Aug 2, 2015
Executives
Ronnie Speight - Investor Relations Jamie Macdonald - Chief Executive Officer, Director Greg Rush - Chief Financial Officer, Executive Vice President
Analysts
John Kreger - William Blair Robert Jones - Goldman Sachs Dave Windley - Jefferies Michael Baker - Raymond James Donald Hooker - KeyBanc
Operator
Good day, ladies and gentlemen. Welcome to the INC Research Second Quarter 2015 Earnings Call.
At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instruction will be given at that time.
I would like to hand the conference over to Ronnie Speight, Vice President of Investor Relations. Please go ahead, sir.
Ronnie Speight
Good morning, everyone. The purpose of this call is to review the financial results for INC Research's second quarter 2015.
With me on the call today are, Jamie Macdonald, our Chief Executive Officer and Greg Rush our Chief Financial Officer. In addition to the press release, a slide presentation corresponding to our prepare remarks is available on our website at investor.incresearch.com within the Presentations and Events section.
As a reminder, an archive version of this webcast will be available for replay on our website after 1'oclock PM today. As outlined in our press release, there will also be a telephone replay of this conference call available for the next seven days.
Remarks that we make about future expectations, plans and prospects for the company constitute forward-looking statements for purposes of the Safe Harbor Provisions, under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors.
These factors are discussed in the Risk Factors section of our Form 10-K for the year ended December 31, 2014, our Form 10-Q for the quarter ended March 31, 2015, as well as our other SEC Filings. In addition, any forward-looking statements represent our views as of today and should not be relied upon as representing our views as of any subsequent date.
While we might update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so. During this call, we will discuss certain non-GAAP financial measures, which exclude the effect of events we consider to be outside of our core operations.
These measures should be considered as supplement to and not a replacement for measures prepared in accordance with GAAP. We believe that providing investors these measures helps investors gain a more complete to understanding of our financial results and is consistent with how management views our financial results.
For a reconciliation of the non-GAAP financial measures with the most directly comparable GAAP measures. Please refer to Slides 16 through 21, in the presentation posted on our website.
As we will be limiting today's call to one hour, we request that participants limit questions to one each with an opportunity to ask one follow-up question. I would now like to turn the call over to Jamie Macdonald.
Jamie?
Jamie Macdonald
Thank you, Ronnie. Good morning and thank you for joining our second quarter 2015 earnings call.
I am pleased to report that we are continuing to maintain our strong momentum with excellent results for the second quarter of 2015. We have continued to focus on delivering high quality service to our customers through our therapeutic alignment and strong execution via our Trusted Process.
I will highlight our progress during the second quarter with some key metrics outlines on Slides 3 of the presentation before Greg provides you with more details on our financial performance. First, we grew our adjusted net service revenue by over 14% compared to the second quarter of 2014.
This was despite a foreign exchange headwind primarily due to the impact of the strengthening U.S. dollar against the euro and the British Pound since the second quarter of 2014.
We estimated the impact of foreign exchange on our revenue was approximately $11.3 million in the second quarter of 2015. Accordingly, on a constant currency basis, we grew adjusted net service revenue by nearly 20% year-over-year during both, the second quarter and first half of 2015.
For the quarter, our net new business awards were $295.9 million compared to $103.4 million during the second quarter of 2014. Our net new business awards in the second quarter of 2015 resulted in a net book-to-bill ratio of 1.3 driven by strong new order activity, modest cancellations and a solid new business pipeline.
As a reminder, the second quarter of 2014, included $132 million cancellation due to regulatory concerns of our customer, thus negatively impacting that quarter's net awards and book-to-bill ratio. New business awards have varied then we will continue to vary from quarter to quarter, due to the fact that we may receive a small number of relatively large orders in any given period.
Therefore, we believe, that this important metric is best viewed over the longer-term. Accordingly, we are also providing our trialing 12-month book-to-bill, which stands at a healthy 1.3 as of June 30, 2015.
We are particularly pleased with this strong book-to-bill ratio given that we are growing adjusted net service revenue at nearly 20% on a constant currency basis, a rate faster than the industry. We also experienced strong backlog growth during the second quarter with backlog as of June 30, 2015 at approximately $1.7 billion, up 12.3% from June 30, 2014.
This growth occurred despite accumulative reduction in backlog of $73 million since the second quarter of 2014 from the impact of foreign exchange. We continue to win a significant portion of our new awards from repeat customers by delivering high quality work and providing added value through our therapeutic expertise.
Our success with this approach is evident in the composition of our new business awards for the second quarter, which includes broad based new wins from existing customers in addition to business from new customers. We are also successfully expanding our business in complex therapeutic areas, like Phase I oncology, where we have built a dedicated group of expert resources within our broader oncology team to support this growing specialty area.
In addition, we have successfully completed the conversion of one of our largest customers from primarily a functional service provider relationship to a more traditional full service arrangement. During the second quarter, we executed a new three-year full service master service agreement with this customer.
We believe this arrangement demonstrates our commitment to this long-term relationship and allows them to take better advantage of our therapeutic expertise. I am also happy to report that during this transition, we continue to win full service work during the second and expect this customer to remain one of our most valued and top customers going forward.
We are also improving the diversity of our customer base with our top-five customers representing only 34% of our revenue in the second quarter of 2015, down from 40% for the second quarter of 2014. Similarly, for the first half of 2015, our top-five customers comprised 35% of our revenue down from 38% for the same period in 2014.
We continue our strong presence in CNS oncology and other areas, where clinical trials are particularly complex. These areas represented approximately 68% of our backlog as of June 30, 2015 compared to 67% as of March 31, 2015.
We believe our continued strong position in these areas demonstrates the effectiveness of our therapeutically focused project teams, which extend to the CRA level, coupled with the therapeutic expertise of our business leaders. Based on industry data, these complex areas represent approximately 60% of the Phase III drugs under development, which we believed continues to favor our strategy.
Site relationships continue to be a key differentiator and important area of focus for INC Research. As demonstrated by our ranking as the Top CRO to Work With among large global CROs in the 2015 CenterWatch Global Investigative Site Relationship survey.
We believe that our ability to collaborate effectively with and leverage insights from this important stakeholder group can deliver significant efficiencies for our customers and transform how clinical trials are conducted. As an example, during the second quarter INC in collaboration with The Society of Clinical Research Sites held the official launch of the CRO industry's first site advocacy group.
This group is focus on incorporating the voices of sites and patients into the evaluation of psychiatry study protocols for scientific merit and operational success. Several protocols have been reviewed to-date through the site advocacy group forum, enabling us to make significant recommendations to our customers, which could result in time and cost savings.
Collaboration with sites across therapeutic areas and geographic regions is key to INC's strategy. During the third quarter, we will be meeting with sites in the Asia Pacific region as part of the Society for Clinical Research Sites, Asia/Pacific Site Solutions Summit.
Our involvement in this event further reinforces the importance of Asia-Pacific as a critical region for growth for INC, where we have increased our headcount by approximately 25% over the last year. The Society of Clinical Research Sites or SCRS continues to be a driving influence in improving sites sustainability worldwide and we continue to partner actively with them on a number of fronts.
Combined, these efforts further on the store INC Research's Commitment to fostering strong site relationships globally to bring new medicines to markets for patients in need. In support of global delivery for our customers, we continue to expand our total employee base to approximately 6,100 staff during the second quarter, up from approximately 5,800 at the end of the first quarter 2015.
We have continued to broaden our capabilities globally through organic expansion of our presence in important market like Japan, where we now have approximately 80 staff, an increase of over five-fold compared to the same period in 2014. Let me now turn it over to Greg Rush for more detailed comments on our financials.
Greg.
Greg Rush
Thank you, Jamie. Good morning everyone.
I would like to start by making some additional comments regarding our financial performance, highlighting some of the key metrics on Slides 3, which are presented with a more detailed view on Slide 4. As a reminder, we are presenting our results on an adjusted or non-GAAP basis.
As Jamie mentioned, we had a strong quarter, six month and trailing 12 months related to net awards and book-to-bill, which is helping to support our strong financial performance. Let me start with revenue, we grow our adjusted net service revenue on year-over-year basis by 14.2% to $227.4 million during the second quarter 2015 from a $199 million for the second quarter of 2014.
On a constant currency basis, excluding foreign currency headwind of $11.3 million, our net service revenue grew by 19.9% year-over-year, reflecting our strength in net new business awards and resulting strong backlog coverage. As a result of our continued strong operational execution and disciplined approach to executing change orders.
Second quarter benefitted from a slight increase in revenue from this acceleration of work and contract execution. We estimate the impact to be an increase of approximately $1 million to $3 million.
On a year-to-date basis, we grew our adjusted net service revenue by 14.4% from $383.7 million for 2014 to $438.9 million for 2015. Excluding our foreign currency headwinds of $20.4 million, our revenue grew by 19.7% compared to the first half of 2014.
Please note, these quarterly and year-to-date revenue growth rates exclude an estimate of $4.5 million of revenue from higher than normal change order activity occurring in the second quarter of 2014. On Slide 5, you can see the improving diversity of our customer base.
We continue to see revenue from a broad cross section of small, mid-size and large bio-pharmaceutical companies as well as a significant percentage of new awards originating from existing customers. On Slides 6, we have provided trending of our adjusted growth margin, adjusted income from operations, adjusted SG&A expense as a percentage of revenue and adjusted EBITDA margin by quarter since the first quarter of 2014.
Although there is normal quarterly variation, these charts highlight our ongoing margin improvement, effective management of pricing and expenses and execution on the delivery for our customers. We have also closely managed our SG&A expenses demonstrated by the overall improvement as a percentage of revenue.
This improving leverage of our SG&A infrastructure is a trend despite our increasing cost from being a public company. Direct cost increased 5.6% from a $130.3 million for the second quarter of 2014 to $237.5 million for the second quarter of 2015.
This gross margin is expanding from 34.6% to 39.5%. For the first half of 2015, direct costs were $262.4 million compared to $250.6 million for 2014.
This gross margin is increasing from 34.7% to 40.2%. As a reminder, direct cost for the first quarter of 2015 included $5.1 million or 120-basis point improvement in margins from non-recurring benefits due to favorable settlement of certain liabilities, which we do not believe will be representative of normal operations.
We are very pleased with our continued progress and improving gross margins. These improve margins are primarily driven by strong execution by our operation team, our disciplined approach to cost management and our ability to better leverage the therapeutic management overhead as we expand our revenue base.
We are also seeing the benefit of improving the utilization of our facilities from 71% at June 30, 2014 to 80% at June 30, 2015. Finally, we are on track to eliminate at least two of our five clinical trials management systems by the end of the year and we continue to gain efficiency with the new systems how which we have standardized.
These improved margins also reflect a favorable revenue mix with included the acceleration of revenue I mentioned earlier. As I mentioned on our first quarter call, we continue to add staff to support our growing business, which may have slight negative impact on gross margin levels relative to the first half of the year.
Lastly, the impact to foreign exchange reduced our direct cost by a greater percentage within our revenue, and thereby positively impact of our gross margin percentage by approximately 135 basis points for the second quarter and 115 basis points for the first half of 2015. In light of these factors, we have increased our expectation for normalized gross margins for the remaining six months of 2014 to range from 37% to 39%.
Due to the fixed nature of many of our costs in the short-term, we continue to expect our gross margin to vary from quarter-to-quarter. SG&A expenses increased from $33.2 million in the second quarter 2014 to $36.6 million in the second quarter of 2015, while declining from 16.7% to 16.1% of net service revenue over the same period.
On a year-to-date basis, our SG&A expense have increased from $65 million to $72 million or declining from 16.9% to 16.4% of net service revenue. We continue to make progress against our margin improvement initiatives growing SG&A at a slower rate than revenue.
Our strong revenue growth, operational execution and leverage of our SG&A infrastructure resulted in adjusted income operations increasing 60.1% from $30.5 million for the second quarter of 2014 to $48.8 million for the second of 2015. With the associated margin increasing from 15.3% to 21.5%, on a year-to-date basis adjusted income from operations increased from $56.2 million in 2014 to $95.3 million in 2015, with the related margin improving from 14.7% to 21.7%.
Adjusted EBITDA grew by 49.9% for the quarter and $53.3 million for the second quarter of 2015 and $35.5 million for the second of 2014. Adjusted EBITDA margins improved to 23.4% for the second quarter of 2015 from 17.9% for the same period in 2014.
For the first half of 2015, adjusted EBITDA increased by 53.4% to $104.5 million, up from $68.1 million for the first half of 2014. Over the same year-to-date period, adjusted EBITDA margins increased from 17.7% to 23.8%.
The overall impact of foreign exchange on our adjusted EBITDA was de minimis for the second quarter and first half of 2015, as the overall reduction in our total costs approximately offset the negative impact to revenue. However, as we pointed out earlier, because of the reduction in revenue, the foreign exchange positively impacted our adjusted EBITDA margin percentage by approximately 130 basis points for the second quarter and 100 basis points for the first half of 2015.
Given our strong performance in the first half and a progress against our cost initiatives, we currency expect adjusted EBITDA margins to be approximately 20% for the second half of 2015, but may vary in any individual quarter. Adjusted net income increased to $28.6 million for the second quarter of 2015 from $11.1 million for the second quarter of 2014, an increased to $54.9 million from $17.3 million on a year-to-date basis.
Adjusted earnings per share was $0.47 and $0.88, for the second quarter and first half of 2015, respectively, compared to $0.21 and $0.33 for the second quarter and first half of 2014, respectively. Fully diluted weighted average shares outstanding were $60.5 million for the three months ended June 30, 2015, which includes an impact of 2.2 million shares from equity-based employee awards.
At June 30, 2015, the outstanding share account was $56.3 million. Slides 7, provides some key metrics demonstrating our improving cash flows and leverage position.
Our cash flow from operations was $51.6 million for the second quarter of 2015 as compared to $49.2 million for the second quarter of 2014. Cash flow from operations for the first half of 2015 was $95.3 million an increased of $14.9 million or 18.5% over the first half of 2014.
These increases were driven by our growth in revenue and margin improvements highlighted previously coupled with ongoing working capital management. During the second quarter, we closed on our new $675 million credit agreement, which was comprised of $525 million term loan and $150 million revolving credit facility.
This new credit facility allowed us to lower our overall interest from 4.5% to 2.2% based on current LIBOR rate. Given our excess cash position at the end of the second quarter, we elected to make a voluntary pre-payment of $15 million of this facility to better allocate our capital in the short-term.
We ended the second quarter of 2015 with $98.5 million in unrestricted cash. On Slide 7, we continue to report overall strong performance in our net DSO of a negative 5.6 days, which includes the impact of customer deposits and other pre-payments, while we are pleased with this performance over time we expected that our DSO will return to a more normalized level in the low-teens.
Turning to backlog, Slide 8 summarizes key metrics related to our backlog. On the roll forward of our backlog, note that the net impact of foreign exchange was an increased in backlog of $13 million for the second quarter 2015, but on a year-to-date basis was a reduction of $26 million.
The cumulative impact of foreign exchange since June 30, 2014 has been a reduction of $73 million. On the right side of Slide 8, the pie chart illustrates the concentration of our backlog with 68% in areas of CNS, oncology and other complex diseases.
We believe one of the most imported leading indicators of feature revenue growth is backlog coverage, which is presented in the bar chart in the bottom-left quadrant of Slide 8. As you can see from this chart, we are maintaining the favorable position with 96.3% coverage of the current year's total revenue forecast as of the end of the second quarter, up from 90.4% as of the end of the first quarter.
This is in line with the 97.2% and 95.3% for the similar more period as of June 30, 2014 and 2013, respectively. Lastly, in the bottom-right quadrant on Slide 8, we provide our backlog burn rate.
We believe our strong operational execution, couple with our conservative and disciplined approached to recording award and backlog drives our quarterly burn rate, which was 14.3% for the second quarter of 2015. On Slide 9, we are providing our revised guidance for key financial metrics for the full year 2015.
This revised guidance takes into account a number of factors including our strong performance in the first half of the year, expectations for the remainder of the year, our recent refinancing and share repurchase transactions, currency exchange rates and our expected tax rate. We expect our net service revenue for the full year 2015 to be between $900 million and $910 million, representing a growth rate of 12.4% to 13.6%.
This takes into account a foreign currency headwind estimated at approximately $35.5 million and negative impact to our growth rate of approximately 445 basis points. Accordingly, our constant currency growth rate is expected to be between 16.8% and 18.1%.
We are forecasting adjusted EBITDA to range from $195 million to $205 million growing at approximately 34% to 41.1%. We expect our adjusted net income to range from $102 million to $109 million growing at 128% to 144%.
This results in adjusted diluted earnings per share of a $1.69 to $1.80. Lastly, we expect to earn $1.44 to $1.60 per share on a GAAP basis.
Included in our revised GAAP earnings per share guidance is an estimated $0.06 per share impact from stock based compensation. Given our projected mix of revenue and expenses by currency, the foreign currency headwind on revenue that I mentioned earlier is expected to only have a nominal impact on earnings for the full year.
This completes our prepare remarks and we would be happy to answer any questions.
Operator
Our first question comes from the line of John Kreger from William Blair.
John Kreger
Hi. Thanks.
I have two questions on the backlog, some of the stats that gave on Slide 8. Jamie, I noticed that the therapeutic area mix seemed to move a little bit from the first quarter.
Do you view that as just sort of typical volatility quarter to quarter or is there something going on in terms of oncology moving up and CNS moving down?
Jamie Macdonald
I think it is sort of fairly typical. We are going to see some ebbs and flows.
I think the oncology market is going to continue to be strong and I think that is very clear. I think, as we may have suggested in the past.
On the CNS side, you probably got a limited pool of customers that are active in the neuroscience space, so therefore it just depends on where they are with their development pipeline, what new studies are coming through on what stage those studies are at, so just normal ebb and flow I think.
John Kreger
Great. Thanks.
Follow-up, again, on backlog, as you look at the makeup of the backlog by client type, how is that changing if at all? We would think of it as sort of small mid-size and large.
Are you seeing any shifts?
Jamie Macdonald
No. Not really.
I think, if you look our composition orders and revenues, which our backlog approximates, you see that our customer profile, the large bio pharma revenue is 56%. If you look at last year's 57, so we are sort of seeing the same mix there.
We are growing across all customer sizes.
Greg Rush
John, as we have said in the past, we obviously think of customers in some of those categories, but we are large pharma sort of than a big, big sort of biotech merge. It is hard to tell, where you put somebody like Amgen or a Biogen or others.
With all the M&A activity going on, it is sometimes hard to keep track of who is in which bucket, so we spend a little less time on that. We obviously look at their propensity to outsource development spend and some of the mid-size pharma and some of the smaller biotech are much more virtual and have a higher likelihood of sourcing the work.
Some large pharma remain more sort of focused on either internal resource or in sourcing from a staff augmentations standpoint. We do segment it that way, but we do not spend a lot of time trying to analyze it.
John Kreger
Understood. Thanks so much.
Operator
Thank you. Our next question comes from the line of Robert Jones from Goldman Sachs.
Robert Jones
Hi. Great.
Thanks for the questions. Just on margins and to can start with growth margins, you previously talked about 36% to 38%.
Now it sounds like we are looking at 37% to 39% for the balance of the year. It looks like this quarter 39-plus percent first half is, actually, probably around that if we adjust for the one-time benefit from last quarter.
Any sense of what is driving, I guess, the front half strength. Then why, I guess, just implicitly here why would you expect that to kind of moderate a bit on that range versus what you guys have been able to put up in the front half?
Jamie Macdonald
Thanks, Robert. I would tell you that, one, we are very proud that we are improving the gross margins, so we feel good about that.
One of the things that is proving out is our Trusted Process is really helping us to get through the startup phase pretty well. In addition, the therapeutic expertise and relationship with sites is helping us there, so that strategy is proving out in growing our gross margins then we have talked about all this initiatives that we are getting a little bit faster, adoption of our new CTMS systems than we previously expected, so that has helped a little bit with our improvement in the second half.
With regards to why is it sort of moderating in the second half using your 39%, we did see a little bit of timing of revenue that I mentioned in the prepared remarks and we are able to get some sites visits and our certain executions from change orders a little faster, which is a 2 million, call it, the mid-point in Q2. That is really a timing pulling it forward.
That all comes in when we get that revenue with the fixed cost base. That is probably about our margin point.
If you can take the 39% in the second quarter take about the point, you are in that 38, which is right in the mid-point of what we expect, so some of it is timing, but a lot of it is our ability to execute.
Robert Jones
No. That's fair.
I guess the follow-up, then. There might be a similar answer Greg.
I think if I heard you correctly, you are calling for about 20% EBITDA margin in the back half, which obviously, again, looks couple of hundred, several hundred basis points below what you guys were able to post this quarter, which seemed like a fairly clean quarter. I guess similar question, just anything that we should think about as far as moving pieces in the back half that might weigh on EBITDA margins?
Greg Rush
Yes. Part of it is, and we have talked about that public company cost, a lot of the stock testing and audit related stuff in the back half of the year.
You also have your DNA renewal in the second half, so we do sort to see a little uptick there. The other thing is, if you look in our cash flow statement, you can see our bad debt expenses basically zero in the first half and that is not normal usually your about a half point at any point of time.
Obviously we feel is sort of going to go bad, we would go ahead [ph] based on the experienced, you can expect about a half point bad debt expense in any period, so we are giving guidance assuming there is something going to happen in the second half.
Robert Jones
Okay, guys. That is helpful.
Thanks.
Operator
Thank you. Our next question comes from the line of Dave Windley from Jefferies.
Dave Windley
Hi. Good morning.
Thanks for taking questions. Jamie, on the therapeutic area concentration diversification and focused on complex areas kind of your pressured in your and your company's views on this is the complex trials conversation seems to be ramping pretty significantly among all your peers.
How are you seeing, I guess, first of all, the landscape for these more complex trials, where you view your skill sets as really well or very adept in applying to the studies. How do you stay ahead of the competition in differentiation on this message?
Jamie Macdonald
Yes. That is going to be a tough question for a consolidated answer.
I mean with complex studies, the answer is obviously pretty long and complex. Essentially, our view is the following, I think, we are moving towards personalized medicine.
I think that is become pretty clear. Therefore, the identification of essentially, smaller patient populations under any disease type is going to part of medicine on a go forward basis.
Therefore, sort of diagnostic biomarkers, some of the genetic mapping that is going ahead, will mean that we are looking for a rarer and scarcer patient for any particular therapy. That does not apply just in oncology.
It is in other indication as well, therefore we been able to identify that patient really map them towards an investigator in a clinical research sites that is able to take him through the consenting process, screen them and hopefully enroll them in a clinical trial is a challenging process. Additionally, understanding how that patient will likely progress from a disease standpoint while [ph] in a clinical trial with all the analysis that goes with that and obviously care for that patient is a pretty challenging task, so therefore we have got to be well aligned to the sponsor, we have got to understand the disease and the indication and the sub-population that we are likely to be identifying and work to find the right sites who have the protocol eligible patients.
That is something that we have done very well for an extended period of time. It takes the knowledge of therapeutic area and indication, it takes very good planning and design, call that, Trusted Process around identification of feasibility site ID and the right investigators.
It is nothing usual for us. We are not surprise that the industry is seeing additional complexity.
That is just the way it is going to go as the diagnostic techniques and better understanding of genetics drives us that direction. I think it is better for patients.
Ultimately, if you look at the analysis, we always knew that most drugs only work in a subset of patients that they were prescribed for particularly in oncology, psychiatric disease, some of the inflammation diseases as well. We are now able to get to very targeted patient populations, where response rates are much improved.
I think that is good from a drug development standpoint. I think it is particularly good for patients.
Greg Rush
The only other color I would add to that is, if you think about our Trusted Process and the themes that we have talked about the last year, our therapeutics expertise and relationships with sites, we really do you think that is helping us to get through some of the bumps you typically see in startup and allowing us to execute and drive very good results for customers. If we can get that through faster, our customers are very happy with.
Then we can obviously get the benefit of that in our gross margins and being able to recognize revenues. You are always going to have some things outside of your control.
We did not have anything that happened in the first half that was bad for us. Sure enough, in the future, we will probably see something, but our execution and the ability to do that I think proves out our thesis of Trusted Process, therapeutic focus and sites relationship.
Dave Windley
Got it. Thank you for that.
Then my follow up is around kind of backlog growth. Having lapped your larger cancellation last year, backlog growth year-over-year is a pretty attractive number.
It is still, I guess, a little lower than what your revenue growth activity, and I think outlook is and I wondered this kind of gets at the conservatism of your backlog. Could you talk about what your views are in terms, maybe not next quarter and second half, but just kind of longer terms sustainable growth rate relative to how fast you are growing backlog.
Jamie Macdonald
We have talked about over the long-term our growth rate in revenue, we think, will be in the low double-digits, you know, 10% to 12%. Certainly in the short-term to mid-term, we are forecasting higher than that.
Part of that is the mix of studies. We have a few studies that are 6 to 10 years, they are small in value, most of the meat of our studies runs at three-year mark, so part of it is where is your sweet spot, in addition, your ability to execute and get those started and completed on time.
We are doing that. That allows us to grow the revenue.
As you pointed, out we are very conservative with what goes into our backlog that helps what goes in comes out.
Greg Rush
Yes. I think, we are appropriately conservative, I think the backlog phasing is obviously something that we focused a lot on.
Book-to-bill is an important metric. Overall backlogs is an important metric, but line of sight on what we see in front of us for the short-term guides everything that we do around resourcing, forecasting and managing the business day-to-day.
Yes, we have backlog that sits out in 2017 and 2018, but it does not form how we managed the business in the short-term, so it is really about getting projects aligned to the right groups in the organization, getting them phased correctly, the resource planning in place, getting those requisitions out into the market, getting the staff brought into the organization and time to be orientated and trained and be productive when the project is up and running. That is about managing the business.
Backlog that sits out more than a year, it does not form what we do in the short-term and may have a slight impact on whether we take on permanent staff for contingent labor, but outside of that it is not a big factor what we do day-to-day.
Dave Windley
Very good. Thanks for the answers.
Jamie Macdonald
Thanks, Dave.
Operator
[Operator Instructions] Our next question comes from the line of Michael Baker from Raymond James.
Michael Baker
Yes. Thanks.
Jamie, relative to the commentary you provided on increase in trial complexity and move to personalized medicine, I was wondering if you could provide us your updated thoughts on whether or not you would reconsider your stance on ownership of lab capabilities versus doing it on an outsource basis.
Jamie Macdonald
Yes. I mean we have some great outsource partners on the lab side who provide us access to all the latest testing in biomarkers, so we are very happy with those relationships.
It is not something we are contemplating in the short-term. The science is moving pretty quickly, the capital expenditure needs are pretty high.
There are already a couple of large providers in the central labs space, so those are providing support for clinical trials. You have also got to remember there is a pretty larger market at there on what I would call the clinical reference lab space, but there is also a lot of smaller niche firms providing some of the new science and the new biomarkers and our ability to access best-in-class labs with the testing capabilities that are most relevant for a particular disease.
We want that flexibility.
Michael Baker
Thanks. Then on my follow-up, I was wondering there have been other players.
This go around in the quarterly announcements, tying a potential changes to burn rate to the rising complexity and I know you guys take a more conservative stance on your backlog. I was just wondering whether we should anticipate any influence on the complexity as it relates to your burn rate.
Jamie Macdonald
Yes. I will maybe take first, and then maybe Greg will talk a little bit about it.
The complexity is certainly there. We look at our backlog and we anticipate how long it is going to take to essentially go through the startup process.
If you think about startup, you are really moving from a final protocol, which is your sort of scientific hypothesis, how you are going to test whether this drug is safe and efficacious and you have got a place that in particular countries, so you go through competent authority approvals and you are going to place that at certain sites, so you go through CTAs clinical trial agreements with sites, ethics approval of IRBs and the others, so it is complex process, but I think the discipline that we have through the way that we manage trials and our Trusted Process allows us to do that very affectively and that gets phased into our thinking, our planning, our timing, but also into the contracts and the expectations we set with customers. We are going to satisfy customers' needs, because we know they are guiding the street and there are investors and others.
We do not want to be in a position where we have given customers' expectations of a trial starting and then rolling faster than it is feasible given the complexity of the trial. I think a lot of our customer appreciate that we are trying to help them manage expectations both, internally and with their investors.
If it is a novel compound in a new indication that looks different from the standard-of-care than you are likely to get questions from competent authorities, they are going to ask you why you are doing the trial, what the purpose of the trial, what is the risk benefit to the patients and you are going to have a more [ph] process with those competent authorities, those sites and those ethics organization and that should part of your planning, that should part of your discussion with your customer and that should part of the way you phase your backlog - complexity, but it is going to be your forecast at the outset.
Michael Baker
Very helpful. Thanks for the color.
Jamie Macdonald
I think we got one other question?
Operator
Yes. Our final question for today comes from the line of Donald Hooker from KeyBanc.
Donald Hooker
Hey, good mooring. In the prepared comments, you all referenced, I think, some investments in Phase I oncology and I know that is from a numbers standpoint, small, as a present of revenues and what not, but I suspect there is a strategy there or some sort of pull-through.
Can you talk about the linkages between that or is that part of a broader strategy to kind of drive the bigger dollar later phase opportunities?
Greg Rush
Yes. I mean good observation.
Phase I oncology, when we normally reference Phase I historically the industry would thought about healthy volunteer studies instead of their own in house facilities. Phase I oncology are patient trials generally.
They run at the usual academic and research centers, so Sloan-Kettering, Dana-Farber, Andersons, it is the usual sort of centers. It is usually a limited number of investigators and a limited number of patients.
Having incumbency on those trials and understanding how that drug works in that patients setting is important should there be follow on work. Additionally, a lot of the new molecules coming into oncology have applicability in multiple indications, so one small Phase I study in one indication might lead to future Phase II studies in multiple tumor types in different patient populations.
Getting early incumbency on those new molecules and how they work and how they are received by patients, will decide deals with the protocol is an important incumbency position and sort of bodes well for those molecules as they advanced in development.
Jamie Macdonald
I think it is built on our thesis that therapeutics are extremely important. I think sort of what you see out there is number one reason why our customers chooses CRO.
We go deeper than anyone else in the industry always with the CRA and that really does help us leverage growth in both, winning new business awards helps us in the startup phase and executing and ultimately delivering what we tell the customers we are going to do. I think all of that is what we are trying to message is that therapeutics are important and we think our business strategy is the right strategy and I think our numbers are proving that out.
Greg Rush
Yes. Almost Don, just going back to comment I think Dave Windley had how do you keep the differentiation there.
It is about retaining talent. I think that is the key component, but also bringing in new talent that has the latest experience and quite often they come yes from pharma and biotech, but they also come from the academic and research side as well.
We have done well in terms of retaining therapeutic talent, but also augmenting that by bringing in new additional experience, not just from pharma and CRO, but from the clinical and patients side of research and development as well.
Donald Hooker
Okay. Great.
I guess my one follow up would be, and I apologize if I was scrolling those too fast and missed it. The second quarter bookings, obviously, we are amazingly high it is great, but just to understand kid of the components of that, was there a renewal like a functional agreement in there.
I think you referenced Astellas kind of moving around a little bit, kind of the structure of that relationship changing and sort of the cancellation profile in there. I think you referenced that was a little bit lower.
Can you clarify a little bit on that?
Jamie Macdonald
Yes. I think cancellations in the number were comparable to the first quarter, so we certainly have seen the moderation of that since 2012 and 2013, so our cancellation rate is improving, but it is in line with the industry so I would not call it unusually low.
Compared to the industry it is probably comparable with the industry, it is just relative to where ours was higher in '12 and '13 for the reason we talked about in the past. It has gotten closer to the industry.
With regard to the renewal, we converted that from FSP relationship to a full service and are now going forward that relationship is no different than any other customer as they put out a bit for new work, we will record those awards as awarded, so there is no large major impact to the awards. I think the actual impact of converting the remaining FSP the tail of the work that we had under the old arrangement, we still would had approximately 1.2 book-to-bill if you excluded that, so there is no significant impact to our book-to-bill from the renewal.
Donald Hooker
Great. Thank you and congratulations.
Jamie Macdonald
Thanks.
Greg Rush
Thanks, Don.
Jamie Macdonald
Any other questions on the line?
Operator
I have no further questions at this time.
Jamie Macdonald
Therefore we are going to wrap up. Thank you ladies and gentlemen, for your attendance today and for your interest and investment in our company.
We look forward to report and back to you on our next call with further progress made during the third quarter 2015. Have a great day.
Operator
Thank you. Ladies and gentlemen, thank you for your participation in today's conference.
This does conclude the program and you may now disconnect. Everyone have a good day.