Good day, ladies and gentlemen, and welcome to the Medpace Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. 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..

Good morning. And thank you for joining Medpace's third quarter 2022 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, including the ongoing impact of COVID-19 on our business, 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 Web site at investor.medpace.com.

With that, I would now like to turn the call over to August Troendle..

Good morning. RFP metrics were reasonably strong, though down slightly on a sequential basis in Q3. Initial award notifications, which I described in our second quarter call was weak, recovered strongly and were in at a healthy level in the third quarter.

This was surprising outcome given the continued financial challenges faced by a large fraction of our clients. Headwinds to revenue from delayed funding, reprioritization and even bankruptcy were higher in the quarter, but not yet broad based.

The business environment is challenging and we remain concerned that a prolonged period of depressed funding flows will eventually lead to a rapid escalation in project delays. Our initial 2023 guidance reflects this caution and we anticipate slowing growth next year. Jesse and Kevin will now review our financial results for Q3..

Thank you. August, and good morning, everyone. Revenue for the third quarter of 2022 was $383.7 million, which represents a year over year increase of 29.8%. Net new business awards entering backlog in the third quarter increased 15.4% from the prior year to $470.9 million, resulting in a 1.23 net book to bill.

Ending backlog as of September 30th was approximately $2.2 billion, an increase of 20.9% from the prior year. We project that approximately $1.17 billion of backlog will convert to revenue in the next 12 months. Backlog conversion in the third quarter was 17.7% of beginning backlog.

And we continue to make progress in hiring, adding 11% to head count from the end of 2021 and 13.7% from the prior year. And with that, I'll turn the call over to Kevin to review our financial performance in more detail, as well as our guidance expectations for the balance of 2022 and initial guidance for 2023.

Kevin?.

Thank you, Jesse, and good morning to everyone listening in. As Jesse mentioned, revenue was $383.7 million in the third quarter of 2022. This represented year over year increase of 29.8% on a reported basis and 31.9% on a constant currency basis.

Revenue for the nine months ended September 30, 2022 was $1.066 billion, and increased 27.8% on a reported basis and 29.3% on a constant currency basis from the comparable prior year period. EBITDA of $89.3 million increased 48.5% compared to $60.1 million in the third quarter of 2021.

On a constant currency basis, third quarter EBITDA increased 41.5% compared to the prior year. Year-to-date EBITDA was $227.7 million and increased 40.9% on a reported basis and 35.7% on a constant currency basis from the comparable prior year period. EBITDA margin for the third quarter was 23.3% compared to 20.3% in the prior year period.

Year to date EBITDA margin was 21.4% compared to 19.4% in the prior year period. The increased EBITDA margin was driven by revenue growth, net foreign exchange benefits behind the strong US dollar and slower headcount growth compared to 2021.

In the third quarter of 2022, net income of $66 million increased 35.9% compared to net income of $48.6 million in the prior year period. Net income growth over the prior year was primarily driven by higher EBITDA, offset by interest expense and the higher effective tax rate.

Net income per diluted share for the quarter was $2.05 compared to $1.29 in the prior year period. Regarding customer concentration, our top five and top 10 customers represent roughly 17% and 25% respectively of our year to date revenue.

In the third quarter, we generated $108.5 million in cash flow from operating activities and our net day sales outstanding was negative 40.5 days. We did not repurchase any shares during the third quarter. In October, our Board of Directors authorized the company to repurchase up to 500 million of the company's common stock.

During the quarter, we paid $110 million against the credit facility and our net debt position at the end of the quarter was $108.7 million, which was composed of debt of $139.7 million and cash of $31 million. Our net leverage ratio is approximately 0.4 times last 12 months EBITDA. Moving now to our updated guidance for 2022.

Full year 2022 total revenue is now expected in the range of $1.44 billion to $1.46 billion, representing growth of 26.1% to 27.8% over 2021 total revenue of $1.142 billion. Our 2022 EBITDA is now expected in the range of $302 million to $310 million, representing growth of 35.4% to 39% compared to EBITDA of $223.1 million in 2021.

Guidance is based on foreign exchange rates as of September 30th. This guidance assumes a full year 2022 effective tax rate of 16% to 17% and 33.7 million diluted weighted average shares outstanding for 2022. There are no additional share repurchases in our guidance.

We forecast 2022 net income in the range of $232 million to $236 million, which includes $3.3 million of interest expense on our outstanding debt. Earnings per diluted share is now expected to be in the range of $6.88 to $7. As Jesse mentioned, we are providing initial 2023 guidance for revenue and EBITDA.

For the full year 2023, we expect revenue in the range of $1.68 billion to $1.74 billion and EBITDA to be in the range of $325 million to $350 million. We plan to provide additional detailed full year 2023 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 Instructions] Our first question or comment comes from the line of Dave Windley from Jefferies. Your line is open..

August, you mentioned in your remarks some of the financial headwinds and even, I think, you mentioned even some bankruptcies, but that those weren't that broad. I guess, that mention seems, I guess, new or maybe somewhat intensified. So it would seem sequentially like a little bit of a headwind.

I'm looking at some of the metrics like your revenue burn rate actually accelerating by quite a bit. And those things seem to be at odd. So maybe you could help us to understand like what helped the backlog burn rate to accelerate in the quarter and how the margin jumped so much sequentially.

Was there any pull forward of revenue in the third quarter?.

No, I don't think there's any pull forward but projects did progress. I think, you got two things going on. We're a little bit concerned about new project starts, but we haven't really seen broad based delays there. But ongoing projects are going very well and that's what's driving conversion is the ongoing projects.

And I think that we made good progress on them. The pass throughs were even higher than service fees growth but projects are progressing very nicely and to a better extent than we expected. And the amount of what we estimated for delays and slowdowns and cancellations were less than what we expected, so I think we had a very good conversion..

Dave, the other thing to consider on margin in addition to revenue is just the FX impact that we saw in the quarter. The dollars significantly strengthened again in the third quarter. And for us it was about $6.5 million impact when you also factor in the FX gain from the revaluation of our balance sheet..

And that last part that you mentioned is the other income in the component?.

Yes, that's right..

So that kind of addresses the margin question. I guess, on that, August, you've talked about how contracts are solidified sometimes -- some amount of time, probably less in your case than others perhaps in terms of the lead time before your study start.

But then you have multiple years of kind of living with those contracts and certain price escalators baked into those contracts that may not be able to be renegotiated. I guess, if anything one would expect that those would be headwinds to your margin. FX maybe is overwhelming that.

But have you been able to negotiate labor inflation up some to protect yourself there?.

We haven't really addressed labor inflation on existing contracts to any extent. Obviously, we do annually and sometimes even small tweaks in between in terms of pricing on new projects, but they're not reflected in our current work. Things that we're bidding in the last nine months or not are not really burning.

So pretty much this reflects awards that were in place a few years back. And there's no real way to address inflation other than the contractual terms, which generally have a set fixed amount of increase each year..

Our next question comes from the line of Sandy Draper from Guggenheim Partners Draper..

Maybe a little bit of a follow-up to Dave’s question, but thinking about your ‘23 guidance, which was admittedly pretty strong. I was surprised, August, you commented that feels like it baked some conservatism. And so I know you're not going to give complete granularity.

But when I think about the inputs are going to drive the revenue growth, you've got what your bookings and implied book to bill shake out to be, what the backlog burn is, and some of that is trials but also mix of service revenue, et cetera.

And so I'm just trying to think about in your -- and then maybe cancellations in your guidance, can you give us sort of some thoughts about are you expecting bookings levels or book to build at these types of levels implied, or is it deceleration? And generally for ‘23, do you have an expectation of the backlog burn sort of stabling at this level? Because it sound like it picked up or is it continue to stay up.

I'm just trying to triangulate what sort of built into the guidance, because again, I was a little bit surprised when you positioned it saying on the conservative side, because that's pretty darn healthy guidance..

Yes, I think we expect book to builds to be in the similar kind of range that they have been this year. We actually think they'd be stronger if we didn't expect to slow down. There's a lot of factors that go into that so I don't know.

But we did look at the entire pipeline and what prior -- what things we have for decision and what decisions have been made kind of our initial awards and how they're going to flow through and model that. And we then said, well, we do still expect -- we're kind of looking for Jamie Diamond's financial hurricane.

I mean, we keep expecting that there's going to be a pretty broad based slowdown in starts and also seek some cancellations, uptick in cancellations that are meaningful, given the funding environment and given the feedback we've gotten from clients and what we're seeing. But we've been to work around it largely to date.

We do expect that to yet hit us at some point. If it doesn't, there's upside in our guidance. If it does, hopefully, we're not below where we've come out on our guidance. You can't -- there's nothing we can do about a very broad based substantial cancellations situation. We don't anticipate that.

But I do think we've put enough conservatism into the guidance that the slowdown we're kind of expecting will allow us to achieve within our guidance range..

And then my next question then I'll leave the floor, probably for Kevin or maybe Jesse. When I look at the EBITDA guidance for next year, obviously, growing slower than revenue.

So just thinking through the margin, is there -- is some of that mostly coming through the gross margin side and thinking maybe it's a mix of service revenue to pass throughs and maybe higher pass throughs, or is that sort of inflation? Just trying to think what is pushing on the expenses is more gross margin line, it’s driven by general inflation or service revenue mix, or is it more in the SG&A line?.

Just to answer your questions, a couple of things that are going on. One is the FX gain that you see in miscellaneous income, that's just driven by the revaluation of the balance sheet.

And so to the extent that rates stay consistent, we don't expect to see a positive or negative influence from that in 2023, and there's $7.8 million year-to-date in foreign currency gains right now.

The other component is just on in terms of building in some level of continued installation or retention efforts in hiring is to make sure that we can support the anticipated growth in '23..

Our next question or comment comes from the line of Mr. Max Smock from William Blair..

I just wanted to ask a quick one here on revenue by Customer Care. Based on their deck, it seems like midsize and large pharma were both really strong in the quarter.

I think each increased by 1% based on year-to-date revenue and small biopharma, it seems like obviously very impressive, but as a percent of revenue, year-to-date dropped off a couple of percent.

So just wanted to see if you had any detail you could provide around whether or not there any notable wins in the mid to large pharma space that we should be aware of, and then any cause for concern on the drop off in small biopharma as a percent of revenue beyond what you've already talked about in terms of some of the near term headwinds from the slowdown in funding that we've seen over the last couple of quarters here?.

Max, nothing really good to point out there. Other than when we do have activity in the mid and large, it tends to be a little bit lumpier than how revenue spread across the population of small biotech customers.

But nothing really that I'd point out there in terms of any therapeutic concentration or specific customer concentration that really drove activity in the quarter..

And then I wanted to go back to the 2023 guide again and appreciate the conservatism that you've built in there. But in terms of funding and whether or not we see it pick back up here near term, if we do actually see it pick back up here near term.

Do you think there could actually be some upside to 2023 guide? Or given the lag between bookings and revenue, would this actually be more of an impact for 2024? And then assuming funding, that's going to pick back up in the next couple of quarters.

Is it fair to think about revenue growth reaccelerating back into that 20% range in 2024 and beyond? And then sorry for lumping a few in here.

But relatedly on the other hand, if we don't see funding pick back up, do you think about 2024 maybe dropping off further from the projected year-over-year growth that you're guiding to in 2023?.

The longer the slowdown in biotech funding, I think, the greater the headwind for us. So I do think it is cumulative. So 2024 would be impacted by very prolonged depression of revenues. If things snap back, yes, there's upside to the 2023.

We've kind of baked in some disruption, both in terms of starting of programs, delays, as well as some kind of cancellation expectations, to get to where we are in the guidance. Again, not a disastrous kind of scenario that could be below. But we have had -- we have tried to be more conservative than usual in terms of anticipating that slow down.

But there certainly is upside if funding rebounded or we don't have the slow down that we expected. And we would look at the last few years and yet 20% plus revenue growth should be quite possible if things don't deteriorate or funding snaps back.

Does that answer your question?.

Yes, that's very helpful. Thank you. And I'll leave it there. Thanks..

Our next question or comment comes from the line of John Sourbeer from UBS..

Congrats on the quarter and the impressive guidance.

Just I was wondering, is there any additional color you can provide on that recovery on the initial award notifications that you saw in 3Q versus 2Q, and do you think that recovery is sustainable as we head into 2023?.

Yes. I think it's sustainable. We didn't really understand why it dropped. We thought it was the beginning of broad based slowdown, and we have not seen that yet. It did come back and the numbers were consistent with prior quarters, substantially up from Q2. So we haven't seen any more.

We thought the beginning of a broad based slowdown, it was a fault signal, I guess, we could say, at least to date, we still anticipate there to be some slowing. But we just haven't seen a great deal of it to date.

There's anecdotal and we do have -- we have had additional projects that have been delayed and as I mentioned even bankruptcy, which is pretty uncommon in an ongoing meaningful project. But we haven't seen it very broad based to affect our growth to a large extent. So again, I just have to leave it at that. So far things look pretty good..

And then just on the cash burn and the increase Q-over-Q and year-over-year and 3Q.

Just any additional color there and then just thoughts given some of the hiring over the last year on just what that trajectory looks like in 2023?.

You said the cash burn?.

Yes..

In the context of….

The cash conversion maybe being a little bit lower….

Yes, the cash conversion, it is pretty volatile for us. We had another good quarter of free cash flow generation, really just driven by earnings and positive working capital. We had a little bit of a blip in the first quarter, if you recall, but things have recovered nicely since then..

John, I was just going to comment on the hiring and the headcount growth. We did pause a little bit or slowed things down a little bit in the third quarter, just given the uncertainty in the environment. We are ramping that back up and do expect healthy hiring expectations in 2023. since in 2023. It does continue to be a challenging environment.

So we're really focused on hiring, we're focused on retention because the labor market still is a tough one..

And then just last one on the -- and I think that maybe Dave touched on it on existing contracts, but just on pricing for new contracts.

Any thoughts there on are you seeing any pressure, or just repricing for some of that wage increasing?.

I think it's kind of we have as we always -- as each year we do evaluate our rates. And in the current environment, it is a little bit larger bump than the last several years. But no, haven't seen much push back.

I think it's -- obviously, it's a competitive environment and everyone is looking, particularly in our clients in this current environment where their funding is down, they're looking for saving dollars and we have that conversation about how the inflationary environment's going to determine our rates.

But as long as we're competitive, we've just not seen unusual push back at all, no..

[Operator Instructions] Our next question or comment comes from the line of Eric Coldwell from RW Baird..

On the -- there was a question earlier on the business mix in the quarter, and jumping off of that.

Do you possibly intend to or consider increasing your business development focus on larger clients in this environment? Do you maybe get a bit more aggressive on larger biotech or a little more open to working with big pharma just to provide some additional avenues for growth and bookings if you are worried about the smaller client trajectory?.

No, that's just not really our focus and not where we -- where the model really matches well. And we just -- it's not where it's such a bad situation that we think we have to kind of jump out into a new adjacency. So it really is largely a different market there.

We do pay a lot more focus on the funding of the client, and so we might move up in terms of size of the biotech client to some extent, there maybe some movement there. But I don't think we're really moving to mid size or large pharma companies with any kind of focus.

Those opportunities occasionally come to us but we don't go out [soliciting] in that group..

Bankruptcies, I'm curious, could you share how many total active clients you have this year and how many bankruptcies across that, whatever that number, that cohort is? How many bankruptcies in total did you experience in 3Q or you to date?.

No, and I don't even know that that's a number, because like how much work you're doing is what matters. We had one client that had a meaningful amount of work ongoing and was ahead and we actually had some loss, because of it a few million dollars and lost opportunity in a bankruptcy that was a meaningful sized project.

And that doesn't come up very often. I mean, usually it's very laid on and we have very little revenue left or something or very early on, and there's just not much impact. So it was more than usual in terms of just the dollar value. But I don't have a good metric on, total number of clients over time that have declared bankruptcy.

And of course, again, you'd have to look at the impact of that, how big a -- what the backlog was with them, when it happened and how much unpaid revenue did we have and all the rest of it, but I just don't have that..

And then I know you don't specifically quantify cancellation rates most of the time. But could you -- and I apologize if I missed this.

Did you give a cancellation rate or quantify whether it was at, above, below normal this period?.

I did not, but our cancellation rate was actually in a very good range. Now what we do talked about in terms of cancellation, I should step back a second and say we've talked variably. We have a formal cancellation rate, although, we don't give it. So you know, generally, but we talk about it being in the kind of 3% to 5% range.

And that's a backlog, so that's a actual ongoing backlog that's 3% to 5%. Sometimes we talk about total cancellation of projects, and we expand that to mean anything that's been awarded to us even though it hasn't started, and things just -- and at times of a slowdown, sometimes that's what happens is you get clients initially delay the startup.

They say, wait a minute, we're still waiting to close on funding, and so we're holding off, we're not putting in backlog, we're not starting. And then eventually they can't start it and they cancel it. And so sometimes we talk about that. In the broader scheme, we have not seen a very broad based blip in cancellations.

And our formal cancellation rate was well within that range of 3% to 5% for backlog projects. So from those kind of metrics, things look pretty good on the quarter. I mean, they actually look better. Our metrics in Q3 were better than Q2. So it's hard to see where things are going..

Can I -- when you say the metrics, it sounds like a broad based comment. When you say metrics look better, would that translate also to win rate and pipeline? I'm curious if you can give us a number….

Win rate ticks up. RFPs, as I mentioned, were slightly down. But win rate came back. I think we mentioned last quarter, it was down a little bit but not a lot. But award notifications were strong.

So across the -- it looks very, like a very strong environment but we've got a lot of clients that are also in financial distress and we've had more sort of impairments in things than usual over the last quarter or two. So I don't know. It's a -- we keep waiting for the real impact to hit, and I haven't seen it and I don't know if that it'll hit.

But the longer funding deficiency proceeds for our clients, I think the greater the risk. The last slowdown, it was pretty rapid and we saw a substantial broad based slowing of starts and we saw cancellations.

And we did a lot to try to invest in business development and broadening the view we get of clients and be able to adapt, hopefully, rapidly to a slow down among a subset of our clients. And I think we've -- I think, so far, we've done that outstandingly. How much you can do that? There's a limit to it, and eventually we get hit.

So I do think it depends on the duration. The downdraft in funding was substantial. We've seen it in our clients. So far we've been able to avoid that affecting our bookings and progression of overall number of projects. Although, there is a subset of our clients that are impaired. And so those have been delayed and we've been able to pivot to others.

How long that can go on? I just don't know..

Our next question or comment is a follow up from Mr. Dave Windley from Jefferies..

August, you introduced this initial project awards metric last quarter, and we're all probably trying to understand how to think about it within the context of your sales pipeline progression to RFPs, to initial project awards, to bookings. And I'm going to guess that initial project awards moving to bookings is not lock step.

They're not -- it's not everything moves at two months or three months or four months or whatever.

But if we have a full quarter's worth of initial project awards that were down 45% year-over-year from what you described last quarter and you apply that negative 45% to 3Q of last year's bookings, 4Q of last year's bookings, 1Q of this year, it suggests a well below 1.0 book-to-bill.

And everything you're saying today suggests that you're going to sidestep that, you're going to be able to do the [delay] on a really bad book-to-bill or am I misinterpreting? Maybe -- I'm just giving you the opportunity to help us understand better how that initial project award flow proceeds to bookings and backlog, and how you're able to smooth that over without having a book-to-bill that would really make an 18% growth rate next year look pretty challenging?.

I mean, I see where you're trying to go and say you have this glitch in the pipeline and that has to show up late in the pipeline. I mean, later down flow. And I guess there's just a lot of factors that it isn't just liquid flowing through a pipe. Things fall out of there.

The duration in which, which are certainly affected by the environment, the duration in which they take before they get to backlog is influenced. And our win rate is a big factor in changing that. I mean, you can have a much lower flow and the win rate comes up and can completely eliminate the deficiency down the line.

So I guess, I don't know, if there are. There are a lot of moving parts. We had a decreased amount of -- but you have to put it in the context of several quarters of very strong initial award notifications. We had a very low quarter. I don't know why they snapped back.

And we have an changing win rate and duration of waits on projects and projects fall out. I mean, just because they're award notifications, doesn't make the -- I mean, they ever make it to backlog. That's part of the broader context of cancellations, but are not in our cancellation metric.

So if you have a reduced number of projects and initial award notifications but you have somewhat lower attrition of those heading toward RFP, the same number may make it into RFP and especially if you've got a changing win rate. So there are lots of ways to work around a low initial awards in a quarter. And I don't know if they're ever visible.

If they'd be seen, it would be a couple quarters down the line on average. And that's what I said, I think, last quarter. But that's on average and that average doesn't mean anything, and other factors can change it to be nothing..

[Technical Difficulty] the other driver of revenue, right, is just what your burn rate is. And so it's a combination of your burn rate -- not just book to bill but your burn rate, rhat's something to be considered as well..

Thank you. I'm showing no additional questions or comments in the queue at this time. I'd like to turn the conference back over to management for any closing remarks..

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 fourth quarter 2022 earnings call..

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day..