Medpace Holdings Inc (MEDP) 2017 Q3 法說會逐字稿

Good morning, and welcome to Medpace's Third 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 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 if estimates change. Accordingly, you should not rely on any of today's forward-looking statements as representing management's view 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 company's Investor Relations section of its website at investor.medpace.com. As a reminder, this conference call is being recorded.

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. Good day, everyone, and welcome to Medpace's third quarter 2017 earnings call. With me on the call is Jesse Geiger, Chief Financial Officer and Chief Operating Officer, Labs. Net new business awards entering backlog during the third quarter were $112 million. This represents a 6% sequential increase over that of Q2 and the second consecutive quarter of improving new business awards. Ending backlog was $510 million, a 6% increase over last year's quarter. The improved business environment observed in the third quarter has continued into the month of October and we project strong awards in the fourth quarter. Although we anticipate revenue to be down sequentially in Q4 2017, we expect revenue growth acceleration beginning in Q1 of 2018.

That completes my brief introduction. And Jesse will now review our overall financial performance for the quarter.

Thank you, August, and good morning to everyone listening in.

Moving now to our key financial highlights and trends on Slide 5 and 6 of our presentation. Net service revenue was $98.7 million in the third quarter, which represents growth of 4.1% from $94.8 million in the third quarter of 2016. Adjusted EBITDA was $28 million compared to $29.5 million in the third quarter of 2016. And our calculation of adjusted EBITDA in the third quarter of 2017 includes adjustments for our corporate campus lease payments and transaction expenses related to our S-3 filing.

Adjusted EBITDA margin for the quarter declined 270 basis points to 28.4% versus 31.1% in the prior year period. This decline was primarily attributable to higher employee-related costs. In the third quarter of 2017, we had GAAP net income of $9.8 million compared to GAAP net income of $5 million in the prior year period. Adjusted net income of $15.9 million in the third quarter increased 5% compared to $15.1 million in the third quarter of 2016.

Adjusted net income growth was primarily driven by revenue growth and reduced interest, partially offset by higher employee-related costs.

GAAP net income per diluted share for the quarter was $0.25 compared to GAAP net income of $0.13 per diluted share in the prior year period. Third quarter adjusted net income per diluted share of $0.40 was flat versus third quarter 2016.

On Slide 7, we have provided a breakdown of our customer concentration by revenue across 3 key categories for both 2016 and 2017 year-to-date periods. Year-to-date revenue growth was primarily driven by growth in Oncology, which remains our largest therapeutic area. With regard to our mix by customer size, we remain focused on serving our core market of small and mid-sized biopharma customers that represent a large portion of our total business and a segment of the market where we see further opportunities for continued growth.

Regarding customer concentration, we maintained a well-diversified mix, with our top 5 and top 10 customers representing roughly 20% and 32%, respectively, of our total revenue year-to-date.

Slide 8 provides a summary of our leverage and liquidity positions as well as a schedule of our free cash flow conversion for both the third quarter and year-to-date 2017 compared to the prior year periods.

In the third quarter, we generated $39 million of cash flow from operating activities. This sequential improvement in cash generation was driven primarily by a decrease in our net days sales outstanding, which decreased compared to the second quarter from 9.5 days to 5.3 days, as we experienced a decrease in trade accounts receivable and an increase in advanced billings as a result of strong collection activities, again, in the third quarter.

Our net debt position at quarter end was $161.5 million, composed of gross debt of $185.7 million and cash of $24.2 million. Our net leverage ratio is approximately 1.5x last 12 months adjusted EBITDA.

During the quarter, we repurchased approximately 0.3 million shares for a total of $8.3 million under the $50 million share repurchase program and 2 million shares from Cinven for $60.5 million. These combined share purchases contributed approximately $0.01 per share to earnings per share in the quarter.

Moving now to our updated guidance for 2017 on slide 9. Our net service revenue guidance is now in the range of $381 million to $386 million for the full year 2017, representing organic growth of 2.8% to 4.2% over 2016 net service revenue of $370.6 million.

Our 2017 adjusted EBITDA guidance is in the range of $106 million to $108 million. Our 2017 GAAP net income range is now $35.5 million to $37.2 million and GAAP earnings per diluted share is expected in the range of $0.87 to $0.92. On an adjusted basis, we now forecast 2017 adjusted net income in the range of $59 million to $61 million and $1.47 to $1.52 per diluted share.

Our updated guidance reflects the shares repurchased in the third quarter, which has an impact of approximately $0.03 per diluted share for the full year 2017.

And with that, I'll turn the call back over to the operator, so we can take your questions.

(Operator Instructions) And our first question comes from the line of John Kreger with William Blair.

August, can you just give us an update on the competitive landscape as you see it? Are you seeing any changes in the number of people competing for bids or any pricing dynamics?

No. I haven't really seen any change, but I don't think you are likely to see any, even if there was a change. The kind of dynamics are they pick a certain number of competitors. When you are in a competitive situation, they pick a certain number and often bring in, say, 3 groups for bid defenses. So it's hard to really get assessment of just how much competition there is, how many groups they considered from the beginning, whether they're broadening their net or narrowing it. It tends to be the same type of process regardless of time. So I've never really seen a big change there.

Okay and now that it is becoming pretty clear that your business is reaccelerating again, with the benefit of a little bit of hindsight, can you give us your sense about what happened kind of late in '16 and early '17? Is this just the normal ebb and flow of the business from your perspective? Or was there a change in how clients are thinking about the world?

Sure. I don't know what was the ultimate underlying cause of it, but we had a fair number of our less well-financed clients having a pause in their plans related to funding. It is finally closing on funding. A lot of our clients have plans on funding depended upon them getting to a certain stage and ready to move forward. And that's a tightly coordinated endeavor for them. They don't take cash. They are not getting cash long before. They are not usually having to delay too long in initiating a project. And we had a number that had substantial difficulties in closing and we had a number of clients that have ongoing programs that had funding in place at least commitment for funding that then evaporated in some way. So I know there was a funding difficulty across a subset of our business, which is an important part of our business. But I don't know the underlying dynamics, whether it was concern about pricing pressure and a lot of other things going on in the political environment, I really don't have any insight to that.

Great. And one last quick one for Jesse. Jesse, can you just give us an update on the bad debt situation? Do you have any items on the balance sheet that you think could be in a position to have to write off?

Sure, thanks. So the bad debt in the quarter that we recognized in Q3 was around $100,000. And many of the credit challenged customers that drove comments earlier in the year have secured at least some funding and we had to -- had strong cash flow collections against accounts receivable in the quarter. So I think, we're fairly baseline from a bad debt perspective.

And our next question comes from Dave Windley with Jefferies.

This is Jared Meggison on for Dave this morning. Just wanted to briefly touch on, August, you had mentioned 4Q, the decline in sequential revenue growth. Can you guys just elaborate a little bit on underlying factors driving that? And if I believe, if I do the math correctly, it implies a little bit lower EBITDA margin. So could you touch on that as well?

Sure. It's Jesse. I'll take that one. So the decline sequentially from Q3 to Q4 expected in revenue is really a function of Q3 having some benefit from -- some revenue benefit from the delayed recognition of for a few of these credit-challenged projects from earlier in the year. So that was what drove the -- what's driving the revenue to be down expected a little bit in the fourth quarter and then from a margin perspective, implying that margin will be down also in the fourth quarter. That's a function of that revenue decline as well as some continued increase in costs and primarily employee-related costs.

Got it. And then, in 2Q, you guys had discussed decline in RFP volumes, but expected your win rates to improve. Is that kind of consistent with how 3Q played out? And where is RFP volume currently?

Let me just first say there is a reason we don't quantitate RFP volume, because it's -- we don't think it's meaningful in the aggregate. There's a lot of factors. We look more at the quality. Because, I mean, RFP volume includes across service lines, across companies, across existing versus new accounts, across therapeutic areas and various opportunities for winning. So an overall number doesn't do as much and we don't think it's very meaningful. But I think we are very comfortable with the RFP flow we have and the quality of the opportunities we have. As I said, the business environment is much improved over 6 months ago and has really continued not just in third quarter but into fourth quarter, which we've seen 1/3 of so far. So we feel pretty comfortable that at least the difficulties which we ran into are abated and things are moving forward pretty well.

Got it. And then, just last one from me. If I do the math on your revenue growth, by client size, it seems most of that has been driven by the mid-sized pharma clients. Is that kind of consistent with what you've been seeing with bookings? Or has that been skewed more towards the smaller pharma?

Yes. It's really the growth is coming from mid and small.

And our next question comes from Donald Hooker with KeyBanc.

So I guess, I've been sort of tracking your staff levels and you are starting to grow revenues now and your staffing has remained relatively stable. So I would assume that there is fairly decent operating leverage there going forward. I guess, point 1 would be, is that a fair sort of induction? And then, can you give any clarity around where you think you need staffing levels to be in the near term? I guess, you are about 2,500 folks now.

So staffing hasn't changed much because we really haven't started to accelerate revenue. As Jesse mentioned, the increase in Q3 was driven a fair amount by delayed recognition. So revenue has been somewhat flat. I mean, it's been ticking up, we're up 4% on the year, something like that, but it's not been a great increase. We do expect to see an acceleration in Q1. And with that, at some point in 2018, we will begin hiring again. We do have a little bit of leverage there, but I wouldn't translate that into a large change in our margin. We do think our margins at around 28% is sustainable level. And we will begin to hire in the New Year as revenue picks up. But I think, currently, we've just kind of kept numbers about the same last few quarters.

Okay, got you. So you are sort of, I guess, I am interpreting your comments, you are somewhere near baseline in terms of your employee base. Is that the right?

Yes, I think, for a growth environment, we are pretty much near baseline. That means we have a reasonable amount of slack, but we don't intend to take up that slack, if we anticipate meaningful growth in the New Year, which we do.

Got you. Last question from me. Can you maybe, for Jesse, kind of looking ahead in terms of I understand you have a number of capital projects that you are focused on next year, if I recall correctly, around the lab and building out new capabilities, if that's right. So can you talk about what kind of a run rate CapEx level we should expect going forward? Obviously, a nice free cash flow this quarter -- kind of trying to get a sense of the sustainability of that.

Sure. Thanks, Don. CapEx, as a percentage of revenue, in the third quarter was about 2.3%. We do expect it to increase in the fourth quarter to approximately 6%, primarily related to some of the projects around expanding our laboratory logistics facilities. And then, as far as CapEx percentage going forward, would expect it to be up in that 6- or -so percent range into next year. Thank you.

And our next question comes from Erin Wright with Crédit Suisse.

Can you comment on sort of your win rates in the quarter and broader pricing discussions that you are seeing across kind of the environment right now? And then also as a follow-up, kind of where was your cancellation rate relative to the typical kind of 4% to 5% sort of rage?

Okay, Erin. Our win rate was good. I think, again, we were very comfortable with the quality of the opportunities we've been seeing off late. And we had a pretty strong win rate in the quarter. So we're comfortable with that overall. Sorry, second part of your question?

Second part, I'll take it. With cancellation rate in the third quarter and our long-term average has been around 4% to 5%. Cancellations in the third quarter were not higher than that and there wasn't any individual notable cancellations to speak of in the third quarter.

Okay, great. And then just a follow-up, kind of the broader biotech funding environment. I mean, are you seeing anything or hearing anything that's unusual or notable based on your kind of conversations with your smaller biotech customers?

Yes. We're not seeing anything notable like we were earlier in the year in terms of funding environment impacting new business and new programs going forward. We're not seeing that have any unusual influence, either positively or negatively here in the third quarter.

(Operator Instructions) And our next question comes from Robert Amparo with Wells Fargo Securities.

Just a quick question on modeling. So absent tax reform, what tax rates should we be modeling as a steady state going forward?

So our Q3 effective tax rate was 35.1%. We do expect full year for 2017 to be approximately 36% and that's probably a good baseline, give or take, as we think about the tax rate into the near term, as you mentioned, absent any changes from tax reform.

And I'm not showing any further questions at this time. I would now like to turn the call back over to Dr. August Troendle for any further remarks.

Right. Thank you very much for joining us for our Third Quarter Earnings Call and I appreciate your interest in Medpace. And we look forward to speaking to you, again, on our Q4 and full year 2017 earnings call, probably in February.

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 wonderful day.