Medpace Holdings Inc (MEDP) 2017 Q1 法說會逐字稿

Good morning and welcome to Medpace's first-quarter 2017 earnings conference call. Before we begin I will read Medpace's Safe Harbor regarding forward-looking statements.

During today's call management's remarks and responses to your questions during this teleconference may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve inherent assumptions with known and unknown risks and other important factors that could cause the Company's future results to differ materially from management's current expectations including those discussed in the risk factors section of our Form 10-K for the year ended December 31, 2016 filed with the SEC.

Management disclaims any obligation to update forward-looking statements in the future even as estimates change. Accordingly, you should not rely on any of today's forward-looking statements as representing management views as of any date after today.

During this call management will be also 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 on Medpace's first-quarter 2017 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 presentation. Net service revenue for the quarter was $93.8 million, an increase of 6.8% over the prior-year period. Net new business awards entering backlog during the first quarter were $93.9 million, down sequentially from 99 $7 million in Q4 2016.

The net book-to-bill ratio for the quarter was 1.0. These net award results as you might expect are disappointing to us. Although we continue to see good RFPs, they clearly have not translated into near-term bookings.

Despite this reduced volume of awards recognized into backlog, our competitive hit rate, which measures the proportion of trials we win compared to those lost to our competitors, was highest in Q1 -- was higher in Q1 than in all but one quarter in the prior two years. Thus, we have not seen a change in the competitive landscape and we have not experienced an increase in pricing pressure.

However, we have seen a slowing of customer decisions and a failure of many opportunities to move forward due to funding difficulties. Why we are seeing this at a time when many observers have seen an improved overall funding environment for biotechnology companies is unclear. It may represent a lag effect from last year's depressed overall funding or maybe unique to our particular segment of the market.

In any case, we believe many of the programs we're seeing will eventually be funded when the market returns to equilibrium.

An overall slowdown in new awards, the cancellation of a few programs with near-term revenue impact as well as financial difficulties involving a few additional clients with ongoing programs has forced us to revisit our guidance for 2017. Jesse will address the revised guidance in his prepared remarks.

Despite our revised guidance, I'd like to note that our business is fundamentally solid. We are winning a large share of the programs we compete for and I believe we are focused on the right segment of the market where small and midsize biopharm companies are attracted to our full service approach and therapeutic expertise. We anticipate improved bookings and revenue progression beginning in the second half of the year and strong growth in 2018.

Due to the attractive outlook for new programs later in the year, which we believe will be funded, we have not looked to reduce staff and we continue to hire to prepare ourselves for growth. We have seen great success in the first quarter in onboarding a number of outstanding individuals who will contribute to our future success. This investment in the business will drive a decrease in our 2017 EBITDA margin but we expect this to improve in 2018.

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

Thank you, August, and good morning to everyone listening in. Moving now to our key financial highlights and trends on Slide 5 and 6. As August mentioned, net service revenue was $93.8 million in the first quarter, which represents growth of 6.8% from $87.8 million in the first quarter of 2016.

Adjusted EBITDA of $26.2 million increased 1.8% compared to $25.8 million in the first quarter of 2016. Our calculation of adjusted EBITDA in the first quarter of 2017 includes an adjustment to subtract our corporate campus lease payments. Adjusted EBITDA margin for the quarter declined 130 basis points to 28% versus 29.3% in the prior-year period primarily attributable to increased employee-related costs.

In the first quarter of 2017, we had GAAP net income of $8.4 million compared to GAAP net income of $3.4 million in the prior-year period. Adjusted net income of $14.1 million in the first quarter increased 21.7% compared to $11.6 million in the first quarter of 2016. Adjusted net income growth was driven by revenue growth and a reduction in our interest expense, partially offset by an overall increase in costs associated with our increased hiring during 2016.

GAAP net income per diluted share for the quarter was $0.20 compared to GAAP net income of $0.11 per diluted share in the prior-year period. First-quarter adjusted net income per diluted share of $0.34 declined 2.9% versus first-quarter 2016 adjusted net income per diluted share of $0.35.

On slide 7 we have provided a breakdown of our customer concentration by revenue across three key categories for both Q1 2016 and 2017. Oncology remains our largest therapeutic area and we continue to see growth in our antiviral anti-infectious disease therapeutic area.

With regard to our mix by customer size, we remain focused on serving our core market of small and midsize 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. We continue to selectively capitalize on opportunities with large pharma customers on projects that fit well with our full service model and our approach to clinical trial execution.

Regarding customer concentration, we maintain a well diversified mix with our top five and top 10 customers representing roughly 21% and 34% respectively of our total revenue for the quarter. Slide 8 provides a summary of our leverage and liquidity positions as well as the schedule of our free cash flow conversion for the first quarter of 2017 compared to the prior-year period.

In the first quarter we used $700,000 in cash flow from operating activities. This was driven primarily by an increase in our debt days sales outstanding which increased compared to the fourth quarter from 12 days to 18.4 days, a decrease in pre-funded study costs and planned Q1 annual employee compensation-related payments.

Our net debt position at quarter end was $132.6 million composed of gross debt of $161.9 million and cash of $29.3 million. Our net leverage ratio is approximately 1.2 times.

Overall, we are confident in the Company's long-term cash flow generation ability and believe our free cash flow profile, our low leverage level and current capital structure provide us with flexibility to pursue continued growth initiatives and deliver shareholder returns. To that end, our Board of Directors has authorized a share repurchase program of up to $50 million and we intend to initiate this in the second quarter.

Moving now to our updated guidance for 2017 on slide 9. Soft first-quarter net awards and expected continued near-term net award headwinds are creating further pressure on revenue growth as well as delays with ongoing programs and lengthening study timelines which are also negatively impacting near-term revenue expectations.

In addition, we are encountering customer financial difficulties with several existing programs which may subject us to lost revenue and elevated bad debt expense. We are closely monitoring each of these potential bad debt situations and expect to have greater clarity on these over the coming quarter or two.

We now forecast net service revenue in the range of $373 million to $385 million for the full year 2017. That represents organic growth of 0.6% to 3.9% over 2016 net service revenue of $370.6 million.

2017 adjusted EBITDA is expected in the range of $104 million to $108 million. Additionally, we forecast 2017 GAAP net income in the range of $32 million to $35.4 million and GAAP earnings per diluted share are expected in the range of $0.77 to $0.85. On an adjusted basis, we forecast 2017 adjusted net income in the range of $54 million to $58 million and $1.30 to $1.40 per diluted share.

From a quarterly cadence perspective, depending on clearing customer funding hurdles we anticipate improved revenue progression in the second half of 2017. Our guidance also reflects second-quarter cost elevated above Q1 levels by about $2 million to $3 million related to potential bad debt expense.

As a result, we anticipate adjusted EBITDA, adjusted net income and adjusted net income per diluted share to be even more heavily skewed to the second half of 2017. And this guidance does not reflect a potential impact of any share repurchases pursuant to the share repurchase program.

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

(Operator Instructions) Dave Windley, Jefferies.

Hi, thanks for take my questions. Good morning.

I guess the first question around demand trends. So you talked about seeing some lengthening decision cycles and things like that on the last call. At that time that had already persisted for longer than what would have been an historical average.

Is what you are seeing today a continuation of that? Has it changed? Is it completely different, is it just a continuation of what we saw before, has it intensified? If you could just provide some additional color about what you are seeing from clients that would be great.

This is August. Hi, Dave. I think that the environment is similar to what we saw before.

What has transpired is most significantly as a continuation of that as well as some cancellations that we've seen. And the cancellations weren't particularly high. They were higher than our trailing 12 months and our usual level, but they were particularly active and just coming into their active phase of burning.

So they had, I mean, cancellations vary in terms of their impact on revenue. Sometimes it is just an issue of replacement of the backlog and other times it has a pretty near-term effect on revenue burn and we had a few of those. And then some client ongoing programs have had some trouble.

And we saw some of that and talked about bad debt potential on the last call but that's continued and has exacerbated with a few other clients. So that's really it.

I don't think things have fallen off the cliff in terms of new activity. We still see good flow of RFPs. But there has been continued difficulty in getting final funding in place to move forward with a number of programs.

Okay. And the lengthening timelines, I guess, you mentioned in that answer some client projects that have had some difficulty. I think maybe you are referring there more to financial side, but you are also talking about some lengthening timelines.

Maybe distinguish those for me. Are the timeline issues around patient recruitment or are they more waiting for regulatory response?

There hasn't been any real delays related to patient recruitment. These are before getting to that stage and I think overwhelmingly related to putting financing in place.

Some of them it's a matter of you are not really sure, it's they are looking at different scenarios and it's protocols being finalized and things. But largely related to funding.

Okay. Then a last question for me that maybe is a little detailed, but as I look at slide 7 with your pie charts there's an interesting match in numbers in terms of a decline year over year in revenue concentration from top five and revenue concentration or contribution from midsize pharma and, then, obviously some shifting around in therapeutic area mix.

Is part of the problem here that you had a midsize pharma that you were doing some significant work for that was a big contributor and that's wound down or come to a close in one way or another and so you had maybe an outsize program or study that was coming out of the revenue base and then the demand environment just hasn't been strong enough to replace something outsized? Is that a fair interpretation?

No, I don't think so. I think our drop-off in large and midsize pharma has been occurring over a number of years, and I think that's just a continuation. And the disruption in terms of cancellations was not related to midsize pharma actually, it was actually in the smaller pharma group.

Okay, thank you. I will yield the floor. Thanks.

Tim Evans, Wells Fargo Securities.

Thanks. August, I wanted to square up this comment that RFPs have been pretty strong and your win rate has been very strong. If you had just told me those two things without telling me the bookings I would have thought, well, those two things would translate into really good bookings.

So why don't they? Is it that you are winning the business but because of the way that you book it you are not putting it into backlog? Or is or something else going on there?

Well, I think there may be a little of that. I think that what we are seeing is we are seeing a similar number in dollar volume of RFPs. And, in fact, the RFP volume in dollar terms is pretty high.

But not a lot of those are being awarded to anybody. So when we look at our win rate we are looking at of those awarded which go to us versus others and we have a high, actually a very high even in historical terms rate of wins. But that's still a small subset of the total RFPs we are bidding on.

And now I think it is also true that you point out that maybe we are not recognizing some things. Yes, there is a number of projects that we have been identified for, and so I think you would call that an award. We have been given a written award that, yes, we want to work with you.

But we can't recognize it because they don't have a clear funding in place yet. And that's why we feel very optimistic about second half of the year and why we haven't decided to respond to this by cutting back on our hiring or I should say laying off people.

We have moderated our hiring some. But we continue to hire for growth because we see great opportunities for the future. But I think the real equation part that doesn't add up is that the total number of decisions is reduced even though the RFP volume is high.

Okay, so people are putting out RFPs but then they are failing to make decisions on those. And do you feel like that's a function of funding and economic decisions? Or is there any looking at taking a second look at the compounds and like, look, these just aren't worth going forward for safety or efficacy reasons?

I think it is a combination clearly. Sometimes that's the case. I think a fair number of them, a greater proportion than usual is funding.

And so that's why we call out funding as being, I think, a real impediment at the current time is what we are seeing is many of those programs I believe will be eventually funded. I think they are reasonably good products. Obviously, something that's an outstanding, great opportunity and everyone is jumping over trying to fund, but I think a number of these are going to be funded and it's really a funding environment problem.

Okay, I will stop there. Thanks.

John Kreger, William Blair.

Hi, thanks very much. August, can you just maybe continue with the thought you were providing just a couple of minutes ago. What sort of bookings are you assuming or do you need to get to support your updated guidance for 2017?

I will let Jesse take that because he has the actual model that we've put together.

Yes, so thanks, John. We are assuming bookings, net awards bookings that are fairly flat with 2016 bookings.

Okay, so the whole year?

For the full year, for the full year.

And are you assuming net bookings remain depressed in the second quarter or snap back in Q2?

Remained depressed here in the second quarter.

Got it. And can you --

They are somewhat back-end weighted.

Okay. Can you tell us again what drives the confidence that the net awards will start to flow more normally in the second half?

There's, again, unfortunately, not a specific parameter. All you can look at is the quality of the awards, the progress clients have made towards getting funding and where we have visibility on what their sources are gets us confident about a number of the programs.

But this is still something that markets have to remain accommodating for. So there is still risks involved, but I think we feel pretty confident that a number of these will get funded.

Great, thanks. And then my other question, can you just maybe quantify if possible the bad debt situations that you said you are monitoring? What would be the dollar volume of all those and maybe could you put that in a historical context, how much larger is that than a typical year with your client base?

Yes, sure. So historically bad debt has been over a number of years about 0.2% to 0.3% of revenue annually. In 2016 bad debt was 0.35% of revenue.

These couple that we are seeing here that are challenged one is the one we mentioned on last quarter's call had potential exposure. That continues to be unresolved. That company is attempting to raise funds this quarter and we are still working with them.

The other few, three to four that we have identified here are also customers with ongoing active projects that have run into some of these challenges and are attempting to raise additional capital. We are working through each of these with the customers, and we have reflected this exposure in our revised revenue guidance with the assumption of about up to $3 million in potential bad debt expense for exposure in the second quarter if they are unable to secure their funding.

Great. So Jesse, just to clarify that, the $3 million would account for the entire value of those four or five projects?

The $3 million would account for the balance sheet exposure that we have on those projects. Now there is further, there is backlog exposure, backlog risk across these couple that are in the range of $15 million to $20 million.

Great, thank you. That is it.

Erin Wright, Credit Suisse.

Great, thanks. Have you typically seen the lag effect historically I think that August you alluded to in your prepared remarks?

As it relates to the biotech funding environment how confident are you, what sort of visibility do you have that this can recover in 2018? And any sort of historical context that you can provide around this phenomenon that you can compare this to? Thanks.

I wish I could. I don't think we've seen such a lag effect. And so I don't know that that's really -- I don't know that that's real.

I just put that out as a possibility. We have not seen that in the past. Certainly our revenue tends to because of the timing of bookings to actually getting to revenue sometimes when there's a slow period there is a substantial lag in terms of revenue impact.

But in terms of bookings there shouldn't be a follow-on effect of low funding one period to another. So I don't know. I can't ascribe it to that, and I do not have a historical comparison to draw upon.

I would just add that we do point to based on our knowledge of some of the pending opportunities and some of those that are still seeking funding there are a number of good compounds here as we assess the opportunities. And as we discussed a little bit ago, some of these they have indicated that they want to work with us. And so the hurdle on a number of these is funding, and it's not funding and CRO selection.

Okay, great. And then are you speaking to a few specific larger contracts or projects? And I think you gave some context to that, but I'm really just trying to get a sense of how broad-based the financial decisions these are?

So for the couple that are ongoing active projects that have some balance sheet exposure we have quantified our best estimate of the bad debt exposure. That is four to five specific contracts, but there are a number of other pending awards or pending opportunities across the portfolio that are still seeking financing. That is a much larger number.

Okay. And then can you speak to some of the nature of stepping away from cancellations or that dynamic and can you speak to the nature of the new business wins that you are seeing from a therapeutic mix or customer mix standpoint? Where are you seeing some offsets?

Where we are seeing good sales?

Sorry, offsets. Yes, positives, I guess.

I think our trends have continued. We are seeing a greater amount of -- we are continuing to see a large amount of oncology and it's even expanded as a percentage of new activity.

AVAI, our antivirals anti-infectives has also been very strong in terms of new awards. I think the revenue numbers you see bounce around a bit on a quarterly basis, but we've got good traction there. So I'd say they're the two largest areas of strength.

And from a customer care perspective it's primarily growth being led by the small biopharma.

Okay, great. Thank you so much.

Donald Hooker, KeyBanc.

Great, good morning. A lot of questions have been asked and answered.

One question I had just more generally, curious if you guys are seeing an increasing appetite from sponsors for risk-based monitoring? And what is your technology strategy there? Does ClinTrak support that or do you typically go to third-party vendors?

ClinTrak does support it. And I wouldn't say there's been a particular change in that over the last few years, the last year certainly. There is a fair amount of interest in it depending on the program.

So I don't have quantified in front of me what percentage of our programs involve specifically risk-based monitoring and a reduced monitoring overall frequency. But it's a meaningful part of projects and always a consideration.

How often do you have discretion in terms of monitoring programs versus the sponsor? I mean how often do you get to go in and manage that process?

Well, if we are doing it we are managing it. But I think the decision of whether we do that and how aggressively we implement it is, obviously, ultimately a sponsor decision.

But we very often make a proposal and sponsors generally evaluate multiple different approaches from different CROs and choose one they feel comfortable with. So we are frequently pitching it, but ultimately the decision is the sponsor's.

Okay, and last question on the same theme and I will go back in queue. Given the rise of oncology I assume there's a lot of complexity and data there. Are you finding greater use for ClinTrak and some of the other functionalities that you have as a result of oncology being a greater proportion of your revenue base?

I don't think therapeutic area drives the decision particularly. And I think our use of ClinTrak as the data tool in programs has been pretty level. It's a bit over 50% of our studies are run in ClinTrak.

Thank you very much.

Michael Polark, Baird.

Hey, good morning. Jesse, I wanted to clarify the net awards input you have in your guidance to meet your revenue targets in the back half.

I am just doing some math and making an assumption that net awards remain depressed in the second quarter, and then rebound in the second half. Are we looking at net book-to-bills in the second half we need 1.25 to 1.3 to achieve the guidance?

It is heavily back-end weighted on the net book-to-bill. So we would expect a book-to-bill ratio of somewhere in line with what we've had in the past two quarters here in the second quarter, which does imply an elevated level in the second half.

Okay. That's helpful. Thank you.

Then just briefly on the repurchase, it sounds like you are going to be in the market this quarter. Can you provide some comments, context in terms of how you are thinking about phasing of the repurchase?

It will depend on a number of factors including market conditions. We are in the process of putting together that program. It will be customary as far as having different tiers and different price points, but we will put that in place here over the next couple of days to weeks.

Thank you.

Tim Evans, Wells Fargo Securities.

Thanks for letting me follow up with one more. August, when I put together a lot of the data points that you've shared with us here including say the increase in the bad debt situation, the funding related, I guess, lack of decision-making and you highlighted in your opening remarks that the overall funding environment kind of looks okay.

Do you believe that you are being, I guess, isolated in particularly biotech companies that are particularly reliant on the capital markets relative to prior years where you may have had been able to access more well-funded clients or something like that? Is there a dynamic like that going on where basically your client mix has shifted more toward the risky side of things?

I think that's a fair characterization. Our clients, we have a greater proportion of clients that are pre-funding and pre-revenue, I should say, and dependent upon external funding for a particular program in which we are bidding.

Okay. And then the last thing, have you lived through a cycle like this before? And if so, what can you share with us from your historical perspective?

Again, I don't think we have a good basis for historical comparison. And much of the difficulty we are seeing currently is in a client base that was a much smaller portion of our exposure in the past. So it's really hard to say whether this is common in this segment of the market or unusual.

Okay, thank you very much.

Dave Windley, Jefferies.

Hi, so I wanted to follow up on the cost and margin side. I think the Company has been very disciplined around managing to what is an industry high margin which, I guess, if you know you are growing fairly quickly or if you know you are growing slowly that is easier, but we are caught a little bit in a pattern or in an in-between state where there is a lot of RFPs where potentially you could need billable staff to surface that work but the funding environment makes that much more uncertain than normal.

How do you think about the management of your, I guess, the question is really more directed at billable staff as part one? And then part two, kind of a follow-up to Tim's question, have you thought about a need to perhaps broaden your salesforce to turn over more rocks and get to, say, a broader client base of incrementally better funded companies? So two questions around cost base, thanks.

Yes, I think that we have to look at our opportunities going forward and there is quite a lag in terms of hiring staff and having them usable on projects. So I think we do look out a couple of quarters and we don't look at the current bookings and revenue, we look at our opportunities more towards driving where we want our staff to be. So I think we have not, again not taken those actions in the current environment because we see good opportunities coming up.

But I think that's something we assess on an ongoing basis. Your second question --

Was salesforce, kind of salesforce size and coverage.

I think that's a consideration. I don't think that -- I think our salesforce is currently appropriately sized. I think that if it really is a case that we need an RFP volume that's substantially larger than the current volume we have in order to find those fundable projects, I guess that would be a consideration.

But I guess we don't really see a dynamic playing out like that. I think it is temporary, I think we will target a little bit differently going forward but I don't think it's a size of the group issue. I think it's a targeting issue.

Okay, thank you. I will leave it at that.

That concludes our Q&A session for today. I'd like to turn the call back over to Dr. August Troendle for any further remarks.

All right. I want to thank everyone for joining us on the earnings call today and your interest in Medpace.

And we look forward to speaking with you again on our second-quarter call. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may all disconnect. Everyone have a good day.