eResearchTechnology Inc. Q3 2007 Earnings Call Tanscript

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 |  About: eResearch Technology Inc. (ERT)
by: SA Transcripts

eResearchTechnology Inc. (ERES) Q3 2007 Earnings Conference Call November 1, 2007 5:00 PM ET

Executives

Mike McKelvey - President and CEO

Rick Baron - EVP and Chief Financial Officer

Analysts

Jim Kumpel - Friedman, Billings, Ramsey and Company

George Hill - Leerink Swann

Jeff Schmidt - Sidoti and Company

Operator

Good day ladies and gentlemen. And welcome to the ThirdQuarter 2007 eResearchTechnology’s Earnings Conference Call. My name is[Angelique], and I’ll be your coordinator for today.

At this all participants are in a listen-only mode. We willbe facilitating a question-and-answer session towards the end of today’s.(Operator Instructions)

I would now like to turn the presentation over to your hostfor today's conference, Mr. Mike McKelvey, President and CEO. Please proceed.

Mike McKelvey

Thank you, Angelique. Good afternoon. Thank you for joiningus for eResearchTechnology's third quarter earnings conference call. A pressrelease announcing the third quarter of 2007 results was released thisafternoon and is available on most financial websites. Joining me today isRichard Baron, Chief Financial Officer of eResearch.

Prior to beginning the call, I would like to read theforward-looking events statement. Statements included on this conference callmay constitute forward-looking statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995.

Such statements including, but not limited to, 2007financial guidance involve a number of risks and uncertainties, such as thecompany's ability to obtain new contracts and accurately estimate net revenuesdue to uncertain regulatory guidance, variability in size, scope and durationof projects, internal issues at sponsoring clients, competitive factors,technological development and market demand.

As a result, actual results may differ materially from anyfinancial outlook stated during this call. Further information on potentialfactors that could affect the company's financial results can be found in thecompany's reports on forms 10-K and 10-Q filed with the Securities and ExchangeCommission. The company undertakes no obligation to publicly update anyforward-looking statements whether as a result of new information, futureevents or otherwise.

I will first give highlights for the third quarter anddetails on new bookings. Rick will then discuss the financials for the quarterand provide guidance for the fourth quarter of 2007 and the full year.

I will then comment on we are performing on the 2007strategic plan. We will then open up the call to questions.

We are pleased with the progress that was made during thequarter in the overall business environment. We are executing well on ourprojects, as well as, key components of our strategic plan. We saw good growthin our financial metrics on a year-over-year basis.

Our business exhibits seasonality, as sponsors sometimes arereluctant to start new trials especially thorough ECG trials in the summermonths when enrollment and subject participation maybe impacted by vacations.

This results in slower revenue growth in the third quarter,as compared to the other quarters this was reflected in the third quarter.Unless otherwise indicated, all comparisons represent changes between the thirdquarter of 2007 and the third quarter of 2006.

Highlights of the quarter were, our revenue of $24 millionfor the third quarter of 2007 was at the bottom end of our previously issuedguidance for the quarter of $24 million to $26 million, this represents a 7.9%growth rate from last year.

The third quarter of last year included $1.2 million inrevenue with no associated costs from ending one of our franchise agreements.This revenue also would have affected both the gross margin and operatingmargins favorably for the same amount during the period. Excluding this thethird quarter's growth rate would have been 14%.

On a segment basis, our core cardiac safety services showedstrong growth. Our core services revenue consisting mostly of cardiac safetyservices grew by 13.5%, representing a strong increase in volume offset by adecline in average ECG pricing.

Site support revenue declined by 3.7%, reflecting a declinein equipment sales relative to last year, excluding equipment sales, sitesupport revenues increased 10.9%. License revenue increased 8.1%.

We were able to leverage our SG&A structure to produceimproved bottom line results as demonstrated by pretax income for the thirdquarter was $5.9 million, up 53.5% from last year. Net income for the thirdquarter was $3.6 million, up 50.3% from last year.

Our net income per diluted share in the third quarter was$7.2, which was slightly above the bottom end of our guidance this representeda growth of 49% from last year. Our net income per diluted share for the ninemonths ending September 30, 2007 was $0.20, which is $0.04 greater than the netincome per diluted share for the full year 2006.

Our margins remained healthy. Our gross margin percentage inthe third quarter was 48%, down from 49.2% in the third quarter of 2006. Therewere three reasons for the decline in margins from last year, first, increasedamortization and expense associated with the bringing online of EXPeRT 2.

Second, higher levels of revenue from our new consultingpractice a precursor of future new business, which have a lower margin andthird, the fact that the third quarter of last year included revenue with noassociated costs of $1.2 million from the ending of a franchise agreement.Excluding this revenue, the gross margin in 2006 would have been 46.6%.

Pretax income margin in the third quarter increased to 24.8%from 17.4% in the third quarter of 2006, an increase of 740 basis points. Netincome margin in the third quarter increased to 15.5%, up from 11.1% last year.

The increase in new business was surprisingly strong, giventhe general trend in summer months for organizations to slow down theircontracting activities. We recorded new bookings of $35.5 million for thequarter, compared to $25.3 million in the third quarter of 2006 and $34.5million in the second quarter of 2007. This is the fourth quarter in a rowwhere new bookings have increased quarter-over-quarter.

The book-to-bill ratio in the third quarter was $1.5, upfrom $1.4 in the second quarter and up from $1.1 in the third quarter of 2006.

This has led to our backlog growing to $115 million, up 23%from a year ago. Our cancellation rate in the quarter was 13.4%, slightly lowerthan the 17% in the past couple of quarters.

As we have discussed in previous calls, we look at ourcardiac safety business in two pieces, routine trials and thorough ECG trials.Routine trials use ECGs as part of regular Phase I through IV trials. ThoroughECG trials are intense, definitive tests for the prolongation of the QTinterval based on the ICH E14 guidance.

Overall, new bookings increased 39% from a year ago, withthorough bookings increased by 67% and routine bookings increasing by 23%. Wesigned seven new thorough ECG trials within the quarter.

These thoroughs all using the semi-automatic method had anaverage value slightly over $1 million. This was the second quarter in a rowwhere the average price of new thorough ECG trials has been over $1 million, asignificant increase from the average value of $630,000 for thorough ECGbookings recorded in the second half of 2006 and the first quarter of 2007.

The main reason for this increase is that the thorough ECGtrials signed in the last two quarters have more robust trial designs, whichinvolve more ECGs. We need to have data for at least two more quarters beforewe can evaluate whether we anticipate that this trend will continue.

For routine bookings, Phase I, II and III all saw growthrates of more than 20% with the strongest growth coming in Phase II. Thepercentage of bookings using the manual methodology fell to 25%, down from 50%a year ago. This reflected a mix shift in projects of clients that before usingthe manual methodology and is generally indicative of the trend that we've beenforecasting for some time.

We are moving toward giving more color on the general trendof transactions pricing as opposed to bookings prices. Transactions prices,which drive our revenue, are the combination of past bookings prices, pastdiscounting and other factors. We feel the trends and transaction prices are ofmore interest than trend and bookings prices.

However, being the only company in our space that reportsdetailed financial quarterly results, we feel that we need to be somewhatguarded in the specificity of pricing discussions. Average prices are alsosubject to substantial mix shifts among transactions utilizing the manual andsemi-automatic method, halters and types of trial.

That being said, this quarter saw an increase in transactionprices for the first time in over two-and-a-half years. This reflected the factthat bookings prices have been higher than transaction prices for the past fourquarters and our backlog has an increasingly higher proportion of higher pricedtransactions.

This reflects the large number of Phase III transactionsbooked over the past two years, many of which utilized the manual methodology.While we anticipate quarter-to-quarter fluctuations in prices, recent trends inprices according point to a flattening of previous price declines and ourpotential slight increases in the future.

Our ePro businesses, we're sitting on schedule. We signedour first ePro contract with a large pharmaceutical company. There is a healthypipeline of new opportunities that we are pursuing.

However, like all businesses that are relatively new, ittakes some time to convert these efforts into signed contracts and subsequentlyinto revenue. Our eClinical business is also seeing some increases in itspipeline and opportunities.

We signed a large new contract in our eClinical group, andare focusing on what we call EDC now, a standards-based, quick-billed EDCdevelopment environment. Our investment in eClinical is proceeding on schedule.

We have made some good progress on integrating the saleseffort of our cardiac safety,

eClinical, and ePro lines of business, and this is resultingin an increased visibility to more opportunities, especially in ourinternational markets.

Let me now turn the call over to Rick for some more detailson our financials for the third quarter and an update on guidance for thefourth quarter and for the full year 2007.

Rick Baron

Thank you, Mike. I would like to review our results for thethird quarter of 2007. As has been our practice, we included the financialstatements, which include a reconciliation of GAAP and non-GAAP informationwith our press release issued earlier today.

As Mike mentioned earlier in the conference call, wereported third quarter 2007 revenues of $24 million, an increase of 7.9% fromthe $22.2 million for the third quarter of 2006.

The Company reported net income of $3.7 million for thethird quarter of 2007, a 50.3% increase from the $2.5 million in the thirdquarter of 2006. These results translated into net income per diluted share of$0.07 in the third quarter of 2007, compared with $0.05 for the third quarterof 2006.

Our total revenue consisted of three major components. Theseinclude license revenue, which was approximately $651,000 for the third quarterof 2007, as compared to approximately $602,000 for the third quarter of 2006 oran 8.1% increase year-to-year.

Service revenue, which consists mainly of cardiac safetyrevenue, was $16.5 million for the third quarter of 2007, as compared to $14.5million for the third quarter of 2006, or a 13.5% increase year-to-year.

And finally, site support revenue which was $6.9 million forthe third quarter of 2007, as compared to $7.1 million for the third quarter of2006, a decrease of 3.7% year-to-year.

Our gross margin was $11.5 million, for a gross marginpercentage of 48% of revenue for the third quarter of 2007, as compared to$10.9 million for a gross margin percentage of 49.2% for the third quarter of2006.

The components of gross margin and gross margin percentageare as follows, license gross margin was approximately $581,000 for a grossmargin percentage of 89.2% for the third quarter of 2007, as compared toapproximately $527,000 for a gross margin percentage of 87.5% for the thirdquarter of 2006.

The increase in license gross margins was due to an increasein product sales for the third quarter of 2007. Service gross margin was $8.9million for a gross margin percentage of 54% for the third quarter of 2007, ascompared to $7.8 million or 54% for the third quarter of 2006.

The increase in service gross margin was predominantly dueto higher levels of revenue achieved during the quarter. Site support grossmargin was $2 million for a gross margin percentage of 29.6% for the thirdquarter of 2007, as compared to $2.6 million or 36.2% for the third quarter of2006.

Operating expenses for the third quarter of 2007 were $6.1million, or 25.6% of revenues. Included in these Q3 2006 operating expenseswere $714,000 of expenses associated with management transition.

We continue to see improved operating leverage as the levelsof operating expenses as the percentage of revenue have continued to improve.Selling expenses were $2.5 million for the third quarter of 2007, essentiallyunchanged from the third quarter of 2006.

Costs for the same in site of increased sales to the changeswe made in our overall commission structure and other costs. Generaladministrative expenses were $2.5 million for the third quarter of 2007, ascompared to $3.9 million for the third quarter of 2006, which included $714,000of management transition costs.

Even after excluding those transition costs, total G&Afor the third quarter of 2007 decreased as compared to the third quarter of2006 partly due to lower labor costs.

Research and development expenses were $1.1 million for thethird quarter of 2007, as compared to $1 million for the third quarter of 2006.The Company's tax rate was 37.7% for the third quarter of 2007 as compared to36.3% for the third quarter of 2006.

The tax rate in the third quarter of 2006 was lower due toan adjustment of the year-to-date effective tax rate due to our re-forecast oftax-exempt interest income.

Net income for the third quarter of 2007 was $3.7 million,or $0.07 per diluted share. For the third quarter of 2006, net income was $2.5million or $0.05 per diluted share. Excluding the effect of managementtransition charges for the quarter, net income for the third quarter of 2006would have been $2.9 million or $0.06 per diluted share.

At September 30, 2007 our accounts receivable increased to$21.8 million and DSO to 85.5 days from $20.2 million and DSO was of 76.2 daysin June -- as of June 30, 2007. We ended the quarter of 2007 with $71 millionin cash, cash equivalents, and investments, an increase from $63.4 million atJune 30, 2007.

The increase in cash was predominantly due to net cash fromoperations. During the third quarter of 2007, eRT did not purchase any sharesof its common stock under the stock repurchase program.

Guidance for the fourth quarter of 2007 and for the yearending December 31, 2007 we anticipate the revenues for the fourth quarter of2007 will be in the range of $27 million to $28.5 million.

We also anticipate that the earnings per diluted share forthe fourth quarter will be approximately $0.09 to $0.11 For the year endingDecember 31, we anticipate the revenues will be near the mid-point of ourpreviously issued guidance of $95 million to $103 million.

We are raising our diluted earnings per share guidance to arange of $0.29 to $0.31 per diluted share for the year ending December 31,2007.

I will now turn the call back to Mike for some observationson the 2007 strategic plan.

Mike McKelvey

Thank you, Rick. I would now like to give an update on ourprogress for some key elements of our strategic plan for 2007. First our goalof staying the number one firm in the cardiac safety core laboratory field.With our reputation for quality, on-time performance, medical insight, andon-budget performance, we believe that we remain the leaders in the field.

Second, improve the cost structure of our business. Asreported previously, we undertook an efficiency improvement program to betteralign the cost structure of our business. This program was successfullylaunched in February and we are continuing its implementation.

EXPeRT 2 continues to perform very well. In the thirdquarter, 64% of our transactions were processed through EXPeRT 2 and we havebeen able to reap the efficiency benefits of this.

We have also completed the integration of our projectmanagement and data management organizations into one integrated group, whichwe believe has improved the efficiency of our project delivery.

Third, create the eRT consulting practice. We launched theeRT consulting practice in February and the reaction by the market has beenfavorable. In the third quarter, we had an outstanding increase in bookings andrevenue from this group.

Clients continue to express a great deal of interest in ourone-stop shop approach. While the margins in this business are significantlylower than our other cardiac safety businesses, the consulting practice doesincrease our ability in large projects and add value to our clients.

Four, expand sales activity outside of the US. We believethat there is a large and growing market for our services outside of the US. Wehave expanded our sales force in Europe with some in-country salesprofessionals.

In addition, we have expanded our relationships with keypartners in Japan and are actively exploring the expansion of our sales andmarketing activities elsewhere in the Far East and Australia and in SouthAmerica.

Fifth, sales and marketing, we plan to launch our newwebsite this month and are active in preparing podcasts and seminars related tocardiac safety. We have added two sales individuals to our eClinical and eProsales and marketing group and continue to integrate the sales and marketingefforts of cardiac safety, eClinical and ePro to leverage our worldwide salesand marketing force.

And sixth, market powered by eRT services. We have made somegood inroads in establishing more in-depth relationships with several keypartners that are increasing our sales channels and increasing visibility intonew sales opportunities.

This is one reason why our bookings have remained healthyover the past few quarters and give us hope for continued success in thefuture.

I would now like to open the line for questions.

Questions and Answers

Operator

(Operator Instructions) Your first question comes from theline of Jim Kumpel, Private Investor. Please proceed.

Jim Kumpel -Friedman, Billings, Ramsey and Company

Yes. Actually I am reached itself heard eRT but I guess,invest as well. Thank you. Good evening guys. I think the first questionobviously that's going to come to mind is all of the factors behind the grossmargin decline, which was really significant relative to second quarter.

I'm not concerned with the year-over-year comparisons, butcan you talk about the impact of the shift from manual to semi-automated andwhat gives you comfort that we're going to be back up into the low to mid-50sin the fourth quarter?

Mike McKelvey

Thanks Jim. This is Mike. The main reason for the reductionin the gross margin from the second to the third quarter was a mix shift betweena higher level of consulting revenue and site support revenue. We had anexcellent quarter in terms of consulting revenue and that has a very low marginjust almost by definition as the site support revenue.

And so when you move from low revenue site support andconsulting away from higher margin cardiac safety transactions that was thepredominant reason for the reduction in the gross margin.

So we feel comfortable once the mix shift gets back to thelevel or the mix that it was in the second quarter that you'll see margins backin the direction or above those margins in the second quarter soon.

Jim Kumpel -Friedman, Billings, Ramsey and Company

I guess what gives you comfort that that mix is going toreturn to second quarter levels and how much of a drain is consulting relativeto the higher margin cardiac safety stuff?

Mike McKelvey

It's not that large of a number. It just happened to have afairly large, or fairly significant increase in the third quarter. And so basedon what we're looking at as our projections based on the guidance we gave forthe fourth quarter, would have a more significant growth in the cardiac safetytransactions part of the business.

Rick Baron

And Jim, if you know, in previous calls what we've saidabout the margin as we would exit the year is that it would be in the mid-50s.We still feel very comfortable that that would be the range that we are exitingthe year at.

Jim Kumpel -Friedman, Billings, Ramsey and Company

Were you at all surprised by how the third quarter developedin terms of the gross margin?

Rick Baron

No. We actually are very proud of the fact that with thatand with the mix of revenue. We were also able to manage the Company in a wayhaving done the cost efficiencies prior in the year and those types of thingsthat the EPS, the bottom line also held up very nicely.

Jim Kumpel -Friedman, Billings, Ramsey and Company

I guess it looks like for the fourth quarter, you guys aregiving a range of revenues and an EPS outlook that kind of brackets where theconsensus numbers are. And I guess I wanted to just understand if youexperienced certain project starts that got pushed from the third quarter intothe fourth quarter or if it really was just all about pricing and mix.

Rick Baron

Well, I think the nature of this business is that it alwayswill have some projects that slide into one quarter or back into the otherquarter. That's just part of the nature. That is something that hashistorically plagued the Company. At this point, that is not part of any issuethat is here and it is simply the mix shift.

I also think that if you took a look at the guidance thatwe've been giving as far as exiting the year and the way we've been giving itthroughout the year. You would also take note that part of the issue with thethird quarter was anticipated in advance.

Any issue with slightly lower ECG revenue or service revenueclearly is also the seasonality of the business. The risk in the third quarteras we've said before and most likely will repeat is that in the third quarterthe risk is either a slight delay in starting projects because of the Augusttimeframe, the August-September timeframe or under enrollment because forwhatever reason, people prefer to be on vacation than in the Phase I beds.

And I'm sure that a little bit of the low end of the rangewas attributed to that but all projects started as we anticipated with perhapsslightly lower enrollment which is not something that we have control over.

Jim Kumpel -Friedman, Billings, Ramsey and Company

Okay. And I guess, last question will focus on free cashflow and cash flows and DSOs basically. So can you just give us the numbers onoperating cash flows and free cash flow and then talk a little bit about whythe DSOs have kind of continued the slight march upward?

Rick Baron

As I said that the DSOs again are consistent with the priorquarters. It has been a slight march up. It is due to just the nature of thebusiness with whom we are operating. Historically, at least for the three yearsprior to August or September I guess of last year, we have been operating underthe franchise agreement.

And that arrangement on a comparable basis, payments weremade in advance. Therefore DSOs were in fact significantly lower because youhad cash in advance and the day you billed was the day you were able torecognize the preferred revenue.

So on a historic basis, let's go this quarter back to theprior quarter probably would have been most unfavorable comparison just becauseof the timing of the ending of the franchise agreement.

Over the past two quarters, I believe, we have seen someslippage. That slippage is really due to either slightly different termsprovided, nothing of any kind of reportable or any kind of an event along thoselines or the nature of some of our transactions is that there are milestonepayments and that type of thing that need to be applied to either to future orbackwards into a time as to when you can bill for those items.

So from our perspective, there are no significant increasesin risk associated with bad debt expense. Our reserve has stayed reasonablystable over the course of the year-and-a-half that I've been here.

Jim Kumpel -Friedman, Billings, Ramsey and Company

And the free cash flow and the operating cash flow numbers?

Rick Baron

Yes. I'm sorry. Operating cash flow from this quarter wasapproximately $10 million compared to $6 million in the June quarter andcompared to about $2.8 million in the prior year's quarter. So operating cashflow is very strong. The net cash obviously indicated was the increaseperiod-to-period.

Jim Kumpel -Friedman, Billings, Ramsey and Company

And that's your free cash flow?

Rick Baron

Yes.

Jim Kumpel -Friedman, Billings, Ramsey and Company

Okay. Thank you.

Operator

Your next question comes from the line of George Hill ofLeerink Swann.

George Hill - LeerinkSwann

Hey. Good afternoon guys, can you hear me, okay.

Mike McKelvey

Yes. We can hear you fine George. How are you doing?

George Hill - LeerinkSwann

Pretty good. Just a first quick question would be. Did Ihear right that the percent of manual was 25% of the total?

Mike McKelvey

Of the total bookings for the quarter, yes, you did hearthat.

George Hill - LeerinkSwann

And I guess, I know you guys have given guidance for thefull year and those numbers -- it kind of seems to be falling off a cliff. Canyou say whether this is a trend you kind of see persisting at this point andwhether this is something that you saw some short-term change in the market?

Is it something you expect to rebound?

Mike McKelvey

No. I think you'll see a rebound from that. I think it's ait's really a mix shift of the projects that happened to come in that quarter.Now remember these are bookings and these are not this is not revenue.

And it just happened to be the mix shift of bookings fromthose clients that had projects using the manual methodology. We don't see thatfalling off a cliff, as you said, but we see sort of rebounding back notnecessarily up to where it was in the previous quarter, but back in thatdirection or so.

Rick Baron

And also just to remind people on the line that a couple ofthings about the way that we've provided guidance in this area over time andthe results. In the past several quarters, we have hit a surprising 50-50 typeof bookings in this area.

So we have had the benefit of higher bookings, at the sametime that we enjoyed the benefit of that, we also reminded people that overtime, that percentage would be reduced over time.

So this is -- as we said the last quarter two quartersweren't a trend in the 50-50 we also don't feel that this is. Over the courseof the year, we're very comfortable with the average bookings in this area.

George Hill - LeerinkSwann

Yes. Can you say what percentage of manual was in theroutine last quarter?

Mike McKelvey

The percentage of manual overall, we didn't break it downinto routine in rows were 50%.

George Hill - LeerinkSwann

Okay. And just – I’m just chancing down a little bit, whatabout the big deal that you guys won in the eClinical space?

Can you put a little more color on that around maybe whichclient was involved or how big that was?

Rick Baron

No. We don't really talk about those individual clients. Sothe importance to us was more the initial activity in it as opposed to the nameof the client, it's just not something that we put out there. Since, it was thefirst in that specific area.

George Hill - LeerinkSwann

And I guess with reference to the consulting contract, Iguess can you give us a little more color on what people are recruiting youguys and asking you guys to do?

Rick Baron

A large amount of the work is around thorough and consultingand thorough design, primarily in the smaller to medium-sized biotechs.

Most of the large pharmaceutical companies have theirmedical staffs well attuned to that, so it's primarily in the thorough andmaybe the large Phase III trial design for smaller to medium-sized biotechs.

George Hill - LeerinkSwann

Okay. And my last question would be can you provide a littlemore color on the falloff in the SG&A line that happened in the quarter?

Was that a headcount thing or was that a comp thing?

Rick Baron

The falloff on a comparative year-to-year basis is reallydue to two items. Some of it on a year-to-year basis, it was predominantlyheadcount in that we did make those adjustments as of the end of -- somewherein the February timeframe.

There is a bit of seasonality, if you would in the businessin that the June quarter does include costs associated with our larger show theDIA and some other minor shows at that point in time.

So there is that. This is the level we feel, though that wecan sustain.

George Hill - LeerinkSwann

Okay. All right. Thank you.

Operator

(Operator Instructions) You do have a question from the lineof Jeff Schmidt of Sidoti and Company.

Jeff Schmidt - Sidotiand Company

Good evening guys. Is there any way you could give us thecardiac safety line as either as a percent of services or do we have to waitfor the Q?

Rick Baron

Our traditional reporting is really limited to the servicesin total.

Jeff Schmidt - Sidotiand Company

Okay. And can you kind of touch on your plans for the cashnow that it's up to $70 million?

Rick Baron

I'm sorry?

Jeff Schmidt - Sidotiand Company

Touch on the plans for cash?

Rick Baron

Consistent with where we've been over the past severalquarters it is something that we're evaluating the alternatives to for the usesof it, which would include the buyback, which would also include potentialinvestments.

That would be the use of cash Jeff. Also, I misspoke, let mealso give you a little bit of more color on the cardiac safety and othercomponents of the services revenue.

During the quarter, we had $14.9 million of cardiac safetyrevenue. Approximately $700,000 of the consulting and training, softwaremaintenance consisted of $850,000 for the total services revenue.

Jeff Schmidt - Sidotiand Company

Okay. Thanks. And just -- in your press release, youmentioned that you have been working closely with some more CROs.

Can you just kind of discuss how the market is movingtowards that and how you see that affecting your business?

Mike McKelvey

Well, we used -- the majority of our sales are directly tothe pharmaceutical companies, but increasingly we use partners, whether they'reCPU units or clinical pharmacology units or some of the larger or even thesmaller CROs.

And so we're just looking for a number of differentopportunities to work with key value market participants.

Jeff Schmidt - Sidotiand Company

Is there a pricing difference on a royalty there when youget referrals from other CROs?

Mike McKelvey

No. In most cases we don't have a referral or royaltyarrangement. Sometimes it's a symbiotic relationship or we will give them leadsfor example with Phase I units or even sometimes in the Phase II or III

And then they will utilize our services. So it's really moreof a symbiotic relationship in that sense.

Jeff Schmidt - Sidotiand Company

Okay. I guess my last question is the cancellation ratesseemed pretty low this quarter. Is there anything that contributes to that oris there anything that we should read into there?

Mike McKelvey

No. I think we -- you know it bounces around. For those --to forecast the cancellation rate if fairly difficult, but again, that's afully loaded cancellation rate.

So that includes trials that have ended and haven't enrolledas much as we thought. So there really was nothing big about that. We're happywith the numbers.

Rick Baron

And the guidance historically on that has been in the 15% to20% range. We however, have averaged closer to the 17% outside of this quarter.

Jeff Schmidt - Sidotiand Company

Okay. Thanks guys.

Mike McKelvey

Okay. Thank you.

Operator

(Operator Instructions) There are no further audio questionsin the queue. We'll turn it over to Dr. Mike McKelvey for closing remarks.Please proceed, sir.

Mike McKelvey

Thank you. Thank you all very much for your attention todayand your involvement in the Company. We appreciate your vote of confidencethroughout the years.

Rick and I as well as the other members of the Company'smanagement team are deeply to the Company and continuing the Company's momentumand progress in generating future results.

We hope you have a great evening and a great weekend. Andwe'll talk to you next quarter. Thank you.

Operator

Ladies and gentlemen, thank you for your participation intoday's conference. This does conclude the presentation. You may nowdisconnect. Thank you and have a great day.

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