ICON Public Limited Company
Q1 2013 Earnings Call Transcript

Published: 25 Apr 2013

[Operator:]

Good day, and welcome to the ICON plc First Quarter Results 2013 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Simon Holmes. Please go ahead, sir.

[Simon Holmes:]

Thank you, Sara. Good day, ladies and gentlemen. Thank you for joining us on the call covering the quarter ended 31st of March, 2013. Also on the call today, we have our CEO, Mr. Ciaran Murray; and our CFO, Mr. Brendan Brennan. I'd just like to note that this call is webcast, and there are slides available to download on our website to accompany today's call. I will now make the customary statement in relation to forward-looking statements. Certain statements in today's call are or may constitute forward-looking statements concerning the group's operations, performance, financial condition and prospects. Because such statements involve known and unknown risks and uncertainties and depend on circumstances and events that may or may not occur in the future, actual results may differ materially from those expressed or implied by such forward-looking statements. Given these uncertainties, and as forward-looking statements are not guarantees of future performance, investors and prospective investors are cautioned not to place undue reliance on such forward-looking statements. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. This presentation includes selected non-GAAP financial measures. For a presentation of the most directly comparable GAAP financial measures, please refer to the press release statement headed Consolidated Income Statements on Audited U.S. GAAP. While non-GAAP financial measures are not superior to, or a substitute for, the comparable GAAP measures, we believe certain non-GAAP information is more useful to investors for historical comparison purposes. [Operator Instructions] I would now like to hand over the call to our CFO, Mr. Brendan Brennan.

[Brendan Brennan:]

Thank you, Simon. Net revenue in quarter 1 2013 was $317 million, this represents year-on-year growth of 26%. On a constant dollar organic basis, year-on-year growth was 23%. For the quarter, our top client represented 21% of revenue compared to 18% for the full year 2012. Our top 5 clients represented 51% of revenue, up from 48% for the full year 2012. Our top 10 clients represented 66% of revenue compared to 63% for the full year 2012, while our top 25 accounted for 81% of revenue compared to the 76% that we had in 2012. To support our continuing revenue growth, we added 200 new staff members in quarter 1. The acquisition of the Clinical Trial Division of Cross Country Healthcare added a further 500 heads, which meant that the -- overall, we closed the quarter with 10,200 staff, up from 9,500 at the end of 2012. In quarter 1, group gross margin was 36.1%, which compares to 36% in quarter 4 2012 and 35.7% in the comparable quarter last year. We continue to leverage our SG&A, which was 23.9% of revenue in quarter 1 2013, compared to 24.4% in Q4 and 26.8% in Q1 2012. Operating income for the quarter was $27.6 million, and operating margin was 8.7% compared to 8.1% in Q4 and 4.7% in the comparable quarter of last year. The net interest charge in the quarter was $180,000 and the effective tax rate was 18.4%. Net income in the quarter was $22.2 million, equating to EPS of $0.36, which compared to EPS of $0.15 in Q1 2012. DSOs were 33 days compared to 37 days in the same quarter last year, and 40 days at the end of 2012. At the end of March 2013, net cash was $201 million compared to $190 million at December 2012. CapEx for the quarter was $9.4 million and we spent $52 million related to the acquisition of CTS, the division of Cross Country Healthcare. All that said, I'd like to hand over to Ciaran now to talk more about our performance in the quarter and the business environment.

[Ciaran Murray:]

Okay, thank you, Brendan. I'm pleased with the results in quarter 1. I believe we've made an encouraging start to 2013, building on the momentum which we generated in 2012. Gross bookings for the quarter increased to $481 million, cancellations were $59 million, so that all resulted in net bookings for the quarter of $422 million, which is a book-to-bill of 1.33. Our backlog increased 17.5% to $2.9 billion. This backlog gives the 77% forward coverage of the next 12 months' revenue expectations and is a solid foundation upon which to build during the remainder of 2013. While we continue to win significant levels of new business, we remain focused on delivering greater operational efficiency. And in the quarter, we continued to manage our cost base well, reducing our SG&A costs to 23.9% of revenue. Overall, we're happy that during the quarter, we saw further progression against our plan and so I would like to take the opportunity to comment on how we're doing across our individual business units. We're very pleased with the progress we're making in the Central Lab business. I talked on the last call about our desire to balance revenue growth and steady margin improvements in the Lab during 2013, while making sure that we continued to invest appropriately in the quality of the Lab and to reduce its client concentration risks. During this quarter, we succeeded in adding 3 new Lab preferred provider arrangements, we secured $28 million of gross new business awards and grew revenue 4% over quarter 4 2012 and 24% over the same quarter last year. In addition, our focus on balancing our client portfolio resulted in an operating margin of 7% in the quarter compared to 4% in quarter 4 2012. We anticipate margins to continue in the mid- to high-single digits range for the remainder of the year. In our Early Phase business, revenues took longer to flow through than anticipated, resulting in a breakeven quarter. This still represents significant progress when looking at past performance, like in 2011 and early 2012. However, we have taken steps to optimize the capacity of our U.S. Phase I business, closing our Omaha site, the cost of which we took in this quarter, and consolidating the Phase I CPU operations in the U.S. into our San Antonio site in Texas. Expect that this business will remain around breakeven through the remainder of the year as we continue to execute this restructuring. The Late Phase business continues to grow in line with expectations. It recorded a particularly strong level of new business awards in quarter 1, which gives us a good platform to continue to grow to plan for the rest of the year. DOCS, our staffing and FSP business, had another solid quarter. It performed in line with our expectations, and the integration of the Clinical Trial Division of Cross Country Healthcare is proceeding to plan. This acquisition positions DOCS as a global leader in the clinical staffing and FSP fields and significantly expands DOCS U.S.'s footprint. Our clinical business had another strong quarter. We continue to develop new client relationships and have positive discussions with our existing clients around the adoption of new outsourcing of -- development programs. Clinical operating margins continue to improve, leading to further improvement in a group-wide margin, which increased to 8.7% this quarter, up from 8.1% at the end of 2012. Our continued margin improvement, coupled with a healthy business environment, positions us well to deliver on our plan for the remainder of 2013. Before we move on to Q&A, I'd like to thank all of the ICON team worldwide, whose continued commitment and dedication has enabled us to make this encouraging start to 2013. So I'll ask for the Q&A, please, Sara.

[Operator:]

[Operator Instructions] We will now take our first question from Sandy Draper of Raymond James.

[Alexander Y. Draper:]

Just two quick questions. One, first, Ciaran, just wondering that -- we were down at partnerships earlier and you guys and PAREXEL and Pfizer did a presentation, some of the commentary was around -- it sounded like the relationship is going very well. And then the comment came out that there was higher expected expenses or expenses were taking longer or staying at a higher level longer. I would assume that's all built into the guidance, that wasn't a new piece or a new step-up. Just want to make sure that what you've been communicating about Pfizer is already in the guidance.

[Ciaran Murray:]

I'm not familiar with that comment, Sandy. Maybe you can give me some color. What was it that was said?

[Alexander Y. Draper:]

Just said that as the strategic partnerships roll out, that the initial step-up in expenses had to stay around longer and there -- so the buildup in expenses, which obviously happened as you guys saw the drop in the margins. I want to make sure there's not another step-up in expenses coming in the back half of the year, something like that.

[Ciaran Murray:]

I think it might be a context issue. I imagine that, that was a presentation on Partnerships -- for the Partners of the Year Award, and looking back on 2 years of moving towards the partnership and the pioneering in the partnerships model. It wasn't a financial commentary. That comment would have related probably to sometime in the initial year of the contract.

[Alexander Y. Draper:]

Okay, that's what I figured. I just wanted to make sure of that.

[Ciaran Murray:]

Which has been our experience, and not just our account but all of the strategic enhancements. But the partnerships are up and running and that phase has been moved through in the waves and it has settled down to the cost base that it has and of course, all of that will be baked into everything that we say about our forward-looking statements.

[Alexander Y. Draper:]

Great. Well, that's what I figured, and I just wanted to make sure -- and it certainly sounded like the partnership was progressing well in terms of the results. That's nice to hear. Second question, and I'll jump back in the queue. One thing I'm sort of trying to reconcile, and this may be some type of a math issue. Your burn rate was nicely up, your pulling out of backlog is improving, it's nice to see that. But when I look at your backlog earned in the next 12 months, when I do the calculations, it looks like you're actually projecting a lower percentage of backlog in the next 12 months. Is that really just an indication of the lengths of the business you're signing, any slow down? I'm trying to reconcile the faster burn rate that you've been seeing in the past couple of quarters. When I look at your expected next 12 months revenue coming out of backlog, you're actually taking a lower percentage. I'm just trying to match those 2 numbers up.

[Ciaran Murray:]

I know it's not your fault, Sandy, because you're an analyst, so you might be overanalyzing here. But if you look at our conversion rates, say, over the last 6 or 8 quarters, it tends to move about in the range of sort of 11% to 11.5%. I think 1 or 2 quarters, not too long ago or 1 quarter, certainly, I think it was 10.8%. And it's really just a function of, we have the other 900 significant projects in our backlog across 4 or 5 existing business units. We forecast them in a very great level of detail and granularity ourselves. And a lot of what you see when you look at it yourself. But there are assumptions about how quickly certain studies will start up there, studies of different therapies that take longer than other studies and things that start slowly and then suddenly go a lot quicker. And so all you're really seeing is that, I think, this quarter we had -- was that, Brendan, 11.4%, 11.5%?

[Brendan Brennan:]

11.5%.

[Ciaran Murray:]

11.5% burn rate, that was stronger than we've seen in a while. A couple of things went faster than we expected. When we look forward, we just make the forecast on a study-by-study basis. So I wouldn't try and read too much into that in terms of -- that it's signifying some fundamental change in anything, it's just our best guess of what the remainder of the year looks like when it comes to how things will start up and progress and translate into revenue.

[Operator:]

We will now take the next question from Eric Coldwell of Robert Baird & Co.

[Eric W. Coldwell:]

Maybe three quick ones. First off, you mentioned the Central Lab concentration mitigation, I'm just curious if you can maybe give us some color on where you are with client concentration in the Central Lab? And maybe, given the new preferred provider deals, where you see that trending over the next year?

[Ciaran Murray:]

Yes, I mean, our concentration in the Lab has been high for a number of years, and I think we've talked about that before. And it's still higher than you would ultimately like. So one of the objectives that we took was to start a bunch of new strategics against the lab, we've added 3 fairly significant ones this quarter. Obviously, we won't see the benefits of that start to really accrue until a couple of quarters pass, and then significant business comes in, and as trials just started and samples -- and patients are recruited and samples come in, the revenue flows to the Lab and the Lab tends to be a little -- a bit slower than other sides of the clinical business. So I think we're happy with the progress, exactly where it leads, ultimately, in numbers, I can't say at this stage, but it will lead to having a much better balanced portfolio of customers in the Lab. We've already seen the start of that and we will see that continue.

[Eric W. Coldwell:]

Okay. Second one is, and I -- of course, I loathe to ask questions about specific clients, so I'll keep it anonymous. But there has been a couple of press releases by your peers about working with one of your known customers and it has raised a lot of turmoil in the market about your preferred provider with a specific account and what's going to happen on the clinical side of that as well. I'm curious if you can give any kind of broad stroke comments on where you stand with preferred provider's strategic relationship deals, renewals and expectations for customer attrition or retention as you look at 2013?

[Ciaran Murray:]

I think we stand well. I saw those press releases, as well, that were really very specifically, in relation to the Lab, which is sort of a different business and ultimately, not a particularly significant part of our business. Our existing client relationships are good, they're strong, and we continue to work successfully with them and try and challenge ourselves and them to keep making a difference and looking at new ways to improve the quality of what we do and take out time and cost and add value. We have a couple of specific clients up for renewal this year and I'm very optimistic that those negotiations are proceeding as you would expect at this stage. With one of those clients, we have -- we're very close to finalizing with -- the draft of the final extension of the MSA, so that's encouraging. But of course, these are commercial negotiations, so I'm not going to negotiate in a public forum. But we're in good standing, we're working well. I think, substantially, our relationships are solid, albeit that this is clinical research, there are always plenty of times when there are challenges and moments that we all have to work through and test the strength of our partnerships and relationships. But it's -- sort of to what you're alluding to on the renewals, I think we're in good shape. We have a process to go through, as you would expect, to sign things off, and when we sign them off, we will be happy to tell you we've signed them off.

[Eric W. Coldwell:]

Okay. Last one and I'll jump off. Cross Country Healthcare, public company before, part of one and the analyst forecast for that segment appeared to be fairly higher than what you've put into your next 12-month outlook, which I believe, $40 million this year, $52 million for the 12 months. So I'm just curious, Wall Street was forecasting high-60 millions of revenue for that business, you're saying it's at a $52 million run rate. Is there something about that, that you're building in cushion or you had a subcontractor relationship or maybe you're just modeling some attrition to be safe. I'm just curious what the delta is there. And then, any color on the margin progression with Cross Country, which I know for years they've come down, but looked like it was maybe on the cusp of heading back to higher levels. So any additional details on that would be great.

[Brendan Brennan:]

Eric, it's Brendan here. I think what we've put out initially was -- you'll recall, we've put out 2 sets of guidance, once this year with -- without Cross Country and the other, with share. And that range of revenue is still where we're very comfortable with. So I think you're referring to the midpoint of that range, but there's also an upper end of that range that we could get to. But we're still comfortable in our overall revenue guidance, so that's probably where we stand on that one. I mean, in the quarter, they've come in well. That they -- in this quarter, they -- it was only -- only at the 15%, they haven't had a huge impact on the quarter but somewhere in the range of $6 million for this quarter and our margins are about 6% to 7% for this quarter. We'll see the, obviously, a bigger revenue contribution as we go through the rest of the year from them. And the margins, I would imagine, it will be -- still remain in that ballpark, somewhere between 6% and 9% for the full year.

[Operator:]

We will now take the next question from John Kreger of William Blair.

[John Kreger:]

My question is about client concentration. If we look at the stats in the first quarter versus last year, the top client concentration with revenue was just continuing to creep up. If you look at the business that you signed in the quarter, would that imply that concentration will continue to trend up throughout the rest of this year or perhaps start to go back the other way?

[Ciaran Murray:]

I suppose it depends, John, on how quickly the newer stuff starts up. I mean, we've been booking significant amounts of business during the course of last year and this year, outside of the top client relationship. But these are big trials and some of them don't kick in. I think it's moved very rapidly over the last year, that concentration metric. It might tick up another little bit, looking at the forecast, but it shouldn't tick up, my expectation is that it won't tick up significantly. And then, we'll start to see it either later on in the year or early next year, start to move back as new business kicks off. I think it's fair to say that, that performance of other clienteles has exceeded the original forecast that we gave back at the start of the relationship. And so we've been very successful in onboarding a lot of business, so it will just take it a while to unwind. So I wouldn't expect it in the next quarter or 2, but we should see that start to move back towards the end of the year.

[John Kreger:]

Great. And then, a second question, totally unrelated. Back at your Analyst Day, there was a lot of discussion about Firecrest and some of your new technology offerings. Can you just give us a quick update? What sort of traction are you seeing those offerings gain with your clients?

[Ciaran Murray:]

Well, it's good. I mean, I suppose at a higher level, you'd say that it's one of the factors that has led to the kind of trailing book-to-bill. I mean, our 12 months trailing book-to-bill is 1.4-something, and nearly 1.5. That was last quarter, and so it's 1.4 now. So these offerings have been gaining traction gradually. With each passing quarter, we deploy more of it, we expose more of it to our existing clients, to new ones, to more people within the clients. And so it's -- we're very happy with the progress that it's making.

[Operator:]

We will now take the next question from Dave Windley of Jefferies.

[David H. Windley:]

A couple of things, a couple of themes that I'd love for you to comment on. One, around strategic partnerships, the discussion was about the magnitude of investment, the magnitude of commitment by both sides and therefore, really, the stickiness of the relationships. So I'd love for you to elaborate on how you see, kind of, the tighter and tighter marriage between the sponsor and the CRO. And then, secondly, that the, call it, the -- the partnership 2.0, these renewals that we're headed into are, perhaps, likely to focus more on operational process and taking unnecessary steps out or things like that, maybe technology-enabled things, as opposed to continuing to squeeze down on unit costs? And I'd be curious if you could comment on that as well.

[Ciaran Murray:]

Let's go to the first one. Look, there's nothing new in what we've been saying about the potential stickiness of strategic partnerships. I mean, if we look at our experience over the number that we've done, which is pretty significant over last year's, the investment is significant in terms of dedicated management resource and oversight models much more senior executives have done in the past, talking to each other, it's significant on both sides; alignment of SOPs, which SOPs to use between the clients and sponsor; sometimes, the amendment of both sides' existing SOPs, and that takes time and effort; aligning technology platforms and metrics and how we measure things. So all of those steps take a lot of time. There's a big change, as I said, there's as much, but change management as clinical management, at the start of these things. And you'll find that people being people and it takes a good while to get things up and running. The first year tends to be fairly frantic, people are learning to work with each other, you're firefighting with all of those kind of process changes, getting things aligned. And then, over time, you do get to a point where the relationship's sticky for a number of reasons. Well, I mean, if it's working well, it's sticky because there's good quality work being delivered. And relationships, importantly, have been built, people understand how each other thinks, so it's easier to exceed your clients' expectations in an enhanced relationship as you learn more about their behavior patterns and vice versa for the sponsor than with the CRO. So these are all things you would've expected, I think, to come from strategic relationships. They're part of what made them attractive to us and why we geared our strategy towards this. And I think it's just the natural cycle of the change management process. You get to a point where there would be an awful lot of unraveling. It's not impossible, I would say that. But there would be an awful lot of backing out in terms of realigning systems and SOPs, and things like that, in particular. So I think it works to everyone's benefit and then, what underlies both sides to do is -- and largely, it's to put a platform in place and that probably leads, then, to your second question. And once you have that platform in place, that takes the first 2 or 3 years or whatever. Then, really, as the focus is now on significant change in terms of, basically, how do you take out chunks of cycle time, how do you improve quality of data, how do you get to go, no-go decisions more quickly at a level of transparency and how do you take out layers that are duplicated between the -- as trust builds up, you don't need the kind of the matching concept of layers between the sponsor and the CRO, so you get a more seamless interface and then, it's almost as if everyone begins to act as one. I mean, that's hard stuff to do, but we see it happening. It just always takes a little longer than you might like. So I think, if we look at what we're doing, initially, if you take a client -- a hypothetical client, you're getting studies on board, you're getting things up and running. And as you move through that, then, you can put it on your own platform. Some of our platforms are quite advanced, and then it's a question of saying, "Well, look, you can take all of these sites." And I'll use Firecrest as an example, we're working on a new version of that with much better data capture capabilities than traditionally, which will take out time that was traditionally lost. They have to investigate the site, prove the quality, reduce the error of content data, you can take a couple of weeks out there. If you get it to another point, you get the systems either us under sponsor on a common platform or else, we spent the time getting our platforms to talk together. How much time can you take out in data processing and things like that. So it's really just, I think, you build the platform in the first phase, what I call the strategic partnership Phase I. By Phase II, you have a platform there and it's just about the evolution of process improvement based on working together, based on trust, based on being able to align more closely, your common objectives. And then, you put the technology platforms in place and time comes out and as time comes out, cost comes out. As time comes out, it can also have the benefit of leading to data that will help you decide not to proceed with the trial more quickly than you would, and then, deploy resources elsewhere. So those are the kind of benefits that we see, probably, a long way of saying we're seeing these benefits evolve through the time that you work together at the strategic level.

[David H. Windley:]

That's very helpful, I appreciate that. If I could ask a shorter follow-up on Central Lab, you've added 3 new preferred providers in the quarter, was that a net 3? Is that -- did you -- in the quarter, with 3 more preferred provider arrangements than you started?

[Ciaran Murray:]

That's 3 real live breathing clients, Dave, yes.

[David H. Windley:]

And no losses, is the implied question there.

[Ciaran Murray:]

No significant losses, no. I mean, look, business goes up and down with any customers at various points in time, but we're still working with all of the clients at the end of the quarter that we were at the start of the quarter.

[Operator:]

We will now take the next question from Ross Muken of ISI group.

[Vijay Kumar:]

This is Vijay in for Ross. Just wanted to -- quick housekeeping question. Could you comment on what the organic growth rates were for the segments, the Lab versus the clinical research?

[Brendan Brennan:]

Well, actually, we never really break out the organic piece on just the lab versus the rest of the segment. But obviously, we don't acquire businesses in the lab business, so it's all organic. What we did say is that 23% was across the group, and that's a decent read through for both segments.

[Vijay Kumar:]

Got you. And I was just curious on cancellations. I mean, this has been coming in at the low end of your historical range for the last few Qs now, and I mean, what's the read-through from those numbers, I mean, coming in at 2 or below 2 right now? Does this mean that the industry is sort of -- are we entering a phase of stabilization, we're past through -- past through those periods when we saw a 5-plus kind of cancellation rates? I mean, what's driving this?

[Ciaran Murray:]

Look, it's too early to say. Our history of cancellations has built up over 21 years. We've seen a few quarters with lower cancellations, before that, we've seen some quarters with higher rates. I don't think there's any fundamental change, some of it's just timing. Some of it might be that one of the advantages of strategic relationships is that we all have a lot more visibility in how things go. So it's, perhaps, and I say perhaps because it's too early to conclude, but perhaps, we're seeing that when things go into the backlog under a strategic arrangement, they are less likely to be canceled. But that doesn't preclude, I mean, things get canceled for a number of reasons. Sometimes it's about the failure of a compound in terms of safety or efficacy as the data comes out and that risk is harder to legislate for. So I wouldn't read too much into the low rates. We still continue to model our historical average because we have no reason to change that at this time.

[Operator:]

We will now take the next question from Todd Van Fleet of First Analysis.

[Todd Van Fleet:]

Ciaran, I wanted to get your sense as to how you feel about ICON's presence in the Asia Pacific region and maybe, just your general thoughts on how key that part of the world remains in terms of overall industry growth and then, I guess, the growth of ICON specifically?

[Ciaran Murray:]

Look, we're a service provider, Todd, so we tend to follow the market, follow where our customers go. And at the moment, we have over 1,600 people in Asia Pac. We've done a lot of work in building up our footprint there organically. We're working also about, I suppose, at 18 different sites. We have lab capability there; and in India and in Singapore and in China, we have the clinical offices and the clinical footprint, 15 or 16 countries. And we have the acquisition of BeijingWits last year, which brought a high level of talent. We've operated in Japan for a very long time. We continue to invest resources in that business and continue to look at how to develop it. So I think we're appropriately positioned for where we are now in Asia. But if you look at the development of the way that our customers' plans are going, in terms of how they execute on clinical trials due to, I suppose, principally, patient availability and factors like that. We'll see the number of patients that are enrolled in global trials, in that region, increasing over the next few years. As that increases, we'll scale up our resources as we do. So it's going to be an important growth area. We are well-placed to participate in this and have a good solid foundation there. But undoubtedly, we have to grow it as the market grows. But it's very much -- we've seen this before when Eastern Europe started to grow back in the early midyears of the last decade, and we're using the same model there. You build a certain platform, probably, a little bit ahead of growth, you grow into it. So in Asia Pac, we built it out, we've grown into it, and as business there develops, we'll be able to scale up to follow it.

[Todd Van Fleet:]

Okay, I guess that was really kind of the genesis, but my question is, is the investment in that region in advance of realizing the revenue, my guess would be, my suspicion is that some of your strategic partners are asking you to do more work in that region. I don't know if you can confirm that and maybe just qualitatively, characterize the investment. Will it be significant -- more investment in advance of realizing revenue or work in that region?

[Ciaran Murray:]

No, it won't. I mean, look, it's not just our strategic partners, all of our customers who are doing development in Asia ask us to put resources there, so I wouldn't overemphasize that it's in some way related to requirements of strategic partners. It requires the market in general. It's the way the development is going. I think that the hardest bit of getting into a region or getting anywhere, are those early years when you're starting to -- you have to start from 0, build up an infrastructure, build up local knowledge, build up regulatory knowledge and knowledge of who's in the market and recruiters and all these kinds of stuff. And once you have a significant platform in place, it's much easier to scale it up. So it's really just a question of adding heads and there's no reason to think that a significant amount of heads would be added in advance of revenue. You might put in a few managers or some oversight or governance, but that's certainly not, in any way, significant enough to move the needle on the numbers.

[Operator:]

We will now take the next question from Timothy Evans of Wells Fargo Securities.

[Timothy C. Evans:]

I wanted to follow up on Eric's question regarding the contract renewals. I understand that you feel like you're in good shape on the renewals in general. Could you -- again, speaking broadly, not about specific clients, but as you extend these MSAs, do you anticipate having any headwinds to deal with it at all in the terms of the agreements, whether it be pricing or additional investments that you need to make? Anything that you could see might kind of slow your momentum as we go into 2014, 2015?

[Ciaran Murray:]

No, there's no reason at this stage to believe they'll be fundamentally different in terms of t's and c's and what we've done so far. I think the key is that what we all want to do, because these are partnership arrangements, are make our working relations closer so that between the sponsor's efforts and ours, the time and cost comes out of the development effort. You get more drugs to the market quicker. But no, in specific terms, there's nothing there, nothing there that concerns me.

[Timothy C. Evans:]

Okay, and for your strategic partners with whom you do both Central Lab or for whom Central Lab and clinical are part of the agreement, can you speak to just the differences in how that works, like, why should your arrangement in Central Lab not necessarily correlate to the arrangement in clinical?

[Ciaran Murray:]

It depends what you do, I guess, to find strategic partners across those 2. They're 2 different businesses. And you have different buying groups in different parts and various customers. I would say that some of our strategic relationships have allowed us to cross-sell our lab services into the same customer. I mean, that's cross-selling more than a strategic offering that's joined at the hip. They're 2 very different kind of processes, 2 very different markets. So I wouldn't overemphasize the connectivity in those terms, what I would say is that having strategic relationships and building up trust of people can allow cross-selling opportunities, but it's no more than natural.

[Operator:]

We will now take the next question from Douglas Tsao from Barclays.

[Douglas D. Tsao:]

So Ciaran, just to sort of follow up, do you see an inherent strategic value or strategic necessity to being in the strategic business, Central Lab business?

[Ciaran Murray:]

There are advantages to being in the lab business. It builds out your service offering for those customers that do want to minimize their number of providers. While well-run labs can generate good margins, when you get them to a certain level of scale, so -- an attractive part of our business. And increasingly, with the big data agenda and harnessing the part of data to try and get some level of predictability into how a trial might perform or the effect in patients or investigator's performance, and the more data sources that you have, the better that -- that is. So there are very strong reasons for us to stay in the lab business. Whether I'd call it a strategic imperative of that, I don't know. As you know, Doug, I'm not really given to hyperbole at the best of times. So I think, but I think there are good reasons to stay in it, and we're very happy that as we grow the scale of the Lab and it's growing the top line and as we add customers and preferred provider arrangements, it will help support future growth. And we're increasingly finding that we're more consistently delivering profit from it and predictability. I think I'm happy with the progress it's making and certainly wouldn't be considering not being in the lab business.

[Douglas D. Tsao:]

Okay. And then, just turning to the margins. We saw a very nice improvement in terms of the operating margins for the business, it seemed to be largely driven by your sort of leveraging your SG&A spend with some improvement in the gross margin. But that, certainly, has been more modest. As we look forward, and you consider as your operating margin target, will that be driven largely by continued leverage on the SG&A line or do you anticipate to see some kind of inflection point on the gross margin side to get back to the sort of high 30s, sort of even 40% level that we saw just a few years ago?

[Ciaran Murray:]

I think it's a bit of both. Doug, I think there's still more leverage that will be gained from our SG&A line, but I'm looking forward to improvement in the gross margin line. I think what you're really seeing there, the gross margin line is really about the sort of direct operating costs of the business. They haven't increased -- gross margin hasn't increased quite as quickly as I might have expected, but then, I didn't think we'd be continually reporting these 20-percent-plus growth rates when I thought that. So if you looked at the past, what tended to happen, when revenue grew too high, gross margin actually went down. So I think the fact that we've performed the trick of growing the top line significantly, while getting leverage off SG&A and modestly improving the gross margin, I think it shows we're making fundamental changes there. And that we'll get leverage from as they mature and as the business goes forward. So I'm happy enough with where we are. Ultimately, I'd like to see the gross margin in the higher 30s, that would be our aim in the medium-term, but we'll be working towards that very gradually.

[Operator:]

[Operator Instructions] We will now take the next question from Jack Gorman of Davy, Research.

[Jack Gorman:]

It's a broader question, really. Concentration in the quarter was extremely good, net cash increased, notwithstanding the acquisition in the period. Just wondering, Ciaran, if you can give us just your latest thoughts on capital allocation, the investment opportunities or the strength of the M&A pipeline that's in front of you today. Your thoughts and your updated thoughts in terms of value return, maybe buybacks, et cetera, and I suppose, maybe, or whether you're still philosophically, still maintaining a net cash position, or will there be an opportunity or scenario where you see yourselves moving into net debt at any point in time?

[Ciaran Murray:]

Nothing has changed, Jack. Our primary concern here is driving shareholder value. We've said that we see significant opportunity to grow, still, in the market and with the change in the outsourcing market and future outsourcing penetration growth and the consolidation of market share to more limited strategic providers. We said we're committed to being one of the top-tier strategic providers. We embarked on an investment program around filling in our gaps over the last years, the growth in Asia I talked about earlier, investment in differentiating capabilities with consulting and Late Phase offerings, our enhanced FSP offering, our informatics and technology leverage. So none of those things changed. We've added infill acquisitions such as the Cross Country one as well, recently, to build things out. We look at an M&A pipeline, there's quite a lot in the market at the minute, some of it might fit us, some of it might not, we'll analyze it. We'll make the decision based on whether we think, in the medium-term, we can generate the return from it and make sure that we keep our offering fresh in terms of maintaining our position and being able to give the full range of services and the full range of therapies and geographies for our customer. And what it takes to do that, it takes to do that. We're not philosophically hung up on having a net cash position, I don't think we ever were philosophically hung up. We will be happy to take debt when it's appropriate to, towards the ends that we want to get to and towards our consideration of the primacy of our shareholder returns, so nothing has really changed and we just -- we'll monitor the market and adapt to the market as we find it.

[Jack Gorman:]

Just one -- just detailed follow-up. You obviously incurred a charge in the quarter and do you foresee any further restructuring associated with the Early Phase in the near-term, and which -- should we expect, maybe, further charges in the next quarter or 2?

[Ciaran Murray:]

No, there'd be no charges related to the Early Phase in the near term. That's the charges that's sufficient to do what we have to do there.

[Operator:]

We will now take the next question from Robert Jones of Goldman Sachs.

[Robert P. Jones:]

Just thinking about the near-term margin progression, if I look at the quarter, obviously, the conversion was quite strong, it sounds like, that's not the run rate expectation. Is there any implication just as we think about the kind of ebbs and flows of the margin progression over the next several quarters relative to the spike in revenue growth or conversion this quarter?

[Ciaran Murray:]

No.

[Robert P. Jones:]

Great, okay. Thanks for the long answer.

[Ciaran Murray:]

There's no implications, I don't want to take too awful long. But no, we're going to see more of -- just maybe reiterate what we've said before, we'll see more of that the same. I mean, it's 6 quarters now that we've got steady evolution in the margin and looking out towards the rest of the year, I think we said we expect it to exit the year, approaching 10%, or thereabouts. I think we're on track for that and we'll continue to see that, and within those forecasts, we've factored in the revenue growth that it takes to get us to what we guided, and to say that, that conversion rate, those tend to fluctuate a little bit, quarter-on-quarter, looking forward. You can see 1 quarter adds fairly clearly, I would expect it'll be 11.3% or 4% or something like that. So no, there's no implications to worry about on that front.

[Robert P. Jones:]

Great. And then, most of my questions have been answered but I guess, just one bigger picture question on Phase I. You obviously mentioned closing the Omaha facility. It just seems like in the last several years in the industry, Phase I has been kind of in a secular decline, I was wondering, Ciaran, if you wouldn't maybe just opine on kind of the state of clinical pharmacology and kind of where you see that phase of development progressing over time?

[Ciaran Murray:]

I mean, it's hard to look too far over time, Bob. I think we can look back and see that yes, you're right, in the last couple of years, things have tightened up a little bit there. I think everything has its cycle. I mean, at a more general level, you're seeing more work in clin pharma, and now using biomarkers and science to try and minimize the amount of work that will be done and tailor it and get good go, no-go decisions earlier. We're seeing smaller trials and things like that, more use of -- level on the technology that goes around medicine. And so I mean, there is a longer-term trend in that direction. And there's also a cyclical trend that I think we saw. And if you look at our customers and the challenges they faced with patent cliffs and go back a couple of years, the funding crunch, I think there was a sort of a decision to move through compounds more aggressively that we're further up the development pipeline. So we've seen that softness in markets, maybe in preclinical and a little bit in Phase I. But the cycle will turn and as these compounds move through, I think you'll see some switch back to more focus on the earlier phase, but that's speculation on my part. Time will tell.

[Operator:]

As there are no further questions in the queue, I would now like to turn the call back to Mr. Murray for any additional or closing remarks.

[Ciaran Murray:]

Okay, well, thank you, everyone, for listening in today. We're pleased with the start we have made to 2013, and we're looking forward to working hard through the remainder of the year to continue to position ICON as a global CRO partner of choice to the industry and in delivering the best-in-class information solutions and performance. Thank you, everyone. Good day.

[Operator:]

That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.