eResearchTechnology, Inc. Q1 2008 Earnings Call Transcript

May. 5.08 | About: eResearch Technology (ERT)

eResearchTechnology, Inc. (ERES)

Q1 2008 Earnings Call Transcript

May 5, 2008 5:00 pm ET

Executives

Mike McKelvey – President and CEO

Rich Baron – EVP and CFO

Analysts

Asher Dewhurst – FBR

Will Hyte [ph] – Leerink Swann & Company

Jeff Schmidt – Sidoti & Company

Operator

Good day ladies and gentlemen and welcome to the first quarter 2008 eResearch Technology conference call. My name is Naquita and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to send the presentation over to your host for today's call, Dr. Michael McKelvey, President and CEO. Please proceed, sir.

Mike McKelvey

Thank you, Naquita. Good afternoon. Thank you for joining us for eResearch Technology's first quarter 2008 earnings results conference call. A press release announcing the first quarter 2008 results was released this afternoon and is available on most financial Web sites. Joining me today is Richard Baron, Executive Vice President and Chief Financial Officer of eRT.

Prior to beginning the call, I would like to read the forward-looking event statement. When used in this conference call, words such as anticipate, could, estimate, expect, intend, may, will, would, believe or other similar expressions are intended to identify forward-looking statements. As such, these forward-looking statements may involve known and unknown risks, uncertainties and assumptions that could cause our actual results to differ materially from those that we present.

The risks and uncertainties applicable to these forward-looking statements include but are not limited to competitive factors, integration of acquisitions, technological developments, market demand, our ability to obtain new contracts and estimate net revenues accurately due to the uncertain regulatory guidance and other factors, variability in size, scope, timing and duration of projects, internal issues in and external issues affecting our sponsor and clients and other risk and factors relating to our business and the businesses of our clients as discussed in our reports on Form 10-K and 10-Q filed with the Securities and Exchange Commission. Our forward-looking statements speak only as of the date made. We do not undertake and expressly disclaim any obligation to update forward-looking statements to reflect events or circumstances after the dates of the statements except as required by law. You are cautioned not to place undue reliance on our forward-looking statements.

I will first give highlights for the quarter and details on new bookings and our ePRO and eClinical business lines. Rick will then discuss the detailed financials for the quarter and provide guidance for the second quarter of 2008 and the full year of 2008. I will then discuss some of the key growth drivers for our company. Finally, we will then open the call up to questions. Unless otherwise indicated, all comparisons represent changes from the first quarter of 2007.

We feel that the first quarter of 2008 was a very solid start to the year. We continued the momentum that we built up throughout 2007 and continued to realize the inherent leverage in our business model. The fundamentals of our overall business environment are favorable and eRT's leadership position in the market in quality, scientific and medical leadership, project execution and technology give our clients a strong reason to continue to utilize our services.

The quarter saw significant improvements in three core areas, financial, operations and new bookings. Financially, we achieved record revenues and record backlog along with very strong margins. Operationally, for the quarter, we achieved record transaction volumes and continued to perform exceptionally well on client projects.

We have significantly increased both the number of ongoing projects and the number of transactions processed. This was reflected in the growth in cardiac safety transactions and services revenue which increased by 80.9% from a year-ago.

The efficiency and capacity of our workflow system, EXPeRT 2, has been a key factor in enabling us to easily absorb this increased volume, as have our scalable processes and the hard work and dedication of our employees. This industry is all about quality and trust and delivery and I am constantly impressed by comments from our clients on our stellar reputation for quality, project execution, medical and scientific expertise and technology excellence.

From a new bookings perspective, we had by far the best quarter ever recorded by eRT with bookings topping $50 million. Importantly, this was not just caused by one or two large contracts, but was rather reflective of a broad increase in new opportunities. I subscribe the success in new bookings to two factors. First, we're seeing a robust environment for spending on clinical trials in general and cardiac safety specifically. And second, eRT's dominant leadership position in the industry and its reputation for quality, best in class customer service and innovative technology presents a compelling case to our existing and new clients alike.

During the quarter, we made some organizational changes to address the growth that we have experienced and the growth that we expect into the future. In January, we integrated the Americas and the international sales forces under one individual, John Blakeley, who previously ran our international sales group. George Tiger will continue to run the America sales group. I might note that the America sales group had a record-breaking quarter in terms of new bookings.

We also combined the sales forces of each of our product lines, Cardiac Safety, eClinical and ePRO into one organization to help promote cross-selling of the three product lines. This has already resulted in increased business opportunities for all three product lines. We put a full time senior level individual in charge of maximizing the opportunities from the Covance exclusive marketing agreement and this has also resulted in some strong increases in new bookings and an enhanced pipeline.

The pricing environment continues to be favorable with average prices of both new bookings and transactions increasing slightly on a sequential basis. Our pipeline of new business opportunities continues to grow fuelled by a continued healthy environment for outsourcing directed to eRT, a continued move toward the centralized collection of cardiac safety data, a continued focus on cardiac safety and an emphasis from our sponsors on high quality and stellar project execution.

Some trends that we have seen are the increased globalization of clinical trials, the increased emphasis on quality, the continued emphasis by regulatory bodies on the importance of cardiac safety, and a substantial increase in demands for ECGs in routine trials services [ph] provided by eRT.

A particularly noteworthy trend over the past couple of quarters is in the increased flow through our CRO partner channel. While the acquisition of Covance's central ECG business certainly changed our relationship from one of a competitor in the cardiac safety space to a strong partner, we have also seen a very significant uptick of other CROs coming directly to eRT and awarding us large program studies. We work with almost all of the large CROs.

We find that our ability to execute on large complex global projects seamlessly with CROs is a huge advantage in that they see a competitive differentiator in using the market leader as part of their team in winning and subsequently managing clinical trials. Our global capacity to meet future demands is also a key factor in this.

Given the excellent start to the year and our optimistic view of the current demand for our services, we feel that 2008 will be a good year for eRT. This is reflected in the change to our previously issued guidance which Rick will discuss in a moment.

The integration of our acquisition of Covance Cardiac Safety Services, which I will refer to as CCSS, is proceeding well and we are on schedule to complete this integration as previously announced by the end of the year. Financially, the impact of the CCSS acquisition added to record levels of revenues. Excluding CCSS, eRT reached record levels of revenue. Including CCSS, we reached even higher levels of record revenues.

As we discussed on last quarter's call, the impact of the CCSS transaction for the first three quarter of 2008 will be to increased revenue but lower net income and margins. Once the integration is complete, the negative impact on our net income and margins will reverse and help set the stage for further growth in 2009. We will discuss some of the specific financials related to CCSS later in this call. From a business development perspective, the marketing agreement with Covance has been successful so far and we are quite optimistic as to its prospects into the future.

In the quarter, we signed an alliance agreement with nSpire Health to partner with them to jointly provide our cardiac safety services and nSpire Health's industry-leading respiratory services. Respiratory is one of our fastest growing therapeutic areas.

Several times in the past, we have been approached by sponsors in the respiratory therapeutic area who have indicated their desire to work with eRT in conjunction with pulmonary specialist organizations such as nSpire Health. Sponsors have expressed the desire to work with one team that can provide them support in both cardiac safety and pulmonary services.

Under the agreement, eRT and nSpire will deliver a combined solution to meet the increased demand for cardiopulmonary safety and efficacy services during clinical trials. We are actively working with nSpire to provide an integrated offering to our clients. This is another example of creating additional marketing channels for eRT's products and services.

I will now discuss some of the highlights of the quarter. As a reminder, unless otherwise indicated, all comparisons represent changes from the first quarter of 2007. Highlights of the quarter were; our revenue of $33.7 million for the first quarter of 2008 was the highest quarterly revenue ever recorded by eRT. This represented a 59.7% increase. The quarter's revenue included $3.3 million of revenue from the CCSS acquisition.

Our core cardiac safety services showed very strong growth. Service revenue, consisting mostly of cardiac safety services, grew by 80.9% driven by a very strong increase in volume and a slight price increase. Site support revenue increased by 22.8% due to the growth in rental units. License revenue, which is a very small percent of our revenue currently, declined by 20.1%.

We were able to leverage our expense structure to produce improved bottom line results as demonstrated by gross margin in the first quarter was $17.7 million as compared to $10 million for the previous year's quarter, an increase of 76.3%. Income before income taxes for the first quarter was $8.9 million as compared to $3.7 million in the prior year's quarter, an increase of 144.4%. Diluted net income per share was $0.11 as compared to $0.04 for the prior year's quarter.

Our margins were healthy. Gross margin percentage in the first quarter of 2008 was 52.5%, up from 47.6% in the first quarter of 2007. The gross margin percentage was negatively impacted by CCSS, which generated net revenues of $3.3 million while incurring expenses of $3.2 million.

The income before income taxes margin percentage was 26.5%, an increase from 17.3% in the first quarter of 2007. The income before income taxes margin percentage was negatively impacted by CCSS, which generated a loss before income taxes of $1.4 million. The net income margin percentage was 17.1%, an increase from 10.7% in the first quarter of 2007.

I will now discuss new bookings for the quarter. The quarter saw a very strong increase in new bookings to a new quarterly record. New bookings were $50.1 million for the quarter, an increase of 68.7% from the $29.7 million recorded in the first quarter of 2007. This is the sixth quarter in a row where new bookings have increased quarter-over-quarter.

Several factors have contributed to the strong bookings growth over the past few quarters. First, the general level of activity of clinical trials requiring digital, centrally collected ECG has and is increasing strongly. Second, we have seen an increase in the number of ECG's per trial in routine trials, especially in Phase I and in Phase III. Third, pricing continues to be favorable, increasing slightly sequentially. Fourth, the quarter saw a couple of large program awards through our CRO partners.

Fifth, our exclusive marketing relationship with Covance and the exposure to all of their clients in their backlog helped to increase new bookings. What we have found, as we had hoped, is that as we work with some of the clients which we acquired as part of the CCSS transaction, that they place new work with us as a result of our performance on their projects. And sixth, we were awarded a couple of large projects that were rescues of previously performed projects with other core labs.

We signed seven new thorough QTC trials. The average trial value of the thoroughs was just in excess of $1 million. Over time, we anticipate a slight decrease in the average size of a thorough QTC trial. But given our healthy pipeline of new thorough QTC opportunities, we do not believe that this will have a material impact on new bookings into the future.

Overall, Phase III bookings accounted for 52.4% of our bookings, with thorough QTC trials accounting for 19%, Phase I trials accounting for 17.1%, and Phase II trials accounting for 10.5%. The book-to-bill ratio in the first quarter was a very healthy 1.5, up from 1.4 in the first quarter of 2007. This was despite a sequential quarterly increase of revenues of 16.5%. The strong increase in new bookings more than offset the strong revenue increase. The annualized cancellation rate in the quarter was 15.6% as compared to the annualized cancellation rate of 15% for the prior year's quarter. This has been pretty much steady for the entire year.

On the last call, we made note of the fact that we will discontinue giving the percentage of bookings performed using the manual methodology. We do so because we feel this information is not helpful to you in assessing pricing trends. This quarter was a good example of that. The percentage of manual bookings was 26.1%, down from our reported 39% last quarter. However, the average new bookings prices rose.

The pipeline of new opportunities for our nascent ePRO business is growing. ePRO represents a very small percentage of our revenue base now, but over the long-term, we are optimistic about the ability of ePRO to contribute to our growth prospects. Like all businesses that are relatively new, it takes some time to convert these efforts into signed contracts and subsequently into revenue.

Our eClinical business also has seen increases in its pipeline and opportunities. In the quarter, we were awarded CDISC certification on Version 1.3 of the CDISC operational data model, only one of a few firms in the industry to be certified on the latest version of the standards.

In addition, we released a complete new version of our adverse event reporting solution as well as our portal product, both of which are receiving quite favorable reviews from our clients. We are focusing on what we call EDC Now, a standards-based quick build EDC development environment that clients are finding quite attractive.

Our belief is that eClinical clients are looking to vendors who have a reputation for project execution in global trials, a strong EDC platform, an understanding of clinical data standards and an ability to quickly get their projects up and running. Our technology and sales investment in eClinical is proceeding on schedule.

One specific action that we have is to integrate our global sales forces across all three business lines. This has already resulted in increased visibility to more opportunities for our exiting three product lines as well as several new clients.

I will now turn the call over to Rick for some more details on our financials for the first quarter and an update on guidance for the second quarter of 2008 and the full-year 2008.

Rick Baron

Thank you, Mike. I would like to review our results for the quarter ended March 31, 2008. As has been our practice, we included financial statements with our press release issued earlier today.

As Mike mentioned earlier in the conference call, we reported first quarter 2008 revenues of $33.7 million versus $21.1 million for the first quarter of 2007. This represents a 59.7% increase. The quarterly revenue reported from the CCSS transaction was $3.3 million. Our revenue consists of three major components. These include license revenue, which was $625,000 for the first quarter of 2008 compared to $782,000 for the first quarter of 2007.

Services revenue, consisting mainly of Cardiac Safety revenue, was $25.3 million for the first quarter of 2008 as compared to $14 million for the first quarter of 2007 or an 80.9% increase year-to-year. Site support revenue was $7.8 million for the first quarter of 2008 as compared to $6.3 million for the first quarter of 2007 or an increase of 22.8% year-to-year.

Our gross margin was $17.7 million for a gross margin percentage of 52.5% of net revenues for the first quarter of 2008 as compared to $10 million, for a gross margin percentage of 47.6% for the first quarter of 2007. Included in the cost of revenues for 2008 were $3.2 million of expenses associated with CCSS sales and integration.

License gross margin was $425,000 for a gross margin percentage of 68% of net revenue for the first quarter of 2008 as compared to $716,000, for a gross margin percentage of 91.6% of net revenue for the first quarter of 2007. The decrease in margin was due to slightly lower net revenue for this quarter's period.

Service margin was $14.8 million for a gross margin percentage of 58.4% of net revenue for the first quarter of 2008 as compared to $7.2 million, for a gross margin percentage of 51.4% of net revenue for the first quarter of 2007. The increased margin was predominantly due to continued leverage associated with the operations in this area as sales increase.

Site support margin was $2.5 million for a gross margin percentage of 32.2% of net revenue for the first quarter of 2008 as compared to $2.1 million, for a gross margin percentage of 33.8% of net revenue for the first quarter of 2007. The decrease in margin in this area was due to the $536,000 of costs associated with the CCSS integration.

Operating expenses for the first quarter of 2008 were $9.2 million or 27.3% of net revenue. Included in these expenses were expenses associated with the CCSS sales and integration of $1.4 million.

For the first quarter of 2007, operating expenses were $6.9 million or 32.9% of net revenue. Included in these expenses were $676,000 of expenses associated with the cost efficiency improvements taken in 2007. Selling expenses were $3.3 million for the first quarter of 2008 as compared to $2.5 million in the first quarter of 2007.

Costs increased by $785,000 from the prior year's quarter predominantly due to higher bonus and commission expenses associated with the increased level of net revenue during this period and due to increases in salaries and headcount from year-to-year.

General administrative expenses were $4.9 million, which included $1.3 million of costs associated with the CCSS sales and integration during the first quarter of 2008. This is compared to $3.5 million which included $676,000 of costs associated with the efficiency improvements taken in the first quarter of 2007. Excluding these costs mentioned above, the total SG&A expenses increased by $733,000.

Research and development expenses were $1 million for the first quarter of 2008 as compared to $925,000 for the first quarter of 2007. The company's tax rate was 35.6% for the first quarter of 2008 versus 38.4% for the prior year quarter. The lower effective tax rate in the first quarter of 2008 was due principally to $300,000 of special benefits.

Net income for the first quarter of 2008 was $5.7 million or $0.11 per diluted share. This is compared with $2.2 million and $0.04 per diluted share for the first quarter of 2007.

Our accounts receivable increased to $26.9 million at March 31, 2008 from $26.7 million at December 31, 2007, while our DSOs decreased to 74.3 days at March 31, 2008 from 78 days as of December 31, 2007.

We ended the first quarter of 2008 with $48.9 million in cash, cash equivalents and investments, an increase from $46.9 million as of December 31, 2007. The increase in cash was predominantly due to the net cash from operations. During the first quarter of 2008, eRT did not purchase any shares of its common stock.

Backlog, the backlog at March 31, 2008 was $151.4 million. The backlog as of December 31, 2007 was $140.2 million, thus increasing the backlog at an annualized rate of 32%. The annualized cancellation rate was 15.6% and was 15% as of March 31, 2007.

Guidance for the first quarter and for the year ending December 31, 2008, we anticipate revenues for the second quarter will be in the range of $34 million to $36 million. We also anticipate diluted net income per share of approximately $0.10 to $0.12 per share.

We are increasing our full-year guidance of revenues to between $133 million to $140 million from the previous guidance of $130 million to $137 million. We are also increasing our full-year guidance for diluted net income per share to $0.44 to $0.49 from the previously issued guidance of $0.42 to $0.46.

I will now turn the call back to Mike for some observations on bookings for the quarter and some additional thoughts on 2008.

Mike McKelvey

Thank you, Rick. I will close by offering some reflections on our growth drivers. We have four main growth drivers. First, increases in spending on clinical trials by pharmaceutical and biotechnology clients. Second, increases in the digital collection of ECGs and the centralization of these ECGs. Third, the increasing emphasis on cardiac safety, and fourth, increases in market share.

In terms of the increase in spending on clinical trials, we see this growth continuing as it has in the past and we believe it will continue into the future at roughly the same rate. In terms of the second growth driver, increases in the digital collection of ECGs and the centralization of these ECGs, we see the growth in new projects as evidence of an increase in centralization.

Over the past year, the growth in the number of new projects that eRT has been awarded has far outpaced that which could be attributed simply to an increase in clinical trial spending. While some of this growth might be attributable to increases in market share, we believe that a significant part of the increase is due to more trials requiring digital collection of ECGs.

In terms of the third growth driver, increasing emphasis on cardiac safety, we have seen an increase in the number of ECGs per routine trial, especially in Phase I and Phase III. Comments from our sponsors and regulatory agencies as a result of the ICAG 14 guidance, directly point to a continued and increasing emphasis on the importance of cardiac safety and we expect this emphasis to continue into the future. We see upside growth in the use of ECGs from eRT in several therapeutic areas including among others, oncology, CNS and respiratory.

In terms of the fourth growth driver, increases in market share, we continue to be the market leader in our industry and the amount of repeat business along with the increase in the number of new clients attest to our continued reputation of quality, thought leadership, project execution and technology leadership.

There are a number of reasons that we believe we can increase our market share into the future. These include, first, our increased use of the CRO market channel; second, the increased globalization of clinical trials that require providers with world-class global project management and logistics capabilities such as eRT; third, the increasing trend of large pharma toward using preferred provider relationships; fourth, the increased desire of some sponsors to work with a firm that combines world-class consulting capabilities along with its other offerings; fifth, the general increase and focus on high quality; and sixth, the large numbers of new clients that we are working with as a result of increased new bookings and our work with CROs. Combined with a stable pricing environment, the favorable outlook for all of these growth drivers gives us confidence into the future.

With that, we will now take questions. Operator?

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Asher Dewhurst of FBR. Please proceed.

Asher Dewhurst – FBR

Good afternoon. Nice quarter.

Mike McKelvey

Thank you, Asher.

Asher Dewhurst – FBR

You'd mentioned that the U.S. had a strong sales bookings growth. Can you talk about the international activity you're seeing?

Mike McKelvey

The international was also strong. It was just outpaced by the tremendous quarter that the Americas had. We're seeing good growth both in the Americas and international. International was roughly flat maybe up a tad sequentially.

Asher Dewhurst – FBR

Okay. You also talked about increased core lab penetration. Would you mind trying to gauge that to where you think that's at and where it could reach?

Mike McKelvey

Well, we're trying to come up with a more numeric representation of that. It's not the easiest thing to model. But we use the number of trials that we do, which as I mentioned in my prepared remarks, outpaced the increase we believe is in clinical trial spending. And also what we're seeing, especially in routine trials in Phase I and III, is the number of ECGs per trial increasing, so those two factors give us confidence that there is an increasing move towards centralization of ECGs.

Asher Dewhurst – FBR

Okay. Looking at your guidance here, the low end of the range basically looks like first quarter was annualized. That would imply no sequential growth. It seems awfully low. Do you think that that could be a possibility or why would you leave that low end so low, I guess?

Rick Baron

A couple of things and thanks for the question. One, this quarter did see the benefit from the individual tax item, so that is something that will not repeat in future quarters. And there still are some potential risks and potential costs associated with the integration. We felt it was wiser to leave a broader range for those things.

Asher Dewhurst – FBR

Okay, great. And last question deals with the eClinical. You guys talked about the CDISC certification but it just on the revenue side doesn't seem to be translating. Can you talk about where you see that going or any opportunities you see ahead?

Mike McKelvey

Well, I think focusing in on EDC now that we talked about which is more simplified, quick, getting up and running, standards-based approach is getting a lot of traction in the marketplace and unfortunately it takes a long time to go from sort of concept through the sales process into actual revenue, so we still have great hopes that that will continue. We really like the attraction that we've got in the marketplace, but it's just going to take longer than to actually come into real revenue or something so.

Asher Dewhurst – FBR

Great, thanks for taking the questions.

Mike McKelvey

Thank you, Asher.

Operator

Your next question comes from the line of Bret Jones of Leerink Swann. Please proceed.

Will Hyte – Leerink Swann & Company

Hey, guys. This is actually Will Hyte [ph] in for Bret.

Mike McKelvey

Hi, Will. How are you doing?

Will Hyte – Leerink Swann & Company

Good. How are you? I was just wondering if you could give us an update on how far along you guys are in recreating the algorithms to transfer Covance's QC studies to the EXPeRT – to be performed on the EXPeRT 2 system?

Mike McKelvey

Sure. Thank you for the question. We are very far along in doing that. As we've talked about before, one of the issues we had to do was first deal with the different way of getting information from their MTX 2 boxes into our EXPeRT 2 system and then to recreate the algorithm. So those have been recreated and we're in the process of going through our QA-QC process right now which is a very extensive process to make sure that we have got it totally correct.

Will Hyte – Leerink Swann & Company

Now, would you say that you're ahead of schedule or right on schedule or …

Mike McKelvey

No, I would say we're right on schedule. And as I mentioned in the press release, we are now starting to have our initial meetings with clients as to actually moving their projects over from the Reno-based facility into either Philadelphia or (inaudible). So we're pretty much right on schedule on that, Will.

Will Hyte – Leerink Swann & Company

Thanks. And I was just wondering if you guys could give us an idea of the pricing disparity between the manual and the semiautomatic trials. I think that you'd said in the past that it's like a 25% to 30% difference.

Mike McKelvey

It's starting to come down a little bit. Manual pricing has been flat, if not slightly declining, but semiautomatic price has actually been increasing, as we've talked about before, at the rate of inflation or maybe slightly higher. So over time, the difference between the manual and the semiautomatic price have become less and less.

Will Hyte – Leerink Swann & Company

And do you guys still believe that the floor is around 20% for manual versus QT?

Mike McKelvey

That seems about right to us. That's what we've guided to in the past.

Will Hyte – Leerink Swann & Company

And what is it that's actually driving that assumption?

Mike McKelvey

Certain clients like the manual method. They believe that it is gold standard as we believe it is. And so based on their particular compound and their experience in the past, they would prefer to go with the manual method. Others would prefer the semiautomatic method. So, based on the historical information we've seen, we believe in (inaudible) of around 20% makes sense.

Will Hyte – Leerink Swann & Company

All right. Thank you for taking my questions.

Mike McKelvey

Thank you very much for your question.

Operator

(Operator instructions) Your next question comes from the line of Jeff Schmidt of Sidoti. Please proceed.

Jeff Schmidt – Sidoti & Company

Good afternoon, guys.

Mike McKelvey

Hello, Jeff.

Jeff Schmidt – Sidoti & Company

I was wondering if we could dig into the bookings number and can you break out what percent of bookings you believe came from CROs as opposed directly from the sponsor and then maybe to dig deeper into how much Covance contributed?

Mike McKelvey

Thanks, Jeff. It's difficult for us to break that out because we can either get bookings directly from a CRO because the sponsor has given the CRO the authority to outsource whoever they would like or we work directly with the CRO. So sometimes we may bring the CRO in or sometimes they may bring us. So it's a difficult number to really put together, but I think for the next quarter's call, we'll do that because of the importance of the CRO channel. But right now, I'm not in a position of giving a number that I could probably back up.

Jeff Schmidt – Sidoti & Company

Can you quantify the Covance bookings?

Mike McKelvey

It's difficult to quantify. Again, it's because there's two parts of the Covance bookings. One, they come directly from bookings of clients that we're working with as part of the acquisition of the clients and the other are from referrals from those clients. So we haven't chosen right now to really segment that into specific numbers.

Jeff Schmidt – Sidoti & Company

Okay. And I guess I just kind of want to focus on, Rick, gave us pretty good quarterly guidance on the last quarter's call. Do you guys, looking at the guidance now, still expect that same ramp heading just into Q4?

Rick Baron

We would expect it to be a similar type of a trajectory. Of course, we have better insight into the revenue line, but we would expect higher EPS, higher revenues in Q4. That would make sense given the initiatives of integration of the CCSS business and the success hopefully of that process over the course of time.

Jeff Schmidt – Sidoti & Company

Okay. Are you expecting similar gross margins in Q2 and Q3 that you saw in Q1?

Rick Baron

In order to achieve the EPS that we've guided to, we would anticipate similar levels of gross margin with and without the CCSS costs that we have tried to identify.

Jeff Schmidt – Sidoti & Company

Okay. And just my last question is license margins seem to decline this quarter. Can you give us color for that?

Rick Baron

Yes. That's largely – it is largely volume driven. It's not a significant uptick in the cost side of things. You're going to have that with lower volumes of revenue.

Jeff Schmidt – Sidoti & Company

Okay, all right. Thanks, guys.

Rick Baron

Thank you, Jeff.

Operator

And it appears at this time there are no further questions. I will now turn the call back over to Dr. Michael McKelvey for closing remarks.

Mike McKelvey

Well, thank you very much for your attention today and your involvement with our company. We appreciate your vote of confidence throughout the years. Rick and I, as well as other members of the company's management team, are deeply committed to the company and continuing the company's momentum and progress in generating results. I hope you all have a great evening and a good rest of the week. Thank you very much for joining us.

Operator

Thank you for your participation in today's conference. This concludes the preparation. You may now disconnect. Have a great day.

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