Phase Forward Reports Fourth Quarter and Full Year 2009 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 2009.

GAAP revenues for the fourth quarter of 2009 were $58.8 million, a 22% increase from $48.3 million in the fourth quarter of 2008. Within total revenues, electronic data capture (EDC) license, application hosting and other related revenues were $41.6 million, representing 70% of fourth quarter total non-GAAP revenues and an increase of 18% from $35.3 million in the prior year period.

Bob Weiler, chairman and chief executive officer, remarked, "The fourth quarter was a strong finish to a successful year for Phase Forward and was highlighted by revenue growth and non-GAAP operating income that was at the high-end of our guidance. We also won a number of highly competitive EDC evaluations, experienced continued rapid growth with our Phase Forward™ IRT offering, signed the first multi-million dollar agreement related to our Clinical Development Center offering from Waban and made progress bringing our late stage/ePRO solutions to market.”

Weiler added, "2009 was one of the most important years in the history of our company. We took major steps to evolve Phase Forward from the leading EDC vendor to the first end-to-end provider of an integrated clinical research suite (ICRS) spanning EDC, IRT, data and statistical analysis platforms, safety and ePRO/late solutions. The strength of our business model and balance sheet enabled us to execute on our strategy when we did. We are already starting to see the benefits of our expanded offering and believe our early lead in providing an end-to-end ICRS offering will become increasingly important moving forward.”

For the fourth quarter of 2009, GAAP income from operations was $539,000, a reduction from $3.4 million in the fourth quarter of 2008 due primarily to non-cash expenses relating to a $2.3 million impairment charge and a $700,000 increase in the amortization of intangible assets resulting from acquisitions. GAAP net loss for the period was $68,000, or $0.00 per diluted share, compared to GAAP net income of $2.7 million, or $0.06 per diluted share in the fourth quarter of 2008.

For the fourth quarter of 2009, non-GAAP revenues were $59.4 million, which excludes a $597,000 purchase accounting adjustment to record deferred revenues and backlog assumed in acquisitions at fair value. Non-GAAP income from operations was $8.7 million, an increase from $7.5 million in the prior year period, representing a non-GAAP operating margin of 15%. Non-GAAP net income for the period was $5.9 million, or $0.13 per diluted share, compared to $5.8 million, or $0.13 per diluted share, in the fourth quarter of 2008.

The attached table presents a reconciliation of GAAP to non-GAAP revenues, income (loss) from operations and net income and net income per share applicable to common stockholders for the three and twelve months ended December 31, 2008 and 2009. Non-GAAP results exclude the impact of stock-based compensation expense, amortization of intangible assets, the effects of purchase accounting adjustment to record deferred revenues and backlog assumed in acquisitions at fair value, impairment of intangible assets and restructuring expenses.

Total cash, cash equivalents and investments were $135.5 million at the end of the fourth quarter, a decrease of $11.7 million from $147.2 million at the end of the prior quarter. For the fourth quarter, positive cash flow from operations of $15.1 million was offset by $12.9 million in capital spending and $14.0 million in cash used to repurchase shares as part of the $40 million share repurchase program approved by the Board of Directors and announced during the fourth quarter. Total deferred revenues were $98.4 million at the end of the quarter, down from $103.6 million at the end of the prior quarter and up from $88.5 million at the end of the fourth quarter of 2008.

Other Fourth Quarter and Recent Business Highlights

• During the fourth quarter, the company hosted its 8^th annual International Users Conference (IUC) in Boston, Massachusetts, in addition to its annual users conference in Japan. Over 100 companies were in attendance at these combined events, including a near doubling in attendance at Japan’s users conference, as Phase Forward officially launched its integrated, end-to-end ICRS offering and strategy.
• Strong growth related to the company’s Interactive Response Technology (IRT) offering continued in the fourth quarter and included a combined EDC/IRT agreement with Dow Pharmaceutical. IRT-related revenue grew over 130% during the fourth quarter as compared to the prior year.
• The company announced a major new release of its IRT solution, Phase Forward™ IRT 5.0, which gives managers direct control over clinical supply management and helps to provide assurance of supply availability at randomization. Phase Forward IRT 5.0 also offers a new integrated drug forecasting module for advanced global clinical trial supply management and a new, enhanced user interface to streamline navigation and consolidate workflow.
• The Cancer Research UK's Drug Development Office, the drug development arm of the world's largest independent organization dedicated to cancer research, signed a multi-year agreement in which they are standardizing on Phase Forward's InForm™ GTM solution. Phase Forward was selected based on its partnership approach, global services team, the technical strength and scalability of its product, broad experience with oncology trials and the availability of investigators trained in using InForm.
• PharmaNet Development Group, Inc., a global drug development services company, signed a multi-year agreement to offer Phase Forward’s InForm GTM solution to its customers worldwide. PharmaNet provides a comprehensive range of services to the pharmaceutical, biotechnology, generic drug and medical device industries that includes clinical trial data management.
• The company’s CRO-related non-GAAP revenues of $13.6 million grew 30% year-over-year during the fourth quarter.

Full Year 2009 Summary Financial Results

GAAP revenues in 2009 were $213.3 million, a 25% increase from $170.2 million in 2008. Within total revenues, EDC license, application hosting and other related revenues were $154.7 million, an increase of 21% from $127.9 million in 2008, representing 73% of 2009 total revenues.

GAAP income from operations was $11.2 million in 2009, compared to $16.4 million in 2008. GAAP net income was $8.0 million, or $0.18 per diluted share, in 2009, compared to $13.8 million, or $0.32 per diluted share, in 2008.

Non-GAAP revenues in 2009 were $216.3 million, a year-over-year increase of 26% from $171.2 million in 2008. Non-GAAP income from operations was $33.6 million in 2009, representing an increase of 21% from 2008 and a full year operating margin of 16%. Non-GAAP net income was $23.1 million, or $0.52 per diluted share, in 2009. Non-GAAP net income was $21.3 million, or $0.48 per diluted share, in 2008.

The attached table presents a reconciliation of GAAP to non-GAAP revenues, income (loss) from operations and net income and net income per share applicable to common stockholders for the three and twelve months ended December 31, 2008 and 2009.

Financial Outlook

"As we begin 2010, we expect Phase Forward to deliver solid financial results, characterized by low to mid-teen revenue growth and a continuation of the recent trend of margin expansion,” said Weiler. "With many of the visionaries and largest companies in the pharmaceutical industry further down the path from an EDC adoption perspective, it will be increasingly important for vendors to deliver a true end-to-end ICRS offering. During 2010, and even more so in future years, we expect areas complementary to EDC to be the fastest growing segments of the ICRS market. Moreover, it will be these areas along with the ability to deliver an end-to-end ICRS offering that customers will increasingly evaluate when making decisions on strategic vendor relationships. We believe Phase Forward’s market share lead in EDC and status as the only true ICRS vendor at this time position the company well to sustain and potentially increase revenue growth as the market evolves toward purchases of integrated applications and end-to-end ICRS offerings.”

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 first quarter of 2010, the company currently expects the following:

• Non-GAAP revenue: $56.0 to $57.5 million
• Non-GAAP operating income: $7.3 to $8.1 million
• Non-GAAP EPS: $0.11 to $0.12
• GAAP EPS: $0.03 to $0.04

For the full year 2010, the company currently expects the following:

• Non-GAAP revenue: $240.0 to $248.0 million
• Non-GAAP operating income: $36.5 to $40.5 million
• Non-GAAP EPS: $0.54 to $0.60
• GAAP EPS: $0.26 to $0.32

GAAP EPS includes purchase accounting adjustments related to some of our acquisitions to record the assumed deferred revenues and backlog at fair value, non-cash expenses associated with stock-based compensation expense and the amortization of intangible assets. The expected GAAP and non-GAAP EPS reflects an estimated tax rate of 37% to 38%.

Conference Call

The company plans to host its investor conference call today at 5:00 p.m. ET to discuss its financial results for the fourth quarter and full year 2009 and its outlook for the first quarter and full year 2010.

The investor conference call will be available via live webcast on Phase Forward’s web site at www.phaseforward.com under the tab "Investors.” To participate by telephone, the domestic dial-in number is 888-680-0865 and the international dial-in is +1 617-213-4853. The access code is 92050428. 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 4, 2010 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. 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 300 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, SGS, 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, possible acquisitions, integration of acquired businesses, 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 or increase 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.

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 adjustments 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.