Accounting adjustments for last year’s acquisition of ClinPhone clouded Parexel’s financial results for the fourth quarter of fiscal 2009, as operating income dropped by 27.5% on a 9.1% fall in service revenues.
Without the extra charges, earnings per share (EPS) for the quarter ended 30 June 2009 were in line with Parexel’s projections at the third-quarter stage, although Q4 service revenues fell short of the company’s own forecast. Looking ahead, the US-based contract research organisation (CRO) says it is entering fiscal 2010 “with caution”, although a gradual improvement in new business activity is expected during the second half of calendar 2009.
The accounting changes, which Parexel stressed did not have any impact on fundamentals, related to the ClinPhone Interactive Voice Response (IVR) component of the company’s technology division, Perceptive Informatics, and to purchase accounting for ClinPhone, the UK-based clinical technology specialist acquired by Parexel in August 2008.
The problem was that Parexel had been recognising revenues and direct costs for ClinPhone IVR contracts during the ‘start-up’ period for the contracts, rather than the estimated ‘hosting’ period for each study once an application went live. This meant certain IVR-related start-up revenues and costs originally recorded during the first three quarters of fiscal 2009, as well as amounts expected to be recorded during the fourth quarter, needed to be deferred.
Income hit
The adjustments reduced consolidated service revenues by US$16.9 million, costs by US$4.9 million and operating income by US$12.0 million in the fourth quarter of fiscal 2009 and the full year.
Taking these charges into account, consolidated service revenues for the fourth quarter (which excluded reimbursement revenues) were US$247.4 million, compared with US$272.2 million for the same period last year. Quarterly operating income was US$19.5 million against US$26.9 million in the year-before period. Diluted EPS came in 74.4% lower at US$0.11.
Without the charges, consolidated service revenues would have been US$268.4 million, operating income US$35.5 million and diluted EPS around US$0.27, Parexel reported. Back in April, the CRO forecasted diluted EPS of US$0.26 to US$0.28 for the fourth quarter, on service revenues projected at US$271-US$277 million.
Analysts polled by Thomson Reuters had also been expecting EPS of US$0.27, although Parexel missed the consensus revenue estimate of US$274.8 million.
In the full year, consolidated service revenues, including the accounting adjustments, rose by 9.0% to US$1,050.7 million, while operating income was 12.8% lower at US$75.6 million. Diluted EPS fell by 39.3% to US$0.68.
Stripping out the accounting adjustments gave full-year service revenues of US$1,071.7 million, operating income of US$91.6 million and EPS of around US$0.85. At the third-quarter stage, Parexel was predicting EPS of US$0.83 to US$0.85 on consolidated service revenues of US$US$1,075-US$1,080 million for fiscal 2009.
Negative headwinds
On top of the accounting charges, service revenues in the reporting period were held back by “headwinds emanating from the broader economic environment, including the year-over-year negative impact of foreign exchange”, noted Josef von Rickenbach, chairman and chief executive officer of Parexel.
Nonetheless, cost controls and efficiency improvements had enabled Parexel to meet its EPS guidance for the fourth quarter (ignoring the special charges) and the CRO was “encouraged by a sequential increase in demand during the June quarter”.
Parexel reported a backlog of US$2,176.4 billion for the end of fiscal 2009, up by 5.7% on the year-end backlog for fiscal 2008. Last year’s figure included gross new business wins of US$316.6 million, US$48.5 million in cancellations, a positive impact of US$123.9 million from currency translation and a negative impact of US$4.6 million related to an adjustment in ClinPhone’s backlog at the time of acquisition.
The net book-to-bill ratio was 1.08 for the fourth quarter and US$1.14 for the full year.
With the duration of the worldwide recession “clearly still undetermined at this point in time”, and although Parexel has developed plans to manage in the current environment, “we enter Fiscal 2010 with caution”, von Rickenbach commented.
“Nevertheless, over the past few months, we have experienced an increase in the value and volume of opportunities that are in the proposal pipeline, which leads us to expect a gradual improvement in new business activity over the second half of calendar year 2009.”
The aforementioned accounting changes are expected to shave US$16-US$18 million off consolidated revenues and US$0.13 to US$0.14 off diluted EPS in fiscal 2010. Taking these factors into account, Parexel is looking for consolidated service revenues of US$1,120-US$1,150 million and diluted EPS of US$0.85 to US$0.95 in the current fiscal year.
In the first quarter of fiscal 2010, the company expects to report consolidated service revenues in the range of US$263 million to US$268 million, and earnings per diluted share of US$0.16 to US$0.18.
Morningstar analyst Jeffrey Stafford commented: “Project delays and an uncertain environment continue to dampen Parexel’s results. We expect weakness will continue into fiscal 2010, but we expect demand will return to more normal levels after the current round of pharma mergers is complete.”
