Summary
IQVIA (NYSE:IQV) focuses on technology solutions and contract research services. The company offers a broad range of solutions, which include clinical development strategies, therapeutic expertise, predictive and prescriptive analytics, and patient retention services. The business has consistently seen positive growth over the past decade and has a normalized growth rate of mid-to-high single digits. As of LTM, the business has a total revenue of $14.6 billion and a net debt position of $12.6 billion. The business reports in three key segments: research and development solutions (RDS), technology and analytics solutions (TAS), and contract and medical solutions (CMS). I am recommending a hold rating as I expect the stock to be rangebound in the near term given the numbers are likely to be weak in the near term as the TAS and CMS segments face delays in customer spending and the RDS segment cycles back to the normal mix of bookings.
Financials
IQV’s 2Q23 top and bottom line results were better than expected. IQV reported $3.73 billion in revenue, an increase of 5.3% compared to the prior year and higher than the consensus expected $3.7 billion. Adj. EBITDA of $864 million was in line with the guided range of $850 to $875 million and bettered the consensus estimate of $861 million. Accordingly, the adj EPS of $2.43 was higher than the $2.35 predicted by consensus.
Comments
Considering my belief that IQV’s short-term prospects are mixed, I foresee the stock trading within a defined range for the near term. What concerned me most in their recent results was the weak performance in TAS and CMS, primarily driven by clients delaying their spending decisions. Management has adjusted their organic growth outlook for TAS in FY23, downgrading it by 200 basis points from the initial 7-9% to 6%, reflecting clients’ continued hesitance to invest. This revised forecast, no longer anticipating TAS growth in the second half of 2023, signals significant underlying weaknesses. On a positive note, the decline in TAS revenue, which represents about a quarter of the total, was limited to the data analytics and consulting division. Similarly, CMS performance suffered due to cautious spending, with IQV now expecting a 3% organic revenue decline, a substantial shift from the previous expectation of 2% growth.
The reason I focused on the near future is because I attribute the current weakness to broader macroeconomic factors. On the call, management expressed optimism that demand for their services would continue, citing unsigned but negotiated contracts as evidence. This indicates that the need (revenue recognition) has been postponed rather than eliminated. However, the current investment paradigm places a premium on short-term performance (this is my belief based on how the valuation of growth assets has been slashed, suggesting investors are cutting risk exposure to long-term duration assets), so this would likely have an immediate effect on IQV stock price.
The pipeline is there. No one is telling us, I am just not doing the project, and therefore, we would say, well, the prospects are lower. We have — the projects are still there, but the decision making seems to be pushed to the right. We were hoping, frankly, up to two or three months ago that things would recover by now in terms of the decision making and accelerate. Source: 2Q23 earnings
On the other hand, the RDS segment is still robust and competitive. Notably, bookings increased to $2.7 billion, a $1 billion increase from 1Q23, a result that reflects robust demand, especially in the current spending environment. Management highlighted the R&DS industry’s thriving end markets, citing increases in spending, regulatory approvals, clinical trials, and mergers and acquisitions. However, I have my reserve regarding this as well as the dynamics of the current bookings mean that short-term numbers won’t be appealing because these are long-term duration bookings. Remember that in 1Q23 earnings, management mentioned that bookings are returning to normal, with a growing share of bookings (excluding the COVID vaccine work). Since these bookings typically involve lower up-front payments and higher unbilled revenue, they don’t make a significant impact on the bottom line for the near term.
And we’re reverting to more regular mix of projects with, as you know an increasing share in oncology, which typically burn a little slower that might have a little bit at the margin of an impact, but I wouldn’t read anything into it. Source: 1Q23 earnings
Put together, I believe the current sentiment regarding IQV business is that the near-term is likely to be weak. This weakness is not due to a fundamental weakness but is a matter of time. I expect IQV to perform positively over the medium term, but the lack of a near-term catalyst makes me give it a hold rating.
Risk & Conclusion
My hold rating is due to my expectation that IQV will not show strong numbers in the near term as weakness in the TAS and CMS segments is macro-driven, which takes time to recover. If the macroeconomy recovers faster than expected, it could drive faster growth as IQV converts bookings to revenue at a faster pace. This could be the positive catalyst that drives the stock up. In summary, I believe the stock is likely to remain rangebound in the near term due to weak numbers expected in the TAS and CMS segments, primarily influenced by broader macroeconomic factors. The downgraded growth outlook for TAS and the decline in CMS revenue reflect ongoing client caution in spending decisions. While the RDS segment remains robust and competitive, its long-term nature may not significantly impact short-term numbers. Also, although management remains optimistic about the pipeline and future demand, I believe the current investment climate favors short-term performance, affecting IQV’s stock price.
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