Oct 22, 2008
Executives
John Climax – Executive Chairman Peter Gray – Chief Executive Officer Ciaran Murray – Chief Financial Officer
Analysts
Ian Hunter – Goodbody Stockbrokers John Kreger – William Blair & Company David Windley – Jefferies and Co. [Doug – Barclays Capital] [Greg Bolin – Wachovia Capital] Sandy Draper – Raymond James & Associates [Eric Caldwell – Badge] [Zach Sayers – Bossa Capital] Jack Gorman – Davy Stockbrokers Randall Stanicky – Goldman Sachs
Operator
Good afternoon ladies and gentlemen and welcome to the third quarter 2008 earnings conference call hosted by Ciaran Murphy. (Operator Instructions) I’m now handing over to Mr.
Murray to begin today’s conference.
Ciaran Murray
Good day ladies and gentlemen, I’d like to confirm that this is Ciaran Murray and not Ciaran Murphy and there has been no late change in the running order I am happy to say. Thank you for joining us today in this call covering the quarter ended September 30, 2008.
On the call today with me I have Dr. John Climax, our Chairman and Mr.
Peter Gray, our CEO. Before I hand the call over to John, I would like to note that this call is webcast.
There are slides available, and the comments will follow the slide show. I will now make the customary statement in relation to forward-looking statements.
Certain statements in today’s call may constitute forward-looking statements concerning the company’s operations, performance, financial condition, and prospects. Because such statements involve known and unknown risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements.
Given these uncertainties, investors and prospective investors are cautioned not to place undue reliance on such forward-looking statements. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
Today’s commentary refers to our third quarter ending September 30, 2008. Please note that in the following commentary, the earnings-per-share numbers reflect the two-for-one shared split that occurred in August.
Also please note that the financials for both current and prior quarters and any reference to margin is after charging stock compensation expense. With all of that said, I will now hand the call over to John.
John Climax
Thank you, Ciaran. Good day ladies and gentlemen.
We are very pleased to report another excellent performance by ICON in quarter three 2008. The group’s net revenue grew 35.1% from $166.9 million in quarter three last year to $225.5 million.
Excluding the impact of HCD, the U.S. Phase I unit, which we acquired in February 2008, the organic growth rate was 32.9%.
Excluding the impact of currency movements, the organic growth rate was 28.5%. Year-to-date net revenue was up 43.4% from $450 million to $645 million.
Operating income for the quarter was $27.1 million representing a 45.1% increase over the same quarter last year. Year-to-date operating income was $73 million representing an increase of 47.7% over the prior year.
Group operating margin grew for the quarter to 12% compared to 11.2% in the same quarter last year. Year-to-date group operating margin increased to 11.3% up from 11% in the prior year.
The margin in our clinical business was up for the quarter at 12.5% compared with 11.6% in the same quarter last year. Year-to-date our clinical business posted a margin of 11.7% which was up compared with 11.3% in the prior year.
The Central Laboratory’s revenue grew by 33.7% to $18.5 million and achieved operating margins of 7.1% compared with 7% in the same quarter last year. The investment in our new facility in India and the upgrading of our laboratory in Singapore are progressing well and we are currently validating equipment and tests prior to commencing operation.
Year-to-date our Central Laboratory has achieved operating margins of 7.5% on revenues of $51.5 million compared to a margin of 6.5% on revenues of $39.8 million in prior year. Group net income rose to $21.4 million from $14.5 million last year representing 47.4% growth.
EPS grew from $0.24 per share to $0.35 per share, a 45.8% increase. The effective tax rate for the quarter was 20%.
Year-to-date net income increased to $57.1 million from $40.1 million last year representing 42.4% growth. EPS grew from $0.67 per share last year to $0.93, a 38.8% increase.
The effective tax rate for the year-to-date was 20% down from 22% in the previous year. Cash flow provided by operating activities was $58 million in the quarter.
We invested $18.1 million on capital expenditure, which was related to the continuing expansion of a global infrastructure in line with our strong growth. Of this, $5.6 million related to the extension of our Dublin facility, which is now almost complete.
Year-to-date cash flow from operations was $86 million and the capital expenditure was $53.6 million of which $17.6 million was in Dublin. In addition, we invested $12 million in the acquisition of HCD, our new Phase I facility in San Antonio.
At September 30, the company’s net cash amounted to $55.6 million, compared to net cash of $6.9 million at June 30, 2008. DSO at the end of September was 54 days, compared to 58 days at the end of June 2008 and 66 days at the end of December 2007.
At this point I would like to hand the call over to Peter Gray, who would give you an update of the business outlook.
Peter Gray
Thanks, John. Just talking about business and how business is being, gross awards, as you’ll have seen from the press release, for the quarter were $394 million; cancellations were $44 million, which is about 11% of gross awards.
As a result, in that business, wins were $350 million, compared to $230 million in the same quarter last year, which represents an increase in net awards of 52% and a strong book-to-bill of 1.6 to 1. Year to date gross business awards were $1.2 billion; cancellations were $171 million, which represents 14% of gross awards.
Plus in our most recent quarter our cancellation rate is actually down a little on the average we’ve encountered so far this year. Net business wins for the year to date were $1.1 billion, compared to $683 million in the same period last year, which again represents an increase in net awards of 54.6% and an average book-to-bill of 1.6.
As a result of all of this, our total backlog at the end of September was $1.74 billion, which is a 54% increase over last year; and obvious backlog we are expecting $763 million to be earned in the next four quarters, representing a coverage of approximately 77% of our expected revenues in those four quarters. Overall, the tone of business continues to be strong.
While RFP volumes were down by a couple of percent, the value was up by approximately 9% in the quarter. Interestingly, we can’t detect any slowing in the value of opportunities coming from biotech companies.
Although, I think we should note that the majority of ICON’s biotech business tends to come from more established companies rather than emerging startup-type biotechs. That concludes our formal comments, but before handing over to questions I would like to take the opportunity to thank all of our 6,600 employees around the world, in 71 offices and in 38 countries, for their continuing significant contribution to our success.
Can we take the first question now please?
Operator
Thank you. (Operator Instructions) Our first question comes from the line of Ian Hunter from Goodbody Stockbrokers.
Go ahead, Ian.
Ian Hunter – Goodbody Stockbrokers
Good afternoon, gentlemen. Peter, I think you really covered what I was going to ask there, but I’ll go through it anyway.
I mean, I do see there’s good visibility on the business over the next 12 months with the strong net and your business wins you have, but I’m just again kind of we think (ph 00:14:22) what you feel the feeling is within the sects are on the ability of your clients to weather the external financial conditions and be able to fund future research. I think you alluded to the fact that your biotech─ I’m not going to call it exposure─ biotech clients are mainly the large cap, I’m presuming, and not the smaller companies, but I’m just wondering can you give us a feel for the breakdown in your revenue numbers as to what the percentage would be between large-cap pharma, large-cap biotech, mid and small pharma, and mid and small biotech.
That’s all I need to know.
Peter Gray
You wouldn’t like any more granularity than that.
Ian Hunter – Goodbody Stockbrokers
I wasn’t going to say granularity.
Peter Gray
In the year to date, Ian, revenue from biotech companies, including the large-cap biotechs, represents about 19% of our total revenues, and from midsize companies we have about 22% of our revenues coming from midsize companies. So, that leaves you with just about 60%, a little over 60%, coming from large-cap.
Back to your more general question in relation to what’s our feeling about the ability of our customer base in general to weather the financial storm, I think it’s very good. People don’t stop obviously buying medicines, don’t stop needing treatment for disease when there’s a recession on; and because the timeframes involved in developing new compounds are, as we all know, years and years and years, our experience in the past and our expectation for the future is we’re not going to see, certainly among more established companies any diminution in their commitment to developing compounds for the future and therefore ensuring the future of their research pipelines.
So, we’re not anticipating any impact on the larger well-capitalized companies. As I commented, the view we have at the moment is biotechs and I know people have been expressing concern about biotechs.
We are not seeing any slowdown in the value of opportunities coming from biotechs. Although I do qualify and did qualify that by saying that in general, our biotech customer base tends to be a pretty well-capitalized organization; although I don’t want anyone to imply from that that it’s only the mega biotechs we are talking about.
As you know, there are quite a number of smaller biotechs. The important factor that I look at is, are they earning revenues, do they make profit, therefore, do they have a cash flow to support their research spending?
And if the majority of our biotech customers fall into that category.
Ian Hunter – Goodbody Stockbrokers
Okay. Maybe just a quick follow-up there from your comments there saying that the RFPs were down but the values were up.
Is it a feeling generally that the contracts everybody know are larger in size?
Peter Gray
Well I think we have been commenting that now for the last year or year and half, Ian, and we show data in our investor day earlier this year about how significantly the value of individual opportunities had increased and I think what we’ll continue to see is that the opportunities get larger and larger.
Ian Hunter – Goodbody Stockbrokers
Okay. Thanks very much.
Operator
Thank you. Our next question comes from the line of John Kreger from William and Blair.
Go ahead, John.
John Kreger – William Blair & Company
Hi. Thanks very much.
Just to follow-up on Ian’s question. Peter, we have the sense that a lot of the large pharma companies are in the process of restructuring their R&D models.
Would you concur with that and are you seeing any interesting trends coming out of that as they make their decisions about how they are going to change their model, what has that done for their outsourcing patterns, and how they work with company like yours?
Peter Gray
I think the thing we all need to remember as we talk about these things, John, is this industry moves slowly. At our guidance call last December, we talked about the fact that we were seeing signs of increasing embracing by large pharma companies of a more strategic approach to outsourcing and through the year we have continued to see that and obviously there had been a few announcements over the last while that emphasized the fact that there are companies looking at outsourcing in a more strategic way.
But the words you use in the question was do we see a lot of or most of the large pharma companies changing their model and I wouldn’t want to give the impression that the tidal wave of change has suddenly happened. I think what we see is a number of companies over the last number of years have been changing their approach.
I think that continues to develop, it's gaining a little momentum but I don’t think the world as we know it changed last week or two months ago or the beginning of this year. I think the world as we know it is morphing slowly and large pharma companies are responding to two things.
Obviously they have their own pressures to deal with. But secondly, the CRO industry has become a much more mature industry and the quality and the depth that the CROs in general can deliver to pharma companies is now perceived and viewed very positively I think by large pharma.
The net result is they are comfortable and getting comfortable with the idea of CROs being their partners as opposed to just being arms and legs that they hire from time to time. So, I think we are seeing that change but I wouldn’t want the community at large to think that somehow or other the game changed on a particular midnight of one day during this year.
It is a flow progression that is taking place.
John Kreger – William Blair & Company
Great, thank you Peter. A question for Ciaran.
I noticed that your gross margins were down a bit year-over-year. Can you comment on that?
Were there any particular drivers?
Ciaran Murray
No, John. There were no particular drivers in there.
I suppose it’s just a number of small things being influenced by like foreign exchange, by recovery and various reasons, and probably a little bit of softness there coming from the fact that if there’s one unit in Manchester had a poor quarter this year in Q3 and had a good quarter last year in Q3, that would be principally what's behind that.
John Kreger – William Blair & Company
Thanks very much.
Operator
Thank you. Our next question comes from the line of David Windley from Jefferies and Company.
Go ahead, David.
David Windley – Jefferies and Co.
Thank you. Good morning and congratulations on the quarter.
Peter thanks for the additional detail. I wanted to dig in to the RFP flow metric that you’ve given.
If I remember correctly, I can’t remember if it was 1Q or 2Q, but one of the earlier quarters of this year, your value of RFPs had increased some 20% in your year-over-year net new business wins and have outpaced RFP flows by at least the factor of 2, sometimes 3, I suppose. This quarter your number is an RFP value growth of 9% which is decent growth but certainly slower than what you have seen.
So, I guess my question is two-fold. One, if you’re not seeing weakness from biotechs, where is that growth slowing and two, what do you think─ what is ICON’s positioning that is allowing you to have such a high hit rate that you’re winning, you know, you’re growing your wins some four or five fold above the RFP growth rate?
Ciaran Murray
Okay. The first part of your question was, if we’re not seen weakness from bio tech, where is the growth slowing?
Well, what we’re saying is we’re not seen weakness from bio tech, but across the board, Dave, what we’re seeing is growth. Albeit, the growth and value across the board is a little slower than it was last year.
If I can─ I think I recall that last quarter we said, actually, that the RFP value growth was 10% up. So, the 9% is pretty consistent with what it was last quarter.
I’m not sure what the 20% relates to. It might have been during last year or towards the back end of last year.
I’d have to go back and check on that. So, I think the fact that growth is 10%, rather than 20 or something like that, is really a function of the law of large numbers.
It’s really a function of─ we grew so spectacularly, and we grew─ our value last year was 80%, as I recall from our investor day presentation. The value of opportunities in 2007 was up 80%.
So, for it to slow down to a more modest growth rate this year, I think is hardly surprising. I wouldn’t read too much into it, we’re certainly not reading too much into it.
And then we turn to the second part of your question, which is hour win rate. Book-to-bill─ I’m not sure I actually understand the math of your question.
Our bookings are the book-to-bill of 1.6, so can you explain to me what you’re really asking there?
David Windley – Jefferies and Co.
Well, I think if I look at your─ I believe John said that, or it would have been in your comments, that net new business was up 52%.
Ciaran Murray
That’s correct.
David Windley – Jefferies and Co.
So, you’re clearly able to grow your wins─
Ciaran Murray
We’re not comparing apples with apples, though, there. ‘Cause, the 10% increase in value of RFPs─ yeah, okay, I do see what you’re saying.
Yeah, the growth in RFPs is compared to last year, the same period last year, and obviously our wins are up 52%. We’re just damn good, David, that’s the answer.
We’re just damn good.
David Windley – Jefferies and Co.
That’s easy enough.
Ciaran Murray
And, you have to remember that a lot of that RFP activity, as we explained in our investor days, some of it never goes anywhere. So, you know, we haven’t tried to analyze whether more of what is coming to us this year is real, and less of it is budgeting exercise stuff.
So, it’s difficult to draw correlations between those two numbers.
David Windley – Jefferies and Co.
Okay, just one follow-up on that. Do you think that the 9%─ or can you hazard to guess, even, if the 9% RFP value growth represents the market?
Ciaran Murray
I haven’t the faintest idea, Dave. I have no idea whatsoever.
David Windley – Jefferies and Co.
Okay, last question. Ciaran, can you comment a little bit on the FX impact on operating income, for operating margin?
You know, it’s been, in the first half of the year, a little bit of a drag on operating margin. What did you do in the third quarter?
Ciaran Murray
And third quarter, as we’d expect with our model, Dave, it was positive. Sequentially, it added about 50 bits two of our operating margin.
David Windley – Jefferies and Co.
Okay, great. Thank you very much.
Operator
Thank you. Our next question comes from the line of Doug (inaudible 00:26:01) from Barclays Capital.
Go ahead.
[Doug – Barclays Capital]
Hi, good morning guys. To start off with, Ciaran, the cash flow performance was very strong this quarter.
And, to some extent, bucked the trend we had seen where we had very strong performance in the even quarters and not the strong performance in the odd quarters. And, I was just wondering if there was some kind of renewed focus by the company recently, or sort of initiative, which has paid some dividends?
Ciaran Murray
Gosh it, your way ahead of me. You’re noticing trends in even quarters and quarters.
You must give me lessons on this. And, no, we always worked hard at DSO, and if you look back it 2007, you know, I think we had an average of 55 and even as low as 51, and, you know, other quarters it was 59.
Towards the end of that year it slipped a little bit into the sixties. I think we finished the year at 66, just due to the number of operational factors and milestones.
The trouble with DSO, you know, you work hard at it all the time, but once it slips and you have a bad quarter it just takes a while to get it back, you know? (Inaudible 00:27:17) and it’s down to that game of interest.
So, from when we hit the low point back in Q4, then in Q1, we improved it to (inaudible 00:27:28) in Q2. We’ve kept the improvement into Q3, and it’s not, unfortunately, result of any magical individual approach.
It’s just doing the same things that we always do. Trying to watch our payment schedules and our milestones.
And we design contracts trying to get passed through the build as efficiently and as quickly as we can, after we pay them. Getting fee invoices out, and collected, and primed.
So, it’s been a good quarter. We head into Q4.
You never quite know how Q4 goes, with budget cycles and people may want to hang onto cash for their year-end balance sheets and things. And, so we’ll see how it goes.
We’re targeting─ our target is, sort of, 60 days, is what we aspire to. We’re running ahead of that at the minute.
I would like to stay there, but we’ll see. We’ll see what happens this quarter.
[Doug – Barclays Capital]
Okay. And then, you know, you alluded to the phase one business in the UK not having the best quarter.
This has been a business that has obviously had some management changes, I believe at the beginning of last year. And, you know, results have continued to lag.
And I was just wondering, you know, are you thinking about further changes, not necessarily in the management team, but just simply in the approach that you’re taking their?
Ciaran Murray
Yes, is the short answer to that. We have made some further changes in the current quarter, and some changes in approach.
And, you know, we’re hopeful that that’ll began to pay dividends. The history of the business in Manchester has been one of feast and famine.
They have a couple of good quarters, and then they suffer a lot of cancellations and they have a couple of bad quarters. And, it’s been a very variable business.
And, we feel our business development efforts have not been strong enough and haven’t been consistent enough, for that business. And, that’s one of the areas that we have addressed and have made some changes in.
Happily, the HCD acquisition in San Antonio, which we made earlier this year, had a very good quarter and its backlog is built nicely. So, the poor execution we’ve had in business development, I suppose, for the Manchester unit, have not been replicated in the phase one unit so far in San Antonio.
And, I say, it had a good quarter, its backlog is in good shape and it’s continuing to build that backlog.
[Doug – Barclays Capital]
And then, thank you very much for that detail, and then one last question. The Central Lab, the operating margin was, you know, down a little bit sequentially.
Even though we saw, what I think, is a nice increase in terms of the revenue growth. And, I was just wondering if we could get a little color around that?
Ciaran Murray
As John said in his comments, you know, the India and Singapore investments are, I suppose, in the expensive phase at the moment. It’s easy to spend capital.
It’s harder to actually, when you’ve hired the people and you’re validating the machines, and you’re validating the tests. So, we’ve got an expense (inaudible 00:30:47) in India, and to a lesser extent in Singapore, at the moment, that isn’t mitigated by any revenue.
So, it has increased our costs. And, as Karin points out to me regularly, the difference between the margin we had last quarter and the margin we have this quarter is about $150,000.
So, very small amounts of money make a significant─ can have a significant impact on that margin, because the business is a relatively small part of our business overall. So, there’s nothing significant there, Doug.
I would have liked to have seen, obviously, more leverage from that revenue increase, but we are in investment mode.
[Doug – Barclays Capital]
Okay, great. Thank you very much.
I’ll hop out.
Operator
Thank you. Our next question comes from the line of Greg Bolin from Wachovia Capital.
Go ahead, Greg.
[Greg Bolin – Wachovia Capital]
Thanks for taking the question gentleman. And just kind of following on Doug’s question, if you could just add a little bit additional color on the business wins at the HCD unit during the quarter.
And then just any additional insight on any improvement you might be seeing in bookings at Manchester Clinic during the quarter.
Ciaran Murray
We don’t drill down into that level of detail, Greg, in terms of our business wins. It’s safe to say, as I said in response to Doug, that HCD had a good quarter in terms of, obviously, performance and revenues, and bottom line.
Its backlog has been growing. When we acquired it, it had a relatively weak backlog, and it’s nice to see a good, solid backlog building there.
But, you know, we’re talking about a business we paid $10 million for. Therefore, its backlog needs are pretty (ph 00:32:27) in relation to the overall backlog of ICON’s.
So, we don’t really want to get into that level of granularity around our business wins at any point in time.
[Greg Bolin – Wachovia Capital]
Fair enough. And, then, in terms of the profitability of the phase one operation in 3Q, was it better or worse than the breakeven level posted last quarter?
Ciaran Murray
In Manchester it was worse, and in HCD it was considerably better.
[Greg Bolin – Wachovia Capital]
So, net positive compared to last quarter or─
Ciaran Murray
I think net a little negative compared to last quarter.
[Greg Bolin – Wachovia Capital]
Okay. Fair enough, thank you.
Operator
Thank you. Our next question comes from the line of Sandy Draper from Raymond James.
Go ahead, Sandy.
Sandy Draper – Raymond James & Associates
Thank you very much. Just a question, Ciaran, on the backlog going into the next 12 months.
Relative to the very strong bookings, that number didn’t pick up maybe quite as much. Is there any, sort of, trend developing where your wins this quarter were more skewed towards longer contracts, and, so, that’s why it wouldn’t jump up as much?
Or, is this normal quarterly volatility? I’m just trying to, you know, sort of match those things up.
Thanks.
Ciaran Murray
No, sandy, it’s a good question. I think if you go back, even as far as the guidance call last December, you may recall that I was forecasting that our backlog conversion would slow down as we went through 2008.
It’s really driven by, as you say, larger, more global, more complex projects. But, it’s not this quarter that we started to win them.
What we’ve seen is that if you were to go back to Q4, ’07, we posted a book to bill of 1.9 to 1 in those wins there were a number of large, large projects that we discussed that time. We followed it up with Q1 then with a book to bill of 1.8 to 1 and again when you get numbers that size it contains more than its fair share of large complex global high dollar value trials.
And through the year we’ve said that we’ve been maintaining a very robust book to bill at 1.5 in Q2 and 1.6 in Q3. So, what this is really saying is that the past year the mix of our backlog compared to our historical kind of backlog has been changing.
I think if you take every quarter from Q4 last year to now, you will have seen the backlog conversion risk reduced modestly quarter-on-quarter. All we seen now is the continuation of that and what we’ve seen is that it comes closer to what I would have forecast back in December that it shouldn’t slow down as much in the first half of the year as I had forecast hence we had a couple of big revenue bits early on the year.
And I think what we’re seeing is that that our conversion rates─ it’s traditionally been a bit higher than the industry and I think now that that with a mix, no backlog was seen as converged towards industry levels. So, I’d hold to what I’ve said to the full gear and the conversion rate will slow.
The backlog is very strong that reached $1.74 billion, it’s very robust. The business went to very good just that conversion is reflecting really there, the complexity that lies within the backlog.
Sandy Draper – Raymond James & Associates
Great, that’s very helpful. And then this one follow-up, if you can repeat up─ I missed some of the numbers, the organic growth and then the FX impact both on the total business in the clinical side, that’d be great.
Thanks.
John Climax
On the total business, we gained from the total business, we don’t split, and that’s the clinical side separately. The organic growth was 20.5% when you excluded the forex benefits and HCD.
Yes, it’s organic. With the forex element in it, it was at 32.9% so far in exchange year-on-year gave us a bend just over 400 bets on the revenue growth number.
Sandy Draper – Raymond James & Associates
Okay, great! Thank you.
Operator
Thank you, ladies and gentlemen. (Operator’s instructions) We have follow-up question coming from the line of Greg Bolin from Wachovia Capital.
Go ahead, Greg.
[Greg Bolin – Wachovia Capital]
Hey, thanks for taking a follow-up. This one put the last question here.
So, based on your current assumptions for FX as well as the kind of slowing revenue burn to finish up the year, would you think that revenues in the fourth quarter may grow the similar sequential rate that it did from 2Q to 3Q?
Ciaran Murray
I think, yes, broadly. I would expect that.
I certainly wouldn’t expect to be going back to this sort of very elevated sequential growth rates that we had earlier on the year. Think it’d be a fair assumption.
I think we’ve been consistent all along and we’ve given our number in our guidance to talk about the foreign exchange impact, which increases our revenue when the dollar weakens, but has an adverse impact on our margin. Now we’re seeing the opposite happened.
The dollar is strengthening so it’s taking a little bit of heat out of the revenue number and that we show this quarter with a 50 bit bends sequentially because of the forex and operating margins. It strengthens our EPS.
So, when I look forward towards the end of the year, I would think our revenue will hover around the lower end of our expectations where the earnings will be up other above the top end and certain enough, you know materially different from what you said before, but I think we’ll see, you know, we’ll just see a slight change, a switch from revenue to operating margins because of that foreign exchange movement.
[Greg Bolin – Wachovia Capital]
Makes sense, thanks Ciaran.
Ciaran Murray
Okay.
Operator
Our next question comes from the line of Eric Caldwell from Badge (ph 00:38:28). Go ahead, Eric.
[Eric Caldwell – Badge]
Thanks, Marg. Most of my questions have been addressed to this point, but I was just curious, I know Peter, you don’t like the event (ph 00:38:39) of granularity into the sub-segment businesses in terms of backlog or business development, but I think historically you have provided in on central lab, and I may have missed it today, but I was hoping we can get the networkings in central lab.
Peter Gray
Networkings in the lab were just over 20 million, so it was a 1.1 or one point something like this. It’s either 1.1 book to bill, which is a little lower than we would have liked.
[Eric Caldwell – Badge]
Okay, thank you and just qualitatively, any changes in the hiring or environment or turn operates in the staff. I don’t know if you had some modest growth in headcount in the quarter, just creates what you’re seen on the recruiting front?
Peter Gray
On the recruiting front, we haven’t been enormously active this quarter, so I guess, I can’t give you of today’s information, but the view with that sort of that I’m hearing is recruitment is still fair if we need and if we want to. I think I understand where you’re question is coming from given the economic climate, is it changing the game in any way.
We certainly have seen our turnover raise come down a little this year, and I would anticipate, Eric, that that will probably be retained if not further improved, given the uncertainties in the economic line of pharma.
[Eric Caldwell – Badge]
Right. Right, yes I think you read me right and also with some of the restructuring in pharma it might potentially free up some employees or at least reduced the recruiting activity in pharma, which could be a benefit.
Um, finally, just again, qualitatively, could you speak to geographic trends in terms of areas of particular strength or changes in momentum in terms of your various global geography?
Peter Gray
I think we’ve covered all this before, and it hasn’t materially changed. What we’ve seen in the last year, year and a half is that the growth in the U.S., in terms of execution of clinical trials, has moderated, and we’re seeing very low percentage growth I suppose in the U.S.
and very high percentage growth everywhere else in the world. Eastern Europe continues to be a favored location.
Asia continues to grow strongly, and Latin America continues to grow strongly. So, I think it’s a function, Eric, in our view, of the patient pool in the U.S.
It’s pretty stretched. It’s pretty saturated.
And therefore as additional work is placed in these larger and larger RFTs. The incremental activity is going outside of the U.S.
where people believe the patients can be recruited.
[Eric Caldwell – Badge]
Thank you very much.
Peter Gray
John wanted to make a comment here
John Climax
Eric, not to misunderstand also we are winning a significant amount of work in the U.S. But where it’s been placed in the various geographies is different.
So, we continue to win significant amounts of work from our clients in the U.S. That hasn’t gone away.
It’s just the geographical spread, as Peter had said, of where it’s executed is just moving around in Europe and ROW.
[Eric Caldwell – Badge]
That makes a lot of sense. We’ve seen some data from IMF and other forecasters recently about particular strengths in what are being called the pharmerging markets in Eastern Europe, Asia-Pacific, Latin America etcetera, and I just had the sense that perhaps the growth rates might actually be accelerating a little bit in some of those markets versus the U.S.
and it doesn’t sound like you would largely disagree.
Peter Gray
I think the major acceleration we saw back in 2007, growth in Europe this year for example, in the way that we measure it internally is probably around 50 %.
[Eric Caldwell – Badge]
Yes.
Peter Gray
Which is similar to what it was in 2007. So, accelerating, I wouldn’t say.
I think the big acceleration really took place in 2007.
[Eric Caldwell – Badge]
Very fair. Let me add my congratulations for a good result.
Thanks, guys.
Peter Gray
Thanks, Eric.
Operator
Thank you. Our next question comes from Ian Hunter of Goodbody Stockbrokers.
Go ahead, Ian.
Ian Hunter – Goodbody Stockbrokers
Thanks very much gentlemen. I jumped in with a supplemental, and Greg jumped in before me and asked most of the question I think.
Really just getting a handle here know that with the foreign exchange effect what we’re really doing is the revenue will be fairly flat, will it, because of the dollar impact, but your margins will be up. Is that─ am I correct in that side of things, in that we can be expecting if the dollar stays as it is and you are guiding that net revenue may be have a similar sequential effect Q4 on Q3 as it has had Q3 on Q2, that the operating margins will still stay up at the 12% level?
Peter Gray
Insofar as you can foresee in these turbulent times! Interest rates are going to go, yes, Ian.
Ian Hunter – Goodbody Stockbrokers
Yes, yes. I was just making sure I got that right.
And I was also going to ask, of course, for your guidance but you did give guidance on the back of that for this one quarter, and I’m just wondering whether we might hear where your, and I quote, “view 2009 with optimism” will come through in actual guidance of numbers?
John Climax
Where it will come through? You’re asking me to give you guidance for 2009?
Ian Hunter – Goodbody Stockbrokers
Well, I could ask for guidance for 2009. Otherwise I’m just asking for a timing as to when we might get some guidance.
Peter Gray
Yeah, we actually haven’t set a time yet.
Ian Hunter – Goodbody Stockbrokers
Yes.
Peter Gray
We actually have a bit of a debate internally about it, to be honest. The last two years we’ve given guidance in December, and fairly quickly into the New Year we’ve had to revise guidance.
John Climax
Upwards.
Ian Hunter – Goodbody Stockbrokers
Hmm.
Peter Gray
So, we were contemplating perhaps holding back our guidance until we do our year end results in February, but we see advantages as well to getting the guidance out there before the beginning of the financial year. So, we haven’t made a decision on that yet.
We’ll clarify that over the next─ before the end of November we’ll make a decision on that. We are going through our budgeting process at the moment so we haven’t got clarity on that yet.
So, as that all becomes clearer we’ll make a decision as to what would be appropriate time for us to offer guidance.
Ian Hunter – Goodbody Stockbrokers
Okay, thanks very much.
Operator
Thank you. Our next question is a follow-up from Zach Sayers (ph 00:45:10) from Bossa (ph 00:45:11) Capital.
Go ahead, sir.
[Zach Sayers – Bossa Capital]
Hi, thanks for taking the follow-up question. Just sort of following up on the questions earlier in terms of where work is getting done, is this─ and Peter, you made the comment that work is going abroad because that’s where the patients are.
I was curious, is this something that sponsors are coming to you with and saying, “We would like work to be done in these particular regions,” or is this a situation where they are perhaps suggesting work get done in the U.S. and that you may make a counter proposal that you think that the study can get done more quickly and efficiently ex-U.S.?
Peter Gray
Generally, I think clients have a fair idea of where they want to execute the work. What we try to do is influence them if we think that there will be a better outcome for them if they change the balance.
But it would be rare, for example, for a client to say, “I want to do this study in the United States” and we come to them and say, “Well, we think you should do it in Russia. ” It's unlikely that the client is going to be prepared to make that degree of change.
So, typically they have a shape, an idea of how they want the balance to work and we may─ we may advise on changing that balance or if it's a very difficult situation we may say to them we do not believe you will get the patients in the proportions that you're projecting here in the geographies that─ that you're seeking and we think you need to look at it radically but that would be the exception rather than the rule. The norm would be nuanced changes in balance but not dramatic changes in balance.
[Zach Sayers – Bossa Capital]
Okay. And then Ciarnan in terms of FX I was just hoping you could provide a little detail in terms of your currency exposure and whether we should be looking at the British pound more or is it a question─ or are most of your contracts denominated in─ your foreign contracts are nominated in euros.
Ciaran Murray
I think Doug you know me long enough to know I'm not going to give you too much detail on foreign exchange exposure and I won't say whether –
[Zach Sayers – Bossa Capital]
I thought it's worth a shot though.
Ciaran Murray
It's too complicated that even I don't really understand it you know but it's simple enough. We don't have a great deal of exposure to the British pound.
[Zach Sayers – Bossa Capital]
Okay.
Ciaran Murray
And substantially our business is contracted in U.S. dollars and in euro and then when it comes to─ to our operations and the fact that our global footprint goes around the world, we would have cost streams and, you know, 25 or 30 different currencies, but no─ no one of them would be particularly material except for─ for the euro taken on its own.
So, you know we've seen even during the most turbulent times of the dollar that we─ we can have some modest adverse impact on the─ on the margin. As things turn around, there would be modest up side in the margin.
[Zach Sayers – Bossa Capital]
So, it's not a hugely significant factor and that arises from the fact that we do our best to get natural hedges in the currency between our revenue stream and our cost base. If you were to go back you know a year ago or probably more than a year now, just over a year, and when the dollar started to weaken our─ our European business probably hit 50% of its revenues in dollars and 50% in euro.
Over that year we've taken the opportunity to─ to─ to increase the amount of euro proportion as we've managed contracts where possible obviously you need sponsor cooperation and to contract in certain currencies. So, we have increased the proportion of euro which has increased the natural hedge.
Of course the downside is then if the dollar strengths you know you won't get the benefit because you've made a decision for certainty in hedging by that. The other thing that restricts our─ our exposure is the caps that we've talked about in─ in our contracts where in the past when the dollar moves beyond a certain rate, we look at repricing and we look at recovering that element of the─ of the cost for an adverse dollar movement and of course the (inaudible 00:49:16) will hold as we go forward we could be in situations whereby you know the dollar strengthens.
We get potentially a lot of upside but you know sponsors who stood by us during─ during the past year and have been very cooperative in terms of (inaudible 00:49:32) exchange exposure. We won't─ we won't milk the advantage and our contract will provide that─ that we would reimburse them.
So, you're not going to see, you know, really significant differences arising from the─ dollar euro (inaudible 00:49:43). They are the two principal currencies.
As I say, I think at the worst times we estimated the downside to be 100 to 150 bits and really really volatile and significant movements. So, as we go forward we'll see some modest benefit as the dollar keeps strengthening but not─ you know, there's no huge─ huge payday in there.
[Zach Sayers – Bossa Capital]
Okay. Great.
Thank you very much.
Operator
Thank you. Our next question comes from the line of Jack Gorman from Davy.
Go ahead, Jack.
Jack Gorman
Great. Thank you very much.
Two questions please maybe more general questions. Peter, you talked about obviously the perceived turbulence in the market in general.
Just wondering if you have seen any evidence of any changes in commercial behavior or indeed in pricing behavior from any of your competitors in this euro market in more recent times.
Davy Stockbrokers
Great. Thank you very much.
Two questions please maybe more general questions. Peter, you talked about obviously the perceived turbulence in the market in general.
Just wondering if you have seen any evidence of any changes in commercial behavior or indeed in pricing behavior from any of your competitors in this euro market in more recent times.
Peter Gray
No is the short answer to that, Jack. I suppose pricing is the real (inaudible 00:50:40) position in this business and the turbulence, the dramatic turbulence is only a fairly recent phenomenon.
So, if there was anything, I suppose we would haven't seen it yet. It wouldn't have─ it wouldn't have really hit our radar but I don't anticipate that there will be any.
Demand continues to be strong in the industry and what we've seen through the last number of years is very good pricing discipline across the industry. I don't think that's likely to change.
Jack Gorman
Great. Thanks.
The other─ the other trend you mentioned obviously and you mentioned previously is the move towards perhaps more strategic outsourcing and by some of─ some of your larger clients. And just looking─ looking across your own business base and─ what impact do you think that may have if it has any on your contract staffing business as you position that over the next couple of years.
Davy Stockbrokers
Great. Thanks.
The other─ the other trend you mentioned obviously and you mentioned previously is the move towards perhaps more strategic outsourcing and by some of─ some of your larger clients. And just looking─ looking across your own business base and─ what impact do you think that may have if it has any on your contract staffing business as you position that over the next couple of years.
Peter Gray
I think as our─ as our clients and large pharma in particular we structure and make changes to their structures. I think it'd create an opportunity for our staffing business because what we're seeing and I think everyone has talked about Lilly/Covantis view for example and what you see in that is a combination of a number of different outsourcing models being─ being used as Lilly makes some changes within its own business including a use of the staffing model for─ for one aspect─ or some aspects of what they're doing.
So, I see opportunity for all of our business lines in the changes that are taking place and the more strategic approach to outsourcing that our large clients seem to be embracing.
Jack Gorman
And Peter you mentioned before I think in discussions past. You believe that in more mainstream sort of business and essentially targets a different type of market than contract staffing.
So, what you’re saying here is that you don’t see those lines blurring between those particular segments or requirements of the part of big pharma.
Davy Stockbrokers
And Peter you mentioned before I think in discussions past. You believe that in more mainstream sort of business and essentially targets a different type of market than contract staffing.
So, what you’re saying here is that you don’t see those lines blurring between those particular segments or requirements of the part of big pharma.
Peter Gray
Well, It depends on what your definition of lines blurring is, Jack. If you think about where this contract staffing is used, what we’re seeing in our contract staffing business in Europe so far this year is they’re a small proportion of the revenues in permanent placement revenue for─ where they are actually acting as a recruitment agency.
That’s down, not surprisingly because if they ask if the economic environment is a little tougher, people tend to be more circumspective by adding to their permanent headcount. On the other hand, their contract placement business is up.
So, again, in the economic─ difficult economic times, people are more inclined to choose to bring in a contractor for us to find period rather than bring in permanent employee. So, we’re seeing some of those trends in our business.
Those─ the contract staff that pharma companies bring in usually to supplement their own internal resource. And it therefore, doesn’t compete as such with the full service outsourcing.
Jack Gorman
As changes take place, will they have less and less of their own internal resource and therefore, will they have less and less need for contract staff?
Davy Stockbrokers
As changes take place, will they have less and less of their own internal resource and therefore, will they have less and less need for contract staff?
Peter Gray
Possibly, more likely in what we see in lot of companies is they’re just freezing the amount of their internal activities─ resource. And therefore, they are using contractors where they have gaps.
But they are not growing that segment of their business. Yet all of the growth that’s taking place in activity is going to fall short of outsourcing.
I wouldn’t want to interpret that is the way the world is. But for a lot of clients certainly that seems to be the way they are behaving.
So, if─ there’s no strays─ there is no one answer to your question. I think that as opportunity for our staffing business from a variety of different factors and it is a different market or a subset of the market that the staffing business addresses.
Jack Gorman
And as a final wrap up to that Peter, would your client mix in the contract staffing business be very different from your more mainstream sort of business? As a guide to big pharma versus biotech or specialty pharma.
Davy Stockbrokers
And as a final wrap up to that Peter, would your client mix in the contract staffing business be very different from your more mainstream sort of business? As a guide to big pharma versus biotech or specialty pharma.
Peter Gray
It’s a─ I could give you a off the top of my head answer, which would probably be wrong, Jack. So, I am not sure I have the information.
I do know that the staffing business has a good percentage of its activity with large pharma companies. I don’t think it would be a very different mix to that which we have in our─ in our─ in our mainstream CRO business integration.
Operator
Thank you. Your next question is a follow-up from David Windley of Jefferies & Co.
Go ahead sir.
David Windley – Jefferies and Co.
Thank you, thanks for taking the follow-ups. I believe, late in the quarter the updates that management was giving in conferences and so forth on bookings were they were targeting about a 1.3 to 1.4 book to bill and had about two-thirds of that in hand.
Can you confirm that that September accelerated in terms of perhaps our free flow and the winds.
Ciaran Murray
I think what you are referring to is and I was on the road to September and what I was saying at that point I expected 1.3 to 1.5 as I recall in the range. And on that the two summer months were meeting expectation in terms of our target.
And to try and simplify it then to such a binary thing in September accelerate and I’d be reluctant to go there. I would just sort of say that we had an expectation of a certain amount of win in that range.
We knew September would be stronger than July and August because it’s traditionally summer time in Europe. We factored that into our planning.
I think maybe what you’re seeing in the U.S. now is that you’re acquiring bad European habits and starting to go to the seaside in August.
But we factored that into our planning. So, September was strong.
It was hardly expected. It exceeded a little bit the kind of guidance that I give or spoke about when I was out.
But you have to remember, Dave, that when we’re talking about numbers at any given point in the quarter, you’re looking at information flow that are quite raw. The book-to-bill that we all look at is a net book-to-bill, so at any given point in the quarter you have more certainty on your gross number.
But of course the merry-go-round that is consolation, it’s impossible to know where it’s going to stop. So, September was good.
It was what we expected. And I wouldn’t say more than that.
Peter Gray
That’s an important point. It was what we expected because July and August have become typical holiday months.
And as Ciaran said, you Americans have picked up a few European’s bad habits.
David Windley – Jefferies and Co.
It’s not good. On prior calls, you’ve given us some sense of the larger awards in the overall wins in the quarter.
I think last quarter you said 12 over 5 million. Can you give us any similar characterization of the signing of the awards?
Peter Gray
Nine over 5 and 3 over 20, Dave.
David Windley – Jefferies & Company
Okay. Great.
And Peter, I think maybe it was Doug or Jack’s line of questioning, but on these larger deals you refer to the Lilly deal and the variety of models that are incorporated in that. I’m hearing of an increasing number of discussions with large pharma that would include the CRO assuming staff or buildings or lab or whatever it might be, but in your case I would assume the types of conversations would be more around staff, and my question is are those types of deals interesting to ICON?
Peter Gray
Yes, I suppose is the short answer. John, do you want to say (inaudible 00:58:59).
John Climax
Yes, it is, of course, interesting to us, and when those opportunities present to us, we will certainly go for it.
Peter Gray
I think the key point there, David, is of course they should be interesting to us because it is again the embracing by pharma of the outsourcing model and the recognition by them that CROs are going to be their partners for the future, as opposed to just hired guns. And I think that’s a very healthy thing.
I think that’s a healthy thing for pharma, but I think it’s obviously a very healthy thing for our industry in general, and therefore it’s something we’d enthusiastically participate in.
David Windley – Jefferies & Company
Getting into the nuts and bolts of labor rates being different and different cost structures and different, say, pace of work and all those cultural differences and things of that sort, do you feel like ICON’s, say, HR and training groups and all the supporting groups that would be taxed by the assumption of a big block of staff like that, are they developed to the point of being able to do that right now?
Peter Gray
Well, you were all worried last year that we couldn’t grow as fast as we were growing and we’d have difficulty getting the people in an maintaining our quality and so on, and we did all of that. So, I think we’re happy that we have the infrastructure to support whatever might come our way.
Obviously if one was assuming a bolus of people from a large pharma company, typically they are already trained; they have been working for the pharma company and therefore have good habits. Of course we’d want to train them in our own way in our own SOPs in our own quality systems and so on, but they have a very good grounding as they were joining us, so that wouldn’t cause us any concern, David.
John Climax
David, I don’t think this is all anything new because we have made a number of acquisition in the past, and we’ve successfully grappled with culture and different salary structures. So, this is yet another, just another model.
David Windley – Jefferies & Company
Okay.
Peter Gray
Just on the salary structure point, I think certainly any deals that we’ve been involved in discussing, it has been clear and no one’s been under any illusions that perhaps salary structures and benefits have to be adapted to the CRO model rather than the pharma model, and any deals have generally taken that into consideration.
David Windley – Jefferies & Company
And are you in ongoing discussions around these types of deals now?
Peter Gray
Dave, you don’t really expect me to answer that question, do you?
David Windley – Jefferies & Company
Well, I was hoping. Could you maybe alternatively, theoretically, could you talk about what you view as the minimum criteria to really seriously entertain discussions perhaps in terms of year of committed work or things of that sort, and can you get those types of things in these discussions?
Peter Gray
One of the things when we do customer surveys on ICON is that we’re regarded as a very flexible company. So, we don’t go into such a discussion with a set of rigid we-must-haves.
It depends on what the circumstances are; it depends on what the client is trying to achieve; and it depends on what the terms are. Of course, if one is taking over a large fixed cost infrastructure from a client, you’d be very careful about taking it over without some commitment of revenues to support that cost structure, at least for a period of time.
You’d want to be very brave or you’d want to have a lot of assurance about something for you to take on a cost base without any revenue to go with it.
David Windley – Jefferies & Company
Okay. Thank you very much.
Operator
Thank you. Our next question comes from the line of Baneesh Banwait from Goldman Sachs.
Go ahead.
Randall Stanicky – Goldman Sachs
Hi. It’s Randall Stanicky.
Thanks, Peter. I just figured out how to push the 7 button.
Just two very specific follow-ups here. On the competitive or on the wins that you talked about in the U.S.
market, the increased wins, was that skewed to competitive wins or were those just broad-based RFP type of situations?
Peter Gray
I’m not understanding your question.
Randall Stanicky – Goldman Sachs
Were the wins that you were seeing in the U.S., were those more competitive, in other words, business that you were taking from other CROs, or were they just generally competitive from pharma?
Peter Gray
Why are you focusing on the U.S., Randall? Sorry, I’m not quite sure where you’re coming from.
Randall Stanicky – Goldman Sachs
You talked about some increased wins in the U.S. market.
Peter Gray
Not really. I think you may have misunderstood something that John said, which was that we are having strong wins from the U.S.
and from companies in the U.S. in case, because I think of a phrase that I’d used earlier, in case anyone thought that we were winning lots of business and it was outside of the U.S.
What we were saying is we’re still winning strong business from companies within the U.S.; albeit a lot of the execution on that work may be ex-U.S., but there isn't a change in our acceleration in winds in the U.S. We’re just saying the wins generally are good and the balance across different companies from different geographies hasn’t really changed significantly.
Randall Stanicky – Goldman Sachs
Okay. I got it.
And then just to be specific because I know you talked a lot about this, but is it fair to say you’re not seeing any slowing in decision making at pharma, specifically with any of these companies that have announced restructurings at all?
Peter Gray
No, we have not.
Randall Stanicky – Goldman Sachs
Okay, and then finally, Ciaran, just on the SG&A number, can you help us? How would you think about that going forward?
Ciaran Murray
I wouldn’t say that it’s going to change significantly going forward. If you go back over the years, we’ve seen very modest leverage as the business has grown.
You continue to see modest leverage but certainly nothing that─
Randall Stanicky – Goldman Sachs
So, it pulled back at─
Ciaran Murray
─different from what the past pattern has been.
Randall Stanicky – Goldman Sachs
It pulled back a little bit this quarter, so is that a fair run rate to think about going forward?
Ciaran Murray
It pulled back a little bit this quarter because the SG&A line also includes the balance sheet foreign exchange translation of accounts receivable and cash and accounts payable balances in the European euro denominated business. So, a little bit of the benefit was coming from that, so we would really look at─ the year-to-date number, I think, is about 29%.
I’d be saying 29 to 30 is the right number.
Randall Stanicky – Goldman Sachs
Perfect. That’s helpful.
Thanks a lot.
Operator
Thank you. We have no further questions coming through, so I’d like to hand back to your host to wrap up today’s call.
Ciaran Murray
Well, thank you very much, ladies and gentlemen. In conclusion, all I want to say is that to date, 2008 has been a great quarter and a great year to date.
The revenues, the operating income, the net income, and the margins all grew strongly, and business wins continued to be buoyant. Thank you for participating in the call.
Thank you.
Operator
Thank you for joining. You may now replace your handset.