ICON Public Company - Q2 2024
July 25, 2024
Transcript
Operator (participant)
Good day, and thank you for standing by. Welcome to the ICON Q2 2024 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one and one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one and one again. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker today, Kate Haven. Please go ahead.
Kate Haven (Head of Investor Relations)
Good day, and thank you for joining us on this call covering the quarter ended June 30, 2024. Also on the call today, we have our CEO, Dr. Steve Cutler, our CFO, Brendan Brennan, and Senior Vice President of Corporate and Commercial Finance, Emer Lyons. I would like to note that this call is webcasted 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 statement, 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 February 23rd, 2024. 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, adjusted net income, and adjusted diluted earnings per share excludes stock compensation expense, restructuring costs, foreign currency gains and losses, amortization, and transaction-related and integration-related costs and their respective tax benefits. We will be limiting the call today to one hour and would therefore ask participants to keep their questions to one each in the interest of time. I would now like to hand over the call to our CEO, Dr. Steve Cutler.
Steve Cutler (CEO)
Thank you, Kate, and good day, everyone. ICON's results in quarter two continued our positive year-to-date trajectory of growth, marked by solid financial performance and further success in securing new business across our segments. Net business wins and backlog grew by 7% and 10%, respectively, year-over-year, as our leading scaled offering continues to resonate with our customers, uniquely positioning ICON to meet increasing demand for innovative and flexible solutions in clinical development. We remain encouraged by the leading indicators in our market that support a solid demand environment, including continued growth in RFP flow and the overall consistent level of opportunities we are seeing across our customer segments.
While biotech funding levels attenuated slightly in quarter two from a robust start in quarter one, we see this market continuing to stabilize and have seen a modest uptick in RFPs on a trailing twelve-month and sequential basis within this segment. Importantly, customer sentiment appears to be improving, and we remain optimistic around the contribution to midterm growth this important customer segment represents. In the large pharma segment, we see continued opportunity to win and expand our support of the many customers seeking novel solutions. While macro challenges and budget uncertainties remain a factor at the forefront in their overall spending decisions, we have seen continued prioritization around the development of late-stage clinical pipeline assets to advance drugs to market.
We believe this provides a certain degree of stabilization to the demand patterns in this area of the market that have largely been steady through more volatile macroeconomic periods in recent years. Our offering in large pharma is particularly well-placed to serve customers seeking flexible, blended solutions, encompassing both full service and functional elements of delivery, with our proven agility and scalability in both service areas. One of the key strategic initiatives we laid out at our Investor Day in May was extending our leadership in the large pharma market through our blended solutions offering and our differentiated ability to customize a model for customers. This increasingly important approach was critical to our success in securing another new strategic partnership with a rapidly growing top 30 pharma company for full-service solutions in quarter two.
We were selected for this partnership due to our ability to partner with this customer in creating a tailored operational solution that was optimized to fit their evolving needs. Our deep understanding of various outsourcing models and the ability to pivot between them was a key differentiating point for ICON, as well as our portfolio of integrated clinical services that will create value in areas such as site and patient solutions and laboratory services. This reinforces our recent success in building partnerships outside of our top-tier customers, creating a well-diversified and balanced portfolio that is not overly concentrated to a particular customer or therapeutic area. Specifically, in the first half of this year, we were able to grow revenue outside our top five customers by over 8%, illustrating the success we are having in executing our portfolio and developing our top-tier customers of the future.
As we continue to grow and scale our company, we remain focused on leveraging the unique blend of experience and capability we have in not only winning, but executing and expanding large-scale strategic partnerships that create strong value for both our customers and Icon. While our perspective on this year's demand environment has remained consistent, we did receive an update late in the quarter pertaining specifically to next-generation COVID vaccine trials that will cause an impact to our full-year revenue in 2024 due to the delayed start of these studies. There were two primary but separate issues that affected the start of these trials. One was a delay in sponsors receiving regulatory guidance that was required before commencing trial enrollment pertaining to new variant specifications. The second was investigational product-related issues that caused a delay in enrollment.
We are working closely with our development partners to ensure efficient and timely execution of these high-priority studies that continue to be of critical importance to our customers and the safety and health of our communities. To be clear, these studies have not been canceled, and our expectation is that these trials will enroll the majority of patients in 2025, with startup-related activities having already commenced in some instances. With these anticipated changes, we now expect our COVID-related revenue to be approximately 1.5%-2% of total revenue for the full year in 2024, representing a year-over-year headwind of approximately 200 basis points to total revenue. While we're disappointed by these unanticipated one-off project delays, these do happen in our industry, and they are limited to one specific area within our business.
We remain confident in the strength and delivery of our underlying service offering, as well as the benefits of a diversified mix of customers and therapeutic areas that constitute our entire portfolio. Our business performance, excluding COVID, has been very solid, with revenue growing 8% year to date over the first half of 2023, and is helping to offset some of the negative headwind we are now expecting from both foreign exchange and the COVID-specific study delays. To that end, given the excellent margin delivery year to date through strong project execution and cost control across the business, as well as further leverage of our Global Business Services model, we are increasing our full-year Adjusted EBITDA margin expectation to 21.7% at the midpoint of our range, an increase of 80 basis points on a year-over-year basis.
This outperformance, coupled with the expected savings on full-year interest expense, is supporting the increase of our full-year adjusted earnings per share guidance, which we now expect to be in the range of $15-$15.20, an increase of 17.3%-18.8% over the full year 2023. With the consistent trends in our broader demand environment, our expectation on book-to-bill remain in the range of 1.2-1.3x on a quarterly basis, maintaining our previous target range. Turning to financial performance in quarter two, net bookings grew 7% on a year-over-year basis, resulting in a book-to-bill of 1.2x in the quarter, and sustaining our trailing twelve-month book-to-bill ratio of 1.24x.
We again saw a strong performance in our large pharma business, particularly in full service solutions, as well as for operational delivery services in data sciences, which notably secured a new sole provider award in the quarter. Total revenue increased 5.3% on a constant currency, year-over-year basis in the quarter. Gross margin of 29.9% increased 30 basis points over quarter two 2023, and total SG&A expense decreased 40 basis points on a year-over-year basis to 8.7% of total revenue, driving another quarter of strong adjusted EBITDA growth of 9% over quarter two 2023. This resulted in an adjusted EBITDA margin of 21.2% in the quarter, up 70 basis points year-on-year.
With strong margin delivery through our P&L, in addition to the benefits of our debt refinancing, we saw excellent year-over-year growth in adjusted earnings per share of approximately 21%. Following the successful repricing of our existing Term Loan B facility earlier this year, we continued our strategy of further refinancing our variable debt in quarter two. We completed our inaugural SEC bond offering totaling $2 billion in early May, which was met with very strong investor interest and initial order book of circa $15 billion. The proceeds of this offering were allocated to the repayment of our fixed Term Loan B debt, resulting in a current capital structure, which has approximately 72% of our debt subject to fixed rates.
As we noted at our Investor Day in May, this now provides us visibility to a reduction of approximately $110 million in interest expense over 2023, resulting in expected total full-year interest expense in the range of $200 million-$210 million for 2024. Importantly, this was a great milestone for our company in completing our first investment-grade bond offering and providing increased balance sheet flexibility as we look to continue to optimally deploy capital on a go-forward basis. As we have previously stated, we remain focused on M&A as the priority use of capital in the near term, with a focus on strategic assets that continue to differentiate our clinical offering and drive value for our customers.
However, as communicated previously, we have authorization from our board of directors for a share repurchase program of up to $500 million to be deployed opportunistically on an ongoing basis if the appropriate assets cannot be secured at the right price. We are updating our full-year 2024 guidance range to account for the delayed COVID-related projects, as well as foreign exchange headwinds, due to the strengthening US dollar since our quarter one report. We now expect revenue to be in the range of $8.45 billion-$8.55 billion, an increase of 4.1%-5.3% over full year 2023.
As I noted earlier, we are increasing our full-year adjusted earnings per share guidance to a range of $15-$15.20, an increase of 17.3%-18.8% on a year-over-year basis, reflecting our strong margin delivery and continued cost management. Before I close out my prepared remarks, I want to provide a brief update on our CFO transition. We continue to make good progress on our search for a new CFO, and we now have a small number of very strong candidates remaining in the process. We expect to make a more detailed announcement regarding this transition later in the current quarter.
Finally, I want to extend my sincere thanks to all of our colleagues at ICON for their many efforts in the quarter and the first half of this year in supporting our customers and helping to accelerate their development programs to bring new therapies to patients around the world. Brendan, I'll now hand it over to you to review our financial performance in more detail.
Brendan Brennan (CFO)
Thanks, Steve. In quarter two, ICON achieved gross business wins of $3.07 billion, an increase of 7.4% on a year-over-year basis. In addition, we recorded $493 million worth of cancellations, resulting in net awards in the quarter of $2.58 billion and net book-to-bill of 1.22 times. With the addition of the new awards in quarter two, our backlog grew to a record $23.8 billion, representing an increase of 2% on quarter one of 2024, or an increase of 9.9% year-over-year. Our backlog burn was 9.1% in the quarter, slightly down from quarter one levels. Revenue in quarter two was $2.120 billion.
This represented a year-on-year increase of 4.9% or 5.3% on a constant currency basis. Overall, customer concentration in our top 25 customers decreased from quarter one 2024. Our top 5 customers represented 24.7% of revenue in quarter two. Our top 10 represented 39.3%, while our top 25 represented 60.9%. Gross margin for the quarter was 29.9%, consistent with quarter one 2024, as expected. Gross margin increased 30 basis points over gross margin of 29.6% in quarter two 2023. Total SG&A expense was $183.5 million in quarter two, or 8.7% of revenue. This is in line with the prior quarter on total percent of revenue basis.
In the comparable period last year, total SG&A expense was $182.9 million, or 9.1% of revenue. Adjusted EBITDA was $450.4 million for the quarter, or 21.2% of revenue. In the comparable period last year, adjusted EBITDA was $414.2 million, or 20.5% of revenue, representing a very solid year-on-year increase of 8.7% and expansion of 70 basis points in margin. Adjusted operating income for the quarter two was $417.3 million, a margin of 19.7%. This was an increase of 8.7%, adjusted operating income of $383.8 million, a margin of 19% in quarter two of 2023.
Net interest expense was $42.9 million for quarter two. We're continuing to fix the full-year interest expense to total approximately $200 million-$210 million in 2024, with a roughly even split in total remaining interest expense for the remaining two quarters of the year. The effective tax rate was 16.5% for the quarter. We continue to expect the full year 2024 adjusted effective tax rate to be approximately 16.5%. Adjusted net income attributable to the group for the quarter was $312.6 million, a margin of 14.7%, equating to adjusted earnings per share of $3.75, an increase of 20.6% year-over-year.
In the second quarter, the company recorded $6.8 million of transaction integration-related costs and $45.8 million of restructuring costs. US GAAP income from operations amounted to $229.9 million or 10.8% of revenue during quarter two. US GAAP net income in quarter two was $146.9 million or $1.76 per diluted share, compared to $1.40 per share for the equivalent prior year period, an increase of 25.7%. Net accounts receivable was $1.198 billion at thirtieth of June 2024. This compares with a net accounts receivable balance of $1.146 billion at the end of quarter one 2024.
DSO was 51 days at June 30, 2024, a decrease of 1 day from quarter two, 2023, and an increase of 2 days from March 31, 2024. Cash from operating activities in the quarter was $218.6 million, and free cash flow was $182.4 million in the quarter, an increase of 6% on a year-over-year basis. We continue to see customers seeking more competitive contracted credit terms, as well as a desire to hold on to cash longer, given the higher interest rate environment we're currently in. This dynamic is primarily focused on our large pharma customer group, which has been growing faster at ICON and is thus driving greater impact on our overall DSO profile.
At June 30, 2024, cash totaled $506.6 million, and debt totaled $3.4 billion, leaving a net debt position of $2.9 billion. This compared to net debt of $3.1 billion at March 31, 2024, and net debt of $4 billion at June 30, 2023. Capital expenditure during the quarter was $36.3 million. From a capital deployment perspective, $2 billion of cash from the successful investment-grade bond was used to repay sorry, $2.014 billion of our Term Loan B facility. Additionally, our revolving credit facility was undrawn at the end of quarter two.
From a capital deployment perspective, as Steve indicated, our priorities for capital to be centered on M&A, where we can acquire assets that further strengthen our portfolio of services and value proposition for customers. Our pipeline of opportunities is healthy, yet we remain disciplined in our approach to evaluating acquisitions that will meet our criteria from a strategic and financial perspective. We also continue to consider opportunistic share repurchase, given our strong balance sheet position. Our key assumptions behind the full-year guidance remain in place: an effective tax rate of 16.5%, free cash flow target of circa $1.1 billion, CapEx spend in the range of $150 million-$200 million, and interest expense in the range of $200 million-$210 million, all for the full year 2024.
Finally, I would like to also thank our ICON employees for their dedicated efforts in quarter two. Operator, we are now ready for questions.
Operator (participant)
Thank you. As a reminder, to ask a question, you will need to press star one and one on your telephone and wait for your name to be announced. Please note, we ask you to limit your questions to one only. To withdraw your question, please press star one and one again. We will take our first question, and your first question comes from the line of Justin Bowers from Deutsche Bank. Please go ahead. Your line is open.
Justin Bowers (Analyst)
Hi. Good morning, everyone. In terms of what you're seeing with large pharma, what inning are we in, in terms of some of the announcements that we've seen, let's say, over the last six months, and how they're approaching IRA, and what opportunities does that present for you outside of the core clinical business?
Steve Cutler (CEO)
Yeah, you mean in terms of budget discussions or budget cuts, Justin? Is that where you're coming from?
Justin Bowers (Analyst)
Yeah, that's right, Steve.
Steve Cutler (CEO)
You know, that's always hard to tell. But I suspect we're, you know, into the middle inning, I guess. I'm thinking fourth, fifth, even sixth. You know, I think we've seen a number of companies make fairly public announcements. Certainly some of our top customers have been in that cohort. And so I think, but I think we're seeing that starting to get through, and we're pretty optimistic about large pharma growth in terms of R&D spend and in terms of outsourcing growth going forward. And that's what we see in our RFP numbers. Certainly on the trailing twelve-month basis from large pharma, we're in the low double digits, even pushing up a little bit higher than that. And so we're pretty optimistic around where large pharma is going.
Sometimes, as I think I've said before on these calls, the cost cuts and the budgets, while they do have an immediate impact, long term, they think more about how they spend their money, and we can benefit from that. And I think that applies to your second part of your question around the IRA. They are thinking about how best to deploy their capital. I've been to one or two strategic partnership meetings recently where they've been very open, saying that they're not where they want to be, and they think outsourcing and strategic partnerships is one of the ways they're going to improve their efficiency, their speed, their cost competitiveness. And so-
I'm encouraged by that attitude, by that open attitude that many of our larger pharma customers are taking and the opportunities that they're presenting to us, even as they go through you know considerations around IRA and even even budget cuts. It does, I think, present us with with opportunity in the long term.
Operator (participant)
Thank you. We will take our next question. Your next question comes from the line of David Windley from Jefferies. Please go ahead. Your line is open.
David Windley (Analyst)
Thank you. Good morning. Thanks for taking the question. Steve, I guess I'm interested. I appreciate your comments on large pharma. If I could sneak in kind of a two-parter. On biotech, you had both at our conference in June, and then again, on the call, talked about attenuation in funding. I wanted to understand, is that just a funding comment, or did you also see that flow through to your activity? And then thinking about your you know, kind of the pace of business flowing not only into backlog, but through backlog, you know, burn rate, kind of just very moderately declining, as you know, as has been the case for the industry for a long time.
Just wanted to understand if that's kind of what we should set as our expectation going forward, or do some of the, you know, global business services and your new functional Center of Excellence approach have the ability to stem that tide? Thanks.
Steve Cutler (CEO)
Sure. Let me take the biotech first. You know, we continue to see, you know, a constructive improvement in the biotech market. You know, I think we're all aware that the first quarter was pretty strong from an overall funding. Second quarter, perhaps not so strong. And so my comment was related to some attenuation in the funding side of things on the biotech in the second quarter. Although, I think year to date, we see a very positive, constructive progress in that biotech funding area. In terms of the activity in our group, you know, we're still seeing opportunities.
Something like, you know, 50%-60% of the opportunities that we have in the pending pipeline, I'm talking about significantly, these are the top 25, are in the biotech space, and these are very substantial opportunities. So we feel there's plenty of opportunity and plenty of projects coming through. Interestingly, as we look at cancellations in the biotech and the RFP area, we typically talk about biotech dollars coming through and not so much what actually gets decided on. So we've seen actually in quarter two, a reduction in the number of cancels in the pending side of things. In other words, proposals that come to us, and we bid on, you know, a proportion of those always get canceled, never actually come to decision.
We've seen a reduction in that, and that, I think, gives me some, you know, encouragement in terms of the rigor and the robustness of our pending pipeline. And as I said, of the top 25 opportunities, about half of them are in the biotech segment. So it really shows, it really shows, I think, that the biotech are coming through. They're serious about offering us opportunities, and they are substantial opportunities. We're talking about very significant $multi-million-dollar, $tens of millions of dollars of opportunities in that. So I'm pretty optimistic around where the biotech market is going and around the opportunities that we're gonna have to execute on those opportunities.
In terms of backlog burn, it did tick down a little bit, and I think that's a consequence of, you know, the makeup of our backlog. As you know, a lot of it is oncology, and that will continue to be the case. Our Centers of Excellence will, I think, help to mitigate that downturn, but I don't think it's necessarily gonna change the overall challenge there or the overall trend. You know, we'll still see, I think, a push perhaps down. We're down at around 9%. We may push under that a little bit in the more medium term.
I think what will give us an opportunity is as we get into some of these other therapeutic areas in cardiovascular and metabolic, these COVID trials will help us as well. And so as we improve the mix, or at least change the mix of our portfolio, I think that's the opportunity from a startup burn point of view. The other thing is, as we said at our Investor Day as well, we have a very clear and strong initiative around our study startup program, which I think is starting to pay some dividends and starting to improve.
So I do think that will be a mitigating factor as well, and we'll be able to get studies started and get patients in and burn revenue a little bit more faster, which is also a good thing, of course, for customers, as we complete them, those projects on time or even ahead of time. So there's a number of things we're doing, and I think we see on the horizon as an opportunity to improve our backlog burn. But that oncology and rare disease, you know, portfolio composition is always gonna be a continued challenge.
Operator (participant)
Thank you. We will take our next question. Your next question comes from the line of Max Smock from William Blair. Please go ahead. Your line is open.
Max Smock (Analyst)
Hi, good morning. Thanks for taking our questions. Wanted to follow up on the small biotech and get an update around some of your... the traction that you're making with your, you know, revamped small biotech offering that you've been talking about over the last couple of quarters here, and just how that revamped offering has translated into your win rate here in the second quarter of this year. Thank you.
Steve Cutler (CEO)
You know, I think it's still early days, Max, in that. You know, we have, as we said at the Investor Day, rebranded our biotech offering. We're, you know, we're, as I think we said at Investor Day, we're known as a large pharma CRO. So this is a process, and this is something that's gonna take a little bit of time. We are seeing some progress. As I said, we've got a lot of opportunity to prosecute in that pending pipeline. And I think the next couple of quarters, probably the next 12 months, will determine how successful that refocus and rebranding is. So I think it's a little early to call, you know, to declare victory in that space.
We're certainly seeing some progress in terms of opportunities to bid on, and we've won our share of those. But I'd like to perhaps give that question another quarter or two before we really give you a definitive answer.
Operator (participant)
Thank you. We will take our next question. Your next question comes from the line of Elizabeth Anderson from Evercore ISI. Please go ahead. Your line is open.
Elizabeth Anderson (Senior Managing Director)
Hi. Maybe sticking on the biotech theme, like, obviously, earlier this year, we saw some, you know, a massive increase in funding come through and sort of moderating, but still positive trends in the second quarter. Have you seen where are we in sort of that bolus that we saw in the first quarter coming through? I'm sure the answer is that it varies somewhat, but, you know, are those, you know, still coming in the RFP stage, or are they sort of starting to convert? Like, how do we think about that in terms of the opportunity that that presents?
Steve Cutler (CEO)
Yeah, it's a good question, Elizabeth. You know, I think, I think it's fair to say that we're starting to see that early year funding flow through. And as I said, the cancellations in the funding area, in the proposal, seem to be down in the second quarter. So I'm, I'm, really encouraged by that opportunity. This seems to be a much more robust pipeline of pending opportunities, which I think is good news for us. We are seeing, you know, that sort of push up in the mid-single digits. Even, even sequentially, we've seen a progress on that Q1 to Q2. And so I'm, again, I, I, I'm encouraged there. You know, in terms of awards and then converting to revenue, I think we're probably still a couple of quarters away.
I think maybe Q4, early next year is gonna be when that, when that starts to play through. But I think overall, we're starting to see that, but we're at the sort of early part of that, sort of progress, if that makes sense.
Operator (participant)
Thank you. We will take our next question. Your next question comes from the line of Patrick Donnelly from Citi. Please go ahead. Your line is open.
Patrick Donnelly (Director in Equity Research)
Hey, guys. Thanks for taking the questions. Steve, maybe one for you, just on the bookings trends, you know, pretty solid first half year. Is it still right to think about kind of that mid-1.2 range? You know, any changes to your level of confidence? You know, obviously, the RFP flow and things like that support it, but just curious. Obviously, last quarter sounded really good coming off that 1.07. Just wanted to take your temperature on the book-to-bill trends. Then just a quick housekeeping one for Brendan. On the revenue guide, it seems like if you back out the COVID piece, the core actually moved up over $50 million. I just wanna make sure I'm doing the math on that correctly. I appreciate it, guys.
Steve Cutler (CEO)
Sure. I'll take. Maybe I'll take the first one, and then I'll leave the second one to Brendan, Patrick. Yeah, we, we feel pretty good about where we are, on the, on the book-to-bill, 1.2 this quarter, 1.7 last quarter. 1.2 to 1.3 is, is where we think we'll be and what we need to, to do in order to continue the growth trajectory of the company. So there's certainly nothing that's happened in the last, you know, couple of months that would change our view on, on that. So I'll leave it at that. We're optimistic. As I said, the RFP cancellations seem to be down. I'm encouraged by that.
The RFP opportunities seem to be continuing to move forward across the segments, not just in large pharma, where it's doing well, but across the mid-sized companies and the biotechs as well. So, you know, overall, we're pretty constructive, pretty optimistic on where we think the market will be and what we think we can deliver, the back end of the year in terms of a book-to-bill. Brendan, you wanna take the core question?
Brendan Brennan (CFO)
Sure. Yeah, I think, you know, Patrick, it's well observed. You know, we've, you know, and Steve called it out when he was talking through his points. We've seen, you know, good elements of growth in our core, you know, ex-COVID, where we talked about being up for the first half of the year, 8%. And also, outside of our top five, you know, there's good growth and diversification of our customer base, and outside that top five, we're in addition, up 8%. So absolutely. I think when you look at the component parts of the guidance, what you see is that, you know, circa $150 million of headwind from COVID. And also, we talked to the fact that we're.
There's another bit of a headwind on FX there of $20 million. So I think that the revised $100 million decrease does show good strength, as outside of those elements, and certainly good elements of growth there, as I listed at the start.
Operator (participant)
Thank you. We will take our next question. Your next question comes from the line of Michael Ryskin from Bank of America. Please go ahead. Your line is open.
Michael Ryskin (Analyst)
Great. Thanks for taking the question, guys. I wanna focus on the margin rate. You know, like you said, solid progress in Q2, and you're raising the guide for the year. Looks like you're guiding to roughly 22% EBITDA margin in the second half, just to get to that full year number. So I just wanna dig into that a little bit further. You know, you called out project execution, cost controls, efficiencies, things like that. But just curious if you could go into that a little bit deeper. You know, do you expect those to continue going forward? And I'm just asking that in the context of, you know, your Analyst Day, just a couple of months ago, you talked about 22.5% for 2027.
You're already, you know, hitting 22 in the second half of the year. Just curious about the sustainability of that and how we should think about that as a jumping off point. Thanks.
Steve Cutler (CEO)
Yeah. Yeah, Michael, let me give you some high-level thoughts on that, and then I'll. Then Brendan might jump in on a little more of the detail. You know, overall, I'm really pleased with the way the margins, you know, continue to progress and expand. We've done a number of, you know, a number. And it's not just in the sort of SG&A area, you know, it's across the gross margin as well. I think we're up 30 basis points on the year in gross margin due to good, strong execution from our team, and that's, you know, I'm really proud of the way the team's delivered on the work we have. They're very efficient, and it enables us to be very aggressive and.
You know, on the money when we bid on these more strategic partnerships. You know, the pricing environment is getting challenging in some of those areas, but I have, we have a lot of confidence in our ability to deliver margins or deliver work above the theoretical margins that we bid on. So you know, that we have a good, strong execution team that's helping us on the gross margin line. You know, on the SG&A side, as I've said before, we have a very, very good global business services team that continues to challenge itself with respect to, you know, where they're located. The automation, AI, our IT team have done a great job in moving that forward.
As you can see on the headcount, you know, we're pretty much flat over the year, and yet we've been able to grow the business. So, you know, I think that shows you that we're focused on cost, but we're focused on getting more efficient. And that's important because of some of the challenges that we get, as I say, compete for these strategic partnerships. So overall, you know, we're up, I think, 80 basis points on the EBITDA number, and that's a combination of both. And I certainly see us, you know, being able to... Well, you know, that you can't keep doing that. You obviously, you've gotta. There's some limits to that. But we're challenging those limits.
I think as my former boss used to say, "Every ceiling becomes a floor," and that's the way we're approaching it. Brendan, maybe on a more specific basis, you can give us a few thoughts?
Brendan Brennan (CFO)
Yeah, no, I think maybe, you know, that, that, that's, I mean, that's all correct. I think, Michael, to your question, you know, circa 22%, the second half, just to give a guide on that piece is broadly incorrect, as well. So, obviously, we're looking for good margin expansion. As Steve said, that's gonna come from both, you know, both, both, all elements of the business as cross-controlled right across the organization. So we expect to see gross margin expansion in the second half and continued really, really good cost control in our SG&A, and that should help us drive up to that overall position for 21.7 for the full year, but certainly, yeah, in the range of 22s in the second half.
Operator (participant)
Thank you. We will take our next question. Your next question comes from the line of Eric Coldwell from Baird. Please go ahead. Your line is open.
Eric Coldwell (Managing Director and Senior Research Analyst)
Thank you. Good afternoon. So first one, it's probably a bit of a nuanced question, but these COVID delays, is that part of the equation on the EBITDA margin increase? Because those programs, at least historically, typically came with higher pass-throughs, so you'll have, perhaps a less negative mix from that revenue headwind.
Brendan Brennan (CFO)
Eric, yeah, it's Brendan here. Yeah, I think that's, that's absolutely correct. Obviously, as we went into the second half of the year, and as we were thinking about our forecasting and our guidance for the start of the year, we were expecting those, those programs to hit in the second half. Predominantly, they're obviously, as we talked about, majority going to be delayed out into the very end of this year into 2025. Still good work, still get done, but, you know, just delayed. That certainly will have a positive gross margin impact as we continue to ramp up other parts of our business that we were expecting and as we talked about, are coming through well as we go into the second half of the year. So yes, I do think that'll have a positive gross margin mix impact.
Eric Coldwell (Managing Director and Senior Research Analyst)
Thank you. Then on the DSO, you made really nice progress through 2023 with sequential improvements. Now it's ticked back up into the last year average range here over the last couple of quarters. You mentioned it was either a more competitive environment or a continuation of a more competitive environment. Then I just want to clarify, which is it? Is it that the competitive environment continues, but you're getting more mix from larger pharma that are traditionally more competitive or asking for more, I should say? Or has the pressure to delay payments actually increased?
Steve Cutler (CEO)
Well, let me, I'll try that one from a high level, and then again, Brendan can jump in. Eric, certainly on the pricing environment, you know, I do think it has ramped up a little bit in the last, I want to say, few months even. And maybe that's, you know, you tend to, you know, I get involved in some of these more strategic meetings, and I'm aware of some of the requests and the asks that our larger pharma partners are looking for, particularly for these more strategic relationships. These, you know, when they're gonna commit themselves to a three- to five-year type of relationship, they're looking for the best possible rates they can get, and it gets pretty hairy at times.
And there are one or two of our competitors who are willing to entertain some, dare I say, fairly unconventional sort of rates. And we're not going there, and I think that's not the, that's not the whole market, but there are one or two out there who, you know, who are moving in that direction, and I think our customers can see through a lot of that. But it's, it does present, you know, something of a challenge. And as I said, before to the previous question, I feel confident that our delivery and our execution can manage any challenges we have on that top line, because we are able to typically deliver 200 to 400 bips ahead of what we, you know, usually propose.
I'll leave Brendan to talk a little bit more on the DSO side of things.
Brendan Brennan (CFO)
Thanks, Steve. Yeah, Eric, just on—I think there's, you know, two really salient points to note here. First off, obviously, we've been very successful in our large pharma group, and we've seen probably more expansion in our business. So certainly the mix of our customer base, that is that larger proportion, certainly the revenues that come from them, and consequently, the billing and the DSO, is probably pushed more towards customers, you know, who do push us on credit terms. You know, there's no question about that. So the mix is one piece. I would say in terms of the competitiveness, in terms of DSO and credit terms, I would say that internally, really more internally, is from the pharma companies themselves.
As we know, the very first question was about, you know, the implications of IRA and the mix of cost. Pharma companies are very focused on maintaining their cash balances, and some of them have specific issues where they really need to do that in 2024 and into 2025. So I think the push on this from a credit terms perspective has been much more driven, rather than by competition between CROs, but actually from the actual pharma company base themselves, and the folks that they're working with to manage their cost base and their R&D spends, as well as their cash balances over the next couple of years.
Eric Coldwell (Managing Director and Senior Research Analyst)
If I could go back to Steve's response on the pricing competitiveness. We heard earlier in the week from your competitor that is much more biotech focused, that they felt like perhaps if anything, maybe the pricing competitiveness got a little easier in recent months, that it was worse a few you know a couple of quarters ago and before. Your mix is obviously a bit more skewed or balanced, but skewed more to big pharma than that competitor. Is this a nuance on pricing? Big pharmas are you're seeing big pharmas get a bit more competitive, particularly in strategic deals.
Are you seeing the same thing in your smallest biotech base, or could perhaps you align with your competitor's comments that maybe that cohort, given the funding and the better mood, is a little less focused on price today than it was a few quarters ago?
Steve Cutler (CEO)
Yeah. Eric, I think you've characterized it very well. That's exactly the way we see it. We don't. We're not seeing the sort of pricing discussions and pricing pressure that we see in the biotech space as we do in the large pharma space. But it, it's kind of the way it's always been. When you have these large strategic partnerships, three to five years, you know, $hundreds of millions annually, you know, they're looking and they tend to negotiate these up front, and we all line up and do the beauty parade. You know, as you'd expect, they're looking for optimal terms. Brendan referenced it in terms of credit terms, pricing, you know, and all of that sort of stuff.
And so it is a very competitive process because once you're in there, you know, you've competing with one other or maybe two others. So that's typically the way it goes, and expect that. On the other hand, as you sort of quite rightly said, in the biotech space, and our competitors said it pretty well as well, I think the pricing, while it's always competitive and we compete with them and others, it's not quite as intense because you tend to be one-off projects. You know, one program, one trial, maybe there's some follow-on, if you've got other indications to develop.
But it's a different type of environment, and I think one that, you know, lends itself to, you know, a slightly different outcome in terms of pricing, although, of course, the volume is not there in the end.
Operator (participant)
Thank you. We will take our next question. Your next question comes from the line of Luke Sergott from Barclays. Please go ahead. Your line is open.
Luke Sergott (VP and Equity Research Analyst)
Great. Thanks, guys. I just kinda wanna dig in on the enrollment delays. And you're talking about how they're not canceled, and they're coming back. So can you give us a sense of the timing of how we should think about those kind of rolling back on? And then more high level is like the delays, were they caused more from you lacking those functions and having to subcontract out or partner with somebody else? And then, you know, would those issues been rectified if you guys had those functions internally?
Steve Cutler (CEO)
No, let me, let me take the second part of your question first, Luke. No, no, the advice we were looking for, the regulatory advice, was really from the agencies in terms of the variants that were needed to be in the comparator. So that was... It was very specifically with the agency. It wasn't something that we were able to provide. We could've, we could have obviously had our opinion, but the customer was looking for the agency advice. So it wasn't anything that we didn't have that would have mitigated. We needed that advice, and the other part of it was the investigational product as well. So there were very specific issues, nothing that we could have actually done.
Well, you know, of course, we, we jumped in and tried wherever possible to help, but, it wasn't anything we didn't have. In terms of the delays, you know, we got the news sort of in June, sort of, and so it, you know, it was pretty clear that there was gonna be a delay. It's not that, it's not that the actual work has stopped. We're actually gonna be enrolling around 400 patients in one of the trials, this year, and we've, we're. And that, that'll be starting in sort of late August, September. So the work is moving along, certainly on one of the trials. The bulk of the enrollment will not really be until early next year. And so that's, you know, because of the delays we've had.
But the initial part of one of the studies will happen. The startup work will start, but it's not gonna be material enough to impact. And obviously, the bulk of the enrollment with the investigator fees and our direct fees around monitoring and management are where the bulk of the revenue is recognized as that work gets done. So that won't happen until next year.
Operator (participant)
Thank you. We will take our next question. Your next question comes from the line of Jailendra Singh from Truist Securities. Please go ahead. Your line is open.
Jailendra Singh (Managing Director and Senior Equity Research Analyst)
Thank you, and thanks for taking my questions. I actually want to follow up on comment around guidance, excluding COVID and effects, stable to improving.
As you think about the business over the past six months compared to expectations heading into the year, what are some of the key areas you will highlight that trends, either macro front or from the company-specific, have been coming in better than your expectations? And what are the areas you will say that they didn't play out as well as you expected? Again, I'm focused on core trends, excluding COVID and FX.
Brendan Brennan (CFO)
Jailendra, I might, I might take that one. It's Brendan here. Obviously, we've—you know, when we looked at the modeling for the organization as we came into this year, obviously, we were talking about, you know, different quantums of COVID work, and obviously, we've spoken to that, you know, extensively on this call. I think the positive signs, as we've talked about a little bit already, is kind of some of our growth customers actually have done very well during the course of this year. And that's really customers that are outside that top five. We've seen really very strong, pleasing growth coming from them. There's some developing relationships there that we as Steve referenced in his prepared remarks, you know, we see as the big customers of the future.
That, and added to that, the fact that we, you know, we continue to do well on signing new major relationships. All of these things are very significant positives in that core business. So that continues at good pace. As we said, at top of our top five, we grew year-over-year at 8%, and that's been driven by some of the good growth, probably even, maybe even, a little bit ahead of our expectations as we came into the year. But as I said, probably more importantly, those new customer relationships that we continue to win are going to obviously be what really keeps us going as we go forward into the more medium term.
So still very much believe in our medium-term growth outlook, as we talked about in our New York conference.
Operator (participant)
Thank you. We will take our next question. Your next question comes from the line of Jack Meehan from Nephron Research. Please go ahead. Your line is open.
Jack Meehan (Analyst)
Thank you. Hello, everyone. I wanted to talk a little bit about just expectations around the burn rate. So, you know, it stepped down a little bit sequentially here. You know, just based on the business that's coming in the door and some of the adjustments you made, can you just talk about, like, how you think it trends, you know, through the remainder of the year? And, you know, do you think we're kind of at a bottoming point here as we enter 2025?
Brendan Brennan (CFO)
Jack, hi, it's Brendan here again. Obviously, you know, we did step down a little bit in the current quarter. We were 9.1 in Q2. As we look at Q3 and Q4, and you look at our guidance, obviously, you know, it's not terribly hard to do the math to see that it will be kind of, you know, stepping down a little, probably into the high eights as we think about the back half of the year. That's, you know, really still very solid when we look at our mix of backlog that we have. You know, the trend in the longer term here has been, you know, one that, you know, has seen it decreasing, and that's as much to do with the mix of, you know, the business that we have.
Obviously, a lot of that is oncology, you know, longer term in nature, in the business. It just takes longer to burn through. It's all solid business wins. We've obviously talked about the fact that we have some, you know, fast burn vaccine work, which we think will kick in in 2025. So there is opportunity to push back on that a little bit, but the way I would look at it is it's more about, from our perspective, it's more about trying to lessen the impact of the backlog burn rate dropping over time. So really, what we're always trying to do, and we'll continue to do in 2025, is to really have that impact as little as possible. Could we see some uptick maybe in with different vaccine mixes as we go into 2025?
Well, that would very much depend on obviously business wins performance between now and the end of the year. But certainly, we will be, you can absolutely be guaranteed that we will continue to make sure that we convert as much as we can in each quarter, and that will remain a significant focus for the company.
Operator (participant)
Thank you. We will take our next question. Your next question comes from the line of Dan Leonard from UBS. Please go ahead. Your line is open.
Dan Leonard (Analyst)
Thank you. Can you discuss whether or not your view on the long-term durability of COVID vaccine work has changed?
Steve Cutler (CEO)
I don't know that it's changed much. You know, we see the percentages of revenue from our COVID vaccine work is sort of moderately dropping. But we do feel there's gonna be opportunities, such as we're, you know, such as we're talking about today, for the new next generation vaccines and even other vaccines that are coming through for similar type diseases, COVID-20, dare I say it. So there's... You know, I think this is gonna be an ongoing part or ongoing, albeit fairly modest part of our work in the long term, but it will be fairly volatile as well.
These, these trials are typically, as you would expect, very large trials, very material trials, and so when they hit and when they happen, they'll have, you know, quite a significant impact, as it did during the pandemic. It's hard to predict the future in terms of what's, what's gonna happen pandemic-wise, but I think certainly the regulators, the agencies, the governments around the world are very, you know, conscious about the potential for a, you know, future pandemic, and are wanting to be well prepared for that, much better prepared than they were for the, for the recent one, and I do think that will mean there'll be opportunities for us, next gen or, whatever that may be. But it won't be. It'll be hard to predict, it'll be inconsistent, it'll be volatile. That's all I can say.
It's, I don't have a crystal ball in front of me, Dan, so it's difficult to sort of put too many, you know, specifics on it.
Kate Haven (Head of Investor Relations)
Yeah, I mean, and the way that we talked about it, Dan, was that it wouldn't be or it would be somewhat similar to, you know, other, you know, infectious disease areas like flu, that we see on an annual basis being, you know, call it 1 to sometimes 2% of revenue for us. That it could be, you know, somewhere in that range on an ongoing basis. Obviously, our expectation based on the work that we had won was higher than that this year. But certainly something like that on a longer-term basis, we don't think would be, you know, out of the realm of possibility. But of course, will depend on, you know, obviously the size of those trials and what we see come in ultimately.
Operator (participant)
Thank you. We will take our next question. Your next question comes from the line of Jack Wallace from Guggenheim Securities. Please go ahead. Your line is open.
Jack Wallace (VP and Equity Research Analyst)
Yeah, thanks, team. Wanted to quickly touch back on the accounts receivables. Again, you know, it sounds like you're really not willing to bend too much on price, but in terms of you winning some additional share inside of your larger customers, is the strength of your balance sheet, you know, an asset for you to be able to be a little bit more competitive than maybe some of your competitors on payment terms?
Brendan Brennan (CFO)
Thanks, Jack. It's Brendan here. Listen, I think all of our... I think this is a competitive piece that goes into those conversations. As I mentioned earlier on in my in my answering of a different question, it is a big requirement from the pharma companies themselves. That's as much to help them in their own cash flow issues and their own issues that they have generally speaking at the moment. So I think everybody is met with the same response from large pharmas on this, those are our other competitors.
I think the strength of our balance sheet certainly gives us an ability here, and that's something that we've looked at in the past as, you know, and we've always thought our balance sheet and the strength of our balance sheet is a competitive advantage in our marketplace. And we'll use that wherever and whenever we can, be that deployment of capital from an M&A perspective, or be that in the ability to negotiate deals with our customers. So yeah, we'll use everything that we have in our arsenal to our advantage to make sure we're continually winning business and competitive.
Operator (participant)
Thank you. We will take our next question. Your next question comes from the line of Casey Woodring from J.P. Morgan. Please go ahead. Your line is open.
Casey Woodring (VP and Equity Research Analyst)
Great. Thank you for taking my questions. So just cancellations in the quarter were slightly above 2% of beginning backlog, which has been, you know, your quarterly guide, over time, but they were up 7% sequentially. So just wondering if there's anything to read into there, Steve, you mentioned earlier in the call that cancellations related to funding were down in the second quarter. And then, you know, just on the GLP-1 front, a few larger pharma companies have made some progress in the last couple of months. So curious if the recent updates we've seen in that space has changed your view on GLP-1 contribution in the near to medium term. Thanks for fitting me in.
Steve Cutler (CEO)
Sure. Casey, you're right. There was a slight, you know, a very, very modest uptick on cancels in the quarter. I don't think... We're not reading anything into that, really at this stage. You know, we feel the portfolio has been prosecuted pretty well. You know, cancels can be volatile, can be up and down in this business. That's really why we exist, in case things don't work. So we can't complain too much about that, but we don't see any trend, any particular trend in that space. In terms of the GLP-1s, you know, we're encouraged by the research and the opportunities that are coming through in that space, particularly in the large pharma area.
We're also encouraged by some of the strategic partnerships we've won that are also working actively in that area. So there's plenty of, again, opportunity and constructive positivity going forward in the GLP-1. We feel we're well-placed for those very large-scale trials. We're well-known as probably the best of the vaccine CROs in the industry. And these trials in the GLP-1s, be they new or be they ongoing or be they, you know, new indications, are gonna be very large trials. And so we're well positioned. You know, our scale, our infrastructure is well positioned to really be able to put those trials and to execute those trials really well.
And our technology, in terms of tokenization, is gonna allow us to do them in a really efficient manner. So again, I'm very positive about the future around whether it be obesity or cardiometabolic areas, diabetes. There's. You know, and these trials will also burn a bit faster than some of the rare disease or the oncology studies we have. So it's a good place, and I'm looking forward to seeing more opportunity in that space, and we're starting to see that.
Operator (participant)
Thank you. We will take our next question. Your next question comes from the line of Matt Sykes from Goldman Sachs. Please go ahead. Your line is open.
Matthew Sykes (Managing Director and Senior Equity Research Analyst)
Yeah, good. Good morning. Thanks for squeezing me in. Just on capital deployment, I know you have the buyback authorization. You've talked about wanting to be active in M&A. Is this like an either/or decision for you? Can you do both, depending on the potential size of the M&A transaction? How are you thinking about prioritizing those two capital deployment efforts?
Steve Cutler (CEO)
I think we've been fairly clear, Matt, that M&A will be our focus. That's. We do have a number of opportunities in the pipeline at the moment that we feel are a good chance of moving forward over the next, realistically, six months or so. We have some targets in terms of the areas we wanna prosecute in, and that's around sites and around late stage, around labs. We've talked about those sorts of areas, and that's all starting to move together.
These things always take a little longer than we'd like, and of course, there's a, you know, we're not gonna overpay in this area, but we do have some good opportunities in that space around how we facilitate the prosecution of our clinical work and improve our offering. That's really where we're focusing on that space. Having said that, I've also said we wanna stay within the sort of 1.5-2.5 in terms of ratio of Adjusted EBITDA. And so as we get towards the end of the year, we'll be without any M&A, we'll be approaching getting below that.
We will be, of course, considering what the opportunities are for buying back, and we'll, we won't be shy where we see those opportunities. Again, I would say it very clearly, M&A is the focus, and we do have some opportunities, but, you know, we wanna use our balance sheet. As Brendan's already said, we have a very strong balance sheet, and we're a good player in that market, and so, you know, we're gonna continue to use it. We're certainly not going back to, you know, to the days, perhaps of 5, 10 years ago, when we really had very little debt at all. We think that's a reasonable place to be, and we feel good about our positioning in that space.
Operator (participant)
There are no further questions. I would like to turn the conference back to Steve Cutler for closing remarks.
Steve Cutler (CEO)
Okay. Thank you, thank you, operator. I think we certainly see a very constructive market going forward and certainly plenty of opportunity for ICON. There's no doubt there'll be a little volatility, but with the biotech funding stabilizing and our opportunities increasing within large pharma, we feel like this is a good place to be, and we feel in a very strong position to be able to benefit from that constructive market. So thank you for joining the call today. Your continued interest and support of ICON, we do appreciate it. We look forward to further updates as we continue our progress in partnering with our customers and accelerating their critical medicines to the patients who need them. Thanks, all, and have a good day.
Operator (participant)
This concludes today's conference call. Thank you for participating. You may now disconnect.