Medpace Holdings, Inc. (NASDAQ:MEDP) Q3 2023 Earnings Call Transcript

Medpace Holdings, Inc. (NASDAQ:MEDP) Q3 2023 Earnings Call Transcript October 24, 2023

Operator: Good day, ladies and gentlemen, and welcome to the Medpace Third Quarter 2023 Earnings Conference Call. [Operator Instructions] 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.

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

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, 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. The slides are available in the Investor Relations section of our website at investor.medpace.com.

With that, I would now like to turn the call over to Jesse Geiger.

Jesse Geiger: Thank you, Lauren. Good morning, everyone. Revenue in the third quarter of 2023 was $492.5 million, which represented a year-over-year increase of 28.3%. Net new business awards entering backlog in the third quarter increased 29.9% from the prior year to $611.5 million, resulting in a 1.24 net book-to-bill. Ending backlog as of September 30, 2023, was approximately $2.7 billion, an increase of 20.3% from the prior year. We project that approximately $1.46 billion of backlog will convert to revenue in the next 12 months. And our backlog conversion in the third quarter was 19.1% of beginning backlog. Now, with that, I will turn the call over to Kevin to review our financial performance in more detail as well as our guidance expectations for the balance of 2023 and our initial guidance for 2024.

Kevin Brady: Thank you, Jesse, and good morning to everyone listening in. As Jesse mentioned, revenue was $492.5 million in the third quarter of 2023. This represented a year-over-year increase of 28.3% on a reported basis and 27.6% on a constant currency basis. Revenue for the nine months ended September 30, 2023, was $1.39 billion and increased 30.2% on a reported basis and 30% on a constant currency basis from the comparable prior year period. EBITDA of $90.2 million increased 1% compared to $89.3 million in the third quarter of 2022. Year-to-date EBITDA was $266.7 million and increased 17.1% from the comparable prior year period. EBITDA margin for the third quarter was 18.3% compared to 23.3% in the prior year period. Year-to-date EBITDA margin was 19.2% compared to 21.4%.

EBITDA margin compared to the prior year period was impacted by higher reimbursable costs, personnel costs and the foreign exchange benefit in 2022 behind the strong U.S. dollar. In the third quarter of 2023, net income of $70.6 million increased 6.9% compared to net income of $66 million in the prior year period. Net income growth ahead of EBITDA growth was primarily driven by a lower effective tax rate of 15.2% compared to 19.4% in the prior year period as well as lower interest expense. Net income per diluted share for the quarter was $2.22 compared to $2.05 in the prior year period. Regarding customer concentration, our Top 5 and Top 10 customers represent roughly 23% and 29%, respectively, of our year-to-date total revenue. In the third quarter, we generated $114.4 million in cash flow from operating activities, and our net days sales outstanding was negative 42.2 days.

During the quarter, we paid off our outstanding debt, and we have $95.2 million in cash as of September 30, 2023. Moving now to our updated guidance for 2023. Full year 2023 total revenue is now expected in the range of $1.87 billion to $1.89 billion, representing growth of 28.1% to 29.5% over 2022 total revenue of $1.46 billion. Our 2023 EBITDA is now expected in the range of $353 million to $361 million, representing growth of 14.6% to 17.2% compared to EBITDA of $308.1 million in 2022. Guidance is based on foreign exchange rates as of September 30, 2023. We forecast 2023 net income in the range of $272 million to $276 million. This guidance assumes a full year 2023 effective tax rate of 16.25% to 17.25%, and 31.8 million diluted weighted average shares outstanding for 2023.

There are no additional share repurchases in our guidance. Earnings per diluted share is now expected to be in the range of $8.54 to $8.66. As Jesse mentioned, we are providing initial 2024 guidance for revenue and EBITDA. For the full year 2024, we expect revenue in the range of $2.15 billion to $2.2 billion, and EBITDA to be in the range of $390 million to $415 million. In addition to continued growth in direct service activities, the revenue guidance anticipates investigator site activity and costs remain elevated, similar to what we have seen recently in 2023. We plan to provide additional detailed full year 2024 guidance on our fourth quarter earnings call in February. With that, I will turn the call back over to the operator so we can take your questions.

Operator: [Operator Instructions] Our first question will come from Max Smock of William Blair. Your line is open. Pardon me Mr. Max Smock, your line is open. [Operator Instructions] Hello, Mr. Smock of William Blair, are you able to hear me?

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Q&A Session

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

Operator: Thank you. [Operator Instructions] Our next question will come from David Windley of Jefferies. Your line is open.

David Windley: Hi, hopefully, you can hear me. Working?

Kevin Brady: Yes, we hear you David.

David Windley: Okay, fantastic, great. Good morning. Thank you for taking my question. I wondered if you could comment a little bit on environment. The – kind of the rate of biotech restructuring announcements and things of that sort has attenuated maybe ever so slightly in 2023. Your – everybody, I think, is aware that your exposure to that part of the customer base is pretty high. So wondered if you could comment on that maybe qualitatively. And then quantitatively, are you seeing more activity at the beginning of the funnel. Are you seeing your win rates improve? Like from a metric standpoint, what would you attribute to your booking success? Thanks.

August Troendle: Sure. Sure, Dave. Yes, the environment is kind of hard to comment on because it’s pretty variable. I mean, we’re still seeing quite a bit of funding challenges by clients. And we’ve been through a period of a lot of clients in distress and a number of bankruptcies and challenges. I think that’s actually derisked our backlog quite a bit of those that are going to have a problem, I think, most of them have. And, on the other side, we’re seeing very strong business environment. Just surprisingly, you know to see the disparity is amazing. We have a very strong RFP flow. I think our RFPs – total RFPs pending is the second highest we’ve ever had. And to fill the pipeline, the new awards, initial awards, as we’ve talked about, that were awarded in Q3 were a record highest we’ve ever had. So, we’re seeing great business environment and a horrible business environment. So I don’t know. It’s just kind of schizophrenic.

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

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

David Windley: Okay. Last question for me. The pass-through – the elevated pass-throughs have maybe persisted to a greater degree than you expected. Can you talk to that a little bit? Has the composition of work changed? Is it more client – I guess I’m wondering, is it a therapeutic area thing where the work that you’re doing just naturally has more pass-through associated with it. Is it an inflationary environment at the site level where those activities are just costing more or are you being asked to do that more? I’m just trying to understand why the significantly elevated pass-through growth and your expectations for that to continue? Thank you.