Pharsight Corporation F1Q09 (Qtr End 06/30/08) Earnings Call Transcript

Pharsight Corporation (PHST)

F1Q09 Earnings Call

July 25, 2008 1:00 pm ET

Executives

Dahlia Bailey

Shawn M. O’Connor – Chairman of the Board, President & Chief Executive Officer

William Frederick – Chief Financial Officer, Senior Vice President & Corporate Secretary

Analysts

Michael Petusky - Noble Financial Group

[Madu Kidali - Vertamine Capital]

Tom McGuire - Private Investor

Presentation

Operator

Welcome to the Pharsight fiscal first quarter 2009 conference call (Operator Instructions) I would now like to turn the conference over to Dahlia Bailey.

Dahlia Bailey

Thank you all for joining us today for this our Pharsight 2009 fiscal first quarter. If you have not received a copy of today’s press release and would like one, or if you’d like to be added to our distribution list, please call the EVC Group at 415-896-6820. The news release is also posted on the Investor Relations section of the company’s website at www.pharsight.com. Please note that there will be a replay of this call beginning approximately one hour after its conclusion and will be available through midnight Pacific Time on Friday, August 1, 2008. To access the replay domestic participants please dial 800-405-2236 or international callers should dial 303-590-3000. Both will need to use pass code 11117194 and the # sign. In addition a replay of the call will also be available via webcast and will be accessible at the Pharsight website for one year following the conclusion of the call.

With me today are Shawn O’Connor, Chairman and CEO, and Will Frederick, Senior Vice President and Chief Financial Officer. During this call we will be making statements regarding future events or expected results which are forward-looking statements. These statements including management’s forecasts for financial performance, management plans, objectives and strategies are subject to a variety of risks and uncertainties. Actual results may differ materially. Factors that may affect actual results are contained in the company’s filings with the SEC including Form 10K for fiscal 2008 as of March 31, 2008. Please consider these risks and uncertainties carefully in evaluating these forward-looking statements and Pharsight’s prospects and be advised that we undertake no obligation to obtain forward-looking statements that we make today. In addition Pharsight’s will provide financial information in this call that has not been prepared in accordance with GAAP. This information includes non-GAAP net income and net earnings per share, basic and diluted, and non-GAAP net income and diluted earnings per share guidance for fiscal 2009. Pharsight used these non-GAAP financial measures internally in analyzing its financial results and believe they’re useful to investors as a supplement to GAAP measures in evaluating Pharsight’s ongoing business performance in comparison to prior periods. Pharsight believes each of these non-GAAP financial measures provides an additional tool for investors to use in comparing its financial measures with other companies in Pharsight’s industry, many of which present similar non-GAAP financial measures to investors. The non-GAAP financial measures discussed above exclude the effect of the following non-cash items: stock-based compensation expense and/or a charged associated with the preferred stock conversion in the first quarter of fiscal 2008. Non-GAAP financial measures should not be considered in isolation from or a substitute for financial information prepared in accordance with GAAP. Investors are encouraged to review the reconciliation of these non-GAAP measures to their most direct comparable GAAP financial measures.

Now I will turn the call over to Shawn O’Connor.

Shawn M. O’Connor

Thanks for joining us on the call today to discuss our results for the first quarter of 2009 and our outlook for the remainder of fiscal year. During the first quarter we continued to execute on a strategic growth plan further building upon our successes in fiscal 2008. Yesterday afternoon after the market closed, we reported financial results for our first quarter of fiscal 2009. Revenue for the first quarter grew 8% to $6.6 million compared with $6.1 million in the first quarter of fiscal 2008. We achieved 21% year-over-year revenue growth from our consulting services businesses which include the strategic consulting services and reporting and analysis services business units, RAS which grew 278% compared to the first quarter of fiscal 2008. Revenue from our software business was even with last fiscal year and reflects the delay of two enterprise product transactions that we now expect will close in the second quarter. During the quarter we successfully launched our PK Accelerator bundled software package. We broadened our RAS service offerings and added two new management positions to lead these divisions. Additionally our Phoenix development program is entering its second external beta phase with 15 participants including the US Food and Drug Administration.

In support of our fiscal 2009 initiatives we ramped up operating costs in the first quarter to support our continued growth strategy. All-in-all our team is executing well on our business model and we remain confident about our ability to meet our expectations for the full fiscal year.

As we’ve discussed during recent conference calls we are continuing to see momentum build for the modeling and simulation methodology. This positive attention has driven interest in our technology and services which we believe will support our growth expectations. The pharmaceutical and biotechnology industries continue to struggle in the translation of promising science to approved therapies. The FDA approved just 17 new molecular entities and two biologic license applications in 2007, the lowest number since 1983 according to the February 2008 issue of Nature Review’s Drug Discovery. As many of you know, although the growth rate of research and development spending has slowed especially in large branded pharma, early stage pipelines are growing. As a result there are more drug candidates emerging from discovery waiting for in vivo evaluation for PK before they can be pushed through to later stage development.

As the pharmaceutical and biotechnology development industries continue to look for innovative technologies that can improve the outlook for success, we believe Pharsight has a compelling opportunity to continue to drive long-term profitable growth. We are continuing to see interest build in modeling technologies that allow scientists to better design trials and extrapolate model data which are Pharsight’s areas of expertise. This continued and growing interest is the fundamental driver of our growth.

During the quarter we engaged seven new reporting and analysis services customers. In addition we signed two new strategic consulting services customers including Eurand Pharmaceuticals a specialty pharmaceutical company that develops, manufactures and commercializes enhanced pharmaceutical and biopharmaceutical products based upon its proprietary drug formulation technologies. In addition to new client growth we have continued to expand our relationships with existing customers. During the fiscal first quarter we signed 20 new SCS agreements and 20 new RAS agreements.

We remain committed to being technology and methodology leaders and during the first quarter we illustrated our commitment by launching PK Accelerator a bundled package of software including a rapid deployment service targeted to small and medium size companies. Adoption of PK Accelerator could allow small and mid-size organizations to deploy Pharsight’s best practice solution for end-to-end pharmacokinetic analysis and validatible CFR 21 Part 11 reporting in as little as 90 days.

We have experienced significant growth in our RAS business unit since its launch in 2007 and last week we announced the expansion of our RAS offerings into preclinical, biostatistics and data management. These offerings complement our existing business unit and enable us to compete for business in a much larger market than the regulatory clinical PKPD. The preclinical business consists of non-compartmental analysis, elemetric scaling, and development consulting. The biostatistics business consists of developing statistical plans, statistical analysis of trial results, and preparation for statistical reporting. Work in both areas is required for regulatory submission. We estimate this market size to be approximately $2 billion in total with approximately $600 million or 30% currently outsourced to contract research providers such as Pharsight’s RAS services. Two new additions to the company’s management team will lead the growth of the new divisions, Mark Reimer, Senior Director of Operations and Preclinical Development, and Jean-Sébastian Brunet, Senior Associate of Statistics and Data Management. All three RAS divisions will operate from the company’s new Montreal, Canada facility.

In summary, we believe that the positive emerging trends that we have been discussing are continuing to come to fruition. Modeling and simulation as a methodology offers the drug developer tremendous opportunities to more efficiently use their development resources. With our full suite of products and services we believe we are very well positioned to greatly benefit from this environment. Demand for our consulting services continues to grow. We believe our market leadership with our industry-leading WinNonMix, DMX, PKS and autopilot software products position us well to achieve continued growth.

At this time I’d like to turn the call over to Will to review our financial performance as well as provide more specifics on our outlook.

William Frederick

For the first quarter ended June 30, 2008 total revenue was $6.6 million up 8% compared with $6.1 million for the same quarter last fiscal year. The year-over-year increase was driven by a 21% increase in consulting services revenue driven by the strong contribution from our RAS business unit. Gross margin for the first quarter of fiscal 2009 was 68% up from the 62% we reported during the first quarter of fiscal 2008. Gross margin for the first quarter this fiscal year includes accrued credits for eligible expenses incurred in Montreal, Canada for the RAS business unit. Operating expenses in the first quarter of fiscal 2009 were $5.1 million compared with $4.2 million for the first quarter of fiscal 2008. The increase in operating expense reflects an increase in operational costs to support our revenue growth expectations.

On a GAAP basis net loss for the first quarter of fiscal 2009 was $409,000 compared with $383,000 in the first quarter of fiscal 2008. Excluding the effects of stock-based compensation expense, non-GAAP net loss for the first quarter of fiscal 2009 was $20,000 compared with $151,000 for the same quarter in fiscal 2008. The company’s GAAP net loss attributable to common stockholders for the first quarter of fiscal 2009 was $409,000 or $0.04 per basic and diluted share compared with $7.5 million or $1.11 per basic and diluted share for the same quarter in fiscal 2008. The company’s non-GAAP net loss attributable to common stockholders for the first quarter of fiscal 2009 was $4,000 or $0.00 per basic and diluted share compared with $309,000 or $0.05 per basic and diluted share for the same quarter in fiscal 2008.

The company’ non-GAAP net earnings attributable to common stockholders excludes the effects of the company’s non-cash accounting charges for the deemed dividend for the stock conversion in fiscal 2008 and stock-based compensation expense.

Now let’s move to the financial results for our three business units. Revenue from our software business unit for the first quarter was $3.7 million which was even compared to the same quarter last fiscal year. License renewal and maintenance revenue was $3.4 million this quarter compared with $3.2 million for the same quarter last fiscal year. Software services revenue was $289,000 this quarter compared with $509,000 for the same quarter last fiscal year. From a product line perspective, first quarter revenue for our desktop software products was $2.3 million compared with $2.1 million in the first quarter of last fiscal year. PKS revenue for the current quarter was $755,000 compared with $888,000 for the same quarter last fiscal year. DMX revenue for the current quarter was $163,000 compared with $200,000 for the same quarter last fiscal year. Autopilot generated $153,000 in revenue this quarter compared with $27,000 for the same quarter last fiscal year. Gross margin for the software business unit for the fiscal first quarter was 89% compared with 87% for the same period last fiscal year.

Revenue from our SCS business unit in the first quarter of fiscal 2009 was $2.1 million which was approximately even compared to the same quarter last fiscal year. Gross margin for the SCS business unit for the fiscal first quarter was 32% up from 26% for the same quarter last fiscal year.

Revenue from our RAS business unit in the first quarter of fiscal 2009 was $791,000 reflecting a 278% growth rate compared to $209,000 for the same quarter last fiscal year. Gross margin for the RAS business unit was 70% for the fiscal first quarter compared to a negative gross margin of 18% in the first quarter of last fiscal year when we launched the business unit. Gross margin for the first quarter this fiscal year does include $112,000 of accrued credits for eligible expenses incurred in Montreal, Canada for the RAS business unit.

Now for our cash position. We exited the first quarter of fiscal 2009 with $16.1 million in cash, cash equivalents and short-term investments compared with $17.1 million at the end of fiscal 2008 and $12.7 million at June 30, 2007.

Finally, we are reiterating our fiscal 2009 guidance. As we said in our press release issued yesterday we expect annual revenue growth of approximately 13% to 18% compared with fiscal 2008 or revenue of approximately $32 million to $33.5 million. We expect gross margin of approximately 64% to 66% of revenue depending on the revenue mix between software products, software services and consulting services. We expect GAAP net income of approximately 7% to 9% of revenue with GAAP fully diluted EPS of approximately $0.21 to $0.29. We expect non-GAAP net income excluding non-cash expenses associated with stock-based compensation of approximately 11% to 13% of revenue with non-GAAP fully diluted EPS of approximately $0.34 to $0.41. We also expect to have a fifth consecutive year of positive annual net cash flow.

Now I’d like to turn the call back to Shawn.

Shawn M. O’Connor

In summary, an increasing number of pharma and biotech companies are turning to technology such as Pharsight’s to improve productivity and leverage scarce internal scientific talent, and where internal technology investment is not practical, rely on capable outsourced vendors like us who can apply the most sophisticated techniques to the analysis and interpretation of their early stage PK PD data. This results in a very robust market demand for our products and services and our strategic plan is focused on meeting our clients’ growing needs and expanding our addressable markets. Pharsight is positioned well with a compelling opportunity to drive long-term profitable growth and increased shareholder value.

Operator, I’ll turn it over to you and we’ll answer some questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Michael Petusky - Noble Financial Group.

Michael Petusky - Noble Financial Group

Shawn or Will, can you guys size those two enterprise product transactions that got pushed out during the quarter?

William Frederick

They’re in the neighborhood of $250,000 to $500,000.

Michael Petusky - Noble Financial Group

That’s cumulatively?

William Frederick

Each.

Michael Petusky - Noble Financial Group

Terrific margins on the RAS. You guys I think keep under-promising there and over-delivering even given the $112,000 in accrued credit. What should be a target gross margin? How should we be thinking about that business over say the next several quarters?

William Ferderick

I’d say from the standpoint this quarter that we got the benefit of some tax credits in Canada. Montreal specifically had some pretty nice incentives that flow into both our reduction of cost and revenue and they flow into a tax benefit. We’ve said historically we’re looking at 50% margin as a target. It’s above our 35% to 40% target for SCS. As we continue to go forward and see what the credit impact is as well as just a very, very efficient business, we’ll see where it heads. But from my standpoint over-delivering on a commitment is definitely a place I don’t mind being.

Shawn M. O’Connor

Mike I would add that in the long run the RAS business is driving exceptional margins based upon their use of our software technology. It’s a dynamic in which without the efficiency of the automation that the combination of WinNonLin PKS and autopilot bring to the table, without those efficiencies the typical project is a five-day endeavor by a scientist to deliver a typical clinical report. With the infrastructure that we’ve built there on our own technology, the dynamic is one of a two-day production turnaround time for that equivalent service. At this point in time in the market place we’re operating and offering our services at a relatively comparable price and delivering it much more efficiently and enjoying the margin that that provides.

Operator

Our next question comes from [Madu Kidali - Vertamine Capital].

[Madu Kidali - Vertamine Capital]

Shawn, on the last question about the infrastructure and automation, do you normally have these customers also using those products already or do you use those products only in your RAS group to include the productivity?

Shawn M. O’Connor

As we’ve indicated in the past, the combination of technology there is Win Lin, PKS and Autopilot and today we’ve got about 23 clients in the PKS space, so even those clients that have PKS and Autopilot which has an install base of seven or eight out there are not tailoring their application for the usage that we’ve implemented here. But more importantly there are only seven other entities that have that combination out there. RAS productivity is actually a tremendous selling tool in terms of our marketing of the software technology out there.

[Madu Kidali - Vertamine Capital]

Shawn, on the software licensing, the revenue is a little bit down. I was wondering, can you probably add some light to it, what’s going on there?

William Frederick

I’ll answer that question. It’s one thing that as we’ve seen historically from a quarter-to-quarter perspective revenue’s going to fluctuate somewhat based on revenue recognition on the various enterprise products that we have. I’d say from a quarter standpoint this year it’s going to be the same as we’ve seen. We’re still as we’re getting bigger going to see that fluctuate potentially less but at this point it still goes up or down depending on the timing of deployment, completion or final implementation within a customer.

[Madu Kidali - Vertamine Capital]

Also on the deferred revenue, that’s down as well. Is it a year-end thing or is there something else to it?

William Frederick

It depends. I’d say the factors there are timing of deployment and implementation on software to timing of work plan completion on the SCS business. RAS tends to have smaller projects so less impact there. But on the SCS and software business we can’t see things move from quarter to quarter to some extent, I’d say a large extent, driven by the timing of the customer versus necessarily our timing on our quarters.

Shawn M. O’Connor

I’ll just add that when I put my quarter-by-quarter hat on and look at the first quarter, I certainly would have preferred to see a couple of enterprise transactions come through and contribute in the first quarter. But we’ve seen our business on the software side to be lumpy at times in the past as Will indicates and we encountered that certainly this quarter. When I take that short horizon first quarter hat off and look at it from a longer term perspective, the first quarter was incredibly successful. We have expanded the RAS business opportunity and in some ways, we’ve talked in the past of how do we accelerate growth and M&A transactions have come into that discussion. And in this case rather than pursue some risky opportunities in that direction we’ve repeated our effort of last year and found an organic means to grow and expand that market opportunity from $100 million market to $600 million and have taken some very critical early steps in that endeavor.

I’ll highlight the two individuals that we’ve brought on board this quarter which positions us to immediately enter that market. RAS last year with a smaller horizon of $100 million market size was able to grow within a short window of time to 5% of our revenues for the fiscal year last year. It continues to grow at a very accelerated rate this year and now we’ve added opportunity to it to grow into a much larger market. So with that longer-term horizon hat on I’m very pleased with the progress that we’ve made during the quarter. And over time that lumpiness of the software business tends to even out as we’ve seen in the past and I would fully expect that to be the case as we continue through the fullness of the fiscal year here and as a result have not changed our outlook in terms of our guidance for the year in any way.

[Madu Kidali - Vertamine Capital]

Continuing on the same lines, sales and marketing and G&A costs are quite high. I guess G&A you probably have some year-end. How much of it is year-end and how much should we look in terms of going forward on a run rate basis? And why is sales and marketing so high?

William Frederick

Let me answer both of those. The G&A number, to some extent we’ve got costs that do take place in the first quarter that tend to trend it up higher than the other quarters on a sort of year-over-year comparison we did this last fiscal year add a few headcount into G&A just to support the growth of the company. Total headcount in the company grew about 25% to 30%. There are some infrastructure requirements there. On the sales and marketing side, we added John Murphy as we mentioned on our last call and while he’s running the consulting businesses his expense lies in the sales and marketing line as well as we brought on a couple of inside sales people since we saw some opportunities there with the IBIBC launch last year and a continued focus on growing our desktop software products. So the sales and marketing line is about where it is continuing on throughout the rest of the year for the most part barring any additional headcount hires as the RAS business grows if we see needs for additional sales people. And the G&A line a little bit high this quarter but probably in comparison to how it trended last year shouldn’t be significantly different on that trend line.

[Madu Kidali - Vertamine Capital]

How many sales people do you have now?

William Frederick

At this point we’re up to about 14 sales people.

[Madu Kidali - Vertamine Capital]

How many of them are new you just said you added?

William Frederick

We added two new to that group.

[Madu Kidali - Vertamine Capital]

Shawn, can you elaborate a little more on the CRI Worldwide opportunity? When do you see that getting kick-started and what kind of opportunity do you see there?

Shawn M. O’Connor

The CRI opportunity is an example of the opportunity from a distribution or sales pipeline perspective on the RAS business. There are a number of CROs out there that do not have the strength of service in terms of the clinical trial reporting aspect of a CRO offering that we can partner with and while their expertise in terms of providing beds and patients and undertaking the protocol of the clinical trial exists, that’s not a direction that we are interested in going or it doesn’t utilize our core competencies or our modeling and simulation skills. Many of those entities out there are deficient in terms of their ability to provide modeling and simulation assistance to their clients. So CRI is a first example of what I expect to be a number of partnerships that will allow us to team with those parties that can provide that aspect of the clinical trial protocol while we provide the clinical trial reporting and front end planning process to supplement the offering.

Operator

Our next question comes from Tom McGuire - Private Investor.

Tom McGuire - Private Investor

I’m glad to hear Shawn answer the previous caller’s question talking about the risks inherent in M&A and consequently focusing on internal growth. I take comfort in the fact that you have a little lumpier quarter than I expected. I’ve been here long enough to see that you’ve had lumpy quarters every once in a while but even with that, that you still endorse the full-year guidance that you came out with at the end of the last fiscal year. I see the hires that you’ve had and looking on your website I see a number of higher level positions that you are looking for: senior scientist, consultant, project managers, etc. So notwithstanding the infrastructure building that you laid out in the first quarter and the number of hires that you see coming on because we all know that the costs come first before the results, how comfortable are you in attaining the guidance that you have laid out?

Shawn M. O’Connor

The confidence there Tom is quite high. If we didn’t have confidence obviously we would make an adjustment there. It’s a market place in which we’ve got a number of offerings, both our existing PKS Autopilot offerings and we’ve introduced new offerings into the mix whether it’s the bundled package of PKS with the deployment services or the expanding RAS services. It’s a market place that is going through a lot of change right now and a lot of pressure, pressure to improve results and that oftentimes trickles down to budget cuts and constraints and capital expenditure scrutiny, etc. All of that makes our sales effort that much more important in its execution of delivering the Pharsight story and the ROI benefits from utilizing either our products or services. In the end that environment is a positive environment from my perspective because it’s an environment that is motivating change on the part of our clients. If everything was hunky dory their motivation to change their basic development process would be nonexistent and that’s a world that we operated in-in Pharsight’s history of evangelizing the use of these techniques but the slow adoption curve in an environment that was very positive was challenged. And so the environment that we face today, boy it’s a difficult world for pharma and biotech today but I think in the long run that bodes well in terms of their motivation to change and we represent one of those very positive changes that they can bring into play to get the answers quicker and be more productive in their development cycles. A bit long winded in terms of reply to your question. Are we confident in the guidance we put forth? Yes we are very confident.

Tom McGuire - Private Investor

Where do you see yourself in five years? And the question comes from your growth appears to be stronger in the consulting area yet I would say you’re in the very, very early inning for a baseball analogy in terms of your penetration with your software products and we still have some potentially very large software products that have yet to be introduced. So five years from now if you’re still independent, etc., are you 50/50 consulting and software or will software still be 66% or two-thirds of the business? Where do you see yourself in terms of that kind of revenue breakdown?

Shawn M. O’Connor

In that regard I think a year ago or two years ago I would have answered that question by being a little bit more aggressive in terms of the more accelerated growth on the software side and it becoming a greater percentage of our revenue. It’s not from a perspective of pulling back on the software side, it’s just that I think we’re seeing the phenomena of: it’s quicker and easier for our clients rather than changing their internal process and acquiring software and implementing and going through the re-engineering internally, I think one of the dynamics we’re seeing here is it’s quicker for them to make that change using an outsourced vendor and I think that underlies their use of our software if you will through the outsourcing to RAS as opposed to their acquisition of our software.

So I think compared to where I may have been a year or two ago, today my expectation in terms of the disproportionate growth on the software side has probably metered a bit. I do think though in the long run over time the industry has been one that has linked to keep control and ownership over their data internally, so my expectations on the software side are still strong; I just think that in the interim here we’re seeing a more accelerated adoption ability through outsourcing. I think opportunity abounds for us in both worlds. The ability to continue to deliver more functionality, be it on the desktop as we’ve done with IBIDC in expanding the scientific application of our analytical tools on the desktop or by building more functionality at the enterprise level to help them manage. And more opportunity exists there to support and expand our continued growth there. And we’ve succeeded in terms of getting to 22 to 23 PKS customers but the runway still is very long for not new products but the adoption of the existing products there. So I think both sides have an ability to grow. I think right now we’re seeing the quicker adoption on the services side. One, we’ve added some new offerings that have bolstered our ability to sell on the service side, and I think the adoption curve is much quicker on the service side than it is on the software side.

Tom McGuire - Private Investor

I’ve asked this before but not recently. Has the competitive landscape changed at all in software and/or consulting in the sense that I know software is a harder or a longer sales cycle, but are there any new entrants coming in or situations changing there? And then can you talk about the consulting area, too? I’m sure that’s very spread out, etc.

Shawn M. O’Connor

 

No new entries on the software side in terms of direct competitive offerings. Our number one competitor there I view as being the adoption rate by our clients not necessarily Brand X out there that we’re competing with. On the services side again the landscape hasn’t changed but we’ve change it by entering the RAS market place in a bigger way and offering more services. We’re now competing with people who are offering those services that I wouldn’t necessarily have pointed to as competitors, the general CRO market place there. We talked about CRI being an example of a CRO that doesn’t have these services. Many of the CROs have clinical trial reporting services in their offering and while we would not have been competing with them in the past I guess we’re, don’t gasp, but I know we’re competing with them today. So as we’ve added a new business we’ve added a list of competitors there. It’s a much bigger market, much bigger existing market and there are service providers there that we’re displacing and competing with them. But on the software side, no I wouldn’t say the landscape has changed their at all.

Tom McGuire - Private Investor

Regarding your cash, I’ve seen some companies with cash hordes get into some sort of difficulty by buying auction rate securities, etc. What’s your cash invested in and do you have any auction rate securities or exposure there?

William Frederick

Cash is very conservatively invested for us so we had no negative impact from the auction rate securities that are out there. I think we were out of them before all of the problems took place. But from the standpoint of where we keep them on a regular basis, it’s a very conservative approach.

Shawn M. O’Connor

I can assure you it was a topic at our Audit Committee meeting last round, Tom, and we took a very close look at the policy and the conservative nature of it.

Tom McGuire - Private Investor

You know my opinion that a company seems to make better decisions with less cash than with more cash, but you made a good decision if you got out of them before the trouble.

Operator

Our next question comes from [Zach MacNew - Xana Group].

[Zach MacNew - Xana Group]

I have two questions about the RAS division. One, I was wondering what the rationale for launching these new services was? I think I remember last year when you launched the PKPD analysis you already had some orders in hand from some customers that were asking you for it. I was wondering if you had a similar situation with these new services? And the second part of the question is do you expect to realize the same efficiencies in the new services that you are in using your software with the current services?

Shawn M. O’Connor

On the first question, when we first introduced RAS last year some work was being done by our SCS group in this space in preparation for bigger projects that were being done, a small of work there, and certainly from a client perspective our sales group were encountering, “Gee, do you do this as well?” sort of inquiries from our clients. As we now look at the expanded set of services a similar dynamic being encountered. And in fact as you take that $600 million market and you break it into pieces, without this broadening we were well positioned in a segment of the market where clients were willing to break up into pieces and parcel out to multiple vendors the various components of a clinical endeavor and hand to the CRO the protocol in action and the bed and patient gathering and hand to another vendor the clinical trial reporting and so on down the line. By adding these services to the RAS offering, we’ve made our life easier in the sense those clients out there that want to hand off the clinical trial reporting to a partner that can also do the biostat work and the data management, etc. for them, those clients that fell into that subset of the market are now target clients for ourselves. So yes there was a similar adjacent demand and in fact it enhances our position in the market to sell through to a broadening group of clients within that market.

Will we encounter similar efficiencies? The answer is yes. I wouldn’t anticipate that it would be 100% of the leverage that we get in the clinical trial reporting but there are some carry-over benefits from the software and some of the broadened services that we’ve introduced. And quite frankly it opens up an opportunity for us to look at incremental products on the software side that could be developed that would create an opportunity to sell through directly to our clients in our software business as well as to provide to our internal RAS group on this side of the ledger as well.

[Zach MacNew - Xana Group]

If you have a client that came to you for a reporting and analysis project, if that project was say a dollar, how many dollars would the new services add to that same project?

Shawn M. O’Connor

In a market size as full, the prior RAS services represented about $100 million market and the new services takes that to $600 million so that’s looking at it from a market size in total. If you look at what a client spends on a Phase 1 clinical trial that sort of ratchet from $100 million to $600 million is similarly reflected in the budget for a Phase 1 clinical trial, that budget in total if you look at what portion of that was the prior set of RAS services, you would have seen that it was X of total budget and if you now look at that same budget for that same clinical trial and you circle the line items that now are offered in the expanded RAS service offering, it would be about 6X of the budget for a typical clinical trial.

Operator

Our next question comes from [Madu Kidali - Vertamine Capital].

[Madu Kidali - Vertamine Capital]

Shawn, I probably asked you this question but I was wondering if you could remind me on the Phoenix opportunity here. Once you have the product for production release would you see your existing customers upgrading or do you see revenue opportunity there?

Shawn M. O’Connor

Yes and yes. On the upgrade side of your question, Phoenix will be our next release of all of our existing products, all of our existing Win Lin products that are split into a sequence of two releases, but our first release of Phoenix will bring out the next release of the Win Lin product and our existing clients will upgrade. That upgrade will be metered over time as with any of our Win Lin releases because it operates in a validated environment and our client’s house. They typically bundle and upgrade in a planned out way over time.

Will it create new revenue opportunities? Yes it creates new revenue opportunities as well. In this first version of Phoenix we are introducing a new NLME module, new NLME product if you will, it replaces our Win Lin mix product which is a relatively small install base of clients, and allows us to enter a market for the NLME product that will create incremental revenue streams. Its value in the long term is really to make more efficient both from a client perspective their use and integration of our products as well as internally our product development process will become more efficient. And the real value is that it provides a more platformed and tier architecture of our products in the market place that allows us to develop new products more rapidly and provide to our clients on a more modular basis out there. So a very exciting project for us, very exciting time for us as we enter the external beta with 14 leading commercial pharma biotech entities out there participating as well as significantly the FDA participating in the beta process. We’re pretty excited about the coming months there.

[Madu Kidali - Vertamine Capital]

When do you expect to get to the initial release date and also what would be the pricing for this?

Shawn M. O’Connor

The release date will really be determined firmly when we get through the beta process here. We’re growing close but have not pegged that date as yet. In terms of the pricing, the release of Phoenix creates an opportunity to adjust our price list for existing install base customers as well as a pricing of a new product on NLME. Going forward those same sources of revenue that I described before come with new pricing.

[Madu Kidali - Vertamine Capital]

The release, would that be this year or next year? Any idea?

Shawn M. O’Connor

Our beta process will run through this quarter and into next quarter and then we’ll be able to firmly set an expectation in terms of when it’ll be released.

[Madu Kidali - Vertamine Capital]

One other question on the cash you have. You also had $3 million last year in cash flow and you expect to do something higher this year, maybe $3.5 million to $4 million. Now that you’re more focused on the organic than M&A, what are the plans for the cash in terms of share buy backs or even probably giving out the new cash in [inaudible] dividend even at 5% to 10% given the state where you are in terms of liquidity in the market? I thought that might be a good way to help shareholders.

Shawn M. O’Connor

We continue on the side to evaluate all opportunities there. The range as you’ve described from acquisition activity to other uses from share buy-back dividends sort of perspective, those are all on our radar and continuing to be looked at very closely. And we will report on decisions made there as they occur in the future.

Operator

Ladies and Gentlemen, that does conclude the question and answer session. I’d now like to turn the conference back over to Shawn O’Connor for any closing remarks.

Shawn M. O’Connor

Thanks everyone. I appreciate you joining us on the call and look forward to reporting next quarter. Take care.

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