ICON plc

ladies and gentlemen thank you for standing by and welcome to icon q1 results 2023 conference call at this time all participants are in a list and only mode after the speaker presentation there will be a question and answer session so ask a question you will need to press star 1 1 on your telephone i would now like to end the conference over to the speaker today kate even please go ahead mom the one is open

Good day and thank you for joining us on this call covering the quarter ended March 31st, 2023. Also on the call today we have our CEO, Dr. Steve Cutler and our CFO, Mr. Brendan Brennan. I would like to note that this call is webcast and that there are slides available to download on our website to accompany today's call. Certain statements in today's call will be forward looking statements. These statements are based on management's current expectations and information currently available, including current economic and industry conditions. Actual results may differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with the company's business, and listeners are cautioned that forward-looking statements are not guarantees of future performance. Forward-looking statements are only as of the date they are made, and we do not undertake any obligation to update publicly any forward-looking statement either as a result of new information, future events, or otherwise. More information about the risks and uncertainties relating to these forward-looking statements may be found in SEC reports filed by the company, including the Form 20-F filed on February 24, 2023. This presentation includes selected non-GAAP financial measures, which Steve and Brendan will be referencing in their prepared remarks. For a presentation of the most directly comparable GAAP financial measures, please refer to the press release section titled, Condensed Consolidated Statements of Operations. While non-GAAP financial measures are not superior to or substitute for the comparable GAAP measures, we believe certain non-GAAP information is more useful to investors for historical comparison purposes. Included in the press release and the earnings slides, you will note a reconciliation of non-GAAP measures. Adjusted EBITDA, adjusted net income, and adjusted diluted earnings per share exclude stock compensation expense, restructuring costs, foreign currency gains and losses, amortization and transaction-related and integration-related costs and their respective tax benefits. We will be limiting the call today to one hour and would therefore ask participants to keep their questions to one each with an opportunity for a brief follow-up. I would now like to hand the call over to our CEO, Dr. Steve Cutler.

Thanks, Kate, and good day, everyone. ICON made a good start to 2023 in quarter one. delivering solid results while continuing to develop our strategic initiatives in healthcare intelligence. We continue to navigate macroeconomic headwinds that are impacting our industry. While we expect these challenges to cause uncertainty in the short to medium term, now, more than ever, our customers are turning to Icon as a strong, stable, and strategic partner that has the broad services, resources, and capabilities to optimally manage their clinical development programs and functions. Notwithstanding this, we have seen a generally stable underlying market demand across customer segments, supported by the fundamental drivers of increasing R&D spend and further outsourcing penetration. This has resulted in improving sequential RFP trends in quarter one. Within customer segments, Demand from mid and large biopharma companies continues to show growth with a recent increase in the number of larger FSP opportunities. In the emerging biotech segment, cautiousness with regard to spending has continued as the broader funding environment remains challenged. Companies are actively conserving cash and prioritizing programs until they have improved visibility to additional funding. As a result, We have seen some delays in decision-making within this segment and more considered assessments on the scale and timing of their studies. While this dynamic creates a more challenging environment in this segment in the near term, our commitment remains unchanged in this area of the market that continues to fuel innovation in R&D. We are partnering with many of our biotech customers at an early phase of development, and connecting our operational and medical experts with their leadership teams to collaboratively regenerate optimal development plans and conduct their studies. In doing so, we get to truly understand our customers' objectives, and this builds meaningful and long-term partnerships. We remain encouraged by the traction we are gaining broadly in the marketplace and the opportunity ahead of ICON. Our unique position as a world-leading provider of clinical development services appeals to customers across all segments, and we've made good progress in advancing a number of strategic discussions with large and mid-sized pharma companies since our union with PRA Health Sciences. There is an increasing amount of engagement taking place at a strategic level in customer accounts as companies evaluate and review their optimal clinical development strategies. we are seeing a growing need for full service, functional, and hybrid solutions, with customers seeking a partner that has the necessary scale, expertise, experience, and breadth of offering to seamlessly execute their programs and or augment their existing infrastructure. To that end, in quarter one, we announced a strategic partnership with Leo Pharma, a global leader in dermatology, with ICON acting as their sole provider of clinical development services. The partnership will leverage both fully outsourced and functional outsourcing activities in a tailored and flexible hybrid approach to development. This unique model is designed to provide patients improved access to innovative trials while effectively and flexibly managing LEO's development portfolio. In addition, Our late-phase business was awarded a full-service strategic partnership in real-world solutions by a large biopharma sponsor in quarter one. This customer cited ICON's strong history of delivering real-world evidence studies, collaborative approach to deliver solutions, and assessment of CRO leadership as key decision criteria when awarding this partnership. We continue to see opportunity to improve our execution in key development activities such as study startup, site selection, patient identification and recruitment as trial complexity increases and durations expand. With challenging dynamics in the market, such as sites facing resource constraints, increasingly niche patient populations and an overall uptick in regulatory requirements, the need for novel solutions and new approaches is accelerating. As a consequence, our focus and investment innovation has continued to increase across a number of areas within our organization. We have demonstrated success with several tools we have developed at ICOM and believe we are in the early stages of creating even more meaningful improvements in clinical development. Our approach to innovation recognizes the importance of coupling our unique experience and expertise alongside technology to develop solutions that deliver value for customers. OneSearch, our integrated AI tool for site identification and selection, is driving remarkably better delivery of studies, with a 53% reduction in the median time for site identification and a 50% reduction in the percentage of non-enrolling sites on Icon Studies. Separately, we have launched a new customer-facing tool with our late-phase business called Cassandra, designed to more accurately predict post-marketing commitments. This model utilizes machine learning technology along with our leading expertise in phase four and post-marketing clinical trials to generate insights on late phase strategy and planning. Outside of technology, we are further investing in our differentiated capabilities with the purchase of the remaining shares in our joint venture with OncaCare, a global cancer research site network. OncaCare is uniquely positioned to increase patient engagement and oncologist participation in clinical research through more efficient clinical trial delivery and a patient-led approach. We are excited to add OncoCare to our leading site and patient solutions business with the critical therapeutic expertise and experience it brings to further enhance our offer. Moving to our financial performance in quarter one, Icon delivered solid results with a 5.3% revenue growth on a constant currency organic basis over quarter one, 2022. Excluding COVID related work on a constant currency basis, revenue increased 9% year over year. Gross bookings increased 6% sequentially, but a higher level of cancellations and contract modifications in the quarter resulted in net bookings growth of 3% over quarter four, 2022, and a net book-to-bill of 1.22. Solid direct fee revenue growth drove gross margin expansion of 200 basis points on a year-over-year basis. We also saw another quarter of impressive growth in adjusted EBITDA, resulting in an increase of 17.2% year-over-year, driven by cost management and the continued execution of our hub location strategy across global business services. Our capital deployment strategy continued as planned, with a further reduction in our floating rate debt exposure in the quarter. Additionally, we remain active in evaluating potential acquisition opportunities that strategically align with our portfolio and further enhance our offering. We are reaffirming our full year 2023 financial guidance of revenue in the range of $7.94 to $8.34 billion, representing 2.6 to 7.7% growth on a year-over-year reported basis, and adjusted earnings per share in the range of $12.40 to $13.05, representing growth of 5.5 to 11.1% on a year-over-year basis. The guidance assumes double-digit adjusted EBITDA growth for the full year 2023 over 2022. Finally, I want to thank our employees across ICON for their significant contributions to our performance in quarter one. We remain steadfast in our commitment to advancing and accelerating clinical development, and we are encouraged by the value we are delivering for customers, sites, and patients. I'll now turn the call over to Brendan for additional comments on our financial results. Brendan.

Thanks, Steve. In quarter one, ICON achieved gross business wins of $2.86 billion and recorded $443 million worth of cancellations. This resulted in net awards in the quarter of $2.42 billion, a net book to bill of 1.22 times. With the addition of the new awards in quarter one, our backlog grew to a record $21.2 billion, representing an increase of 2.4% on quarter four of 22, or an increase of 8.4% year over year. Our backlog burn was 9.6% in the quarter, slightly down from quarter four levels as expected. Revenue in quarter one was $1,978,000,000. This represents a year-on-year increase of 4% or 5.3% on constant currency organic basis. Overall customer concentration in our top 25 customers decreased from quarter four 2022. Customer represented 8.8% of total revenue in quarter one, and our top five customers represented 28.8% of revenue. Our top 10 represented 42.6, while our top 25 represented 63.5%. Gross margin for the quarter was 29.8% compared to 29.9% in quarter four, 22. Gross margin increased to 200 basis points over gross margin of 27.8% in quarter one, 2022. Total SG&A expense was $189.6 million in quarter one, or 9.6% of revenue. In the comparable period last year, total SG&A expense was $187.9 million, or 9.9% of revenue. The uptick in SG&A expense was driven by an increase in our general bad debt provision of approximately $15 million in the quarter. As Steve mentioned, this is a reflection of the challenging environment economic environment that a small subset of our customers are facing. Adjusted EBITDA was $399 million for the quarter, or 20.2% of revenue. In the comparable period last year, adjusted EBITDA was $340.6 million, or 17.9% of revenue, representing a year-on-year increase of 17.2%. Adjusted operating income for quarter four was $368.7 million, a margin of 18.6%. This was an increase of 17.4%, over adjusted operating income of $314.1 million, a margin of 16.5% in quarter one of 2022. Then an interest expense was $81 million for quarter one, as rate increases drove sequential interest expense higher as anticipated. We continue to expect the full year interest expense to total approximately $300 million in 2023. The effective tax rate was 16.5% for the quarter, and we continue to expect the full year 2023 adjusted effective tax rate to be approximately 16.5%. Adjusted net income attributable to the group for the quarter was $239.8 million, a margin of 12.1%, equating to adjusted earnings per share of $2.90, an increase of 5.1% year over year. In the first quarter, the company recorded $11.4 million of transaction and integration-related costs, U.S. GAAP income from operations amounted to $216.8 million, or 11% of revenue during quarter one. U.S. GAAP net income attributed to the group in quarter one was $116.7 million, or $1.41 per diluted share, compared to $1.36 per share for the equivalent period in the prior year. In terms of other dynamics to consider for this year, we expect to see backlog conversion average 9.5% for the whole year, in line with our previous expectations. As longer duration, complex therapeutic programs continue to grow as a proportion of our overall backlog. Separately, we expect to see a modest decrease in our interest expense in quarter two from quarter one levels. Net accounts receivable was $1,197,000,000 at the 31st of March, 2023. This compares with a net accounts receivable balance of $1,182,000,000 at the 31st of December, 2022. DSO was 54 days in the quarter, up from 35 days on a comparable basis from March 31st, 2022, and flat on a comparable basis at December 31st, 2022. Cash from operating activities in the quarter was $176 million. We continue to focus on management of our DSO and are encouraged with our billing levels, as well as record cash collection activities, which were in excess of $1.9 billion in quarter one. However, we have more work to do in this area and our focus will remain to ensure we sequentially improve both our collections and DSO performance for the remainder of the year. At March 31st, 2023, the company had a cash balance of $282 million and debt of $4.489 billion, leaving a net debt position of $4.207 billion. This compared to a net debt of $4.364 billion at December 31, 2022 and net debt of $4.581 billion at March 31, 2022. Capital expenditure during the quarter was $26.7 million. We made a $250 million payment on our term loan B facility in quarter one and ended the quarter with a leverage ratio of 2.8 times net debt to adjusted EBITDA. We expect to continue our payments on our term loan B facility over the course of 2023 totaling approximately $800 to $1 billion for the full year. In addition, we have negotiated an increase in our revolving credit facilities from $300 million to $500 million as a result of the increased scale of the organisation. In closing, before we move to Q&A, we want to again extend our gratitude to ICON employees around the globe for their efforts and contributions throughout the quarter. Operator, we are now ready for questions.

Ladies and gentlemen, we now begin the question and answer session. As a reminder, if you wish to ask a question, please press star 1-1 on your telephone. We are now taking the first question. And the first question from John Sorby from UBS. Please go ahead. Your line is open.

Hi. Thanks for taking the question. I guess I was wondering if you could provide a little color on what you're seeing from large pharma demand. Some of the large pharma companies have now some optimization on R&D projects and are you seeing any changes in demand there and has that played into any of those increases in cancellations?

Yeah, John, I think the demand as we've said on previous calls from large farmers has been pretty consistent and pretty solid. So we haven't seen any sort of significant downturn. Our large farmer part of our business has been probably one of the best performing parts of our business over the last 12 months or so and the demand continues from that from that group of customers. As I alluded to in my comments, we're seeing some FSP opportunities in that area, but I'm not ready to declare that as a trend. But certainly the demand has continued quite strongly in that space in large pharma.

Great. If I could ask just one follow-up here. Just when you look at the backlog conversion, some of the dynamics there, How do you expect that to play out throughout the year? Do you expect that burn rate to continue to be below that 10% rate for the remainder of the year?

Yeah, we expect it to continue at around the rate it is. I think we've said 9.5% for the year, mid-nines there. So I don't think that's going to change dramatically as we've gone through the year. Brendan, do you want to?

Yeah, that's exactly it. I think we were pretty clear on that. So, yeah, we expect it to be, on average, about 9.5% for the full year.

Great. Thanks for taking the questions.

Thank you for your question. We are now taking the next question. The next question for Hans Heinz from MIDS Group. Please go ahead. Your line is open.

Great. Thank you. Maybe you could talk about the RFP activity by customer type, what's growing, what's not growing. And then secondly, the non-human primate issue. When do you think, if at all, that will impact late-stage clinical trials? And maybe what are your customers talking about, and is this something that you are worried about for 2024 and 2025? Thanks.

Sure. And let me take the second one first, if I could. NHP, the non-human primate issue, we really haven't seen our customers or heard our customers talking about that at this point. And I don't anticipate that's going to be an issue for us, certainly in the short to medium term. You know, if things continue or go worse on that front, there would presumably be some impact down the track. But there are different models that I think our customers can implement in that space and believe that things will get sorted out well before it impacts us in the clinical space. So I don't have that as one of my top 10 risks, so to speak. And that's not something that I say our our customers are concerned about, at least from what they've told me at the moment. In terms of RFP activity across the customer segments, as I mentioned to John's question, we've seen solid continuation on the RFPs from a large farmer point of view. I think biotech has been a bit more muted. We've said that. We've been consistent in what we've said over the last 12 months. Having said that, sequentially from the last water, we've seen upticks in both areas from an RFP point of view. So it seems that we're seeing some positive steps in that direction, as I say, on a sequential basis. And then across things like labs, real world evidence, late phase, we're seeing some consistently strong trends on a year-to-year basis. So overall, we see demand continuing, being solid. A little bit of volatility in the biotech space, as I think we've alluded to, in terms of decision-making and RFP opportunities. But overall, the market, I think, is constructive and solid.

Great, thanks. Thank you for your question. We are now taking the next question. Please stand by. The next question from Elizabeth Henderson from Ever Crazy. Please go ahead. Your line is open.

Hi, guys. Thanks so much for the question. Obviously, you mentioned that on the SG&A line in the first quarter, the bad debt expense flew through that. How are you expecting the cadence of that to continue through the back half of the year? Where are sort of like your incremental opportunities given the sort of current, you know, macro outlook. Thanks.

Hey, Elizabeth, I might take that one. Yeah, we increased that, obviously, as I mentioned, in the prepared remarks, $15 million in the quarter. It was a general provision, so it was just across the board, across that customer group. We don't anticipate that it'll be of that quantum as we go forward. I'm sure we'll keep an eye to it, and in the normal course, it would be maybe a couple of million dollars on a quarterly basis, but we certainly don't expect that quantum to have to be repeated as we go beyond quarter one at this point. So it was, I think, appropriate, and the level of bad debt provision we have across the group, which is still only about in totality about $36 million, is appropriate. But again, we don't expect that sequentially to be in that same ballpark.

Got it. And can you talk about any sort of notable changes in sort of share shift or anything? I know we've heard different commentary from different players in the market. So just trying to get a sense of any notable changes, either sequentially or sort of year over year, depending how you think about that in terms of share shifting among different CROs.

Yeah, I don't think we have any sort of specific comments to make on that, Elizabeth. You know, we see ourselves competing very well. You hear the odd story about, you know, a study coming to us. It's probably in the most recent past from some of the smaller mid-sized CROs than it is from the larger ones. But we do believe we're well positioned to take shares. As we all know, some of our larger competitors are are going through some changes, and we do think there might be some opportunity there for us, and we'll be looking to take advantage of that. But I can't say that we've had a significant share shift on that front from the larger customers or larger competitors at the present time.

Got it. Thanks so much, guys.

Thank you for your question. We are now taking the next question. The next question from Max Mock from William Lay. Please go ahead. Your line is open.

Hi, good morning. Thank you for taking our questions. Starting off with a quick one for me here. I just wanted to clarify on how your expectations for FX have changed this year. Brennan, I know previously you talked about it being a little less than a 1% headwind. Is there any update to that outlook given the more moderate headwind that we saw here in the first quarter?

Yeah, I mean, it has gone a little positive, Max, in terms of the overall outlook at this point. So should it really be a little bit of a tailwind for the full year at this point? We've always gone to $1.10. We're hanging in around that, that being the major currency pair. You know, you will have noticed that we are reaffirming our guidance. So certainly our thinking on that FX during the course of this quarter is certainly included in those numbers.

Okay, thank you. And then following up, I believe you said excluding COVID growth was 9% in a quarter, which implies COVID was something like a 90 million headwind. In your commentary last quarter about COVID revenue stepping down, I think 6% of revenue in 22 to 4% in 23 implied something like 140 million headwind in total in 2023. So I'd be curious to hear if the headwind that we saw in this quarter was in line with your expectation. And is there any changes of thinking in terms of the total headwind this year? In other words, do we only have roughly $50 million of a headwind to work through here in the remainder of 2023? Thanks.

A lot of headwinds there, Max. We see COVID revenues coming down at about the rate that you outlined there. We see it ring around about 4% to 5% this year and probably coming down. The backlog, I think, is around 3%. So yeah, it is AR coming down. So I think your assumptions or your expectations on that front are broadly in line with ours.

Yeah, Max, I mean, the expectation coming into this year is that we were going to see sequential decreases as we progress through the year. So Q1 was the expectation in terms of the highest COVID contribution as we're continuing to work through some trials that are starting to wind down.

Okay, great. Thank you.

Okay, thanks. Next question.

Thank you for your question. We are now taking the next question. The next question from Patrick Donnelly from Citi. Please go ahead. Your line is open.

Hey, guys. Thank you for taking the questions. Steve and maybe Brendan can chime in as well. Just one on the guidance, I guess, philosophy at a high level. I mean, it seems like As you worked your way through the quarter, cancellations maybe picked up a little bit. You have the bad debt expense. Your early stage biotech continues to be a little bit soft, I guess. I guess you guys have this great track record of execution, hitting numbers, beating numbers even. I guess when you sit here today, four months into the year, how do you think about the upside to guidance compared to whether it's January, this time last year, whatever it might be? I guess how comfortable are you with the guide given, you know, there are maybe some cracks showing up on the macro side at a high level. You know, obviously the bookings held in well. So just curious as you kind of sit here and think about the guide, particularly on the top line, you know, the confidence level there.

Yeah, I'll have a crack at that, Patrick, and then Brendan can jump in. You know, we've reaffirmed guidance. So we believe we, you know, we can get, you know, to our midpoint. That is our expectation at the moment. Having said that, You know, the macro environment is probably more challenging now than it was when we set guidance back a couple of months ago. And so, you know, there are some things we have to work through, and we're doing that very actively with the team. We're all very engaged in wanting to do that. But at the moment, we feel, you know, with a reasonable level of confidence that we can reaffirm and we can get where we want to be on the guidance side.

Yeah, I mean, just to, again, echo maybe some of the comments I said to Max, Patrick. Obviously, you know, we are in a slightly more favorable foreign exchange environment now than we would have been when we set the guidance. And you'll see that, to Steve's point, but there have been some macro other elements that have given caution. Overall, we've left it in the same place. So you can see that even though we're leaving it in the same place, there are certainly puts and pulls that are going into that number and we're considering on a quarterly basis.

Yep, understood. Okay. And then, Brendan, maybe on the DSO piece, obviously that's been a focus. You kind of flagged it last quarter, talked a little bit more about it this quarter. Can you just talk about, I guess, what's being done there? To your point, I don't think there was any sequential improvement you're talking about. Obviously, throughout the year, we'll see some improvement there. So can you just talk about

know the level of focus there you know any changes to customer payment terms things like that uh the unbilled side you know picked up a little bit so just just want to talk through that and what the expectations are sure sure patrick this is an item that's on that's usually on my own radar and i'll be working with our teams to make sure that it makes good progress over the course of the year um what are we doing um biggest piece i suppose that we've done over the last couple of quarters and making sure that we're billing the correct quantums on a quarterly basis. We've seen billing now in Q4 and Q1 well in excess of our revenue in both of those quarters, and in fact in excess of $2 billion in each of those quarters. Effectively, that's just catching up on some of the billing that, as I kind of outlined, was missed effectively during the first half of 2022. So we needed to get back in line with that. Those bills are out the door. We're having, obviously, now we're at the point of making sure that we can get them in within credit terms. And, of course, the ongoing conversations with our customers to make sure that they're happy with the flat process and that we're getting the cash in. So I think what we've done is made really, really good progress in terms of making sure that our billing is at the right level over the last couple of quarters. We've seen that our cash collections ticked up nicely from Q3 into Q4, and then into Q4 into Q1, I should say. So what we're seeing really then is making sure that we're continuing on that good progress as we go from one into two, and certainly we'd like to see some significant impacts to the DSO over the course of the year, and that's exactly what we're focused on.

Okay, appreciate it, guys.

Thank you for your question. We are now taking the next question. The next question from Heidi Caldwell for Harvey Bale. Please go ahead. Your line is open.

Thank you. Good morning. A lot of mine have been covered, but I'm going to go a little different direction with two here. First off, pass-throughs. I know you don't break out reimbursable and pass-through details, view it all as one cohesive model, but I am curious. We've seen some volatility in that sector of revenue, that segment of revenue, more than I think more than normal, and normal is pretty volatile. Can you give us some qualitative trends in terms of pass-through impact on revenue or bookings? I know you don't break it out specifically, but I'm just curious what you're seeing in the marketplace.

Yeah, I think as I said to you, Eric, you're right. The pass-throughs are volatile and have been volatile as we've kind of exited the COVID era. We've had some headwinds there that have given us some challenges. I think maybe the best way to answer that question is to say that on a direct fee basis, revenue growth was in the highest sort of single digits for the quarter. And so clearly, as we've reported at about a 5%, 5.3% I think was constant currency, you can say that the pass-throughs were a little bit of a headwind at the quarter and probably continue to be going forward. very confident and very happy that the underlying margin generating revenue and business is continuing to grow at a very solid clip. And so I think that's probably the best way to address that question.

Fair enough. And then second one here, labor inflation. Obviously, it's been rather high the last couple of years. There's been good pricing opportunities the last couple of years as we entered into the 2023, I think the general expectation in the market was that getting pricing out of customers might be harder after two years of pretty good activity. But I am curious if you could give us an update on those two fronts, both the labor inflation, what you're expecting on a net realized basis this year within your staff, and then how pricing opportunities are stacking up to offset those pressures. obviously say this all in the context of a very nice margin expansion. So I think we know where you're headed with this, but I'd like to get your updated thoughts.

Yeah, I mean, let me start with the pricing. You hit it pretty much spot on, Eric. Our pricing negotiations, I think we talked about this on previous calls, have been relatively collaborative discussions with customers for the first couple of years. That is starting to change as we go into the post-COVID era, and customers are perhaps a little bit more, dare I say it, recalcitrant in terms of, you know, working with us on not just inflation increases, but also there's a level of sort of market-related increases that we have, you know, we have some good data on, but of course that's always a discussion, and it's probably a increasingly challenging discussion going forward. So I'd say that particular aspect of our business has probably become a bit more challenging from a pricing point of view. But we continue to provide good data on not just the inflation environment, but the market environment. And customers are smart. They do understand that we need to pay market-related salaries and all that good stuff. So it's a constructive conversation, but probably not as These things are never easy, but it's probably a bit more challenging than it was a year or two ago. In terms of wage inflation, again, that one's been a bit more challenging as well. As we all know, inflation continues. We've seen it around about the 4% to 5% level across the organization. Some countries, of course, are more than others. That's been the level, but I would say the pressure in the labour market has probably attenuated a little bit over the last six months, 12 months or so. We've seen our retention levels continuously tick up over the last few, really last 15, 18 months now. We're getting well back to pre-COVID levels now, in fact, even ahead of pre-COVID levels. We've made some good progress in that front. And so we are finding, I think, that the labour market, the sort of red-hot labour market it was perhaps during COVID or post-COVID is sort of easing a little bit now and we're finding that our salary merit increases and bonuses have gone down well with our employees and that we're able to retain them and give them opportunities. So overall, I think both environments are challenging, perhaps more so than the normal times, but We're managing, I think, pretty well.

That'll be all for me. I just want to say congrats on a steady report and pretty choppy seas. So keep it up. Thanks, guys. Thanks.

Thanks, Eric.

You're the best. Next question, please.

Thank you for your question. We are now taking the next question. Please stand by. The next question from Sandy Draper for Google Name Partner. Please go ahead. Your line, it's open.

Thanks very much. Yeah, I'll sort of echo what, well, two things what Eric just said. One, congrats on last quarter, but also a lot of my questions have been asked and answered. So maybe for me, and just to sort of head potential questions for me off at the pass, in your slides, you just, you called out the 2022 revenue by customer segment. And I think there could potentially be some misunderstanding. You call out small biopharma is 33%, but in the footnote, that's still companies that 76 are below, so they're still revenue producing. Could you just remind us what percentage of your customer base is pre-revenue, just so people don't get the sense of, oh, wow, 33% are biopharma out there looking for funding tomorrow?

Hey, Sandy, it's Brendan here. Yeah, as we talked about, it's kind of, you know, the way we've defined how we look at that subsector of emerging biotechs or small non-funded or non-revenue generating is for companies that have R&D spends on an annual basis of less than 100 million. And companies of that ilk would represent about 15% of total revenue. So obviously 15 of that 33. So just to give you an idea of what that quantum of exposure is.

Okay, great. I appreciate that clarification. And then maybe my unrelated follow-up, just longer-term thinking about your comments about backlog burn. Certainly understand as you're getting through the COVID work, which is burning fast, and obviously depending on where pass-throughs come in, you're seeing it step down but sort of stabilize around sort of 9.5-ish. Is the mix of business such that if it stayed like this, you would see a multi-year just a little bit of step down, or are we now sort of at a level that, okay, we're stable here, and unless there are changes, it's going to say plus or minus, stay in this nine and a half type level longer term, or are we back into a long-term, slightly declining trend? Thanks.

Yeah, I mean, Sandy, that's a tough one to answer. It really depends upon, you know, the sorts of projects we can win and get into the portfolio and the start-up. You know, obviously, oncology is about 40% of our work. That tends to burn a bit slower. But when we get some vaccine work coming, that will burn faster. So, you know, we would anticipate, we're certainly looking at keeping our backlog burn number around about the mid-2040s. Amid nines, 9.5% is our expectation. I think we can do that. It certainly has ticked down a little bit since on the post-COVID period, and that is because those vaccine studies have tended to go away, and we're back into the more sort of routine oncology slower studies. There are other therapeutic areas that would burn a little faster as well. We believe there's some opportunities in the metabolic – area with some of the GLP inhibitors coming through and those sorts of trials we believe can... So there's some positives and there's always some negatives on this. I think the best way to think of it is mid-nines in the longer term.

Okay, great. Thanks so much.

Thank you for your question. We are now taking the next question. Please stand by. The next question from David Winley from Jefferies. Please go ahead.

Hi. Thank you very much. Thanks for taking my question. Kind of a different version of the much-asked burn question. Steve, your comments in your prepared remarks, you talked about changes in decision-making cycle times, which is I don't think the first time you've talked about that. That's kind of been an ongoing kind of building issue. We are seeing in you know, in kind of industry clinical trial start data, this large building bucket of trials that are really not moving to start, which would seem to kind of square with what you're talking about. Would you, I guess, two-part question here, would you attribute that to mostly small biotech and mostly kind of challenges in funding, or are there other issues there? And then the second part of the question is, How are you guys thinking about risk adjusting your revenue forecast and or your backlog for this, you know, deeper deliberation about what clients want to move forward? Thanks.

Yeah, I'll take the first part. David and Brendan might have a crack on the revenue forecasting side of things. You know, I think there's a good chunk of that, those trials that are not starting as fast as you'd like, as we'd like. is in the biotech funding area. We have plenty of customers who come to us and who want to get proposals and budgets for their trials who haven't raised the money. We're very careful, of course, about putting those in our backlog. But there's certainly a component of the industry, I think, and that tends to be in the small... It's not exclusively. I must say, it's not exclusively in the biotechs and emerging companies, but that, I would say, would tend to be... tend to be the most of it. Interestingly, as we look across our cancellations, they were slightly elevated for the quarter, but as we look across that, they really came about 50-50 from our larger pharma and our biotech. So if you look at it on a cancellation basis, there wasn't any sort of particular predominance towards the biotech sector. So take from that what you will. Maybe on the forecasting stuff, Brendan.

Yeah, I suppose on that one, Dave, We constantly look on a quarterly basis, of course, at our forecast. And that's obviously deliberating about when's the first patient in, when are we going to get going on the actual project. And of course, we're constantly thinking about what the headcount demand, in fact, will need to be able to put onto our organization to be able to deliver that revenue over the course of the year. So certainly on a quarterly basis, yes, we are having very active conversations with our project managers, with our relationship managers, with our exec sponsors, and indeed with our customers about the timing of their projects. And so really it's only projects that have good visibility that come into that forecast. And we really have a very, very strong sense that they have funding in place and all of those pieces to actually, to actually go ahead. So of course that then informs our guidance setting processes we go through on a quarterly basis. So I feel like we have a fairly robust idea and picture of what styles are going to start and what trials are going to be attenuated.

Got it. And then my, my second question, if I can sneak this one in on. On cash conversion, I appreciate you addressed this a little bit before to one of the prior questions, but I think on the last quarter you talked about having improved your billings in the third quarter and fourth quarter. I guess I thought that, albeit to be fair, you said first half. I thought that maybe the third quarter billings from last year would start to see maybe a more impactful move on your AR. and I guess I'm just kind of fishing for, are you getting pushback in terms of customers' ability or willingness to pay on time, or is it simply just customers waiting to the, you know, whatever the term is, 60, 90, 120-day term on the payment, and that hasn't gotten to, we haven't gotten to that point yet?

It is. predominantly the latter, Dave. There's always going to be some, you know, conversations you have to have with customers to make sure that they pay their bills and that they're well-funded and all those kind of points. But, you know, as we said, we did uptick our billing in Q3. Our cash collections in Q1 weren't significantly off the amount that we billed in Q3. So we did see a nice uptick, albeit we need to continue that uptick from Q3 to Q4, and likewise the cash collections from Q1 to Q2. So still an area of focus. I think we still have some and we should be able to get the cash in, but still very much focused.

Great. Thank you. I appreciate the additional detail. Good luck.

Thank you. Great.

Thank you for your question. We are now taking the next question. The next question is from Justin Bowers from Deutsche Bank. Please go ahead. Your line is open.

Hi. Good afternoon. On the prepared remarks, you mentioned seeing an uptick in demand across full service. I was hoping you could expand upon that and where you're seeing senior demand from there.

I think we talked about an uptick in demand across large pharma. That's a decent chunk of full service in that. Most of our uptake in full service is really within the biotech and the more midsize in terms of uptick in demand. The large farmer market's been strong, but there's a good component of FSP in that market as well, Justin. I don't think I'd mean to lead anyone astray on that one, but it's really the large farmer, we've seen good, you know, a solid market demand RFP-wise on that one. And there is a component of both FSP and full service in that, whereas, of course, in the biotech and midsize, it's much more predominantly FSP. full service and that that's that market has been a little bit more as i say volatile uh so you put it all together and i think we see we see good demand for both and uh and even for hybrid opportunities as well and we see we see ourselves as as well positioned to be able to accommodate either either of those three models really do you think a full service fsp and the more hybrid ones got it and then just uh one quick follow-up with um

With sort of taking a step back and as we think about some of these more hybrid with respect to like virtual and DCTs, you know, increasing over time, how should we think about that with respect to the level of pass-throughs? And are you starting to see that impact the level of pass-throughs now in some of the contracts?

I don't think we've seen any sort of material impact on pass-throughs through the shift to sort of hybrid models or DCTs. I mean, DCTs will still have significant pass-throughs associated with them. I'm not sure I see too much difference between that and a full-service type opportunity. Hybrids, perhaps, I mean, the FSP traditionally has a lower proportion of pass-throughs, so hybrids are probably... The pass-through proportions are probably towards the lower end, not as high as, say, a full service. So to the extent that that impacts, we'll see that. The number of DCT trials we do is fairly limited. Most trials have a DCT component, but there are very few pure DCT trials. As I said, we don't really see any impact on the proportion or the amount of pass-throughs on those trials at this point.

Got it.

Thanks a bunch.

Okay, thanks. Next question.

Thank you for your question. We're now taking the next question. Please stand by. And the next question from Luke Segroth for Barclays. Please go ahead. Your line is open.

Awesome. Good morning, everybody. I want to go back to that decision and the timing delays because Brendan and Steve, I guess when we talked back in 4Q, you guys were talking about customers kind of right-sizing their R&D budget and maybe they're not ordering up all the bells and whistles that would go into a trial. And now we're hearing about actual delays in trial starts. And so through your history in the industry, what percentage of these trial delays – or the starts will actually turn into just never even starting up, like as you guys think about it?

Gee, Luke, that's a – I mean, how long is a piece of string? I mean, we almost want a response to that one. That's a hard one. It's a hard one to answer. I think it's fair to say – that we are seeing some delays. And in terms of the percentages and the impact, you know, it will have an impact. There's no question about that. To the extent that it's going to continue to the percentage of trials that are in that case, you know, it's not insignificant. And, you know, we are seeing, as I say, some delays. And, you know, we're looking at it in terms of decision-making and customers being very careful about what services they want and what trial they want to do. And there's there are some opportunity in terms of consulting with them to make sure they're doing the right trial and that they didn't do anything that's too big or too small or they do the right number of trials and all that. So there's, as I say, some opportunity, but they are being very considered and it is leading to some delays, particularly with those smaller companies who have got the one or two drugs to get to market. It's really hard to quantify the impact of that on our numbers at this point. But it isn't nothing, I'll put it that way.

That's helpful. Let's turn the page here to the business. So the OneSource continues to be a differentiator for you guys. Can you update us on how much of the backlog includes or how many of the wins are now including OneSource for you guys? And I assume that this is a premium service?

Yeah, it's OneSearch actually, Luke.

Oh, OneSearch. I'm sorry.

Yeah, this is our proprietary application that allows us to identify the right sites to be in a trial. And the benefits we're seeing, as I said, is faster selection, faster identification, faster setup. But probably most importantly, fewer sites that have zero recruiting patients or even one patient. As you can imagine in our business, getting a site up that doesn't recruit or even recruits one patient can be much more problematic than obviously not getting that site up at all or getting sites that recruit five or 10 or a critical number of patients. So the benefits are there from an efficiency point of view. We apply that tool now to all the studies we do, but it's only been routinely applied for the last probably 12 to 18 months. And so the benefits are really, as I alluded to in my comments, the benefits are really just starting to flow through and that these trials take a while and we measure whether there's zero recruiting and what's at the end of the trial. So most of these trials take at least a year to two years and sometimes three years. So many of the trials that we started using this technology on are still in process and still working through. What I was alluding to in my comments is we're starting to see those tangible benefits really impact our portfolio of work. And so I'm really pleased with the technology and we've been able to bring in some different data sources as well, which help us to identify sites that have a greater propensity to recruit diverse patient populations. You know, that's a big issue with the regulatory authorities now. We need to be recruiting more diverse patient populations. And so the tool is also allowing us to identify sites that can help us to do that as well. So it has a number of benefits, not just speed, but also diversity and quality.

Great, thanks.

Thank you for your question. We are now taking the next question. And the next question from Casey Woodring from JP Morgan. Please go ahead, Yananizo.

Great. Thanks for taking my questions. So we've been getting a lot of questions around the read-through to CROs from the bearish commentary from some of the bioprocessing companies on their SMID biotech customers of late. Can you explain your level of visibility into the SMID STEM? versus some of those bioprocessing players. You know, those companies largely took down their expectations for the year after seeing SMID spend trends over the first three months of this year. But you've just said here today that SMID Biotech RFPs improved sequentially and are reiterating guidance. So just kind of curious on the difference in commentary there.

Yeah. You know, as I said, Casey, we see, we've seen sequential upticks. And so we see an underlying pretty reasonably constructive market in the biotech area. It's not to say there's not some volatility out there. Funding challenges are in existence. They are taking more time. You've heard all of that. But overall, these are the companies that are producing or finding the drugs. This is where the innovation is happening in our industry. And so we really want to engage with them because they often become part of our large pharma partners as well as the CGEN Pfizer acquisition, I think during the quarter that happened. And these are the companies that really have, are really bringing these really new and improved and fantastic drugs to market. So being part of it is important for us. We're there for the long term. There is some volatility in the market, no question about that. They are, by their very nature, higher risk companies. They only have sometimes one or two drugs sometimes. And so there's an element of volatility that we're all working through. But overall, the underlying market and the underlying business, we believe, in the biotech space is solid, is strong. And I believe we've probably hit the nadir in terms of the biotech funding area. I think we can see some positive noises and some positive funding moves going forwards. So I'd like to think that in 12 months, it won't be in the next six, I don't think, but in the next 12 months or so, we'll really be back on track with respect to a solid and stable biotech funding environment, particularly as we see things like interest rates and hopefully some of the macroeconomic challenges dissipate, we can be in a good place. So as I say, short-term volatility, short-term challenges, next 12 months or so, but I think in the longer term, we feel we're in a very good place with this market and we feel the market's very solid.

Got it. And then just as a follow-up to that commentary, so the banking crisis and the SVB situation, that specifically occurred in the last few weeks of the quarter. Curious as to how spending is trending from Smith customers over the last few weeks, kind of after all of that stuff went down, has there been a notable drop-off in RFPs or any significant change to how those Smith customers are thinking about things after SVB? Thank you.

Hi, Casey. It's Brendan here. We didn't see any substantial movement after it. Obviously, it was a concern at the time, but I think, obviously, the federal government came out and dealt fairly definitively with it. And so it hasn't had a kind of significant knock-on at this point.

Next question, thanks. Thank you for your question.

we are now taking the next question please stand by the next question from the bank of america please go ahead your name is open hi great thanks for squeezing me in um so a lot of what um lots of asked but i just wanted some color is there any particular therapeutic area that is on some of the early-stage biotechs that are delaying, you know, for example, cell and gene therapy or something like that. Anything that's sort of common about it, and then I actually have some financial statement questions.

Sorry, the question was around cell and gene therapy?

Well, basically just asking if you're seeing a therapeutic area in some of these early-stage biotechs. There's one therapeutic area that's getting delayed. Right, for example, cell and gene therapy. I'm just sort of curious as to if there's any common theme for the ones that are getting delayed or they just all just early stage and have cash issues.

Yeah, more the latter, I think. There's no particular focus on any particular therapeutic area. No, oncology is obviously the big area for that, and so any delay isn't helped by oncology studies typically being a bit slower anyway. But no, I don't think there's any real focus

there's no real sort of therapeutic area that's particularly impacted got it and then just some um some questions on some of the adjustments um what are you looking for for a run rate on uh for the year for restructuring and other costs and for stock based compensation just to sort of help sure up the adjusted net income numbers yeah i don't think i think probably the first quarter numbers aren't a bad proxy in terms of you know what we're expecting for

might see some of the integration costs tail off a little bit as we go through the course of the year. But the dollars that we have at the first quarter probably aren't a million miles off. Certainly on something like stock-based comp, that will nearly just be, take that number and multiply it by four. So integration costs we expect to see run off a little bit. And on restructuring, well, we'll keep an eye to that as we go through the course of the year. We're constantly looking at our office infrastructure. That was a large part of the restructuring cost in the current quarter. So that's something I think that will be in the same ballpark and we'll keep an eye to that. So that might move around a little bit, but the other two, one decreasing slightly, the other one will be relatively stable.

Great. Thank you very much.

Thank you for your question. We are now taking the next question. The next question is from Timothy Dale from West Fargo. Please go ahead.

Great. Thank you. So, Steve, just wanted to follow on to an earlier response on share shift. You mentioned some changes going on at peers that offer near-term opportunities to pick up some share around this volatility. But thinking about after those transition periods are behind them, how should we be thinking about share defensibility under a backdrop of a few new well-capitalized players or more motivated well-capitalized players with an increased appetite for recovering the share lost over the last few years?

Tim, I'm not sure you should be overly concerned about it from our point of view. I mean, I think, you know, we see, as I say, some of our competitors going through some changes and unexpected changes and that's all good for them. But, you know, customers are relatively conservative and share shifts don't happen quickly in our business. I mean, you know, it's a relatively conservative industry and we all have partners and relatively long-term partnerships that play out, and these agreements are usually in place for several years. So certainly nothing dramatic would be my expectation. So from that on the large-scale competitor point of view, I think what we've seen more recently is some pickup in share from some of the smaller mid-size competitors. And so we've been fortunate, I think, as I think about rescue opportunities or rescue trials at that come into our business, and we've seen several come in from some of the smaller players, smaller to mid-sized players, I'll put it that way. And so that's probably the more opportunity for short-term gain. It's more over several years, I think, to make any adjustments on the larger competitors.

All right, no, I appreciate that. And thank you for introducing me to the term recalcitrance, by the way. My follow-up is just, Brendan, you know, I think we'd all appreciate if you're willing to provide a bit more visibility on how order trends vary on a month-by-month basis in OneQ. Appreciate the commentary, you know, a little peek through into April. But that would be great if you could help us out or at least tell us if there's any volatility across the months within the quarter.

In business development, Tim, is it?

Yep, yep, thanks.

Yeah, I mean, every quarter has its own look to it, in all honesty. There's some quarters where you come in strong at the start of the quarter, and there's often more quarters where you're finding it out at the last minute. So I don't think there's any – this quarter, we started off well. We had a solid quarter throughout. As Steve mentioned, the cancellations were a touch harder than we would have liked, but still very solid overall performance. So I don't think there's a particular trend. Yeah, as I said, we started well, and that was more of the trend this quarter, but it changes from quarter to quarter.

All right. Appreciate it. Thank you.

Thank you for your question. There are no further questions. I will hand back the conference to Steve Cooper for closing remarks.

Okay, thank you, operator, and thank you, everyone, for joining the call today. We look forward to updating you on our results as we progress through the year and further deliver on our mission in accelerating clinical development. Thanks, all, and have a good day.

That concludes the conference for today. Thank you.