August Troendle - President & CEO Jesse Geiger - CFO.

Dave Windley - Jefferies Tim Evans - Wells Fargo Securities John Kreger - William Blair Erin Wright - Credit Suisse Donald Hooker - KeyBanc Capital Markets.

Good morning and welcome to Medpace's First Quarter 2017 Earnings Conference Call. Before we begin, I will read Medpace's Safe Harbor regarding forward-looking statements.

During today's call, management's remarks and responses to your questions during this teleconference may make 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 other important factors that could cause the company's future results to differ materially from management's current expectations including those discussed in the risk factor section of our Form 10-K for the year ended December 31, 2016, filed with the SEC.

Management disclaims any obligation to update forward-looking statements in the future even if estimates change. Accordingly, you should not rely on any of today's forward-looking statements as representing management's views as of any date after today. During this call, management will also be referring to certain non-GAAP financial measures.

A reconciliation of such non-GAAP financial measures to the most directly comparable GAAP measures is available as attachments to the earnings press release and earnings call presentation slides provided in connection with today's call. The slides are available on the company's Investor Relations section of its website at investor.medpace.com.

With that, I will now turn the call over to Dr. August Troendle, Medpace's President and Chief Executive Officer, for opening remarks. Dr. Troendle, please begin..

Thank you, operator. Good day, everyone and thank you for joining us on Medpace's first quarter 2017 earnings call. With me on the call is Jesse Geiger, Chief Financial Officer and Chief Operating Officer, Labs. For reference, please refer to Slides 3 and 4 of our presentation.

Net service revenue for the quarter was $93.8 million an increase of 6.8% over the prior year period. Net new business awards entering backlog during the first quarter were $93.9 million, down sequentially from $99.7 million in Q4 if 2016 and the net book-to-bill ratio for the quarter was 1.0.

These net award results as you might expect are disappointing to us. Although we continue to see good RFPs, they clearly have not translated into near term bookings.

Despite this reduced volume of awards recognized into backlog, our competitive hit rate, which measures the proportion of trials we win compared to those lost to our competitors, was highest in Q1 -- was higher in Q1 than in all but one quarter in the prior two years.

Thus, we've not seen a change in the competitive landscape and we've not experienced an increase in pricing pressure. However, we have seen a slowing of customer decisions and a failure of many opportunities to move forward due to funding difficulties.

Why we are seeing this at a time when many observers have been observed -- have seen an improved overall funding environment for biotechnology companies is unclear. It may represent a lag effect from last year's depressed overall funding or may be unique to our particular segment of the market.

In any case, we believe many of the programs we're seeing, will eventually be funded when the market returns to equilibrium.

An overall slowdown in new awards, the cancellation of a few programs with near-term revenue impact, as well as financial difficulties involving a few additional clients with ongoing programs has forced us to revisit our guidance for 2017. Jesse will address the revised guidance in his prepared remarks despite.

Despite our revised guidance, I'd like to note that our business is fundamentally solid. We're winning a large share of the programs we compete for and I believe we're focused on the right segment of the market where small and midsized biopharma companies are attracted to our full-service approach and therapeutic expertise.

We anticipate improved bookings and revenue progression beginning in the second half of the year and strong growth in 2018. Due to the attractive outlook for new programs later in the year, which we believe will be funded, we have not looked to reduce staff and we continue to hire to prepare ourselves for growth.

We have seen great success in the first quarter in onboarding a number of outstanding individuals who contribute to our future success. This investment in the business will drive a decrease in our 2017 EBITDA margin, but we expect this to improve in 2018. With that, I'll turn the call over to Jesse to review our financial performance in more detail..

Thank you, August and good morning, to everyone listening in. Moving now to our key financial highlights and trends on Slides 5 and 6, as August mentioned, net service revenue was $93.8 million in the first quarter, which represents growth of 6.8% from $87.8 million in the first quarter of 2016.

Adjusted EBITDA of $26.2 million increased 1.8% compared to $25.8 million in the first quarter of 2016. Our calculation of adjusted EBITDA in the first quarter of 2017 includes an adjustment to subtract our corporate campus lease payments. Adjusted EBITDA margin for the quarter declined 130 basis points to 28% versus 29.3% in the prior year period.

Primarily attributable to increased employee-related costs, in the first quarter 2017, we had GAAP net income of $8.4 million compared to GAAP net income of $3.4 million in the prior year period. Adjusted net income of $14.1 million in the first quarter increased 21.7% compared to $11.6 million in the first quarter of 2016.

Adjusted net income growth was driven by revenue growth and a reduction in our interest expense, partially offset by an overall increase in cost associated with our increased hiring during 2016. GAAP net income per diluted share for the quarter was $0.20 compared to GAAP income of $0.11 per diluted share in the prior year period.

First quarter adjusted net income per diluted share of $0.34 declined 2.9% versus first quarter 2016 adjusted net income per diluted share of $0.35. On Slide 7, we have provided a breakdown of our customer concentration by revenue across three key categories for both Q1 2016 and 2017.

Oncology remains our largest therapeutic area and we continue to see growth in our antiviral, anti-infectious disease therapeutic area.

With regard to our mix by customer size, we remain focused on serving our core market of small and midsized biopharma customers that present a large portion of our total business and a segment of the market where we see further opportunities for continued growth and we continue to selectively capitalize on opportunities with large Pharma customers on projects that fit well with our full-service model and our approach to clinical trial execution.

Regarding customer concentration, we maintain a well-diversified mix with our top five and top 10 customers representing roughly 21% and 34% respectively of our total revenue for the quarter.

Slide 8 provides a summary of our leverage and liquidity positions as well as a schedule of our free cash flow conversion for the first quarter of 2017 compared to the prior year period. In the first quarter, we used $700,000 in cash flow from operating activities.

This was driven primarily by an increase in our net day sales outstanding, which increased compared to the fourth quarter from 12 days to 18.4 days, a decrease in pre-funded study costs and plan to Q1 annual employee compensation related payments.

Our net debt position at quarter end was $132.6 million composed of gross debt of $161.9 million and cash of $29.3 million. Our net leverage ratio is approximately 1.2 times.

Overall, we're confident in the company's long-term cash flow generation ability and believe our free cash flow profile, our low leverage level and current capital structure provide us with flexibility to pursue continued growth initiatives and deliver shareholder returns.

To that end, our Board of Directors has authorized a share repurchase program of up to $50 million and we intend to initiate this in the second quarter.

Moving now to our updated guidance for 2017 on Slide 9, soft first-quarter net awards and expected continued near-term award headwinds are creating further pressure on revenue growth as well as delays with ongoing programs and lengthening study timelines, which are also negatively impacting near-term revenue expectations.

In addition, we are encountering customer financial difficulties with several existing programs, which may subject us to lost revenue and elevated bad debt expense. We're closely monitoring each of these potential bad debt situations and expect to have greater clarity on these over the coming quarter or two.

We now forecast net service revenue in the range of $373 to $385 million for the full year 2017. That represents organic growth of 0.6% to 3.9% over 2016 net service revenue of $370.6 million. 2017 adjusted EBITDA is expected in the range of $104 million to $108 million.

Additionally, we forecast 2017 GAAP net income in the range of $32 to $35.4 million and GAAP earnings per diluted share are expected in the range of $0.77 to $0.85. On an adjusted basis, we forecast 2017 adjusted net income in the range of $54 million to $58 million and $1.30 to $1.40 per diluted share.

From a quarterly cadence perspective, depending on clearing customer funding hurdles, we anticipate improved revenue progression in the second half of 2017. Our guidance also reflects second quarter cost elevated above Q1 levels by about $2 million to $3 million related to potential bad debt expense.

As a result, we anticipate adjusted EBITDA, adjusted net income and adjusted net income per diluted share to be even more heavily skewed to the second half of 2017 and this guidance does not reflect the potential impact of any share repurchases pursuant to the share repurchase program.

With that, I'll turn the call back over to the operator and we'll take your questions..

Thank you. [Operator instructions] Our first question is from the line of Dave Windley of Jefferies. Your line is open..

Hi, thanks for taking my questions. Good morning. I guess the first question around demand trends, so you talked about seeing some lengthening decision cycles and things like that on the last call.

At that time, that had already persisted for longer than what would have been kind of an historical average, is what you're saying today a continuation of that, has it changed? Is it completely different, is it just a continuation of what we saw before? Has it intensified? If you could just provide some additional color about what you are seeing from clients that would be great..

Yes, this is August. Hi Dave. I think that environment is similar to what we saw before what is kind of transpired is most significantly as continuation of that as well as some cancellations that we've seen and the cancellations weren't particularly high.

They were higher than our trailing 12 months in our kind of usual level, but they were particularly active and just coming into their active phase of burning. So, they had a -- the cancellations vary in terms of their impact in revenue.

Sometimes it's just an issue of replacement of the backlog and other times it has a pretty near-term effect on revenue burn and we had a few of those.

And then some client ongoing programs have had some trouble and we saw some of that, you talked about a bad debt potential on the last call, but that's continued and has exacerbated with a few other -- a few other clients. So that's really, I think things have fallen off the cliff in terms of new activity.

We're still see good flow of RFPs, but there has been continued difficulty in getting final funding in place to move forward with a number of programs..

Okay.

And the lengthening timelines I guess is you mentioned in that answer some client projects that have had some difficulty I think maybe you're referring there more to financial side, but you're also talking about some lengthening timelines, maybe distinguish those, are the timeline issues around patient recruitment or are they more waiting for regulatory response?.

No, there hasn’t been any real delays related to patient recruitment. These are before getting to that stage and I think overwhelmingly related to putting financing in place, some of them, it's a matter of you're not really sure, it's looking at different scenarios and its protocols being finalized and things, but largely related to funding..

Okay.

And then last question for me, maybe is a little detailed, but as I look at the Slide 7 with your pie charts, there is an interesting match in numbers in terms of a decline year-over-year in revenue concentration from top five and revenue concentration or contribution from midsized Pharma and then obviously some shifting around in therapeutic area mix.

Is part of the problem here that you had a midsized Pharma that you're doing some significant work for, there was a big contributor and that's wound down or come to in one way or another and so you had maybe an outsized programmer or study that was coming out of the revenue base and then the demand environment just hasn’t been strong enough to replace something outsized.

Is that -- is that a fair interpretation?.

No, I don't think so. I think our drop-off in large and midsized Pharma has been occurring over a number of years and I think that's just a continuation and the disruption in terms of cancellations was not related to midsized Pharma actually. It was actually in the smaller Pharma group..

Okay. Thank you. I'll yield the floor. Thanks..

Thanks Dave..

Thank you. Our next question is from Tim Evans of Wells Fargo Securities. Your line is open..

Thanks. August, I wanted to square up this comment that RFPs have been pretty strong and your win rate has been very strong. If you had just told me those two things without telling me the bookings, I would've thought, those two things would translate into really good bookings.

So why don't they? Is it that you're winning the business but because of the way that you book it, you're not -- you're not putting it into backlog or is there something else going on there?.

Well I think, there maybe a little of that. I think that what we're seeing is we're seeing a similar number in dollar volume of RFPs and in fact that RFP volume in dollar terms is pretty high, but not a lot of those are being awarded to anybody.

So, when we look at our win rate, we're looking at of those awarded, which could us versus others and we have a high actually a very high, even in historical terms rate of wins, but that's still a small subset of the total RFPs we're bidding on.

And now I think there is -- it is also true that you point out that maybe we're not recognizing some things. Yes, there's a number of projects that we've been identified for and so I think you call that an award.

We've been given a written award that yes, we want to work with you, but we can't recognize it because they don't have a clear funding in place yet and that's why we feel very optimistic about second half of the year and why we haven't decided to respond to this by cutting back on our hiring or I should say laying off people.

We have moderated our hiring some, but we continue to hire for growth because we see great opportunities for the future, but I think the real equation part that doesn't add up is that the total number of decisions is reduced even though the RFP volume is high..

Okay. So, people are putting out RFPs, but then they're failing to make decisions on those and do you feel like that's a function of funding economic decisions or is it -- is there any looking at the comp -- if you take a second look at the compounds and it's just don't worth going forward for safety or efficacy reasons..

I think it is a combination. Clearly sometimes that's the case. I think a fair number of them a greater proportion than usual is funding and so that's why we call out funding as being I think a real impediment at the current time is what we're seeing is many of those programs I believe will be eventually funded.

I think they are reasonably good products. Obviously, something that's an outstanding, a great opportunity where everyone is jumping over trying to fund, but I think of a number of these are going to be funded and this really is a funding environment problem..

Okay. I'll stop there. Thanks..

Thank you. Our next question is from John Kreger of William Blair. Your line is open..

Hi, thanks very much.

August, can you just maybe continue with the thought you provided just a couple minutes ago, what sort of bookings are you assuming or do you need to get to support your updated guidance for '17?.

I'll let Jesse take that because he has the actual model that we've put together..

Yes, thanks John. We're assuming bookings, net awards bookings that are fairly flat with 2016 bookings..

Okay. So, the whole year..

For the full year..

And are you assuming net bookings remained depressed in the second quarter or snap back in Q2?.

Remained depressed here in the second quarter?.

Got it. And can you….

They are somewhat backend weighted..

Okay.

Can you tell us again what drives the confidence that the net awards will start to slow normally in the second half?.

There's again unfortunately not a specific parameter, all you can look at is the quality of the awards, the progress clients have made towards getting funding and where we have visibility on what their sources are gets us confident about a number of the programs. But this is still something that markets have to remain accommodating for you.

So, there's still risks involved, but I think we feel pretty confident that a number of these will get funded..

Great. Thanks.

And then my other question can you just maybe quantify if possible the bad debt situations that you said you're monitoring? What would be the dollar volume of all those and maybe could you put them in a historical context how much larger they’ve been a typical year with your client base?.

Yes. Sure. So historically bad debt has been over a number of years about 0.2% to 0.3% of revenue annually in 2016. Bad debt was 0.35% of revenue. These couple that we're seeing here that are challenged.

One is the one we mentioned on last quarter's call, it had potential exposure that continues to be unresolved that company is attempting to raise funds this quarter and we're still working with them.

The other few three to four that we've identified here are also customers with ongoing active projects that have run into some of these challenges and are attempting to raise additional capital.

We're working through each of these with the customers and we're reflected this exposure in our revised revenue guidance with the assumption of about up to $3 million in potential bad debt expense or exposure in the second quarter if they're unable to secure their funding..

Great. So, Jesse just to clarify that, the $3 million would account for the entire valuables four or five projects..

The $3 million would account for the balance sheet exposure that we have on this project. Now there is further -- there's backlog exposure -- backlog risk across these couple that are in the range of $15 million to $20 million..

Great. Thank you. That's it..

Thank you. Our next question is from Erin Wright of Credit Suisse. Your line is open..

Have you typically seen this lag effect historically, I think that August you eluded to in your prepared remarks that as it relates to the biotech funding environment, how confident are you or what sort of visibility do you have that it can recover in 2018 and then any sort of historical context that you can provide around this sort of phenomena that you can compare it to, thanks?.

Hi Erin. I wish I could. I don't think we've seen such a lag effect and so I don't know if that's really the I don't know if that's real. I just put that out as a possibility. We've not seen that in the past.

Certainly, our revenue tends to because of the timing of bookings to actually getting to revenue, sometimes when there's a slow period, there's a substantial lag in terms of revenue impact, but in terms of bookings it should be a follow-on effective low funding of one period to another. So, I don't know.

I can't ascribe it to that and I do not have a historical comparison to draw upon..

Yeah. I would just add that we do based on our knowledge of some of the pending opportunities and some of those that are still seeking funding, there are a number of good compounds here as we assess -- as we assess the opportunities and as we discussed a little bit ago.

Some of these they have indicated that they want to work with us and so the hurdle on a number of these is funding and CRO selection..

Okay. Great.

And then are you speaking to a few specific larger contracts or privates and I think you gave some context of that, but I am really just trying to get a sense of how broad-based these financial decisions these are?.

Yeah. So, for the couple that are ongoing active projects that have some balance sheet exposure, we've quantified our best estimate of the bad debt exposure that is a four to five specific contracts, but there are a number of other pending awards or pending opportunities across the portfolio that are still seeking financing.

That's a much larger number..

Okay.

And then can you speak to some of the nature of the stepping away from cancellations or that dynamic and can you speak to the nature of the new business wins that you are seeing from a therapeutic mix or customer mix standpoint? Where are you seeing some offset?.

Where we're are seeing good sales?.

Sorry, offsets, yeah positive I guess..

I think our trends have continued. We're seeing a greater amount of oncology -- we're continuing to see a large amount of oncology and it's even expanded as a percentage of new activity. AVAI, our Antiviral Anti-infectives has also been very strong in terms of new awards.

I think the revenue numbers you see bounce around a bit on a quarterly basis, but we've got good traction there. So, I would say there they're the two largest areas of strength. And from a customer care perspective, it's primarily growth being led by small Biopharma..

Okay. Great. Thank you so much..

Thank you. Our next question is from Donald Hooker of KeyBanc. Your line is open..

Great. Good morning. A lot of questions have been asked and answered.

One question I had just more generally, curious if you guys are seeing an increasing appetite from sponsors for risk-based monitoring and what is your technology strategy there I guess that this ClinTrak support that or do you typically go to third-party vendors?.

ClinTrak does support it and I wouldn't say there's been a particular change in that over the last few years, but there's been in the last year certainly, there is a fair amount of interest in it depending on the program.

So, I don't have quantified in front of me what percentage of our programs involve specifically risk-based monitoring and a reduced monitoring overall frequency, but it's a meaningful part of projects and always a consideration..

How often do you have discretion in terms of monitoring programs versus the sponsor? How often do you get to go in and manage that process?.

Well, if we're doing it we're managing it, but I think the decision of whether we do that and how aggressively we implement it is obviously ultimately a sponsor decision, but we very often make a proposal and sponsors generally evaluate multiple different approaches from these different ceros and choose one they feel comfortable with.

So, we're frequently pitching it, but ultimately the decision is the sponsors..

Okay. And last question, kind of on the same theme and I'll go back in queue, given the rise of oncology I assume there is a lot of complexity and data there.

Are you finding greater use to our ClinTrak and some of the other functionalities that you have as a result of oncology being a greater proportion of your revenue base?.

I think therapeutic area drives the decision particularly and I think our use of ClinTrak as a data tool in programs has been pretty level. It's a bit over 50% of our studies are running ClinTrak..

Thank you very much..

Thank you. Our next question is from [Michael] of Baird. Your line is open..

Hey. Good morning. Just here wanted to clarify the net awards input you have in your guidance to meet your revenue targets in the back half. So, I am just doing some math and making an assumption that net awards remain depressed in the second quarter and then rebound in the second half.

Are we looking at a book-to-bills in the second half, we need 1.25 to 1.3 to achieve the guidance?.

Yeah. It is heavily backend weighted on the net book-to-bill. So, we would expect a book-to-bill ratio of somewhere in line with what we had in the past two quarters here the second quarter, which does imply an elevated level in the second half..

Okay. That's helpful. Thank you and then just briefly on the repurchase, it sounds like you're going to be in the market this quarter.

Can you provide some comments in context in terms of how you're thinking about phasing of the repurchase?.

It will depend on a number of factors including market conditions, we're in the process of putting together that program. It will be customary as far as having different years in different price points, but we'll put in place here over the next -- over the next couple days to weeks..

Thank you..

Thank you. Our next question is from Tim Evans of Wells Fargo Security. Your line is open..

Thanks for letting me follow up with one more. August when I put together a lot of the data points that you've shared with us here including say that the increase in the bad debt situation, the funding related I guess lack of decision-making and you highlighted in your opening remarks that the overall funding environment looks okay.

Do you do you believe that you are being I guess isolated in particularly in the biotech companies that are particularly reliant on the capital markets relative to prior years where you may have had been able to access more well-funded clients or something like that? Is there a dynamic like that going on where basically your client mix has shifted more toward the risky side of things?.

I think that's a fair characterization. Our clients -- we have a greater proportion of clients that are pre-funding and pre-revenue I should say and it's dependent upon external funding for particular program in which we're bidding..

Okay.

And then the last thing, have you lived to a cycle like this before and if so, what can share with us from your historical perspective?.

Yeah, again I don't think we have a good basis for historical comparison and much of the difficulty we're seeing currently is in our client base. It was a much smaller portion of our exposure in the past. So, it's really hard to say whether this is common in this segment of the market or unusual..

Okay. Thank you very much..

Yeah thanks..

Thank you. And it looks we have a follow-up from Dave Windley of Jefferies. Your line is open..

Hi. So, I wanted to follow up on cost and margin side.

I think the company has been very disciplined around managing to a what is an industry high margin, which I guess if you know you're growing fairly quickly or if you know you're growing slowly, that is easier, but we're caught a little bit in a pattern or in an in between state where there's a lot of RFPs, where potentially you could need billable staff to service that work, but the funding environment makes that much more uncertain than normal.

How do you think about the management of your I guess the question is really more directed at billable staff as part one and then part two, kind of a follow-up to Tim's question, do you -- have you thought about a need to perhaps broaden your sales force to turn over more rocks and get to say a broader client base of incrementally better funded companies? So, two questions around cost base, thanks..

Yeah, I think that we have to look at our opportunities going forward and there is quite a lag in terms of hiring staff and having them usable on projects. So, I think we do look out a couple quarters and we don't look at the current bookings and revenue. We look at our opportunities more towards driving where we want our staff to be.

So, I think we've not -- again not taken those actions in the current environment because we see good opportunities coming up. But I think that's something we assess on an ongoing basis. And your second question....

Was on sales force -- sales force size and covered..

I think that's a consideration. I don't think that -- I think our sales force is currently appropriately sized.

I think that if it really is a case that we a RFP volume that's substantially larger than the current volume we have in order to find those fundable projects, I guess that will be a consideration, but I guess we don't really see the dynamic playing out like that. I think it is temporary.

I think that we will target a little bit differently going forward, but I don't think it's a size of the group issue. I think it's a targeting issue..

Okay. Thank you. I'll leave it at that..

Thank you. And that concludes our Q&A session for today. I would like to turn the call back over to Dr. August Troendle for any further remarks..

All right. I want to thank everyone for joining us on our earnings call today and your interest in Medpace and we look forward to speaking with you again on our second quarter call. Thank you..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may all disconnect. Everyone have a good day..