Earnings Call
Icon PLC (ICLR)
Earnings Call Transcript - ICLR Q2 2023
Operator, Operator
Hello, and welcome to the ICON plc Q2 2023 Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Kate Haven.
Kate Haven, Head of Investor Relations
Good day, and thank you for joining us on this call covering the quarter ended June 30, 2023. Also on the call today, we have our CEO, Dr. Steve Cutler; and our CFO, Mr. Brendan Brennan. I would like to note that this call's 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 SEC reports filed by the company, including the Form 20-F filed on February 24, 2023. 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 exclude stock compensation expense, restructuring costs, foreign currency gains and losses, amortization and transaction-related and integration-related costs in their respective tax benefit. We will be limiting the call today to 1 hour and would therefore ask participants to keep their questions to 1 each with an opportunity for a brief follow-up. I would now like to hand the call over to our CEO, Dr. Steve Cutler.
Steven Cutler, CEO
Thank you, Kate, and good day, everyone. ICON delivered good results in quarter two as our focus on quality, operational excellence and innovative solutions continue to drive success in our project delivery for customers. The industry demand environment has been solid with positive trends across all customer segments. Overall RFP activity continued the sequential improvement we experienced in quarter one, and we saw a notable pickup in RFP activity within the biotech segment toward the end of quarter two. While we are encouraged by the uptick in overall opportunities, the behavior we have previously noted of cautiousness regarding spending as well as delayed decision-making on awards is still present within this segment. Within the mid and large biopharma segments, we continue to see a resilient environment with another quarter of strength in functional service and hybrid opportunities. We are cautiously optimistic that we will see an improving trend in bookings through the second half of this year. And while it's early in the third quarter, we have seen RFP activity continue its positive trajectory in July. We continue to see a high level of engagement with customers that are seeking a partner that can provide flexible and customized solutions for their specific clinical development needs. As customer pipelines, development plans and management priorities evolve, their outsourcing partner requirements change as well. Our differentiated position as the most scalable and comprehensive provider of clinical development solutions strongly positions us with existing and new customer opportunities and partnerships regardless of their preferred development model. To that end, I'm very pleased to announce we were successful in securing an expansion of an existing strategic partnership with a top 20 pharma customer in quarter two. We have increased the scope and scale of services under our partnership, which now includes multiple elements of our offering in full service and functional solutions as well as a number of periclinical services. This strategic customer recognized the value of easily accessing a variety of scaled clinical development services and technologies that were unavailable at our competitors. We see this scenario being replicated at other top 50 biopharma companies going forward, and we remain in active dialogue with several large companies contemplating this type of model. Similar to this partnership, we have begun to see a number of large pharma customers move towards a more blended hybrid model of clinical development. This incorporates elements of both traditional full service and functional outsourcing as customers seek a solution which drives efficiency for their entire portfolio, which often includes augmenting their existing infrastructure alongside outsourcing support. As a market leader and a scaled provider of these services, ICON is uniquely positioned to partner with customers in driving more efficient delivery of services and better outcomes to achieve their specific goals. Our stated vision is to be the world's leading health care intelligence organization. And to this end, we recognize the importance of being at the forefront of technology adoption specifically with potential applications of artificial intelligence and machine learning in clinical development. We are investing in our technology infrastructure in order to accommodate the significant volume growth in trial data appropriately scaling to enable seamless data collection and management. We are focused on developing and advancing our market-leading tools that utilize elements of AI and machine learning alongside our clinical expertise. In quarter two, we released our latest AI-enabled capability called ICONEX which enables study teams to more quickly and easily identify potential investigators based on connections in active physician networks and published content. This is particularly important in complex therapeutic areas such as rare disease and will support our efforts in improving site selection, a long-held industry challenge. ICON has also continued to make considerable advancements with robotic process automation, and we are on course to double our progress from last year in 2023 with the expectation of processing 2 million hours of activity through automation, focused in areas such as data mastering, systems integrations and document handling. In addition, we recently released the latest version of the ICON digital platform, our end-to-end solution to enable patient-centric decentralized clinical trials. This new release includes updates to important features such as direct data capture while also integrating with several other Icon solutions such as Firecrest portal for site training and communications as well as the Mapi Research Trust, our market-leading clinical outcomes assessment library and other validated instruments. We are also making notable progress in other initiatives at ICON. In May, we released our 2022 ESG report, providing updates on our commitment to conducting business sustainably and the further advancement of our ESG program ICON cares. We've made great progress towards the achievement of a number of our targets, most notably in our goal to achieve gender parity at senior levels by 2025. We have also submitted our commitment letter to the science-based targets initiative, the first step in submitting targets for validation. Separately, we were delighted to be added to the Russell 3000 Index at the end of June, following its annual reconstitution process. It is a great milestone for ICON since becoming a publicly traded company in 1998, presenting an opportunity to further expand our shareholder base. Turning to our financial performance in the quarter, ICON delivered solid results with a 4.4% revenue growth over quarter two 2022, our first quarter in excess of $2 billion in revenue. Direct fee revenue growth was in the high single digits year-over-year on a constant currency basis and net bookings grew 4% over quarter two 2022, resulting in a net book-to-bill of 1.2. Of note, similarly to direct revenue, our direct fee net bookings grew in the high single digits on a year-over-year basis. We delivered another quarter of impressive margin performance, with gross margin expansion of 120 basis points on a year-over-year basis and 17% adjusted EBITDA growth on quarter two 2022. Strong direct fee revenue growth and continued focus on cost management across the company were key factors in our margin expansion in quarter two. Our capital deployment strategy remains unchanged with our priorities focused on further reduction of our floating rate debt as well as potential tuck-in acquisition opportunities that are strategically aligned with our portfolio. Depending on progress in these two areas, we will also be opportunistic on share buybacks as we get to the end of 2023 and into 2024. We made great progress in achieving our net leverage ratio target of 2.5x adjusted EBITDA as we closed out quarter two, and this is now at a level to position us to return to an investment-grade rating. This will enable us to return to the debt market in the short term to restructure part of our current debt, thereby allowing us to reduce our interest payments for 2024. With the positive results we have delivered so far in the first half of this year, we are narrowing our financial guidance for the full year 2023. We now expect revenue to be in the range of $8.07 billion to $8.21 billion, an increase of 4.3% to 6.1% over the prior year. Additionally, we expect adjusted earnings per share to be in the range of $12.63 to $12.91, representing an increase of 7.5% to 9.9%, over the full year 2022. This increases the midpoint of our adjusted earnings per share by $0.04 to $12.77. This guidance includes progress on our tax rate and assumes adjusted EBITDA margin expansion of approximately 150 basis points on a year-on-year basis. Finally, I want to highlight an important milestone we recognized earlier this month, which was the 2-year anniversary of our union with PRA Health Sciences. We have delivered on all of the targets we set at the announcement of our combination, surpassing initial timelines on the achievement of cost synergies and our target net leverage ratio. We also performed at or above our key financial targets for the full year 2022 and through continuing to deliver for our customers and patients. We are grateful to and proud of all of our employees for their valuable efforts and commitment to driving our success through this transformational period for our company. We look forward to ICON's continued progress and market leadership as we continue to build the world's leading health care intelligence organization. I'll now turn the call over to Brendan for additional comments on our financial results.
Brendan Brennan, CFO
Thanks, Steve. In quarter two, ICON achieved gross business wins of $2.86 billion and recorded $441 million worth of cancellations. This resulted in net awards in the quarter of $2.42 billion and net book-to-bill of 1.2x. With the addition of the new awards in quarter two, our backlog grew to a record $21.7 billion representing an increase of 2.2% on quarter one of 2023 or an increase of 8.5% year-over-year. Our backlog burn was 9.5% in the quarter, slightly down from quarter one levels as we had anticipated. Revenue in quarter two was billion. This represents a year-on-year increase of 4.4% and or 4.3% on a constant currency organic basis. Overall, customer concentration in our top 25 customers decreased from quarter one at 2023. Our top customer represented 8.6% of total revenue in quarter two. Our top five customers represented 26.2% of revenue. Our top 10 represented 40.3%, while our top 25 represented 61.1%. Gross margin for the quarter was 29.6% compared to 29.8% in quarter one, 2023. Gross margin increased to 120 basis points over gross margin of 28.4% in quarter two 2022. Total SG&A expense was $182.9 million in quarter two or 9.1% of revenue. In the comparable period last year, total SG&A expense was $194.5 million or 10% of revenue. Adjusted EBITDA was $414.2 million for the quarter or 20.5% of revenue. In the comparable period last year, adjusted EBITDA was $354.3 million or 18.3% of revenue, representing a year-on-year increase of 16.9%. Sequentially, adjusted EBITDA margin improved 20 basis points over quarter one margin of 20.2%. Adjusted operating income for quarter two was $383.8 million, a margin of 19%. This was an increase of 16.8% over adjusted operating income for $328.6 million or a margin of 17% in quarter two of 2022. The net interest expense was $80.9 million for quarter two. We now expect the full year interest expense to total approximately $310 million in 2023, reflecting the change in market expectations for further rate increases in the second half of 2023. The effective tax rate was 15.2% for the quarter. We now expect the full year 2023 adjusted effective tax rate to be approximately 15.5%, down from our full year 2022 effective tax rate of 16.5%. Adjusted net income attributable to the group for the quarter was $256.9 million, a margin of 12.7% equating to adjusted earnings per share of $3.11, an increase of 8.7% year-over-year. In the second quarter, the company recorded $12.7 million of transaction and integration-related costs U.S. GAAP income from operations amounted to $209.5 million or 10.4% of revenue during quarter two. U.S. GAAP net income attributable to the group in quarter two was $115.6 million or $1.40 per diluted share compared to $1.41 per share for the equivalent prior year period. Net accounts receivable was $1.171 billion at the 30th of June 2023. This compares with a net accounts receivable balance of $1.197 billion at the end of quarter one, 2023. DSO was 52 days at June 30, 2023, an increase from 40 days at June 30, 2022, with a decrease of 2 days from March 31, 2023. Cash from operating activities in the quarter was $204 million. Free cash flow increased 18% over the second quarter of 2022, and we expect further improvement in cash conversion in the second half of this year as quarter two is typically our lowest quarter due to the timing of bonus payments. We expect this to result in free cash flow of circa $1 billion for the full year 2023. We are pleased with the initial progress made on DSO in the quarter and will remain focused on billing levels and cash collection activities to ensure we continue to improve progress through this year. At June 30, 2023, the company had a cash balance of $270 million and debt of $4.312 billion, leaving a net debt position of just over $4 billion. This compares to net debt of $4.21 billion at March 31, 2023, and net debt of $4.43 billion at June 30, 2022. Capital expenditure during the quarter was $32.1 million. From a capital deployment perspective, we made a payment of $150 million on our Term Loan B facility in quarter two and ended the quarter with a leverage ratio of 2.5x net debt to adjusted EBITDA. We expect to continue our payments on our Term Loan B facility over the course of 2023, totaling approximately $800 million to $1 billion for the full year. As Steve mentioned, given we met our initial target leverage ratio of 2.5x adjusted EBITDA, we will be actively pursuing options to restructure our long-term debt. Given the current floating rate level on our Term Loan B facility, we see a very good opportunity to secure a more favorable position in 2024, assuming an investment-grade ratings occur this year. Alongside revising our financial guidance for the full year, we have updated key assumptions which are now an effective tax rate of 15.5%, free cash flow target of circa $1 billion, CapEx spend of $150 million and interest expense of circa $310 million, all for the full year 2023. Before we move to Q&A, we want to extend our thanks to the entire ICON team for their many contributions to our performance this quarter.
Operator, Operator
The first question comes from Sandy Draper at Guggenheim Partners.
Alexander Draper, Analyst
I guess the first question is, Steve, on your comment on or maybe is Brendan, on the potential bookings improvement in the back half of the year. Trying to think, are you thinking about that on a year-over-year growth basis, on a gross bookings and we'll see where cancellations sort of shake out or net bookings? Just any more color on how you see that? And is that primarily driven by the biotech area.
Steven Cutler, CEO
Yes, thanks for the question. I'll start by addressing your last point. The opportunities we see in our business are quite broad-based, not limited to just biotech. Last quarter, we reported a sequential increase in requests for proposals, which has continued into the second quarter. As I mentioned earlier in July, we're observing more opportunities, which makes us cautiously optimistic about robust business development performance in the latter part of the year across various segments. In terms of gross and net new business, all of it contributes to our revenue growth. While we have noticed that cancellations are somewhat higher than usual, they are not significant enough to raise any major concerns. Overall, we remain cautiously optimistic about an improved business development performance in the latter part of the year based on the opportunities we are seeing throughout the business.
Alexander Draper, Analyst
Great. That's really helpful. And then just a quick follow or unrelated follow-up for Brendan on the free cash flow. Down a tiny bit to $1 billion, but still would expect that requires a pretty good improvement in the back half of the year. Is that just driven by continued DSOs coming down? And do you have a new DSO target for the end of the year?
Brendan Brennan, CFO
Yes, we need to continue to focus on our cash conversion, absolutely. And of course, a big part of that will be DSO management. We've said over the last couple of quarters that we wanted to see that come down by at least a couple of days. We've said in the longer term, we'd like to be in the mid-40s. And certainly, that's where I'd like to be coming to as we get to the back end of the year. So that's certainly the target I've given the guide, we think that's a good and close to optimal level of DSO for ICON, given the structure of our company but also our customers. So that's very much the focus as we get into the back half of the year. I think it's also important to say we'll be looking carefully at the other elements of our balance sheet. In terms of our own DPO focus and making sure that that lines up with DSOs and the credit market that we're in the environment that we're in. So we'll be keeping an eye on all elements of the balance sheet. But yes, the DSOs is by far the biggest piece of that, and we'll be targeting mid-40s.
Operator, Operator
The next question comes from Justin Bowers at Deutsche Bank.
Justin Bowers, Analyst
Is the improving demand environment observed across all customer segments? What changes have you noticed in the second quarter compared to the first quarter and potentially the end of last year? Additionally, are there any shifts in the conversion rate, or is that something you expect to see in the latter half of the year?
Steven Cutler, CEO
Yes, Justin, it's Steve. As I mentioned earlier, the increase in demand and RFP opportunities spans across all segments of our business, including large pharma, biotech, and lab services, especially in early-phase and preclinical areas. Overall, I am satisfied that this growth is broad-based. Regarding conversion rates, we haven't observed any significant changes. Much of our work continues to be in oncology, which tends to progress more slowly. There are several substantial opportunities emerging from the post-COVID next-generation work, and our success in securing these will influence our burn rate. This outcome remains uncertain. However, the key takeaway is that the growth is widespread across the organization. We are cautiously optimistic about enhancing our business development achievements in the latter half of the year, which should position us well for 2024 and beyond.
Justin Bowers, Analyst
Good to hear. If I may ask about the expansion of the existing strategic partnership, when do you expect that to start showing results? Also, do you have any updates on your top customer in that partnership?
Steven Cutler, CEO
The expansion of the existing partnership will take some time to take effect due to various constraints on their portfolio. Therefore, we do not expect a significant immediate increase in revenue from that partner. However, in the medium to long term, we see potential opportunities to increase revenue from this partner. There will be no contributions from this in 2023. Regarding our top customer, we continue to work effectively with them. They are making some adjustments to their development models, transitioning to a more functional hybrid approach, which is typical among large pharmaceutical customers right now. This trend is evident across the industry, but we believe we are well positioned to adapt since we are the leading provider in the functional space and have a robust full-service group. Typically, these customers implement hybrid solutions where part of their business is functional, while another part remains full-service, with some aspects becoming more hybrid. We feel confident in our ability to support whatever development model our largest customers or any others wish to pursue.
Operator, Operator
Thank you. Your next question comes from Luke Sergott at Barclays.
Luke Sergott, Analyst
Great. So I kind of wanted to dig into the customer classes here that you guys reported on. So the top 11 through 25 have really been picking up here the last three quarters now, I guess, can you talk a little bit about what's going on there? I would assume that I'm probably wrong in thinking that these are smaller biotech and it might just be that they're underserved by you guys, and you guys are winning wallet share. So talk about the growth that you're seeing there, especially in light of the overall industry demand structure.
Steven Cutler, CEO
Let me have a go on that one, Luke, and then I think Brendan might want to dig in. We don't assume that the 11-25 are all large or small. There's a fair mix of different customers in and some customers jump in there for a period of time and then come out. I don't know that there's anything in particular going on with that group of customers. We believe we serve our large customers effectively. I think the opportunity we're having as we go forward is looking at the more midsized customers those who are interested, obviously, in the functional but perhaps don't have their own internal development resources to be able to do that. And so they go full service. But they're also thinking about a more hybrid model. I think we are focusing our attention and our services more effectively in that midsized market. That may be some of what we're seeing in terms of how they're growing.
Brendan Brennan, CFO
No, I was just going to add to that, Luke. Obviously, it's a great sign to see expansion in the kind of the next cohort outside your top 10. And again, I think it speaks to the strength of the portfolio of businesses that we have, that we're growing not just in the top 10, but growing outside of that top 10 and broadening the customer base generally speaking. So I think it's a positive piece, and I think it speaks really well to the combination of the organizations over the last two years to Steve's point in the opening remarks, and how we're really managing now to do a much better job and making sure that right across our portfolio, we're selling as much services we can into all our customers.
Luke Sergott, Analyst
Great. The follow-up adds to that. As you think about current industry growth and discuss observing positive signs and funding, what conversations are you having with your larger customers in the pharmaceutical sector about unlocking those programs and finding a way to return to high single-digit growth?
Steven Cutler, CEO
The conversations we have focus on how our clients can spend their money effectively and efficiently and how we can assist them in achieving that. When asked about this, I point out that even if R&D budgets are increasing or they are spending more, we clearly have an opportunity. However, even if budgets are decreasing or staying the same, there is still an opportunity for us. In fact, sometimes it can be more advantageous for organizations like ours when budgets are flat because pharmaceutical companies reassess their spending and seek to optimize it. The situation varies depending on the customer. For larger pharmaceutical companies, there is currently a trend towards a hybrid full-service functional model. In contrast, biotechs are fully committed to full-service models, while mid-sized companies are exploring ways to optimize their development spending. Ultimately, it really depends on the specific company, its management at a given time, and the size and structure of its portfolio. There isn’t a one-size-fits-all approach in this scenario.
Operator, Operator
Please stand by for your next question. Your next question comes from Jack Meehan of Nephron Research.
Jack Meehan, Analyst
Thank you. Good morning. Steve, was curious to get your thoughts as you speak with your pharma customers. I'm just curious, has the inflation reduction act come up as a consideration? And how do you think that could impact trial activity as we go into 2024?
Steven Cutler, CEO
Yes, thank you, Jack. I wouldn't say there’s been any specific discussion regarding the Inflation Reduction Act. It is certainly a consideration for the future, and while I believe they are internally discussing it and reviewing their development investments and portfolio organization, we haven't had targeted conversations about it. I think the IRA presents an opportunity for us moving ahead, as it may influence their drug development and expenditure. They will likely focus on how they approach this. Some emerging models could potentially be responses to anticipated developments related to the IRA in the coming years, but again, we haven't had specific talks with them about this.
Jack Meehan, Analyst
Great. Okay. I have a question for Brendan regarding expectations for backlog burn. Previously, you mentioned an estimate of 9.5% for the year, which suggested a stabilization in the latter half. Is that still your perspective? Additionally, as you evaluate your backlog, what trends do you anticipate beyond this year?
Brendan Brennan, CFO
Jack, I believe we’re at 9.5% for the full year. We began at 9.6% and are currently at 9.5%. It won't see significant movement from that, but I think we’ll be around 95% as we enter the second half of the year. This is our full-year outlook. Conversion has been challenging, as we’ve discussed before. Steve mentioned it earlier; there is still a lot of oncology work in the market. Some trials can last four to six years, which mathematically is much lower than 1.5% per quarter. In contrast, we have a diverse business mix with some areas experiencing faster revenue burn. We continually seek ways to optimize our efficiency in project delivery. It’s crucial that we quickly start projects and enroll participants in trials. This challenge is ongoing. As we move into next year, we will provide deeper insights at that time. It’s clear that there has been a downward trend in the industry over time. However, we are constantly exploring options to maintain stability, and we will strive to do so as we approach 2024, providing more detailed information as the year progresses.
Operator, Operator
The next question comes from Daniel Leonard at Credit Suisse.
Daniel Leonard, Analyst
I'm curious, with the biotech funding environment seeming to be improving a bit, could you share any thoughts on timing whether you'd expect any lag between improved funding and your business opportunity or whether you think you could see a change in real time?
Steven Cutler, CEO
Sure. I think as we see the green shoots of biotech funding sort of seeming to appear and as I say, in the RFP opportunities. I think this is going to take a little bit of time to play out. As I said, I think we'd like to think the second half of this year, those opportunities will lead us to strong business development performance, which should play then, I think, into revenues as we get into 2024. I think that's all I can give you on timing at this stage. Dan, some of these opportunities, as I think I indicated, are around more sort of next-generation vaccines. That may burn a little faster and help us, but others typically biotech is highly focused in the oncology space as well. So that will tend to be pushed down the track a little bit. So I wouldn't expect, as I say, with the opportunities we're seeing to see much impact this year, but I do think it gives us optimism for 2024.
Daniel Leonard, Analyst
Appreciate that. And just a cleanup question. Brendan, can you remind us how much of your backlog is COVID at this point and what the COVID associated revenue was in the quarter?
Brendan Brennan, CFO
Yes, it's currently low singles, around a couple of percent in terms of the backlog. For the full year, our COVID revenue is likely still in the 3% to 4% range at this point. Dan?
Kate Haven, Head of Investor Relations
And Dan, just to jump in, that's where it was for this quarter as well, around 3.5% of revenue, which is down from quarter one as expected.
Operator, Operator
The next question comes from Patrick Donnelly at Citi.
Patrick Donnelly, Analyst
Great. Steve, maybe just kind of putting a lot of your comments together on the potential improvements in bookings, RFPs, you sound pretty optimistic about the potential biotech improvement. There's a lot of attention turning to '24. I know it's a little early, but there seems to be some debate. You guys are more of a mid-single-digit grower next year. I guess, in the current environment and what you're seeing, do you see a path to that being more kind of getting back to that high single-digit framework next year? Brendan touched a little bit on the conversion as well. What do you see as the key variables? And how do you kind of look at that high level?
Steven Cutler, CEO
Yes, Patrick, I don't think we're quite ready to talk too much about 2024 at this point. As you've outlined, you quite well. We see optimism for a reason for cautious optimism with the RFP flow, a sequential RFP flow coming in, and that obviously needs to be converted into business wins in the next couple of quarters. If we do well in that space, and we continue our, I think, very good win rates, if we can apply those to the opportunities that we're seeing, I think we'll be in good shape for 2024. But I'm not ready to put a number on 2024 at this point. We feel optimistic about our medium and certainly long-term growth but medium-term growth, and that does include 2024. But we'll, as Brendan said, we'll get back to you on that as we get towards the end of the year.
Kate Haven, Head of Investor Relations
Sorry, Patrick, we just lost you. If you could just try to repeat that second part.
Operator, Operator
Patrick got disconnected. In the meantime, should we take the next question from David Windley at Jefferies.
David Windley, Analyst
You've made really solid progress seems to be well on your way to the 150 basis points of margin improvement this year. That has, as I think you and we expect been more geared toward G&A leverage, but you have made some progress on gross margin as well. I guess I'm wondering, Steve, what your longer-term aspirations are relative to margin and the opportunities to get there, essentially, is there still some room on gross margin to make some progress? Or should we think about that largely being scaled on SG&A?
Steven Cutler, CEO
Yes. Dave, I think we made about 120 bps improvement on gross margin year-on-year from the quarter. So I think that's a reasonable progress on a gross margin basis. And as you know, we've also made some progress on our SG&A. I think it will depend a little bit on the mix of work that we get. Certainly, some therapeutic areas, some parts of our business, obviously, have a slightly different margin profile, so it will depend upon that. I think we see still some optimism in terms of our ability to move our gross margin forward modestly, given the various options we have with respect to, I talked about it, robotics, AI and machine learning and how that can help us in the direct sort of fee direct cost of labor area. But I'd say probably most of our margin gain over the next few years will be around SG&A. We continue to, I think, have one of the best mobile business services groups in the industry. So continuing to leverage that and to leverage their expertise, we have an opportunity, I think, in terms of where we're locating those people, as I say, the processes around what they do, our abilities with. So it's really on both, but I'd say probably the majority of progress will be made in the SG&A sort of level.
David Windley, Analyst
And do you hazard a numerical target? Like if you're better than 25.5% for this year on EBITDA, are you thinking several percentage points more to be had over multiple years?
Steven Cutler, CEO
EBITDA I think still about 20.5%, Dave. Not 25.5%. Don't give me a heart attack... Thank you. I'll just pick it back up if you don't mind. We've made significant progress in that area. I'm pleased with what we've accomplished both in terms of gross performance and at the SG&A level. We believe we can continue to make further advancements as we approach the end of the year, and we'll evaluate our goals for next year. I'm not ready to set a specific target at this time. We continually push ourselves in this area, as our former CEO mentioned, every ceiling becomes a floor. However, I'm not prepared to announce any particular target right now.
Operator, Operator
The next question comes from Elizabeth Anderson at Evercore ISI.
Elizabeth Anderson, Analyst
Maybe to follow up on Willy's question, how do you view the long-term trend in pharma towards a hybrid functional full-service model? What are your thoughts on the potential margin opportunities associated with that shift? Are there specific offsets or other opportunities that might arise from this change?
Steven Cutler, CEO
Yes, I think there are certainly some challenges related to the businesses focused on functional and hybrid models, Elizabeth. We have significant plans in place to ensure that our teams are in the right positions, at suitable locations, and utilizing the appropriate technology to address these challenges. While there will always be some hurdles, whether in full-service, functional, or hybrid business models regarding margins, customers consistently expect us to deliver faster, better, and more cost-effectively over time. However, we believe our organization is well-positioned to meet these expectations, and we are actively taking steps to continue our progress moving forward.
Brendan Brennan, CFO
No, I think that's it. I think it's something that we constantly keep under review. As we look at our mix of business, we're always challenging ourselves is what Steve said earlier on. How do we maintain our gross margin profile in the right levels? And something that we do is it's just part of our organization and part of the investment strategy indeed that we have to make sure that we're thinking about technology and the efficiency of our trials to both deliver the best customer results, but also make sure that we're maintaining margin profile.
Operator, Operator
Please stand by for the next question in the queue.
Maxwell Smock, Analyst
Sticking on the customer theme. We talked about your top customer and some smaller customers, but it looks like revenue from customers 2 to 5 was down year-over-year and more than 10% sequentially here in the second quarter. Just wondering if there's anything to call out that would explain the lack of growth from these customers in particular in the second quarter.
Brendan Brennan, CFO
Max, Brendan here. I don't think there's anything particularly significant to highlight, Max. It really varies from one customer to another and their project statuses. For instance, we often encounter situations where a retro change order for a specific house can boost revenues significantly in the short term, affecting the overall appearance of other customer segments. So, I don’t believe there is any extraordinary calculation involved. Additionally, as we’ve mentioned before, the numbers aren’t absolutely consistent. While our top five customers usually remain stable, there are always new customers coming in and others leaving, which can be specific to each customer and their stage in the development process. One notable shift we observe, even with our larger clients, is related to their development pipelines. Frequently, we see substantial work coming from certain clients that they quickly complete, then they may pause before returning for more. This fluctuation is a normal aspect of the clinical research industry.
Maxwell Smock, Analyst
Yes, I understand. That's very helpful. I have another quick question regarding cancellations. The rate is 2.1%, which is slightly above the 2.0% target you previously mentioned. Can you provide any details about what is driving the slightly higher cancellations in terms of customer size, therapeutic modality, or indication? Additionally, what was the amount of bad debt expense recorded in the second quarter?
Steven Cutler, CEO
I'll leave the bad debt one to you, Brendan. But in terms of the cancellations Max, no, that were fairly across the I say broad-based, if you like, or consistent across the various segments of our business. There's no particular therapeutic area or a customer segment where we saw any more cancellations. I mean, really, on a historical level, the cancellations were pretty much as previously really went up sequentially or on the year. So it's really nothing to see there as far as we're concerned from a cancellation basis.
Brendan Brennan, CFO
Yes. Sure, Max. As you guys know, we took a chunk in the first quarter. We felt in the second quarter that we were at more than adequately provided on bad debt provision. We don't consistently over time do it every single quarter. And so we kind of look at it on a quarter-by-quarter basis. We didn't feel the need to increase that provision in the current quarter.
Operator, Operator
The next question comes from Casey Woodring at JPMorgan.
Casey Woodring, Analyst
So Steve, based on your comments, it sounds like 4Q was the bottom in terms of SMID RFPs given the sequential upticks here in 1Q and now in 2Q so far through July. But order growth was flat sequentially in 2Q. So can you maybe just talk about the customer conversations you've had recently that gives you some confidence that this deliberate decision making that you called out during the prepared will improve in the back half of this year? And then maybe just thoughts on where bookings growth can be in the back half? And is the book-to-bill acceleration maybe closer to the middle of that 12% to 13% guidance range goal? Is that realistic in the back half?
Steven Cutler, CEO
Yes. Regarding our discussions with customers and the conversion of RFPs to rewards, we have seen relatively flat activity on a sequential basis. However, RFPs typically involve a lag between winning the work and implementing it, which can often take three months or longer. We are optimistic about improving our business development performance in the latter half of the year, but we do not expect a significant revenue impact until 2024. Our conversations with customers reflect this trend, and there are certainly opportunities available. We noted some encouraging signs regarding biotech funding, and RFP opportunities have increased across the board, not only in biotech but also in large and midsized pharma, as well as in our preclinical labs and functional areas. I am cautiously optimistic, which is a sentiment I believe is important to emphasize. We think we have promising opportunities to pursue and secure wins in the next six months, potentially allowing us to reach our expectation of the 12% to 13% range. However, we must deliver by winning the work and converting it into revenue. There is still work ahead of us, but we are well-prepared and have the necessary resources and opportunities to achieve this.
Casey Woodring, Analyst
Got it. That's helpful. And then just one last one for me for the model, Brendan. Any changes to your FX assumptions? I think last quarter, you were embedding a 50 basis point tailwind from FX on the top line, just has that changed at all?
Brendan Brennan, CFO
We are still reviewing our FX assumptions for the current year. It remains around 0.5%, and we will continue to monitor it throughout the year. As we know, FX movements can fluctuate in both directions. Our current guidance takes into account our thoughts on FX and other factors at this time.
Operator, Operator
Please stand by for the next question in the queue. The next question comes from Derik De Bruin at Bank of America.
Derik De Bruin, Analyst
I won't focus on the EBITDA margins or the RFPs that have already been addressed. My question is about your capital deployment strategy. You've reduced leverage nicely and your cash flow generation is improving. How should we consider capital deployment? Are there any M&A opportunities, especially in technology, that you are exploring? Additionally, what are your thoughts on share buybacks? I'd appreciate more insight into how we should view the uses of cash.
Steven Cutler, CEO
Yes, Derik, I believe we've made significant progress in reducing our debt and achieving investment grade status. Our first step will likely involve restructuring part of that debt. As we approach the end of the year and move into next year, we are actively exploring the market for potential mergers and acquisitions. We plan to take a traditional approach focused on smaller, strategic acquisitions, similar to what we've done in the past. There are still areas within our business that I want to expand and enhance, particularly in real-world evidence, labs, and imaging, where we see the potential for substantial growth and competitive advantage by integrating and scaling these segments. Regarding share buybacks, they will be our third priority, but we will remain opportunistic. The current M&A market has elevated valuations for companies, and we will not overpay for acquisitions. We will assess each opportunity based on its value and how well it fits with our business. If the conditions are favorable, we will proceed with acquisitions. If not, and if we find ourselves with excess capital, we will consider buying back our stock, but that will be done opportunistically.
Derik De Bruin, Analyst
Got it. And just one follow-up. The biotech industry in China has been weak, raising many concerns that are certainly affecting some of the other companies we monitor. Can you remind us about your activities in that market? Has it been a challenge or a chance for growth? Please elaborate on that.
Steven Cutler, CEO
China is not a major part of our business, comprising about 1,500 employees, which is roughly 3 to 3.5 percent of our operations. We haven't encountered any specific issues, and with the easing of COVID restrictions, we find that sites are now more accessible. As the COVID situation settles, we are seeing a return to normalcy in China. This contrasts with the ongoing challenges in Russia and Ukraine. However, we are pleased that China is returning to the levels we expect. Our presence there is significant, and we have a fully operational and functional business. We are also increasingly observing customer opportunities. Overall, I would say that China is almost back to its pre-COVID status.
Operator, Operator
The next question comes from John Sourbeer at UBS.
John Sourbeer, Analyst
Just one, just one, do you have any additional color around trial starts and how those are tracking and there have been some press reports on shortage on certain oncology drugs out there that might be impacting trial starts. Just any color you can provide there.
Steven Cutler, CEO
John, I don't believe we've observed any significant changes in trials based on the limited data available from the industry, particularly concerning Phase III trials. This trend hasn't been reflected in what we are hearing from our customers regarding RFPs and opportunities. Therefore, I don’t have much to add on that topic. The market still presents numerous opportunities, and we continue to see substantial innovation, particularly with new drugs and advancements in cell and gene therapy, where we have expertise. So, nothing stands out as unusual. I'm not sure if Elizabeth or Patrick wishes to add anything, but otherwise, I think we're nearing the end, right operator?
Operator, Operator
Yes, they haven't rejoined the queue, so I'm assuming they don't wish to. The next question is from indiscernible at Citi.
Steven Cutler, CEO
Okay. Well, thank you, operator, and thank you all for listening into our call today and your interest in ICON. We look forward to providing further updates as we progress through the second half of 2023. So thank you all, and have a good day.
Operator, Operator
Thank you. This concludes today's conference call. You may now disconnect. Speakers, please stand by.