Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Michael McKelvey - President and Chief Executive Officer

Keith Schneck - Executive Vice President and Chief Financial Officer

Analysts

Bret Jones - Leerink Swann

Jeff Schmidt - Sidoti

(Raymond) - American Growth Equity

eResearch Technology Inc. (ERES) Q2 2008 Earnings Call August 4, 2008 5:00 PM ET

Operator

Good day ladies and gentlemen and welcome to the Second Quarter 2008 eResearch Technology Conference Call. My name is Malini and I will be your coordinator today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session at the end of this conference. (Operator instructions). As a reminder, today’s conference is being recorded for replay purposes.

I would now like to turn the call over to Dr. Michael McKelvey, President and Chief Executive Officer. Please proceed.

Michael McKelvey - President and Chief Executive Officer

Thank you and good afternoon. Thank you for joining us for eResearch Technology's second quarter 2008 earnings call. A press release announcing the second quarter 2008 results was released this afternoon and is available on most financial Websites. Joining me today is Keith Schneck, the eRT's new Executive Vice President and Chief Financial Officer and Steve Eisenstein who has served as Interim CFO for the past two months.

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 related 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. Keith will then discuss the detailed financials for the quarter and provide guidance for the third quarter of 2008 and the full year of 2008. I will then discuss ECG measurement methodologies and also give an update on the key growth drivers for our company, I will then open up the call to questions. Unless otherwise indicated, all comparisons represent changes from the second quarter of 2007.

We feel that the second quarter of 2008 was a very strong quarter for eRT. We continued the momentum that we built up over the last few quarters and again demonstrated the inherent leverage in our business model. The fundamentals of the overall business environment are favorable and eRT's leadership position in the market in quality, scientific and medical leadership, project execution and technology gives our clients a strong reason to continue to utilize our services.

Keith Schneck joined eRT as Executive Vice President and Chief Financial Officer on July 28. Keith has over 30 years of Senior Financial experience and Executive Management expertise in high growth companies and public accounting. He was previously Executive Vice President and Chief Financial Officer of Neoware Incorporated, a publicly traded company prior to his acquisition in September 2007 by Hewlett-Packard Company. We believe Keith will be a tremendous addition to the eRT team. I look forward to working closely with Keith and our Senior Management team and then implement our strategy moving forward and to continue to improve of our financial and operational processes. We have made significant progress in our integration of the Covance Cardiac Safety Services or CCSS operations in the eRT. All the new software systems required for the CCS integration have been completed and fairly validated. In May we moved the CCSS ECG receiving station from Reno to Philadelphia. In June we started transitioning projects from the CCSS digital otography system to eRTs EXPeRT 2 system. This was proceeded very well and I am pleased to announce that rather they are completing the integration by the end of the year we plan to have it complete by the end of September, three months ahead of schedule. We believe the clients have found the integration seamless and they’re enjoying an enhanced level of services.

Last month we executed a lease to move our corporate headquarters and US based core lab to 18 market streets in Philadelphia. We are scheduled to move to our new headquarters by the end of 2008. The new headquarters will be approximately 60,000 square feet compared to approximately 40,000 square feet in our current Philadelphia location. This increase in space reflects the growth that we’ve experienced over the past few years and that we anticipate in the future. We will continue to operate our other locations in Bridgewater New Jersey and Petersburg in UK.

On July 30th, our Board of Directors Michael DeMane as the Director. Michael was previously Chief Operating Officer of Medtronic, Incorporated and served as Senior Vice President and President of Europe, Canada, Latin America and Emerging Markets. Michael brings a wealth of international experience and marketing experience to the Board and I personally am very excited to have the opportunity to deliver from him in a number of key areas.

The quarter saw continuous significant improvement in our 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 continue to perform exceptionally well on client projects. We have significantly increased both the number of ongoing projects and a number of transactions processed. This was reflected in the strong growth in services revenue, which increased 55.9% from a year ago.

From a new bookings perspective, we recorded another strong quarter, 49.0 million. In the first half of the year, we have recorded new bookings of 99.1 million. This compares to 64.2 million in the first half of 2007 or 54.7% increase. As in the first quarter, importantly, this was not just caused by one or two large contracts but rather was reflective of a broad increase in new opportunities. We added 16 new clients in the quarter.

I ascribe the success in new bookings to three factors: first, we are seeing a robust environment for spending on clinical trials in general and on centralized cardiac safety services in particular. Second, eRT's leadership position in the industry and its reputation for quality, best-in-class customer service and innovative technology prevents a compelling case to existing and new clients alike. And three, increases in new bookings from our CRO and other partner channels.

The pricing environment continues to be favorable with adequate new bookings, transactions and backlog remaining steady. Our pipeline of new business opportunities continues to grow fueled by a continued health environment for outsourcing directed to eRT, our continued move toward the centralized collection of cardiac safety data, our 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, a continued emphasis by regulatory bodies on the importance of cardia safety and a substantial increase in demand for ECG's and routine trials at least as provided by eRT.

The trend of the increased flow through our CRO partner channels continued and helped to increase bookings in the quarter. While the acquisition of Covance's central ECG business certainly changed our relationship from one of our 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 studies. We work with almost all of the large CROs.

We find that our ability to execute on large global complex projects seamlessly with CROs is a huge advantage and 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.

The impact of the CCSS acquisition on our results in the second quarter was slightly more favorably than in the first quarter. We had 3.0 million of revenue and 3.3 million cost attributable to CCSS in the second quarter compared to 3.3 million in revenue and 4.6 million in cost in the first quarter. This was the result of moving some of the operations from Reno to Philadelphia more quickly than anticipated and other cost reductions. By the end of the third quarter, we should be in a position to eliminate a portion of the ongoing cost attributable to CCSS, although some costs will still remain.

The revenue stream from the CCSS backlog will continue to decline throughout the year, which we believe will be offset over time by other revenue from current backlog clients and higher bookings from the marketing agreement with Covance. Once the integration is complete, the negative impact on our net income and margins will seize and help to set the stage for further earnings growth in 2009.

From a business development perspective, the marketing agreement with Covance continues to be successful has added to our new bookings in the first half of the year. We are quite optimistic about its prospects into the future.

I will now discuss some highlights of the quarter. As a reminder, unless otherwise indicated, all comparisons represent changes from the second quarter of 2007. Highlights of the quarter were; revenue of 35.5 million was the highest quarterly revenue ever recorded by eRT. This represented a 43.4% increase. All revenue areas showed good growth.

Our core cardiac safety services showed very strong growth. Service revenue, consisting mostly of cardiac safety services, grew by 55.9% driven by a strong increase in volume and an increase in the average revenue per transaction. Site support revenues increased by 9.5% due to the growth in rental units, offset by a decrease in the average revenues per rental unit. License revenue, which is currently a very small component of our revenue increase by 50.0%.

We were able to leverage our expense structure to produce improved bottom line results as demonstrated by; gross margin for the second quarter was 20.2 million as compared to 13.3 million for the prior year's quarter, an increase of 51.8%. Operating income for the second quarter was 10.8 million as compared to 6.2 million for the prior year's quarter an increase of 72.2%.

Net income for the second quarter was 6.7 million or $0.13 per diluted share. This is compared to 4.1 million and $0.08 per diluted share for the second quarter of 2007.

Our margins were healthy. Gross margin percentage in the second quarter of 2008 was 57.0%, up from 53.9% in the second quarter of 2007. The gross margin percentage was negatively impacted by CCSS, which generated net revenues of 3.0 million while incurring expenses at the gross margins line of 2.4 million including integration cost.

The operating income margin percentage was 30.3% an increase from 25.3% in the second quarter of 2007. The operating income margin was negatively impacted by CCSS, which generated an operating loss of 0.3 million. The net income margin percentage was 18.8%, an increase from 16.7% in the second quarter of 2007.

I will now discuss new bookings for the quarter. The quarter saw another strong level of new bookings. New bookings were 49.0 million for the quarter, an increase of 42.0% from the 34.5 million recorded in the second quarter of 2007.

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 increased and continues to increase. Second, pricing continues to be stable. Third, the quarter continued the expansion of CROs as key marketing partners. Fourth, our exclusive marketing relationship with Covance and the exposure to all the clients and their backlog help to increase new bookings. What we have found as we had hoped is that as we work with some of the clients, his businesses we acquired as parts of the CCSS transaction that they place new work with us as a result of our performance on their projects. We will need more data points in the future to see if the last two quarter of bookings have created a new level that we can expect to regularly attain or whether they were positively impacted by some short term pickups. However, we do feel that there has been a significant increase in the overall market for our services which is reflected in our growing pipeline of new opportunities.

The quarter saw a large increase in the number of thorough QTC trials signed. We signed 15 new thorough QTC trials a new record for eRT. The average booking revenue of the thorough QTC trial was just in excess of 900,000. Overtime, we anticipate a slight decrease in the average size of the thorough QTC trial. I caution you not to come to the conclusion that this number of thorough QTC trials will be the norm.

New contract awards are by the very nature lumpy and this quarters activity may not be represented of future periods. Overall, Phase III accounted for 36% of our bookings with through our QTC trials accounting for 34%, Phase I trials accounting for 9% and Phase II trials 16%.

As we have reported in the past, these percentages were subject to considerable quarterly fluctuations. The book-to-bill ratio in the second quarter was 1.4; the same is in the second quarter of 2007. The annualized cancellation rate in the quarter was 18.1% as compared to the annualized cancellation rate of 17.6% for the prior year's quarter. This has been relatively steady for the past few quarters.

The average new bookings prices remain stable. A decline in the prices for booking using the manual methodology was more than offset prices for bookings using the semiautomatic methodology. This resulted in the slight overall price increase for new bookings.

The pipeline of new opportunities for our 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.

We have seen a significant amount of interest in our Suicidality Monitoring System which we announced and we look forward to this contributing to our revenue growth in 2009. Our eClinical business saw a slight increase in the revenue last quarter in contrast of the declines in revenue that we have seen in the recent past.

Our goal this year is to stop the declined which has occurred over the past of few years and we hope that the results were quoted in the second quarter will be the first step in that direction. We’re seeing some increases and eClinical pipeline and opportunities.

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

Keith Schneck – Executive Vice President and Chief Financial Officer

Thank you, Mike. Our gross margin was 20.2 million for gross margin percentage of 57.0% of net revenues for the second quarter of 2008 as compared to 13.3 million for a gross margin percentage of 53.9% in the second quarter of 2007.

Included in the cost of revenues for 2008 where 2.4 million of cost associated with the CCSS sales and integration. These costs created a gross margin for CCSS business of $649,000 or gross margin percentage of 21.6%. The components of the gross margin and the gross margin percentage are as follows. License gross margin was $700,000 for a gross margin percentage of 80.5% of net revenues for the second quarter of 2008 as compared to $517,000 for a gross margin percentage of 89.1% of net revenues for the second quarter of 2007.

The decrease in margin was due to higher cost associated with the ePRO royalty payments and depreciation expense offset somewhat by higher revenue. Services margin was 16.9 million for a gross margin percentage of 61.7% of net revenues for the second quarter of 2008 as compared to 10.3 million for gross margin percentage of 58.8% of net revenues for the second quarter of 2007. The increase in margin was predominantly due to the continued leverage associated with the operations in this area as revenues increase.

Site support margin was 2.6 million for a gross margin percentage of 36.3% of net revenues for the second quarter of 2008 as compared to 2.5 million for a gross margin percentage of 37.6% of net revenue for the second quarter of 2007. The decrease in margin in this area was due to lower average price per rental unit.

Operating expenses for the second quarter of 2008 were 9.5 million or 26.7% of net revenues. Included in these expenses are expenses associated with the CCSS operations and into of $900,000.

For the second quarter of 2007 operating expenses were 7.1 million or 28.6% of net revenues. We continue to see improved operating leverage for these expenses as a percentage of net revenues even with the inclusion of CCSS operations and integration cost. The company’s tax rate was 39.5% for the second quarter of 2008, up slightly from the 39.3% for the prior year’s quarter. The rate was up sequential 35.6% rate in the first quarter of 2008 which included $300,000 of special benefits.

Our accounts receivable increased to 29.3 million at June 30, 2008 from 26.9 million at March 31, 2008. While our DSOs increased to 75.2 days at June 30, 2008 from 74.3 days at March 31, 2008. We ended the quarter of June 2008 with 55.9 million in cash, cash equivalents and investments an increase of $7 million from the 48.9 million at March 31, 2008. The increase in cash was predominantly due to net cash from operations which generated $10.4 million. During the second quarter of 2008 eRT did not purchase any shares of its common stock.

Moving to backlog. Backlog at June 2008 was $157.9 million, the backlog as of March 31, 2008 was $151.4 million. The backlog increased from a first quarter by an annualized rate of 18.3%. The annualized cancellation rate was 18.1%.

Now moving to guidance. Guidance for the third quarter of 2008 and for the year ended December 31, 2008 is as follows. We anticipate that the revenues for the third quarter will be in the range of $33 million to $35 million reflecting a normal slowdown due to summer vacations which typically reduces study activity. We also anticipate diluted net income per share of approximately $0.10 to $0.12 per share for the third quarter. The diluted net income per share includes the costs of the CCSS business.

For the full year 2008, we are maintaining our previously issued guidance of revenues between $133 million to $140 million which is up from our original guidance of a 130 million to a 137 million originally forecasted in February 2008. We are comfortable with the midpoint of the present range. Factors impacting our revenue range include: one, the revenue from the runoff of the CCS backlog which will take time to be replaced by new bookings that may have longer revenue runoffs. And two, the difficulty in determining the timing or when the large number of through QTC trials booked in the second quarter was start. The mid-point of the revenue range implies an increase of 38.3% for 2008. We are raising the lower end of our full year guidance for diluted net income per share to $0.46 to $0.49 from the previously issued guidance of $0.44 to $0.49.

I will now turn the call back to Mike for some observations on our different methods of reading ECG’s and our growth drivers for 2008.

Michael McKelvey – President and Chief Executive Officer

Thank you, Keith. I will close by offering some reflections on the trends and the use of different methodologies for measuring ECG’s and on our growth drivers. The successful running of the cardiac safety portion of a clinical trial utilizing centralized ECG’s requires many services. These services include one, study design and consulting. Two, global logistics for provisioning ECG equipment. Three, the measurement of ECG’s. Four, the assessment of the morphology of an ECG’s. Five, project management. Six, 24x7 customer care and call center support. Seven, training and eight, reporting. Into the integrated combination of the all of these services to give eRT it's industry leading reputation quality delivery, technology innovation and scientific and medical expertise and has allowed eRT to grow significantly over the last few years. eRT uses different methodologies to measure ECGs which are only one part of the suite of integrated services necessary to run the cardiac safety portion of our clinical trial utilizing centralized ECGs. The term is used to define these measures and methodologies are used differently by core labs and these semantic differences can lead to confusion. These methodologies differ in the amount of intervention by cardiologist in the reading and measurement of ECGs.

Manual and semiautomatic methodologies involved the use of trained cardiologist and other specialist to measure an analyzed ECGs. The automatic methodology on the other hand does not involve human intervention in the measurement and analysis of the ECGs leaving important clinical results to our computer algorithm with known inherent limitation. This methodology allows inherent errors and algorithm diagnosis to go uncorrected. It also does not provide a definitive evaluation of ECG morphology which is clinical in the evaluation of the impact of a drug on the heart. eRT has offered the automatic measure methodology for several years but we have received a very few request for the use of the measurement method from our clients or and by inference our clients believe the current clinical and research standards require cardiologist whether or not assisted by our computer to overread the computers initial ECG measurement.

eRT use algorithms produced by the most established manufactures in the industry, for example, GE and Metar, these manufactures spent years and millions of dollars developing and refining ECG measurement algorithms. Despite this, it is our experience that a significant portion of the ECGs require human intervention to correct the machine generated data due to inaccuracies inherent in the algorithm used in determining the interval measurement. We look at new algorithms frequently, and today have found none that are superior to those of the major manufactures.

Given the highly regulated industry in which we work we believe it would take years for new automatic methods to be validated, approved. The clinical research industry is appropriately conservative and we believe clinical sponsors will not risk the marketing approval of their drugs on exploratory and unproven methods and we therefore maintain their protocols in conformity with existing available guidance and practice.

Cardiac safety generally represents less than 2% of the cost of the trial. While new fully automatic methods may potentially reduce of the cost of the specific trial the cost to reanalyze the ECGs and perhaps to be required to conduct a new trial far out way the relatively small incremental cost of using proven established methods to analyze the cardiac safety data to the highest quality standards.

In addition, various results from automated method cannot be discarded. They can turn this the reputation of the investigational drug and resulting a significant cost for more ECGs in Phase III trial to assure regulators that the findings were indeed only related to the measurement methodology used.

If improved automatic ECG assessment tools were the biomarkers or other automated algorithm, however accepted, we believe that this might help accelerate the trend toward increased centralization of ECGs. The protocols that currently do not call for centralization of ECGs. The potential lower price point of an automatic algorithm might present an attractive value preposition. This could accelerate the moment toward centralization. Centralization of these ECGs will then benefit from use of consistent clinical evaluation of ECGs, standardized equipment, data management and project management, the core ECG labs such as eRT arrived.

As an industry leader eRT is in an ideal position to benefit from this increase in centralization. Given our leverage business model the increase volume derive from its additional demand would have very attractive incremental profit margins. eRT works with almost all the worlds largest pharmaceutical and biotech companies and this gives us a good perspective and future trends in cardiac safety. This allows us to provide the highest value to our clients along with increased adaptability, flexibility and scalability, all with our continued laser like focus on quality.

Let's look at eRT's financial history. Over the three-year period from the first half of 2005 to the first half of 2008, average ECG transaction prices declined, the industry went through a number of changes due to regulatory guidance, there were several changes in industry participants and there was a shift in the ECG measurement techniques. In that same period, however, eRT revenue went up by 70%, operating margin went up by 310 basis points and earnings per diluted share went up 118%. We believe this is evidence of eRT's ability to adjust to changing market dynamics. We have accomplished this growth by investing wisely and proactively in operating systems by maintaining state-of-the-art processes with optimize our work flow and by being at the forefront of medical and scientific thinking in the cardiac safety area. We also believe that our bookings growth of 54% from the first half of 2007 through the first half of 2008 is indicative of client's demand for our current methods of measuring and reading ECGs.

Let us now discus and update you on our key growth drivers. We have four main growth drivers; one, increases in spending and clinical trials by pharmaceutical and biotechnology clients; two, increases in the digital collection of ECGs and the centralization of these ECGs; three, the increasing emphasis on cardiac safety; and four, increases in market share.

In terms of the first growth driver, increase in spending our clinical trials, we see this growth continuing as it has in the past and we believe that into the future at roughly at the same rate. PAREXEL recently reported in its Bio/Pharmaceutical R&D Statistical Source Book for 2008/2009 a record number of new clinical trials initiated as well as a continued high level of active commercial INDs at the FDA.

In terms of the second growth driver, increases in the digital collection of ECGs and the centralization of these ECGs, we see the growth of new projects as evidence of an increase in centralization. Over the past year, the growth in 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 as has the growth in cardia safety services. While some of this growth might be attributable to increases in market share, we believe that a significant part of this increase is due to more trials requiring centralized collection of ECGs. The 129% growth in eRT's cardiac safety revenue from the second quarter of 2006 to the second quarter of 2008, which includes the acquisition of CCSS, is a further indication of this trend.

In terms of the third growth driver, increasing emphasis on cardiac safety, we have continued to see an increase in client's concerns on making sure that they effectively test for cardiac safety in new clinical trials. Comments from our sponsors and regulatory agencies as a result of the ICH E14 guidance directly point to our continued increasing emphasis on the importance of cardiac safety and we expect this emphasis to continue into the future. We see significant 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 for quality, comp leadership, project execution and technology leadership.

There are a number of reasons that we believe we can increase our market share in the future. These include, first, the 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 increased 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 our other offerings; fifth, the general increasing focus on high quality; and sixth, the large numbers of new clients that we are working with as a result of increased bookings and our work with CROs. Combined with the stable pricing environment the favorable outlook for all of these growth drivers gives us confidence for our future.

With that, we will now take any questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). And your first question comes from the line of Bret Jones from Leerink Swann. Go ahead.

Bret Jones

Good afternoon. Thank you for taking my question. Mike, I guess, I see this is the first time I have ever heard you say that you offered fully auto in the past, I know on previous calls you have always maintained it. Your regulatory group has indicated the FDA would not accept the fully auto study and you have never seen or do you have had any clients actually requesting them, so I am wondering if you currently have had any client or have seen in the market at all, any clients moving towards fully auto?

Mike McKelvey

Yes. Thank you, Bret. Yes, we have always offered or at least for the last four or five years offered the automatic method. We have -- I am not sure the exact number of studies, I can get that for you, but it’s a very small number. And given what we say about an automatic method should the client decide to go through that we will perform the task. Yes, we have said that before.

Bret Jones

Well, I know, you were always capable of doing it. I just -- I had never taught -- I was pretty sure you would always maintain that -- you didn’t believe the FDA would even accept the fully auto study?

Mike McKelvey

Right. What we believe is that the FDA will -- in terms of submission of data, well, take any data that a pharmaceutical company will give them. In terms of the acceptance of the data for key trial, for pivotal trials that would remain upto the decision by the FDA. What we have said consistently is that we believe that manual or semiautomatic methods are far superior to automatic methods for these particular trials.

Bret Jones

Okay. So when you discuss the software and if its already been developed by GE and Mortar, if they are moving towards increasing their investment or their R&D into improving that software to adjust for morphology which is one of the areas you have discussed, you know, do you think -- and you believe if the market moves in this direction, you actually benefit from this, I just want to understand you are position as the market moves towards more centralized core labs?

Mike McKelvey

Right. We have always talked about the 70% market that is currently what we called decentralized or uses paper usages and we believe that in order to move that to 70% into a centralized mode that they are a number of areas that we can go into whether its cheaper equipment or less expensive ways of doing things. And what we have said in the prepared remarks is that if a fully automated algorithm was validated accepted and implemented, but that may well go or allow us to go at that 70% centralization quicker than we would otherwise anticipate.

Bret Jones

Okay. And so you don’t believe that the large cap pharma companies were the Heros themselves, would just simply be able to process this data themselves under a fully automatic method and that it would retain in specialized ECG core lab?

Mike McKelvey

No, we believe that the best way to analyze the data from a centralized ECG core lab or centralized data is using manual or semiautomatic methods as we define them today, yes.

Bret Jones

All right, thank you. I will jump back in the queue.

Mike McKelvey

Good. Thank you, Bret.

Operator

Your next question comes from the line of Jeff Schmidt with Sidoti. Go ahead.

Jeff Schmidt

Good afternoon guys.

Mike McKelvey

Hi, Jeff.

Jeff Schmidt

I was just wondering if you could kind of help me understand as I think we spoke about the ramp up of EPS on last quarter's call, I was expected by the movement from CCSS, now the integration movement one of the faster should we expect some of that margin increase in the third quarter?

Mike McKelvey

I think Jeff what we did was being able to benefit of integrating CCSS acquisition into the second quarter, it doesn’t mean that all the benefits are gone there, but where as we originally talked about doing that in the back half of the year, we were able to move some of the benefits up into the second quarter.

Jeff Schmidt

Okay. And then just the commencing on the move of your headquarters can you just confirm that that is built into guidance?

Mike McKelvey

Yes, that is all built into guidance.

Jeff Schmidt

And then maybe can you please sing around what you are seeing with the thorough bookings here, if there is any in particular in the market?

Mike McKelvey

Well I think the 15 throughs that we had were just really a way of the projects fell during the quarter. We have never had 15 before and then I guided not to think that we are going to have 15 in the quarter, there is continued interest in throughs, there is number of biotech’s and large pharma that are getting near the position more than each of one throughs in terms of their drug development and we continued to see healthier demand out there for them.

Jeff Schmidt

Okay. And then what you are seeing as far as market share, and you guys think – you are taking share at this point?

Mike McKelvey

You know, most of our competitors, as now all of them are private. So, it’s tough to be definitive in that, but we do believe that with our revenue growth and our bookings growth that we must be doing relatively well in that part.

Jeff Schmidt

And this is my last question in on the penetration rate you’re seeing in the market, you’ve been commenting on 30% proverb, but you’ve seen a pretty good ramp in revenue and bookings here. Do you think that numbers is increasing?

Mike McKelvey

Yes I do.

Jeff Schmidt

Do you a ballpark of where you could get though?

Mike McKelvey

No, I think it should be increasing, we haven’t really qualify the rate of increase if you will, but I couldn’t right now give you where I think the accentuate might be or so, I think there will be continual movement overtime as people look at the value proposition of centralizing ECG’s.

Jeff Schmidt

Great, thanks guys.

Mike McKelvey

Thank you.

Operator

Your next question comes from the line of (Raymond) (Inaudible) with American Growth Equity. Go ahead.

Raymond

Thank you. Mike, I was just hoping if you could give us a little more clarity as to what where you would expect your service and site support gross margin to level out once you achieve the synergies from CCSS and also give us some sense of the timing?

Mike McKelvey

Alright, we’re – right now we have an operating margin in the second quarter of 30.3%, we believe we can and increase that slightly overtime but we were happy with the sequential increase from 25% to 30% from first and the second quarter but we do believe that those type of operating margins are sustainable.

Raymond

So, we think the way you’re saying it sounds like 30% about the operating margin you would expect on average going forward.

Mike McKelvey

No, we would like to try to get slightly higher than that, but I am not sure I can give you a target margin right now, but we would like to see that increase in both 2008 and 2009.

Raymond

Well, given that you just increased it by 20% in one sequential quarter, it’s natural first to try to get some sense of what phase you do you expect that to continue to that?

Mike McKelvey

Right. And I think as we’ve talked about in the guidance the third quarter historically has always been a slower quarter for us just because we get paid based on when patients are subject in its clinical trials, taking ECG, so long time they take vacations especially with our global presence. So we see it probably being flat in the third quarter, and then picking up or being -- slightly picking up in the fourth quarter, and then I think you will get some of the benefits also in 2009.

Raymond

Okay, thank you.

Mike McKelvey

Thank you.

Operator

And we have follow-up question form the line of Bret Jones. Go ahead.

Bret Jones

Thank you. I was wondering, can you remind us Mike, where you think the market size falls, if all the ECG is associated with clinical trials down in the core lab, I know you said the penetration is north of 30% now, but if you give so 100%, how big is this market?

Mike McKelvey

Yeah, thank you Bret. We are looking anywhere between three quarters of a billion and the billion market, and to the times of 2007 we had made enough sooner of about three quarters of a billion or 750 million, but that would be increasing at the rate of clinical trials spends. So it depends on what time period you are looking at Bret.

Bret Jones

Okay. And so, its – can you also talk about the ePRO market, the size of that market as you see it?

Mike McKelvey

The ePRO market right now is tough one to really look at, but we’re using estimates roughly in the 300 million ranges as estimates provided to us by other people in the particular industry. I haven’t done as much analysis of that industry if you will that they have done in the cardiac safety, but what we’re hearing from some of the players in the space is roughly in the 300 million range.

Bret Jones

Alright, great. And then finally, I would just – I am just curious, you said that ePRO attributed small amount of revenue currently, but, can you talk about bookings? Are you seeing a pickup in bookings here?

Mike McKelvey

Yep, we’re seeing pick up in bookings from the first quarter to second quarter and the pipeline of the activity is much stronger going into the second half of the years. So how much of that will actually turn into bookings this year I can predict, but certainly the opportunities we have out there are larger than we had in the first half of the year. And particularly with respect to the suicidology monitoring system we see a lot of interest in that.

Bret Jones

And, can you talk about the contribution to this quarters booking from ePRO and…

Mike McKelvey

We haven’t broken that out yet Brett.

Bret Jones

Alright, thank you very much.

Mike McKelvey

Yeah, thank you Brett.

Operator

And ladies and gentlemen, I show no further question at this time. I would like to turn the call back over to Dr. McKelvey for any closing remarks.

Mike McKelvey

Well, thank you. We thank everybody for their time today and their interest in eRT. We appreciate your vote of confidence throughout the years. Keith and I, as well as other members of the management team are deeply committed to this company and continuing the continued momentum and progress in generating results. Have a great evening and a great rest of the week. Thank you very much.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. That does conclude the presentation you may disconnect. Have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: eResearch Technology Inc. Q2 2008 Earnings Call Transcript
This Transcript
All Transcripts