Medpace Holdings Inc (MEDP) 2018 Q1 法說會逐字稿

Good morning, and welcome to the Medpace First Quarter 2018 Earnings Conference Call. Before we begin, I will read Medpace safe harbor forward-looking statements.

During today's call, management 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, 2017 filed with the SEC.

Management disclaim 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 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 attachment 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 President and Chief Executive Officer for opening remarks. Dr. Troendle, please begin.

Thank you, operator. Good day, everyone, and welcome to Medpace's First Quarter 2018 Earnings Call. With me on the call is Jesse Geiger, Chief Financial Officer and Chief Operating Officer, Labs. Please refer to Slide 3 on our earnings presentation. Revenue for the first quarter of 2018 was $163.1 million. Under our old approach applying ASC 605, Q1 service revenue came in at $108.4 million, an increase of 15.6% as reported and 14.2% on a constant dollar organic basis over Q1 of 2017. Net new business awards entering backlog were $128.2 million giving 1.18 book-to-bill ratio. At the end of Q1, our employee headcount was 2,555 under both ASC 605 and ASC 606. Nobody was lost in transition.

We would like to distance ourselves from the 2017 slowdown as quickly as possible, and Q1 2018 was a good start. However, Q1 growth was ahead of curve benefiting from the acceleration of several projects with pull-forward revenue we anticipated for Q2. Therefore, the growth trajectory will not be smooth this year even as we expect fundamentally accelerating backlog growth and ultimately revenue at a more normalized conversion rate. I would like to recognize some of the challenges we face in achieving steady and consistent quarterly growth. Our strategy of providing exclusively full-service offerings significantly limits our opportunities in large companies where there's an interest and a more flexible outsourcing model. We therefore have a high concentration of small pre-revenue clients and greater sensitivity to biotech funding. Although, we see no signs of a slowdown at present, we must admit that we did not recognize early signs of one in late 2016, which resulted in unexpectedly low revenue growth for 2017.

Our decision to expand business development bandwidth, which I had discussed in our last earnings call, should improve flexibility in targeting clients based on funding flows. However, the long sales cycle in clinical outsourcing suggested short-term changes in funding flows will be hard to mitigate effectively. All this leads me to reiterate that we will probably experience more quarterly volatility than our peers.

That said, we see a strong demand for our services and expect continued strong backlog growth through the remainder of 2018 and barring a slowdown in funding double-digit service revenue growth on an ASC 605 basis going forward. Our investments in the business are progressing well, and we are optimistic about our organic growth prospects. In an attempt to save some time by anticipating questions, I would add the following: the funding environment was good with projects moving forward as we would expect. RFP volume was strong in Q1. Our competitive hit rate was strong in Q1 and has been for the past 3 quarters. Cancellations were in line with our expectation and historical range. Oncology was our strongest therapeutic area for backlog awards, and there was no particular concentration among our backlog awards. Now Jesse will provide a review and more detail of our financial performance. Jesse?

Thank you, August, and good morning to everyone listening in. As a reminder, on January 1, 2018, we adopted ASC 606 using the modified retrospective approach. And we now recognize revenue on a percentage of completion basis as a single performance obligation inclusive of service revenue, reimbursed out-of-pocket revenue and revenue from fees paid to investigators and other arrangements where the company acts as an agent on behalf of the customer. Under this new standard, all revenue was reported within a single revenue line item and related expenses are presented with indirect costs. For the 2018 reporting period, we will continue to provide disclosures as if we were reporting under ASC 605, so that comparisons can be made on a consistent basis. In the future, we will also provide net new business awards backlog and the related metrics on an ASC 606 basis.

Revenue under ASC 606 was $163.1 million in the first quarter of 2018. Net service revenue under the previous standard, ASC 605, was $108.4 million, which represents year-over-year growth of 15.6% on a reported basis or 14.2% on a constant currency basis. We did experience elevated revenue in the first quarter partially driven by increased activities across several projects ramping up quicker than anticipated with heavy upfront activities. Adjusted EBITDA was $28.7 million in the first quarter of 2018. Under ASC 605, adjusted EBITDA was $31 million, which increased 18.2% compared to $26.2 million in the first quarter of 2017. Our calculation of adjusted EBITDA in the first quarter of 2018 includes an adjustment for our corporate campus lease payments.

On a constant currency basis under ASC 605, first quarter adjusted EBITDA increased 22% compared to the prior year. Adjusted EBITDA margin was 17.6% for the first quarter of 2018. Adjusted EBITDA margin for the quarter under ASC 605 increased 60 basis points to 28.6% versus 28% in the prior year period. This increase was primarily attributable to higher revenue partially offset by higher employee-related costs. When comparing adjusted EBITDA and adjusted EBITDA margin between ASC 606 and ASC 605, keep in mind that the inclusion of reimbursed out-of-pocket revenue and revenue from fees paid to investigators in the ASC 606 calculation has an impact on the margin percentage. And there are potential timing differences between the recognition of the revenue and the related cost in any given period. However, this does not impact the underlying economics of our contracts over the life of the contract.

In the first quarter of 2018, GAAP net income was $14.6 million under ASC 606 and $16.3 million under ASC 605, which compares to GAAP net income of $8.4 million in the prior year period. Adjusted net income under ASC 606 was $20 million in the first quarter of 2018. Under ASC 605, adjusted net income of $21.8 million in the first quarter increased 54.8% compared to $14.1 million in the prior year. Adjusted net income growth was primarily driven by revenue growth partially offset by higher employee-related costs.

Under ASC 606, GAAP net income per diluted share was $0.40, and adjusted net income per diluted share was $0.55 for the first quarter of 2018. Under ASC 605, GAAP net income per diluted share for the quarter was $0.45 compared to $0.20 in the prior year period. First quarter 2018 adjusted net income per diluted share of $0.60 grew 76.5% versus first quarter 2017 adjusted net income per diluted share of $0.34.

On slide 7, we have provided a breakdown of our customer concentration by revenue across 3 key categories under ASC 606. Our revenue growth was primarily driven by growth within oncology and cardiometabolic therapeutic areas. With regard to our mix by customer size, we remain focused on serving our core market of small- and mid-size biopharma customers that represents 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 maintain a well-diversified mix with our top 5 and top 10 customers representing roughly 22% and 35%, respectively of our total revenue for the year.

Slide 8 provides a summary of our leverage and liquidity positions, as well as a schedule of our free cash flow conversion for the first quarter compared to the prior year period. In the first quarter, we generated $23.3 million of cash flow from operating activities, and our net days sales outstanding on an ASC 605 basis increased compared to the fourth quarter from 7.6 days to 8.7 days, as we experienced an increase in trade accounts receivable.

Our net debt position at the end of the quarter was $176.3 million, composed of gross debt of $198.5 million and cash of $22.2 million. Our net leverage ratio was approximately 1.6x adjusted EBITDA. Consistent with the guidance given last quarter, our 2018 updated guidance we are presenting today is based on ASC 605.

As shown on Slide 9, our revised guidance reflects net service revenue in the range of $421 million to $435 million for the full year 2018. Representing organic growth of 8.9% to 12.6% over 2017, net service revenue of $386.5 million. Our revised 2018 adjusted EBITDA guidance is in the range of $105 million to $111 million compared to full year 2017. This ranges down 2.8% to up 2.7%. Our 2018 guidance also assumes full year exchange rates at the end of March. This currency assumption translates into a revenue tailwind and an adjusted EBITDA headwind compared to 2017 exchange rates. Considering these assumptions, our 2018 guidance on a constant currency basis has revenue growth in the range of 8.1% to 11.8%, and adjusted EBITDA growth in the range of 0.6% to 6.2%. We still anticipate our 2018 effective tax rate to be in the range of 22% to 25%.

We forecast 2018 GAAP net income in the range of $46.2 million to $50.4 million, and GAAP earnings per diluted share is expected in the range of $1.27 to $1.38. On the adjusted basis, we forecast 2018 adjusted net income in the range of $68 million to $72 million, representing growth of 12.5% to 19.1%, and $1.87 to $1.97 per diluted share, representing growth of 22.7% to 29.9%.

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

(Operator Instructions) The first question will come from John Kreger of William Blair.

I guess, are you able to sort of quantify the pull-forward that you saw in the first quarter relating to these few projects? And maybe if you could just talk a little bit more. Is that something that you tend to see? What's the sort of nature of the change that would drive that?

Okay, sure. Good question. Yes, I mean, it was a number of things. Some of it was a quicker startup, some of it was just heavier burn because of the position of the broad project that came up earlier. And I don't have an exact number for how much would have been in second quarter, and how much was kind of added add-on services that hit in the quarter, but I think you can get an idea from our kind of our guidance clues and how much we overperformed. I think a good part of that was related to timing of things and that's why I think, certainly things have been pulled forward and we would expect that to pull revenue into the year overall and into the third quarter and fourth quarter as that project accelerates, but a lot of it was also unique things in the quarter that I think came out of second quarter but is going to -- doesn't increased the entire year as proportionately. So I don't have a specific dollar value but maybe just...

Yes. John, one way to think about it is, we had conversion of 20.7% in the first quarter, and we had expected a conversion or a burn rate probably closer to the 19.5% range in the first quarter.

Great. That's helpful. And Jesse, one for you. I know there's a lot of noise around the conversion from 605 to 606, at this point, do you have a sense about the kind of EPS hit to '18 full year from 606? We saw it was $0.05 in the quarter. And longer term, should we think about 606 versus 605 is sort of a wash? Will it help earnings in '19 and '20 or hurt them in '19 and '20?

Thanks. Yes, John, I think it's a little too early to tell on the full year impact. It was $0.05 difference in Q1. The one thing I can point to is that I mean, there's 2-point estimates right now. There is what was the Q1 impact and then the other piece that's reflected is, what was our cumulative opening adjustment from a 605 to 606 perspective, and the Q1 impact was larger than the cumulative impact recognized on day 1 of adoption. But where that goes over time and how it ebbs and flows, I think it's too early to tell.

Yes, and larger, not larger dollar wise but larger in reference to kind of growth of the company. If we look at it as all these projects ongoing, we have $500 million of backlog, how much have we grown? It was a very large -- several times larger than you would have expected relative to the opening level, the opening balance sheet adjustments that were made.

Yes. So as far as what -- what's the overall impact for the year or thinking about it for 2019 or 2020, I think as we build some experience here on a 606 basis, we'll begin to get a better idea and refine our models and likewise help you refine yours. But again, over the life of the project, no economic impact, it is going to move some activities between periods just based on the matching. It does have the effect of disconnecting a little bit the cost and the related revenue from a period-to-period basis.

The next question is from Erin Wright of Crédit Suisse.

Just follow-up on the pull-forward year, I guess, how much does come out of the second quarter? I guess, essentially what I'm looking for is how should we be thinking about that quarterly progression? And what lingers maybe into the third and fourth quarter throughout the year in terms of that progression of revenue?

Yes, yes. Thanks, Erin. Look, I think that -- we're not going to give quarterly guidance. And so how much was pulled out versus pulled forward and so some things might have been projected for Q3 coming to Q2. I don't think we're prepared to say. I do think that you can look at as kind of both one-off kind of issues in the quarter and some projects that accelerated that will -- are going to be going for a couple years, and so pulling them forward helps later in the year too. And that's why overall guidance for the year was increased. So I think it's a combination. I think what you can expect is Q2 to be under Q1, but we're not giving kind of a quarter-by-quarter cadence.

Okay. Yes. No. I understand. And the headcount stepped up, obviously, in the quarter. Is this, I guess, ahead of some of the aforementioned acceleration in projects? I guess, how should we be thinking about how that progresses throughout the year and how is the hiring environment, just generally speaking?

So we are hiring pretty aggressively because we have backlog growth that is ahead of where we'd hope to be and things look strong. Obviously, that's something we can shutdown rather rapidly, if things soften. But right now, the business and development environment looks very strong, so we're hiring aggressively. We're also doing those investments we talked about, and we had some, I think, pretty good luck in terms of employee departures in first quarter, so we were able to very effectively add employees.

The next question is from David Hooker (sic) [Donald Hooker] of KeyBanc.

It's Donald. Wanted to get a sense of -- so the -- so look, revenue per employee was up, but gross margins are down. I'm just trying to get my bearings here in terms of what's the right gross margin for the business with all these investments going forward, I guess, maybe for this year. And then, kind of, structurally, where are you? Because, I guess, if I look back over when the gross margins were above 50% going back, and I don't know if that's the right level going forward at some point, but can you talk about kind of -- can you bear me around gross margins?

Sure, Don. Yes, I mean, our guidance implies -- still implies 25% EBITDA margin and we do anticipate while it was lower in the first quarter, we do expect SG&A growth for the year in the 16% to 17% range. And so that implies gross profit in the 42-or-so percent range for the year.

Is that the right, kind of, gross margin for you guys at this point long term, I guess, given some of the expanded geographies that you're operating in? Or how do we think about gross margins, kind of, structurally over time for this business?

I mean, at this point, as we think about the -- what level of slack capacity we have and how much of that do we maintain as we look at the growth in the pipeline. I think it's a good working assumption for now. Obviously, as the business development funnel expands and contracts, that can change the pace at which we're hiring, but right now I think it's a good working assumption.

Okay. And maybe last just kind of hammering this theme in terms of profitability. Are there things aside from hiring and firing and moving your -- managing your staff around your use of IT and technology or things that you can do or that you've had some success with driving efficiencies perhaps outside of hiring and firing?

Well, we're always building and we're always looking at data partnerships and use, and we invest quite a bit in our IT and software systems to analyze that. So I think we have a number of projects that are adding to our investment this year and will continue. So I'd say yes, there's a lot of it. I don't think we give specific project names to them, but we have a half dozen initiatives in enhancing our data utilization and recruitment is one of the key areas there that we're trying to improve.

(Operator Instructions) The next question is from Jason Twizell of MUFG Securities.

First of all, just wanted to -- given the $20 million pay down on the revolver and the strong cash flow generation in the quarter, just wanted to get an update on your uses of cash for the year.

Yes. Thanks, Jason. Capital allocation priority for us remains the debt pay down. So we'll continue to focus on deleveraging with our cash flow. We do expect some elevated CapEx that we've spoken of for the year relative to prior years. And so capital expenditures and debt reduction are our top 2 priorities.

Okay. Great. And then just, I guess, from a high level looking at the patient recruitment environment, how challenging is that? How difficult it is in order to avoid having project delays occurring? Has that changed over time or you're still having some difficulties as everyone else has over the last few years?

Yes. Look, I think it's something that the industry has not solved. It's the primary issue in timing of a clinical trial, particularly when you get into more rare diseases. And our business is around rare disease and oncology largely today. So recruitment is a key part of that. And I don't think that anyone has got a perfect solution, but I think we do a very good job at it and that's how we differentiate ourselves.

There are no further questions in the queue at this time. I'd like to turn the call back over to Dr. Troendle for closing remarks.

All right. Well, thank you, everyone, for joining us on our earnings call, and talk to you at our next earnings call in end of Q2. Thank you.

Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect. Great day.