Executives
Jody Burfening
Robert Brill - Chairman
Chuck Piccirillo - Interim Chief Executive Officer and Interim President
Joseph F. Trepanier, III - Chief Financial Officer
Analysts
Steven Silk - C. Silk and Sons
Raymond Myers - Emerging Growth
etrials Worldwide Inc. (ETWC) Q2 2008 Earnings Call August 12, 2008 4:30 PM ET
Operator
At this time I would like to welcome everyone to the etrials Worldwide second quarter 2008 earnings conference call. (Operator Instructions) Miss Burfening, you may begin your conference.
Jody Burfening
Thank you [Tina]. Good afternoon and welcome to the second quarter earnings conference call for etrials Worldwide. With us on today's call are Bob Brill, Chairman, Chuck Piccirillo, Interim Chief Executive Officer; and J. Trepanier, Interim Chief Financial Officer.
Before starting today's call I would like to remind everyone some of the comments made today will be forward-looking statements and are made under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected or implied due to a variety of factors.
For more detailed discussion of the risks that could impact the company's future operating results and financial conditions we refer you to etrials recent filings with the Securities and Exchange Commission including the risk factor section of the company's quarterly filings as well as the earnings press release.
With that I would now like to turn the call over to Bob. Good afternoon, Bob.
Robert Brill
Good afternoon. Thank you for joining our second quarter earnings call. I'd like to take a few minutes to talk about etrials from the 30,000 foot view. Over the past 12 months etrials has been embarking on a major transformation of its offerings and capabilities with a goal to become a clear leader in the emerging eClinical market.
We believe that etrials possesses a unique solution set and is increasingly positioning itself to garner a growing share of the more than $1 billion that will be spent in the market this year. Although adoption has doubled since 2005 the underserved mid-tier market is in an earlier stage of adoption and represents a much better growth opportunity for etrials.
The board supports the company's growth strategy and its ambition to become the leader in the mid-tier eClinical market. We support the management team and the financial goals of accelerating revenue growth and achieving sustained profitability in 2009.
However, we acknowledge that the company's quarterly losses are unacceptable. From the forwards point of view solid progress has been made by the senior management team that has been spearheading etrials's strategic re-engineering initiatives.
But there is still a lot of work to do particularly in the area of cost management. Chuck and J., both members of the senior management team, have been an integral part of our re-engineering initiatives in their respective domains. We appreciate their hard work and commitment shown by the management team and the employees at etrials.
With that I'd like to turn the call over to Chuck Piccirillo for a strategic and operational view of our second quarter. Afterwards, J. Trepanier will discuss the second quarter financial results.
Chuck Piccirillo
Thanks Bob. Good afternoon everyone. During the second quarter etrials continued to build the backlog and increase bookings. We won 9.3 million worth of awards during the quarter getting 6.5 million to our backlog of projects that will start within the next six months.
This brings our total backlog for the first two quarters of 2008 to 22.3 million. Contract awards in the second quarter were nearly double the amount we won in the first quarter. This represents solid performance on behalf of our sales, client services and service delivery teams.
While we are pleased with our progress in rebuilding the backlog we still have significant ground to cover particularly in the areas of cost controls and revenue. This is evident in our net loss for the quarter of 2.2 million.
We are beginning to see positive results from the improvements in our sales team structure, process and selling strategies. During the quarter we were awarded 35 new contracts including 29 with existing clients and six with new clients.
The new sales organization is becoming more productive, generating higher quality leads and building a deeper pipeline of opportunity. Additionally our client services team is working closely with the sales team and becoming more consultative in a sales approach.
As a result we're able to help our clients derive greater value from incremental solutions and services available from our integrated offerings. The work that we have done over the past several months to improve our technology, product positioning and to change our go to market model came together at this years Drug Information Association annual meeting in Boston.
The DIA meeting is the must attended forum for Pharma IT companies such as etrials. This year we showcased some of our new tools in automation, new corporate branding, and product positioning. We illustrated how our solutions align with customer's changing needs and requirements. We generated over 600 leads which is double last year's figure.
And our sales reps tripled the number of product demonstrations at last year's show. We're very encouraged to see prospective customers showing such strong interest in our solutions. And the sales team has been hard at work qualifying and following up on the leads from DIA.
As our presence grows it will enable us to expand our client base as an important step toward achieving accelerated growth. We offer a comprehensive and flexible suite of products and services that accommodates varying client needs. This allows us to start our client relationships with as much or as little of the software and services as best meets their needs.
For example this quarter 12 of the 35 new contract awards are for solutions with multiple technology offerings. And seven of the contracts covered multiple product studies.
As we better understand our client's business challenges and they gain a better appreciation for the value etrials provides it opens up opportunities for clients to begin from the full scope of our integrated solutions portfolio.
Our goal is to build long-term relationships with our clients while creating a stream of re-occurring revenues for etrials. In the area of service delivery we have been back filling critical project management positions and establishing key training modules.
We're also establishing an integrated sales and service delivery implementation process that combined with enhanced automation is expected to reduce the time and cost it takes to implement the study and increase customer satisfaction.
The objective of these changes it to create a powerful combination of study design and implementation capabilities, project management skills and clinical expertise that will clearly set aside apart – etrials apart particularly in the mid-tier market. By improving service delivery we're positioning etrials to further entrench our customer base and increase revenue per customer, grow our market share and scale the business.
Our backlog growth, market reaction to DIA, new sales model, and integrated offerings are all positive indicators that our changes are resonating well with our customers in the market. At the same time we recognize that we still have a lot of work to do to create a sustainable and profitably growing business.
In recent weeks several people have asked me if etrials's strategy is going to change and I want to emphasize that we remain committed to our strategic goals, operational plan and market positioning. We are and will continue to aggressively drive transformation of etrials.
We clearly need to continue our momentum around building the backlog of projects with new and existing clients, broadening market awareness, advancing our technology to enable more efficient and effective service delivery, and expanding the functional capabilities of our suite of integrated software applications.
At the same time we must sharpen our focus and intensity on re-engineering our business processes, applying software-as-a-service practices, strengthening our expertise in project management, software implementation and clinical knowledge, and managing our costs while continuing to make the necessary investments in transforming our business.
At this point in the transformation process it's about blocking and tackling, building off the operational fundamentals applicable to our business model. Above all it's about executing predictably and efficiently to meet our customer commitments. We're building our success one day at a time by focusing on the needs of our customers and delivering on those needs with improved execution.
But the management team knows that without the commitment and enthusiasm of our employees, our most valuable asset, we could not move forward, gain market share and profitably grow the business. The passion and excitement of our employees is essential. To that end the management team is keenly focused on creating a dynamic, agile culture that is both highly responsive to clients and yet disciplined, systematic, and well organized.
We believe that this vibrant culture will create competitive differentiation for etrials and allow us to scale the business without losing site of our innovative spirit. So in closing and on behalf of the management team I want to thank all of you, our employees, for the many contributions through a great deal organizational change, and our investors for their support.
We're carrying forward the growth strategy and collectively working toward building our backlog and pipeline in 2008 in order to deliver profitability in 2009. Now I'll turn the call over to J., who will take you through the second quarter financial details.
Joseph Trepanier
Thanks, Chuck, and good afternoon everybody. Net service revenues were 4 million which was up 8% over the first quarter. Q2 2007 net service revenues were 5.2 million. The decrease from prior year is primarily the result of timing and delays of new studies, as well as lower than expected billable utilization rates.
Cost of revenues was 2.5 million compared to 2.2 million in the second quarter of 2007. The variance is primarily due to the increased operational personnel and alignments with our 2008 re-engineering initiatives as well as our focus on service delivery and customer satisfaction.
Gross margin was 37% which was actually a seven point increase over Q1 but down from 58.5% reported during the same period last year. The sequential improvement in gross margin was driven by increased revenues and better controlled overall expenses. I'll talk a little bit more about our gross margin expectations at the end of my comments.
Sales and marketing expenses were 1.4 million compared to 1.5 million for the same quarter last year, and to 1.1 million for the first quarter 2008. Compared to last year the decrease was primarily the result of reduced spending in marketing expenses offset partially by increased sales personnel and related costs.
Compared to the prior quarter, sales and marketing expenses increased due to cost associated with our DIA conference that Chuck alluded to.
General and administrative expenses were 1.7 million compared to 2.5 million last year which was a 43% decline year-over-year. Last year's G&A expenses included approximately 1 million in CEO transition costs as well as patent infringement litigation expenses.
G&A expenses for the second quarter of 2008 included approximately 500,000 associated with the resignation of Jim Clark, our former CFO. Operating expenses excluding cost of services were 4.1 million for the second quarter of 2008 compared to 6.4 million last year and 3.8 million for the first quarter of this year.
Included in the operating expenses for all three periods were non-cash expenses including depreciation, amortization and stock-based compensation. In addition to these non-cash expenses the second quarter of 2008 included approximately 280,000 related to the resignation of Jim Clark.
These non-cash expenses amounted to approximately 1 million in the second quarter and roughly 648,000 in the first quarter. The net loss for the quarter was 2.2 million or $0.20 per share versus a net loss of 1.3 million or $0.12 per share in the second quarter of 2007. This is compared to the 2 million or $0.19 per share net loss reported in the first quarter of 2008. If you back out the one time expenses for Jim Clark's resignation our quarter-over-quarter net loss is narrowed by 300,000.
Moving on to the balance sheet at quarter end we had cash and cash equivalents of 13.9 million and working capital of 12.1 million as well as minimal debt. Our balance sheet remains very strong and we certainly have sufficient resources to see our re-engineering plans through to completion.
Our cash burn declined in the quarter 550,000 from 750,000 in the first quarter 2008. Despite our significant net losses with our increased focus on accounts receivable and collections we've been able to manage cash more effectively.
In Q2 we added 6.5 million to our backlog which is up more than 53% over the 4 million added in the same period last year. Our Q2 bookings also increased 35% over Q1. Adjustments to backlog in the quarter were 602,000.
As you know it's not uncommon for customers' clinical trial plans to change. We ended the quarter with a strong backlog of 22.3 million up from 18.1 million a year ago and up 11% from the 20.1 million at the end of the first quarter.
During the quarter the company spent approximately 209,000 to repurchase 98,328 shares of common stock under the 1 million buyback program that was announced in late November of 2007. As I'm sure you can appreciate we had very limited window to conduct any transactions given Chip and Jim's resignations.
It's important to note that the prior stock buyback program expired on June 30th. However the board has approved the reauthorization of repurchasing up to $1 million in shares going forward.
In the second half of 2008 we expect revenue will be equal to or slightly higher than the first half. With the backlog growing this year we are positioning the company to be profitable in 2009. As a reminder, new bookings, revenue and profitability depend on many factors including a timing of new project bookings, cancellations and new project start ups.
With respect to gross margin we anticipate achieving approximately 45% gross margin by year end. In addition absent one time changes we expect the second half of the year operating expenses to be slightly lower than the first half. Longer term we believe increased revenue, strict expense control and improved utilization will drive gross margin improvements.
With that let me turn the call back over to the operator so we can actually take some of your questions.
Question-and-Answer Session
Operator
(Operator Instructions) Your first question comes from the line of Steven Silk with C. Silk and Sons.
Steven Silk - C. Silk and Sons
Good afternoon. The expense related to Jim Clark was about a half a million dollars corresponding a year earlier for the prior CEO was a million dollars. What are we – should we expect in the third quarter from Chips' leaving expense?
Joseph Trepanier
Yes right now Chip – if you refer to the [AK] Chip received about a year of annual salary which is roughly $325,000 and then we're currently assessing any associated expense that we're going to have to take into Q3 associated with his stock that he took that he had when he departed.
Steven Silk - C. Silk and Sons
Okay and the reason I bring that up is, you know, there's you know a revolving door at the top and even outside of that you seem to be making progress as far as the ability to get clients, retain clients, whatever so I think that's a vote that the product that you have is valuable.
And that leads really to my next question where the actions of the prior CFO who's looking to maximize shareholder value and that's kind of what we're in here for. Would it be conceivable that what you have as a product offering might be best in a larger capitalized company for you to – for the product really to find what its potential is and align those lines to get the shareholders, you know, some more value than the current price of the stock?
Chuck Piccirillo
This is Chuck. I think the product portfolio that we have today and back to your point about its acceptability within the marketplace is a strong indication of the potential organic growth given the changes that we're making.
It has even within the etrials's, you know, current structure and position. I would – you know, I’m not going to venture to say one way or another whether I think it's better positioned in a different organizational structure going forward.
I do think it has potential. We're seeing positive indications in our backlog, in the interest of our clients in terms of backlog growth. That's a positive indicator just in terms of the direction we're taking it.
Steven Silk - C. Silk and Sons
Okay. Would there be a point where you have to say – I mean you're guiding revenue to pretty much flat from what we had in the first half of the year so you can kind of extrapolate, you know, what the losses are going to be, what the burn on cash is going to be, what have you.
At some point – I mean the other thing is that being a small company if you do have some of that backlog delay or a project started which is somewhat out of your hands we as a small company don’t necessarily have the leeway of being able to push out part of that backlog another couple of quarters towards the middle of 2009.
So you know, at some point the board has to you, know, say at what point do we see the best way to maximize shareholder value if it can't' be done internally. So what would your thoughts be on that?
Chuck Piccirillo
Well I'm not going to comment on behalf of the board. Bob, if you'd like to add any additional comments – but I think that we have still strong opportunity with the growth and you know, looking for ways to, you know, always be able to sell into opportunities that could potentially enable us to deliver revenue sooner than the six month backlog window that we're currently booked against. But beyond that again, Bob, if you have any other comments
Robert Brill
Yes this is Bob Brill. Clearly the board does want to maximize shareholder value. I think that we do believe that the company – although your points are well taken about, you know, some of the unpredictability of when backlog turns into revenue and cash, the company does have a very strong cash position and there's no scenario that we foresee at this time that the company will have a cash problem.
We really don’t think that will happen. But clearly if it makes sense the board will do what it thinks is in the best interest of the shareholders.
Steven Silk - C. Silk and Sons
I do appreciate the share repurchases. I think that's a wise investment with your cash and I'd like to see you be as aggressive as you can so that if things turn around it's to the advantage of the common shareholders. And thank you for your time in taking my questions.
Operator
(Operator Instructions) Your next question comes from the line of Raymond Myers of Emerging Growth.
Raymond Myers - Emerging Growth
Thanks for taking the question and having the call. I wanted to see if we could go down a little bit on what the going forward expenses were? So let's see if we can separate out what were the non-recurring expenses in the second quarter and get a sense of what we expect expenses will be going forward.
Joseph Trepanier
Sure well the non-recurring expenses were really around the former CFO's resignation, as I said approximately 500,000. About 280 of that was related to the 123R stock and [inaudible] agreement as far as accelerated stock, et cetera and the expense that we incurred as a company regarding that. And then the other portion of that, around 220, was related to salary benefits and some vacation, unpaid vacation. So if you take out that 500,000 again we actually – we narrowed our loss by about 300,000.
Raymond Myers - Emerging Growth
Great and what was the stock option expense in the second quarter? Total?
Joseph Trepanier
The total stock option expense was about 730,000.
Raymond Myers - Emerging Growth
730. And how about cost savings going forward. I think that was mentioned in the press release. Can you give us a sense of what the value of cost savings are that are targeted to happen by year end?
Joseph Trepanier
Regarding cost savings can you allude further to – we're constantly as a company looking at ways to save costs. I mean one of the things we're doing is we're looking at policies and procedures. We're looking at all our controllable expenses and really diving into those and scrubbing the numbers.
So I mean we're always looking to save costs. To put a figure on it would be difficult for me right now but I can with confidence say that we expect our expenses to be, as I said, slightly lower than where we were for the first half of the year.
Raymond Myers - Emerging Growth
Okay so slightly lower expenses and slightly higher revenue, slightly better margins, so basically everything improving incrementally.
Joseph Trepanier
Correct.
Chuck Piccirillo
Yes.
Raymond Myers - Emerging Growth
Okay. And help me understand the bookings number was great. You had 7 million in bookings in the fourth quarter last year. Why aren’t revenues expected to be advancing more rapidly in the second half given the strong Q2 bookings? Q1 wasn’t that bad. Q4 was really strong. When are we going to start seeing improved revenue?
J Trepanier
Yes that's a great question. As we state in here our strong performance from the sales perspective is setting us up for what we believe to be a profitable 2009 but your question is – it's well-received because as a company what we're seeing as our awards come in they're starting at about four – the studies are all starting at about 4 to 6 month delay between when the award – is we receive written award to when we actually start the study and can recognize the revenue.
So honestly the majority of the studies that are going to come in for the rest of the year and get awarded to us aren’t going to have any impact or have very little impact on 2008. They're going to play more into 2009 and the strong award that we just received in Q2 really won't go into effect from a revenue perspective until really Q4 and into Q1 of '09.
Raymond Myers - Emerging Growth
Okay but wouldn’t the contracts that you sign in Q4 be affecting revenue by the end of 2008?
Joseph Trepanier
Yes they are and they're – so I think we had around 7 million at the end of Q4 and all but a few adjustments that we had to make for cancellation and another opportunity that we – an IVR study that has been delayed for about a year – it has already started and we are starting to see the benefit of those revenue of those studies.
And so, you know, the revenue of those studies are spread over an average of 24 to 36 months of the life of the studies so we're in a percent completion as we recognize revenue. That's our revenue recognition policy so, you know, you recognize that entire revenue value over 24-to 36 months. So you're seeing; it's starting to come in. It's not just a big lump sum of revenue that comes in at once.
Raymond Myers - Emerging Growth
Okay well that sounds like that's on the right track. What specific products or services are driving the improved sales or to what can you attribute the improved signings?
Chuck Piccirillo
Yes its a couple things to that. One is through actually, you know, customer satisfaction because some of that signage is coming through repeat orders which is a positive sign relative to you, know, our customer satisfaction with our offering.
And then the other piece that's beginning to resonate is, you know, etrials has had a very strong suite of applications and DIA was a good galvanizing moment in time to help improve awareness. That too is contributing to it.
The other piece is the EDC continues to be a significant contributor with IDR and eDiary following in that order. So it's really the awareness and the integration messaging that we have been really communicating out to the marketplace that is contributing to improved orders.
And the last piece I'll add is, you know, is we have made changes to our sales organization. It's the way it operates and the way it sells and that contributes to it as well.
Raymond Myers - Emerging Growth
Okay well that sounds encouraging. Is the growth primarily coming from winning business from competitors or is it more that the industry is expanding particularly in the mid market where you're concentrated?
Chuck Piccirillo
It's a combination of both. I mean we, well, I think realize the expansion that's occurring relative to the market growth but also, you know, again back to that awareness and our ability to be selling out to our customers or the opportunity to sell prospective customers is contributing to winning orders over competitors.
Raymond Myers - Emerging Growth
Okay and one final question. How do you intend to respond to the 13D filing that's been publicly filed by I guess we call it a dissident shareholder group?
Chuck Piccirillo
Bob, would you mind answering that?
Robert Brill
This is Bob Brill. You know the board will consider, you know, we will try to understand and consider, you know, what they are requesting and suggesting and, you know, we will then look at the interest of all the shareholders including that group, you know, taking the appropriate inputs and doing what we think is best for all the shareholders in the company.
And I really, you know, I can't go into any specifics but you know, we do listen to the shareholders and we will, you know, to the extent that we think it's appropriate you know, we will listen to the recommendations.
Raymond Myers - Emerging Growth
Okay great. And then if I could one more question. The new contract signings, what do you expect in the second half? What trend? Do we expect a continued growth or how do we expect the contract [inaudible]?
Joseph Trepanier
Yes we do expect continued growth you know as we proceed into the second half. Yes most definitely.
Raymond Myers - Emerging Growth
Okay excellent. When would the company next be presenting either to investors and/or industry trade shows?
Chuck Piccirillo
Yes off the top of my head I don’t know the answer to that. I'm sorry. I can get back to you on that.
Raymond Myers - Emerging Growth
Okay well thank you very much.
Operator
At this time there are no further questions. Are there any closing remarks?
Chuck Piccirillo
Yes I'd just like again thank everybody for joining us on the call today and we're looking forward to updating all of you with our progress in Q3. Have a good evening everyone.
Operator
Thank you. This concludes today's conference. You may now disconnect.
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