PAREXEL International's (PRXL) CEO Josef von Rickenbach on Q3 2016 Results - Earnings Call Transcript

| About: PAREXEL International (PRXL)

PAREXEL International Corporation (NASDAQ:PRXL)

Q3 2016 Earnings Conference Call

April 28, 2016 10:00 a.m. ET

Executives

Ron Aldridge - Senior Director, IR

Josef von Rickenbach - Chairman, CEO

Mark Goldberg - President, COO

Ingo Bank - CFO, SVP

Analysts

John Kreger - Blair

Tim Evans - Wells Fargo Securities

Eric Coldwell - Robert W. Baird

Garen Sarafian - Citi

Dave Windley - Jefferies

Robert Jones - Goldman Sachs

Donald Hooker - KeyBanc

George Hill - Deutsche Bank

Operator

Good morning, my name is Bethany, and I'll be your conference operator today. At this time, I would like to welcome everyone to the PAREXEL International Third Quarter Fiscal Year 2016 Earnings Conference Call. Please note that today's call is being recorded. [Operator Instructions]

At this time, I'd like to turn today's program over to Senior Director of Investor Relations, Ron Aldridge. Mr. Aldridge, you may begin.

Ron Aldridge

Good morning, everyone. I'm Ron Aldridge, the new Senior Director of Investor Relations at PAREXEL. I'd just like to take a moment to tell you how pleased I am to be representing PAREXEL and to be working with all of the analysts and investors following the Company. The purpose of this call is to review the financial results for PAREXEL's third quarter fiscal year 2016. With me on the call today is Josef von Rickenbach, our Chairman and Chief Executive Officer; Mark Goldberg, President and Chief Operating 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 most recent 10-K report as filed with the Securities and Exchange Commission on August 25, 2015, 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 service 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 investors portion of the Company website and will be discussed during the course, or will be discussed during the course of this teleconference.

During the course of our call today, we will be referring to a presentation of our third quarter fiscal year 2016 earnings. You can find the presentation on the homepage of the investor's portion of the Company website under the Q3 2016 quarterly results banner. The document is titled Q3 Financial Results and Trended Information. As we will be limiting today's call to one hour, we request that participants limit questions to one each, with an opportunity to ask one follow-up question.

I would now like to turn the call over to Mr. von Rickenbach.

Josef von Rickenbach

Thank you, Ron, and good morning everyone. First of all, it's my pleasure to introduce Ron to our analysts and investors as PAREXEL's new Senior Director of Investor Relations. Ron, welcome to the PAREXEL team. I would now like to start with commentary on our third quarter, including significant market trends. Following that, Mark will discuss the company's operational performance; Ingo will then provide more details on our financial results after which we will open the call to questions.

I'm very pleased with PAREXEL's solid third quarter. We were successful on several fronts; achieving revenue in line with our expectations, healthy growth in new business awards and backlog, substantial profitability improvement, and robust diluted EPS growth. Total company revenue of about $527 million came in at the high-end of our guidance range. We had one of our best quarters for new business. Gross new business wins of $999 million drove a healthy net book-to-bill ratio of 1.33. Backlog grew 3.2% sequentially and 9.1% year-over-year to $5.7 billion.

Our proposal flow in the quarter was strong providing attractive opportunities for new business. The performance of our three business segments met our expectations. In clinical research services, or CRS, service revenue was relatively unchanged versus the prior year quarter, while new business wins continued to be strong. I'd like to take a moment to address a change in marketplace dynamics that contributed to this performance. As we have previously discussed, more than half of our current projects in backlog relate to innovate compounds and complex therapeutic areas such as oncology, immunology and rare diseases. These are areas of expertise and competitive advantage for PAREXEL.

As we have communicated, we are finding that these types of trials take longer than typical trials did in the past in the initiation, startup and patient accrual stages. For example, patients often now may need companion diagnostic tests. As a result of these slower, longer trials, we are seeing a shift in the revenue conversion curve. Backlog conversion has declined and our average backlog duration has increased meaningfully. As a result, our revenue growth has decreased even in the face of strong bookings performance. So the question is when is this change in project mix and its effect on revenue growth going to normal? We think sometime in the fiscal year 2017 the prolongation of trials will have reached steady state.

At that point, revenue growth may begin to come more in line with recent backlog growth. The long-term drive for our revenue growth, of course, remains our new business performance. We are encouraged by our strong new business flow and backlog growth which we are confident in time will drive future revenue growth. These market trends are also impacting the demand for peri and post-approval interventional studies. As the new mix of products moves through the pipeline and some are approved, fewer large multi-center interventional studies will need to be conducted and more smaller and more complex studies in the peri and post-approval setting will become the norm.

We believe that this trend creates an exciting opportunity for us to support our client's needs for real world evidence to help them gain market access and reimbursement. Mark will have more to say about these trends in a moment. Let me now turn to our other businesses. Year-over-year revenue growth in PAREXEL Consulting and PAREXEL Informatics was strong, up 49% and 10.7% respectively. Consulting revenue benefited from strong organic growth in the acquisition or health advances which closed during the quarter. In April we further strengthened our Informatics business with a new alliance between PAREXEL Informatics and EMC Corporation to support our customers’ needs for end-to-end management of their product regulatory lifecycle.

This was also a quarter of solid operational progress as we continued to execute on productivity and cost control initiatives. Our margin acceleration program, or MAP, remained on track and generated approximately $12 million of savings in the quarter relative to a year ago. You will recall that the MAP was a key element in achieving our longer-term goal of 13% to 15% in adjusted operating margin. We're pleased to have successfully reached that lower end of that range and we intend to achieve further margin improvement going forward. We completed our accelerated share repurchase program in the quarter returning capital to shareholders and accelerating EPS growth. We remain focused on optimizing the Company's capital structure; our priority for capital deployment remains targeted acquisitions.

Our EPS growth in the quarter was strong. Diluted EPS of $0.89, both GAAP and adjusted represented year-over-year growth of 30.9% and 34.8% respectively. Looking to the future, we expect to benefit from continued favorable industry trends. R&D spending continues to grow at both large and small biopharmaceutical companies; there has been a concern among investors about the slowdown in funding of small emerging pharmaceutical and biotech companies earlier in the year. Let me be clear that this has not hindered PAREXEL's performance. On the contrary, we are seeing very strong new business flow from the segment. We believe the fundamentals of our core business remains sound. Outsourcing penetration continues to grow as biopharmaceutical companies recognize the value that our industry offers in technical expertise, operational flexibility, high quality and cost effective solutions.

As the marketplace has changed over the past few years, we have been retooling both building our capabilities and improving our operational efficiency through the MAP to reposition ourselves for future growth. We anticipate that we will compete effectively with other biopharmaceutical services companies by continuing to build our leadership position in our core businesses and by investing in adjacent areas to serve more of our customers’ needs. And as our margin acceleration program comes to a successful conclusion this fiscal year, we will renew our efforts to improve our profitability by continuing to offer our customers value added services and by increasing operational efficiency beyond the MAP. We look forward to updating you about our environment, market trends and strategy for fiscal year 2017 and beyond at our Investor Day on June 30.

So, in summary, to put our overall performance in fiscal year 2016 in perspective, we expect to achieve adjusted diluted EPS of $3.42, up 23% versus last year. This is $0.22 higher than the goal of $3.20 that we shared with you at our Investor Day last June. We believe this represents substantial value creation for our shareholders and we believe that PAREXEL will continue to build significant shareholder value going forward.

And with that I'd like to hand the call over to Mark.

Mark Goldberg

Thanks, Joe, and good morning everyone. I'll now provide some additional details on our operational performance this quarter. Starting with new business, as Joe mentioned, third quarter gross new business wins were very strong at just under $1 billion. This result was driven by high customer satisfaction levels as evidenced by positive feedback and survey results. Wins were well distributed across all customer types including large and small companies and both strategic partners and key accounts. Several of our partnerships are currently expanding and at the same time new business with small and mid-sized biopharmaceutical companies has been particularly strong. We continue to make progress in diversifying our client base. In the third quarter, our largest client represented 11.7% of revenue.

The concentration of the top five clients decreased to approximately 42% in the third quarter from about 46% last year. I'm sure that you are all interested in our relationship and contract discussions with Pfizer. We cannot comment specifically on the status of negotiations due to our confidentiality obligations but I can say that our discussions and our relationship with Pfizer are going well and that we expect that our relationship will continue to be strong after our contract discussions are concluded. New business growth was solid across all major geographies and therapeutic areas. Asia had a particularly good new business quarter, new business in oncology, our single largest indication was once again robust and our pipeline of new business opportunities remains strong.

Net book-to-bill in the quarter was a healthy 1.33 and backlog increased to $5.7 billion, up 9.1% year-over-year. Our 12-month trailing net book-to-bill stands at a solid 1.24. Our cancellation rate for the third quarter was 5.5% of beginning backlog, somewhat higher than our historical range of 3.5% to 5.0%. The main reason for cancellations in the quarter was client portfolio reprioritization. Cancellations were not driven by performance related issues. The 12-month trailing average cancellation rate of 4.8% is within our normal range. Cancellation of revenue generating projects does create some near-term top-line headwind. Our backlog conversion rate was 9.6% for the third quarter. As Joe discussed, we continue to see our backlog building faster than our revenue growth due to the smaller size and increase in complexity of clinical trials in therapeutic areas such as oncology, immune mediated disorders and rare diseases.

More and more patients are recruited at specialized centers, many of which do not use centralized ethics committees and hence have longer startup times. Finding patients for highly targeted indications sometimes takes longer.

Consistent with market trends highlighted by Joe, CRS revenue is being impacted by a revenue decline in peri and post-approval interventional studies. While new business in this space can be lumpy, new awards are not keeping pace with the large simple programs that are completing. It's possible that as in Phase 2, 3 we may see smaller and more complex post-approval interventional studies as the indications for approved drugs become more targeted and specialized.

Turning now to PAREXEL Consulting and PAREXEL Informatics, our revenue performance in both segments was impressive. Consulting revenue grew 49% of which 35.8% was organic growth. We closed the Health Advances acquisition in the quarter and are pleased to welcome our new colleagues to PAREXEL.

PAREXEL Informatics achieved 10.7% revenue growth. This growth was broad-based with a strong performance by our medical imaging group. We are pleased that we achieved margin improvement year-over-year in all three of our business segments largely due to the MAP program.

In fiscal year 2016 we expect savings from the MAP to come in at the higher end of the expected $20 million to $30 million range. As previously communicated, the savings are expected to annualize to $50 million to $60 million in fiscal year 2017. The impact of these efforts is reflected in our year-over-year improvement of 360 basis points and adjusted gross margin and 250 basis points in adjusted operating margin. The gross margin improvement was particularly strong in CRS where it was 370 basis points year-over-year. Margin improvement will continue to be a critical focus for us going forward.

We ended the quarter with a total headcount of 18,450 FTEs, up about 250 staff sequentially. This number includes Health Advances. In addition to M&A, the increase includes hiring in low-cost countries. Our distribution of labor to low-cost locations improved meaningfully in the quarter. We expect overall headcount to remain essentially flat in the fourth quarter.

Finally, I want to comment briefly on the innovative technology offering made possible by the new alliance between PAREXEL Informatics and EMC Corporation. Our customers can conveniently utilize the combined solution to create, manage, publish, submit, view and archive their regulatory filings. Essentially the entire regulatory lifecycle of a product can be managed within the system. Users also benefit from reduced cost of ownership, the convenience and the rigorous security features of PAREXEL's regulatory cloud. This alliance reinforces our market leading position in regulatory information management.

To sum up, we believe that our fundamentals are sound, market demand for our services is strong, customer satisfaction is high and we are well positioned for future growth.

With that, I'll now hand over the call to Ingo who will provide more detail on our financial results.

Ingo Bank

Thank you, Mark, and good morning. I will start my comments by summarize PAREXEL's performance in the third quarter of fiscal year ‘16, followed by more commentary related to our three reporting segments. The summary of the results can also be found in the Q3 fiscal year 2016 earnings presentation posted on our Web site yesterday.

Total company service revenue for the third quarter of fiscal year ’16 of $526.1 million grew 5.4% year-over-year as constant currency and was at the top end of the guidance we provided. Excluding the impact of the acquisitions of QSI and Health Advances, comparable growth was 2.9%. Health Advances is now accounted for in our PAREXEL Consulting reporting segment.

As you will see on slide five of our earnings presentation, adjusted gross margin came in at 36.3% showing a 360 basis points improvement year-over-year driven by improved gross profit in all of our segments; in particular in CRS; compared to our second quarter of fiscal year ‘16, the company's adjusted gross margin increased by 40 basis points, largely driven by PAREXEL Informatics.

Adjusted SG&A as a percentage of revenue came in at 18.4% compared to 17.6% a year ago in the same period. The increase was largely driven by higher variable compensation expense and investments to support our expansion of our PAREXEL Access business targeting evidence-based services for biopharmaceutical product.

Let me now move on to operating margin on slide six. Adjusted operating margin came in at 13.3%, 250 basis points improved compared to the same quarter a year ago and similar to our fiscal year 2016 December quarter. The year-over-year increase was driven by much improved gross margin, largely due to the savings generated through our MAP as Mark outlined earlier.

Excluding purchase accounting and integration of cost effects, the company's third quarter earnings before interest, tax and amortization or EBITDA margin was 14.3% improving by 260 basis points compared to the same period a year ago in line with the improvement in underlying profitability.

Moving on to slide seven of the earnings presentation, other expense net came in at $2.6 million for the quarter, up from $0.5 million in the same quarter a year ago. The increase was largely due to higher net interest expenses reflecting our increased net debt position as well as the absence of foreign currency gains. Net foreign currency gains recorded within miscellaneous expenses amount to a loss of approximately $0.5 million in the quarter compared to a gain of $0.2 million in the third quarter of fiscal year ‘15.

For the third quarter, our non-GAAP tax rate was 28.9% in line with expectations and lower than in the same period a year ago as we are progressing with the implementation of our tax strategy. Our adjusted tax rate is expected to be between 28% and 30% for fiscal year ‘16 in line with prior guidance.

Given the operating margin performance and the lower effective tax rate, adjusted EPS continued to grow in the double digits year-over-year. Third quarter adjusted diluted earnings per share increased to $0.89. This compares to $0.66 in the same quarter a year ago representing a strong 34.8% increase. On a GAAP basis, diluted EPS was $0.89.

Moving on to slide eight of the earnings presentation now, operational cash flow for the quarter was $44.4 million with DSO at 51 days largely driven by our current client mix. CapEx for the quarter was $23.5 million in line with plans and free cash flow for the March quarter was $20.9 million.

During the March quarter we concluded our $200 million accelerated share repurchase program or ASR resulting in the delivery of approximately 900,000 additional shares in February. In total, this program yielded approximately 3.2 million shares representing approximately 5.8% of our share count at the end of our fiscal year 2015.

The non-GAAP EPS benefit for the full fiscal year 2016 is expected to be approximately $0.09 per share net. The net impact of this ASR on our March quarter earnings was approximately $0.03 per share on a non-GAAP basis. Net debt came in at approximately $371 million, up from the prior quarter by approximately $42 million, reflecting the acquisition of Health Advances as well as higher working capital needs in the quarter. Return on invested capital was 21.4%, driven by an improved adjusted operating margin. The company's ROIC continues to be substantially above our weighted average cost capital creating significant shareholder value.

Let me now provide more details on the performance for the quarter in our three segments. Please also refer to slides 9 and 10 of the presentation. I will start with the financials of CRS, our largest segment.

CRS recorded revenue of $402.8 million in line with our expectations representing constant currency growth of 0.7%. Sequentially CRS revenue was lower by 1.1% as constant currency for the reasons stated earlier. Excluding the contribution of QSI, revenue declined 1.4% year-over-year. CRS gross margin increased year-over-year by 370 basis points, largely due to savings from the MAP. At 32.7%, CRS gross margin was largely unchanged compared to our fiscal year 2016 December quarter despite the lower revenue base.

Moving on, PAREXEL Consulting revenue came in at $49.9 million, growing by 49.7% on a constant currency basis when compared to the third quarter a year ago. When adjusting for the consolidation of Health Advances, year-over-year revenue growth was strong at 35.8%. Sequentially, revenue growth was 9.6% on a comparable basis. Adjusted gross margin of PAREXEL Consulting in the quarter was up 80 basis points at 47.1% when compared with the same quarter of fiscal year 2015. Favorable business mix and improved utilization were the key drivers for the improvements.

In PAREXEL Informatics or PI, quarterly revenue was strong at $74.4 million representing a year-over-year increase or 11.5% at constant currency. Sequentially PI's constant currency revenue growth was 6.5%. PI's gross margin improved by 80 points when compared with the same quarter a year ago, coming in at 48.3% driven by higher revenue; compared to the December quarter, gross margin improved by 160 basis points for the same reason.

Let's change perspective now and take a look forward. We've included our forward-looking guidance for the fourth quarter of fiscal year ‘16 and full fiscal year 2016 as part of the earnings release that we issued yesterday. You can also find it on slide 14 in the presentation.

We expect to finish our fiscal year 2016 at the lower end of the guidance range that we provided earlier in January. In terms of revenue, we expect approximately 4.9% year-over-year constant currency growth at the midpoint. This reflects a more temporary revenue outlook for our CRS segment in Q4 fiscal year 2016. We're looking at adjusted EPS; we now expect to come in at $3.42 for the fiscal year at the midpoint. Overall, this would result in strong year-over-year growth in adjusted EPS of approximately 23%.

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 John Kreger, William Blair. Your line is open.

Robbie Fatta

Hi, good morning guys, this is Robbie Fatta in for John. Thanks for taking the question. The first question on the guidance to the last point that CRS will be a little bit more temperate in the fourth quarter, can you flush that out a little bit? What's driving that sequential weakness? Is it related to the slower conversion rates that you talked about earlier or maybe something more acute like slower decision making by Pfizer in the wake of the Allergan deal?

Josef von Rickenbach

Yes, hi Robbie, this is Joe. So, let me take it up front. I think I can fairly state that the dynamics around Pfizer have essentially nothing to do with the fourth quarter, but the changes in the marketplace that I have alluded to, Mark has alluded to, as well as the cancellations that we have had through the year have had an impact. And so I think that's really what we are finding that led to the change.

Robbie Fatta

Got it. And then if we think about the margin trend, it sounds like the margin acceleration program is going very well. What have you found is the low hanging fruit in that program? Are there a couple of areas that have been particularly successful, you found a lot of things to improve?

Mark Goldberg

Yes, this is Mark. There were a few things. I think they're the things that we've talked about in the past. So, for example, we've looked at trying to optimize the organizational structure and in particular looking at spans of control and layers within the organization. We've found efficiencies and we also believe that some of those improvements also benefit the interface that we have with our clients. In addition to that, a big and important part of the program has been to take advantage of lower cost locations from a labor perspective, an area that I commented we made also additional progress on in Q3. And then finally, we've worked to take better advantage of our geographic footprint. We've reshaped our footprint in some areas and we've repurposed certain locations around the world to take best advantage of the right labor at the right cost for the right purpose.

Robbie Fatta

Great. As you've gone through the program, is there any structural reason that you found that your margins couldn't kind of converge with some of the peers that are a little bit higher than you guys at present?

Josef von Rickenbach

Yes. As you know, Robbie, we have a range out there that we gave, 13% to 15%. We are now at the low end of that range and we're continuing to work towards improvements and once we're ready, you know, we may reset that, but right now that is what we are striving for.

Robbie Fatta

Great. Thanks very much.

Operator

Thank you. And our next question comes from Tim Evans of Wells Fargo Securities. Your line is open.

Tim Evans

Thank you. I wanted to dive into this backlog conversation issue a little bit more. The first kind of question on that Joe is, can you, or Ingo, can you reiterate for us what exactly is your bookings policy? I seem to recall that in the past you've said that you'd like to see revenue within; I think you said six months, and can you just confirm that I'm correct on that? And if that is the case, I just wonder why we're not starting to see revenue flow through from some of the stronger bookings that you've gotten within the last two or three quarters. It suggests to me that your bookings are strong but your conversion continues to go down but maybe it's not as conservative of a bookings policy as we once thought?

Josef von Rickenbach

Well, yes, Tim, you're correct with your assumption about the policy, it is exactly that. I mean, it's exactly that, that's one point, there are others obviously but as we pointed out before, there is, of course, more going on including the cancellations that have had an impact and also the general execution dynamics of the trials themselves.

Tim Evans

Okay. And can you just dive into the cancellation issue a little bit more? I guess it's a little more protracted here than we expected. What is causing the cancellations to remain elevated?

Mark Goldberg

Well, I think as we said in the quarter, this is Mark, the main driver basically is pipeline reprioritizations and those happen because companies either look at their strategy or they find that products within their pipelines are not performing as expected for one reason or another and are therefore forced to reshuffle and that results in the cancellation of certain programs and then shifting to other programs as they go forward.

Tim Evans

Okay. Thanks for the color.

Operator

Thank you. And our next question comes from Ross Muken of Evercore. Your line is open.

Unidentified Analyst

Hey, guys. This is Luke in for Ross. I'm jumping in a little late on the call so I don't know if you already called it out, but would you care to break out your book-to-bill per customer base between like large pharma and maybe small biotech mid-pharma?

Josef von Rickenbach

We don't actually break it out like that, but as Mark pointed out in his commentaries, we had a strong quarter in terms of bookings pretty much across the board and across geographies and including in particular also the smaller companies but also large companies, strategic, pretty much across the board; one of our better quarters if not the best in some areas.

Unidentified Analyst

Okay, thanks.

Operator

Thank you. And our next question comes from Eric Coldwell, Baird. Your line is open.

Eric Coldwell

Okay. Thanks very much. First one is, I don't know if you give this, some of your peers do, but could you talk at all about the percent of studies in startup mode and perhaps how that's changed year-over-year.

Josef von Rickenbach

We don't specifically outline that Eric but the point is that we have had a lot of studies in startup obviously as a result of the relatively good new bookings that we have had. Over time, this would have normalized somewhat. We have now more in execution mode but having said that, you know, that's relatively slow for the, or slower, compared to the past for the reasons that we gave before.

Eric Coldwell

Okay, just trying to figure out, you know, how much of a delta the number might be and you obviously can pay attention to your peers and what they're saying. It would be kind of an interesting data point if you could give it in the future so we could get a better sense on kind of coming to the same alignment that you have that perhaps this revenue does start to burn at some point in 2017 as those studies ramp. So, something I'd like to see in the future if you can do it.

Shifting gears, DSO, always been a volatile number but, ten quarters ago it was in the high 40s, came down to about 26 days, now we're back up to 50 plus. Where is that number going and I know Ingo made a comment on client mix but has the mix really changed that much in the last year to lead to a doubling of DSO?

Ingo Bank

Thanks, Eric. So we had this one quarter where we had 26. I think I pointed out that that was completely extraordinary and that was not something we expect to repeat and unfortunately I was true with that statement. When we look at the current DSO, it does reflect a slightly different client mix I think when you look at the client concentration that we also publish here all of the time. You see that there were some shifts and that's also somewhat reflected in the DSO.

Plus, if you look at the dynamics we have around the backlog conversion and it takes longer to have things in a steady startup that also means that there's a shift from a billing milestone perspective and therefore the billing milestones are more further in the execution phase and as such, you have a temporary effect on your DSO. So, where we see the change in the revenue curve that Joe was referring to, so that's normalized, I would also then expect these all to come back to something that is more towards the sort of high 40 range, but for now I expect that these will stay somewhat at this level that we saw in this current quarter.

Eric Coldwell

Okay, that's helpful. And then just lastly on Consulting services and Informatics as well, you know, very good results in both segments. How sustainable is this? I mean, I don't want to get ahead of my skates, but to show the kind of sequential and year-over-year jump in Consulting is pretty impressive. Is this something that -- and I do know that there was some M&A in there as well but I think organic around high-30s growth rate, how do we think about this model for consulting moving forward and was 3Q at all an anomaly or is this sort of the new run rate in the $50 million a quarter range?

Mark Goldberg

So, this is Mark, Eric. So, yes, we had a really nice quarter in PC. The Consulting business was a relatively, in some ways, easy comparison to the prior year. If you recall the prior fiscal year, we had a little bit of a dip in the consulting business so, it's a somewhat extra ordinary year-over-year improvement but in terms of do we think this is sort of a reasonable level to be at, we do. And similarly, sequentially obviously the rate wouldn't expect to be sustainable quarter-after-quarter but we feel like we're in a pretty good place right now with PC.

And with PI, we had a good quarter also. The imaging group was strong and we also believe that we're still on a bit of an upward trajectory with our RTSM business still working on propagating the technology from the ClinIntel acquisition into RTSM solution. So, again, I think, you know, we're operating at a level that we think is good for the business.

Eric Coldwell

Okay. And I just -- Mark, thank you. And just one quick clarification. When you said you wouldn't expect the rate to continue sequentially in the quarter, I assume you're talking about the growth rate because of the easy 3Q comp this period but nominally you expect to be in the ballpark of what you did last quarter?

Mark Goldberg

Correct. I think Q4 was also a relatively lower quarter than the prior year so we'll probably have a nice year-over-year comparison, again, in Q4 I would expect.

Eric Coldwell

Okay, great. Thanks guys.

Operator

Thank you. And our next question comes from Garen Sarafian of Citi. Your line is open.

Garen Sarafian

Good morning Joe, Ingo, Mark. We've been running around this morning, so apologies if you sort of touched on this but, wanted to sort of follow-up on portion of the prepared remarks that I had heard Joe which on the more cautious few of the trial taking longer for start-up but the conversion rate was actually stable which given the recent peer result was actually favorable. So, we haven't gone through all of the numbers but are you implying that this metric will go lower until mid-fiscal 2017 before improving or is it more after it convert -- the slope is different?

Josef von Rickenbach

Well -- hi, Garen, this is Joe. If you just would do the math and let's say take the midpoint of the fourth quarter and the beginning backlog that we have, yes, it would probably take a little bit of a dip into the fourth quarter and then, move wherever it does into 2017. And -- but yes, that's correct.

Garen Sarafian

Okay, got it. And then asking a question on margins and MAP a bit differently from a prior question, is the margin acceleration program in any way a pull-forward of the types of margin improvement programs you've had in place previously? I thought it was more on new opportunities so if you could comment on any overlap there?

Ingo Bank

Hi, Garen, I think the MAP was a combination of addressing the organizational structure as Mark pointed out and addressing unnecessary indirect costs in that structure and at the same time accelerating initiatives that were ongoing particularly around moving activities into low cost countries. So we will, of course, when we go into Investor Day end of June, we will talk to you about what else is on the agenda for us if we move into the next fiscal year and how we will see and how we will strive to continue the operating margin further.

Garen Sarafian

I guess -- because historically the 100 to 120 bps rate that you guys have had and given the industry margins of some of your peers, I'm just trying to figure out if it would go back to that normal rate of improvement or if this is entirely pulled forward. So it sounds like it's more of a -- it's a combination of both your current projects that were pulled forward as well as some new.

Josef von Rickenbach

Yes, indeed.

Garen Sarafian

Yes, great. Thank you.

Operator

Thank you. And our next question comes from Dave Windley of Jefferies. Your line is open.

Dave Windley

Hi. Thanks for taking my questions. Good morning, gentlemen. The first question I wanted to ask is around the backlog conversion and hoping Joe and Mark to look at this or talk about this a little more qualitatively. Joe, I think in your prepared remarks, you mentioned an example of like a companion diagnostic maybe being needed for the trial. I was hoping you could maybe expound on examples like that and help us to understand, maybe a short list of factors that are -- we understand that it's harder to recruit patients but why? And harder to get the site set up but why? And dig a little deeper on what the issue is here and how much is in your control versus how much is either the sponsor or, as you mentioned with a companion diagnostic, maybe a third-party control issue.

Josef von Rickenbach

Okay, hi David. Actually…

Dave Windley

Hi, good morning.

Josef von Rickenbach

Before we go into the details, let me actually helicopter up a little bit and, I'll kind of explain maybe the bigger picture. I was talking about our portfolio, our pipeline, and, what it's composed of right now to large extent with family complex compounds. By the way, this hasn't just started in 2, 3, this actually originally came through early phase and remember, two or three years ago we had the capacity issues in the early phase as these kinds of products came into early phase and moved into patient, and it caused all that kind of dislocation and it's now moving through the two, three world and probably has already migrated fairly far into that and has now an impact also on the late stages of Phase 4 interventional types of studies. That maybe has the biggest impact there right now and, if you want to go into some of the specifics, I gave an example. There are other examples, so for instance, IRB approvals would be another good example. Generally for the kinds of studies that we did before, more typically, we still do some of them of course. You would have a central IRB whereas here often now you would use specific institutional IRB, which is a little more tedious, takes a little longer, there's more involvement, they may not need this often. These are some examples. But maybe Mark you could give a few more examples.

Mark Goldberg

I think that's, from an operational standpoint, a very big one, the one that Joe just talked about, but I'll give you a couple of other examples. So if you have a highly specific product then finding the right patients can just take longer. So, the inclusion, exclusion criteria for a program becomes much more stringent. And to Joe's point earlier about diagnostics, sometimes this requires, for examples, that you have a biopsy specimen that gets sent off to a specialized lab and only at that point do you then find out whether or not the patient is suitable for the program and that also means that at the time of enrollment the patient has had a biopsy or is having a biopsy. So it's just sort of a little bit of one complexity on top of another. If you kind of put all of these things together that results in a prolongation of the whole process.

Dave Windley

Got you. Thank you for that. Is there an element or an investment maybe in feasibility capabilities that PAREXEL might think about making or needs to make on the front-end such that you're more informed and able to anticipate these types of factors and maybe even in your advisory capacity are telling the client that these are going to be factors that are going to prolong the study because ultimately if they haven't – if they aren't anticipating this and there's an element of disappointment when this prolongs to this degree?

Josef von Rickenbach

Yes, David, good point. Of course, we are but I want to make one thing also very clear. Our clients are not disappointed as a result of this prolongation. They fully expect this as well, they are aware of this. In fact, I would actually point out at this juncture that our client satisfaction overall is actually very good. I could kind of look over the last several years, certainly over the last couple of years and in particular this year, our client satisfaction has come up quite a bit and I want you to know, we are measuring this very carefully. We're obviously very much attune to that and the best evidence of that, of course, is our new bookings.

Dave Windley

Right, okay. My last question and I'll jump off. In fiscal 2015, financially the company went through a period where gross margin was under some pressure I think because of some of the earlier elements of this conversion issue, but SG&A was declining and that kept margin fairly stable. Now gross margin is improving, but SG&A is also rising. The net effect is an improvement in margin for sure, we should acknowledge that, but SG&A has been on the rise and I guess I'm not clear -- you mentioned a couple of things, but I guess I'm not clear why SG&A is rising so much faster than topline if you could talk to that please?

Ingo Bank

Hi, David. So I think if we look at the year-to-date number, so if you take the first nine months our SG&A, adjusted SG&A as a percentage of revenue is actually 120 basis points lower than a year ago. So I think that we said that we would lower SG&A and I think that the first nine months also see that in the numbers. Secondly, we also always said that we will continue to invest into the future of the company because we believe there's a large sum of opportunities out there. So as I said in my prepared remarks with this quarter we invested into our PAREXEL Access business and we will continue to seek for opportunities this quarter given the very strong bookings. We also had a higher share of commissions accounted for then maybe in prior quarter. So those are the reasons and I think they're all good reasons why SG&A in the particular quarter was a bit up, but over the nine-month period, again, we were 120 bps down year-over-year.

Dave Windley

Okay, thanks. I appreciate it.

Operator

Thank you. And our next question comes from Robert Jones of Goldman Sachs. Your line is open.

Robert Jones

Thanks for the questions. It's certainly not an original topic at this point but just on the conversion rate, again, Joe, and again maybe just taking a step back. This is an issue now that I feel like you and your peers have obviously been talking about and trying to get your hands around for some time and I think we all understand the mix shift towards trials and more startup phase and that's caused the elongation, and I don't think the revenue ramp in CRS has quite played out how you thought it would originally when we came into this year. But I guess, as we sit here today what I'm still struggling with is, how I guess has it taken this long to kind of get your hands around this for the actual dynamic at play to normalize? And then more importantly I guess, it sounds like you really are confident at this point that this will, in fact, normalize in fiscal 2017. I guess what gives you the line of sight or the confidence that we'll get to more of a normal run rate at that point?

Josef von Rickenbach

Right. It's a good question and maybe a little bit of perspective might be in place. The conversion rate over time, and go back ten years, has actually declined fairly consistently. It's only been in the relatively recent past where this has been roughly stable around 10% to – let's say 10% or 11%. And so it's not as if this had been -- a statistic or a metric that had been viable for a very long period of time. To your question, why would we not have seen this sooner or have had our arms around it better, well, the point of course is, a relatively big trend is playing out with these new types of compounds. Again, not a surprise, people have been talking about this, the industry has been talking about this, but exactly how does migrate through our system, if you want, is not totally clear. Some of these things can be anticipated and others cannot, but it's a relatively big change that is taking place as other changes have taken place in the past in our industry and are affecting our operational realities. And then there is always, of course, the one-offs such as the cancellations, which you simply cannot predict.

Robert Jones

Got it. And then I guess just over on SG&A, if I look at it as a percent of sales continued to tick up the last few quarters and I know you've obviously had a successful MAP program so far. Could you just remind us of the breakdown of the total savings, the $50 million to $60 million between COGS and SG&A, when would you expect to start seeing more stable leverage against SG&A as a percent of revenue?

Ingo Bank

So we didn't provide the breakdown and -- but we also said that MAP was addressing the entire company. And on the organizational structure side, we were particularly addressing indirect cost in the business, so not necessarily if you think about it in SG&A, but indirect cost in the business. And if you see how the cost margin improved in this quarter, you can actually see that -- how the MAP is working because a big part or most all of the part of the gross margin expansion that we noticed was driven by MAP.

From an SG&A perspective, again, we did some investments in the quarter and relative also to the second quarter, which is typically at the end of December, it’s a holiday season we see it typically impacts our variable compensation expense and fringe benefits increasing. That's the normal seasonality we've seen most of the years. So from that perspective that's pretty much what we expect with SG&A for us to do at least. Going forward, we're continuing to implement the improvement areas in the -- let's say G&A assumptions of SG&A and there we're making good progress and that should result into a somewhat lower percentage. Maybe not in the first quarter of this fiscal year, but going forward in fiscal year 2017 where we see SG&A as one of the continued supporters of an improved operating margin for the company.

Robert Jones

Okay, got it. Thank you.

Operator

Thank you. Our next question comes from Donald Hooker of KeyBanc. Your line is open.

Donald Hooker

Great, good morning. Wanted to maybe follow-up on a tangential issue, the Optum relationship you guys announced in January seems kind of interesting. I know it's been -- it's only a couple of months old here, but was wondering if -- how we might think about this -- how sort of the timing around maybe some payoff from that relationship. Is this going to sort of play out over years or is this something where you start seeing some benefit in this calendar year? How fast might that play out for you guys?

Mark Goldberg

Well, this is Mark, so it's early days for sure and at some level this is a sale into the marketplace right now that is a little bit more of a missionary sale than our more typical offerings. Having said that, I can tell you the level of interest that we've seen has really been terrific and so we're very excited about the offering. We do think that we're going to see traction with it, but I do think that it's going to be a relatively gradual ramp in terms of the uptake of these kinds of newer approaches.

Donald Hooker

Are you talking with them about other opportunities to use their data set in different ways, I guess they have other sort of life sciences applications that might be of mutual benefit to both companies, are you thinking about other areas, so we might think about sort of where that arrangement could expand over time?

Mark Goldberg

So we have a very -- actually, a very broad approach to using third party data and how that can assist us in a variety of different ways in clinical trials. In fact, we have access to over 300 different data sources. Optum, of course, is an impressive one in terms of the amount of electronic health record data and claims data that's in there. But we are absolutely looking at a number of different ways to leverage the availability of this data particularly around and there was a question that sort of touched on this earlier in the call, startup, feasibility, understanding who the right sites and investigators would be for trials would be one of the examples of where we're quite focused.

Donald Hooker

Thank you.

Operator

Thank you. And our next question comes from George Hill of Deutsche Bank. Your line is open.

George Hill

Yes, good morning guys and thanks for taking the questions. And I guess, Ingo and Joe, one of the things I want to ask about is the margin profile in the CRS segment where you guys are showing pretty nice expansion the last couple of quarters as part of the MAPS program despite kind of the slowing revenue growth. And I guess, if we look out a year and the revenue growth reaccelerates, what I want to understand is should we see margin expansion on top of that? So, is there kind of room for significantly higher gross margins in the CRS segment or should we expect to see costs ramp as revenue ramps and maybe margin inverts, again, kind of what's the right way to think about the matching of the costs with the matching of the revenue if and when growth reaccelerates?

Ingo Bank

So first of all I think -- I like indeed the observation that despite the revenue challenge that we have a little bit right now in CRS, we've nevertheless seen margins improve, gross margins improve, which is a sign that we have done the right things from a MAP perspective and from a cost productivity perspective. As we said many times before, we expect that CRS is – should be capable of getting back to somewhat the historical levels we had from a gross margin perspective. And if you look at the current quarter where we were at, I think, 32.7%, that's not where ultimately where we want to be. How fast you get there, and what exactly the plans are, we're planning to update you on that during our Investor Day, end of June. But clearly we're not yet satisfied with this current level, but are very encouraged by the improvements we've made so far.

George Hill

Okay, I appreciate the color. Thank you.

Operator

Thank you. And at this time I would like to turn the call back over to the CEO for final remarks.

Josef von Rickenbach

Okay, thank you very much operator. And I'd like to thank everybody for their interest in PAREXEL. As we said, we are looking forward to updating you at our Investor Day, which is coming up in June, and enjoy the rest of the day. Bye-bye.

Operator

Thank you again for joining us today. This concludes today's conference call. You may now disconnect.

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