PAREXEL International (PRXL) Josef H. von Rickenbach on Q4 2016 Results - Earnings Call Transcript

| About: PAREXEL International (PRXL)

PAREXEL International Corp. (NASDAQ:PRXL)

Q4 2016 Earnings Call

August 04, 2016 10:00 am ET

Executives

Ronald Aldridge - Senior Director of Investor Relations, PAREXEL International Corp.

Josef H. von Rickenbach - Chairman & Chief Executive Officer

Mark A. Goldberg - President & Chief Operating Officer

Emma Reeve - Corporate Vice President and Interim Chief Financial Officer

Analysts

Garen Sarafian - Citigroup Global Markets, Inc. (Broker)

Ross Muken - Evercore ISI

Eric W. Coldwell - Robert W. Baird & Co., Inc. (Broker)

Erin Wilson - Credit Suisse Securities (NYSE:USA) LLC (Broker)

Jonathan Groberg - UBS Securities LLC

David Howard Windley - Jefferies LLC

Tim C. Evans - Wells Fargo Securities LLC

Jon Kaufman - William Blair & Co. LLC

Adam Noble - Goldman Sachs & Co.

George R. Hill - Deutsche Bank Securities, Inc.

Operator

Good morning my name is Darla and I will be your conference operator today. At this time, I'd like to welcome everyone to the PAREXEL International Fourth Quarter and Fiscal Year 2016 Earnings Conference Call. Please note that today's call is being recorded.

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

Ronald Aldridge - Senior Director of Investor Relations, PAREXEL International Corp.

Good morning, everyone. The purpose of this call is to review the financial results for PAREXEL's fourth 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 Emma Reeve, Corporate Vice President and Interim 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 or GAAP. 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 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 fourth quarter fiscal year 2016 earnings. You can find the presentation on the homepage of the Investors portion of the company website under the Q4 2016 Quarterly Results banner. The document is titled Q4 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 H. von Rickenbach - Chairman & Chief Executive Officer

Thank you, Ron, and good morning, everyone. Today, I'll comment on our fourth quarter and fiscal year 2016 results and the key factors driving our business as we begin the new fiscal year. Mark will provide more details on the company's operational performance; Emma will discuss our financial results in more depth, and we will then open the call to questions.

Before I begin, I'd like to take a moment to speak about our former CFO, Ingo Bank and our finance team. As you know Ingo recently decided to leave PAREXEL to take another position. I want to thank Ingo for his service to our company and to wish him well.

Among Ingo's legacies are the strong finance team that he put in place here at PAREXEL and the succession plan, from which we are now benefiting.

While we proceed with a search for a permanent CFO, our finance team led by our Interim CFO, Emma Reeve is moving ahead to carry on with the company's financial strategies. Emma has more than 20 years of experience in senior finance roles at Bristol-Myers Squibb, Merck, and Novartis, and also served as CFO for two biotech companies.

Since joining PAREXEL as our Controller in September 2014 she has been a key player in our margin improvement, capital deployment, tax and other financial initiatives. Emma and her team have our full confidence and are moving ahead without missing a beat.

I'll now provide an overview of PAREXEL's fourth quarter and full year – fiscal year 2016. This can be found on slide three of the presentation. We achieved strong EPS growth in the year through our Margin Acceleration Program or MAP. We made substantial progress in improving our margins.

Our revenue performance was impacted by elevated cancellations and slowed backlog conversion, issues that we believe will normalize over time. We achieved record new business awards in the fiscal year, driving a healthy net book-to-bill ratio. Looking forward, we believe our business outlook remains good. We are fully committed to accelerating our revenue growth and further improve our margins in 2017 and beyond.

PAREXEL concluded a successful fiscal year 2016 with a solid fourth quarter. As the quarterly numbers on slide four indicate, diluted EPS growth of 36.1% and adjusted diluted EPS growth of 19% in the fourth quarter were driven by slightly better than expected revenue and continued strong margin improvement. Service revenue in the fourth quarter grew 3%.

Our revenue growth continues to be constrained by slower than normal backlog conversion caused by an increasing proportion of smaller, more complex, longer running clinical trials, particularly in oncology. I'll have more to say about this in a minute.

We continued our profitability improvement efforts in the fourth quarter with 450 basis points improvement in adjusted gross margin and 290 basis points improvement in adjusted operating margin year-over-year. These benefits were mainly driven by our fiscal year 2016 Margin Acceleration Program. It's important to note that after MAP, our margin improvement efforts will continue in fiscal year 2017 and beyond.

Even as we delivered a good quarter, we continued to build a solid foundation of future revenue growth. I'm encouraged by our new business performance, gross new business wins were $967 million, which was one of our better quarters. It contributed to a healthy net book-to-bill of 1.2.

Turning to the full year now, we deliver good results for fiscal year 2016 as well. 9.1% diluted EPS growth, 22.9% adjusted diluted EPS growth, 4% revenue growth, 190 basis points improvement in adjusted gross margin, and 210 basis points improvement in adjusted operating margin.

We delivered on the EPS commitment that we made at our Investor Day a year ago. Our full-year fiscal year 2016 non-GAAP diluted EPS of $3.43 was $0.05 better than the top of the guidance range and $0.23 better than the midpoint of the range that we announced at that meeting. Gross new business wins for fiscal year 2016 totaled $3.7 billion, up 11.8% and a company record. Our net book-to-bill for the full year was 1.24 and backlog grew 7.4% during the year.

I would now like to take a look at our new business performance over the last several years and add some perspective. Looking at our trailing 12 month business wins from fiscal year 2014 through fiscal year 2016 on slide five, we generated 13% average annual growth.

Our backlog growth over the same period was about 7% in line with estimates for overall growth among larger CROs as you can see on slide six. The difference between the 13% growth in new business wins compared to the 7% backlog growth is mainly due to cancellations, which have been somewhat elevated in recent quarters.

Our cancellation history over several years is depicted on slide seven. Cancellations have increased in recent quarters. They were 5.7% of backlog in the fourth quarter and 5.3% in the trailing 12 months. We anticipate that higher level of cancellations may continue in the near-term.

We believe that we will revert to our historic range of 3.5% to 5% over time. We have seen fluctuations in the past. For example, we have cancellation rates similar to current levels back in the 2013 timeframe after which they fell substantially in 2014 and 2015. Mark will add some more color on the cancellation topic in his commentary.

As you can see on slide eight our revenue growth from 2014 to 2016 was about 4% compared to backlog growth of 7%. The main reason for slower conversion of backlog into revenue was an increase in focus on more complex therapeutic areas such as oncology, immunology, and rare diseases which can have longer clinical trials. The average duration of clinical trials in our backlog is now more than 40 months.

As we discussed previously, we are seeing a greater proportion of smaller, more complex longer running clinical trials in therapeutic areas such as oncology, which are increasing our average clinical trial duration and are reducing our backlog conversion as you can see on slide nine.

As the new mix of clinical trials and backlog reaches steady state which we expect towards the latter half of this fiscal year, we expect backlog conversion to start improving. Revenue growth should then come more in line with backlog growth.

On investor day, we highlighted our strategy to grow our core business in clinical trials management and clinical IT and to capture new growth from businesses adjacent to our core business. We believe the fundamentals in our core business are sound and that outsourcing penetration continues to grow, providing a foundation for high-single-digit revenue growth going forward.

Adjacent businesses such as market access and medical affairs, including Phase IV clinical trials and pharmacovigilance will add further momentum. This strategy, shown on slide 10, extends our existing capabilities into new growth areas. In carrying out this strategy, we remain committed to our revenue, margin improvement and diluted EPS goals.

In the long term, we expect to achieve 10% to 12% revenue growth including acquisitions, 100 basis points to 120 basis points improvement in adjusted operating margin, and 15% to 20% adjusted EPS growth. We expect to continue to enhance our leadership position in the biopharmaceutical services industry throughout the coming years and beyond.

And so, with that, let me hand the call over now to Mark.

Mark A. Goldberg - President & Chief Operating Officer

Thanks, Joe, and good morning, everyone. Starting on slide number 11, I'll now provide more details on our operational performance, beginning with our new business walk. For the fourth quarter, gross new business was $967 million. After cancellations of $322 million or 5.7% of quarter beginning backlog, net new business was $644 million, and after revenue of $539 million, the net book-to-bill was 1.20.

Backlog conversion in the quarter was 9.5%, slightly down compared to Q3 and down from 10.1% in the prior year. Cancellations were not performance-related and continue to reflect the combination of product failures and pipeline reprioritizations, particularly among our larger clients.

Looking at the full year, for 2016, on slide number 12, gross new business wins grew nearly 12% compared to fiscal year 2015. The full year net book-to-bill was a solid 1.24 and up slightly from the prior year.

Turning now to slide number 13. We continue to focus on driving new business based upon the depth and breadth of our expertise, our geographic reach and our technology capabilities. All were instrumental in the strong new business performance in the fourth quarter and in fiscal year 2016. New business was strong across our entire customer base including large and small companies, strategic partners and key accounts, and across all geographies including Asia-Pacific.

Wins extended across a wide range of therapeutic areas with oncology remaining the single largest indication. As mentioned at our recent Investor Day, our customer satisfaction scores have been improving for two years in terms of quality, loyalty and overall satisfaction. And a recent study that we undertook showed the PAREXEL study startup performance is exceeding industry benchmarks.

As shown on slide number 14, we saw growth across a broad portfolio of clients leading to increasing diversification of our client base. Our largest client represented 12.7% of revenue for the full year decreasing approximately 110 basis points year-over-year. As you can see on the slide, revenue is growing substantially from customers outside of our top 20.

It is worth noting that in June we signed new Master Services Agreement with Pfizer, our largest customer. We're proud of the work that we do for Pfizer and are excited about the relationship going forward.

I'll now turn to slide number 15 to discuss profitability, which remains a major focus. A year ago we announced our Margin Acceleration Program, or MAP. It was designed to simplify our organizational structure by eliminating unnecessary roles and layers, to improve our labor mix by shifting more tasks to low-cost locations and to optimize our global infrastructure. Today we can say that we executed the MAP fully in line with our plans. Savings in fiscal year 2016 came in at $34.6 million, above the high-end of the estimated pre-tax savings range of $20 million to $30 million. We expect annualized savings of approximately $60 million in fiscal year 2017. Total net charges for the execution of the plan were $47.8 million, slightly above our original target as we identified a few additional opportunities.

As a result of the MAP and other measures, adjusted operating income increased from 10.7% in fiscal year 2015 for the full year to 12.8% in fiscal year 2016. This represents a 210 basis point improvement and was driven by a 190 basis point improvement in gross margin. It's important to underscore that while the MAP was successful, our margin improvement efforts continue. We remain fully committed to delivering 100 basis points to 120 basis point of improvement in adjusted operating margin in fiscal year 2017 moving toward our new target range of 14% to 16% over time.

As shown on slide number 16, a critical element of margin improvement is careful management of labor cost. Through the MAP, we succeeded in keeping our head count flat throughout fiscal year 2016. As shown on the slide, our head count decreased slightly from 18,660 at the start of the fiscal year to 18,600 at year-end, while growing revenue during the same period. Despite the net reduction, we did add staff in low-cost locations and in areas of significant opportunity, including Asia-Pacific.

As you can see on slide number 17, we've been steadily improving gross margins and operating income for several years, which has accelerated in fiscal year 2016. Both our adjusted gross margins and adjusted operating margins have improved by nearly 500 basis points in the last three years all at a time when our revenue growth has moderated due to slower backlog conversion.

So to sum up, we believe strong new business growth bodes well for stronger revenue growth when cancellations stabilize and backlog conversion normalizes. We expect to continue to drive strong EPS growth in fiscal year 2017 and beyond through continued margin improvement efforts and accelerating revenue growth.

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

Emma Reeve - Corporate Vice President and Interim Chief Financial Officer

Thank you, Mark, and good morning, everyone. I'm very happy to be here today. I've had the chance to meet many of you at investor meetings over the last year or so. And I look forward to engaging with you more in the months to come.

I'd like to make clear upfront that's as interim CFO, I plan to continue to drive PAREXEL's stated financial priorities. Including margin expansion, tax strategies, and capital deployment.

Let's turn to the results starting on slide 18. Total company service revenue for the fourth quarter fiscal year 2016 grew 3% year-over-year to $538.6 million or 2.6% growth at constant currency. This slightly exceeded the top end of our guidance range of $528 million to $538 million. Excluding the impact of the acquisition of Health Advances, growth in the quarter was 1.2% at constant currency. Health Advances is accounted for in our PAREXEL Consulting reporting segment. We leveraged this 3% revenue growth through effective cost control into an 18% year-over-year growth in adjusted gross profit, 30.8% growth in adjusted operating income, and 13.5% growth in adjusted net income.

For the full year, total company service revenue of $2.096 billion represented 4% growth or 5.1% in constant currency. Our cost control efforts generated growth of 9.9%, 23.7% and 19.2% in adjusted gross profit, adjusted operating income, and adjusted net income respectively.

On slide 19, you can see our revenue performance by segment. Clinical Research Services had a small decline in service revenue in the quarter, mainly due to a decline in revenue from post-approval interventional studies. PAREXEL Consulting, on the other hand, achieved 59% growth in the fourth quarter, driven by strong overall demand and the acquisition of Health Advances. PAREXEL Informatics achieved 7.1% growth in the quarter with our regulatory information management and medical imaging solutions performing particularly well. The same trends generally apply to the full-year results.

Turning to adjusted gross margin, slide 20 shows that we were able to expand adjusted gross margin by 190 basis points in fiscal year 2016 versus the prior year, by 450 basis points between the two fourth quarters. Much of this improvement was achieved through MAP. As mentioned, we're focused on continuing our margin improvement after MAP.

On slide 21, we've broken out our adjusted gross profits and adjusted gross margin by segment. You can see that each of our segments improved its fourth quarter gross margin year-over-year. And CRS and PAREXEL Consulting improved their gross margin in full fiscal year 2016 as well.

SG&A has been an area of focus for cost control. Specifically, we've applied Lean principles to our finance, IT and HR functions. Slide 22 shows that we reduced SG&A as a percentage of service revenue by 60 basis points for the full year.

In the fourth quarter, a major component of the increased spending related to year-end incentive compensation. As a result of these efforts, we improved our adjusted operating margin by 210 basis points year-over-year to 12.8% for the year, as you can see on slide 23. Substantial progress in margin improvement led us to announce a new long-term target for adjusted operating margin of 14% to 16%. By the second half of fiscal year 2017, we expect to be well within the new range. Before fiscal year 2017, we expect 100 basis points to 120 basis points of improvement.

Slide 24 shows how our initiatives have driven strong EPS growth for several years. Our adjusted diluted EPS has more than tripled in the past four fiscal years and grew 23% in fiscal year 2016. In doing so we've driven our return on invested capital to approximately 21%, well above our weighted average cost of capital. We had strong operating cash flow and free cash flow in the fourth quarter, as you can see on slide 25. The largest driver of this improvement in the quarter was customer collections, with DSO improving sequentially from 51 days to 48 days.

Our cash flow is likely to continue to show considerable variability from quarter to quarter. On the right, you can see our net debt has increased over the past three years as we took advantage of low interest rates to moderately leverage our balance sheet to finance our share repurchase program and M&A.

Turning to slide 26, we successfully completed an accelerated share repurchase program during the year. We returned $200 million to shareholders, and contributed to a reduction in – of our share count of 2.7 million shares or 4.8% in fiscal year 2016. As a result, we drove our growth rate in adjusted diluted EPS to 19%. Overall, our share repurchase improved adjusted diluted EPS in fiscal year 2016 by approximately $0.09.

Turning to guidance now, we believe our business is on track. At Investor Day on June 30, we gave guidance for full-year revenue and EPS, which you can see at the bottom of slide 27. Based on our solid prospects, we reconfirmed our full fiscal year 2017 revenue guidance with the midpoints of $2.19 billion. We increased our full fiscal year 2017 GAAP and non-GAAP EPS guidance by $0.03 each at the midpoint with new midpoints of $3.85 and $3.92, respectively.

Our initial guidance for the first quarter is consistent with our view as stated at Investor Day that we expect revenue growth to step down in the first quarter and then to improve sequentially throughout the year as our backlog conversion begins to improve, and this is also consistent with our quarterly pattern in the past.

So to conclude on slide 28. We remain committed to long-term value creation. Our ambition is to grow the company revenue at 10% to 12% per annum, on average, including 3% to 4% growth from acquisitions. We aim to improve adjusted operating margin 100 basis points to 120 basis points on average per year, which in combination with revenue growth should deliver solid 15% to 20% adjusted EPS growth. We expect to continue to pursue an active capital deployment strategy with M&A as a top priority, and we believe we'll continue to drive a return on invested capital that delivers a significant premium above our weighted average cost of capital.

Thank you for your attention, and I'll now turn the call back over to Joe.

Josef H. von Rickenbach - Chairman & Chief Executive Officer

Thanks, Emma. And operator (27:30-27:34) the question and answer period.

Question-and-Answer Session

Operator

Your first question is from Garen Sarafian with Citi Research.

Garen Sarafian - Citigroup Global Markets, Inc. (Broker)

Good morning, Joe, Mark, and welcome to the team, Emma. Joe, I guess, I first want to touch on backlog conversions. Your comment today, as lot of your comment last quarter, was sort of that you'd reach trough levels sometime in fiscal 2017, and was this quarter's 9.5% what you would've expected after last quarter, since even though it's 10 bps decline, your chart itself implies a much more gradual decline a quarter after such a comment versus prior quarter. So, if you had any thoughts there that would be great.

Josef H. von Rickenbach - Chairman & Chief Executive Officer

As I pointed out, Garen, the backlog conversion is essentially a derivative metric, I mean, we have to bear that in mind, with a view that the driver is actually the execution of the work coming out of backlog. Okay. And so we're not per se driving the conversion as a performance metric, if you want. So, of course, what this means is that we do a great job with especially startup and execution of our projects, and as Mark pointed out in his comments, that is actually happening. So, with all that being said, the performance in this quarter was basically what we pretty much expected for the period and probably – this will probably bottom out eventually and then start to track up over time in 2017.

Garen Sarafian - Citigroup Global Markets, Inc. (Broker)

Okay. So, it sounds like it was pretty much in line with what your expectations were?

Josef H. von Rickenbach - Chairman & Chief Executive Officer

Yeah.

Garen Sarafian - Citigroup Global Markets, Inc. (Broker)

And then just on cash flows, Emma, you sort of mentioned in one of your slides, but you ended the year very strong on operating cash flow from what we can see in the filing. So – but when I look back at my model, it's actually been quite volatile with fiscal 2016 being a very nice – fiscal 4Q 2016 being a very nice uptick as well as the year. So, first, could you just repeat what there was for this quarter, anything that was unusual pulling forward from future quarters? And second, how should we think about this metric for even the next year since some of the underlying items in the statement tend to move around quite a bit.

Emma Reeve - Corporate Vice President and Interim Chief Financial Officer

Thanks, Garen. Yes, just to reiterate the improvement in fourth quarter really came largely from collections in the quarter. We do expect variability. It's not a metric that we're really sold for. We're much more focused on margin growth and revenue growth. And it really flows with operating margin.

Operator

Your next question comes from Ross Muken with Evercore ISI.

Ross Muken - Evercore ISI

Hi. Good morning, guys. So, I guess, thinking about sort of the tenor of RFP activity out there, seems like oncology obviously quite busy. I mean how would you sort of characterize the rest of sort of biotech and how your win rate has been trending? It feels like on a net new basis certainly over the last several quarters, it's stepped up and so how do you feel about the business development organization and sort of the success you've had?

Josef H. von Rickenbach - Chairman & Chief Executive Officer

Well, generally, fiscal year 2016 was a good year for us in terms of new business. As we said our net book-to-bill for the year was over 1.2, 1.24, if I recollect it right. And so that business flow came over the year, looking over the whole year from pretty much all sources, including in particular also small companies, but not only, of course, also strategic partnerships and so on. But I think what's worth pointing out is that small company segment continues to be buoyant and providing opportunities to us.

Ross Muken - Evercore ISI

And I guess obviously not much you can say on Pfizer, but as we just think about other renewals and obviously your ability to sort of still inflect margins despite sort of these client activity, I mean, I guess how should we put in context, how you need to sort of think about the cost line or different elements of it, whether it's gross versus operating in different periods based on the tenor of these renewals? And I only ask this because obviously you've been getting a lot of gross margin expansion more recently versus OpEx, and you're OpEx has been more elevated than gross, so I'm just trying to figure out the cadence as we sort of move forward.

Josef H. von Rickenbach - Chairman & Chief Executive Officer

So, Ross, is your question about renewals, so I'm not really exactly sure.

Ross Muken - Evercore ISI

I missed, you know, like – I guess there was sort of a perception that we'd see some gross margin pressure maybe post-Pfizer, doesn't sort of seem to be the case. And so I'm just trying to figure out as we think about the components of your operating margin expansion plan post the MAP, how we should think about what's going to come from gross margin in a given year versus OpEx leverage, and how that's influenced by the renewal factors.

Josef H. von Rickenbach - Chairman & Chief Executive Officer

Okay. I got it. Okay. So while – look, these negotiations are fairly intense at some level, of course, okay. I mean, we – as you could tell from our commentaries, we are acutely aware that we need to continue to expand our margins, and so therefore holding on rates and price and economics is very important.

And of course, it's not always easy, but I believe that the company has done a good job in our negotiations. I think, the deal with Pfizer certainly is a deal that we can live with. And in general, I think, we have our focus on this. And maybe, Mark, you can give some more commentary on that.

Mark A. Goldberg - President & Chief Operating Officer

Yeah. Well, I think, all of our comments are of course inclusive of our understanding of what's happening in all of these partnerships. In terms of margin opportunity, as we go forward, I think, particularly from a gross margin perspective we still see a number of opportunities that help us to drive our commitment to expanding our margins and these include the continued application of LEAN in the business where we have been successful over the course of 2016 and see new opportunities in 2017.

It includes a focus on project management, excellence in project management, and also pushing P&L responsibility and ownership down lower in the organization at the project management level. We're continuing to improve how we do resource management to maximize our utilization of our folks and we'll also continue to take advantage of low-cost locations. So, I mean, those are at least some of the levers that we see from a gross margin improvement perspective, and of course, these all move forward independent of the renewals of our partnerships.

Ross Muken - Evercore ISI

Great. Thanks.

Operator

Your next question comes from Eric Coldwell with Robert W. Baird.

Eric W. Coldwell - Robert W. Baird & Co., Inc. (Broker)

Thanks very much. On Consulting, unless I've missed something in the model it looks like you've averaged 37% constant dollar organic growth the last two quarters. That was against some very easy comparisons, of course, but still very strong. I'd like to get a little more specific on what were the drivers of this as well as the sustainability. Looking back over the last few years the business often generates similar revenue from 4Q to 1Q, but occasionally we do see a big dip. And I just want to make sure we're not going to get caught off guard here this quarter.

Josef H. von Rickenbach - Chairman & Chief Executive Officer

Yeah. Hi, Eric. So, yeah, I think we had a very good performance in Consulting, I mean that has to be stated and appreciated, helped in part by Health Advances, but as you said, even taking that off and even taking into account the relatively easy comparables that we had a year ago, it was a very strong quarter.

And we have repositioned the business a little bit, and remember back when those tough quarters occurred, we said that that was temporary and that we believed that our positioning and our franchise there was very solid, and that turned out to be the case. And demand is relatively good in this area. And so generally we're probably not going to see these kinds of rates forever. But it's definitely an area of strength for the company.

Eric W. Coldwell - Robert W. Baird & Co., Inc. (Broker)

Nominally should we be looking at jumping off at $60 million a quarter here or is there a reason why Q1 would go back to say a more average level with the first three quarters of the year?

Josef H. von Rickenbach - Chairman & Chief Executive Officer

Well, I don't want to be so specific with any particular segment. As you know, we don't guide our segments, but I'll just say we have a good pipeline. We have good momentum. And I think we entered the new fiscal year with a degree of confidence in that business.

Eric W. Coldwell - Robert W. Baird & Co., Inc. (Broker)

Okay. If I could just throw in one more quick one; really good progress on the margin, happy to see MAP ahead of target and completed at this point. And the guidance for this year is solid. But the implicit outlook for the first quarter here based on your revenue and earning guidance appears to be a fairly significant margin decline quarter-over-quarter and then building back into the second half. One, am I reading that accurately? And two, can you remind us what the perhaps seasonal factors are that's driving what appears to be about 100 bps margin decline here in Q1.

Emma Reeve - Corporate Vice President and Interim Chief Financial Officer

Yes. Hi, Eric, this is Emma. Yes, we do expect the margin to decline little in Q1. You're absolutely right and really it's a reflection of – the seasonality is the reflection of our clients in Europe, and just really the vacation period. Our Q1 obviously occurs over the summer unlike the other companies.

Eric W. Coldwell - Robert W. Baird & Co., Inc. (Broker)

So it would be lower utilization, but steady head count. Is that the main driver? I guess, what I'm asking, are there any other corporate costs that you tend to accrue in your first fiscal quarter of the year, whether it be benefits, payroll, things like that, that would be very specific to the quarter or is it more just about activity levels?

Emma Reeve - Corporate Vice President and Interim Chief Financial Officer

Really just on activity levels, right.

Eric W. Coldwell - Robert W. Baird & Co., Inc. (Broker)

Okay. Thanks very much.

Operator

Your next question comes from the line of Erin Wilson with Credit Suisse.

Erin Wilson - Credit Suisse Securities (USA) LLC (Broker)

Hi. Thanks. Could you give us an update on underlying trends you are seeing from an RFP perspective in that core clinical uro[logy] business, where you are seeing the most demand by customer type? And lastly I guess any commentary around pricing trends in the market? Thanks.

Mark A. Goldberg - President & Chief Operating Officer

Hi. So, I guess, a couple things. The market continues to be attractive and we see lots of opportunity. I would say we see good opportunities in the two space, three space. We've seen continued strength in the early phase area. The one area that's been a little bit slower for us and we touched on it at Investor Day is that we've seen the run-off of some very, very large interventional post-approval studies that aren't getting replaced right now with studies of exactly the same size.

And we think this ties into the change in study mix towards smaller more complex studies in more targeted indications, and we believe these companies will have need for post-approval work as they bring products to market. Although it's possible some of that may take the form of more real-world evidence kind of work than the traditional large Phase IV work but that will depend on indication. No real changes to speak of, I would say, from a pricing perspective in the marketplace. And we continue to feel good about our competitiveness.

Erin Wilson - Credit Suisse Securities (USA) LLC (Broker)

Great. And then on the management changes and shifts there? Should we – I assume, we shouldn't anticipate any sort of major shift to the model or long-term targets here as you've restated a lot of them in the prepared remarks. I guess specifically as it relates to the broader efficiency initiative, will operating margin leverage be an increasing focus for you and what sort of timeline should we expect for you to finalize the CFO position. Thanks.

Josef H. von Rickenbach - Chairman & Chief Executive Officer

Well, as you could take from our commentaries, Erin, the margin improvement has been a priority, will continue to be a priority. And I think, I've spelled out pretty clearly what we plan to do with the CFO position.

First of all, I'd say, we're happy to have Emma who has been involved very closely and to basically for all intents and purposes was in Ingo's right-hand and maybe left too. And so has been intimately involved with pretty much all our initiatives and is very familiar with all the activities that we have ongoing and could take over and move forward. But nevertheless we are doing the search expeditiously, but at the same time we also want to do a good job. We want to make sure that we ultimately make the right decision.

Erin Wilson - Credit Suisse Securities (USA) LLC (Broker)

Okay. Great. Thank you.

Operator

Your next question comes from Jon Groberg with UBS.

Jonathan Groberg - UBS Securities LLC

Great. Thanks (42:35). Can you maybe just expand a little bit more on the cancellations that you mentioned and why you're running elevated, and what gives you the confidence that this is temporary and that you're going to see it move down here back to a more normal level?

Mark A. Goldberg - President & Chief Operating Officer

Sure. The – I mean, if you look -- and Joe, I think, commented on this in his prepared comments. We've seen periods where we have elevations of cancellations. We've gone through these kinds of cycles in the past. These are really attributed to either products that are simply not working or decisions that are being made that products are not going to be sufficiently competitive in the marketplace by our clients. And I think, this will work its way through the system. I don't think it's completely worked its way through the system. Of course, it's to some degree a function of who your clients are, and we're seeing this particularly among some of our larger clients at the moment. But we really do have confidence that this will normalize over time as it has in the past.

Jonathan Groberg - UBS Securities LLC

Okay, I guess, what I am – and maybe you're answering the question, but is it more just you're looking at history, and that's what gives you the confidence or I didn't know if they were like some very specific programs that stand out to you that, okay, we could see why these are going to be canceled here and they seem one-time in nature, or – it seems like – anyway, I guess, it's just different – it seems like something that's happening a little bit across the industry, and I am just curious if it's something broader that might be going on whether it be the deterioration in backlogs or anything else that we need to be aware of?

Mark A. Goldberg - President & Chief Operating Officer

No. I think – again, sort of, your – the first part of your question is, what's our impression about what's happening based on, and I'd say, it's based both on experience in the past, but also our insight into what's happening in our client base. And so we see that this is still kind of working its way through, but we also believe that it will settle out based on those insights.

Josef H. von Rickenbach - Chairman & Chief Executive Officer

Jon, this is Joe. I just want to add to that, if there is anything to be said about the kind of a more broader industry change or what would be different, let's say, from the past is that our clients and in particular the larger companies as Mark said, actually now make decisions very fast. The vast majority if not all of these cancellations are the result of problems in efficacy, safety and in some cases, economics. And pretty much the second a client comes to a conclusion that there is a problem, the cancellation is here because they don't want to invest more into the product once that decision is made. In prior times it would have taken more time and would've sort of happened more moderately over time whereas in today's world this is happening very quickly and very decisively.

Jonathan Groberg - UBS Securities LLC

Okay. And just one quick clarification or kind of follow up. What is your current average duration of your backlog?

Josef H. von Rickenbach - Chairman & Chief Executive Officer

It's just over 40 months right now.

Jonathan Groberg - UBS Securities LLC

Okay. Thanks.

Operator

Your next question comes from Dave Windley with Jefferies.

David Howard Windley - Jefferies LLC

Hi. Thanks for taking my questions. So, first one, Joe, you and I talked about the upgrades to the financial organization that Ingo had undertaken under his tenure as CFO. I got the sense that maybe some of that was in mid-flight, but maybe I was wrong. So, I guess I wanted to understand the status of some of those kind of personnel investments in the financial organization if that's already done.

Josef H. von Rickenbach - Chairman & Chief Executive Officer

Well, I would say, and in fact I did say in my comments that one of the legacies that Ingo is leaving behind is really a strong finance team. And if you go back three years, there has been a fair amount of, let's say, augmentation and I really believe that we have a strong team. Of course, Emma came as part of that a couple of years ago. But now also has a very effective organization and a lot of bench strength that we can rely on.

And I'd have to say, especially, on the operational side. Now, if you go back more into history I'd say that was not a particular strength of ours. That's operational finance. Today I'd say it's just the opposite. It's really strong and great and that of course is very helpful when we talk about margin expansion and to have the analytics at our fingertips basically, very quickly and effectively.

David Howard Windley - Jefferies LLC

Thank you for that. I wanted to shift over my follow-up on cancellations. And just to understand the reference to kind of an evaluation or a way for lack of a better word, working its way through the system suggests to me that there's been some trigger.

Maybe this is what Jon was trying to get at, that there is either a class where data has been reported out and it was not compelling and that's caused a bunch of people to reevaluate or perhaps the broader pricing concerns and government intervention on pricing in the U.S. or something like that that would cause multiple people in a nonrandom way to be evaluating this and thus "working" through the system and I guess I wanted to understand what you thought that trigger was?

Josef H. von Rickenbach - Chairman & Chief Executive Officer

Well, I think we have already opined on this. But maybe just two more thoughts. One is that unlike in the past, today, often already in development there is competition in a particular drug area. I don't mean in therapeutic area, I mean very specific in the drug class. And when one fails, often the others fail as well very quickly. And so it has a little bit of a domino effect. And it's not particularly unusual that we would work on more than one at any one point in time.

So that could definitely be another aspect that one could take into account is that this migration to the specialty products possibly has increased the failure risk somewhat. Okay. And it's not totally unexpected. Of course we all expect these products to be great, okay, and have significant clinical advances. And often these are high-tech products also. And so it's not totally unexpected that you would see this happening.

David Howard Windley - Jefferies LLC

Okay. And I guess that is why in your comments I think Joe you said the higher cancellation rate could continue at a higher level for a little while longer, is this view that the management team has expressed this morning. That is what prompts you to say that. Is that the right interpretation?

Josef H. von Rickenbach - Chairman & Chief Executive Officer

Yeah. I mean you could say that. Yes. I mean, correct. I mean...

David Howard Windley - Jefferies LLC

Okay.

Josef H. von Rickenbach - Chairman & Chief Executive Officer

...we just don't want people to think that this abruptly will stop. I mean that's not – these things sort of tend to take the course and as you could see from the slides and the charts that we showed, I mean it doesn't just kind of fall off or for that matter just come up. But over time, and when I say over time, years or decades, it kind of really levels out and we still believe that the 3.5% to 5% over time is a realistic band.

David Howard Windley - Jefferies LLC

Okay. Thank you.

Josef H. von Rickenbach - Chairman & Chief Executive Officer

You're welcome.

Operator

Your next question comes from the line of Tim Evans with Wells Fargo Securities.

Tim C. Evans - Wells Fargo Securities LLC

I'm really sorry to do this, but I've got to ask a cancellation question as well. So I guess the thing that people are struggling with, Joe, is that it's tough to really conceptualize what's going on. And I feel like the difference in your comments versus what we hear from others is maybe the protracted nature. So I was just looking back and it looks like four quarters out of the last six quarters your cancellation rate has been higher than your target range. And then you're saying that that might continue for some time.

And so I hear what you've said about safety and efficacy issues. But maybe, I'll just ask you a very pointed question. If you go back to your client, your backlog two years ago and you think about the clients that are in that backlog. Have you had any clients that have canceled studies and moved those studies to other CROs?

Josef H. von Rickenbach - Chairman & Chief Executive Officer

I'd say, basically on that point, to answer the pointed question in a pointed way. As Mark has elaborated, the vast majority, and I don't want to say all, because it's an absolute, but pretty much really the vast majority are not related to performance. And I think this is really important to reemphasize, that actually our client satisfaction has significantly improved over the last couple of years precisely because we now know that a margin improvement also goes along with client satisfaction and most of our business is repeat business. I mean the absolute biggest proportion is repeat business, especially from the larger customers. And so, do we never have a problem? That wouldn't be right given that we have hundreds if not thousands of projects. But it's an exception.

Tim C. Evans - Wells Fargo Securities LLC

Okay. And maybe just, Emma, would you be willing to tell us what the foreign exchange impact was on your operating income for the full fiscal year 2016?

Emma Reeve - Corporate Vice President and Interim Chief Financial Officer

Tim, we don't disclose that.

Tim C. Evans - Wells Fargo Securities LLC

Okay. Thanks.

Operator

Your next question comes from the line of John Kreger with William Blair.

Jon Kaufman - William Blair & Co. LLC

Hi, guys. This is Jon Kaufman on for John. Can you talk about your hiring plans moving forward in any areas where you're seeing wage inflation. And how do you view the current labor market in comparison to historical norms? Yeah.

Mark A. Goldberg - President & Chief Operating Officer

So, as we did in the course of FY 2016, in FY 2017 we're going to continue to be very careful about bringing on staff in a way that aligns with the revenue growth of the company and we showed that discipline in 2016 and we'll need to continue to do that as we go forward.

I don't think there's really anything extraordinary to comment on in terms of labor costs per se. I mean there's always pockets here and there where markets are more competitive for certain resources at certain points in time, but really nothing that's impacting our ability to execute or meet our clients' expectations.

Jon Kaufman - William Blair & Co. LLC

Okay. Great. And then regarding broad demand trends, last we heard at Analyst Day demand has been pretty robust, I think the 1.2 book-to-bill piece of that, but have you seen any changes in the demand environment recently, whether on the large pharma or on the biotech front?

Mark A. Goldberg - President & Chief Operating Officer

No, really not. I mean I would just highlight again what Joe already said that, in particular, we've seen a lot of robust activity in the small and mid company space, who continue to seem in a position and willing to take advantage of the capital that they have on their balance sheets, have interesting products and are moving them forward.

Jon Kaufman - William Blair & Co. LLC

Okay. Great. Thank you.

Operator

Your next question comes from the line of Robert Jones with Goldman Sachs.

Adam Noble - Goldman Sachs & Co.

Thanks for the question. This is Adam Noble in for Bob. Just want to ask around the CRS gross margin. It took a step down sequentially in the quarter despite the increase in revenue in the completion of the MAP savings. Could you walk us through what was responsible for the sequential decline and should we view 3Q or 4Q as the more appropriate baseline for FY 2017 CRS margins?

Mark A. Goldberg - President & Chief Operating Officer

So, you're right. We did have a little bit of a step down in Q4 and basically two factors that I would point to. One is there was an increase in incentive compensation in the quarter, and the second relates to the fact that we actually had some really attractive opportunities that require that we ramp up rather quickly in order to make the client comfortable that we would be able to deliver and so we've taken advantage of those opportunities. But that did have a little bit of a gross margin impact in the quarter.

Adam Noble - Goldman Sachs & Co.

Got you. Appreciate the comments. And just to sneak one more in. I'm not sure if you've shared this before, but what is the tax rate and share count guidance for FY 2017, and how should we think about the tax rate moving forward?

Emma Reeve - Corporate Vice President and Interim Chief Financial Officer

Yes. Hi, Adam. This is Emma. So we expect our tax rate to continue to improve. I think for 2017 we're looking at somewhere between 28% and 30%, as we continue on our journey towards the longer-term range of 20% to 30%.

Adam Noble - Goldman Sachs & Co.

Great. Thanks for the questions.

Operator

Your final question comes from the line of George Hill with Deutsche Bank.

George R. Hill - Deutsche Bank Securities, Inc.

Hey. Good morning, guys. Thanks for sneaking me in here. I guess, Joe, my first one would be, as you talked about an average trial duration of just over 40 months, what should we think of as the range on that? And I guess if we were looking out to the far right end, kind of where is this number peaking out, if we were trying to find the top end of where backlog burn rate would look like?

Josef H. von Rickenbach - Chairman & Chief Executive Officer

Yeah. A good question. Obviously, like everything else, it's sort of a normal distribution. But it has a relatively long tail forward. Some studies can last for years. And on the shorter side, the tail is probably less pronounced. And on the outside, that's also relatively unusual. But there is a distribution. No question.

George R. Hill - Deutsche Bank Securities, Inc.

Yeah. Well, I guess, then, on the far right, are we talking 48 months, are we talking 50 months, 60 months – like kind of what's the far right side of the curve look like?

Josef H. von Rickenbach - Chairman & Chief Executive Officer

Well, I can't tell you exactly a standard deviation, for instance, okay, our two standard deviations, but the tail can go fairly far, as I said, up to five years, although that would be unusual. I mean, again, this is an average. Okay.

And that gives you a little bit of an indication, obviously, and it's clearly bunched around this. And it would be unusual – now, for the vast majority of studies, it'd be unusual to go, let's say, over 50 months, 60 months. I mean, pretty much have all or the vast majority of studies and projects inside that range.

George R. Hill - Deutsche Bank Securities, Inc.

Okay. That's helpful. Then maybe just for a follow-up, can you give us an update on the status of the Optum relationship and what it's bringing you? A lot of the competitors in this space seem to be focused on faster and more efficient trial recruitment. And, I guess, do you feel like the Optum relationship is kind of helping you guys answer the challenge there? Thanks.

Mark A. Goldberg - President & Chief Operating Officer

Yeah. I think it's absolutely an interesting asset that we're able to bring to bear. I think it's still early days. There's a lot of interest in discussions and we're having those discussions. And we're happy that we have access to that at asset. We also have access to a large number of other assets that we take advantage of in trying to assist in study feasibility and patient recruitment. And so we're absolutely believers that there's a benefit to using these data assets and we do believe that we'll see benefits from an execution standpoint as we go forward.

George R. Hill - Deutsche Bank Securities, Inc.

Okay. Thank you.

Josef H. von Rickenbach - Chairman & Chief Executive Officer

Okay. And with that, I thank everybody for your interest in PAREXEL. We look forward to giving you further updates after the first quarter release in October. Hope you have a nice summer and enjoy the rest of the day. Thank you.

Operator

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

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

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!