IMS Health Q3 2007 Earnings Call Transcript

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IMS Health, Inc. (RX) Q3 2007 Earnings Call October 17, 2007 5:00 PM ET

Executives

Darcie Peck - VP, IR

Dave Carlucci - Chairman and CEO

Gilles Pajot - COO

Leslye Katz - CFO

Analysts

Larry Marsh - Lehman Brothers

John Kreger - William Blair

Eric Coldwell - Robert W. Baird

Alex Alvarez - Goldman Sachs

James Kumpel - Friedman, Billings, Ramsey

Robert Willoughby - Banc of America

Glen Santangelo - Credit Suisse

Operator

Good afternoon ladies and gentlemen, thank you for standingby, and welcome to the IMS Health Third Quarter 2007 Earnings Conference Call.

During the presentation, all participants will be in alisten-only mode. Afterwards, we will conduct a question-and-answer session.(Operator Instructions). As a reminder, this conference is being recordedWednesday, October 17, 2007.

I would now like to turn the conference over to Darcie Peck,Vice President Investor Relations. Please go ahead.

Darcie Peck

Thank you, Frank. Good afternoon, and welcome to the IMSthird quarter 2007 earnings conference call.

With me today are Dave Carlucci, our Chairman and ChiefExecutive Officer; Gilles Pajot, our Chief Operating Officer; and Leslye Katz,our Chief Financial Officer. Dave, Gilles and Leslye will discuss highlightsfrom our third quarter results, and discuss our guidance for the full year of2007.

As in the past, we've posted slides on our website, and Iwould encourage you to review these during our prepared remarks this afternoon.A question-and-answer session will then follow.

As a standard procedure, let me read our Safe Harborprovision. Certain statements we make today are forward-looking within themeaning of the U.S. Federal Securities Laws. These statements include certainprojections regarding the trends in our business, future events, and futurefinancial performance.

We would like to caution you that these statements are justpredictions, and the actual events or results may differ. They can be affectedby inaccurate assumptions or by known or unknown risks or uncertainties.Consequently no forward-looking statement can be guaranteed.

We call your attention to our third quarter 2007 earningsrelease issued earlier today, and our 2006 full year report on Form 10-K, whichset forth important factors that could cause actual results to differmaterially from those contained in any such forward-looking statements.

All forward-looking statements represent our views only asof the date they're made, and the company undertakes no obligation to corrector update any forward-looking statements, whether as a result of newinformation, future events or otherwise.

Some of the financial measures we'll talk about today are ona non-GAAP basis. We highlight notable items in our results in order to providemore meaningful comparisons to prior year's non-GAAP results. Reconciliation toresults on a US GAAP reported basis, are in our press release and in theInvestor section of our website, and I encourage investors to review thesematerials.

Now let me turn our call over to Dave Carlucci. Dave?

Dave Carlucci

Thank you, Darcie. Good afternoon, everyone, and thanks forjoining us.

IMS’s results for the third quarter reflect solid gains inour USoperations, and strong momentum in our consulting business. We did have more moderategrowth in Europe consistent with what we sawin the second quarter.

Our total revenue was $539 million, up 12% reported and 8%constant dollar. Our operating margin was 22%, while operating income was up 1%reported and constant dollar year-over-year.

On a comparable basis, our earnings per share were $0.36,unchanged from last year. Leslye is going to take you through the details ofour financial results and operating margin dynamics in a few minutes. But letme start with some perspective on what’s driving our overall performance.

After ten straight quarters of double-digit growth throughthe first quarter of this year, we are now seeing moderating growth thatreflects intensifying challenges, clients face in several countries. They arecontinuing to play significant value on our evidence-based capabilities inareas like portfolio strategy, pricing and market access, and promotionassessment. And this is reflected in the strong growth we are seeing in ourconsulting and services business. Those activities are also benefiting us inthe Americas, where wecontinue to post double-digit gains on the strength of our significantengagements with several clients in the US. Emerging markets like China and India, also remain bright spots forus where our global offerings are contributing to double-digit growth.

Now, let me give you an overview of our business lineperformance through the first nine months of the year. Sales forceeffectiveness, our largest business line grew 9% reported and 7% constant dollaryear-to-date. That performance was driven by strength in our sales and accountmanagement consulting practice. Key competitive wins in the US with ournext generation prescription services and APLD offerings, and continued growthin emerging markets.

That said, we see clients continuing being cautious in theirpurchase decisions in local markets. And that’s impacting our information andanalytics business in some of our larger markets. We have introduced enhancedinformation offerings in those markets and our pursuing additional consultingopportunities. For example, as we roll out our precision sales force offeringsworldwide, clients are increasingly turning to us for advice on restructuringan their sales forces and improving their execution.

In the area of Launch brand and other, we grew 15% reportedand 11% constant dollar year-to-date. Optimizing brand value is a top priorityfor clients, and a key driver of the double-digit gains in both, our promotionmanagement and pricing and market access consulting practices. Our results alsoreflect a lower level of acquisition activity so far this year. As we said inthe second quarter, the pace of brand performance bench marking activity byclients has continued to slow in Europe, andin the third quarter we saw that in other regions as well.

Our portfolio optimization business was up 14% reported and11% constant dollar year-to-date. We're especially pleased with the continuedsuccess of our portfolio strategy services and MIDAS offerings. These are fundamentalto making portfolio decisions and understanding the impact of patent expiries.

Pharma, biotech, and more recently, generics companies aretaking more systematic of an approach to their planning and strategies, and theexceptional growth of our generics clients is truly reflected by thatphenomena. So, now that we have three quarters behind us, what does it tell us?

Well coming out of the second quarter; we learned a lot ofabout our EMEA performance. 40% of our opportunities moved out of the secondquarter, and we saw a similar amount move out at the end of the third quarter.

Part of the reason for the longer sales cycles is thatpharma companies are changing their models. They used operate in silos at thecountry level, which was not particularly efficient. And they are now takingsteps to operate on a more global basis.

Senior decision makers in procurement are working to attainoverall cost reductions, by selecting strategic global or regional partners.For us, this began last year at this time with our first global agreement. Andsince then we have completed an additional global agreement and severalregional agreements primarily in EMEA.

These agreements are structured as a 'win-win' scenario, andin the short-term the incentive for our clients is cost savings, and overtimewe gained access to incremental and long-term opportunities. Unfortunately, themarket environment has not improved our ability to close these sell-throughopportunities as quickly as we had expected.

That coupled with the fact that we are seeing across board,sales cycles have increased and the variability in our operating results willcontinue into the fourth quarter. As a result we expect fourth quarter revenuegrowth to be in the mid to low single-digits.

So now the low-end of our original full year guidance,becomes the top-end of our updated range. For 2007, we expect constant dollarrevenue to be 7% to 9%, constant dollar operating income growth to be 6% to 9%,and earnings per share to be $1.52 to $1.56.

With that as a backdrop, Gilles will provide some additionalinsights to our regional results and describe the actions we're taking toenhance our performance in the current environment. Gilles?

Gilles Pajot

Thanks, Dave. Reflected in this updated guidance, is apossibility that our growth will continue to moderate in the fourth quarter.Over the past two quarters, we have experienced longer sales cycles of SAPinformation offerings in our large markets. We are taking specific action inthe regions to address this.

Let me start with EMEA. In the third quarter, EMEA revenuewas 10% reported and 4% constant dollar. Consulting and services is doing verywell across Europe, and we expect this tocontinue. In Germany,we told you in July, that we had modified or SAP offerings, to comply with new[SK] reform legislations. Clients are adopting this, although more slowly thanwe would luck.

In the UK,we have launched more granular SAP offerings, and that as already lead tocompetitive wins in the first quarter. We are experiencing continued momentumin this market for the rest of the year. We have seen pockets of weakness ininformation occurrence in mid-sized market, and we are refocusing our salesspecialist to pursue multi-country agreements.

In Asia Pacific, revenue growth was 7% reported and 5%constant dollar. The growth of the consulting and services, and DDD offeringslowed in Japanin the third quarter. We have accelerated our plans to provide more granularinformation through enhanced DDD offering in Q4. And we need to get momentum inour consulting business by expanding our methodology in all practice areas.

Across the rest of the regions, we expect the good growth wehave had in the next four largest markets; Australia,China, Korea and India to continue.

Going forward, we will see more pioneer opportunities inthose markets. We have recently launched our initial DDD offering in China and India. The American regions postedanother strong quarter, with a revenue growth of 14% on a reported basis and13% constant dollar.

The success of our SAP and MIDAS offering across a broaderspectrum of client segments drove solid results in the U.S. or Pfizerwin in SAP contributing to growth in the quarter, as we delivered informationthat will help them implement their new sales processes in [2008].

We also are realizing the benefits of new offerings tailoredto the managed market space and for generic clients. Last quarter we talkedabout some key wins we are having with our anonymized patient level dataofferings, but we would continue to look for those wins as clients buyadditional information to gain deeper patient inside across more [therapy]areas.

And in consulting and services, growth in the third quarterwas 36% reported, and 31% constant dollar. We are building scale in ourmid-size and emerging markets as we expand the methodologies into morecountries.

Utilization is better. Our new alliance with our north-shoreprovider of analytical services will give us added flexibility and morevariable construction. We are spending a already new gross rate and our grossmargin is high.

As I look at our performance in the third quarter and thegross challenge we face in fourth, I am confident that we are putting the rightactions in place to drive gross and improve our execution. First, we are takingaction to grow our information metrics where we'll redirect our sales resourcesto drive growth in this small complex environment. That includes the roll outof MIDAS market segmentation in new countries.

DDD services in emerging markets and approval [for six] in Japan and mid-size markets in Europe.And we will accelerate demand of weekly exponents in the US, an increased adoption of our patient’s (inaudible)for APLD offerings in the USand major markets in Europe.

Next, our consulting business is performing very well, butwe can accelerate momentum to shorten sales cycle, we are focusing our seniorconsulting principles on accelerating closure on the largest engagements. Thereare 97 significant proposals we are pursuing with clients.

Third, to accelerate the growth in markets by healthcarereforms have impacted us the most. We have to transition the client to newoffering, specifically, we are really providing sex specialist to drive DDD A+in Japan and on house assetdeal for in Germany, andclient win backs in the UK.

Finally, as Dave mentioned, we will continue to focus oncompleting prepaid supplier agreements with our largest global customs. Yes, wedo have challenges, but we have relevant offerings. We are executing well inmany areas, and adjusting in houses to respond to the current environment.

Now I will turn the call over to Leslye, who will take youthrough the details of our third quarter financials.

Leslye Katz

Thanks Gilles, and good afternoon everyone. This afternoonI'd like to cover our Q3 results including dynamics behind our operating incomeand EPS performance, and then give you my perspective on the update to our fullyear guidance. For the third quarter, revenue was $539 million up 12% as reported,and 8% on a constant dollar basis. As in the previous two quarters, there isseveral percentage point gap between reported and constant dollar revenuegrowth as a result of the weaker dollar.

As you heard from Gilles, we had a mixed revenue performancein the quarter; consulting and services revenue growth was excellent across allpractice areas. In addition, gross margins improved 460 basis points versuslast year, and 110 basis points sequentially versus the second quarter,primarily due to utilization impairments.

We also continue to build out our consulting capabilitiesgeographically and across practice areas. Information and analytics revenuegrowth was 6% reported, 3% constant dollar. This growth has been declining forthe last three quarters primarily driven by weaker performance in severalEuropean markets. Given an I&A revenue, was almost 80% of our total revenueand its fixed cost structure. Revenue growth at this level adversely affectsoperating income growth and margins.

Operating Income in the quarter was $117 million, up 1% on areported and constant dollar basis versus Q3 '06. In the third quarter, ourreported operating margins decline 30 basis points versus last quarter, and 220basis points versus last year.

Foreign exchange continues to have an impact on our reportedoperating margins. Of the 220 basis point year-over-year decline 50 basispoints are due to foreign exchange. Net interest expense in the quarter was $8million down approximately $1 million from last year. As we saw last quarter,this was due to lower interest rates or results of diversifying our debtstructure into low interest rate jurisdictions such as Japan. Otherexpense net in the quarter was $9 million; this is $8.5 million more than lastyear and primarily due to foreign exchange hedge losses this year, comparedwith hedge gains last year.

Last year in our adjusted results, we phased these hedgegains and losses to better match to quarterly timing of our operating income.On a comparable basis this quarter, about $3 million would have been phased tothe fourth quarter. This is equivalent to one penny of EPS.

GAAP net income in the third quarter includes a tax chargeof $7.5 million, the results of German Tax Reform Act that was enacted in lateAugust. This law reduces our affected tax rate in Germany from 40% to 32%. However,we've had to revalue our net deferred tax assets on the balance sheet, andrecognize a tax charge in the third quarter. Statutory tax rate changes such asthis, cannot be anticipated and none were assumed in our full year EPSguidance. This had a $0.04 impact on EPS in the quarter. Excluding this impact,we are still projecting a 31% effective tax rate for the year.

GAAP net income in the quarter including the $7.5 milliontax charge was $57 million, down $12 million or 18% from Q3 last year. GAAP EPSwas $0.29, compared to $0.34 in Q3, ’06.

In the note section of our press release, we've detailed thenotable items that were included in our GAAP net income and EPS in the thirdquarter this year and last year.

In summary, our Q3, ’07 GAAP EPS of $0.29 was reduced by$0.04 for the German tax charge; $0.01 for hedge losses, that would have beenphased in to the next quarter; and $0.02 for tax benefit, that would have beenphased into the third quarter.

On a comparable basis, Q3, 2007 EPS would have been $0.36flat versus the $0.36 non-GAAP adjusted EPS in Q3 last year. This is the EPScomparison that Dave referenced earlier.

We continued our share repurchase program in the third quarter,and bought back 2 million shares for a total of $59 million. This brings ourtotal share repurchases for the year to 13.2 million shares at a total cost of$393 million.

Actual shares outstanding at September 30 totaled a $194million, and there are $3 million shares remaining on our current Boardauthorization. Weighted average diluted shares outstanding for the thirdquarter were $198.4 million. Preliminary free cash flow was $19 million in thethird quarter, bringing year-to-date free cash flow to $110 million.

This was a very disappointing quarter for free cash flow,primarily due to the increase in the DSO this quarter to 71 days. DSO was up 11days from last year and up 5 days sequentially, from Q2, 2007. Improvements insome of our regions were more than offset by the higher DSO in EMEA, largelythe result of closing larger transactions in late September.

Our focus remains intense on driving DSO improvement, but itis unlikely DSO will return to last year’s level by year-end. This has asignificant effect on our full year cash flow guidance, which we are updatingtoday to $195 million to $230 million.

The majority of this reduction in free cash flow is DSOrelated. It also reflects our updated income range, and CapEx for severalfacility relocations all of which hit this year.

Cash and equivalents totaled $196 million, and debt totaledjust under $1.2 billion as of September 30, 2007.

Turning to our year-to-date result. IMS revenue was $1.6billion up 12% reported and 9% constant dollar. Year-to-date operating incomewere $346 million, up 9% reported and on a constant dollar basis.

Excluding the VNU merger-related charge from Q2 last year;year-to-date operating income growth was 7% constant dollar. Operating marginyear-to-date was 21.8% versus 22.5% last year, down 70 basis points.

Excluding the merger-related charge from last year,year-to-date operating margin declined 110 basis points, 70 basis points ofwhich are due to foreign exchange. Year-to-date GAAP EPS was $1.08, down $0.12or 10% from the first nine months of last year.

On a comparable basis, as outlined in the notes to our pressrelease, year-to-date EPS would be a $1.10, up $0.09 or 9% versus last year'snon-GAAP adjusted EPS of a $1.01.

Looking to the balance of the year, we still believe we canachieve the low-end of our original guidance range for revenue and EPS. Weexpect C&S revenue growth to remain strong. However, given the marketchallenges our clients face, the elongated sales cycle and the variability ofour performance in several major markets, it is also possible that I&Arevenue growth might decline. We have taken a conservative approach, andupdated our full guidance.

As Dave said, for this year, we now expect constant dollarrevenue growth to be 7% to 9%, constant dollar operating income growth to be 6%to 9%, and earnings per share to be $1.52 to $1.56. This EPS guidance does notinclude the $0.04 impact from the German tax rate change.

With three quarters of actual results in hand, these mayseem to imply very wide Q4 ranges. But the fourth quarter is historically ourlargest quarter and this revenue range equates to as little as $20 million ofvariability. From an EPS standpoint, only $3 million of operating incomeequates to a penny.

Based on this outlook, we are aggressively reassessing ourexisting cost and expense structure. We are taking action in the followingareas. We are expanding our use of outsourcing in our production anddevelopment functions. We have begun an off-shoring initiative for some ofC&S delivery resources, which will reduce overall cost, and increase thevariable portion of our C&S cost structure. We have started globalprocurement initiative which will yield cost savings in 2008. And we have takenimmediate action to limit hiring and to reduce discretionary expense.

Two successive quarters of 8% revenue growth and operatingincome growth lagging behind revenue growth were not what we anticipated whenwe started at this year. As a result, we have modified our guidance to reflectthe possibility that we will not achieve our original guidance range. But ourgoals remain unchanged, we remain confident that our strategy is sound, and weare committed to margin expansion.

Our 2008 planning process will address, bringing our cost expensestructure in line with our revenue growth expectations. And we will share ourplans with you and we provide 2008 guidance at the end of January.

Now let me turn the call back to Dave.

Dave Carlucci

Thanks Leslye. We are realizing that market pressurescontinue to intensify. Gilles and I have met with the leadership of many of ourlargest clients over the past several months in Asia, Europe and the United States.The dialog is centered on their business challenges and opportunities, but whenwe turned to a discussion of IMS, they are telling us that we are investing inthe right areas, and that we have built the right capabilities to help them.

We also heard that the confluence of market events that wetalked about this afternoon is complicating their decision-making. We saidthat, that has led to elongated sale cycles for our teams.

Well, I am disappointed in the effectiveness of our responseto changing market conditions I remain confident in our strategy. We are themarket leader, we have a very diverse business, and we are significantlydifferentiated in marketplace. Our breadth of capability makes us increasinglyrelevant to clients in this environment, and our ability to respond to theirneeds is stronger than it's ever been.

So with that, why don't we open an upright away to yourquestions? Thanks.

Question-and-AnswerSession

Operator

Thank you. (Operators Instructions) Our first question comesfrom the line of Larry Marsh with Lehman Brothers. Please proceed, sir.

Larry Marsh - LehmanBrothers

Thanks and good afternoon. I guess, I'd like for you toelaborate, if you could about what seems to be a bit of certainly a surprisethat you addressed a little bit at the end of this second quarter, it’s obviousit got worst, and it seems like it's centered mainly in EMEA. I guess, if youcould, if you try to triangulate how much of this was totally outside of almostanything you could have predicted, and how much would you constructivelycriticize your own organization, not really being on top of some of the changesin the market place, especially when you talk about healthcare reform, becauseit strikes me that some of this could have been anticipated or not? I justwanted to maybe get you to elaborate on that, and is that, while I think aboutthis, this is really all an EMEA disappointment.

Dave Carlucci

Yeah Larry, I think, I really do think it is a confluence ofthe Benson, I think on the healthcare reform issue we actually couldn't haveanticipated it much better than we did. We were very involved in thosediscussions over a protracted period time in Germany, but as you know thoselegislative decisions happen at the very end, on what’s in and what’s out. Andas a result, we did have to adjust our offerings as I told you, and we did thatpretty rapidly in terms of the data design.

The fact of the matter is, is the requirement was to bringcapability and resource in, to couple it with consulting capabilities to beable to get a level of insight for the client that was frankly anywhere nearwhat they got from just the straight data assets we provided for them in thepast. That said, I think the criticism that could come on the up-tick here wasthat, we were probably overly optimistic that we could turn this situationfaster, and that the clients would respond in a more aggressive fashion to thechanging environment.

I also mentioned that we have been looking at and doingthese -- few of these global and regional transactions in EMEA which we alsofelt opened up a wealth of added opportunity and that we have the capabilitiesto sell through a broader range of offerings as we provided a more attractiveproposition for them in their existing base business with us. And the fact thatsale cycles have slowed down, as a result of a lot of stuff we covered on thesecond quarter call, product withdrawals, drug safety issues, the magnitude ofthe generic events.

Even though you see the generic events coming, the falloffin some of these countries is becoming much swifter, more in line with thekinds of falloff we’re seeing in the United States by generics. So, Iwould say that, the team suffered a little bit from over optimism andconfidence on their ability to sell through, and that we have hit a number ofchallenges in predicting based on historical pipeline measures, what will beable to turn that into in terms of our performance.

And I think some of that phenomenon has shown somechoppiness in other parts of the world. We saw choppiness in Japan, where we had seen a veryweak first quarter, a very strong second quarter, and a very weak thirdquarter.

So, I am the last one to pin it on the industry's woes forus not being successful, but I would say there are a number factors here, andobviously we are looking very closely at what we need to do in Europe not onlyget the sales engine on track, but to leverage a very healthy consulting andservices foundation and performance, and to obviously look at all of the costin expense elements that go along with investing in the business as we have.

Larry Marsh - LehmanBrothers

Okay. And then just to elaborate. Obviously the one newrelationship you highlighted in the second quarter was Pfizer, and youcommunicated today that it was a contributor in your C&S business as youanticipate the roll-out of the contract relationship at the beginning of '08.

Your consulting business was very strong, is there anyway toquantify even generally how much of a benefit you got from that newrelationship?

Dave Carlucci

Well, we don’t really give you client level information, butI would make a correction on that. We had one of the exponent business therewhich is a data and information piece, that was reflected part impart in our USresults in the third quarter.

So it relates to NGPS, our ability to win that weeklybusiness, and our ability to begin shipping data to the client. But that wasnot reflected in the consulting and services piece.

Larry Marsh - LehmanBrothers

Okay. I am sorry, so there was no real contribution fromthat particular relationship and consulting and services.

Dave Carlucci

Correct, as it relates to that win.

Larry Marsh - LehmanBrothers

Got it. Okay. And then just finally, if I could get maybethe elaboration on a cash flow from Leslye. Another disappointing phenomenon asyou just talked about, there's a ballooning of DSOs, and was there anythingmore specific that you can elaborate on there? In your business these days,does a delayed selling cycle result in an immediate benefit, a boost in DSOs?We certainly didn't see that in the second quarter. Maybe just clarify that abit.

Leslye Katz

Right, we are definitely, Larry, seeing a lot of ourbusiness closing later in the quarter. We saw that in the third quarterparticularly in the EMEA region, or a lot of the elongated sales cycles, whenwe were able to bring them to fruition in the quarter or came in very close tothe end of the quarter.

And we are going to focus extremely hard. My team is verycommitted to turning this around, but it is having a material impact on us.

Larry Marsh - LehmanBrothers

Right. And are you characterizing this as, what you think isa short term phenomenon or is it something that could continue to impact you into '08.

Leslye Katz

I definitely think it’s a phenomenon that’s going tocontinue to impact us in ’07. I am not ready yet to comment on ’08, we’ve notgot our planning done for ’08. But I believe we’ll make improvement in this inthe fourth quarter of ’07, but I don’t think we are going to get back to lastyear’s DSO by the end of the year.

Larry Marsh - LehmanBrothers

Right. Okay. Thank you.

Operator

Ournext question comes from the line of, John Kregerwith William Blair. Please go ahead, sir.

John Kreger - WilliamBlair

Thanks very much. Just a follow-up on a Larry’s lastquestion. Leslye are you seeing any changes in terms that you are granting thatwould explain part of the stretching out of DSOs, or is it really just thetiming of the contracts getting signed?

Leslye Katz

Certainly we are working with our clients, when we work onthese large global or regional transactions. There is a lot of give and take,and we may be willing in a couple -- we have been willing in a couple of thesecases with these large transactions to grant a little bit of an extension inour payment terms. But that’s not really the biggest factor here; the biggesthere is seeing more of the business coming in late in the quarter.

John Kreger - WilliamBlair

Okay. And then Dave you talked about the fact that Japanweakened in the third quarter versus the second. What did you see in the UK and Germany; I believe those were twomarkets that you highlighted as showing some softness in Q2. Did those getbetter, worse or stay the same in third quarter?

Dave Carlucci

I would characterize them as getting better, but not fastenough. And as we look into the fourth quarter where we continue to see theopportunity to see it accelerate. But it’s clear to us that it’s not on thetrajectory that it will be significant to the degree that we planned 2007.

So, improvement we haven't disappointed at all in ourcompetitive record, but certainly the uptick of the new offerings are not whatwe had anticipated. So we did see an improvement in the third over the second,but it was marginal.

John Kreger - WilliamBlair

Okay. Thank you. And then one final question, IMS iscertainly used to operating in very tough pharmaceutical industry environmentsif you look back over the last three or four years. What is it that you thinkis different about this environment that as you said has caused a real revenueslowdown versus the last 10 quarters or so?

Dave Carlucci

And you are right John, we have been consistent in sayingthat these kinds of issues create opportunities for us, and I sincerely believethey do. But, at least in the five years I've been here, I haven't seen thislevel of uncertainty and delays in reevaluating in some of our very largestclients, their plans to move forward.

So we are in a little bit of a planning versus buying mode.And I believe that the new offerings that we have in place, the investmentswe've made in the therapy areas, in areas that are focused on specialty drugs,and on the efforts that we put in place to put intelligence around these newassets with our consulting teams will absolutely pay off for us.

But it is the really serious activities that have slowed anumber of players down. And if I thought it was strictly an EMEA phenomenon, Iwould outline it that way. We have seen it manifest itself pretty heavily inEMEA. But we are seeing it in other parts of the business.

And what is different is a lot of the decisions that arebeing worked on, we are participating in after headquarters level, but there isa lot of pressure from headquarters in these companies on the local countriesto reduce their spending or to slow down, until they reevaluate their path.

And although, it's hard to predict what the outcome of thatis, I am quite confident that this is choppiness not a long-term trend.

John Kreger - WilliamBlair

Great, thanks very much.

Operator

Our next question comes from the line of Eric Coldwell withRobert W. Baird. Please go ahead with your question, sir.

Eric Coldwell -Robert W. Baird

Thanks very much, can you hear me?

Dave Carlucci

Yes.

Eric Coldwell -Robert W. Baird

Yeah, great. I was hoping that we could get a quantificationof the impact of M&A on the constant dollar sales growth in the quarter. Iknow it was decided that it’s one of the reasons for the lower constant dollargrowth?

Leslye Katz

About two points contribution to revenue growth in thequarter.

Eric Coldwell -Robert W. Baird

Two points from M&A.

Leslye Katz

Right. From acquisitions we made in the last year.

Eric Coldwell -Robert W. Baird

Okay. And then my second question is, there was the launchof the global Oncology Analyzer in May. I believe it was, and there were somesigns of uptake in the last quarterly report. I am hoping we can get an updateon that, because I think that does speak to some of the newer specialty linesthat you are rolling now in some of the new offerings there?

Gilles Pajot

As you know, we were delayed in launching that. I think welaunched it by the end of May. We have signed a few contracts on that. However,I think we still are a little bit slower than we anticipated. I think the prospectslooks good, with again the sales cycle are a little bit longer.

Eric Coldwell -Robert W. Baird

My third question relates to Pfizer, and I know you are notgoing to quantify the exact impact on 3Q, but the question relates to theamount of opportunity that you saw hitting in totality in the second half of2007. How much of that opportunity was recognized in 3Q, and how much remainsas an incremental opportunity in 4Q?

Leslye Katz

We saw that opportunity in Q3, we delivered data to themthat they are using now and they are planning for 2008, as they are going livewith their applications in 2008. And we continue to see a very strong pipelineof other opportunities all across our business for Pfizer, but this particularimpact was in Q3?

Eric Coldwell -Robert W. Baird

Okay. Thank you.

Operator

Thank you. Our next question comes from the line of AlexAlvarez with Goldman Sachs. Please go ahead, sir.

Alex Alvarez -Goldman Sachs

Hi thanks for taking the question. Leslye just wanted to getsome color from you, in terms of how this slowdown in revenues is going toimpact some of the margin improvements that you were hoping to get again longterm?

And then as a related question you had mentioned some of thesteps you are planning to take, how to control expenses. Are these initiativesthat were prompted by some of the issues that have surfaced here in the coupleof quarters, or are these part of your plan again to improve margins over thenext several years?

Leslye Katz

Let me take the first one, and then I will try to answer thesecond one as well as Alex. Certainly we remain committed to marginimprovement. So that remains unchanged. I think that the factors that weidentified as the potential drivers of margin improvement, those remain the samefactors that we will look to achieve margin improvement.

Some of the elements that we put in place right now as wesee this slowdown in revenue over the last two quarters, it's certainly goingto help us achieve that longer term as well as we look to offshore, forexample, more of our production and development, that continues to be somethingthat we think will help drive long-term margin improvement.

Also longer term, I think we would like to introduce morevariability into our cost structure. As we saw in these last two quarters, wedon't have a lot of short-term variability, but longer term there is more offshoring with the initiative on C&S.

I think we'll see that happen. We saw margin improvement inC&S in the quarter, and that remains one of the key drivers for us in termsof achieving our overall margin improvement. We saw that on the gross marginlines, but we do continue to invest in our C&S capabilities. So the driversare there and we remain committed to margin improvements.

Alex Alvarez - GoldmanSachs

Alright, thanks. And just one other question; in terms ofsome of the comments that have already been provided, I just wanted to get asense of whether this slowdown is having any kind of impact in the Americasregion which sort of remains one bright spot for the company, and based onconversations with customers, what sort of would be your assessment of the riskthat this slowdown could eventually spread to the Americas as well?

Dave Carlucci

Yeah, I think we are seeing good strength in the United States.Canada is a little softer,and Latin America is a little softer. I dothink that the United Statesbenefits a little bit by some of our acquisition activity, that has beenheavier in the last year and a half in the US, and we continue to see goodstrength in our consulting and services business.

As we look at some of the areas of information spending onthe part of the client, we are watching very closely, whether we think that’sgoing to be impacted because we have seen a precipitous drop in the USfrom a shipment point of view of pharmaceuticals. So, we’ve never had a directcorrelation of that. But when you go from a little over 8% in January of pharmaindustry growth in the USto 2.6% at the end of June, we saw that move up to about 4% in July, and Augustwas back down a little bit. We are watching it extremely closely.

We’ve also had some innovation in the United States around NGPS which westill think we have a lot of opportunity to get customers over from monthly toweekly, and we have the opportunity to continue to accelerate the APLD piecesof our business. And certainly we are engaged at the headquarters level veryactively and about half of the top global pharmaceutical companies areheadquartered in the United States. So, I think it’s a very goodquestion Alex, because we are seeing some things happen around us, but at thispoint the USappears to continue strong.

Alex Alvarez - Goldman Sachs

Okay. Thankyou. I appreciate the color.

Operator

Our next question comes from the line of Robert Willoughby,Banc of America. Please go ahead with your question sir

Robert Willoughby -Banc of America

Thank you. Leslye, do you actually have the deal spending towhat it was in the quarter, the actual M&A spending. And then just second, Iknow you are not anxious to comment on '08 at this point, but I guess some ofthese issues appear to have a bit of a longer tail on them. So is it just asafe assumption to keep first half expectations for next year kind of a bitlower than the second half expectations?

Leslye Katz

Well, we've spent about $17 million year-to-date onacquisitions. And again, to be handed, Bob, we are not going to give '08'sguidance yet, we are not finished with our '08 budget yet, and therefore we reallycan't provide it. We will provide when we provide our year end results inJanuary.

Robert Willoughby -Banc of America

I have payments on acquisitions through six months of $22million, am I misreading the second quarter number? Or should it be biggernumber than 17?

Leslye Katz

Some of the payments that show up on the cash flow statementrelate to earn outs on prior period acquisitions. So the new businesses thatwe've purchased through the three months we have made by the acquisition, theresmall ones obviously had a purchase price of $17 million.

Robert Willoughby -Banc of America

Okay. Any early read on what that line item in the 10-Qwould say, the aggregate number?

Leslye Katz

Let me check that, and I'll try to answer that little laterin the call if I can.

Robert Willoughby -Banc of America

Okay. Thank you, and just the CapEx number. You hadindicated there were some one-time items. Can you detail exactly what thosewere?

Leslye Katz

We had several large facility relocations this year, and wedid our best to estimate exactly how that would all sort out in the year. Butit does make a pretty significant year-over-year difference. We certainlyexpect next year to have something more historical and all likely. So all overagain, I can't really you give you guidance on that.

Robert Willoughby -Banc of America

But the drivers behind the cash flow, the free cash flowrevision here, I mean, it should have been less, the CapEx number right. Thatwas planned; and it was just DSO in the lower earnings guidance?

Leslye Katz

Those are the biggest drivers.

Robert Willoughby -Banc of America

Okay, CapEx is in line with your expectation.

Leslye Katz

Yes.

Robert Willoughby -Banc of America

Thank you.

Operator

Our next question comes from the line of Glen Santangelowith Credit Suisse. Please go ahead sir with your questions.

Glen Santangelo -Credit Suisse

A quick follow up to some of the comments you made duringyour prepared remarks. I mean, last quarter we clearly talked about some of theregulatory issues in Germany,I think even the UK.But this quarter, it sounds like you talking about a whole new issue aroundsome of the bigger pharma companies that used to operate in silos that are nowtaking a more of the global approach. How does that issue not sort of spillover into the other territories outside of Europe.And then, you sort of suggested that it's really just choppiness and not along-term trend. I mean, what makes you think that this won't continue intomost of 2008 and potentially even beyond?

Dave Carlucci

Let me clarify it, Glen. When we talk at the end of thesecond quarter, as you know, we saw this phenomenon hit late in June, and wesaid we had a couple of things that we absolutely knew about regarding the UK and Germany uptake. Since that periodof time, we’ve looked underneath, what will contribute to long-term performancethere and what are we seeing from an uptake point of view. But the globalagreement we did a year ago was a European-based company.

The majority of the agreements that we’ve done on theregional basis have been EMEA based. What we were saying is that the trendswe've talked about for a long time that our global footprint is a strategicadvantage, and that clients are looking more and more at how they can look formore ways to do business efficiently on a Pan Region or a global basis, playsinto our strengths. So, with that in mind, we work very closely with our topclients to solidify our position overtime with a much broader portfolio.

What that says, when you are dealing with them andprocurement in order to have a win-win, they were looking for some advantage onthe base business that they purchased from us today. And the quid pro quo isthey gave us an access to a broader set of opportunities across multiplecountries.

That selling activity has to take place from that point on,in those associated terms based on how successful we are. What I am saying is,as we looked at it with more than a couple weeks of analysis, we have foundthat those types of agreements and the expected business performance in sell-inactivity have been impacted by this overall slowdown in decision-making andwhat we are seeing happened to our pipeline. So, it’s just another dimension ofwhat is underneath the delays in the business that we had anticipated to give.

Glen Santangelo -Credit Suisse

So David, just to kind of conclude here. As you think aboutthe two issues, the regulatory changes and more of the globalization in facthere, which do you see was a bigger one in your mind?

Dave Carlucci

Well, we saw softness across the mid-markets, softer in thethird quarter in Europe, than we had seen inthe second quarter. And we saw softness in major countries with the exceptionof United States.So, I am suggesting that this is a continued trend at this point of seeing aslowdown and that globalization in our mind is a long-term benefit to ourmodel, overtime we will see the benefit of this.

And the questions of when will we see the turnaround andwhat is overtime mean, I see this as a choppiness right now, and I don't seethis as a long term trend. I see the long term opportunity as a better abilityto sell through the multiple offerings that we invested in over the last fewyears. And so, I am very comfortable with the strategy, but your questions arevery fair ones, Glen.

What are the implications, and I think the implications are,we've got to see these new businesses that we've talked about that providesignificant opportunity for us to start to yield in this environment faster. Wegot the question on oncology earlier, we would like to see in the up tick onthat faster, but it is a number of events that are kind of hitting it once thatare creating this slowness.

Glen Santangelo -Credit Suisse

Okay. Thanks for the comments.

Dave Carlucci

Okay, we have a chance for one more question.

Darcie Peck

Just one more.

Operator

Thank you. Our last question comes from the line of JamesKumpel, Friedman, Billings,and Ramsey. Mr. Kumpel? Mr. Kumpel, go ahead.

James Kumpel -Friedman, Billings,Ramsey

Yeah. Thanks. I just wanted to build on a question, andbasically just -- if globalization is a benefit long-term and there is morecentralized purchasing, isn't that going to put more pressure on pricing and onmargins, and won't we just see a bigger manifestation of these extended salescycles getting longer and longer?

Dave Carlucci

Well, Jim, we have the ability to make that decision on whatof that business do we want take in, what business do we assess really has anupward opportunity for us. We are a little bit in the driver's seat on makingthat decision with clients.

And we honestly believe that long-term that is a huge plusfor us. It's opening doors for our consulting and services business in areaswhere people didn’t understand our capabilities fully across multiplegeographies. We are getting executives sponsors within the client to be theadvocates of our preferred vendor status.

But we kind of come up, we bump up against as we're rampingsome of these deals up, we are coming up against this slow down, due to theevents we have talked about.

So, Jim I don’t think they are bad, they will if we arefinding that they don’t materialize as we thought in the upside, we would haveto rethink that strategy. But at this point, I don’t want to give up theopportunity of what we see with the breath of our offerings and the doors thatthis opens for us on a global basis, to take advantage of pharmaceuticalcompanies getting more centralize in the way they make decisions.

And frankly, I think, from my discussion they all feel that,that’s kind of long overdue. When businesses contract, they have to look at adifferent way. When there is no limit to their success, the local economy lookslike it makes a lot of sense. So they are looking for every way possible to runtheir business more efficiently.

We offer a series of things to make them more productive,and how we package those with them is going to be very important to our abilityto sustain those kinds of growth rates that we have seen historically.

So, I am not willing to give up on them at this juncture,but obviously we are going to track the ones we've done very closely, to whatwe had anticipated seen when we culminated those deals.

James Kumpel -Friedman, Billings, Ramsey

And I guess, if I could just conclude on this one. Leslye,since you talked about receivables being a big issue and big source of slowdownin cash flow generation in third quarter. I think that you related that towhat's going on in the global trends and you are extending sales cycleetcetera.

If this in fact is a longer sales cycle overtime, if this isreally a trend? What's an appropriate way of looking at your free cash flowgeneration capabilities, are there some other areas that you can tweak to helpto continue to grow that overtime?

Leslye Katz

I think we can see improvement in our AR, so I definitely donot think we are at the level today, where we can improve upon that further.And we also continually look frankly at all the components of our cash flow,managing our payables etcetera. So, I think there are leverage there, but I amvery determined that we will see improvement in the DSO, we will not be at thislevel long-term.

James Kumpel -Friedman, Billings, Ramsey

Very good, thank you very much.

Dave Carlucci

Okay. Thank you very much for your attention and yourquestions, and we'll talk to you after the fourth quarter. Thank you.

Operator

Thank you ladies and gentlemen; this does conclude theconference call for today. We thank you all for your participation, and askthat you please disconnect your line. Have a great day everyone.

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