Phase Forward Reports Second Quarter 2007 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 second quarter of 2007. Revenues for the second quarter of 2007 were $31.5 million, a 28% increase from $24.7 million in the second quarter of 2006. Within total revenues, InForm™ license, application hosting and other related revenues were $22.8 million, an increase of 39% from $16.3 million in the prior year period, representing 72% of second quarter 2007 total revenues. Bob Weiler, chief executive officer and president, remarked, "We are pleased with the company’s performance during the second quarter, which was highlighted by major customer wins, new and expanded partnerships with Contract Research Organizations (CROs), a breakthrough technology introduction and an increase in the level of competitive replacement activity. We continue to be encouraged by the overall strength of market demand for electronic data capture (EDC) and safety solutions, which is reflected in our increased outlook for bookings in 2007.” Weiler added, "During the second quarter, a top 10 pharmaceutical company expanded its adoption of our InForm™ EDC solution with a multi-year, multi-million Dollar ASP commitment. We believe the increasing adoption of EDC by the world’s largest pharmaceutical companies adds further pressure on other companies to make similar investments or risk being at a competitive disadvantage. Phase Forward is benefiting from this trend due to our customer referenceability, proven scalability, global service and support infrastructure, as well as the breadth and depth of our products’ functionality. In addition, our recently introduced Central Designer™ application can help customers shorten the EDC study design and build process more effectively, improving operational efficiencies and reducing the barriers to adoption for customers of all sizes.” For the second quarter of 2007, GAAP income from operations was $3.2 million, compared to $1.6 million in the second quarter of 2006. The company’s results in the second quarter of 2006 included $438,000 of expense for professional services which related to an acquisition opportunity the company chose not to pursue. GAAP net income for the second quarter of 2007 was $4.3 million, or $0.11 per diluted share, compared to $1.9 million, or $0.05 per diluted share, in the second quarter of 2006. For the second quarter of 2007, non-GAAP income from operations increased 89% from the prior year period to $4.5 million, resulting in a 14.4% non-GAAP operating margin. Non-GAAP net income for the period was $5.6 million, or $0.14 per diluted share, compared to $2.7 million, or $0.07 per diluted share, in the second quarter of 2006. 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 second quarter of 2007 and 2006. Cash, cash equivalents and short-term investments were $179.4 million at the end of the second quarter, an increase of $97.6 million from $81.8 million at the end of the prior quarter. The increase in cash was due primarily to $89.1 million, net of expenses, raised from the offering of common stock during the quarter, in addition to positive cash flow from operations of $11.2 million which was offset by capital expenditures of $3.0 million during the three months ended June 30, 2007. Total deferred revenue was $61.5 million at the end of the quarter, down 1% sequentially and up 27% on a year-over-year basis. Business Highlights A top 10 pharmaceutical company signed a multi-year, multi-million dollar ASP commitment for the use of Phase Forward’s InForm EDC solution. Phase Forward continued to make progress executing against its strategy to broaden and deepen its relationships with CROs. During the quarter, the company expanded its relationships with ICON, PharmaLink and PPD, while establishing new relationships with Averion International and Symbios Clinical. During the second quarter, ICON purchased a multi-year enterprise license for the internal use of Phase Forward’s InForm EDC solution. This purchase expands Phase Forward’s relationship with ICON following ICON’s selection of InForm for EDC in the first quarter of 2007. During the second quarter, the company announced the release of Central Designer, a next-generation clinical study design application. This new product leverages advanced functionality to streamline the study development process, facilitate extensive component reuse, enable global collaboration and workflow across teams, and enable the incorporation of standards. This helps lower barriers to adoption and rapid scale-up of EDC for companies of all sizes. Safety solutions continued to gain traction in the second quarter as evidenced by deals for Web Submission Data Manager (WebSDM™) from Cephalon and Genzyme, Signal Management with AstraZeneca and Clintrace deals from Chang Gung University and Egis Pharmaceutical. During the second quarter, the company announced a new Submission Checking Service offering based on its WebSDM application. Developed under a Cooperative Research and Development Agreement with the FDA, WebSDM gives organizations a means for testing FDA submissions for compliance with the Clinical Data Interchange Standards Consortium's (CDISC) Study Data Tabulation Model (SDTM) standard for human clinical trials before they submit to the FDA. Phase Forward completed a public offering of 6,325,000 shares of its common stock at a price of $15.00 per share, raising $89.1 million, net of expenses. Financial Outlook The following statements are based on current expectations as of the date of this press release 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 the company’s public filings made with the Securities and Exchange Commission, or other factors. For the third quarter of 2007, the company expects revenues to be between $33.2 and $34.0 million. The company expects non-GAAP operating income to be between $4.6 and $5.0 million, with non-GAAP EPS between $0.14 and $0.15. GAAP EPS is expected to be between $0.11 and $0.12, including non-cash expenses associated with stock-based compensation expense and the amortization of intangible assets. For the full year 2007, the company expects revenues to be between $129 and $131 million and bookings to be between $150 and $160 million. On a non-GAAP basis, operating income is expected to be between 14.5% and 15.0%, with non-GAAP EPS between $0.55 and $0.57. GAAP EPS is expected to be between $0.43 and $0.45, including non-cash expenses associated with stock-based compensation expense and the amortization of intangible assets. Conference Call The company plans to host its investor conference call today at 5:00 pm EST to discuss its financial results for the second quarter 2007 and its outlook for the third quarter of and full year 2007. The investor conference call will be available via live web cast on Phase Forward's web site at www.phaseforward.com under the tab "Investors." To participate by telephone, the domestic dial-in number is 888-713-4215 and the international dial-in is 617-213-4867. The access code is 95430759. 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 Friday, August 31, 2007 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™), clinical data management (Clintrial™), clinical trials signal detection (CTSD™), strategic pharmacovigilance (WebVDME™ and Signal Management), adverse event reporting (Clintrace™) and applied data standards (WebSDM™). 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 250 organizations and regulatory agencies worldwide including: AstraZeneca, Boston Scientific, Dana-Farber Cancer Institute, Eli Lilly, the U.S. Food and Drug Administration, or FDA, GlaxoSmithKline, Harvard Clinical Research Institute, Merck & Co., 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 Quarterly Report on Form 10-Q. Non-GAAP Financial Information Phase Forward provides non-GAAP 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 and Subsidiaries Condensed Consolidated Statements of Income (unaudited) (in thousands, except per share amounts)       Three Months EndedJune 30, Six Months EndedJune 30, 2006 2007 2006 2007         Revenues: License $ 9,383 $ 11,469 $ 18,408 $ 22,505 Service 15,339 20,065 29,930 39,113         Total revenues 24,722 31,534 48,338 61,618 Costs of revenues: License 597 529 1,303 1,134 Service(1) 9,007 12,359 17,902 23,886         Total cost of revenues 9,604 12,888 19,205 25,020 Gross margin: License 8,786 10,940 17,105 21,371 Service 6,332 7,706 12,028 15,227         Total gross margin   15,118   18,646   29,133   36,598   Operating expenses: Sales and marketing(1) 5,184 5,775 9,421 11,222 Research and development(1) 3,860 4,922 7,484 9,554 General and administrative(1) 4,448 4,787 8,587 9,425         Total operating expenses   13,492   15,484   25,492   30,201   Income from operations 1,626 3,162 3,641 6,397 Other income (expense): Interest income 679 1,532 1,275 2,396 Other, net - 4 (64) (62)         Total other income   679   1,536   1,211   2,334   Income before provision for income taxes 2,305 4,698 4,852 8,731 Provision for income taxes 417 370 878 922         Net income $ 1,888 $ 4,328 $ 3,974 $ 7,809   Net income per share applicable to common stockholders: Basic $ 0.06 $ 0.12 $ 0.12 $ 0.22   Diluted $ 0.05 $ 0.11 $ 0.11 $ 0.21   Weighted average number of common shares used in net income per share calculations: Basic   34,256   36,991   34,006   35,815   Diluted   35,933   38,997   35,587   37,727   (1) Amounts include stock-based compensation expense, as follows: Costs of service revenues $ 49 $ 118 $ 93 $ 228 Sales and marketing 98 203 208 369 Research and development 67 179 127 335 General and administrative 345 665 587 1,265         Total stock-based compensation expense $ 559 $ 1,165 $ 1,015 $ 2,197 Phase Forward Incorporated and Subsidiaries Tables of Reconciliation from GAAP to Non-GAAP (unaudited) (in thousands, except per share amounts)       Three Months EndedJune 30, Six Months EndedJune 30, 2006 2007 2006 2007 Reconciliation of GAAP to Non-GAAP income from operations:         GAAP income from operations $ 1,626 $ 3,162 $ 3,641 $ 6,397 Stock-based compensation expense 559 1,165 1,015 2,197 Amortization of intangible assets 218 218 435 435         Non-GAAP income from operations $ 2,403 $ 4,545 $ 5,091 $ 9,029               Three Months Ended June 30, Six Months Ended June 30, 2006 2007 2006 2007   Reconciliation of GAAP to Non-GAAP net income and net income per share applicable to common stockholders: GAAP net income $ 1,888 $ 4,328 $ 3,974 $ 7,809 Stock-based compensation expense, net of tax 559 1,073 1,015 1,965 Amortization of intangible assets, net of tax 218 201 435 389         Non-GAAP net income $ 2,665 $ 5,602 $ 5,424 $ 10,163       GAAP net income per share applicable to common stockholders: Diluted $ 0.05 $ 0.11 $ 0.11 $ 0.21   Non-GAAP net income per share applicable to common stockholders: Diluted $ 0.07 $ 0.14 $ 0.15 $ 0.27 Phase Forward Incorporated and Subsidiaries Condensed Consolidated Balance Sheets (unaudited) (in thousands, except per share amounts)       December 31, June 30, 2006 2007   Assets Current assets: Cash and cash equivalents $ 42,169 $ 145,468 Short-term investments 27,466 33,924 Accounts receivable, net of allowance of $384 and $477 in 2006 and 2007, respectively 29,652 26,030 Deferred set up costs, current portion 1,649 1,907 Prepaid commissions and royalties, current portion 3,570 4,157 Prepaid expenses and other current assets 2,972 3,576 Deferred income taxes 5,158 5,173     Total current assets   112,636   220,235   Property and equipment, net 8,561 11,945 Deferred set up costs, net of current portion 1,000 1,251 Prepaid commissions and royalties, net of current portion 2,670 3,077   Intangible assets, net of accumulated amortization of $1,176 and $1,611 in 2006 and 2007, respectively 2,724 2,289 Goodwill 27,820 27,505 Deferred income taxes 4,988 4,735 Other assets 252 243     Total assets $ 160,651 $ 271,280   Liabilities and Stockholders' Equity Current Liabilities: Accounts payable $ 2,893 $ 3,260 Accrued expenses 14,183 13,493 Accrued earn-out 3,500 3,500 Deferred revenue, current portion 47,128 58,296 Deferred rent, current portion 352 387     Total current liabilities   68,056   78,936   Deferred revenues, net of current portion 3,527 3,179 Deferred rent, net of current portion 596 262 Other long-term liabilities 451 550     Total liabilities   72,630   82,927   Stockholders' equity: Preferred stock, $.01 par value: Authorized-----5,000 shares Issued-----0 shares - - Common stock, $.01 par value: Authorized-----100,000 shares Issued-----35,529 and 42,050 shares in 2006 and 2007, respectively 355 421 Additional paid-in capital 176,545 268,756 Treasury stock, 37 shares at cost (111) (111) Accumulated other comprehensive (loss) income (72) 174 Accumulated deficit (88,696) (80,887)     Total stockholders' equity   88,021   188,353   Total liabilities and stockholders' equity $ 160,651 $ 271,280 Phase Forward Incorporated and Subsidiaries Condensed Consolidated Statements of Cash Flows (unaudited) (in thousands)     Six Months Ended June 30, 2006 2007   Operating activities Net income $ 3,974 $ 7,809 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,525 3,172 Stock-based compensation 1,015 2,197 Loss on disposal of fixed assets 12 - Foreign currency exchange loss 61 62 Provision for allowance for doubtful accounts 79 100 Deferred income taxes (267) (2,592) Tax benefit related to exercise of options (724) - Non-cash income tax expense 912 3,023 Amortization of premiums or discounts on short-term investments (9) 40 Changes in assets and liabilities: Accounts receivable 6,978 3,641 Deferred costs (872) (1,448) Prepaid expenses and other current assets 432 (561) Accounts payable 407 349 Accrued expenses (2,126) (629) Accrued litigation settlement (8,500) - Deferred revenue 1,776 11,043 Deferred rent (375) (293)     Net cash provided by operating activities   5,298   25,913   Investing activities Proceeds from maturities of short-term investments 15,718 45,422 Purchase of short-term investments (29,249) (51,919) Purchase of property and equipment (2,530) (6,105) Payment on earn-out under acquisition (2,000) - Increase in other assets (79) -     Net cash used in investing activities   (18,140)   (12,602)   Financing activities Net proceeds from issuance of common stock 1,675 90,078 Tax benefit related to exercise of options 724 -     Net cash provided by financing activities   2,399   90,078   Effect of exchange rate changes on cash and cash equivalents   50   (90)   Net change in cash and cash equivalents (10,393) 103,299 Cash and cash equivalents at beginning of period 51,779 42,169     Cash and cash equivalents at end of period 41,386 145,468 Short-term investments at end of period 22,347 33,924     Total cash, cash equivalents and short-term investments at end of period $ 63,733 $ 179,392