ICON PLC

NASDAQ:ICLR

Earnings Call Transcript 2022-Q2

[Operator]

Good day and thank you for standing by. Welcome to the ICON’s Second Quarter 2022 Results Conference call. At this time, all participants are in listen-only mode. After the speaker’s presentation, there will be a question-and-answer session [Operator instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Kate Haven. Please go ahead.

[Kate Haven, Vice President Investor Relations]

Thank you. Good day and thank you for joining us on this call covering the quarter ended June 30, 2022. 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 March 1, 2022.

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 excludes stock compensation expense, restructuring costs, foreign currency gains and losses, amortization and transaction-related costs and their respective tax benefits. We will be limiting the call today to one-hour, and we therefore ask participants to keep their questions to one each with an opportunity to ask one related follow-up question.

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

[Brendan Brennan, Chief Financial Officer]

Thank you, Kate. In Quarter 2, ICON achieved gross business wins of $2.76 billion and recorded $441 million worth of cancellations. This resulted in net awards in the quarter of [$2.32 billion] [ph] in a net book-to-bill of 1.2. On a trailing 12-month basis, our net book to bill was 1.25.

With the addition of the new awards in quarter 2, our backlog grew to a record $20 billion, representing an increase of 2.1% on quarter 1of 2022 or an increase of 10.7% year-over-year on a combined company basis. Our backlog burn was 9.9% in quarter consistent with quarter 1. Revenue in quarter 2 was $1.935 billion. This represents a year-on-year increase of 122.1% or 129.9% on a constant currency basis.

On a combined company basis, revenue increased by 0.9% or 4.4% on a constant currency basis from the comparable period last year. The revenue impact from year-over-year changes in foreign currency exchange rates resulted in a headwind of approximately 68 million in quarter 2.

Our Top 25 customer concentration decreased slightly from quarter 1 as our top customer represented 8.7% of revenue, our Top 5 customers represented 27.2% of revenue, our Top 10 represented 40.6%, while our Top 25 represented 59.7%. Adjusted gross margin for the quarter was 28.4%, compared to 27.8% in quarter 1. Gross margin increased sequentially due to increased operational efficiency and strong direct fee revenue growth.

Total SG&A expense was $194.4 million in quarter 2 or 10% of revenue. We expect total SG&A expense to continue at a similar absolute dollar level as we progress through the second half of the year. Adjusted EBITDA was $354.3 million for the quarter or 18.3% of revenue. In the comparable period last year, adjusted EBITDA was $305.1 million on a combined company basis, or 15.9% of revenue representing a year-on-year increase of 16.1%.

Adjusted operating income for quarter 2 was $328.6 million, a margin of 17%. The adjusted net interest expense was $43.5 million for quarter 2, due to the increasing interest rate environment expected through the duration of the year, we are now anticipating full-year interest expense to total approximately $210 million. This represents an increase of approximately $50 million from our initial assumptions for the full-year interest expense when guidance was issued in January.

The adjusted effective tax rate was 17% for the quarter. We continue to expect full-year 2022 adjusted effective tax rate to be approximately 16.5%. Adjusted net income attributable to the Group for the quarter was $235.8 million, a margin of 12.2% equating to diluted earnings per share of $2.86, an increase of 24.4% year-over-year.

In the second quarter, the company recorded $8.9 million of transaction and integration related costs. U.S. GAAP income from operations amounted to $177.8 million or 9.2% of revenue during quarter 2. U.S. GAAP net income attributable to the group in the quarter 2 was $115.7 million or $1.41 per diluted share, compared to $1.38 per share for the equivalent prior year periods.

Net accounts receivable was $875 million at the [start of June] [ph] 2022. This compares with a net account receivable balance of $745 million at 31 March 2022. Cash collection efforts continue to be strong with DSOs of 41 days in the quarter, down from 43 days on a comparable basis from June 30, 2021 and up from 35 days on a comparable basis at March 31, 2022.

Cash generated from operating activities in the quarter was $182 million. At June 30, 2022, the company had a cash balance of $614.9 million and debt of [$5.046 billion], moving a net debt position, of $4.429 billion. This compares to net debt of [$4.581 billion] [ph] at March 31, 2022, and net cash of $707.2 million at June 30, 2021. Capital expenditure during the quarter was $28.2 million.

We ended the quarter with a net debt to trailing 12 months adjusted EBITDA ratio of 3.1x. From a capital deployment perspective, our priority remains our debt paydown in the near term, and as such in quarter 2, we made a payment of $100 million on our Term Loan B facility, bringing our total repayments to 400 million year to date.

Given our continued strong cash flow generation, we remain well on track to exit 2022 below [3 turns] [ph] of net debt to adjusted EBITDA. We are evaluating our capital structure to determine if a more optimal mix can be attained. We've not yet made any changes to our current structure, but we will continue to actively evaluate potential options through the course of Q3.

And with all that said, I would now like to hand the call over to Steve.

[Steve Cutler, Chief Executive Officer]

Thank you, Brendan, and good day everyone. ICON delivered strong results in quarter 2 whilst continuing to manage through a number of global macroeconomic factors that are currently impacting our business. The ongoing war in Ukraine continues to present operational challenges as we focus on supporting our employees, customers, and patients in the affected countries.

Our priorities remain on ensuring the safety of our employees, as well as continuity for our customers' programs and the effective monitoring of patients on our trials. During the quarter, we saw a step-up of the impact to our business in both countries. At this time, and for the foreseeable future, we are not recruiting any new patients or starting any new studies in Russia or the Ukraine, but we are continuing to support in-flight [trial work] [ph] in both countries wherever possible.

Additionally, COVID-19 continues to have an impact on the business. Number of sites restricted in some capacity was approximately 15% at the end of the second quarter as new variants spread. Most significantly, the mandated lockdowns in China, which were in place for most of quarter 2, presented challenges to site access, staffing, and also to our laboratory operations in the country.

We now expect the full-year revenue impact from the war in Ukraine and COVID-related lockdowns in China to be approximately $60 million to $80 million. In addition to the conflict in Europe and China lockdowns, the strengthening U.S. dollar and rising interest rate environment provided further macroeconomic challenges during the quarter, which will impact our results for full-year 2022.

Despite these current challenges, the underlying demand conditions in clinical development remained solid. In the past month, we have seen more deliberate spending from select customers in the emerging biotech segment as they look to prioritize due to public market funding challenges.

Given the more challenging macro environment for emerging biopharma companies, we see an opportunity to further penetrate this segment as companies seek additional strategic input and the most efficient clinical trial plans to maximize their clinical development budget. We also remain vigilant on what our customers we are working with and continue to perform consistent due diligence on their ability to fund trials before the contracting phase.

As a result, we are pleased to report that we have not seen any unusual cancellation activity in our backlog or with ongoing trials. We believe the fundamentals in our industry are well intact, anchored by large and mid-sized biopharma companies continuing to grow their R&D spend in-line with historic market rates.

On a trailing 12-month basis, total RFP value was up mid-single-digits, in-line with broader market growth. In addition, we see good evidence of venture capital and private fund supporting small biopharma companies that are developing drugs and devices on the basis of good science.

We remain confident in our ability to continue to meet our financial outlook as our business development performance continues to deliver against our goals of a 1.2 to 1.3 book to bill and our backlog growth accelerated to an impressive 10.7% year-over-year on a combined company basis.

Our customer mix remained well balanced and consistent with prior periods, with approximately 50% of our revenue in large biopharma approximately 45% of our revenue in small and midsized companies. Approximately 15% of total company revenue and backlog is derived from the emerging biotech companies, which we define as those with less than $100 million of annual R&D spend.

Additionally, we are encouraged by the number of strategic partnership opportunities that are currently in our pipeline with large and mid-sized biopharma, including full service, functional and hybrid models of development. The clear benefits of our scale, depth, and breadth of service offerings and expertise, as well as differentiated technologies and analytics are resonating well with new and existing customers.

ICON's investment in areas such as advanced analytics, as well as decentralized clinical trial technology and services and delivered innovative solutions that are enabling studies of the future. In the quarter, we completed a new release of the ICON digital platform, our purpose built platform, specifically designed to decentralize clinical trials. This latest release included enhanced features on electronic clinical outcome assessments and electronic consent functionalities.

We continue to integrate our related clinical services and technologies. [indiscernible], Accellacare sites, home health services, Mapi assessments, and others to further support harmonized integration of all patient data and services in a customized and flexible manner. In this way, we will provide a compelling solution that will enable us to provide a more efficient and faster clinical trial service to our customers.

Turning to our financial results, performance was very good in the second quarter, resulting in combined company revenue growth of approximately 1% or 4.4% on a constant currency basis year-over-year. Excluding COVID revenue, growth was approximately 16% year-over-year on the same basis.

Operational performance was particularly strong in the quarter with 16% adjusted EBITDA growth year-over-year on a combined company basis, driven by strong direct fee revenue growth, as well as efficient resourcing and continued SG&A cost management. In addition, earnings per share grew an impressive 24% year-over-year.

We are updating our full-year 2022 financial guidance to reflect the impacts of macroeconomic factors on our expected results. The company now expects revenue to be in the range of 7,690 million to 7,810 million, an increase of 40.3% to 42.5% year-over-year or 3.1% to 4.7% on a combined company basis.

This updated revenue range assumes foreign exchange rates at current spot rates for the second half of 2022, and reflects an anticipated incremental negative headwind of approximately $120 million to $140 million on revenue since our earnings call in April, as well as an additional impact from the combination of the ongoing war in Ukraine and COVID-related lockdowns in China.

The combination of our direct fee revenue growth and realized cost synergies is driving accelerated margin expansion, which is expected to result in an adjusted EBITDA margin of approximately 19% for the full-year, 100 basis points above our previous expectation. Further, we are narrowing our full-year earnings per share guidance to a range of $11.65 to $11.85 remaining at the same midpoint as our previous earnings per share range.

We continue our capital deployment strategy as expected by making a $100 million payment on our Term Loan B facility in the quarter, further reducing our leverage to 3.1x net debt to adjusted EBITDA at the end of the quarter, down from 3.3x at the end of quarter 1. We believe we are on track to hit our aspirational target of exiting 2022 with a leverage ratio of approximately 2.5x adjusted EBITDA.

Earlier this month, ICON passed another milestone in our transformational union with PRA Health Sciences by celebrating the one-year anniversary of the launch of new ICON. We have made significant progress in our integration over the past year as our highly effective team has met the challenge of bringing together two large organizations all while continuing to focus on operational execution and project delivery for our customers.

The response to new ICON has continued to be very positive from our customers as evidenced by the number of new and expanded customer relationships that have been formed over the past year. I'm particularly proud to note that this integration has progressed with excellent customer attention, a testament to ICON's organizational commitment and execution in minimizing disruption for our customers.

There have been numerous achievements from our team over the past years, which continue on our journey to become the world's leading healthcare intelligence organization. One of our priorities at the outset was to enable a shared employee experience throughout ICON, and we are well on our way to achieving this through the rollout of key systems and platforms, as well as in areas such as benefits harmonization and career development and training programs.

As of the end of quarter 2, we have completed 60 facility integrations or closures over the past year, reducing costs, optimizing our office footprint and bringing our staff together to allow for increased collaboration and engagement. We have an ambitious goal to be the recognized employer of choice in the industry focusing on career development and growth opportunities for our employees.

We believe we are seeing results of our targeted investments in areas such as talent acquisition, diversity inclusion, and retention programs that are translating to reduced attrition and stabilizing turnover levels throughout the first half of this year. Due to the accelerated progress on integration efforts, we now expect to realize $100 million in cost synergies in 2022, an increase of $25 million over our previous target for the full-year.

Our targets for total cost synergies and revenue synergies of $150 million and $100 million respectively remain in place as we continue to focus our efforts to implement our global business services model and drive further success in cross sell opportunities. With the acceleration of expected realized cost synergies in 2022, we now anticipate achieving our $150 million cost synergy target exiting 2023, 12-months ahead of our previous guidance.

ICON has made great strides over the past year as we doubled the scale of our organization, while continuing to deliver best-in-class performance to our customers. With the ever changing macro environment and growing complexity of clinical trial, we recognize the need for continued innovation and the importance of integrated and flexible solutions to meet customers' evolving needs. We remain committed to investing further in the critical data, technologies, and talent to further enhance our service offer.

Before moving to Q&A, I would like to take a moment to thank our dedicated employees for their ongoing commitment to our company, customers, and patients. and to recognize their significant efforts over the past quarter in driving the success of new ICON.

Operator, we are now ready for questions.

[Operator]

Thank you. [Operator Instructions] And now we're going to take our first question. The first question comes from the line of Elizabeth Anderson from Evercore ISI. Your line is open. Please ask your question.

[Elizabeth Anderson, Evercore ISI]

Hi, guys. Thanks so much for the question. I was wondering two things. One, can you talk about, sort of a little bit more in detail with sort of RFP and win rate by, sort of customer types in the quarter, I know you alluded to some potential changes in and sort of [effort] [ph] sort of on biotech to, sort of feel things out in terms of funding? And then can you also talk about, you know I think you said that there was nothing unusual in the cancellations, but on [indiscernible], it looks like the translation picked up a little bit in the quarter and I don't know if there was like a specific program that perhaps didn't go or something else you could provide in terms of that we can sort think about the run rate going forward? Thank you.

[Brendan Brennan, Chief Financial Officer]

Sure. Let me take the first one, sorry, the second one first. In terms of cancellations, they did tick up slightly, but it was really around the down scoping of a couple of significant vaccine studies that we were working with, in fact, starting to work on or putting forward. It wasn't anything to completely cancel. It's just these vaccines studies a large, and they are somewhat changeable as they get planned.

So, we had a couple that have gone into the backlog within actually came out because they got down stocked, fewer patients, they're still moving forward, but at a reduced scope. That was the major sort of uptick or a driver for the uptick on the cancellation side of things. So, really nothing there that we saw as material in terms of taking stuff out.

In terms of the RFP, I think we're going to be a little careful about RFP. We do see them as somewhat directionally correlated with longer-term business performance, but really, I think when you look at quarterly numbers, they can vary quite significantly and they can be quite volatile. You get a particular large ballpark into a quarter, which can skew the numbers quite a lot.

I just want to be a little careful with when we start quoting on the RFP. As I said, they were up on a trailing 12-month. I think trailing 12-month is probably the best way to look at these sort of things. We're up about mid-single-digits. for us. And on a – if you take COVID out, that were pretty flat.

In terms of the segments, we're certainly seeing a lot of positive move forward in our large pharma and midsize. The biotech’s were a little bit more [genuine] [ph], a little bit down to the year-on-year. But really overall, we see a pretty solid and positive business environment. And as I say, the RFPs, you have to be a little careful and you have wins, you have losses, and you have, sort of cancellations within the RFPs.

There's a sort of a mid-teens I suppose proportion or percentage of RFPs that actually don't get to any decision. And so, you do have to be a little careful I think about how you interpret RFP data in this industry.

[Elizabeth Anderson, Evercore ISI]

Okay, super helpful. Maybe one just quick [factual one] [ph]. I'm sorry if I missed it. Did you give the cross-sell number in the quarter?

[Brendan Brennan, Chief Financial Officer]

No, we didn't give the cross-sell number in the quarter. We weren't specific on that.

[Elizabeth Anderson, Evercore ISI]

Would you like to?

[Brendan Brennan, Chief Financial Officer]

I'm not sure if I have it. Do we have that.

[Steve Cutler, Chief Executive Officer]

We're not far off the [indiscernible] expectation on an annual basis.

[Brendan Brennan, Chief Financial Officer]

I think overall, I think to date we're at about 100 million in cross-sell up from the close. So, that's in the year. That's pretty much in-line with what we expected to do. So, we're on track with the cross-sell. The revenue takes, of course, a little bit longer to flow through on those cross sales, but on terms of sales, we're – in terms of year to date, we're on track.

[Elizabeth Anderson, Evercore ISI]

Okay, perfect. Thank you so much, guys.

[Operator]

Thank you, Elizabeth. Now we're going to take our next question. Please standby. The next question comes from the line of Christine Rains from William Blair. Your line is open. Please ask your question.

[Christine Rains, William Blair]

Good morning and thanks for the question. You made the comment that you're trying to become more penetrated in small biotech, you're at 15% now, but what is your ideal mix here? And how does your strategy change when you're targeting these smaller customers? And what solutions are resonating with them? Thanks.

[Brendan Brennan, Chief Financial Officer]

Good. Lot of questions there, Christine. Just be clear, the biotech – about 30% of our business is in the biotech, small biotech. The capital market, what we call, we define them as those companies that spend 100 million or less annually in R&D. That's about 15% of our revenue. So, just to clarify a little bit in terms of where our business is. So, about a third in biotech, including those [slow] [ph] ones, and there's midsized and about half of our businesses in large pharma. I mean, to answer your question in terms of getting more penetrated, we do see opportunities in that space. There are a lot of companies in there and they have – there is some – many of them are doing very [good signs] [ph] and so we have some real opportunity.

And as we move forward with them, we – as I've indicated, we [vet] [ph] them very carefully in terms of what we do and how we contract with them. We have that ability to do that. And we're finding that we have a strong opportunity to help them develop their drugs and devices in a way that it’s perhaps a bit more efficient and maybe they would have done, left on their own or working with somebody else. We have a strong drug development group.

We can put together a plan that essentially spends their money more effectively. That's the way we'd like to look at it. Plans their registration programs, plans their clinical development plans, and runs their studies more effectively, and more efficiently. That's the opportunity we see as we see companies wanting to spend their money more deliberately and more effectively in the space.

[Christine Rains, William Blair]

Great. Thank you.

[Operator]

Thank you. Now, we're going to take our next question. Please standby. And the next question comes from the line of Patrick Donnelly from Citi. Your line is open. Please ask your question.

[Patrick Donnelly, Citi]

Hey, guys. Thanks for taking the questions. Steve, maybe just one on the setup. I mean, you guys had talked about the backdrop generally still being pretty solid, maybe a little bit on the biotech side. I know intra-quarter you talked a little bit about the 23 set of kind of saying, your funding remains muted, potentially in a scenario next year is maybe a little more mid-single versus high-single. Can you just talk about, I guess, what you're seeing currently, what plays into, what that scenario could look like into next year on the growth side?

[Steve Cutler, Chief Executive Officer]

On the growth for ICON, Patrick, you're looking for?

[Patrick Donnelly, Citi]

Yes. Yes, absolutely.

[Steve Cutler, Chief Executive Officer]

Yes. Okay. So, I mean, we are – at the moment, we're standing behind our plan for the 7% to 9% on a longer-term basis. We have a plan to get to 10 billion by 2025. So, we don't see anything in the current environment that would stop us moving in that direction and going that. We've talked about high-single-digits as we get into the back-end of this year. And that's the sort of number we should be thinking about. We are thinking about as we go through in the next couple of years.

The funding environment, there's a lot of talk about it, and clearly it's attenuated and come down over the last few quarters, but if you look at the absolute levels, they're still in a – from a historical norm basis, it's still in a pretty good place. You probably got to go back three, four, five years to be there and we've had an extraordinary period really over the last few years, but really [Technical Difficulty] if you look at it on a sort of average basis over the last 10 or 15, the amount of money that's out there is still very solid.

And so, we see plenty of opportunity in that space and we're still seeing RFPs and opportunities and engaging with customers. We had talked to a customer recently, just yesterday, who raised well over $100 million to prosecute three of their Phase 3s, which we're helping them with. So, there is money out there for [good science] [ph] and we feel that we can help our customers drive that and that can continue to fuel obviously our growth expectations, which remain as we've outlined previously.

[Patrick Donnelly, Citi]

That's helpful. And then Brendan, maybe one for you just on kind of the margin guidance and then the synergies as well. Obviously, the incrementals jump up a bit in the second half year. Can you just talk about, I guess, the confidence level as you work your way through this year in terms of kind of maintaining that earnings guide. Obviously, the synergy pull forward helps a bit. And then on the synergies, it doesn't seem like a true cost pull forward given that obviously next year you're kind of increasing the numbers as well. So, can you just talk about what's trending better there and how you're able to kind of deliver the savings this year and then obviously next year as well?

[Brendan Brennan, Chief Financial Officer]

Sure. Yes. No, I think in the second half, yes, I mean, we were – Steve mentioned in his comments, we're very pleased with our margin progression even in Q2. And I think we're set up well for our margin progression as we get in Q3, Q4. We need to continue to execute to our plan obviously. We need to continue to be efficient as an organization. We've got a big plan around our synergies as we've spoken about before, and I'll come back to that in a moment.

And certainly, we need to continue to execute on that, but as you saw, with a [35] [ph] additional on the realized in 2022 or from 75 in Q1, we do feel like we're moving a good pace through that ambition of getting to the 150. So, we think given our strong and solid debt, particularly I'm very happy with the gross margin profile in the current quarter. And again, that comes from a good mix of very good solid underlying business from a direct fee perspective, a good efficient use of our projects and our staff as we go through the second quarter as well.

So, the pipeline remains good and solid. We're working on business that will be able to continue to deliver to that kind of margin profile in the second half of the year. And as I said, we've got good visibility on our synergies. I think on the synergies specifically, just going back to that, I think we're pretty good cost managers as you guys know from many years of interaction.

We were always going to look to drive harder on the timing certainly of our synergies and I'm very pleased that we've now realized and we'll realize $100 million and we feel we have good visibility to that during the course of 2022. And then obviously, we've got the external announced target of $150 million there. And we feel that we will be able to totally implement that so that we're in good, Nick, to deliver those kind of savings from 2024 onwards.

So, yes, we're making good progress there. We've been running ahead of the curve obviously on this one. We'll try to continue to do that, but right now, we're happy with the progress we've made. And if we feel like we're in a better position as we go on through the course of the year, of course, we'll update you guys as we go through that.

[Patrick Donnelly, Citi]

Helpful. Thank you.

[Operator]

Thank you. Now we're going to take our next question. Please standby. And the next question comes from the line of Sandy Draper from Guggenheim. Your line is open. Please ask your question.

[Sandy Draper, Guggenheim]

Thanks very much. If I can maybe sneak in two just housekeeping and then one sort of bigger picture. On the housekeeping, just to make sure I have it correctly Brendan. So, it looks – sounds like the total FX headwind is now 2.2% to 2.4% that's assuming it was 1% before and it's now [120 to 140] [ph]. And then the other housekeeping is, I want to make of the $60 million to $80 million incremental revenue headwind that's China and Russia, Ukraine or just one of those or just trying to make sure I get that? And then the strategic question for probably Steve is the strategic opportunities that are coming up in the pipeline, is that a notable increase compared to the past? Is there different things driving it? Is it people looking to replace other vendors, build strategic for the first time, just any additional commentary there would be great? And thanks for sneaking those questions.

[Brendan Brennan, Chief Financial Officer]

I'll take the housekeeping one first Sandy. I think the best way to maybe think about this is, we moved the midpoint of our guidance by about $160 million to be able to quickly identify once you've had a chance to look them up. We said obviously on the call there [120 to 140] [ph] of that is foreign exchange headwind. I think that does tie in more or less the numbers you're talking about there in percentage terms.

Obviously, the remainder of the 160 then is in relation to the other kind of macroeconomic environment issues that we talked about, which is a mix of Ukraine, Russia and China. Albeit, we call it the fact that Russia, Ukraine on its own would probably be a bigger quantum. And I think Steve mentioned up to $80 million.

So again, you can see the fact that we're talking about still continuing to offset some of that headwind in our numbers. So, I think that probably gives you kind of an idea of what the component parts are. And in terms of the strategic question, Sandy, the opportunities really fall into a number of different buckets. In some cases, we are in discussions of adding on for a customer.

In some cases, it's replacing. In others, it's expanding or there's a refresh happening. In many cases, that's the case these things tend to come up every three to four years and we now very much a player in that market. And so, we've been able to come into those discussions with perhaps in the past as either individual organization that wouldn't have been the case.

Interestingly, they're not just happening in the large pharma space, although that tends to be the predominant, it's in some of the mid-pharma space as well. And the fact that we have both functional and full service capability then of course lasted is also very important because there are a number of customers who want to talk to us about the sort of hybrid model, some functional areas, but a full service component.

So, we feel we're well-positioned from a service offering point of view to be a part of these strategic discussions and these strategic partnerships. And we're pleased with where they go. They don't – they take a little bit of time to come on board, you know that yourself, but we do feel we're in a good place with a number of these discussions with a view to longer-term growth for our company.

[Sandy Draper, Guggenheim]

Great thanks.

[Operator]

Thank you. Now, we're going to take our next question. Please standby. And the next question comes from the line of Eric Coldwell from Baird. Your line is open. Please ask the question.

[Eric Coldwell, Baird]

Thanks, and good morning. I wanted to hit on this margin expansion improvement. It's very impressive. Obviously, you do have some cost actions and PRA synergies, but it sounds like there's also maybe an acceleration in service revenue above what you possibly anticipated in the past. And you mentioned the cancellations, which were actually below my model, but maybe ticked up a little versus the recent average. You said those were related to COVID vaccine studies. I'm wondering if some of that might have been pass-through revenues such that just the optics on the margin are benefiting from lower pass-throughs than perhaps you anticipated to start the year? I'll start with that question and I have one more follow-up. Thanks.

[Brendan Brennan, Chief Financial Officer]

Yes. Eric, it's Brendan here. I might give a crack at this. And you're quite right actually on your – although it's not a COVID vaccine, it's a vaccine study, but it's a down scope. So, you're right. On vaccine studies, there's always a biggest pass-through element, and as you know, we always talk of our business wins and our revenue in principle pass-through. So, there absolutely is an uptick there that probably plays against us a little bit in the quarter from the cancellation quantum perspective. That's quite correct.

We've been really happy with our – I mean, we called it out in the call in terms of our direct fee revenue growth ex-COVID, on a constant currency basis, it's 16% up year-over-year on a 606 basis, yes, just to clarify that point. Kate’s giving me a little hint here to make sure I put that in. So, and that's been strong performance.

When it comes back to I suppose the dilemma we've been talking about over the course of this year, and then that we came into the year with good visibility of nice strong as a mix of business in terms of our non-COVID business, and so that's been playing through well. And obviously, that step down in the proportional margin or it's a proportional pass-through is very positive from a margin expansion perspective as we go through the course of the year.

So, I think it's in-line probably with our expectations. To this point, as I said, very pleased with gross margin to make that comment earlier on. So, we are seeing good utilization of our business. So, I suppose it's a couple of things. It's strong revenue as anticipated with a better mix COVID, non-COVID and then really, really good operational delivery from an efficiency of headcount perspective and utilization of that headcount as we went through the first half of the year.

So, yes, I wouldn't say we're out of line with our expectations at this stage, but certainly happy with where we're progressing.

[Eric Coldwell, Baird]

Okay, great. And then on my other question, it's about hiring, you have accelerated your headcount addition, net headcount addition again this quarter, a very big number. Can you talk a little bit about the labor environment, the recruiting situation, turnover just a broad stroke on what you're seeing on the human capital side of the business? Thanks very much.

[Steve Cutler, Chief Executive Officer]

Sure. Eric, it’s Steve. Maybe I'll take that one. Certainly, we continue to hire pretty aggressively. We have a lot of work to do and we're bringing people in at a pretty rapid rate. In terms of the labor market itself, it's challenging. There are certainly some – the costs of bringing people in are significantly similar, more significant than they were a year or two ago. But it's not crazy. And then certainly, I think we've seen perhaps over the last month or two even in relatively short period, but some attenuation of that.

The labor market seems to be modifying a little bit and I think we're seeing to be, we're certainly able to meet our goals in terms of recruitment and the cost of that recruitment. It's a little early, but the impression is that it's becoming easier. In other words, the costs are not as sky rocketing perhaps much as they were, let's say, 12 months ago.

So, I think from that point of view, our recruitment is in good shape. Our retention certainly improved over the last quarter or so. We've moved that up several hundred bps, if that's the right way to put it, well over 80% now and making good progress on a month-by-month, quarter-by-quarter basis. Again, we're doing a number of things in terms of training programs, development opportunities for people making sure we have retention programs in place, but we feel that the labor market is modifying a little bit in the positive direction for us.

We're also able to be – I'm sure you're interested in that from a margin perspective, the pricing negotiations with customers have been constructive, I would say, probably more constructive than any time I've seen in the industry over the last whatever it is 25 years. And they really do understand that it's in our best interest to be able to pay people market salaries and to repaying people.

So, I think our customers are on board with that and that helps – the partnership angles that we have with our customers really help those sort of discussions. We can have very honest discussions. We get independent surveys. We have good data now available on what those salaries are and it does help us to have those pricing discussions with customers. So, all-in-all, I would say the labor market is improving overall, whether it be from recruitment and or retention from [the quarter] [ph].

[Eric Coldwell, Baird]

Thank you very much.

[Operator]

Thank you. Now, we're going to take our next question. Please standby. The next question comes from the line of Casey Woodring from JPMorgan. Your line is open. Please ask your question.

[Casey Woodring, JPMorgan]

Hi, guys. Thanks for the question. So, just can you comment on the DSO in the quarter? It looks like it increased 17% sequentially to 41% and I noticed that there was no reiteration of the prior DSO guide for the full-year, which had been 25 days to 35 days. So, just wondering if you have any updated expectations there and if there's any concern around cash balances on the SMID side that's driving that number up?

[Brendan Brennan, Chief Financial Officer]

Hi Casey, I'll take that one. It’s Brendan here. Yes. No, listen, it was a picture in the course of the quarter. We certainly want to see it back below 4G as we think about the backend of the year and into Q4. We are doing a lot of change management in our finance organization at the moment. That's both in terms of location of heads, but also the systems that we're using. So, there was a lot of focus on that. So, there is – the upshot of that is a little bit of a lack of focus on DSO and we need to write that quite frankly in the second half of the year.

It doesn't give me any great [pause] [ph]. We thought there was nothing in our customer base that worries me from an aging perspective or a debtor book or any other elements and then there was any particular cohort of our debtors that were more triple than anywhere else. So, still a very, very solid cash collections profile, wouldn't revise any of that. So, expect that as we go through the course of the year. And again, I expect that to flow into cash nicely.

We always see a bit of a dip in our second quarter in terms of cash from operations, but I would expect that to pick up again in Q3 and Q4. So, no, a little bit more work to be done. Certainly, a lot of played spinning here in the finance organization at the moment. We're making good progress, generally speaking, and we would like to see this come back on the [40] [ph] by the time we get to the end of the year.

[Casey Woodring, JPMorgan]

Got it. That's helpful. And then just on the SMID cap RFP flow, you said it was down a bit year-on-year. One of your smaller peers the other day talked about how if RFP flow from SMID biotech, may be artificially inflated during this time just as a lot of these customers are fishing for price between CROs. So, do you believe this is true for your SMID cap customer base, and is that kind of RFP flow you called out maybe a little higher than normal given some of those dynamics? Thank you.

[Steve Cutler, Chief Executive Officer]

Casey, we're not seeing that. As I indicated with the RFPs, we get in there basically three categories, you win some, you lose some, and some get canceled. We're not seeing – in other words, the ones that get canceled tend to be the ones that have been submitted for sort of pricing discussions or at least some sort of pricing indication. I never had really any intention of outsourcing. And that number hasn't gone up.

As I said, it's in the mid-teens, fairly consistently across the business. We haven't seen that go up over the last quarter or [not] [ph]. I don't believe that our biotech customers are throwing stuff out there that's not valid in general, 85% of it are the moves towards an award. I would say successful award or an unsuccessful award, but I don't see any evidence of them just putting stuff out there for the sake of it.

[Operator]

Casey, may I just confirm, have you finished with your questions?

[Casey Woodring, JPMorgan]

Yes. That was great. Thank you.

[Operator]

Thank you. Now, we're going to take our next question. Please standby. The next question comes from the line of Justin Bowers from Deutsche Bank. Your line is open. Please ask your question.

[Justin Bowers, Deutsche Bank]

Hi, good afternoon everyone. Just following up on kind of the backlog and the awards, has been any shift in kind of what customers are seeking the type of solutions over the last couple of quarters, whether it's full service FSP mix, more DCT, etcetera? And can you help us think through how in the context of full service clinical, if something were to enter the backlog now when that would actually start to burn and show up in revenue?

[Steve Cutler, Chief Executive Officer]

Okay. So, Justin, to answer the first part of your question, shift in terms of solutions, I mean, we're certainly seeing an increased demand for these more decentralized or decentralized components within our clinical trial. So, we feel we're in a good place as we develop our decentralized platform and their services around that decentralized platform. We're able to provide, if not a whole solution because there are still not very many fully decentralized trials, but we do have all of the components.

So, I think that's probably a shift that's happened really as we come out of the pandemic. A more risk-based monitoring approach seems to be more in play. Our home health care services have been in demand, our [indiscernible] sites. We're moving on with the call over – the e-consent, sort of areas. So that would be, I would say, a trend.

In terms of FSP versus full service, I don't think we see any particular move either way. As I mentioned in terms of our partnership discussions, many of the companies who are looking to partner with us want to have the option of a functional service provider, as well as a full service provider. Some of the – part of their portfolio, they may do full service, other parts of their portfolio or their functions they want to have in-house or they want to have a functional [indiscernible] oversee or provide it together. So, we're able to provide both of those sort of areas of the business.

So, that's I think very positive for us and puts us in a good position around those partnership discussions. In terms of backlog and burn, the timing in terms of that can vary. If you get a rescue project, you could be – you get it Friday and you start Monday. On the other hand, things – we don't put – we're pretty careful about what goes into our backlog. We don't put projects into our backlog that have a first patient in beyond, I think it's about 9 months to 12 months. And we also don't put it in if there's a go no go decision to be made in a program.

So, what goes into our backlog is it's fairly conservatively managed, I would say. To give you some sort of indication, I would say on average, it's probably 3 months to 6 months from award till we start work. That's sort of – it can be a little faster than that at times. It can be a little longer than that at times, but I would say that's sort of ballpark.

[Justin Bowers, Deutsche Bank]

Thank you. That's helpful. And then just one follow-up on that. It sounds like you're expecting growth ex-COVID to accelerate over the next few quarters? And how much of the backlog still has COVID in it roughly?

[Steve Cutler, Chief Executive Officer]

We expect our COVID revenues to be around about the 5% maybe less in the second half of the year. So, there's certainly still some COVID work in there. No question about that in the backlog. In terms of acceleration, I mean, I think 16% is a pretty good rate of growth ex-COVID, Justin. I'm not sure I'm going to stay on the studio and tell you that we're going to be growing faster than 16%, that's the number that we've been able to get through, excluding COVID on a constant currency basis.

So, I'm not sure I see faster, as I said, faster than that, but we certainly see our non-COVID revenue continuing to grow. And we certainly said, as we've already said, continuing to provide us with opportunities for continuing to improve our margins.

[Kate Haven, Vice President Investor Relations]

And Justin, just on the percentage of COVID work and backlog, it is similar to that level that Steve quoted around that percentage of revenue that we expect, which is in and around 5%. So that's the expectation as we go through the second part of the year. And then just as a reminder that Q2 last year was certainly our highest percentage of revenue in terms of COVID work last year. So, that was our toughest comp.

[Steve Cutler, Chief Executive Officer]

Yes.

[Justin Bowers, Deutsche Bank]

Yes. Appreciate all the questions. Thank you.

[Operator]

Thank you. Now, we are going to take our next question. Please standby. And the next question comes from the line of David Windley from Jefferies. Your line is open. Please ask your question.

[David Windley, Jefferies]

Hi, good morning and good afternoon. Thank you for taking my question. I wanted to drill in a little bit on the emphasis on direct fee growth, make sure I kind of understand, but it seems to both incorporate parts of what Eric asked in the change and maybe down scoping of pass-through elements that would then modestly shift mix toward direct fee, but then you also are talking about DCT elements, kind of highlighted in what solutions are being demanded. And so I just wanted to better understand how the mix of demand of backlog bookings are coming through as it relates to direct fee versus pass through and how that's evolving? And if you feel like your, kind of, forward expectations of that mix are appropriately set? Thanks.

[Brendan Brennan, Chief Financial Officer]

Yes. Hi, David. I might take a crack at this one. It’s Brendan here. I suppose really what that makes and I wouldn't like to think we were downplaying pass-through. I mean, obviously pass-through is a big element of our revenue and will continue to be, it's just obviously we've come to a very extraordinary period where in the first half of last year was completely outsized.

I think the way to think about it though is that we are definitely going back to a period now where pass-through represents no more or less than it did before COVID. So, we're probably back to that proportionality of both business wins and revenue as we go forward. Kate made the point we're about 5% of backlog on those big COVID trials.

Vaccine mixes is an element of that, but obviously we're not seeing the same kind of supersized studies and kind of outsized studies if you like that we saw during the COVID era. So that's certainly something to bear in mind, but of course, the mix of revenue is important and the margin profile is changing quite a bit from a margin perspective, but it's because we're seeing that COVID-bubble is really a lag over the numbers and really seeing that margin profile move up. But as I said, the pass-through elements will probably be where they were back in 2019 as we think about the back half of the year.

[David Windley, Jefferies]

Okay.

[Steve Cutler, Chief Executive Officer]

I think David, just to add to your second part of the question around DCTs and different risk base. I think that will fuel our margins, but I do think that's more in the longer-term. And I think I wouldn't want to sit here and tell you that that's a real source of driving the margin in the relatively short-term, that's more of a longer-term plan.

[David Windley, Jefferies]

Okay. on the – Brendan on the SG&A comments through the second half of the year, you said, kind of dollars remaining relatively constant in a positive way, kind of back to your old ways, I'm wondering with a 50 million, kind of an incremental synergy realization in 2023, if you know continuing on back to the old ways, if that kind of stability in dollars of SG&A can continue beyond [2022] [ph] it looks like that could or maybe the 50 million doesn't completely manifest in the SG&A line. But I'm just curious about how you might continue to scale the SG&A ratio as you did through the middle [indiscernible]?

[Brendan Brennan, Chief Financial Officer]

Yes. I mean, like, to be honest, every target will become the floor. I mean, every [indiscernible] will become the floor. So, as we get to our target and we're a conservative bunch. We don't generally talk about targets. We don't think if we can hit them. We also don't talk about the next target before we do the first one. So, I do think it's fair to say, we have good visibility to that.

I think that will continue our ability to a significant leverage on our SG&A base as we go through 2023. And yes, I think it's probably within our ambition to continue to leverage that SG&A. And even as I said it back when we talked about in February when we were on our Analyst Day, we talked about the path to 21%. We do see a big chunk of that coming from continued SG&A leverage and that probably means going down to – in the ballpark of 9% to 8% on SG&A over time.

So, I think that's certainly within our ambition and certainly within our scope of how we're thinking about our SG&A. Will that deliver absolute dollar for dollar flat into 2023 and 2024. I think that's one, we'll have to wait and see David at this point, but certainly, we do have a lot of ambition about continued leverage.

[David Windley, Jefferies]

Got it. If I can ask just one more. Steve, I appreciate your comments on your own labor force retention recruiting, etcetera. Because ICON owns its Accellacare Network, I would think that you have somewhat of a unique maybe a more boots on the ground view into the site level. And we are hearing increasing feedback that the, kind of the labor stress at the site level is perhaps still rising, kind of consistent with what we hear out of the health care system in general. And I wondered if you could comment on that and how that might or might not be affecting the throughput for, kind of your supply chain and the throughput for trials at the site level?

[Steve Cutler, Chief Executive Officer]

Yes, it's a really good point, Dave. And you're absolutely right. We are seeing some challenges at the site level, particularly in terms of labor and availability of labor. We feel we're in a better place than most on that front because we have our Accellacare site and of course that they're staffed in most cases by our own people or supported by our own people. And we have more of an ability to coordinate and manage that.

So, we're finding the Accellacare sites are starting to disproportionately perform than they already have been, but their performance has been even more enhanced. And I think part of it is because of the stability of the labor force that we're able to provide. One of the other opportunities we believe we have with our home health care and the Accellacare resources is actually deploying some of that resource to some of these sites that may not be within our network, but obviously needs support.

So, there's a business opportunity there that we are actively pursuing until we can get some benefit from as well because of those resources we have. As I say, in the home healthcare, they don't go to obviously the patient's home, they go to the site and help the site. And so there is some opportunity there, but it is a challenge. I think right across the industry, the sites are under pressure, a lot of recruiting that we and many of our brethren have been doing is from sites. Study site coordinators, study nurses make very good CRAs in many cases. And so the sites are under some pressure and it's something that, as I say, represents challenge, but also a significant opportunity for us going forward.

[David Windley, Jefferies]

I appreciate the answers. Thank you very much.

[Operator]

Thank you. Now we're going to take our next question. Please standby. And the next question comes from the line of Luke Sergott from Barclays. Your line is open. Please ask your question.

[Salem Salem, Barclays]

Hi, this is Salem on for Luke. We just had a question on COVID headwinds in the second half. Do you have any color there?

[Brendan Brennan, Chief Financial Officer]

I think, sentiments, we just talked about there a moment ago. I think most of the headwind on the year-over-year comparative was always going to be in the first half of the year. You'll see it. I mean, it's not gone away obviously entirely in the second half of the year, but the most significant deal we had to climb was in Q2. So, a bit of an element of that in Q3, Q4, but not to the same extent that we've seen in Q1, Q2.

[Salem Salem, Barclays]

Got you. Sorry for the redundant question. We have another question on the pricing environment on RFPs, could you guys give us any color there as well?

[Steve Cutler, Chief Executive Officer]

I don't think we see any major changes on the pricing environment, as I think I alluded to or I spoke to previously in terms of pricing from a rate point of view, customers have been constructive in their conversations we've had with them around increases. and the ability for us to move our rates up in an manner and in an amount that's in-line with not just inflation, but with the current market and the current market for our staff and the challenges we have there.

So, I think, I mean pricing discussions are always a challenge with – in our industry, it's a very competitive industry. That's how it should be. But we don't see any particular challenge or any particular issue that's driving more of a challenge in that space at the moment. It's always competitive, continues to be competitive and I don't expect it's going to change anytime soon.

[Salem Salem, Barclays]

That's helpful. Thank you.

[Operator]

Thank you. We are now going to take our next question. Please standby. And the last question comes from the line of Derik De Bruin from Bank of America. The line is open. Please ask your question.

[Unidentified Analyst]

Hi, good morning or good afternoon. This is [Sean] [ph] on for Derik. On net leverage, you've gone from targeting sub 3x to just, it was previously your aspirational 2.5x EBITDA, but now you're there, you're targeting that 2.5x as you continue to pay down the debt? Now, do you continue to make progress in bringing your leverage down? Where are you in terms of pursuing share repurchases and could you talk about your M&A pipeline as well and how the market is? Are you starting to have more in-bound discussions on maybe data assets, additional site networks?

[Steve Cutler, Chief Executive Officer]

Sure. From a share buyback point of view, we really are focused on share buybacks at the moment. We are laser focused on paying out debt down. As you know, the Fed raised interest rates, I think it was yesterday [indiscernible] percent we're expecting we've modeled in further rate increases. And from our point of view with where our share price is at the moment and where our company is at the moment, and what the likely scenarios are going forward on an interest rate basis, we think that is the best use of our capital to put it into paying down the debt and we're very, as I say, very focused on doing that.

So, at least at the moment, there's no real thought of buying back shares. Well, obviously, as we get down to under 3 and we have as Brendan often talk about, our aspirational target of 2.5 as we get into next year. We'll obviously start to think about that or we consider that and be probably a bit more opportunistic on that basis. And that will obviously lead also to a review of our M&A pipeline.

At the moment, we're seeing – we're making such good progress on that front, but we are starting to look around the industry. And as we go through some of the macro environmental and economic challenges, we think there could be opportunities for us, whether they be in the data [indiscernible], as you mentioned, all in the site network or in other parts of our business.

We are very focused in the clinical business. We want to continue that. We do see some opportunities around helping us to get patients into clinical trials faster and better. And so those are – that's the area where we're looking at. Data, data analytics site and the networks around sites those are the areas we would consider, but we're not really – quite ready to pull a trigger on those at the moment.

We're starting to scan the environment. We're looking at what opportunities may be available in the next 12 months or so, but at the moment, as I said, the rule laser focus is on paying on the [indiscernible].

[Unidentified Analyst]

Great. Thank you. And 1Q, you guys talked about some supply chain challenges surrounding [kids supplies] [ph], any ongoing issues there?

[Steve Cutler, Chief Executive Officer]

No, those are pretty much resolved now. [Sean] [ph], we did have some challenges as I alluded to. As I mentioned on the previous call, we've worked hard to get our [indiscernible] in a row on that front and we are now in a much better place on that front. So, that situation is resolved.

[Unidentified Analyst]

Okay, great to hear. Thank you.

[Operator]

Thank you. There are no further questions and would like to hand the conference over to Steve Cutler for closing remarks.

[Steve Cutler, Chief Executive Officer]

Thanks, operator. Thank you everyone for joining the call today. We are pleased to have delivered another quarter of solid financial and operational performance and extend our gratitude to over 40,000 employees across the globe for their continued contributions to our mission of accelerating development of our customers' drugs and devices. Thank you all, and have a good day.

[Operator]

This concludes today's conference call. [Technical Difficulty] disconnect. Have a nice day.