Medpace Q3 2023 Earnings Call Transcript

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October 24, 2023

There are 10 speakers on the call.

Operator

Good day, ladies and gentlemen, and welcome to the Medpace Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. As a reminder, this call may be recorded. I would now like to introduce your host for today's conference call, Lauren Morris, Medpace's Director of Investor Relations.

Operator

You may begin.

Speaker 1

Good morning, and thank you for joining Medpace's Q3 2023 earnings conference call. Also on the call today is our CEO, August Troendle our President, Jesse Geiger and our CFO, Kevin Brady. Before we begin, I would like to remind you that our remarks and responses to your questions during this teleconference may include forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve inherent assumptions with known and unknown risks and uncertainties as well as other important factors that could cause actual results to differ materially from our current expectations. These factors are discussed in our Form 10 ks and other filings with the SEC.

Speaker 1

Please note that we assume no obligation to update forward looking statements even if estimates change. Accordingly, you should not rely on any of today's forward looking statements as representing our views as of any date after today. During this call, we will also be referring to certain non GAAP financial measures. These non GAAP measures are not superior to or replacement for the comparable GAAP measures, but we believe these measures help investors gain a more complete understanding of results. A reconciliation of such non GAAP financial measures to the most directly comparable GAAP measures is available in the earnings press release and earnings call presentation slides provided in connection with today's call.

Speaker 1

The slides are available in the Investor Relations section of our website at investor. Medpace.com. With that, I would now like to turn the call over to Jesse Geiger.

Speaker 2

Thank you, Lauren. Good morning, everyone. Revenue in the Q3 of 2023 was $492,500,000 which represented a year over year increase of 28.3%. Net new business awards entering backlog in the 3rd quarter increased 29.9% from the prior year to $611,500,000 resulting in a 1.24 net book to bill. Ending backlog as of September 30, 2023 was approximately 2,700,000,000 an increase of 20.3 percent from the prior year.

Speaker 2

We project that approximately $1,460,000,000 of backlog will convert to revenue in the next 12 months. And our backlog conversion in the 3rd quarter was 19.1 percent of beginning backlog. Now with that, I will turn the call over to Kevin to review our financial performance in more detail as well as our guidance expectations for the balance of 2023 and our initial guidance for 2024.

Speaker 3

Thank you, Jesse, and good morning to everyone listening in. As Jesse mentioned, revenue was $492,500,000 in the Q3 of 2023. This represented a year over year increase of 28.3% on a reported basis and 27.6% on a constant currency basis. Revenue for the 9 months ended September 30, 2023 was $1,390,000,000 and increased 30.2% on a reported basis and 30% on a constant currency basis from the comparable prior year period. EBITDA of $90,200,000 increased 1% compared to $89,300,000 in the Q3 of 2022.

Speaker 3

Year to date EBITDA was 266,700,000 and increased 17.1% from the comparable prior year period. EBITDA margin for the Q3 was 18.3% compared to 23.3% in the prior year period. Year to date EBITDA margin was 19.2% compared to 21.4%. EBITDA margin compared to the prior year period was impacted by higher reimbursable costs, personnel costs and the foreign exchange benefit in 2022 behind the strong U. S.

Speaker 3

Dollar. In the Q3 of 2023, net income of $70,600,000 increased 6.9% compared to net income of $66,000,000 in the prior year period. Net income growth ahead of EBITDA growth This primarily driven by a lower effective tax rate of 15.2% compared to 19.4% in the prior year period as well as lower interest expense. Net income per diluted share for the quarter was $2.22 compared to $2.05 in the prior year period. Regarding customer concentration, our top 5 and top 10 customers represent roughly 23% and 29% respectively of our year to date total revenue.

Speaker 3

In the 3rd quarter, We generated $114,400,000 in cash flow from operating activities and our net days sales outstanding was negative 42.2 days. During the quarter, we paid off our outstanding debt And we have $95,200,000 in cash as of September 30, 2023. Moving now to our updated guidance for 2023. Full year 2023 total revenue is now expected in the range of $1,870,000,000 to $1,89,000,000 representing growth of 28.1 percent to 29.5 percent over 2022 total revenue of 1,460,000,000 Our 2023 EBITDA is now expected in the range of $353,000,000 to $361,000,000 representing growth of 14.6 percent to 17.2% compared to EBITDA of $308,100,000 in 2022. Guidance is based on foreign exchange rates as of September 30, 2023.

Speaker 3

We forecast 2023 net income in the range of $272,000,000 to 276,000,000 This guidance assumes a full year 2023 effective tax rate of 16.25 percent to 17.25 percent and 31,800,000 diluted weighted average shares outstanding for 2023. There are no additional share repurchases in our guidance. Earnings per diluted share is now expected to be in the range of $8.54 to $8.66 As Jesse mentioned, we are providing initial 2024 guidance for revenue and EBITDA. For the full year 2024, we expect Revenue in the range of $2,150,000,000 to $2,200,000,000 and EBITDA to be in the range of 390,000,000 to $415,000,000 In addition to continued growth in direct service activities, The revenue guidance anticipates investigator site activity and costs remain elevated, similar to what we have seen recently in 2023. We plan to provide additional detailed full year 2024 guidance on our Q4 earnings call in February.

Speaker 3

With that, I will turn the call back over to the operator, so we can take your questions. Thank

Operator

Our first question will come from Max Smock of William Blair. Your line is open. Pardon me, Mr. Max Smock, your line is open. Hello, Mr.

Operator

Smock of William Blair, are you able to hear me?

Speaker 3

Operator, we can move on to the next and get Max back in the queue.

Operator

Thank you. Again, Mr. Smock, if you want to get back in the queue, please hit star 11 again. One moment please. And one moment for our next question.

Operator

Our next question will come from David Windley of Jefferies. Your line is open.

Speaker 4

Hi. Hopefully, you can hear me working.

Speaker 5

Yes. We hear you, Tim.

Speaker 4

Okay. Fantastic. Great. Good morning. Thank you.

Speaker 4

Thank you for taking my questions. I wondered if you could comment a little bit on environment. Kind of the rate of biotech restructuring announcements and things of that sort has attenuated maybe ever so slightly in 2023, your everybody, I think, is aware that your exposure to that part of the customer base is pretty high. So I wondered if you could comment on that maybe qualitatively and then quantitatively. Are you seeing more activity At the beginning of the funnel, are you seeing your win rates improve like from a metric standpoint?

Speaker 4

What would you attribute to your booking success? Thanks.

Speaker 5

Sure, sure, Dave. Yes, the environment is kind of hard to comment on because It's pretty variable. I mean, we're still seeing quite a bit of funding challenges by clients. And we've been through a period of A lot of clients in distress and a number of bankruptcies and challenges. I think that's actually derisked Our backlog quite a bit of those that are going to have a problem, I think most of them have.

Speaker 5

And on the other side, we're seeing very strong business environment. Just surprisingly, to see The disparity is amazing. We have very strong RFP flow. I think our RFPs, total RFPs pending is the 2nd highest we've ever had. And

Speaker 3

to fill the

Speaker 5

pipeline, the new awards, initial awards, as we've talked about, that were awarded in Q3 were a record highest we've ever had. So we're seeing Great business environment and a horrible business environment. So, I don't know. It's just kind of schizophrenic.

Speaker 4

Yes, interesting. So we would suggest that you're able I mean That you're taking share, you must be able to find enough of the positive ones to offset the absence of clients that are being hit by the financial concerns. Any color that you could provide around Sales strategy or investment in sales force more recently, I know you did that years ago, but has there Further investment to try to cultivate more opportunity?

Speaker 5

No, I wouldn't say investment in terms of Expanding the size and breadth of the group, I think we're in pretty good shape there. I think we're much better able to address The challenge is this time because I think we were scaled and there has been quite a bit of Shifting focus to funding capabilities on the clients' part. So we have moved to Somewhat different subset of small biotech that has funded programs. But that's really it. It's just kind of been a pivot on that side and found lots of opportunities despite the environment.

Speaker 4

Okay. Last question for me. The pass through the elevated pass throughs have maybe persisted to a greater degree than you expected. Can you talk to that a little bit? Has the composition of work Changed, is it more client I guess I'm wondering is it a therapeutic area thing Where the work that you're doing just naturally has more pass through associated with it, is it an inflationary environment at the site level where Those activities are just costing more, or are you being asked to do that more?

Speaker 4

I'm just trying to understand why the significantly elevated pass through growth and your

Speaker 5

I think it's kind of a combination of all of the above. There's been quite a bit of inflationary Changes, particularly in some therapeutic areas and part of that's competition and all the rest of it. And So I think investigator fees have gone up as a percent of budgets and higher percent than our costs. And there's obviously the mix of Phase 3s and large studies and particularly Maybe more expensive patient populations have been a factor too, but I think it's really a combination of Therapeutic area, the type of study, the cost of the patient and inflationary factors that are all driving up The pass through, the pre funded investigator costs, I think that may Over time, less than a little, but I think kind of the percent of investigator Fees as a proportion of the total projects may remain elevated for quite a while.

Speaker 4

Okay, great. Thank you.

Operator

Thank you. One moment please for our next question. Our next question will come from John Sauerber of UBS. Your line is open.

Speaker 6

Thanks for taking the question. I guess just following up there a little bit on the beat in the quarter and just some of the disclosures. It seems like midsize biotech and Tablasm are very strong and I guess also coupled with those large pass throughs. Is the beat mostly driven by a couple of larger studies? Are you seeing Broad based strength here currently?

Speaker 5

It's pretty broad based. We don't have yes, Jesse, go ahead.

Speaker 2

Yes. I was going to say It's broad. It's not concentrated in any one study. And metabolic has been running pretty hot past couple of quarters, and it's continuing to contribute, but plenty of good contribution from other therapeutic areas as well in the quarter.

Speaker 6

Thanks. And funding was pretty good in 2Q, but Any additional color you can provide on where you see the funding environment going maybe in the second half of this or I guess for the remainder of this year or into next year? And could there be any impact there on a lag basis?

Speaker 5

I'm sorry, funding and how that might play out going forward?

Speaker 6

Yes. Just what are your expectations around maybe further 4Q and then for next year?

Speaker 5

Things look strong. As I said, we've got record kind of levels of both RFP and awards and we had a drop off in awards. So Q4, Q1, we had kind of a very weak time period and it was all a question of how quickly we could refill things compared The food moving through the Python kind of thing, I think things look Pretty good. We won't see a drop off and we're hoping that the business environment holds up and we'll have a very strong 2024.

Speaker 6

Thanks. And last one here on my end. Just any additional color you provide on the 2024 EBITDA margin guidance? And Just remind us even over the long term, I guess, what is the margin expansion opportunity there or a target level?

Speaker 3

Yes, John, this is Kevin. I don't expect I mean, it's going to be somewhat contingent on what happens with the reimbursable activities, right, Just given the impact that that has on margin percentage. But if that levels off and kind of remains elevated Listen to where we were in the past couple of quarters here. I don't expect there to be a margin expansion. We still have some loan pressure from Wage and benefits inflation.

Speaker 3

So I don't see 2024 as being a huge margin expansion opportunity.

Speaker 6

And then I guess, you're even beyond 24, any color on what long term targets?

Speaker 3

I mean, it just depends. I mean, We've kind of said, if things kind of normalize, there's something in the high teens, but it remains to be seen just in terms of what the environment is And what hiring looks like too.

Speaker 6

Great. Thanks for taking the questions.

Operator

Thank you. One moment please for our next question. Our next question will come from Eric Coldwell of Baird. Your line is open.

Speaker 7

Thank you. Good morning. Just a few quick ones here. On the wage inflation, my understanding was that it had peaked a few quarters ago and was Still elevated, but starting to perhaps moderate a bit. Has that continued?

Speaker 7

Do I understand that correctly?

Speaker 2

Hey, Eric, that's right. Kind of mid to high single digit.

Speaker 7

Jesse, what do you see on the next 12 months? Stable at these levels, perhaps some continued moderation, just any sense on what the outlook is?

Speaker 2

Yes, I think stable at these levels. Yes. At this point, I don't see anything that would drive that higher or lower. The market from a hiring standpoint is more stable than it has been in the past. We've also had good success with lower turnover.

Speaker 2

So employee base stable, we're continuing to grow, but wage pressures have moderated a little bit and I would expect it to be fairly consistent.

Speaker 7

Okay. And then, in terms of cancellation profile, if I missed this, I apologize. But Have you returned fully to normal levels, which I believe are somewhere in the 4% to 5% of backlog? Or What's going on with the cancellations? Anything abnormal there?

Speaker 2

Yes. Normal level. Pretty well Back to normal, at least for the Q3 and towards the lower end of that range.

Speaker 7

Okay. And then Hit rate, my understanding from our visit a month or 2 ago was that hit rate was back to Solid but normal levels, has that continued? And have you seen any change in rescue award activity? There's a lot of disruption in this sector over the last couple of years and some of your peers had obviously were giving up some work. I'm just curious what the rescue activity looks like these days?

Speaker 5

No particular rescue activity. It's been very little. And, yes, it's been pretty

Speaker 3

mild.

Speaker 7

Okay. Last one, and I hate to go there. It's an unfortunate circumstance. But I am curious about your Middle East exposure, just in case The situation that's unfolding continues to escalate. What kind of concentrations or exposures might you have in the Middle Eastern region?

Speaker 2

Yes. Thanks for asking, Eric. All of our Israeli employees are safe and accounted for people working remotely At this point, our concentration there, it's less than 1% of our total headcount and less than 1% of active sites, but activity is continuing and we're keeping a close eye on it.

Speaker 7

Okay. Thanks very much guys. Congrats on the good performance.

Operator

Thank you. One moment please for our next question. Our next question will come from Jack Wallace of Guggenheim Partners. Your line is open.

Speaker 8

Thanks, Annette. Congrats on the quarter. A couple of questions here. One around headcount. Looks like we're trending to the mid to high, new teens growth rate this year.

Speaker 8

And given the strength of the RFP awards In the pipeline you mentioned earlier, do you think this is the right level of headcount growth over the next year or so? Or Maybe said a different way, are we on plan with hiring now? Is there any catch up that's needed? Thank you.

Speaker 2

Yes. Thanks, Jack. Yes, we would expect headcount here for the balance of the year to remain in that mid to high teens level. And then for 2024, we anticipate headcount growing in line with revenue.

Speaker 8

Got you. That's helpful. And then just thinking about The comments on one hand, there's maybe some of the less promising Lead targets and lesser funding companies have kind of sorted themselves out, but it does sound like promising lead candidates are getting funded And there's a good amount of jump balls for you to go after. Have you had to have any It changes in your selectivity of trials. And if so, has that played any role in your hiring plan?

Speaker 8

And Just thinking about how much hiring ahead is taking place? Thank you.

Speaker 2

Yes. I mean, we We continue to be selective always in terms of targets and opportunities, but its impact on hiring plans, not too much of an impact. I think we're well positioned for Current work, we're well positioned with our hiring plans for upcoming work and we've had really good retention and that's really helped us as well in terms of the capacity that we have for trials. We've had good employee retention and that's always easier than hiring and onboarding new people.

Speaker 8

Yes, hidden costs of the running the business. And then just kind of lastly here, just More of a housekeeping item, it looks like the customers 6 to 10 were down sequentially from a revenue standpoint. Just wondering if there's any just Trial roll offs in there or kind of any kind of noise factors. So just looking historically, yes, the Top 10 and go to the 6 to 10 category. Looks like there's been some trading between, you say, the top 5.

Speaker 8

It didn't look like there's a graduate this year. So just wondering if there's any kind of timing nuances or anything going on there? Thanks.

Speaker 5

Yes. I don't think there's anything. Maybe Maybe we shouldn't provide the detail. I don't know. It's like you can't it's different subset of companies every time.

Speaker 5

You're comparing apples to oranges. I guess you're looking at a 9 months 'twenty two versus a 9 months 'twenty three. I mean, if you look at it quarter by quarter, What's revenues coming from our clients, 6 to 10, it's increased sequentially every quarter over the past year. I really don't it's companies move in and out and up and down and it's by the quarter and you're looking at a 3 month You're looking at a 3 quarter trailing and it's I just I don't think there's anything there that's meaningful or represents Any large roll off or anything like that.

Speaker 8

Got you. Thank you. Appreciate it. Congrats again on the quarter.

Speaker 3

Thanks,

Operator

And again, we have on the line Max Mok of William Blair. Your line is open.

Speaker 9

Hi. Thank you for coming back to us. Can you hear me?

Speaker 3

Yes.

Speaker 9

Okay, great. Thank you. It's Christine Raines on for Max Smock. So I was wondering now that you've paid off your debt, How should we think about capital allocation moving forward? And then also relatedly, how much interest income could you earn next year?

Speaker 3

Yes. The capital allocation, or kind of our methodology, Christine, will remain the same, Continued investment in the organic growth of the business. In 2024 and the next couple of years, we will have some increased Capital expenditures related to the expansion of our headquarters here in Cincinnati. But beyond that, we'll opportunistic We look for share repurchases to the extent that we're not able to execute that at the levels that we want. We're okay building some cash.

Speaker 3

And to your question on kind of interest and how to think about that, I think the simplest way is to Kind of think of it as in current rates, a blended rate of kind of 4.5% or so is a reasonable Assumption to build into your model.

Speaker 9

Great. Thank you. And then, not to dig too deep in the details, but it seems Like you had a relative jump in your metabolic exposure. It sounds like it wasn't just one larger study, so hoping you can give any color there.

Speaker 2

Yes. Christine, a couple of studies in the category have been burning really well. It's nothing to call out there other than this year. We've had good success in the space over the past couple of quarters and that's continuing.

Speaker 9

Great. Thank you. That's all for us.

Operator

Thank you. This will end the Q and A portion of today's conference. I would now like to turn the conference back to Lauren Morris for closing remarks.

Speaker 1

Thank you for joining us on today's call and for your interest in Medpace. We look forward to speaking with you again on our Q4 2023 earnings call.

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