PAREXEL International (NASDAQ:PRXL) continued to make good progress in shaping up its business in its fourth quarter. The drug research services provider's strategy of focusing overseas is paying off, while a commitment to further improvement in U.S. operations bodes well.
The company indicated that service revenue in the fourth quarter climbed 18% year over year to $169.5 million, while net income hit $8.4 million, a nice turnaround from a year-ago loss of $51.5 million. Granted, last year's fourth quarter included some hefty one-time charges, but even factoring out these items, PAREXEL's earnings this quarter were up 265% versus pro forma earnings in the fourth quarter of 2005.
Perhaps the most encouraging sign of the quarter, though, was PAREXEL's progress in profitability. Operating margins hit 7.7%, up from the 7.1% reported in the previous couple quarters. PAREXEL is still underperforming smaller rivals like ICON (NASDAQ:ICLR) and Kendle (NASDAQ:KNDL) on this front, but management is promising more improvement in fiscal 2007.
The firm's backlog likewise continues to grow, although it's probably best not to bank on all $1.1 billion of its bookings being converted into revenue. PAREXEL officials acknowledge that the cancellation rate has been unusually low and that this is unlikely to persist. Furthermore, the company has been signing large deals lately, and if any of these didn't pan out, it would naturally take a big bite out of the backlog.
Nevertheless, PAREXEL likely can sustain more cancellations without much harm, especially because the current business climate remains favorable. The company is experiencing a rising level of proposals; as a result, it has been and expects to continue to add staff. In the fourth quarter alone, PAREXEL hired 150 new employees.
The company attributes its success at winning contracts to its extensive overseas operations. In the latest quarter, just 33.7% of business came from the U.S. Given the global scope of the drug industry, this mix makes some sense. PAREXEL officials, though, have vowed to keep honing U.S. operations, which they need to do because many of the largest pharmaceutical players, like Motley Fool Inside Value pick Pfizer (NYSE:PFE), are based in the U.S. and conduct large-scale U.S. clinical trials.
PAREXEL still has room to improve, but its rising operating margins and promise of more to come may make it worth a closer look.
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Fool contributor Brian Gorman does not own shares in any of the companies mentioned.
