IQVIA Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 1, 2023

There are 10 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. At this time, I would like to welcome everyone to the IQVIA Third Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. As a reminder, this call is being recorded.

Operator

Thank you. I would now like to turn the call over to Nick Childs, Senior Vice President, Investor Relations and Treasury. Mr. Childs, please begin your conference.

Speaker 1

Thank you, Regina, and good morning, everyone. Thank you for joining our Q3 2023 Earnings call. With me today are Ari Boosby, Chairman and Chief Executive Officer Ron Bruman, Executive Vice President and Chief Financial Officer Eric Sherbet, Executive Vice President and General Counsel Mike Fedock, Senior Vice President, Financial Planning and Analysis and Gustavo Perron, Senior Director, Investor Relations. Today, we will be referencing a presentation that will be visible during this call for those of you on our webcast. This presentation will also be available following this call in the Events and Presentations section of our IQVIA Investor Relations website atir.iqvia.com.

Speaker 1

Before we begin, I would like to caution The actual results could differ materially from those stated or implied by forward looking statements due to risks and uncertainties associated with the company's business, which are discussed in the company's filings with the Securities and Exchange Commission, including our annual report on Form 10 ks and subsequent SEC filings. In addition, We will discuss certain non GAAP financial measures on this call, which should be considered a supplement to and at a substitute for Financial measures prepared in accordance with GAAP. A reconciliation of these non GAAP measures to the comparable GAAP measures is included in the press release and conference call presentation. I would now like to turn the call over to our Chairman and CEO. Thank you,

Speaker 2

Nick, and good morning, everyone. Thank you for joining us today to discuss our Q1 results. So in line with our expectations, R and D It's performing very well. The TAS business continued to grow, but revenue fell short of what we had expected. About half Our total revenue shortfall came from foreign exchange headwinds versus our previous guidance and the other half from persistent weakness in demand in the TAS segment.

Speaker 2

Despite The TAS revenue shortfall, our productivity actions allowed us to deliver on our profit guidance. We continue to receive questions about the health of the industry and customer demand, and I'd like to give you the latest of what we're seeing in the market. Let's start on the clinical development side. Demand in the R and D segment remains strong. Net new bookings exceeded $2,600,000,000 representing a quarterly book to bill of 124, Overall, including pass throughs, and given that this quarter, there is a significant difference Between services bookings and bookings with pass through, I note that our services bookings We're the highest ever at $2,300,000,000 resulting in a 1.4 Services book to bill.

Speaker 2

Our backlog reached $28,800,000,000 growing 11.7% versus prior year, another historic high. Our quarterly RFP flow was up 10% year over year with growth across all customer segments. Our strong performance is supported by continued healthy market dynamics. Emerging biotech funding was Strong in the quarter. According to BioWorld, 3rd quarter EBP funding was $18,700,000,000 the largest quarter this year.

Speaker 2

Year to date, EBP funding through Q3 was up 8% versus prior year. If you look at the first half large pharma R and D spend, it was above 20% of net revenues, highlighting continued strong R and D activity within large pharma as well. Based on these indicators, the clinical trial industry remains healthy. Our strong market position, Market wins, scale and differentiated offerings give us confidence that our R and D business will continue to deliver I'm sure you also saw that several large pharma have announced significant cost reduction programs And obviously, we are a significant vendor to large pharma. Now we had anticipated to see improvements As we progress through the year, specifically in the quarter, we usually see activity pick up in September After the slow July August summer months, it didn't happen.

Speaker 2

While we still had growth for the segment as a whole, We experienced further declines in our Analytics and Consulting business, somewhat slower than expected growth in the discretionary parts of our real world business as well as some impact from the China situation. While the acceleration we are anticipating is taking longer than expected, Based on our pipelines, we remain confident that there will be a rebound in demand sometime in 2024. We know this because the pipeline of opportunities remains strong even as decision timelines are elongated and negotiations with our customers have become more difficult. We also know this because Historically, going back 25 years, every time there was a pullback in spend on the commercial side, The industry adapts and comes back within a year or 2. With this as context, let's now review the 3rd quarter results.

Speaker 2

Revenue for the 3rd quarter grew 4.9% on a reported basis, 4.1% at constant currency. Compared to last year and excluding COVID related work from both periods, We grew the top line approximately 8.5% on a constant currency basis, and that includes approximately 1.5 percent of contribution from acquisitions. 3rd quarter adjusted EBITDA increased 9.1%, driven by revenue growth and ongoing cost management discipline. 3rd quarter adjusted diluted EPS of $2.49 faced the ongoing headwind of the step up in interest And the UK corporate tax rate. If you exclude the impact of these non operational items, Our adjusted diluted EPS growth underlying was 13%.

Speaker 2

Let me share a few highlights of business activity in the quarter, and let me start with TAS. This quarter, IQVIA was awarded 7 noteworthy analytics contracts to support our clients' go to market strategies. For example, An EBT client selected IQVIA to provide analytics around key prescriber and payer trend for their women's health products. In another significant win this quarter, IQVIA secured a large U. S.

Speaker 2

Data analytics contract with a top 10 pharma client that had been buying from a competitor for over a decade. We also received an award from an EVP client to support the launch of their first branded product into the diabetes market. This will be an end to end launch solution including field reps, inside sales reps, OCE, information management infrastructure, data analytics, Commercial Compliance and Co Pay Card Operations. Also in the quarter, I'm sure you saw that we received an award from Sanofi to deploy our OCE platform within the Middle East and Africa markets. Sanofi has been using IQVIA in many markets around the world to support their HCP engagements.

Speaker 2

On the tech side, we've been getting some questions about our partnership Salesforce and I just want to confirm that IQVIA has been a key life sciences partner to Salesforce for many years now with offerings that span from clinical to commercial. And we plan to continue this strong partnership with Salesforce, combining our life sciences domain expertise and intelligence with sales force technologies and platforms. Moving now to real world. We were awarded multiple rare disease studies from both large pharma and biotech clients, Highlighting our expertise and differentiated offerings within this growing therapeutic area, including innovative study design, Patient recruitment and AI enabled technology to provide unique solutions. Couple of examples.

Speaker 2

A top 20 Large Pharma awarded IQVIA a 10 year study to improve patient treatments for a rare genetic liver disease. A Japanese EDP client awarded IQVIA 2 large post marketing surveillance studies on rare diseases Strategic collaboration with the Coalition For Epidemic Preparedness Innovations, CEPI, aimed at enhancing the world's ability to rapidly conduct This collaboration is a key enabler of CEPI's mission goal, which is sponsored by the G7 and G20 countries to develop safe, effective and globally accessible vaccines against emerging disease outbreaks within 100 days. We've also entered into an innovative strategic collaboration with argenx, a global immunology biotech company. Leveraging our connected intelligence capabilities, we bring together end to end asset development services, ranging from regulatory to market authorization to integrated technology enabled pharmacovigilance safety tracking. This will allow argenx to accelerate the market launch of new rare disease therapies to autoimmune patients.

Speaker 2

In the quarter, a top 10 pharma client renewed their FSP partnership with IQVIA As they look to design and launch their new clinical monitoring model, IQVIA will co develop the solution, leveraging our expertise, innovative tech enabled approach and exceptional delivery performance. IQVIA has been named the sole global medical information center provider by one of our large pharma clients. IQVIA differentiates in the market as the only provider to have successfully utilized an AI Natural Language Processing Solution for Medical Information. As has been the case In the last few years, R and D has continued to win big in oncology with multiple awards in the quarter. A few examples: IQVIA won a late stage program with a biotech company developing immuno oncology therapies.

Speaker 2

We were selected after successful delivery of an earlier stage trial as well as our unparalleled data analytics to help identify patients and populations with unmet needs. We were awarded a Phase 3 oncology trial from a large cutting edge biotech company. IQVIA was selected for our expertise in endometrial carcinoma cancer as well as our ability to accelerate trial start up. This is an important trial given the unmet medical need and limited treatment options for patients with this condition. Also IQVIA was awarded 2 large global oncology trials from a midsized pharma client.

Speaker 2

IQVIA was selected due to our strategic design and operational expertise in oncology, including our ability to manage multiple large complex trials and our experience managing the unique safety profile of these molecules. With that, I will turn it over to Ron for more details on our financial performance.

Speaker 3

Thanks, Ari, and good morning, everyone. Let's start by reviewing revenue. 3rd quarter revenue of $3,736,000,000 Grew 4.9% on a reported basis and 4.1% at constant currency. Now in the quarter, COVID related revenues were about $95,000,000 down about $125,000,000 Versus the Q3 of 2022. Excluding all COVID related work from both this year and last, constant currency growth was approximately 8.5%.

Speaker 3

As Ari mentioned, acquisitions contributed about 150 basis points of this growth. Technology and Analytics Solutions revenue was $1,431,000,000 that's up 2.2% on a reported basis and 0.9% at constant currency. Excluding all COVID related work, constant currency growth in TAS was 5%. R and D Solutions revenue of $2,122,000,000 was up 7.2% reported and 6.4% constant currency. Excluding all COVID related work, constant currency growth in R and Ds was 11%.

Speaker 3

Lastly, Contract Sales and Medical Solutions or CSMS revenue of $183,000,000 was flat on a reported basis and up 4.9% at constant currency. Year to date revenue of $11,116,000,000 Grew 4.2% on a reported basis and 4.8% at constant currency. Excluding all COVID related work, constant currency growth was 11% Technology and analytics solutions revenue year to date was $4,331,000,000 up 2% reported and 2.4% at constant currency and excluding all COVID related work growth at constant currency and TAS year to date was 7%. R and D Solutions year to date revenue of $6,244,000,000 was up 6.5% at actual FX rates And 6.8% at constant currency. Excluding all COVID related work, growth at constant currency and R and Ds was 14% year to date.

Speaker 3

And finally, Contract Sales and Medical Solutions year to date revenue of $541,000,000 declined 3.6% reported And increased 1.2% at constant currency. Let's move down the P and L. Adjusted EBITDA in the quarter was $888,000,000 representing growth of 9.1%, while year to date adjusted EBITDA was $2,603,000,000 up 7.3% year over year. 3rd quarter GAAP net income was $303,000,000 and GAAP diluted earnings per Share was $1.63 Year to date, GAAP net income was $889,000,000,000 or $4.76 of earnings per diluted share. Adjusted net income was $460,000,000 $260,000,000 for the 3rd quarter And adjusted diluted earnings per share was $2.49 Year to date, adjusted was $1,378,000,000 or $7.37 per diluted share.

Speaker 3

Excluding the year over year impact of the step up in interest rates and the increase in the UK corporate tax rate, adjusted diluted earnings per share grew 13% The 3rd quarter and 12% year to date. Now as Ari reviewed, R and D Solutions delivered another strong quarter of bookings. Backlog at September 30 stood at $28,800,000,000 up almost 12% year over year and 33% higher in the last three years. Okay, let's review the balance sheet. As of September 30th, Cash and cash equivalents totaled $1,224,000,000 and gross debt was $13,631,000,000 And that resulted in net debt of $12,407,000,000 Our net leverage ratio ended the quarter at 3.52 times trailing 12 month adjusted EBITDA.

Speaker 3

3rd quarter cash flow from operations was $583,000,000 And capital expenditures were $146,000,000 resulting in free cash flow of $437,000,000 You saw in the quarter that we repurchased $144,000,000 of our shares, which puts our year to date share repurchase This activity just slightly below $800,000,000 This leaves us with just under $2,600,000,000 of share repurchase Authorization remaining under the current program. Okay, let's turn to guidance. We're updating our guidance to reflect Both the slower growth in the TAS segment and the headwind from foreign exchange rates compared to our previous guide, We currently expect revenue to be between $14,885,000,000 $14,920,000,000 which represents year over year growth of 3.3% to 3.5%. Excluding approximately $600,000,000 of COVID This guidance represents growth at constant currency of approximately 9%, including about 100 and 40 basis points of contribution from acquisitions. To reflect these changes in revenue, we're also updating our guidance for full year adjusted EBITDA to $3,560,000,000 to $3,570,000,000 and this represents year over year growth of 6.4% to 6.7%.

Speaker 3

It also implies 70 basis points of margin expansion for the year. Lastly, we're updating our guidance for adjusted diluted EPS to $10.16 to $10.23 which is flat to up 0.7% versus the prior year. This includes the year over year impact of the step up The increase in the UK corporate tax rate, if you were to exclude these items, adjusted diluted earnings per share is now expected to grow 11% to 12%. Based on this full year outlook, our implied 4th quarter guidance is as follows. For revenue, We expect between $3,769,000,000 $3,804,000,000 or growth of 0.8% to 1.7% on a reported basis and 0.7% to 1.6% on a constant currency basis.

Speaker 3

Adjusted EBITDA is expected to be between $957,000,000 $967,000,000 up 4% to 5.1% Net yields margin expansion of about 80 basis points in the quarter. Adjusted diluted EPS It's expected to be between $2.79 $2.86 growing 0.4% to 2.9% year over year. Excluding the step up in interest expense and the increased UK tax rate, we're expecting 4th quarter adjusted diluted EPS to grow 10% to 13%. Now all of our guidance assumes that foreign currency rates as of October 30th Continue for the balance of the year. Now, as is our custom, we plan to provide you with a detailed 2024 full year guidance on our Q4 earnings call in February.

Speaker 3

However, while it's early and we're still in the midst of our planning process, we thought it would be helpful to share A preliminary view that would help you frame how we see 2024. We see reported revenue growth in the mid single digits in 2024. This includes a further step down of approximately $300,000,000 in COVID revenue, which is about 200 basis points of headwind to revenue growth, as well as another 100 basis points of headwind from foreign exchange rates, Assuming current foreign currency exchange rates remain in effect for 2024. We see adjusted EBITDA margins expanding 50 basis points and this will drive high single digit adjusted diluted EPS growth. Now, I trust this preliminary look at 2024 is helpful to you.

Speaker 3

Again, we will, as is our custom, give you more detailed guidance and specificity for 2024 when we release our full year earnings early next year. So to summarize, despite client caution and spending levels below our expectations, the TAS business Continued its growth in the quarter, while the near term growth outlook for TAS is below our previous expectations. We're Confident in the longer term fundamentals of the business as our pipelines indicate there will be a rebound in demand sometime in 2024. In the quarter, we delivered another strong performance in R and D with 11% revenue growth at constant Currency excluding COVID related work, quarterly net new bookings were strong at over 2.6 $1,000,000,000 representing a book to bill of 124, and we reached a historic high of 2 point Our industry leading backlog reached a new record of $28,800,000,000 up approximately 12% year over year. And finally, leading indicators on the clinical side remains strong as evidenced by our quarterly RFP growth of 10% versus the prior year with growth across all customer segments.

Speaker 3

With that, let me hand it back over to the operator to open up The conference for Q and A.

Operator

We request that you please limit yourself to just one question, so that others in the queue may participate as well. We'll pause for a moment to compile the Q and A roster. Your first question comes from the line of Elizabeth Anderson with Evercore ISI. Please go ahead.

Speaker 4

Hi, guys. Thanks so much for the question. One thing that I was just trying to work through for my own sort of benefit It's sort of the commentary, I think Ari, you alluded to in terms of some of the pullback in R and D spend on the pharma side Under the sort of continued strength of R and Ds in terms of bookings and what you're seeing in terms of RFPs, could you help us sort of think about How you think about those two factors, sort of that commentary, where you sort of think pharma's growth is going to be for sort of the remainder of this year and next year and that and maybe Remind us of how that's played out in prior cycles? Thank you.

Speaker 2

Yes. You're asking Elizabeth, thanks for your question. You're asking about Contrasting the pullback in spend on the commercial side versus the unit strength in R and D.

Speaker 4

Sorry, R and Ds more specifically, sorry.

Speaker 2

Yes. But there is no pullback on spend in R and Ds. I don't think I said that. I said the opposite. Funding, NDS, has been very strong.

Speaker 2

I'm sorry if I misspoke It was misunderstood, but there is no pullback in R and D as quite the opposite. I mentioned in my introductory Comments that the if you look at the EBP sector, which has been under pressure and people have been concerned about, We see EBP funding in the quarter actually higher Then it was last year. And I think year to date, I mentioned that Ape founding was up 8% year over year. So, I also mentioned that we are experiencing a strong Continued RFP flow growth, it's actually up 10% in the quarter year over year. So I think it's quite the opposite.

Speaker 2

Our awards continue at a record high level, again, Higher than last year. To give you some more color, our qualified pipeline is up 16% year over year and continues to be very, very strong. Our total pipeline as well, very strong, record high historically. I mentioned our book to bill in the quarter It's 124 on a 606 basis including pass throughs. And when you exclude pass throughs And you just focus on services.

Speaker 2

Our book to bill is 1.4. Our services bookings We're $2,300,000,000 in the quarter. That's a historic high for us. So again, nothing that we see and we've been Handling this point over and over again in the environment or in an all internal metric leads us to believe there is anything Changed on the RNDS spend. There are different dynamics.

Speaker 2

It is true that we have we see Our clients, large pharma especially, explore new models with more FSP or hybrid type of Services awarded, I mentioned we won some large FSPs, which explains, of course, the lower amount of pass throughs In the quarter, in our bookings. But other than that, the spend is strong and our prospects for the business continue to be very strong on the R and D

Speaker 4

Thanks. Ari, that's super helpful. And so when we take the sort of pharma R and D Commentary that you said about some of the pullbacks that and some of the spending cuts in there, you would say that you guys are seeing you're still seeing strong demand within that specific Pharma segment maybe, yes, further and they're cutting costs by pushing more into FSP and maybe there's some anecdotal large pharma

Speaker 2

Yes. I mean, large pharma, you saw, I think 2 thirds of the top 10 large pharma, and we know that that's basically the case. The vast majority All large pharma companies have announced either publicly or internally a significant cost cutting program that's due to The macro environment, which is very challenging, concerns raised by the IRA And the general issues that we see, geopolitical problems all over the world, continuing wars in Europe, the Middle East, And of course, we have the situation in China, which has all but frozen the market For multinational corporations in China, so all of those are headwinds, plus the companies that were very active During the COVID years, are seeing dramatic pullbacks in revenue and all of that is putting pressure on margins. And as a result, Large pharma has been, and I would say unusually so, very aggressive in launching cost reduction programs. Now I said before that, that is not reflected.

Speaker 2

So far, we haven't seen that in the R and D side of the house. Again, I want to reiterate a very strong strength, I mean, a good momentum in the business and all the metrics Show that there is no slowdown there. Again, not surprising, it's a long cycle business. However, we're bearing the brunt Of those cost reduction initiatives on the TAS segment, where we see that projects that This should take a certain amount of time, are taking a lot more time to get decided or awarded. And we see our clients negotiating on terms a lot harder than they ever were.

Speaker 2

And all of that has caused us to come short on the TAS segment in our revenues. But again, we're confident that this is will rebound. We know this because The pipelines continue to be very strong on the DAS segment, and we if you look back at every time there was A pullback of sorts from large pharma in history, whether you go back to the 2,008, 2010 period or Anytime some big legislation was enacted, there was always a little bit of a pullback and then it came back. The company in the industry is very innovative And comes back rolling and our business goes along with it. So we're confident it will come back sometime in 2024.

Speaker 2

Thank you, Elizabeth. Thank

Operator

you. Your next question comes from the line of Charles Rhyee with TD Cowen. Please go ahead.

Speaker 5

Yes, thanks for taking the question. Just wanted to follow-up on the TAS segment here. You talked about sort of longer timelines, but When you're in discussions with clients, do they continue to express an intention to kind of continue with the projects or is are things sort of just on hold? And how much of this is you mentioned the IRA, how much would you attribute to sort of these pharma companies Kind of reviewing pipelines and projects overall. And do you have a sense of how long that kind of process could take?

Speaker 5

You mentioned Sort of reacceleration sometime in 2024, but do you think that's early next year or could that stretch into later next year? Thanks.

Speaker 2

Yes. Well, thank you, Charles. I mean, look, I want to distinguish again between the clinical development side of the house And the commercial shorter cycle part of the house where there are more pockets of spend that are more discretionary from a time So again, on the clinical side of the house, yes, there are reviews of pipelines and so on. And which molecules are worthwhile developing, there's more analysis, but this is at the early, early stage of the process. As you know, we are primarily almost entirely a Phase 3 clinical trial company.

Speaker 2

And so we are not seeing that and we will not be seeing that for another several years if it were to affect The pipeline. I remind you that the number of molecules coming down the pipe is at a record high. The number of FDA approval is at a record high and all of that bodes well for our clinical business and all the metrics that we see From funding to RFPs to awards to backlog and bookings are very, very strong. Once again, we had a record historically historic high In services bookings in the quarter of $2,300,000,000 representing a book to bill ratio of 1.4, Excluding pass through. So that's for the clinical side of the house.

Speaker 2

We have not seen the impact of any revisions or rethinking of pipelines So far, on the commercial side, that's the area where we are seeing an impact Of our clients being more cautious, more conservative, stepping back from some of the projects they were planning to do. But for the most part, What we do, except again for the discretionary part, must be done. There is discretion with respect to timing. And of course, clients are being more aggressive in terms of seeking price reductions and better terms and so on. The pipelines that we have indicate that demand is still there.

Speaker 2

To your question, When people say to us that we no longer do a project, it's no longer in our pipeline. But if it remains in our pipeline, That indeed the client still intends to do it. It's just that the timeline for decision making has been pushed to the right. What explains it? It's again general concerns about the economy, general concerns about the macro geopolitical issues, The pressures resulting from sharp revenue declines post COVID and what that entails from a margin Point of view.

Speaker 2

As I mentioned in my introductory remarks, we are very large vendor to pharma and to large pharma in particular. And when large pharma seeks to improve their margins, they seek to reduce costs and obviously they come to us for further reductions and that elongates time lines and of course erodes pricing as well on our side. All of that has resulted in us coming short on our revenues in DAS along with, as we mentioned in introductory remarks, The significant FX headwinds versus what we had guided to before. So that's the environment. Yes.

Speaker 2

Thank you very much.

Speaker 5

Sorry, the portfolio review, but

Speaker 2

Portfolio, I mean, on the R and D side?

Speaker 5

No, no, on the commercialization side. I misspoke. I meant, how much has the ROI impact is sort of as a Has that had an effect on when pharma said portfolio reviews and where they put their discretionary spend, but it sounds like you're saying it's more just The general macro environment that's having an impact on Yes.

Speaker 2

I mean, the IRA hasn't had any concrete significant concrete impact yet On the market, this is all based on hypothetical developments and down the line. So that just Adds another cloud of uncertainty and in anticipation of that uncertainty that causes management teams to appropriately Seek cost containment. That's all.

Speaker 5

Okay. Okay, appreciate it. Thank you.

Operator

Your next question comes from the line of Dan Leonard with UBS. Please go ahead.

Speaker 6

Thank you. I just wanted to circle back to your 2024 framing commentary. That mid single digit growth figure, can you speak to your expectations between the TAS segment in the R and D S segment. And then in R and D S in 2024, do you expect any meaningful difference in growth rates

Speaker 2

So, again, This is a very we thought it would be helpful just because there's uncertainty and you will recall that even in the At the peak of COVID, we decided to give you guidance early, and we're doing this because We hope that that's helpful to you. Now it's an initial outlook based on where we are in our planning process. We have not completed that planning process. So I would caution you that this is again preliminary and we will come back as is our custom when we release Full year earnings early in 2024 with detailed and precise guidance by segments, etcetera. Just on your question, We are guiding to mid single digit overall revenue growth.

Speaker 2

That includes $300,000,000 of step down from COVID and I think that's essentially all In RMBS. So if you added that back to our total revenues, that would be Another couple of 100 basis points on top of that. And of course, we have we expect 100 basis points of foreign exchange headwinds, Assuming FX rate remains what they are today. So when we say mid single digits, that's really On a reported basis, once you adjust for the COVID step down and FX, It's more high single digits, which I'm sure you agree for an about $15,000,000,000 revenue company is quite an achievement in the current environment. With respect to segment growth, I think it's too early to give it to you.

Speaker 2

We obviously have an idea, But what should we I mean, I just gave it to you, but when we tell you that the COVID Impact is 100% in R and D as you could just assume that we are expecting essentially for now assume about the same Across the segments, that is mid single digits, I would say, okay, before the COVID adjustment.

Speaker 7

Thanks, Ari.

Operator

Your next question will come from the line of David Windley with Jefferies. Please go ahead.

Speaker 8

Hi, good morning. Thanks for taking my question. Ari, I wanted to focus on margin. You commented in your prepared remarks about productivity initiatives that you took in the Q3. You're talking about the bookings mix being heavy to Service and so that could be beneficial in R and D as to EBITDA growth.

Speaker 8

Just wondered if you could talk Kind of expansively about any further productivity initiatives that you might be able to take and kind of what are the drivers to get you to that 50 basis points of EBITDA margin expansion for next year?

Speaker 2

Thanks. Thank you, Dave. Look, I mean, the productivity initiatives I mentioned, not just in the Q3, you will recall, we started This towards the end of last year, that's what has led us to be able to address the revenue shortfall And not completely bear the brunt of that reduction falling through EBITDA. We've been able to offset A lot of that headwinds with those cost reduction programs, it takes time. As you know, The actions that we took in Q3 are not going to bear a benefit until Q4, Q1, Q2 of next year.

Speaker 2

So We're constantly taking actions to restructure our overhead structure, To review our spans of control globally, to continue our offshoring programs, To review our infrastructure footprint that includes real estate, it includes IT, It includes really all of that infrastructure that we need to run our business and all of those cost Factors along with the proper mix of insourcing, outsourcing and as I mentioned, Our continued offshoring of certain activities and taking advantage of our labor arbitrage among our different centers, whether it's in the Philippines, in India, In Bangladesh, in South America, etcetera, all of those things are being done on an ongoing basis and we see The benefit in our margins this year and the actions we took, for example, in the Q3, the carryover Benefit will materialize in Q4, so the and in following quarters during 2024. The reason we feel confident about a 50 basis points margin expansion in 2024 is because we see That it's the carryover of the actions we took this year that will benefit on a full year basis 2024. And of course, we don't intend to stop those actions selectively.

Speaker 8

That's great. Thank you. I'll stay the 1. Thanks.

Operator

Your next question will come from the line of Justin Bowers with Deutsche Bank. Please go ahead. Justin, your line might be on mute.

Speaker 7

Thank you, and good morning, everyone. So just wanted to take a step back and with respect to some of the cost cutting programs that we've seen large pharma Announced, what is IQVIA's opportunity to sort of participate in some of that and help drive some of those savings, Whether it's in sort of RDS or TAS? And then, secondarily, On for the outlook for 2024, what is what's the M and A assumption embedded in that growth rate?

Speaker 2

Thank you, Justin, for your question. Yes, we are actively engaged with our customers to help them With our cost reduction programs, look, we have to we are a large vendor across the board, clinical and TAS, And they come to us and ask us to help them. So we have an opportunity to do that. Obviously, it affects our revenue growth. That's primarily the case in TAS because that's where the pricing changes As the renegotiated terms impact us almost immediately, Less so in RNDS, but mostly in TAS.

Speaker 2

Now the opportunity, if you will, for us Is that in those conversations, we try to offer more services That has always been the case. That's a traditional way of engaging with our clients when they seek cost reductions. We try to capture a bigger share of their spend in exchange We're being able to deliver those services at a lower price point, and so the benefit for us In longer term, we get a bigger piece as they give us more volume. We've seen that Happened frankly on the commercial side and on the R and D side over the past 5, 6 years and certainly since the merger. And we certainly hope that, that will materialize, but it will take a couple of years to materialize because when clients need to switch Vendors, it takes time to let the contract end and convey them to us.

Speaker 2

Your next question was on the acquisition impact. It's about

Speaker 3

a 100 basis points.

Speaker 2

Got it. Thanks. Again, that's the assumption for 2024 at this stage. Yes. That's what's Thank you, Tim.

Speaker 2

Yes. When we come back, we'll give you four more guidance. This is really not guidance. It's really

Operator

The next question will come from the line of Shlomo Rosenbaum with Stifel. Please go ahead.

Speaker 6

Hi. Thank you very much.

Speaker 7

I just want to drill down a little bit more into As you talked about the discretionary areas, maybe you can just get

Speaker 6

a little bit more into is it Consulting, BPO, software, data sales, maybe just a little bit more of detail as to how growth is trending Within each one of kind of the sub segments, I know you don't break it out exactly revenue wise, but it

Speaker 7

is helpful to kind of think about what's going on beneath the surface there.

Speaker 2

Yes. Thank you, Shlomo, for the question and opportunity to clarify. Look, the TAS segment has continued to grow in the quarter. I mean, you know and you can look at large cap companies that serve the life sciences industry With products and services supporting post drug Introduction in the market and you can see that they almost uniformly are showing Declining growth this year and sharp declines in the quarter for those who have reported. Now we continue to have growth.

Speaker 2

And the reason for that is because some of this stuff is longer term and is Somewhat mission critical. I'm speaking about data, the stuff that's Technology licenses, subscription, recurring revenue, all of that continues As is and that's what is enabling us to continue to deliver growth. However, the parts of our business that are more Discretionary and when I say discretionary, I don't mean to say that our clients may decide Simply not to go ahead. It happens, but that's a small proportion of what we sell. It means that it can be done later.

Speaker 2

It means that it can be done in a different way, Perhaps in a slim down version, less better than we thought. And so the consulting and analytics part of our business, which as you know is about a Quarter of our revenues is showing sharp declines, sharper than we would have expected. Some of the projects have simply fallen off, But the pipelines are still there. That's what gives us confidence for a rebound in 2024. We know That these projects have to be done.

Speaker 2

The clients are just taking a lot more time To make a decision, they are negotiating us a lot longer and a lot more and a lot more aggressively. And this is what has happened. This is I mentioned in my introductory remarks a few examples of significant wins It does, and these are almost uniformly, these types of projects, helping clients launch Launched products in new markets, helping them with their go market Go to market strategies, these are things that have to be done. And the projects that we won in the quarter, frankly, some of those we should have won in the Q1. They were in the pipeline since last year.

Speaker 2

So the decision timelines have extended and the terms Have been tougher. That's what has happened. I hope that color helps you. Thank you. Thank you.

Operator

Your next question comes from the line of Luke Sergut with Barclays. Please go ahead.

Speaker 9

Awesome. Thanks. So You talked about the large FSP win, and you're seeing a lot more shift to that type of hybrid model. And You've talked in the past about this being really in cyclical nature, but this has also come at a lower margin. So help us think about like The duration, the size of the FSP wins that you had and if we should expect Some of the mix headwinds to your future over the next 3 months to a year On this business from regarding RDS side?

Speaker 2

Thank you, Luke. Yes, you're absolutely correct That an FSP award comes at a lower booked margin than a Full service program. And you're also correct that this has is a cyclical development in the industry. I recall very well that at the time we did the merger 7 years ago, Coming into at the time the legacy Quintas organization, it was explained to me that the industry was now in the midst of A switch from full service to FSP and as a result of which Quinta at the time had pulled back From servicing these clients because they didn't want to do FSP work given its lower margin profile. I thought at the time there was a strategic error and we since then, of course, have decided to serve our clients With the full portfolio of services, including FSP and including full service and including hybrid and everything else, We serve clients.

Speaker 2

We don't push offerings. So if at this point in time, our clients are interested In more FSP or more hybrid models, that's what we will sell to them. It is then incumbent upon us To work on our cost structure to try to recover margins when we execute the work at a higher level than what we booked it at And try to continue to develop cost containment and cost reductions, so that we can offset The margin mix impact. Look, we are a very large company. We are executing thousands of trials at any given We manage a portfolio of businesses.

Speaker 2

Once again, we are about a $15,000,000,000 revenue company growing mid single digits Before, you account for the step down in COVID revenue and the FX headwind, And we are at adjusted EBITDA margins of 24%, And we are expanding those margins, and we intend to continue that model well into the future Despite cyclical headwinds that may occur, whether it is a tougher spending environment on the TAS side, Whether it is a switch to FSP from some of our large pharma clients, you saw in the quarter again $2,300,000,000 Of services fee revenue, excluding pass through bookings, resulting in a Book to bill at 1.4, again, a historic high in our bookings. That included some FSP wins. Again, not anything that would move the needle dramatically, but on a large number like this, You can see that we have less pass throughs. That will materialize in our margin mix in the next couple of years, not next quarter, obviously. And we fully intend to offset that with our cost reductions and continue to increase our margins.

Speaker 2

Thank you for your question.

Speaker 9

Yes. Thank you.

Operator

Your next question will come from the line of Jalendra Singh with Truist Securities. Please go ahead.

Speaker 2

Yes, thank you. Thanks for taking my questions. I want to ask for the capital deployment strategy over the next 12 months. Has there been any change there in terms of your priority to pay down debt versus buyback shares or even M and A allocation? And one quick clarification, what is the magnitude of the The first question and the second question, I'll give to the technicians here.

Speaker 2

The first question on capital allocation, look, it's Fascinating that we are getting from our investors 2 different messages. 1 is, please, please reduce your leverage And one is please, please do not change your leverage. And I have to tell you, we Historically, we have been living with a level of leverage that's admittedly higher Than others, we are at around 3.5 net leverage right now. I want to just The anecdote tells you that we've had in the past much higher levels of leverage And much more difficult market conditions and much lower levels of cash flow conversion. And we've lived with that nicely because we have a highly predictable, high visibility business model.

Speaker 2

Our strategy has been, a, to invest in the business, in capital expenditures to innovate new products and services b, Buy companies that add, that are accretive and enable us to grow faster and see return money to our shareholders through share repurchases. And that has been a very effective strategy, especially when rates were extremely low. I remind you that just 2 years ago, Treasuries were at 0, 0. And I'm very glad that we had that amount of leverage. Today, treasury is at what, 5.5%.

Speaker 2

I mean, we've never seen in history Such a sharp dramatic rise in interest rates in such a short period of time. Obviously, We are paying the brunt of our leverage, the price of that leverage, because of that and it's costing us 10 points, 10 points of growth in earnings per share. However, I would argue that mid single digits Treasury rates is high versus 0, but it's not the end of the world. I would also tell you that we Bore the brunt of that sharp increase in interest rates this year in 2023. And assuming like everyone else Assumes that the curve, if it is to be believed, indicates a stabilization and even a potential decline, Then that should be a headwind I'm sorry, a tailwind to our EPS going forward, and we don't anticipate A sharp increase in rates or in interest expense going forward.

Speaker 2

And so therefore, we should be able to resume Strong EPS growth going forward. That's for the leverage. Having said that, we are working as we speak Obviously, refinancing and readdressing some of the shorter term maturities, which we have In 2024 and 2025, and we'll do that soon hopefully, and that will continue to alleviate That headwind that we faced this year in interest expense and continue to stabilize our balance sheet. But for now, at least, We intend to continue to use our cash to invest in the business and do acquisition and share repurchase, especially at the levels Where we are? Thank you for your question.

Speaker 2

Any comment on the swap?

Speaker 3

Yes, we have about $800,000,000 of swaps rolling off In the Q2 of 2024. Yes. And anything to that next

Speaker 1

Which is at about an average rate of about, call it, somewhere between 2% and 3%. So, it will be a headwind next year, but not to the extent that you saw on the swap that rolled off, this year.

Speaker 2

Got it. Thank you. Yes. Thank you very much.

Speaker 1

Thank you everyone for We look forward to talking to everyone on our next call and myself and the team will be available for any follow-up calls and any other follow-up questions you have across the day and over the next few days. So feel free to reach out. Thanks everyone for joining.

Operator

This concludes today's conference call. You may now disconnect.

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Earnings Conference Call
IQVIA Q3 2023
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