IMS Health Q2 2007 Earnings Call Transcript

TRANSCRIPT SPONSOR

IMS Health, Inc. (RX)
Q2 2007 Earnings Call
July 18, 2007 5:00 pm ET

Executives

Darcie Peck - VP of IR
David Carlucci - Chairman & CEO
Leslye Katz - CFO
Gilles Pajot - COO

Analysts

Eric Coldwell - Robert W. Baird
John Kreger - William Blair & Company
Sandy Draper - Raymond James & Associates
Alex Alvarez - Goldman Sachs
James Kumpel - Friedman, Billings, Ramsey Group
Robert Willoughby - Banc of America Securities
Larry Marsh - Lehman Brothers
Steve Unger - Bear Stearns

Presentation

Operator

Ladies and gentlemen, thank you for standing by and welcome to the IMS Health Second Quarter 2007 Earnings Conference Call.

During the presentation, all participation will be in a listen-only mode. Afterwards we will conduct a question-and-answer session (Operator Instructions). As a reminder, this conference is being recorded Wednesday, July 18, 2007.

I’d now like to turn the conference over to; Darcie Peck, Vice-President, Investor Relations. Please go ahead

Darcie Peck

Thank you, Frank. Good afternoon and welcome to the IMS second quarter 2007 conference call. With me today are Dave Carlucci, our Chairman and Chief Executive Officer; Leslye Katz, our Chief Financial Officer and Gilles Pajot, our Chief Operating Officer.

Dave and Leslye will discuss highlights from our second quarter results and discuss our guidance for the full year 2007. And then in the past we posted slides on our website and I would encourage you to review these during Dave and Leslie's prepared remarks this afternoon. A Q&A session will follow these prepared remarks.

Now as the standard procedure, let me read our Safe Harbor Provision. Certain statements we make today are forward-looking within the meaning of the U.S. Federal Securities Laws. These statements include certain projections regarding the trends in our business, future events and future financial performance.

We’d like to caution you that these statements are just predictions and the actual events or results may differ. They can be affected by inaccurate assumptions or by known or unknown risks or uncertainties, consequently no forward-looking statements can be guaranteed.

We call your attention to our second quarter 2007 earnings release issued earlier today and 2006 full year report on Form 10-K which set forth important factors that could cause actual results to differ materially from these contained in any such forward-looking statements.

All forward looking statements represents our views only as the date they’re made and the company undertakes no obligation to correct, or update any forward-looking statements, whether as a result of new information, future events or otherwise.

And certain other financial measures we’ll talk about today are in a non-GAAP basis. We highlight notable items in our results in order to provide more meaningful comparison to prior year's non-GAAP results.

Reconciliation to results on a U.S. GAAP reported basis are in our press release and in the investor section of the website and I encourage investors to review these materials.

Now let me turn our call over to Dave Carlucci. Dave?

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David Carlucci

Thank you, Darcie. Good afternoon, everyone, and thanks for joining us. As you’ve seen in our press release, we closed out the first half of 2007 with a solid performance. Our revenue and operating income results were strong in the second quarter and our teams worldwide continue to execute on our strategy.

Based on our overall performance in the first half, we’re comfortable that we’ll achieve our financial objectives for the full year.

In the second quarter, revenue was $537 million, up 11% reported and 8% constant dollar. Operating income was up 11% reported and 13% constant dollar year-over-year. Our operating margin remains stable at 22%. And on a comparable basis, our earnings per share was up 15% over last year's second quarter. Leslye will take you through the details of our financials in a few minutes.

Overall we were pleased with our performance in the quarter. Our results were driven by strong revenue gains in the U.S., Japan and the emerging markets. In Europe, however, we saw moderating growth.

In our EMEA region revenue grew 11% reported and 5% constant dollar. There were a number of factors that contributed to these results. The combination of market conditions impacting timing of our client decisions and our ability to drive sales execution.

As you are aware, our clients are operating in a very challenging environment with issues ranging from cost containment to safety concerns. In the European major markets, healthcare reforms particularly in the U.K. and Germany have driven clients to rethink plans and actions for sales and marketing operations.

As a result, we experienced a long-dated sales cycle late in the quarter with some offerings including sales force effectiveness and performance management. We saw many of these transactions move into the second half of the year. Closing these opportunities will certainly be a focus for us and along with several other near term actions.

First, we were engaging clients with new SFE offerings tailored to their needs in Germany and the U.K. Additionally, we’re continuing to rollout our new portfolio and promotional optimization capabilities to assist clients across Europe and making their resource tradeoff decisions.

And we’ll drive more opportunities for our health economics and outcomes research services as we help clients adapt to the dynamic regulatory environment. The rate at which our clients adopt these offerings will be important to our second half performance.

Second, to accelerate the yield from our sales pipeline, we’ve evaluated our client's decision-making and priorities their sale and support resources to better close opportunities.

And we will continue to leverage our areas of strength in EMEA and these include our modest offerings and portfolio strategy and pricing and market access consulting practices, which did very well in the quarter.

Turning to the Americas, we posted another strong quarter with revenue growth of 10% on both a reported and constant dollar basis for the region. We again saw double-digit gains in the U.S. driven by the success of next generation prescription services, specifically, our new weekly exponent prescription offerings.

On that note, we have outstanding news in the U.S. on the competitive front, where we won a significant engagement with the world's largest pharmaceutical company. Pfizer has decided to switch their sales force management information services business to IMS. We’ll deliver a customized solution that leverages our exponent information starting later this year.

Also in the quarter, we had other competitive wins as several clients selected IMS to integrate our anonymized patient- level data assets into their sales management applications. We also saw exceptional growth beyond our traditional Pharma clients with new audiences, including generics companies and government agencies.

In Asia/Pacific, revenue growth accelerated in the region to 12% on both the recorded and constant dollar basis.

In our April earnings call, we told you that we expected the region to return to double-digit growth and it did. Japan was a bright spot for us as client uptake of our DDD sales force effectiveness offerings led to an excellent performance there. An exceptional growth in consulting and services was driven by strong demand for our precision sales offerings.

Growth in the rest of Asia/Pacific continued at a robust pace with our Launch and Brand offerings leading the way. We saw particular strength in two high-priority markets for us, and our clients China and India, which together grew 30%.

Now let me give you an overview of our business line performance through the first half of the year. Europe's performance impacted two of our business line; sales force effectiveness and launch brand another.

SFE, our largest business line grew 8% reported in 6% constant dollar year-to-date. We saw strength in our sales and account management consulting practice in Asia/Pacific, continued growth of our DDD products in Japan and emerging markets and growth in our exponent information offerings worldwide.

In Europe, we’re rolling-out new offerings in the second half that address changing needs in key markets. For example in Germany, we just launched an offering that provides insights into the emerging managed care environment.

We were able to respond rapidly in Germany by leveraging our managed care expertise in the United States. In the U.K., we have an innovative offering for new account base selling models that are emerging in that country. And in the U.S., we expect to benefit from the Pfizer sales management implementation.

We also have good client traction going into the second half with our precision resource optimization offering that we rolled out in 2006 and we will be delivering our new precision compensation offering later in the year. All of these actions create momentum for SFE as we head into the second half.

Launch, Brand and Other grew 17% recorded and 13% constant dollar through the first half. Our pricing and market access consulting practice did well, as clients look to us to optimize pricing and reimbursement strategies as they prepare to launch new products.

The promotion management practice also gained traction as we helped clients maximize returns on their promotional investments worldwide. However, the pace of brand performance benchmarking activity by clients slowed in the second quarter as some European base clients delayed sales and marketing decisions. That had an impact on our performance management consulting practice.

And Oncology is another area in Launch and brand that performed slightly below our expectations through the first half of the year due to the launch of our global oncology information offering being delayed to May. As we look to the second half, we’ve recently signed three large clients; and today, we launched our oncology offering for China.

Our portfolio optimization business was up 16% reported and 13% constant dollar through the first half. We were especially pleased with the momentum in our portfolio strategy practice.

The combination of expertise from our STG acquisition and global market intelligence from our MIDAS offerings also is generating strong demand. And in consulting and services, growth through the first half of the year was 32% reported and 28% constant dollar.

Our capabilities that help clients make global strategic decision; specifically, pricing and market access, and portfolio strategy are performing above expectations.

We’re extending our methodologies into more countries and seeing a especially strong returns in the mid-size and emerging markets. Our client satisfaction scores remain very high and we’re pleased with the improvement we’re seeing in utilization and gross margins.

So we had a solid second quarter and we were on-track through the first half of the year. We have the right strategy, global capabilities and people in place to serve our clients in a rapidly changing marketplace, and deliver strong results going forward.

Now I will turn the call to Leslye who will take you through the details of our second quarter financials. Leslye?

Leslye Katz

Thanks, Dave and good afternoon, everyone. Let's me begin with the details of our results in the second quarter. Then I’ll provide some analysis on our performance in the first half followed by our key areas of focus for the second half of the year.

For the second quarter, revenue was $537 million, up 11% as reported, and 8% on a constant dollar basis. Relative to Q2 2006, the dollar was generally weaker versus several key currencies with the exception of the Japanese, Yen.

Operating income was $118 million, up 11% as reported and 13% on a constant dollar basis. This growth was affected by $6 million nonrecurring expense item last year. You may recall that in Q2, 2006 we received $45 million merger termination fee from VNU and recorded $6 million of related fees in operating income.

Six points of operating income growth in the quarter are due to the absence of this nonrecurring expense. Operating margin in the second quarter was 22%, up 20 basis points sequentially over the first quarter of 2007, and up 10 basis points over last year.

The absence of the Q2, 2006 nonrecurring expense contributed 120 basis points to Q2, 2007 operating margin. The weaker dollar reduced our Q2, 2007 reported margin by 80 basis points.

Consulting and services revenue in the quarter reached $115 million, 21% of total revenue. CNS revenue grew 24% reported and 21% constant dollar.

To provide some additional visibility into our CNS business; beginning this quarter, we have disclosed the direct and incremental cost of CNS. These include the labor costs associated with our billable revenue as well as any data cost incurred specifically for CNS engagements.

On this basis, CNS growth margin this quarter was 52.8%, up 2.7 points versus last year. This improvement was driven primarily by better utilization. For your information we have posted the 2006 quarterly CNS direct and incremental cost data on our website.

Net interest expense in the quarter was $8 million, down $1.3 million from last year. This was due primarily to lower interest rates, a result of diversifying our debt structure into low cost jurisdiction such as Japan.

Other income net in the quarter was $2 million. On a GAAP basis this is down $35 million. Primarily, due to last year's $45 million merger related payment. The remainder of the difference is due to larger foreign exchange hedge losses last year versus this year.

As you know, in 2007 we’ve taken steps to simplify our financial reporting. As you see from our press release, we now report only our GAAP net income and EPS results. However, we have highlighted specific items in order to provide a more meaningful comparison to prior years adjusted non-GAAP results.

GAAP net income in the second quarter was $73 million, up $11 million or 17% from the second quarter of 2006. GAAP EPS for the quarter was $0.36, up $0.06 or 20% compared to Q2 of last year.

In the note section of our press release we detailed the notable items that were included in our GAAP net income and EPS results in the second quarter of 2007 and 2006. This quarter's GAAP EPS of $0.36 excludes $0.03 of tax benefits that would have been phased into the quarter.

On a comparable basis Q2, 2007 would have been $0.39 versus $0.34 non-GAAP adjusted EPS in Q2 last year. This amounts to year-over-year growth of $0.05 or 15%. This is the EPS growth Dave referenced earlier.

In terms of our second quarter tax rate, let me put that in the context of what we expect for the full year. Our tax rate in the second quarter was 34.8%, up from 15.5% in the first quarter. That's because in the first quarter we recorded the benefits from the settlement of a foreign tax audit and other tax related items.

If these Q1 tax benefits were phased rateably throughout the year, they would give us our expected full year rate of approximately 31%. We continued our share repurchase program in the second quarter and bought back 5 million shares for total of $158 million.

We had $201 million weighted average diluted shares outstanding in the quarter, and we ended the quarter with 195 million shares outstanding. Preliminary free cash flow was extremely strong at $107 million, bringing year-to-date free cash flow to $91 million.

DSO in the quarter was 66 days, a five-day improvement over the first quarter, but still four days worse than Q2, 2006. We are making progress in improving DSO, especially in the U.S. and Asia and I expect more progress as we go through the second half.

Cash and equivalents totaled $210 million at June 30, an increase of $48 million compared with the end of the first quarter. Debt as of June 30, totaled $1.17 billion, and an increase of $9 million compared with March 31, 2007.

During the first week in July, we completed three acquisitions to build out our consulting and services capabilities at total purchase price of $3 million. One provides brand and promotional management services in the Middle East.

The second is a Japan based information management, consulting and services firm. The third expands our health economics and outcomes research capabilities in Germany, our HEOR acquisition on a global basis. Year to date, acquisitions spending was $13 million.

Our first half results continue to show solid performance. Revenue through the first half was $1.05 billion, growing 12% reported and 9% on a constant dollar basis. Operating income was $229 million, up 13% reported and 14% constant dollar, better than balanced with revenue growth.

The three points of the operating income growth year-to-date are due to the absence of the Q2, 2006 nonrecurring expense. Year-to-date operating margin was 21.9%, up 10 basis points versus last year.

Our margin reflected the benefits of holding panel and customer delivery costs below revenue growth rates in the first half and the improvement in CNS gross margins.

GAAP EPS through first half was $0.79, down $0.07 or 8% from the first half of 2006. The $0.79 included $0.05, primarily due to the first quarter tax audit benefits. Had we phased this tax benefit throughout the year, first half 2007 EPS would have been $0.74.

On a comparable basis, first half EPS would be up $0.09 or 14% versus last year's non-GAAP adjusted EPS of $0.65. We are certainly off to a good start for the year with a very strong growth in the first quarter and some moderations in the second quarter.

We are very pleased with the rebound in revenue growth in Asia/Pacific including Japan and the continuing excellent growth in the portfolio optimization business line. The Americas turned in another quarter of very good revenue growth with significant DSO improvement that helped fuel our five-day reduction in DSO this quarter. And we delivered very strong free cash flow.

The slowdown in EMEA revenue late in the second quarter was not what we expected. And we quickly put in place the action plans necessary to address the execution issues we experienced in Q2.

So there are several key areas of focus that are important to us in the second half. Dave already outlined for you those related to sales closure rates and the uptake of new offerings in EMEA.

There are three others that I’d also like to highlight. First, we need to continue to leverage our recent acquisitions. As Dave mentioned, we saw terrific synergies with the STG, portfolio of strategy consulting acquisitions and our global MIDAS offerings in the first half.

And we need to build on the momentum from this acquisition and the others we closed this year. We also need to quickly integrate the three acquisitions we completed in early July, as these can be readily leveraged into our existing businesses and the geographies.

Second, we need to maintain strong gross margins in our CNS business as we did throughout the first half. Year-to-date CNS gross margins were 48.2%, up 1.1 points over last year. This will be a factor in helping to drive to balanced operating income and revenue growth for the full year.

And third, we need to continue to improve DSO in the second half, a significant driver of free cash flow. Given our solid first half performance, our success in these areas of focus will be very important to achieving our full year guidance, which we are reiterating today.

Constant dollar revenue growth of 9% to 11%, constant dollar operating income growth of 9% to 11%, full year GAAP EPS of $1.56 to $1.06 and free cash flow of $290 to $325 million.

Now let me turn the call back to Dave.

David Carlucci

Thanks, Leslye. Before we get to questions, let me give you some perspective on our outlook for the rest of the year.

As you know, many of our large clients have announced earnings in the past few days. Most have reported moderating growth inside a number of challenges from generics competition and delays in new product launches to safety concerns and the increasingly intense regulatory environment.

These kind of challenges can be a bit disruptive to us in the short-term, but long term we have aligned our offerings to address those very issues.

Clearly healthcare stakeholders need our information and consulting offerings to understand market dynamics and make evidence based decisions. Improvements in healthcare quality, cost management and patient safety hinge on access to more healthcare information, not less. And patients benefit from a more transparent, competitive and safer health care system.

And as you know, we received a favorable ruling in New Hampshire when the law restricting access to provider level data was declared unconstitutional. More than 20 states over the last few years have considered legislation similar to New Hampshire's Law and only two, Vermont and Maine have passed similar laws. Because these two laws are based on New Hampshire, we are evaluating our legal options in those states.

So to summarize, challenges for our clients present long-term opportunities for us. At a recent Investor Day, we outlined how we’re well positioned to capitalize on a very large and growing market opportunity.

We have the relevant offerings to help our clients through their challenges, the demand for our capabilities remain strong, and we’re taking the right actions to deliver on our full year expectations.

So thanks for your time this afternoon. And Leslye, Gill and I will be happy to take a few questions. Frank, are you there?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Eric Coldwell of Baird. Please go ahead, sir.

Eric Coldwell - Robert W. Baird

Hi. Thanks, guys. When you gave guidance initially for calendar '07, did you have any insight that you might be able to pick up the Pfizer SFE contract? And if so, are the issues in Europe going to really make this year kind of a little bit of an uphill battle to get to guidance?

And if not, is Pfizer going to be enough to offset the potential challenges that you are facing in Europe at the moment?

David Carlucci

Well, I will ask Gill to comment a little bit more on EMEA because I did talk about some of the things we’re taking on. Clearly this is been a long-term engagement to extend our business with Pfizer. So, we have been in this process with them for awhile.

But candidly Eric, we are not that precise in our budgeting to be able to say that this was in or out. And it is an upside opportunity in my mind. The issues in Europe really came upon us in the middle of June.

We did not see the tapering off of the sale cycle earlier in the quarter. We saw it hit us late in the quarter. So, I’ll have Gilles comment a little bit more on Europe. But we have some work to do in Europe as we had this happen rather late. We entered the quarter with a strong pipeline and we enter the third quarter with an even stronger pipeline. So what I want to make sure as we go through this that those things that moved into the third quarter are ones that are real and that we can close in the second half of the year. Gilles, do you want to comment?

Gilles Pajot

Yes. You know, what happened in Europe really is if you look at the major countries like Germany or U.K., they are ahead of the others, they are basically changing their, you know, they are changing the way they are going to sell product. They are changing their local tactical sales operation.

And what happens there is when they are redesigning and doing that, they're decision making process is elongated. And as Dave said, we saw that pretty late in the quarter. And one of the reasons is usually they make decision pretty late in the quarter, at the end of the quarter.

And what are we doing here in, first of all, the good news here we have offerings ready in those countries. And what we have done here is we are realigning our resources to a good pipeline in order to make sure that we can execute very quickly on that. So I'm pretty confident that we are going to get there, however, we have to make sure that we have a lot of agility in getting engaged with our customers.

Eric Coldwell - Robert W. Baird

Guys, can you still hear me?

David Carlucci

Yes.

Eric Coldwell - Robert W. Baird

Yes, great. Second question and then I'll drop out. At the Investor Day in May, which was a pretty bullish day, you did for the first time in years talk about operating margin expansion and the target you laid out was 150 basis points by the end of calendar 2009. You did not at that day identify kind of the progression over '07, '08 and '09 in terms of how we should consider margin improvement.

With the issues pointed out today and the fact that 2Q margin, at least in my model, came in a little bit lighter than expected, should we look at this now as more of an '08 event or do you still see an opportunity in the second half of '07 to start to show some year-over-year improvement in operating profitability?

Leslye Katz

Yes, I think when we talked about it on Investor Day, Eric, we talked about the fact that we saw up to 150 basis points of improvement over the two-and-a-half year period taking us through the end of 2009.

I think that we as we head into our planning for 2008, we'll have a better handle on what exactly the phasing of that may be into 2008. But I'm very comfortable that the key drivers that are going to give us up to that 150 basis point improvement overtime are still in place.

Eric Coldwell - Robert W. Baird

Leslye, when do you think we might get some guidance or some perspective on the model and the budget? Is that really going to be more into '08 or do you think over the next one or two quarters we might start to get some more short-term insight into that expectation?

Leslye Katz

Typically, we would provide our 2008 guidance in late January, perhaps very early February. So I think that's the timeframe we're dealing with.

Eric Coldwell - Robert W. Baird

Okay. Thanks. I'll drop out.

David Carlucci

Thanks, Eric.

Operator

Our next question comes from the line of John Kreger, William Blair. Please go ahead.

John Kreger - William Blair & Company

Thanks very much. Just to follow-up on Eric's question, Gilles, could you give us a little bit of a longer-term perspective on the European market? I know you had a track record of double-digit growth for many quarters which you guys were proud of and then it started to moderate a bit even before this new issue that hit in June. Can you just kind of step back and help us understand that progression and what might be behind it?

Gilles Pajot

Yeah, I think the European markets, especially the major one, they are in transition for the time being. And as I said before, they are very, very focused on redesigning their sales operations. And this is affecting the major customers.

As you know, they have a new portfolio there. Very broad portfolio, 300 drugs to deal with, they can just promote 10. They've got to pick and choose, you know, what they want to do. They are doing that and we are pretty well engaged and will continue to do that very well.

The good news farther down the road and we'll talk about that during Investor Day, most of those countries are moving to a clear cut decision-making process involving health outcomes which U.K. has now made a decision, Germany has not made a decision. This is good for us.

What we got to do is to make sure that all the new offering we have built in our sales management area, we can get the right momentum to engage our customers and we are, again, we’re upgrading that offering by the end of last year and the beginning of this year, we have really the right capabilities to help them. So in a way the irony is we are more relevant than ever and, but you know the timing is going to be challenging into that.

John Kreger - William Blair & Company

And how about the competitive environment, has that changed much with the Cegedim getting a little bit bigger?

Gilles Pajot

You know what? I should say with this new offering we are gaining momentum on that and we are expecting a number of win backs coming up further down the road, and you know, by the end of this year or next year. So I really think, you know that environment are good for us on that. Again, I want to repeat this is a timing for us to get that valuing of customers.

John Kreger - William Blair & Company

Great. Thank you.

Operator

Our next question comes from the line of Sandy Draper of Raymond James. Please go ahead, ma'am.

Sandy Draper - Raymond James & Associates

Thank you, very much. Can you guys hear me?

Leslye Katz

Yes.

Sandy Draper - Raymond James & Associates

Okay. Thank you.

Just a question on trying to make sure I understand the timing of Pfizer. I know you probably can't give that much more detail, but is this a new contract that actually can start contributing to revenue in the third quarter or that's when you start actually working with them and it's a fourth quarter of 2008 revenue contributor?

David Carlucci

Well, I just commented it will contribute to revenue in the second half. We were awarded RP. Their sales teams have been notified of the change.

As it relates to contracts and timing, I can't be that specific, but their plan is to cut over to our offering for their sales force beginning January 1st. That says a lot of work a lot of information has to be provided between now and then.

Sandy Draper - Raymond James & Associates

Okay. Great. Thanks much for the clarification.

David Carlucci

Okay, Sandy. Thanks.

Operator

Our next question comes from the line of Alex Alvarez of Goldman Sachs. Please go ahead.

Alex Alvarez - Goldman Sachs

Thanks and good evening. I was hoping we could get an update, so I was talking about acquisitions in terms of the pipeline that you're looking at and whether you think you can still get to the target for the full-year in terms of total spend that you're looking at.

David Carlucci

Yes, I think as Leslye, said we only did about $13 million through the first half. We have a very strong pipeline going forward but, as you know, we have a pretty rigorous set of hurdle rates and evaluation. And so that's another thing that's a little bit difficult to predict timing on, but we're very pleased with the pipeline we have in front of us. Leslye, do you have anything else?

Leslye Katz

Yes, no, I would echo that. I think we're very, we have some good prospects in the pipeline. The timing is always a question mark.

Alex Alvarez - Goldman Sachs

And can you remind us, was there a specific contribution from a top line perspective in terms of constant dollar growth that you were hoping to get from that spend in 2007?

Leslye Katz

We got about two points, slightly under two points of our constant dollar revenue growth from acquisitions year-to-date.

Alex Alvarez - Goldman Sachs

And then in terms of the free cash flow guidance for the full-year of 290 to 325, seems like you kept that. Saw an improvement in the quarter, but still a long ways to go to get to that number. Leslye, what are some of the drivers that you're hoping to pull here in the second half of the year to try to get to that full-year number?

Leslye Katz

Well, historically the way our free cash flow has come in has been heavily skewed to the second half of the year. And as I mentioned, DSO, we got some good improvement in the quarter, but with a lot of focus and hard work I think we'll get further improvement and that'll be a good driver for us going into the second half.

Alex Alvarez - Goldman Sachs

Okay. And one last one here the SG&A spend, sequentially at least, kind of came up quite a bit. Can you give us some color there in terms of the, maybe investments that you were making in the business or what drove that a sequential increase?

Leslye Katz

Sure. We have a lot of variability when you look quarter-to-quarter in things like SG&A year-to-date it's running just slightly ahead of our revenue growth, like a point ahead of our revenue growth. And we are making investments.

We continue to invest in our consulting business and in our sales and marketing resources, as we get, really focused on engaging well with our clients.

Alex Alvarez - Goldman Sachs

All right. Thank you.

Operator

Our next question comes from the line of James Kumpel of Friedman, Billings, Ramsey. Please go ahead.

James Kumpel - Friedman, Billings, Ramsey Group

Hi. Good evening. Can you talk a little bit about the progress you've made in Japan, what specific steps you've taken, and maybe about what proportion of the old penetration you think you've won back with the re-launch of your products there?

David Carlucci

Sure, Jim. In the first quarter we pointed out we had a pretty tough compare because we were still comparing ourselves to the initial launch phase of DDD. We had two occurrences in the second quarter was a continuing strength in adding additional lines to DDD with the clients we had signed up originally.

Secondly, we saw very strong C&S growth. And if you look at Japan and its progression, their contribution from C&S was smaller than the other major countries around the world and it's really starting to kick in. So those are really the two factors.

And so it's a different business today than it was when we had a problem with our weekly offering in 2002 and withdrew it in 2003. And as we added back our capability in the ‘05 timeframe, we have seen a steady improvement in the business there.

James Kumpel - Friedman, Billings, Ramsey Group

Now philosophically, do you guys maybe adjust your acquisition pipeline to the, any kind of long-term trends on currency? It looks like the dollar has been kind of in a fairly extended decline and I was curious if that might impact where you'd want to deploy some of your dollars from an acquisition perspective?

David Carlucci

No. I think what we did was we restructured our debt to places where we generate a lot of cash a year or so ago, and Leslye could elaborate on that. But from an acquisition point of view it's not a consideration.

We have always said that we're not balance sheet or cash constrained on what we would do from an acquisition point of view. It really is the quality of the property and the relevance to our business and our ability to leverage it.

James Kumpel - Friedman, Billings, Ramsey Group

Okay. And I guess just finally, if you can maybe talk about some of the new pieces of legislation, the new laws on so-called physician privacy. And what, if anything, that you're aware of that seems to be leading to greater, at least press commentary, about so-called data mining.

David Carlucci

Well, I think it's interesting. We obviously got a lot of questions and there were a lot of activity around New Hampshire when we won that ruling in New Hampshire. Really, the activity around these kinds of legislation, from a press point of view, has actually got a lot quieter. And I think you'd have to question why Vermont and Maine moved forward after this precedent was set in the courts.

That said, each of those have a little modification to them and we think there's some linkage in the thought process on how you test whether these are violations of commercial speech, which we strongly believe they are. So we're evaluating our legal options at this point and we'll take appropriate action in a reasonable timeframe.

James Kumpel - Friedman, Billings, Ramsey Group

Great. Thank you very much.

Operator

Our next question comes from the line of Robert Willoughby of Banc of America Securities.

Robert Willoughby - Banc of America Securities

Leslye, can you comment on what the outstanding share base should look like for the remainder of the year? You came in a bit below where I was?

Leslye Katz

Yeah, I mean, I think we've got the 195 million shares outstanding right now. We are seeing a high level of option exercises in the second quarter.

I think that certainly could persist. I think we could see, therefore, a little creep up in the shares outstanding between Q2 and year-end. By the same token, we still have 5 million shares available to us under our share repurchase authorization so we have the flexibility to go into the market.

We did that in the second quarter. So we could do that again. So I don't envision a lot of variability in shares outstanding between now and year-end.

Robert Willoughby - Banc of America Securities

Okay. Thank you. I seem to remember a 207 million number was the prior guidance. Was that just -- do I have a wrong number there or?

Leslye Katz

I think I gave you that bad number and I apologize for that. But I think a little later in that call I tried to clarify that that I thought it really would be a lot closer to a level below, a few million shares below that.

Robert Willoughby - Banc of America Securities

So what you're saying now is more or less status quo here for the remainder of the year based on the second quarter level?

Leslye Katz

Yes. More or less.

Robert Willoughby - Banc of America Securities

Okay. Thank you.

Operator

Our next question comes from the line of Larry Marsh of Lehman Brothers. Please go ahead.

Larry Marsh - Lehman Brothers

Thanks and good evening. In your Dave -- I wanted get you to elaborate a little bit on your sense of confidence in your team's ability to execute. Now what you're communicating today is really a little bit of a surprise in part of your business toward the end of the quarter based on, I think, Gilles talking about some country specific issues.

I know in the past when there's been a challenge of certain timing issues, seems like you've been able to drive good results second half of the year.

Is this really a situation where you have high confidence that you're going to get back on track the third quarter or is this a message that maybe there really are some more transitional issues in Europe that you're going to have to review?

David Carlucci

Well Larry, I've got a lot of confidence in the European team. We've had a pretty strong track record across the Board and we've had occasional quarters with some ups and downs.

I think the reason we pointed out the fact that we saw this phenomenon in the latter half of June says that we don't know everything about it. I mean, we don't know every transactional reason right now and whether we're going to see this come back sooner or later. I'm very comfortable with the second half and I'm comfortable with this team's ability to adjust to market conditions.

And as you know, we have never pinned our results on our client's issues. We just always have pointed out that that will have an impact on sale cycles when they go through a series of unexpected occurrences in the marketplace.

It kind of has them hesitate, re-evaluate their course of action and generally we're in good shape to be a part of that course of action. So I have confidence in that team, but we're going to work closely with them because the third quarter is traditionally a difficult quarter in Europe.

As you know, it's hard to find a lot of clients in the month of August. And so, July is an important month to us, having our plans in place for September, and of course, we're not going away in August. But it is a quarter that you keep your eye on relative to timing of transactions.

And again, since this phenomenon occurred a little late, we're a little less definitive on exact timing on it. But as it relates to the second half of the year, I'm comfortable with our team in Europe and the plans that are in place.

Larry Marsh - Lehman Brothers

And if you were to sort of generalize based on your past experience with particular customers and the impact of your selling cycle, is it a matter of an added few months? As in some case, does it create six to nine-month extension of a selling cycle and others a much shorter period of time or are you sort of communicating that it's really hard to pinpoint a specific figure in this particular situation?

David Carlucci

Yeah. It just isn't that precise. And what is encouraging to me is that, as I mentioned, our third quarter pipeline is even stronger than the second. But the second was strong. So, we want to watch the closure rates moving through sale cycles from qualified opportunity to a verified client, who is the owner to a proposal to the closure.

And we really need to kind of watch that tracking and see whether we have a longer-term trend or a short-term trend. But at this point, I really couldn't be any more precise than that.

Larry Marsh - Lehman Brothers

Okay. And then finally, I know at the Analyst Day, as you went through, kind of listed your top 20 global clients in natural figure, who you might expect and it just sort of, my own analysis, you've got really four, maybe five of those companies that had some challenges here in the last two months.

David Carlucci

Right.

Larry Marsh - Lehman Brothers

I guess the issue in your experience, Dave, and as you know, there have been other times when, again, four to five of your top 20 clients have all sort of hit some issues within a two or three-month period.

David Carlucci

It has happened. It just seems like there are a lot of events and for those few that you mentioned, they're pretty substantial. It has dampened a bit the growth rates for the top 20 in total, although, as you mentioned, they vary widely. And we saw the top 20 clients in the first half grow about 7%.

As you know, that had been tracking around 10% on the full-year. But again, that can change a lot over the course of the year and it says that we're seeing some nice growth in other markets like generics, like biotech, like government, and we're also seeing small and medium perform better.

Larry Marsh - Lehman Brothers

Okay. All right. Very good. Thank you.

David Carlucci

Thanks, Larry.

Operator

Our next question comes from the line of Steve Unger from Bear Stearns. Please go ahead.

Steve Unger - Bear Stearns

Hi, good evening. I just want to be clear on the Pfizer contract. Is that the sales force compensation contract that used to be, I guess serviced by Wolters Kluwer?

David Carlucci

Yes, it is.

Steve Unger - Bear Stearns

Okay. And so Pfizer's U.S. sales force will be compensated using IMS data, starting January 1st?

David Carlucci

That's correct.

Steve Unger - Bear Stearns

Okay. And then moving to -- I'm a little confused on what your message is regarding Europe. Is this a customer budgetary issue? I mean are budgets have contracted unexpectedly or is this a sales execution issue on the part of IMS?

David Carlucci

I'd say, I didn't answer the word ‘budget’. I entered decision-making process, as Gilles mentioned, in terms of the client. When there's a lot of confluence of negative challenges, sometimes there's a little bit of a stall in getting to the clients and getting answers on perspective opportunities that we expected to close in the quarter. And that, there is a certain element of execution in it. So it's on us but it also relates to that environment. And so I just wanted to give kind of a fair depiction of the phenomenon we saw as we hit the middle of June.

Steve Unger - Bear Stearns

Okay. So as far as you know, it's not mid year budget cuts, it's just delayed decision making?

David Carlucci

That’s correct.

Steve Unger - Bear Stearns

Okay. Excellent. Okay. Thank you very much.

Operator

There are no further questions at this time. I'll turn the call back to you.

David Carlucci

All right. Well, I thank all of you for joining us and we'll speak to you again at the end of the third quarter. Thanks.

Operator

Ladies and gentlemen, that thus conclude today's conference call. We thank you for your participation, and ask that you now please disconnect your lines. Have yourself a good day.

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