IQVIA Holdings, Inc.

Ladies and gentlemen, thank you for standing by. Welcome to the IQVIA Third Quarter 2019 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. As a reminder, this conference is being recorded Wednesday, October 30, 2019. I would now like to turn the conference over to Andrew Markwick, Senior Vice President, Investor Relations and Treasury. Please go ahead.

Thank you. Good morning, everyone. Thank you for joining our third quarter 2019 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, Nick Charles, Senior Vice President, Financial Planning and Analysis, and Jen Haljo, Senior Director, Investor Relations. Today, we will be referencing a presentation that will be visible during this call for those of you on our website. This presentation will also be available following this call on the events and presentation section of our IQVIA investor relations website at ir.iqvia.com. Before we begin, I would like to caution listeners that certain information discussed by management during this conference 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, 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 should be considered a supplement to and not a substitute for financial measures prepared in accordance with GAAP. A reconciliation of these non-GAAP measures to 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 Boothby.

Thank you, Andrew, and good morning, everyone. Thanks for joining our first quarter 2019 earnings call. I'm pleased to report that the first quarter is a continuation of the solid momentum we've had since the beginning of the year. Once again, revenue adjusted EBITDA and earnings all came in at the high end or above our guidance ranges even after the currency impact. Third quarter revenue of $2,769,000,000 came in $14 million above the midpoint of our guidance range and $34 million above the midpoint of our guidance range when you adjust for the foreign currency impact. Revenue growth was 7.9% on a constant currency basis. Actually, when you adjust for acquisitions and pass throughs for the total company, organic constant currency revenue growth is already in the 7% range. From a segment perspective, technology analytics solution revenue grew 10% at constant currency. During the quarter, we marked the anniversary of several tech businesses we had acquired in 2018, and therefore, the contribution to growth from M&A was about 280 points, which is half of what it was last quarter. The acceleration of the TAS organic constant currency revenue growth which came in at almost 8% this quarter, was driven by the timing of our real-world client engagement deliverables, as well as accelerated technology deployments. R&D solutions revenue grew 6.8% at constant currency. This growth rate included an impact from pass-throughs of approximately 200 basis points, which was roughly offset by the contribution from M&A. Contract sales and medical solutions continues to demonstrate that it has turned a corner, growing about 5% on a constant currency basis. This is the result of our strategy to integrate the business with our commercial operations. We expect the CSMS business to deliver the flat year-over-year growth we projected for the year and to sustain modest growth in 2020, maybe in the low single digits. Third quarter adjusted EBITDA of $593 million was towards the high end of our guidance range. As I mentioned, our technology deployments are driving our top line acceleration, but we also incur upfront costs with these deployments, which are included in our margins. So, in this context, our adjusted EBITDA performance in the quarter was quite strong. Adjusted EPS of $1.60 was above the high end of our guidance range and grew 12.7%. The $0.04 beat versus the midpoint of our guidance was driven by $0.02 of strong organic operational performance and $0.02 of below-the-line efficiencies. Let me give you some color on the businesses and our progress. In technology, I am pleased to report that we now have over 70 OCE wins since launch. In the third quarter alone, we signed 20 new OCE deals, including a win with a top 15 pharma client to deploy OCE sales and marketing in the U.S. And another win with a top 15 pharma client to deploy OCE in Asia. Both of these deals with large pharmas have the potential for geographic as well as therapeutic area expansion. Of the 20 new wins in the quarter, 15 were head-to-head competitions against the leading dominant incumbent in the CRM space. And the two top 15 pharma wins were outright displacements. Turning to real world. We've spoken to you before about our success in supporting single-arm studies using real-world evidence. Our clients are increasingly looking to us for innovation in this space. In fact, in just the last 12 months, the number of projects we're working on that use an external comparator arm has quadrupled. We had a recent win with the top 10 pharma clients in Europe to conduct an hematology oncology external comparator project. Critical to the success of the project was a QGIS proprietary oncology network infrastructure, which was utilized to access a very difficult to find comparator patient population. Our global infrastructure allows us to provide our clients a faster and more predictable path to deep clinical insights on each patient populations and enable this kind of novel research. During the call, the real-world team was also awarded a preferred provider partnership with a top 10 pharma company for our ECOA or electronic clinical outcome assessment technology platform. Our newly launched cloud-based technology platform uses a simple interface to collect direct-from-patient clinical data. This allows sponsors to better understand and improve the patient experience, resulting in reduced timelines, improved transparency, and real-time insights about patients. Moving to R&D, the team continued their strong momentum with another quarter of excellent bookings. For the quarter, On a contracted basis and excluding pass-throughs, our book-to-bill was 131, and including pass-throughs, the RMDS book-to-bill was 124. We are reporting this metric for transparency, but as we've said many times before, we think it is much less meaningful than services bookings as the estimates and timing of pass-throughs can vary greatly quarter to quarter. For the last 12 months, as of September 30, the contracted book-to-bill ratio was 140, excluding reimbursed expenses, and 136, including reimbursed expenses. R&D's backlog of $18.3 billion grew over 11% compared to the third quarter of 2018. And importantly, our next 12 months' revenue from backlog increased by a further $200 million to $5.1 billion, growing 10.6% year-over-year, or 13.3% if you exclude pastors. This important forward indicator metric supports our expectations of continued RMDS revenue growth acceleration into 2025. Demand for our core power capabilities continues to be strong. We now have 13 large pharma clients using our differentiated solution. Further, during the call, we were very excited to secure a new preferred provider agreement with a top 10 pharma client. This was previously a locked out account and our achievement resulted in the displacement of two competitors. Let's call them particularly prominent competitors. The environment for R&D and outsourcing remains very healthy. Our pipeline of R&D opportunities, whether you look at dollars or number of RFPs, continues to be at the same strong pace as 2018. And that was a record year for us. Our pipeline is growing heightened year to date compared with last year. The EBP segment, which I know is often the subject of questions, remains very healthy. As you know, 2018 was a blockbuster year in terms of funding the year to date 2019 funding is tracking similar to 2017, which was also a very strong year. The pipeline of late-stage molecules continues to expand, growing 8% since the end of last year, and interestingly, 11% in oncology. Once again, another strong quarter across all of our businesses, and I'm going to now turn it to Mike We'll review the financials in more detail.

Thank you, Ari, and good morning, everyone. As you've seen, we've had another solid quarter. Let's turn first to revenue. Third quarter revenue of $2,769,000,000 grew 6.7% reported and 7.9% in constant currency. Revenue for the first nine months of the year was $8,000,000,000. $193 million and grew 6.1% reported and 7.9% at constant currency. Technology and analytics solutions revenue of $1,095,000 grew 8% reported and 10% at constant currency. Tech and analytics solutions year-to-date revenue of $3,272,000 grew 8.7% reported and 11.4% at constant currency. R&D Solutions' third quarter revenue of $1,466,000,000 grew 6.1% at actual FX rates and 6.8% at constant currency. Year-to-date, R&D Solutions' revenue of $4,317,000,000 grew 5.4% at actual FX rates and 6.5% at constant currency. Third quarter contract sales and medical solutions revenue of $208 million grew 5.1% on both a reported and constant currency basis. Contract sales and medical solutions year-to-date revenue of $604 million declined 2.1% at actual FX rates and half a percent at constant currency. Let's turn now to profits. Adjusted EBITDA was $593 million for the third quarter and $1,758,000,000 for the first nine months of 2019. Third quarter GAAP net income was $57 million and GAAP diluted earnings per share was 29 cents. Year-to-date GAAP net income was $175 million and GAAP diluted earnings per share was 87 cents. Adjusted net income was $318 million for the third quarter and $933 million year-to-date. Third quarter adjusted diluted earnings per share grew 12.7% year-over-year to $1.60. Year-to-date adjusted diluted earnings per share of $4.65 grew 14.8%. Let's now turn to R&D Solutions backlog. Closing backlog at September 30, 2019 was $18.3 billion, and the amount of backlog that we expect to convert to revenue over the next 12 months grew by about $200 million to $5.1 billion. As Ari mentioned, we are well positioned for further acceleration in R&DS revenue growth in 2020. Let's now review the balance sheet. At September 30, cash and cash equivalents totaled $863 million, and debt was $11,542,000,000, which resulted in net debt of $10,679,000,000. Our net leverage ratio was 4.6 times our trailing 12-month adjusted EBITDA. Cash flow from operating activities was $330 million in the third quarter. CapEx was $149 million, and free cash flow was $181 million. We repurchased $313 million of our stock during the third quarter, including $157 million from certain of our remaining private equity sponsors. Our private equity ownership now represents approximately 5% of our shares outstanding. Before we turn to guidance, a few words on FX. As Ari mentioned earlier, the Q3 revenue number we just reported includes an impact from FX of about $20 million versus the last time we reported. Our full-year revenue guidance previously included a 110 basis point impact from FX. This has now increased to 160 basis points. As a result of our strong year-to-date organic performance, we are reaffirming our constant currency full-year revenue growth guidance at the midpoint and tightening our range. As you know, we raised our full-year guidance last quarter largely to reflect our stronger organic performance. There is no change here, and we still see good momentum on the top line. On a constant currency basis, we now expect revenue to grow 7.3% to 7.7%. On a reported basis, revenue growth is expected to be 5.6% to 6.1%, which reflects the additional 50 basis point impact from FX that I just discussed. Therefore, our full-year revenue guidance is now expected to be between $11 billion and $11.5 billion. Adjusted EBITDA guidance has been narrowed and reaffirmed at the midpoint. We now expect full-year adjusted EBITDA to be between $2,393,000,000 and $2,407,000,000, representing year-over-year growth of 7.6% to 8.2%. Adjusted diluted EPS guidance has also been narrowed and reaffirmed at the midpoint. We now expect full-year adjusted diluted EPS to be between $6.30 and $6.40, which represents year-over-year growth of 13.5% to 15.3%. As expected, our adjusted book tax rate was more favorable than normal in the third quarter, but we do expect this to revert back in the fourth quarter, and we are still estimating about 22% for the year. This guidance assumes that foreign currency rates at September 30 remain in effect for the rest of the year. Now turning to our resulting fourth quarter 2019 guidance. For the fourth quarter, revenue is expected to be between $2,807,000,000 and $2,857,000,000, representing growth of 4.4% to 6.3% at actual FX rates, assuming a 100 basis point impact from foreign currency year over year. From the segment perspective, we expect four-quarter growth in technology and analytic solutions to moderate sequentially, reflecting the strong Q3 organic performance, a lower contribution from M&A, as well as a tougher expected cost year-over-year. In R&DS, we expect year-over-year services growth to be somewhat stronger than what you have seen in prior quarters. And in CSMS, we expect the trend to remain positive, and consistent with our expectation for flattest revenue growth for the year. For profit, we expect adjusted EBITDA to be between $635 million and $649 million, representing year-over-year growth of 8.9% to 11.3%. Adjusted diluted ETF is expected to be between $1.65 and $1.75, which represents year-over-year growth of 10% to 16.7%. So, in summary, we delivered third quarter results at the high end or above our guidance ranges. Revenue came in at the high end of our guidance range, notwithstanding an approximate $20 million impact from foreign currency. Technology and analytics solutions and R&D solutions sustained their strong momentum. OCE now has almost 70 wins since launch, including two important wins with top 15 pharma clients in the quarter. The R&D team secured another strong quarter of net new business with backlog and next 12 months' revenue from backlog both growing double digits year over year. And lastly, CSMS continues to improve. With that, let me hand it back to the operator for Q&A.

Thank you. Ladies and gentlemen, if you would like to register a question, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. If you are using a speakerphone, please lift your handset before entering your request. One moment, please, for the first question. Our first question is from the line of Eric Coldwell with Baird. Please proceed with your question.

Thanks very much. Good morning. First off, just two questions. The new large pharma win, I know it was a task client decision. Was it also a commercial client prior to the R&D win? Was any of your existing sales to that form kind of a driver of this new opportunity, number one? Number two, could you give us a sense on maybe a framework of how to think about sizing it either in terms of bookings contribution this quarter or over the next year or maybe long-term revenue growth? And then I have maybe a quick follow-up. Thanks.

Yeah. Thanks, Eric. Look, we're very excited. It took some time. You know, as we've said many, many times, unlocking previously locked out accounts, as they were known in the industry, was a major goal for us. We've done a few by now. This one was very important to me that we have been working on, you know, literally for the past couple of years. We did win a couple of small studies where they wanted to test out our new capabilities and see whether there was really real value there, and that prompted them. So, again, the main trigger and driver for the displacement here was our new set of smarter trial capabilities. And they decided to essentially replace their existing providers with us. Can't say much more. Bookings in the quarter, I think we can get you that to follow up, but I don't think it was very significant. The preferred provider arrangement was executed in the quarter. That's why we're reporting it, but there was nothing much there. The pipeline for that particular client is very strong, and we do expect that this is going to result in significant bookings going forward.

And just quickly, my follow-up here, that client, I know you displaced two. I believe you also had another public CRO that participated in that win. So there are two of you in that new arrangement. Is that correct?

Yes.

Yes. Good. Thanks, guys.

Thank you.

Thank you. Our next question is from the line of Aaron Wright with Credit Suisse. Please proceed with your question.

In terms of the new business wins in the quarter, I mean, it sounds like you're still seeing the traction across large pharma, but can you speak to some of the traction across the smaller emerging biopharma segment that was an area of focus during the investor day, and how should we be thinking about just the traction overall across that cohort? Thanks.

Yeah, I mean, look, if you're, Erin, you're specifically asking about core power and smarter trials, correct?

Yeah, and traction across the emerging biopharma segment, the small biotech. Right, yeah.

Yeah. So, look, we obviously, we want to be balanced and we are balanced. We, in the early days of the new solutions, Probably more than two-thirds of our awards were with EBP clients. And as I said before, it was a lot easier because single decision-making points, faster decision cycle in general, you know, less silos to go through. But along the way, large pharma has been adopting the solution. And to date, I think we have almost $6 billion of awards on smart trials and on the dollar value, almost two-thirds of that is with large pharma, but, you know, it is quite significant. In the quarter, it continued that kind of a breakdown, okay, about two-thirds, almost two-thirds large pharma and the balance EDP. And as I mentioned in my instructor remarks, strong, strong EDP funding environment year to date at the level of 2017.

Okay, great. Thanks. And then on OCE, you've made considerable headway there with 20 new deals you mentioned. I guess can you quantify how much that's lifting the tech segment or the TAS segment, and can you speak to what's driving some of those business wins, and do you expect that momentum to continue here?

Thanks. Yeah. So as you know, you know, we've been in the market with OCE for I think we announced the launch at the end of 2017, and we really took it to market at the beginning of 2018. So it's not even two years. It's a year and three quarters. and we've had over 70 wins to date. It's a market that is occupied largely by one company, and we believe, and the feedback from our customers is that our products and solutions are superior in terms of functionality, cost to deploy, efficiency and a number of other aspects. So we, again, want over 70 new customers for this new product. The sales cycle is fairly long. You know, that's why people like technology. You know, once you're in, you're in for a long time, so it's hard to displace existing solutions. These are enterprise-wide solutions often and they, you know, switching costs are very high. But we're very pleased to have won so many new engagements. It takes time to deploy. If it's a global deployment, it could take a year or more, potentially two years if it's, you know, in a lot of countries. And the deployment phase does not contribute much. It's, you know, not so profitable. It's more labor-intensive in the initial phases. And, of course, the upside is when the solution is being used by the client and they pay license, which are, which is really when we recoup our investments and contribute significantly to both revenue and profit. So I think in the quarter, there wasn't much from the wind. No, of course not. And there will be some contribution from implementations over the next 12 months from these new winds, but, you know, really not much to profit.

Okay. Thank you.

Thank you. Our next question comes from the line of Stan Brennan with UBS. Please proceed with your question.

Great, thanks. Ari and Mike, I was just hoping, just on R&D solutions, could you just walk through, I know you had the pass-through kind of headwind this quarter, but in terms of getting to the organic growth, I know you discussed M&A as well. Could you just give us kind of what was your organic growth this quarter, and when we think about what's expected kind of going forward, I know the expectation is that continues to accelerate as the burn rate you basically burned in a very large backlog. So can you just walk us through a little bit about organic growth in the quarter and kind of what the outlook is?

Sure. So I'd say for the total company, we were in the quarter at, when you peel out the acquisitions, contributions, and the pass-throughs, for the total company, we were at 7%. For the technology analytic solutions, we were at almost 8%. And for the R&D solutions, it was 6.8%. Yeah.

And then I am off through. Right.

Offset each other.

Got it. And then maybe could you just speak a little bit more to, you know, the large backlog and in terms of the burn rate and kind of how we think about that kind of going forward, I know the expectation was as you move through some of the older quintiles backlog and into the next-gen backlog that you would begin to see that really convert. So I know we're just guiding for Q4 right now, but just kind of walk us through a little bit about how to think about, you know, that large backlog burning going forward. Thank you.

Go on.

Yeah, so again, it's Mike. I'd say that... You know, you've seen, if you calculate backlog charges based on revenue over starting quarter backlog, obviously we've been adding backlog at a very advanced rate, and so that percentage naturally, you know, decreases, and we're not, it's not one that we're overly focused on. I think that the takeaway here, as we mentioned in our prepared remarks, is that we feel like we're very well positioned. The bookings continue to be strong. We had a very good complement of core clinical bookings during the quarter in particular. And we do see the growth accelerating in RMDS as we head into 2020, as we said in our prepared remarks.

Great. Okay, I'll leave it there. Thank you.

Thank you. Our next question is from the line of Ricky Goldwasser with Morgan Stanley. Please proceed with your question. Yeah, hi. Good morning. So when we think about the fourth quarter guide and the conversion from revenue to EBITDA in terms of growth, EBITDA growth is around two times to 1.8 times both sides of the range in terms of growth and more significant conversion that you're guided to on your amnesty. So if we think about kind of like the mix of business for the fourth quarter, how should we think about that in terms of where we are in the trial conversion, in any other things that are impacting fourth quarter guide, and then how should we think about this within the context of the midterm guide? Should we think about this as a sign that there is upside opportunity to that EBITDA growth guidance that is provided back in Investor Day?

Hey, Ricky. It's Andrew. Sorry. Can I clarify your question? You're asking about EBITDA ramp going into the fourth quarter and midterm outlook? Yes.

Yeah, so even the growth rate for the fourth quarter, we're seeing kind of like nice acceleration versus kind of like the revenue growth. So how should we think about it within the context of the midterm guide that you provided on analyst?

Yeah. We're looking at the fourth quarter in particular. I think if you look back to last year, we see a sequential ramp, Q3, Q4, three to die. I think we had about 10% growth three to die in the fourth quarter last year, and I'll go like this year and play something very similar. The fourth quarter ramp is standard for our business. So, I mean, as a reminder, we usually see a technology and analytics solutions business ramp in the fourth quarter. That revenue is higher margin revenue and drives our normal sequential margin improvement during the year. And for the last few years, I think Q4 EBITDA has come in around that same kind of proportion of full-year EBITDA. I think as you think about the medium term and EBITDA for us, we've said that we're kind of delivering top-line acceleration, and we've always said that we don't want to give up on a point of revenue growth for margin expansion, and that can deliver a lot more value over time. Now, I think we're very familiar with our history and our commitment to margin expansion, and we've also said that As well as delivering revenue acceleration, we also want to deliver margin expansion as we go forward. Now, it's not going to be to the same rate as you've seen in the past, but we're committed to that. But we need to face that this acceleration is coming from technology deployments, which creates pressure to margins. We're investing. We're still investing in data assets, whether that be in the emerging markets or specialty areas. We've got to bring employees in and new recruits to deliver on the clinical trial side, as we've got a large backlog to deliver on. And we've also got to bring people in to deliver on the deployments for Roche and Novo. as well as the other two top 15 pharma clients that we secured this quarter. So there's a lot going on in the base. We're committed to expansion. I think the Q4 ramp is normal on a sequential basis, and we've kind of laid out what to expect for the next few years.

Okay. And just one follow-up. When we think about the in the quarter M&A and pass-through offset each other, so how should we think about the M&A pipeline? in acquisitions of interest and just capital deployment for remainder of this year and into next year?

Yeah, I think we've always said that we look to deploy between a billion and a billion and a half every year towards M&A and share repurchase. The size of share repurchase will obviously depend on M&A opportunities, but if you look at history, on average we spend about $500 million a year on M&A, so that's stepped down a little bit. I think so far this year we've bought about a billion dollars and the bulk of that is really done for share of purchases. We see the stock as a good investment.

Okay. Thank you. Thank you. Our next question comes from the line of Tycho Peterson with JPMorgan. Please proceed with your question.

Hey, thanks. I'm curious if you could talk about the impact to, you know, backlog and revenue going forward, both for the Biogen Alzheimer's, you know, decision. Did you add back the 390 million that you previously pulled out? And then also on the new preferred provider wins, you know, what does that do to the revenue ramp going forward?

The good news with us is that no one client has an impact, you know, one way or the other. We have, I want to remind you, over 8,000 clients globally, and this is precisely the reason why when that particular client, you know, we have a great relationship with Biogen, obviously, and we're committed to our strong partnership at the event, the science, But, you know, when they decided to put that trial on hold and we took that adjustment out of our backlog, you know, we didn't change our revenue expectation. You will recall that. So just as on the downside, it didn't affect us, so too on the upside. There's no one client that is going to change our overall guidance for the year or in the years ahead. We did our investor day indicate to all of you that our expectation for growth over the next three-year period, 2020 to 22, was higher growth rate as a company overall and for the R&D and the title segments in particular. And that includes, they included the expectation that we were going to win. and we still expect to win more preferred provider, my reporting to you that we did sign that preferred provider agreement with this other company is simply to support those growth expectations, those accelerated growth expectations. With respect to Biogen, again, so far, obviously, there is just a decision to reapply. The particular work associated with it hasn't been yet signed or totally formalized, and therefore it's not in the backlog. I remind you that we changed three years ago our practice and only included on backlog that for which we are contracted for. And so that's not yet there.

And then on OCE, you know, it's great to see the momentum. Can you just spend a minute on, you know, what in your offering is particularly resonating, you know, relative to the competition as we think about some of these head-to-heads? You know, what is really the differentiating factor?

Yeah, we were talking about that before. Sure, yeah.

I think I'll go to Andrew. I mean, OCE, I think we've spent a long time in 17 building the new offering there. One of the key moves forward for us was the partnership with Salesforce. We're obviously platforming OCE on a best-in-breed technology platform there. It helps with us in terms of the functionality. OCE for us also embeds multiple different functions. So it's not just a CRM tool for sales reps. It also brings in the mixed marketing campaign management, brings in the mixed home office operations. So I think when you look at the likes of the large pharma clients or even many of the 70-plus wins we've had to date, the clients like the fact that they can put this tool in the hands of more than one person within their organization. So both the sales rep and the marketing team have the same tool. They have the same version of the truth. The sales rep becomes aware that the marketing team is sending out email campaigns. They know what a doctor has done with that. They know if the doctor has opened it. Have they requested more information? Have they logged on to social media and commented about it? They just become a lot more informed. The tool also then uses artificial intelligence and machine learning. to help streamline the tasks. So a sales rep will get suggestions for meeting invites. It will help place those calls in the sales rep's calendar. If a sales rep gets to the stage where they've got one last visit they can make in a day, it will use artificial intelligence to make next best doctor recommendations and look at rankings of doctors and who their next best visit could be and where they can have the most success. So really we're bringing a very intuitive tool to market that brings together multiple functions within an organization and utilizes AI and machine learning within the application as well. And I think platforming on Salesforce is key. They've got a great technology there. They can focus on the platforming capabilities, and it gives us the ability to really focus on building best-in-breed end-user applications.

Okay, and if I could ask one last quick one. Are there any offsets on organic growth that you're factoring in? You're leaving it unchanged despite, you know, the top line momentum. So as we think about the fourth quarter, are there any, you know, kind of headwinds that left all your guidance unchanged on organic?

Well, yeah. I think the fourth, I mean, Mike gave a commentary in his prepared remarks regarding the fourth quarter. I think TAS obviously saw an acceleration this quarter. I think as you go into Q4, we see continued strength. There is obviously a tough problem. That's where we started to see the acceleration in Q4 2018. R&D continues strength, and on a services basis, we expect an improvement. Don't forget, we see longliness from pass-throughs, and this quarter it was about 200 basis points to Edwin, but that's kind of flat for the year, as we've said.

Okay. Thank you.

Thank you. Our next question is from the line of Jack Meehan with Barclays. Please proceed with your question.

Thank you. Good morning. I want to go back to the two new OCE wins you talked about. Could you maybe just walk through the framework for why they're starting in one geography in the U.S. and Asia and what the timeline would be to expand from there? What are they doing in other regions?

Okay. Well, I said before it's very hard to displace incumbents technology providers by definition. We've said a long time ago that that was our goal. These are large companies, multiple therapeutic areas, you know, hundred geographies. We're very pleased that for each one of them in a very large geography, U.S. and Asia respectively, and for one of them in one particular therapy area, we were able to do the displacement. Now it's natural that that's the way it works. We are working hard to expand our relationship with all our customers and, you know, we hope to expand from there.

Great. And maybe just on the investment side, if I look, you know, at the overall company level, gross margins were down year over year and I think down sequentially. So, you know, clearly there's a lot of investment going behind that. When do you think you hit the tipping point where the level of growth from these projects begins to accelerate to match the level of investment so, you know, on the gross profit line that becomes more neutral?

Yes, we are more impatient than you are about margins. Trust me, we're working very hard on trying to even sustain those margins. I think it's a very, very good level of performance, given the amount of investment and work that's going on. The first point I'd like to highlight is margin expansion can be lumpy between quarters and even years, okay? When we talk about margin expansion, we look at it in terms of trend line over multiple years. Now, we've always said we are not going to sacrifice top-line growth for margins. You know, do the math. One extra point of revenue growth is always, delivers always more value to shareholders than one extra point of margin. Having said that, you know our history and our stated mission, and that is that we're not going to compromise our margins. We're committed to an expanding margin trend line, even though, as you just pointed out, there are quarters where that might not be the case. We explained during our recent investor conference and every time we interact with you guys that We have been investing for the growth acceleration, and that can cause additional in margin expansion. You know, we get the deployments. We deployments globally. We are bringing a new suite of products to market, the OCT, orchestrated clinical trial suite of applications. We've been investing since the merger three years ago on the smarter trial automation techniques, and we continue to do that. Virtual trials, we continue to bring very expensive data scientists and software experts. They are expensive. We compete in the marketplace. This is a zero-unemployment economy. So all of that, has, you know, if we did nothing else, certainly our margins would contract. That's not the case on the trend line. Of course, there's also a mixed impact. You know, our data business, which is very high margin, is essentially flat, and the other businesses are growing. These are businesses that won't have as attractive margins. We've acquired some businesses. Most of the time, these businesses are small, low-profit or no-profit margin contributors, and that also adds to the problem in the mix. And finally, the good news is the CSMS business is improving, but, you know, it costs us lower margins. So it will affect our money. So we are dealing with a growth. horizon. That's very attractive, a top-line acceleration. In order to generate that, we've got to invest. That's obviously headwinds to our margins. We're dealing with a change in the mix, and that also is a headwind to our margins. So, we expect to see margin expansion resume in the fourth quarter. That's what I expect. Now, that's in line with normal seasonality in the business. And look, we are the highest margin performer in certainly in the industry. And certainly if you compare to our on the clinical trial side, on the CRO side, by several points. And so we continue to face pressure from competition. We're squeezing them. We've been gaining share over these competitors. There's one place they can go to, and we're trying very hard to hold the line. So this is the context we're facing. Now, in this context, to come in with our profits above our midpoint guidance, I think it's very good, and we're very pleased with that. I know you and patients would like to see further margin acceleration, and we expect that to happen, you know, over the midterm as we signal at our investor conference.

Appreciate it. Thanks, Harry. Thank you.

Thank you. Our next question comes from the line of Shlomo Rosenbaum with Stifel. Please proceed with your question.

Hi. Thank you very much. I just – the book-to-bill metric is one that investors focus on a little bit, and if you just kind of compare sequentially from 2Q to 3Q, it looks like, I think, from the reported number, 1.35 to 1.31. Can you just comment a little bit on – is this just the vagaries of the lumpiness of how contracts fall out, or does this quarter have – Any particular, you know, anything different about it in terms of contract signings versus what we've seen from prior quarters? It looks like 2Q is a particularly strong contract signing quarter.

You know, there's nothing unique about quarters. This is exactly as you said it, Shlomo. This is lumpiness in quarters when the contracts get signed. I remind you that we are on a contracted basis, so... You know, the contract gets signed by the end of the quarter. It's in the quarter. If not, it's going to be the next quarter. So I wouldn't read too much. The environment remains very healthy. Our pipeline of qualified leads is going versus prior year. It's really very, very strong across the board, particularly strong bookings, I might add, give you a bit more color on the full finical side of the house, really, really strong. I mean, I don't normally want to give those numbers, but in the full finical side, which is the more attractive segment of what we do, it's actually over 1.5 in the quarter on a services basis, which is really what matters, frankly. I don't know why people pay any attention whatsoever on book-to-bill ratios on the on a six-on-six basis, they're absolutely meaningless. The lumpiness and difficulty to approximate pass-through payments, as you know, when you look at our numbers on an LTM basis, we had that big adjustment in the first quarter, which was just reminded of a moment ago by one of your colleagues, and that was disproportionately weighted towards pass-throughs. So we need to, first of all, we've got to focus on LCM members, and I strongly encourage you to ask from our peers that they give you the number on the services revenue only because these fast rules are extremely lumpy. They can vary a lot by mix of business, and there is a high degree of estimation You know, probabilistic estimation judgment involved, and we tend to be extremely conservative. So that's all I'll say on that. But, again, I wouldn't derive any significant conclusions one quarter versus the other. It's very strong. We're gaining share. We continue to have a very strong momentum on our bookings. The team is executing superbly. And it's currently exceeding our expectations.

Okay. If you don't mind, one follow-up. Just on the OCE, it's been a lot of wins. Number one, do you have the manpower to really deploy all these different wins, you know, in a timely basis? And then, you know, over how many years, you know, of the 20 that you won, I mean, how many years does it take to deploy them before they're at a steady state where you can kind of grow them from there?

Okay, I'll take the last part of the question. Most of those wins, it's about they are with, you know, mid-size or EBP segment, and those will take no more than a year to deploy. The large pharma deals, again, if it's one country, one terapia, it's also about a year, you know, at the most, six months to a year. you know, when you've got large deployments like the Roche win, which is in over 100 countries, then that could take, you know, a couple of years, year and a half to a couple of years. And then that's when you start seeing the ramp and the revenue and profit contribution, which we are starting to see from the wins last year. So that should come in, and at that time, you know, in the, If you want to quantify it, I would say, you know, towards the middle to end part of 2020, we should start seeing significant contribution from all those wins accumulated to date. And as to the manpower, you are absolutely correct. This is, you know, to someone else's question earlier, this is what's causing some pressure on our margin. We've got to hire the people. We've got to, and they are expensive. They are a scarce commodity. and strong economy, thank God. So we are facing the costly manpower deployments in the initial stages. Look, we're here for the long term. We could deliver much higher margin, but it would compromise longer-term growth prospects, and we don't want to do that.

I think we've got lots of questions in the queue, but I think we're coming up on the hour, so let's squeeze in one more, and then I think that'll be our last question for today.

Thank you. Our next question will come from the line of David Windley with Jefferies. Please proceed with your question.

Thanks very much. Thanks for squeezing me in. So I wanted to focus on TAS. With the growth in OCE in particular, you've talked in the past about kind of the three pieces of TAS being about a third, a third, a third. I wondered if you could update us on The relative contributions of those, I figure that may have migrated a little bit. Second, if you could talk about, Ari, you mentioned OCT, clinical trials, and its progress. Maybe more specifically, where is it in its go-to-market commercial availability? Have you won any clients there yet? And then lastly, you talked about, you have talked about in the past, kind of 500 trials on the Smart Trial platform and maybe 200 of those having completed patient recruitment, I believe, if you could update us on any perspective around that. So I snuck in three. Hopefully you'll take them. Thank you.

Nice try. Three highly granular, specific, strong questions. I know we could spend an hour on these. Okay, let's quickly take, you know, you want to talk about quickly the breakdown of TAS?

The TAS segment, yeah, I mean, I think we told you before our segment is roughly about $4.5 billion. I think you're right, David, kind of break out roughly into a third, a third, a third. A third of that segment is the legacy IMS data offering, which is kind of script and wholesaler data, which We pretty much sell to everyone, but in order to grow in other areas, we maintain that business flat. So you should expect kind of clattish growth in that area. The two growth drivers in the segment are really real world and technology. They're growing nice double digits. Real world, obviously, a little bit of acceleration this quarter as well, driving. organic growth for the segment up to the 8% mark and tech continues to be strong as well. And then you're left with kind of analytics and services-based businesses, which are kind of in that mid single-digit range. They could be a little bit lumpy, maybe high singles, low single, but kind of a mid-single-digit growth on average, I think. So that gets you to that kind of the growth rate we're seeing now of the segment inching towards high single-digit organic growth. And the acceleration going forward will come from those kind of the areas of higher quality, higher margins, a future which is real-world and technology. Second question. What was your second question again, Dave?

Can you just remind me? OCT. OCT and where it is in its commercial traction.

The traction there, yeah, I think the branded offering, which we've said before, we're looking to deploy that in the end of 20, coming up to the end of this year. So the full suite isn't in market yet. We've had success with different parts of the offering. So if you look at our regulatory compliance, tech platforms, vigilance, and so on, they're out in the market. We've had good success there. Mobile CRA, we've actually got the bulk of our CRAs in the organization actually using mobile COA, and we're trying to sell that to our clients as well. ETMF, which is one that's in the market as well, and we've had some good success. I'd note that the Roche deal that we announced previously was for the OTE contract. ETMF is one thing they bought, but they bought it on the commercial side. We made a kind of a horizontal plate there and built that platform out for commercial content management capabilities as well. So we've already got large pharma kind of coming to the table and interested in these offerings. I think the 70-plus OCE deals we've had so far this year, plus the fact that we've had Roche and Novo sign up and two more top 15 large pharma clients this quarter goes to show further that we're building ourselves to become an increasingly larger technology-based company. And I think that's where we want our growth to come from in the future. Thank you very much for your questions. And your fifth question, Dave, I think was around the 200 to 500 trials that have progressed on SmartTrial.

SmartTrial, yeah.

Yeah, and we've seen a lot of success there with the trials. And you're right, we said at our analyst data we had roughly 200 trials that were kind of deep into the mix where we were able to monitor and look at the success we're having versus trials we've had in the past. We said then that the speed in terms of reduction in site ID counts versus the historical benchmarks, we were seeing about a 40% improvement. Predictability, which would be the reduction in non-enrolling sites versus historical benchmarks, was around 60%. And productivity improvements in terms of faster recruitment rates versus historical benchmarks was around 30%. So they were asking how many more. I mean, we saw some stats on what we saw. In terms of what we sold, we've got $5.8 billion in terms of customer awards for the core power of smart trials. This quarter was how much? In terms of? It's almost $700 million this quarter in terms of the bookings. And as Ari said, that kind of from launch of the offering to date, about two-thirds of those are with large farmers. So we're seeing large farmer increases.

Great. Thanks very much.

Thanks very much, Dave. Thanks, everyone, for taking the time to join us today, and we look forward to speaking with everyone again on our fourth quarter 2019 earnings call. There was still a lot of questions in the queue, so Jen and I will be available to take any follow-ups for the rest of the day.

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. Thank you and have a great day.