ICON PLC

NASDAQ:ICLR

Earnings Call Transcript 2018-Q2

[Jonathan Curtain, Investor Relations]

Good day ladies and gentlemen. Thank you for joining us on this call covering the quarter ended June 30, 2018. 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. 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.

The company's filings with the Securities and Exchange Commission discuss the risks and uncertainties associated with the company's business.

This presentation includes selected non-GAAP financial measures. For a presentation of the most directly comparable GAAP financial measures, please refer to the press release statement headed Consolidated Income Statements Unaudited U.S. GAAP. 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.

We will be limiting the call today to one hour and would therefore ask participants to keep their questions to one each with an opportunity to ask one related followup question.

I would now like to hand over the call to our CFO, Mr. Brendan Brennan.

[Brendan Brennan, Chief Financial Officer]

Thank you, Jonathan. A reminder, January 1, 2018, the new revenue recognition standard ASC 606 became effective for ICON. Having adopted the cumulative effect transition method, prior comparisons have not been restated under this new standard. Instead, we feel that providing comparable Q2 2018 financial results under the previous revenue recognition standards is the best way to evaluate our performance during this transition period. Whilst the comments may incorporate the impact of ASC 606, Steve will focus his comments on our performance excluding the impact of ASC 606.

In quarter 2, we achieved strong gross business wins, excluding the impact of ASC 606, with $720 million, with cancellations of $120 million. As a result, net awards in the quarter were a new record $600 million, resulting in a book-to-bill of 1.27 times. This means our trailing 12-month book-to-bill is a very healthy 1.29 times.

With the addition of these new awards, our Q2 2018 backlog, excluding the impact of ASC 606, grew to $5.2 billion representing a year-over-year increase of 16%. Our top customer represents 10.4% of this backlog, down from 11.3% at the end of quarter two last year. Reported revenue in quarter two were $641.6 million, excluding the impact of ASC 606, revenue was $473.9 million. This represents year-on-year growth of 10% or 8% on a constant currency basis and 2% on a constant dollar organic basis.

Excluding the impact of ASC 606, our customer concentration with our top customer in the quarter represented 13.5% of revenue compared to 20% of revenue last year. Our top 5 customers represented 39.1% of revenue compared to 41.2% of revenue last year. Our top 10, represented 54.2% of revenue compared to 55% of revenue last year, while our top 25 customers represented 70.2% of revenue compared to 73.4% of revenue last year.

In quarter two, reported gross margin was 30% compared to 30.6% [ph] in quarter one. Excluding the impact of ASC 606, group gross margin for the quarter was 40.9%. This compared to 41.2% last quarter and 42% in the comparable quarter last year.

Reported SG&A for the quarter, was 12.6% as compared to 13% in quarter one. Excluding the impact of 606, SG&A was 17.1% of revenue. This compared to 17.5% last quarter and 18.8% in the comparable period last year. This was as a result of our continued leverage of our global business support model.

In quarter two, we reported operating income before the nonrecurring charges of 14.7% or $94.4 million. This compared to 14.8% or $91.7 million in quarter one. Excluding the impact of ASC 606, operating income before nonrecurring charges for the quarter was $96 million and operating margin of 20.2%. This compared to 20.1% last quarter and 19.9% in the comparable quarter last year.

As reported, net interest expense for the quarter, was $2.3 million, and the effective tax rate for quarter two was 10%. Net income reported before nonrecurring charges was $82.9 million or 12.9%. This equated to $1.51 in diluted earnings per share before nonrecurring charges. A 6.3% increase on Q1 EPS of $1.42. Excluding the impact of ASC 606, net income before nonrecurring charges was $84.3 million, a margin of 17.8%, equating to diluted earnings per share of $1.54. This compares to earnings per share for $1.44 last quarter and $1.31 comparable quarter last year, an increase of 17.6%.

DSO in the quarter was 49 days, which compared to 51 days last quarter and 53 days in the comparable quarter last year. Cash generated from operating activities for the quarter was $32.7 million and capital expenditure was $8.9 million. At June 30, 2018, the company had net cash of $23.9 million compared to net cash of $4.6 million at March 31, 2018, and net debt of $33.8 million at the end of June '17.

During the quarter, we took a restructuring charge of $12.5 million, as we continue to improve the efficiencies of our operating model. This restructuring plan reflected rationalization across the business to improve resource utilization and their office footprints. As a result of this, our GAAP EPS was $1.31 compared to $1.51 on a non-GAAP basis.

As a reminder, I have dealt with the new revenue standard. Steve will focus his comments on our performance, excluding the impact of ASC 606. And with all of that said, I would like to now hand over the call to Steve.

[Steven Cutler, Chief Executive Officer]

Thank you, Brendan. Fueled by strong outsourcing trends and a buoyant by a funding environment, market fundamentals remain very positive for the CRO industry. The momentum we saw during 2017 has continued into 2018. And during quarter two, we've again seen strong level of market demand across all of our business segments.

Our backlog in the quarter grew 16% year-on-year driven by a record net business award level of $600 million. This delivered a net book-to-bill of 1.7 times for the quarter or 1.29 times on a trailing 12-month basis. Our backlog now stands at $5.2 billion, which gives us a firm foundation to build upon during the remainder of the year and beyond.

We continue to broaden our customer base with both new and existing biopharma companies seeking to leverage ICON's operational excellence, flexible partnership model and depth of therapeutic expertise across our global footprint. Since our foundation in 1990, we have strived to work as a trusted partner to our clients, collaborating, innovating and finding new ways to improve outcomes together.

On the P&R business strategies, a deep understanding of our industry landscape, enabling us to work closely with our clients and allowing us to be competitive at a time when technology, regulations and client needs are changing. We have the global scale and flexibility to organize our resources around their requirements and adapt our delivering models as their strategy dictates and evolves.

Our accountability to successfully manage projects under a variety of integrated and flexible outsourcing models has led to new opportunities for both our full service and functional services businesses during the quarter. We are very pleased with the continued progress being made in this area on an integrated basis, with other service areas and as a standalone offering, and we believe this is becoming another differentiator for ICON in the market.

Access to patients continues to be a key challenge for the industry. ICON has developed an integrated site and patient solution that makes it easier for sites and patients to actively participate in a trial and increase the predictability and speed of enrollment and retention.

Leveraging our PMG network, which now includes the recently announced DuPage network. We are helping customers to enhance clinical trial feasibility, while also giving patients access to a broader range of care options through clinical trials. Our innovative partnership with Intel and Saama, as well as our collaborations with TriNetX, EHR4CR and most recently Practice Fusion, within the Life Science segment, continue to be used successfully in conjunction with our OneSearch data platform.

These partnerships are all helping to enhance engagement with sites, patients and healthcare providers to take significant time and cost from our customers' development programs.

We also continue to work on a series of internal projects to evaluate the potential opportunities with robotics and process automation. We believe that there are several areas in the clinical trial process which lend themselves to further efficiencies through the use of robotics process automation, starting with the digitalization of protocol, and the creation of data capture tools as well as testing and validation of applications. We also believe there is application for robotics in the conduct of routine tasks within our global business services environment, which help us to continue to leverage our spend across these key support groups.

The consequence of our strong business development performance, means that we need to ensure we have appropriate staff members in place to cater for the ramp-up in operational activity levels. During the quarter, our headcount grew to 13,650 employees, an increase in staff of over 1,300 employees year-over-year. The identification and the successful recruitment of best-in-class talent, our key is to ensuring the continued delivery of our customers' projects.

Upon joining ICON, a clear onboarding program is communicated to directly engage employees with ICON's mission, vision and values, with center on integrity, collaboration, partnership and accountability and delivery. We also focus on retention of our staff in the longer term by engaging and helping them map out their own individual career plans in our internal career hub.

This provides an opportunity for each employee to create their own career framework, and how to develop their experiences, abilities and competencies over time. The result of this is that approximately 10% of our employees will be promoted within ICON each year, recognizing their performance, skills development and increased level of experience, and helping to retain them long term for the benefit of our customers.

Our approach allows us to continue to pursue our goals of attracting and retaining the best talent in the industry, ultimately driving long-term performance at an individual and company level. As recognition of this, we were proud to be including in Forbes Magazine's America's Best Large Employers List for 2018, which is a ranking by employees of the best employers across 25 industry sectors. This is a second consecutive year that ICON has been named one of America's Best Employers. And we're also the top-ranked CRO for the second year in a row.

As a result of the ongoing execution of our strategic plans, our year-on-year revenue growth was 10%. Careful management of our cost base enabled us to expand our operating margin to 20.2%. This strong operational performance, along with an effective tax rate of 10%, allowed us to grow our earnings per share by 17.6% year-over-year to $1.54. During the quarter, we repurchased $16 million worth of shares under our share repurchase program, bringing the total repurchase value to date to $297.3 million worth of shares at an average price of $85.36.

As we look forward to the end of the year, I want to take this opportunity to update our full-year guidance. We expect 2018 revenue to move from a range of $2.52 billion to $2.64 billion to a range of $2.56 billion to $2.64 billion and earnings to move from a range of $5.91 to $6.11 to a range of $5.98 to $6.12.

Before moving to Q&A, I would like to thank the entire ICON team for all their hard work and commitment during the quarter. In particular, I'd like to recognize the immense contribution of Dr. Ronan Lambe, ICON's cofounder and father figure, with Dr. John Climax, who after 28 years of service, retired this week from our board. We thank Ronan for the hugely positive influence he has had on shaping ICON into the industry leader it is today and we wish him well in his retirement.

Thank you, everyone. And we're now ready for questions.

[Operator]

Thank you, sir. [Operator Instructions] And we will now move to our first question facing Robert Jones of Goldman Sachs. Please go ahead sir.

[Robert Jones, Goldman Sachs]

Great, thanks for the question Steven and Brendan. You guys have been pretty upfront that gross margins will experience some pressure as you onboard, people to handle all the new project that you've been winning. I guess, maybe, it would be helpful if you can lay out how we should think about your ability to kind of maintain the type of gross margin we saw this quarter? And then, if there's any timeline you can provide as far as when you might start to again see some leverage against the infrastructure that you are currently building?

[Steven Cutler, Chief Executive Officer]

Yes, Robert, it's Steve here. You are right. We have been upfront about the pressure on gross margin. Obviously, as we build the business, we bring in new people. There will be inevitable pressure in that area. So we're offsetting that to some extent by looking at how efficiently we are running our operations. Our startup to our clinical trials is under plenty of attention and scrutiny, and we're looking at how we are improving our resourcing and our process there. Also looking at how we can bring in automation in that area as well.

There are various offsets, if you like, on the gross margin side of things. And of course, I think, as we said before, we're also trying to offset any pressure on gross at the SG&A line. I think you can see we have been successful in doing that again this quarter. And we continue to ultimately maintain our operating margin based on some offset at the SG&A line. And we believe we can continue to do that. So we see our margins at the operating level being maintained and possibly increased slightly, but we're working very hard to do both - on both those areas.

[Robert Jones, Goldman Sachs]

And I guess, just a followup to that, Steve. You mentioned SG&A, you guys closed in on this goal of 17% of the 606 revenue pretty quickly, looking at the results from this quarter. Anything you would call out there as far as what drove the progress? And then, is this the type of SG&A as a percent of revenue level that we should think about for the rest of the year?

[Steven Cutler, Chief Executive Officer]

I think, in terms of what drove the process, we continue to look at it very hard, we continue look at our process, we continue to offshore appropriate parts of that business where we've been able to do so. We continue to challenge our business service leaders to hold their costs tight and be as effective and efficient. And we've - as you've said, we got to our target a little earlier than we thought. We think there's still some further upside or at least further progress to be made there over the next, probably, longer term than medium term.

And I think, I referenced in my comments, robotics automation as being a particular component of that. We'll talk a bit more of that at our Analyst Day in New York in a couple of months. We believe, there is some further progress we can make in that space, albeit probably not at the same rate as we've made over the last couple of years.

[Robert Jones, Goldman Sachs]

Great, thanks for the questions.

[Operator]

Thank you. We will now move to our questions from Tycho Peterson of JP Morgan. Please go ahead.

[Tycho Peterson, JP Morgan]

Hey, thanks. I want to start with good backlog. I'm wondering if you can comment at all on next your biotech versus pharma, to what degree also fixed-price contracts are a part of that backlog? Thanks.

[Steven Cutler, Chief Executive Officer]

I didn't get the second part of the question, the type of contracts, Tycho?

[Tycho Peterson, JP Morgan]

Fixed-price contracts, how much of the backlog today are fixed price?

[Steven Cutler, Chief Executive Officer]

Okay. Let me start with the biotech versus pharma. Certainly, over the last 12 months or so we've seen - I think, we've all seen a very strong funding environment around biotech, probably unprecedented, I would say. And that can certainly continue this quarter. So biotech and midsize has certainly increased in proportion in our backlog. We still remain a very significantly large pharma CRO that continues, and that certainly continues as well as part of our strategy, but the funding environment within the biotech has pushed that part of our backlog up. In terms of fixed-price contracts, I don't quite understand what that's all about.

I mean, we - well, all of the large CRO's do fixed-price contracts, there's nothing particularly novel or new their. Our customers expect us to put a budget down and fix the price according to the expectations in the scope of that project, recruitment rates, et cetera, et cetera. Particularly, as we become and we continue to become better in terms of our processes and our feasibility, we are able to nail our colors to the mast and actually fix a price in terms of what a recruit made his buck.

No CRO - and I don't care what they tell you, no CRO is going to be held to a fixed price if things like drug is not available or the FDA puts a hold on the contract or the project or those sorts of things. So we all operate to fix the price where it comes to operational parameters, like recruitment and us believing we can get the patients, et cetera. But there are always limits to that fixed price. And I don't believe anybody in the industry is operating outside of those limits.

[Tycho Peterson, JP Morgan]

Okay. That's helpful. And then two quick follow ups, Pfizer, you had sequential increase in the overall contribution, so should we assume that this is going to continue for the remainder of the year? And then, on the hiring point, back to Bob's question, where are you in, kind of, the overall process of hiring? You said 1,300 employees over the past year. Just how far down that path are you at this point?

[Steven Cutler, Chief Executive Officer]

Just the Pfizer once first, we saw it as a slow - a bit of a bounce and uptick on our Pfizer revenues this quarter. We think, we're - we've reached pretty much a steady state with Pfizer, they remain our largest customer. And we believe we're at about a regular, sort of, cadence of quarterly revenues, annual revenues in the $220 million to $270 million sort of mark, that sort of number. So I think, we're in a good place there.

Certainly, we won - from this quarter to round about slightly under a 1 book-to-bill, but I think overall last 12 months, we're at about a 1 book-to-bill. So I think we're in a good place there. In terms of hiring, as I said, 1,300 people came in, about half - a bit more of those came in through the Mapi acquisition. So we continue to bring on board new people, as we need to, to win the work. As you can see the backlog has gone up 16% year-on-year.

So I don't expect we'll be increasing necessarily 16% of that people-wise, year-on-year. But we certainly have our HR machine and recruitment machine ramped up to be able to bring those people in efficiently and effectively. That's an ongoing process. As we continue to win more work than we're burning, we expect to grow and we expect to bring the people on at about the rate of revenue post of what we're going to pursue. So that's a process that's working well.

I think, we feel, we're able to bring them on at the right time. We're not bringing them too early and having them sit around. And we're not bringing them on too late and leaving revenue on the table. That's the challenge we have as an organization. And I believe our operational people are handling that very well.

[Tycho Peterson, JP Morgan]

Okay, thank you.

[Operator]

Thank you, and I'll move to our next question from Ross Muken of Evercore. Please go ahead.

[Ross Muken, Evercore]

Good morning guys and congrats or good afternoon for you. Maybe, just on, sort of the revenue cadence for the rest of the year and then, into next year, I mean it feels like you had very strong bookings momentum now for some time, obviously, the backlog is growing at an elevated rate, as you spoke. We're starting to comp again some of the easier compares from last year, given some of the trials that fell off.

So how are you thinking about, sort of, that burn rate and your ability to, sort of, get back to more of the normalized growth we were used to seeing from you, at least, on the core basis? Because it feels like we're, kind of, hitting into this inflection period, into the back half of this year and the next year where we can get back to, sort of, the top line expectations we're used to seeing, given how strong you have done from a new business perspective?

[Steven Cutler, Chief Executive Officer]

Yes Ross, I'll have a crack at that and then Brendan might jump in as well. I think we're seeing puts and pulls on the burn rate. We were $9.4 million this quarter, we were $9.4 million last quarter. So we do think we're starting to approach the nadir. The pressure down already is, we continue to win as a number of our peers do oncology work, which is long, complex, long term and certainly, without any shadow of a doubt, burn slower than other trials.

And that is an increasing part of our backlog. We reflect the clinical development landscape there. So that is - that does put pressure on the burn. On the other hand, as I outlined, we're looking at how we can get better and faster and more efficient at starting our clinical trials up. The focus on our startup approach is starting to yield some benefits in terms of our operational metrics and time to get to first sight initiated.

We're seeing some - certainly, some progress there. We obviously, where at all we can, look to win work that can burn a bit faster, but to some extent, we're constrained by what's out there. So I think there are, let's say, puts some coals on that and we do think we are approaching the nadir. We are looking to try to bring that up, but that's, I think, more of a longer-medium to longer-term approach. You want to…?

[Brendan Brennan, Chief Financial Officer]

Yes, Ross and I think you wanted - the points you're making in your question there was, obviously, we've had some tough comps in the first half of the year from a revenue perspective on the, sort of, the mix really of the Pfizer and non-Pfizer book of business. As we go into the third quarter, obviously, by this time last year, in the third quarter, we were through the bococizumab cancelations.

So I think the organic revenue growth that we referred to this quarter at 2% will go up fairly significantly, as we look into the back end of the year. And I suppose, what I do is, I point you towards revenue guidance for the full year, which is like in that 7% to 10% range now, as we pushed it up in this current quarter. And certainly, we'd like to be seeing CDOs that are certainly in that range, as we go into the next couple of quarters.

[Ross Muken, Evercore]

That's helpful, Brendan. And maybe just, if you guys give a little color. There's a lot of strategic deal activity, a number of key renewals went on or going on. How are you thinking about the conversations for some of the larger contracts? Obviously, so much time has been spent on, sort of all the biotech businesses, given what demands look like in that environment? How would you just, kind of, characterize the conversations there? And what else is still left out there for the remainder of the year, at least that's big and chunky?

[Steven Cutler, Chief Executive Officer]

Yes, I think, we look at our performance. I think with these strategic deals, if you book it more over the longer term, what you win and what you're able to renew. Certainly, we've able to renew a number of ours. We've competed very hard, I think, in these areas and we win, I think, more than our fair share. We've been successful over the longer period of time in these deals. And they take some time to, sort of, mature.

They take a little bit of time to evolve, but there's one or two them that we've won in the last 6 months that are starting to move very significantly, and certainly contributed pretty much on a new business wins perspective in this quarter, limited though, in revenue. Really the revenue takes something like 12 months, sometimes even longer to start with these - particularly the newer strategic deals. So we're starting to see the wins come in. And we expect to see the revenue will start to burn later this year and certainly into 2019 and beyond.

These things take a little bit of time. And as I said, we believe we have good offering in the area. We're able to engage. We have a lot of experience. We've been part of the largest partnership in the industry for a number of years. That has given us some credibility and some experience in this space. We're able to bring that and bring that experience to some of these newer partnerships.

We're also seeing some of the, perhaps, more midsized companies become interested in these partnerships. And a midsized company, it may be outsourcing, of course, less in terms of dollar terms. But if you can win the vast majority of that or one or two partners in that, sort of - you can secure yourself a very good revenue stream.

So we don't just look at the top 10 or 15 companies on the partnership side of these, Ross, we're looking a bit more broadly in building partnership, building relationships and going out proactively and approaching customers more in the top 30 to 40, who still have a substantial amount of work to outsource and a willingness, increasing willingness to do it with organizations like us. So we feel the environment there is good. I strongly feel we're competing really well, and our offering is being well received.

[Ross Muken, Evercore]

Thank you, guys.

[Operator]

Thank you. And I'll move to our next question which comes from Jack Meehan of Barclays. Please go ahead sir.

[Jack Meehan, Barclays]

Thanks and good morning. Steve, I was hoping you can elaborate on the comments you made related to the expansion plans with the PMG network. And just specifically there, what are your plans regionally? Are there any partnerships you could use to expand there? And what level investment should we expect to build that out?

[Steven Cutler, Chief Executive Officer]

Yes, interestingly, Jack, we've - we have expanded the PMG network. I mentioned the DuPage network of sites that we brought on. We have them and we've taken over that - the clinical trials capabilities within that network without having to pay anything. It's something we've assumed responsibility for. Obviously, you see in the costs and we assume the benefits. But it's not been something we've actually had to pay for.

There are other - there are one or two other networks in the same, sort of, state in North America. So we're looking at that. Not costing us all the money, it's costing is, obviously, resource, and we're building our infrastructure and adding that and building it into the PMG network. So the expansion into North America is really limited cost, but it's - and it takes some time and effort, and all of course, investment for us to build that out.

What we want to go next is to Europe and we've been actively looking in Europe for a network that we would be able to acquire. We've had a couple one or two false starts. We're fairly disciplined in terms of making sure we acquire an operation that has a very high quality of service, and is very well thought after or thought at - has a good reputation and so we've had a couple of - little bit of stop-start in Europe, where we continue to look very actively today.

And I think you could expect, certainly in the next 12 months, and I hope earlier than that, some progress on that front. But our site network is still very much a fundamental part of our strategy combining with our - with the analytics and data strategy that we have around EMR in EHR records and analytics driving patients to the site. So it's fundamental to us and it's something that we feel, we can continue to develop and make progress on.

[Jack Meehan, Barclays]

Great. And maybe one for Brendan, could you just confirm that 2018 targets related to cash flow? And can you help us with the pacing going into the back half of the year? Just looks a little bit more back-half weighted than you've historically posted.

[Brendan Brennan, Chief Financial Officer]

Yes, that's probably fair, Jack. We were kind of - we're in that, kind of, I suppose $300 million, kind of, level of expectation on cash flow. As you guys know in the past, we do have a pretty high percentage cash conversion cycle. I would agree with you, it is more back-half related. And obviously, we'll be looking to deploy that capital, either or predominantly on our M&A strategy, as I think we've outlined over the last year or so. So yes, it is definitely more back-end related. So we expect probably - and I think we've done about 100 year-to-date, maybe just shy of that, and probably the rest in the back half.

[Jack Meehan, Barclays]

Great, thank you Brendan.

[Operator]

Thank you, and I'll move to our question, which comes from Donald Hooker from KeyBanc. Please go ahead sir.

[Donald Hooker, KeyBanc]

Great, good afternoon to you, good morning for us. On the continued - everyone continues to be impressed with your discipline around SG&A expenses. I was just wondering, is there a risk that you guys might be somewhat under investing in your business? I mean, do you feel like there are areas where - is there a risk that you are under investing in the business where that could come back and bite you down the road?

[Steven Cutler, Chief Executive Officer]

Donald, you've always got to balance up between the investments you make and the efficiency you are trying to get and how you leverage that investment. So is there is a risk? There's always a risk, but I don't believe we are doing that. We are disciplined in the way we look at our costs. We're very focused in that area and we have a very good group of people looking after, particularly on the global business services side of things, who are not just able to take up a challenge when it comes to being efficient and make - maximizing the value or the spend that they have, but being open to new ideas and new ways of doing things.

And then that's a state of mind that, I think, our leaders in that group have that, sort of, differentiate them, perhaps, from others. They are open to doing things differently, be it robotics or process engineering or different ways of organizing their group or different ways of doing the work that they're supposed to be doing, or different locations for those people and how that works into our overall business and how it supports our overall business. So I think I'm lucky in that we have a strong group of people, who are - not just on the global business service, but also in the operational area, who are innovative and open to new ideas. And so I don't think we are under investing.

I think we're appropriately spending the money that we have. We're challenging ourselves, where we need to spend it. Perhaps such things like the security, IT security side of things. We have made significant investments in that area over the last 6 to 12 months, particularly given the environment we're all in now and the threats we're under with cyber security.

So we've made solid and very significant investments in that as we brought the Mapi organization in, we've isolated them, quarantined them, sorted them out from our - from a security point of view and brought them into the fold. So I believe, we're spending the money appropriately. We're spending it in a way that it's maximizing the value of that money, but we are also being creative and watching our pennies.

[Donald Hooker, KeyBanc]

Great, and certainly impressive to see. So my followup question will be more specific. I was curious, specifically, on the recent announcement with Practice Fusion, your relationship there. Can you - how does the economics of that relationship work? What is - obviously, I think I understand what you guys get. But how do we think about the other side? What is practice - what are Practice Fusion's economics and that relationship for you?

[Steven Cutler, Chief Executive Officer]

Don, I have to be absolutely honest with you, I am not absolutely familiar with the detail of the economics that are offered. We - they are an organization that has patient records and an ability to access patient records and the data base of patients. They're helping put in place electronic medical records in, I think, it's around 20,000 practices, so a large number of practices. And they used - those practices use those electronic medical records in those practices and we, then, are able to have access if we pay a fee to have access to those records.

These patients have all opted in, so they're not de-identified, a very important distinction, I'd have to say, between us and someone between us, relationship with some of our competitors. These patients are opted in to be contacted for clinical trial opportunities. And our late-stage group, our ICON Commercialization Group is running a couple of pilots with them.

I would have to say the economics of the relationship and the pilots is probably going to be a certain way and then different to how it will work out if we industrialize this, out it that way. So we would be paying some fee to access those records. They'll be making those available to us. We'll be then, using that data or finding those patients to bring those patients into the trial. That's the way it's, sort of, broadly working. I need to - if you need any more detail on that, I think, we'll take it off line, but that's the way it's working out here.

[Donald Hooker, KeyBanc]

Okay, thank you for that, have a nice day.

[Steven Cutler, Chief Executive Officer]

Thank you.

[Operator]

Thank you, our next question now comes from Erin Wright of Crédit Suisse. Please go ahead.

[Erin Wright, Crédit Suisse]

Hey, thanks. I guess can you give us an update on Mapi how that transaction is progressing relative to your internal expectations at this point and did you break out the contribution as well from acquisitions of Mapi in the quarter? That would be great, thanks.

[Brendan Brennan, Chief Financial Officer]

Hi Erin, this is Brendan here. Yes, we're pleased with the inspiration of Mapi. As you guys know, we brought it actually around this time last year and have been working hard on the integration since. We're pretty much through, 95% I would say, of the integration process at this stage. And so, we're happy with the overall performance of the business unit.

At the beginning of the call, I called out there just the - I suppose, if you like, the revenue contribution from the different elements. And I did say that the CDO revenue growth was about 2% versus a constant currency growth year-over-year of about 8%. Obviously, the FX and the difference coming from the Mapi organization, so a little ahead, actually in the current quarter versus last quarter, so good progress from our perspective at this stage.

[Erin Wright, Crédit Suisse]

Okay great. And then on the capital deployment front, I guess where are the holes in your offering or where are you seeing opportunities in the M&A pipeline? Would you focus or target more post approval, pharmaco vigilance, Asia, or I guess, you were mentioning earlier investments in site networks, I guess, we are your priorities today? Thanks.

[Steven Cutler, Chief Executive Officer]

Oh Erin, your view pretty much answered your own question. You have outlined a couple of areas there that we would certainly be looking at or we are currently looking at in terms of M&A and capital deployment. It's not that we - I think we feel we're particularly weak in those areas, but we have an ambition to be in the top echelon in each of the segments we operate in, as all companies in this space.

So there are a couple of areas there, certainly, we already talked about the site network and expanding that. We fundamentally believe that is the right strategy. We're starting to get some traction with that. And so that's an area, particularly in Europe. As I said, we've broadened out, we are broadening out in the United States. Our aspects of Asia, Japan is an area I think I've mentioned before that we're looking to actively deploy capital in. And so those spreads, and then you look at some of the functional areas. Pharmaco vigilance, I believe, in the industry is ripe for some consolidation. So I think there's some opportunity there to build an organization in that space.

And we've got a good pharmaco vigilance safety group. We're implementing some new software and applications there to really move them along. And at that point, I think, that might be a good time to look at that space. So those are the areas that we are actively looking at. We have a number of opportunities in our sights at the moment. And we expect to be able to execute on at least one or two of those within the foreseeable future, medium term, next, I'd say, six to nine months.

[Erin Wright, Crédit Suisse]

And the size of those transactions, I guess, what sort of size you would be targeting? I guess it was this time next year, there was news of a potential larger acquisition, so I just, kind of, wanted to get a sense of what you were thinking?

[Steven Cutler, Chief Executive Officer]

I have to say, we - I think, again, we've been public in terms of opportunistic on the - on larger transactions. What we're talking about is our string of pearls strategy, which is traditionally being what we've been focused on. And those acquisitions, I think, as you probably know, range from anything, $50 million - $30 million, $50 million, but even smaller if they're strategic. Some of the site networks aren't that big, up to $150 million, $200 million. That's the sort of range we're expecting in that, sort of - with that sort of approach.

[Erin Wright, Crédit Suisse]

Excellent, thank you.

[Operator]

Thank you and we'll take our next question from John Kreger of William Blair. Please go ahead.

[John Kreger, William Blair]

Hey Steve, just a question to expand on your comments on site network, what percentage of your active projects would you say you are using some sort of a site networks strategy at this point?

[Steven Cutler, Chief Executive Officer]

John, I would have to be honest and say I don't have that specific number in my head. I would estimate at about 25%, possibly up to 30% of our - that we would be currently using now. Having said that, I would say, 75% of our new - 75% of new projects would be going into that network approach because actively promote our site network approach for all of our new projects. And that doesn't mean every one of them is suitable or appropriate, but we certainly have a higher proportion of new projects going into that strategy or that approach that we do traditional within our backlog, so to speak.

[John Kreger, William Blair]

Got it, interesting, thank you. And then, you mentioned a number of, sort of, new technologies in your prepared remarks. If you, kind of, step back, do any of them stand out to you as particularly exciting in terms of a value add for you or your clients and anything that you can call out? And even just generally, do you see bigger opportunities, sort of, externally around maybe trial design and site ID or more opportunity in terms of internal operational efficiency? Thanks.

[Steven Cutler, Chief Executive Officer]

That's a broad question, John. We could probably spend days talking about that. Certainly, from a technology point of view, you're aware of what we are doing from electronic medical records and that certainly a focus for feasibility and how we find patients. That will - we're trying a number of horses and trying a number of tracks and we believe that's the right way to go. Some more successful than others, but we certainly - we'll still be seeing some traction in the areas we're working in and getting some benefits and quite frankly, learning a lot, as we go along.

If I look things like robotics, and we'll talk about a bit more of this at our Analyst Day on September 10 in New York. We're hoping to have some demonstrations of some of the technology there around our robotics and automation approach, but we see some very exciting things. I get exciting about it, some people may not, around our trial master file and how we - I was seeing a demonstration yesterday from our IT guys in terms of how we're improving the designation and categorization and filing of follow-up letters to monitoring reports. A simple thing enough, but a robot can do this in a minute.

It takes - we've calculated, it takes our people 6 minute to do it and we have a lot of people. We handle a lot of paper across our organization with the 500 clinical trials that we have running. And so that is a material - that can be a material impact in terms of how we, more effectively, more efficiently, file - putting documents into files for the regulatory authorities and for the auditors to look at. And again, a relatively simple thing, but something we're processing and moving forward. And we have a number of our folks, including myself, very excited about the benefits that can bring to us.

Not just in terms of reducing costs and being more efficient, but being faster and being more up-to-date for audits gives us a quality angle as well as an efficiency angle. So there are number of things in there. Then if we look at the adaptive trial design, and that continues to be important for us, we continue to focus on. It hasn't perhaps go into the take-up and the uptick as much, as I would have liked to see in the industry, but there are several customers who are very engaged in it.

Certainly some of our alliance partners are very interested in what the capabilities we have, and how we can apply those sorts of new designs to their development program. So I think on a number of fronts, be it applications, be it software, be it IT, be it process, be it statistics, we're looking at a driving forward innovation and technology and bringing those sorts of solutions and new ways of doing things to our customers.

[John Kreger, William Blair]

All right very interesting. Thank you.

[Operator]

Thank you. [Operator Instructions] We'll now to move to our next question from Sandy Draper of SunTrust. Please go ahead.

[Alexander Yearley Draper, SunTrust]

Thanks very much and good afternoon guys. Just may be a very quick question. Just thoughts on any updated thinking on stock repurchases, obviously, did a bunch last year, it sort of slowed down as you anticipated. As you build up cash, there's a balance of M&A opportunities versus stock buyback. But just thinking about the last couple of years you've taken points of being aggressive, any thoughts on how you feel so softly about stock buybacks, has that changed at all or is it still pretty much the same thought process?

[Brendan Brennan, Chief Financial Officer]

Hey Sandy, it's Brendan here. I don't think fundamentally, we are shifting from where we have certainly been over the last 6 to 12 months in terms of our buyback mentality here. I think we've been very clear that our primary use of capital that is going to be around the M&A side of things. That's definitely what we want to do.

By the end of this year, we want to see a couple of deals in the door and we're actively working towards that. In terms of the buyback program, it's not gone away. You've seen it's chunking away through the first half of the year. We did, again, continued it in Q2. I think, one of the things that we are mindful of is making sure that stock dilution that we get from exercise of the issue of shares to employees during the course of the year isn't impacting.

And that's about 1 million shares a year. So that in itself is a chunk of change that is going to be used and we will continue to use. So I think that's possibly the best way to think about it in terms of our balancing, our M&A portfolio and capital deployment around that, and our buyback procedures.

[Alexander Yearley Draper, SunTrust]

Okay, thanks that was my only question.

[Brendan Brennan, Chief Financial Officer]

Thanks Sandy.

[Operator]

Thank you. And I'll move over next question from Juan Avendano of Bank of America. Please go ahead.

[Juan Avendano, Bank of America]

Hi, thank you and congratulations on the quarter. A lot of my questions have been answered, but I do have one. With regards to customer specific trends, revenue growth in your top 10 customers has picked up, particularly among customers 6 through 10. Can you tell us what's driving that or what's happening with those relationships? And then, also what was your net book-to-bill outside of your top customer? Thank you.

[Steven Cutler, Chief Executive Officer]

I'll have a go at the first one, Juan, in terms of what's driving revenue growth trends across our top 10 customers. I think, Brendan can answer your second one in terms of book-to-bills outside of that. I think, for us, we've - one of our strategic pillars is around partnership and what we bring to a partnership. I think, as I mentioned, we have a lot of experience in this area and it's something we take very seriously in terms of where we're going with our organization.

I think we've been able to bring that partnership approach to those - I mean, the top 10 customers do tend to be our partner customers, our alliance partner customers. We've been able to wrap a solid execution and delivery around them. We dedicate specific and very competent resources to those customers. We get to know them very well. We spent time with them and we look at it in terms of very much a long-term relationship and a number of those alliances have really moved to the next level now, and we're securing a very significant annual revenues from those customers.

And it's not just within, say, our full service business, it's now broadening out across - again, as I mentioned in my comments, across other parts of our business. And other parts of our business, our doctor IFS group is also bringing in opportunities for our full service. So there's a cross fertilization, if you like, across the various service areas and functions within the customer, within now across our company is also helping to drive the accumulation of significant revenues and broaden out the partnership and the relationship across those allied - alliance customers. So it's - I think it's been a very positive experience for us and I think they are also seeing the benefits of that partnership as well.

In terms of solid delivery, good operation metrics, we track the performance of the partnership in terms of what we're doing on the day-to-day basis, how fast we are starting studies, how quickly we are completing the studies, are we on time performance wise, et cetera. Quality is a very important focus as well. With all of that, I think we gain further credibility and we build a relationship with those partners. It goes from strength to strength, it's a good news story. And obviously, we look to deploy it on as many - on new partners as well and new customers as well. In terms of book-to-bill, do you have it?

[Brendan Brennan, Chief Financial Officer]

Yes. Obviously, Juan, I suppose that we because we don't call out that number specifically anymore, because our biggest customer is now at a level that we think it is a sustainable number as we go forward. I think as Steve mentioned, we have a better one with a book-to-bill with them over the last couple of quarters. So excluding them, it's not a huge difference between what we actually would report, the 1.29 that we reported - sorry, the 1.28 that we reported the first half of the year. So excluding them it's about 1.31, 1.32.

[Juan Avendano, Bank of America]

Thank you.

[Operator]

Thank you. We'll now move to our next question from Justin Bowers of Bloomberg Intelligence. Please go ahead sir.

[Justin Bowers, Bloomberg Intelligence]

Thank you, good afternoon and good morning. So just wanted to followup on the robotics in digital strategy and some of the investments that you've made in kind of the plan going forward and I realized that these things take more than a few quarters to really affect the business. But if we were to look out, let's say, one to two to five years, how would you guys measure success from the broader digital strategy?

Would this translate into market share gains, like an increase in burn rate, for example? And then, is that something that you are going to continue to do organically or with some of your existing big tech partners? Or is that going to include some external, kind of, organic efforts as well? And then, I have a followup.

[Steven Cutler, Chief Executive Officer]

Okay. That's a pretty broad question, Justin, but in terms of our robotics and digital strategy, I think we see a number of advantages over many points or measures of success. I would say, obviously, margin - I would probably say margin maintenance. Margins are solid now and strong. Maybe we can tick them up a little bit, but we do see the digitalization and robotics process automation really helping us to maintain margins overall and probably improve our SG&A leverage spend, particularly around more routine tasks and having our people move up to more higher value tasks, so I think that's certainly 1 area of it.

And then, I think, in doing so, we can make sure that our value - the value we offer customers from a pricing point of view continues to be solid. And I think if we do that well, we should be able to take market share. That's a longer-term play but it's certainly within our strategy and it's certainly something we want to focus on. We believe - I fundamentally believe that the clinical trial process is too clunky and too expensive and we do need to be able to - we need to be part of the solution there in making it more efficient, more effective. And I think the robotics is just one aspect of what we can do to improve that and we have a responsibility and I think an obligation to do it.

And I think if we can, we'll be very successful. I think it's a matter of reducing margins, in fact - if anything, we'll be maintaining or possibly even improving them if we do it really well. Now we've got to execute on that, and that's always the challenge. In terms of who we partner - our strategy at the moment is to work with different partners, particularly around the data strategy and the site in-patient EMI, EHR strategy, that's very clear.

We have been very upfront with that for some time. In terms of robotics and automation I think, again, we'll be; looking out who's out there. We're already doing some pilots, again we'll talk a bit more about that on September 10. But we're looking at who are the right partners and what are the right organizations and what are the right technologies. Let's just be honest here, we are fairly early in the process here.

This is not something that's necessarily going to be implemented within the next quarter or two. As I say, it's a medium- to longer-term play. But we do believe it has a fundamental role to play in our continued success. We're embracing it, our leaders are embracing it and we believe it's going to be strong. The exact strategy into who we partnership or what sort of organizations and how we do that, is being worked out as we speak.

[Justin Bowers, Bloomberg Intelligence]

Got it. Thank you. The quick follow up is it sounds like - I mean, funding has been strong all year, but it sounds like there's been kind of an improvement this last quarter and I would say maybe even now versus the first quarter in terms of RFP activity and the opportunities out there. Is that a fair characterization and even a little more activity from the small to midsize?

[Steven Cutler, Chief Executive Officer]

I think that's a fair characterization. Yes, I think everyone is aware that the funding environment has been very strong. Not just this year, but certainly over the last few years, really. The public markets have been open and we find that biotech is a well-funded and ambitious. They're like I said, five, 10 years ago, they might have been looking to partner, less so these days. So we find they have large programs and projects that they are ready to fund and able to fund themselves, so funding environment is great.

We've seen, I would say, modest to mid-single-digit, sort of, uptick in RFP opportunities. We have a strong business development group who have been able to take advantage of that and I will win rate, if anything, has been increasing as well. So you get more opportunities and you get a stronger win rate, it adds up to a pretty solid formula from a business development point of view.

[Justin Bowers, Bloomberg Intelligence]

Got it, that's all, thank you.

[Operator]

Thank you. And I'll move over next question from David Windley of Jefferies. Please go ahead.

[David Windley, Jefferies]

Hi and good morning. Thanks for taking my questions. The, and perhaps intersecting with a robotics discussion, I'm wondering Steve, as you see this demand increase and I think you're pretty aggressive in adding staff. In 2Q, how do you see your sales position to service the growth? How fast do you need to be continuing to add headcount? What does the labor market look like so how is the pool of available talent to service that or to feed that headcount add? And then how much are you able to alleviate your need to add headcount through some of this robotic and automation investment that you're making?

[Steven Cutler, Chief Executive Officer]

Yes. Interesting question, David. Let's - I think it's premature for me to, sort of, declare that we could alleviate our headcount requirements on the basis of robotics at the moment. We are moving on this but it's going to take a little bit of time. We are doing some pilots, and I think it will be at least a couple of quarters before I'm in the position to even answer that question or make an attempt to answering that question in terms of what impact that is going to have.

I would say we are very optimistic, we can see some bright spots and some real possibilities quantifying it. I think it's way too early to do that at the moment. In terms of the labor market, it remains tight, particularly around CRAs and project managers particularly with oncology experience, as you would expect. We have a number of approaches to build our own. We have a number of graduate - from new graduate programs, certainly in Asia. In Japan, we brought on 50 new graduates and then we trained them and we literally sit them in the office ourselves for the first six to nine months and train them up and then, gradually are able to assign them to work. So that's an investment we are making.

We are also doing that in the United States and couple of other European - sorry, Asian countries, particularly as well, China. So we're alleviating some of those headcount or labor market challenges through things like that, training our own resources. Our retention has been very good over the last 12 months, it's improved fairly - not dramatically, it was always fairly good. But I think we are at an all-time high in terms of retention now, so that always helps you. If you don't lose as many people, you don't have to replace as many.

I think we're in a good position in terms of the work we've got coming in and managing the just-in-time process of bringing in those resources to do the work. As I said, not leaving revenue and work on the table but not bringing it in so early that people don't have enough to do. It's a fine balance that we have to strike, but I think with the tools we have and the competent folks we have running these groups, we are able to tread that [indiscernible].

[David Windley, Jefferies]

Super, I appreciate the answer. On just thinking about the revenue base, the totality of revenue and folks I know, me included, still thinking, kind of, Pfizer and ex-Pfizer. And I know you probably want to get away from that. But I understand early - I jumped on late, and I understand earlier in the call you said you think Pfizer has kind of normalized around, maybe, 260 or 260 to 270. I think that number in and of itself has bounced around a fair amount as we've tried to find the bottom one, on Pfizer post-bococizumab.

I guess I just would be interested in hearing your answer again on the visibility that you have to the run rate from Pfizer. And then, given a steady book-to-bill outside of that, as you described, is that ex-Pfizer book of business something that you think can still generate - continue to generate double-digit growth? Could it even be mid-teens as it was in the first quarter? How should we think about that ex-Pfizer book of business converting out of backlog and growing going forward?

[Steven Cutler, Chief Executive Officer]

I'll have a crack at that and I'll get Brendan to add. In terms of Pfizer, I think as you've seen the revenues have come down over the last few quarters. I think this quarter, we actually bounced up a bit to around 60-something million dollars. And I do think - so we do think are looking at a steady state now, whether it's $260 million, a little higher, a little lower. I don't think it's going to be materially different to that. And I think that's a good number for us to be at. I think that's a number that they will feel comfortable with. We certainly feel comfortable in delivering at that level of work.

We have a good pipeline of opportunities with them. The work we've won over the last 12 months, as I mentioned, is in about [indiscernible] on the book-to-bill. So we figure that's about the right number, that's a good number for us to be at. In terms of ex-Pfizer growth, certainly, we have seen on a book-to-bill basis, very solid numbers posted and very solid revenue growth ex-Pfizer. I do think that will start to, as Brendan said, start to really play in as we get towards the back-end of this year and into next year. I'm not sure about teens, but I would've thought high single digits, maybe low double digits is the sort of number we'd be actively looking at for 2019 and beyond.

Dave, we think the work we've brought in, the quality, the backlog we brought in - notwithstanding, a lot of it is oncology so I put that out as a little bit of a warning, but the quality of the backlog we have and we have won, particularly through our alliance partners and the newer midsized biotechs, is such that we believe we can get this moving and get to those sort of numbers. So we are optimistic and certainly very positive about the revenue growth potential for the company over the next couple of years. really.

[Brendan Brennan, Chief Financial Officer]

The only thing that I would add to that, Dave, is just to say really quickly, we guided at the beginning of this year 12% to 14% of concentration from the customer. First quarter, we were 12%, second quarter we were 13.5%. So we are in the range. It will jump around a little bit, just like any other customer. So I think the expectation I'd say is just be careful on a quarterly basis if you're expecting absolutes. Look at it on a 12-month basis is how I would say it, and I think we'll definitely be in that or above the 14% range.

[David Windley, Jefferies]

Thank you very much.

[Operator]

Thank you. As we have no further questions, I'd like to turn the call back over to you gentlemen for any additional or closing remarks. Thank you.

[Steven Cutler, Chief Executive Officer]

Thank you, operator. Quarter two was another very strong quarter for ICON and we look forward to building on this progress throughout 2018 as we consolidate our position as the CRO partner of choice in drug development. We look forward to talking with many of you at our Investor Day at The NASDAQ Markets in New York City on Monday, September 10. Thank you, everyone.