Phase Forward Reports Third 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 third quarter of 2007. Revenues for the third quarter of 2007 were $34.9 million, a 24% increase from $28.0 million in the third quarter of 2006. Within total revenues, InForm™ license, application hosting and other related revenues were $25.5 million, an increase of 29% from $19.7 million in the prior year period, representing 73% of third quarter 2007 total revenues. Bob Weiler, chief executive officer and president, remarked, "We are extremely pleased with the company's performance during the third quarter, which was highlighted by strong revenue and profitability growth. Phase Forward’s proven customer success and referenceability continue to be significant differentiators, and they were key factors in major electronic data capture (EDC) wins during the third quarter with customers such as Eisai and Novartis Vaccines.” Weiler added, "During the quarter Eli Lilly, a top 10 pharmaceutical company adopted Phase Forward’s advanced safety solutions after realizing the business benefits of our InForm EDC solution. We believe customers will look to purchase integrated EDC and safety solutions from a single vendor when considering a long-term strategy, and that Phase Forward’s leadership ranking in both of these areas positions it well to capitalize on this trend. We continue to be encouraged by demand levels for EDC, which is reflected by our strong third quarter results and increased guidance for the full year." For the third quarter of 2007, GAAP income from operations was $4.1 million, compared to $2.8 million in the third quarter of 2006. GAAP net income for the third quarter of 2007 was $5.7 million, or $0.13 per diluted share, compared to $2.9 million, or $0.08 per diluted share, in the third quarter of 2006. For the third quarter of 2007, non-GAAP income from operations was $5.4 million, representing a margin of 15.6% and an increase of 37% from the prior year period. Non-GAAP net income was $6.9 million, or $0.16 per diluted share, for the third quarter of 2007. This represented an increase of 69% from non-GAAP net income of $4.1 million, or $0.11 per diluted share, in the third 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 third quarter of 2007 and 2006. Cash, cash equivalents and short-term investments were $187 million at the end of the third quarter, an increase of $7.6 million from $179.4 million at the end of the prior quarter. Total deferred revenue was $60 million at the end of the quarter, down $1.5 million sequentially and an increase of $11.9 million on a year-over-year basis. Business Highlights Eisai Medical Research, a U.S. pharmaceutical subsidiary of Tokyo-based Eisai Co., signed a license and services agreement with Phase Forward for the implementation and use of the company's InForm EDC solution. Schering-Plough Research Institute (SPRI) signed a multi-year, multi-million Dollar renewal of their InForm EDC license, added coverage for Japan and purchased additional modules. Novartis Vaccines signed a multi-million dollar license, hosting and services agreement with Phase Forward for the implementation and use of the company’s InForm EDC solution. Phase Forward continued to make progress executing its strategy to broaden and deepen its relationships with Contract Research Organizations (CROs) and academic research centers around the globe. During the quarter, the company expanded its relationships with MedPace, Imperial College and SGS for the use of its InForm solution. Phase Forward announced a multi-year alliance agreement with AAIPharma, Inc., a leading global CRO with operations throughout the United States, Canada, Western and Eastern Europe and South America. AAIPharma plans to offer services centered around Phase Forward’s InForm EDC solution and its Clintrial ™ clinical data management product. 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 fourth quarter of 2007, the company expects revenues to be between $36.0 and $36.8 million. The company expects non-GAAP operating income to be between $5.2 and $5.6 million, with non-GAAP EPS between $0.15 and $0.16. GAAP EPS is expected to be between $0.12 and $0.13, 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 $132.5 and $133.3 million and bookings to be between $180 and $190 million. On a non-GAAP basis, operating income is expected to be between 14.5% and 15%, with non-GAAP EPS between $0.58 and $0.59. GAAP EPS is expected to be between $0.46 and $0.47, 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 third quarter of 2007 and its outlook for the fourth 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 888-679-8035 and the international dial-in is 617-213-4848. The access code is 54496615. 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, November 30, 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, 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 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 Ended September 30, Nine Months Ended September 30, 2006 2007 2006 2007   Revenues: License $ 11,225 $ 12,924 $ 29,633 $ 35,429 Service 16,824 21,952 46,754 61,065         Total revenues 28,049 34,876 76,387 96,494 Costs of revenues: License 717 552 2,020 1,686 Service(1) 10,079 13,561 27,981 37,447         Total cost of revenues 10,796 14,113 30,001 39,133 Gross margin: License 10,508 12,372 27,613 33,743 Service 6,745 8,391 18,773 23,618         Total gross margin   17,253   20,763     46,386     57,361     Operating expenses: Sales and marketing(1) 5,377 6,509 14,798 17,731 Research and development(1) 4,538 5,066 12,022 14,620 General and administrative(1) 4,551 5,084 13,138 14,509         Total operating expenses   14,466   16,659     39,958     46,860     Income from operations 2,787 4,104 6,428 10,501 Other income (expense): Interest income 735 2,362 2,010 4,758 Other, net 14 (91 ) (50 ) (153 )         Total other income   749   2,271     1,960     4,605     Income before provision for income taxes 3,536 6,375 8,388 15,106 Provision for income taxes 642 657 1,520 1,579         Net income $ 2,894 $ 5,718   $ 6,868   $ 13,527     Net income per share applicable to common stockholders: Basic $ 0.08 $ 0.14   $ 0.20   $ 0.36     Diluted $ 0.08 $ 0.13   $ 0.19   $ 0.34     Weighted average number of common shares used in net income per share calculations: Basic   35,147   41,238     34,386     37,643     Diluted   36,620   43,397     35,921     39,659     (1) Amounts include stock-based compensation expense, as follows: Costs of service revenues $ 68 $ 102 $ 161 $ 330 Sales and marketing 143 201 351 570 Research and development 121 181 248 516 General and administrative 644 652 1,231 1,917         Total stock-based compensation expense $ 976 $ 1,136   $ 1,991   $ 3,333   Phase Forward Incorporated and Subsidiaries Tables of Reconciliation from GAAP to Non-GAAP (unaudited) (in thousands, except per share amounts)           Three Months Ended September 30,  Nine Months Ended September 30, 2006 2007 2006 2007 Reconciliation of GAAP to Non-GAAP income from operations: GAAP income from operations $ 2,787 $ 4,104 $ 6,428 $ 10,501 Stock-based compensation expense 976 1,136 1,991 3,333 Amortization of intangible assets 218 202 653 637                 Non-GAAP income from operations $ 3,981   $ 5,442   $ 9,072   $ 14,471                 Three Months Ended September 30, Nine Months Ended September 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 $ 2,894 $ 5,718 $ 6,868 $ 13,527 Stock-based compensation expense, net of tax 976 1,019 1,991 2,985 Amortization of intangible assets, net of tax 218 181 653 570                 Non-GAAP net income $ 4,088   $ 6,918   $ 9,512   $ 17,082         GAAP net income per share applicable to common stockholders: Diluted $ 0.08   $ 0.13   $ 0.19   $ 0.34     Non-GAAP net income per share applicable to common stockholders: Diluted $ 0.11   $ 0.16   $ 0.26   $ 0.43   Phase Forward Incorporated and Subsidiaries Condensed Consolidated Balance Sheets (unaudited) (in thousands, except per share amounts)         December 31, September 30, 2006 2007   Assets Current assets: Cash and cash equivalents $ 42,169 $ 157,134 Short-term investments 27,466 29,832 Accounts receivable, net of allowance of $384 and $426 in 2006 and 2007, respectively 29,652 27,990 Deferred set up costs, current portion 1,649 2,201 Prepaid commissions and royalties, current portion 3,570 4,865 Prepaid expenses and other current assets 2,972 3,691 Deferred income taxes 5,158 5,150     Total current assets   112,636     230,863     Property and equipment, net 8,561 12,023 Deferred set up costs, net of current portion 1,000 1,263 Prepaid commissions and royalties, net of current portion 2,670 3,205 Intangible assets, net of accumulated amortization of $1,176 and $1,814 in 2006 and 2007, respectively 2,724 2,086 Goodwill 27,820 27,268 Deferred income taxes 4,988 4,569 Other assets 252 259     Total assets $ 160,651   $ 281,536     Liabilities and Stockholders' Equity Current Liabilities: Accounts payable $ 2,893 $ 2,497 Accrued expenses 14,183 18,070 Accrued earn-out 3,500 3,500 Deferred revenue, current portion 47,128 56,731 Deferred rent, current portion 352 417     Total current liabilities   68,056     81,215     Deferred revenues, net of current portion 3,527 3,273 Deferred rent, net of current portion 596 70 Other long-term liabilities 451 -     Total liabilities   72,630     84,558     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 42,319 shares in 2006 and 2007, respectively 355 423 Additional paid-in capital 176,545 271,179 Treasury stock, 37 shares at cost (111 ) (111 ) Accumulated other comprehensive (loss) income (72 ) 656 Accumulated deficit (88,696 ) (75,169 )     Total stockholders' equity   88,021     196,978     Total liabilities and stockholders' equity $ 160,651   $ 281,536   Phase Forward Incorporated and Subsidiaries Condensed Consolidated Statements of Cash Flows (unaudited) (in thousands)     Nine Months Ended September 30, 2006 2007   Operating activities Net income $ 6,868 $ 13,527 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,809 4,930 Stock-based compensation expense 1,991 3,333 Loss on disposal of fixed assets 51 - Foreign currency exchange loss 45 160 Provision for allowance for doubtful accounts 79 75 Deferred income taxes (206 ) (4,554 ) Tax benefit related to exercise of options (1,027 ) - Non-cash income tax expense 1,329 5,410 Amortization of premiums or discounts on short-term investments 39 57 Changes in assets and liabilities: Accounts receivable 2,361 2,012 Deferred costs (512 ) (2,498 ) Prepaid expenses and other current assets (398 ) (658 ) Accounts payable (225 ) (437 ) Accrued expenses 451 3,337 Accrued litigation settlement (8,500 ) - Deferred revenue 1,687 9,359 Deferred rent (472 ) (452 )     Net cash provided by operating activities   7,370     33,601     Investing activities Proceeds from maturities of short-term investments 29,163 60,172 Purchase of short-term investments (44,186 ) (62,594 ) Purchase of property and equipment (3,502 ) (7,707 ) Payment on earn-out under acquisition (2,000 ) - (Increase) decrease in other assets (32 ) 1     Net cash used in investing activities   (20,557 )   (10,128 )   Financing activities Net proceeds from issuance of common stock 2,332 91,369 Tax benefit related to exercise of options 1,027 -     Net cash provided by financing activities   3,359     91,369     Effect of exchange rate changes on cash and cash equivalents   (174 )   123     Net change in cash and cash equivalents (10,002 ) 114,965 Cash and cash equivalents at beginning of period 51,779 42,169     Cash and cash equivalents at end of period 41,777 157,134 Short-term investments at end of period 23,791 29,832     Total cash, cash equivalents and short-term investments at end of period $ 65,568   $ 186,966     Non-cash investing activities Accrued earn-out in connection with acquisition of Lincoln Technologies, Inc. $ 3,500   $ -