IQVIA Holdings, Inc.

Ladies and gentlemen, thank you for standing by. At this time, I would like to welcome everyone to the IQVIA's third quarter 2023 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. As a reminder, this call is being recorded. Thank you. I would now like to turn the call over to Nick Childs, Senior Vice President, Investor Relations and Treasury. Mr. Childs, please begin your conference.

Thank you, Regina, and good morning, everyone. Thank you for joining our third quarter 2023 earnings call. With me today are Ari Boosby, Chairman and Chief Executive Officer, Ron Brooman, Executive Vice President and Chief Financial Officer, Eric Sherbet, Executive Vice President and General Counsel, Mike Fedock, Senior Vice President, Financial Planning and Analysis, and Gustavo Peron, Senior Director, Investor Relations. 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 in 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. The 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.

Thank you, Nick, and good morning, everyone. Thank you for joining us today to discuss our first quarter results. So, in line with our expectations, RNDS is performing very well. The task business continued to grow but revenue fell short of what we had expected. About half of our total revenue shortfall came from foreign exchange headwinds versus our previous guidance, and the other half from persistent weakness in demand in the TAS segment. Despite the TAS revenue shortfall, our productivity actions allowed us to deliver on our profit guidance. We continue to receive questions about the health of the industry and customer demand, and I'd like to give you the latest of what we're seeing in the market. Let's start on the clinical development side. Demand in the R&DS segment remains strong. Net new bookings exceeded $2.6 billion, representing a quarterly book-to-bill of 124. overall, including pass-throughs. And given that this quarter, there is a significant difference between services bookings and bookings with pass-through, I note that our services bookings were the highest ever at $2.3 billion, resulting in a 1.4 services book-to-bill. Our backlog reached $28.8 billion, growing 11.7% versus prior year, another historic high. Our quarterly RFP flow was up 10% year over year, with growth across all customer segments. Our strong performance is supported by continued healthy market dynamics. Emerging biotech funding was strong in the quarter. According to BioWorld, third quarter EBP funding was $18.7 billion, the largest quarter this year. Year-to-date, EBP funding through Q3 was up 8% versus prior year. If you look at the first half, large pharma R&D spend, it was above 20% of net revenues, highlighting continued strong R&D activity within large pharma as well. Based on these indicators, the clinical trial industry remains healthy. Our strong market position, market wins, scale, and differentiated offerings give us confidence that our R&DS business will continue to deliver above market growth. Turning now to TAS. On the commercial side of our business, we are obviously facing a tougher macro environment. Our clients remain cautious with their spending and have extended their decision-making timelines beyond what we would have normally expected. I'm sure you also saw that several large pharma have announced significant cost reduction programs, and obviously we are a significant vendor to large pharma. Now, we had anticipated to see improvements as we progress through the year, and specifically in the quarter, we usually see activity pick up in September after the slower July-August summer months. It didn't happen. While we still had growth for the segment as a whole, we experienced further declines in our analytics and consulting business, somewhat slower than expected growth in the discretionary parts of our real world business, as well as some impact from the China situation. While the acceleration we are anticipating is taking longer than expected, Based on our pipelines, we remain confident that there will be a rebound in demand sometime in 2024. We know this because the pipeline of opportunities remains strong, even as decision timelines are elongated and negotiations with our customers have become more difficult. We also know this because historically, going back 25 years, every time there was a pullback in spend on the commercial side, the industry adapts and comes back within a year or two. With this as context, let's now review the third quarter results. Revenue for the third quarter grew 4.9% on a reported basis, 4.1% at constant currency. Compared to last year and excluding COVID-related work from both periods, we grew the top line approximately 8.5% on a constant currency basis, and that includes approximately a point and a half of contribution from acquisitions. Third quarter adjusted EBITDA increased 9.1%, driven by revenue growth, and ongoing cost management discipline. Third quarter adjusted diluted EPS of $2.49 faced the ongoing headwind of the step up in interest expense and the UK corporate tax rate. If you exclude the impact of these non-operational items, our adjusted diluted EPS growth underlying was 13%. Let me share a few highlights of business activity in the quarter. And let me start with Taz. This quarter, IQVIA was awarded several noteworthy analytics contracts to support our clients' go-to-market strategies. For example, an EBP client selected IQVIA to provide analytics around key prescriber and payer trend for their women's health products. In another significant win this quarter, IQVIA secured a large U.S. data analytics contract with a top 10 pharma client that had been buying from a competitor for over a decade. We also received an award from an EPP client to support the launch of their first branded product into the diabetes market. This will be an end-to-end launch solution including field reps, inside sales reps, OCE, information management infrastructure, data analytics, commercial compliance, and co-pay card operations. Also in the quarter, I'm sure you saw that we received an award from Sanofi to deploy our OCE platform within the Middle East and Africa markets. Sanofi has been using IQVIA in many markets around the world to support their HCP engagements. On the tech side, We've been getting some questions about our partnership with Salesforce, and I just want to confirm that IQVIA has been a key life sciences partner to Salesforce for many years now, with offerings that span from clinical to commercial. And we plan to continue this strong partnership with Salesforce, combining our life sciences domain expertise and intelligence with Salesforce technologies and platforms. Moving now to real world. We were awarded multiple rare disease studies from both large pharma and biotech clients, highlighting our expertise and differentiated offerings within this growing therapeutic area, including innovative study design, patient recruitment, and AI-enabled technology to provide unique solutions. Couple of examples. The top 20 large pharma awarded IQVIA a 10-year study to improve patient treatments for rare genetic liver disease. The Japanese EDP client awarded IQVIA two large post-marketing surveillance studies on rare diseases in the circulatory nervous and muscular systems. Moving now to RNDS. We entered into a strategic collaboration with the Coalition for Epidemic Preparedness Innovations, CEPI, aimed at enhancing the world's ability to rapidly conduct clinical research for vaccines and other biological countermeasures against emerging infectious diseases. This collaboration is a key enabler of CEPI's mission goal, which is sponsored by the G7 and G20 countries to develop safe, effective, and globally accessible vaccines against emerging disease outbreaks within 100 days. We've also entered into an innovative strategic collaboration with Argenix, a global immunology biotech company. Leveraging our connected intelligence capabilities, we bring together end-to-end asset development services ranging from regulatory to market authorization to integrated technology-enabled pharmacovigilance safety tracking. This will allow Argenix to accelerate the market launch of new rare disease therapies to autoimmune patients. In the quarter, a top 10 pharma client renewed their FSP partnership with IQVIA as they look to design and launch their new clinical monitoring model. IQVIA will co-develop the solution, leveraging our expertise, innovative tech enabled approach, and exceptional delivery performance. IQVIA has been named the sole global medical information center provider by one of our large pharma clients. IQVIA differentiates in the market as the only provider to have successfully utilized an AI natural language processing solution for medical information. As has been the case in the last few years, RNDS continues to win big in oncology. with multiple awards in the quarter. A few examples. IQVIA won a late stage program with a biotech company developing immunooncology therapies. We were selected after successful delivery of an earlier stage trial, as well as our unparalleled data analytics to help identify patients and populations with unmet needs. We were awarded a phase three oncology trial from a large cutting edge biotech company. IQVIA was selected for our expertise in endometrial carcinoma cancer, as well as our ability to accelerate trial startup. This is an important trial given the unmet medical need and limited treatment options for patients with this condition. Also, IQVIA was awarded two large global oncology trials from a mid-sized pharma client. IQVA was selected due to our strategic design and operational expertise in oncology, including our ability to manage multiple large complex trials and our experience managing the unique safety profile of these molecules. With that, I will turn it over to Ron for more details on our financial performance.

Thanks, Ari, and good morning, everyone. Let's start by reviewing revenue. Third quarter revenue of $3,736,000,000 grew 4.9% on a reported basis and 4.1% at constant currency. Now, in the quarter, COVID-related revenues were about $95 million, down about $125 million versus the third quarter of 2022. Excluding all COVID-related work from both this year and last, constant currency growth was approximately 8.5%. As Ari mentioned, acquisitions contributed about 150 basis points of this growth. Technology and analytic solutions revenue was $1,431,000,000. That's up 2.2% on a reported basis and 0.9% at constant currency. And excluding all COVID-related work, constant currency growth in TAS was 5%. R&D solutions revenue of $2,122,000,000 was up 7.2% reported and 6.4% at constant currency. Excluding all COVID-related work, constant currency growth in R&DS was 11%. Lastly, contract sales and medical solutions, or CSMS, revenue of $183,000,000 was flat on a reported basis and up 4.9% at constant currency. Year-to-date revenue of $11,116,000,000 grew 4.2% on a reported basis and 4.8% at constant currency. Excluding all COVID-related work, constant currency growth was 11% year-to-date. Technology and analytics solutions revenue year-to-date was $4,331,000,000, up 2% reported and 2.4% at constant currency. And excluding all COVID-related work, growth at constant currency and TAS year-to-date was 7%. R&D solutions year-to-date revenue of $6,244,000,000 was up 6.5% at actual FX rates and 6.8% at constant currency. Excluding all COVID-related work, growth at constant currency and R&DS was 14% year-to-date. And finally, contract sales and medical solutions year-to-date revenue of $541 million, declined 3.6% reported, and increased 1.2% at constant currency. Let's move down the P&L. Adjusted EBITDA in the quarter was $888 million, representing growth of 9.1%, while year-to-date adjusted EBITDA was $2,603,000,000, up 7.3% year-over-year. Third quarter GAAP net income was $303 million, and GAAP diluted earnings per share was $1.63. Year to date GAAP net income was $889 billion, or $4.76 of earnings per diluted share. Adjusted net income was $462 million for the third quarter, and adjusted diluted earnings per share was $2.49. Year to date, adjusted mid-income was $1,378,000,000, or $7.37 for diluted share. Excluding the year-over-year impact of the step-up in interest rates and the increase in the UK corporate tax rate, adjusted diluted earnings per share grew 13% in the third quarter and 12% year to date. Now, as already reviewed, R&D Solutions delivered another strong quarter of bookings, Backlog at September 30th stood at $28.8 billion, up almost 12% year-over-year and 33% higher in the last three years. Okay, let's review the balance sheet. As of September 30th, cash and cash equivalents total $1,224,000,000 in gross debt was $13,631,000,000. and that resulted in net debt of $12 billion, $407 million. Our net leverage ratio ended the quarter at 3.52 times trailing 12-month adjusted EBITDA. Third quarter cash flow from operations was $583 million, and capital expenditures were $146 million, resulting in free cash flow of $437 million. Now, you saw in the quarter that we repurchased $144 million of our shares which puts our year-to-date share repurchase activity just slightly below $800 million. This leaves us with just under $2.6 billion of share repurchase authorization remaining under the current program. Okay, let's turn to guidance. We're updating our guidance to reflect both the slower growth in the TAS segment and the headwind from foreign exchange rates compared to our previous guide. We currently expect revenue to be between $14 billion $885 million, and $14,920 million, which represents year-over-year growth of 3.3 to 3.5 percent. Excluding approximately $600 million of COVID-related revenue step-down versus 2022, this guidance represents growth at constant currency of approximately 9 percent, including about 140 basis points of contribution from acquisition. To reflect these changes in revenue, we're also updating our guidance for full-year adjusted EBITDA to $3,560,000,000 to $3,570,000,000. And this represents year-over-year growth at 6.4% to 6.7%. It also implies 70 basis points of margin expansion for the year. Lastly, we're updating our guidance for adjusted diluted EPS to $10.16 to $10.23, which is flat to 0.7% versus the prior year. This includes the year-over-year impact of the step-up in interest rates and the increase in the opaque corporate tax rate. If you were to exclude these items, adjusted diluted earnings per share is now expected to grow 11% to 12%. But based on this full year outlook, our implied fourth quarter guidance is as follows. For revenue, we expect between $3,769,000,000 and $3,804,000,000 or growth of 0.8 to 1.7% on a reported basis and 0.7 to 1.6% on a constant currency basis. Adjusted EBITDA is expected to be between $957 million and $967 million, up 4 to 5.1 percent, and that yields margin expansion of about 80 basis points in the quarter. Adjusted diluted EPS is expected to be between $2.79 and $2.86, growing 0.4 to 2.9 percent year over year. Excluding the step up in interest expense and the increased UK tax rate, we're expecting fourth quarter adjusted diluted EPS to grow 10% to 13%. Now, all of our guidance assumes that foreign currency rates as of October 30th continue for the balance of the year. Now, as is our custom, we plan to provide you with a detailed 2024 full year guidance on our Q4 earnings call in February. However, while it's early and we're still in the midst of our planning process, we thought it would be helpful to share a preliminary view that would help you frame how we see 2024. We see reported revenue growth in the mid-single digits in 2024. This includes a further step down of approximately $300 million in COVID revenue. which is about 200 basis points of headwind to revenue growth, as well as another 100 basis points of headwind from foreign exchange rates, assuming current foreign currency exchange rates remain in effect for 2024. We see adjusted EBITDA margins expanding 50 basis points, and this will drive high single-digit adjusted diluted EPS growth. Now, I trust this preliminary look at 2024 is helpful to you. Again, we will, as is our custom, give you more detailed guidance and specificity for 2024 when we release our full-year earnings early next year. So to summarize, despite client caution and spending levels below our expectations, the TAS business continued its growth in the quarter. While the near-term growth outlook for TAS is below our previous expectations, we're confident in the longer-term fundamentals of the business as our pipelines indicate there will be a rebound in demand sometime in 2024. In the quarter, we delivered another strong performance in R&DS with 11% revenue growth at constant currency excluding COVID-related work. Quarterly net new bookings were strong at over 2.6%. Billion dollars representing a book, the bill of 124. And we reached a historic high of 2.3Billion dollars in services bookings representing a services book. The bill of 1.4 out. Our industry leading backlog reached a new record of 28.8Billion dollars. Approximately 12% year over year. And finally, leading indicators on the clinical side remain strong as evidenced by a quarterly RFP growth of 10% versus the prior year with growth across all customer segments. With that, let me hand it back over to the operator to open up the conference for Q&A.

At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We request that you please limit yourself to just one question so that others in the queue may participate as well. We'll pause for a moment to compile the Q&A roster. Your first question comes from the line of Elizabeth Anderson with Evercore ISI. Please go ahead.

Hi, guys. Thanks so much for the question. One thing that I was just trying to work through for my own sort of benefit is sort of the commentary I think Ari, you alluded to in terms of some of the pullback in R&D spend on the pharma side and the sort of continued strength of R&DS in terms of bookings and what you're seeing in terms of RFPs. Could you help us sort of think about how you think about those two factors, sort of that commentary, where you sort of think pharma's growth is gonna be for sort of the remainder of this year and next year and that, and maybe remind us of how that's played out in prior cycles? Thank you.

Yeah, you're asking, Elizabeth, thanks for your question. You're asking about contrasting the pullback and spend on the commercial side. versus .

Sorry, at RMDS, more specifically, sorry.

Yeah, but there is no pullback on spend in RMDS. I don't think I said that. I said the opposite. Funding in RMDS has been very strong. I'm sorry if I misspoke or was misunderstood, but there is no pullback in RMDS, quite the opposite. I mentioned in my introductory comments that the, if you look at the EBP sector, which has been under pressure and people have been concerned about, we see EBP funding in the quarter actually higher than it was last year. And I think year to date, I mentioned that EBP funding was up 8% year over year. So, I also mentioned that we are experiencing a strong continued RFP flow growth. It's actually up 10% in the quarter year over year. So, I think it's quite the opposite. Our awards continue at a record high level, again, higher than last year. I can give you some more color. Our qualified pipeline is up 16% year-over-year and continues to be very, very strong. Our total pipeline as well, very strong, record high historically. I mentioned our book-to-bill in the quarter is 124 on a 606 basis, including pass-throughs. And when you exclude pass-throughs and you just focus on services, our book-to-bill is 1.4. Our services bookings were $2.3 billion in the quarter. That's a historic high for us. So, again, nothing that we see and we've been hammering this point over and over again in the environment or in our own internal metric leads us to believe there is anything changed on the RNDS span. There are different dynamics. It is true that we see our clients, large pharma especially, explore new models with more FSP or hybrid type of services awarded. I mentioned we won some large FSPs, which explains, of course, the lower amount of pass-throughs in the quarter in our bookings. But other than that, the span is strong, and our prospects for the business continue to be very strong on the R&D side.

Thanks, Ari. That's super helpful. And so when we take those sort of pharma R&D contracts, commentary that you said about some of the pullbacks and some of the spending cuts in there. You would say that you guys are still seeing strong demand within that specific pharma segment, maybe, yeah, further, and they're cutting costs by pushing more into FSP, and maybe there's some anecdotal large pharma companies that are cutting, but the sort of broader strength across that. That's the correct way to interpret what you're saying on the large pharma?

Yes. I mean, large pharma, you saw, I think, two-thirds of the top 10 large pharma, and we know that that's basically the case. The vast majority of large pharma companies have announced either publicly or internally, significant cost-cutting programs. That's due to the macro environment, which is very challenging, concerns raised by the IRA, and the general issues that we see, geopolitical problems all over the world, continuing wars in Europe, the Middle East. And of course, we have the situation in China, which has all but frozen. the market for multinational corporations in China. So all of those are headwinds, plus the companies that were very active during the COVID years are seeing dramatic pullbacks in revenue and all of that is putting pressure on margins. And as a result, large pharma has been, and I would say unusually so, very aggressive in launching cost reduction programs. Now, I said before that that is not reflected so far. We haven't seen that in the R&D side of the house. Again, I want to reiterate very strong strength, I mean, a good momentum in the business, and all the metrics show that there is no slowdown there. Again, not surprising. It's a long cycle business. However, we're bearing the brunt of those cost reduction initiatives on the TAS segment, where we see that Projects that should take a certain amount of time are taking a lot more time to get decided or awarded. And we see our clients negotiating on terms a lot harder than they ever were. And all of that has caused us to come short on the TAS segment in our revenues. But again, we're confident that this will rebound. We know this because the pipelines continue to be very strong. on the DAS segments. And if you look back at every time there was a pullback of sorts from large pharma in history, whether you go back to the 2008-10 period or any time some big legislation was enacted, there was always a little bit of a pullback. And then it came back. The industry is very innovative and comes back roaring, and our business goes along with it. So we're confident it will come back. sometime in 24. Thank you, Elizabeth.

Thank you. Your next question comes from the line of Charles Rhee with TD Cowen. Please go ahead.

Yeah, thanks for taking the question. Just wanted to follow up on the task segment here. You talked about sort of longer timelines, but when you're in discussions with clients, do they continue to express an intention to kind of continue with the projects? or are things sort of just on hold? And how much of this is, you mentioned the IRA, how much would you attribute to sort of these pharma companies kind of reviewing pipelines and projects overall? And do you have a sense on how long that kind of process could take? You mentioned sort of reacceleration sometime in 24, but do you think that's early next year or could that stretch into later next year? Thanks.

Yeah, well, thank you, Charles. I mean, look, I want to distinguish again between the clinical development side of the house and the commercial shorter cycle part of the house where there are more pockets of spend that are more discretionary from a timeline standpoint. So, again, on the clinical side of the house, yes, there are reviews of pipelines and so on. and, you know, which molecules are worthwhile developing. There's more analysis, but this is at the early, early stage of the process. As you know, we are primarily, almost entirely, a phase three clinical trial company, and so we are not seeing that, and we will not be seeing that for another several years if it were to affect the pipeline. I remind you that the number of molecules coming down the pipe is at a record high. The number of FDA approvals is at a record high. And all of that bodes well for our clinical business. And all the metrics that we see from funding to RFPs to awards to backlog and bookings are very, very strong. Once again, we had a record historic high in services bookings in the quarter of $2.3 billion, representing a book-to-bill ratio of 1.4, excluding pass-throughs. So that's for the clinical side of the house. We have not seen the impact of any revisions or rethinking of pipelines so far. On the commercial side, that's the area where we are seeing an impact of our clients being more cautious, more conservative, stepping back from some of the projects they were planning to do. But for the most part, what we do, except again for the discretionary part, must be done. There is discretion with respect to timing. And of course, clients are being more aggressive in terms of seeking price reductions and better terms and so on. The pipelines that we have indicate that demand is still there. To your question, you know, when people say to us they will no longer do a project, it's no longer in our pipeline. But if it remains in our pipeline, then it means the client still intends to do it. It's just that the timeline for decision making has been pushed to the right. What explains it? It's, again, general concerns about the economy, general concerns about the macro geopolitical issues, the pressures resulting from sharp revenue declines post-COVID, and what that entails from a margin point of view. As I mentioned in my introductory remarks, we are a very large vendor to pharma and to large pharma in particular. And, you know, when large pharma seeks To improve their margins, they seek to reduce costs, and obviously they come to us for further reductions, and that elongates timelines and, of course, erodes pricing as well on our side. All of that has resulted in us coming short on our revenues in TAS, along with, as we mentioned in introductory remarks, the significant FX headwinds versus what we had guided to before. So that's the environment.

Yeah. Thank you for your question.

Sorry, I meant portfolio review. Portfolio, you mean on the R&D side?

No, no, on the commercialization side. I misspoke. I meant, you know, how much has the IRA impacted sort of, has that had an effect on when farmers have portfolio reviews and where they put their discretionary spend? But it sounds like you're saying it's more just the general macro environment that's having an impact on discretionary spend.

Yeah, I mean, the IRA hasn't had any impact concrete, significant concrete impact yet on the market. This is all, you know, based on hypothetical developments and down the line. So that just adds another cloud of uncertainty and anticipation of that uncertainty that causes management teams to appropriately seek, you know, cost containment. That's all.

Okay. Okay. Appreciate it. Thank you.

Your next question comes from the line of Dan Leonard with UBS. Please go ahead.

Thank you. I just wanted to circle back to your 2024 framing commentary. That mid-single-digit growth figure, can you speak to your expectations between the TAS segment and the R&DS segment? And then in R&DS in 2024, do you expect any meaningful difference in growth rates between the direct fee revenue and total revenue? Thank you.

So, again, this is a very, we thought it would be helpful just because there's uncertainty, and you will recall that even in the, you know, at the peak of COVID, we decided to give you guidance early. And we're doing this because we hope that that's helpful to you. Now, it's an initial outlook based on where we are in our planning process. We have not completed that planning process. So I would caution you that this is, again, preliminary, and we will come back as is our custom when we release full-year earnings early in 24 with detailed and precise guidance by segments, et cetera. Just on your question, we are guiding to mid-single-digit overall revenue growth. That includes $300 million of step-down from COVID, and I think that's essentially all in RMDS. So if you added that back to our total revenues, that would be another couple of hundred basis points on top of that. And of course we have, we expect a hundred basis points of foreign exchange headwinds, assuming FX rate remains what they are today. So when we say meet single digits, That's really on a reported basis. Once you adjust for the COVID step down and FX, it's more high single digits, which I'm sure you agree for an about $15 billion revenue company is quite an achievement in the current environment. With respect to segment growth, I think it's too early to give it to you. We obviously have an idea, but what should we? I mean, I just gave it to you, you know, but when we tell you that the COVID impact is 100% in RMDS, you could just assume that we are expecting, essentially for now, assume about the same across the segments. That is, you know, mid-single digits, I would say, okay, before the COVID adjustment. Thanks, Ari.

And as a reminder, we ask that you please limit your questions to one. Your next question will come from the line of David Windley with Jefferies. Please go ahead.

Hi, good morning. Thanks for taking my question. Ari, I wanted to focus on margin. You commented in your prepared remarks about productivity initiatives that you took in the third quarter. You're talking about the bookings mix being heavy to service and so, you know, that could be beneficial. in R&DS to EBITDA growth. Just wondered if you could talk kind of expansively about any further productivity initiatives that you might be able to take and kind of what are the drivers to get you to that 50 basis points of EBITDA margin expansion for next year. Thanks.

Well, thank you, Dave. Look, I mean, the productivity initiatives I mentioned, not just in the third quarter. You will recall we started this towards the end of last year. That's what has led us to be able to address the revenue shortfall and not completely bear the brunt of that reduction falling through EBITDA. We've been able to offset a lot of that headwind with those cost reduction programs. It takes time. As you know, the actions that we took in Q3 are not going to be you know, bear benefit until Q4, Q1, Q2 of next year. So, we're constantly taking actions to restructure our overhead structure, to review our spans of control globally, to, you know, continue our offshoring programs. to review our infrastructure footprint that includes real estate, it includes IT, it includes really all of that infrastructure that we need to run our business, and all of those cost factors along with the proper mix of insourcing, outsourcing, and as I mentioned, a continued offshoring of certain activities and taking advantage of labor arbitrage among our different centers, whether it's in the Philippines, in India, in Bangladesh, in South America, et cetera. All of those things are being done on an ongoing basis, and we see the benefit in our margins this year. And, you know, the actions we took, for example, in the third quarter, the carryover benefit will materialize in Q4, and in following quarters during 2024. The reason we feel confident about a 50 basis points margin expansion in 2024 is because we see that it's the carryover of the actions we took this year that will benefit on a full year basis 2024. And of course, we don't intend to stop those actions selectively.

That's great. Thank you. I'll stay to one. Thanks.

Your next question will come from the line of Justin Bowers with Deutsche Bank. Please go ahead. Justin, your line might be on mute.

Thank you, and good morning, everyone. So, just wanted to take a step back, and with respect to some of the cost-cutting programs that we've seen large pharma announce, what is IQVIA's opportunity to sort of participate in some of that and help drive some of those savings, you know, whether it's in sort of RDS or TAS. And then secondarily, for the outlook for 2024, what's the M&A assumption embedded in that growth rate?

Thank you, Justin, for your question. Yes, we are actively engaged with our customers to help them with their cost reduction programs. Look, we have to. We are a large vendor to large pharma across the board, clinical and TAS. And they come to us and ask us to help them. So, you know, we have an opportunity to do that. Obviously, it affects our revenue growth. That's primarily the case in TAS because that's where, you know, the pricing changes and the renegotiated terms impact us. you know, almost immediately. You know, less so in RNDS, but mostly in TAS. Now, the opportunities, if you will, for us is that in those conversations, we try to offer, you know, more services. That has always been the case. That's a traditional way of engaging with our clients when they seek cost reductions. We try to capture a bigger share of their spend in exchange for being able to deliver those services at a lower price point. And so the benefit for us is longer term, we get a bigger piece as they give us more volume. We've seen that happen, frankly, on the commercial side and on the R&DS side over the past five, six years, and certainly since the merger. And we certainly hope that that will materialize, but it'll take a couple of years to materialize because when clients need to switch vendors, Um, you know, it takes time to let the contract and and and convey them to us.

Your next question was on the acquisition impact and it's about, yeah, about about 100 basis point. Yeah.

Got it thanks again. That's the assumption for 2024 at this stage. Yeah, that's what baked in. Yeah. When we, when we come back. um we'll give you four more guidance this is really not guidance it's really yeah a preliminary look at where we are thank you justin welcome from the line of shlomo rosenbaum with steeple please go ahead hi thank you very much i just want to drill down a little bit more into taz uh you talked about the discretionary areas maybe you can just

get a little bit more into, you know, is it consulting, BPO, software, data sales, maybe just a little bit more of detail as to how growth is trending within each one of kind of the sub-segments. I know you don't break it out exactly revenue-wise, but it is helpful to kind of think about what's going on beneath the surface there.

Yes, thank you, Shlomo, for the question and the opportunity to clarify. Look, The task segment has continued to grow in the quarter. I mean, you know, and you can look at large cap companies that serve the life sciences industry with products and services, you know, supporting, you know, post-drug introduction in the market. you can see that they almost uniformly are showing declining growth this year and sharp declines in the quarter for those who have reported. Now, we continue to have growth. And the reason for that is because some of this stuff is longer term and is, you know, somewhat mission critical. I'm speaking about data. um the stuff that's uh you know technology licenses um subscription recurring revenue all of that continues as is and that's what is enabling us to continue to deliver growth however the parts of our business that are more discretionary and when i say discretionary i don't mean to say that that that our clients may decide simply not to go ahead it happens but that's a small proportion of what we sell, it means that it can be done later. It means that it can be done in a different way, perhaps in a quote unquote slimmed down version, less, you know, bears and whistles. And so the consulting and analytics part of our business, which as you know is about a quarter of our revenues, is showing sharp declines, sharper than we would have expected. Some of the projects have simply fallen off, but the pipelines are still there. That's what gives us confidence for a rebound in 24. We know that these projects have to be done. The clients are just taking a lot more time to make a decision. They are negotiating us a lot longer and a lot more and a lot more aggressively. And this is what has happened. This is, you know, I mentioned in my introductory remarks a few examples of significant wins in TAS. And these are almost uniformly these types of projects. helping clients launch products in new markets, helping them with their go-to-market strategies. These are things that have to be done. And the projects that we won in the quarter, frankly, some of those we should have won in the first quarter. They were in the pipeline since last year. So the decision timelines have extended, and the terms have been tougher. That's what has happened. I hope that color helps you. Thank you. Thank you.

Your next question comes from the line of Luke Sergot with Barclays. Please go ahead.

Awesome. Thanks. So you talked about the large FSP win. You're seeing a lot more shift to that type of hybrid model. And you've talked in the past about this being really in cyclical nature. This has also come at a lower margin, so help us think about the duration, the size of the FSP wins that you had, and if we should expect some mixed headwinds to your future over the next three months to a year on this business regarding RDS side. Thank you, Luc.

Yes, you are absolutely correct that an FSP award comes at a lower booked margin than a full service program. And you're also correct that this is a cyclical development in the industry. I recall very well that at the time we did the merger seven years ago, And, you know, coming into, at the time, the legacy Quintas organization, it was explained to me that the industry was now in the midst of a switch from full service to FSP. And as a result of which, Quintas at the time had pulled back from servicing these clients because they didn't want to do FSP work given its lower margin profile. I thought at the time that was a strategic error. And we, since then, of course, have decided to serve our clients with the full portfolio of services, including FSP and including full service and including hybrid and everything else. We serve clients. We don't push offerings. So if at this point in time our clients are interested in more FSP or more hybrid models, that's what we will sell to them. It is then incumbent upon us to work on our cost structure to try to recover margins when we execute the work at a higher level than what we booked it at and try to continue to develop cost containment and cost reductions so that we can offset the margin mix impact. Look, we are a very large company. We are executing thousands of trials at any given point in time. We manage a portfolio of businesses. Once again, we are about a $15 billion revenue company growing mid-single digits, you know, before you account for the step down in COVID revenue and the FX headwind. And we are at just a little bit of margins of 24%. And we are expanding those margins. And we intend to continue that model well into the future, despite cyclical headwinds that may occur, whether it is a tougher spending environment on the TAS side, whether it is a switch to FSP from some of our large pharma clients. You saw in the quarter, again, $2.3 billion of services fee revenue excluding pass-through bookings resulting in a book to be the 1.4 again a historic high in our bookings that included some fsp wins again not anything that would move the needle dramatically but on a large number like this you can see that we have less pass-throughs that will materialize in our margin mix you know, in the next couple of years, not next quarter, obviously. And we fully intend to offset that with our cost reductions and continue to increase our margins. Thank you for your question.

Yeah, thank you.

Your next question will come from the line of Dilinder Singh with Truist Securities. Please go ahead.

Yeah, thank you. Thanks for taking my questions. I want to ask about the capital deployment strategy over the next 12 months. Has there been any change there in terms of your priority to pay down debt versus buyback shares or even M&A allocation? And one quick clarification, what is the magnitude of the swaps rolling off next year?

The first question and the second question I'll give to the technicians here. The first question on capital allocation, look, It's fascinating that we are getting from our investors two different messages. One is, please, please reduce your leverage. And one is, please, please do not change your leverage. And I have to tell you, we historically have been living with a level of leverage that's admittedly higher than others. We are at around 3.5%. net leverage right now. I want to just, for the anecdote, tell you that we've had in the past much higher levels of leverage under much more difficult market conditions and much lower levels of cash flow conversion. And we've lived with that nicely because we have a highly predictable, high visibility business model. Our strategy has been A, to invest in the business, in capital expenditures, to innovate new products and services. B, buy companies that add, that are creative and enable us to grow faster. And C, return money to our shareholders through share repurchases. And that has been a very effective strategy, especially when rates were extremely low. I remind you that just two years ago, Treasuries were at zero. Zero. And I'm very glad that we had that amount of leverage. Today, treasuries at, what, five and a half? I mean, we've never seen in history such a sharp, dramatic rise in interest rates in such a short period of time. Obviously, we are paying the brunt of our leverage, the price of that leverage, because of that, and it's costing us 10 points, 10 points of growth in earnings per share. However, I would argue that mid-single-digit treasury rates, you know, is high versus zero, but it's not the end of the world. I would also tell you that we bore the brunt of that sharp increase in interest rates this year in 23. And, you know, assuming like everyone else assumes that the curve, if it is to be believed, you know, indicates a stabilization and even a potential decline, then that should be a headwind, I'm sorry, a tailwind to our EPS going forward. And we don't anticipate a sharp increase in rates or interest expense going forward and so therefore we should be able to resume strong eps growth going forward that's for the leverage having said that we are working as we speak on obviously refinancing and readdressing some of the shorter term maturities which we have in 24 in 25 and we'll do that you know, soon, hopefully, and that will continue to alleviate that headwind that we face this year in interest expense and continue to stabilize our balance sheet. But for now, at least, we intend to continue to use our cash to invest in the business and do acquisition and share repurchase, especially at levels where we are. Thank you for your question. Any comment on the swap?

Yeah, we have about $800 million of swaps rolling off in the second quarter of 2024. You want to add anything to that next?

Which is at about an average rate of about, call it somewhere between 2% and 3%. So, you know, we'll be ahead with next year, but not to the extent that you saw on the swap that rolled off this year. Got it. Thank you. Yes. Thank you very much. All right, well, thank you, everyone, for joining us today. We look forward to talking to everyone on our next call, and myself and the team will be available for any follow-up calls and any other follow-up questions you have across the day and over the next few days, so feel free to reach out. Thanks, everyone, for joining.

This concludes today's conference call. You may now disconnect.