Medpace Holdings Inc (MEDP) 2018 Q3 法說會逐字稿

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

During today's call, management's remarks in 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 actual results to differ materially from management's current expectations, including the impact of the changes to the revenue recognition standard. These factors are discussed in the Risk Factors section of our Form 10-K for the year ended December 31, 2017, and our other filings 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. These non-GAAP measures are not superior to or a replacement for the comparable GAAP measures, but management believes these measures help investors gain a more complete understanding of the results. 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. Mr. Troendle, please begin.

Thank you, operator. Good day, everyone, and welcome to Medpace's Third Quarter 2018 Earnings Call. With me on the call is Jesse Geiger, Chief Financial Officer and Chief Operating Officer, Labs, also nursing a cold.

I have little to message this quarter. New business activity continues at a brisk rate, providing a nice set-up for 2019. However, one headwind we see in Q4 and going into 2019 is the significant cancellation, that occurred earlier this month, of an ongoing program with approximately $20 million of remaining unperformed service fees.

Replacing the backlog should not be a problem in the current environment, but the delayed timing of replacement revenues will be a headwind for at least a few quarters. Jesse will now review our financial performance for the quarter and update our 2018 guidance.

Thank you, August, and good morning to everyone listening in. We are presenting net new business awards and backlog on both the ASC 606 and ASC 605 basis. We will continue to present this way for the duration of 2018 before fully transitioning to the ASC 606 basis only, beginning in 2019.

Net new business awards entering backlog in the third quarter under ASC 606 were $227.6 million, resulting in a 1.27 net book-to-bill. On an ASC 605 basis, net new business awards were $150.1 million, representing a net book-to-bill of 1.21.

Revenue under ASC 606 was $179.3 million in the third quarter of 2018. Net service revenue under the previous standard, ASC 605, was $124 million, which represents year-over-year growth of 25.6% on a reported basis or 25.8% on a constant currency organic basis.

Third quarter revenue was fueled by strong biotech funding environment, solid net awards and continued momentum with existing projects.

Adjusted EBITDA was $36.4 million for the third quarter of 2018. Under ASC 605, adjusted EBITDA was $42.7 million, which increased 52.1% compared to $28 million in the third quarter of 2017. On a constant-currency basis, under ASC 605, third quarter adjusted EBITDA increased 50.1% compared to the prior year.

Adjusted EBITDA margin was 20.3% for the third quarter of 2018. Adjusted EBITDA margin for the quarter under ASC 605 increased 600 basis points to 34.4% versus 28.4% in the prior year period. This increase was primarily attributable to higher revenue, partially offset by higher employee-related costs.

We increased employee headcount to 2,799 employees at the end of the third quarter, and we continue to hire across the company.

In the third quarter of 2018, GAAP net income was $19.3 million under ASC 606 and $24 million under ASC 605, which compares to GAAP net income of $9.8 million in the prior year period.

Adjusted net income under ASC 606 was $25 million in the third quarter of 2018. Under ASC 605, adjusted net income of $29.7 million in the third quarter increased 86.8% compared to $15.9 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 $0.52, and adjusted net income per diluted share was $0.67 for the third quarter of 2018. Under ASC 605, GAAP net income per diluted share for the quarter was $0.64 compared to $0.25 in the prior year period. Third quarter 2018 adjusted net income per diluted share of $0.80 grew 100% versus third quarter 2017 adjusted net income per diluted share of $0.40.

Regarding our mix by customer size, we remain focused on serving 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.

Most of the revenue growth in the third quarter was in the small biopharma customer group. Regarding customer concentration, we maintained a well-diversified mix, with our top 5 and top 10 customers representing roughly 22% and 33% respectively of our total revenue.

Turning now to our leverage and liquidity positions as well as free cash flow conversion. In the third quarter, we generated $52.5 million in cash flow from operating activities, and our net days sales outstanding on an ASC 605 basis decreased compared to the second quarter from 4.1 days to negative 3.7 days.

Our net debt position at the end of the quarter was $92.2 million, composed of gross debt of $114.5 million and cash of $22.2 million. Our net leverage ratio is approximately 0.7x trailing 12-month adjusted EBITDA.

Turning now to our guidance update. Consistent with the guidance we gave last quarter, the 2018 updated guidance we are presenting today is based on ASC 605, and this guidance assumes exchange rates for the rest of the year based on exchange rates as of September 30. Our revised guidance reflects net service revenue in the range of $474 million to $479 million for the full year 2018, representing organic growth of 22.7% to 23.9% over 2017 net service revenue of $386.5 million.

Our revised 2018 adjusted EBITDA guidance is in the range of $147 million to $149 million, representing organic growth of 36.1% to 37.9% over 2017. 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 $79.9 million to $82.1 million and GAAP earnings per diluted share in the range of $2.16 to $2.22.

On an adjusted basis, we forecast 2018 adjusted net income in the range of $102 million to $104 million, representing growth of 68.7% to 72% and $2.76 to $2.82 per diluted share, representing growth of 81.6% to 85.5%.

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

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

August, maybe could you just elaborate a little bit more on the cancellation. Was it just 1 program? And at what point next year would you expect it to be fairly washed out of the numbers?

Yes, it's single study. And -- I don't know, what do you mean by washed out? I mean it's obviously a project that was going to run for a few years. As new studies come in to replace it, it'll become unapparent. It's just, I think, a few quarters where you would see a -- maybe a reduction in our revenue growth. So I think we'll continue to have good bookings and like I said, replacement's not a problem. But obviously from a timing perspective, it was ongoing. And so it takes a while to get a study into an ongoing, well into startup phase. So you're taking -- talking about a couple of quarters, I think that you'd see a sort of an inflection, maybe reduction in our revenue growth and then it should accelerate again like it has in the past.

Great. And then a second question. Jesse, you had mentioned a few times during your remarks about higher labor cost. Can you just refer to that or elaborate a little bit more? Are you starting to see perhaps higher wage trends or higher cost to recruit talent?

Yes, John, I mean it continues to be a competitive environment. I think we're seeing wage rates consistent with the market. But I wouldn't say that, that's a significant driver of cost, more of the labor cost is from the headcount additions than heavy inflation in the rate.

Your next question comes from Erin Wright with Crédit Suisse.

A quick follow-up to that question. How should we think about the quarterly progression of margin trends, I guess, both on a gross margin and an SG&A standpoint, if we think about the next quarter and kind of into 2019?

Erin, yes, sure. So for the -- for Q4, the midpoint of our guidance does imply a Q4 EBITDA margin kind of in the 30% to 31% range. We would anticipate SG&A in the kind of 16% to 17% range and gross margin closer to 47% for the fourth quarter, and we'll give guidance for 2019 in our next quarter's call.

Okay, great. And then I'm curious if you're seeing -- I'm sorry, if you had something else.

No, go on.

Okay, yes. I'm curious if you're seeing any changes in the underlying competitive landscape at all? Are you seeing others, I guess, entering sort of that biotech or small biopharma target customer base that you have or is it relatively unchanged?

I -- we don't really notice much difference. Obviously, the pundits look for market share by book-to-bill ratio, and I guess, from that perspective, we're losing. But I don't think our revenue's going to tail off. So I think we are doing fine.

Your next question comes from David Windley with Jefferies.

I was curious around kind of the 2 quarters in a row here for you to raise guidance by quite a bit, and honestly to raise your EBITDA outlook by more than your revenue outlook, which certainly speaks to the margin that you're producing in the actual results that we're seeing in the third quarter. I guess, I'd love for you to juxtapose that against your plans at the beginning of the year to hire fairly, aggressively and anticipated that, that would depressed margin a little bit. Are we -- are you still getting the hiring done? And how are we able to be able to see the kind of margin performance that you are delivering year to date?

Yes, sure, Dave. I think we are making very good progress on hiring. I think you see we're on track for hiring at least 20% of staff. I mean on an organic basis, hiring -- adding 20% to your staff base is pretty aggressive hiring I think. I think we're doing a good job there. I think we are doing a good job on the hires in addition to operational staff that we'd planned earlier in the year. So I think we've made good progress against the cost side of things. What we did not anticipate and is above our guidance considerably is revenue. The market's been a lot stronger than we anticipated going into the year. We did anticipate good growth in the year, and we were indicating we'd probably have double-digit growth. But we didn't expect revenue growth to be beyond 20%. And that's really taken up our utilization quite a bit. So I guess, you'd say certainly, we want to hire faster than we'd planned going into the year, and we have in fact raised our hiring rates. And I think we will continue that and continue to ramp going into next year.

And just to clarify, so I see in the press release, it says you have about 2,800 staff. Is that the number, or did you give a more exacting number on the ending?

We do have an exact number for you. I think we did on the slides.

2,799 employees.

799, so we're one off, yes. One short.

One -- close enough.

One short.

So then I mean far be it from for -- any of us to predict what's going to happen with market and funding and direction of the XBI and things like that. But if we continue to be in a volatile market and risk appetites do moderate some, how do you think about fortification of your business development activity as we move into late this year, 2019 to continue to see strong bookings and book to bill in an environment that is perhaps not a rising tide to the degree that we've seen in the last 3, 4, 5 quarters?

Yes. So Dave, I guess I'd say, untested. But we did put in place a number of initiatives late last year and early this year to expand our ability to handle a greater -- really see a larger number of projects and have greater opportunities. Right now, we're being pretty selective, so we're not using that opportunity. We're actually only bidding on things that we think we can -- that make the most sense at this time, and I think things have to pull back a ways before we see opportunity -- lack of opportunities. And then I think we've done a lot to beef up our ability to keep growth going despite a slowdown. But depending on the severity of the slowdown, and how sharply biotech funding is cut off, I don't know, it's sort of untested. But I think, again, I don't want to overthink the short term. We can manage the short term. I think longer term, biotech funding is a driver of growth in this industry, and we're in the right place, and we're going to grow faster than our peers because we're in the right space. And so I'm not really -- obviously, I'm concerned about funding and how sharp pullback there eventually will be, but I think longer term, I'm not concerned.

Your next question comes from Jason Twizell with MUFG Securities.

Just quickly around capital deployment. You paid down another chunk of the debt. Looks like your net debt to EBITDA is under 1x. Are you going to be looking towards new priorities like buybacks or more aggressively on the M&A front in order to inorganically grow the top line?

Jason, yes, right now, we're continuing to focus on organic investments and debt paydown for the foreseeable future. If you look at our short, but past pattern of share repurchases, we tend to be more opportunistic than systematic in our approach. We do have an authorization from the board. But right now, we're using cash flow to pay down debt.

And I guess, foreseeable future means a few quarters in terms of debt paydown because we're going to be out of debt in not too long.

Mid...

Given that...

I think, a problem to have, so -- and then the follow-up just on sequential decline in CapEx. I know you guys have been building out your IT and infrastructure outside the U.S. Is that largely done or is there another reason for the sequential decline?

Yes. No, it's -- some it's continuing. We are through a lot of the build that we -- from some of the different offices. But we're continuing to expand in a number of geographies outside the U.S, which comes with some CapEx as we take on new facilities. And then really it's not until 2020, when things pick back up a little bit as we enter a new camp -- a new building here at the corporate headquarters.

Your next question comes from Donald Hooker with KeyBanc.

Great. So I hear you about -- you guys discussed the project cancellation, I got that. Can you -- I guess, maybe can you provide any visibility in terms of to help us kind of trying that around 2019 in terms of -- outside of that cancellation kind of bookings trends. I think in the last quarter, you mentioned sort of a book to bill of I think north of 1.2 in the second half. It looks like you -- or something like that, it's looks like you're a little bit ahead of that in the September quarter. I mean are we thinking another strong December quarter for bookings?

I -- look, the environment hasn't changed. I don't know what'll happen the rest of the quarter. So I wouldn't try to predict what the book to bill exact is going to be. But I would expect it to be reasonably strong. I think that we're not going to do something like last quarter, the prior quarter, which was very high. We look for it -- we target 1.15, 1.2 to 1.25 is great, higher than that, is not good. So we're not looking to book those kind of numbers, but I think the environment remains strong. I suspect, we'll have a book to bill that's well within our nice range in the next quarter. And then going into next year, we'll switch to 606, and I don't even know what they look like under 606. I guess, they're a little bit higher.

Little higher.

Sure. And then maybe sort of outside of the quarter, what is your thinking around that year -- you have a -- I think a small Phase I facility still. Is that something that -- is that profitable now? Is that -- can talk about the value of that business to the overall enterprise?

Our Phase I operation is not profitable. It's probably the only area that's down this year, year-over-year, so it's actually been a drag on things. So it's very small and not currently...

I mean, what does that do to you -- do for you strategically I guess. So I mean I guess why do you -- why -- what is the thought behind having that business?

Well, I think it is complementary to many of our clients that the work with. There are certainly some important studies were performed there. But on a making it -- it's a matter of filling beds. I mean, individual studies can be strategically important and the unit operates very well, and it's kind of got a niche metabolic focus, so I think it complements many of our other programs in later stage. But to fill beds, you have to do a lot of -- either a lot of those studies, or you've got to do a lot of bioequivalence our drug interaction studies and kind of the more generic normal healthy volunteer studies. And we've never done a lot of that, so we don't fill beds, so occupancy is relatively low. So probability is just not there. But I think we evaluate that time to time, how we should -- what we should do with it, but I think it does add value and that's why we've kept it.

Your next question comes from Eric Coldwell with Baird.

Could you share the revenue expectations or concentration percentage of your largest single study in either calendar '18, calendar '19, trailing 12, next 12? I'm just trying to get a sense on framing what the single study concentration risk is?

I think our largest client is about 5% of revenue.

It would have to be less than that.

On a year-to-date basis, our largest client, I think is 5.4% of revenue exactly, if I recall correct. So it'd say it's just over 5%. So no, it's a small. Look, there's -- nothing is big in our shop.

Now shifting gears quickly. Just probably need to double-check this math. There was such a big -- it appeared to be a big change, want to make sure we have the numbers right. Your small biopharma concentration in prior years, you've been disclosing somewhere around 64%, 65% of the total. I believe, and correct me if we've done the math wrong, I believe this quarter that number is up to about 83%. Am I looking at that correctly? Or did -- maybe am I throwing a number in there incorrectly?

No, I'm not sure that's true, and I think that may be a -- may relate to a classification change in some of that.

I think it's about 70% for Q3.

For Q3?

Yes.

(Operator Instructions) Your next question comes from Erin Wright with Crédit Suisse.

Just a quick follow-up here and I understand you don't have really much exposure to large pharma. But I guess, more broadly speaking, are you seeing any changes in insourcing, outsourcing trends or potential rationalization of research projects? Just saw some of the recent Novartis news of late cutting projects in areas such as infectious disease. I'm just curious what you're hearing out there and any sort of signs of any rationalization or building of R&D efforts across like maybe medium and large pharma.

I don't think our exposure to medium and large pharma is large enough to have those. Obviously, there is -- as changing science and market dynamics, particular areas become more and less in focus, and there is reprioritization even among our clients that we see. But no, I don't -- we don't have any general trends that -- and certainly not large pharma-based exposure to see any of that.

Your next question comes from David Windley with Jefferies.

I'll get on the -- to chime in train here. So wanted to ask a question, Jesse, on 606. So you have the dynamic that you are guiding on 605, as you've done all year. Fortunately, kind of consensus in first call and everything seems to be reflecting 606. I am wondering if things like the -- and you mentioned -- before I go there, you mentioned that like book to bill looks different for you on a 606 basis, which is I guess not surprising, but I wondered if you could peel the onion back a little bit in terms of do you think you have -- because you are doing full-service work, will your P&L have more reimbursed out-of-pockets than your peers? Will that accelerate, decelerate? How should we think about the amount of that kind of no margin direct cost that's going to run through P&L as we go to 2019?

Yes, Dave. I think -- as it relates to the mix of our business and you hit on it, since we do all full service, we don't have a staffing offering. We don't do functional outsourcing. We're not selling work that -- we're really not selling work that doesn't come with investigator payments primarily. And the pass-throughs in investigator payments will be a larger percentage of our mix relative to peers. So it does -- it is -- the impact is amplified in our business. But as far as how it's going to play out in 2019, we will be giving guidance on a 606 basis in our next quarter call. How it differs from 605, and what we're experiencing to date in the 3 quarters that we have here is a -- about a 10% drag on EBITDA relative to 605 and it is a different equation. Altogether, it has different inputs, different formula. It's more complicated than just layering on pass-through cost and investigator payments on top of the 605 revenue. So we're continuing to learn from our short experience here on 606, and we're developing our model. But how that plays out quarter to quarter going forward into 2019, we're still learning, and we'll try to guide to it as best we can in the next year.

Your next question comes from Sandy Draper with SunTrust.

And this is maybe a follow-up to today's earlier question that was about margin. But you clearly outperformed on revenue by about 10%, raising the guidance this year, and obviously you talked about coming in better. when I think about that, how much of that is you're pulling out of backlog faster and we're you able to get study startups more quickly? Or is this that new business got signed and you are able to start quickly? Just trying to think about when things go well like this, is it just coming out of backlog faster? Or are you actually winning new business and able to start it right away?

Well, I guess, by definition, you could look at what's coming out of backlog by our burn rate, and our burn rate has gone up. So our proportional quarterly revenue of burn off of backlog has increased. That's timing, it's related to a number of things. Obviously, the type of project and how easy it is to get started up and how rapidly it recruits, influence all that. So there is some of that, but I think it's also just a matter of the timing of different projects going in. And of course, our -- the way we -- the way we -- that we account for backlog, it goes in maybe a bit later than not just based upon an award that's sometime in the future. For ours, it's got to be pretty active to get into backlog. So it's -- it generally burns rather quickly anyway. But shifts in the burn rate have to do with type of project and just what stage they're at, how well they recruit, how quickly they start up, and that's the biggest driver of our increasing conversion and then along with additional bookings. So you are right, additional bookings also. Sometimes, you get a revenue right away with new bookings. It usually isn't very material, things that come in the same quarter, but there is some of that.

There are no further questions at this time. I will now turn the call back over to Dr. Troendle for closing remarks.

All right. I want to thank everyone for their interest in Medpace and bearing with us on the call. And look forward to speaking to everyone again in February for our full year 2018 earnings call. Thanks, everybody.

This concludes today's conference call. You may now disconnect.