functionality et cetera and so we are spending more, that we had not anticipated.

Unidentified Analyst

Okay that’s great. Thank you very much.

Ari Bousbib

Thank you.

Operator

And the next question comes from the line of David Larsen from Leerink Partners. Please go ahead.

David Larsen – Leerink Partners LLC

Hey guys congratulations on a good quarter. Ron can you maybe just touch on the Cegedim acquisition, if they have $86 million of EBITDA and if you can achieve $50 million of synergies, the math I’m doing I arrive at the potential positive EPS impact to be significantly above $0.10 to $0.12 range. Can you maybe just talk about that a little bit if the timing of the integration and my math? Thanks.

Ronald Bruehlman

Well I think the first thing you have to keep in mind is we don’t know exactly when it’s going to close. So if you’re doing it on a calendar year basis you may get only to three quarters of the year next year, although we’re not even certain of that, really depends on the regulatory process and so forth. I think you also have to factor in there’s going to be some obviously some financing cost associated with the transaction and I can take you – you’re running me back through my places from the Cegedim call, but I can take you through the math and show to you how you get to the number.

Of course there’s going to be no synergies in the first year at all. All of that will happen in a year or two or three we said about $50 million of synergy. Let me take you through the math offline, we’re probably a little bit on the conservative side in our guidance but not to the extent that you’re indicating.

Ari Bousbib

Yeah I’ll just, if I can add some more color here. We said this many times we love this acquisitions. We think that it will provide for great benefits on the revenue and on the cost side. Your commentary is on the mark David, in the sense that when you look at the numbers you would credit us with more appreciation than what we said but we were as Ron said somewhat conservative it’s true. So if you’re saying that there could be upside to the numbers in the guidance we provided, the answer is yes.

Secondly there are costs to generate the synergies. There are integration costs and around the world and so the first year we’re going to have charges associated with that merger. We don’t know the timing and how it’s going to calenderize, and then its financing cost.

Ronald Bruehlman

Yeah there’s financing cost and the other cost that I missed. You got to consider that we include businesses by age or depreciation and amortization cost, not purchase accounting related amortization cost, but business as usual that is what would Cegedim have been booking for depreciation amortization on an ongoing basis, we include that in the numbers that we give you when we said – gave you our first year EPS guidance and that maybe missing from your model as well.

Ari Bousbib

Right, and a final point I would say is as you know – I don’t know that we said that it’s about a quarter of the revenues of Cegedim. That says that we’re buying, that will be under review by the acquisition of the company.

David Larsen – Leerink Partners LLC

Okay that’s great, that’s very helpful. Thanks a lot.

Ari Bousbib

Okay I think we have time for one more call.

Operator

And our next question is from coming from the line of John Krueger from William Blair. Please go ahead.

John Krueger – William Blair & Co.

Hi thanks very much. Maybe another just quick follow up on Cegedim, since the deal was announced you had an opportunity to talk to your key clients and has that caused your thinking on the deal to evolve at all. I’m thinking on for example some of those legacy CRM customers has your thinking changed at all though whether you have an opportunity to migrate them to cloud based system or is that more likely that just go away?

Ari Bousbib

Look I don’t want to, given the sensitivity here and we have a lot of regulatory approvals to obtain both in U.S. and Europe and we’re actively working. The vast majority of the work we’ve seen now is with these bigger teams, engaging with authorities as well as conversation and consultations with the workers. With respect to our customers of course we’ve engaged with them, both us and Cegedim to both ourselves and Cegedim to separately to expand the rationale and what I can tell you as a general observation is that our customers are generally very favorable and supportive of this transaction. They see value and they see how with respect to CRM we could bring benefits in terms of the product line and migration to the cloud and we’ve already done that. Maybe we have one more…

Ronald Bruehlman

Yeah we have time for one more question.

Ari Bousbib

One more question.

John Krueger – William Blair & Co.

Thanks guys.

Ari Bousbib

We’ll do one more operator.

Operator

Sure the next question comes from the line of Paul Ginocchio from Deutsche Bank. Please go ahead.

Unidentified Analyst

Hi it’s [Adrianne Colby] for Paul thanks for taking the question. If we can just go back to the gross margin in the information segment, I’m just wondering if you could clarify if there was a particular of investment or some headcount changes that were driving the higher cost base for this quarter.

Ronald Bruehlman

Well recall I mentioned that part of the charge for the phantom stock option, non-executive phantom stock option termination about a third of that within the cost of information. So I think when you back that out you’ll find that the gross margin is more normal.

Unidentified Analyst

Thank you.

Ari Bousbib

Okay, I think we’ve come to the end of our time here. Tom you want to close?

Tom Kinsley

All right thanks for taking the time to join us today. And we’ll look forward to speaking with you next quarter and in the meantime don’t hesitate to contact me with follow up questions I’ll be available along with Andrew [Markwick] and Reena Patel, both of whom recently joined the Investor Relations team here at IMS. Thank you.

Operator

Ladies and gentlemen that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.

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