August Troendle – President and Chief Executive Officer Jesse Geiger – Chief Financial Officer and Chief Operating Officer, Labs.

Erin Wright – Credit Suisse Jason Twizell – MUFG Securities Donald Hooker – KeyBanc Eric Coldwell – Baird.

Good morning, and welcome to Medpace’s Second Quarter 2018 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 factors important that could cause the Company’s future results to differ materially from management’s current expectations, including those discussed in the Risk Factors section of our Form 10-K for the year ended December 31, 2017, 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 welcome to Medpace’s second quarter 2018 earnings call. With me on the call is Jesse Geiger, our Chief Financial Officer and Chief Operating Officer, Labs. Q2 revenue ramped faster than anticipated, with projects progressing rapidly and with few funding hurdles that we observed last year.

The business environment continues to strengthen. Bookings in the quarter were broad-based without unusual concentration by project or client.

We continue to have a strong presence in oncology but have successfully limited – maintained a diversified portfolio with respect to therapeutic area despite the overwhelming bias toward oncology in the small biotech client base we serve.

I believe we are well positioned going forward to continue to capture share organically in the market as we have done consistently over the past five years. Our constant-dollar organic revenue growth in Q2 over last year’s second quarter was 24%. Jesse will now review our financial performance for the quarter and update guidance..

Thank you, August, and good morning to everyone listening in. We are now presenting net new business awards and backlog on both the ASC 606 and ASC 605 basis. We will continue to present this way for the duration of 2018 before fully transitioning to the ASC 606 basis only beginning in 2019.

Net new business awards entering backlog in the second quarter under ASC 606 were $239.9 million, resulting in a 1.41 net book-to-bill. On a ASC 605 basis, net new business awards were $155.9 million, representing a net book-to-bill of 1.32. Revenue under ASC 606 was $170.1 million in the second quarter of 2018.

Net service revenue under the previous standard, ASC 605, was $117.8 million, which represents year-over-year growth of 24.6% on a reported basis or 24% on a constant currency basis.

The continued revenue momentum in the second quarter was fueled by a robust biotech funding environment, strong net awards and an accelerated pace of existing projects across the portfolio. Adjusted EBITDA was $32.9 million for the second quarter of 2018.

Under ASC 605, adjusted EBITDA was $35.8 million, which increased 33.6% compared to $26.8 million in the second quarter of 2017. On a constant currency basis, under ASC 605, second quarter adjusted EBITDA increased 33.7% compared to the prior year.

We increased employee headcount to 2,661 employees at the end of the second quarter, and we continue to hire aggressively across the company as well as continue investments in business development activities and bandwidth. Adjusted EBITDA margin was 19.4% for the second quarter of 2018.

Adjusted EBITDA margin for the quarter under ASC 605 increased 210 basis points to 30.4% versus 28.3% in the prior year period. This increase was primarily attributable to higher revenue, partially offset by higher employee-related costs.

When comparing adjusted EBITDA and adjusted EBITDA margin between ASC 606 and ASC 605, keep in mind that the inclusion of reimbursed out-of-pocket revenue and revenue from fees paid to investigators in the ASC 606 calculation has an impact on the margin percentage, and there are potential timing differences between the recognition of the revenue and the related costs in any given period.

However, this does not impact the underlying economics over the life of the contract. In the second quarter of 2018, GAAP net income was $16.6 million under ASC 606 and $18.8 million under ASC 605, which compares to GAAP net income of $9.6 million in the prior year period.

Adjusted net income under ASC 606 was $22.4 million in the second quarter of 2018. Under ASC 605, adjusted net income was $24.6 million in the second quarter, increased 58.9% compared to $15.5 million in the prior year. Adjusted net income growth was primarily attributable to revenue growth, partially offset by higher employee-related costs.

Under ASC 606, GAAP net income per diluted share was $0.45 and adjusted net income per diluted share was $0.61 for the second quarter of 2018. Under ASC 605, GAAP net income per diluted share for the quarter was $0.51 compared to $0.23 in the prior year period.

Second quarter 2018 adjusted net income per diluted share of $0.67 grew 76.3% versus second quarter 2017 adjusted net income per diluted share of $0.38. By therapeutic area, our revenue growth was primarily driven by oncology, cardiometabolic and antiviral, anti-infectious diseases, or AVAI.

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 22% and 33%, respectively of our total revenue. Turning now to our leverage and liquidity positions as well as free cash flow conversion.

In the second quarter, we generated $41.3 million in cash flow from operating activities, and our net days sales outstanding on an ASC 605 basis decreased compared to the first quarter from 8.7 days to 4.1 days. Our net debt position at the end of the quarter was $142.1 million, composed of gross debt of $164.4 million and cash of $22.2 million.

Our net leverage ratio is approximately 1.2 times trailing 12-month adjusted EBITDA. And now for our guidance update. Consistent with the guidance given last quarter, the 2018 guidance update that we are presenting today is based on ASC 605. And this guidance assumes exchange rates for the second half of the year based on exchange rates as of June 30.

Our revised guidance reflects net service revenue in the range of $461 million to $473 million for the full year 2018, representing organic growth of 19.3% to 22.4% over 2017 net service revenue of $386.5 million.

Our revised 2018 adjusted EBITDA guidance is in the range of $135 million to $141 million, representing organic growth of 25% to 30.5% over 2017. We still anticipate our 2018 effective tax rate to be in the range of 22% to 25%.

We forecast 2018 GAAP net income in the range of $69.8 million to $73.9 million and GAAP earnings per diluted share in the range of $1.90 to $2.01. On an adjusted basis, we forecast 2018 adjusted net income in the range of $92 million to $96 million, representing growth of 52.2% to 58.8% and $2.51 to $2.62 per diluted share.

This represents growth of 65.1% to 72.3%. And with that, I will turn the call back over to the operator so we can take your questions..

[Operator Instructions] Our first question comes from the line of Erin Wright with Credit Suisse. Your line is now open..

Great, thanks. Can you speak to the nature of the new business wins in the latest quarter? Looking at your therapeutic mix and customer mix, were there any one-off, more sizable or disproportionately larger factors contributing or influencing that new business win number? Thanks..

Yes. As I tried to mention in my opening remarks, it was pretty diversified. There was no unusual concentration for either client or project. So it’s pretty broad. In terms of therapeutic mix, it was a bit more oncology than our overall portfolio. We’re still moving in that direction. It was pretty broad, though. No real lumpiness..

Okay, great.

And then can you discuss the broader RFP environment? Were you seeing RFIs converting to RFPs? Is this trend accelerating? And how should we think about, I guess, that seemingly strong biotech funding environment and how that’s contributing to bookings metrics? And if you can give a sense of, I guess, those types of wins in terms of midsized to biotech, that would be great.

Thanks..

Okay. So it was very strong and the strength was overwhelmingly small biotech. And in fact, I think our small biotech client revenue is 60% or so of our revenue. It was over 70% of awards. It’s, if anything, going more and more towards smaller biotech companies. We did have good progress on – as I said, the business environment has been very strong.

We’ve seen a lot of proposals. A lot of RFPs were up. I think we’re winning our share. I think the market is overall very strong. I think the one thing that surprised us was the revenue growth, which we did not think was going to take off quite as rapidly in the second quarter.

And that was really surprisingly easy steady start-ups on a number of programs. No delays, no client delays, no mid-based delays, things have been running very smoothly. In last year, we had a lot of sort of slowdown by clients, either due to funding or for whatever reason, and which we haven’t seen that, so things have moved along quite rapidly..

It’s great to hear. Thanks..

Thanks, Erin..

Our next question comes from David Windley with Jefferies. Your line is now open..

Dave, are you unmute?.

Our next question comes from Jason Twizell with MUFG Securities. Your line is now open..

Hi, good morning, everyone. In terms of the investments, I just wondered if you could talk a little bit about where you expect to see additional capital deployed over the next year and if that is more domestic or abroad, perhaps in Japan and China, which you’ve discussed in prior quarters..

Sure. Thanks, Jason. As it relates to capital expenditures, some of the near-term capital outlays this year are more abroad as we’re expanding a number of additional offices that require some build-out space, IT, equipment, furniture, et cetera. So that relates to largely offices outside the U.S. during this year and into next year.

The real expansion starts – from an office space perspective in the U.S. begins in 2020 as we’ll be putting up another building and taking on a larger lease here in the U.S. So that’s where the mix is from an office space standpoint. In our laboratory, we are expanding, started last year and into this year, both some of our space in the U.S.

and also in our Belgium facility..

Okay, great. Thank you for that. And then on the staffing side, as I – about a 4% sequential uptick in the headcount, are you still expecting to add lives in the second half of 2018? And then talk a little bit about the labor market conditions that you’re seeing, I guess, in U.S. and abroad..

Yes, we’re hiring pretty aggressively. I think our headcount is up 9% so far this year. We expect it to be up in the kind of range of our revenue, so we are going to hire quite aggressively through the year – through the second half of the year. And, of course, it’s easier to hire in the second half of the year.

I think our turnover tends to spike late first quarter with – we have the bonuses paid out. That tends to be a time of a little bit higher turnover in the industry overall. So I think we’ll be catching up with our revenue growth in terms of employee count.

We haven’t seen anything particularly challenging about the labor market, but it is always difficult to find good people and we are actively working on it..

Okay, great. Appreciate the color. Thank you very much..

Yes. Thanks, Jason..

[Operator Instructions] Our next question comes from the line of Donald Hooker with KeyBanc. Your line is now open..

Great, good morning. Question on your central lab business.

Are you guys seeing more demand there sort of separately from your core full service outsourcing? Is that a business that could be growing on its own as you’re expanding capacity there?.

Yes. Thanks, Don. We’re seeing good demand, I would say, balanced between the amount of lab works that comes as part of a full-service operation engagement with the CRO activities compared to some stand-alone lab activity. We’re seeing good progress in both areas.

I wouldn’t say either one is more outweighted, but the more that we are growing the overall business, that does have a pull-through effect that impacts the lab positively..

Great. And I don’t know if you’re able or willing to do this, but I would ask.

In terms of – as you look into the second half of 2018, given the sort of trends in funding and outsourcing in your client base, what is kind of a normal kind of book-to-bill ratio for you guys that we should sort of be targeting? I mean, it’s moved around a lot in the past. Obviously, this quarter is very, very strong.

And I guess same question for backlog burn. Is there any reason? I think in the past, you guys talked about a normal backlog burn of 19.5% to 20%. It seemed like there was some one-off – or it seems like this quarter might be an anomaly on that front.

But should we continue to assume kind of a – where should we assume sort of book-to-bill and backlog burn sort of for the rest of the year? Thanks..

Sure. Thanks, Don. We’re assuming a book-to-bill rate of about 1.15 in the second half of the year. Certainly, the 1.32 in the second quarter was an outlier, so we’re targeting something closer to 1, 1.15. As far as the burn rate goes, normal for us – more expectation is – for us is around that kind of 19%, 19.5% range.

It has been trending higher up in the north of 20% so far this year. So I would expect that for the balance of this year, it’s probably going to stay around that 20% range or so..

Okay, thank you..

Thanks, Don..

Our next question comes from Eric Coldwell with Baird. Your line is now open..

Hey, thanks very much. Your incremental margin is extremely high, especially considering the four margin headwinds you cited earlier in the year and also the comments that you’re going to grow headcount almost at parity with revenue growth, which is pretty aggressive hiring.

So simple question, how are you getting there to be exceptionally high numbers? Is it pricing? Is it the easy start-up and study mix that August cited? Is there some other factor here that’s helping you do that? Thanks very much..

Yes. It’s – I think things just moved along rather smoothly. Our utilization, obviously, has picked up a fair amount. So not particularly high on a historical basis, but in the last year and half, it’s at a high. So I think we are utilizing a lot of select capacity.

We wanted to keep quite a bit of select capacity because if we anticipate growing double digits going forward, there is a long lag time, and that’s why we’re hiring now. We’re not hiring now for people that will be utilized particularly, necessarily this year. It’s kind of future growth.

So we’re trying to keep it ahead of the curve so we can maintain our growth. But we have used up more of that select than we anticipated. Our revenue ramped faster than we anticipated. But I don’t think there’s any sort of pricing dynamic here.

It is true that as business development gets rather strong, we are a bit more selective on projects, but our pricing doesn’t change..

Eric, are you there?.

You have a follow-up question from the line of Erin Wright with Credit Suisse. Your line is now open..

Could you comment a little bit on the competitive landscape? Are you seeing any sort of new phases when setting for RFPs or the usual suspect? And is everyone behaving rationally from a pricing perspective? I know you just commented a little bit on pricing, but I’m curious what you’re seeing as far as the competitor competitively see those things..

Yes. Thanks, Erin. We’re not seeing any irrational pricing behavior competitively. We’re up against the same cast of characters that we traditionally have been, and that is largely the public peers and PPD. And so no outrageous behavior that we’re noticing. And we’re seeing a good volume of RFPs, and we’re winning our share..

Okay, great. And then just one more follow-up, if I can. I understand your business is more skewed towards biotech, but I’m curious kind of what you’re hearing, if anything, from customers around the broader scrutiny on drug pricing out of Washington. Or is it a little bit too early for your customer base? Thanks..

Yes, we really don’t hear anything on that..

Okay, great. Thank you..

Yes, thank you. Thanks, Erin..

I’m not showing any further questions at this time. I’d like to turn the call back to management for any closing remarks..

Well, thank you. I hope everyone had a chance to ask questions. I’m sorry if Dave got somehow disconnected or what. But thank you, everyone, for your interest in Medpace and speak to you again in October, I guess, at our Q3 earnings call. Thank you, everyone..

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may now disconnect. Everyone, have a great day..