PAREXEL International's (PRXL) CEO Josef H. von Rickenbach on Q4 2014 Results - Earnings Call Transcript

| About: PAREXEL International (PRXL)

PAREXEL International (NASDAQ:PRXL)

Q4 2014 Earnings Call

August 07, 2014 10:00 am ET

Executives

Jill L. Baker - Corporate Vice President of Investor Relation

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

Ingo Bank - Chief Financial Officer and Senior Vice President

Analysts

Jeffrey Bailin - Crédit Suisse AG, Research Division

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

Garen Sarafian - Citigroup Inc, Research Division

Ross Muken - ISI Group Inc., Research Division

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

David H. Windley - Jefferies LLC, Research Division

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

Alexander Y. Draper - SunTrust Robinson Humphrey, Inc., Research Division

Steven Valiquette - UBS Investment Bank, Research Division

Michael J. Baker - Raymond James & Associates, Inc., Research Division

Todd Van Fleet - First Analysis Securities Corporation, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the PAREXEL International Fourth Quarter and Fiscal Year 2014 Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Jill Baker, Corporate Vice President of Investor Relations. Ma'am, you may begin.

Jill L. Baker

Good morning, everyone. The purpose of this call is to review the financial results for PAREXEL's fourth quarter and 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 May 2, 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 Financial Information section of the Investor section of our website or will be discussed during the course of this teleconference.

I would like to note that we have posted a PowerPoint presentation of our fourth quarter and fiscal year 2014 earnings and outlook in the Investor Relations section of the PAREXEL website in the Financial Information section. The document is titled Additional Financials. [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'd like to start today by providing some commentary on our results for the fourth quarter and fiscal year and then discuss our outlook for fiscal year 2015. Following that, Ingo will provide more detailed information on the financials, and we will then open the call to questions.

The fourth quarter financial results capped a successful year for the company. Many of our plans and investments came to fruition, and our progress was well received by the market. We delivered strong growth in revenue and earnings per share and achieved a record full year operating margin of 10.3%, up 250 basis points over fiscal year 2013. I'm very pleased with the progress that we made in our business units and believe that we are well positioned for additional growth and improvement as we start our new fiscal year.

Speaking now to the results of the fourth quarter. Service revenue was $510.6 million compared with $463.1 million in the same quarter of the prior year, an increase of 10.2%. For the entire fiscal year, revenue was $1.94 billion compared with $1.73 billion in fiscal year 2013, a year-over-year increase of 11.8%.

Now I'd like to make some comments about each of our businesses. In our Clinical Research Services or CRS segment, we had a very successful year and achieved revenue growth of 12.3% in the fourth quarter and 11.6% for the full year. In the fourth quarter, gross margin grew by a healthy 410 basis points on a year-over-year basis and by 400 basis points for the full year. The fourth quarter also marked our sixth consecutive quarter of gross margin improvement. We continue to achieve these operational improvements as our ongoing strategic initiatives advanced according to plan. We are pleased with the progress that we have made in driving profitability in CRS and believe that further improvements lie ahead.

At our Investor Day in June, we discussed some of the ongoing profitability initiatives in CRS. These include improving utilization of our workforce, centralizing and better controlling resource allocation processes, deploying new planning tools and using lean methodologies to drive efficiencies. We're also flattening the overall CRS organization and team structure, consolidating CRS back-office and support functions into shared services centers and are offshoring certain activities. We expect that these initiatives will continue to bear fruit in fiscal year 2015.

Moving on to PAREXEL Consulting. Revenue grew 1.7% in the quarter and by 6.7% for the full fiscal year. Gross margin improved by 580 basis points in the quarter and by 200 basis points for the full fiscal year. The result of fiscal year 2014 for PC included 2 notable achievements. In the first example, PAREXEL Consulting helped to obtain the approval of the world's first monoclonal antibody biosimilar. Another achievement was the launch of PAREXEL Regulatory Outsourcing Services. This new offering combines PAREXEL Consulting's global regulatory expertise with the best-in-class regulatory information management technology of Liquent. PAREXEL Consulting won what we believe is the industry's first large-scale regulatory outsourcing program. This is a testament to the value that our clients see in this new offering and provides growth opportunity for the business going forward. Looking to the year ahead, we expect PAREXEL Consulting to resume its revenue growth by expanding on their best-in-class service lines and further integrating services across PAREXEL while also maintaining attractive gross margin levels.

In the PAREXEL Informatics business, the recent rebranding of the business to PAREXEL Informatics allows a closer linkage with the CRS business, which has created additional sales momentum in the marketplace. We expect that this bodes well for a year-over-year uptick in growth. We achieved year-over-year revenue growth of 6.7% in the quarter, which capped off a full year growth rate of 17.3%.

The business mix in the fourth quarter dampened the quarterly growth rate somewhat, but we expect positive sales momentum to improve results during the course of fiscal year '15. The business drove gross margin improvement by 310 basis points for the full year. We believe that the PAREXEL Informatics industry-leading suite of products and services is attractive to clients. Our integrated and deep product and service offering combined with PAREXEL's long track record in conducting global clinical trials is a strong and clear competitive differentiator.

In regard to our employee base. We ended the year with approximately 15,560 employees or a net increase for the fiscal year of 5.9%. I'd also like to note that while we continue to be successful on the hiring front, we're also investing in training and development programs to meet our future staffing requirements.

Moving on now to new business dynamics. Backlog of $5 billion at the end of the fourth quarter was up 8.6% year-over-year. Cancellations in the quarter came in at 2.9% of beginning backlog. The fourth quarter average cancellation rate for the year was 3.7%, within our expected cancellation range of 3.5% to 5%. The main reason for cancellations continued to be drug failure.

The net book-to-bill ratio for the quarter was 1.16 and was 1.14 for the full fiscal year. Revenue conversion of backlog improved sequentially from 10.2% in Q3 to 10.4% in Q4.

With regard to partnerships, I'm pleased to report that we recently were selected as a strategic partner to another of the world's leading pharmaceutical companies. In addition, we continue to win significant amounts of business in the small and midsized biopharma client segment. We're also pleased to see client concentration declining, which is, in part, due to the significant traction that we have achieved with our BioPharm Unit and small and midsized clients.

During the quarter, proposal flow remained strong. At the end of June, the value of proposals pending was up significantly as compared to the same quarter in 2013. Clearly, there is a lot of opportunity in the marketplace for our services.

Turning now to a couple of additional highlights of the fiscal year. Free cash flow was approximately $215 million in the year. Our free cash flow puts us in a good position to continue to execute on our strategic objectives, and one example is our $150 million accelerated stock buyback program that is returning value to shareholders.

On the M&A front. We recently announced the acquisition of ATLAS Medical Services, a provider of clinical research services in Turkey, the Middle East and North Africa. ATLAS provides services across all phases of clinical development, has deep therapeutic expertise and has been a PAREXEL partner for many years. We continue to have a focus on M&A, applying a rigorous approach in our evaluations and always keeping shareholder value creation in mind.

Shifting now to our thoughts about the industry overall. I'd like to reiterate a couple of comments that I made at our Investor Day. The marketplace in which we operate is diverse, and virtually all of our markets segments are growing. We believe that R&D spending is growing in the low single-digit range globally, and furthermore, many small biopharmaceutical companies have successfully raised capital and are now deploying those funds into outsourcing of clinical development activities. We have certainly experienced this over the past year in our BioPharm Unit. We believe that CROs are now the world's primary source of expertise in the clinical development domain. We're pleased with the increasing levels of outsourcing penetration in the industry and believe there is more headroom for further penetration. As a leading CRO, we expect to win our fair share of that.

Two other important trends that impact our business environment are emerging markets and the ongoing digitization of clinical research. Growth potential in both areas is fueled by the globalization of clinical trials and the increasing size and complexity of these trials. All in all, we feel that the dynamics that are playing out in our industry provide a positive backdrop for many years of growth.

As we enter fiscal year 2015, our priorities include further building upon our leadership position in the marketplace, delivering high-quality services to our clients and continuing to foster a high-performance culture focused on innovation. At the same time, we expect to achieve solid revenue growth accompanied by continued improvement in our operating profitability and increased earnings per share. We're also actively working on the implementation of a revised long-term tax strategy to enhance shareholder value. We expect to achieve our fiscal year 2015 objectives while we continue to improve the products and services that we offer to our clients, positioning us for sustained growth.

In summary, I'm pleased with our position in the marketplace and our prospects looking forward. I'd like to take this opportunity to thank our employees. It has been with their hard work and dedication that we have delivered a strong operational and financial performance in fiscal year 2014. We look forward to continuing to improve our performance in the new year. And with that, I'm handing over to Ingo, who will provide some more details on our financial results.

Ingo Bank

Thanks, Joe, and good morning to all of you. Overall, as Joe pointed out, we delivered a strong fourth quarter, finishing off a very successful fiscal year 2014 for the company. I will start my comments by summarizing the overall company performance first and then I will provide more insight into the performance of our 3 reporting segments.

Total company revenue for the June quarter grew 10.2% to $510.6 million, with the HERON acquisition contributing 0.2 percentage points. Excluding the positive effects of foreign currency exchange and the acquisition of HERON, comparable revenue growth was 9.1%. All of our segments contributed to the growth.

Gross margin continued to expand strongly. Compared with the same quarter of fiscal year '13, gross profit grew by $34 million. Gross margin improved by 370 basis points in the quarter to 35.7% and increased sequentially by 130 basis points as we continue to reap the benefits of our various productivity programs. All of our segments showed strong expansion in Q4 for the full fiscal year and also sequentially.

Adjusted SG&A as a percentage of revenue was up 150 basis points in the fourth quarter compared to a year ago, coming in at 20.4%. The increase was driven by investments in selling and promotions, the acquisition of HERON and higher IT expenses. With the efficiency initiatives outlined during our Investor Day in June 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 with the first benefits becoming visible during fiscal year 2015.

Let me now move on to adjusted operating income and adjusted operating margin. The combination of strong revenue growth and gross margin expansion helped us to grow operating income substantially by $17.5 million in the quarter, a year-over-year increase of 44%. As a result, operating margin expanded by 260 basis points in the fourth quarter to 11.2%. Sequentially, operating margin improved by 40 basis points.

Excluding purchase accounting and integration cost effects, the company's fourth quarter earnings before interest, tax and amortization was 11.7%, up 180 basis points compared to Q4 fiscal year '13. As I discussed during the previous quarter's earnings call, this metric is an important operational profit measure for us. It helps us to understand the underlying structural profit margin of our business better without the distorting effects of purchase accounting.

Moving on. Other expense net came in at $2.6 million for the quarter driven by net interest expense of $1.7 million. Foreign currency results recorded within other income and expense were a negative $1.3 million.

The June quarter effective tax rate on a GAAP basis was 28.7%. The adjusted tax rate was 31.4%, up 380 basis points from the same quarter a year ago, reflecting that the majority of the company's pretax income is now generated in the United States. In the quarter, we benefited from the release of certain valuation reserves providing a onetime benefit and reducing the adjusted tax rate on a sequential basis by 470 basis points.

For the full fiscal year, our adjusted tax rate came in at 33.7%, in line with the previous guidance given. The rollout of our new tax strategy is continuing, and we have started the dialogue with stakeholders. As outlined during our Investor Day in June, we expect that the new tax strategy will yield gradual improvements over time, with early benefits potentially starting to show towards the latter part of fiscal year '15. We expect to see a more substantial improvement for the years subsequent to fiscal year '15 to ultimately bring us in line with the industry average.

Given the strong improvement in operating margin, we delivered another quarter of double-digit growth in EPS. Fourth quarter adjusted diluted earnings per share increased to $0.65. This compares to $0.50 in the same quarter a year ago, representing a 30% year-over-year increase. On a GAAP basis, diluted EPS grew 34.6% year-over-year.

Cash flow was strong in the quarter. Operational cash flow represented an inflow of $99 million and was driven by a combination of strong earnings growth and good working capital management. Our DSO was low at 32 days, 1 day lower compared to prior quarter and 10 days lower compared to the same quarter a year ago.

With CapEx for the quarter at $23 million, free cash flow for the June quarter was approximately $76 million. Net debt was approximately $77 million compared to $12 million in Q3 fiscal year '14 as we used part of our cash flow and the revolving line of credit to fund the $150 million accelerated share buyback program that we announced in early June.

Turning now to client concentration. The largest client in the June quarter represented 17% of revenue, unchanged from the prior year. The top 5 clients declined to 47% as compared to 49% 1 year ago, and the top 20 clients were down to 77% as compared to 80% 1 year ago. For the full fiscal year, the top client was 16% of service revenue, down from 17% in fiscal year 2013. The top 5 represented 47%, down from 50% a year ago. And the top 20 comprised 77% of the total, which was down from 79% 1 year ago.

Let me now provide more details on the performance in our 3 segments. I will start with the financial performance of our largest segment, CRS. In the quarter, CRS grew revenue by 12.3% to $385.6 million. Adjusted for the positive impact of foreign currency exchange, comparable growth was 11.5%. All of our client segments contributed to growth.

In the fourth quarter, CRS gross margin continued to improve and increased by 410 basis points year-over-year, coming in at 32.2%. This translates into a total gross profit increase of almost $28 million compared with the same period in fiscal year '13. The higher revenue provided us with good leverage of our indirect business infrastructure cost while the operational efficiency program continued to deliver benefits. CRS gross margin also increased on a sequential basis by 60 basis points.

Moving on to PAREXEL Consulting. The business grew by 1.7% with the acquisition of HERON, contributing 2.9 percentage points to the year-over-year growth. Adjusted for the positive impact of foreign currency exchange and the acquisitions, PAREXEL Consulting revenue declined by 2.4%. The year-over-year decline in revenue was largely due to the impact of the contract cancellation reported in our Q3 fiscal year '14 earnings call. On a sequential and comparable basis, PAREXEL Consulting grew 4.1%.

Gross margin in PC in the quarter was strong at 46.1%, significantly improved by 580 basis points compared to the same quarter of fiscal year '13 and also up compared to the prior quarter by 470 basis points. These improvements were largely driven by a more favorable revenue mix.

When looking at our third business segment, PAREXEL Informatics or PI, we recorded revenue growth of 6.7% in the quarter, delivering a total revenue level of $69.8 million. When adjusted for the positive impact of foreign exchange, revenue increased by 5.4%. The overall somewhat modest growth in the quarter was due to a revenue decline in our Liquent business, where, in the prior year, we benefited from a significant peak in software license revenue, which was absent in Q4 fiscal year '14. Sequentially, PI revenue grew on a comparable basis by 3.5%. Growth continued to be strong in our Medical Imaging business supported by healthy growth in our platform solutions business, which includes our MyTrials offering.

PI's gross margin improved further and reached 46.8% for the quarter, up 100 basis points compared to the same period in fiscal year '13. Sequentially, gross margin improved by 250 basis points. Revenue mix and a higher share of costs in low-cost countries were the primary drivers of the improvement.

Before I start my forward-looking remarks, I would like to summarize the financial performance for the full fiscal year '14 as follows: Fiscal year '14 revenue growth for PAREXEL was strong at 11.8% and in line with our targeted average annual growth range of between 10% to 12%. All business segments contributed to this growth. CRS grew by 11.6%, PC by 6.7% and PI by 17.3%. Adjusted operating margin for the full year was 10.3%, the highest annual operating level in the history of the company. All segments supported this improvement through significant expansion of their respective gross margins, led by CRS, which delivered 400 basis points improvement in gross margin.

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

Adjusted EPS grew by 28.4% compared to fiscal year '13 despite an increase in our effective tax rate of 780 basis points, reflecting our strong revenue growth and operating margin. Free cash flow for fiscal year '14 was a healthy $250 million driven by strong earnings growth and good working capital management, particularly with respect to DSO.

Return on invested capital for fiscal year '14 was at 17.2%, meaningfully above our weighted average cost of capital, creating substantial shareholder value. Our $150 million accelerated share buyback program announced in June reconfirmed our overall commitment to active and value-creating capital deployment.

Let's change perspective now and take a look forward. We have included our forward-looking guidance for fiscal year '15 and the first quarter of fiscal year '15 as part of the earnings release that we issued yesterday.

For Q1 fiscal year '15, we expect revenue to be sequentially lower, in line with historical seasonality as we are in the summer period. As a result of the lower revenue, we expect operating margin to be somewhat lower than the fourth quarter of fiscal year '14.

For the full year of fiscal year '15, we've raised the lower end of our revenue and EPS guidance compared to prior guidance. With the revised guidance, we anticipate our adjusted operating margin for the full fiscal year 2015 to improve within the targeted bandwidth of 100 to 120 basis points over fiscal year '14.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Jeff Bailin of Crédit Suisse.

Jeffrey Bailin - Crédit Suisse AG, Research Division

Ingo, maybe I'll start with the guidance that you just touched on. If I look at the adjustments for fiscal '15, the company had just given initial guidance a little over a month ago, so I'm wondering what has changed and given you the confidence to tweak the lower end of guidance up already.

Ingo Bank

Okay. Well, obviously, we're now a little bit further into the quarter. We've seen the Q4 come out strongly. We've seen the new bookings come in, so we feel we have more visibility on the revenue front maybe compared to a month ago, so that's why we sort of raised the lower end of the bandwidth from a revenue perspective. And with that, obviously, there will be -- also be some benefits from a margin perspective, plus relative to what we said at the guidance during the June Investor Day, we exited the year somewhat higher on the adjusted operating margin front than -- and therefore, we reflected that also in the somewhat higher guidance we gave with respect to midpoint on the EPS piece.

Jeffrey Bailin - Crédit Suisse AG, Research Division

Got it. Maybe just one follow-up for Joe. Can you offer any color around the strategic partnership you discussed in your prepared remarks? I assume this hasn’t really shown up in bookings yet, but is this a new relationship that we should expect to ramp throughout fiscal '15 on a bookings revenue front? Or is this just a change in the format of an existing client relationship?

Josef H. von Rickenbach

It's more of the latter. We have already worked with this client for actually many years. And it has -- the relationship has been, if you want, upgraded now to strategic partnerships. And over time, this will result in increases in new business and also some investments, of course. But I don't think it's going to really disrupt anything on either side actually.

Operator

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

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

A quick one on the consulting gross margin. Given just the very large sequential step up, how should we be thinking about that going forward? Is this kind of a permanent reset to a higher level? Or would it step back down?

Josef H. von Rickenbach

Yes. So we had a good quarter in PAREXEL Consulting with respect to margins. This is mainly due to a change in revenue mix within the various operating units in the business and is likely not going to continue at this level going forward. Now having said this, remember, the margins generally in the consulting business are attractive. And even if it comes back a little bit, it's still a very good performance in our view.

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

Okay. And just a bigger-picture question on bookings. Gross bookings in fiscal year '14 were effectively flat year-over-year. So I'm just wondering, what's your level of confidence that you're going to be able to grow the gross bookings to get you to an acceptable book-to-bill in the coming year?

Josef H. von Rickenbach

Well, as I pointed out during my remarks, generally speaking, our markets are good. They're solid, and we have a good proposal flow and a strong pending proposal portfolio going into the year. And I made the various -- or I spelled out the various contributors that we feel are there for continued growth. We have a good position in the marketplace, good relationships both with the large companies, the partners and the smaller companies. And so overall, we feel that we even gained some market share maybe as we move into the year. And I'd also say actually, one of the things that maybe hasn't come through as much, together with the margin improvements, we have actually also improved client satisfaction. And of course, that's also very important when you get to the point of the repeat business decision.

Operator

Our next question comes from Garen Sarafian of Citigroup.

Garen Sarafian - Citigroup Inc, Research Division

First, just a clarification on the partnership that you mentioned in the prepared remarks. I understand it was more with a current client that essentially was upgraded. But are you -- was this anticipated? I'm just curious to get a sense of, is this within the normal routine of the partnership discussions that you periodically have with customers? Or is this -- are you sensing any sort of an uptick in the partnership conversations that you're having and seeing and hearing?

Josef H. von Rickenbach

Yes. So I think this was a negotiation and a discussion that we anticipated. It was a competition, to be clear. But as I said, we have worked with the customer before. But you know our opinion on partnerships. Generally, this is a good model for -- especially for the large pharma clients, but not only. And so over time, you'll probably see more and more of these types of customers adopt some form of partnership or another. And this is an important one, of course, for us, and we're pleased that we won it and also still feel that there are some out there that we are still pursuing.

Garen Sarafian - Citigroup Inc, Research Division

Got it. But it doesn't sound like any sort of a shift in any way.

Josef H. von Rickenbach

No, not really. I wouldn't characterize it as a shift away from anything that we would've anticipated and have talked about.

Garen Sarafian - Citigroup Inc, Research Division

Got it. And then the second question, this quarter, there was -- there's been some noise on either cancellations or conversion rates. Your conversion rate, I thought I heard 3.7% range, which was well within your historical averages and the guidance that you've given. But could you -- even if it's within the range, could you give any more color on how these metrics are changing even if the net rates are remaining the same?

Josef H. von Rickenbach

Are you referring mainly to the conversion rates now or which...

Garen Sarafian - Citigroup Inc, Research Division

Both, conversions and cancellations. You highlighted safety is an issue in cancellations. But any changes that are occurring in the marketplace with either cancellations or conversions?

Josef H. von Rickenbach

Yes. Okay, so let's talk about cancellations first. So cancellations in the quarter were relatively low. And obviously, we're pleased about that. Generally, I think this has -- is driven mainly by, you could say, the maturity of the backlog. If you go back a number of quarters, we had a lot of study start-ups and then also eventually an uptick in cancellations towards the higher end of the range. Generally, now, the studies that are in the backlog are probably going to see -- we are going to see them through to the end, so they're very likely not going to cancel. And over time, we don't believe this is a permanent change in our range. And over time, we'll probably come back into the 3.5% to 5% range as it has for a very long period of time. As far as the conversions are concerned, again, you may remember, if you go back roughly to the same time period as I've just talked about before with the cancellations when we had a lot of those study start-ups, the conversion rates actually dropped a lot. And over time now, as basically the backlog behavior has normalized, so have the conversion rates. And I also say the law of the big number of the backlog is starting to kick in, and any sort of future changes in terms of mix or new business patents and so on are unlikely to change the conversion rates a lot. And I think there's going to be a gravitation towards the 10% to 11% range.

Operator

Our next question comes from Ross Muken of ISI Group.

Ross Muken - ISI Group Inc., Research Division

I have 2 questions on the business. One, Joe, you talked a bit about sort of regulatory consulting as sort of an incremental opportunity. Can you just sort of start to frame how that is developing? And maybe if you can put any sort of sizing around how you see that opportunity. And then secondly, on PAREXEL Informatics. One, how has the rebranding gone? Obviously, you did that recently. And then what has the interest been in sort of MyTrials, which has sort of been a pretty successful launch, it seems like, for you.

Josef H. von Rickenbach

Okay. Big question, Ross. Okay, so I'll to try to do justice to these various points. So in terms of regulatory opportunity, as you kind of look at the various functions in the drug development world, while overall, of course, the outsourcing happens programmatically, we have to also remember that in each case, in each area, in each function, there is also a functional outsourcing business basically or opportunity. And in each -- pretty much in each one of those, we are participating. Historically, most of our regulatory business was what one would call consulting or advisory in nature. And what we're talking about here is more basically what you would call functional outsourcing or insourcing, where a company actually, wholesale, outsources part or even all or most of the regulatory function. And it's -- I wouldn't say it's the hugest opportunity in the drug development world but it's significant and -- now we feel that we are well positioned to take advantage of this opportunity because of the long track record that we have in the business. We have a lot of expertise and a lot of relationships with customers and with regulatory agencies around the world. In terms of the Informatics rebrand, we feel that, that went very well. I remember one of the reasons why we did this was because we felt that the informatics part of the business is getting increasingly -- becoming increasingly part of the core also or to say it differently, we're becoming more and more an eCRO, and we wanted to make sure that there was no question about that, especially as some of our competitors have started to also fairly successfully get that message out into the marketplace. And given that we have such a deep, long history and track record and capacity in that area, we wanted to make sure that there was not any confusion about our position in the marketplace about that particular competitive differentiator. And as far as MyTrials are concerned, just for everybody's background, MyTrials basically is a platform that we have created where we can put our applications but also competitive applications or even legacy or internal applications can be put on. This is getting, I'd say, slowly, traction. And I say "slowly." It's a relatively long sales cycle. We are finding out companies are really carefully evaluating whether they want to go with this platform because once you make a commitment, this is then a long -- has a long future, and it's not so easy to get off it. But it's getting traction, and we're basically happy with the positioning and feel it's obviously a great product from a technical point of view.

Operator

Our next question comes from Robert Jones of Goldman Sachs.

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

Yes, Joe. I guess just going back to bookings. If I look at the net bookings, we're a little light relative to what we expected, and the trailing 12 months now is at 1.4. It is slower than what we're seeing from some of the other large public late-stage competitors. I'm just wondering as we think about that type of bookings level, especially relative to some of the mix shift you talked about from the larger clients to the midsized clients, is this a bookings level or a book-to-bill level that you think can support the growth outlook that you guys have laid out?

Josef H. von Rickenbach

Yes. So remember, we talked about that already at the Investor Day. So the answer is basically yes. If we continue to perform at the levels that we're at and were at for the past fiscal year, we believe that, that's sufficient for us to meet our growth targets. Now having said that, of course, we are aiming higher and especially when it comes to the gross new business, as it has already been pointed out, the quarter was, relatively speaking, a little lower than what we would've liked. But having said that, there are ebbs and flows in various quarters and maybe more importantly, the opportunity continues to be there.

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

That's fair. And then I guess just my follow-up for Ingo on tax. I know at the Analyst Day, you discussed moving the tax rate down over time. If I remember correctly, I thought this was something that would take some time to put into place. Just curious if you could comment on the lower tax rate in the quarter. What drove it? And was this anything to do with the longer-term planning that you guys are putting in place?

Ingo Bank

Sure. So I think -- let's start with the current quarter. I think, as I said in my prepared remarks, we benefited in the quarter from some of what I would call onetime benefits of releases of valuation reserves here in the U.S. but also outside of the U.S. So I don't expect that to repeat to the same magnitude going forward. So we're still at -- are at a level where a significant amount of our pretax income is generated here in the United States and that has not changed compared to the prior quarter. And as a result, I don't think what you've seen this quarter is representative of the new tax strategy. However, at the same time, obviously, we've made progress with respect to implementing our new tax strategy in terms of preparation. We've now been able to also start the conversation with some of the external stakeholders that need to be involved in this process. And the first discussions have been, I would say, encouraging in that regard. And as I said in my prepared remarks, I expect the new tax strategy to really take hold in a more significant way beyond fiscal year '15, so there is some expectation that we might see some gradual improvement throughout the course of fiscal year '15, more towards the latter part. But clearly, for the upcoming first half of our fiscal year '15, I would expect the impact of the new strategy to be rather muted, and we should, therefore, think of tax rates that are representative of a substantial amount of pretax income here in the United States.

Operator

Our next question comes from Dave Windley of Jefferies.

David H. Windley - Jefferies LLC, Research Division

First of all, congratulations on your margin improvement. I know that -- I was just looking historically that it has eclipsed a level that you haven't seen in an awfully long time, on the gross margin line in particular. And I suppose I can count myself as one that was somewhat skeptical, so congratulations from a guy who wasn't sure you could do it. The question that I have is around your visibility, kind of following on Bob's question but a different way. You, I think, Joe, have telegraphed pretty clearly that your confidence in your revenue growth was not tied to a 1.2 book-to-bill but rather a stabilizing conversion rate. I guess, it then becomes important for us to understand the duration of your backlog, which is kind of hard to see. Are you able to provide for us, for example, coverage levels of your forward revenue guidance? Or how much of your backlog do you expect to burn in the next 12 months? Things along those lines in comparison to last year that might give us some visibility as to a stabilizing duration of the backlog.

Josef H. von Rickenbach

In terms of visibility on the kind of metrics you're talking about, we are, of course, focusing on those exact metrics a lot and know them well. And it's actually interesting, the -- in the forward-looking -- let's say if you take 12 months forward and look at how much of our backlog would cover revenue, what percentage of the forward-looking revenue would come out of backlog, that metric, that would be, by the way, approximately in the range of 70% to 90%. So there's actually a relatively large fluctuation there over time. And I emphasize that simply because as we maybe occasionally talk about that, I want people to know that, that's not abnormal to see some fluctuation. And -- but overall, we feel good about these conversion metrics and these coverage metrics going into the fiscal year. I think this looks actually healthy, normal, and I'll be happy to give you an update from time-to-time if you are so inclined in terms of how this is behaving.

David H. Windley - Jefferies LLC, Research Division

I guess, just to follow up, is it logical to think that as you are less dependent -- as you're thinking about your book-to-bill being somewhat lower than it has been historically, that your forward revenue -- that you should have more of your forward revenue in hand at any given time than the amount that you are depending on to come in through new bookings within the year? And so we should be thinking that, that forward coverage metric ought to be trending higher as a general statement, acknowledging fluctuation quarter to quarter, but that, that should be trending higher as you become less dependent on new wins within the year.

Josef H. von Rickenbach

Well, not really. I mean, I don't think there is that direct a correlation. Well, first of all, one comment to the book-to-bill. I -- we have not given up at all to -- from time-to-time, we have book-to-bills that are higher than a 1.2. We just -- we don't want to be completely beholden to that 1.2 target. And over time, our focus is to win enough business to basically to fuel our growth and keep us competitive in the way we have spelled out in some detail already. But as I said, the fluctuations on the forward-looking coverage, the metric you just talked about, I think this is probably more dependent on the mix of the backlog than on anything else. And so I think naturally, and in a healthy way, this can in fact fluctuate. And I think it's important to bear in mind as we potentially see that more talked about.

Operator

Our next question comes from John Kreger of William Blair.

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

Joe, just following on Dave's question. So if you think about, over the last year, gross bookings growth has sort of come down a bit, but your margin performance has been really, really good. Have you approached -- has your pricing strategy changed at all as you go after new business? Are you sort of approaching this now with a little bit higher return objective perhaps?

Josef H. von Rickenbach

I would say we have always had a good level of discipline around pricing and are maintaining that. So the margins in the recent past, the depression of the margin in the recent past really had to do with the very high growth rates that we experienced. Again, if you kind of go back to that journey, we -- and just even as late as last year, we were -- we had a growth rate well into the 20% range. And when you grow at that rate, just to bring in the people to ultimately do the work, the facilities and on and on and on, require a lot of upfront investments that depress your margins. Today, we're more in a longer-term sustainable growth environment, and so all this is much more balanced. And combined with the focus that we have, as I pointed out, with the various initiatives in terms of margin improvement, I think we're getting to the margins that we always expected to get at and probably would've gotten to sooner had we not had the good fortune of the high growth that we enjoyed in the last year and the year before.

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

Great. Just 2 quick follow-ups. As you think about fiscal '15 and the guidance you've given us, what sort of net hiring do you expect and is implied in your numbers for '15?

Josef H. von Rickenbach

Well, you saw the increases in headcount that we had this year. It was a decent number, approximately 800 to 900 people. And in the growth for fiscal year '15, it's probably going to be in the same order of magnitude, maybe a tick higher, roughly there, and that could -- should give us again a good progression in terms of margin expansion as Ingo has detailed.

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

And then one last one, your revenue concentration stats. A year from now, do you think those numbers will be very different from where they stand today?

Ingo Bank

First of all, of course we are happy to see that we got a sort of improvement in the client concentration. We also pointed out that we've seen significant amount of success with our BioPharm Unit and mid to small size. So I think we would probably see some kind of improvement also going forward in that metric based upon what we know from our backlog and based upon what we know from what's outstanding there in terms of proposals.

Operator

Our next question comes from Sandy Draper of SunTrust.

Alexander Y. Draper - SunTrust Robinson Humphrey, Inc., Research Division

I think most of my questions have been asked and answered. I did get on a little bit late, so I don't know if you covered this. But maybe on the PAREXEL Informatics business. Obviously, a lot of interest and growth in that area. When I look at the organic growth in the second half of the year or really for the past year, it was decent but not double digits. I'm just trying to get a sense for what you think it takes to get the PAREXEL Informatics business to start growing double-digits top line because it seems like the market is certainly out there to support that.

Josef H. von Rickenbach

It's an interesting question in the sense that, actually, our new business has been pretty good and the book-to-bills have been pretty high in that business, in Informatics. But in the way the revenue gets recognized, that's relatively understating actually the success on the ground in terms of new business. And maybe, Ingo, you could say a few words exactly how this works.

Ingo Bank

Yes. So if you look at, for instance, a part of the business which we're very successful, RTSM, and we operate as -- from a Software-as-a-Service model where we have a revenue model that is more linear and pro rata and therefore, does not always immediately show a significant pickup in revenue when we have seen a significant pickup in our backlog, also -- or new business. Also, typically, in these type of businesses, we cannot recognize revenue during the period between the win of this business and when we start basically customizing the solution for the client, where we put all the work basically into deferred revenue and then see the pickup somewhat later. So it's really an error in how we treat it from an accounting perspective, I would say.

Operator

Our next question comes from Steven Valiquette of UBS.

Steven Valiquette - UBS Investment Bank, Research Division

Right. So the 11% adjusted operating margin in the quarter is obviously a pretty strong result. But just curious, I basically know you guys mentioned some seasonality in sales in the beginning of a new fiscal year versus the trend exiting the prior fiscal year. But on the operating margin front, for the last 4 years in a row, you've actually had some pretty big sequential operating margin expansion in the fiscal first quarter of each year. So just wondering if there's any way to reconcile that perception of seasonality versus those actual trends over the past 4 years, at least on the operating margin front.

Ingo Bank

Thanks. Yes, so from a revenue perspective, we've seen indeed some sort of seasonality in the growth pattern. I think irrespective of revenue, we've now seen a strong impact by the various productivity initiatives that we have. And they are sometimes somewhat irrespective of what the revenue does because simply by improving some of our processes, increasing visibility and efficiency on running projects actually gives you some kind of lift also in the margins. At the same time, obviously, I can't deny that there is also a certain leverage effect that you get obviously from revenue, and that's also why I said in my prepared remark that with the lower revenue that we expect for the first quarter of fiscal '15 relative to the last quarter of fiscal '14, therefore, we would also see a little bit of a drop in operating margin going forward.

Steven Valiquette - UBS Investment Bank, Research Division

Okay, got it. Okay, and then one other quick one. I think back at the Analyst Day, you mentioned for the PAREXEL Informatics division your goal to get the gross margins to 50% or above. Can you just remind us again just the approximate time frame you were talking about when you were making those comments?

Ingo Bank

Yes. So obviously, it's a question that we always address as well here. It's very important to us. I think we're -- looking back, I think it's important to know that we've made really significant process -- progress in PI with respect to margins. Certainly, over this year, I would also look -- if you look at fiscal year '13, we made progress here. As Xavier pointed out during the June Investor Day, we clearly have a path how to get there, but I don't expect us to do this within the next 12 months or so. I see more of a gradual improvement from here onwards in that regard. We still have some runway to go from a low-cost country perspective, and being able to drive revenue growth will be a key aspect to also create the leverage that we need for the R&D investments we've done in this business. So it's a function of sort of the growth picture that we will see there, as well as the ability to continue to sort of move activities from high-cost to low-cost countries, and that should give us sort of a gradual pickup in the next couple of quarters.

Operator

Our next question comes from Michael Baker of Raymond James.

Michael J. Baker - Raymond James & Associates, Inc., Research Division

Ingo, the question I have for you is in terms of your backlog. What percentage comes from large pharma? And how does that compare to, say, a year ago?

Ingo Bank

Thanks. I don't think we've ever publicly disclosed that. And I think when you look back at fiscal year '14, I think we've done -- we continue to do well with our strategic partners. And as Joe just mentioned, we just added one to the group in the last quarter. At the same time, we've been pointing out for a number of quarters that we see a strong success with our BioPharm Unit and the small and midsized where we are simply benefiting from the significant funding that goes into that sector right now. So as a result, obviously, you would see it, over some point in time, also somewhat reflected in our client concentration. That backlog is shifting a little bit. And pending of course the funding environment, that might also continue to look like that going forward.

Operator

Our next question comes from Todd Van Fleet of First Analysis.

Todd Van Fleet - First Analysis Securities Corporation, Research Division

Ingo, you gave some commentary on where you expect G&A expense or SG&A expense to kind of trend over the course of 2015. I'm just kind of curious if you can give us a little bit more details surrounding why we saw the spike in absolute dollar amounts in the June quarter, and then how we should expect to see that trend in the near term.

Ingo Bank

Yes. So if you look at the June quarter, I would say that we continue to see some investments into sales and marketing, which, again, is a bit of a testament to what Joe was pointing out that we see strong demand out there. We want to make sure that we are able to address that demand in the various market segments that we can see growing for a while and we continue to see growing, so we invested there. We continue to invest also into facilities because obviously, when you move into or increase your move into low-cost countries, you also need to ready facilities to receive these activities. I mentioned during the Investor Day that the company has decided to open a second shared service center in India, so we're in the process of preparing that. And then in the quarter itself, we also had the situation that if you look at capital expenditures, we typically have a large part of our capital expenditures, internally developed software, where we basically capitalize a big bulk of our IT expenses. And as we've been driving CapEx down, obviously, we had a somewhat lower share of IT expenses being capitalized. So that's a little bit of color to the June quarter, I'd say. As to fiscal year '15, I think we've now more or less finalized all the plans for the functions, so they're ready to roll it out. Also the budgets that we have in place for -- particularly HR, IT and also finance are aiming at a somewhat lower percentage than we had in the course of 2015. So I see us, in the course of '15, certainly moving below the 20% mark.

Josef H. von Rickenbach

All right. So with that, I think we're at the top of the hour. I thank everyone for participating in our call and your interest in PAREXEL, and we look forward to updating you on our next earnings call. Thank you, and goodbye.

Operator

Ladies and gentlemen, thank you for participation in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a wonderful day.

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