PFWD Phase Forward (MM)

Phase Forward Incorporated (NASDAQ: PFWD), a leading provider of data management solutions for clinical trials and drug safety, today announced its financial results for the fourth quarter and full year 2009.

GAAP revenues for the fourth quarter of 2009 were $58.8 million, a 22% increase from $48.3 million in the fourth quarter of 2008. Within total revenues, electronic data capture (EDC) license, application hosting and other related revenues were $41.6 million, representing 70% of fourth quarter total non-GAAP revenues and an increase of 18% from $35.3 million in the prior year period.

Bob Weiler, chairman and chief executive officer, remarked, “The fourth quarter was a strong finish to a successful year for Phase Forward and was highlighted by revenue growth and non-GAAP operating income that was at the high-end of our guidance. We also won a number of highly competitive EDC evaluations, experienced continued rapid growth with our Phase Forward™ IRT offering, signed the first multi-million dollar agreement related to our Clinical Development Center offering from Waban and made progress bringing our late stage/ePRO solutions to market.”

Weiler added, “2009 was one of the most important years in the history of our company. We took major steps to evolve Phase Forward from the leading EDC vendor to the first end-to-end provider of an integrated clinical research suite (ICRS) spanning EDC, IRT, data and statistical analysis platforms, safety and ePRO/late solutions. The strength of our business model and balance sheet enabled us to execute on our strategy when we did. We are already starting to see the benefits of our expanded offering and believe our early lead in providing an end-to-end ICRS offering will become increasingly important moving forward.”

For the fourth quarter of 2009, GAAP income from operations was $539,000, a reduction from $3.4 million in the fourth quarter of 2008 due primarily to non-cash expenses relating to a $2.3 million impairment charge and a $700,000 increase in the amortization of intangible assets resulting from acquisitions. GAAP net loss for the period was $68,000, or $0.00 per diluted share, compared to GAAP net income of $2.7 million, or $0.06 per diluted share in the fourth quarter of 2008.

For the fourth quarter of 2009, non-GAAP revenues were $59.4 million, which excludes a $597,000 purchase accounting adjustment to record deferred revenues and backlog assumed in acquisitions at fair value. Non-GAAP income from operations was $8.7 million, an increase from $7.5 million in the prior year period, representing a non-GAAP operating margin of 15%. Non-GAAP net income for the period was $5.9 million, or $0.13 per diluted share, compared to $5.8 million, or $0.13 per diluted share, in the fourth quarter of 2008.

The attached table presents a reconciliation of GAAP to non-GAAP revenues, income (loss) from operations and net income and net income per share applicable to common stockholders for the three and twelve months ended December 31, 2008 and 2009. Non-GAAP results exclude the impact of stock-based compensation expense, amortization of intangible assets, the effects of purchase accounting adjustment to record deferred revenues and backlog assumed in acquisitions at fair value, impairment of intangible assets and restructuring expenses.

Total cash, cash equivalents and investments were $135.5 million at the end of the fourth quarter, a decrease of $11.7 million from $147.2 million at the end of the prior quarter. For the fourth quarter, positive cash flow from operations of $15.1 million was offset by $12.9 million in capital spending and $14.0 million in cash used to repurchase shares as part of the $40 million share repurchase program approved by the Board of Directors and announced during the fourth quarter. Total deferred revenues were $98.4 million at the end of the quarter, down from $103.6 million at the end of the prior quarter and up from $88.5 million at the end of the fourth quarter of 2008.

Other Fourth Quarter and Recent Business Highlights

• During the fourth quarter, the company hosted its 8th annual International Users Conference (IUC) in Boston, Massachusetts, in addition to its annual users conference in Japan. Over 100 companies were in attendance at these combined events, including a near doubling in attendance at Japan’s users conference, as Phase Forward officially launched its integrated, end-to-end ICRS offering and strategy.
• Strong growth related to the company’s Interactive Response Technology (IRT) offering continued in the fourth quarter and included a combined EDC/IRT agreement with Dow Pharmaceutical. IRT-related revenue grew over 130% during the fourth quarter as compared to the prior year.
• The company announced a major new release of its IRT solution, Phase Forward™ IRT 5.0, which gives managers direct control over clinical supply management and helps to provide assurance of supply availability at randomization. Phase Forward IRT 5.0 also offers a new integrated drug forecasting module for advanced global clinical trial supply management and a new, enhanced user interface to streamline navigation and consolidate workflow.
• The Cancer Research UK's Drug Development Office, the drug development arm of the world's largest independent organization dedicated to cancer research, signed a multi-year agreement in which they are standardizing on Phase Forward's InForm™ GTM solution. Phase Forward was selected based on its partnership approach, global services team, the technical strength and scalability of its product, broad experience with oncology trials and the availability of investigators trained in using InForm.
• PharmaNet Development Group, Inc., a global drug development services company, signed a multi-year agreement to offer Phase Forward’s InForm GTM solution to its customers worldwide. PharmaNet provides a comprehensive range of services to the pharmaceutical, biotechnology, generic drug and medical device industries that includes clinical trial data management.
• The company’s CRO-related non-GAAP revenues of $13.6 million grew 30% year-over-year during the fourth quarter.

Full Year 2009 Summary Financial Results

GAAP revenues in 2009 were $213.3 million, a 25% increase from $170.2 million in 2008. Within total revenues, EDC license, application hosting and other related revenues were $154.7 million, an increase of 21% from $127.9 million in 2008, representing 73% of 2009 total revenues.

GAAP income from operations was $11.2 million in 2009, compared to $16.4 million in 2008. GAAP net income was $8.0 million, or $0.18 per diluted share, in 2009, compared to $13.8 million, or $0.32 per diluted share, in 2008.

Non-GAAP revenues in 2009 were $216.3 million, a year-over-year increase of 26% from $171.2 million in 2008. Non-GAAP income from operations was $33.6 million in 2009, representing an increase of 21% from 2008 and a full year operating margin of 16%. Non-GAAP net income was $23.1 million, or $0.52 per diluted share, in 2009. Non-GAAP net income was $21.3 million, or $0.48 per diluted share, in 2008.

The attached table presents a reconciliation of GAAP to non-GAAP revenues, income (loss) from operations and net income and net income per share applicable to common stockholders for the three and twelve months ended December 31, 2008 and 2009.

Financial Outlook

“As we begin 2010, we expect Phase Forward to deliver solid financial results, characterized by low to mid-teen revenue growth and a continuation of the recent trend of margin expansion,” said Weiler. “With many of the visionaries and largest companies in the pharmaceutical industry further down the path from an EDC adoption perspective, it will be increasingly important for vendors to deliver a true end-to-end ICRS offering. During 2010, and even more so in future years, we expect areas complementary to EDC to be the fastest growing segments of the ICRS market. Moreover, it will be these areas along with the ability to deliver an end-to-end ICRS offering that customers will increasingly evaluate when making decisions on strategic vendor relationships. We believe Phase Forward’s market share lead in EDC and status as the only true ICRS vendor at this time position the company well to sustain and potentially increase revenue growth as the market evolves toward purchases of integrated applications and end-to-end ICRS offerings.”

The following statements are based on current expectations and the company assumes no obligation to update or confirm them. These statements are forward-looking and inherently uncertain. Actual results may differ materially as a result of the factors identified below and the factors identified in our public filings made with the Securities and Exchange Commission, or other factors.

For the first quarter of 2010, the company currently expects the following:

• Non-GAAP revenue: $56.0 to $57.5 million
• Non-GAAP operating income: $7.3 to $8.1 million
• Non-GAAP EPS: $0.11 to $0.12
• GAAP EPS: $0.03 to $0.04

For the full year 2010, the company currently expects the following:

• Non-GAAP revenue: $240.0 to $248.0 million
• Non-GAAP operating income: $36.5 to $40.5 million
• Non-GAAP EPS: $0.54 to $0.60
• GAAP EPS: $0.26 to $0.32

GAAP EPS includes purchase accounting adjustments related to some of our acquisitions to record the assumed deferred revenues and backlog at fair value, non-cash expenses associated with stock-based compensation expense and the amortization of intangible assets. The expected GAAP and non-GAAP EPS reflects an estimated tax rate of 37% to 38%.

Conference Call

The company plans to host its investor conference call today at 5:00 p.m. ET to discuss its financial results for the fourth quarter and full year 2009 and its outlook for the first quarter and full year 2010.

The investor conference call will be available via live webcast on Phase Forward’s web site at www.phaseforward.com under the tab “Investors.” To participate by telephone, the domestic dial-in number is 888-680-0865 and the international dial-in is +1 617-213-4853. The access code is 92050428. Investors are advised to dial into the call at least ten minutes prior to the call to register. The webcast will be available for replay until Thursday, March 4, 2010 on the “Investors” page of Phase Forward’s website.

About Phase Forward

Phase Forward is a leading provider of integrated data management solutions for clinical trials and drug safety. Phase Forward's products and services have been utilized in over 10,000 clinical trials involving more than 1,000,000 clinical trial study participants at over 300 organizations and regulatory agencies worldwide including: AstraZeneca, Boston Scientific, Dana-Farber Cancer Institute, Eli Lilly, the U.S. Food and Drug Administration, GlaxoSmithKline, Harvard Clinical Research Institute, Merck Serono, Novartis, Novo Nordisk, PAREXEL International, Procter & Gamble, Quintiles, sanofi-aventis, Schering-Plough Research Institute, Servier, SGS, Tibotec and the U.K. Medicines and Healthcare Products Regulatory Agency. Additional information about Phase Forward is available at www.phaseforward.com.

Cautionary Statement

Certain statements made in this press release that are not based on historical information are forward-looking statements which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. This press release contains express or implied forward-looking statements relating to, among other things, Phase Forward's expectations and assumptions concerning management's forecast of financial performance, the performance of Phase Forward's products and services, future business and operations plans of Phase Forward's customers, the ability of Phase Forward's customers to realize benefits from the use of Phase Forward's products and services, possible acquisitions, integration of acquired businesses, and management's plans, objectives and strategies. These statements are neither promises nor guarantees, but are subject to a variety of risks and uncertainties, many of which are beyond Phase Forward's control, which could cause actual results to differ materially from those contemplated in these forward-looking statements. In particular, the risks and uncertainties include, among other things, changes in our customers' industries; our ability to convince prospective customers to adopt our solutions; competition and changes in competition during future periods; changing customer requirements; governmental regulation; our ability to maintain or increase profitability; fluctuations in our operating results; long sales and implementation cycles; our dependence on a limited number of customers or suppliers; product performance; third party service interruptions or delays; technology failures; our ability to maintain customer relationships and contracts; our ability to retain and hire skilled personnel; our ability to protect our intellectual property rights; product liability or intellectual property infringement claims brought against us; acquisitions; our ability to manage our rapid growth; our ability to obtain capital when desired on favorable terms; and the volatility of the market price of our common stock. Existing and prospective investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Phase Forward undertakes no obligation to update or revise the information contained in this press release, whether as a result of new information, future events or circumstances or otherwise. For additional disclosure regarding these and other risks faced by Phase Forward, see the disclosure contained in Phase Forward's public filings with the Securities and Exchange Commission including, without limitation, its most recent Annual Report on Form 10-K.

Non-GAAP Financial Information

Phase Forward provides non-GAAP revenues, income from operations, net income, and net income per share applicable to common stockholders data as additional information for its operating results. These measures are not in accordance with, or an alternative for, generally accepted accounting principles and may be different from non-GAAP measures used by other companies. Phase Forward's management believes these non-GAAP measures are useful to investors because this supplemental information facilitates comparisons to prior periods. Management uses these non-GAAP measures to evaluate its financial results, develop budgets and manage expenditures. Investors are encouraged to review the reconciliations of these non-GAAP financial measures to the comparable GAAP results, which are attached to this press release.

  Phase Forward Incorporated Condensed Consolidated Statements of Income (unaudited) (in thousands, except per share amounts)         Three Months Ended December 31, Twelve Months Ended December 31, 2008 2009 2008 2009   Revenues: License $ 14,029 $ 15,867 $ 52,704 $ 59,837 Service 34,293 42,954 117,480 153,420                       Total revenues 48,322 58,821 170,184 213,257 Costs of revenues: License(2) 596 609 2,715 2,519 Service(1), (2) 19,820 25,696 70,225 89,916                       Total cost of revenues 20,416 26,305 72,940 92,435 Gross margin: License 13,433 15,258 49,989 57,318 Service 14,473 17,258 47,255 63,504                       Total gross margin   27,906     32,516     97,244     120,822   Operating expenses: Sales and marketing(1), (2) 8,063 9,650 28,021 33,750 Research and development(1) 7,497 10,282 25,500 37,526 General and administrative(1), (2) 8,447 9,752 26,821 36,067 Lease exit costs 527 - 527 - Impairment of intangible assets - 2,293 - 2,293                       Total operating expenses   24,534     31,977     80,869     109,636   Income from operations 3,372 539 16,375 11,186 Other income: Interest income 1,093 271 5,863 1,744 Other, net (810 ) (72 ) (1,039 ) 513                       Total other income   283     199     4,824     2,257   Income before provision for income taxes 3,655 738 21,199 13,443 Provision for income taxes 947 806 7,354 5,397                       Net income (loss) $ 2,708   $ (68 ) $ 13,845   $ 8,046   Net income (loss) per share applicable to common stockholders: Basic $ 0.06   $ (0.00 ) $ 0.33   $ 0.19   Diluted $ 0.06   $ (0.00 ) $ 0.32   $ 0.18   Weighted average number of common shares used in net income (loss) per share calculations: Basic   42,308     42,741     42,092     42,663   Diluted   43,945     42,741     43,942     44,437   (1) Amounts include stock-based compensation expense, as follows: Costs of service revenues $ 340 $ 736 $ 1,618 $ 2,018 Sales and marketing 302 775 1,377 2,078 Research and development 251 1,285 1,182 3,750 General and administrative 1,421 1,311 4,168 5,451                       Total stock-based compensation expense $ 2,314   $ 4,107   $ 8,345   $ 13,297   (2) Amounts include amortization of intangible assets, as follows: Costs of license revenues $ 155 $ 208 $ 792 $ 765 Costs of service revenues 61 292 61 1,096 Sales and marketing 262 649 693 1,744 General and administrative 27 25 34 103                       Total amortization of intangible assets $ 505   $ 1,174   $ 1,580   $ 3,708   Phase Forward Incorporated Reconciliation of GAAP Revenues, GAAP Income From Operations and GAAP Net Income to Non-GAAP Revenues, Non-GAAP Income From Operations and Non-GAAP Net Income (unaudited) (in thousands, except per share amounts)           Three Months Ended December 31, Twelve Months Ended December 31, 2008 2009 2008 2009 TOTAL REVENUES: GAAP total revenues $ 48,322 $ 58,821 $ 170,184 $ 213,257 Deferred revenues and backlog adjustments related to acquisitions (1) 779 597 980 2,995                   Non-GAAP total revenues $ 49,101 $ 59,418   $ 171,164 $ 216,252   INCOME FROM OPERATIONS: GAAP income from operations $ 3,372 $ 539 $ 16,375 $ 11,186 Stock-based compensation expense 2,314 4,107 8,345 13,297 Amortization of intangible assets 505 1,174 1,580 3,708 Deferred revenues and backlog adjustments related to acquisitions (1) 779 597 980 2,995 Lease exit costs 527 - 527 - Impairment of intangible assets - 2,293 - 2,293 Restructuring - - - 86                   Non-GAAP income from operations $ 7,497 $ 8,710   $ 27,807 $ 33,565   NET INCOME: GAAP net income (loss) $ 2,708 $ (68 ) $ 13,845 $ 8,046 Stock-based compensation expense, net of tax 1,715 3,019 5,449 8,969 Amortization of intangible assets, net of tax 374 863 1,032 2,501 Deferred revenues and backlog adjustments related acquisitions, net of tax (1) 577 439 618 2,020 Lease exit costs, net of tax 391 - 333 - Impairment of intangible assets, net of tax - 1,691 - 1,547 Restructuring, net of tax - - - 59                   Non-GAAP net income $ 5,765 $ 5,944   $ 21,277 $ 23,142       GAAP net income per share applicable to common stockholders: Diluted $ 0.06 $ (0.00 ) $ 0.32 $ 0.18   Non-GAAP net income per share applicable to common stockholders: Diluted $ 0.13 $ 0.13   $ 0.48 $ 0.52

(1) Fair value adjustments to deferred revenues and backlog. Purchase accounting requires that deferred revenue assumed in an acquisition be recorded and subsequently recognized at its fair value as of the time of the acquisition. Consequently, we do not recognize the full amount of these deferred revenues and backlog. We add back non-GAAP revenues associated with deferred revenues and backlog that were excluded as a result of purchase accounting adjustments, as we believe that this provides information about the operating impact of the acquired business in a manner consistent with the revenue recognition for our pre-existing products and services.

  Phase Forward Incorporated Condensed Consolidated Balance Sheets (unaudited) (in thousands, except per share amounts)       As of December 31, 2008 2009   Assets Current assets: Cash and cash equivalents $ 131,550 $ 41,862 Restricted cash, current portion 500 - Short-term investments 27,893 67,241 Accounts receivable, net of allowance of $578 and $781, respectively 39,999 56,034 Acquired future billings, current portion 1,129 172 Deferred set up costs, current portion 2,393 2,786 Prepaid commissions and royalties, current portion 4,524 5,449 Prepaid expenses and other current assets 4,773 6,287 Deferred income taxes, current portion 12,895 9,521 Securities settlement agreement - 4,345             Total current assets   225,656     193,697       Acquired future billings, net of current portion 962 396 Property and equipment, net 36,615 52,840 Deferred set up costs, net of current portion 1,630 2,835 Prepaid commissions and royalties, net of current portion 4,277 5,375 Intangible assets, net of accumulated amortization of $3,624 and $7,332 respectively 27,586 41,661 Goodwill 39,125 59,027 Deferred income taxes, net of current portion 7,107 5,465 Restricted cash, net of current portion 962 962 Long-term investments 18,022 26,439 Securities settlement agreement 5,322 - Other assets 626 1,259             Total assets $ 367,890   $ 389,956     Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 8,895 $ 5,909 Accrued expenses 22,686 27,634 Leasehold incentive obligation, current portion 791 956 Deferred revenues, current portion 79,918 85,896             Total current liabilities   112,290     120,395       Deferred rent, net of current portion 564 2,115 Leasehold incentive obligation, net of current portion 7,248 7,914 Deferred revenues, net of current portion 8,600 12,478 Other long-term liabilities 1,515 1,726             Total liabilities   130,217     144,628     Stockholders' equity: Preferred stock, $0.01 par value: Authorized-----5,000 shares Issued-----0 shares - - Common stock, $0.01 par value: Authorized-----100,000 shares Issued----- 42,986 and 43,577 shares, respectively 430 436 Additional paid-in capital 283,676 296,572 Treasury stock, 37 and 980 shares at cost, respectively (111 ) (14,147 ) Accumulated other comprehensive (loss) income (672 ) 71 Accumulated deficit (45,650 ) (37,604 )             Total stockholders' equity   237,673     245,328     Total liabilities and stockholders' equity $ 367,890   $ 389,956     Phase Forward Incorporated Condensed Consolidated Statements of Cash Flows (unaudited) (in thousands)       Year Ended December 31, 2008 2009   Operating activities Net income $ 13,845 $ 8,046 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 10,198 17,068 Stock-based compensation expense 8,345 13,297 Loss on disposal of fixed assets 454 55 Amortization of leasehold incentive obligation (66 ) 831 Provision for allowance for doubtful accounts 322 311 Deferred income taxes 6,525 2,614 Amortization of discounts or premiums on investments (112 ) (135 ) Impairment charge on intangible assets - 2,293 Change in fair value of investments 6,028 (1,598 ) Change in fair value of securities settlement agreement (5,322 ) 977 Changes in assets and liabilities: Accounts receivable and acquired future billings (2,916 ) (12,911 ) Deferred costs (1,925 ) (3,365 ) Prepaid expenses and other current assets (651 ) (1,680 ) Accounts payable 7,485 (3,283 ) Accrued expenses 3,932 2,878 Deferred revenue 18,914 6,375 Deferred rent 196 1,551             Net cash provided by operating activities   65,252     33,324     Investing activities (Increase) decrease in restricted cash (1,462 ) 500 Proceeds from maturities of short-term and long-term investments 55,291 61,478 Purchase of short-term and long-term investments (57,901 ) (107,510 ) Purchase of property and equipment (21,501 ) (29,207 ) Cash paid for acquisitions, net of cash acquired   (40,848 )   (34,629 ) Net cash used in investing activities   (66,421 )   (109,368 )   Financing activities Proceeds from issuance of common stock 2,185 2,493 Withholding taxes in connection with vesting of restricted stock awards (1,723 ) (2,888 ) Purchase of treasury stock - (14,036 )             Net cash provided by (used in) financing activities   462     (14,431 )   Effect of exchange rate changes on cash and cash equivalents   (1,144 )   787     Net decrease in cash and cash equivalents (1,851 ) (89,688 ) Cash and cash equivalents at beginning of period 133,401 131,550             Cash and cash equivalents at end of period 131,550 41,862 Short-term and long-term investments at end of period 45,915 93,680             Total cash, cash equivalents and short-term and long-term investments at end of period $ 177,465   $ 135,542