Good day, ladies and gentlemen, and welcome to the Medpace's Second Quarter 2023 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 second quarter 2023 earnings conference call. Also, on the call today, is our CEO, August Troendle; our President, Jesse Geiger, and our CFO, Kevin Brady.

Before we begin, I would like to remind you that our remarks and responses to your questions during this teleconference may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These statements involve inherent assumptions with known and unknown risks and uncertainties, as well as other important factors that could cause actual results to differ materially from our current expectations. These factors are discussed in our Form 10-K and other filings with the SEC.

Please note that we assume no obligation to update forward-looking statements even if estimates change. Accordingly, you should not rely on any of today's forward-looking statements as representing our views as of any date after today. During this call, we will also be referring to certain non-GAAP financial measures.

These non-GAAP measures are not superior to or replacement for the comparable GAAP measures. But we believe these measures help investors gain a more complete understanding of results.

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

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

Good day. I'm going to make a couple quick comments on the business environment and turn things over to Jesse and Kevin to review the details. The business environment continues to improve. RFP volume in Q2 was up sequentially over an already strong Q1. Award notifications rebounded strongly in Q2.

We're making good progress toward strong 2024 in building our backlog.

Jessie?.

Thank you. Good morning, everyone. Revenue in the second [technical difficulty], which represents a year-over-year increase of 31.2%. Net new business awards entering backlog in the second quarter increased 27.6%, from the prior year to $574.8 million, resulting in a 1.25 net book-to-bill.

Ending backlog as of June 30, 2023 was approximately $2.57 billion. This was an increase of 18.6% from the prior year. We project that approximately $1.42 billion of backlog will convert to revenue in the next 12 months, and backlog conversion in the second quarter was 18.7% of beginning backlog.

And with that, I will turn the call over to Kevin, to review our financial performance in more detail, as well as our guidance expectations for the balance of 2023..

Thank you, Jesse. And good morning to everyone listening in. As Jesse mentioned, revenue was $460.9 million in the second quarter of 2023. This represented a year-over-year increase of 31.2% on a reported basis, and 31% on a constant currency basis.

Revenue for the six months ended June 30, 2023 was $894.9 million and increased 31.2% on a reported basis and 31.3% on a constant currency basis from the comparable prior year period. Revenue growth for the quarter was favorably impacted by higher pass-throughs particularly at investigator sites.

As a reminder, pass-throughs impact both revenue and cost under the Accounting Standard 606 for revenue recognition. EBITDA of $83.6 million increased 22.8%, compared to $68.1 in the second quarter of 2022. On a constant currency basis, second quarter EBITDA increased 21.8% compared to the prior year.

Year-to-date, EBITDA was $176.5 million and increased 27.4% on a reported basis, and 25.2% on a constant currency basis in the comparable prior year period. EBITDA margin for the second quarter was 18.1%, compared to 19.4% in the prior year period. Year-to-date, EBITDA margin was 19.7%, compared to 20.3% in the prior year period.

EBITDA margin for the quarter was impacted by reimbursable cost, which accelerated further during the quarter, driven by increase in investigators site cost and continued improvement in site activity across the portfolio.

In the second quarter of 2023, net income of $61.1 million, increased 23.7%, compared to net income of $49.4 million in the prior year period. Net income growth over the prior year was primarily driven by higher EBITDA and a lower effective tax rate. Net income per diluted share for the quarter was $1.93, compared to $1.46 in the prior year period.

Regarding customer concentration, our top-five and top-10 customers represent roughly 23% and 30% respectively, of our year-to-date revenue. In the second quarter, we generated $82.5 million in cash flow from operating activities. And our net day sales outstanding was negative 42.6 days.

During the quarter, we repurchased approximately 126,000 shares, for a total of $23.9 million. As of June 30, 2023, we had 308.8 million remaining under our share repurchase program.

During the quarter we paid $60 million against the credit facility, ad our net debt position at the end of the quarter was $15.9 million, which was composed of debt of $55 million and cash of $39.1 million. Moving now to our updated guidance for 2023.

Full year 2023 total revenue is now expected in the range of $1.84 billion to $1.88 billion, representing growth of 26% to 28.8% over 2022 total revenue of $1.46 billion. Our 2023 EBITDA is now expected in the range of $340 million to $358 million, representing growth of 10.4% to 16.2% compared to EBITDA of $308.1 million in 2022.

The revenue guidance anticipates the higher second quarter investigators site activity and costs continue the balance of the year, as well as continued growth in direct service activities. Guidance is based on foreign exchange rates as of June 30, 2023.

This guidance assumes a full year 2023 effective tax rate of 17.5% to 18.5% and $31.8 million diluted weighted average shares outstanding for 2023. There are no additional share repurchases in our guidance. We forecast 2023 net income in the range of $256 million to $271 million.

Earnings per diluted share is now expected to be in the range of $8.04 to $8.50. 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 David Windley from Jefferies. Your line is open..

Hi, good morning -- excuse me. Good morning. Thanks for taking my questions. I wanted to dig in on the site commentary from few different angles. August, I think, well several of -- you actually commented that the level of throughput or activity at sites is improving. I wondered what you would attribute that to.

Is it better staffing, or is it perhaps, higher levels of payment to them to either support them or incentivize them to get more done?.

Yeah. Dave, this is August. I think it's a combination of things. In general. I think staffing is improving at sites and operations are becoming more normalized. There's a lot of disruption for quite a bit of time. Now -- the reimbursement sites has gone up in many cases, and in some cases, that helps, but, it's fundamentally staffing.

And the other reason, our costs are going up, and our activity is also the -- the positioning of programs that, a lot of awards over the last period of time and things getting into the rapidly recruiting phase of trials. But I think it's all good news, and that, in general, I think things are getting back to a normalized pace.

And things are moving along nicely. And that speaks well for our performance on trials..

Excellent. That's helpful. Thank you.

So do you see that or is it possible to quantify, how much of a -- I'll call it a knock on effect -- positive knock on effect that is having on your direct revenue? So I'm trying to get a sense for, how much are pass-throughs just going up because, some inflationary factor, versus how much is more throughput, then would mean more direct revenue for you as the CRO? And how should we think about that, say, pulling-through or continuing through the next several quarters?.

Yeah. I mean, I think that's difficult to try to sort out. There is obviously some inflationary effects. And I guess you could look at inflationary effect on both sides.

Although, our margins are strained by the fact that, our contracts are fixed price and last -- for a number of years inflation -- already assumptions made a time of execution of the bid for a project. So, there is kind of quite a bit of lag for that.

Some site costs have been raised, kind of midterm, and you can say, there's some a bit of inflation, and that's outpaced our inflation, I think site inflation. But, how much is increased volume at sites doesn't necessarily translate into -- directly into increased direct fees. I mean, it drives a number of direct feeds, but it's not a direct relation.

And it depends on the type of trials you're doing. And, some trials have more indirect as opposed to direct, and it depends on the -- sort of the size of the trial and the type of trial. And it's really impossible, I think try to sort that out, in terms of what percent is being driven by different factors. But we do see good traction in activity.

I think, that is driving direct seems also and we will see a ramp in direct fees and growth of the company overall.

The indirect, because they were -- partially because they were depressed for such a time during pandemic, and things are becoming better and better online, I believe outpaced as there's been a recovery of growth in RFPs, and there has been a greater amount of inflation so we might consider there to be some amount of increased average percentage of pass-throughs as a part of projects going forward.

But a lot of it's driven by the individual uniqueness of a project. So it's hard to sort that out. But we're growing well, both direct and indirect fees, and it's not just an inflationary effect of investigator costs..

Got it. Last question for me. If I -- not saying my assumptions for pass-throughs were correct or whatever. But if I just kind of neutralized for the difference in what you experienced versus my expectation to see, what depressive effect that just that higher pass-through would have had on margin. It look like, I think about 90 basis points.

But more importantly, I guess, what I'm looking at is first quarter was really high relative -- and on that same basis, it looks like margin -- so kind of normalized margin did decline by 300 basis points or so.

Could you talk about mix effects or hiring trends or things like that that would have had an effect on, kind of the margin apart from the effect of pass-through dilution?.

Kevin, you want to?.

Yeah, Dave, this is Kevin. As I talked on the first quarter call, we did expect some headwinds related to kind of our incremental hiring and then just wage inflation, that being our annual merit hitting on the second quarter here. And so, we did see some of that inflationary impact and the impact of the hiring that we've done.

We see that impact in the second quarter in addition to, as you mentioned, the impact from the reimbursable costs..

Got it. That's all for me. Thank you very much..

Thank you. One moment for our next question. Our next question comes from Max Smock with William Blair. Your line is open..

Hey, good morning. Thank you for taking our questions. I wanted to start off just following up on Dave's questions on pass-throughs here. August, you mentioned being back at sort of a normalized level.

Do you think it's fair to say, we're at the right level now in terms of pass-throughs as a percent of total revenue, or could there be potentially some headwind at some point in the future as pass-throughs are lost? Thank you..

I'm sorry.

So the question is, do I think that the level percentage of pass-throughs as a part of our total revenue will remain the same going forward?.

Yeah. .

Or would there be a headwind and it dropping off?.

Potentially, a headwind and it dropping off? I mean, I guess the question is, yeah, is it going to remain kind of at this 38%-39% level that we saw in the second quarter? Or do you think that growth slows here as we move into the back half of 2023?.

Yeah, I think, projecting precisely where it's going to go in a given quarter, it's difficult. I do think that it's not going to continue rising beyond that significantly. And I think it will tend to normalize a bit lower over the longer term. But I don't want to be, try to -- trying to pick particular quarters.

A lot of things are difficult to -- it is very difficult to project, the rate of recruitment and the rate of direct or indirect fees. It's a lot easier for us to projecting direct fees. And so, I don't want to get into trying to clarify -- refine that in terms of a model. But I do think that we're kind of at a higher level of indirect.

But again, it's the type of studies you're doing that can influence things quite a bit. And it's not just the recovery from COVID. And this is a new normal necessarily. It's going to vary overtime..

Yeah, Max, as mentioned, it is very difficult to forecast the pass-through costs. But just in our guidance, we do expect it to be elevated the balance of the year. We're not going to give a specific percentage, but we do expect it to be elevated, that is an assumption in our guidance..

Yeah. That that's helpful. Thank you both. I guess, Kevin, following up on that point that you mentioned, expected to be elevated, that's incorporated in the guidance.

But be curious to hear what is baked into the guidance for direct fee revenue in particular, up 24% year-over-year so far here in the first half of 2023? Can you just talk about what you have embedded for direct fee revenue, in particular as we move into the back half of '23 and into 2024?.

Yeah, I mean, we're not going to speak to 2024 at this point. It's in terms of 2023, the largest portion of the guide increase was driven by the elevated pass-throughs. And so that again, coming back to my comment on that we do expect pass-through cost to be elevated similar to what we saw in the second quarter, is what's built into our guidance..

Got it and maybe one just quick modeling, clean up one here for me. In terms of backlog conversion, again, elevated. I think last quarter, you pointed to stepping back down towards 17.5%.

How should we think about backlog conversion moving forward here? And is there any -- has there been any change to your assumptions in terms of mid-1.2 range book-to-bill for 2023?.

Yeah, good question. I did expect the burn rates to come back down. But obviously with the increase that we saw in pass--through activities that did remain elevated, at least kind of that higher 18%. And I think we'll be in that kind of 18.5% range, the balance of the year or the booking of about a 1.2-ish to 1.25 range..

Sorry, Kevin.

Just to clarify that 1.2 to 1.25 range, that's for the back half of the year, or is that for 2023 in total?.

That's 2023..

Got it. Thank you..

Thank you. One moment for our next question. Our next question comes from Sandy Draper from Guggenheim. Your line is open..

Thanks so much. I guess want to sort of address this the question around in inflation and pricing and pass-throughs, as it relates to bookings. Obviously, another very strong bookings quarter. You're up close to 30% year-to-date in terms of your first half of your bookings versus last year.

Can you talk at all to -- is any of that as you've been -- I think, obviously, you talked about your new business, you can price with the inflation, how much of an impact is that? How much is -- and I don’t obviously expect exact numbers.

How much might be -- okay, some of these trials that you're signing for whatever reason, are ones that have more pass-through revenue? I'm just trying to think through, are there things that sort of are pushing up that growth rate or is it really just a function of the markets improving.

And the mix of businesses is apples-to-apples, and so it's a clean nearly 30% type of growth?.

Well, I think things are growing across the board. We've had a greater amount of pass-through growth and direct growth just lately. It's difficult enough that we get into trying to sort out pass-through bookings, and direct bookings, and all the rest of it. And it is difficult to get back to a 605-type of look at things.

But look, there is a lag between winning work, and it working its way through. Things look very good, from our perspective in terms of the opportunities now. I mean, there was a time for several quarters that, award notifications and RFPs, and overall business environment had softened. And that's come back quite a bit.

A lot of its pivot to better-funded clients. I don't know how much of it's funding itself, but the business environment has improved quite a bit. So, we're lining up new work, and I think we're going to have, good growth going forward this year and next. We're not going to get into specifics on 2024 and guidance there until next quarter.

But, things are looking much improved over what they were a couple quarters ago. So, I think it looks good, trying to sort out, and getting back to a 605-type of look at things is difficult to do.

Kevin or Jesse, do you have any comments?.

No, I think it was well said. If you look at kind of the composition, we don't see a significant change. But it's kind of hard to sort some of that out, just given the overall portfolio that we have..

Okay, I appreciate that. That's definitely helpful commentary. And maybe one follow-up on the hiring side. I believe you guys were targeting. I think it was close to 20% growth, I think that's right. You're tracking sort of mid-teens.

I know you guys set an aggressive target, but would just love to hear sort of your updated thoughts on your targets for hiring.

Do you feel like you're progressing well? And again, it doesn't look like there's any indication that you guys would be slowing down hiring, but just any comments on the on the environment and how you're tracking towards your goals for hiring? Thanks..

Yeah. Hi, it's Jesse. We're progressing well against gold. It is still a challenging environment. I would say for the year, we're likely going to end up in the high-teens to 20% growth for the year. .

Yeah, maybe I'll add to that one part of that. The one good thing is, turnover has really dropped back to normal pre-pandemic or maybe even lower in many cases. And so, the churn is has dropped and makes things a lot easier to manage. So, I think we're in good shape with hiring and staffing..

Super. Thanks, August and thanks..

Thank you. And one moment for our next question. We have a question from John Sourbeer from UBS. Your line is open..

Hi, hello. This is Chin Shi [ph] calling in for John Sourbeer. Thanks for taking the question.

So given the current funding environment and your year-to-date performance, are you taking share versus peer? And do you have any commentary on how is Metapace waning?.

Are we taking share, you asking?.

Yes, that is correct. .

Look, I don't know what that really means. Look, our growth has been for years, year-after-year. And, we have a slide in our deck on growth in revenue and EBITDA and net income et cetera. We've -- on an entirely organic basis, we've outstripped the growth of any of the peers.

And, we've, I guess the way, most -- I hear most analysts talk about, is bookings at our share. And on that basis, I guess we've been losing share for a decade. But, I tend to look at things in terms of revenue and, and profit et cetera.

And we're appeared to be taking share, but I can't quantify what that what that represents?.

Thank you.

Sort of second one is, have you noticed any increase in project delays since 1Q, any color of on that?.

Yeah, I mean things overall have been accelerating since the first quarter..

Thank you very much. That's all for me. .

Thank you. Okay, well, our next question comes from Eric Coldwell from Baird. Your line is open..

Well, thank you very much. I should have lowered my hand. I think all of my topics have been covered. But congrats on a good quarter. And I look forward to future updates. Thank you..

Thanks, Eric. .

Thanks, Eric. .

Yeah. Thanks. .

Okay, I'm showing no further questions at this time. I'd like to turn the call back to Lauren Morris 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 third quarter 2023 earnings call..

This concludes today's conference call. Thank you for participating. You may now disconnect..