IQVIA: Expect Margins To Continue Expanding

Recommendation

While IQVIA Holdings (NYSE:IQV) revenue and EPS were ahead of estimates, the company's outlook for 2023 was below expectations. For 4Q22, R&DS grew by 5.9% on a reported basis and management mentioned a healthy demand, pushing R&DS bookings to $3.1 billion. Importantly, management has stated that it remains confident in its ability to achieve an 11-13% increase in EBITDA for FY25, despite pressure from foreign exchange rates. I am also encouraged by the company’s cost cutting actions, which should drive EBITDA margin expansion. With the view that margins will expand and drive earnings growth, I am recommending a buy rating.

Latest earnings highlights

IQV revenue grew 2.8% over last year to $3.74 billion in the 4Q22, which was slightly above the midpoint of guidance. Revenue relating to COVID fell by roughly $150 million year over year to around $190 million in the fourth quarter, while the core business grew by a solid 10% organically, in line with underlying ex-COVID growth projection of more than 10% at the midpoint. Specifically for R&DS, revenue grew 5.9% to $2.058 billion, higher than consensus estimate of $1.992 billion, meanwhile $1.499 billion revenue generated by TAS was lower than the estimate of $1.546B, and the $182 million generated by CSMS was in line with the consensus estimate of $184 million.

All in all, strong revenue growth and the cost management resulted in an adjusted EBITDA of $920 million, which was within the range of $904-934 million and in line with the consensus estimate of $915 million. Adj. EPS of $2.78 were within the range of $2.72-2.82 guided by IQV. In addition, IQV repurchased $25 million in shares during the fourth quarter, bringing the total for the year to about $1.17 billion.

Guidance

Revenue is expected to be between $3.570 billion and $3.640 billion in 1Q23. Quarterly adj EBITDA is forecast to be $835-860 million, and adj EPS is projected to be $2.35-2.46. Management guided that adj. EPS is likely to increase by 6-10% in 1Q23, provided there is no increase in interest expense or UK tax rate. Also, 1Q will be a challenging period for FY23 because of foreign exchange impact, post COVID impact, and the impact from increased interest rates. I think investors should set their expectations right as management has stressed that this guidance is based on the assumption of FX rates on February 8, barring any major changes.

Macro Challenges

In my opinion, the crucial point to note is that there is a robust demand for IQV's services in all markets, as indicated by a 13% increase in requests for proposal throughout the year (and a 20% increase in the fourth quarter alone) and two significant business wins in the past few months. This is noteworthy because the management had cautioned about a potential decline in demand for clinical and commercial services due to reduced biotech funding from 2021 onwards. Importantly, while IQV has observed indications of reduced funding levels similar to the pre-pandemic period, there have been no indications of project delays or significant cancellations. Additionally, the growth has been observed across all customer segments, indicating that the company is not overly dependent on any particular segment. I believe this is encouraging as it shows resiliency and that IQV should continue to grow in this year.

That said, Consulting services and data & analytics are two areas where IQV has seen the most fluctuations in commercial client discretionary spending. On the commercial side, consultancy and analytics, which are more tightly related to discretionary expenditure and have shorter cycles, have seen declines according to management. The logic, in my opinion, is that since these are the types of services where customers normally spend their remaining budgets at the end of the year, IQV experienced a softer 4Q budget flush dynamic this year, further dragging down performance in these areas.

Wage pressure

IQV's wage inflation pressures persist because the company actively recruits individuals with backgrounds in healthcare, data science, software, or a combination thereof, who are in great demand and hence fetch a premium rate. In addition, IQV is a hotbed of talent, making it essential that the company offer salaries that are comparable with other similar organizations. When asked if they might pass on price increases due to inflation, management said that while it is theoretically conceivable for the shorter-cycle commercial firms in the portfolio, given the competitive nature of the industry, flexibility is limited. This is something I wish to highlight, despite me recommending it as a long position, as it is a key metric to watch. The way I see it, it is a matter of ROI at this point, and since a core part of growth reinvestment into the business is hiring talents – so long as growth can outpace wage inflation, I believe it is fine. Although margin might go down (on a percentage basis), so long as absolute profit goes up (i.e., positive ROI), I would concur with management strategy. Also, this is a very competitive industry, an exodus of talents could dent IQV’s growth.

Conclusion

The combination of IQV's clinical knowledge and its technological assets makes the company a highly-differentiated participant in the CRO environment at a time when there is a growing need for modern-tech solutions. While I agree that there is a near-term transitory and manageable headwind of inflationary pressures and labor shortages in R&DS, as well as macro sensitivity in TAS, I believe IQV's scale allows them to better navigate these problems given its extensive client and geographic reach. Furthermore, I believe the company is well positioned to capitalize on the secular demand trends for their services and offerings, limited exposure to COVID revenue and pre-commercial customers, and inherent portfolio resiliency.