Earnings Call Transcript - ICLR Q1 2024

Kate Haven, VP of Investor Relations

Thank you. Good day, and thank you for joining us on this call covering the quarter ended March 31, 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 webcast 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 statements, 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 the SEC reports filed by the company, including its Form 20-F filed on February 23, 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 1 hour.

Steven Cutler, CEO

Thank you, Kate, and good day, everyone. ICON's performance in quarter 1 marked a strong start to the year, combining solid financial results, an impressive uptick in business awards, and excellent adjusted earnings growth. Net business wins were a record in the quarter, exceeding $2.65 billion as our comprehensive scaled offering continues to fuel our leadership position in clinical development. The market trends we saw early in quarter 1 continued throughout the balance of the quarter, characterized by stabilizing demand within the biotech customer base as well as a continuation of the robust demand we have consistently seen from large pharma customers. Underlying demand drivers are incrementally more positive through quarter 1, with biotech funding increasing over 50% on a year-over-year basis in quarter 1, according to BioCentury, and large pharma R&D spend figures indicating low single-digit growth for the full year, in line with previous expectations. Proposal volumes are at healthy levels, with overall RFP volume increasing low double digits on a trailing 12-month basis. In quarter 1, net bookings grew 10% on a year-over-year basis, resulting in a book-to-bill of 1.27x in the quarter and increasing our trailing 12-month book-to-bill ratio to 1.24. We had a robust business development performance across all operational segments, with notable strength in our large pharma full-service solutions segment as well as in our laboratory business. While it's early in quarter 2, to date, we have seen a continuation of these trends across customer segments, and we remain positive on the outlook for the full year. We expect book-to-bill to be in the range of 1.2 to 1.3x on a quarterly basis, maintaining our previous target range and expectation for an average book-to-bill of 1.25x for the full year 2024. One of our important strategic initiatives as we came into 2024 was the focused rebranding of our dedicated biotech solutions business, ICON biotech. We saw an opportunity to enhance our market position within the biotech segment with customers that historically associated ICON with a large pharma focus. ICON biotech is the world's largest dedicated biotech CRO, with approximately 8,000 staff that are exclusively committed to that segment and understand the unique needs of the biotech customers we support. We are committed to optimally serving this key customer group and believe we can best do so through our current dedicated structure. Following the rebrand activity in quarter 4 last year, I am pleased to report that we are already seeing positive momentum in terms of customer receptivity and an increased win rate in this segment. In addition to our focused efforts within the biotech segment, we continue to drive forward our leadership in large pharma. Growing strategic partnerships is a critical element to this strategy, which not only includes the execution of new strategic partnerships but renewing and expanding existing customer relationships. In quarter 1, we were successful in renewing a long-standing top 20 pharma partnership, primarily utilizing full-service solutions. The renewal reinforces our strong delivery, history of execution for this important customer and our collective team's collaboration to drive efficiency across their development portfolio. Another important factor in ICON's ability to secure and grow our customer partnerships is through the development of innovative solutions across our portfolio. We are excited about the future potential of our comprehensive and cost-effective offering in clinical trial tokenization. This end-to-end approach follows patients longitudinally through their healthcare journey beyond their participation in a clinical trial. The surge in drug development in areas like diabetes and obesity has increased the need to collect and analyze long-term follow-up safety, efficacy and health expenditure data. We are anticipating greater market, regulatory and reimbursement requirements in the future, hence the need to deliver broader, more comprehensive insights that ultimately drive increased value for our customers. Turning to our financial performance in quarter 1. Our team delivered another period of strong results across a number of measures. Total revenue increased 6% on a year-over-year basis. Gross margin of 29.9% increased 10 basis points over quarter 1 2023. And total SG&A expense decreased 90 basis points on a year-over-year basis to 8.7% of total revenue, driving a very strong adjusted EBITDA growth of 11.3% over quarter 1 2023. This resulted in an adjusted EBITDA margin of 21.2% in the quarter, up 100 basis points year-on-year. Given the performance on adjusted EBITDA growth and the continued paydown of our Term Loan B debt, we saw excellent year-over-year growth in adjusted earnings per share of 20%. The execution of our capital deployment strategy continued as planned in the first quarter. We closed the previously announced acquisition of HumanFirst in January, a leader in the field of digital health technology selection. This important capability is strategically aligned with our approach to providing an enhanced integrated offer. Combination of our leading clinical outcome assessment capabilities and digital health technology selection offers the ability for customers to optimize clinical trial design and enhance data collection quality. As we've previously noted, our capital deployment priority remains M&A, and we continue to actively evaluate assets that will strategically and operationally enhance the current areas of our service portfolio. After positive rating changes from S&P and Moody's in the back half of 2023, moving ICON back to investment-grade status, we began the execution of the planned refinancing of our variable rate debt in quarter 1. This included a successful repricing of our existing Term Loan B in the quarter, reducing our interest rate by 25 basis points as well as the removal of our credit adjustment spread. In parallel, we improved the terms of our revolver facility. And we are working closely with our banking partners to progress refinancing of our debt. This will allow us to better utilize our balance sheet and provide more certainty on our annual interest expense. We continue to expect our full year interest expense will be in the range of $200 million to $230 million this year. We are updating our full year 2024 guidance range to account for our financial performance in quarter 1 and the positive market environment we've seen so far this year. We expect revenue to be in the range of $8.48 billion to $8.72 billion, an increase of 4.4% to 7.4% over full year 2023. Additionally, we expect adjusted earnings per share to be in the range of $14.65 to $15.15, an increase of 14.5% to 18.5% on a year-over-year basis. The new ranges maintain the midpoint of our previous guidance range, reflecting an outlook that is consistent in terms of overall market activity and our performance year-to-date. Before I hand it over to Brendan for further detail on our financial performance, I want to provide a brief update on our previously announced CFO transition. As we indicated earlier this month, Brendan has decided to depart ICON after a long and very successful tenure in our finance organization of the company, and importantly, as our CFO for the past 12 years. While we're sorry to see Brendan go, we understand his desire to take on the new challenge in his career, moving to a different industry. And we are very grateful for his significant contributions to our organization over the past 18 years. As previously noted, we have commenced a process with a large global recruitment firm to identify our next Chief Financial Officer, which includes both external and internal candidates for the role. We plan to provide additional updates on this process and transition period as we progress. In the meantime, Brendan is firmly in his role as the CFO, and we have not made any changes to our broader finance organization as a result of this announcement. Finally, we are looking forward to our upcoming Investor Day, which will take place on May 30 in New York City. The leadership team of ICON will be present at this important event, and further details will be made available on our website in the coming week. In closing, I want to thank all of our colleagues at ICON for their dedicated efforts in quarter 1 in continuing to support our mission in bringing new therapies to patients around the world. Brendan, I'll now turn it over to you.

Brendan Brennan, CFO

Thanks, Steve. I appreciate the kind words and want to reiterate my commitment to ensuring a smooth transition. We plan to work closely with Steve and our broader management team to accomplish this. Turning to our financial results in quarter 1. In quarter 1, ICON achieved gross business wins of $3.11 billion and recorded $460 million worth of cancellations. This resulted in a solid level of net awards in the quarter of $2.65 billion and a net book-to-bill of 1.27. With the addition of new awards in quarter 1, our backlog grew to a record $23.4 billion, representing an increase of 2.5% on quarter 4 of 2023 or an increase of 10.1% year-over-year. Our backlog burn was 9.2% in the quarter, slightly down from the quarter 4 levels, and we anticipate similar levels through the remainder of the year. Revenue in quarter 1 was $2,090 million. This represents a year-on-year increase of 5.7% or 5.4% on a constant currency basis. Overall, customer concentration in our top 25 customers decreased from quarter 4 2023. Our top 5 customers represented 26% of revenue in quarter 1; our top 10 represented 41.4%; while our top 25 represented 62%. Gross margin for the quarter was 29.9% compared to 30.4% in quarter 4 2023. Gross margin increased 10 basis points over gross margin of 29.8% in quarter 1 2023. Total SG&A expense was $181.7 million in quarter 1 or 8.7% of revenue. This was in line with the prior quarter on total percent of revenue. In the comparable period last year, total SG&A expense was $189.6 million or 9.6% of revenue. Adjusted EBITDA was $444 million for the quarter or 21.2% of revenue. In the comparable period last year, adjusted EBITDA was $399.1 million or 20.2% of revenue, representing a very strong year-on-year increase of 11.3%, an expansion of 100 basis points in margin. Adjusted operating income for quarter 1 was $411.4 million, a margin of 19.7%. This was an increase of 11.6%; adjusted operating income of $368.7 million; and margin of 18.6% in quarter 1 of 2023. Net interest expense was $65.8 million for quarter 1. We continue to expect the full year interest expense to total approximately $200 million to $230 million in 2024. 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 $288.5 million, a margin of 13.8% equating to an adjusted earnings per share of $3.47, an increase of 19.7% year-over-year. In the first quarter, the company recorded $7 million of transaction- and integration-related costs. U.S. GAAP income from operations amounted to $285.5 million or 13.7% of revenue during quarter 1. U.S. GAAP net income in quarter 1 was $187.4 million or $2.25 per diluted share compared to $1.41 per share for the equivalent prior year period, an increase of 16%. Net accounts receivable was $1,146 million at 31st of March 2024. This compares with a net accounts receivable balance of $1,088 million at the end of quarter 4 of 2023. DSO was 49 days at March 31, 2023, a decrease of 5 days from quarter 1, 2023. Cash from operating activities in the quarter was $327.1 million. And free cash flow was $300 million in the quarter, an increase of 102% on a year-over-year basis. While DSO increased sequentially, we continued to target mid-40s in terms of DSO on a full-year basis, albeit we can have fluctuations on the timing of payments that can influence total DSO in any particular quarter. At March 31, 2024, cash totaled $398 million, and net debt totaled $3.5 billion, leaving a net debt position of $3.1 billion. This compared to net debt of $3.4 billion at December 31, 2023, and net debt of $4.2 billion at March 31, 2023. Capital expenditure during the quarter was $27.2 million. From a capital deployment perspective, we made a payment of $275 million on the Term Loan B facility in quarter 1, and ended the quarter with a leverage ratio of 1.8x net debt to adjusted EBITDA. Given the successful repricing of our Term Loan B and our intention to refinance our existing debt, we do not anticipate making discretionary payments in quarter 2 at this time. After successfully deleveraging over the past few years as well as our return to investment-grade rated company, we feel we are well positioned from a balance sheet perspective to deploy more capital opportunistically for M&A as well as potential share repurchase. Our preferred use of capital remains M&A, and we have a number of opportunities in the pipeline that we are currently engaged on, which would add scale and capability to fast-growing strategic areas of our portfolio. Our key assumptions behind the full year guidance remain in place: effective tax rate of 16.5%; free cash flow target of circa $1.1 billion; CapEx spend in the range of $150 million to $200 million; and interest expense in the range of $200 million to $230 million, all for the full year 2024. Finally, I would also like to sincerely thank our ICON employees around the world for their hard work and dedication in delivering our strong performance in quarter 1. Operator, we are now ready for questions.

Unknown Analyst, Analyst

This is Adam on for Charles. We've seen an uptick in emerging biopharma funding. I'm wondering if you can give us a sense of what's usually the general timeframe for that to flow into RFPs, bookings and then ultimately revenue. You guys noted seeing stabilizing biotech demand. I'm wondering if you guys are already starting to see in the robust growth in net wins this quarter biotech contribute?

Steven Cutler, CEO

Certainly. Overall, we have observed a solid increase in RFPs this quarter, in the low double-digit range. Biotech funding, as you've mentioned, has indeed picked up quite well. However, we haven't yet seen a significant impact on RFPs from this funding. I would anticipate that any effects will likely be delayed by a quarter or two. We expect to start seeing the results of that biotech funding in the second half of the year, assuming it continues, reflecting in awards and eventually impacting revenue towards the end of this year and into next. We are witnessing strong demand in the biotech sector, but I believe the real opportunities and growth are likely to manifest later in the year and into early next year regarding revenue.

Unknown Analyst, Analyst

Your next question comes from Max Smock at William Blair. Steve, you called out a continuation of positive trends here in the second quarter. Results were solid, and you had a great quarter for bookings. Given things seem to be moving in the right direction here, can you just walk through the rationale for taking down the high end of your guidance range for 2024?

Steven Cutler, CEO

Yes, Max. It's still early in the year. We have narrowed the guidance significantly for both EPS and revenue. Since it’s early in the year, we believe it’s not appropriate to increase the midpoint of guidance. We are confident in the midpoint as we initially announced it. Therefore, we think the right approach now is to simply narrow the guidance. We’ll be assessing our situation in the coming months, and as we approach the July call, we’ll see where we stand. In our business, there are always various factors at play, some challenges, and some advantages. Since we’re only three months into the year from a results perspective, we felt narrowing was the right decision because we’re confident in the midpoint, but we’re not adjusting it at this moment.

Max Smock, Analyst

Understood. Maybe just to clarify quickly on RFPs. You mentioned up low double digits in total. Do you have that breakdown or how that breaks down between biotech and large pharma? And then how does each of those buckets compare to where they were at, at the end of last year? And then it sounds like, based on your prior answer a few minutes ago, you would actually expect RFPs to get better from here given the lag between funding and that ultimately showing up in RFP flow. I just wanted to make sure I understood that commentary correctly.

Steven Cutler, CEO

Yes, to address the second part of your question, we do believe there is a lag period. The improved funding environment we've observed in the first quarter is likely to impact the second half of the year. Specifically, we expect a lag of at least a couple of quarters. Regarding RFP data, we don't provide too much detail, but qualitatively, large pharma remains strong, and biotech has been solid, showing signs of growth though not as robust. If I had to estimate, large pharma is performing well above low double digits, while biotech is likely in the mid-singles. Overall, we see numerous good opportunities in the biotech sector, and our win rate there has improved over the last quarter. We are confident in the solutions and propositions we are offering to customers and their positive reception. In summary, the environment for RFPs is solid and constructive, and we are optimistic about the market's direction.

Casey Woodring, Analyst

So your book-to-bill target for the year is 1.25 on average, the midpoint of that 1.2, 1.3 range. I know bookings fluctuate on a quarterly basis. But given the strong start to the year and the improving funding backdrop, do you think you can sustain quarterly bookings above that 1.25 number? And then on that point, from a quarterly phasing perspective, if we see similar bookings in 2Q here that we saw in 1Q, above 1.25, is it fair to assume that there would be upside to the back half of the year?

Steven Cutler, CEO

Casey, we had a solid quarter in terms of bookings, and we're very pleased with the direction the market is heading. I won't get ahead of us regarding surpassing the 1.25 target, as it's a reasonable goal. We will assess how the biotech funding and market conditions impact RFP opportunities as we discussed. While it's possible we could exceed that target, for now, we'll maintain our forecast within the 1.2 to 1.3 range, aiming for an average in the middle throughout the quarters. If we go beyond that, it’s uncertain at this point since revenue takes time to materialize. Much of our current work is in oncology, with a burn rate around 9.2, which I don't expect to increase soon. There might be minor effects if we have a particularly strong second quarter in new business wins, but I'm not making promises about that just yet. We believe the opportunities are developing well; it's early in the second quarter, and we have a promising list of potential projects. I'm confident about our performance in Q2, though it's still early to draw conclusions. As things progress, we'll reach July and revise our forecasts accordingly. Overall, we are optimistic and constructive, but we're not ready to declare success and rush ahead, even if that's what you might wish for.

Casey Woodring, Analyst

Got it. That's helpful. And then maybe just a quick follow-up. Can you talk about your win rate in the quarter? And maybe elaborate on how much of the bookings growth you saw was the result of share gains versus trial growth coming back?

Steven Cutler, CEO

Our win rate was consistent with where it's been. Certainly, the large pharma win rate has been very positive. That's been consistent. Biotech certainly came back in the quarter very well. So we feel we're making a lot of progress in the biotech space with the opportunities that we've pitched. And we've got some good opportunities in the hopper for the second quarter. So we feel that we're on our game nicely with the biotech. That story, the rebranding that we put in place towards the end of last year is really starting to gain some traction with customers. We have a number of very significant opportunities. Some of these biotech opportunities are really large trials, really large programs, and we've been successful on a number of them. So we feel we're in a good place. And the hit rate, strike rate, call it what you like, it's not as high, of course, in biotech as it is in large pharma where we tend to have the strategic partnerships, but we compete very strongly and increasingly strongly in that space. And we feel the rebranding approach is really starting to pay dividends along with the good people and the good team we have on the biotech space.

Ann Hynes, Analyst

You both mentioned M&A as a priority in your prepared remarks. Can you just remind us what type of services or needs that you think ICON is missing? And then secondly, your DSOs, down year-over-year, but they did tick up sequentially. If you could provide some more data on that, that would be great.

Steven Cutler, CEO

I will address the M&A aspect, and then Brendan will cover the DSO question. We have consistently stated that M&A is a key priority for us, particularly focused on enhancing our existing services and capabilities. Our goal is to increase our presence in areas such as laboratories, sites, and other sectors of the business, including devices. We believe there are several functional service areas where we can elevate our position to either first or second in the market. Overall, we consider ourselves equal to or slightly ahead of the competition in some categories, especially as the leading player in the FSP space and very close to the top in the full-service space. However, there are opportunities within laboratories, sites, and devices that we see as potential growth areas to boost our revenue and operational scale. We are currently pursuing several of these opportunities. With our improved finances and balance sheet, we are better positioned to execute these transactions. Recently, we completed a couple of smaller acquisitions with HumanFirst and BioTel. We aim to continue this trend with an emphasis on increasing revenue and EBITDA contributions from new acquisitions. Brendan, would you like to discuss DSO?

Brendan Brennan, CFO

Thank you, Ann. I was optimistic about the strong levels of cash from operations and free cash flow during the quarter. I'm pleased with the progress we've made compared to the past, although there was a slight two-day delay in the DSO from Q4 to Q1. There's nothing significant to note there. We aim to maintain a DSO in the mid-40s for the full year, which is our target. The timing of the Easter holiday at the end of the quarter on March 31 affected this outcome, as Easter was earlier this year. However, I believe we can make up for those couple of days as the year progresses, and I'm overall satisfied with the strong cash flows we've seen this quarter.

Daniel Leonard, Analyst

Steven, I was hoping maybe you could elaborate a bit further on your improved win rate in biotech.

Steven Cutler, CEO

Dan, we have made significant improvements, and there are many factors contributing to this. We recently brought in new leadership in the biotech sector, and they have been effective in enhancing our organization's engagement with customers and increasing our traction in biotech. We have 8,000 dedicated staff members for this area, and our story is resonating well with biotech clients. They typically see smaller CROs as more agile and responsive. We now have a team of 8,000 focused on biotech who are empowered to make quick decisions. We've managed to balance this agility within the structure of a large, financially stable company, which is a key advantage for our biotech customers. They appreciate the dedicated resources, financial robustness, and our capacity for innovation and flexibility in their projects. As our senior managers intensify their efforts to engage with clients, understand their needs, and present innovative solutions, we are seeing positive results. This has translated into an improved win rate. There isn't one single reason for this improvement, but it appears to be a developing trend, and I expect it to continue.

Daniel Leonard, Analyst

And a related follow-up, I just want to make sure I understand better the biotech rebrand. A couple of years ago at your Analyst Day, you talked about your dedicated business units for biotech, 8,000 employees and such. So what exactly changed at the end of the year?

Steven Cutler, CEO

I don't believe there have been significant operational changes from our perspective. What we have improved is our communication with customers, and with new leadership in place, they have done an excellent job establishing personal connections with clients. ICON has been recognized historically as a larger pharma CRO, which remains true. However, it's important to note that approximately 30% to 35% of our work is in the biotech sector, making it a crucial area for us. There is considerable innovation in drug development within biotech, and a large portion of new drugs, around 40%, that reached the market last year through the FDA originated there. This sector plays a vital role in the drug development landscape, and being a key provider and partner in this space is essential. Our customers are beginning to understand this better as we enhance our communication. Our marketing efforts are gaining traction, but more importantly, our senior leaders have been actively engaging with customers to convey the benefits of having 8,000 professionals dedicated to this work, combining innovation with financial stability. It's fundamentally a matter of communication, and I feel we are making significant progress in that area.

Kate Haven, VP of Investor Relations

Yes. And I think it's an important point, Dan, that you made that structurally, actually, it isn't different than what we presented at the Analyst Day in terms of having a dedicated segment to biotech with those dedicated resources. It's really around that customer perception and making sure people understand that, which is what we're redoubling efforts on and not making the structural changes there.

Michael Ryskin, Analyst

Great. And Brendan, I want to say congrats and wishing you the best going forward. I know you'll still be here for the next couple of calls, but still, it's good working with you.

Brendan Brennan, CFO

Thanks, Michael.

Michael Ryskin, Analyst

Yes. I want to focus a little bit on the big pharma segment a little bit or customer group a little bit. I think in your prepared remarks, you called out a continuation of robust demand. You talked about R&D for the group for 2024 seems to be pretty stable, in line with prior. I just want to get a sense of how much of that is already locked in when we think where we are in the year in April. Is there a risk of that changing as you go forward? I know budgets can be set, but there's also news this morning of Bristol announcing job cuts, 2,200 layoffs. So there's still some things that are fluid in that end market. So just curious how those conversations have evolved year-to-date and sort of upside/downside risk for the rest of the year?

Steven Cutler, CEO

Yes, Mike, I'll take this, and Brendan may want to add later. As you mentioned, we've experienced strong demand in the large pharma sector, which has been consistent for the past 12 to 18 months. This trend remains unchanged for now. Some larger companies have indeed revised their models or budgets. We noticed fluctuations in revenues in the first quarter across different areas. However, we're optimistic about overall organizational growth, especially outside our top 10 customers, where we've observed significant year-on-year revenue increases. It's important to note that not all of these are smaller clients; some biotech customers are quite substantial for us. Therefore, moving beyond the top 10 or 25 does not necessarily mean dealing with smaller or less significant customers. That segment has definitely grown. There are a couple of clients in the higher revenue range who have seen declines due to budget cuts and challenges related to patent extensions, among other factors. Revenue can vary from quarter to quarter; for instance, we might complete a significant project at the end of one year and see revenue drop in the first quarter. Overall, we perceive stable and robust demand in large pharma. I previously indicated a growth expectation of around 3% to 4%, and we believe we are gaining market share in this area, attributed largely to our effective operational performance. While there may be fluctuations and varying budget challenges among customers, many face significant patent life and exclusivity issues regularly. This prompts them to increase R&D efforts to develop new compounds. In summary, we remain positive about this market segment.

Brendan Brennan, CFO

Yes. No, I think just reflecting on it, one of the things that we talked about at the start of our call is we have actually seen pretty decent traction from the large pharma group and probably more on the full service side of the house as well as we've come into '24, and that's been heartening. But you also see in our statistics that we continue to diversify as a customer base. The customer base continues to diversify. And so that large concentration is always going to be there as part of our piece. It's always part of how CROs are built, but it continues to diversify. And to Steve's point, some go up, some go down. What we're focused on as an organization is that in holistic terms, we're moving in the right direction. I feel we have a market, both in pharma and biotech, that really does support that. So yes, that's what we want to see continuing is that diversification increasing over time.

Michael Ryskin, Analyst

Okay. That's helpful, and appreciate it. If I could squeeze in a quick follow-up, going back to the CFO transition. It sounds like you never know, but you might not be able to sort of announce a successor until later in the year, but you've got the Analyst Day coming up in May. So anything you can say in terms of what we should look forward to from the event?

Steven Cutler, CEO

You can look forward to our plans for the next few years and our innovations at the upcoming Investor Day. We will provide an update on our CFO transition then. We are moving quickly and have engaged a global recruitment firm, with interest from several strong candidates. While no one can quite match Brendan's abilities, we must find a replacement, as we cannot clone him in the next six months. We wish him all the best. We feel optimistic about our position, having attracted promising candidates who have experience running public companies. The Investor Day is just about a month away, and while we won't have a definitive announcement then, I will share where we stand. We are working within tight timelines to establish long and short lists for appointments and anticipate having someone in place this year. We hope the new hire will overlap with Brendan to learn from him before he leaves. Overall, we feel we are in a reasonable position early in the search.

Eric Coldwell, Analyst

I wanted to go back to the biotech rebranding and the improved win rate and your double-down focus there. I'm curious if you could share with us the number of small biotechs that you work with, whether you want to call that emerging biopharma, pre-revenue clients, however you wish to define them and then how that number has changed? And then also, what that is as a percent of revenue and/or backlog? I think a couple of years ago, it was laid out as somewhere around, if I remember, about 16% of revenue the way you used to define it. So if you could give us an update on that. And then with this focus, is it on the really small, really early-stage biotech clients? Or is it more mid and large biotech where you're just looking to further penetrate a more mature biotech segment? I'm curious on how broad the focus is, how deep you're going in terms of the nascency of some of these clients, their size, et cetera?

Steven Cutler, CEO

There is a lot to unpack in that question, Eric. Regarding the biotech rebrand, we consider biotech to represent roughly low 30% of our revenues. A few years ago, we noted that our capital market-dependent biotechs, which need to raise funds, make up about 15%. We work with many biotechs, approximately 500, providing services ranging from small consulting projects to large-scale Phase III trials costing hundreds of millions. Biotechs operate differently from large pharmaceutical companies, which requires us to have a specialized focus on them. This allows us to engage effectively and provide input on their trial designs and development programs. It's a distinct market where our team is excelling. With the rebrand, our customers are beginning to understand and appreciate this. They acknowledge our expertise, resources, and importantly, our financial stability, which is crucial for customers intent on taking a drug to market instead of simply partnering with a large pharma. We present a different strategic option for these companies moving forward, which we believe is extremely valuable. We are successfully communicating this to the market, and I hope this gives you a clearer picture of our customer base.

Eric Coldwell, Analyst

If I could just throw one more in, then I'll jump off. Head count's been flat over the last year, and you are growing in the mid-single digits. I'm just curious what your thoughts are on labor productivity, retention and then also hiring demands as 2024 progresses and maybe moving into 2025 if current trends continue.

Steven Cutler, CEO

We haven't dramatically increased our headcount; it's remained quite flat over the past year, yet we've managed to boost our revenue. A significant part of this success comes from our focus on efficiency. We've integrated bots and machine learning into our operations, with AI playing a key role. Our IT team has excelled in implementing these technologies, which contributed to saving about 2 million hours last year, with a target of 3.5 million hours this year. Optimizing our workforce's location has also been crucial. Our team at ICON is dedicated and highly efficient, constantly striving to improve. Additionally, the systems and technology we've deployed have enabled our skilled employees to maximize their productivity within the same timeframe. As a result, we've kept our headcount relatively stable, with only a slight increase of around 100 over the year, allowing us to enhance our productivity consistently. We've set a goal to raise productivity by several percent each year to maintain our efficiency. Another positive factor has been our retention. Managers have done an outstanding job engaging employees, resulting in a retention rate now in the high 80s, which is the best we've seen in years, especially post-COVID. This improvement is a testament to our leadership that fosters an inviting work environment. All of these elements have contributed to our ability to remain efficient without needing to expand our workforce in line with revenue growth.

Patrick Donnelly, Analyst

Maybe on the back of that last one on head count piece, it's probably one for Brendan. Just on the margin side, obviously, SG&A has been a nice lever. Can you talk about, is that still heading towards 8 here in the relative near term? And obviously, you guys are talking about 50 bps overall. But can you just talk about the margin dynamics, FSP, that shift has seemed to quiet down a little bit. I guess it's just because service has been strong for you guys, better margins on that front. But again, can you just talk about, I guess, the SG&A levers? Is it still right to think about that 8% near term? And then again, that FSP shift, where it feels like you guys have that well under control, but if you want to talk to that as well.

Brendan Brennan, CFO

Yes, Patrick. To begin with the gross margin aspect, we have clearly stated our goal for this year is to maintain a gross margin around 30% for the full year. There are many factors at play here. Steve mentioned our organizational efficiency, and you noted our previous discussions about FSP, although full-service offerings have had a greater impact this year, which has altered the margin profile slightly. However, we have accounted for this in our gross margin forecast, which remains around that 30% mark. Those factors are integrated into our expectations regarding margin shifts, and we believe we can sustain that 30% gross margin. As I have mentioned in previous calls, we anticipate a 50 basis points expansion in 2024, primarily through improvements in SG&A, and we are making solid progress in that area. We have focused on managing costs carefully and strive for efficiency leveraging the same strategies Steve mentioned regarding gross margin efficiencies, including technology, systems, machine learning, AI, and robotics. This ensures our organization operates efficiently, allowing our team to focus on value-added tasks rather than anything that can be automated. This approach will continue to be the primary way we enhance our margins and manage costs, both this year and beyond. We're pleased with the progress made and hope to see it continue.

Justin Bowers, Analyst

So we'll stick with large pharma here. Can you talk a little bit about the velocity of decision-making amongst the large pharma clients with respect to either new programs or to outsourcing approaches relative to last year and some of the concerns there? And then, just with respect to outsourcing penetration, I think historically, we thought we've seen the industry grow, let's say, 1 or 2 points per year there. Is that still intact for 2024 and the next couple of years?

Steven Cutler, CEO

Sure. Justin, I mean, I'll answer your second part first. Penetration, yes, 1% to 2% a year, 100, 200 bps, I think, is the way to think about it. And that's what we think about it. We think there's still plenty of upside over the next decade or 2. Maybe there's no doubt a ceiling, maybe at 70%, 75%, but we're probably only at sort of 50%, 55% now. So I think there's still plenty of room for upside on the penetration side. And of course, it varies depending on which company you're at. A large pharma, it's going to be lower than it is in the biotech where we'll typically do pretty much everything for them. In terms of velocity decision, I don't think we see any particular change in the velocity decision. Things can take some time, and sometimes they happen very quickly. A rescue project can be made, a decision to be made in a week. If it's a large development program with a new asset in a significant indication, that could take 3 to 6 months really depending on the individual customer, on their circumstances, on whether they're raising money or not. I don't see much difference between large pharma and between biotech. Sometimes the biotechs take a fair bit of time on these things. Possibly they're a little faster in terms of making decisions. But I'm not sure I notice too much of a difference on that one, and I certainly haven't noted any elongation of the decision velocity over the last quarter or 2. I think that that's continued at about the same rate as normal.

David Windley, Analyst

My first question, Steve, you've both mentioned a couple of times about large pharma and FSO being strong to start off the year. You also mentioned the client renewal on that front. I wondered if those are one and the same or if the large pharma and FSO uplift is broader than just that one client renewal. Maybe you can give some color around that.

Steven Cutler, CEO

The recent renewal we've had is specifically in full service, and it's indicative of a broader trend beyond just that single customer. Generally, our industry experiences shifts where trends fluctuate back and forth. About a year ago, the focus was leaning more towards functional services, but we are now observing a reversal with a slight recovery in full service. It’s not a dramatic shift, but there is a noticeable easing of the push towards functional service provision, suggesting a potential return to full service offerings. What we are seeing more prominently are blended models, especially among large pharmaceutical companies that prefer having the flexibility to utilize both functional and full service approaches. For instance, on a particular project, they may manage data, medical writing, or statistics through a functional service agreement, while conducting clinical and project management on a full service basis. We believe we are well positioned to deliver these types of solutions. As the leading provider in functional service provision and with a strong presence in full service as well, we have an unprecedented capability to integrate these models. Coupled with our technology and site networks, we can create a highly attractive offering for large pharma clients. Thank you, operator. I appreciate everyone joining our call today and for your ongoing interest in ICON. We look forward to seeing many of you at our upcoming Investor Day in New York City, where we will have the opportunity to showcase the important work we do here at ICON. Thank you all, and have a great day.

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect. Speakers, please stand by.