Medpace Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 23, 2024

There are 13 speakers on the call.

Operator

Day, ladies and gentlemen, and welcome to Medpace Second Quarter 2024 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 Moores, Medpace Director of Investor Relations.

Operator

You may begin.

Speaker 1

Good morning, and thank you for joining Medpace's Q2 2024 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 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 of our website at investor. Medpace.com. With that, I would now like to turn the call over to August Troendle.

Speaker 2

Good day, everyone. Net new business awards entering backlog were down in Q2 compared to the same quarter of 2023. This was primarily the result of significantly elevated project cancellations, including backlog cancellations that were more than 2x the quarterly average of the calendar year 2023. Gross bookings were strong and had the cancellation rate been equal to the average quarterly rate in 2023, our net book to bill would have been 1.24. Cancellations were disproportionately high in the month of June with April May cancellations in line with our expectations for a strong quarter.

Speaker 2

Reasons for cancellations included reprioritization, impaired sponsor liquidity and acquisition of 1 sponsor by large pharma with subsequent decision to move the work to an existing preferred provider. As several of the cancellations involved awarded work not yet recognized in backlog, we also anticipate a depressed book to bill ratio in Q3. The business environment remains robust and we continue to be optimistic about our future growth, but it may take a few quarters to replenish the flow of opportunities converting into backlog at a more normalized rate. I should stress that despite the challenged backlog growth, we continue to anticipate industry leading organic revenue growth and profitability. In fact, we are raising our 2024 EPS guidance as will be discussed by Kevin.

Speaker 2

With that, I'll turn the call over to Jesse.

Speaker 3

Thank you, August. Good morning, everyone. Revenue for the Q2 of 2024 was 528,100,000 dollars which represents a year over year increase of 14.6%. Net new business awards entering backlog in the 2nd quarter, which were influenced by higher cancellations, decreased 4.1% from the prior year to 551,000,000 dollars This resulted in a 1.04 net book to bill. Ending backlog as of June 30, 2024 was approximately $2,900,000,000 an increase of 13.7% from the prior year.

Speaker 3

We project that approximately $1,585,000,000 of backlog will convert to revenue in the next 12 months. And backlog conversion in the 2nd quarter was 18.2% 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 2024. Kevin?

Speaker 4

Thank you, Jesse, and good morning to everyone listening in. As Jesse mentioned, revenue was $528,100,000 in the Q2 of 2024. This represented a year over year increase of 14.6%. Revenue for the 6 months ended June 30, 2024 was $1,040,000,000 and increased 16.1 percent. EBITDA of 112.3 increased 34.2% compared to $83,600,000 in the Q2 of 2023.

Speaker 4

Year to date EBITDA was $227,900,000 and increased 29.1% from the comparable prior year period. EBITDA margin for the 2nd quarter was 21.3% compared to 18.1% in the prior year period. Year to date EBITDA margin was 21.9 percent compared to 19.7% in the prior year. EBITDA margin benefited from direct service activities, continued productivity and foreign exchange. In the Q2 of 2024, net income of $88,400,000 increased 44.7% compared to net income of 61,100,000

Speaker 3

dollars in the prior year period.

Speaker 4

Net income growth ahead of EBITDA growth was primarily driven by higher EBITDA and interest income, partially offset by a higher effective tax rate in the quarter. Net income per diluted share for the quarter was $2.75 compared to $1.93 in the prior year period. Regarding customer concentration, our top 5 and top 10 customers represent roughly 22% and 29%, respectively, of our year to date revenue. In the second quarter, we generated $116,400,000 in cash flow from operating activities and our net days sales outstanding was negative 58.1 days. We did not repurchase any shares during the Q2.

Speaker 4

As of June 30, 2024, we had $510,900,000 in cash $308,800,000 remaining under our share repurchase authorization program. Moving now to our updated guidance for 2024. Full year 2024 total revenue is now expected in the range of $2,125,000,000 to $2,175,000,000 representing growth of 12.7 percent to 15.3 percent over 2023 total revenue of 1,89,000,000 dollars Our 2024 EBITDA is now expected in the range of $430,000,000 to 460,000,000 dollars representing growth of 18.6 percent to 26.9 percent compared to EBITDA of $362,500,000 in 2023. We forecast 2024 net income in the range of $361,000,000 to $383,000,000 This guidance assumes a full year of 2024 effective tax rate of 15% to 16%, interest income of 24,000,000 dollars 32,100,000 diluted weighted average shares outstanding. There are no additional share repurchases in our guidance.

Speaker 4

Earnings per diluted share is now expected to be in the range of $11.24 to $11.93 Guidance is based on foreign exchange rates as of June 30, 2024. With that, I will turn the call back over to the operator, so we can take your questions.

Operator

Thank Our first question comes from the line of Eric Coldwell with Baird. Your line is open.

Speaker 5

Thank you. Good morning. I wanted to obviously dive into the cancellations. I was hopeful you could provide maybe some more details around perhaps the number of cancels or maybe relative sizing? Were there any that were particularly large here?

Speaker 5

And I'm curious if there's any way you could help us frame your expectations for the 3Q cancellations experience or what you're expecting at this juncture for a reasonable net book to bill range, given that some of these cancels are for awards that had not previously been placed into backlog? Thank you.

Speaker 2

Yes, sure. Hi Erik. This is August. It surprised me, usually, you have a big cancellation quarter, it's a couple drive things. And I don't think this was far off.

Speaker 2

It was several that were large, but it wasn't just 1 or 2 very large cancellations. So it was pretty distributed in that way, although some of the bigger ones do drive a lot of it. Again, they were kind of across the board in terms of what the rationale for the cancellation was and primarily that's kind of a reprioritization compound not meeting expectations, don't want to focus on other projects. And yes, is the cancellations are kind of on programs and there were cancellations that involve just sort of things that were awarded, but hadn't gotten the backlog, we were getting very close and things that were in backlog, but we didn't have all of the backlog recognized yet under our policy. So it does cause kind of a gap there that will impact our Q3 bookings.

Speaker 2

But But that depends upon the continuation of cancellations. They were kind of focused in Q2. I don't see a reason why they should continue elevated, but I also don't have a good rationale for why they why we have cancellations that are twice kind of a run rate in the Q2. So I think cancellations are always kind of that unknown and can happen at any point. We have reasonable visibility on awards coming along and awards looked good and that we're getting to the point of backlog recognition.

Speaker 2

It was the cancellations that caught us by surprise and they always can in another quarter. But yes, we already see a challenged Q3 based on the cancellations that we had in Q2 that will impair your recognition of backlog from projects that were canceled now.

Speaker 5

I realize it's very difficult to forecast the remaining cancellation experience this quarter as well as your gross bookings experience this quarter. But just to help level set, are you at least at this point initially thinking a book to bill that is similar to 2Q's experience, something maybe a little better, but not quite in that typical 1, 2 plus zip code? Or are we talking to book to bill that could, at this juncture could reasonably look like something lower than 2Q's experience?

Speaker 2

Well, look, in early June, I thought we're going to have a booking a book to bill of at least 1.2. So it's late in the quarter that you really kind of round things out and know where they are. So that's really difficult to say. I would hope it's above the current quarter. I think a 1.2 is probably not in the cards.

Speaker 2

But so I think you're kind of setting in that kind of range is where I would expect somewhere like we booked this current quarter 1.04 to hopefully getting closer to the 1.2. Percent.

Speaker 5

Okay. Thank you very much. I'll let others jump in. Thanks.

Operator

Thank you. Please standby for our next question. Our next question comes from the line of Max Mach with William Blair. Your line is open.

Speaker 6

Hi, good morning. Thanks for taking our questions. Maybe one here for me on Win rate. You mentioned you had some cancellations that were associated with an acquisition where the sponsor ended up moving some, I think you said work to a larger player. And you mentioned gross bookings seemed solid in the quarter, but any sort of update you can give us around how much of the booking shortfall, if any, was tied to maybe a step down in win rate?

Speaker 6

And did you see any sort of improvement in win rate after the bit a step back that you took in the Q1 here?

Speaker 2

No. The win rate was good, not outstanding, but it came back, snapped back from it was down a bit in Q1. It was the business environment again looks very good. I really think we're in a position to rebuild kind of that pipeline nicely. It's we kind of got a little bit of gap here, but I don't see a long term issue and I we are our win rate is good, our opportunities are good.

Speaker 2

I think it's hard look, CEOs are always optimistic. I really am I'm not the kind of guy who tends to put a lot of fluff into it, but things really do look a lot stronger than this unfortunate bookings reflect.

Speaker 6

That's helpful. Maybe just putting some more color on that to kind of frame out what you're seeing on the business environment. Can you give us an update on how RFP flows and initial awards in 2Q trended? And then any sort of initial look, I guess, at how these metrics are trending so far here in the Q3?

Speaker 2

Yes. Our RFPs were strong. I think they were up about 16% both sequentially and year over year. So it was really strong. We have and again RFP numbers, I never I don't like discussing numerically because numerically isn't a good way to discuss RFPs because you can have lousy RFPs and a lot of rehashed RFPs and a lot of searching for funding RFPs to support them trying to line up things when it looks unlikely that the project is going to go forward.

Speaker 2

But we had very we have very good pipeline of RFPs. So I think if you look at kind of a if you qualified them or graded them, I think we're it's not only a numeric increase in RFPs, but the quality of RFPs. Again, our initial awards were strong in the quarter. And everything all the other metrics look good except cancellations. I mean, that's basically it.

Speaker 2

I mean, this is difficult always difficult. Cancellations are always there as a possible downside, but everything else looks good. And I think that things will normalize and we will get back on to backlog growth rate soon. But and look, we're going to put great growth numbers on GAAP basis in the meantime.

Speaker 6

Yes, absolutely. And maybe just sneak in one final one here for me. You talked about 3rd quarter bookings obviously going be depressed, maybe a step up off that 1.04. But is there any other detail you can give us on the timeline for book to bill to move back above 1.2 and what that means for 2025? I'm assuming the step up in revenue you called for is obviously off the table next year.

Speaker 6

But can you frame up the range of outcomes for how we should be thinking about revenue next year given your commentary about it taking some time to rebuild backlog?

Speaker 2

I think it's too early to talk about next year. And I think we will have kind of a view on that next quarter. And of course, we get to look at where things shake out and what it looks like. Like I said, we see in the next quarter, you kind of see what is lined up for possible getting across the line. Cancellations are always wildcard, but you can just kind of line up what is likely to get across the line.

Speaker 2

I think we'll have good, at least reasonable insight as things normalizing in Q4. We're still having a problem in Q4. I hope to be able to tell you that at the end of Q3, but I think it's a little bit too early to talk about the impact on 2025, except to say that I anticipate, I continue to anticipate better than industry growth and that we're going to continue to perform well. I do not think this is a prolonged pullback

Speaker 6

in anything. I mean, if

Speaker 2

it was awards and opportunities were drying up, that's a much more concerning situation. We've got some a group of projects that were removed, but I don't think that is predictive of the long term. I mean cancellations are random things and we've got an upswing. I just don't think that's a pattern that's going to continue.

Speaker 6

Thanks again for taking our questions.

Operator

Thank you. Please standby for our next question. Our next question comes from the line of Tucker Rimmer with Jefferies. Your line is open.

Speaker 7

Let me it might be Dave Windley with Jefferies. If you can hear me, can you hear me?

Speaker 2

We can hear you, Dave. We can hear you.

Speaker 7

Okay, great. Thanks. So wrong code number, sorry. A few questions. Thanks for taking my questions this morning.

Speaker 7

So the impact to bookings and backlog, you've guided revenue. I guess I'm wondering how we should think about revenue conversion in light of the fact that it sounds like some of these cancellations were either revenue generating or about to be revenue generating. How does that impact your near term revenue?

Speaker 2

Kevin, you want to

Speaker 8

take that?

Speaker 4

Yes. Dave, this is Kevin. Just in terms of 2024, we do feel pretty good about it. Certainly, there's a little bit of headwinds associated with some of those canceled. We'll see how those programs kind of tail off and finish up.

Speaker 4

But we still feel good about revenue. Now we did take the midpoint of the guidance and the guidance range down a little bit. That was more indicative of the pass through activity and the decline that we saw in the Q1, it did bounce back a bit in the Q2. But at the same time, it wasn't something that we could overcome the decline that we saw in the Q1. But no, we feel good about revenue kind of the balance of the year, in particular on direct service side.

Speaker 4

Again, there was a bit of headwind associated with these cancels, but still feel good about where we are.

Speaker 9

Okay.

Speaker 7

On the pipeline, I guess a couple of things that we've heard a little bit and not been sure exactly how much credit to put on them are that oncology as a therapeutic area is perhaps among the most volatile right now, perhaps more jockeying around of programs and intentions in that space that has been highly invested and kind of crowded. And then we also hear that there's quite a bit of price competitiveness. And I think we talked about some one off kind of deep discount deals by some of the bigger CROs that you had seen in the Q1. I'm wondering, if you're seeing more of that. It sounds like win rate bounced back up.

Speaker 7

So that's encouraging relative to that. But on those two fronts, is there any theme in oncology specifically and is there a theme of large players being more price competitive?

Speaker 2

In terms of our cancellations, they were not overly concentrated in oncology relative to our overall oncology. I mean, I don't think. I don't have the exact numbers whether percentage wise, but oncology is obviously a big part of our work and it was a big part of the cancellations. But I'm not really sure if that's a factor. Pricing overall, look, it's a competitive market.

Speaker 2

We have seen some cases of very aggressive looking for things given the environment we're coming out of. Actually think things are a lot better now, but a few quarters back, things were a lot tighter I think for a lot of groups and there was some maybe aggressive pricing. But it's really not, I think, a driver of things now.

Speaker 7

Okay. Last question for me. Your headcount growth in the Q1 was I think lower than expected in this quarter. It's basically flat. I mean that's certainly you've talked about some productivity initiatives, but I'm guessing that those don't preclude any hiring at all or net hiring at all.

Speaker 7

So how should we think about kind of the margin increase that you're showing in the guidance today? I'm sure positively influenced by the lack of hiring and the sustainability of that when this growth resumes and you have to resume the hiring front? Help us with your hiring thoughts.

Speaker 3

Yes, David, it's Jesse. Yes, I mean, we're still expecting hiring. The retention has continued to be good. Productivity has been good, good efficiency. But we do anticipate some kind of mid perhaps mid to low mid single digit net headcount growth for the year.

Speaker 3

So still hiring despite the cancellations and despite continued productivity and efficiency.

Speaker 7

Okay. And so that hiring you anticipate for the balance of the year and that's baked into the most of your margin can absorb that and still go up as you're guiding?

Speaker 2

It is baked into the guidance.

Speaker 3

Okay. Thank you.

Operator

Thank you. Please standby for our next question. Our next question comes from the line of Dan Leonard with UBS. Your line is open.

Speaker 10

Thank you. I have a follow-up to that last question. Is the muted hiring in the quarter, was that reflective of any countermeasures you took in response to the weaker bookings? Or was that consistent with your plan?

Speaker 3

Hey, Dan, primarily consistent with plan. The cancellation came very late in the quarter and at the elevated level and we are continuing to hire, kind of according to plan through the quarter.

Speaker 10

And then separately, that acquisition of a customer by large pharma, was that a trial that was already in flight? Because I know that moving that type of work would be unusual. Could you clarify that and also clarify whether that was the biggest factor in the elevated cancellations or just one of many?

Speaker 2

That was just one of many. And the project was very early, but near running near significant revenue. So it was late in the pipeline should have been was in backlog. So it was already was running in the field. So had patients being recruited, but it wasn't fully it wasn't very broadly operationalized yet.

Speaker 10

And then final question. I'd love to be able to better quantify the impact of the double of cancellation rate compared to typical. Can you remind me what is the normal cancellation rate, so I could do my own math on doubling that?

Speaker 2

Yes. Well, we've talked about that our cancellation rates, Steve, normally run below 4.5%.

Speaker 9

Thank you very

Speaker 4

much. Thanks, Dan.

Operator

Please standby for our next question. Our next question comes from the line of Anne Hynes with Mizuho Securities. Your line is open.

Speaker 11

Hi, good morning. I know you made a comment that cancellations got worse in June. Can you give us an update on what's happening in July since it's later in the month? My second question is just around the RFP activity. I believe you said RFP activity is up 16% year over year.

Speaker 11

Is that just actual RFPs or does that represent in a revenue term? So if it doesn't, can you tell us from a revenue perspective that the total RFP activity up year over year, that'd be great. Thanks.

Speaker 2

So, yes, I don't have numbers on the actual dollar value of the RFP, but that's what we're talking about in percentage terms, percent of dollars. So, 16% up means dollar value of the RFPs responded to in the quarter were up 16%. We're not disclosing the actual dollar value, but those are dollar value. We don't talk about numbers unless I specifically call that out. We don't really think that's relevant.

Speaker 2

And then you asked about cancellations

Speaker 11

In July,

Speaker 2

in July. Yes, today. Nothing unusual, not like in June. So no, no unusual activity in July.

Speaker 11

And then maybe we can just talk about EBITDA. Obviously, your EBITDA guide despite the book to bill was very strong.

Operator

Can you just

Speaker 11

talk about the drivers of that? That'd be great as well. Thanks.

Speaker 4

Yes. I mean, it's continued good progression in our direct service activity. As we've kind of mentioned previously, just improved continued improved productivity that we're seeing on existing staff and somewhat slower hiring in the second quarter. Again, as Jesse had mentioned, we do think that we'll end the year kind of mid single digits, mid to low single digits for the year. And so that might pick up in the balance of the year.

Speaker 4

And we had a little bit of FX benefit in the quarter as well from the strengthening of the dollar.

Speaker 11

Thanks.

Operator

Thank you. Please standby for our next question. Our next question comes from the line of Charles Rhyee with TD Cowen.

Speaker 3

Cowen.

Speaker 8

I wanted to ask in terms of maybe in terms of the guidance, right, with the cancellations and sort of the step down the backlog, maybe first if you how much of the backlog reduction is a function of pass through revenue versus maybe direct service revenue?

Speaker 4

Yes.

Speaker 2

I guess we're both percentage of direct versus indirect cancellation, we don't.

Speaker 3

I can tell you the percentage of the quarter cancellations that were passed through was around 50%, 55%.

Speaker 8

Okay. And is that kind of and then we kind of back into that in for backlog as well in terms of reduction there. Is that a good proxy?

Speaker 4

In terms of the what, Charles?

Speaker 8

When we look at the backlog reduction, because I guess

Operator

the question I'm trying to

Speaker 8

ask is, if we think about the burn rate and reaching the revenue guide for this year, obviously, because it seems like if it's more pass through, is that a function of why the EBITDA guide remains actually has gone up? And instead, when we think about getting to the $2,000,000,000 plus in the revenue guide, should we expect a material uptick than in the burn rate because we're really just taking out on service revenue, which would have been more stable anyways?

Speaker 4

Yes. I think what you will see is probably somewhat of an increase in the burn rate, the balance of the year in light of the cancellations. And as I had mentioned earlier in the call, the reduction in the revenue guidance is primarily related to pastures, both in terms of the reduced pass throughs that we saw in the Q1, but then also the cancellations to which Jesse pointed out a little bit heavier on the pass through on those cancellations than direct.

Speaker 8

Okay. And I guess just overall, obviously, we had a very strong funding quarter in the Q1 for Biotech, still overall decent second quarter and when you look at the first half, very strong relative to prior year. Is that funding yet to translate through? You kind of mentioned that without the cancellations, are looking at a book to bill of 1.24. Are you would you say that from a gross bookings perspective, we are seeing this funding flow through or is that still do you think yet to come in terms of activity?

Speaker 2

I think the business environment remains is strong and is going to remain strong. I don't know about what's flowing through where, but the business environment is strong. I think we will replenish our pipeline of projects that are converting into backlog. And of course, anything that gets to backlog, it tends to burn direct faster than indirect. And so cancellations tend to have a higher percentage of indirect to direct when they cancel.

Speaker 2

But I think the environment is going to keep up and we'll replenish our pipeline. But I don't know about what funding what funding is tied to what opportunities, etcetera.

Speaker 8

Okay, great. If I could just sneak one more, just in the cancellation you mentioned one was due to an acquisition client getting acquired by a large pharma client that moved that business. Can you kind of help size relative to overall cancellations how much of the cancellations was related to that?

Speaker 2

No, but it wasn't it was not most of the cancellation or anything like that. It was a size of cancellation, but not one of the larger ones, but not overwhelmingly driving it.

Speaker 8

Okay. That's great. Thanks a lot.

Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Jack Wallace with Guggenheim Securities. Your line is open.

Speaker 9

Hey, thanks for taking my questions. Wanted to just ask kind of a broader question about the cancellation related to the M and A event. Just looking back in your company's history as we the biotech industry has gone through cycles of higher M and A, Have you typically lost most of those clients when they've been acquired by a larger pharma? Have you been able to maintain a decent amount of the business post acquisition? Thank you.

Speaker 8

Yes.

Speaker 2

Losing a project that is in backlog and running in the field is highly unusual. So that was the reason I mentioned it. That's like it almost never happens. But losing the future work from that client is very frequent. So if they get acquired by large pharma, usually they bring it into their systems And we're cut out for future work, but it's very rare that they pull a study that is actually started and decide to move it.

Speaker 2

So that was very unusual.

Speaker 9

Got it. Yes, thank you. That's helpful. And then just thinking about the competitive environment, have you seen any just change in posture activity from some of your larger CROs coming down market a bit? And just kind of another kind of question there around pricing, which types of competitive actors have been most aggressive on price or have been most formative in terms of how they're attacking the new business?

Speaker 9

Thank you.

Speaker 2

Yes. No, that would be largely kind of anecdotal. I think the competitive environment remains much the same. I don't see a big change there. Certainly as most of our competition is larger players and by and large.

Speaker 2

So I don't really see a change in that overall dynamic. I think there was a time when a few quarters back when things I think were much worse in terms of funding environment and there was maybe a little bit more talk about competitive pricing and some of our larger competitors making some very aggressive moves possibly, but I think the environment is relatively normalized in a competitive environment.

Speaker 9

Got it. Thank you.

Operator

Thank you. Please standby for our next question. Our next question comes from the line of Justin Powers with Deutsche Bank. Your line is open.

Speaker 12

Hi, good morning everyone. Can you remind us of your backlog policy and the gist of the question is trying to understand your visibility on the 3Q bookings as you enter into 2Q? In your prepared remarks, you made some comments based on what's coming in out of backlog and how that would impact 3Q?

Speaker 4

Yes. Justin, this is Kevin.

Speaker 3

Go ahead, Kevin. Sorry.

Speaker 4

Just in terms of our backlog policy, there's a couple of criteria that have to be in place or gating items that have to be in place before it's put in the backlog. There can't be any regulatory hurdles that are still pending. The program has got to be ready to get started and actively recruiting patients. There can't be any funding issues. So there's got to be clear line of sight to funding and where that funding is going to come from before we'll put that into backlog.

Speaker 4

And so those programs that we do put in the backlog, they are starting to actively generate revenue relatively shortly after we put those programs in the backlog. And so a cancellation out of backlog does have a nearer term impact on revenue, depending on how those programs wind down and finish out. But as August mentioned as well, there were some cancellations that happened for programs that were awarded that were not yet in backlog and how that this funnel of opportunities eventually convert into in the backlog and new awards, it remains to be seen. We do have to continue to fill up that pipeline and fill that gap. And as August had mentioned, Q3 is potentially going to be a little bit light as we kind of fill up that pipeline.

Speaker 2

Okay. So you were in

Speaker 3

And on top of that, the other criteria for backlog recognition is we only put the 1st 3 years of a project into backlog and then the balance beyond 3 years kind of bleeds in over time as quarters progress. And so some of those active backlog cancellations also had a portion that was straddling backlog and also some pre backlog that would then impact future quarters like Q3 and beyond.

Speaker 12

Okay. So cancellations is not

Speaker 2

like just to give you a little bit of more also to address your question directly on kind of our visibility on it. Sometimes things are awarded and don't get to backlog for quite a long time. And it may be because they're out looking for funding and it looks like they're lining things up and they're going to start things and or it could be we're doing some early start up kind of but on hold for the rest of the project because they don't have funding. And you're kind of ready to run forward as soon as they close on funding. And it might be it looks like it's coming in the next quarter.

Speaker 2

It looks like they've raised the money. They're going to go give us the green light. We're going to move forward. So you do have quite a bit of stuff that's in that hold pattern that could be pulled or could go forward into the quarter.

Speaker 12

Okay, that's helpful. Understood. So there were of the cancellations, there were some that were in backlog and some that were not in backlog in the current period, but you were anticipating going into backlog into 3Q. Okay. All right.

Speaker 12

And then just okay. And then in terms of hiring, you've had some productivity measures, right? It sounds like this year. What's the new is there sort of a rule of thumb or back of the envelope way for us to think about hiring on the go forward based on some level of revenue growth now that you've instituted some of these productivity programs? And just like for example, for every 10% of revenue growth, there's going to be a 4% growth in FTEs.

Speaker 12

Sort of the gist of the question?

Speaker 3

Yes, Justin, it can be volatile. I mean, it can depend from time to time where we are with people versus near term revenue. We're looking at the funnel, we're looking at the pipeline, we're estimating staffing needs on an ongoing basis, trying to determine how much of a buffer do we have? Are we sitting on some excess capacity? Or have we gotten to too high of a utilization level where we need to aggressively hire and catch up from time to time?

Speaker 3

And so over time, it really depends on kind of how those 2 sit, how revenue projection sits versus staffing needs. We have been fortunate, as we've mentioned, lately in terms of good retention and low turnover, which has been kind of reducing the needs for more gross hiring. But kind of how that progresses, how the rate of hiring progresses versus the revenue rate as we move through into 2025 will largely be dictated by how the pipeline shapes up and how the award and then revenue growth looks as we move into the year.

Speaker 12

Okay. Appreciate it. I'll take the rest offline.

Operator

Thank you. We have a follow-up question from the line of Eric Coldwell with Baird. Your line is open.

Speaker 5

Thanks very much. Last quarter, you did mention still a 1.2 book to bill, but you did mention higher cancels in Q1. And obviously, some of these cancels did impact 2Q to a limited amount. I'm curious if you could tell us the impact of year to date heightened cancellations, if that makes sense, on 2Q's revenue?

Speaker 2

I don't think Eric wrote that out.

Speaker 9

Right.

Speaker 4

And while they were somewhat elevated in Q1, Eric, it wasn't significant enough that it had a major impact on Q2. And as August mentioned, Q2 cancellations were primarily in June, the elevation that we saw was in June.

Speaker 5

So probably not more than say $1,000,000 $2,000,000 at the most, correct? Is that a fair

Speaker 4

I don't know, Eric. I mean, like August said, we didn't quantify it, but not a significant amount.

Speaker 5

Yes. What I'm trying to get to here is, let's call this in the zip code of $100,000,000 to $110,000,000 incremental abnormal cancels in 2Q, you would have had $655,000,000 of net awards at a $124,000,000 book to bill, you did $551,000,000 So zip code of 105. You said the pass through or indirect cancels were somewhat disproportionate 50% to 55% of the total. So I'm thinking $50,000,000 give or take $50,000,000 of direct fee cancellations that were deemed as abnormal this quarter. Your backlog is 3 years, that's 12 quarters.

Speaker 5

I take $50,000,000 I divide by 12. I'm coming up with something like $4,000,000 a little over $4,000,000 a quarter of revenue impact on the direct fee side and maybe closer to $5,000,000 on the indirect fee side. If the duration of all of these cancels were equally split across the next 3 years, which obviously is not going to be the case and you would have a tail beyond the 3 years you put in backlog. But directionally speaking, if I do that, I'm coming up with about $9,000,000 a quarter of revenue headwind. You get to something like $17,000,000 $18,000,000 for the year, you cut guidance by $25,000,000 I'm just trying to understand if that's directionally the theme on why you're cutting revenue by a little over 1%.

Speaker 5

Is the thought process behind that the correct thought process? Or do these cancellations truly skew more to the 1st the next 12 months? Or are they in fact more balanced? I'm just trying to get a dynamic on how we start you're not going to guide 25, but we need to start thinking about it. So trying to get a sense on where we go with our models here.

Speaker 2

I was just going to say, I what your math sounds fine. I don't really think that's how we're doing our projections is based on what it looks like we lost this out of it and therefore it's going to come down by this amount. I mean it's kind of a buildup of everything going forward again. And so we just don't quantify the amount that was lost, but your calculations are probably true. There would have been an upside.

Speaker 2

I mean, I think the bigger thing we've seen is a drop off in some of the pass through expenses that maybe had an impact on revenue. Now we would have had an upside. We probably would have beat revenue if we hadn't had cancellations. And cancellations sometimes remembered aren't always immediate revenue ceases at that moment. It just means they cease over the next quarter possibly or whatever.

Speaker 2

So it may not even impact the current quarter, and it may be farther out. Sometimes it's 2 quarters out that the drop off in all of the revenue from that project is for a backlog cancellation. AIS, something that isn't in backlog yet, that can affect, but generally, the next quarter, the few several quarters, whatever, going forward. But yes, I mean, you're right. It's a big headwind to revenue overall.

Speaker 5

Yes. And thank you for all of that. And I think ultimately what I was trying to get to is if there hasn't been much impact to date and I was asking my follow-up question was, how do the cancels impact the next couple of this quarter or the next quarter or 2 from transitory events as you wind those down? Do you get wind down payments, etcetera. I was just trying to get a sense if there was anything more built into the $25,000,000 revenue reduction because again very simple and arguably very incorrect math would get us to something like $17,000,000 $18,000,000 impact for this year And that would be before including potential wind down payments or some of these cancels that may have a few months left in their life in 3Q.

Speaker 5

And so I'm just trying to get a sense on if you quite frankly, if you built in some extra cushion with the $25,000,000 or if I'm just thinking about it wrong.

Speaker 4

Eric, I mean, as always mentioned, I think you're thinking about it right logically that there is some headwind there. Now in terms of quantifying it, that's a bit of a challenge. But as I had mentioned, the lowering of the revenue range is really twofold. It's number 1, it's the lower pass through activities that we saw in the first half of the year, in particular the Q1. As I had mentioned on the Q1 call with those reimbursables coming in lower, I expected it to potentially be on the lower side of the range.

Speaker 4

And just kind of with the rebounding in the Q2, but maybe not as much as I had anticipated, that's part of it. And then the other piece of it's going to be the headwinds on these cancellations. It's going to be a combination of the 2, if that's helpful.

Speaker 5

Okay. Yes, it is. Thank you.

Speaker 8

Okay.

Operator

Thank you. Please standby for our next question. We have a follow-up question from the line of Dave Windley with Jefferies. Your line is open.

Speaker 7

Thanks. Following up on Eric's line of questioning on the pass through. So Kevin, the last part of your answer that you just gave, my recollection is that, as you described, Q1 was low on pass throughs. And but your expectation was that it would still jump back up and run at about a 38% similar to last year, 38% of total revenue level. I could be wrong in not remembering something about the lower end, but remember 38% of total revenue similar to last year.

Speaker 7

It sounds like what you're saying today is that is trending lower than that. So some of this is a reset of expectations around pass throughs. So, I guess confirm that, put magnitude on it if you could, 38 drops to what? And then how where's the point of stabilization? Several years ago, it was 33%, 34%.

Speaker 7

It got up to 38% and change last year. Where is that going?

Speaker 4

Yes. I mean, Dave, nothing's changed in terms of our ability to predict where it's going to go. Certainly, as I mentioned in the Q1, I do expect it to increase and it did in the second quarter. I think we finished it like 38.4 percent of revenue in the 2nd quarter. And so it did rebound from the Q1 and modeling would suggest that it's going to be at or slightly above these levels for the balance of the year.

Speaker 4

We'd like to see how it finishes out, but that's kind of what the modeling would suggest at this point in time. And we'll try to provide more color in the Q3 call on 2025 here.

Speaker 7

So like just as a general statement, you don't have a view as to whether it feels like there's a little post COVID inflation rate at the sites and things like that. And is that normalizing and maybe we're headed back over the long term to something like 34 instead of 38?

Speaker 4

In the long term, I don't know. I mean, I don't know that it's going to go back to those historical levels. It probably will trend back to those levels. But again, I'll provide more color on 2025 and Q3.

Speaker 7

Okay. Last question for me. Balance sheet is now at $500,000,000 Can you talk to us about your intent for use of the balance sheet, please? Thanks. Yes.

Speaker 7

I mean, Dave, more kind of

Speaker 4

of the same. We'll continue to invest in the organic growth of the business. That's going to be our first priority. We do have some elevated capital expenditures that will happen here as we expand the campus, as I had mentioned previously. But beyond that, you really it's just continue to look for opportunistic share repurchases.

Speaker 4

And to the extent that we're able to trigger at levels that we see valuable, we'll go ahead and get those executed. And if not, we're okay building some levels of cash.

Speaker 7

Great. Thanks for taking my extra questions.

Speaker 4

Thanks, Dave.

Operator

Thank you. Ladies and gentlemen, I'm showing no further questions in the queue. I would now like to turn the call back to Lauren for closing remarks.

Speaker 1

Thank you for joining us on today's call and for your interest in Methase. We look forward to speaking with you again on our Q3 2024 earnings call.

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Medpace Q2 2024
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