Parexel cuts guidance & Phase I capacity after weak results

02-May-2011 - Last updated on 03-May-2011 at 11:05 GMT

Parexel has slashed its guidance and is cutting early phase capacity after weak results, but hiring in other areas is accelerating.

Slow backlog conversion and project delays continue to affect results and contributed to net revenue and earnings falling short of analysts’ estimates in the third quarter. The impact of these problems is predicted to continue into the next quarter and beyond.

“As a result of this quarter's performance, coupled with expectations for a soft [fourth quarter], Parexel has slashed its [fiscal 2011] guidance”, said David Windley, equity analyst at Jeffries & Co, in a note to investors.

Continuation and worsening of problems such as delays and backlog conversion were compounded by weak early phase performance. In response Parexel will make capacity cuts in the fourth quarter.

“The Phase I segment has been universally weak for most CROs. Parexel is no exception. Due to overcapacity pressuring margins, management has decided to reduce capacity”, said Windley. Parexel anticipates restructuring charges of $15m (€10m) over the next three quarters.

Excluding special items total operating income dropped by 25 per cent year-on-year as growth in expenses outstripped a low single-digit increase in revenue. Growth in revenue was strongest in Asia Pacific, up 40 per cent year-on-year, and offset a dip in sales from the Americas.

Hiring in anticipation of growth

Guidance for the first half of fiscal 2012, from July to December 2011, was also cut, but results should improve in the next calendar year. “We anticipate mid-teens revenue growth in the second half of fiscal year 2012”, said Josef von Rickenbach, CEO of Parexel, in a press statement.

In anticipation of this growth in revenue Parexel is accelerating hiring. Backlog continues to grow, up 34 per cent year-on-year, and as Parexel wants to put staff in place for when this converts to work and revenue.

However, the hiring plan is a source of concern for analysts. “The topic we’re struggling with more than any: accelerated hiring”, said Eric Coldwell, equity analyst at RW Baird, in a note to investors. Icon has also maintained staffing in anticipation of more work in coming quarters.

Parexel shares were down 18.39 per cent in after hours trading. A conference call with investors is being held at 10am ET, highlights of which Outsourcing-Pharma will share on Twitter.