Medpace Holdings Inc (MEDP) 2019 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Medpace first quarter earnings conference call. (Operator Instructions) As a reminder, this call may be recorded.

I would now like to introduce your host for today's conference call, Kevin Brady, Medpace's Executive Director of Finance. You may begin.

Good morning, and thank you for joining Medpace's First Quarter 2019 Earnings Conference Call.

Also on the call today is our President and CEO, August Troendle; and our CFO and COO of Laboratory Operations, Jesse Geiger.

Before we begin, I would like to remind you that our 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 actual results to differ materially from our current expectations, including the impact of the changes to the revenue recognition standards. These factors are discussed in the risk factors section of our Form 10-K and other filings with the SEC.

Please note that we assume no 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 our views as of any date after today.

During this call, we 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 we believe these measures help investors gain a more complete understanding of results. A reconciliation of such non-GAAP financial measures to the most directly comparable GAAP measures is available in the earnings press release and earnings call presentation slides provided in connection with today's call. The slides are available on the Investor Relations section of our website at investor.medpace.com.

With that, I would now like to turn the call over to August Troendle for opening remarks.

Thank you, Kevin. Good morning, everyone.

I have a three quick topics to comment on before Jesse reviews our financial results for the quarter.

Number one, business environment. The business environment remains consistent with last quarter and somewhat below the level of the past year. Although overall net awards were sequentially higher in Q1 at $249 million, the level of net direct revenue or service revenue-based awards were down in the quarter, reflecting a higher proportion of pass-through amounts.

Number two, cancellations. Cancellations in Q1 have continued at levels significantly above expectation and our historical averages. I'm not sure if this represents bad luck or a new normal, but in any case, recent cancellations represent a meaningful headwind in 2019.

Number three, margin. As anticipated, our margin has come down in Q1. This reflects good progress in hiring effectively and in line with our 2019 plan. We anticipate continued success hiring well in advance of business needs. In addition, we have taken on a number of contract staff to fill gaps where they've come up.

We expect full year margin at or slightly below the level in Q1.

Jesse will now review our financial performance for Q1.

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

As a reminder, all financial and backlog metrics in the presentation are now on an ASC 606 basis unless otherwise noted.

Net new business awards entering backlog in the first quarter increased 23.9% from the prior year to $248.7 million resulting in a 1.24 net book-to-bill. Ending backlog as of March 31 was $1.1 billion, an increase of 21.8% from the prior year. Revenue was $200.7 million in the first quarter of 2019 which represents year-over-year growth of 23.1% on a reported basis and 23.7% on a constant currency organic basis.

EBITDA of $33.4 million increased 12.7% compared to $29.7 million in the first quarter of 2018. On a constant currency basis, first quarter EBITDA increased 9.2% compared to the prior year. EBITDA margin for the quarter declined 150 basis points to 16.7% versus 18.2% in the prior year period. The decrease was primarily attributable to higher employee-related costs, reimbursed out-of-pocket expenses and operating lease expense under ASC 842, partially offset by higher revenue.

For the first quarter of 2019, we did not have any adjustments to EBITDA.

The first quarter of 2018 EBITDA excluded $1 million of corporate campus lease payments. And as of January 1, we converted these buildings from deemed assets and liabilities to operating leases with the adoption of ASC 842. Therefore, we no longer have the adjustment and we are no longer showing adjusted EBITDA.

We increased employee headcount to 3,062 employees at the end of the first quarter, and headcount growth continues to be an area of focus this year.

In the first quarter of 2019, GAAP net income was $19.2 million compared to GAAP net income of $14.6 million in the prior year period.

Adjusted net income of $23.8 million in the first quarter increased 18.9% compared to $20 million in the prior year. Adjusted net income growth was primarily driven by revenue growth, partially offset by higher employee-related costs and reimbursed out-of-pocket expenses.

GAAP net income per diluted share for the quarter was $0.51 compared to $0.40 in the prior year period. First quarter 2019 adjusted net income per diluted share of $0.64 grew 16.4% versus first quarter 2018 adjusted net income per diluted share of $0.55. And we did not purchase any shares in the first quarter.

Regarding customer concentration, we remain -- we maintain a well-diversified mix, with our top 5 and top 10 customers representing roughly 21% and 32%, respectively, of our total revenue for the quarter.

In the first quarter, we generated $34 million in cash flow from operating activities, and our net days sales outstanding decreased compared to the fourth quarter from negative 6.9 days to negative 9.2 days.

Our net debt position at the end of the quarter was $26.3 million composed of gross debt of $56.4 million and cash of $30.1 million. And our net leverage ratio is approximately 0.2x LCM EBITDA.

Moving now to our updated guidance for 2019. We now forecast total revenue in the range of $813 million to $837 million for the full year 2019, representing growth of 15.4% to 18.8% over 2018 total revenue of $704.6 million. We are expecting elevated reimbursed out-of-pocket expenses, and we are maintaining our 2019 EBITDA expectation in the range of $137 million to $145 million compared to EBITDA of $140.9 million in 2018.

Our previous adjusted EBITDA guidance assumed ASC 842 lease treatment and no further adjustment for the corporate campus lease, so our new EBITDA guidance is comparable to our previous adjusted EBITDA guidance with respect to these leases.

We anticipate our 2019 effective tax rate to be in the range of 22% to 24%.

We have assumed 37.6 million fully diluted shares for 2019. No stock repurchases in our guidance and exchange rates as of March 31, 2019.

We forecast 2019 GAAP net income in the range of $85.2 million to $89.2 million, and GAAP earnings per diluted share in the range of $2.27 to $2.38.

On an adjusted basis, we forecast 2019 adjusted net income in the range of $97 million to $101 million, and adjusted EPS in the range of $2.58 to $2.69.

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

(Operator Instructions) Our first question comes from the line of Erin Wright from Crédit Suisse.

You mentioned the cancellation trend and that you're not sure if that's some sort of continuing trend. But what were the nature of the cancellations? Is it pipeline reprioritization or funding dynamics that are influencing this? I'm just curious if there's any -- a little bit more color there.

Yes

(technical difficulty)

to differentiate between those, but yes, mostly pipeline or product failure.

And any sort of dynamics on those biotech funding side of...

No, we really have not seen a slowdown in funding that's really impacted things. Again, it's always difficult to know a pipeline reprioritization from a total funding issue. But no, we haven't seen things that are stalling like in the past times of slowdown.

Okay. And can you speak to the level of hiring that you're doing? More broadly, how should we be thinking about that quarterly progression in the margin trend from here?

So I think we should continue hiring on the sort of rate we've been hiring. We expect to hire 20% or so staff over the course of the year and pretty linearly.

And the quarterly progression of EBITDA or margin trends kind of going forward? Should we think about any anomalies here?

Yes, I mean I think from a quarterly progression, we'll stick to kind of the full year guidance here on margin percentage. And August commented at the beginning of the call about EBITDA margins for the year around the level that they were in Q1.

And the next question comes from the line of John Kreger from William Blair.

Jesse, just to clarify the guidance change. So the revenue went up, I think, about $30 million, but EBITDA did not. Again, should we just think about that as higher reimbursed expenses flowing through the top line?

That's right, yes.

Okay, great. In your slide deck that shows some of the revenue mix, it looked like there was a pretty significant change in revenue coming from cardiovascular on the therapeutic side and from small biopharma on the client side. Anything you could add to what's driving those mix changes? Or does that have any other implications from your perspective?

No broad implications. But the shift towards small biopharma continues to be an area that we're focused on and an area where we see good growth opportunities. The mix change by therapeutic area, I guess cardiovascular programs tend to be a little more lumpy than some of the other therapeutic areas. So I think that has an influence there period to period on the -- on that particular percentage. But nothing else that I would call out notable about any specific drivers in any of the therapeutic classes.

Okay. And then one last one. August, when you talk to your clients, how do they react to the increased rhetoric out of DC about drug prices being too high? Does that influence their behavior at all?

I never discuss that with them.

(Operator Instructions) Our next question comes from the line of Stephen Baxter from Wolfe Research.

I was wondering if you could comment on your win rates in the quarter. Just trying to think about whether there's any material differences between the RFP flow and win rates that we should consider when thinking about the bookings performance in the quarter.

Yes. Win rate was pretty strong. And I think in general, you see a correlation between cancellations and win rates. We've had high cancellations, and that often results in strong win rates. I think when you have very strong teams that are coming off of projects that are winding down, you have an enhanced chance of winning.

Okay, that makes sense. And then as a follow-up, with the company approaching a net cash position, I was wondering if you could comment on what you think the capital deployment priorities will be over the next few quarters. Obviously, the company has been focused on organic growth historically, but I'm wondering if that changes given the evolution of your balance sheet over the past couple of years.

Yes, we'll continue with our organic growth strategy as our primary strategy. We'll continue to pay down debt here over the next couple of quarters, and then share repurchases could be the next logical use of capital for us.

Next question, we have a follow-up from Erin Wright from Crédit Suisse.

And August, at the beginning of the call, you mentioned sort of a continuing environment from what you saw last quarter. And I'm just curious, particularly across your kind of core biotech customers, you mentioned sort of a more subdued kind of environment. How are you measuring this environment? Like what are some of the key metrics that you're looking at that you look across to your customers or in your customer conversations that you think are important in identifying kind of the underlying trends and demand trends across this market?

I'm mostly focused on RFP flows for most of the business environment in general, both quantitatively and subjectively because I think the actual numeric -- numbers' total value is sometimes very misleading. And I've said, I think overall, I look as far as the flows and quality of them, which is maybe more important which is difficult to quantify. But maybe a feeling for the funding environment seems pretty well. We don't see a lot of things that are stalled and held up for when we're going to close. But I just don't rely on this number. So I think the environment's pretty good from funding, and I think it's pretty good from both total flow and quality of the flow of RFPs. And that's what I'm judging it on.

And our next question comes the line of David Windley from Jefferies.

Jumping on late. I apologize if this has been asked. But just want to confirm that the guidance that you provided last night in the deck, you shift from an adjusted EBITDA description to an EBITDA description, which last year there was a delta between those two. And if we apply a delta similar to that, it would imply that your EBITDA guidance is actually kind of apples-to-apples gone down. I just want to make sure that, that's actually not the case. And the audio, by the way, is really bad at least on my end. It's kind of breaking up. I'm not sure if that's the case with anybody else but...

[The current] EBITDA [included] the corporate campus lease as an adjustment to get to adjusted EBITDA. So in the current year EBITDA that P&L is already burdened by the campus lease on an unadjusted basis. So that's the one delta between prior year EBITDA and current year EBITDA is the change in the lease accounting.

So they should be exactly comparable.

So the burden -- the corporate campus lease burden flows through another line. Is that...

No.

It flows through with operating lease expense in current year EBITDA. In prior year EBITDA, it flowed through interest and depreciation. And then we adjusted for it with a negative adjustment to burden the adjusted EBITDA as if it were an operating lease in the prior year period.

Okay. All right. Thank you for that. And then, August, from a -- I caught the tail end of one of your answers where you said you have some teams coming out of projects and kind of that makes it easier to sell in into a new project. Is your answer to Erin that the environment is still not maybe as healthy -- if I understand correctly, not as healthy as you'd like to see it, but yet, book-to-bill was really strong. Is it unchanged? Is it improving? And then where does your kind of staffing level match against a book-to-bill that came in pretty high?

Okay. So multiple components to that, but yes. So is business environment as strong as I'd like it? Well, I don't know how to answer that. But it was very strong middle of last year, and it's soft but it has been relatively consistent, Q4 and Q1. And I think that level of business environment is adequate to -- for us to book along our plan and meet our guidance. So I think it's adequately strong. I do think that it's been strong enough for us to rebook despite some very high cancellation rates in the last two quarters, surprisingly high and historically very high. And again, I always think you've got a little bit of advantage in bookings when you have high cancellations because again you've got very strong, ready teams. And I think that's true in any case. So how we stand in terms of hiring? I think we're good. I think we are at a good level relative to the business environment and our upcoming projects. I do think that we anticipate continued growth, and so we are continuing to hire at a 20% or so level. We have had some staff pressure given our growth in some areas, where we've moved to some contract staff. And as I mentioned, that, in course, increases our cost base some and is part of the reason for margin compression. But yes, the other thing is that we've had an increased level of pass-through component of our mix in awards. And so the booking -- as I mentioned, the bookings look a little higher than they really are in terms of staff capacity needs.

Let me just ask this question one different way, and I'll yield the floor. You have in the past said to me that when we're thinking about your book-to-bill relative to competitors' book-to-bill and then your book-to-bill relative to how you think about your ability to kind of hire relatively untrained employees, you're hiring people that are not from your competitors, for example, and train them and bring them on in a quality way, I think you said in the past that a 1.15 to 1.2 book-to-bill was kind of a sustainable level for Medpace. And kind of taking all of those things into account, you're doing better than that, but we're hearing from you is that the environment is actually maybe a little sluggish. Those things seem at odds to me. Help me to reconcile those.

Okay, so when I said 1.15 to 1.2 is a good level for us, that was 605-based.

605, fair point.

Under 606, an equivalent level is probably 1.2 to 1.25. And under 606, with the new math that nobody can understand, you got the components of it. And our 605 relative amount is actually lower than average, so it's -- that 1.2 is probably a 1.3 given the current mix of our pass-through prefund versus service revenue. What you care about is service revenue to drive employment and profitability and all the rest of it, but you got this other moving part. And so what I require to get -- a 605 basis, 1.15 to 1.2, is complex math. And like I said, usually, it's 1.2 to 1.25, but maybe it's 1.3 now under the current bookings mixture. So yes, we're not booking where I'd like to, we're not booking where could work at, but I think the environment is consistent with us meeting our plan and our guidance.

Thank you. And as of right now, we have no further questions at this time. I would like to turn the call back to Kevin Brady for closing remarks.

Thank you for joining us on today's call and for your interest in Medpace. We look forward to speaking with you again on our second quarter 2019 earnings call.

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