Applied Materials Q1 2023 Earnings Call Transcript

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April 25, 2023

There are 9 speakers on the call.

Operator

Good day, ladies and gentlemen, and welcome to the Medpace First 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, you may begin.

Speaker 1

Good morning, and thank you for joining Medpace's Q1 2023 earnings Conference Call. Also on the call today is our CEO, August Trendle 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 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 a replacement for the comparable GAAP measures, 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 August Trendles.

Speaker 2

Thank you, Lauren. Business environment improved in Q1 with RFP flow up On a sequential and year over year basis, the total dollar value of pending RFPs also improved significantly. Although award notifications were down on the quarter, they showed sequential improvement January to February to March and have improved even further to a relatively strong level in the 1st 3 weeks of April. Total pipeline cancellations were down over 50% on a sequential basis in Q1. The trends at this point look favorable and we are cautiously optimistic about our backlog build toward 2024.

Speaker 2

We are raising 2023 guidance in line with our strong financial performance in Q1 and greater visibility we now have into the full year results. Jesse and Kevin will now review Q1 financial results in detail and our updated 2023 guidance.

Speaker 3

Thank you, August, and good morning, everyone. Our revenue in the Q1 of 2023 was $434,100,000 which represents a year over year increase of 31.2%. Net new business awards entering backlog in the Q1 increased 31.4% from the prior year to $555,800,000 resulting in a $1,280,000 net book to bill. Ending backlog as of March 31 was approximately $2,500,000,000 which was an increase of 17.8% from the prior year. We project that approximately $1,330,000,000 of backlog will convert to revenue in the next 12 months And backlog conversion in the Q1 was 18.6% of beginning backlog.

Speaker 3

In 2023, we continued to make progress in hiring in the Q1, adding 4.3% from the end of 2022 and over 15.8% from the prior year. Employee retention and continued hiring for future business will remain top priorities in 2023. And with that, I will turn the call over to Kevin to review our financial performance in more detail and discuss our 2023 guidance.

Speaker 2

Kevin?

Speaker 4

Thank you, Jesse, and good morning to everyone listening in. As Jesse mentioned, revenue was 434,100,000 and Q1 of 2023. This represented a year over year increase of 31.2% on a reported basis and 31.8% on a constant currency basis. The strong revenue results for the quarter reflected less funding challenges than anticipated for our clients. EBITDA of $92,800,000 increased 31.9% compared to $70,400,000 in the Q1 of 2022.

Speaker 4

On a constant currency basis, EBITDA for the Q1 increased 28.6% compared to the prior year. EBITDA margin for the Q1 was 21.4% compared to 21.3% in the prior year period. EBITDA margin for the quarter was positively impacted by the strong revenue. We anticipate margin headwinds The balance of the year is a result of wage inflation, headcount growth and higher reimbursable costs as a proportion of total revenue. In the Q1 of 2023, net income of $72,900,000 increased 18.9% compared to net income of $61,300,000 in the prior year period.

Speaker 4

Net income growth lagging EBITDA was primarily driven by a higher effective tax rate of 15.3% compared to 6.1% in the prior year period. Net income per diluted share for the quarter was $2.27 compared to $1.69 in the prior year period. Regarding customer concentration, Our top 5 and top 10 customers represent roughly 22% 29% respectively of our Q1 revenue. In the Q1, we generated $80,100,000 in cash flow from operating activities. Our net days sales outstanding was negative 43.2 days.

Speaker 4

During the quarter, we repurchased Approximately 650,000 shares for a total of 120,100,000 As of March 31, 2023, we had $332,700,000 of authorization remaining under our share repurchase program. Our net debt position at the end of the quarter was $68,100,000 which was composed of debt of $115,000,000 and cash of $46,900,000 Our net leverage ratio is approximately 0.2x last 12 months EBITDA. Moving now to our updated guidance for 2023. Full year 2023 total revenue is now representing growth of 19.5 percent to 23.6 percent over 2022 total revenue of 1.46 Our 2023 EBITDA is expected in the range of 335,000,000 to $355,000,000 representing growth of 8.7% to 15.2% compared to EBITDA of $308,100,000 in 2022. Guidance is based on foreign exchange rates as of March 31.

Speaker 4

This guidance assumes a full year 2023 effective tax rate of 17.5% to 18.5 percent and 32,000,000 diluted weighted average shares outstanding for 2023. There are no additional share repurchases in our guidance. We forecast 2023 net income in the range of $250,000,000 to $269,000,000 Earnings per diluted share is expected to be in the range of $7.81 to $8.40 With that, I will turn the call back over to the operator, so we can take your questions.

Operator

Thank you. First question, it comes from the line of David Windley from Jefferies. David, your line is open. Please ask your question.

Speaker 5

Hi, thanks for taking my question. I apologize I toggled over a little bit late, so I may have missed some of this. But For the group, I guess, we are seeing in some of our data, a buildup of studies that are Seem to be proposed, but are not starting. So call it, to be specific, estimated start dates in clinicaltrials dot gov That are not flipping the actual starts, kind of not getting the 1st patient in. I wondered in the environment, it sounds like you said RFPs Peas were stronger, but maybe awards were a little softer.

Speaker 5

And I wonder if that juxtaposes with anything that you're seeing this kind of studies that seem to be sitting in limbo and not moving forward?

Speaker 2

Yes, Dave. This is August. Yes, I think RFPs are not at that stage. I guess things that are awarded but not Got into our backlog, which sort of represent that class of studies where it's kind of stalled. Client maybe doesn't have the funding or unsure, thinking of redesigning their programs, put things on hold.

Speaker 2

Certainly, we have a number of programs like that and this environment tends to cause a greater number of those. But I think what we've seen in the last quarter was less of that than we kind of anticipated and more things moving forward. And we had seen quite a bit of pause by a lot of our clients in Q4 and we were kind of expecting worsening, kind of a snowballing of this Effect, but did not see that and things have kind of improved. But you certainly do see programs that are stalled and unable to move forward.

Speaker 5

Got it. And then you're historically given the small biotech focus, your Customer concentration has usually been quite diverse. And We noticed in the slide deck that your both your customer concentration and your therapeutic concentration kind of jumped in tandem. I wonder if I'm assuming those are related to the same thing. Perhaps you could flesh out what the driver was there?

Speaker 2

I think first off, you're looking at suddenly at Q1 this year versus Q1 of last year. We look at the pie charts are kind of cumulative for the year. This is a 1 quarter comparison rather than a 2, 3 or 4 quarter comparison. There's been no I guess the trends that we've seen over this downturn is a greater Amount of our bookings and awards have been more in the midsize clients. Many of our very small clients have had Challenges, we have had very strong metabolic awards, oncology, which tends to be toward our Biotech clients and antivirals, anti infectives, which Infectious disease type studies have which have always tend to have a lot of funding difficulties have been Smaller in number.

Speaker 2

That's the kind of profile I'd provide.

Speaker 5

Got it. Okay. So I guess the maybe more specific question around that is The metabolic jump that you mentioned, is that multiple clients driving that? And I guess what you'd be saying is the 1Q over 1Q is a little idiosyncratic, but that perhaps you're insinuating that the growth has been Building over the course of 2022 in those buckets, is that

Speaker 2

That's right. I think what you're seeing is a cumulative Rise in our metabolic, which has been very strong throughout the past year, there is no one client pushing that. There's no large study. There's no It's a very diversified pool. So we have no real strong concentration there.

Speaker 2

There's nothing unusual, nothing particularly large that came in or anything, just Across the board, a large number of cities.

Speaker 5

Okay, got it. Thanks. I'll yield. Thank you very much.

Operator

One moment for your next question. For your next question, it comes from the line of Max Mach from William Blair. Max, your line is now open. Please ask your question.

Speaker 6

Hi, good morning. One quickly here for me on the lack of growth in backlog not expected to convert to revenue over the next 12 months here. I think it was flat quarter over quarter, First time that we've seen this. So just wondering if you can help us understand how this would happen given the really strong bookings that you saw in the quarter. Does this mean that The outsized portion of bookings are coming from changed orders and pass throughs as opposed to customers booking out new longer term studies that go beyond the next 12 months?

Speaker 4

Sorry, Max, what are you seeing in terms of next 12 months? You're saying it's flat?

Speaker 6

Yes. So if you look at your portion of backlog and if you look at total backlog and Track out the portion that you called out that you expect to convert to revenue over the next 12 months. That's actually flat quarter over quarter suggesting that a lot of the backlog growth All of the backlog growth rather is expected to convert to revenue over the next 12 months, right? So on a non next 12 month backlog Metric here at 1.13, then going into the Q1 that stayed the same in spite of the big jump up in bookings that you saw in the quarter. So just wondering why The portion of your backlog that is not expected to convert beyond the next 12 months, why that would actually be flat given the really large Step up in bookings that you saw here in the Q1?

Speaker 4

Yes. From the Q4, you should have seen an increase in the next 12 months roll off It's a 1.3 or so for again the next 12 months relative to In Q4, we might have been kind of in the 1.21 maybe range?

Speaker 2

Yes, it jumped 120,000,000 Hi, Scott.

Speaker 6

Yes. Sorry, I'm doing a poor job of phrasing this. I'm talking about so if you back out that 1 point $3,000,000,000 right from your total ending backlog number, you get the portion that's not so I'm talking about the portion that's not expected to convert to revenue over the next 12 months, which would be $1,130,000,000 If you go back to the 4th quarter and you back out the $1,210,000,000

Speaker 2

a year ago. Our conversion rate has increased. That's what you're pointing out.

Speaker 7

Okay, got it. Yes,

Speaker 2

I think.

Speaker 7

Yes, I

Speaker 3

mean that's a function of the The heavy revenue growth and the conversion rate ticking up here in the Q1. So if you're saying

Speaker 6

that I

Speaker 2

don't think we have any Particular reason for drawing that out or anything. I don't think it's

Speaker 4

fair. No, Max. Our typical Typically, we're in kind of the low 50% of our backlog will convert into revenue over the next 12 months. And that's What we continue to see here in the Q1, so nothing has really changed in that regard. Clearly, as you think about, we've got existing backlog and those programs, it's a mix of portfolio and At different stages of progression and then you're adding in the new awards that we saw in the quarter, which were very strong.

Speaker 4

So it's kind of a balance of studies that are starting up through the new awards and what we've got in existing backlog.

Speaker 6

Okay, got it. Thank you. Yes, it just stood out because I think it's the first time that that non next 12 month backlog number hasn't jumped up, but Appreciate your point there about conversion picking up. Following up on Dave's question here and acknowledging that revenue growth outside your top five customers was still Pretty strong. I did want to dig into the revenue from the top five customers since it's really accelerated over the last couple of quarters.

Speaker 6

And going back to the 10 ks from the Q4 here. It looks like revenue from LIB Therapeutics is a key driver. Can you just confirm how much revenue and bookings came from LIB in the Q1? And then, August, given your role with that company, is there any detail you can provide around what exactly is causing that big step up that we've seen recently and the expected contribution from from LIV moving forward here in 2023. Thank you.

Speaker 2

Yes, I think the amount of revenue will be in our queue. I don't have it in front of me, but it's just a I think at that peak point of its Phase 3 programs. I don't think there's anything unusual there.

Speaker 6

All right. I'll leave it there. Thank you.

Operator

One moment for your next question. Your next question comes from the line of Sandy Draper from Guggenheim Partners. Sandy, your line is open. Please ask your question.

Speaker 7

Thanks very much. Really just some modeling questions right now for me. One, when I Sort of look at your revenue guidance and the current backlog conversion rate, which as you pointed out was 18.6% and up. Obviously, some of this will depend on what bookings are, but it looks like in your guidance that you're assuming that the backlog conversion rate Starts to moderate back down, otherwise I get way above your revenue guidance. So one, just wanted to make sure I'm right on that.

Speaker 7

And then if you could sort of give me an idea of what you're sort of targeting for the backlog conversion rate, that would be my first question.

Speaker 4

Yes. Sandy, you're right. We do expect Thanks. To slow down a little bit in the back half for the rest of the balance of the year. For the year, book to bill, somewhere in the 1.25% range, with a burn rate for the year of kind of 17.5% to 18%.

Speaker 4

So kind of going back to where we were in the 3rd Q4 of 2022. The Q1 really just it was accelerated With less funding challenges than anticipated with clients and lower cancellations as August had pointed out in his prepared remarks, We kind of had a perfect setup for us in the Q1 with reimbursable activities and direct service activities that really drove that first But we expect that to come back to ranges that we saw in the Q3 and Q4 of 2022.

Speaker 7

Okay, great. That's really helpful. And then my next question, when I look at The Q1 EBITDA and then the full year guide, it obviously assumes there's some EBITDA reduction over the next three quarters. I've just wanted to I guess a 2 part question. 1, is that more gross margin driven or margins are expected to come down some Or SG and A is going to go up because of hiring and then I guess if it is the margin, is that more on The mix of pass through revenue staying higher increasing or is it expecting the service margins to come back down because you're hiring aggressively?

Speaker 7

Thanks.

Speaker 4

Yes. Good question. The raise that we had was really driven by the 1st quarter Revenue and the leverage that it enabled on our cost structure. So if you think about the balance of the year, We expect our cost structure to remain pretty much the same and that we do expect headwinds The rest of the year, headwinds from a couple of things. One is hiring that we pointed out in the last quarter.

Speaker 4

We do intend to continue aggressive hiring the balance of the year. We made some progress in the Q1. The Q2 typically is our highest hiring quarter. We've got wage inflation pressures, but then as you pointed out, we do expect Our reimbursable cost as a percentage of revenue to continue to be elevated the balance of the year. So it's a combination of those three factors really.

Speaker 7

Okay, great. And then my last question is probably for August or maybe Jesse, and I'm not sure it's really a fair question because this is about competitors and just breaking news. But obviously, August, that was Your commentary about the environment and RFP Flow awards was, to me, notably more positive than what we've seen the last Your 3, 4 quarters, sounds like things are better. But when I look at some comments out of Donahue and LabCorpCovant and WuXi, there was definitely seems more concern in calling out the biotech funding environment. Just any thoughts you can think of, do you think you guys are winning more share, operating just obviously different spaces, Just because it's a little bit confusing when to me you had a positive tonal shift, but other folks out there seem to be calling out Some concerns, so I just love any commentary there.

Speaker 7

Thanks.

Speaker 2

Yes, I don't know. Everyone's Client base is a bit different and profile, etcetera. We certainly have seen the funding difficulty and drop off of things. And I would characterize this quarter as less bad than we anticipated. Things have certainly come down over time Our growth this year is not like the last year and last few years, But we have seen a turn through the quarter, through Q1 of improving Profile in both RFPs and programs not getting stalled, the clients that were Kind of on a cash basis accrual, we thought they were going under and continue to pay us and Things have just seemed to improve over the quarter.

Speaker 2

But there's Certainly, still a number of our clients that are having funding difficulty installed programs. And so I think we're We think we've seen the low in the near term. Things could always turn again, but things are In the right direction as far as we can see at this point.

Speaker 7

Okay, great. That's really helpful. Thanks.

Operator

Your next question comes from the line of John Sauerbeer from UBS. John, please go ahead.

Speaker 8

Hi. Thanks for taking the question. I guess, just maybe digging in a little Deeper, just on what Sandy asked there then. So it sounds like RFPs up quarter to quarter year over year. I guess Just I mean, is this despite the funding environment, where do you think that this strength has come down?

Speaker 8

Is there like additional specific Indications, is it going into larger customers? I guess just any additional color there just, despite some of the commentary that peers have out there?

Speaker 2

Yes. So I guess I'd say that RFPs have kind of still mirrored our usual Client profile, we have had stronger awards and Programs that are moving forward from the larger companies. And so in our breakout that we provide, it shows You'd see a larger number coming from midsized pharma rather than smaller biotech, but it's been kind of Moving up the chain even within the biotech, so it tends to be the better funded companies. There's still a lot of very small companies that are challenged and having Much more funding difficulties than they have in the past, but our RFP flow is actually not very Predictive of that in terms of it tends to have the same breakout as historically with a lot of Biotech is our largest client and the proportions have remained about the same. I don't know if that helps.

Speaker 8

Appreciate it. And also I know you mentioned I think pipeline cancellations down 50%. Just Any additional color there? Why do you think that you might have seen that spike in the 4Q and what's normalizing here? And then just any anecdotal Color you can provide since the SVB takeover and maybe how that's trended into early April here?

Speaker 2

Yes. Well, we had a lot of clients that were having difficulty raising funding and we had some that Declared bankruptcy and stopped their programs and largely that was Q4 phenomena and we haven't seen as much we kind of anticipated seeing more of that and have not seen as much In Q1 and things I don't know, maybe it's the clients that had challenged Profile are now not part of it and remaining companies are able to raise funds, But that's just been the profile we've seen.

Speaker 8

Great. Well, thanks for taking the questions.

Operator

There are no further questions at this time. I would now like to turn the conference back over to Lauren Morris, Medpace's Director of Investor Relations for closing remarks.

Speaker 1

Thank you for joining us on today's call and for your interest in Medpace. We look forward to

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.

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