Dr. August Troendle - President & CEO Jesse Geiger - CFO & COO.

John Kreger - William Blair Dave Windley - Jefferies Donald Hooker - KeyBanc Erin Wright - Credit Suisse Robert Amparo - Wells Fargo Securities.

Good morning and welcome to Medpace's Third 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 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 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 today’s call, management will 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.

As a reminder, this conference call is being recorded. 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. Good day everyone and welcome to Medpace's third quarter 2017 earnings call. With me on the call is Jesse Geiger, Chief Financial Officer and Chief Operating Officer, Labs.

Net new business towards entering backlog during the third quarter were 112 million, this represents a 6% sequential increase over that of Q2 and the second consecutive quarter of improving new business awards. Ending backlog was 510 million, a 6% increase over last year's quarter.

The improved business environment observed in the third quarter has continued into the month of October and we project strong awards in the fourth quarter. Although, we anticipate revenue to be down sequentially in Q4, 2017, we expect revenue growth acceleration beginning in Q1 of 2018.

That completes by brief introduction, and Jesse will now review our overall financial performance for the quarter..

Thank you, August, and good morning to everyone listening in. Moving now to our key financial highlights and trends on Slides 5 and 6 of the presentation. Net service revenue was 98.7 million in the third quarter, which represents growth of 4.1%, from 94.8 million in the third quarter of 2016.

Adjusted EBITDA was 28 million, compared to 29.5 million in the third quarter of 2016 and our calculation of adjusted EBITDA in the third quarter of 2017 includes adjustments for our corporate campus lease payments and transaction expenses related to our S-3 Filing.

Adjusted EBITDA margin for the quarter declined 270 basis points to 28.4% versus 33.1% in the prior year period. This decline was primarily attributable to our hiring employee related cost. In the third quarter of 2017, we had GAAP net income of $9.8 million, compared to GAAP net income of 5 million in the prior year period.

Adjusted net income of 15.9 million in the third quarter increased 5%, compared to 15.1 million in the third quarter of 2016. Adjusted net income growth was primarily driven by revenue growth and reduced interest and partially offset by higher employee related costs.

GAAP net income per diluted share for the quarter was $0.25, compared to GAAP net income of $0.13 per diluted share in the prior year period. Third quarter adjusted net income per diluted share of $0.40 was flat versus third quarter 2016.

On Slide 7, we have provided a breakdown of our customer concentration by revenue across three categories for both 2016 and 2017 year-to-date periods. Year-to-date revenue growth was primarily driven by growth in oncology, which remains our largest 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 represent a large portion of our total business and a segment of the market where we see further opportunities for continued growth.

Regarding customer concentration, we maintain a well diversified mix with our top 5 and top 10 customers representing roughly 20% and 33% respectively of our total revenue year-to-date.

Slide 8 provides a summary of our leverage and liquidity positions as well as the schedule of our free cash flow conversion for both the third quarter and year-to-date 2017 compared to the prior year periods. In the third quarter, we generated 39 million of cash flow from operating activities.

This sequential improvement in cash generation was driven primarily by a decrease in our net day sales outstanding, which decreased compared to the second quarter from 9.5 days to 5.3 days as we experienced a decrease in trade accounts receivable and an increase in advanced billings as a result of strong collection activities again in the third quarter.

Our net debt position at quarter end was $161.5 million composed of gross debt of $185.7 million and cash $24.2 million. Our net leverage ratio is approximately 1.5 times last 12 months adjusted EBITDA.

During the quarter, we repurchased approximately 0.3 million shares for a total of $8.3 million under the $50 million share repurchase program, and 2 million shares from Cinven for $60.5 million. These combined share purchases contributed approximately 0.01 per share to earnings per share in the quarter.

Moving now to our updated guidance for 2017 on Slide 9. Our net service revenue guidance is now in the range of 381 million to 386 million for the full year 2017, representing organic growth of 2.8% to 4.2% over 2016 net service revenue of 370.6 million. Our 2017 adjusted EBITDA guidance is in the range of 106 million to 108 million.

Our 2017 GAAP net income range is now 35.5 million to 37.2 million and GAAP earnings per diluted share is expected in the range of $0.87 to $0.92. On an adjusted basis, we now forecast 2017 adjusted net income in the range of 59 million to 61 million and $1.47 to $1.52 per diluted share.

Our updated guidance reflects the shares repurchased in the third quarter which has an impact of approximately $0.03 per diluted share for the full year 2017. With that, I will turn the call back over to the operator, so we can take your questions..

Thank you. [Operator Instructions] Our first question comes from the line of John Kreger of William Blair. Your line is open..

August, can you just give us an update on the competitive landscape as you see it? Are you seeing any changes in the number of people competing for bids or any pricing dynamics?.

No, I haven't really seen any change, but I don’t think you're likely to see any, even if there was a change the kind of dynamics are, they pick a certain number of competitors. When you’re in a competitive situation, they pick a certain number and often bring in and say three groups for bid defenses.

So, it's hard to really get assessment of just how much competition there is? How many groups they considered from the beginning? Whether they are broadening their net core narrowing it, it tends to be the same type of process regardless of time. So, I've never really seen a big change there..

Okay, thanks. And now that's becoming pretty clear that your business is reaccelerating again.

What the benefit of the little bit of hindsight? Can you give us here your sense about what happened kind of late'16 and early '17, as this just a normal ebb and flow of the business from your prospective? Or was there a change in how clients are thinking about the world? Thanks..

Sure, I mean I don’t know what was the ultimate underlying cause of it, but we had a fair number of our less low financed clients having a pause in their plans related to funding that is finally closing on funding, a lot of our clients have plans on funding, depended upon and getting to a certain stage and ready to move forward, and that’s a tightly coordinated and demo for that.

They don’t take cash and they are not getting loan before. They’re not usually having to delay to long and initiating a project. And we had a number that had substantial difficulties in closing and we had a number of clients that had ongoing programs that had funding in place at least commitment for funding that then evaporated in some way.

So -- and I know there was a funding difficulty across a subset of our business, which is an important part of our business. But I don’t know the underlying dynamics whether it was concerned about pricing pressure and lot of other things going on in the political environment. I really don’t have any insight to that..

Great. Thanks. One last quick one for Jesse.

Jesse, can you just give us an update on the bad debt situation? Do you have any items on the balance sheet that you think could be in a position that have to write off?.

Sure, thanks. So, the bad debt in the quarter that we recognized in the Q3 was around a $100,000 and many of the credit challenged customers that drove comments earlier in the year have secured at least some funding.

And we had to have strong cash flow collections against cash receivable in the quarter, so I think we're fairly baseline from a bad debt perspective..

Thank you. And our next question comes from Dave Windley with Jefferies. Your line is now open..

Hi guys this is [Jerry Megason] on for Dave this morning. Just wanted to briefly touch on August, you had mentioned 4Q the decline in sequential revenue growth.

Can you guys just elaborate a little bit on underlying factors driving that? And as I believe I do the math correctly it implies a little bit lower EBITDA margin, so could you touch on that as well?.

Sure, Jesse. I'll take that one. So, the decline sequentially from Q3 to Q4 expected in revenue is really a function of Q3 having some benefit from -- some revenue benefit from the delayed recognition for a few of these credit challenged projects from earlier in the year.

So, that was drove -- was driving the revenue to be down expected a little bit in the fourth quarter. And then from a margin perspective, implying the margin will be down also in the fourth quarter. That's a function of that revenue decline as well as some continued increase in cost and primarily employee related cost..

And then in 2Q you guys had discussed a decline in RFP volumes, but expected your win rates to improve.

Is that kind of gave system without 3Q played out and where's RFP volume currently?.

Yes, let me just first say that there is a reason we don't quantitate RFP volume because it's -- we don't think it's meaningful in the aggregate. There is a lot of factors. We look more to quality.

I mean RFP volume includes across service lines, across companies, across existing versus new accounts, across therapeutic areas and various opportunities for winning. So -- an overall number doesn't do us much, and we don't think it's really meaningful.

But I think we're very comfortable with the RFP flow we have and the quality of the opportunities we have. As I said that the business environment is much improved over six months ago and has really continued not just in third quarter, but into fourth quarter which we've seen a third of so far.

So we feel pretty comfortable that at least the difficultly which we reign into are abated and things are moving forward pretty well..

And then just last one from me. If I do the math on your revenue growth by client size, it seems most of that's been driven by the midsized pharma clients.

Is that kind of consistent with what you've been seeing with bookings? Or is that been skewed more towards the smaller pharma?.

Yes, it's really the growth is coming from mid and small..

Thank you. And our next question comes from Donald Hooker with KeyBanc. Your line is now open..

So I guess I've been sort of tracking your staff levels and you're starting to grow revenues and your staffing is remained relatively stable.

So I would assume that there's fairly decent operating leverage there going forward, I guess 0.1 will be, is that a fair sort of induction? And then can you give any clarity around where you thinking you need staffing levels to be in the near-term? I guess there about 2500 folks now. Thanks..

Yes, okay. So staffing hasn’t changed much because we really haven't started to accelerate revenue. As Jesse mentioned, the increase in Q3 was driven a fair amount by delayed recognition. So revenue has been somewhat flat I mean it's been ticking up or up 4% on year something like that, but it's not been a great increase.

We do expect to acceleration in Q1 and with that at some point in 2018, we will begin hiring again, we do have a little bit of leverage there, but I wouldn’t translate that into a large change in our margin.

We do think our margins at around 28% is sustainable level, and we will begin to hire in the new year as revenue picks up, but I think currently we just kind kept numbers about the same last three quarters..

Okay, got you. So, you're sort of I guess interpreting your comments here somewhere in your base line in terms of your employee base..

I think for a growth environment, we're pretty much near base line. That means we have a reasonable amount of slack but we don’t intend to take up that slack, if we anticipate meaningful growth in the New Year which we do..

Got you. Last question for me. Can you -- maybe for Jesse kind of looking ahead in terms of I understand you have a number of capital projects that you're focused on next year, if I recall correctly around the lab and building out new capabilities if that’s right.

So can you talk about what kind of run rate CapEx level we should expect going forward? Obviously, you had a nice free cash flow this quarter kind of get a sense of the sustainability of that? Thanks..

Sure, thanks John. CapEx as a percentage of revenue in the third quarter was about 2.3%.

We do expect it to increase in the fourth quarter to approximately 6% primarily related to some of those projects around expanding our laboratory logistics facilities, and then as far as CapEx percentage going forward, we would expect it to be up in that 6% or so percent range into next year..

Thank you. And our next question comes from Erin Wright of Credit Suisse. Your line is now open..

Can you comment on sort of your win rate in the quarter and broader pricing discussions that you're seeing across kind of the environment right now? And then also I'd like to follow up kind of where was your cancelation rate relative to the typical kind of 4% of 5% sort of range? Thanks..

Our win rate was good. I think again we were very comfortable with the quality of the opportunities we're seeing of late and we had a pretty strong win rate in the quarter. So we’re comfortable with that overall. Sorry, second part of the question..

Second part I will take it. Obvious with cancelation rate in the third quarter and our long-term average has been around 4% to 5%. Cancellations in the third quarter were not higher than that and there wasn’t any individual in notable cancellations to speak off in the third quarter..

And then just a follow-up, kind of a broader biotech funding environment. I mean, are you seeing anything or hearing anything that's unusual or notable, these are your kind of conversations with your smaller biotech customers? Thanks..

Yes, we're not seeing anything notable like we were earlier in the year. In terms of funding environment, impacting new business and new programs going forward, we're not seeing that have any unusual influence either positively or negatively here in the third quarter..

[Operator Instructions] And our next question comes from Robert Amparo with Wells Fargo Securities. Your line is now open..

Just a quick question on modeling, so absent tax reform.

What tax they should be modeling as a steady stake going forward?.

So, our Q3 effective rate was 35.1%, we do expect full year for 2017 to be approximately 36% and that's probably a good baseline give or take as we think about tax rate into the near term as you mentioned absent any changes from tax reform..

And I'm not showing any further questions at this time. I would now like to turn the call back over to Dr. August Troendle for any further remarks..

Alright, thank you very much for joining us for our third quarter earnings call, and I appreciate your interest in Medpace. And we look forward to speaking to you again on our Q4 and full year 2017 earnings call probably in February..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may everyone have a wonderful day..