ERT CEO Discusses Q3 2010 Results - Earnings Call Transcript

Nov. 4.10 | About: eResearch Technology (ERT)

eResearchTechnology, Inc (ERES) Q3 2010 Earnings Call November 4, 2010 5:00 PM ET

Executives

Michael McKelvey - President & CEO

Keith Schneck - EVP & CFO

Analysts

James Kumpel - Madison Williams

Raghavan Sarathy - Dougherty & Company

Gene Mannheimer - Auriga

Mitra Ramgopal - Sidoti

Operator

(Operators Instructions), please note this even is being recorded, I would now like to turn the conference over to Dr. McKelvey, please go ahead.

Michael McKelvey

Thank you, Jamie, and good afternoon. Thank you for joining us for ERT's third quarter 2010 earnings results conference call. A press release announcing the third quarter results was released this afternoon and is available at the ERT.com and most financial websites. This press release includes the financial results for the third quarter which includes three months of our recent acquisition of CareFusion's Research Services division or RS. As a reminder the second quarter of 2010 only included one month June of RS operations.

Joining me today is Keith Schneck, Executive Vice President and Chief Financial Officer.

Prior to beginning the call, I would like to read the forward-looking event statement. Certain statements in today's call may constitute forward-looking statements which involve known and unknown risks and uncertainties, actual results may differ materially from those in the forward-looking statements. Information about these risks and factors that could cause actual results to vary and it's disclosed in the press release announcing our results and in the risk factor section of form 10Q and our 2009 for 10K.

Guidance is based on management's good faith expectations given current market conditions, but any further deterioration of general economic conditions in addition to other factors cited elsewhere, could result in the company not achieving the revenue and diluted net income per share figures provided in our guidance.

Our forward-looking statements speak only as of the date made. We do not undertake and expressly disclaim any obligation to update forward-looking statements to reflect events or circumstances after the dates of these statements, except as required by law. You are cautioned not to place undue reliance on our forward-looking statements.

In addition to GAAP financial measures, we used certain non-GAAP financial measures that exclude charges related to amortization of the acquired intangible assets and the acquisition and other costs related to the recent acquisition of RS and related income tax effects. A discussion of the use of non-GAAP measures and the reconciliation to GAAP amounts is contained in the press release that we issued this afternoon.

I will first give highlights for the third quarter and details on new bookings and our operations. Keith will then discuss the detailed financials for the quarter. I will then provide some further comments on the business and then open the call up to questions.

The third quarter saw the first full quarter impact of our resent acquisition of RS. This has significantly increased our market opportunity and has given us a much broader set of products and services to offer to the clinical trials industry and potentially in the future to the healthcare industry.

Specifically, we now have an industry leading suite of products in respiratory diagnostics for clinical trials that encompass the primary respiratory diseases of COPD, asthma, and cystic fibrosis. We have added significant additional capabilities to our ePRO product and service lines by adding a PDA like device VIAPad as well as a pen based device VIAPen. We have also added a whole dimension to the products and services that we can offer our own proprietary diagnostic devices for clinical trials.

These devices give us an expanded approach to offer and customize product solutions using multiple modalities for the acquisition of important information in clinical trials. We believe this offers us a key strategic competitive advantage in our industry.

Several clients have expressed support for buying multiple services from one vendor especially vendors with a strong reputation for quality and service that ERT and RS have in the marketplace.

Other advantages decided by clients are bringing together the combined medical expertise of two of the leading providers of technology and services used in clinical trials. The increased resources that the combined company can bring, the increased global foot print of a combined company and the advantages of working on a company whose sole current focus is on clinical trials.

The third quarter of 2010 showed the highest quarterly level of revenue ever recorded by ERT, 45.1 million. Revenue in the third quarter increased 55% sequentially and 99% from the year ago.

Almost all of the increased revenue came from RS with only a small increase in revenue from legacy ERT. Legacy ERT revenue was impacted by delays and the start of both routine and Thorough QT trials as well as by seasonality in the third quarter.

These trial delays are consistent with what seems to be experienced reported by several large CROs recently. Although our cardiac safety bookings continue to be strong, the conversion of these bookings and the revenue continues to take longer.

Legacy ERT revenues increased 4% in the third quarter compared to a year ago. This year-over-year increase in legacy ERT revenues was primarily due to a pick up in routine ECG revenues and the strong increase in ePRO revenue albeit it from a low base offset by a decline in revenues from zero QT trials.

Legacy RS recorded 21.5 million in revenues for the third quarter. The RS revenues in the second quarter were 5.7 million while this represented just one month June of revenues.

We were pleased with the revenues for RS in our first full quarter of incorporating the results in the consolidated ERT. Our GAAP to gross margin percentage was 44.5% in the third quarter down from 54.4% in the second quarter of 2010 and down from 51.6% a year ago.

The third quarter gross margin percentage reflected the expected impact of adding a full quarter of RS which historical generate a lower margin than our legacy ERT business but also the impact of increased integration expenses.

Keith, will provide more detail on this later in the call. GAAP operating income was 6.6 million in the third quarter a growth of 39.9% from a year ago. This compares to a GAAP operating income in the second quarter of 2010 of 1.1 million.

The GAAP operating income in the second quarter was significantly impacted by 4.7 million of acquisition and integration related cost and amortization of acquired intangibles and other assets related to the acquisition of RS.

GAAP operating income margin percentage in the third quarter was 14.6% compared to 3.6% for the second quarter of 2010 and 20.9% a year ago. On a non-GAAP basis which excludes the expenses I just mentioned, operating income margin percentage increased to 21.3% from 19.7% in the second quarter and increased from 20.7% a year ago.

GAAP diluted net income per share was $0.06 for the current quarter compared to $0.02 in the second quarter of 2010 and $0.06 a year ago. Non-GAAP diluted net income per share in the third quarter of 2010 was $0.11, up from $0.08 in the second quarter of 2010, and up from $0.06 a year ago. Both GAAP and non-GAAP diluted net income per share were negatively impacted by the strengthening euro relative to the U.S. dollar in the third quarter.

This resulted in the reduction in diluted net income per share of approximately $0.03. And it is reflected in the GAAP and non-GAAP diluted net income per share numbers that I just mentioned. Keith will provide more detail on this later in the call.

Let me give a little more color on the quarter's bookings. The third quarter saw new bookings of 59.1 million, up from 51.0 million in the second quarter. The third quarter included a full-quarter of bookings from RS. The full inclusion of RS in the booking's numbers make some of the bookings trends that we have previously reported and given out, difficult to compare.

The increase in large project and program awards that we noted last quarter continued in the third quarter, mostly as a result of our being awarded strategic outsourcing relationships from several biopharma companies. Large pharmaceutical companies continue to account for over 50% of our bookings in the third quarter.

An interesting trend that we're seeing that booking from small to mid-sized biopharma companies have picked up over the past couple of quarters and has shown some significant increases from levels seen in 2009. This suggests a continued increase in spending on clinical trials by this part of the market that was particularly hard hit by the recession of 2008 to 2009.

The strategic investments that we made in 2009 in augmenting our sales forces to expand our focus on new business developments from smaller clients continues to pay off. Over the past two quarters, the results from this group has been quite impressive.

As usual Phase III represented the largest segment of our bookings by phase, although we did see a good pick up in bookings in Phase II and in Phase I. We believe that the pick up in Phase 1 bookings is positive for us, as it portents a potential pick up in Phase II bookings in the future as well as a potential positive indicator for future increased demand for Thorough Q2 studies.

Thorough Q2 bookings were slightly lower in the third quarter than in the second quarter. While clients continue to express interest in Thorough Q2 studies, going from expressions of interest in the pipeline, the signed contracts continues to be slower than we have seen historically.

The bookings profile of legacy RS is somewhere to that of legacy ERT, except that it is more heavily weighted towards Phase II and Phase III studies. The distribution by client size for legacy RS is more weighted to larger pharmaceutical companies than that of legacy ERT.

We have seen stabilization in cardiac safety pricing, but the same pattern is seen in respiratory and in ePRO.

Our backlog at the end of the third quarter of 2010 was 303.1 million. This represented an increase of 83% from a year ago, which do not have a contribution from more RS and an increase of 1.2% sequentially. A very high portion of the backlog is associated with Phase III studies and the time period for revenue realization from backlog continues to be elongated, relative to historical norms.

In terms of backlog run off, we anticipate approximately 40% to 45% of our backlog will convert into revenue over the next four quarters. The gross book-to-bill ratio in the third quarter was 1.3 down from 1.8 in the second quarter of 2010 and down from 1.9 a year ago. The net book-to-bill ratio was 1.1.

The cancellation rate in the third quarter of 2010 was 14.6% compared to 9.7% in the second quarter of 2010 and 20.0% a year ago. I will now turn the call over to Keith for some more details on our financials for the quarter and for guidance for the full-year 2010.

Keith Schneck

Thank you, Mike. Let me add some colors to the numbers that might just outlined. The mix of services and site support revenue had shifted from a year ago due to the RS acquisition. During the third quarter, services revenues represented 57.5% of total revenues, down from 70.0% a year ago. Site support revenues represented 42.5% of total revenues up from 29.7% a year ago. RS has a higher mix of site support revenue and services revenue due to the significance of the respiratory equipment and related products in a total study value.

In addition, RS recorded a large equipment sale in the third quarter of about 2.0 million. As Mike indicated, the gross margin percentage for the third quarter of 2010 was 44.5% and reflected the expected impact of adding a full quarter of RS which historically generates a lower margin than our legacy ERT business and also integration expense. This compares to the 54.4% in the second quarter of 2010 and 51.6% in the third quarter of 2009.

Third quarter gross margin was impacted by the following items. Number one, the third quarter was the first full quarter of consolidating the RS results. RS gross profit margin are historically lower than ERT as their operations infrastructure relies on higher-cost labor, contractors and customization services and they have more complex products which are manufactured internally compared to ERT legacy which utilizes more standard prophecies and technology to deliver services and utilizes standard ECG equipment purchased from third-parties.

RS also contributed a higher proportion of lower margins site support revenue compared to service revenues in the third quarter compared to their contribution in the month of June. As part of the split confusion in May 2010, RS have to develop to complete manufacturing and operation infrastructure which ran from the acquisition date at the end of May 2010 to being fully staffed and operational in July. Thereby, resulting in higher cost for the third quarter compared to their month of June.

Prior to this split, the manufacturing operations were handled by an internal CareFusion manufacturing services group which supported several businesses in addition to RS. Also during the third quarter, RS added more staff to handle the increase customer demand for delivery of services and products and also to support our integration efforts.

Also in the third quarter, we recorded a full quarter of amortization of acquired intangibles. A total of 2.5 million which was charged to cost to sales.

Our gross margin percentage ERT core business was down about two margin points sequentially, this was due to higher costs incurred for the depreciation of ECG equipment which correlate to the higher level of equipment purchases incurred over the past several months. In addition to higher employee related costs and other operating costs to support incremental studies recently booked and integration costs.

The ongoing integration of all the product lines across ERG will we believe increase these gross margins overtime as we apply more efficient technology platforms and project management processes to all of our projects.

The expenditures on integration will be reduced over time. As we had discussed in the past, we anticipate that the full integration of all activities will not be completed until the end of 2012. The integration is currently well underway.

Let me now move to operating expense. The operating expenses for the third quarter of 2010 was 13.5 million, compared to 14.8 million in the second quarter of 2010 and 7 million a year ago. Operating expenses included 0.6 million in the third quarter of 2010 and 3.8 million in the second quarter of 2010 of transaction and other one time costs associated with the RS transaction.

Operating expenses in the third quarter also included $4.1 million related to RS operations which also then had 2.0 million in the second quarter of 2010. Comparing the categories of OpEx, sales and marketing expense was $4.5 million in the third quarter of 2010, compared to $3.9 million in the second quarter and 3.1 million a year ago with most of the increase due to the RS expenses.

G&A expense was 7.8 million in the third quarter, compared to $9.8 million in the second quarter and 3 million a year ago. Excluding the RS transaction costs and other costs of 0.6 million and 3.8 million in the third and second quarters of 2010, G&A expense increased 1.3 million sequentially and 4.2 million from a year ago.

The 4.2 million increase from a year ago is due to the RS G&A expense of 2.6 million and the G&A expense in the core ERT business increased another 1.6 million, primarily due to increased salary, T&E, IT, legal and other costs driven by the complexity of the business, tax and legal structuring activities, a higher 2010 bonus expectation and costs of integration. The sequential increase in G&A is due to a full quarter of RS. R&D expense was $1.3 million in the third quarter of 2010, compared to $1.1 million in the second quarter and $1 million a year ago.

Income taxes, our effective tax rate for the third quarter was 31.7% and we are projecting a 36% effective tax rate for the year. our non-GAAP estimated tax rate is 29% and reflects a more steady state tax rate as it takes out the non deductible transaction costs which drive up our GAAP tax rate and also excludes any one time tax adjustments which were made in our recent September quarter for GAAP purposes.

Foreign exchange, I'll now discuss the foreign exchange impacts on our business in the quarter. Prior to the acquisition of RS, our international operations consisted of our core lab operation in the UK which generated about 20% of our combined revenue and costs.

With the RS acquisition we now have significantly greater non-U.S. operations resulting in more exposure to fluctuating exchange rates. The impact of foreign exchange fluctuations on our revenue and operating expenses in the third quarter resulted in a negative impact of about $0.01 per share compared to what our diluted net income per share would have been had the foreign exchange rate been unchanged from the June 2010 level.

We also reported a net fix loss of about $0.02 per share as part of the other expenses below the operating income line. This is due primarily to the negative impact from the foreign exchange rate change on the portion of our accounts receivable at the UK and Germany enteritis bill to our customers in US dollars.

Give the rise in the euro and pound subsequent to the base of these billings, this means this will receive fewer euros or pounds upon payments by these customers and we report this difference as an unrealized exchange loss. We are currently evaluating options to hedge these exposures going forward.

Let me now move to the balance sheet, we ended the quarter with 19.4 million in cash in short term investments, compared to 22.6 million as of June 30, 2010. For the quarter, net cash provided by operating activities 6.4 million. We paid CareFusion an additional 2.3 million cash in September 2010, related to the final closing account reconciliations as required under the acquisition agreement.

In addition, during the quarter we made a voluntary pay down of 2 million on our line of credit with Citizen Bank.

As of September 30, 2010, 21 million was outstanding. Total interest expense on this line was approximately a $150,000 for the third quarter, accounts receivable were 37.2 million at September 30, 2010, compared to 31.7 million at June, few of those was 74 days at September 30, 2010, up from 64 based on the ENT -- ERT level as of June 30.

DSOs are up given this significant revenue contribution of RS for the quarter and the fact that their customer based is mostly larger format. Our goal is to drive these back down into the mid 60's.

Moving to guidance, in the press we updated guidance for the full 2010 year, ERT expects net revenues of between 137 million and 140 million for 2010, which is at the high end of our previous guidance. ERT expects GAAP diluted net income per share to be between $0.16 and $0.18 for 2010.

This GAAP EPS is at the lower end of our previously issued guidance and reflects the net $0.03 per diluted share effect of the foreign exchange impact in the third quarter that was not factored into our previous guidance. We did have some other changes in gross profit, operating expenses and taxes, but they essentially net to zero.

Excluding these foreign exchange impacts our guidance would have been at the high end of our previously issued guidance. We expect non-GAAP diluted net income per share to be between $0.33 and $0.35 for 2010. This guidance also reflects the $0.03 per diluted share effect of the foreign exchange impacts mentioned above as well as some of the GAAP and non-GAAP reconciliation differences and an improved estimated effective non-GAAP tax rate of 29%.

For the quarter this implies revenue of between 40.9 and 43.9 million, revenue is forecasted to be slightly lower sequentially in the forth quarter given the impact of previously discussed large equipment sales reported by RS in the third quarter and continued slow build of ECG transaction volume in the cardiac safety business.

We also forecast fourth quarter profit margins to be flat compared to our current third quarter. I will now turn the call to Mike.

Michael McKelvey

Thanks Keith, the integration of the RS and the legacy ERT business is going well. We have combined the business development organizations and we are now engaged in the integration of all functional areas such as operations, R&D, finance, HR and IT.

We are in the process of cross training a number of individuals from both organizations, in some cases sending individuals from Philadelphia to Germany for extended period.

As we have stated in the past, we anticipate that the full integration of the two organizations will be completed by 2012 and we feel good about the progress made so far.

In addition, to making good progress on the integration we are continuing to focus on the existing business that we have with our clients and ensuring that we continue to provide the high same level of quality and service that has made us successful in the past.

One area that we have seen a substantial amount of activity as a result of the acquisition of RS is ePRO or electronic patient reported outcomes. This is an area in which we have had a presence since 2007 and it was more focused on phones based ePRO utilizing mostly defined clinical assessments and diaries along with the recent expansion in the suicidality assessments.

With our acquisition of RS we have added two other modalities of ePRO, hand held devices and a pen device.

This will provide us with what we believe will be an industry leading suite of multi-modality ePRO solutions.

The development of this offering coincides with what we see as a strong movement within the clinical trials industry to increase the use of electronic patient reported outcomes and clinical trials.

Specifically, the FDA released the final guidance for label claims using ePRO in December 2009. In this guidance FDA emphasize the importance of the patient perspective that can represent a well defined and reliable measure of a labeling claim for our compound.

We have found that the finalization of this guidance is for considerable from our clients and potentially using ePRO in their clinical trials.

In September 2010 the FDA released a draft guidance on suicidality respective assessments of our current and clinical trials which addresses the FDAs current thinking about the importance of suicidality assessments and psychiatry and non-psychiatry drug trials and the general principals for how best to accomplish this assessment during drug development.

The draft guidance indicates that suicidality should assessed in clinical trials as part of the evaluation of any drug being development for psychiatric conditions that fall under the occupancies of the FDAs division of psychiatric products. The guidance specifically mentions that Columbia Suicide Severity rating scale as an acceptable instrument for conduction this assessment.

ERT has an exclusive licensees as Columbia scale and electronic form. The issuance of this draft guidance has generated a considerable interest from our clients in this area and in the early September we passed the milestone of processing our 15,000 assessment using the Columbia scale.

The progress that we have made over the past year in working through the past recession and the recent acquisition and ongoing integration of RS is only been possible due to the incredible hard work and dedication of all of the employees of ERT.

I am extremely proud of each and every one of their efforts in making ERT a better place to work and to enhance our position as the market leader in providing key clinical trial data in partnership with our clients to make the world a better place by helping to develop safer drugs. I congratulate them all.

Before I open up the call to questions, let me just say that the search for a new CEO is continuing as scheduled. Some candidates have been identified and some initial interviews have been held. With that, we will now take any questions. Jamie?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question comes from James Kumpel at Madison Williams.

James Kumpel - Madison Williams

Hi, good afternoon guys. Can you actually go through the currency sites, again, Keith? Obviously, a weak dollar should help on the revenue side and presuming that the business is possible and Germany shouldn't have offer to translate into more U.S. dollars.

Keith Schneck

No, what happens is that in Germany, half of their revenues are build in U.S. dollars. They nominate U.S. dollars. And in the U.K., most of all of their revenue is denominated, build in U.S. dollars. So, we are not getting the uplift on the revenue side that you would normally expect in that kind of scenario. Consequently, all their expenses are in local currency.

James Kumpel - Madison Williams

I see. Okay. Do you intend it all to basically bring the dealing process and the cost structure together so that, they kind of move in line, creating their natural hedge?

Keith Schneck

Yeah, we are looking at number of these situation including the hedging piece of it as well.

James Kumpel - Madison Williams

Okay. I guess, second thing, is you've talked a little bit about, softness in the QT arena in the third quarter but you guys said that fourth quarter would be sequentially down or maybe at best, flat because of that continuing trend. So, is that say that you expect to be even softer in the fourth quarter or is it to say that original expectations are key to you for fourth quarter just aren't going to materialize?

Keith Schneck

We do expect pretty much the same scenario that we saw in the third quarter.

Michael McKelvey

So, the reduction there was in the third quarter, Jim. There was a $2 million equipment sale within the respiratory area. And so, we don't anticipate that repeating itself in the fourth quarter.

James Kumpel - Madison Williams

Okay. And I guess, in terms of the industry-wide trend towards the strategic partner, can you just comment a little bit about whether that influencing your discussions, negotiations, both in the RS and the traditional legacy ERT side and whether or not that might impact positively, backlog on a going forward basis?

Michael McKelvey

In both the RS business and legacy RS and the legacy ERT business, the strategic outsourcing relationships has been important. And we talk to that on a number on a number of this calls and we continue to read the benefits of many of the strategic outsourcing relationships that we've won over the past year, year-and-half. So, it is definitely a positive sign for us going forward, as we win those. And they're generally three year deals and so they have a nice ramp up here and they will continue on for probably you know, two to two and half years for many of them.

James Kumpel - Madison Williams

And this will be my last one but can you distinguish those particularly strategic relationship that you're forging from just a traditional function or service provider relationships that you might normally negotiate with partners?

Michael McKelvey

We can in generally but there is a definitial issue of what a strategic outsourcing partnership is versus lets say a very strong preferred provider of partnership. And I think within the industry you might find different definitions but the ones that we uses is where we are the predominant provider of services or vendor within that particular client or we have a very well-defined strategic outsourcing relationship. So of those which we have a number with the large companies, we have found that we continue to get good bookings and good revenue from those relationships that we have forged.

James Kumpel - Madison Williams

Great. Thank you very much guys.

Michael McKelvey

Yes, thank you Jim.

Operator

The next question comes from Raghavan Sarathy from Dougherty & Company.

Raghavan Sarathy - Dougherty & Company

Hi, good afternoon and thanks for taking my questions. Keith you mentioned that the third quarter included $2 million equipment sale. So if you look at the fourth quarter, can you give you some color on how to think about the mix between services and site support should be into that $2 million of differential decline and site support?

Keith Schneck

That's probably a rational way to look at it, yeah.

Raghavan Sarathy - Dougherty & Company

Okay. And then in terms of gross margin I know you said you are expecting that to be flat on third quarter to fourth quarter. How it means, just -- obviously there's a big change in gross margin in the model, how should we think about this gross margin coming back up to the level I think if you look past this year?

Keith Schneck

Well, if you look at it on a non-GAAP basis, the gross profit margins closer to the 50% which is -- we've been in the low 50s over the last year or so. So on a non-GAAP basis, we're getting there and that's really the big amortization charge effect. As I indicated as we get more automation built-in as we hit more workflow processes from the integration standpoint, we expect to see improvements in gross profit margins on the RS side, so it's really over the next couple of quarters.

Michael McKelvey

Another thing to look at is not just gross margin but down to the operating margin line and we've seen some good leverage from OpEx getting into the operating margin line which then translates into EPS or diluted net income per share.

Raghavan Sarathy - Dougherty & Company

Okay. And then just one final question. How much is the bookings from RS in that quarter?

Keith Schneck

We're not going to distinguish between the bookings between RS and the ERT going forward. We'll try to do so make it a little more simple to look at an overall number. But there were sort of similar as you would go from annual or from quarter wise bookings in the second quarter into the third quarter a little stronger on the legacy ERT side then a little weaker on the legacy RS side.

Raghavan Sarathy - Dougherty & Company

Right. And then one final question. So I know that the cancellation -- they picked up sequentially it may be because it's likely ours business at lower cancellation rate so that in the coming quarter you would have three months of bookings so modest, I would imagine that the cancellation rate has gone down. Do you see more cancellation delays on the ERT side or can you help us understand that?

Keith Schneck

No. The cancellation rate on the legacy ERT side was pretty consistent. It was a little bit lower than our average 15% to 20% that we talked about. So just the mix between the two groups ended up with the 14.6% which is still below our targeted 15% to 20% cancellation rate going forward.

Raghavan Sarathy - Dougherty & Company

Okay, great. Thank you.

Michael McKelvey

Thank you Rag.

Operator

The next question comes from Gene Mannheimer at Auriga.

Gene Mannheimer - Auriga

Oh thank you. Good quarter gentlemen. I understand you don't break out RS bookings per say but can you tell us if bookings net of RS were up year-over-year?

Michael McKelvey

Yes, bookings net of RS would be up year-over-year. Yes, definitely.

Gene Mannheimer - Auriga

Okay, good. And with respect to CROs, how was the volume relative to the year ago period and was the pricing -- has the pricing been fairly consistent throughout the year?

Michael McKelvey

The volume is down in terms of a dollar value from 2008 certainly. 2009 I think it was pretty much flat. We were looking for a little bit of a -- more of a pick up in the second half of the year. There is a lot of interest in writing CROs. They just seem to be very difficult to turn from interest into actual bookings or so. Its -- the guidance is still out there as it always has been from the FDA. Just turning that interest into actual bookings is a -- it's a difficult thing. And we've also talked to you about over time we see the average price of a CRO going down slightly. There is a big mix shift. Some CROs are larger and some CROs are smaller and so average prices are difficult to really make much of a trend down if you will.

Gene Mannheimer - Auriga

Okay, fair enough. And at what point down the road Mike or Keith would you begin to break out ePRO revenue as a separate line item?

Michael McKelvey

It's still relatively small. So I don't see that happening in the next couple of quarters.

Gene Mannheimer - Auriga

Okay. That's fine. And with respect to the large equipment sale and it sounds like it was an anomaly if you will this quarter. Is there any seasonality or predictability to know when these large sales might be inclined to occur and then last question, I'd be remised if I didn't ask, what type of demand did you see from -- for automated studies this quarter? Thanks guys.

Keith Schneck

I'll handle the equipment one. No there is no -- there is no seasonality or patterns of that. It really gets down to facts and circumstances

Michael McKelvey

What we do is that we give clients an option sometimes to buyer to lease or rent their equipment, what makes more sense to them and what we want to do is to give the option to the client that reduces their total cost.

In terms of auto we're seen an increase in inquiries from clients about the use of other algorithms. However at this point, all of these have been enquires and we have not been asked to bid on any projects using in an auto algorithm.

As we have discussed several times on these calls Gene that each ERT has an automatic algorithm available to clients but so far we have not seen a demand for this. But with -- as with all of our products and services we continue to look to improve our offerings and we feel that when and if the demand for the auto algorithm increases that we're well positioned to respond to our clients.

Gene Mannheimer - Auriga

Pretty good. Thank you.

Operator

Your next question comes from Mitra Ramgopal at Sidoti.

Mitra Ramgopal - Sidoti

Yes, hi. Good afternoon guys. Just a few questions, Keith I believe you mentioned earlier how much the revenue mix has changed for a year ago. Can we use the third quarter sort of a barometer going forward in terms of what the mix is going to look like?

Keith Schneck

I would hedge it there -- I would say yes the, it really gets down to the relative contributions of the RS business versus the core ERT business because we're going to have a higher percentage of service so it really depends on what the mix is going to be going forward, but for now I think the third quarter is probably as good as estimate as you can get right now.

Mitra Ramgopal - Sidoti

Okay and I believe you'd mention the amortization we can take out of office services, I missed if you mentioned the integration cost, where we should take that our of?

Keith Schneck

That's in the G&A line.

Mitra Ramgopal - Sidoti

Okay and I was wondering given to commentary, earlier as you mentioned things slowing down a little in just the overall general environment is sort of really not picked up and if you look at sort of the commentary we are getting our original the big players like Charles River, etc. It seems like it still going to take some time before we see things pick up or get back to kind of where we were a few years ago.

I don't know if you can add some more color in terms of -- as you look out over the next year, what your expectations are?

Keith Schneck

Well I think in terms of Charles River, there focus was really more in the toxicology area as were some of the other large zeros that recently reported. Yeah I think we see the phase 2-3 trials phase very similar to the large zeros, that we're seeing good bookings, we're seeing good visibility into future revenue because of the relationship through strategic outsourcing.

It's just the realization of that revenue into or the booking into revenue seems to be slow and it seems to be consistent with what I've at lest see from all the other zeros so, we're very much in that same pattern and we believe that we'll get better especially as a lot of these strategic outsourcing relationships get off the ground and move into more execution processes as supposed to defining how they're going to work together, so to say.

Mitra Ramgopal - Sidoti

Okay and just finally on the integration again, I think you had mentioned initially fix the 10 million of potential cost savings that you might realize by 2012, as us said going to the process, these -- are you sort of identifying more opportunities perhaps to gain even more energies?

Keith Schneck

It's -- we're looking at it in two different ways, our current business environment with ERS activities as Mike indicated it's actually better than we expected it to be, so in -- consequently we are in a situation where we may not be cutting back as much, we maybe not be adding as much going from in a growth mode.

So we really are going to hold off on making comments on that, until we go through our 2011 guidance and numbers and so forth. So overall we're pleased with what we see with what we're doing when the opportunities and the question gets down to whether it's going to be cost savings or are we going to be reducing the growth -- the increase in spending commenced with growth of revenue going forward.

So till we put it in number out there in a guidance for 2011 at this stage we really can't comment any further.

Mitra Ramgopal - Sidoti

Okay, thanks again guys.

Operator

This concluded our questions and answer session. I would now like to turn the conference back over to Dr. McKelvey for any closing remarks.

Michael McKelvey

Yeah thank you Jamie and thank you all very much for your attention today and your involvement in ERT, we appreciate your vote of confidence through out the years. Keep and eye as other members of the ERT's management team are deeply committed to the company and to continuing on momentum and progress and generating results. Have a great evening and a great rest of the week. Thank you.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

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