Icon Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 27, 2023

Key Takeaways

  • ICON delivered 5.3% constant-currency organic revenue growth in Q1 2023 (9% excluding COVID-related work) and 17.2% adjusted EBITDA growth, while reaffirming full-year guidance of $7.94–$8.34 billion in revenue and $12.40–$13.05 in adjusted EPS.
  • Underlying market demand remained stable with improving sequential RFP trends in mid- and large-cap biopharma, though emerging biotech customers continued to delay spending amid funding uncertainties.
  • Advanced strategic partnerships and innovation, including a hybrid outsourcing agreement with LEO Pharma, rollout of the AI-driven OneSearch tool (cutting median site selection time by 53% and non-enrolling sites by 50%), and full acquisition of the OncoCare cancer site network.
  • Achieved gross bookings of $2.86 billion and net bookings of $2.42 billion in Q1 (net book-to-bill of 1.22), driving a record $21.2 billion backlog (+8.4% yoy) and 200 bps year-on-year gross margin expansion.
  • Maintained disciplined capital deployment with $282 million cash, $4.49 billion debt (net $4.21 billion, 2.8× EBITDA leverage), a $250 million Term Loan B repayment in Q1, and plans for an additional $800–$1,000 million of debt reduction in 2023.
AI Generated. May Contain Errors.
Earnings Conference Call
Icon Q1 2023
00:00 / 00:00

There are 15 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to ICON Q1 Results 2023 Conference Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session. Referrer. I would now like to turn the conference over to the speaker today, Kate Heavann.

Operator

Please go ahead, ma'am. Your line is open.

Speaker 1

Good day, and thank you for joining us on this call covering the quarter ended March 31, 2023. Also on the call today, we have our CEO, Doctor. Steve Cutler and our CFO, Mr. Brendan Brennan. I would like to note that this call is webcast and that there are slides available to download on our website to accompany today's call.

Speaker 1

Certain statements in today's call will be forward looking statements. These statements are based on management's current expectations and information currently available, including current economic and industry conditions. Actual results may differ materially from those stated or implied by forward looking statements due to risks and uncertainties associated with the company's business and listeners are cautioned that forward looking statements are not guarantees of future performance. Forward looking statements are only as of the date they are made, and we do not undertake any and obligation to update publicly any forward looking statement, either as a result of new information, future events or otherwise. More information about the risks and uncertainties relating to these forward looking statements may be found in SEC reports filed by the company, including the Form 20 F filed on February 24, 2023.

Speaker 1

This presentation includes selected non GAAP financial measures, which Steve and Brendan will be referencing in their prepared remarks. For a presentation of the most directly comparable GAAP financial measures, and answer session. Please refer to the press release section titled Condensed Consolidated Statements of Operations. While non GAAP financial measures are not superior to or a substitute for the comparable GAAP measures. We believe certain non GAAP information is more useful to investors for historical comparison purposes.

Speaker 1

Included in the press release and the earnings slides, you will note a reconciliation of non GAAP measures. Adjusted EBITDA, adjusted net income and adjusted diluted earnings in their respective tax benefits. We will be limiting the call today to 1 hour and would therefore ask participants to keep their questions to 1 each with an opportunity for a brief follow-up. I would now like to hand the call over to our CEO, Doctor. Steve Cutler.

Speaker 2

Thanks, Kate, and good day, everyone. ICON made a good start to 2023 in quarter 1, delivering solid results while continuing to develop our strategic initiatives in Healthcare Intelligence. We continue to navigate macroeconomic headwinds that are impacting our industry. While we expect these challenges

Speaker 3

and a listen. Because uncertainty in the short to

Speaker 2

medium term, now more than ever, our customers are turning to ICON as a strong, stable and strategic partner that has the broad services, resources and capabilities to optimally manage their clinical development programs and functions. Notwithstanding this, we have seen a generally stable underlying market demand across customer segments, supported by the fundamental drivers of increasing R and D spend and further outsourcing penetration. This has resulted in improving sequential RFP trends in quarter 1. Within customer segments, demand from mid and large biopharma Continues to show growth with a recent increase in the number of larger FSP opportunities. In the emerging biotech segment, cautiousness with regard to spending has continued as the broader funding environment remains challenged.

Speaker 2

Companies are actively conserving cash and prioritizing programs until they have improved visibility to additional funding. As a result, we have seen some delays in decision making within this segment and more considered assessments on the scale and timing of their studies. While this dynamic creates a more challenging environment in this segment in the near term, Our commitment remains unchanged in this area of the market that continues to fuel innovation in R and D. We are partnering with many of our biotech customers at an early phase of development and connecting our operational and medical experts with their leadership teams to collaboratively regenerate optimal development plans and conduct their studies. In doing so, We get to truly understand our customers' objectives and this builds meaningful and long term partnerships.

Speaker 2

We remain encouraged by the traction we are gaining broadly in the marketplace and the opportunity ahead of ICON. Our unique position as a world leading provider of clinical development services appeals to customers across all segments, and we've made good progress in advancing a number of strategic discussions with large and midsized pharma companies since our union with PRA Health Sciences. There is an increasing amount of engagement taking place at a strategic level in customer accounts as companies evaluate and review their optimal clinical development strategies. We are seeing a growing need for full service, functional and hybrid solutions with customers seeking a partner that has the necessary scale, expertise, experience and breadth of offering to seamlessly execute their programs and or augment their existing infrastructure. To that end, in quarter 1, we announced the strategic partnership with LEO Pharma, a global leader in dermatology with Icon acting as their sole provider of Clinical Development Services.

Speaker 2

The partnership will leverage both fully outsourced and functional outsourcing activities in a tailored and flexible hybrid approach to development. This unique model is designed to provide patients improved access to innovative trials, while effectively and flexibly managing LEO's development portfolio. In addition, Our late phase business was awarded a full service strategic partnership in real world solutions by a large biopharma sponsor in quarter 1. This customer cited ICON's strong history of delivering real world evidence studies, collaborative approach to deliver solutions and assessment of CRO leadership as key decision criteria when awarding this partnership. We continue to see opportunities to improve our execution in key development activities such as study start up, site selection, patient identification and recruitment as trial complexity increases and durations expand.

Speaker 2

With challenging dynamics in the market Such as sites facing resource constraints, increasingly niche patient populations and an overall uptick in regulatory requirements, The need for novel solutions and new approaches is accelerating. As a consequence, our focus and investment and innovation has continued to increase across a number of areas within our organization. We have demonstrated success with several tools we have developed and believe we are in the early stages of creating even more meaningful improvements in clinical development. Our approach to innovation recognizes the importance of coupling our unique experience and expertise alongside technology to develop solutions that deliver value for customers. OneSearch, our integrated AI tool for site identification and selection is driving remarkably better delivery of studies with a 53% reduction in the median time for site identification and a 50% reduction in the percentage of non enrolling sites on ICON and answer session.

Speaker 2

Separately, we have launched the new customer facing tool with our late phase business called Cassandra, designed to more accurately predict post marketing commitments. This model utilizes machine learning technology along with our leading expertise in Phase 4 and post marketing clinical trials to generate insights on late phase strategy and plan. Outside of technology, we are further investing in our differentiated capabilities with the purchase of the remaining shares in our joint venture with OncoCare, a global cancer research site network. Oncocare is uniquely positioned to increase patient engagement and oncologists' participation in clinical research through more efficient clinical trial delivery and a patient led approach. We are excited to add OncoCare to our leading site and patient solutions business with the critical therapeutic expertise and experience it brings to further enhance our offer.

Speaker 2

Moving to our financial performance in quarter 1, ICON delivered solid results with 5.3 percent revenue growth on a constant currency organic basis over quarter 1 2022. Excluding COVID related work on a constant currency basis, revenue increased 9% year over year. Gross bookings increased 6% sequentially, but a higher level of cancellations and contract modifications in the quarter resulted in net bookings growth of 3% over quarter 4, 2022 and a net book to bill of 1.22. Solar direct fee revenue growth drove gross margin expansion of 200 basis points on a year over year basis. We also saw another quarter of impressive growth in adjusted EBITDA, resulting in an increase of 17.2% year over year, driven by cost management and the continued execution of our hub location strategy across Global Business Services.

Speaker 2

Our capital deployment strategy continued as planned with a further reduction in our floating rate debt exposure in the quarter. Additionally, we remain active in evaluating potential acquisition opportunities that strategically align with our portfolio and further enhance our offering. We are reaffirming our full year 2023 financial guidance of revenue in the range of $7,940,000,000 to $8,340,000,000 representing 2.6 to 7.7% growth on a year over year reported basis and adjusted earnings per share in the range of $12.40 to $13.05 representing growth of 5.5% to 11.1% on a year over year basis. The guidance assumes double digit adjusted EBITDA growth for the full year 2023 over 2022. Finally, I want to thank our employees across ICON for their significant contributions to our performance in quarter 1.

Speaker 2

We remain steadfast in our commitment to advancing and accelerating clinical development and we are encouraged by the value we are delivering for customers, sites and patients. I'll now turn the call over to Brendan for additional comments on our financial results. Brendan?

Speaker 4

Thanks, Dave. In quarter 1, ICON achieved gross business wins of $2,860,000,000 and recorded $443,000,000 worth of cancellations. This resulted in net awards in the quarter of $2,420,000,000 and net book to bill of 1.22 times. With the addition of the new awards in quarter 1, our backlog grew to a record $21,200,000,000 representing an increase of 2.4% on quarter 4 of 2022 or an increase of 8.4% year over year. Our backlog burn was 9.6% in the quarter, slightly down from quarter 4 levels as expected.

Speaker 4

Revenue in quarter 1 was $1,978,600,000 This represents a year on year increase of 4% or 5.3% on constant currency organic basis. Overall, customer concentration in our top 25 customers decreased from quarter 4, 2022. Our top Customer represented 8.8 percent of total revenue in quarter 1 and our top five customers represented 28.8 percent of revenue. Our top 10 represented 42.6, while our top 25 represented 63.5%. Gross margin for the quarter was 29.8 percent compared to 29.9% in quarter 4 2022.

Speaker 4

Gross margin increased to 200 basis points over gross margin of 27.8 percent in quarter 1 2022. Total SG and A expense with $189,600,000 in quarter 1 or 9.6 percent of revenue. In the comparable period last year, total SG and A expense was $187,900,000 or 9.9 percent of revenue. The uptick in SG and A expense was driven by an increase in our general bad debt provision of approximately $15,000,000 in the quarter. As Steve mentioned, this is a reflection of the challenging environment economic environment that a small subset of our customers are facing.

Speaker 4

Adjusted EBITDA was $399,000,000 for the quarter or 20.2 percent of revenue. In the comparable period last year, adjusted EBITDA was $340,600,000 or 17.9 percent of revenue, representing a year on year increase of 17.2%. Adjusted operating income for quarter 4 was $368,700,000 a margin of 18.6 percent. This was an increase of 17.4 percent over adjusted operating income of $314,100,000 a margin of 16.5 percent in quarter 1 for 2022. Selling interest expense was $81,000,000 for quarter 1 as rate increases drove sequential interest expense higher as anticipated.

Speaker 4

We continue to expect the full year interest expense to total approximately $300,000,000 in 2023. The effective tax rate was 16.5% for the quarter, and we continue to expect the full year 2023 adjusted effective tax rate to be approximately 16.5 percent. Adjusted net income attributable to the group for the quarter was $239,800,000 a margin of 12.1 percent, equating to adjusted earnings per share of $2.90 an increase of 5.1 percent year over year. In the Q1, the company recorded $11,400,000 of transaction and integration related costs. U.

Speaker 4

S. GAAP income from operations amounted to $216,800,000 or 11 percent of revenue during quarter 1. U. S. GAAP net income attributable to the group in Quarter 1 was $116,700,000 or $1.41 per diluted share compared to $1.36

Speaker 5

per share

Speaker 4

for the equivalent period from the prior year. In terms of other dynamics to consider for this year, we expect to see backlog conversion average 9.5% for the full year, in line with our previous expectations, as longer duration complex therapeutic programs continue to grow as a proportion of our overall backlog. Separately, we expect to see a modest decrease in our interest expense in quarter 2 from quarter 1 levels. Net accounts receivable was $1,197,000,000 at the 31st March, 2023. This compares with a net accounts receivable balance of $1,182,000,000 at 31st December 2022.

Speaker 4

DSO was 54 days in the quarter, up from 35 days on a comparable basis from March 31, 2022 and flat on a comparable basis at December 31, 2022. Cash from operating activities in the quarter was $176,000,000 We continue to focus on management of our DSO and are encouraged with our billing levels as well as record cash collection activities, which were in excess of $1,900,000,000 in quarter 1. However, we have more work to do in this area and our focus will remain to ensure we sequentially improve both our collections and DiaZone performance for the remainder of the year. At March 31, 2023, the company had a cash balance of $282,000,000 and debt of $4,489,000,000 leaving a net debt position of $4,207,000,000 This compared to a net debt of $4,364,000,000 at December 31, 2022 and net debt of $4,581,000,000 at March 31, 2022. Capital expenditure during the quarter was $26,700,000 We made a $250,000,000 payment on our Term Loan B facility in quarter 1 and ended the quarter with a leverage ratio of 2.8x net debt to adjusted EBITDA.

Speaker 4

We expect to continue our payments on our Term Loan B facility over the course of 2023, totaling approximately $800,000,000 to $1,000,000,000 for the full year. In addition, we have negotiated an increase in our revolving credit facilities from $300,000,000 to $500,000,000 as a result of the increased scale of the organization. In In closing, before we move to Q and A, we want to again extend our gratitude to ICON employees around the globe for their efforts and contributions throughout the quarter. Operator, we are now ready for questions.

Operator

Ladies and gentlemen, we now begin the question and answer session. We are now taking the first question. And the first question is from Jon Sorby from UBS. Please go ahead. Your line is open.

Speaker 3

Hi. Thanks for taking the question. I guess, I was wondering if you could provide a little color on what you're seeing from large pharma demand. Some of the large pharma companies have now some Optimization on R and D projects. And are you seeing any changes in demand there?

Speaker 3

And has that played into any of those increases in cancellations?

Speaker 2

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

Speaker 3

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

Speaker 2

Yes. We expect it to continue at around the rate it is. I think we've said 9.5 Yes. For the year, mid-9s there. So I don't think that's going to change dramatically as we've gone through the year.

Speaker 2

Brendan, do you want to?

Speaker 4

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

Speaker 3

Thanks for taking the questions.

Operator

Thank you for your question. We are now taking the next question. The next question is for Han Hynes from Mid Group. Please go ahead. Your line is open.

Speaker 6

Great. Thank you. Maybe you could talk about the RFP activity by customer type, What's growing, what's not growing? And then secondly, the non human primate issue, when do you think, if at all, that will impact late stage clinical trials? And maybe, what are your customers talking about?

Speaker 6

And is this something that you are worried about for 2024 2025? Thanks.

Speaker 2

Sure. And let me take the second one first, if I could. In HP, the non human primate issue, We really haven't seen our customers or heard our customers talking about that at this point. And I don't anticipate That's going to be an issue for us certainly in the short to medium term. If things continue or go worse on that front, there would Presumably be some impact down the track, but there are different models that I think our customers can implement in this space in that space and believe that things will get sorted out well before it impacts us in the clinical space.

Speaker 2

So I don't have that as one of my top ten risks, so to speak. That's not something that, as I say, Our customers are concerned about at least from what they've told me at the moment. In terms of RFP activity across The customer segment, as I mentioned to John's question, we've seen solid continuation on the RFPs from a large pharma point of view. I think biotech has been a bit more muted. I think we said that.

Speaker 2

We've been consistent in what we've said that over the last 12 months or so. Having said that, Sequentially from the last quarter, we've seen upticks in both areas from an RFP point of view. So It seems that we're seeing some positive steps in that direction as I say on a sequential basis. And then across things like labs, real world evidence, late phase. We're seeing some consistently strong trends on a year to year basis.

Speaker 2

Overall, we see demand continuing being solid, a little bit of volatility in the biotech space as I think we've alluded to in terms of decision making and RFP opportunities. But overall, the market, I think, is constructive

Speaker 4

and solid.

Speaker 6

Great. Thanks.

Operator

Thank you for your question. We are now taking the next question. Please standby. The next question from Elizabeth Henderson from Evercore ISI. Please go ahead.

Operator

Your line is open.

Speaker 7

Hi, guys. Thanks so much for the question. Obviously, you mentioned that on the SG and A line In the Q1, the bad debt expense flew through that. How are you expecting the cadence of that to continue through the back half of the year? Where are sort of like your incremental opportunities given the sort of current macro outlook?

Speaker 7

Thanks.

Speaker 4

Hey, Les Brown might take that one. Yes, we increased that obviously, as I mentioned in the prepared remarks, dollars 15,000,000 in the quarter. It was a general provision. So it was just across the board, across that customer group. We don't anticipate that it will be of that Quantum as we go forward.

Speaker 4

I'm sure we'll keep an eye to it. And in the normal course, it would be maybe a couple of $1,000,000 on a quarterly basis. But we certainly don't expect That quantum does have to be repeated as we go beyond quarter 1 at this point. So it was, I think, appropriate and the level of bad debt provision we have across the group, which is still only about in About $36,000,000 is appropriate. But again, we don't expect that sequentially to be in that same ballpark.

Speaker 7

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

Speaker 2

Yes. I don't think we have any sort of specific comments to make on that, Elizabeth. We see ourselves You hear the odd story about a study coming to us. It's probably in the most recent past from some of the smaller midsize CROs than it is from the larger ones. But we do believe we're well positioned to take shares.

Speaker 2

As we all know, some of our larger competitors are going through some changes and we do think there might be some opportunity there for us and we'll be looking to take advantage of that. But I can't say that we've had a significant share shift on that front from the larger customers or other competitors at the present time.

Speaker 7

Got it. Thanks so much guys.

Operator

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

Speaker 8

Hi, good morning. Thank you for taking our questions. Starting off with a quick one for me here. Just wanted to clarify on how your expectations for FX have changed this year. Brennan, I know previously you talked about it being a little less than a 1% headwind.

Speaker 8

Is there any update to that outlook given the more moderate headwind that we saw here in the Q1? Thanks.

Speaker 4

Yes. I mean, it has gone a little positive, Max, in terms of the overall outlook at this point. So should it really be a little bit of a tailwind for full year at this point. We've always gone to 110,000,000,000. We're hanging around that, that being the major currency pair.

Speaker 4

You will have noticed that we are reaffirming Our guidance, so certainly our thinking on that FX during the course of this quarter is certainly included in those numbers.

Speaker 8

Okay. Thank you. And then following up, I believe you said excluding COVID, growth was 9% in the quarter, which implies COVID was something like a $90,000,000 headwind. In your commentary last quarter about COVID revenue stepping down, I think, from 6% of revenue in 2022 to 4% in 2023 implied something like $140,000,000 headwind in total in 2023. So I'm curious to hear if the headwind that we saw in this quarter was in line with your expectation.

Speaker 8

And is there any change to the thinking in in terms of total headwind this year. In other words, do we only have roughly $50,000,000 of a headwind to work through here in the remainder of 2023? Thanks.

Speaker 2

A lot of headwinds there, Max. Yes, we see COVID revenues Coming down at about the rate that you outlined there. We see it a ring around about 4% to 5% this year And probably coming obviously coming down the backlog, I think is around 3. So yes, it is they are coming down. So I think your Assumptions or your expectations on that front are broadly in line with ours.

Speaker 1

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

Speaker 8

Okay, great. Thank you.

Speaker 1

Okay, thanks. Next question.

Operator

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

Speaker 3

Hey, guys. Thank you for taking the questions. Steve and maybe Brendan can chime in as well. Just one on the guidance, I guess philosophy at a high level. I mean, it seems like as you work your way through the quarter, cancellations maybe picked up a little bit, you had the bad debt expense, Your early stage biotech continues to be a little bit soft, I guess.

Speaker 3

I guess you guys have this great track record of execution, hitting numbers, beating numbers even. I guess when you sit here today, 4 months into the year, how do you think about the upside to guidance compared to whether it's January this time last year, whatever it might be? I I guess, how comfortable are you with the guide given there are maybe some cracks showing up on the macro side at a high level? Obviously, the bookings held in well. So just curious as you kind of sit here and think about the guide, particularly on the top line, the conference level there.

Speaker 2

Yes. I'll let Craig at that, Patrick, and then Brendan can jump in. We've reaffirmed guidance. So we believe we can get to our midpoint. That is our expectation at the moment.

Speaker 2

Having said that, the macro environment is probably more challenging now than it was when we set guidance Back a couple of months ago. And so there are some things we have to work through and we're doing that very actively With the team, we're all very engaged in wanting to do that. But at the moment, we feel with a reasonable level of confidence that we can reaffirm and we can Get where we want to be on the guidance side of things.

Speaker 4

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

Speaker 3

Yes, understood. Okay. And then Brendan, maybe on the DSO piece, Obviously, that's been a focus. You kind of flagged it last quarter, talked a little bit more about it this quarter. Can you just talk about, I guess, what's Being done there, to your point, I don't think there was any sequential improvement.

Speaker 3

You're talking about obviously throughout the year, we'll see some improvement there. So can you just talk about The level of focus there, any changes to customer payment terms, things like that, the unbilled side picked up a little bit. So just want to talk through that and what the and answer session.

Speaker 4

Sure, sure Patrick. This is an item that's on that's usually on my own radar and I'll be working with our teams to make sure that it makes good progress over the course of the year. What are we doing? Biggest piece, I suppose, that we've done over the last couple of quarters in making sure that we're Billing the correct quantums on a quarterly basis. We've seen billing now in Q4 and Q1, well in excess of our revenue in both of those quarters and in fact in excess of $2,000,000,000 in each of those quarters.

Speaker 4

Effectively, that's just catching up on some of the billing that as I kind of outlined was missed effectively during the first half of twenty twenty two. So we needed to get back in line with that. Those bills are out the door. We're having obviously now we're into the point of making sure that we can get them in within credit terms. And of course, the ongoing conversations with our customers to make sure that they're happy with the flat process and that we're getting the cash in.

Speaker 4

So I think what we've done is made really, really good progress in terms of making sure that our It's at the right level over the last couple of quarters. We've seen that our cash collections ticked up nicely from Q3 into Q4 And then into Q4 and into Q1, I should say. So what we're seeing really then is making sure that we're continuing on that good progress as we go from 1 into 2. And certainly would like to see some significant impacts to the DSO over the course of the year and that's exactly what we're focused on.

Speaker 3

Okay. Appreciate it, guys.

Operator

Thank you for your question. We are now taking the next question. The next question from Harry Coldwell from AirBayer. Please go ahead. Your line is open.

Speaker 9

Thank you. Good morning. A lot of mine have been covered, but I'm going to go a little different direction with 2 here. First off, pass throughs. I know you don't break out reimbursable and pass through details, view it all as one cohesive model.

Speaker 9

But I am curious, we've seen some volatility in that sector of revenue, that segment of revenue more than I think more than normal and normal is pretty volatile. Are you can you give us some qualitative trends in terms of pass through impact on revenue or bookings? I know you don't break it out specifically, but I'm just curious what you're seeing in the marketplace?

Speaker 2

Yes. I think we'll I think as I said to you, Eric, you're right. The pass throughs are volatile and have been volatile as we've Kind of exited the COVID phase as well. We've had some headwinds there that have had some given us some challenges. I think maybe the best way to answer that question is to say that Yes.

Speaker 2

On a direct fee basis, revenue growth was in the highest sort of single digits for the quarter. And so clearly, as we've reported at about 5.3%, I think it was in constant currency. You can say that the pass throughs were a little bit of a headwind at the quarter and probably continue to be going forward. But We're very confident and very happy that the underlying margin generating revenue and business It's continuing to grow at a very solid clip. And so that's I think that's probably the best way to address that question.

Speaker 9

Fair enough. And then second one here, labor inflation. Obviously, it's been rather high the last couple of years. There It's been good pricing opportunities the last couple of years as we entered into 2023. I think the general expectation in the market was that Getting pricing out of customers might be harder after 2 years of pretty good activity.

Speaker 9

But I am curious if you could give us an update on those two fronts, both the labor inflation, what you're expecting on a net realized basis this year within Your staff and then how pricing opportunities are stacking up to offset those pressures. And obviously, say this all in the context of and very nice margin expansion. So I think we know where you're headed with this, but I'd like to get your updated thoughts.

Speaker 2

Yes. I mean, so let me start with the pricing. You hit it pretty much spot on, Eric. Our pricing negotiations, I think we We talked about this on previous calls, have been relatively collaborative discussions with customers for the 1st couple of years. That is starting to change as we go into the post COVID era.

Speaker 2

And customers are perhaps a little bit more, dare I say it, recalcitrant in terms of working with us on not just inflation increases, but also there's a level of sort of market related We have some good data on, but of course that's always a discussion. And it's probably an increasingly challenging discussion going forward. So I'd say That particular aspect of our business has probably become a bit more challenging from a pricing point of view. But we continue to provide good data on not just the inflation environment, but the market environment. And customers are smart.

Speaker 2

They do understand We need to pay market related salaries and all that good stuff. So it's a constructive conversation, but probably not as easy. These things are never easy, but it wasn't it's not as it's probably a bit more challenging than it was a year or 2 ago. In terms of wage inflation, again,

Speaker 4

that one's been

Speaker 2

a bit more challenging as well. As we all know, inflation continues. We've seen it in around about the 4% to 5% level across the organization. Some countries, of course, are more than others. And of course, so that's been the level.

Speaker 2

But I would say that the pressure in the labor market has probably attenuated a little bit over the last sort of 6 months, 12 months or so. We've seen our retention levels continuously tick up over the last a few really last 15, 18 months now on a sort of we're up well above Well, we're getting well back to pre COVID levels now, in fact, even ahead of pre COVID levels. So we've made some good progress in that front. And so we are finding, I think, that the labor market, the sort of red hot labor market as it was perhaps during COVID or post COVID is sort of Easing a little bit now and we're finding that our salary merit increases and bonuses have been gone down well with our employees and that we're able to retain them and give them opportunity. So overall, I think both environments are challenging, perhaps more so than the normal times, but We're managing, I think, pretty well.

Speaker 9

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

Speaker 2

Thanks. Thanks, Erik.

Speaker 1

Next question please.

Operator

Thank you for your question. We are now taking the next question. Please stand by. The next question from Sandy Draper from Guggenheim Partners. Please go ahead.

Operator

Your line is open.

Speaker 10

Thanks very much. Yes, I will sort of echo what Well, two things. Eric just said, 1 congrats on last quarter, but also a lot of my questions have been asked and answered. So maybe for me, just to sort of Had potential questions for me off at the past. In your slides, you just you called out the 2022 revenue by customer segment.

Speaker 10

And I think there could potentially be some misunderstanding. You called out small biopharma is 33%, but in the footnote that's Still companies greater that 76% or below. So there's still revenue producing. Could you just remind us what percentage of your customer base It's pre revenue, just so people don't get the sense of, oh, wow, 33% are biopharma out there looking for funding tomorrow.

Speaker 4

Hey Sandy, it's Brandon here. Yes, as we talked about, it's kind of the way we've defined How we look at that subsector of whether we want to call them emerging biotechs or small non funded or non revenue generating It's for companies that have R and D spends on an annual basis of less than $100,000,000 And companies of that ilk would represent about 15% of total revenue. So obviously, 15 of that 33. So just to give you an idea of what that quantum of exposure is.

Speaker 10

Okay, great. I appreciate that clarification. And then maybe my unrelated follow-up, just longer term thinking about your comments about backlog burn. Certainly understand as you're getting through the COVID workforce is burning fast and obviously Depending on where pass throughs come in, you're seeing it step down to sort of stabilize around sort of 9, 5 ish. Is the mix of business such that if it stayed like this, you would see a multi year just a little bit of step down or we've now sort of at a level that, okay, we're stable here.

Speaker 10

And unless there are changes, it's going to say plus or minus, stay in this 9.5 type level longer term or are we back into a long term slightly declining trend? Thanks.

Speaker 2

Yes. I mean, Sandy, that's a tough one to answer. It really depends upon the sorts of projects we can win and get into the portfolio and the start up. Obviously, oncology is about 40% of our work that tends to burn a bit slower. But when we get some vaccine work come in, that will burn faster.

Speaker 2

So We would anticipate and we're certainly looking at keeping our backlog burn number at around about In the mid-9s, 9.5 percent is our expectation. I think we can do that. It certainly has ticked down a little bit since on the post COVID period and that is because those vaccine studies have tended to go away and we're back into the more sort of routine oncology slower studies. There are other therapeutic areas that would burn a little faster as well. We believe there's some opportunities in the metabolic area with some of the GLP inhibitors coming through and that those sorts of trials we believe can so there's some positives and there's always Some negatives on this.

Speaker 2

I think the best way to think of it is mid-9s in the longer term.

Speaker 10

Okay, great. Thanks so much.

Operator

Thank you for your question. We are now taking the next question. Please standby. The next question from David Dwendly from Jefferies. Please go ahead.

Operator

Your line is open.

Speaker 5

Hi. Thank you very much. Thanks for taking my question. Kind of a different version of the much asked burned question. Steve, your comments in your prepared remarks, you talked about changes in decision making cycle times, which As I don't think the first time you've talked about that, that's kind of been an ongoing kind of building issue.

Speaker 5

We are seeing In kind of industry clinical trial start data, this large building bucket of trials that are really not moving to start, which would seem to kind of square with what you're talking about. Would you I guess 2 part question here. Would you attribute that To mostly small biotech and mostly kind of challenges in funding or are there other issues there? And then the second part of the question is, how are you guys thinking about risk adjusting your revenue forecast and or your backlog for this deeper deliberation about what clients want to move forward? Thanks.

Speaker 2

Yes. I'll take the first part, Dave, and then Brendan might have a crack on the revenue forecasting side of things. I think there's a good chunk of that those trials that are not starting as fast as you like, as we'd like, is In the biotech funding area. We have plenty of customers who come to us and who want to get proposals and budgets For their trials, who haven't raised that who haven't raised the money. We're very careful, of course, about putting those in our backlog.

Speaker 2

But there's certainly a component Of the industry, I think of and that tends to be in the small it's not exclusively. I must say, it's not exclusively In the biotechs and the emerging companies, but that I would say would tend to be the most. But interestingly, as we look across our cancellations, they were slightly elevated for the quarter. But as we look across that, they really came about fifty-fifty from our larger pharma and our biotech. So If you look at it on a cancellation basis, there wasn't any sort of particular predominance towards the biotech sector.

Speaker 2

So And take from that what you will, maybe on the forecasting stuff, Brendan?

Speaker 4

Yes. I suppose on that one, Dave, We constantly look on a quarterly basis, of course, at our forecast. And that's obviously deliberating about when is the first question in, when are we going to get going on the actual project. And of course, we're constantly thinking about what the headcount demand, in fact, will need to be able to put on to our organization to be able to deliver that revenue in over the course So certainly on a quarterly basis, yes, we are having very active conversations with our project managers, with our relationship managers, with our exec sponsors and indeed with our customers about the timing of their projects. And so really it's only projects that have good visibility that come into our forecast.

Speaker 4

And we really have a very, very strong sense that they have and fully in place and all of those pieces to actually go ahead. So of course, that then informs our guidance setting process as we go through on a quarterly basis. So I feel like we have a fairly robust idea and picture of what styles are going to start and what trials are going to be attenuated.

Speaker 2

Got it.

Speaker 5

And then my second question, if I can sneak this one in, on cash conversion, I appreciate you addressed this a little bit before to One of the prior questions, but I think on the last quarter you talked about having Improved your billings in the Q3 and Q4. I guess, I thought that, albeit to be fair, you said first half, I thought that maybe the Q3 billings from last year would or to see, maybe a more impactful move on your AR. And I guess I'm just Kind of fishing for, are you getting pushback in terms of customers' ability or willingness to pay on time? Or is it simply just customers waiting to the whatever the term is, See 90, 120 day term on the payment and that hasn't gotten to we haven't gotten to that point yet.

Speaker 4

It's predominantly the latter, Dave. There's always going to be some conversations have to have the customers to make sure that they pay their bills and that they're well funded and all those kind of points. But as we said, we didn't uptake our billing in Q3. Our cash collections in Q1 weren't significantly off the amount that we built in Q3. So we did see a nice uptick, albeit we need to continue that uptick from Q3 to Q4 and likewise the cash collections from Q1 to Q2.

Speaker 4

So still an area of focus. I think still have done decent billing and we should be able to get the cash in, but still very much focused.

Speaker 5

Great. Thank you. Appreciate the additional detail. Good luck.

Speaker 8

Thanks. Thanks.

Operator

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

Speaker 11

Hi, good afternoon. Just on the prepared remarks, you mentioned Seeing sort of an uptick in demand across bus service and was hoping you could expand upon that and where you're seeing Senior demand from there.

Speaker 2

Yes. Well, I think we talked about an uptick in demand across large pharma. And so that's Decent chunk of full service in that. But the full most of our uptick in full service is really within the biotech and the more midsized Areas in terms of uptick in demand. The large pharma market has been strong, but there's a good component of FSP in that market as well, Justin.

Speaker 2

I hope I don't think I don't mean to lead anyone astray on that one, but it's really the large pharma. We've seen good solid Market demand RFP wise on that one. And that there is a component of both FSP and full service in that, whereas of course in the biotech and midsize, It's much more predominantly full service. And that market has been a little bit more, as I say, volatile. So you put it all together and I think we see good demand for both and even for hybrid opportunities as well.

Speaker 2

And we see ourselves as well positioned to be able to accommodate either of those three models really, do you think a full service FSP and the more hybrid ones.

Speaker 11

Got it. And then just one quick follow-up with sort of taking a step back and as we think about Some of these more hybrid with respect to like virtual and DCTs increasing over time. How should we think about that with respect to the level of pass throughs? And are you starting to see that Impact the level of pass throughs now in some of the contracts?

Speaker 2

I don't think we've seen any sort of material impact on pass throughs through the shift to sort of hybrid models or DCTs, I mean, DCTs will still have significant pass throughs associated with them. I'm not sure I see too much difference between that and a full service type opportunity. Hybrids perhaps, I mean, the FSP traditionally has a lower proportion of pass throughs. So hybrids are probably Towards the pass through proportions are probably towards the lower end, or as high as, say, a full service. But, so to the extent that that impacts, we will see that.

Speaker 2

But it's a yes, the number of DCT trials we do is fairly limited. Most trials have a DCT component, but there are very few pure DCT trials. And as I said, we don't Really see any impact of on the proportion or the amount of pass throughs on those trials at this point.

Speaker 11

Got it. Thanks a bunch.

Speaker 1

Okay. Thanks. Next question.

Operator

Thank you for your question. We are now taking the next question. Please standby. And the next question is from Luke Segrod from Barclays. Please go ahead.

Operator

Your line is open.

Speaker 12

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

Speaker 2

Gee, Luke, that's a I mean, how long is the piece of string? How much will I respond to that one? That's a hard one. I think it's fair to say that we are seeing some delays. And in terms of the percentages and the impact, it will have an impact.

Speaker 2

There's no question about that. To the extent that's going to continue to the percentage of trials that are in that case, it's not insignificant. And we are seeing, as I say, some delays. And we're looking at it in terms of decision making and customers being very careful about what services they want and what trial they want to do in this. There are some opportunity in terms of consulting with them to make sure they're doing The right trial and that they didn't do anything that's too big or too small or they do the right number of trials and all that.

Speaker 2

So there's As I say, some opportunity, but they are being very considered and it is leading to some delays, particularly with Smaller companies who have got the 1 or 2 drugs to get to market. It's really hard to quantify the impact of that on our numbers at this point, but it isn't nothing. I'll put it that way.

Speaker 12

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

Speaker 2

It's OneSearch actually, Luke. OneSearch,

Speaker 12

I'm sorry.

Speaker 2

That allows us to identify the right sites to be in a trial. And making sure that and the benefits we're seeing, as I said, is faster selection, faster identification, faster setup, but probably most importantly, fewer sites that have 0 recruiting Or even one patient. As you can imagine in our business, getting a site up that has that recruits that doesn't recruit or even recruits one patient Can be much more problematic than obviously they're not getting that side up at all or getting sides that recruit 5 or 10 or A critical number of patients. So the benefits are there from an efficiency point of view. We apply that tool now to all the studies we do, but it's only been routinely applied for the last probably 12 months to 18 months.

Speaker 2

And so the benefits are really just as I alluded to in my comments. The benefits are really just starting to flow through and that these trials take a while and we measure this 0 whether there's 0 recruiting And what's been at the end of the trial. So most of these trials take at least a year to 2 years and sometimes 3 years. So many of the trials that we started using this technology and are still in process and still working through. What I was alluding to in my comments is we're starting to see Those tangible benefits really impact our portfolio of work.

Speaker 2

And so I'm really pleased with the technology. And we've been able to bring in Some different data sources as well, which help us to identify sites that have a greater propensity to recruit diverse patient populations. That's a Big issue with the regulatory authorities now. We need to be recruiting more diverse patient populations. And so the tool is also allowing to identify sites that can help us to do that as well.

Speaker 2

So it has a number of benefits, not just speed, but also diversity and quality.

Speaker 13

Great. Thanks.

Operator

Thank you for your question. We are now taking the next question. The next question from Casey Boudry from JPMorgan. Please go ahead. Your line is

Speaker 13

open. Great. Thanks for taking my questions. So we've been getting a lot of questions around the read through to CROs from the bearish commentary from some of the bioprocessing companies on their SMID Biotech customers of late. Can you explain your level of visibility into the SMID stem versus some of those bioprocessing players.

Speaker 13

Those companies largely took down their expectations for the year after seeing some mid spend trends over the 1st 3 months of this year. But you've just said here today that Smith Biotech RFPs improved sequentially and are reiterating guidance. So just kind of curious on the difference in commentary there.

Speaker 2

Yes. As I said, Casey, we've seen sequential uptick. So we see an underlying pretty reasonably constructive market in the biotech area. It's not to say there's not Volatility out there, funding challenges are in existence. They are taking more time.

Speaker 2

You've heard all of that. But overall, These are the companies that are producing or finding the drugs. This is where the innovation is happening in our industry. And so We really want to engage with them because they often become part of our large pharma partners as well. And Seagen 5, our acquisition you was I think during the quarter that happened.

Speaker 2

And these are the companies that really have are really bringing these really new and improved and fantastic drugs to market. So being part of it is important for us. We're there for the long term. There is some volatility in the market. No question about that.

Speaker 2

They are by their very nature, higher risk companies. They only have sometimes 1 or 2 drugs sometimes. And so there's an element of volatility We're all working through. But overall, the underlying market and the underlying business we believe in the biotech space is solid, is strong. And I believe we probably hit the idea in terms of the biotech funding area.

Speaker 2

I think we can see Some positive noises and some positive funding moves going forward. So I'd like to think that in 12 months, it won't be in the next 6, I don't For the next 12 months or so, we'll really be back on track with respect to a solid and stable biotech Funding environment, particularly as we see things like interest rates and hopefully some of the macroeconomic challenges dissipate, we can be in a good place. So I'd just say, short term volatility, short term challenges next 12 months or so. But I think in the longer term, we feel we're in a very good place with this market and we feel the market is very solid.

Speaker 13

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

Speaker 13

Thank you.

Speaker 4

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

Speaker 1

Next question. Thanks.

Operator

Thank you for your question. We are now taking the next question. Please stand by. The next question from Derik De Bruin from Bank of America. Please go ahead.

Operator

Your line is open.

Speaker 3

Hi, great. Thanks for squeezing me in. So one of them asked, but I just wanted some color. Is there any particular therapeutic area That is on some of the early stage biotechs that are delaying, for example, cell and gene therapy or something like that. Just anything to sort of comment about it?

Speaker 3

And then I actually have some financial statement questions.

Speaker 2

Sorry, the question was around cell and gene therapy?

Speaker 3

Well, basically just asking If you're seeing these therapeutic area in some of these early stage biotechs, there's just one therapeutic area that's getting delayed, right? For example, cell and gene therapy. I'm just sort of curious as to Any comments being for the ones that are getting delayed or they just all just early stage and have cash issues?

Speaker 2

Yes, more the latter. I think there's no particular and focus on any particular therapeutic area. Now oncology is obviously the big area for that. And so any delay It isn't helped by an oncology study typically being a bit slower anyway. But no, I don't think there's any real There's no real sort of therapeutic area that's particularly impacted.

Speaker 3

Got it. And then just some questions on some of the adjustments. What are you looking for a run rate on for the year for restructuring and other costs and for stock based compensation just to sort of to help shore up the adjusted net income numbers.

Speaker 13

Yes. I don't think

Speaker 4

I think probably the Q1 numbers aren't a bad proxy in terms of what we're expecting. Might see some of the integration costs tail off a little bit as we go through the course of the year. But the dollars that we have in the Q1 probably aren't $1,000,000 off. Certainly, on Something like stock based comp that will nearly just be take that number and multiply it by 4. So integration costs, we expect to see run off a little bit.

Speaker 4

On restructuring, well, we'll keep an eye to that as we go through the course of the year. We're constantly looking at our office infrastructure. That was a large part of the restructuring call from the current quarter. That's something I think that will be in the same ballpark, and we'll keep an eye to that. So that might move around a little bit, but the other 2, one decreasing slightly, the other one will be relatively stable.

Speaker 3

Great. Thank you very much.

Operator

Thank you for your question. We are now taking the next question. The next question is from Timothy Dell from Wells Fargo. Please go ahead. Your line is open.

Speaker 14

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

Speaker 2

Tim, I'm not sure you should be overly concerned about it from our point of view. I mean, I think, we see, as I say, some of our Competitors going through some changes and unexpected changes and that's all good for them. And but customers are relatively Conservative and chair shifts don't happen quickly in our business. I mean, it's a relatively conservative industry and we have we all have partners and relatively long term partnerships that play out and these agreements usually in place for several years. So Certainly nothing dramatic would be my expectation.

Speaker 2

I think what I so from that on the large scale competitor point of view, I think what we've seen more recently is some pickup in share from some of the more from the smaller midsize competitors. And so We've been fortunate, I think, as I think about rescue opportunities or rescue trials that come into our business and we've seen several come in From some of the smaller players, smaller to midsized players, I'll put it that way. And so that's probably the more opportunity for It's more over several years, I think, to make any adjustments on the larger competitors.

Speaker 14

All right. I appreciate that. And thank you for introducing me to the term recalcitrantz, by the way. My follow-up is just Brendan, I I think we'd all appreciate, if you're willing to provide it, a bit more visibility on how order trends vary by on a month by month basis in 1Q. Appreciate the commentary, a little peek through into April, but that would be great if you could help us out or at least tell us if there's any volatility across the months within the quarter.

Speaker 4

In Business Development, Tim, is it?

Operator

Yes, yes. Thanks.

Speaker 4

Yes. I mean, Every quarter has done look to it in all honesty. There are some quarters where you come in strong at the start of the quarter and there's often all quarters where You're finding it out at the last minute. So I don't think there's any this quarter, we started off well. We had a solid quarter throughout.

Speaker 4

As Steve mentioned, the cancellations were a touch hard than we would have liked, but still very solid overall performance. So I I don't think there's a particular trend. Yes, as I said, we started well, and that was more of the trend this quarter, but it changes from quarter to quarter.

Speaker 5

All right. Appreciate it. Thank

Operator

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

Speaker 2

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

Operator

That concludes the conference for today. Thank you.

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