ICON Public Limited Company (NASDAQ:ICLR) Q3 2023 Earnings Call Transcript

ICON Public Limited Company (NASDAQ:ICLR) Q3 2023 Earnings Call Transcript October 26, 2023

Kate Haven: Good day, and thank you for joining us on this call covering the quarter ended September 30, 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's 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.

A research doctor, looking intently at their microscope as they try to decipher the mysteries of immuno-oncology.

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 excludes stock compensation expense, restructuring costs, foreign currency gains and losses, amortization and transaction-related and integration-related costs in their respective tax benefit. We will be limiting the call today to 1 hour and would therefore ask participants to keep their questions to 1 each with an opportunity for a brief follow-up. I would now like to hand the call over to our CEO, Dr. Steve Cutler.

Steven Cutler: Thank you, Kate, and good day, everyone. ICON delivered impressive results in quarter three as we continue to work as a trusted partner for our customers in bringing innovative solutions to achieve their clinical development goals. The industry-demand environment in clinical development remains healthy with a solid level of opportunities present across all customer segments. Overall RFP activity continued to improve in quarter three, with growth in the high single digits on a trailing 12-month basis. Net bookings increased 10% year-over-year, resulting in a good book-to-bill of 1.26 times revenue in the quarter. Historically, we've seen a very close correlation between 606 and 605 net business wins, and that was the case this quarter as well.

This has helped us to drive strong direct fee revenue growth and our margin progression. We are encouraged by the positive trends we are seeing across our business that have continued into the beginning of quarter four, and we remain cautiously optimistic that this trend will continue as we close out this year. With that said, we're mindful of macroeconomic factors driving uncertainty in a number of areas, including biotech funding levels, the interest rate environment, and evolving geopolitical concerns, all of which impact our industry. As customers face uncertainty or potential challenges in their business, whether it be from macroeconomic concerns, changes such as the Inflation Reduction Act, or internal cost pressures, our role as a strategic partner becomes even more critical.

We are constantly engaging with our customers in identifying solutions that accelerate clinical development while driving greater efficiencies across their portfolios. We do this in a number of areas, including implementing technology solutions, advanced data analytics, and streamlining rate limiting development activities. We believe this backdrop presents ICON with even more potential opportunity in terms of outsourced work over time. Given the scale of the company and the range of our customer base, we are well diversified and embedded from a customer and service segment perspective, ensuring that the impact of any market changes can be managed effectively. To that end, we are seeing a significant level of demand with customers seeking novel solutions to customize a development model that is built on flexibility and efficient delivery of services.

As we've noted before, this often takes the shape of a blended model of development, incorporating elements of full service and functional solutions. Our competitive position has never been better in being able to address our customer needs in this regard. The experience, depth, and breadth of our capabilities across full service and functional solutions is unmatched in the industry. In addition, our market leadership extends beyond the services and solutions offered to the stability, tenure, and consistency of our team at an executive and operational level. This has allowed us to build and further develop strong customer relationships, leaving ICON well placed to partner with customers in a more strategic manner. We also retain our singular focus in clinical development, which we believe provides improved project delivery for our customers and is a key differentiator in our industry.

Our therapeutic depth and experience has led to continued success from a new business perspective. As we announced in September, we are partnering with BARDA as part of Project Next Gen to execute a phase two multi-year clinical trial to evaluate the effectiveness of next generation COVID-19 vaccines. We were selected for this important trial due to our leading experience in vaccine development and specifically in effectively executing recent first generation COVID-19 trials. In the current year, we expect our COVID related business to be in the range of 3%-4% of total revenue and would anticipate that on a go forward basis would continue to represent a similar percentage of total revenue. We have continued our focused investments to drive forward our strategy in becoming the world's leading healthcare intelligence organization.

One critical element we've focused on is in improving overall patient access and engagement to make it easier for the site and patient to participate in clinical research. We have recently partnered with LightShip, a clinical trial provider that utilizes decentralized solutions to bring the trial to a patient either through a mobile research unit or nursing team at a patient's preferred location. We believe LightShip's capabilities will nicely complement our decentralized trial offering and act as an extension of our broad, Accellacare site network. This approach to development not only improves overall patient access but importantly it has the potential to reach more diverse patient populations as well. An issue that is an increasingly important factor in clinical development.

We recently completed our annual celebration of our own it culture at ICON engaging every single employee across our organization, across time zones and global locations. We highlight the important work that we do in advancing life-saving products to the market, a noble mission that unites our dedicated workforce and underpins the unique culture and pride that differentiates our organization. A great testament to this point was the recognition that ICON received in September in being named as one of the world's best companies in 2023 by time. This inaugural list is a compilation of the most outstanding global companies across a number of industries. The analysis ranked companies in three key areas, employee satisfaction, revenue growth and sustainability.

We were proud to be recognized amongst this prestigious group of companies as the top ranked CRO on the list. This award is reflective of the increased scale of our organization and our commitment to making ICON the customer partner and employer of choice within our industry. Moving to our financial performance in the quarter, ICON delivered strong results with 6% revenue growth over quarter three 2022. Directly revenue growth was again in the highest single digits on a year-over-year basis. Net bookings were also strong across our business segments, reaching a record level in quarter three and driving 10% year-over-year growth in our total backlog. Solid direct fee growth and our industry leading cost management supported our double digit adjusted EBITDA growth, resulting in a margin of 21% in the quarter.

This was driven by a continued increase in gross margin, as well as further leverage in our SG&A expense, which totaled 8.8% revenue in quarter three. The adjusted EBITDA margin level of 21% was set as a midterm target for 2025 back in early 2022, and I commend our team for the impressive performance to deliver on this target well ahead of our initial plan. Further, despite the ongoing pressure on a year-over-year basis from increased interest expense, we continue to grow our earnings per share in quarter three with a notable 10% increase over quarter three 2022. From a capital deployment perspective, we executed on our strategic priorities as previously outlined, with a focus on continued debt pay down, as well as a return to our M&A strategy, focused on tucking in acquisitions in strategically important areas of our portfolio.

In October, we closed a small but strategic acquisition of Phillips Pharma Solutions, a leading provider of medical imaging and cardiac safety monitoring solutions. This will enhance our medical imaging experience and capabilities, particularly in the therapeutic areas of cardiovascular and metabolic diseases. It also brings new core laboratory services to ICON, positioning us well to grow further in both existing and new customer relationships. While this is a small acquisition for ICON, expected to contribute less than $10 million in the fourth quarter, it's synergistic with our business in providing cardiac services that are needed on clinical trials. We expect to continue evaluating further strategic acquisitions as well as opportunistic shepherding purchases as we move into 2024.

I was also pleased with our recently announced return to an investment-grade debt rating by S&P Global Ratings. While we are still in discussions with other rating agencies, I'm confident that we will be able to restructure a significant portion of our variable rate debt within the next six months or so, which will, along with continued debt pay down, lead to significantly reduced interest expense in 2024. We will provide more details on this as we make further progress. With our performance through quarter three, we are reiterating our financial guidance for the full year 2023. We expect revenue to be in the range of $8.07 billion to $8.21 billion, an increase of 4.3% to 6.1% over the prior year. Additionally, we expect adjusted earnings per share to be in the range of $12.63 to $12.91, representing an increase of 7.5% to 9.9% over the full year 2022.

Before I close out my comments, I want to recognize our colleagues in Israel and the conflict area in the Middle East during this very difficult time. The safety and well-being of our employees is and will always be our number one priority, and we are actively supporting affected employees as well as customers in that region. We remain focused on ensuring continuity of our business operations and customer studies to the best of our ability, and we will continue to support our dedicated team who have shown great resiliency during these challenging times. I'll now turn it over to Brendan for additional comments on our financial results. Brendan?

Brendan Brennan: Thanks, Steve. In quarter three, ICON achieved gross business wins of $3.06 billion and recorded $474 million worth of cancellations. This resulted in an impressive level of net awards in the quarter of $2.58 billion and net booked a bill of 1.26 times. With the addition of the new awards in quarter three, our backlog grew to a record $22.2 billion, representing an increase of 2.6% on quarter two of 2023 or an increase of 10% year-over-year. Our backlog burn was 9.5% in the quarter in line with quarter two levels as we anticipated. Revenue in quarter three was $2.55 million. This represented a year-on-year increase of 5.8% or 4.8% on a constant currency organic basis. Overall, customer concentration in our top 25 customers increased slightly from quarter two 2023.

Our top customer represented 8.5% of total revenue in quarter three, and our top five customers represented 25.7%. Our top 10 represented 40.4%, while our top 25 represented 62.2%. Our customer base remains well diversified with a number of scaled partnerships, resulting in a lack of particular concentration across our top customers. Gross margin for the quarter was 29.8% compared to 29.6% in quarter two 2023. Gross margin increased 30 basis points over gross margin of 29.5% in quarter three 2022. Total SG&A expense was $180.1 million in quarter three or 8.8% of revenue. In the comparable period last year, total SG&A expense was $192.9 million or 9.9% of revenue. The year-over-year reduction was driven by successful delivery of cost synergies related to the PRA transaction as well as further implementation of our global business services model.

Adjusted EBITDA was $432.5 million for the quarter or 21% of revenue. In the comparable period last year, adjusted EBITDA was $379.6 million or 19.5% of revenue, representing a year-over-year increase of 13.9%. Sequentially, adjusted EBITDA margin improved 50 basis points over quarter two margin of 20.5%. Adjusted operating income for the quarter three was $401.1 million, a margin of 19.5%. This was an increase of 13.7% over adjusted operating income of $352.7 million, a margin of 18.2% in quarter three 2022. Net interest expense was $78 million for quarter three. We continue to expect that full year interest expense to total approximately $310 million in 2023. The effective tax rate was 15.2% for the quarter. We continue to expect the full year 2023 adjusted effective tax rate to be approximately 15.5% down from our full year 2022 effective tax rate of 16.5%.

Adjusted net income attributed to the group for the quarter was $273.9 million, a margin of 13.3%, equating to adjusted earnings per share of $3.30, an increase of 10% year-over-year. In the third quarter, the company recorded $10.4 million of transaction and integration related costs. U.S. GAAP income from operations amounted to $264.3 million or 12.9% of revenue during quarter three. U.S. GAAP net income attributed to the group in the quarter three was $163.7 million or $1.97 per diluted share, compared to $1.94 per share for the equivalent period in the prior year. Net accounts receivable was $1.129 billion at 30 September 2023, as compared with a net accounts receivable balance of $1.171 billion at the end of quarter two 2023. DSO was 49 days at September 30, 2023, a decrease of three days from June 30, 2023.

Cash from operating activities in the quarter was $341.5 million. Free cash flow was very strong in the quarter three, increasing impressive 82% sequentially. We were pleased with the improvements in DSO and quarter three and expect to make further progress in quarter four as our focus on billing levels and cash collection activities continue. At September 30, 2023, cash equivalents totaled $315 million and debt totaled $4.04 billion, leaving a net debt position of $3.73 billion. This compared to a net debt of $4.04 billion at June 30, 2023 and net debt of $4.24 billion at September 30, 2022. Capital expenditure during the quarter was $29.1 million. From a capital deployment perspective, we made a payment of $300 million on our Terminal B facility in quarter three and ended the quarter with a leverage ratio of 2.3 times net debt to adjust the deep end.

We expect to make another payment on our Terminal B facility in quarter four, which would result in total payments for the full year in the range of $800 million to a billion dollars. We were pleased to receive an upgrade in our credit rating from S&P Global Ratings earlier this month to an investment rate rating with a stable outlook. This upgrade was based on our strong operating performance and commitment to delivering de-leveraging since the acquisition of the PRA Health Sciences Acquisition in July 2021. As we have done in the past, we will plan to issue full year guidance for 2024 and early in conjunction with our presentation at the JPMorgan Health Care Conference. Finally, our key assumptions behind the full year guidance remain in place, an effective tax rate of 15.5%, free cash flow target of circa a billion dollars, cap expense of circa $150 million, and interest expense of circa $310 million for the full year 2023.

Before we move to Q&A, we want to thank all of the employees of ICON for their efforts in delivering our continued performance in Q3. Operator, we are now ready for questions.

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