Phase Forward Reports Fourth Quarter and Full Year 2008 Results

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 2008.

GAAP revenues for the fourth quarter of 2008 were $48.3 million, a 28% increase from $37.8 million in the fourth quarter of 2007. Within total revenues, InForm™ license, application hosting and other related revenues were $35.3 million, representing 72.9% of fourth quarter total revenues and an increase of 28.9% from $27.4 million in the prior year period.

Bob Weiler, chief executive officer and president, remarked, "The fourth quarter was a strong finish to a highly successful year for Phase Forward, with both the traditional Phase Forward business as well as our recently acquired Clarix™ offering delivering better than expected revenues. We were particularly pleased to sign multi-million dollar, multi-year contract extensions and expansions with some of the largest companies in the pharmaceutical industry, as this underlines our strong value proposition and high levels of customer satisfaction. In addition, the continued traction of our CRO partnering strategy contributed to over 40% growth in our CRO-related revenues during the fourth quarter.”

Weiler added, "We believe customers are increasingly focusing on the financial strength of their critical suppliers. Phase Forward’s proven, long-term track record of delivering profitability and cash flow, combined with our very strong balance sheet, are highly valued in this environment. We remain optimistic about our long-term outlook based on our business momentum, market leadership position and strong financial profile coupled with a business model that provides a high level of visibility into future revenue streams."

For the fourth quarter of 2008, GAAP income from operations was $3.4 million, compared to $2.5 million in the fourth quarter of 2007. GAAP net income for the period was $2.7 million, or $0.06 per diluted share, compared to net income of $15.7 million, or $0.36 per diluted share, in the fourth quarter of 2007.

For the fourth quarter of 2008, non-GAAP revenues were $49.1 million, which excludes a $779,000 purchase accounting adjustment to record the assumed Clarix deferred revenues and backlog at fair value. Non-GAAP income from operations was $7.5 million, representing an increase of 43% from the prior year period and a non-GAAP operating margin of 15.3%. Non-GAAP net income for the period was $5.8 million, or $0.13 per diluted share, which was at the high end of the company’s guidance of $0.12 to $0.13. Non-GAAP net income was $18.2 million, or $0.41 per diluted share, in the fourth quarter of 2007. GAAP and Non-GAAP EPS for 2007 included a $0.22 per share benefit related to an adjustment and full release of the company’s remaining deferred tax asset valuation allowance and $0.04 related to other tax credits in the fourth quarter of 2007.

The attached table presents a reconciliation of GAAP to non-GAAP revenues, income from operations and net income and net income per share applicable to common stockholders for the three and twelve months ended December 31, 2007 and 2008. Non-GAAP results exclude the impact of stock-based compensation expense, amortization of intangible assets associated with acquisitions, the purchase accounting adjustment to record the assumed Clarix deferred revenues and backlog at fair value and a lease exit cost related to the company’s recent move to its new corporate headquarters.

Total cash, cash equivalents and short-term investments were $159.4 million at the end of the fourth quarter, an increase of $4.1 million from $155.3 million at the end of the prior quarter. The increase in cash in the fourth quarter was due primarily to $14.7 million in cash flows from operations, partially offset by capital expenditures of $10.4 million. In addition, long-term assets include $18.0 million of auction rate securities and a security settlement valued at $5.3 million, which is exercisable commencing in June 2010. Total deferred revenues were $88.5 million at the end of the quarter, an increase of $2.0 million compared to $86.5 million at the end of the prior quarter.

Fourth Quarter Business Highlights

• Phase Forward signed InForm-related multi-year, multi-million Dollar extensions and expansions with four of the top ten pharmaceutical companies in the world.
• Novo Nordisk signed a multi-year, multi-million dollar enterprise license and services contract to extend and expand the use of InForm. As part of this Novo Nordisk will be using InForm as their default data capture system across all clinical trial phases from Phase I through Phase IV. Since signing an ASP arrangement in mid 2006, Novo Nordisk has successfully implemented and integrated global InForm studies with key internal systems such as Oracle Clinical.
• The company continued to add new InForm ASP customers including Danone Research, Oxagen Limited, Theravance and Lexicon, among others.
• In the safety area, the company closed new and renewal deals for the company’s Empirica™ suite of products with customers including Bayer Schering, Drug Safety Alliance, Alcon and UCB.
• Phase Forward was selected as a Technology Pioneer 2009 by the World Economic Forum, which characterized Technology Pioneers as "innovators of the highest caliber, whose technologies will have a deep impact on business and society”.

Full Year 2008 Summary Financial Results

GAAP revenues for the full year 2008 were $170.2 million, a 27% increase from $134.3 million in the full year 2007. Within total revenues, InForm license, application hosting and other related revenues were $127.9 million, an increase of 32.1% from $96.9 million in 2007, and representing 75.2% of 2008 total revenues.

GAAP income from operations was $16.4 million in 2008, compared to $13.0 million in 2007. GAAP net income was $13.8 million, or $0.32 per diluted share, for the full year 2008, compared to $29.2 million, or $0.72 per diluted share, in the full year 2007.

Non-GAAP revenues for the full year 2008 were $171.2 million, a year-over-year increase of 27% from $134.3 million in the full year 2007. Non-GAAP income from operations was $27.8 million in 2008, representing an increase of 41% from 2007 and a full year operating margin of 16.2%. Non-GAAP net income was $21.3 million, or $0.48 per diluted share, for the full year 2008. Non-GAAP net income was $35.2 million, or $0.87 per diluted share, in 2007. GAAP and Non-GAAP EPS for 2007 included a $0.22 per share benefit related to an adjustment and full release of the company’s remaining deferred tax asset valuation allowance and $0.04 related to other tax credits in the fourth quarter of 2007.

The attached table presents a reconciliation of GAAP to non-GAAP income from operations and net income and net income per share applicable to common stockholders for the fourth quarter and full year of 2008 and 2007.

Financial Outlook

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 full year 2009, the company expects non-GAAP revenues to be between $200 and $205 million, with approximately 75% to 78% of revenue recognized coming from backlog at the end of 2008. On a non-GAAP basis, operating income is expected to be between $31 and $34 million. Non-GAAP EPS is expected to be between $0.50 and $0.54. GAAP EPS is expected to be between $0.30 and $0.34, including the purchase accounting adjustment to record the assumed Clarix deferred revenues and backlog at fair value, non-cash expenses associated with stock-based compensation expense and the amortization of intangible assets. The expected full year EPS reflects an estimated tax rate of approximately 35%.

For the first quarter of 2009, the company expects non-GAAP revenues to be between $47 and $48 million. The company expects non-GAAP operating income to be between $7.3 and $7.8 million. Non-GAAP EPS is expected to be between $0.12 and $0.13. GAAP EPS is expected to be between $0.07 and $0.08, including the purchase accounting adjustment to record the assumed Clarix deferred revenues and backlog at fair value, non-cash expenses associated with stock-based compensation expense and the amortization of intangible assets. The expected EPS reflects an estimated first quarter tax rate of approximately 35%.

Conference Call

The company plans to host its investor conference call today at 5:00 pm ET to discuss its financial results for the fourth quarter and full year 2008 and its outlook for the first quarter and full year 2009. The investor conference call will be available via live webcast on Phase Forward’s website at www.phaseforward.com under the tab "Investors.” To participate by telephone, the domestic dial-in number is 888-680-0878 and the international dial-in is 617-213-4855. The access code is 23115725. 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 5, 2009 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. The company offers proven solutions for electronic data capture (InForm™), phase I clinic automation (LabPas™), clinical data management (Clintrial™), clinical trials signal detection (CTSD™), strategic pharmacovigilance (Empirica Signal™) and Signal Management, adverse event reporting (Empirica™ Trace), applied data standards (WebSDM™) and Web-integrated interactive voice response systems (Clarix™). In addition, the company provides services in the areas of application implementation, hosting and validation, data integration, business process optimization, safety data management and industry standards. 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 280 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, 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, 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 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, as updated by its most recent report on Form 10-Q.

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.

(1) Fair value adjustment 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.