ICON (ICLR) Q2 Earnings Beat, Soar Y/Y; '15 View Revised - Analyst Blog

Global provider of drug development solutions and services, ICON plc ICLR, reported second-quarter 2015 earnings per share of 95 cents, which beat the Zacks Consensus Estimate by 5 cents and surged 48.4% year over year on the back of robust sales and expanding margins.
 

 

 

Quarter Details

Net revenue increased 3.4% on a year-over-year basis to $388.7 million, but fell short of the Zacks Consensus Estimate of $403 million. Net revenue was also shy of management’s expectations. The downside in this case may be attributed to slower backlog conversion.

On a constant currency basis, organic revenue grew 4% from the year-ago quarter. Net business wins in the second quarter totaled $486 million, representing a net book to bill ratio of 1.25.

Group gross margin was 42.1% in the second quarter of 2015, as compared with 29.6% in the year-ago quarter. The margin improvement is primarily owing to robust cost curtailment initiatives and better management of resources across ICON’s project teams.

Operating margin expanded 470 bps on a year-over-year basis to 17.5% on the back of higher operating efficiency and an elevated gross margin.

Financial Details

For the quarter ended June 30, 2015, cash generated from operating activities was $28.1 million, compared with $61.1 million in the previous quarter.

ICON’s net cash amounted to $132.2 million as of June 30, 2015, compared to $171.7 million as of Mar 31, 2015. During the second quarter, the company bought back shares worth $58 million. Additionally, the board of directors of ICON approved an expansion of the share buyback program of up to $400 million.

Capital expenditure totaled $13.4 million in the second quarter, versus $10.7 million in the preceding quarter.

2015 Guidance

Buoyed by improving margins, ICON raised its bottom-line projection for 2015. Earnings per share guidance have been increased to a range of $3.90–$4.00 from the previous $3.60–$3.70 range. The current Zacks Consensus Estimate is $3.84. Consequently, we feel analysts will likely raise their estimates in the coming days, encouraged by the company’s upbeat outlook.

However, owing to slower revenue conversion from backlog, revenue guidance has been slashed to $1.57–$1.60 billion from the earlier estimated $1.60–$1.65 billion. On a constant currency basis, organic growth is anticipated to be in the range of 3–5%.

Our Take

We are impressed with ICON’s significant year-over-year earnings growth which was driven by higher sales and an improved operational performance. The successful integration of the core CRO business of Aptiv delivered significant cost synergies. We believe ICON is poised to gain more synergies as the company integrates the adaptive trial technology into its informatics platform.

Moreover, acquisitions have been a key growth catalyst for ICON. The company has been gaining competitive edge from the Niphix business (acquired from Aptiv) in Japan. Subsequently, ICON won substantial business in the region. Moreover, the acquisition of MediMedia Pharma Solutions, in our view, is complementing ICON’s existing offering by adding scientific communication services.

Tactical capital deployment and a strategic policy of increasing shareholder value through share buybacks remain key positives for ICON. Additionally, we feel expanding margins pose a major tailwind. The revised EPS guidance, according to us, will help instill investor confidence.

However, slower revenue conversion may pose hurdles, hurting the company’s top line ahead.

Stocks to Consider

Currently, ICON carries a Zacks Rank #3 (Hold).

Better-ranked medical stocks at the moment include RTI Surgical RTIX, LDR Holding Corp LDRH and Synergetics USA SURG. All the three stocks sport a Zacks Rank #1 (Strong Buy).

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