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| ERES > SEC Filings for ERES > Form 10-Q on 8-May-2009 | All Recent SEC Filings |
8-May-2009
Quarterly Report
Cardiac Safety Consulting. The centralization of electrocardiograms in clinical
research has become increasingly important to organizations involved in the
development of new drugs. Global regulators each apply their own slightly
different interpretation of the International Conference on Harmonization E14
guidelines and, as a result, sponsors look to their vendors to provide key
scientific input into the overall process. Our cardiac safety consulting service
aids sponsors in the development of protocol synopses, the creation and analysis
of statistical plans as well as the provision of an expert medical report with
regard to the cardiac findings. We are involved in all phases of clinical
development from a consultancy point of view. We offer this service both as a
stand-alone service and integrated with our full suite of Cardiac Safety
solutions.
EDC. The process of designing, implementing and managing a clinical trial
requires a well defined process and set of supporting products to effectively
handle the variety of tasks and information comprising a clinical trial. We
provide a suite of products to address the capture, management and dissemination
of clinical trial data. Our integrated suite is comprised of the following:
• Portal is an easy to use portal application enabling clinical trial
researchers and staff to gain real-time access to study dashboards, progress
reports, folders and forums enabling efficient management and communication of
study progress.
• EDC Now! technology provides a comprehensive electronic data capture
(EDC) system comprised of technology and consulting services formulated to
deliver rapid time to start for electronic trial initiatives.
• Data Management is a clinical data management application for collecting,
cleaning and managing clinical trial data.
• Adverse Event Reporting is an adverse event management system enabling the
generation of key regulatory reports, including CIOMS and Medwatch.
• Trial Management is a clinical trial management technology that can be used to
set up clinical trials, establish standards, track study activities, plan
resources, distribute supplies, manage the financial aspects of a trial and
electronically view clinical trial data.
ePRO. Our electronic patient reported outcome (ePRO) solution is an Interactive
Voice Response (IVR) system that allows subjects to easily and quickly report
data for a clinical trial. Because it can be accessed from a standard phone, our
ePRO system is cost effective while being extremely scalable and suitable from
Phase I through Phase IV. Diaries, screening, recruitment and all clinical
assessments can be completed directly by the subject without requiring clinician
involvement.
Project Assurance. We provide a full spectrum of consulting services for all of
our products that augment the study management and implementation efforts of
clients in support of their clinical research requirements.
We recognize software revenues in accordance with Statement of Position
(SOP) 97-2, "Software Revenue Recognition," as amended by SOP 98-9,
"Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions." Accordingly, we recognize up-front license fee revenues under the
residual method when a formal agreement exists, delivery of the software and
related documentation has occurred, collectability is probable and the license
fee is fixed or determinable. We recognize monthly and annual license fee
revenues over the term of the arrangement. Hosting service fees are recognized
evenly over the term of service. Cardiac Safety services revenues consist of
services that we provide on a fee for services basis and are recognized as the
services are performed. We recognize revenues from software maintenance
contracts on a straight-line basis over the term of the maintenance contract,
which is typically twelve months. We provide consulting and training services on
a time and materials basis and recognize revenues as we perform the services.
Site support revenues are recognized at the time of sale or over the rental
period.
For arrangements with multiple deliverables where the fair value of each element
is known, the revenue is allocated to each component based on the relative fair
values of each element in accordance with Emerging Issues Task Force
(EITF) Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." For
arrangements with multiple deliverables where the fair value of one or more
delivered elements is not known, revenue is allocated to each component of the
arrangement using the residual method provided that the fair value of all
undelivered elements is known. Fair values for undelivered elements are based
primarily upon stated renewal rates for future products or services.
We have recorded reimbursements received for out-of-pocket expenses incurred as
revenue in the accompanying consolidated financial statements in accordance with
EITF Issue No. 01-14, "Income Statement Characterization of Reimbursements
Received for 'Out-of-Pocket' Expenses."
Revenue is recognized on unbilled services and relates to amounts that are
currently not billable to the customer pursuant to contractual terms. In
general, such amounts become billable in accordance with predetermined payment
schedules, but recognized as revenue as services are performed. Amounts included
in unbilled revenue are expected to be collected within one year and are
included within current assets.
Cost of licenses consists primarily of application service provider (ASP) fees
for those clients that choose hosting, the cost of producing compact disks and
related documentation and royalties paid to third parties in connection with
their contributions to our product development. Cost of services includes the
cost of Cardiac Safety services and the cost of technology consulting, training
and maintenance services. Cost of Cardiac Safety services consists primarily of
direct costs related to our centralized Cardiac Safety services and includes
wages, depreciation, amortization, fees paid to consultants and other direct
operating costs. Cost of technology consulting, training and maintenance
services consists primarily of wages, fees paid to outside consultants and other
direct operating costs related to our consulting and client support functions.
Cost of site support consists primarily of wages, cardiac safety equipment rent
and depreciation, related supplies, cost of equipment sold, shipping expenses
and other direct operating costs. Selling and marketing expenses consist
primarily of wages and incentive compensation paid to sales personnel, travel
expenses and advertising and promotional expenditures. General and
administrative expenses consist primarily of wages and direct costs for our
finance, administrative, corporate information technology, legal and executive
management functions, in addition to professional service fees and corporate
insurance. Research and development expenses consist primarily of wages paid to
our product development staff, costs paid to outside consultants and direct
costs associated with the development of our technology products.
We conduct our operations through offices in the United States (U.S.) and the
United Kingdom (UK). Our international net revenues represented approximately
20% and 17% of total net revenues for the three months ended March 31, 2008 and
2009, respectively. The majority of our revenues are allocated among our
geographic segments based upon the profit split transfer pricing methodology,
and revenues are generally attributed to the geographic segment where the work
is performed. The profit split methodology equalizes gross margins for each
legal entity based upon its respective direct costs.
Results of Operations
Executive Overview
Net revenues were $23.8 million for the first quarter of 2009, a decrease of
$9.9 million or 29.4% from $33.7 million in the first quarter of 2008. The year
over year revenue decline is due to a decline in transaction volumes in both
Thorough QTc and routine studies, lower revenue from acquired backlog of Covance
Cardiac Safety Services, Inc. (CCSS) as this backlog nears completion and less
equipment sales in the first quarter of 2009 than in the first quarter of 2008.
Gross margin percentage in the first quarter of 2009 was 50.4% compared to 52.5%
in the first quarter of 2008. Gross margin percentage is significantly impacted
by volume. The negative impacts of volume on the gross margin percentage
compared to the prior year's quarter was partially offset by the elimination of
legacy costs associated with processing the CCSS backlog during the period we
integrated their operations and lower depreciation and amortization.
Operating income for the first quarter of 2009 was $3.3 million or 14.0% of
total net revenues as compared to $8.5 million or 25.2% of total net revenues in
the first quarter of 2008. Total expenses were $20.4 million in the first
quarter of 2009, a decrease of $4.8 million from $25.2 million in the first
quarter of 2008. Our tax rate for the first quarter of 2009 was 40.1% as
compared to 35.6% in the first quarter of 2008.
Net income for the first quarter of 2009 was $2.1 million as compared to
$5.7 million in the first quarter of 2008. This resulted in net income per
diluted share of $0.04 in the first quarter of 2009 as compared to $0.11 in the
first quarter of 2008.
General business and economic conditions have deteriorated globally since the
fourth quarter of 2008. Starting in the fourth quarter of 2008, we have
experienced an increased focus in Phase III opportunities, a decline in the
number of Thorough QTc bookings, and a delay in starts for certain Thorough QTc
trials and we believe these trends will continue through at least the first half
of fiscal 2009. We believe the increase in Phase III opportunities will provide
us with a base of business into the future, however this business will take
longer to turn into revenue. We believe that the delays in Thorough QTc trials
are related to timing as the result of the uncertain economic environment,
especially in small to midsize customers. Thorough QTc trials are generally
required to be performed due to regulatory guidance, however the timing of when
these trials are done is discretionary. We also experienced an increase in
awards of new and expanded exclusive or near-exclusive long-term enterprise
relationships with large pharmaceutical companies during the latter portion of
fiscal 2008 and also continuing into the first quarter of 2009, including
several that we had very little business with in the past. Overall, we believe
the fundamental drivers of our core business remain positive. However, a
continued weakened global economy could have a negative impact on future results
of operations.
The following table presents certain financial data as a percentage of total net revenues:
Three Months Ended March 31,
2008 2009
Net revenues:
Licenses 1.9 % 3.0 %
Services 75.0 70.7
Site support 23.1 26.3
Total net revenues 100.0 100.0
Costs of revenues:
Cost of licenses 0.6 0.9
Cost of services 31.2 33.4
Cost of site support 15.7 15.3
Total costs of revenues 47.5 49.6
Gross margin 52.5 50.4
Operating expenses:
Selling and marketing 9.9 14.4
General and administrative 14.4 17.2
Research and development 3.0 4.8
Total operating expenses 27.3 36.4
Operating income 25.2 14.0
Other income, net 1.3 0.5
Income before income taxes 26.5 14.5
Income tax provision 9.4 5.8
Net income 17.1 % 8.7 %
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Three Months Ended March 31, 2008 Compared to Three Months Ended March 31, 2009. The following table presents our consolidated statements of operations with product line detail (dollars in thousands):
Three Months Ended March 31,
2008 2009 Increase (Decrease)
Licenses:
Net revenues $ 625 $ 709 $ 84 13.4 %
Costs of revenues 200 205 5 2.5 %
Gross margin $ 425 $ 504 $ 79 18.6 %
Services:
Cardiac Safety
Net revenues $ 23,784 $ 15,617 $ (8,167 ) (34.3 %)
Costs of revenues 9,865 7,377 (2,488 ) (25.2 %)
Gross margin $ 13,919 $ 8,240 $ (5,679 ) (40.8 %)
Technology consulting and training
Net revenues $ 706 $ 398 $ (308 ) (43.6 %)
Costs of revenues 427 363 (64 ) (15.0 %)
Gross margin $ 279 $ 35 $ (244 ) (87.5 %)
Software maintenance
Net revenues $ 783 $ 802 $ 19 2.4 %
Costs of revenues 222 214 (8 ) (3.6 %)
Gross margin $ 561 $ 588 $ 27 4.8 %
Total services
Net revenues $ 25,273 $ 16,817 $ (8,456 ) (33.5 %)
Costs of revenues 10,514 7,954 (2,560 ) (24.3 %)
Gross margin $ 14,759 $ 8,863 $ (5,896 ) (39.9 %)
Site support:
Net revenues $ 7,775 $ 6,260 $ (1,515 ) (19.5 %)
Costs of revenues 5,268 3,635 (1,633 ) (31.0 %)
Gross margin $ 2,507 $ 2,625 $ 118 4.7 %
Total
Net revenues $ 33,673 $ 23,786 $ (9,887 ) (29.4 %)
Costs of revenues 15,982 11,794 (4,188 ) (26.2 %)
Gross margin 17,691 11,992 (5,699 ) (32.2 %)
Operating expenses:
Selling and marketing 3,323 3,426 103 3.1 %
General and administrative 4,873 4,077 (796 ) (16.3 %)
Research and development 999 1,149 150 15.0 %
Total operating expenses 9,195 8,652 (543 ) (5.9 %)
Operating income 8,496 3,340 (5,156 ) (60.7 %)
Other income, net 427 116 (311 ) (72.8 %)
Income before income taxes 8,923 3,456 (5,467 ) (61.3 %)
Income tax provision 3,177 1,386 (1,791 ) (56.4 %)
Net income $ 5,746 $ 2,070 $ (3,676 ) (64.0 %)
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The following table presents costs of revenues as a percentage of related net revenues and operating expenses as a percentage of total net revenues:
Three Months Ended March 31, Increase
2008 2009 (Decrease)
Cost of licenses 32.0 % 28.9 % (3.1 %)
Cost of services:
Cardiac Safety 41.5 % 47.2 % 5.7 %
Technology consulting and training 60.5 % 91.2 % 30.7 %
Software maintenance 28.4 % 26.7 % (1.7 %)
Total cost of services 41.6 % 47.3 % 5.7 %
Cost of site support 67.8 % 58.1 % (9.7 %)
Total costs of revenues 47.5 % 49.6 % 2.1 %
Operating expenses:
Selling and marketing 9.9 % 14.4 % 4.5 %
General and administrative 14.4 % 17.1 % 2.7 %
Research and development 3.0 % 4.8 % 1.8 %
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Revenues
The decrease in Cardiac Safety services revenues was primarily due to a
$6.3 million reduction in transactions performed in the three months ended
March 31, 2009 as compared to the three months ended March 31, 2008 and due to a
decrease of $1.8 million of CCSS backlog revenue recognized as these studies
reach completion. The impact of CCSS backlog revenue is expected to continue to
decrease in significance as these studies reach completion. There was also a
decrease in average revenue per transaction that was largely due to a heavier
weighting of semi-automatic studies which carry lower transaction prices which
resulted in a decrease in revenue of approximately $0.6 million. Partially
offsetting these decreases was $0.5 million resulting from a change in
classification of reporting configuration revenue that was previously included
in technology consulting and training revenue. As of January 1, 2009, we include
reporting configuration as part of our package of Cardiac Safety services.
Technology consulting and training revenues decreased due to a change in revenue
classification as discussed above.
Site support revenues decreased primarily due to a $0.8 million decrease in
equipment sales as more customers choose to rent cardiac safety equipment and a
$0.5 million decrease in rental revenue from cardiac safety equipment due to a
lower average price per unit. The lower average price per unit is a result of
planned actions that we have recently taken to improve our competitiveness with
regard to this component of our revenue.
Costs of Revenues
The decrease in the cost of Cardiac Safety services was primarily due to
$2.1 million of costs recognized in the first quarter of 2008 associated with
the CCSS operations. We successfully completed the integration of the CCSS
acquisition in the third quarter of 2008 with the complete transfer of all
operating activities from the CCSS Reno facility into our operations in
Philadelphia and Peterborough. Additionally, amortization of intangible assets
decreased $0.3 million as result of certain assets becoming fully amortized,
telecommunications costs decreased $0.2 million due to negotiated adjustments
related to contract renewals and bonus expense decreased $0.2 million due to
reduced accruals based on operating results. Partially offsetting the decrease
was a $0.4 million increase in labor costs related to additional staff added in
2008 and market adjustments to salaries made in 2009. The increase in the cost
of Cardiac Safety services as a percentage of Cardiac Safety service revenues
reflects the fact that some of the costs do not necessarily change in direct
relation with changes in revenue.
The decrease in the cost of site support, both in absolute terms and as a
percentage of site support revenues, was primarily due to a $0.8 million
decrease in depreciation expense as older, more expensive ECG equipment has
become fully depreciated and a $0.4 million decrease in the cost of equipment
sold due to lower equipment sales. Additional decreases totaling $0.4 million
occurred in freight, costs associated with the CCSS operations in 2008, supplies
and other expenses.
Operating Expenses
The increase in selling and marketing expenses, both in absolute terms and as a
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