Medpace Holdings Inc (MEDP) 2016 Q4 法說會逐字稿

Good morning and welcome to Medpace's fourth-quarter and full-year 2016 earnings conference call. Before we begin, I will read Medpace's Safe Harbor regarding forward-looking statements during today's call.

Management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These may include statements about Medpace's expectations regarding backlog conversion, plans and expectations regarding the treatment of stock-based awards; plans and expectations regarding customer exposure, customer mix and customer profile; expectations regarding growth initiatives; plans and expectations regarding outstanding debt structure; and other expectations regarding anticipated financial and operational results.

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 Factors section in reports 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 for Medpace's fourth-quarter and full-year 2016 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 earnings call presentation.

Net service revenue for the quarter grew 11.3% compared to the prior-year period while full-year 2016 net service revenue grew 15.8% over 2015. These changes represent entirely organic growth.

Net new business awards entering backlog during the fourth quarter were $99.7 million, down sequentially from $109.1 million in Q3 and $111.7 million in Q2. Fourth-quarter net awards represent a net book-to-bill ratio of 1.05 for the quarter, which is below our trailing 12-month average and our target of approximately 1.15.

I would like to make a few comments about the award trend and challenges we see in the year ahead. First, I'd like to emphasize that business development activities remain strong and we continue to see robust RFP flow and our competitive win rate has remained at consistent levels. However, we've seen a slowing of customer decisions in the second half of 2016, which has continued into early 2017.

We believe this delay is related primarily to funding difficulties our clients are facing; although growing trial complexity is an additional factor. We expect this trend to depress awards in the first half of 2017 before returning to target net book-to-bill levels later in the year. The 2017 guidance we present today should be viewed in light of this trend.

To provide additional commentary on the current funding environment, I want to highlight two customer situations. In 2016, we had a customer file for bankruptcy, which impacted our business by $4.3 million through a combination of bad debt expense and unpaid work performed. This was fully reflected in our 2016 performance. We are working on an agreed plan with a customer in the bankruptcy case as we believe we may achieve a better recovery by taking control of the underlying asset post-bankruptcy than the amount of recovery we estimate can be achieved through liquidation.

The other situation relates to a potential 2017 exposure from a current customer. While not realized yet, we do see potential for around a $4.5 million impact negatively from this, which is already factored into our 2017 guidance.

Total backlog as of the end of 2016 was $483.9 million, an increase of 12.6% compared to the prior-year period. We project that approximately $270 million of that will convert to revenue in the next 12 months. Backlog conversion in Q4 was 19.9% of opening quarter backlog and the average for 2016 was 20.3%.

Headcount was up 19% in 2016. In light of our slower projected revenue growth in 2017, we expect headcount growth to be minimal in 2017.

With that, I will turn the call over to Jesse to review our performance in more detail.

Thank you, August. Good morning to everyone listening in. Moving now to our key financial highlights and trends on slides 5 and 6. As August mentioned, we achieved net service revenue of $95.4 million in the fourth quarter, which represents growth of 11.3% from $85.7 million in the fourth quarter of 2015. Full-year 2016 net service revenue increased 15.8% to $370.6 million from 2015.

Adjusted EBITDA of $27.5 million increased 2.6% compared to $26.8 million in the fourth quarter of 2015. Our calculation of adjusted EBITDA in the fourth quarter of 2016 includes an adjustment, which adds back the loss on extinguishment of debt related to our December refinancing, partially offset by our corporate campus lease payments.

Full-year 2016 adjusted EBITDA was $113.4 million, an increase of 12% from the prior year. Adjusted EBITDA margin for the quarter declined 250 basis points to 28.8% versus 31.3% in the prior-year period, primarily attributable to increased employee-related costs.

Adjusted EBITDA margin for the full year was 30.6% consistent with our expectations. In the fourth quarter of 2016, we had a GAAP net loss of $21,000 compared to a GAAP net loss of $8.6 million in the prior-year period. For the full-year 2016, GAAP net income was $13.4 million compared to a GAAP net loss of $8.7 million in 2015.

Adjusted net income of $14.3 million in the fourth quarter increased 75.4% compared to $8.2 million in the fourth quarter of 2015. Our full-year 2016 adjusted net income of $55.7 million increased 37.8% compared to $40.4 million in 2015. Adjusted net income growth was driven by revenue growth and a reduction in our interest expense, partially offset by an overall increase in direct costs associated with our planned increased hiring during 2016, as August noted in his remarks.

GAAP net loss per diluted share for the quarter was zero compared to a GAAP net loss of $0.27 per diluted share in the prior-year period. For the full-year 2016, GAAP net income per diluted share was $0.37 compared to a GAAP net loss of $0.28 in 2015.

Fourth-quarter adjusted net income per diluted share of $0.35 grew 34.6% versus fourth-quarter 2015 adjusted net income per diluted share of $0.26. For the full-year 2016, adjusted net income per diluted share of $1.53 increased 18.6% from $1.29 per diluted share in 2015.

On slide 7, we have provided a breakdown of our customer concentration by revenue across three key categories for both 2015 and 2016. Oncology remains our largest therapeutic area while we have continued to see growth in our anti-viral, 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 represent a large portion of our total business and a segment of the market where we see further opportunities for continued growth.

Meanwhile, we continue to selectively capitalize on opportunities with large pharma customers on projects that fit well within our full-service model and our approach to clinical trial execution.

A byproduct of our focus on small and midsized biopharma customers is a well-diversified customer mix with our top 5 and top 10 customers representing roughly 23% and 37% respectively of our total revenue for the year.

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 fourth quarter and full-year 2016 compared to the corresponding prior-year periods.

In the fourth quarter, we generated cash flow from operations of $29 million and our net days sales outstanding remain steady compared to the third quarter.

During the fourth quarter, we entered into a senior secured credit agreement consisting of a $165 million term loan and a $150 million revolving credit facility. Proceeds from the term loan were used to repay and extinguish obligations under the previous agreement, as well as pay fees and expenses related to the transaction.

Our net debt position at quarter-end was $127.9 million composed of gross debt of $165 million and cash of $37.1 million. Our net leverage ratio is approximately 1.1 times. This new facility lowered our interest rate by approximately 260 basis points to 2.15% based on the leverage level and the LIBOR rate at the end of 2016 and this provides additional balance sheet flexibility.

In connection with the extinguishment of the previous senior secured credit facilities, we also recognized a loss on extinguishment of debt of approximately $10.7 million in the fourth quarter of 2016 related primarily to previously capitalized fees and expenses.

Overall, we believe our strong free cash flow profile, our low leverage level and current capital structure provide us with sufficient flexibility to pursue continued growth initiatives.

Moving now to our newly established guidance for 2017. As shown on slide 9, we are forecasting that service revenue in the range of $390 million to $406 million for the full-year 2017 representing organic growth of 5.2% to 9.6% over 2016 net service revenue of $370.6 million. 2017 adjusted EBITDA is expected in the range of $122 million to $126 million representing growth of 7.6% to 11.1% over 2016.

From a quarterly cadence perspective, we expect revenue and adjusted EBITDA growth to be slightly weighted towards the second half of 2017. Additionally, we forecast 2017 GAAP net income in the range of $43.9 million to $47.5 million and GAAP earnings per diluted share are expected in the range of $1.06 to $1.14.

On an adjusted basis, we forecast 2017 adjusted net income in the range of $66 million to $70 million representing growth of 18.5% to 25.7% and $1.58 to $1.68 per diluted share.

With that, I will turn the call back over to the operator so we can take your questions.

(Operator Instructions). David Windley, Jefferies.

August, you mentioned that you are expecting to see these impacts that are depressing awards continue through the first half and then return to normal I think in the second half of 2017. What indicators give you visibility or confidence that that would normalize by the middle of the year?

It's really impossible to have an indicator. It would normalize in that timeframe. So I think it's really just our best projection that we can make. It has to unwind at some point. We are seeing an expansion in the average number of days between RFP and decision and that can't continue to expand.

I think those decisions have to be made at some point and is it possible it's a new normal, that it takes 10 months between first RFP to start of a study? I think that has to unwind at some point. We have seen it extend into first quarter, so we are conservatively estimating that things won't start to unwind till second half, but I don't have a particular metric to go by that can give me confidence in exactly when that would happen.

Would I be oversimplifying to look at this as your client base is predominantly small biopharma? We've been in not an absolute drought, but a lower level of funding into those companies for an extended period of time now and that these RFPs are -- the clients are taking a long time to get to decision because they are having a hard time finding the funding to support those RFPs, or is that oversimplifying the context?

It might be oversimplified a little bit, but I think that is basically the way I would read it. I think that the funding environment is more difficult for them and it's taking longer for them to line up funding for the trials. I think complexity of the trials is an additional factor that is meaningful and there could be a significant increase due to that alone, but I think underlying many of the difficulties we have seen with clients is lining up final funding. And sometimes that means several iterations of things, but underlying it is getting a program that they can get funding lined up for.

Okay. Let me just sneak one last one in. Help me just with dynamics around your backlog policy and recognition. Help me with how a trial that goes into backlog and is fully funded results in a bankruptcy and a bad debt? Obviously you are not going to be able to avoid all bad debt, but one of your key metrics is that it is fully funded in order to make it into backlog and so help me with how that develops.

Absolutely. First, if we had a study that started up and three months later ran out of cash that would be a sign that our policy is not working. These were large studies, obviously this bankruptcy last year was over a $4 million hit, was a large study. It was running for 2.5 years, so I think that the money isn't escrowed. We do have adequate funding in place. Obviously in a trial that's going to take three years, you don't have clarity that in the third year they could have problems. It seemed like a perfectly reasonable approach and obviously a long-term study like that has data being looked at along the way and part of the problem is always one of how well the product is working. So a product that is not working too well has difficulty continuing to fund it. A product that's working very well is going to be funded.

So I think that no matter how good a job you do, you can't, without getting paid everything up front and put in escrow, which is not a term that anyone would accept, you are going to have some risk on the later stages of a trial.

Okay, thank you.

Erin Wright, Credit Suisse.

I'm just curious how much of the delayed decision-making do you think is due to uncertainties in the political environment and how much truly is broad-based versus maybe what you would consider one-off scenarios? Thanks.

Well, we are seeing a number of -- a large number of decisions that are being held up. I have no insight into what's resulting in a difficulty in putting financing in place. I have no idea whether the political environment is meaningful. I really can't comment on that; although I've never seen a real connection there. That's certainly not something that our clients talk about.

Erin, I can just point to the experience we're having with dialogue we have with customers is anecdotally they are working through protocol amendments; they are working through greater feasibility on the front end and those are the types of things that are having an influence on some of the delayed funding as opposed to some more of the macro environment that we really can't comment on.

Okay, that's really helpful. And outside of some of these more -- I guess some of the client situations that you mentioned, can you discuss just the broader RFP environment, your win rates and pricing discussions?

I think that, as I mentioned, our RFPs have been strong. They have continued at really very high levels. Our win rate has been consistent throughout 2016 and 2016 was actually a slight uptick from the prior year, so it has remained very strong. So I don't see a win rate problem. It's really making decisions and there's a fairly large number of pending decisions that we are waiting on.

Okay, great. Thank you.

Jonathan Groberg, UBS.

Two things stand out to me a little bit and one is that, for the most part, your EBITDA and your EPS guidance are pretty much in line with the Street, so despite the more muted expectation on the top line, can you just talk a little bit about what you are doing operationally that is able to continue to hit some of those operating targets?

Sure. Yes, the guidance we set is a little muted on the top, but given the headcount additions that we made in 2016 relative to the needs of the business that we see here in 2017, a lot of what we are doing is leveraging the hires that we made in this past year in 2016 to -- that will have an impact on keeping EBITDA and EBITDA margins up in the 30% range.

Okay. I know you said you hope to recover a little bit more, I think it was $4.2 million in 2016. Can you give us a little bit more detail on this? You said it's a potential $4.5 million loss in 2017 that is in your guidance. Maybe what the parameters are of that happening, not happening.

And I guess just bigger picture, until this morning when someone else reported and also said that this quarter new business wins were weak, for the most part, it sounded like other CROs were having a pretty good fourth quarter in terms of new business wins. Is there -- internally do you think that there is a need to go after -- it seems like it's these small, midsized biopharma companies that are maybe the holdup. Is there internally a strategy or a plan to go after some of the larger, more well-funded pharma companies? Thanks.

No, we don't plan to change our strategy. Our focus is on smaller biotech players and our share in that market has expanded quite a bit. I think we are taking marketshare. I think we are growing faster than the overall industry organically and I think that's been entirely in the small biotech segment, which has expanded as a proportion of our overall business.

I think that RFP flow has again remained robust and our win rates remain high. So I don't see a reason to back off of that. I think that decisions will eventually be made and I think the delayed decisions we have seen will unwind over time.

And just the parameter around why you may or may not actually see that loss, that $4.5 million loss in 2017?

Okay. Well, part of that is backlog. A good part of it is work performed and we still have to wind down the study. So the question is how much cost we have in winding down existing work because it is still ongoing and how much we can recover from the client that has a relatively limited amount of cash and can't raise money now is the question. And I think that will shake out sometime in the first quarter.

But when we put together our guidance expectations for 2017, it was a consideration as we thought about how much of that work is in backlog and what would otherwise be rolling out of backlog into revenue, we took that into consideration when we were setting our 2017 levels.

Thanks.

Tim Evans, Wells Fargo Securities.

Were your cancellations abnormally high this quarter? Is there anything you are willing to say about that?

No, I don't think they were abnormally high. They actually were numerically a bit above what they had been throughout 2016, but we look at 5% or less as being in the normal area of what we would expect and they were within that range and I don't think they were a significant factor in our performance. And of course, our revenue was held up pretty well and our margin held up pretty well in fourth quarter and our guidance is not heavily impacted by cancellations this year in the fourth quarter.

These were drug safety or efficacy cancellations with no real concentrations in a certain therapeutic class.

Okay. And when your clients are coming to you and saying we are not making a decision yet on this -- the slow decision-making factor in all of this -- are they specifically telling you that it's a funding issue? I'm just curious what are you hearing directly from them.

Sometimes and sometimes it's 16 different scenarios to try to find a cost-effective strategy that can meet a budget that they can raise. But, frequently, they will say they are in funding mode and most of our clients, of course -- the vast majority of our clients have no revenue of their own, so they are dependent on outside funding or balance sheet and many of them to get adequate cash to embark on the study do need some level of funding.

The fallback argument tends to be, well, good compounds will find funding. And I guess my question to you is is that still the case, or are we in a situation where maybe we are talking about compounds that are not as, quote/unquote, good as they have been in prior years?

Yes, I agree with you. Good compounds tend to get funded. What happens though is they don't get funded at the price point that a company wants and so they shop around for a while and they eventually get funded. In fact they could be funded now, but they are unwilling to take the amount of dilution required to fund it in the current environment.

And then there's also the compounds that are on the edge that may be in a better market would be funded and in a tighter market won't be funded. So I think there's a combination of them all, but even good compounds can have a delay in funding because they want to get the least dilutional funding possible.

Thanks for the comments.

John Kreger, William Blair.

August, when did you start to observe this pattern of extended decision-making?

Third quarter and we mentioned it on our third-quarter call that we had seen a number of delayed decisions and our bookings were, although perfectly normal range, actually at 1.15 I think we had a net book-to-bill in third-quarter, which is our target, our running target. We had seen a substantial number of decisions that hadn't been made and relative to the environment in terms of number of RFPs we were seeing a slowing of decisions or a lack of decisions.

Thanks. And if you think back over the last 10 or 15 years to other up and down funding cycles, what has been a typical period of time where it can impact your business in terms of slower awards and slower uptake to revenues?

Well, we've had times when there are substantial delays for a quarter or so, just slightly over a quarter and then things unwind and our average duration of decision come back and normalize. This is already a little bit longer than that and I think if you go back too far, the impact on us wasn't as large because our client base was different.

Over the years, even in the last year, our exposure to clients that have little to no revenue of their own, the smaller biotech clients, has expanded. So it's hard to compare to prior periods, but when we have seen it in the past, it's been relatively short-lived. It's been a quarter or a quarter and a half.

Great. Thanks. And that last point you just made, what's the rough percentage of your backlog that would have clients with little to no revenues?

Two-thirds.

Two-thirds. Okay. And then one last one. I believe you had indicated that your backlog coverage at the beginning of this year is about 68% if I did the math right. Assuming that was right, if you look back over the last two or three years, what does that metric tend to be at the beginning of the calendar year?

Right about that level. The 68% coverage is consistent with the past couple years.

Okay. So the conservatism in the budget is about what you have used in prior years?

Yes, it has usually been in that mid-60%, mid-60% range, mid-60%, low-60%.

Thanks much.

(Operator Instructions). I'm not showing any further questions at this time. I would now like to turn the call back to Dr. Troendle for any further remarks.

Thank you for joining us in today's call and for your interest in Medpace. We look forward to speaking with you again on our first-quarter 2017 earnings call. Thanks, everyone.

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