Phase Forward Incorporated Q4 2007 Earnings Call Transcript

| About: Phase Forward (PFWD)

Phase Forward Incorporated (PFWD) Q4 2007 Earnings Call January 31, 0000 9:00 PM ET


Timothy Dolan - Senior Managing Director, IntegratedCorporate Relations, Inc.

Robert K. Weiler - President, Chief Executive Officer

Rodger Weismann - Senior Vice President, Chief FinancialOfficer


Nabil Elsheshai - Pacific Crest Securities

Raghavan Sarathy - Ferris Baker Watts

LenPodolsky - Piper Jaffray

Richard Close - Jefferies

Andrey Glukhov - Brean Murray

Asher Dewhurst - FBR

Raymond Myers - Emerging Growth Equities

Don Hooker – UBS

Steven Crowley - Craig-Hallum Capital Group

Richard Davis - Needham

Stephen Shankman – Natexis


Good day, ladies and gentlemen and welcome to thePhase Forward Incorporated Fourth Quarter Fiscal Year 2007 Earnings ConferenceCall. (Operator Instructions)

I will now like to turn thepresentation over to your host for today’s call. Mr. Tim Dolan.

Timothy Dolan

Thank you. Please note that various remarks today consist offorward-looking statements for thepurpose of the SafeHarbor Provision under thePrivate Securities Litigation Reform Act of 1995.

These statements including management’s forecast offinancial performance and management’s plans, objectives and strategies aresubject to a varietyof risks and uncertainties, which could cause actual results to differmaterially from those discussed today. These risks and uncertainties arecontained in thecompany’s public filings with theSecurities ExchangeCommission.

With that, let meturn it over to theCEO of Phase Forward, Robert Weiler.

Robert K. Weiler

I’ll begin thecall by saying that we arevery pleased with thecompany’s performance inthe fourth quarter,which was a strongfinish to a highlysuccessful year for Phase Forward.

During 2007 we added 55 new direct customers, inaddition to the 38 weadded in theprior year. Theadditions in 2007included multiple clients spanning theglobal pharmaceutical, biotech, medical device, CROs, and academic sectors. Andthey range from thesmallest to some of thelargest life science companies inthe world.

Our direct customer count does not include customers of CROsthat use our solutions, which atour last count in 2007exceeded 65.

We believe our proven track record of delivering highlyscalable and complex deployments for companies of allsizes, serves as astrong motivating factor that influences customers to adopt Phase Forward, and hasmade us a strategicpartner of choice to many of our customers.

Our business momentum is strong, and theindustry fundamentals remain solid, and these combined factors make usoptimistic about our outlook as we begin 2008. This is reflected inthe 2008 financialoutlook that Rodger will share with you ina moment, which callsfor another year of over 20% revenue growth.

Now, let metake you through thesummary results for thefourth quarter. Total revenue came inat $37.8 million,representing a 25%year-over-year growth and exceeding thehigh-end of our guidance.

From aprofitability perspective, non-GAAP operating income was $5.3 millionrepresenting a growthof 28% on ayear-over-year basis. On afull year basis, thecompany generated revenue of $134.3 million in2007, representing anincrease of 26% on ayear-over-year basis, up from 22% year-over-year growth in2006, and 18% year-over-year growth in2005.

We believe this growth pattern is reflective of themomentum in themarket for clinical trial automation solutions combined with Phase Forward’sleadership position. I’m also pleased to report that 2007 annual bookings of$195.8 million represents a43% increase over 2006, and brings our year-end backlog to $279.1 million.

There were numerous factors that contributed to our growth in2007 which we believe will also help us to position thecompany well for thelong-term. For starters,  EDC adoptionaccelerated in 2007resulting in many moretrials being done inEDC. Within this framework we continue to besuccessful in winningstrategic EDC relationships with some of thelargest pharmaceutical companies inthe world, often inhighly competitive situations.

During 2007, these wins included names such as Eisai, AbbottLaboratories, Dainippon Sumitomo, and Novartis Vaccines who joined alist of strategic customer relationships that include other industry leaderssuch as GlaxoSmithKline, Merck, Eli Lilly, Novo Nordisk, Johnson & Johnson,Schering-Plough, among others.

We were also pleased to build on our earlier customer growthin 2007 byestablishing new InForm EDC relationships inthe fourth quarterwith customers such as Aerovance, Children’s Hospital of Boston, EpixPharmaceuticals, and Biotronic, to name afew.

These new customers and strategic wins areimportant because we believe they aresignificant validations of theindustrial strength of Phase Forward’s technology and our industry leadershipposition in domainexpertise, global service capabilities, and thescalability of our solutions. We also believe that these successes would not bepossible without thereferences provided by our customers.

Companies looking for atechnology solution provider to help their clinical trial and safety effortsconduct exhaustive comparative evaluations. We arepleased that our track record of successfully supporting and scaling largenumber of studies across alldevelopment phases and therapies hastranslated into strong customer growth we saw in2007.

We also continue to earn follow-on business in2007 from our existing customers, examples included additional ASP trials fromlong-standing customers such as Genzyme and Allergan and larger add-onengagements with Quintiles and Millennium.

Even some of thenew customers we won inearly 2007 were quick to strengthen their relationship with Phase Forward byawarding us additional ASP trials and larger add-on engagements later inthe year, such asNovartis Vaccines, Kyphon inQ3, and ev3 in Q4.

Inaddition to maintaining our strong leadership position among theworld’s leading pharmaceutical companies, animportant component to our long-term growth strategy is expanding and deepeningour relationships with CROs. We saw a52% year-over-year growth inrevenues from CROs in2007, which represents 16% of revenues for theyear, up from 14% in2006.

During thefourth quarter, we continue to make solid progress inthis area. We signed another multi-year, multi-million dollar agreement withPAREXEL, one of theworld’s largest CROs for InForm use and related services. You may recall thatearlier in theyear, we announced that PAREXEL had extended its alliance with us through asimilar multi-year commitment signed inthe first quarter of2007, which also elevated InForm to thepreferred EDC-solution status atPAREXEL.

Also on theCRO front in thefourth quarter we expanded our relationships with other CRO partners, such asPharmalink and Prologue Research. And received initial order from sixnew CRO partners including Montreal Heart Institute, Everest Clinical Researchand [Robotus] Clinical Trials on theInForm front; and Sentrx Research Pharmaceutical Services and Paramax with ourClintrace and Clintrial solutions.

Every new CRO brings indirect customers who areexperiencing our technology, which arein addition to our owndirect customer count. We believe therelationships we established and expanded inthe past year have notonly contributed to our results in2007, they also provide Phase Forward with asignificant long-term opportunity to growwith our customers as they increase their usage of our InForm EDC solution overtime, as well as their adoption of our other solutions such as those inthe safety area.

We continue to seesolid interest in ourportfolio of safety solutions from customers like theDepartment of Defense, Barrier Ingleheim, and Otsuka, who allmade purchases during thefourth quarter.

On theproduct front, we announce theimmediate availability of anew version of WebSDM, which is capable of reading data directly from ourInForm EDC solution by enabling data manage to evaluate data more thoroughly atan earlier stage inthe clinical trialprocess. The combinedproducts can help to detect anomalies prior to submission.

This release will also enable our InForm customers todirectly leverage our clinical trial signal detection product to conductongoing review of trends and safety analysis during theclinical development process. As areminder, WebSDM is used by theFDA to validate data submissions made inthe CDISC SDTM format.

We arealso seeing growing interest inour Clintrace safety solution, especially inthe CRO inemerging company segments based on its modern, web-based architecture and easeof deployment. We continue to leverage theexpertise of our safety division to further improve functionality and integrationwith the remainder ofour suite of solutions.

We believe this will help us drive demand and furtherdifferentiate Phase Forward from competitors with narrow value propositions. Inaddition to expanding our product capabilities through internal development, weare also focused onacquiring complementary technologies and companies to expand our valueproposition and market opportunity.

During thefourth quarter we acquired privately-held Green Mountain Logic, avendor of process automation software for managing Phase 1 clinical trials,which will broaden our offerings inthe Phase 1 space.We’re still quite early inbringing Green Mountain Logic’s LabPas solution to market, but we arereceiving positive, proactive interest from prospective customers, as well aspositive feedback from early implementation customers.

We plan on continuing to explore additional acquisitionopportunities as they may arise and to build on our experience inacquiring and integrating businesses that enhance Phase Forward’s reach across theclinical and safety operations of our customer base. Atthe end of theyear we are proud ofhow broadly our InForm EDC solution continues to besuccessfully deployed inhighly complex and scalable trial environments interms of size, design complexity, duration, and global spread.

We have supported users in105 countries and estimate that our InForm EDC solution hasnow been used in over2000 trials to date. In2007 alone we had over 22,000 user registrations of our EDC e-learningsolutions, up from approximately 8000 in2006.

In2007 we saw rapid expansion of our broader InForm related offerings, throughcustomers adopting additional modules, such as central coding, which is nowbeing used in over 40live production trials; strong demand for integrations with third-partyapplications leveraging our adapter and InPhase technologies; and increased useof our e-learning solutions.

We believe this adoption validates theinvestments we aremaking in enhancingour technologies as demonstrated by our announcement early this week of asignificant new release inCentral Coding and our release of Central Designer earlier inthe year.

We arealso proud of theprogress we are makingon other solution fronts, such as increased interest inour safety solution, which we continued to enhance in2007 as demonstrated by thenew versions of CTSD and WebSDM, and theexpansion of our product portfolio through our recent acquisition of LabPasPhase 1 management solutions.

As we look to 2008, we will continue to focus on keyareas that helped to contribute astrong performance in2007 namely, ensuring customer success inhighly complex environments, increasing our presence within our blue-chipcustomer base, diversifying our business across multiple market segments, andgrowing our business internationally and with CRO’s.

Insummary, we are verypleased with thecompany’s financial performance inthe fourth quarter andfull year 2007. Thecompany is executing ata high level acrossour key growthinitiatives, which combined with solid industry fundamentals, makes usconfident about our outlook as we begin theNew Year.

With that, let meturn it over to Rodgerwill go over thefinancials in moredetails.

Rodger Weismann

Let meprovide some further detail on thefourth quarter and full year 2007 financial statements. And then we will closewith our first quarter and full year guidance before turning itover to the operatorfor Q&A.

Beginning with theP&L, total revenues for thefourth quarter of 2007 is $37.8 million, anincrease of 25% year-over-year and above thehigh end of our previously issued guidance range. Within total revenue InFormlicense, application hosting, and other related revenues were $27.4 million,representing 72% of total revenue, anincrease of 30% on ayear-over-year basis.

Overall license revenues inthe fourth quartercame in at$13.4 million, representing 35% of total revenue and 19% year-over-year growth.We saw continued strength inour Q4 services revenue of $24.4 million, growing at29% year-over-year due to thestrong growth in ourInForm ASP business which at45% of total revenues is up 41% from Q4 of 2006.

Turning to costs and profitability, we will review ournumbers on both a GAAPand non-GAAP basis. Areconciliation between GAAP and non-GAAP results is contained inour earnings release, which is posted on our website. Our non-GAAP resultsexclude non-cash expenses associated with FAS 123R, anamortization of intangible assets associated with theacquisitions of Green Mountain Logic which closed on October 30th, and LincolnTechnologies.

Non-GAAP gross margin was 58% inthe fourth quarter of2007, down from thethird quarter in thesame period a year agowhen the margin was63%. This was due to acombination of higher percentage of revenue being related to services and lowerservices margins compared to prior quarters, as we continue to make investmentsto handle increases incurrent and forecasted ASP related business.

Some of these aremade well in advanceof the time trials golive and as we must recruit and train project managers and trial-designconsultants before thedesign phase of thetrials initiated. Inaddition, to handle theincrease number of customers and trial volumes, some of theinvestments require step-function increases to hardware, software licenses, anddata center expansion. These areinvestments that we expect to gain leverage on in2008.

From anoperating expense perspective, total non-GAAP expenses inQ4 were $16.7 million, a12% increase from $14.9 million inthe same period ayear ago. Our non-GAAP income from operations inthe fourth quarter was$5.3 million, anincrease of 28% on ayear-over-year basis, and representing anon-GAAP operating margin of 13.9%.

Operating margin was down inQ4, since expenses came inhigher than expected due to several factors that were each relatively smallindividually, such as theimpact of LabPas which was not inour original guidance, ahigher than expected amount of billable pass-through expense which contributesno margin, higher-than-normal severance costs, and longer training and ramp-uptime of new services personnel. Many of these factors arenot expected to recur inQ1 of 2008.

While we had previously anticipated realizing anon-GAAP tax rate ofapproximately 10-11% inthe fourth quarter,our tax provision included atax benefit of $9.6 million or $0.22 pershare due to additional and full release of theremaining valuation allowance against our NOLs, and other net tax credits of$1.6 million or $0.04 pershare that were not inour projected tax rate.

As aresult, our tax provision for thequarter was a netcredit of $10.7 million. This helped to drive non-GAAP net income to $18.2million in thequarter or $0.41 on aper-share basis, compared to $0.19 inthe fourth quarter of2006, which included atax benefit of $0.07. Allearnings-per-share references areto diluted earnings pershare.

Looking atour fourth quarter 2007 results on aGAAP basis, GAAP net income was $15.7 million, including theimpact of $2.2 million related to FAS 123R stock-based compensation expenses,and $230,000 inamortization of intangibles related to theacquisition of Lincoln Technologies and Green Mountain Logic, and thewrite-off of $300,000 of Green Mountain Logic in-process R&D.

We generated GAAP earnings pershare of $0.36 in thefourth quarter of 2007 compared to $0.15 inthe fourth quarter of2006. GAAP EPS was impacted by a$0.22 benefit from theadditional release of theevaluation allowance against our NOLs and the$0.04 net tax credits.

From afull year perspective, we delivered revenue of $134.3 million, representing anincrease of 26% on ayear-over-year basis and ahead of our initial guidance of $124-129 million. Ourfull year non-GAAP operating income was $19.7 million, representing anincrease of 50% on ayear-over-year basis, and our non-GAAP operating margin of 14.7% was consistentwith our guidance of 14-15%.

Non-GAAP EPS was $0.87, including thetwo tax adjustments totaling $0.26 and ahead of our initial guidance of $0.47to $0.51. On a GAAPbasis we delivered full-year EPS of $0.72, including the$0.26 related to thetax adjustments and better than our original guidance of $0.33 to $0.37.

Moving to thebalance sheet, cash, cash-equivalents, and short-term investments totaled a$182.6 million at theend of the fourthquarter, a decrease of$4.3 million from theend of the thirdquarter.

For thequarter, the companygenerated $8.8 million incash from operations, which was offset by $5.7 million of capital expenditures,the $5.4 millionpurchase of Green Mountain Logic, and thefinal $3.5 million payment for Lincoln Technologies. For theyear the companygenerated $42.4 million incash from operations, while spending $13.4 million of capital expenditures.

Inaddition, the companygenerated $92.8 million from thesale of stock, $89 million of which came from our secondary stock offering.

Total deferred revenue was $67.1 million atthe end of thequarter, an increaseof $16.5 million on ayear-over-year basis and up $7.1 million compared to theend of the priorquarter. This increase to deferred revenue was amajor contributor to thehigher-than-expected cash from operations. We donot currently anticipate such asignificant increase in2008.

During 2007 we had anumber of large, upfront commitments. However, itis very difficult to predict whether customers will choose aterm license or ASP service offering, and if they choose anASP offering, whether they will make alarge upfront commitment or buy thetrial over time.

Account receivable increased $7.5 million from theend of the priorquarter, ending theyear at $35.5 million.This led to DSOs of 86 days, up from 74 days atthe end of theprior quarter. Our fourth quarter DSOs have historically been over 90, due toseasonality of customer invoicing.

Total bookings were $195.8 million for theyear, up 43% over 2006 and above thehigh-end of our latest guidance. This represents thesecond year of exceptional bookings growth, following a52% growth in 2006over 2005. In-form related bookings over $158.5 million were up 48% over 2006,and represent 81% of thetotal. Within total bookings, ASP bookings were $95.8 million, and increased37% compared to 2006.

As areminder, Phase Forward defines bookings as firm commitments and contracts thathave been signed by both parties, and excludes potential bookings from unsigneddeals, letters of intent, and expected follow-on awards or renewals, even if wehave been given averbal award. These bookings resulted ina year-end backlog of$279 million.

As we have discussed over thepast year, it’s important to appreciate that several factors influence bookingsand backlog increases and decreases. Thelevel and growth of service bookings can vary period-to-period, depending onwhether customers make asignificant up-front commitment or buy on atrial-by-trial basis. Inaddition, the amountof license bookings arecontingent on acustomer’s choice of term, which typically varies from three to five years.

Other factors, such as thenumber and term of renewals, can also have asignificant impact on bookings during agiven period. Further, acquisitions with different business models makecomparability of bookings from period-to-period more difficult; thesedifferences ultimately have little to no impact on our revenue.

Thus, although backlog reflects future revenues to berecognized over aperiod of years, growth inour total bookings and backlog quarter-to-quarter and year-to-year arenot a meaningful wayof trying to forecast future revenue growth, as they arenot necessarily indicative of current business trends.

As aresult we believe revenue is amore accurate way to track and measure thegrowth in ourbusiness, although we expect bookings to continue to increase in2008, we will no longer bereporting bookings for backlog inthe future. However,we will provide thevisibility we have coming from our backlog into both our full-year and nextquarter’s revenue guidance.

With that let menow turn to guidance. Thefollowing statements arebased on our expectations as of today, and we assume no further obligation toupdate or confirm them. As areminder, our non-GAAP references exclude theamortization of intangibles associated with theacquisitions of Lincoln and Green Mountain Logic and allFAS 123R stock-based compensation expense.

Looking atthe year as awhole, revenues areexpected to be between$165 and $169 million, anincrease of between 23% and 26%. Approximately 75% of these revenues areanticipated to come from beginning backlog.

Service revenues areexpected to continue to increase as apercent of total revenues during theyear, driven primarily by thegrowth in our InFormASP business. It couldexceed 70% by thefourth quarter, up from 65% inQ4 of 2007.

Turning to profitability for 2008, we’re forecasting grossmargins to be between58% and 59% and operating expenses to bebetween 41% and 42% of revenues. Our gross margins areexpected to remain fairly constant from Q4 of ‘07 through 2008, as our servicemargins are expectedto increase over thecourse of the year,offsetting the effectof the shift of theservice mix of our business.

Within operating expenses, we expect sales and marketing to bebetween 15% and 16%, R&D between 14% and 15%, and G&A between 11.5% and121.5%. As a result,we expect non-GAAP operating margin to bebetween 16% and 17% for theyear.

Due to thefull release of our tax benefits in2007, our anticipated book tax rateis expected to bebetween 37% and 39%, while our cash rateis expected to remain inthe 3-5% range.

Although we expect acontinuing increase to theservices component of our business, our target operating margin over thenext three to four years remains inthe range of 18-21%.This will now beachieved by gross margins inthe 60-62% range andoperating expenses between 40% and 42%.

Looking atnon-operating items, and with thecurrent interest rateenvironment, it isdifficult to forecast interest rateand thus interest income. But for purposes of our guidance, we have assumed a3% and 3.25% rate for theyear 2008.

Using anestimate of stock-based compensation expense between $8 and $8.5 million, weexpect GAAP EPS to bebetween $0.33 and $0.36. On anon-GAAP basis, excluding thestock-based compensation expense and acquisition purchase price amortization of$720,000, and assuming anon-GAAP tax rate ina range of 37-39%,non-GAAP EPS is expected to bebetween $0.46 and $0.49.

We expect to spend between $20 and $24 million incapital expenditures, split about evenly between expanding our productioncapacity and building out and furnishing anew corporate headquarters, which we plan to moveinto late in 2008.

Looking now atthe first quarter of2008, revenues areestimated to bebetween $37.0 and $37.6 million with approximately 90% anticipated to berecognized from beginning backlog. We expect gross margins to bebetween 56.5% and 57.5%, and operating expenses as apercent of revenues to bebetween 40% and 41%.

As result we expect non-GAAP operating income to bebetween $5.5-6.0 million. Our non-GAAP tax rateis anticipated to bebetween 37% and 39%, and stock-based compensation expense is estimated to beapproximately $1.9 million.

GAAP earnings areexpected to be between$0.07 and $0.08 perdiluted share, with non-GAAP earnings expected to bebetween $0.10 and $0.11 perdiluted share.

Insummary, our fourth quarter and full-year 2007 results were strong and we haveconfident as we enter 2008.

With that let meturn it back to theoperator to begin theQ&A session.


(Operator Instructions) Your first question comes from theline of Nabil Elsheshai - Pacific Crest Securities.

Nabil Elsheshai -Pacific Crest Securities

I guess Rodger or Bob, if step back and you look at‘07 and the growthdrivers; it seemed alittle bit like thelast couple of years hasbeen a bit of aland grab, especially atthe high-end of themarket.

If you look out at‘08 and ‘09, do youanticipate it being thesame sort of thing or doyou think most of thelarge guys have lined up and it’s more amatter of taking advantage of your installed base, and getting more largerpercentages of trials, and maybe getting after themid-market?

Robert K. Weiler

I think its combination of anumber of things. First, alot of the market sharepositions are settlingout because many of thepeople have made their strategic decisions over thelast couple of years, and alot of that growth that we foresee of those customers that have chosen us asstrategic partners, ramping up their adoption either through ASP trials orconverting to enterprise adoption, depending upon their own internal processesand how they want to dothat ASP or internal adoption.

Thesecond thing we’re seeing is that new companies coming in, much of our businessis coming from thefive, six, seven, eight trial type segment, which arethe smaller companieswhich are reallyembracing EDC. As they just start thetrials are going EDC;they are notconverting from paper; they arenot doing hybrid trials; they’re not doing anything like that; they just goahead directly to EDC.

And lastly we areseeing CROs. The CROshave really in 2007embraced EDC and as I mentioned inmy call on the scriptearlier is that we’ve had over just inthe last little morethan a year, CROs havebrought us over 65 companies that what we call indirect; that we haven’t reallytouched at all.

So thelarge ramp up of thesuccessful CROs and thesuccess they arehaving is really promoting EDC as well. Soit’s really the threefactors. There are afew other larger opportunities out there, but many of thestrategic decisions have already been made.

Nabil Elsheshai -Pacific Crest Securities

Rodger what’s your assumptions on share count for ‘08, ifyou can give us that?

Rodger Weismann

We areestimating a slowgrowth in thenumber of shares outstanding, soI think it averagesaround 44.5 million for theyear.


Your next question comes from theline of Raghavan Sarathy - Ferris Baker Watts.

Raghavan Sarathy -Ferris Baker Watts

Bob, if you look atlast year, you seem to have wonmore than your fair share of large deals. Looking ahead, doyou see any changein thecompetitive landscape interms of EDC vendors and theability to continue to gain market share?

Robert K. Weiler

I believe we can continue to gain market share. We dobelieve that we wonmore than our fair share of thelarger deals as well as thesmaller deals and we don’t seeanything in thefuture. I mean if you look where we’re at, our customer base is gettingstronger; we’re having more success with more trials.

We areover 2000 InForm trials right now having been done. We arehosting many, many trials, more than that, actually. Our product is robust.It’s deep, we continue to enhance and add.

Our suite insolutions that we arestarting to sell also have more impact. Inmy comments I mentioned thefact that we had WebSDM. Thenew release now goes directly to beable to read information directly from InForm, allowing atremendous amount of functionality for safety analysis of theclinical trial that there is essentially no one inthe market that hasanywhere near that type of competitive offering.

And I think this business is truly built around success andpeople want to make sure their trials work, they scale, they have performanceand that is theposition that we enjoy right now. So, I would hope we could build on thatduring 2008.

Raghavan Sarathy -Ferris Baker Watts

And then with regards to Oracle, I understand that Oracle hasreleased its new product and some other customers aretesting it. I was wondering if you seeany opportunity taking some customers away from Oracle.

Robert K. Weiler

Maybe you have information I don’t. Usually you don’t hearthat somebody released anew product and does that create anopportunity to replace them. My view on Oracle hasalways been this: is that they have some excellent customers that they’ve hadsince Oracle clinical days that have used Oracle products; they will continueto use Oracle products and they will bekind of flagship customers for Oracle.

Thequestion however is with Oracle’s new product if you don’t already have aninvestment in that wedon’t see that productbeing that competitive inthe new customers. Wedon’t see that productwinning new business. And then to pick up on what you said, we have had anumber of their customers come to us and want to evaluate our productside-by-side, while they arelooking at that RDCproduct. So we will seehow that holds up.

Raghavan Sarathy -Ferris Baker Watts

Rodger, can you update us on theavailable NOLs at theend of the year andwhen do you expect to paycash taxes at thefull rate?

Rodger Weismann

As I mentioned for book purposes there areno more NOLs. We booked allthe benefits for taxreturn purposes, which is basically for cash purposes. Thebalance is about $70 million after we filed the2007 return.

And again, thepart of it is how longdo we expect that tolast? That gets more problematic to try and forecast that. We need forecast2008 and ‘09 income and one of thebig variables offorecasting how longthat will last is theamount of disqualifying disposition of incentive stock options, which areallowed as a taxreturn deduction even though itdoesn’t go through theP&L. And those arevery hard to forecast, depending on when people sell, and stock prices, and allthat. Having said that we expect itto last at least two,but it could bethree or four years.

Raghavan Sarathy -Ferris Baker Watts

Can you give us theinterest rate? I was wondering if you could give us thedollar amount for thetotal interest and other income.

Rodger Weismann

We haven’t given acash flow forecast forthe year, soI could speak very roughly and this is not acash flow forecast,but if you took anaverage balance of $200 million. Sothis would exclude any effect of apotential acquisition. Theaverage cash balance of about $200 million times 3.75% comes to $7.5 million.

Raghavan Sarathy -Ferris Baker Watts

What was thecontribution from consulting and customer support?

Rodger Weismann

Thecustomer support was 10% and theconsulting was 9%.


Your next question comes from theline of Len Podolsky -Piper Jaffray.

Len Podolsky - Piper Jaffray

Bob, can you give us anupdate on your view of market penetration, please?

Robert K. Weiler

Yes, I think 2007 was what we allthought was going to bethe tipping year andcertainly it was. Wethink that it wasabout 45% of new trial starts that was forecasted is about where it’s at. And Ithink we are going to see2008 that number movenorth of 50% more like probably inthe 55-60% of allnew trials starting using EDC, with that accelerating towards theend of the year.

So, I think this steady progression and thechart I think you’ve seen us put up many times, which is theIDC chart of themarket, the marketpenetration of new trials starts, seems to bespot-on.

Len Podolsky - Piper Jaffray

What about on thesafety side?

Robert K. Weiler

Actually, we’re starting to seeinteresting; a lot ofpeople have safety products already, soit’s been somewhat of asaturated market. However, we arestarting to see thatfor many of theproducts that are outthere, frankly including our old Clintrace product, we arestarting to see peoplelooking up to refresh that and doing more evaluations.

And we arestarting to see that getstronger, being driven by also our signal detection products that arealso gaining hold. SoI think from astandpoint of market size, we still think that market is about $100 million insize and is probably, on agiven year’s standpoint, somewhere around $30-35 million.

Len Podolsky - Piper Jaffray

Arethere any more elephant deals out there inthe EDC market?

Robert K. Weiler

We just don’t talk about elephant deals. And thegood news is that anumber of years ago, in2004 and 2005, it’s alleveryone talked about. With theability to add such impact on your numbers, if you look atour numbers and our growth right now, somuch of what we aregetting now is coming from smaller ASP non-commitment deals.

But yes, there areprobably one or two every year large deals that will surface and I don’t think2008 is going to be anexception to that. Will we winthem all, maybe? Will we winsome, probably? You don’t know. It’s acompetitive environment, but we feel we’ll winour share.

Len Podolsky - Piper Jaffray

Could you just quickly go through theQ1 guidance? I missed allthose breakouts. That’s just for gross margin and OpEx.

Rodger Weismann

Yes, thegross margin is between 56.5% and 57.5%, and operating expenses between 40% and41%.

Len Podolsky - Piper Jaffray

You mentioned that there was some severance costs inthe quarter; could yougive us a little moredetail, where those came from?

Rodger Weismann

We prefer not to comment on exactly where that came from.


And next question comes from theline of Richard Close - Jefferies.

Richard Close -Jefferies

Bob or Rodger, I wondered if you could recap, I think youmade a comment withrespect to some of theupside coming from follow-along and add-on engagements. And I was just curiousif you could just elaborate alittle bit more on that.

And then if we look atthe bookings ininitial guidance for ‘07 I think itwas $135-150 and then where you came in. If you could sort of break out howthat variance was broken out between maybe new customers that you didn’t knowinitially versus add-on customers?

Robert K. Weiler

Let meanswer the secondquestion first. Theincrease from theguidance from theearly part of the yearreally rested on three, or somewhat four, four criteria. Thefirst was some deals that were inour pipeline. We forecast itfrom our grass roots up, came in, and frankly were much larger than we hadanticipated. So youhad kind of a biggerdeal component to theforecast coming through thesecond half of theyear.

Thesecond part was it isvery difficult as much as we like to look atoutside pundits and guess ourselves to what theadoption rate wasgoing to be. In thebeginning or this time last year itwas really hard to saywith certainty that that adoption ratewas going to accelerate in2007 and we didn’t start seeing that until thesecond half of theyear.

Thethird factor was theacceleration of adoption and implementation by theCROs. That the CROsstart stepping up, making commitments as well as delivering products andordering a lot moretrials from us than I think even they had anticipated.

And then lastly was theemergence of thereplacement market, where we had anumber of customers that were with our competitors that signed up for multi-milliondollar, multi-year contracts with us that weren’t inour original forecast. Sothose were kind of four drivers of why our bookings guidance went up during theyear and then ultimately we exceeded that bookings guidance. Thefirst part of thequestion what was thefirst part again?

Richard Close -Jefferies

Theadd-on again, you mention follow-on or add-on engagements.

Robert K. Weiler

Yes. I mean this goes back to what we were saying as earlyas 2005 and 2006, is that many companies were making strategic decisions withus. But they would come back and say, we’re going to give you aninitial order, and itmight have only been 1 or $2 million. And then they would come back and sayall right, we haveseven trials going live inSeptember, we want to put anorder in for you to dothose seven trials.

As well as, we had customers that signed up early inthe year, likeNovartis Vaccines, that put aninitial order in, but their ramp up was going soquickly, they came back atthe end of theyear, and did multi-trial orders as well.

That also happened with some of theCROs that had initial commitments atthe beginning of theyear that they thought would last maybe ayear or two, by theend of the year, theyhad already eaten through itand came back and gave us another multiple-year order.

Sothis is what we’re kind of seeing, we’re seeing this build up of thosecompanies that made strategic decisions over thelast couple of years, starting to gain traction using EDC for pretty much alltheir trials. And we’re benefiting from that by orders during theyear that is very hard for both our customers and ourselves to forecast. But Ithink the inertia ofEDC and everybody moving to that direction, we’ll seethat continue in the2008.

Richard Close -Jefferies

With respect to, Rodger, you threw out anumber and I missed it. I believe itwas 70% of the revenueguidance for ‘08 you expect to come from thebeginning backlog, was that correct?

Rodger Weismann

Yes, 75% from thebeginning backlog.

Richard Close - Jefferies

That number hasn’t changemuch over the pastcouple of years, hasit?

Rodger Weismann

That’s correct. It’s I think thelast two years it’s been somewhere between like 74% and 77%. That’s been afairly narrow range. I think back more than two or three years agowas a little broaderrange, so year-to-yearit might vary inthe 70-80% range.

Richard Close -Jefferies

Is there any way or any reason that number would go down,approach the low70s, or dip into the60s at allin terms ofessentially giving you more visibility than you currently have?

Rodger Weismann

You mean that would give us less visibility as thenumber dropped. Yes, I mean even as there hasbeen a slight shift tomore services and ASP, which turns to revenue sooner. That percent coming outof the backlog for thenext 12 months really hasn’t changedvery much. So, I don’t seeanything really shifting itsignificantly.

I mean I think if order came inthat was very, very large license order that had avery long term to itthat would take longer for itto convert to revenues.

Richard Close -Jefferies

Pulling back on thebooking’s guidance in thebacklog, giving those numbers, that begs thequestion, have you seen any changein theenvironment or anytime ametric is pulled back somewhat like that. But how would you characterize Iguess your business today here inthe first month of2008 as compared to last year, January 2007? Is this better business for youguys, is the marketopportunity increased, hasit decreased, is itthe same,characterization along those lines?

Rodger Weismann

Thenot giving guidance on bookings hasmore to do with thecomposition of thetype of bookings that come inat different periodsof time. And depending on what’s inthat mix bookings fluctuations can have nothing to dowith the strength of thebusiness in aparticular period of time, which is why we think that number doesn’t make senseanymore.

SoI think you need to look more to therevenue side of thebusiness and we’re quite bullish on therevenue. Our guidance was 23-26% overall growth, compared to the26% that we saw in2007. So if anything,we see I think nextyear as stronger, continuing strength than we saw inthe last two years. Idon’t know if you want to comment more on that, Bob?

Robert K. Weiler

No, I think, whenever, we’re cognizant of theconcerns that some people have when you back away from anumber. I think that itcould be read into,while the number is,we discredited itsomewhat, we felt itwas appropriate to do itwhen the number wasvery, very strong as itwas this year.

I think during my script and Rodger’s script you heard anumber of comments about our optimistic outlook for ‘08 and future years, anumber of comments that we felt our business was very strong. We feel our productand position is very strong. We think themarket dynamics areprobably as strong, if not stronger than they have been inthe past.

So, we felt that surrounded by thepositive revenue guidance that we’re giving that that would calm any fears thatwe anticipate aslowing of any sort inour bookings going forward. We just don’t think it’s avalid number for people who try to dowaterfalls and build models out of. So, I would caution anyone to read into anynegative on our position on thebusiness based on dropping that number.


Thenext question comes from theline of Andrey Glukhov - Brean Murray.

Andrey Glukhov -Brean Murray

Bob, one of thethings that we’ve seen in2007 is your sales force productivity really stepped up. If you look atthe number of bookingsper rep, what areyour sales force hiring plans going into theyear? And I guess directionally, if you comment on, areyou increasing thequotas and if you are, can you help us with themagnitude of that increase?

Robert K. Weiler

Thething that we areprobably going to add to thefirst part of thesituation is, we’re probably going to add about three sales people two orthree, tops, non-exclusive, I mean, exclusive of any acquisitions that we mightdo. So if we doan acquisition obviouslythat would changeit, but from a normalstandpoint, we think that we probably add somewhere inabout four, maybe going from 29 to about 33, which will beabout a 10% increase inour sales force.

As far as quotas, they’re going up as they always doin any salesorganization. But I really don’t like giving quotas out publicly. So, butthey’re going up to represent our goals for theyear, and I will saythat they, we do graspgrounds-up forecast and our sales force buys into thequotas, and sales managers buy into thequotas in theplans. So I think we arein good shape.

Andrey Glukhov -Brean Murray

And as far as I guess theacquisitions areconcerned, you guys proceeded fairly cautiously for thefirst couple of quarters. Areyou starting to see evaluationexpectations on thepart of your targets moderate? And by thesame token, if not, areyou guys starting to doanything, sort of aninternal R&D trying to accelerate some additional products, sothat in case you donot acquiring anything, we’re going to seesome radically new products in2009, 2010?

Robert K. Weiler

Well, I think theonly thing we want to talk about that point is that you look atour R&D number that Rodger mentioned inhis script to give you afeel for where we believe our R&D expenses areand there’s always on-going products.

We’ve been doing alot of things. We mentioned coming out of R&D, which doesn’t geta lot of fanfare, wasour central coding product. Sowe talked about it; we announced it; we geta value for that everytime we sell that with atrial. And we have 40 trials live with that product now, soour R&D efforts really starting to paya lot of dividends.

Our adaptors arearound using for integrations aremaking an impact. Soif you look at ourR&D historically it’s been 15-16% of revenues and as our revenues growthat number gets, as anabsolute, larger for us to domore things. So otherthan that I don’t want to talk about what our R&D plans are.

I would hope that some of thecompanies that we’re looking at, particularly with themarket considerations and what’s going on inthe marketplace rightnow, that their market expectations or their valuations may move. I think 2007 themarket was very hotand everybody was feeling very, very good about themselves. And we saw alot of people having what we thought were unreasonable expectations ofvaluations.

We arenot bottom fishers; we arewilling to pay for agood company, but it hasto be realistic aswell. Maybe with themarket acting the wayit’s been will besobering. I’m not sosure what the IPOmarket is going to look like in2008. So, I think that’s going to limit some options for other companies thatwe’d like to talk to. SoI think if people getrealistic I think thegaps can close and hopefully we will dosome in 2008.

Andrey Glukhov -Brean Murray

Rodger, as far as thebacklog and bookings metric, doyou guys plan to report itin arrears, inother words are wegoing to see backlogonce a year inthe K?

Rodger Weismann

I don’t think so. No.


Your next question comes from theline of Asher Dewhurst with FBR.

Asher Dewhurst – FBR

Back to Len’s question on market adoption, there was aCRO press release recently; itsaid they are doingabout 70% of their new trials with EDC. I assumed that was awfully high and youkind of confirmed that with that 45%, but is itsafe to assume that CROs areabove that 44% areadopting EDC at amuch faster rate?

Robert K. Weiler

No, actually I think what that happened is, I’ve seen thatreport. What I think that tends to beis that the CROs geta little ahead ofthemselves, because we’ve been using that as agreat barometer for us to look ahead. And what that tends to beis the number oftrials that they arebidding.

So, they’ll look and sayhow many trials we’re bidding EDC and that converts to we’re doing that inEDC. And it spans thegamut, if you take Quintiles as anexample. They’re probably bidding over 90% of alltheir trials now areEDC, and if they had their way itwill be 100% andthey’re fairly public about that. So, you take that versus some others that areonly doing 10-20% you getthis average craziness going on.

What we look atis a great number. Ifthey are saying nowthat they are doingabout 70% that means in2008 the number Italked about, 60% maybe alittle higher inactual implementations. But they tend to bea little ahead of theregular market, but they include what they’re bidding as opposed to what welook at, which is actually bought and started.

Asher Dewhurst – FBR

And is there any segment of themarket that’s really lagging inEDC adoption, small, biotech, or anything like that?

Robert K. Weiler

No I think 2007 theyear, we started seeing ittake off everyplace. We started seeing thesmall companies starting itand having never done atrial before going right into EDC. We’ve seen large pharmaceutical companiesreally trying to ramp up, and getto 80%, 90% of all oftheir trials and that’s being successful.

SoI can’t look at anarea and say boy, theyare really far behind.Everyone seems to begoing along in theright direction, somewhat atlittle different paces, but going along inthe right directions.


Your next question comes from theline of Raymond Myers - Emerging Growth Equities.

Raymond Myers -Emerging Growth Equities

Most of thequestions have been answered, but let meask a high level one,I guess for Bob. Could you describe thepricing environment capacity particularly inline with consolidations that we seem to seeing as themarket coalesces around, just ahandful of the largerand in fact even someof the smaller, butstill viable, growing competitors?

Robert K. Weiler

Pricing hasbeen fairly consistent. One of things that we’re seeing over thelast number of years, theaverage ASP price for us hasgone up to $400,000. Now that’s more to signal that pricing inits fundamentals hasremained stable, but thetrials are gettingbigger, more complex. And things like with central coding we’re able to addmore functionality into those trials which we’re unable to price for. Sothe pricing tends to befairly significant.

When you seea major price discountor a major price kindof deal where somebody hasa very, very lowprice, it’s usually not ahealthy situation for that company. What you have is apharmaceutical company gets nervous of why you arebidding this so muchlower than everyone else. And it’s usually that they aretrying to raise cash or they aretrying to do winthe business. And whenyou are dealing with adrug that’s going to begenerating about $1 billion ayear worth of revenue, thedifference in $50,000or $100,000 in thetrial is really insignificant.

So, while theprocurement people tend to beat us allup significantly and try to pound us to thebest dollar, which is their job, theactual value of what we’re providing is tremendous compared to thevalue, the costthat would be paidwith paper or inrelation to theoverall cost of thedrug being successful. So, it’s rarethat someone would come inand say “I’m buyingbecause of price”. They generally make their decision based on theiropportunities for risk and success.

Raymond Myers -Emerging Growth Equities

My impression throughout 2007 was that capacity inthe industry hasbeen getting rather tight as demand hascontinued to be high.And is that what we’re seeing? Doyou agree and then relate that to what we’re seeing, and what you mentioned theinvestment and that’s causing some decline ingross margin. Are youtrying to increase your capacity to meet that demand?

Robert K. Weiler

Absolutely, and we’re trying to stay ahead of that capacity.One of the things,we’ve visibility in thebusiness; we know when these trial arestarting; we have apretty good grip on how many trials we’re going to bedoing in 2008. We saw theramp up in 2007.

We have formulaic hiring when we know we have somany trials coming; we know how many production people we need; we know howmany servers we need; we know what that takes. We had astep function that you areseeing in theshort-term margins here where, we had to hire more senior people, such as avice president of production, another one to help with our growth.

We’ve had to acquire licenses from software that used inour systems, like Oracle and Microsoft, and allthe things you have todo ina growing company. Andwe want to make sure we’re ahead of thecurve, because thething that differentiates Phase Forward from our competitors is that we’re ableto build trials quickly, we’re able to deliver them, and they run, they runglobally.

We’ve made investments inthings like Akamai for internet acceleration because what we found is that whencustomers are doingtrials in China,and the Far East, and into Indiathat you have a normalinternet-based latency that allcompanies would have. But we’re able to use our financial strength to beable to invest inthose products, to make partnerships with people like Akamai to provide highend performance for those global trials, and no one else is doing that.

Sothose are thetypes of things that we believe that if we want to maintain and growour leadership position we have to beable to be ina position to serviceour customers. And when our customers come to us and they say, “We want to do40 trials” we have to bethere to be able to doit. We cannot say“Gee, I’m sorry, we’re out of capacity”.

Sothat’s why you’re seeing some step functions as you’ve seen inthe past during ourgrowth, you’ve seen step functions there every 18 months or sowhen we make thestrong investments inour future and that’s areflection on our confidence, thebusiness is going forward.

Raymond Myers -Emerging Growth Equities

Let meask you one more question about aspecific CRO. What’s your relationship then with Covance? Arethey a major purchaserof trials from Phase Forward?

Robert K. Weiler

Coban’s is been using anumber of players. Their primary provider had been acompany called Data Labs that they’ve been using anumber of their trials. They’ve done anumber of trials with us, aredoing a number oftrials with us and underway for their customers. Sowe have a relationshipwith them.

They will probably sometime in2008 decide on avendor of which they’ll start putting alot of their efforts and resources behind. And we feel that we will becompeting for that in acompetitive environment. We would hope to winit. Not sure that we will, not sure that we won’t. Every deal is verycompetitive and until it’s awarded you don’t know. We dohave the benefit that thetrials that arerunning with them right now aregoing very well. So, we’ll seehow that turns out.


Your next question comes from theline of Don Hooker - UBS.

Don Hooker - UBS

Is there any kind of quantitative metrics that you can talkabout in terms ofrevenue per trial orthings like that to give us sort of asense of where pricing is going?

Rodger Weismann

Yes. It’s roughly about $400,000 perASP trials. That’s our average and once again it’s anaverage. Yes, some trials are$1 million, $1.2 million; we have others that are$175,000. The way thatis determined is by thescope of the number ofdata items, it can bethe number ofpatients, the numberof sites, the requirednumber of eCRFs, and thenumber of rules. So itall comes out as anaverage of about $400,000 and that is up from about $325,000 in2004.

So, we areseeing that as well. Also as I mentioned thenumber of patients, thenumber of investigators, thenumber of sites, because you have your help desk, you have your user fees andthings like that. So, that’s themetrics that we use to determine our pricing.

Theway it works on anenterprise license you take anumber of their trials; you take thenumber of that average; you seewhat they are doing;what it looks like.And you essentially add itup to whatever millions of dollars that thecustomers are willingto commit.

Don Hooker - UBS

And one last little details interms of central designer, which I recall there is some excitement around that,you mentioned there were 40 trials I think you mentioned running on that.

Robert K. Weiler

No, no. Let mecorrect that. There is two products they aretalking about. Central Coding, which is what is used to take your EDCinformation and go against the[mederic] dictionaries. That’s aproduct that we announced last year, and that is Central Coding and there are40 live of that. Our Central Designer, we announced inJune, which is a toolto speed up thedelivery; the buildingof trials in acollaborative environment is what was launched inJune.

Don Hooker - UBS

Can you talk about how many customers areup on that now?

Robert K. Weiler

We aren’t going to talk about our customers. We will saythat, we do havetrials live resulting from being built inthat product. And our goal through theend of 2008 is that allthe trials that webuild will be onCentral Designer, and that we would beexpect the 100% by thefourth quarter, during thefourth quarter.


Your next question comes from theline of Steven Crowley - Craig-Hallum Capital Group.

Steven Crowley -Craig-Hallum Capital Group

First of all, Rodger and Bob, you talked about service beinga bigger part of thistrain going forward given thetremendous success you had with ASP model and other service offerings. You alsotalked about some training curve issues. Itsounded like that might beshort-term in nature.I’m wondering how this alldovetailed into thespecific margin expansion you might beable to see inservice gross margins?

Robert K. Weiler

I indicated that we expected theservice gross margin to basically increase every quarter. Now, it’s possibledepending on thetiming of certain deals within aquarter, things don’t necessarily go up exactly each quarter, but that’s ourcurrent expectation and what’s built into our current internal plan.

Sothat some of the stepfunction increases that we made inQ3 and Q4 of this year 2007, we expect to getreturns from, and some of those investments aresort of like straight lines. I mean, our example is we took advantage of someattractive pricing and bought kind of athree year license for software and sort of have bigstep-function increase when we bought it, but itstays level over time.

So, our service margin is inthe neighborhood, Ithink it was 37.5% inthe current quarter;this is the non-GAAPservice margin. And I would expect that to bewell north of 40% by thefourth quarter of 2008.

Steven Crowley -Craig-Hallum Capital Group

Itseems like thetraining issue you mentioned is really just ashort-term front-end issue also.

Rodger Weismann

Yes. I certainly hope itis, and if it’s not we’ll end up building itinto our model that ittakes a little longerto get people up tospeed.

Steven Crowley -Craig-Hallum Capital Group

And theimpact of Central Designer, ithasn’t been obvious inthe numbers sofar. Might it becomeobvious over the nextyear?

Rodger Weismann

Well, I think itbecomes obvious as probably one of theelements that will drive theservice margin well north of 40% by theend of the year. Thereis a definite lageffect to that. Because when you start building thetrials, using Designer doesn’t show up inrevenue that savings until you actually go live. Sothere is a lag effectto when Bob’s comment that our goal is to have allnew trials being built inDesigner, even that effect will lag into 2009, because they arebeing built but they arenot live yet.

Steven Crowley -Craig-Hallum Capital Group

Bob, as to Lincoln Technologies you made some very positivequalitative comments about thewhole suite of quality and PharmacoVision’s products. Itseems like there is –an interest inbroader adoption. One of thekeys to driving that market size is to getmore quality drug safety products on more people’s desks atyour customers. Where arewe in that cycle andhow does that translate to your business?

Robert K. Weiler

Well, I think it’s what people aredoing with the trialsand this could cause along soI’ll keep this brief. Sowe mentioned for instance theDoD, the Department ofDefense, they’re not just doing regular trials; they aredoing longitudinal trials, which is another whole avenue for people to beable to kind of look atthe data.

TheDoD has thelargest electronic medical record database inthe world, onedatabase of all themilitary. And to beable to dolongitudinal studies, to beable to mind that, andthe enthusiasm whichthey are talking aboutthat at theepidermal seminars is just catching on.

We have Barrier Ingleheim, Otsuka as new customers. Sowe’re seeing more and more of our new customers as well as existing customerstaking the product,experimenting it, and following theadoption curve. So wethink its gaining traction and themore and more people areout there talking about this is agood tool, I think benefits everyone.

Steven Crowley -Craig-Hallum Capital Group

Interest income was obviously avariable that’s surprising some of us with models. Have you had amajor interest ratereset in yourportfolio of investments or areyou conservatively looking out ata future reset ofwhere it’s down to 3.75%?

Rodger Weismann

Well, most of our portfolio is invested fairly short-term,and short-term rates have significantly declined over thelast couple of months. Two months agoit was 5%, and now Ithink it’s down to like 4.3%, 4.2% ina lot of short-termpaper and funds.

And sothat already in ashort period of time, it’s afairly big drop andwith the Fed fund ratedrop yesterday, itcould go down some more. And who knows what’s going to happen beyond that? Sowe just put a stake inthe ground forpurposes of theforecasting and came up with 3.75%, but I don’t have amagic ball in interestrates for 2008.

Steven Crowley -Craig-Hallum Capital Group

Soyou are doing someconservative, logical prognostication, but prognostication nonetheless?

Rodger Weismann



Your next question comes from theline of Richard Davis - Needham.

Richard Davis - Needham

With regard to Virtusa, therelationship you announced on your Indian subsidiary that you created; I think itwas like around Thanksgiving. Could you just give us aquick sense of your long-term vision for that market and early traction you’reseeing there?

Robert K. Weiler

TheVirtusa opportunity is one where we’ve been using consultants inIndia to helpus with a lot of thetrial bill-type work. And one of thethings that happens is what they dois as we getvariations in ourtrials, they are ableto absorb of that capacity for us.

One of thethings that we realized that we want to expand that with our relation withVirtusa, we opened up our own subsidiary, started off with two to three people ina hybrid model where theVirtusan employees will turn over to Phase Forward employees. And we’re goingto expand that as thecapacity is needed.

So, thesecond part of it isthat we recognize that as pharmaceutical companies aremoving a lot of theirdata management, as theCROs are moving lot oftheir data management and functionalities to India,they are going to wantto be serviced out ofthat. We want to make sure our organization is inplace both there and here to meet that need. So, there’s no grandiose plans ofmoving a whole lot ofpeople there or doing that. We’re just going to growsimultaneously to try to meet themarket demand.


Your next question is from theline of Stephen Shankman - Natexis.

Stephen Shankman -Natexis

For 2008 revenue guidance, can you break out theexpected contribution from GML?

Rodger Weismann

I think I indicated that there revenues were inthe neighborhood of amillion dollars at thetime of theacquisition and they won’t bemuch larger than that in2008.

Stephen Shankman -Natexis

For full-year 2007 does foreign exchangehave any significant impact on thetop line?

Rodger Weismann

Yes. I think for theyear I think that was about 3% impact on revenue.

Stephen Shankman -Natexis

Positive side.

Rodger Weismann

Yes, positive side.

Stephen Shankman -Natexis

And then any expectation for that in2008, any internal modeling for that?

Rodger Weismann

No, I don’t have internal expectations on that for 2008. Imean, again, I have to getinto forecasting exchangerates.

Stephen Shankman -Natexis

Sobasically the way youlook at it, if youlook at our current exchangerates they kind of run that forward throughout theyear?

Rodger Weismann

Yes, exactly.


Thenext question comes from theline of Raghavan Sarathy - from Ferris Baker Watts.

Raghavan Sarathy -Ferris Baker Watts

Rodger, you said you’re expecting theservices to increase to 70% of revenue by fourth quarter. Can you give us somesense where do you maystart the year from thefirst quarter, itseems like you arelooking at 5%?

Rodger Weismann

Actually, I think I said itcould exceed 70% actually, itwas not a 70% forecastfor Q4. I just said itcould exceed that by theend of the year. Andso, the Q4 of lastyear was 64.7%. I think well nothing goes up instraight line or steady line on these things. But I would expect fairly rapidincrease, like possibly atwo percentage points shift every quarter.

Raghavan Sarathy -Ferris Baker Watts

And then interms of the grossmargin compression that you’re seeing, areyou going to continue to invest atleast in thefirst half of the yearin theinfrastructure?

Rodger Weismann

I also indicated that I thought thetotal gross margin would stay fairly constant through 2008 on aquarterly basis, even though again you getsome fluctuations quarter-to-quarter. Since there is always investments goingon, but in terms ofdisproportion investment, no, I don’t seethat in thefirst half of 2008. So, I would expect by thesecond quarter we would seereasonably significant improvement inthe services margin.


Atthis time there are nomore questions in thequeue. And I would like to turn thecall back over to management for closing remarks.

Robert K. Weiler

Thank you for joining us inthe call. Talk to younext quarter. Good evening.

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