Medpace Q4 2024 Earnings Report

Medpace EPS Results

• Actual EPS: $3.67
• Consensus EPS: $2.96
• Beat/Miss: Beat by +$0.71
• One Year Ago EPS: N/A

Medpace Revenue Results

• Actual Revenue: N/A
• Expected Revenue: $534.99 million
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Medpace Announcement Details

• Quarter: Q4 2024
• Date: 2/10/2025
• Time: After Market Closes
• Conference Call Date: Tuesday, February 11, 2025
• Conference Call Time: 9:00AM ET

Medpace (NASDAQ:MEDP) engages in the provision of outsourced clinical development services to the biotechnology, pharmaceutical and medical device industries. Its services include medical department, clinical trial management, data-driven feasibility, study-start-up, clinical monitoring, regulatory affairs, patient recruitment and retention, medical writing, biometrics and data sciences, pharmacovigilance, core laboratory, laboratories, clinics, and quality assurance. The company was founded by August James Troendle in 1992 and is headquartered in Cincinnati, OH.

Medpace Q4 2024 Earnings Call Transcript

Presentation

[Operator]

Good day, ladies and gentlemen, and welcome to the Medpace Fourth Quarter and Full Year twenty twenty four Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' remarks, there will be a question and answer session. As a reminder, this call is being recorded. And now I'd like to introduce your host for today's conference call, Lauren Morris, Medpace Director of Investor Relations.

[Operator]

You may begin.

[Lauren Morris, Director-Investor Relations at Medpace]

Good morning, and thank you for joining Medpace's fourth quarter and full year twenty twenty four earnings conference call. Also on the call today is our CEO, August Trundle 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.

[Lauren Morris, Director-Investor Relations at Medpace]

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.

[Lauren Morris, Director-Investor Relations at Medpace]

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

[August Troendle, Chairman & CEO at Medpace]

Thank you, Lauren. Good day. Backlog cancellations in Q4 were within our normal range. Our book to bill ratio was 0.99, influenced by prior pipeline cancellations as well as the delay of some projects previously expected to enter backlog. RFPs were down slightly in Q4 compared to Q3 as the overall business environment weakened somewhat, but remained up relative to Q4 twenty twenty three.

[August Troendle, Chairman & CEO at Medpace]

For the 2024 calendar year, backlog increased 3%. However, total awards and outstanding unperformed work, considering both backlog and pre backlog awards, was down slightly. This reflects the high level of cancellations we experienced in 2024. All this provides a challenging backdrop to growth in 2025. Assuming cancellations remain in our historical range and the business environment does not continue to deteriorate, we remain hopeful that we can achieve growth in bookings with a book to bill ratio above 1.15 in the second half of the year.

[August Troendle, Chairman & CEO at Medpace]

Revenue growth for 2025 is expected to be in the low single digits. I will now turn things over to Jesse for comments on Q4.

[Jesse Geiger, President at Medpace]

Thank you, August, and good morning, everyone. Our revenue in the fourth quarter of twenty twenty four was $536,600,000 which represents a year over year increase of 7.7% and full year 2024 revenue was $2,110,000,000 an 11.8% increase from 2023. Net new business awards entering backlog in the fourth quarter decreased 13.8% from the prior year to $529,700,000 dollars resulting in a 0.99 net book to bill. For the full year 2024, net new business awards were $2,230,000,000 a decrease of 5.4% and ending backlog as of 12/31/2024 was approximately $2,900,000,000 an increase of 3.2% from the prior year. We project that approximately $1,630,000,000 of backlog will convert to revenue in the next twelve months and backlog conversion in the fourth quarter was 18.3% of beginning backlog.

[Jesse Geiger, President at Medpace]

Now with that, I will turn the call over to Kevin to review our financial performance in more detail and discuss our 2025 guidance. Kevin?

[Kevin Brady, CFO at Medpace]

Thank you, Jesse, and good morning to everyone listening in. As Jesse mentioned, revenue was $536,600,000 in the fourth quarter of twenty twenty four. This represented a year over year increase of 7.7%. Full year 2024 revenue was $2,110,000,000 and increased 11.8 in 2023. EBITDA of $133,500,000 increased 39.3% compared to $95,800,000 in the fourth quarter of twenty twenty three.

[Kevin Brady, CFO at Medpace]

Full year EBITDA was $480,200,000 and increased 32.5% from the comparable prior year period. EBITDA margin in the fourth quarter was 24.9% compared to 19.2% in the prior year period. Full year EBITDA margin was 22.8% compared to nineteen point two percent in 2023. EBITDA margin for the quarter and for the full year were favorably impacted by reimbursable costs, which decreased by 400 basis points and 180 basis points respectively from the comparable prior year periods. EBITDA margin also benefited from direct service activities and productivity on slower headcount growth.

[Kevin Brady, CFO at Medpace]

The fourth quarter saw additional benefit from foreign exchange behind the strengthening of the U. S. Dollar in the quarter. In the fourth quarter of twenty twenty four, net income of $117,000,000 increased 49.5 percent compared to net income of $78,300,000 in the prior year period. For the full year 2024, net income was $404,400,000 compared to $282,800,000 in 2023, which represents a 43% increase.

[Kevin Brady, CFO at Medpace]

Net income growth ahead of EBITDA growth was driven by interest income and a lower effective tax rate. Net income per diluted share for the quarter was $3.67 compared to $2.46 in the prior year period. For the full year 2024, net income per diluted share was $12.63 compared to net income per diluted share of $8.88 in 2023. Regarding customer concentration, our top five and top 10 customers represent roughly twenty two percent and twenty nine percent respectively of our full year 2024 revenue. In the fourth quarter, we generated $190,700,000 in cash flow from operating activities and our net day sales outstanding was negative seventy one days.

[Kevin Brady, CFO at Medpace]

As of 12/31/2024, we had $669,400,000 in cash. During the fourth quarter and full year 2024, we repurchased approximately 527,000 shares for $174,200,000 At the end of the quarter, we had $134,600,000 remaining under our share repurchase authorization program. Moving now to our guidance for 2025. Full year 2025 total revenue is expected in the range of $2,110,000,000 to $2,210,000,000 which represents flat to 4.8% growth over 2024 total revenue of $2,110,000,000 Our 2025 EBITDA is expected in the range of $462,000,000 to $492,000,000 representing a decline of 3.8% to growth of 2.5% compared to EBITDA of $480,200,000 in 2024. We forecast 2025 net income in the range of $378,000,000 to $4.00 $2,000,000 This guidance assumes a full year 2025 effective tax rate of 18% to 19%, interest income of $30,500,000 and $31,700,000 diluted weighted average shares outstanding for 2025.

[Kevin Brady, CFO at Medpace]

There are no additional share repurchases reflected in our guidance. Earnings per diluted share is expected to be in the range of $11.93 to $12.69 Guidance is based on foreign exchange rates as of 12/31/2024. With that, I will turn the call back over to the operator, so we can take your questions.

[Operator]

Certainly. And our first question for today comes from the line of Dan Leonard from UBS. Your question please.

[Dan Leonard, Managing Director - Research Analyst at UBS Group]

Thank you. A couple of questions. First off on the service gross margins in the quarter, I understand the pass through mix component. I was hoping you could elaborate on some of the other factors that drove the outperformance on that line, whether they be headcount related or otherwise?

[Kevin Brady, CFO at Medpace]

Hey, Dan, this is Kevin. It's really just the productivity of our existing staff and the programs that are in backlog progressing very nicely. And so it's really the kind of the second quarter that we've seen great progress on the direct service side.

[Dan Leonard, Managing Director - Research Analyst at UBS Group]

Okay. And then as a follow-up, what are the assumptions that would get you to the high end of your revenue guidance in 2025?

[Kevin Brady, CFO at Medpace]

Say that again, Dan, sorry.

[Dan Leonard, Managing Director - Research Analyst at UBS Group]

Yes. What are the assumptions that would get you to the high end of your revenue guidance in 2025?

[Kevin Brady, CFO at Medpace]

Yes. I mean, really just the business environment improving a bit and your programs that kind of are sitting in that pre backlog bucket progressing in the backlog as awards in those programs continuing.

[Dan Leonard, Managing Director - Research Analyst at UBS Group]

Understood. Thank you.

[Operator]

Thank you. And our next question comes from the line of Max Schmitt from William Blair. Your question please.

[Max Smock, Research Analyst - Healthcare at William Blair]

Hi, good morning everyone. Thanks for taking our questions. August, you mentioned the business environment deteriorated some over the last couple of months here. I guess my question is, are you surprised by that given the better funding environment that we saw in 2024? And what do you think is behind that deterioration?

[Max Smock, Research Analyst - Healthcare at William Blair]

Do you think it could just be some of these companies maybe taking a little bit of a pause to digest, I guess, some of the uncertainty caused by the election? Or is there something else going on that you would call out that is really driving that weakness?

[August Troendle, Chairman & CEO at Medpace]

Yes. I don't really have an explanation for it. And it was just a and this is a subjective thing. I think RFP flow was fine. It's the qualitative aspects of the type of size and type of projects we're getting and likelihood of them moving forward.

[August Troendle, Chairman & CEO at Medpace]

And I just thought it wasn't as quite as robust as what we've seen in the prior couple of quarters, which was really kind of accelerating and it seemed to decelerate some. And yes, I don't know if it's because of the election and just concerns about where things are going or what the situation is, whether it's going to turn around soon. But I did note that it wasn't as robust as it had been in the prior couple of quarters in terms of core business environment. Now cancellations on the other side have abated some. So there's kind of two sides to this environment and one is kind of new opportunities and that is maybe weakening a bit, but the cancellations were down in Q4 relative to the prior three quarters really.

[August Troendle, Chairman & CEO at Medpace]

So it was the first quarter of the year that we had kind of a closer to normalized cancellation rate, although I think the cancellations were still toward the high side. So cancellations improving, business environment may be just a little bit weaker, we'll have to see Q1.

[Max Smock, Research Analyst - Healthcare at William Blair]

Understood. Thank you for that helpful commentary. And then just following up on your comments about some of those delays. I think you called out a couple of projects that were expected to hit bookings in the quarter. Is there any color you can provide around what was behind that or those delays and how much visibility you have into those projects hitting bookings in the next couple of quarters here?

[Max Smock, Research Analyst - Healthcare at William Blair]

And then how do you think about the risk that those delays eventually turn into cancellations in the first half

[Max Smock, Research Analyst - Healthcare at William Blair]

of this year? Thank you.

[August Troendle, Chairman & CEO at Medpace]

Yes. I do expect those studies that I mentioned being delayed as progressing, just being a little bit slightly delayed, not greatly delayed. We do have some projects that are on longer kind of hold pattern. And there's always a risk that anything cancels. I can't edge that and cancellations are still top of my mind in terms of risks of us performing this year.

[August Troendle, Chairman & CEO at Medpace]

But I think that most of what was kind of pushed out of Q4, I think will hit here in the first half of twenty twenty five.

[Max Smock, Research Analyst - Healthcare at William Blair]

Understood. Thanks again for taking the questions. I'll hop back in the queue.

[Operator]

Thank you. And our next question comes from the line of Eric Caudwell from Baird. Your question please.

[Eric Coldwell, Senior Research Analyst at Baird]

Thanks very much. Good morning. I'm curious about the revenue phasing expectations through the year with a zero percent to 5% growth range. Are you anticipating a big drop off here in the beginning of the year and then a ramp towards the back half? Is it more linear through the year?

[Eric Coldwell, Senior Research Analyst at Baird]

And then what is the indirect revenue mix component or growth component? Is it down like you saw here in the fourth quarter and the deceleration we've seen over the last year, are you expecting it to stabilize at this percent of revenue go back up? What's the mix between direct and indirect fees, please?

[Kevin Brady, CFO at Medpace]

Yes. Eric, as it relates to the indirect, our modeling would suggest that 2025 as a percentage of revenue will be somewhere around where we landed in the fourth quarter here. So you're down from where we were in total year '24 at levels similar to what we saw in the fourth quarter here. What was the first part of your question?

[Eric Coldwell, Senior Research Analyst at Baird]

Phasing on revenue, the 0% to 5% range, are we starting at the low end and moving to a higher level in the back half? Is it more linear growth through the year? Just the thought process on timing the revenue production?

[Kevin Brady, CFO at Medpace]

Yes. It will somewhat depend on how those programs progress into awards throughout the year. Certainly, we've got a pipeline of those backlog opportunities. So I would expect there to be some linear progression throughout the year. I wouldn't expect a major step up in the first quarter here, but hopefully sequentially growing revenues throughout the year from there.

[Kevin Brady, CFO at Medpace]

But it will depend on how the bookings progress as well.

[Eric Coldwell, Senior Research Analyst at Baird]

And then if I could just squeeze in one more. Advanced billings, kind of an intriguing topic, doesn't get a lot of airtime, but you did show quarter to quarter increases in advanced billings 2Q, 3Q, 4Q. You finished the year with advanced billings up 27% year over year. I'm not quite sure what drove that and how that happens in a year where bookings were down, what, 5% plus and down 14% in the fourth quarter revenue slowed. What's keeping these advanced billings at such a high level and actually improving a little bit sequentially through the last three quarters?

[Kevin Brady, CFO at Medpace]

Yes. Good question, Eric. I mean, a lot of that is going to be timing based on the active programs that are in backlog and how those programs are progressing. I mean, you saw the nice growth rates that we've seen on the direct side of the business and we try to create payment schedules and milestone payments that kind of stay a bit ahead of the work that we're doing. And so a lot of it just timing related on how the mix of programs is going and our ability you have to bill according to that milestone those milestone payments and collect against us.

[Kevin Brady, CFO at Medpace]

As you know, we stay on top of kind of sponsors and credit and making sure that we're getting paid as we're doing the work.

[August Troendle, Chairman & CEO at Medpace]

Yes, fewer clients that are not paying us and we continue to work. Maybe that's it.

[Eric Coldwell, Senior Research Analyst at Baird]

Thanks very much.

[Operator]

Thank you. And our next question comes from the line of David Windley from Jefferies. Your question please.

[Dave Windley, Managing Director at Jefferies LLC]

Hi, good morning. Thank you for taking my questions. I wanted to focus on the cost side a little bit. I wondered when we were together in November, you talked about retention being at very high levels, much higher than historical norms, and that was leading to greater levels of productivity. I think the expectation was that it was probably at a peak and couldn't get much better.

[Dave Windley, Managing Director at Jefferies LLC]

Fourth quarter was better, and it seems like at least some of your margin expectation next year assumes that that continues. So I wondered if you could maybe provide a little bit more precision around the productivity levels of the staff and when you would anticipate or if you are anticipating kind of restarting hiring at any point during the twenty year or if the guidance basically assumes that staff continues to be relatively flat? Thanks.

[Jesse Geiger, President at Medpace]

Yes. Hey, David, it's Jesse. Yes, and in terms of productivity, it does remain, at a very high level. Good productivity continues, good retention continues, a lot of experienced staff just continuing to work diligently on projects. The headcount growth was fairly flat in 2024.

[Jesse Geiger, President at Medpace]

We do anticipate accelerating hiring here in 2025. So we are targeting at the moment headcount growth in the mid to maybe upper mid single digit level for the year. How that progresses throughout the year will be somewhat determined by what the business environment looks like and how that progresses. But we do anticipate hiring and kind of restarting the hiring engine a little bit more aggressively as we work through the year. And that will have likely a little bit of an impact on margins.

[Dave Windley, Managing Director at Jefferies LLC]

Got it.

[Kevin Brady, CFO at Medpace]

And Dave, just to build on that, we do expect new headwinds on margins if you look at the guidance that's out there. And the other thing to call out on the question I answered previously is, as it relates to the indirect and reimbursable costs, we do expect 2025 to be at a level similar to what we saw in the fourth quarter, which would mean that that as a percentage of revenue in $25,000,000 comes down a little bit.

[Dave Windley, Managing Director at Jefferies LLC]

Right. On

[Dave Windley, Managing Director at Jefferies LLC]

other cost actions, one of the things that I think you had talked about, I can't remember if it was last quarter or two quarters ago, is the beginnings of investment in offshoring, some back office functions, maybe data management, things like that. Where do those stand? And are some of the benefits of that activity beginning to show through in your financial expectations?

[Jesse Geiger, President at Medpace]

I don't think we're go ahead, August.

[August Troendle, Chairman & CEO at Medpace]

I was going to say, I still think it's early times, but go ahead, Jesse.

[Jesse Geiger, President at Medpace]

Yes. And I just said, we're just getting started there. I mean, that's more of a long term play there. We haven't really seen any of the positive impact of that just yet. We are continuing to hire in India in a couple of back office functions and administrative functions.

[Jesse Geiger, President at Medpace]

But I think any sort of tailwind that that creates or margin help will be some, but it won't be a major margin driver if you think about just the overall picture of margin profile. But it is a longer term play than more so than anything that we're expecting to materialize here in 2025.

[Dave Windley, Managing Director at Jefferies LLC]

Got it. And then last question for me is just I guess around competition. It kind of comes back to a bookings question, but I'm thinking about it more again from a margin sustainability standpoint. And what we hear in the market is, I know you would normally say that you typically see the bigger competitors, but it sounds like in the absence of a stronger demand environment broadly that they are moving down into what would be your more traditional space more aggressively. So I wonder if you're seeing that, and I would assume your reaction would be to not sacrifice price, but maybe August you could speak to that.

[August Troendle, Chairman & CEO at Medpace]

Sure. Look, I think the environment has tightened everybody's built some. I think clients are funding challenged frequently in our at least in our clients. And I think there is a heightened competition and pricing is a part of that. And I think you have to be as efficient as possible.

[August Troendle, Chairman & CEO at Medpace]

Certainly, we have to be competitive and bring value to the table and yes, price is part of that. And we've had to defend our volume as well as our margin.

[Dave Windley, Managing Director at Jefferies LLC]

Got it. That's helpful. Thank you very much.

[Operator]

Thank you. And our next question comes from the line of Jai Lendra Singh from Tuoh Securities. Your question please.

[Jailendra Singh, Managing Director at Truist Securities]

Thank you and good morning everyone. So going back to the comment around biotech slow decision making and delays etcetera, I understand it is tough to know what might be driving that. But based on your conversation with these companies, are there any key catalysts they're watching for before they're comfortable going forward with the project? And related to that, have you seen any signs that sponsors are putting pressure on these companies to put dollars into play? Because it seems like funding is not an issue.

[Jailendra Singh, Managing Director at Truist Securities]

And if that's the case, it could create some pent up demand in near term. Any thoughts on that?

[August Troendle, Chairman & CEO at Medpace]

Yes. I think for our clients funding is the issue. I can't speak to clients that have cash and just don't want to spend it. So yes, I just don't know. I mean, look, there's also things do take time and the clients that do have cash may not be ready with their IP to move forward for other reasons.

[August Troendle, Chairman & CEO at Medpace]

So I don't think I don't perceive a significant number of our clients holding on to cash despite they have a program that's ready to move forward and don't want to spend it. I just don't see that, but I don't know.

[Jailendra Singh, Managing Director at Truist Securities]

Okay. That makes sense. And then my follow-up on the RFP trends in the quarter being down slightly sequentially versus Q3. Can you just speak a little bit more to the quality of RFPs? Are you seeing customers kind of prioritizing research on drugs with more promising data on drugs in later stage trials or mix of RFPs and focus still pretty consistent?

[Jailendra Singh, Managing Director at Truist Securities]

And to that point, can you remind us where your mix is across Phase one to four?

[August Troendle, Chairman & CEO at Medpace]

Yes. Okay. So I think RFPs were okay in Q4. Q4 just tends to be a little bit lighter in general. So I think the volume, the dollar volume of RFPs was fine from my perspective.

[August Troendle, Chairman & CEO at Medpace]

So it was the qualitative side that I didn't think there was quite as many opportunities that looked promising in terms of size and likelihood of moving forward, etcetera. So a little bit more maybe churn in the RFP bucket than I would like. So that was kind of just like qualitative assessment, which is difficult to quantify. In terms of our breakout, Phase one through four, Phase one itself is a very small part of our business. We're talking about a couple percent, 1%.

[August Troendle, Chairman & CEO at Medpace]

It's if you talk about our CPU type operations now, generally other Phase 1s in oncology etcetera, you throw in with Phase two and three. That's the majority of the business and dollar numbers, Phase two and then the Phase three are somewhat comparable type of size of the business and we don't have a lot of very late phase type trials.

[Jailendra Singh, Managing Director at Truist Securities]

Great. Thanks a lot.

[Operator]

Thank you. And our next question comes from the line of Justin Bowers from Deutsche Bank. Your question please.

[Justin Bowers, Analyst at Deutsche Bank]

Hi, good morning everyone. Can you talk about the trends that you're seeing in your pre backlog awards and how cancellations are trending there? Is there similar pattern that you're seeing in the bookings or sort of in line above, below what you're seeing in the backlog?

[August Troendle, Chairman & CEO at Medpace]

I'm sorry, the cancellation and pre backlog?

[Justin Bowers, Analyst at Deutsche Bank]

The pre backlog awards, yes.

[August Troendle, Chairman & CEO at Medpace]

Okay. So our new award notification, you're just asking what the kind of volume was there?

[Justin Bowers, Analyst at Deutsche Bank]

Volume was and then are you seeing is there any divergence in the cancellations there versus what you're seeing in your net business, right? Okay.

[Justin Bowers, Analyst at Deutsche Bank]

For the renewal backlog.

[August Troendle, Chairman & CEO at Medpace]

And then kind of that awards that have been awarded awards that we have that are not yet in backlog. Yes, so I think the flow is still okay. Again, I think that the business environment did soften a little bit in Q4, but our win rate was fine. And so I think that things moving into our kind of awarded but not backlog yet is still looking okay and good enough to kind of get where we want to get second half of this year if everything else remains the same. Cancellations came down both across the portfolio, so both in more into our normal range for backlog cancellations as well as a reduction in our cancellations in that pre backlog kind of phase.

[August Troendle, Chairman & CEO at Medpace]

So those came down quite a bit also and they were actually the bigger part of cancellations in 2024 and drove most of our booking difficulty were from that pre backlog group rather than the backlog group itself. So they came down nicely also along with the backlog cancellations.

[Justin Bowers, Analyst at Deutsche Bank]

Understood. And then just in terms of the demand environment and piecing together some of the other questions, it seems like quality started to improve late last year and pricing was at least stabilizing, maybe improving a smidge. Is that still the trajectory or is that sort of changed direction as well? And then maybe just comments on decision making like there's been a lot of delays throughout 2024. Is that sort of a persistent trend or is the velocity change there at all?

[August Troendle, Chairman & CEO at Medpace]

So I think the business environment was much improved for the first three quarters of twenty twenty four. So I think 2024 was came out with accelerating kind of opportunities and aside from the cancellations. So if we look at just new opportunities and not what was happening in our business environment with things being pulled or funding problems of many of clients, there was a lot of opportunities and they were kind of accelerating. Q4 was just a little bit weaker maybe, but the environment is still not horrible. So I don't know which direction it's going.

[August Troendle, Chairman & CEO at Medpace]

It could just be maybe a little bit of a slowdown in Q4 and then things are going to reaccelerate or it could be the signs of things are slowing down more. Delays and things like that wasn't delays, it was funding really. We've had a few delays and push things out of Q4, but it hasn't really been just quarter to quarter delays in prior in the year. It was more financial difficulty and cancellations. Does that answer your question?

[Justin Bowers, Analyst at Deutsche Bank]

I understood the question. Yes. Yes. Thank you, August.

[Operator]

Thank you. Our next question comes from the line of Charles Rhyee from TD Cowen. Your question please.

[Charles Rhyee, Analyst at Cowen]

Yes. Thanks for taking the questions. Maybe just maybe a little bit more clarification as we think about sort of the cancellation rates. You're saying that it's kind of come back to normal. I know we've talked about sort of cancellations from pre backlog.

[Charles Rhyee, Analyst at Cowen]

How much longer should we expect that kind of these kind of dynamics to be impacting book to bill as we move through the course of the year? Do you feel like we're kind of getting at the end of that? And so when we think about the difference between, let's say, the 0.99 book to bill in the fourth quarter and sort of getting to this 1.15 as we get to the back half of the year, How would you kind of characterize that as a mix between sort of reducing sort of these pre backlog cancellations or just expectations for RFP growth and awards?

[August Troendle, Chairman & CEO at Medpace]

Yes. So I think the elevated pre backlog cancellations throughout 2024 will have an impact throughout 2025. And I expect weak bookings in the first couple of quarters of 2025%. And then hopefully in the second half, we will get bookings that are accelerating and getting above that 1.15 sort of threshold that I look at, hopefully moving in 'twenty six to one point two etcetera. But that's kind of the trajectory seeing based upon the cancellations in our portfolio of pre backlog work, which can take up to a year to translate into backlog.

[Charles Rhyee, Analyst at Cowen]

Okay. So just to follow-up there. So if we assume that that kind of activity is sounds like you're saying it's kind of you feel it's going to be relatively constant. When we think about the weaker first half bookings, is that a function where you think you said RFP activity in the fourth quarter was down slightly. We should expect you're seeing RFP activity here in the first quarter lower.

[Charles Rhyee, Analyst at Cowen]

And so is it right to think that book to go?

[August Troendle, Chairman & CEO at Medpace]

I'm not projecting future RFPs. I'm projecting the bookings. I thought that's what you were asking.

[Charles Rhyee, Analyst at Cowen]

Yes, I'm sorry. Yes. Are you expecting bookings to be book to bill here to be sort of lower in the first half than the fourth quarter and then kind of ramping back up?

[August Troendle, Chairman & CEO at Medpace]

No, I do not I hope nothing is lower than Q4 in terms of booking book to bill. So I'm hoping that that is improved, but still well below that 1.15. So I'm looking for rather weak bookings in the first couple quarters here of 2025. I certainly hope that's above a one point zero and I have every reason to believe it will be, but just not anywhere near our kind of more longer term run rate.

[Charles Rhyee, Analyst at Cowen]

Got it. Appreciate that. Okay. Thank you.

[Operator]

Thank you. And our next question comes from the line of Anne Heintz from Mizuho. Your question please.

[Ann Hynes, Senior Healthcare Services Equity Analyst & Managing Director at Mizuho Financial Group]

Great. Thank you. So I know this is an uncertain environment, but I guess given your guidance, do you think your revenue guidance encompasses just the uncertainty? And when you talk to your customers, how much visibility do they have in the funding environment? So I'm just trying to figure out with this new guidance, how confident are you in the visibility you have at this point in time?

[Ann Hynes, Senior Healthcare Services Equity Analyst & Managing Director at Mizuho Financial Group]

And maybe, what do you think at this point in time would drive upside versus downside? That would be great. Thank you.

[August Troendle, Chairman & CEO at Medpace]

Okay. At the old bit of how confident am I in? I have no idea where the business is going. The business environment in 2025, I think we've tried to make reasonable assumptions about the future path and that's the guidance we came out with. I think there's substantial downside potential with further cancellations, weakening business environment and substantial upside opportunities if cancellations really drop to well into our normal range and the business environment strengthens as it had been in most of 2024.

[August Troendle, Chairman & CEO at Medpace]

So I think we're kind of equiposed here. I think we've got a good guidance that reflects the environment we're in, but there's certainly quite a bit look, this is a business that has a lot of it is established backlog for this 2025 is already in place. It's a matter of cancellations and cancellations can completely destroy those hopes. But there's also the opportunity that cancellations are very low and that's going to be the big driver. Yes, I don't know what else I can say to get you comfortable with the guidance we have.

[Ann Hynes, Senior Healthcare Services Equity Analyst & Managing Director at Mizuho Financial Group]

Maybe on the cancellation part, were there any trials canceled that surprised you like meaning is the industry acting different than historical drivers of cancellations? And then that would be great. And then just on the competitive environment, are there any notable changes sequentially that you would call out?

[August Troendle, Chairman & CEO at Medpace]

No real changes. And on cancellations, it's for this past year, it's been very largely funding related. Now like there's cancellations come for a number of reasons. We've had products fail, various reasons for a cancellation occur, competitive environment change substantially. There's a broad number of reasons for cancellations, but overwhelmingly, they've been at least linked in good part to funding.

[August Troendle, Chairman & CEO at Medpace]

So that is the primary kind of driver that we see in terms of cancellations.

[Ann Hynes, Senior Healthcare Services Equity Analyst & Managing Director at Mizuho Financial Group]

All right. Thank you.

[Operator]

Thank you. And our next question is a follow-up from the line of Max Mun from William Blair. Your question please.

[Max Smock, Research Analyst - Healthcare at William Blair]

Hi, thanks for squeezing in a follow-up here. I just wanted to ask a clarifying question on gross margin. One of the questions we've been getting is around whether there's any sort of tailwind to gross margin from the elevated cancellations that you saw in 2024. So just hoping you can walk through the payments that you receive for those cancellations. And I guess the way I think about it, just for work completed and then for wind down costs, but wanted to confirm that there's not any sort of incremental payments in there that would have artificially inflated your margins this year and then therefore would be a bit of a headwind to margins in 2025 given that cancellations seem to be normalizing a bit?

[Max Smock, Research Analyst - Healthcare at William Blair]

Thank you.

[August Troendle, Chairman & CEO at Medpace]

Kevin, I don't know if you want me to take a stab at that first. I think that cancellations historically have been something of a tailwind for margin. And often it kind of accelerates a lot of work on that closeout, etcetera. And also just I think our routine monitoring of percent completion. And I think we're reasonably conservative about revenue accrual that sometimes catches up some aspects at closeout.

[August Troendle, Chairman & CEO at Medpace]

So I think that in general, there is something of a tailwind from cancellations. Kevin, I don't know if you have any quantification to that.

[Kevin Brady, CFO at Medpace]

Yes. No, it's nothing that I can quantify, but I would say while there is some slight tailwind from that, the core tailwind on margins this year has again been just the productivity of the existing employee base. It's been tremendous. Again, headcount is flat year over year and the organization and the employee base continues to be productive and advancing programs and that's really what's driving margins. Yes, there might be a slight tailwind from some of these cancellations and as August mentioned, closing out those programs, but by and large, it's just the retention of the employee base and good utilization and just great execution.

[Max Smock, Research Analyst - Healthcare at William Blair]

Understood. Thanks again for squeezing in a follow-up.

[Operator]

Thank you. And our next question is a follow-up from the line of Eric Konla from Baird. Your question please.

[Eric Coldwell, Senior Research Analyst at Baird]

Thanks. I was hoping you could help us with performance obligations. Your performance obligations as reported in SEC filings actually grew at a nice and accelerating clip all year. Third quarter was up 25% year over year. It was up over 9% quarter over quarter.

[Eric Coldwell, Senior Research Analyst at Baird]

So I'm struggling a bit with trying to triangulate between what should be and that's historically been an extremely high positive correlation to future revenue growth, which was a number that spiked dramatically in 3Q versus what you're telling us on the bookings and the revenue outlook for this year, which obviously are much lower. So how did that come to pass that performance obligations were up 25% in the third quarter? And why is that not as correlated to revenue growth in 2025 as it has been historically?

[August Troendle, Chairman & CEO at Medpace]

Those look very far out. We have a five year project and all of it goes into performance obligation, But only a portion of that is near term, that is included in our backlog, even if it reaches backlog. I mean, so you get backlog, okay, we get an award usually by the time we got a signed contract and it's obligation, it's usually in backlog, but it's only a part of it that's in backlog. And you'd expect if you have a lot of projects canceling, a lot of new stuff being added in, that the average duration goes up and that would increase your the gap between performance obligations and backlog. But that's I don't know, quantitatively break that down into exactly, but it's not something I think that would be unexpected.

[August Troendle, Chairman & CEO at Medpace]

Your revenue growth is going to be based upon late stage projects, you don't have your fastest conversion and you get it's all in backlog and early stage stuff, there's still a lot of stuff held out.

[Eric Coldwell, Senior Research Analyst at Baird]

Would there be any on top of the timing nuance of cancels now awards for later, is there any other more structural shift in the nature of the programs or the average duration of an incremental program coming in today is longer than what you would have seen in the past? Is there anything like that occurring? And then finally, I don't know if you could help us with this, but would you be willing to foreshadow what the performance obligations look like in the 10 ks that will be coming later?

[August Troendle, Chairman & CEO at Medpace]

Kevin?

[Kevin Brady, CFO at Medpace]

Yes. I mean, in terms of the foreshadowing, I mean, we'll publish that later today. I don't think that the difference will be dramatically different than what you saw in the third quarter. Again, as always had mentioned, the tail on studies is really the largest driver of that delta, because remember, we only put in the first three years of a program in the backlog. And there's other factors like if there's an interim analysis, we only put the study in up to that interim analysis.

[Kevin Brady, CFO at Medpace]

So there's a lot of differences between the accounting version versus the backlog version, but it's consistent from period to period. No structural changes, I guess, in other words, Eric.

[Eric Coldwell, Senior Research Analyst at Baird]

Okay. Thank you very much.

[August Troendle, Chairman & CEO at Medpace]

But I do think backlog is a better reflection of what we think is we do have that obligation look, we've given them a price, we've given them what we do and we're obligated to do it even if they go into that next phase of the study. But sometimes those are really just options that the client holds and it's not likely you can get and I mean, I think our backlog is better reflection of what we think is qualified stuff that we're likely to perform.

[Kevin Brady, CFO at Medpace]

Yes, I agree.

[Operator]

Thank you. And our next question comes from the line of David Windley from Jefferies. Your question please.

[Dave Windley, Managing Director at Jefferies LLC]

Hi. The beauty of a short conference call is we get to have multiple follow ups here. Maybe I don't know if you like that or not, but I wanted to ask one as well. First of all, to clarify an answer you just gave to Eric. So August, you said late stage programs are I think your point was burning more directly into revenue versus early stage programs.

[Dave Windley, Managing Director at Jefferies LLC]

I want to clarify by that that you mean the late stage of programs, right? So not the difference between Phase one and Phase three, but the latter part of the Phase three rather than the earlier part of the Phase three.

[August Troendle, Chairman & CEO at Medpace]

Correct. Correct. It's all in backlog, so it's equal to the performance obligation and it's going to burn all in the next year or two.

[Dave Windley, Managing Director at Jefferies LLC]

Right. So just for kind of purposes of transcript, so we get that clear.

[Jesse Geiger, President at Medpace]

Okay. Not a reference to clinical trial phase, early stage versus late stage, but a comment on trials in their in the latter part of their progression as opposed to trials that are starting earlier. That's what we're talking about.

[Dave Windley, Managing Director at Jefferies LLC]

Right. Appreciate that. And then, Kevin, I think you mentioned on margin some benefit I believe from FX and I didn't hear a quantification of that. Wondered if you might quantify that. And then what is your FX assumption in the guidance for '25?

[Dave Windley, Managing Director at Jefferies LLC]

Thanks.

[Kevin Brady, CFO at Medpace]

Yes. The guidance assumes FX rates as of December 31. And in terms of the impact in the fourth quarter, it was probably about $4,000,000 EBITDA impact for the fourth quarter net.

[Dave Windley, Managing Director at Jefferies LLC]

Okay. All right, great. That's all for me. Thank you.

[Operator]

Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Lauren Morris for any further remarks.

[Lauren Morris, Director-Investor Relations at Medpace]

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 first quarter twenty twenty five earnings call.

[Operator]

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

Participants

Executives

• Lauren Morris, Director-Investor Relations
• August Troendle, Chairman & CEO
• Jesse Geiger, President
• Kevin Brady, CFO

Analysts

• Dan Leonard, Managing Director - Research Analyst at UBS Group
• Max Smock, Research Analyst - Healthcare at William Blair
• Eric Coldwell, Senior Research Analyst at Baird
• Dave Windley, Managing Director at Jefferies LLC
• Jailendra Singh, Managing Director at Truist Securities
• Justin Bowers, Analyst at Deutsche Bank
• Charles Rhyee, Analyst at Cowen
• Ann Hynes, Senior Healthcare Services Equity Analyst & Managing Director at Mizuho Financial Group