IQVIA Holdings, Inc.

Ladies and gentlemen, thank you for standing by. Welcome to the IQVIA fourth quarter 2018 earnings conference call. During the presentation, all participants will be in a listen-only mode. As a reminder, this conference is being recorded Thursday, February 14, 2019. I would now like to turn the conference over to Andrew Markwick, Vice President, Investor Relations. Please go ahead.

Thank you, Edison. Good morning, everyone. Thank you for joining our fourth quarter 2018 earnings call. With me today are Ari Boothby, Chairman and Chief Executive Officer, Michael McDonald, Executive Vice President and Chief Financial Officer, Eric Sherbert, Executive Vice President and General Counsel, and Nick Charles, Senior Vice President, Financial Planning and Analysis. Also here with us today is a new member of the Investor Relations team, Jennifer Helcheck, who just joined IQVIA as Senior Director of Investor Relations. Jen has over 20 years of experience working in the capital markets with extensive experience in IR. We're excited about Jen joining the team and I know she's looking forward to working with all of you. Today we'll be referencing a presentation that will be visible during this call for those of you on our webcast. This presentation will also be available following this call on the events and presentation section of our IQVIA investor relations website at iriqvia.com. Before we begin, I would like to caution listeners that certain information discussed by management during this call will include forward-looking statements. Actual results could differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with the company's business, including the impact of the changes to the Revenue Recognition Accounting Standards, which are discussed in the company's filings with the Securities and Exchange Commission, including our annual report on Form 10-K and subsequent SEC filings. In addition, we will discuss certain non-GAAP financial measures on this call, which could be considered a supplement to, and not a substitute for, financial measures prepared in accordance with GAAP. A reconciliation of these non-GAAP measures, the comparable GAAP measures, is included in the press release and conference call presentation. I would now like to turn the call over to our Chairman and CEO, Ari Busby.

Thank you, Andrew, and good morning, everyone. Thank you for joining our fourth quarter 2018 earnings call. We will review how we closed 2018 and provide financial guidance for 2019. I'm pleased to report that we have another strong quarter, capping a year of consistent, solid operating performance at IQDIA. Once again, we reported results at the high end or above our financial targets. Let's review the numbers. Fourth quarter revenue of $2,688,000,000 came in above our guidance range, resulting in constant currency revenue growth of 8.1%. Relative to the midpoint of our guidance range, over half of the revenue beat was driven by an acceleration of our organic growth rates in both the R&D and technology and analytics segments. And a little less than half was driven by the higher than expected pass-through revenue associated with this organic growth. From a segment perspective, technology and analytics solutions revenue grew 10.9% at constant currency. On an organic constant currency basis, growth was over 5%. You will note This growth rate represents a significant acceleration of our historical consistent 4% organic growth in this segment. We expect this momentum to continue into 2019 and beyond. This strong organic growth performance was driven by solid double-digit growth in our real-world business and higher than expected year-end demand for our other commercial offerings. Also during the quarter, we marked the anniversary of several tech businesses we had acquired in 2017, which is why the contribution from M&A has tempered Sequentium. R&D Solutions revenue grew 8.7% at constant currency of which 8% was organic. You will note the strong organic constant currency growth in the quarter represents a significant acceleration of our R&D growth rate, which was 4.5% through the end of the third quarter. The strong organic growth performance in our R&D business reflects the early signs of revenue acceleration in this segment, with growth resulting from the team winning new business at an extremely high rate, and our unique core enabled approach to the business helping to execute parts of our existing book of business at a faster pace than we had expected. This, in turn, has brought faster revenue in at a faster rate than we had originally anticipated, which also contributed to the acceleration of growth. Fourth quarter contract sales and medical solutions revenue was down about 9% at constant currency. We are seeing the early signs of stabilization and turnaround in this business as the decline has been 13% through the end of the first quarter. Adjusted EBITDA of $583 million was at the high end of our guidance range and grew 9.7% at constant currency. Adjusted diluted EPS of $1.50 was also at the high end of our guidance range and grew 23%. Versus the midpoint of our guidance range, the beat for both adjusted EBITDA and adjusted diluted EPS was entirely driven by our stronger than expected operational performance. I'd like to take a minute and recap some of our key accomplishments during 2018, which will help drive growth in 2019 and beyond. In technology, we made significant progress with our orchestrated customer engagement, or OCE platform. Our CRM smart product Since we launched OCE in December 2017, we have had over 30 competitive wins, including previously announced contracts with Roche and Novo Nordisk. We have more than 30,000 users going live on the platform, and the tool is currently being deployed in over 100 countries. With a solid pipeline of opportunities, the team is currently engaged in over 100 active sales leads. As you know, OCE is powered by force.com, and we announced the expansion of our Salesforce partnership as we aim to build an integrated suite of clinical technology on the Health Cloud platform. For example, we built our virtual trial platform, Study Hub, which is already live in the market on Health Cloud. We see increasing levels of sponsor interest, as we leverage this transformative technology to bring clinical research directly to patients, ultimately increasing participation as we help clients reach diverse and difficult-to-recruit patients. You will have also seen our recent press releases for our regulatory and safety platform, also built on HealthCloud, which will go live in the first half of 2019. As the team builds on the success of our OCE platform, stay tuned for further updates in the clinical technology space. In real world, we close the year with solid double-digit organic revenue growth. Contrary to what is standard in the CRO industry, we do not report our real-world members together with our clinical development members. So unlike our peers, real-world business growth is not included in our R&D solutions business growth. The team has had significant success in 2018 and continues to shape the industry by infusing data smartly into research. For example, the team had a number of wins for single-arm studies during 2018. You'll recall this is an innovative approach where we use a real-world data arm to benchmark the results of the client's single-arm study. We also signed an important collaboration with Genomics England that will make the world's largest pool of linked clinical whole genome sequence data available for research. As you all know, when people speak about genomic data, such as commercial companies that analyze your DNA, they usually have snippets or a partial genome sequence. The focus of Genomics England is that they sequence whole genomes and they link this to the patient's complete clinical record which creates much more extensive granular data. Alongside our novel genomic de-identification approach and E360 machine learning analytics platform, this will accelerate faster and more efficient drug research and greater access to personalized medicine. Across the board, the real-world team has continued to scale our overall real-world business by applying novel and scalable technology to unique data sets. We now receive over 70 billion healthcare records annually, resulting in data sets on over 600 million non-identified patients globally. R&D Solutions had a very strong year of new business wins. We closed 18 with another record quarter of contracted bookings. Our fourth quarter contracted net new business, excluding pass-through, was 1.7 billion, which resulted in a book-to-bill of 1.7 for the quarter. Bookings growth was over 40% compared to the fourth quarter of 2017. And the good news is that the R&D bookings engine is firing on all cylinders. We saw strength across all segments. If you look at this from a customer segment perspective, large pharma bookings growth, which still represents the majority of our bookings, grew 20%. EBP bookings grew over 50%. From a product offering segment perspective, we saw particular strength in full clinical, which comprised the bulk of our bookings. It continued to accelerate with bookings growth of over 60% in the quarter. The lab was also strong with bookings growth of over 30%. The functional service provider business, which as you know, we are still trying to make a comeback in, is still not where we need to be and is still a small part of our bookings. R&D solutions. full-year contracted net new business was $5.85 billion, representing year-over-year growth of over 29%. We now have over $17 billion of R&D solutions backlog when you include fast food. The strategic rationale for our merger is increasingly proving itself in the marketplace. As we exited 2018, we applied our core-enabled smart offering to over 60% of the R&D sales pipeline, resulting in the next generation of clinical development team having yet another strong quarter of gross new business awards of over $800 million, which excludes pass-through associated with this revenue. Large Pharma represents an increasing proportion of our core-enabled smart trial bookings. It has gone from less than 20% when we introduced this differentiated offering to about 60% for Large Pharma at this call. Automation has been key to gaining scale for our core-enabled next-generation smart trials. We can now generate analytics in minutes as opposed to weeks. The team has built analytical libraries to drive automated analytics that can be used off the shelf. In total, we have over 1,000 automated analytics covering nearly 100 indications that we plan to use in over 25 countries in 2019. Today, we have 500 smart trials in operation, representing a third of our total trials in operation. And these 500 trials alone have more than 90,000 patients to be enrolled at about 20,000 sites. In fact, over 70% of the patient recruitment for these next generation smart trials will take place outside of the United States. Once again, underlying the power of our global capabilities. Additionally, and consistent with our new post-merger go-to-market strategy, which we call See More, Win More, we have seen 2018 RFP volume in general increase more than 30%. And we want business with more than 300 new clients in the clinical space during the year. Importantly, We won significant contracts with five large pharma accounts that the R&D team has not done business with in many years. We are clearly seeing more and we are winning more as sponsors come to realize the benefit of our highly differentiated capabilities. Now, we close 18 on a strong note and as we look to 19, the market we address remains healthy. The life science industry is expected to grow mid-single digits over the next five years, R&D activities at an all-time high, and the total number of molecules in clinical development continues to grow, with the late-stage pipeline growing 10% in 2018. The FDA approved 59 drugs in 2018, up from 46 in 2016. The Aikiduya Institute estimates that 270 new molecular entities will be launched over the next five years, up 17% compared to the last five years. The FDA continues to support innovative approaches to clinical development, specifically the use of data, analytics, and technology to accelerate clinical development and reduce regulatory risk. In fact, recent announcements from the FDA continue to support the use of secondary data in the real-world space. And finally, commentary from our client base remains healthy. Pharma is bullish on the science, innovative research, and current clinical research programs. Our clients continue to drive SG&A efficiencies through increased commercial outsourcing to allow for growth in R&D funding. Our clients also acknowledge that pricing is under scrutiny on the commercial side, but they currently don't anticipate this to become a major disruptor to their clinical development initiatives. Taken together, It's clear this is a very compelling backdrop for the industry, and IQVIA is better positioned than ever to capitalize on these dynamics. And with that, let me turn it over to Mike McDonald, our Chief Financial Officer.

Thank you, Ari, and good morning, everyone. As you have seen, we've closed the year with strong fourth quarter financials, and let's now review the details. Fourth quarter revenue of $2,688,000,000 grew 6.6% reported and 8.1% at constant currency. Whole year revenue of $10,412,000,000 grew 7.3% reported and 6.8% at constant currency. Fourth quarter technology and analytics solutions revenue of $1,127,000,000 grew 8.8% reported and 10.9% at constant currency. Technology and analytics solutions full-year revenue of $4,137,000,000, grew 12.4% reported and 12.1% at constant currency. R&D solutions revenue of $1,368,000,000, grew 7.8% at actual FX rates, and 8.7% at constant currency. Full year R&D solutions revenue of $5,465,000,000 grew 7.1% at actual FX rates and 6.5% at constant currency. Contract sales and medical solutions revenue of $193,000,000 declined 10.6% reported and 8.8% at constant currency. Contract sales and medical solutions full-year revenue of $810 million declined 11.5% at actual FX rates and 12.2% at constant currency. Turning now to profit. Fourth quarter adjusted EBITDA of $583 million grew 10.8% reported and 9.7% at constant currency. Full-year adjusted EBITDA of $2,224,000,000 grew 10.6% reported and 9.9% at constant currency, resulting in 2018 adjusted EBITDA margin expansion of 60 basis points on both a reported and constant currency basis. Fourth quarter GAAP net income was $69,000,000 and GAAP diluted earnings per share was $0.34. Adjusted net income of $307 million grew 17.6% in the fourth quarter. Growth was primarily driven by stronger adjusted EBITDA and tax efficiencies, which were partially offset by higher DNA and interest expense. Fourth quarter adjusted diluted earnings per share of $1.50 grew 23%. Year-over-year growth was driven by higher adjusted net income, which I just discussed, as well as the lower share count year over year. 2018 adjusted diluted earnings per share of $5.55 grew 22%. We had another record quarter of bookings in our R&D solutions business. Let's review net new business and backlog. Contracted net new business, excluding pass-through for the full year of 2018, was $5.5 billion. $850 million representing year-over-year growth of 28.9%, a record for the R&D solutions team. Backlog grew almost 15% in 2018 and now stands at $17,130,000,000. As a reminder, we report backlog including pass-through. We were pleased to see an acceleration of over $200 million in our next 12 months revenue from backlog during the quarter, which results in 2019 revenue visibility of $4.8 billion as of December 31, 2018. Now let's review the balance sheet. At December 31, cash and cash equivalents totaled $891 million. and debt was $11 billion, resulting in net debt of about $10.1 billion. Our gross leverage ratio was 4.9 times trailing 12-month adjusted EBITDA. Net of cash, our leverage ratio was 4.5 times. Cash flow from operating activities was $417 million in the fourth quarter. Capital expenditures were $138 million, and free cash flow was $279 million. We repurchased $604 million of our stock during the quarter, including $247 million from our private equity sponsors in December. As a result, our remaining private equity ownership is now about 10% of our total shares outstanding. We executed $1.4 billion of repurchases during 2018, and since the merger, we have completed $5 billion of share repurchases at an average price of $89.11. Yesterday, our board approved an increase of the share repurchase authorization by $2 billion, leaving us with a remaining authorization of approximately $2.3 billion. Let's now turn to 2019 guidance. Our full year 2019 revenue guidance is $10,900,000,000 to $11,125,000,000. This guidance assumes a headwind from foreign currency of 110 basis points based on foreign currency rates in effect at the beginning of the year. It is worth noting that since then, some key currencies have moved against us. So as we sit here today, the FX headwind has increased by approximately 20 million in relation to these key currencies. For full year profit, we expect adjusted EBITDA to be between $2,375,000,000 and $2,425,000,000, and adjusted diluted EPS to be between $6.20 and $6.40. The adjusted diluted EPS guidance assumes interest expense of approximately $425,000,000, operational depreciation and amortization of approximately $325,000,000, other below-the-line expense items such as minority interest of approximately $30 million, and a continuation of our share repurchase activity. Tax rates are expected to be approximately 22% for the adjusted book tax rate and approximately 15% for the adjusted cash tax rate. Again, this guidance assumes that foreign currency rates at the beginning of the year remain in effect for the rest of the year. Now, we are excited to see an acceleration of revenue growth in our R&D solutions and technology and analytics solutions businesses, as well as the stabilization in our CSMS business. Let's review our 2019 revenue guidance in a bit more detail. We currently expect technology and analytics solutions revenue to be between $4,350,000,000 and $4,425,000,000 representing growth of 6.7% to 8.6% on a constant currency basis. R&D solutions revenue is expected to be between $5,750,000,000 and $5,900,000,000 representing growth of 6% to 8.8% on a constant currency basis. CSMS revenue is expected to be about $800 million, representing flattish growth on a constant currency basis. You should note CSMS is expected to transition to growth during the year. For the total company, 2019 constant currency revenue growth is expected to be 5.8% to 7.9%, which includes acquisition contribution to growth of a little more than 100 basis points. This contribution is split approximately two-thirds in technology and analytics solutions and one-third in R&D solutions. Recall, at the time of the merger, we told you that total company revenue growth would be 100 to 200 basis points higher exiting the third year of our merger integration. Now, as we enter the third year of our merger integration, we are already there. Specifically, we are encouraged by the acceleration of our R&D solutions business, which has been driven by the team winning a greater number of opportunities earlier than expected, and our smart clinical trial capabilities enabling execution at a faster pace. Let me now provide you with some color on the first quarter of 2019. Assuming FX rates at January 1st remain constant through the end of the quarter, We expect revenue to be between $2,630,000,000 and $2,680,000,000, reflecting a headwind from FX of almost 300 basis points. Adjusted EBITDA to be between $575,000,000 and $590,000,000. And adjusted diluted EPS to be between $1.48 and $1.53. reflecting growth of 10.4% to 14.2%. In summary, we delivered another quarter of strong financial results. R&D solutions, LPM, contracted services, net new business grew about 29%. Our next generation of clinical development team secured over 800 million of awards for our differentiated offerings. bringing full-year 2018 awards to $2.5 billion, or $3.7 billion since we closed the merger. We are delivering earlier than expected on our merger promise to accelerate revenue growth in our R&D and technology and analytics businesses. 2018 adjusted EBITDA margins expanded 60 basis points on both the constant currency and reported basis. We executed $604 million of share repurchase in the quarter bring the total post-merger repurchase to $5 billion at an average price of $89.11. And the Board has just authorized us to expand our share repurchase authorization by another $2 billion.

And with that... Hang on a second, Mike. Before we turn it over to Q&A, I just want to say how incredibly proud I am of the team for really a superb performance in 2018. Everyone worked very, very hard to deliver a performance we can all be proud of. Frankly, it feels really good to look back at where we were just a couple of years ago after closing our merger. You were all there and recall those beginnings. At the beginning of that journey, we set out to execute a three-year plan to accelerate revenue growth, exiting the third year of the merger by 100 to 200 basis points, to expand our margins to our $200 million cost synergy target and other productivity improvements, and to grow our adjusted root APS by double digits, and, of course, execute on a capital allocation strategy, which included strategic M&A and returning cash to shareholders through share repurchases. And here we are just two years after the merger. We're already looking at the top-run acceleration that we were looking for, and we are well on our path to finalizing the $200 million of cost synergies. So, again, I want to thank our more than 58,000 employees for their hard work and their collective contribution. You've helped take IQVIA to really new heights, and I look forward to continuing this journey with you As our momentum continues to build, it's now okay to get back to the program and, I guess, open up for questions.

Yeah, I think we'll take our first question.

Thank you. Ladies and gentlemen, if you'd like to register a question, please press the 1 followed by the 4 on your telephone. You'll hear a three-tone prompt to acknowledge your request. If your question has been answered and you'd like to withdraw your registration, please press the 1 followed by the 3. If you're using a speakerphone, please lift your handset before entering your request. One moment, please, for the first question. The first question comes to the line of Tycho Peterson with JP Morgan. Please proceed.

Hey, thanks. Congrats on the quarter. Ari, just wondering if you could provide a little bit more color on that healthy bookings and B2B. And, you know, it seems like a lot more commentary on your part on this call about, you know, executing at a faster pace and some of the pass-through revenues, you know, helping also contract sales and medical. So if you could touch on those two dynamics as well, that would be helpful.

Yeah, well, we tried to give you a little bit more color. We heard the questions on our bookings growth and so on, so we wanted to provide as much data as we could, and hopefully that will help the understanding that we are really growing our business at a really unexpected pace. With respect to your question on executing, our book of business faster with our next-gen capabilities. You know, people are focused on the burn rate in aggregate, but it's really a very high-level metric. Because we are booking at a much higher rate, it's very difficult to see that we are actually accelerating revenue growth in the trials that actually use the smart trial next-gen capabilities. On specific trials, we see it And, you know, absent that, you would see an aggregate burn rate go down mathematically because of the very large volume of bookings that we're bringing in at one time. But, in fact, you know, we know that we are accelerating revenue recognition through executing faster on the trials where we deploy the technology. And as a result of that, since we are You know, we changed the accounting method and now have to report pass-throughs and service revenues as one line. Because we are executing faster than we bring in pass-throughs, we recognize pass-through revenue faster as well. And that's also part of why the revenue growth was higher than we had anticipated. But really, it's across the board. I think, as I mentioned, mostly on the full clinical side, the bookings have been extremely strong. It has been strong on large pharma, which is still the majority of our bookings. It's strong on EBP as well. FSP is a bit weaker. As you know, the company has been kind of distancing itself from lower margin FSP work before the merger. We are... We've declared that we intend to come back in this segment, and we are making some progress, but obviously it's still a small part of our bookings that we're not there yet. But, again, the quality of our bookings has been outstanding.

Okay, and then for the follow-up, can you just talk a little bit more about the drivers that underpin your confidence in CSMS transitioning back to growth this year?

So, we said we gave guidance for flat revenue, but again, during the year, we'll transition to growth sometime in the year. That's the way the plan is built. You know, The business was organized centrally and separately, and we thought it was very inefficient. You know that we had kind of a lot of heartache on this business. We didn't quite know what to make of it. We decided in 2018 that we were going to align it with our operating structure regionally. We're taking a much more local approach with our regional business units, selling the offering along with the rest of our commercial offerings. That's where the client relationships are strongest for this type of work. And, you know, operating in this more decentralized way puts us closer to decision makers in the field. We also have a better opportunity to partner with the client and infuse some of the technology and analytics solutions offerings in the sales process. So, overall, we see, you know, positive outlook for the business in 2019 and beyond. in a way that we haven't had in many years. As you know, the business has been declining double digits. So, yes, thank you.

Okay, thank you. Thanks, Alfred. Can you take our next question, please?

The next question comes flying out for us. I'm Eukan with Evercore. Please proceed.

Thanks, Ari, for all the color. I guess maybe first, it seems like, and you highlighted the OCE offering is sort of accelerated to a degree where you're getting a ton of customer traction here, and that obviously has pretty material sort of long-term implications for the growth rate of the technology business. I guess as you think about sort of the scope of where you are in that launch and sort of the investments you're making now and then eventually what that will allow you to do on maybe the operating line in that business, I guess how do you think about sort of what that does to the sustainability of this maybe elevated growth rate we're seeing in technology, and then remind us maybe on the margin cadence for that piece. You know, we get sort of some of the costs now, but the long-term margin profile of that sale should be quite attractive.

Yeah, Ross, thanks for your comment. Yes, that's absolutely correct. The long-term attractiveness of this business is undeniable margin expansion once the technology is deployed and it's essentially SaaS license revenue, which is high margin revenue. The initial phases of deployment and implementation can be costly. This is not a margin business. It is a lot of labor involved, labor content involved. We do most of our implementation ourselves. We, as you know, won some very large contracts. It's unprecedented in our organization. We mentioned the Roche deal, which is really big. It's a very big number. And so in the initial stages, that's very much the margin headwind. But it is an investment for us, and it generates superior growth. And long-term, these are higher margins, as you point out. And I would add they are sustainable long-term margins. It's very, very hard. to dislodge incumbents in technology, which is why it's been a struggle. In this area, in CRM, as you know, there is a very large dominant player who has been very, very good and has been essentially unimpeded. We are making a comeback and we're trying to claim our fair share. But the fact is, once you are in it, the switching costs are very high, which is why This is an attractive business and why embedding technology in everything we do is a fundamental strategy of ours. We want to be partners for the very long term with our clients and we want them to value the partnership and technology builds sustainable partnership possibilities with our clients for the very long term.

Thanks for that. And maybe just going back to, you know, the R&D business, you know, obviously you've done much better on the biotech side, and you've taken a massive amount of share there off of the low base. But it feels like, in general, the momentum in the business, even in the base pharma business, continues to build. I guess as you think about sort of where you're taking the share from and then the sustainability of what that means in terms of the structural advantage it's sort of proving out you now have versus a lot of the peer base, I guess, you know, do you think the runway on continuing to put up, you know, maybe not this level of bookings outperformance, but still superior to kind of industry, you feel like, you know, you're sort of building on something that will lengthen your lead versus the peer group, or you feel like we're seeing sort of this step up and then it maybe renormalizes back to the average over, I don't know, the next 12, 24 months?

Yeah, I mean, you know, Normalizing is not a term that I like culturally. So, no, we're looking, you know, what we're looking to do is accelerate momentum. That's what we are about. And there's no normalization at any point in time here. You know, there's a big market out there. I mentioned in my introductory remarks that the fundamentals of the industry, we believe, are very attractive. Secondly, we look at the market as a whole. That is what is being spent in R&D globally. I don't really care whether the spend is internal, external, with CROs, with small, medium. We can't really make a rigorous analytical analysis. sense of what the market size is and the precise market shares. I think it's very, very hard to ignore the size of our bookings, our book-to-bill ratios, given that we are the largest by far, and then not conclude that there is a market share a significant market share move here. Now, what is it being taken from? I'm not going to speculate that. We don't know. Not every competitor is publicly traded. Not everything is disclosed the same way. People love bookings in a different manner. We haven't changed one iota the way we account for our bookings. It's the same. It's been the same forever, so there's no change. It's consistently applied, other than the change we made at the merger, which was the which was the switching to a contracted basis as opposed to just a worded basis, which we believe is more conservative. But other than that, it's consistently applied. And so, you know, we're looking to increase our share of spend, our share of wallet with each and every customer, large pharma, biotech, domestic, global, FSP, full clinical, we just look at the spending aggregate and buy clients. We have a centralized, unified account management program, and there's no territory that we're not looking at, whatever segment dimension you can think of. And we will continue that strategy. Again, on the numbers, it's hard to ignore the market share shift. And on the specifics of clients, it's also hard to ignore the moves. I mentioned we've got over 300 new clients in 18 alone that we didn't have before. And among the top 20 large pharma, I had mentioned many times at the time of the merger that I was stunned that we didn't do business with many large pharma companies. Well, since then, we're now doing business, and a lot of it, with five previously so-called locked-out accounts. And that's significant.

Thanks so much, and congrats.

Thank you.

We'll take the next question.

The next question comes from Jack Meehan with Barclays. Please proceed.

Hi, thanks. I was hoping to give a little bit more color on the margin progression for 2019. Pleased to see expansion. I know that's cultural for you, but if you could just walk us through, you know, some of the initiatives you have going to streamline things on the R&D side versus some of the investments on the TAS side, just those moving pieces would be helpful.

Yeah, thank you, Jack. Look, we will always think faster growth rate over more margin expansion, right? I don't need to do the math for you. You know that a point, everything has been equal. A point of faster growth is worth a lot more in value than a point more of margin. Having said that, I've said it repeatedly in our state again, we want to do both. We want to grow and accelerate our revenue growth, and we also want to expand our margins. Now, there will be times when it could be a quarter in or quarter out where there may be no margin expansion. But the trend for us will continue to expand our margins. Now, when you step back and look at what we've been doing since the merger in terms of investments in the business, Investment in the OCE platform, investment in deploying for very large wins like Roche and Novo Nordisk and some of the other wins that we've had. Investment in orchestrated clinical technology, OCT suite of products that we are launching or will be launching in 2019. investments in the next-gen, the smart trial automation platforms that we talked about in E360, in the aggregation and sourcing of additional patient-level data. I mentioned we now have over 600 million lives. Investments in virtual trials. All of this means many more. People resources. I think we started the merger with 50,000 people. We are at 58,000 people to support the business growth. We are recruiting a different makeup of skill set population, much higher compensation levels, data scientists. We are in very high demand. Technology salespeople, also in high demand. investing in specialty areas, in assets, in emerging markets. So again, a lot of investments. And anyone would be well served to look at what that means. Very little of those additional resources are capitalized. Of course, software development is to a degree. And we are still carrying redundant expenses from the merger. We've got In some cases, systems integration programs that force us to carry two systems in parallel that's still not over. We're having resources that are dedicated to the merger and that we cannot capitalize, et cetera. So anyone looking at all of that should accept that normally margins should have gone down. And they haven't. 60 basis points of margin expansion in 18. So I would suggest that as we continue to accelerate and we're seeing the fruits of all those investments already in 19, earlier than anticipated, I think we will continue to invest. There will be ups and downs in our margins, but the long-term trend will be margin expansion. Why and how are we able to do that despite all these investments and this headwind? I omitted to mention the acquisitions, obviously, that always come with margin headwind because they have very little profit or zero, in some cases, losses. So all that is headwinds. Why have we been able to overcome all our headwinds and actually generate margin expansion is because, as you said, culturally we are focused on cost containment. We're generating the synergies from the merger. And we are instilling in the company a lean culture. We're kizenning every process. We're reviewing how we do things and looking at how we can do them better, faster, smarter. and transforming our organization to a really lean execution machine that can continue to deliver margin expansion well into the future.

Thanks for all the detail.

Thank you.

Thanks, Jack. The next question, please.

The next question comes from Shlomo Rosenbaum. Hi. Thank you very much.

Ari, you've won a lot of business on the OCU platform. I know it was a big focus at the end of 2017. So you had mentioned at the time that there was a cycle of kind of a renewal cycle where you wanted to gain more market share or recapture more of what you felt belonged to the company or the company could get. How far along are we in this cycle? And, you know, should we see this kind of level of contract wins in kind of the software area continue into 2019 and 2020?

Thanks, Shlomo. Before I answer your question, I just want to send you a little bouquet here for that outstanding investor call that you took the initiative of organizing. You know, we never actually – we didn't even know about it, and, you know, it's quite a coup. to be able to get a client on record to explain to investors their experience with our IQ. And it was favorable on top of it. So thank you for that. With respect to OCE and the pipeline, I mentioned in my introductory remarks that, look, we have right now over 100 active sales leads. We won over 30 accounts, including two large ones. You know, virtually every single one of these is a head-to-head competition. The renewal cycle I mentioned before is very, very hard because it's difficult to remove an entrenched technology provider, as you all know, in any A technology platform, an ERP, or any application is very difficult. The switching costs are high, but we're not deterred by that. We are going to continue to find out, and we have good prospects to win a fair share in that market. We also need to realize that beyond CRM, there's a lot bigger field out there. We mentioned OCT on the clinical technology side. um that's that's a field where there is a renewal cycle this is a big and emerging opportunity where a lot of currently paper labor intensive processes can be easily automated. We're not the only ones to observe that opportunity, but we're fighting it out with others, and we believe we'll gain a fair share of that market as well because of our superior capabilities. So, yes, we're very bullish on technology. We have been for the longest time, and it's really across the board. So, thank you.

If I can get a follow-up, just I think someone was touching on this before, but it seems like the margin expansion you're getting is despite what are significant investments to deploy these wins. Is there some way you can just kind of give us a hint as to how long these deployments will take? In other words, the investments for the 30 you talked about, is that going to go through 19 and halfway through 20? How long should we think about that before they actually start to have a more really a material contribution to margin expansions instead of being a headwind?

Yeah, I mean, look, these implementations, when they are global, you know, can take a year, year and a half. We know that the main, the big dominant competitor in this space um in some cases you know four or five years after the win of the contract they are still deploying in some of the countries they were supposed to deploy in now we believe we can deploy at the faster rate that's yet one of the main advantages of our technology uh i believe the competitive advantage we can deploy at a faster rate so it's a year a year and a half um implementation but again this is going to continue in other words just because we will finish um the implementation for these 30 plus wins um you know we're still winning we hope to win other business so so um you know we will continue to have implementation all the time but hopefully um the the the revenue associated with the um uh the software that's already deployed then can, you know, more than offset and it becomes a manageable headwind to our margins when we have new implementations.

Okay, and thank you for the shout-out earlier.

Thank you.

Thanks very much. Our next question, please, operator.

The next question comes from Eric Holtwood. Eric, please proceed. Thank you.

Thanks very much and good morning. So, I have so many different things I could hit on here, but I'm going to divert a little.

Well, that's because we give you too many numbers to dissect.

Yeah, you know, you're filibustering us this morning. No, it's all good. So, you know, the contract sales division, CSMS, doesn't get a ton of attention and you've been very consistent on that since day one, but You are looking to working on rejuvenating it. I am hearing more positive things in that side of the market, the commercial market. I think your two big peers are seeing better things, at least in the U.S., for sure. I'd love to get a little more color on what you're seeing, why you think it returns to growth in the second half, and you'll probably yell at me offline, but I heard a little rumor that you won a pretty decent contract sales engagement this year. I'm curious if you could talk about the pipeline on just straight Salesforce wins.

Look, we're pleased that our CSMS business is showing positive signs of stabilization as we head into 2019. When you compare our business to the peers you just did, you have to look at geographic mix, service mix, which, again, can impact the growth. You know, we, for example, were very strong in Japan. And actually, leading position in Japan, none of our peers has anywhere near what we have as a competitive position in Japan. And the Japanese market has been, it's a well-known fact, has been declining. So, therefore, our peers are not as impacted. Their business is more skewed to North America and Europe, as an example. Certain markets in Europe have also had been a headwind. You know, some of our competitors, you know, are less exposed. You know, the largest U.S. competitor is not exposed to those markets, either Japan or Europe. If you look at the service mix, you know, we are way more towards CSO type of services, traditional contract sales force. And the peers have a mix of both legacy CSO services along with communications, consultings, MSLs, et cetera. If you look at what's in the bag, it's a lot of cats and dogs, some of which are actually doing better than contract sales. So it's hard to compare us to peers exactly. Also, our peers have done M&A in the space. We haven't. Basically, we've started the business from that standpoint. And so, therefore, it's very difficult to compare our peers' growth rates with ours because of all those reasons. Geographic, product mix, they've got stuff in there that's not really pure contract sales, so it kind of clouds the numbers. And if not M&A, we haven't. So, having said that, you're correct to say that we've re-energized the business. We told you we were going to do that. You know, our practice, hopefully, is to tell you what we are going to do and to do it. And that's what we've done. We're very transparent. We've told you we are going to take that business and give it to the regions. We have very strong operating management, you know, IMS legacy, regional organization structures that are, you know, really outstanding executive operating leaders. And they took ownership for it. We stuck it into their P&L, and they are incentivized to make it work. So as we are, you know, we needed to send the decline and stabilize the business, which we are doing. And then hopefully we are going to transition to growth here. We've got some good aggressive plans. We'd like to stretch the businesses. and we'll see where we land. So we gave guidance for flat revenue growth, and, you know, we look to be favorably, you know, if we can do a little better than that, that'd be great. But that's what we're looking at now. But you're correct. We are winning a little bit more. We have a good pipeline, much stronger than we ever had, and we've got some decent wins. Thank you. And thank you for bringing up that business. We don't talk enough about it. Thank you.

Thanks, Gary. Operator, I think we're running out of time, but I'd like to maybe just try and squeeze in one more very quick question if we can.

Sure. The next question comes from Robert Jones with Goldman Sachs. Please proceed.

Great. Thanks for sneaking me in. You know, Ari, I appreciate that it's difficult to pinpoint, you know, the strength, whether it's from share gains or just from, you know, healthy end market, seems like both. But, you know, I'm curious just as you've seen more traction across, you know, not only large pharma but emerging biotech as well, you know, what's the reaction from the competitive landscape been? Have you seen any change in behavior from those that you're going head-to-head with in the RFPs that you've been winning?

I don't know. Look, we are – What I can tell you is they spend a lot more time looking at what we do than we spend time looking at what they do. And so we've got a totally different strategy. It's hard to bucket our competitors into one group because, you know, you've got those that continue to be dismissive of our approach. Initially, it was about, you know, data doesn't matter, technology doesn't matter. Then it was about we're losing all of our people. You know, we're not really booking real stuff. You know, whatever it is, you talk to them more than we do. And I respect competition. It's good to have healthy competition. We've got a lot of players that are very good in what they do. Our approach is just different. we are leveraging unparalleled, unmatched capabilities that combine unique information assets, advanced analytics, machine learning, technology capabilities, and most importantly, domain knowledge across therapeutic areas that no one comes close to. And we do all of that on a global basis in 100 markets. That's very different than what other people do. We do leverage those capabilities across everything that we bring to our customers, whether it's on the commercial side, in the real world side, or on the R&D side. And we believe that over the long term, that will prove itself out. And we can see in the short term, that we're gaining traction and momentum. So we'll let our competitors do what they do, and we'll continue to focus on our strategy. And we are in the early stages of finalizing the next leg of our journey, which we call internally V22, Vision 22. At the time of the merger, we gave you a midterm plan strategy, meaning what will happen in the 17, 18, 19 three-year period, and we believe we're delivering on that promise and on those goals. Sometime this year, we're trying to pin down a date. We would like to invite all of you to join us for an investor day where we hope to be in a position to give you what our plans are, and our strategic objectives are for the next three-year leg of our journey, the 2021-22 timeframe. So with that, I'm going to conclude. Thank you all for your patience, and it was a little longer call. And obviously, Mike and Andrew and Jennifer will be available for follow-up calls as usual. Thank you.

Thank you, everyone. Thanks for taking the time to join us today, and we look forward to speaking with you again on our first quarter 2019 earnings call. Jen and I will be available for the rest of the day to take up any follow-up questions you have. Thank you.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.