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Parexel International Corp. (NASDAQ:PRXL)

F3Q08 (Qtr End 03/31/08) Earnings Call

April 24, 2008 10:00 am ET

Executives

Josef von Rickenbach - Chairman and CEO

James Winschel - SVP and CFO

Jennifer Baird -Director of Public Relations

Analysts

Dave Windley - Jefferies and Company

Charles Rhyee - Oppenheimer & Company

Todd Van Fleet - First Analysis

Eric Coldwell - Robert W. Baird

Randall Stanicky - Goldman Sachs

John Kreger - William Blair

Jake - Raymond James

Glenn Garmont - Broadpoint Capital

Douglas Tsao - Lehman Brothers

Topher Orr - Thomas Weisel Partners

Operator

Ladies and gentlemen thank you for standing by. And welcome to the PAREXEL International Third Quarter Fiscal 2008 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. (Operator Instructions). And as a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Ms. Jennifer Baird. Please go ahead.

Jennifer Baird

Good morning everyone. The purpose of this call is to review the financial results for PAREXEL’s third quarter and fiscal year 2008. With me on the call today is Josef von Rickenbach, our Chairman and Chief Executive Officer and James Winschel, Senior Vice President and Chief Financial Officer. Thank you for joining us.

We would like to begin by stating our standard Safe Harbor disclosure language. Various remarks that we may make about future expectations, plans and prospects for the company constitute forward-looking statements for the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors. These factors are discussed more fully in the section entitled Risk Factors of the company’s quarterly report on Form 10-Q for the quarter ended December 31, 2007, as filed with the Securities and Exchange Commission on February 7, 2007.

In addition, any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our estimates change, and therefore you should not rely on these forward-looking statements as representing our views as of any date subsequent to today.

During this call, we may refer to certain financial measures, which have not been prepared in accordance with generally accepted accounting principles. When discussing numbers or margins related to direct costs, selling, general and administrative expenses, income from operations, income taxes, net income, and earnings per share, we may refer to pro forma results. These pro forma results may exclude the impact of unusual positive or negative items and/or charges related to special charges, restructuring reserves, and adjustments to restructuring reserves.

As always, our discussion today concerning growth rates and margins will be based upon service revenue and related costs, and will not include revenue and costs related to reimbursable out-of-pocket amounts. A reconciliation of the non-GAAP financial measures with the most directly comparable GAAP measures is available in the Investor Relations section of our website at parexel.com or will be discussed during the course of this teleconference.

As publicly announced on February 15, 2008, PAREXEL has made a preliminary proposal to the Board of ClinPhone in the UK with regard to a potential offer for the company. The preliminary proposal was rejected by the Board of ClinPhone, and PAREXEL is currently evaluating its options in relation to the company. We are therefore unable to provide any additional information at this time nor can we answer any questions in relation to the potential transaction. We will make a further announcement if and when it is appropriate.

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

Josef von Rickenbach

Thank you, Jen. I would like to review some details for the quarter, and then Jim will provide more information on the financials. After that we will open the call to any questions you may have.

For the quarter ended March 31, 2008, service revenue was a record $245.3 million, compared with $191.2 million in the same quarter of the prior year, an increase of approximately 28%. On a sequential basis, revenue in the March quarter was up 2.8% from the December quarter. Excluding the positive impact of foreign exchange of approximately $13 million in the quarter, revenue increased approximately 22% year-over-year.

On a same-store basis, excluding revenue primarily from the acquisition of Apex as well as the two divestitures, which had an impact of $6 million in the current quarter and $1.2 million in the same quarter last year, growth would have been approximately 26%. I will discuss the divestitures in greater detail in a moment.

Excluding the impact of foreign exchange, acquisitions and divestures, growth would have been 19% year-over-year. During the third quarter Clinical Research Services or CRS represented approximately 78% of the company’s total revenue, versus 75% in the same quarter of the prior year. PAREXEL Consulting and Medical Communication Services or PCMS comprised approximately 14% compared with 16% in the prior-year quarter, and Perceptive Informatics was approximately 8% of the total versus 9% one year ago.

With regard to the geographic breakout of revenue for the March 2008 quarter, approximately 41% of revenue was generated in the Americas versus 40% in the March quarter one year ago. Europe, the Middle East, and Africa represented 53% of revenue versus 54% one year ago, and Asia-Pacific represented approximately 6%, the same as one year ago.

During the quarter, the largest client represented 9% of revenue, up from 7% in the March quarter one year ago. The top five clients represented 29%, up from 27% one year ago, and the top 20 comprised 53% of the total, which was down from 54% last year. We remain quite comfortable with our client concentration levels and the broad diversity of our client base.

Our third-quarter operating income increased a robust 46.8% year-over-year to $22.7 million. Even excluding the positive benefit of a restructuring reversal of $860,000, operating income still increased a very healthy 41.3%. As a percentage of total company revenue, the operating margin was 9.3%, an improvement of 120 basis points year-over-year. On a pro forma basis, excluding the restructuring benefit, the operating margin was 8.9%. We do fully expect to further drive operating margin expansion in future quarters.

At this point, I would like to highlight three areas which represent the opportunities for operating profitability improvement. First, I would like to mention the Medical Communications business or PCMS. Now that the restructurings and management augmentations are in place, we expect steady improvement in the business going forward. Eventually, we also expect market tailwinds to provide more support.

A second area for profitability improvement is our Clinical Pharmacology business within the CRS segment. As you are aware from a press release we issued in March, we have increased our bed capacity in the business quite a bit over the past years. This now firmly positions us as a world leading provider of expertise-based Phase I services. Revenue in this business has increased nicely over time, and our challenge now is to convert that momentum into improved profitability as well.

The third example is Perceptive Informatics. The revenue growth rate declined notably this quarter in large part due to delays in obtaining signatures from clients. This also impacted profitability, but we do expect revenue growth and profitability to rebound in the next quarter. There are a number of operational processes that we are focused on improving as well to enable Perceptive to reach the next stage as it evolves into a larger and more mature business.

Now I would like to highlight an area where we have had very positive results in increasing profitability, and that is in our operations in the United States overall. In the March quarter, our domestic operations continued to improve and were nicely profitable. We do expect U.S. operations to be solidly profitable for fiscal year 2008 as a whole and beyond. In the third quarter, diluted earnings per share came in at $0.25, versus $0.19 in the third quarter one year ago, an increase of approximately 32% year-over-year.

I would now like to walk you through the new business and backlog performance for the quarter. Backlog as of December 31, 2007, was $1.78 billion. We added record gross new business wins of $423.5 million in the March quarter and then subtracted $245.3 million of revenue that was recognized during the quarter. Cancellations netted out $49.5 million, which left us with an ending backlog on March 31, 2008, of approximately $1.9 billion. There was a positive impact from foreign exchange of about $33.2 million of backlog.

This quarter’s net book to burn ratio was 1.52 and 1.39 adjusted for the positive impact of foreign exchange. We are obviously very happy with this performance. And as I noted on our last call, in general, we consider a net book to burn ratio of 1.3 to 1.4 to be very strong.

Shifting tracks for a moment, over the past quarters we have discussed the fact that we have been reviewing and evaluating our business portfolio. One outcome of this review was that we decided to divest a bioanalytical lab in Poitiers, France and the Barnett Educational Services business in the U.S. The lab was part of our Clinical Research Services business unit and Barnett was part of PCMS.

We concluded that these were non-strategic assets that no longer fit with our long-term strategy. We booked a small net gain related to these divestitures in the quarter. Going forward, we will continue to evaluate our products and services to make sure that our entire portfolio is in line with our strategic objectives.

During the quarter, we also expanded our minority interest ownership in the Clinical Pharmacology business of Synchron Research in Ahmedabad, India from 19.5% to 31% at a cost of approximately $5 million. We have made a long-term commitment to conducting high quality clinical research in India and expect to continue to strengthen our presence in that region.

Switching gears now, this quarter we had a net increase of 360 employees, almost 70% of whom were hired in locations outside of the United States. This gives us an ending head count of 7,680 full time equivalent employees. Although the labor markets continue to be tight in certain areas, the strength of our global footprint allows us to hire the people we need in many different geographies. I would also like to note that our turnover rate overall continues to decline.

Over the past two years, our head count has grown over 40%. Although this does include some acquisitions, the growth has obviously been quite considerable and we are now at a stage at which our infrastructure is nearing capacity in certain geographies. In fact, in many of our locations we are quite literally bursting at the seams in terms of utilization of office space which is one reason why we reversed a portion of the restructuring reserve this quarter.

To enable further growth, we plan to add facilities and upgrade a number of our enterprise application systems. Consequently, as Jim will discuss in a moment, you should expect to see a high level of capital expenditures in future periods. On another front, as you may know, the UK newspaper, The Sunday Express, published an article on Sunday, April 13 that contained false and erroneous information.

The article incorrectly claims that two volunteers were hospitalized after participating in a clinical study at the PAREXEL UK site. This is completely untrue. In fact, the study is running smoothly and without incident, and we posted the statement to this effect on our website. We are pursuing corrective action with The Sunday Express, as a result, the newspaper has removed the article from its website. And we are currently reviewing additional remedies.

So to conclude my prepared remarks, from our perspective, I would say that the future looks bright, as you can see from our forward-looking expectations and guidance. There is a lot of opportunity in the marketplace, the proposal pipeline is very healthy and it appears that biopharma R&D outsourcing penetration rates maybe accelerating at a faster pace.

So, at this point, I would like to turn the call over to Jim, who will provide more detail on our financial results.

James Winschel

Thanks Joe and good morning everyone. Before I get into a more detailed financial discussion regarding the company’s business segments, I thought it might be helpful to discuss a couple of important items. First, during the third quarter fiscal year 2008, we had a change in assumptions with regard to our restructuring reserves, leading to the reporting of a net restructuring benefit of $860,000 mainly related to facilities. This equated to an EPS benefit of $0.01. And second, as a reminder, we benefited from $1.1 million of one-time net cash adjustments in the year ago quarter. Excluding those tax benefits to prior year, tax rate would have been 39.1% and EPS for the third quarter of fiscal year 2007 would have been $0.02 lower or $0.17 a share.

Now, a few comments about our three reporting segments starting with CRS. During the third quarter, CRS service revenue totaled $191.6 million, up 33.5% compared with the prior year quarter driven by strength in all phases of the business. On a sequential basis, CRS service revenue increased 4.9%. Excluding the Apex acquisition, which contributed $5.5 million and the $12.1 million positive impact of foreign exchange movements, CRS same-store constant currency service revenue growth was a very strong 21.7% on a year-over-year basis.

During the quarter, sequential service revenue growth in the clinical pharmacology portion of the CRS business continued to be adversely impacted by cancellations and delays. Optimizing capacity utilization in ClinPharm clearly represents an opportunity for us going forward. CRS gross margin was 33.9% during the third quarter, down 1.1 points from 35% one year ago. On a sequential basis gross margin was up 1 point.

Year-over-year decline occurred in the Phase II through IV portion of the business as a result of one, increased hiring and training cost in light of the ongoing significant increases in backlog and service revenue. Two, Apex related integration costs. And three, a less favorable revenue mix. Going forward, we expect to see a nice rebound in CRS gross margin driven in part by continued improvements in the Clinical Pharmacology business unit.

Quarterly service revenue of $33.5 million in PCMS increased by 12.7% year-over-year and by approximately 2.9% on a sequential basis. Both PAREXEL Consulting and Medical Communications contributed to the year-over-year revenue growth with a slight sequential drag due to the sale of the Barnett Educational Services business unit midway through the quarter. On a same-store basis, PCMS service revenue was up 13.8% on a year-over-year basis and 5.4% sequentially.

During the quarter, PCMS gross margin at 33.8% increased by a very healthy 3.8 points compared with last year with nice improvements in both business units. The sequential decline of four-tens of a point was driven by MedCom partly offset by a strong performance in PAREXEL Consulting.

Quarterly service revenue of $20.3 million in Perceptive Informatics was up only 12.4% year-over-year, and was down 13.4% on a sequential basis for the reasons Joe just described. We expect to see a very substantial improvement during the fourth quarter.

Perceptive’s gross margin in the quarter was 38.2%, down 5.1 points from the prior year quarter, and down 6.5 points on a sequential basis. These declines were caused largely by the impact of contract signature delays and some current quarter operating issues.

On an overall company basis, gross margin for the quarter was 34.3% compared with 35% one year ago, down seven-tens of a point. On a sequential basis, gross margin was up one-tens of a point for the reasons I have already covered. We expect gross margin to increase nicely in the fourth quarter driven by improvements in all business segments.

SG&A spending in the third quarter stood at 21.5% of revenue, down from 22.6% in the March quarter one year ago, and equal to the December quarter. In dollar terms, SG&A spending was up 22% compared with the March quarter one year ago versus service revenue growth of 28.3%. The primary drivers of the increase included increased facilities and information systems costs, the impact of the Apex acquisition, foreign exchange movements, and other costs incurred to support strong revenue growth. During the fourth quarter, we expect SG&A as a percentage of revenue to be up slightly from Q3 levels.

For the quarter, depreciation expense equated to 3.3% of service revenue, down from 3.5% during the third quarter of last year, and 3.5% in Q2. This resulted from strong revenue growth and a small nominal decline in depreciation expense. As a percent of service revenue, we would expect a small decline in depreciation expense during the next quarter.

Amortization expense was 0.5% of service revenue in the quarter versus eight-tens of 1% one year ago and six-tens of 1% in Q2. This was the result of strong revenue growth and some purchase accounting adjustments to reflect finalization of Apex related amortization decisions.

Excluding the current quarter’s favorable restructuring reserve adjustment, operating margin in the third quarter was 8.9% of service revenue, up eight-tens of a percentage point from 8.1% in the March quarter one year ago. We expect operating margin to be in the 9.5 to 10% range during the fourth quarter. On a full year basis, we expect operating margin to be in the range of 8.8 to 9%.

Other income was $352,000 in the quarter, driven by foreign exchange gains and net gains from the dispositions of Barnett Educational Services and the Poitiers bioanalytical laboratory, partially offset by net interest expense. We are currently forecasting other income to be a loss of about $500,000 in the fourth quarter.

During the March quarter, we had an effective tax rate of 37.2% compared with 32.2% one year ago. The prior year period was impacted by several one-time tax adjustments, including the reversal of a tax reserve in the Netherlands following resolution of several tax audit issues. We are now projecting the full fiscal year tax rate to be 34.5%, down six-tens of a point from our projections back in January. But these numbers include the various one-time net tax benefits that we recorded during the first quarter, including the German statutory tax rate reduction. The projected full year rate excluding those one-time benefits is now approximately 39%, down from our expectations of about 40% back in January. At this time, we are projecting a fourth quarter tax rate of approximately 39%.

Net income of $14.2 million was up 31.4% compared with 10.8 million in fiscal year 2007. Excluding the impact of the restructuring benefit in the third quarter of fiscal 2008 and the one-time net tax adjustment in the third quarter of fiscal year 2007, which was $1.1 million, net income in the current quarter was 13.6 million, an increase of 40.6% year-over-year from $9.7 million in fiscal year 2007.

Moving onto the balance sheet, net receivables stood at $214.6 million at the end of March. Taking into account gross revenue of $333.2 million for the quarter, DSOs stood at 59 days, an increase of 16 days from the March quarter one year ago and an increase of seven days from the December quarter. We had a substantial increase in unbilled receivables related to timing of contract milestones without a corresponding increase in deferred revenue.

Given the fact that many of our contracts now have 45-day payment terms, we are increasing our target range for DSO to 45 to 50 days, up from 40 to 45 days. The good news is that our billed receivables are very much under control with very few collection problems.

During the quarter, we generated cash flow from operations of $15.7 million and other cash inflows included $4.1 million in proceeds from the issuance of common stock in conjunction with the company’s employee stock option plans, $3.1 million from foreign exchange rate movements, and $900,000 from disposal of assets.

Cash outflows included $18.8 million for capital expenditures, mostly, related to hardware and software purchases and leasehold improvements; $12.2 million related to pay down of the company’s credit line and acquisition related expenditures of $2.4 million. Netting the inflows and outflows resulted in an overall decrease in cash of $9.6 million from the end of December, leaving us with a balance of $53.3 million.

During fiscal year 2008, we now expect capital expenditures to total approximately 50 to $55 million.

Given the strong new business and revenue growth, we have been experiencing, we had to accelerate some of our CapEx spending plans to ensure that we have the infrastructure and resources in place to meet the needs of our customers.

Finally, with regard to the earnings guidance, which is contained within our press release, we have increased the low and high ends of both revenue and EPS guidance, taking into account actual third quarter results for revenue and EPS, a small decrease in the tax rate projections, and net new business wins, recent exchange rate movements and the current strong outsourcing market environment.

Operator, at this point, we are ready to begin the question-and-answer period.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Dave Windley from Jefferies and Company. Please go ahead.

Dave Windley - Jefferies and Company

Hi. Good morning. Thanks for taking the questions. I was hoping you could elaborate on the improvements in the U.S. business. Would it be possible to give us a sense of perhaps where margin is, or if not that what kind of incremental margin you are seeing as the U.S. business grows? Any color around that would be much appreciated.

Josef von Rickenbach

Yes. Good morning, David.

Dave Windley - Jefferies and Company

Hi, Joe.

Josef von Rickenbach

So, I am obviously happy that we have been able to improve our margins quite significantly and more or less in line with our expectations in the U.S. overall. And if I had to pick sort of the most important driver, it probably would be growth. In other words, we had very good first backlog bookings, new business bookings, two years ago, three years ago. And eventually, this has now resulted in substantial revenue increases in the U.S. At the same time, we have also improved our gross margin in the U.S., especially, in our core business. And so, I think we’re a good way there. And there is still some upside to be had overall going forward, but we’re clearly solidly in the black at this point.

Dave Windley - Jefferies and Company

Uh-huh. As you think now -- I mean, you are after some long, hard work, you are now kind of threatening that 10% margin threshold. And I guess now that we’re getting there, the sell-side analyst question to you has to be, where are we going now, right? Where is the next plateau that we’re going to set as a goal to achieve? Is somewhere in the low- to mid-teens where the rest of the peer group kind of resides, is that possible?

Josef von Rickenbach

Well, let’s first get to double digit (inaudible).

Dave Windley - Jefferies and Company

Right, right. You know, what have you done for me lately? Come on, Joe.

Josef von Rickenbach

First things first; right now I do look at it as a very important and nice milestone along the journey and not an end point for sure.

Dave Windley - Jefferies and Company

Right. And I wanted to move on then to the -- in your new business, are you seeing -- you have had for the last couple, maybe even three quarters, your top clients have been around that 9% level. Is that rotating or is that the same client through these quarters?

Josef von Rickenbach

I would say certainly for the last couple of quarters it was the same. But overall, it tends to rotate.

Dave Windley - Jefferies and Company

Okay.

Josef von Rickenbach

It would be a coincidence if it were the same, and -- which I think was actually the case in the last two quarters. But generally, we do see some turnover amongst the top clients.

Dave Windley - Jefferies and Company

Okay. On the bioanalytical lab divestiture, given your presence in Phase I in various locations, I am interested in how that bioanalytical lab did not benefit from the volume of specimen that you would have been churning out of your clinical pharmacology units. And perhaps you can explain why that synergy wasn’t there and it made sense to get rid of it.

Josef von Rickenbach

Okay. Well, as I said, first of all, overall, we do look at our portfolio from time to time, and I just want to make sure -- it has taken actually some time to find a good home for this business and we’re very happy with the outcome, by the way. And we are going through these reviews on an ongoing basis and if a business doesn’t fit, we are willing and ready to find a better solution.

Now specifically to your question, it was actually closely tied to our Phase I clinical pharmacology business, but its location and its specific specialty -- it was a highly specialized lab. In the end, it was not -- it didn’t warrant really for us to keep it. It required a lot of attention. As you know, we have made big increases in clinical pharmacology, sort of in the core business. And one of the things we did not want is to divert management bandwidth, basically, to this business, when in fact we have really great opportunities sort of in the core activity.

And finally, I should say the company that now owns the business is a close partner to us, and as you know and as I just said, we increased our percentage ownership in that business quite substantially. So -- and they have a very good use and a very good fit for the business and so eventually who knows where it plays out.

Dave Windley - Jefferies and Company

Okay. Last question and I’ll jump out here. You mentioned -- actually both of you mentioned, accelerating some CapEx spend and that you’re bursting at the seams in some of your facilities. As we look out maybe beyond perhaps the calendar, beyond the fiscal year and into the calendar or even next fiscal year, do we need to anticipate that because of some expanded facilities and the costs associated with that, that when those start to hit the P&L that we’ll see maybe some flattening of the margin progression? Or how do we need to anticipate that as you are investing in expanded infrastructure? That’s my last question. Thanks.

James Winschel

David, that will certainly put a little bit of pressure on us. But as I have said many times before, we are going to continue to target expansion of operating margins in the 100- to 120-basis-point range as we go forward. And so we are going to take all of this stuff into account as we put together our, for example, our fiscal year 2009 budget and beyond.

Dave Windley - Jefferies and Company

Okay. Thank you.

Operator

Our next question comes from line of Charles Rhyee from Oppenheimer & Company. Please go ahead.

Charles Rhyee - Oppenheimer & Company

Yeah. Hi. Thanks for taking the question. I just had a quick question on the CRS business. You talked about the year-over-year decline in the gross margin there, and you cited a couple factors. I just want to drill down little bit in there; maybe you can give us a sense on the breakdown between the increased hiring and training versus Apex. And then, maybe a little more into what you call the unfavorable business mix.

James Winschel

Right. Certainly, as business has been continuing to grow and our backlog has continued to increase, we have seen some pressure on hiring costs. And I think in this particular quarter, the sequential revenue growth was not quite as strong as I would have expected, and so we suffered a little bit from that. But as you can see from our projections for the next quarter, we see some further improvements in service revenue.

And I think we will be in a much better position, for example, during the fourth quarter to absorb those hiring and training costs. And I think in any one particular quarter we can have a mix of revenue that’s either a little better or a little worse than the norm. And I think in this particular quarter, the mix was a little bit less favorable for us. But once again, as we project forward to the fourth quarter, for sure we see a better revenue mix.

Charles Rhyee - Oppenheimer & Company

Great. And just a follow-up real quickly. Can you give us a sense on the environment for pricing? And is pricing of the business having any impact on margins at all?

Josef von Rickenbach

The pricing in the business I would say is normal. If anything, we pass it to market a little bit from a pricing perspective, and I have to say, it responded. So there is -- we had an interesting feedback in terms of market elasticity. But I would certainly say that it’s not worse, for sure, than in prior periods.

Charles Rhyee - Oppenheimer & Company

Okay. Great. Thanks for the comments.

Operator

Our next question comes from the line of Todd Van Fleet from First Analysis. Please go ahead.

Todd Van Fleet - First Analysis

Good morning, guys. Nice quarter. I want to ask first on the ClinPharm business, you had said that some cancellations and delays kind of continue to be on revenue, or at least a drag on revenue growth, I guess, for the CRS business. Is there something kind of anomalous happening in that business at this point? Is it higher than ordinary or what you would expect to see in terms of cancellation, delay activities? Just wondering if you can get a little bit more granular there.

Josef von Rickenbach

Yes. So, hi, Todd. Yes, we did mention that. And perhaps the sort of the big event in ClinPharm is that we have added a lot of capacity. And these additions in capacity can have the potential of some short-term disruption. We mentioned in the last quarter Berlin. That is now okay, but we have brought on more capacity actually in this quarter as well. And this capacity comes on basically in a lumpy way.

And so in the short term, it is hard to balance capacity utilization and revenue in an ideal way. And so, I’d say this quarter, we probably had -- we could have put more revenue through the system than we did. And so on a going forward basis, I expect that revenue will come up and therefore also profitability and utilization will come up as well. And I don’t -- I view actually our business franchise to be very strong.

Todd Van Fleet - First Analysis

So a couple different points in there, I guess, Joe that you draw. One is the utilization, as you bring on additional capacity, which of course is the margin issue. But you had said specifically I think in your comments that cancellation and delays. So, were the cancellations and delays a result of some kind of scheduling problems of bringing on some of the new capacities so that maybe the business that was one was -- you tried to bring it on stream maybe quicker than what you could actually accomplish?

Or I’m just trying to get my arms around why the cancellation and delay activity is something that you decide to kind of bring to our attention. Is it because it’s an unusually large amount of cancellation and delay activity or is there something else going on?

Josef von Rickenbach

Maybe it was a tad higher than normal. But I -- and of course also these cancellations and delays were particularly sensitive this quarter just because of the additional capacity that we had available.

Todd Van Fleet - First Analysis

Okay.

Josef von Rickenbach

But I don’t believe that we could say there is a trend view here that the cancellations are going up or anything like that. Usually, by the way, the Phase I business tends to be a little more volatile anyway. In other words, it’s not at all unusual to have short-term cancellations or even more importantly or more regularly I would say delays because you want to be really careful and really ready to go into these trials. And even the slightest concern you need to delay the study. And so it happens not infrequently and when you have this kind of capacity increase as we have had now over the last few quarters, it then shows up right away basically.

Todd Van Fleet - First Analysis

If I could ask one then on Perceptive, I understand what you’re saying regarding signature delays and that sort of thing. You expect the revenue to come back in Q4. I was wondering, are there any initiatives or is it a strategy of the company to move the revenue stream for that business line away from kind of the lumpiness in the upfront payments, the licensing payments to more kind of pay by the drink or a SAS type of model. I mean we see SAS proliferation everywhere in all different industries.

And it probably makes sense to achieve some of that here in this space as well. So, is that an initiative, first off? And then the second part of that is, would we expect there to be some kind of transition kind of softening on the revenue line related to that sort of transitioning? Thanks.

Josef von Rickenbach

Actually interestingly this quarter, this particular phenomenon which you are describing had almost no impact. Meaning, it was actually on the service side of the business, where we’ve had the challenges. And already now I would say the majority of our business there is more pay-as-you-go kind of a model versus family licenses. Actually there -- significant majority if it came to that. And, we’re also -- the business is also transitioning. It’s getting bigger.

And we’re expanding it from a global perspective. Certain activities are being moved into other geographies and so on, and this also requires us to look at some of the processes that we have in a more comprehensive way that we would otherwise -- than otherwise would be the case. And so hopefully, we will be through this soon and it will be in a more robust environment we get some of this lumpiness out.

James Winschel

And maybe to expand a little bit on this particular subject, we oftentimes will start work for clients before we have signed contract and some of you may feel that’s sort of risky approach, but in fact we have almost very rarely ever gotten burned where we started work and did not get paid or have the client come through for us.

And so the problem is under the current accounting rules unless we have that signed contract, we can’t recognize the revenue. And obviously, we have focused a lot of attention on getting these signatures in this particular quarter. In the Perceptive Informatics business, we weren’t as successful as we would have like to have been and it had a significant impact because we incurred the cost but could not recognize the revenue.

Todd Van Fleet - First Analysis

Thanks.

Operator

Our next question comes from the line of Eric Coldwell, Robert W. Baird. Please go ahead.

Eric Coldwell - Robert W. Baird

Thanks, and good morning. I am curious on this Perceptive Informatics subject, would it be possible that the company’s approach for ClinPhone disrupted some clients and they then delayed their decision to sign those contracts?

Josef von Rickenbach

Hi, Eric. No, I don’t believe so. There is completely no evidence of that.

Eric Coldwell - Robert W. Baird

Okay. Now next follow on question is, I realize you’re probably not going to be able go into too much detail but you could just give something to work with in terms of next steps on that -- your hopes to acquire that company, what the process is at this point, and are there any similar events or dates that we should be looking for and keeping on our calendars?

Josef von Rickenbach

Eric, as we said in the beginning, during the opening comments, we really can’t -- the regulations are very strict here, and actually there are people on the call who make sure that we follow them. And so, I can’t at this point.

Eric Coldwell - Robert W. Baird

I missed your opening comments, so sorry if I (inaudible) wrong question. We’ve seen a lot of misinformation and false report coming out of the U.K. press for the last two years, starting with the TeGenero study. One paper over there is now suggesting that you are close to settling with the six patients that were impacted by that study a couple of years ago, is there any truth to that allegation? And if so, would the settlement that were reported in that particular paper, would they be covered by insurance, or will this become a one-time item in a future quarterly report?

Josef von Rickenbach

Well, first of all I would say, it’s still an open issue, so I don’t want to go into a lot of detail, but we do believe that the settlement process is on its way, and we also believe that there is not going to be any further financial impact on the company in this context.

Eric Coldwell - Robert W. Baird

So the assumption would be that you are going to be covered by insurance -- by liability insurance?

Josef von Rickenbach

I would actually prefer not to discuss this in detail further.

Eric Coldwell - Robert W. Baird

Okay. Since we’re talking about details, you had a reversal in the quarter. We did not get the tax impact of that reversal if we were to look at this on a GAAP basis and additionally, we now find out on the call that there were disposal gains below the line. And, Jim, can you quantify the tax rate on the reversal, number one? And then, quantify the impact on the P&L of the disposal gains and what the GAAP tax rate would be on that as well?

James Winschel

Well, first of all with respect to the tax rate, I think I would use the same tax rate that we used for the quarters, so the 37.2%. And secondly, the gain on sale was relatively small, and actually there were some severance payments recorded elsewhere in the P&L, but it did not appear on that particular line because of -- under our guidelines from our accountants did not qualify to go on that line. And if you take the amount of the gain and offset it with those severance payments, really the net impact on the P&L was de minimis from that perspective.

Eric Coldwell - Robert W. Baird

De minimis in terms of a few hundred thousand dollars, de minimis in terms of...

James Winschel

No. It would be on a net basis less than $100,000.

Eric Coldwell - Robert W. Baird

Perfect. Thanks very much for that.

Operator

Our next question comes from the line of Randall Stanicky from Goldman Sachs. Please go ahead.

Randall Stanicky - Goldman Sachs

Great. Thanks very much for the questions, Joe, just to back to your earlier comment that your turnover rates are going down, can you maybe just helps us through, if you hire -- if you added 360 employees in the quarter, how many did you actually need to hire? In other words, what is your turnover rate now running at, and how does that compare do you think to the overall industry?

Josef von Rickenbach

Yeah. One of the things that we are obviously paying a lot of attention to is recruitment, and I always say the best way to recruit people is to retain the ones you have. And so, we have been actually quite successful in reducing our turnover rate over time for several quarters now, meaning actually for several years. And so, specifically, I can’t tell you what the rate is, but we are heading to a spot where I feel actually comfortable with our turnover and don’t believe it’s kind of a driving urgent problem so to speak. And I haven’t said that this is for the company overall. In certain areas, there is very high competition for talent, especially in certain functions and geographies. And obviously the situation there would be different, and so I would say that.

Randall Stanicky - Goldman Sachs

Okay. In terms of, as you look at your current backlog, and I don’t know what metrics you look at, but certainly I mean if we look at backlog per employee, it is continuing to rise. A lot of future work on your guys’ plates as backlog growth has been very robust. As you think about for the full year, how do you think about your needs for hiring, is there a certain target? Are we looking at hiring at a similar rate to revenue, which is I think roughly 23% based on your guidance for the calendar year?

Josef von Rickenbach

We were obviously looking at this number very carefully. And as you correctly pointed out, our backlog growth is outpacing basically our revenue growth. And so, the only way this can work is if you have an erosion in your backlog burn off. and Marginally this has happened again this quarter. And at this point, I mean eventually this has to level out, but I have no evidence that it will. And so, we are expecting that this will continue to some extent -- mildly continue to level down. Which then gets us to the employees, and I expect that we would more or less keep up the current rate of recruitment and hiring.

Randall Stanicky - Goldman Sachs

In terms of roughly 360 plus or minus a quarter or...

Josef von Rickenbach

No. Maybe I would say 2 to 400 in that range of net ads. So this would be one quarter out now, but it can fluctuate of course.

Randall Stanicky - Goldman Sachs

Right. Of course. And then -- and those are net ads, right?

Josef von Rickenbach

Correct.

Randall Stanicky - Goldman Sachs

Okay. And then on -- we talked about backlog. As you think about backlog coverage, it continues to rise a little bit. Is there a change in the duration of the business? I think you mentioned last quarter that you hadn’t been seeing that, but it that the case, or are you being a little bit conservative with the top line forecast at this point?

Josef von Rickenbach

Well, No -- I don’t believe there was a change in the backlog dynamics overall this quarter. So I don’t think it has extended much and also -- it is also now relatively big and it takes a lot to kind of move the needle on that kind of a backlog. And probably, it would be hard to do in one quarter, almost no matter what happens.

Randall Stanicky - Goldman Sachs

Okay. Just my last question, did you -- I may have missed it, did you talk about the FX impact on your orders this quarter?

Josef von Rickenbach

Yes, we did, and I believe it was about $33 million.

Randall Stanicky - Goldman Sachs

On the new orders?

Josef von Rickenbach

No, this is on the backlog overall.

Randall Stanicky - Goldman Sachs

Was there an FX impact on your net orders this quarter?

Josef von Rickenbach

No.

Randall Stanicky - Goldman Sachs

Okay. Great. Thank you.

Josef von Rickenbach

You’re welcome.

Operator

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

John Kreger - William Blair

Hi. Thanks. Joe, could you give us a sense about your mix of revenue or backlog by client type and large pharma versus large biotech versus small biotech?

Josef von Rickenbach

Yes. Hi, John. Yes, I would be happy to do that. This past quarter, we had generally a good new business quarter. We have always strived to have a good mix between these various segments. And actually, overall, in the quarter for the new business that we secured, it came more from the smaller companies than from the large companies. But I would also say that the proposal activity, which has also been very good, was more biased towards the large companies.

John Kreger - William Blair

Okay. So just -- so new business was tilted more towards smaller, but proposal flow more towards larger?

Josef von Rickenbach

Correct.

John Kreger - William Blair

Could you remind us what your revenue mix is at this point between those categories?

Josef von Rickenbach

It varies actually quite a bit from business to business. For instance in the PCMS or especially in the PC and the consulting area, it’s predominantly smaller companies, although that’s starting to change a little bit as well. In CRS, it’s probably fairly even at this point. So for the company overall, fairly even, 50:50.

John Kreger - William Blair

Okay. And then, another question on Phase I, can you remind us, Joe -- I know you have said you’ve increased capacity. Can you give us a sense about what your capacity is at this point in terms of head count and number of facilities and perhaps what that accounts for as a percent of CRS revenue?

Josef von Rickenbach

Yeah. So we have -- more or less have concluded, I would say, a relatively long-term strategy. When I say concluded, we believe now that we have the scale that we wanted to achieve from a bed count perspective. Depending exactly on how you count with these beds. We’re at around 550 give or take, in some ways of counting, you get closer to 600 and in some ways of accounting you get a little below to 550.

Our big locations for our clinical pharmacology business would be in Berlin, in London, in Bloemfontein and George, South Africa; in Baltimore, here in the U.S., and in Los Angeles around TCT. And we don’t particularly break this out as a percentage or as part of the CRS business, but it’s a sizable business at this point, obviously, growing as we have added these beds. Generally speaking, also the demand is pretty good. But as I said, over the last quarters actually and also again this quarter, our capacity rivals have outpaced the revenue increases.

John Kreger - William Blair

Great. Thanks. And then, just one last question for Jim. Now that the U.S. is nicely profitable and most likely consistently profitable, what’s your thinking long-term on where your effective rate can go?

James Winschel

Well, there have been a lot of changes in the dynamics of the tax rate and the changes that we have made to transfer pricing and FIN 48 and all those kinds of things. But we believe that we can get the longer-term tax rate down to the mid to low 30s.

John Kreger - William Blair

Great. Thanks very much.

Operator

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

Jake - Raymond James

Thank you. This is actually [Jake] for Sandy. Just a few quick questions for you. Based on your calendar year 2008 guidance, it seems to us that your first quarter ‘09 and second quarter ‘09 sequential growth numbers for revenue are little modest. Just wondering if you could speak about, is there something holding kind of the backlog recognition back there given that your backlog and bookings have grown so rapidly recently. I know you just referred to kind of the natural erosion within the industry of the backlog burn rate, just wondering if you could address that for us.

James Winschel

Right. Well, certainly the numbers that we have provided to everyone are based on the current forecast that we have for revenue during the second half of the year. I think one thing you have to keep in mind is that exchange rates obviously in the current periods are having a bigger impact and they will in the future periods, unless I guess the dollar continues to erode. And the other fact is that you start to see, for example, you don’t have a same-store differential there anymore.

So I don’t think that the growth rate is unreasonably conservative right now. But the truth is we are right in the middle of the fiscal year 2009 budgeting process and some time in June, we will be able to give a little more specificity about our revenue projections for the next fiscal year.

Jake - Raymond James

Great. And just one more question for you. I know you spoke about your expectations for sequential increase in your segment gross margins for the fourth quarter 2008. Just wondering if you could add a little color to your expectations about segment gross margins for calendar year ‘08 or the first half of fiscal 2009?

James Winschel

Well, we will have the typical, I believe, decline in gross margins from the fourth quarter to the first quarter that we generally see due to more or less due to the seasonality, and then a rebound in the following period, the same -- the December quarter.

Jake - Raymond James

Thank you.

Operator

Our next question comes from the line of Glenn Garmont with Broadpoint Capital. Please go ahead.

Glenn Garmont - Broadpoint Capital

Thanks. Just a couple of quick follow-up questions on the Perceptive business. Joe, you talked about maybe some operational process improvement that’s likely to occur in that segment, and I know you touched upon it earlier, but I was wondering if you could maybe give us a bit more detail about what you are referring to there. And then sort of related, what’s the attachment rate today between Perceptive and the CRS business?

Josef von Rickenbach

Actually I take the second part of the question first. One of the initiatives that we have actually on the way in the company, broadly speaking, as I pointed out in my comments is to upgrade our systems infrastructure and in several instances, we are putting in place our own systems basically in the core business, meaning the Perceptive Systems specifically variations of impact.

And in terms of process improvements, we have a significant activity in terms of development and I would say some of that could potentially occur outside of our current hubs. So I am thinking of China or India or other parts of the world. And so, as we are optimizing our available footprint in terms of where our development occurs, we obviously have to re-optimize our processes as well. And so you have to kind of look at in that context.

Glenn Garmont - Broadpoint Capital

Okay. And then, the current sort of attachment rate?

Josef von Rickenbach

By attachment rate you mean what exactly?

Glenn Garmont - Broadpoint Capital

Well, the percent of the trial activity that you are involved in where the client is also a customer of the Perceptive business.

Josef von Rickenbach

I see. Okay. So that’s very high. In other words, most of our clinical research programs have one or several or many components of technology associated with them.

Glenn Garmont - Broadpoint Capital

Okay. Thank you.

Josef von Rickenbach

You are welcome.

Operator

Our next question comes from the line of Douglas Tsao from Lehman Brothers. Please go ahead.

Douglas Tsao - Lehman Brothers

Hi. Good morning. Joe, just for a clarification because you indicated on Randall’s question that FX changes to the backlog were not included in the gross orders this quarter because you have in previous periods. I just want to get a confirmation on that.

James Winschel

No, they were included. The way I understood the question was that specifically on just the new business won versus the backlog overall. Obviously, yes, they were added eventually as new business just from sort of an accounting point of view.

Douglas Tsao - Lehman Brothers

So the reported 374 number in terms of what was actually won this quarter was actually some 340 number, correct?

James Winschel

Correct. So basically if you net everything out, it would be a net book to burn of 1.4 basically.

Douglas Tsao - Lehman Brothers

Okay.

Josef von Rickenbach

If you take the FX out.

Douglas Tsao - Lehman Brothers

And then, could you give us a sense of the revenues associated with the divested businesses just so we can have -- just sort for modeling purposes going forward?

James Winschel

Yeah. I think per quarter we are taking in the range of 2.5 to 3 million.

Douglas Tsao - Lehman Brothers

Okay. And that will come out of -- and that’s all out of the PCMS business, correct?

James Winschel

No, a piece out of the PCMS business would be Barnett Educational Services, and a piece out of the CRS business, which would be the bioanalytical lab.

Douglas Tsao - Lehman Brothers

Okay. And then -- and so what would the break down between those two be?

Josef von Rickenbach

I would assume 50-50.

Douglas Tsao - Lehman Brothers

50-50. Okay. And then, in terms of the Phase I business compared to your peers, you have a much more global platform who are predominantly focused in the United -- North America, United States/Canada, as well as Western Europe. And I was just wondering if you could provide some more color on what you feel or what the benefit is of being in both those, North America and Europe, as well as your presence in South Africa and now in India as well?

Josef von Rickenbach

The Phase I business -- first of all I’ll highlight that we are actually very much “in the Phase I business,” which is to say compounds that go from preclinical into clinical versus more generic sort of testing that many of our competitors are performing, bioequivalence, bioavailability kinds of tests, of which we do very few. So generally speaking one could say that the regulations are more important in our business.

So for quite a while the regulations in Europe were actually distinctly different from the U.S. So that was an important reason that they have more or less aligned now. But also many of our clients have specific needs and requirements, and each one of our locations have specific areas of expertise for certain studies or for certain kind of therapeutic areas or for certain type and style of studies. And so to have this kind of availability also in both hemispheres is really advantageous.

Douglas Tsao - Lehman Brothers

And in terms of the client mix, is it primarily still Western companies trying to do Phase I studies in India and South Africa or are you doing sort of local domestic business as well?

Josef von Rickenbach

No. It would be primarily Western companies that do work there. A little bit in India -- I’d say in India it’s still, to a significant degree, also domestic companies. Remember they have a regulatory offset still or they just recently were thinking about changing it, so meaning a phase offset. So the majority of the work that probably actually would be from domestic companies.

In South Africa, this has actually changed a lot. We have added a lot of expertise there and we have a very good franchise there. And four, five years ago, a significant portion of our business would have been biodynamics kind of work which I described before. Now this has completely shifted and it’s virtually all the early stage studies, first-in-man dose ranging studies, proof-of-concept kinds of studies, 2a kinds of studies.

Douglas Tsao - Lehman Brothers

Okay. And then finally on customer concentration, you noted that your largest customer upticked from 7 to 9%. Could you provide sort of within that one customer some details around the project concentration? I mean did it increase because you just got some more business, in terms of numbers of programs that you’re working on or did you just get one or two very significant projects from that customer which led to them taking up more of your overall revenue base?

Josef von Rickenbach

It’s actually interesting. The mix there is very much across the company. So ultimately the reason why this particular customer is our largest customer is because they buy services from us literally across the board. And it’s not at all kind of a few big programs. And actually to that point just -- you haven’t asked the question but I’ll give the answer anyway.

It was a peculiar quarter; in the sense that the predominance of our new business actually were rather smaller programs and smaller projects versus let’s say a few large ones.

Douglas Tsao - Lehman Brothers

Okay. Thank you very much for the color.

Josef von Rickenbach

Sure.

Operator

Our next question comes from the line of Topher Orr from Thomas Weisel Partners. Please go ahead.

Topher Orr - Thomas Weisel Partners

Hi guys. Can you give us an update on your acquisition proposal for ClinPhone? Is that still in the works there or kind of what’s going on there?

Josef von Rickenbach

Yeah, you may probably have missed our opening statements and we have already made some comments also during the call. Unfortunately, we can’t comment further on this situation for regulatory reasons in the U.K. The regulations are very strict and the call is being observed so we can’t really comment further on it.

Topher Orr - Thomas Weisel Partners

Got you. Okay. Well, thank you.

Josef von Rickenbach

You’re welcome.

Operator

And we have a follow-up question from Dave Windley from Jefferies & Company. Please go ahead.

Dave Windley - Jefferies and Company

I followed up on a couple of the other questions here. Joe, there was a question about kind of duration of backlog, and you mentioned that you didn’t think it had changed much. Do you guys have a number that you can put on that, like number of months of average backlog? Just wondering if you can put a number on that?

Josef von Rickenbach

David, the number I watch very closely is the percentage for the trailing 12 months to date, and project that going forward. As you know, and as we have done in the past, you can -- there are two or three metrics that you can sort of forensically look at in our backlog. But then -- to me that seems one that speaks basically. And on that basis we have worked off about 63% of our backlog 12 months ago in this quarter. And this has eroded about 1% or 2 over -- per quarter over actually a fairly long time now. And used to be more than 100%, which is to say we turned our backlog more than once a year, and obviously this has now come down substantially.

And having said this, at the same time eventually just by math, it has to start to even out. And at that point also just by implication our backlog growth has to start to become -- has to start to mirror the revenue growth much more closely. I’m not calling that point anymore. I did several times in the past, and therefore going back to Jim’s discussion before, we have to model and expect it will continue to go down roughly at the same rate going forward.

Dave Windley - Jefferies and Company

Right. I guess once it gets to 1%, it can level out, right? The question along those lines that I am curious about -- you mentioned in this quarter to Doug’s question that your business wins were actually of the smaller variety and from smaller customers in this particular quarter. But PAREXEL certainly had great success in new business, and topline growth has vaulted the overall size of the company. And we are hearing from other players that the number of, I guess what you call mega-contracts or whatever that are floating around out there, are -- certainly that number is growing.

And I think it’s probably actually getting to be a surprising number north of 50 or even north of 100 million. And I guess I am curious about whether or not you are seeing those. Are you being invited to pitch on those and would my expectation be correct that if you were to win those into your backlog, that that would again have a diminishing effect on burn rate?

Josef von Rickenbach

Yes, those contracts are out there. Yes, we are bidding on them. Yes, we have been very successful in winning those in the past. We have actually many of those in the backlog right now. I regard this quarter -- actually it’s somewhat as an anomaly in some ways. And going forward, as I indicated to John before, we have had very good activity from large customer base and from the smaller ones as well, but especially from the large ones. And chances are that we are going to also again continue to win some of these larger projects. I don’t believe it will actually have a big impact on backlog, as I said, a) because we already have a number of those in there, and b) because it’s relatively big. As I said, the big number kind of kicks in and it’s hard to move the averages after the $2 billion backlog.

Dave Windley - Jefferies and Company

Yes, okay. And just to confirm, just to make sure, in terms of this diminishing burn rate, this is a function of structure of contract and protocol and complexity of the studies and not -- in other words, it’s more of a client issue than it is a staffing issue. Is that correct?

Josef von Rickenbach

Yes, that’s a 100% correct. No, it has nothing to do with staffing or resources. It’s very much, I think, also a reflection of the dynamics of outsourcing. I think clients are more comfortable outsourcing more complex, bigger, longer kinds of pieces of work and -- no. However, at the same time that focus on execution and meeting deadlines and milestones is higher than ever. And it is not at all that the slowdown is due to the fact that we are not delivering or that we are not meeting those milestones. I would have to say that has completely no impact actually, or to say it differently I think we are meeting those deadlines and those milestones, I would have to say, more than ever.

Dave Windley - Jefferies and Company

Okay. So we are not at a point where staffing -- the rate of hiring and training is the rate-limiting step to revenue recognition?

Josef von Rickenbach

Yes, you are correct, and resources are tight, but are not at all a factor inhibiting the execution of the work that we have on hand from our clients.

Dave Windley - Jefferies and Company

Okay. I want to move over to margin real quick. As we are focusing on margin improvement and we have talked for a long time about the ex-U.S. versus the U.S. comparison and bringing the U.S. up, has -- kind of cycling back to, U.S. used to be great and the ex-U.S. was low and it kind of reversed. As you have improved the U.S., has the ex-U.S. margin remained constant? Or has it remained up above the double-digit level while the lower profitability part of the business has come up?

James Winschel

Dave, this is Jim Winschel again. Yes, the operating margin or the ex-U.S. business is still above the 10% mark. I think in this particular quarter in a couple of places we did see a sequential decline which did eat up some of the improvement in the U.S. business. But we think this is just a temporary situation, and as you could tell from our expectations for operating margin for the next quarter, we’re expecting a pretty nice sequential improvement there.

Dave Windley - Jefferies and Company

Right. And as we -- looking out just a little bit longer, thinking about kind of the cycle of improvement, two or three years ago, Joe, you addressed sales force in the CRS business and bookings began to improve there. And then I think the next target was consulting and that began to improve. And then MedCom and sounds like that’s beginning to improve. I guess -- I am interested in what is the area of the business that has the greatest room for improvement? What should we be focused on? What should we be thinking about and listening for in terms of traction, new business improvement, et cetera, in that part of the business that has the greatest leverage potential? Is it still MedCom?

Josef von Rickenbach

Well, MedCom clearly -- actually in my comments I gave three specific areas. MedCom is clearly one, although as I said, I feel that we have now made the changes and the ship is heading in the right direction, and hopefully we will get some tailwind there as well, and so that that business can really move forward. So with what we already know, I fully expect that we will continue to see nice improvements quarter by quarter now for several quarters to come in the MedCom area.

In clinical pharmacology, I expect also improvements. As I pointed out, we have now made significant investments. We have put capacity in place there and I think we’re in a -- basically in a leadership position for the kinds of work that we do. And the markets are good and the demand is there. And I also believe that our franchise is strong. So I expect really good, solid improvements there going forward.

And finally, and also importantly, Perceptive Informatics. We have had several discussions now during this phone call on Perceptive Informatics, and I believe once those -- once we kind of have moved through this change that I described before, there is no reason why Perceptive could not have very good margins, as a matter fact, because intrinsically the business is very profitable.

Dave Windley - Jefferies and Company

Thanks for enduring my questions. Good luck.

Josef von Rickenbach

Sure. So maybe at this point we take one more question.

Operator

Our final question will come from the line Todd Van Fleet from First Analysis. Please go ahead.

Todd Van Fleet - First Analysis

I see how we are running long here, guys, I will just take it offline; thanks.

Josef von Rickenbach

Okay, well, no problem. I mean, we are happy to answer your question, Todd, if you want to.

Todd Van Fleet - First Analysis

Well, it is more kind of higher level question, I think, regarding the nature of the relationship that you guys have with some of your best customers, and thinking about how that has evolved maybe over the past 12 months and how you expect it to evolve over the next maybe 12 to 24 months. I am wondering if in the relationship, historically I think the market’s perception and perhaps it been true even within the industry, I mean, it is a very -- has been a very project oriented type of business, one project to the next.

I am just wondering if there is any indications that you guys have gotten from your sponsor customers that it is moving to something more strategic, that it is not just a project discussion here or a project discussion there. That there is something more strategic at play now, given the new kind of state of the world that we seem to find ourselves in.

Josef von Rickenbach

It is an interesting question, Todd. As far as I am concerned we have had strategic discussions with our clients for a long time. It was always going to go to that next level of engagement. And so I take what I am now going to say with a degree of caution. But it does seem at the moment as if a number of our large pharma clients are really seriously reviewing and revisiting in the way they outsource, and in fact the way they do work.

And I have often maintained that we, specifically PAREXEL and actually very specifically PAREXEL because of our global footprint and because of our range of services that we have, are part of the solution. And I think we can really help our clients get to their next level. And so, yes, these discussions are happening, however, they take a long time. So some of these have been ongoing now for, I’d have to say, several quarters. And so I don’t expect that this will kind of start to kick in right away. But I do expect that eventually we will have that more strategic -- those more strategic engagements. I absolutely do. And as a matter of fact I’d say is really big factor we have them today, which is to say, we as an industry and we as a company are of strategic importance to our clients. And in some ways it is just a recognition of that fact.

Todd Van Fleet - First Analysis

And I guess if that’s the case that it is moving to more kind of strategic level of discussions, I guess my sense is you would see probably the sponsors, at least the larger ones anyway who have more business to throw around, we’d see probably fewer people -- or you would see fewer people on the RFP list perhaps, and maybe they’d be a little bit more I guess willing to kind of open up the kimono, if you will, to talk a little bit more about their own businesses and reveal certain costs and so forth, and maybe have more of a detailed discussion regarding what they want to see from -- in terms of the responses on these RFPs. So I don’t know if you could speak to that at all, but perhaps you can kind of suggest that maybe that is the case or it is not the case?

Josef von Rickenbach

It would get to be a little detailed, but clearly when you have these kinds of discussions, a lot of things are on the table that are beyond just regular sort of RFP. And at the end of the day what we are trying to do is to be value added. I think we have a lot to bring to the table in terms of our expertise and in terms of our products and services and in terms of our global understanding. In many cases now actually we are more global than our clients.

And in fact I would say in a number of cases they should be less global, but there is really no need for them to be and are conducting research in a number of places where they do. And we can do this more effectively and more efficiently. And so -- yes, so these are good discussions, very productive and interesting discussions and I think we are participating in them much more in a sort of a partnership fashion than just a provider fashion.

Todd Van Fleet - First Analysis

Thanks.

Josef von Rickenbach

You are welcome. And with that I would like to thank everybody for participating in the call and for your interest in PAREXEL and we look forward to updating you on our next call and I wish you a good day. Bye, bye.

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Source: Parexel International Corp. F3Q08 (Qtr End 03/31/08) Earnings Call Transcript
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