Executives: Ronnie Speight - VP, IR Alistair Macdonald - CEO Greg Rush -

CFO
Analysts: John Kreger - William Blair Dave Windley - Jefferies Tim Evans - Wells Fargo Securities Erin Wilson - Credit Suisse Robert Jones - Goldman Sachs Sandy Draper - SunTrust Greg Bolan - Avondale Partners Tycho Peterson - JPMorgan Michael Baker - Raymond

James
Operator: Good morning, ladies and gentlemen, and welcome to the INC Research Third Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. I would like to hand the conference over to Ronnie Speight, Vice President of Investor Relations. Please go ahead, sir.

Ronnie Speight: Good morning, everyone. The purpose of this call is to review the financial results for INC Research's third quarter 2016. With me on the call today are Alistair Macdonald, our Chief Executive Officer and Greg Rush, our Chief Financial Officer. In addition to the press release, a slide presentation corresponding to our prepared remarks is available on our website at investor.incresearch.com within the Events and Presentations section. An archived version of this webcast will be available for replay on our website

after 01:00 p.m.

today and there will also be a telephone replay available for the next seven days. Remarks that we make about future expectations, plans, and prospects for the Company constitute forward-looking statements for purposes of the Safe Harbor Provisions, under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors. These factors are discussed in the Risk Factors section of our Form 10-K for the year ended December 31, 2015, as well as our other SEC Filings. In addition, any forward-looking statements represent our views as of today and should not be relied upon as representing our views as of any subsequent date.

While we might update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so. During this call, we will discuss certain non-GAAP financial measures, which exclude the effect of events we consider to be outside of our core operations. These measures should be considered a supplement to and not a replacement for measures prepared in accordance with GAAP. We believe that providing investors these measures helps them gain more complete understanding of our financial results and is consistent with how management views our financial results. For a reconciliation of the non-GAAP financial measures with the most directly comparable GAAP measures, please refer to Slides 20 through 24 in our presentation.

As we will be limiting today's call to one hour, we request that participants limit questions to one each with an opportunity to ask one follow-up question. I would now like to turn the call over to Alistair Macdonald. Alistair?

Alistair Macdonald: Thank you, Ronnie. Good morning and thank you for joining our third quarter 2016's earning call. I'm excited sort of officially to assume the role of CEO as of October 1, particularly given the strength of our business and a strong backlog ground for the remainder of 2016 and beyond, along with an excellent management team to guide the company for the future.

I'm pleased to report that INC continued to execute well across the business delivering another strong quarter. We grew our net service revenue by approximately 11% compared to the third quarter of 2015 and by 14% on a year-to-date basis. Our net new business awards for the quarter were $330.1 million compared to $327.7 million during the third quarter of 2015 resulting in a net book to bill ratio of 1.3 for the third quarter and 1.2 on a trailing 12-month basis. Our investments in operational, therapeutic, and business development resources that support our customer proposal process continue to yield strong results. During the third quarter these results included adding 25 new customer relationships and strong demand from our existing customers which represented 84% of the dollar value for our year-to-date new awards.

Our top five customers comprised 33% of our revenue on a year-to-date basis down from 34% for the same period in 2015. In addition, our presence remained strong in areas where clinical trials are particularly complex, with these areas representing approximately 74% of our backlog as of September 30, 2016. I'm also pleased to have recently announced some exciting changes in the structure for our management team which are designed to further strengthen by far focus on execution and the therapeutic alignment of our business model. As part of my transition into the CEO role, however with our executive management team and the board I'm in-depth review of our organization and leadership in light of that strategic goals. As a result Dr.

Michael Gibertini has been promoted to Chief Operating Officer from his prior role as President of Clinical Development. Michael will have global responsibility for all operational aspects of our business which now includes our therapeutic business units as well as other supporting services. In addition, Tara Fitzgerald has been promoted to President of Clinical Development Services from her previous role as Executive Vice President of biometrics and safety. Tara will be responsible for the leadership of all clinical support services as well as the expansion of our key imaging value chains such as Late Phase, Consulting, Medical Devices, and Functional Service Provision. Both of these individuals have a wealth of experience and have been a critical to our success.

I'm excited about their ability to drive our future growth while maintaining our unique culture and focus on quality. At the end of the third quarter our total employee base has grown to over 6,700 staff and we expect to continue expanding our headcount through the remainder of the year. This includes our ongoing expansion in the Asia Pacific region; we will now have a total of 19 offices. Demonstrating the success of our approach to customer engagement in the region, I'm proud that we were recently honored with the 2016 Frost & Sullivan Asia Pacific Best Practices Award, received the Customer Value Leadership Award for contract research, outsourcing services, representing high performance in areas of customer and business impacts including categories such as customer purchase experience, customer service experience, and price performance value. Frost & Sullivan noted that INC Research has an established reputation among its customers for high productivity, rapid turnaround times, and comprehensive customer support.

This continued geographic expansion while remaining focused on customer engagement is key to achieving our strategic goals. In closing, we have transitioned the leadership of the organization during the third quarter through a well planned and executed succession plan. During that time, we have continued to seamlessly deliver against our targets as we strive to become the CRO of choice for all stakeholders, employees, customers, sites and investors around the globe. Let me now turn it over to Greg Rush for more comments on our financials. Greg?

Greg Rush: Thank you, Alistair, and good morning everyone.

As a reminder, we are presenting our results on an adjusted or non-GAAP basis and have further normalized certain metrics to improve comparability. The normalized amounts presented on Slides 3 and 4 and the adjusted amount along with the detail of the normalizing adjustments are presented on Slides 17 to 19. We grew our net service revenue on a year-over-year basis by approximately 11% to $259.6 million during the third quarter, up from $234.5 million for the third quarter of 2015. This was net of foreign exchange headwind of $2.6 million resulting in constant currency revenue growth of nearly 12%. On a year-to-date basis, we grew our net service revenue by 14% from $673.4 million for 2015 to $767.4 million for 2016.

Excluding the foreign currency headwind of $8.6 million, our revenue grew by over 15% compared to the first nine months of 2015. Our direct costs increased 12.8% from $139.6 million for the third quarter of 2015 to $157.5 million for the third quarter of 2016 with gross margin declining from 40.5% to 39.3%. Foreign exchange had a positive impact of 85 basis points on our gross margin percentage during the third quarter of 2016. For the first nine months of 2016, direct costs were $465.4 million compared to $403.7 million for 2015, with gross margin declining from 40.1% to 39.4%. Gross margin for the first nine months of 2016 included a positive foreign exchange impact of 65 basis points.

The decline in gross margin for both the third quarter and the year-to-date 2016 was primarily due to the increased use of contract labor associated with the accelerated work we highlighted in the previous quarters along with revenue mix. SG&A expenses increased from $39.5 million in the third quarter 2015 to $40.1 million in the third quarter of 2016 declining from 16.8% to 15.4% of net service revenue. On a year-to-date basis, our SG&A expenses have increased from $112.6 million to $122.8 million, while declining from 16.7% to 16% on net service revenue. I would like to point out that SG&A expenses were unusually low during the quarter due to lower than normal incentive compensation during the quarter, the continuing benefits from lower foreign exchange rates, particularly the British Pound, and finally lower than expected headcount. Specifically, our SG&A headcount was lower than expected as investments to further support new business acquisitions through additional business development headcount and headcount within our general and administrative functions have been delayed until the fourth quarter of 2016 or early 2017.

In addition, marketing sale was lower than in historical period solely due to timing of the marketing spend which is expected in the fourth quarter of this year. Our adjusted income from operations increased from $51 million to $56.7 million with the associated margin increasing flatly from 21.7% to 21.8%. Year-to-date adjusted income from operations increased from $143.5 million to $163.9 million over the same period. Operating margin improving slightly from 21.3% to 21.4%. Adjusted EBITDA grew by approximately 12% from $55.4 million to $62 million with the associated margin improving slightly from 23.6% to 23.9%.

For the first nine months of 2016, adjusted EBITDA increased by approximately 14% to $179.2 million, up from $157.1 million for the first nine months of 2015 with the related margin remaining flat at 23.3%. Foreign exchange had a positive impact of $2.1 million on adjusted EBITDA for the third quarter of 2016 representing an impact of 100 basis points on EBITDA margin percentage. On a year-to-date basis, foreign currency had a positive impact of $3.8 million on adjusted EBITDA or 75 basis points on EBITDA margin percentage. Adjusted net income increased to $35.3 million for the third quarter of 2016 from $30.7 million for the third quarter of 2015 and increased to $102.1 million from $83.8 million on a year-to-date basis. Adjusted EPS grew about 23.1% from $0.52 in the third quarter of 2015 to $0.64 in the third quarter of 2016 and by 32.6% during the nine months ended September 30, 2016, to $1.83 from $1.38 in 2015.

Diluted weighted average shares outstanding were 55.6 million for the three months ended September 30, 2016, to 55.8 million on a year-to-date basis which included the impact from equity based employee awards of 1.4 million and 1.7 million shares respectively. At September 2016, the outstanding share count was 53.6 million. Slide 7 provides key metrics related to our cash flow and leverage position. During the third quarter of 2016, our operations produced $50.7 million of cash as compared to $45.8 million for the third quarter of 2015. Cash flow from operations for the first nine months of 2016 was $95.1 million, a decrease of $46 million compared to the first nine months of 2015.

This decrease was primarily driven by the increase in our DSOs during the first quarter of 2016 and other changes in working capital. We ended the third quarter of 2016 with $102.9 million in unrestricted cash and total debt outstanding of $500 million. Slide 8 summarizes key metrics related to our backlog. We believe one of the most important leading indicators of future revenue growth is backlog coverage which is presented in the bar chart in the bottom left quadrant. We are maintaining favorable position with 98% coverage over the full year 2016 revenue forecast for September 30, 2016.

To continue capitalizing on capital deployment opportunities as they arise, in August, we repurchased 1.5 million shares of our common stock in conjunction with the final secondary offering by our sponsors. The share repurchase was executed under the 150 million share repurchase plan that we announced on our second quarter earnings call leaving approximately 85.5 million in capacity remaining under the plan. We remain committed to creating shareholder value through the execution of our growth strategy and continuing to evaluate other capital deployment options. I would also like to highlight that as a result of this share repurchase and the associated secondary offering, there is no longer any overhang on our stock related to possible future secondary offering as both Avista and Ontario Teachers' Pension Plan no longer own any shares of INC in the respective bonds. On Slide 9 we are providing our updated guidance for key financial metrics for the full year 2016.

This guidance takes into account a number of factors including our current sales pipeline, existing backlog, and our expectations of net awards for the remainder of 2016. Further our guidance is based on current foreign currency exchange rates, current interest rates, and our expected tax rates. We continue to expect our net service revenue for the full year 2016 to range from $1,030 million to $1,040 million, representing a growth rate of 12.6% to 13.7%. This takes into account of foreign currency headwind estimate of approximately $10 million and negative impact to our full year growth rate of approximately 110 basis points. Accordingly our constant currency growth rate is expected to be between 13.7% and 14.8%.

We expect interest expense for the full year to range between $13 million and $13.3 million and we expect our effective tax rate to be approximately 34%. We expect our adjusted diluted earnings per share to range from $2.48 to $2.52 representing growth of 29.2% to 31.3% compared to normalized adjusted EPS of $1.92 in 2015. Lastly, we expect to earn $1.74 to $1.81 per share on a GAAP basis. Included in our GAAP earnings per share guidance is an expected negligible impact of share-based compensation net of tax which is further detailed on Slide 16 in the Appendix. While we are not providing detailed guidance for 2017 at this time I do want to provide a few comments on how 2017 is shaping up.

First, we had a strong first nine months of the year with a book to bill of 1.2. This is what the backlog covers for fiscal 2017 and was approximately $820 million which puts us on track to achieve our long-term revenue growth target of 10% to 12%. In addition, we currently expect to hold adjusted EBITDA margins relatively flat on a year-over-year basis, while realizing the benefit in earnings of our recent debt amendment and a further decline in our tax rate to approximately 32% to 33%. These earning enhancement opportunities coupled with our recent share repurchase in August provide a solid base to grow our adjusted EPS by the mid to high teens. Our revised guidance for 2016 commensurate with 2017 exclude the potential impact of any share repurchases that we may make in the future within the remaining capacity under our existing equity repurchase plan.

This completes our prepared remarks and we would be happy to answer any questions.

Operator: [Operator Instructions]. Our first question comes from the line of John Kreger from William Blair. Your line is open.

John Kreger: Thanks very much.

Greg thanks for those comments about kind of general 2017 outlook. One other one that I don't think you mentioned you just talked about where you think the backlog conversion rate goes over the next few quarters if you expect any changes. Thanks.

Greg Rush: Backlog conversion rate really depends on how our bookings come in for the fourth quarter, if they come in line with 1.2, I think our backlog conversion will be right in ranges in plus or minus a couple of bps with regard to obviously we have really strong quarter like we did in Q3. That impacts near-term backlog conversion more than anything as you know, you have a really strong booking quarter that creates the bigger backlog and then although that has a negative impact on backlog conversion.

John Kreger: Okay, thanks. And then Alistair could you just talk a little bit more broadly about what you're seeing in the market in terms of demand. Curious if you are seeing any change in behavior from either your smaller or larger clients as we approach the election and given all the rhetoric round pricing? Thanks.

Alistair Macdonald: Thanks, John. I don't think we have seen much of the difference in that I mean same way the answer around Brexit we haven't seen really any change in customer sentiment around either of those issues at the moment.

I think that pressure is there on the pricing and that seems to be a bigger concern for some larger pharmas at the moment, but we have very balanced portfolio. We have customers across U.S., Europe, and Asia, and they seem to be heads down driving forward on their development plans at the moment. So no real difference, no real difference in any of the sectors that we play and either that I could really tell you that we've noticed so far.

Operator: Thank you. Our next question comes from the line of Dave Windley from Jefferies.

Your line is open.

David Windley: Hi, good morning. Thanks for taking the questions. Wanted to ask a couple around backlog composition and your trends in therapeutic areas. I think we'd talked in prior quarters about strength in oncology and how oncology was kind of moving up to your top therapeutic area more similar to the rest of the space and that oncology studies were longer and that was stretching backlog duration a little bit.

But I've seen your release this morning you're kind of emphasizing your strength on CNS year-to-date. So if you could help me to understand how your therapeutic area mix is moving and how that is impacting the duration of your backlog please?

Greg Rush: Yes, this is Greg. David, I think it’s really more of a time units. I think if you remember in 2015 CNS was a little weaker in terms of bookings. And at the time, I think backlog for them was dropping a little bit from what it was in 2014.

I think I even made the comment, I think it was Q4 of last year that we saw 2016 as the year of CNS coming back a little bit and we're just saying that what we thought was happening in the Q4 call is indeed happening less about oncology having any issue or decline just been that's had a really strong first nine months. From a backlog conversion, I mean from a length of backlog, I think in 2014, we are in the mid 30 months to convert I think that at the end of 2015 we talked about in the low 40s. And then earlier this year we were in the mid to high 40s, we're in that same range I think we're in mid to high 40 month average duration of backlog and that's still being driven primarily by mix of oncology like base and to a lesser extent all therapeutic areas were little longer just due to complexity driving patients.

David Windley: Okay, thanks. And then as a follow-up several topic on your -- kind of your add backs your GAAP to adjusted numbers you've got some bigger restructuring numbers in the quarter and year-to-date.

I presume the quarter in particular was probably the CEO transition, if you could confirm that but then also stock-based comp is growing pretty significantly on a year-to-date basis and I wondered if that is a kind of a philosophical change in the way you're compensating or is that just a one-year phenomenon. Thanks.

Greg Rush: I don't think it's necessarily a change. I think we -- I know we've had some discussions, other people have asked questions may be in the call back. Basically if you remember program public, ours is a private company, our share price and volatility was much more muted in determining the fair value of equity awards.

And then so the amount of equity we have been giving to executives in terms of absolute dollar value has not necessarily declined in terms of our not dollar value but number that we apply the client in the amount of shares, we've been issuing to executives and board members. But with the higher valuation and higher sold value that's increased. The only thing that I'd like to point out just to make sure that every value is a layer, we are actually getting on a GAAP basis a net positive impact from stock-based comp, so there is a slide, I think Slide number 15, our total share-based compensation for the year in the year-to-date guidance is for $14.5 million. And then if you take out the tax benefit we are getting from equity because of the value at the time of exercise this year to-date has been much higher than the actual value. We've actually had a net positive impact in our guidance estimated at over $3 million.

So we're actually by non-GAAPing it out, we're actually hurting our non-GAAP earnings in aggregate by pointing it out versus helping in.

Operator: Thank you. Our next question comes from the line of Tim Evans from Wells Fargo Securities. Your line is open.

Tim Evans: Hi, Alistair I think you've mentioned some conversation with your clients around pricing, their own pricing I assume is what you meant and this is I guess something that we heard I go to last week in one of the big distributors talking about greater than expected issues that their customers are having with pricing.

How do you think that this is going to end up impacting those customers willingness to spend on R&D going forward?

Alistair Macdonald: Well, I think it's probably more of a long-term consideration for us is, is their willingness to invest in future development programs of course. The methodologies of biotech and smaller organizations that look to out license up to Phase II or as they develop into Phase III, I don't know if that's going to change. The larger pharmas looking at their ROI on development programs whether that would adjust while they're willing to approve their development programs. But we've seen that in the past where organizations come out, who will take that development off balance sheet, and that development still ends up in the market for us into our market for development. So as that pricing pressure changes and we still this kind of at the end of 2008 and 2009 with the biotech funding, but as that pricing pressure changes because that make a difference as to who actually forms the development.

We saw that back in 2008, 2009 that that was the case then you've got a wave of organizations coming out to take development off balance sheet for organizations. And as the ROI model changes because of the pricing pressures, I think we will probably see that again, I think there all people looking to get into development with capital is sitting on the sidelines. So I don't think we can put a precise finger on it, but I should imagine that that will one of the outcomes and may be as pricing pressures change, does that drive the level of outsourcing in big pharma even further do they look for more the raised expense that obviously the CRO model that provides.

Greg Rush: Tim, I want to add one thing on that. I think it also will better influence who they choose and to help outsource if there is pressure from that.

Well only any CRO will be completely immune from that, if you look at our therapeutic focus and one of the things that we add as a value proposition as we look at drugs as we're selecting which ones to bid on aggressively over the last year we don't want ones that are going to be cancelled and we think we have that added advantage with our focus, and from a cancelation rate, it helps us in their -- on the one side. And secondly customer who don't want to be able to make sure that if the drug is got -- is going to fail that it fails early and so they keep their ROI up and I think that's a value proposition that we bring to the table and are willing to help customer do it quickly.

Tim Evans: Okay. And Greg just quick separate topic, you called for relatively flat EBITDA margin next year, which I think echoes the comments that you made earlier at the Analyst Day this year. There is a tendency I think among investors to want to give you credit for the strength that you have in your margins since your IPO and I mean no really strong execution there and may be assuming you can end up beating that guidance and so given that this is the second time that you really call for flat margins, can you just remind us of the pushes and the pulls there that are going to keep that margin flat in 2017?

Greg Rush: I think that everything else holds constant, margins actually have a little room to improve next year.

The reason I'm emphasizing that I think those stay flattish and flat can be -- in my mind can be up or down plus or minus 50 bps when I use the term flattish. What would calls it to be higher than that? We decide delay investments in some of the things we're trying to do for the long-term and focus solely on our margin improvement initiatives. What would call this to be down the 50 bps at the other end of the spectrum, we feel like we have unique opportunity to invest organically in building our FSB business or our medical device or other areas that we thought we need to invest in. And Japan is a great example we did two years ago, we basically built up the Japanese office in present at flat to slightly negative margins. So effectively we were able to generate enough revenue to roughly cover our cost.

In doing so, we got now over 100 people but it had a definite impact over the last two years on our margin won't be otherwise would be. So if we do something similar to that that's the medical device that will hurt the margin percentage but will set us up for long-term. So we're going through our three-year budget cycle now, we are sitting down with our board and we are as a management team we're making sure we evaluate all those investment opportunities and also successful with the top 20 and penetrating those, the more successful we are with that in getting initial awards that could have a slight impact on margin to the negative in the short run but in the long-term we will accelerate margin growth in absolute dollars.

Operator: Thank you. Our next question comes from the line of Erin Wilson from Credit Suisse.

Your line is open.

Erin Wilson: Great. Thanks for taking my questions. Going back to kind of the fundamental demand trends, how do you kind of view that environment across the small-to-mid-sized bio-tech market and just biotech funding in general. I noticed there was a small European biotech funding or biotech company out this morning commenting on a challenging funding environment and potentially opportunity to renegotiate with the CROs, is that something that you're seeing a lot of or more of lately any sort of greater number of contract renegotiations or anything like that that you could comment on would be great? Thanks.

Alistair Macdonald: Thanks, Erin. I don't think we said any contract renegotiations. I think the funding situation obviously is different for different individual biotech. So I've not heard of anything specific on the EU market for that in terms of the difficulty of those guys finding funding. I think actually we saw a little bit of an improvement in the biotech space over kind of Q2, Q3 both rose in terms of the number of customers coming through in that space and I think we referenced in the release they have 25 new customers obviously some of those coming out of that biotech space as well.

But we've made particular efforts to get more involved in that space to a certain degree as we expand particularly in the disease space of a high complexity obviously lot of those biotech companies are dealing with those types of trials. So it's a good space for us. I think that the level of funding and the level of activity that we've seen has been pretty constant but not I don't see any difference in that space from Q2 to Q3.

Erin Wilson: Okay, great. And you mentioned during your Investor Day increased interest in FSB your Functional Services Business, how is that strategy progressing and is this still an area of increased focus for you and is that reflected in your 2017 preliminary targets?

Greg Rush: Yes, I think we've seen continued progress in that particularly in the areas of data management and the functional delivery of that space of data management statistics from experiencing safety, some of the steady starts of FSPs as well we are delivering right that contracts, site contract management and CNS.

So we do see continued interest in that, I think as that portfolio grows and we do we penetrate larger and larger organizations who can do look for that style of outsourcing. That's something that we need to continue to invest in like you say that it is taken into consideration in 2017, yes it is. We are planning to be more -- delivering more of those style of services as we go forward. But I have to think we are -- we are known for delivering full service, high quality, very complex clinical trials, yes, we want to maintain that ability to deliver that but also to follow our customers into that space that's what they want from as we build platforms for them to launch projects available to deliver data management for us. So and what we have seen a little bit is when we have been able to establish a large portfolio of full service with an organization, we're often asked the question could you do this and the full FSP force across start to forecast data management.

So having that ability compete off full service work, as well as been into full service work, so it's important thing for us to balance as we grow.

Alistair Macdonald: And one thing I want to make sure that's really clear because there is a little bit of confusion out of our Investor Day on this topic, if you think about the top 20 customers, think of it from their perspective, they typically want to have a relationship with only two to three CROs that are their strategic partners and most of the top 20 have a mixed model where on certain tenant studies, they won't complete their full service but this is where our daily we get them where we feel like it's fast from those CROs. Those CROs can bring the best value to pharma by providing full service. But some of those because they have a mixed model won't be able to purchase from those three CROs that FSP model, if we want to be one of those three and amongst the top 20 and we tell them we don't have an FSP offering by definition they are down to two people to competitively bid amongst their study and if we're only one of two, they only have really one and it can do or they go and bring in a third that they may not want to do. And so our main focus on FSP is not that we believe that that's the best model, we want to be a major provider of FSP services with 30% of our revenue comes in but access lower margins but more to make sure that we go to bid with the top 20 but they view us as very strong capable firm that can provide those services and can make sure that we would be one of the competitive bids amongst the three that they have selected.

Operator: Thank you. Our next question comes from the line of Robert Jones from Goldman Sachs. Your line is open.

Robert Jones: Thanks for the question. Greg I want to go back to the EBITDA margin outlook but ask more around gross margin specifically, the direct cost side clearly the third-party contracts has been weighing on margins.

How do you think about this as a key swing factor as you look at 2017 and your expectation for overall EBITDA margins to be flat?

Greg Rush: Yes, I think gross margins certainly the area that I would say has the most volatility and for the reason I mentioned you, when we built Japan out all of that revenue and calls roughly equal in each other with an impact on gross margin. So as we do look at FSP, we look at top 20, the impact that you're going to see on that will probably be more a pressure on gross margin and I think there is more room to expand SG&A than there is necessarily gross margins. Is that help answering the question?

Robert Jones: No, no it does -- does and then I guess just one quick follow-up out there around the really strong net bookings in the quarter. I'm curious if maybe you could comment at all about what you're seeing on the cancelation side reflected within your net bookings number. And then just I guess more broadly as it relates to cancelations, did you say there is anything going on from an industry level as you service therapy into more complex diseases that would heighten concern around cancelation?

Alistair Macdonald: I think our cancelation rate is pretty much in line with where it normally is, so we haven't seen any real increase in that or bio-therapeutic area, there is no spike in those cancelations by therapy or by plastic drills or anything like that, so nothing unusual to report rather there.

Greg Rush: Yes, I think our cancelation rate was actually slightly down from Q3 of last year and probably in line on a year-to-date basis. If you remember we talked about the big cancelation in Q2. I do think that we -- our cancelation rate one thing to keep in mind that I think we do slightly different than many people in the industry is we will be very aggressive in terms of taking things out of backlog. We do risk adjustments that are included in our cancelation released at this time and time is how we do it and report it internally. So the example if you have a study that we sign up and it looks like we are going to finish it early and there is some units that are going to be unused, the project manager will take those units out.

That's in our risk adjustment in addition if customer puts something on hold and we feel like that even they are telling it's going to be on hold for two to three months in start time, we will look at that and say with our therapeutic expertise and say look why are they putting it on hold do we like that study has a reasonable possibility of ultimately being cancelled and if that's the conclusion we will go ahead and take the cancelations in advance of when the customer sent the cancellation notice. So I think that always front loads our cancelations and we will tend to make our cancelation rates may be slightly higher than the industry but if we strip that out, we're probably lower than the industry.

Operator: Thank you. Our next question comes from the line of Sandy Draper from SunTrust. Your line is open.

Sandy Draper: Thanks very much. Just one question. Alistair, you had commented I think you said there were 25 new relationships in this quarter. Just wanted to get a sense of any additional commentary around whether it's certain therapeutic areas, what people are coming to, I would assume these are typically probably smaller initial starts but are any of these customers that over time you think have become very substantial or do you think these are more just you are adding smaller customers nice to diversify but realistically they are not looking at to be in Top 10 and Top 15 customers in three or four years? Thanks.

Alistair Macdonald: Yes, thanks Sandy.

They are mainly small to -- while they are mainly small buyers that's small pharmas who are bringing out venturing the developing phase. So a mix across Phase I and II mainly, so they are not going to -- so they will not make huge impacts to backlog but obviously very important customers for us. It's important sector for us and I think INC's model of strong therapeutics, strong delivery is very appealing to that sector because we commit to them, we provide them with the expert kind of leadership in clinical development and the actual operational delivery. I think we have a strong reputation to delivering on time, on budget, and having good cost controls that mean that when we tell customers a price for a study that's pretty much what they're going to pay. So I think that helps us attach to those organizations, although we are one of the largest CROs now, we're able to blend that with the ability to work intimately with small customers and I think the business units helps with that.

If you work with oncology team, you're working with 1,000 people rather than 7,000 people in a CRO, so if they get some of that intimacy that really helps them deliver what they are up against. So yes smaller customers and look most of our relationships that I've been involved in for the last 15 years even the big ones started actually potentially a smaller biotechs with people who did good job before who moved on to make RIM as the larger pharma and carried us with them or developed great products that expanded their organization and we've been able to grow with them. So I think the phrases from Tony Econ's Major Oaks grows, so we're happy to work with small, mid, large because they're all important for us in terms of development of relationships generation of backlog and so on and so forth.

Operator: Thanks. Your next question comes from the line of Greg Bolan from Avondale Partners.

Your line is open.

Greg Bolan: Hey thanks guys for taking the questions. So I apologize if this is already been asked but if I think about the bookings for the quarter and I know this is a very difficult question but if you could may be take a shot at that that would be great. Just what I mean it seems to us that there are at this point in the cycle for outsource late stage drug development, there are winners in there, losers the tide doesn't seem to be as robust as it once was and as I think about a select few what I would kind of qualify as market share gainers or takers, I certainly would put you guys in that bucket. And as I think about the nearly 1.3 book to bill for the quarter, does it feel like as you're talking to your business development folks that your win rate has kind of may be popped a little bit or increased somewhat as of late and may be if you could talk a little bit about where you guys are positioned versus may be some of your peers from the standpoint of being a bit more agile, being able to move your folks around pretty quickly from a functional outsourcing perspective and obviously how that bodes for your ability to take down new business obviously not having your FTEs locked into some type of huge marriage and just if you can may be qualify competitive advantage as of right now, what's kind of leading to possibly at better win rate and then kind of how you guys view yourselves longer-term from the standpoint of being obviously very focused on the FSP side? Thanks.

Greg Rush: Yes, I will take the first part and see if Alistair wants to comment, he had about 20 questions in there. Well good way to phrase one question in the 20 subparts. I think as the overall cost of your question is, are we winning business from competitors? I think over the last two to three years that's certainly been the case; we have been taking market share. I think all the big fellows guys that are taking market share from the smaller guys. And then the question is who has been winning the bigger piece of that back on the -- is there anyone winning business amongst the bigger guys and we certainly have been in net positive of that over the last two to three years.

More recently is the win rate, our goal actually is to maintain our win rate amongst our existing customer profile but we also want to get more and more our fee business. And so if we do that and we start to see a higher, higher volume of our fee from customers we historically have not seen, our win rate will decline which is not necessarily a bad thing because your strike rate or win rate amongst large opportunity that you never got bet on in the past, if you're executing from half so to speak using a sport sinology your win rate is going to -- hit rate is going to go down but they also count three points. And so and you only take home when you win the game and so our goal is as we played out in Investor Day is to take as many half court shorts as we can on those big top 20 pharma. And even if we missed 10 of them but hit one, we are going to be a net winner from our competitors and that is our strategy, that's how we are going after the top 20 and we hope to do that.

Alistair Macdonald: Yes one thing just to add we are -- I think you comment about agility drug is right, it's having the ability to pull a solution on the ground that's fit for purpose for particular development program or individual trial or partnership.

It's building things that fit for purpose. I think CONACE is very good at that, the theme is always been very agile, I think the business unit structure that we have and the business unit structure really fosters that agility for us to be able to provide either full service delivery on a large scale or an alaca piece of the business may be as an FSP or as an individual trial. So having that is very important but I think also we are at the point where a lot of the investments we've made over the years in structure and in the talent of individuals that we've had in the organization, the environment that we set them up to work in and also the technology that we've deployed, we had a longstanding partnerships with kind of off the shelf service providers on the technology side. A lot of our customers have also developed those technology relationships. So we're a strong fit for them technologically I think with our ability to deliver a trial, I think with great visibility into that delivery and give an end-to-end kind of technical delivery as well as lining out with strong therapeutics.

And our ability to put teams on the ground quickly globally is an advantage for us and I think because we are kind of at that -- we're kind of the smallest of the big CROs if you like that's quite frankly the smaller customers as well where they know they will get that intimacy from us and kind of back to Sandy's question, we're able to deliver all that technology, all that great therapeutic coverage, and delivery and do it in an intimate way with smaller customers. So I think that's a bit of an niche we kind of fallen in and we do it very well in that sector.

Operator: Thank you. Our next question comes from the line of Tycho Peterson with JPMorgan. Your line is open.

Tycho Peterson : Hey guys, thanks for taking the question. Just one quick one here for Greg and I think it may have come up earlier in some other contacts, just wanted to get some color around where you think gross margins might level off over the next 12 to 18 months and also what are the specific sort of levers that you can pull in the SG&A line to offset some of that impact?

Greg Rush: I did mention that earlier, I think gross margin plus or minus 50 bps is like our EBITDA margin that's for most of the volatility over the next year or two it will be and I'm not going to go 12 to 18 months at this stage just given that we're in our three-year planning cycle. And the biggest impact I think on whether margins expand or decline over the next year is how much investment do we want to make and we feel is the right investment for our shareholders long-term in building the IFSC practice, building our medical device practice in those areas. In addition the thing I wanted to highlight is I mentioned this in our discussion about BD, we didn't hire as many people in BD and SG&A as we like in Q3 that certainly caused SG&A margins to be unusually low in Q3. And I think as those investments were made in the fourth quarter, you will see SG&A come back in line with where it has been more historically.

And that we also have resources that go into cost of goods sold that are supporting Bid Defenses is an example that are the guys and women throughout and do the actual work for our customers, they also have to go to Bid Defenses to say why they are the right team to provide the work. We will continue to make those investments as we talked about over the last 18 months and we plan on doing that in 2017 and continuing to do that and make these other investments, gross margin will more likely be under a little bit of pressure and hopefully we can offset that with SG&A improvements.

Tycho Peterson: Got it. And then one quick follow-up here on the DSO dynamic, several of your peers last week mentioned that they were seeing DSOs sort of trend up as customers look for just pushing out payment terms and later milestone. Have you seen any of that sort of come up in your conversations, I know, I mean Alistair mentioned something with contract renegotiations, we haven't really seen any of that but are some of the smaller customers beginning to ask for better payment terms?

Greg Rush: This is a hard question for us to answer.

If you look at our customer base, we are not seeing a significant change in the small biotech and small pharma which is where little less than half of our business comes from. From the top 50 we certainly have been asking customers renegotiating that necessarily but top 50 tend to be a little bit more aggressive on payment terms. And so as we start to partner with new customers they are asked from the starting point are higher than what for a much more extended payment terms negatively impacting DSO, we're certainly seeing that. But I can't tell you, if that's because they've changed their protocol from the past or just because we have a new relationship with them and trying to get on that, that's what we are seeing in the top 20. I think I made a comment earlier, if you looked at our DSO it's in the mid-teens and if you looked at where it was in 2015, we were actually negative, that was one of our most important terms.

Over time, we are going to probably trend back to where the industry is, so we will probably see a lengthening our DSO over time but at least in the next six to 12 months, I think it will still be in the teens.

Operator: [Operator Instructions]. We will take our next question from the line of Michael Baker from Raymond James. Your line is open.

Michael Baker: Thanks a lot.

With the move in pharma towards outcomes value-based contracting, more broadly speaking I was wondering what kind of investment initiatives you have on that front; I know you guys have always been focused in on access to data et cetera. But just wanted to get a sense of where that stands obviously you're very clear on the FSP investments, so I just want to get some color in that front?

Greg Rush: Are you talking about -- from a technology perspective to get access to data to sort of QIMS story or discussion that LabCorp has talk about the investment in their technology to get better patients; is that where your question is coming from?

Michael Baker: Well the first part of it is obviously it creates a dynamic of change in the industry, when you are seeing it from that level and one part of it or the parts that gets talked about the most is the data side, so I wanted to just first off get your view point on that change and the impacts you see to the business. And then secondarily from an investment perspective where that kind of bodes out, I know you've been very clear on the FSP side, so just wanted to understand where that's kind of coming through?

Greg Rush: I think from an investment side, we still believe that software companies such as Metadata, SAP, Oracle, and goBalto, a lot of those guys are all better equipped to produce the technology that gets to the underlying data. And so unless if you have a different business model like few QIMS story -- QIMS broadband kind of business model that Quintiles did in terms of data, what everybody from a CRO perspective is really trying to get to is patients. The data is used is a means to enhance which is to get the patient rolling.

Our strategy which is different than the other companies is to get to that patient, we're going to use best in breed technology that our investment focus is onsite and how we believe sites is the best place to get that underlying data which is where the patients are. So I think in our Investor Day we talked about how just a few percentage points single digits of all identified patients ultimately enroll on the study, our goal is how can we improve our hit rate so to speak on identified patients, and we believe that investment is being made on sites and there's where we continue to make that versus technology, that's not our core competency.

Alistair Macdonald: Does that answer your question Michael or you also asking about kind of outcomes trials?

Michael Baker: So yes you could provide some color on that front, I think Greg's commentary was helpful. But there is also what types to data to access as well, so the relationships they are not only kind of on the technology side but access to the data as well. I think ON and United are up?

Alistair Macdonald: Yes, so that's something we have been growing organically alongside the therapeutic business units for a while now.

So we either we've been working to combine kind of evidence and access real world evidence data into later phase trials alongside where it is, if you look at Phase III or separate trials, we have a strong history and reputation in registries and things like that, so it's always been a part of variable service delivery. We are seeing expansion in that and I think that's important area for any of the largest CROs to be a strategic provider for their customers is the ability to not only get them to that first approval, the regulatory approval but also to that kind of commercial approval who is going to pay for that drug in the end what's the value of it, what's its overall cost and what's the ROI for the patient. So, yes, that's an area we're interested in, that's an area we're expanding into we get more questions about that to more customers as we -- as we've grown and we've grown into large relationships where we're delivering later phase trials, I think it's national evolution for us to continue growing in that space.

Michael Baker: Thanks for the update.

Alistair Macdonald: Thank you.

Operator: Thank you. [Operator Instructions]. And it looks like we have no other questioners in the queue at this time. So I would like to turn the call back over to management for closing remarks.

Alistair Macdonald: Okay.

Thank you. Well thank you, ladies and gentlemen for your attendance today, for your interest and investment in our company. We look forward to reporting back to you on our next call with further progress made during the fourth quarter of 2016 and have a great day and thank you.

Operator: Ladies and gentlemen, thank you again for your participation in today's conference call. This now concludes the program and you may all disconnect at this time.

Everyone have a great day.