ICON Public Limited Company (ICLR) Q1 2023 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to ICON Q1 Results 2023 Conference Call. [Operator Instructions] I would now like to turn the conference over to the speaker today, Kate Haven. Please go ahead, ma'am. Your line is open.

Good day, and thank you for joining us on this call covering the quarter ended March 31, 2023. Also on the call today, we have our CEO, Dr. Steve Cutler; and our CFO, Mr. Brendan Brennan. I would like to note that this call is webcast and that there are slides available to download on our website to accompany today's call. Certain statements in today's call will be forward-looking statements. These statements are based on management's current expectations and information currently available, including current economic and industry conditions. Actual results may differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with the company's business. And listeners are cautioned that forward-looking statements are not guarantees of future performance. Forward-looking statements are only as of the date they are made, and we do not undertake any obligation to update publicly any forward-looking statements either as a result of new information, future events or otherwise. More information about the risks and uncertainties relating to these forward-looking statements may be found in SEC reports filed by the company, including the Form 20-F filed on February 24, 2023. This presentation includes selected non-GAAP financial measures which Steve and Brendan will be referencing in their prepared remarks. For a presentation of the most directly comparable GAAP financial measures, please refer to the press release section titled Condensed Consolidated Statements of operations. While non-GAAP financial measures are not superior to or a substitute for the comparable GAAP measures, we believe certain non-GAAP information is more useful to investors for historical comparison purposes. Included in the press release and the earnings slides, you will note a reconciliation of non-GAAP measures. Adjusted EBITDA, adjusted net income and adjusted diluted earnings per share exclude stock compensation expense, restructuring costs, foreign currency gains and losses, amortization and transaction-related and integration-related costs and their respective cash benefits. We will be limiting the call today to one hour. [Operator Instructions] I would now like to hand the call over to our CEO, Dr. Steve Cutler.

Thanks, Kate. And good day, everyone. ICON made a good start to 2023, in quarter one, delivering solid results while continuing to develop our strategic initiatives in health care intelligence. We continue to navigate macroeconomic headwinds that are impacting our industry. While we expect these challenges to cause uncertainty in the short to medium term, now more than ever, our customers are turning to ICON is a strong, stable and strategic partner that has the broad service -- resources and capabilities to optimally manage their clinical development programs and functions. Notwithstanding this, we have seen a generally stable underlying market demand across customer segments, supported by the fundamental drivers of increasing R&D spend and further outsourcing penetration. This has resulted in improving sequential RFP trends in quarter one. Within customer segments, demand from mid- and large biopharma companies continues to show growth with a recent increase in the number of larger FSP opportunities. In the emerging biotech segment, cautiousness with regard to spending has continued as the broader funding environment remained challenged. Companies are actively conserving cash and prioritizing programs until they have improved visibility to additional funding. As a result, we have seen some delays in decision-making within this segment and more considered assessments on the scale and timing of their studies. While this dynamic creates a more challenging environment in the segment in the near term, our commitment remains unchanged in this area of the market that continues to fuel innovation in R&D. We are partnering with many of our biotech customers at an early phase of development and connecting our operational and medical experts with their leadership teams to collaboratively regenerate optimal development plans and conduct their studies. In doing so, we get to truly understand our customers' objectives, and this builds meaningful and long-term partnerships. We remain encouraged by the traction we are gaining broadly in the marketplace and the opportunity ahead of ICON. Our unique position as a world-leading provider of clinical development services appeals to customers across all segments. And we've made good progress in advancing a number of strategic discussions with large and mid-sized pharma companies since our union with PRA Health Sciences. There is an increasing amount of engagement taking place at a strategic level in customer accounts as companies evaluate and review their optimal clinical development strategies. We are seeing a growing need for full-service, functional and hybrid solutions, with customers seeking a partner that has the necessary scale, expertise, experience and breadth of offering to seamlessly execute their programs and/or augment their existing infrastructure. To that end, in quarter one, we announced a strategic partnership with LEO Pharma, a global leader in dermatology, with ICON acting as their sole provider of clinical development services. The partnership will leverage both fully outsourced and functional outsourcing activities in a tailored and flexible hybrid approach to development. This unique model is designed to provide patients improved access to innovative trials while effectively and flexibly managing LEO's development portfolio. In addition, our late-phase business was awarded a full-service strategic partnership in real-world solutions by a large biopharma sponsor in quarter one. This customer cited ICON's strong history of delivering real-world evidence studies, collaborative approach to deliver solutions and assessment of CRO leadership as key decision criteria when awarding this partnership. We continue to see opportunity to improve our execution in key development activities such as Study Start Up, site selection, patient identification and recruitment as trial complexity increases and durations expand. With challenging dynamics in the market such as sites facing resource constraints, increasingly niche patient populations and an overall uptick in regulatory requirements, the need for novel solutions and new approaches is accelerating. As a consequence, our focus and investment in innovation has continued to increase across a number of areas within our organization. We have demonstrated success with several tools we have developed at ICON and believe we are in the early stages of creating even more meaningful improvements in clinical development. Our approach to innovation recognizes the importance of coupling our unique experience and expertise alongside technology to develop solutions that deliver value for customers. OneSearch, our integrated AI tool for site identification and selection, is driving remarkably better delivery of studies, with a 53% reduction in the median time for site identification and a 50% reduction in the percentage of non-enrolling sites on ICON studies. Separately, we have launched a new customer-facing tool with our late-phase business called Cassandra, designed to more accurately predict post-marketing commitments. This model utilizes machine learning technologies, along with our leading expertise in Phase IV and post-marketing clinical trials, to generate insights on late-phase strategy and planning. Outside of technology, we are further investing in our differentiated capabilities with the purchase of the remaining shares in our joint venture with Oncacare, a global cancer research site network. Oncacare is uniquely positioned to increase patient engagement and oncologists' participation in clinical research through more efficient clinical trial delivery and a patient-led approach. We are excited to add Oncacare to our leading site and patient solutions business with critical therapeutic expertise and experience it brings to further enhance our offer. Moving to our financial performance in quarter one. ICON delivered solid results with a 5.3% revenue growth on a constant currency organic basis over quarter one 2022. Excluding COVID-related work on a constant currency basis, revenue increased 9% year-over-year. Gross bookings increased 6% sequentially, but a higher level of cancellations and contract modifications in the quarter resulted in net bookings growth of 3% over quarter four 2022 and a net book-to-bill of 1.22. Solid direct fee revenue growth drove gross margin expansion of 200 basis points on a year-over-year basis. We also saw another quarter of impressive growth in adjusted EBITDA resulting in an increase of 17.2% year-over-year, driven by cost management and the continued execution of our hub location strategy across global business services. Our capital deployment strategy continued as planned, with a further reduction in our floating-rate debt exposure in the quarter. Additionally, we remain active in evaluating potential acquisition opportunities that strategically align with our portfolio and further enhance our offering. We are reaffirming our full year 2023 financial guidance of revenue in the range of $7.94 billion to $8.34 billion, representing 2.6% to 7.7% growth on a year-over-year reported basis; and adjusted earnings per share in the range of $12.40 to $13.05, representing growth of 5.5% to 11.1% on a year-over-year basis. The guidance assumes double-digit adjusted EBITDA growth for the full year 2023, over 2022. Finally, I want to thank our employees across ICON for their significant contributions to our performance in quarter one. We remain steadfast in our commitment to advancing and accelerating clinical development; and we are encouraged by the value we are delivering for customers, sites and patients. I'll now turn the call over to Brendan for additional comments on our financial results. Brendan?

Thanks, Steve. In quarter one, ICON achieved gross business wins of $2.86 billion and recorded $443 million worth of cancellations. This resulted in net awards in the quarter of $2.42 billion, a net book-to-bill of 1.22x. With the addition of the new awards in quarter one, our backlog grew to a record $21.2 billion, representing an increase of 2.4% on quarter four of '22 or an increase of 8.4% year-over-year. Our backlog burn was 9.6% in the quarter, slightly down from quarter four levels as expected. Revenue in quarter one was $1.978.6 million. This represents a year-on-year increase of 4%, or 5.3% on a constant currency organic basis. Overall, customer concentration in our top 25 customers decreased from quarter four 2022. Our top customer represented 8.8% of total revenue in quarter one, and our top 5 customers represented 28.8% of revenue. Our top 10 represented 42.6%, while our top 25 represented 63.5%. Gross margin for the quarter was 29.8% compared to 29.9% in quarter four '22. Gross margin increased to -- 200 basis points over gross margin of 27.8% in quarter one of 2022. Total SG&A expense was $189.6 million in quarter one or 9.6% of revenue. In the comparable period last year, total SG&A expense was $187.9 million or 9.9% of revenue. The uptick in SG&A expense was driven by an increase in our general bad debt provision of approximately $15 million in the quarter. As Steve mentioned, this is a reflection of the challenging environment -- economic environment, that a small subset of our customers are facing. Adjusted EBITDA was $399 million for the quarter or 20.2% of revenue. In the comparable period last year, adjusted EBITDA was $340.6 million or 17.9% of revenue, representing a year-on-year increase of 17.2%. Adjusted operating income for quarter four was $368.7 million, a margin of 18.6%. This was an increase of 17.4% over adjusted operating income of $314.1 million, a margin of 16.5%, in quarter one of 2022. Net interest expense was $81 million for quarter one as rate increases drove sequential interest expenses higher as anticipated. We continue to expect the full year interest expense to total approximately $300 million in 2023. The effective tax rate was 16.5% for the quarter, and we continue to expect the full year 2023 adjusted effective tax rate to be approximately 16.5%. Adjusted net income attributable to the group for the quarter was $239.8 million, a margin of 12.1%, equating to adjusted earnings per share of $2.90, an increase of 5.1% year-over-year. In the first quarter, the company recorded $11.4 million of transaction and integration-related costs. U.S. GAAP income from operations amounted to $216.8 million or 11% of revenue during quarter one. U.S. GAAP net income attributed to the group in quarter one was $116.7 million or $1.41 per diluted share compared to $1.36 per share for the equivalent period in the prior year. In terms of other dynamics to consider for this year, we expect to see backlog conversion average 9.5% for the full year, in line with our previous expectations. As longer duration, complex therapeutic programs continue to grow as a proportion of our overall backlog. Separately, we expect to see a modest decrease in our interest expense in quarter two from quarter one levels. Net accounts receivable was $1.197 billion at the 31st of March 2023. This compares with a net accounts receivable balance of $1.182 billion at the 31st of December 2022. DSO was 54 days in the quarter, up from 35 days on a comparable basis from March 31, 2022, and flat on a comparable basis at December 31, 2022. Cash from operating activities in the quarter was $176 million. We continue to focus on management of our DSO and are encouraged with our billing levels as well as record cash collection activities, which were in excess of $1.9 billion in quarter one. However, we have more work to do in this area, and our focus will remain to ensure we sequentially improve both our collections and the add-on performance for the remainder of the year. At March 31, 2023 the company had a cash balance of $282 million and debt of $4.489 billion, leaving a net debt position of $4.207 billion. This compared to a net debt of $4.364 billion at December 31, 2022, and net debt of $ 4.581 billion at March 31, 2022. Capital expenditure during the quarter was $26.7 million. We made a €250 million payment on our term loan B facility in quarter one and ended the quarter with a leverage ratio of 2.8x net debt to adjusted EBITDA. We expect to continue our payments on our Term Loan B facility over the course of 2023, totaling approximately $800 million to $1 billion for the full year. In addition, we have negotiated an increase in our revolving credit facilities from €300 million to €500 million as a result of the increased scale of the organization. In closing, before we move to Q&A, we want to again extend our gratitude to ICON employees around the globe for their efforts and contributions throughout the quarter. Operator, we are now ready for questions.

[Operator Instructions] And the first question from John Sourbeer from UBS. Please go ahead. Your line is open.

Hi, thanks for taking the question. I guess I was wondering if you could provide a little color on what you're seeing from large pharma demand. Some of the large pharma companies have announced some optimization on R&D projects. And are you seeing any changes in demand there? And has that played into any of those increases in cancellations?

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

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

Yes, we'd expect it to continue at around the rate it is. I think we've said 9.5% for the year, mid-9s, there, so I don't think that's going to change dramatically as we've gone through the year. Brendan, do you want to...

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

Yes.

Great. Thanks for taking the questions.

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

Great. Thank you. Can -- maybe you could talk about the RFP activity by customer type. What's growing? What's not growing? And then secondly, the nonhuman primate issue, when do you think at all that will impact late-stage clinical trials? And maybe, were your customers talking about it? And is this something that you are worried about for 2024 and 2025? Thanks.

Sure. And let me take the second one first, if I could, NHP, the nonhuman primate, issue, we really haven't seen our customers or heard our customers talking about that at this point. And I don't anticipate that's going to be an issue for us, certainly in the short to medium term. If things continue or go worse on that front, there would presumably be some impact down the track, but there are different models that I think our customers can implement in this, in that space and believe that things will get sorted out well before it impacts us in the clinical space, so I don't have that as one of my top 10 risks, so to speak. That's not something that, as I say, our customers are concerned about, at least from what they've told me at the moment. In terms of RFP activity across the customer segments, as I mentioned to John's question, we've seen solid continuation on the RFPs from a large pharma point of view. I think biotech has been a bit more muted. I think we've said that. We've been consistent in what we've said over the last 12 months or so. Having said that, sequentially from the last quarter, we've seen upticks in both areas from an RFP point of view, so it seems that we're seeing some positive steps in that direction, as I say, on a sequential basis. And then across things like labs, real-world evidence, late phase, we're seeing some consistently strong trends on a year-to-year basis. So overall we see demand continuing being solid; a little bit of volatility in the biotech space, as I think I've -- we've alluded to, in terms of decision-making and RFP opportunities, but overall the market, I think, is constructive and solid.

Great. Thanks.

Thank you for your question. We are now taking the next question. Please standby. The next question from Elizabeth Anderson from Evercore ISI. Please go ahead. Your line is open.

Hi, guys. Thanks so much for the question. What -- obviously you mentioned that, on the SG&A line in the first quarter, the bad debt expense flowed through that. How are you expecting the cadence of that to continue through the back half of the year? Where are sort of like your incremental opportunities given the sort of current macro outlook? Thanks.

Elizabeth, I might take that one. Yes, we increased that, obviously, as I mentioned in the prepared remarks, $15 million, in the quarter. It was a general provision, so it was just kind of across the board, across that customer group. We don't anticipate that it will be of that quantum as we go forward. I'm sure we'll keep an eye to it. And in the normal course, it would be maybe a couple of million dollars on a quarterly basis, but we certainly don't expect that quantum to have to be repeated as we go beyond quarter one at this point. So it was, I think, appropriate. And the level of bad debt provision we have across the group, which is still only about -- in totality about $36 million, is appropriate, but again we don't expect that sequentially to be in that same ballpark.

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

Yes. I don't think we have any sort of specific comments to make on that, Elizabeth. We see ourselves competing very well. You hear the odd story about a study coming to us. It's probably, in the most recent past, from some of the smaller, mid-sized CROs than it is from the larger ones, but we do believe we're well positioned to take shares. As we all know, some of our larger competitors are going through some changes, and we do think there might be some opportunity there for us. And we'll be looking to take advantage of that, but I can't see we -- I can't say that we've had a significant share shift on that front from the larger customers or larger competitors at the present time.

Okay. Thanks so much guys.

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

Hi, good morning. Thank you for taking our questions. Starting off with a quick one for me here, I just wanted to clarify on how your expectations for FX have changed this year. Brendan, I know -- and previously you talked about it being a little less than a 1% headwind. Is there any update to that outlook given the more moderate headwind that we saw here in the first quarter? Thanks.

Yes. I mean it has gone a little positive, Max, in terms of the overall outlook at this point, so it should really be a little bit of a tailwind for the full year. At this point, we've obviously gone to 110. Or I think we're hanging in around that, that being the major currency pair. And you will have noticed that we are reaffirming our guidance, so certainly our thinking on that FX during the course of this quarter is certainly included in those numbers.

Okay. Thank you. And then following up, I believe you said, excluding COVID, growth was 9% in the quarter, which implies COVID was something like a 90 million headwind. In your commentary last quarter about COVID revenue stepping down. And I think 6% of revenue in '22 to 4% in '23 implied something like a 140 million headwind in total in 2023, so I'd be curious to hear if the headwind that we saw in this quarter was in line with your expectation. And is there any change to the thinking in terms of the total headwind this year? In other words, do we only have roughly 50 million of a headwind to work through here in the remainder of 2023? Thanks.

Lot of -- lot of headwinds there, Max. We see our COVID revenues coming down at about the rate that you outlined there. We see around about 4% to 5% this year and probably coming -- obviously coming down. The backlog, I think, is around 3%. So yes, it is they are coming down, so I think your assumptions or your expectations on that front are broadly in line with ours.

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

Okay. Great. Thank you.

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

Hi, guys. Thank you for taking the questions. Steve, and maybe Brendan can chime in as well, just one on the guidance, I guess, philosophy at a high level. I mean it seems like, as you worked your way through the quarter, cancellations maybe picked up a little bit. You have the bad debt expense. Early-stage biotech continues to be a little bit soft, I guess. I guess you guys have this great track record of execution, hitting numbers, beating numbers even. I guess, when you sit here today four months into the year, how do you think about the upside to guidance compared to whether it's January, this time last year, whatever it might be? I guess, how comfortable are you with the guide given there are maybe some cracks showing up on the macro side at a high level? Obviously the bookings held in well, so just curious as you kind of sit here and think about the guide, particularly on the top line, the confidence level there.

Yes, I'll have a crack at that, Patrick. And then Brendan can jump in. We've reaffirmed guidance, so we believe we can get to our midpoint. That is our expectation at the moment. Having said that, the macro environment is probably more challenging now than it was when we set guidance back a couple of months ago, and so there are some things we have to work through. And we're doing that very actively with the team. We're all very engaged in wanting to do that, but at the moment, we feel with a reasonable level of confidence that we can reaffirm and we can get where we want to be on the guidance side of things.

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

Yes. Understood, okay. And then Brendan, maybe on the DSO piece, obviously that's been a focus. You kind of flagged it last quarter and talked a little bit more about it this quarter. Can you just talk about, I guess, what's being done there? To your point, I don't think there was any sequential improvement. You're talking about obviously, throughout the year, we'll see some improvement there, so can you just talk about the level of focus there, any changes to customer payment terms, things like that? The unbilled side picked up a little bit, so I just want to talk through that and what the expectations are.

Sure, sure, Patrick. Obviously this is an item that is usually on my own radar. And I've been working with our teams to make sure that it makes good progress over the course of the year. What are we doing? Biggest piece, I suppose, that we've done over the last couple of quarters is making sure that we're building the correct quantums on a quarterly basis. We've seen billing now in Q4 and Q1 well in excess of our revenue, in both of those quarters, and in fact, in excess of $2 billion in each of those quarters. Effectively that's just catching up on some of the billing that, as I kind of outlined, was missed, effectively, during the first half of 2022. So we needed to get back in line with that. Those bills are out the door. We're having to -- obviously now we entered the point of making sure that we can get them in within credit terms; and of course, the ongoing conversations with our customers to make sure that they're happy with that process and that we're getting the cash in. So I think what we've done is made really, really good progress in terms of making sure that our billing is at the right level over the last couple of quarters. We've seen that our cash collections ticked up nicely from Q3 into Q4 and then into Q4 into Q1, I should say. So what we're seeing really then is making sure that we're continuing on that good progress as we go from one into two. And certainly we'd like to see some significant impacts to the DSO over the course of the year, and that's exactly what we're focused on.

Okay. Appreciate it, guys.

Thank you for your question. We are now taking the next question. The next question from Eric Coldwell from R. W. Baird. Please go ahead. Your line is open.

Thank you. Good morning. A lot of mine have been covered, but I'm going to go a little different direction with two here. First off, pass-throughs. I know you don't break out reimbursable and pass-through details. You view it all as one cohesive model, but I am curious. We've seen some volatility in that sector of revenue, that segment of revenue, more than -- I think, more than normal. And normal is pretty volatile. Are you -- can you give us some qualitative trends in terms of pass-through impact on revenue or bookings? I know you don't break it out specifically, but I'm just curious what you're seeing in the marketplace?

Yes. I think we'll -- I think, as I said to you, Eric, you're right. Pass-throughs are volatile and have been volatile. As we've kind of exited the COVID phase as well, we've had some headwinds there that have had some -- given us some challenges. I think maybe the best way to answer that question is to say that, on a direct fee basis, revenue growth was in the high sort of single digits for the quarter. And so clearly, as we've reported at about 5.3%, I think it was, constant currency, you can say that the pass-throughs were a little bit of a headwind at the quarter and probably continue to be going forward, but we're very, very confident and very happy that the underlying margin-generating revenue and business is continuing to grow at a very solid clip. And so that's -- I think that's probably the best way to address that question.

Fair enough. And then second one here, labor inflation. Obviously it's been rather high in the last couple of years. There's been good pricing opportunities the last couple of years. As we entered into 2023, I think the general expectation in the market was that getting pricing out of customers might be harder after two years of pretty good activity, but I am curious if you could give us an update on those two fronts, both the labor inflation and what you're expecting on a net realized basis this year within your staff and then how pricing opportunities are stacking up to offset those pressures. And obviously, say, this is all in the context of a very nice margin expansion, so I think we know where you're headed with this, but I'd like to get your updated thoughts.

Yes. I mean certainly -- let me start with the pricing, yes. You hit it pretty much spot on, Eric. Our pricing negotiations, I think we've talked about this on previous calls, have been relatively collaborative discussions with customers for the past couple of years. That is starting to change as we go into the post-COVID era. And customers are perhaps a little bit more, dare I say it, recalcitrant in terms of working with us on not just inflation increases, but also -- there's a level of sort of market-related increases that we have some good data on, but of course, that's always a discussion. And it's probably an increasingly challenging discussion going forward, so I'd say that, that particular aspect of our business has probably become a bit more challenging from a pricing point of view. But we continue to provide good data on not just the inflationary environment but the market environment. And customers are smart. They do understand that we need to paymarket-related salaries and all that good stuff. So it's a constructive conversation, but probably not as easy but these things are never easy, but it wasn't -- it's not as -- it's probably a bit more challenging than it was a year or two ago. In terms of wage inflation, we -- again that one has been a bit more challenging as well, as we all know, inflation continues. We've seen it in around about the 4% to 5% level across the organization. Some countries, of course, are more than others. And of course, -- but so that's been the level, but I would say that the pressure in the labor market has probably attenuated a little bit over the last sort of six months, 12 months or so. We've seen our retention levels continuously tick up over the last few -- really last 15, 18 months now. And sort of we're up well above -- we're getting well back to pre-COVID levels now, in fact even ahead of pre-COVID levels, so we've made some good progress in that front. And so we are finding, I think, that the labor market, the sort of red hot labor market as it was perhaps during COVID or post COVID, is sort of easing a little bit now. And we're finding that our salary merit increases and bonuses have been -- had gone down well with our employees and that we're able to retain them and give them opportunities. So overall, I think both environments are challenging, perhaps more so than the normal times, but we're managing, I think, pretty well.

That will be all for me. I just want to say congrats on a steady report in pretty choppy sea. So keep it up. Thanks guys.

Thanks Eric.

Thank you for your question. We are now taking the next question. Please standby. The next question from Sandy Draper from Guggenheim and Partner. Please go ahead. Your line is open.

Thanks very much. Yes, I will sort of echo what -- well, two things of what Eric just said. One, congrats on nice quarter, but also a lot of my questions have been asked and answered, so maybe for me and just to sort of head potential questions for me off of the past. In your slides, you just -- you called out the 2022 revenue by customer segment. And I think there could potentially be some misunderstanding. You call out small biopharma is 33%, but in the footnote that's still companies greater -- that 76 are -- or below. So they're still revenue producing. Could you just remind us what percentage of your customer base is pre revenue? Just so people don't get the sense of, oh, wow, 33% are biopharma out there looking for funding tomorrow.

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

Okay, great. That's -- I appreciate that clarification. And then maybe my unrelated follow-up, just longer term thinking about your comments about backlog burn. Certainly I understand, as you're getting through, the COVID is burning fast. And obviously, depending on where pass-throughs come in, you're seeing it step down, but sort of stabilize around sort of 9.5-ish. Is the mix of business such that, if it stayed like this, you would see a multiyear just a little bit of step down? Or are we now sort of at a level that, okay, we're stable here? And unless there are changes, it's going to say, plus or minus, stay in this 9.5 type level longer term. Or are we back into a long-term slightly declining trend? Thanks.

Yes. I mean, Sandy, that's a tough one to answer. It really depends upon the sorts of projects we can win and get into the portfolio and then start up. Obviously oncology is about 40% of our work. That tends to burn a bit slower, but when we get some vaccine, we come in that -- will burn faster. So we would anticipate and we're certainly looking at keeping our backlog burn number around about the mid-9s. 9.5% is our expectation. I think we can do that. It certainly has ticked down a little bit since and on the post-COVID period. And that is because those vaccine studies have tended to go away; and we're back into the more sort of routine oncology, slower studies. There are other therapeutic areas that would burn a little faster as well. We believe there are some opportunities in the metabolic area with some of the GLP inhibitors coming through. And that -- those sorts of trials, we believe, can -- so there are some positives. And there's always some negatives on this. I think the best way to think of it is mid-9s as in the longer term.

Okay. Great. Thanks so much.

Thank you for your question. We are now taking the next question. Please standby. The next question from David Windley from Jefferies. Please go ahead. Your line is open.

Hi, thank you very much. Thanks for taking my question. Kind of a different version of the much-asked burn question. Steve, your comments -- in your prepared remarks, you talked about changes in decision-making cycle times, which is I don't think the first time you've talked about that. That's kind of been an ongoing, kind of building issue. We are seeing, in kind of industry clinical trial start data, this large, building bucket of trials that are really not moving to start, which would seem to kind of square with what you're talking about. Would you -- I guess 2-part question here. Would you attribute that to mostly small biotech and mostly kind of challenges in funding? Or are there other issues there? And then the second part of the question is how are you guys thinking about risk adjusting your revenue forecast and/or your backlog for this deeper deliberation about what clients want to move forward? Thanks.

Yes, I'll take the first part, David. And Brendan might have a crack on the revenue forecasting side of things. I think there's a good chunk of that, those trials that are not starting as fast as you like, as we'd like is in the biotech funding area. But we have plenty of customers who come to us and who want to get proposals and budgets for their trials who haven't raised the money. We're very careful, of course, about putting those in our backlog, but there's certainly a component of the industry, I think, of -- and that tends to be in the small -- I mean it's not exclusively. I must say it's not exclusively in the biotechs and emerging companies, but that I would say would tend to be the most. Interestingly, as we look across our cancellations, they were slightly elevated for the quarter, but as we look across that, they really came about 50-50 from our larger pharma and our biotech. So if you look at it on a cancellation basis, there wasn't any sort of particular predominance towards the biotech sector. So take from that what you will. Maybe, on the forecasting stuff, Brendan?

Yes. I suppose, on that one, Dave, we constantly look on a quarterly basis, of course, at our forecast. And that's obviously deliberating about when the first patient in. When are we going to get going on the actual project? And of course, we're constantly thinking about what the head count demand. In fact, we'll need to be able to put on to our organization to be able to deliver that revenue in -- over the course of the year. So certainly, on a quarterly basis, yes, we are having very active conversations with our project managers, with our relationship managers, with our exact sponsors and indeed with our customers about the timing of their projects. And so really it's only projects that have good visibility that come into that forecast. And we really have a very, very strong sense that they have funding in place and all of those pieces to actually go ahead, so of course, that then informs our guidance-setting process as we go through on a quarterly basis. So I feel like we have a fairly robust idea and picture of what styles are going to start and what trials are going to be tenuous.

Got it. And then my second question, if I can sneak this one in, on cash conversion. I appreciate you addressed this a little bit before to one of the prior questions, but I think, on the last quarter, you talked about having improved your billings in the third quarter and fourth quarter. I guess I thought that, albeit to be fair, you said first half. I thought that maybe the third quarter billings from last year would start to see maybe a more impactful move on your AR. And I guess I'm just kind of fishing for are you getting pushback in terms of customer's ability or willingness to pay on time? Or is it simply just customer's weighting to the -- whatever the term is, 60-, 90-, 120-day term, on the payment and that hasn't gotten to -- we haven't gotten to that point yet.

It's predominantly the latter, Dave. There's always going to be some conversations you have to have with customers to make sure that they pay their bills and that they're well-funded and all those kind of points, but as we said, we didn't uptick our billing in Q3. Our cash collections in Q1 weren't significantly of the event that we built in Q3. So we did see a nice uptick, albeit we need to continue that uptick from Q3 to Q4; and likewise, the cash collections from Q1 to Q2, so still an area of focus. I think still we have done decent billing. And we should be able to get the cash in, but still very much focused.

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

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

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

Well, I think we talked about an uptick in demand across large pharma. And so decent chunk of full service in that, but the -- most of our uptick in full service is really within the biotech and the more mid-sized areas in terms of uptick in demand. The large pharma market has been strong, but there's a good component of FSP in that market as well, Justin. So I hope -- I don't think -- I don't mean to lead anyone astray on that one, but it's really large pharma, we've seen good, solid market demand RFP-wise on that one. And that -- there is a component of both FSP and full service in that, whereas, of course, in the biotech and the mid-size it's much more predominantly full service. And that market has been a little bit more, as I say, volatile. So you put it all together. And I think we see good demand for both and even for hybrid opportunities as well. And we see ourselves as well positioned to be able to accommodate either of those three models really, if you think of full service, FSP and the more hybrid ones.

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

I don't think we've seen any sort of material impact on pass-throughs through the shift to sort of hybrid models or DCTs. I mean DCTs will still have significant pass-throughs associated with them. I'm not sure I see too much difference between that and a full-service type of opportunity. Hybrid is perhaps -- I mean the FSP traditionally has a lower proportion of pass-throughs, so hybrids are probably towards -- the pass-through proportions are probably towards the lower end, not as high as, say, a full service. But -- so to the extent that, that impacts, we'll see that, but it's the number of DCT trials we do is fairly limited. Most trials have a DCT component, but there are very few pure DCT trials. And as I said, we don't really see any impact of -- on the proportion or the amount of pass-throughs on those trials at this point.

Got it. Thanks so much.

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

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

See Luke, that's -- I mean, how long is the piece is string, want to respond to that one. That's a hard one to answer. I think it's fair to say that we are seeing some delays. And in terms of the percentages and the impacts, it will have an impact. There's no question about that. To the extent that it's going to continue to the percentage of trials that are in that -- it's not insignificant. And we are seeing, as I said, some delays. And we're looking at it in terms of decision-making and customers being very careful about what services they want and what trial they want to do. And that's perhaps some opportunity in terms of consulting with them to make sure they're doing the right trial and that they don't do anything that's too big or too small or they do the right number of trials and all that. So there's, as I say, some opportunity, but they are being very considered. And it is leading to some delays, particularly with those smaller companies who have got the one or two drugs to get to market. It's really hard to quantify the impact of that on our numbers at this point, but it isn't nothing. I'll put it that way.

That's helpful. And let's turn the page here to your -- to the business. So the One Source (sic) [OneSearch] continues to be a differentiator for you guys. Can you update us on how much of the backlog includes -- or how many of the wins are now including One Source (sic) OneSearch for you guys? And I assume that this is a premium service.

Yes. It's OneSearch, actually, Luke...

I'm sorry, yes. I was thinking of something else.

This is our proprietary application that allows us to identify the right sites to be in a trial and making sure that -- and the benefits we're seeing, as I said, is faster selection, faster identification and faster setup. But probably most importantly, fewer sites that have zero recruiting patients or even one patient -- as you can imagine, in our business, getting a site up that has -- that recruits but doesn't recruit or even recruits one patient can be much more problematic than -- obviously than not getting that site up at all or getting sites that recruit five or 10 or a critical number of patients. So the benefits are there from an efficiency point of view. We apply that tool now to all the studies we do, but it's only been routinely applied for the last probably 12 to 18 months. And so the benefits are really -- as I alluded to in my comments, the benefits are really just starting to flow through. And these trials take a while. And we measure this 0, whether there's zero recruiting, and what's been at the end of the trial. Most of these trials take at least a year to two years and sometimes three, so many of the trials that we started using this technology are still in process. It's still working through. What I was alluding to in my comments is we're starting to see those tangible benefits really impact our portfolio of work. And so I'm really pleased with the technology. And we've been able to bring in some different data sources as well which help us to identify sites that have a greater propensity to recruit diverse patient populations. That's a big issue with the regulatory authorities now. We need to be recruiting more diverse patient populations. And so the tool is also allowing us to identify sites that can help us to do that as well. So it has a number of benefits, not just speed but also diversity and quality.

All right, great. Thanks.

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

Great. Thanks for taking my questions. So we've been getting a lot of questions around the read-through to CROs from the bearish commentary from some of the bioprocessing companies on their SMID biotech customers of late. Can you explain your level of visibility into the SMID spend versus some of those bioprocessing players? Those companies largely took down their expectations for the year after seeing SMID spend trends over the first three months of this year, but you've just said here today that SMID biotech RFPs improved sequentially and are reiterating guidance, so I'm just kind of curious on the difference in commentary there.

Yes. As I said, Casey, we see -- we've seen sequential uptick. So we see an underlying pretty reasonably constructive market in the biotech area. It's not to say there's not some volatility out there. Funding challenges are in existence. They are taking more time. You've heard all of that. But overall, these are the companies that are producing or finding the drugs. This is where the innovation is happening in our industry. And so we really want to engage with them because they often become part of our large pharma partners. As well as the Seagen, Pfizer acquisition, I think, during the quarter, that happened. And these are the companies that really have -- are really bringing these really new and improved and fantastic drugs to market, so being part of it is important for us. We're there for the long term. There is some volatility in the market, no question about that. They are, by their very nature, higher-risk companies. They only have sometimes one or two drugs, sometimes. And so there's an element of volatility that we're all working through, but overall and on the underlying market and the underlying business, we believe, in the biotech space is solid, is strong. And I believe we'd probably hit the nadir in terms of the biotech funding area. I think we can see some positive noises and some positive funding moves going forward. So I'd like to think that, in 12 months -- it won't be in the next 6, I don't think, but in the next 12 months or so, we'll really back on track with respect to a solid and stable biotech funding environment, particularly as we see things like interest rates and, hopefully, some of the macroeconomic challenges dissipate. We can be in a good place. So as I say, short-term volatility, short-term challenges next 12 months or so, but I think in the longer term we feel we're in a very good place with this market. And we feel the market is very solid.

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

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

Thank you for your question. We are now taking the next question. Please standby. The next question from Derik De Bruin for Bank of America. Please go ahead. Your line is open.

Hi, great. Thanks for squeezing me in. So a lot of what -- a lot has been asked, but I just wanted some color. Is there any particular therapeutic area that is on some of the early-stage biotechs that are delaying, for example, cell and gene therapy or something like that? Just anything that's sort of common about it? And then I actually have some financial statement questions.

Sorry. The question was around cell and gene therapy...

No, I was basically just asking if you're seeing any therapeutic area in some of these early-stage biotechs, this is one therapeutic area that's getting delayed, right. For example, cell and gene therapy. I'm just sort of curious as to if there's any common themes for the ones that are getting delayed. Or are they just all just early stage and have cash issues?

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

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

Yes. I don't think -- I think probably the first quarter numbers aren't a bad proxy in terms of what we're expecting. We might see some of the integration costs to tail off a little bit as we go through the course of the year. But the dollars that we have in the first quarter, probably aren't a million miles off, certainty on something like stock-based comp that will nearly just be take that number and multiply it by four. So integration costs, we expect to see run off a little bit. And on restructuring, well, we'll keep an eye to that as we go through the course of the year. We're constantly looking at our office infrastructure. That was a large part of the restructuring cost in the current quarter, so that's something I think that will be in the same ballpark. And we'll keep an eye to that. So that might move around a little bit, but the other two, one, decreasing slightly. The other one would be relatively stable.

Great. Thank you very much.

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

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

Tim, I'm not sure you should be overly concerned about it from our point of view. I mean I think we see, as I say, some of our competitors going through some changes and expected changes. And that's all good for them. And -- but customers are relatively conservative. And share shifts don't happen quickly in our business. I mean it's a relatively conservative industry and we have -- we all have partners and relatively long-term partnerships that play out. And these agreements are usually in place for several years. So certainly nothing dramatic would be my expectation. I think what I -- so from that, on a large-scale competitive point of view, I think what we've seen more recently is some pickup in share from some of the more -- the smaller, mid-size competitors. And so we've been fortunate, I think -- as I think about rescue opportunities or rescue trials that would come into our business. And we've seen several come in from some of the smaller players, smaller to mid-size players. I'll put it that way. And so that's probably the more opportunity for short-term gain. The long -- it's more over several years, I think, to make any adjustments on the larger competitors.

All right. No, I appreciate that. And thank you for introducing me the term recalcitrance by the way. My follow-up is just, Brendan, I think we'd all appreciate if you're willing to provide a bit more visibility on how order trends varied by -- on a month-by-month basis in 1Q. Appreciate the commentary, a little peek through into April, but that would be great if you could help us out or at least tell us if there's any volatility across the months within the quarter.

In business development, Tim, is it?

Yes, yes. Thanks.

Yes. I mean every quarter has look to it, in all honesty, there are some quarters where you come in strong at the start of the quarter. And there's also quarters where you're finding it out till the last minute. So I don't think there's any -- this quarter, we started off well. We had a solid quarter throughout. As Steve mentioned, the cancellations were such that we would have liked, but still very solid overall performance. So I don't think there's a particular trend. Yes, as I said, we started well. And that was more of the trend this quarter, but it changes from quarter-to-quarter.

All right. Appreciate it. Thank you.

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

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

That concludes the conference for today. Thank you for participating.