Q3 2019 Earnings Call

This time all participants are in listen only mode. Later, we'll conduct a question and answer session and instructions will follow at that time, if anyone should require operator assistance. Please press Star then zero well your touchtone telephone.

Minder. This call may be recorded I would now like to introduce your host for today's conference call. Kevin Brady met paces Executive Director of Finance you may begin.

Good morning, Thank you for joining bad taste. This third quarter 29 to <unk> earnings Conference call also on the call today is our president and CEO August Trundle, and our CFO and COO Laboratory operations Jesse Geiger.

Before we begin I would like to remind you that our remarks the 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 risk another 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 factor section of our Form 10-K , and other filings with the FCC. Please note that we assume no obligation to update forward looking statements in the future even if that's the much change.

You should not rely on any of today's forward looking statements as representing our views as 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 in earnings call presentation slides provided in connection with today's call.

Slides are available in the Investor Relations section of our web site at Investor Dot Med pace Dot com.

That I would now like to turn the call ever to Jesse Geiger.

[laughter].

Thank you, Kevin and good morning, everyone.

It's all just mentioned in our earnings release, the business environment remained steady in the third quarter.

And cancellations have continued at normal levels within our historical range.

Net new business awards entering backlog in the third quarter increased 25.4% from the prior year to 285.4 million.

Resulting in a 1.32 net book to Bill.

Ending backlog as of September Thirtyth was 1.2 billion.

An increase of 19.9% from the prior year.

Revenue was 216.2 million in the third quarter of 2019.

Which represents year over year growth of 20.6% on a reported basis and 21% on a constant currency organic basis.

As anticipated revenue growth on a sequential basis slowed in Q3.

This reflects the anticipated air pocket, we projected for the second half of 2019 as a result of higher cancellations in Q4, 2018, and Q1 2019.

Third quarter reimbursed out of pocket expenses of 71 million were relatively consistent with Q1 in Q2 and represented 32.8% of revenue.

In the third quarter Med pace investors L. L C.

Which is it related party isn't bad taste.

Completed a tender offer and purchased approximately 229000 vested stock options from med pace employees.

That pace was not a party to this transaction.

There were no changes to the terms of the stock options.

In the same stock options that were previously held by employees and tendered are still outstanding and now held by med pace investors LLC.

Since the tender was initiated by economic interest holder of the company.

GAAP requires met pace to account for das as if the employee stock options were settled and new stock options were issued to med pace investors LLC.

At the fair value as of the transaction date.

This resulted in a recognition of an additional $5.1 million of gap stock based compensation expense recorded in selling general and administrative expenses in the third quarter.

EBITDA of 34.8 million decreased 6.4% compared to 37.1 million in the third quarter of 2018.

On a constant currency basis third quarter, EBITDA decreased 8% compared to the prior year.

EBITDA margin for the quarter was 16.1% compared to 20.7% in the prior year period.

The decrease was primarily attributable to higher employee related costs, partially offset by higher revenue.

In the third quarter of 2019, GAAP net income was 24 million compared to GAAP net income of 19.3 million in the prior year period.

Adjusted net income like 27 million in the third quarter increased 8% compared to 25 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 63 cents compared to 52 cents in the prior year period.

Third quarter 2019, adjusted net income per diluted share of 71 cents grew 6% versus third quarter 2018, adjusted net income per diluted share of 67 cents.

And we did not purchased any shares in the third quarter.

Regarding customer concentration our top five in top 10 customers represent roughly 20% and 30% respectively of our total year to date revenue.

In the third quarter, we generated 64.3 million in cash flow from operating activities.

And our net day sales outstanding decreased compared to the second quarter from negative 6.6 days to negative 12.5 days.

And we ended the quarter with 79.3 million of cash.

Moving now to our updated guidance for 2019.

Total revenue remains unchanged in the range of 842 860 million for the full year 2019.

Representing growth of 19.2% to 22.1%.

Our 2019 EBITDA also remains unchanged.

In the range of 144 to 150 million.

Compared to EBITDA of 140.9 million in 2018.

We anticipate our 2019 effective tax rate to be in the range of 20% to 21% compared to our previous guidance of 20% to 22%.

We have assumed 37 point sixmillion fully diluted shares for 2019.

No stock repurchases in our guidance.

And exchange rates as of September Thirtyth 2019.

Due to the change in tax guidance, we now forecast 2019, GAAP net income in the range of 94.9 to 99.7 million.

And GAAP earnings per diluted share in the range of $2.51 to $2.64.

On an adjusted basis, we forecast 2019, adjusted net income in the range of 107.2 to 112 million.

And adjusted EPS in the range of $2.85 to $2.97.

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

As a reminder to ask a question you're wanting to press star one on your telephone to withdraw your question press the pound key please standby we compile the culinary roster.

And our first question is from Dave Windley from Jefferies. Your line is now fan.

I was quite good morning, Thanks for taking my questions August as per usual, albeit I'd be interested in your characterization of the demand environment and obviously Jesse Olson already said the cancellations were fairly normal I'm just interested in I guess, both general RFP.

Flows and then also your experience from a win rate standpoint.

Hey, Dave it's horrible things are really going bad.

Im South real fast.

Clearly.

Yeah, Yeah, clearly no things that have been really pretty stable. You know we saw very strong period, a year ago dropped off a little bit and it's just been kind assailing along.

At a reasonably nice run rate and RFP flow has been.

Reasonably stable.

It it may tick down numerically just slightly but it is a in the latest quarter, but is still.

Still pretty strong.

I think things are going along our our win rate has remained at a comfortable range. It's a dropped off a little bit and this quarter from.

Some of the highs we hit an all in the last couple of quarters, but is in a in a nice historical range and so I think things are clear sailing.

Okay, great from a a Jesse maybe this one for you and then I'll yield before but.

The the guidance as I look at.

What's the Midpoints of your guidance implied for the fourth quarter.

Suggest that one the burn rate drops off again says that that would be you know two quarters of fairly significant reduction in burn rate and then your EBITDA margin would pop back up from this lower level, which after your explanation on the stock based comp I guess.

This is fairly apparent fairly obvious, but but if you could talk about maybe the air pocket impact and and how Youre no your backlog conversion and progression looks and if that is a persistent effect beyond fourth quarter.

Sure. Thanks, Dave So first to address the he cost item you're right. It's the the tender offer which really.

You know elevated the SGN expense in the into third quarter, we do anticipate S DNA expenses to be.

More in line on a percentage of revenue basis, you know with with other quarters. You know outside of Q3, you know kind of around that 11 or so percent of revenue.

If you normalize for the tender it that's about where actually was in Q3 as well.

And then on the revenue side, Yeah. I mean, we've we have seen you know so you somebody impact of the earlier cancellations in the third quarter. We do expect that to continue to have an impact for the next couple of quarters, you know again in the fourth quarter and into the early part of next year. So it does it does result in.

And you know a burn rate reduction.

Oh, you noticed in a in the third quarter and you're right. It at kind of guidance a mid point that implies you know a another another step down in the conversion rate in the fourth quarter, but.

But the new projects you know there that is somewhat being offset a little bit by a you know bid business environment and new projects that are that are progressing nicely.

But we do think there'll be a couple of quarter effect from what we're now seeing is the flow through of those cancellations from a couple of quarters ago and that definitely hits.

I don't know how much the burn rate drop is related to that I'm sure. It is partially but you also have to look at the burn rate spiked to a an unusually high historically high range and I think its returning back towards a more that the median of of our longer term average. So I you know I don't look at.

I don't expect it to go back to above 19% conversion rate that's just not.

His our historical experience so I I think that it's it you've got some normalization to to the mean.

Right I think my my interest was given that momentum in the first half a year was was to understand specifically what like stop that momentum short and the cancellations really do answer that question I think so yeah. I think there I think the cats right. The cancellations may affect that accelerated some of that outside of the normal range, but I just I don't want to give you.

Impression that you know were where we're dipping down and we're going to come back up to 99 cents 20, yeah.

I understood appreciate it thank you very much thanks thats it.

Thank you. Our next question comes from Sandy Draper from Suntrust. Your line is now fan.

Thanks, very much I guess, just you just a clarification is make sure I get all of that excess stock comp was was in s. United crack none of it was up in cost of goods correct. All when asked you name Okay. Great. Thanks in either I'm not sure August or Jesse on the on the hiring front you even with the sort of slowdown.

At it looks like about another 200 people sort of consistent sequentially, what you've been adding.

Yes. The philosophy here is just continuing to higher head of.

How did the strong bookings and an expectation of of growing up the revenue next year I'm, just trying to get some thoughts around on the pace of hiring how hard it is and then.

Is it pretty much unless something changes dramatically for the better worse, you're just going to consistently higher as much as you can figure does the business comes along to eventually support that thanks.

Yeah, I Sandy I I think work.

Along our target a firing about 20% a year and I think we are going forward with that you say slowdown we really haven't had much of a slowdown in a revenue growth dipped because of those cancellations, but there's some.

You know movement of people between caught you know between projects et cetera are a little bit less efficiency, but you know things are still growing nicely and along you know kind of a 20%.

Right that you know, we do expect to drop off at some point, but right now we have targeted 20% growth this year and we're continuing with that.

Rapid rate of growth.

Okay, that's really helpful I'll jump back in the queue. Thanks.

Thank you. Our next question is from John Kreger from William Blair. Your line is now fan.

Hi, Thanks, very much a I guess to adjust it seems like I think you've had five quarters now have a backlog growth right around 20%, a I would it be reasonable to assume over the next year too. That's that's about where the company is kind of topline growth well will trend or is there anything else that you've seen in the backlog that would.

Caused the the number to perhaps be much lower than that.

I don't think Thats, a reasonable expectation going forward.

Far into the future I think thats, where our current roll off is but we do see Oh, you know I suspect in the next.

And this next year with the election cycle and.

You know uncertainty around the that a you know we will have some softening and I do not believe that up 20% growth is a long term expectation.

See you want to know that's that's I wouldn't say anything else.

Great. Thank you that's a that's helpful. I just anything else you can kind of call out in any industry in terms of sort of what's hot and what's maybe calling off it seems like you continued to see a little bit of shift in a in a the therapeutic concentration.

No I look I I think that oncology has remained very strong and a lot of.

I think you see or the other areas of other kind of some other rare diseases that don't aren't easily.

Fit a belinda and into one of the the buckets, we have but I think things have been reasonably consistent across the therapeutic areas with.

Outsize strengths and in oncology.

Great. Thanks, and then lastly, Jesse any change and the bad debt accruals that you had in the quarter.

No no no no no bad debt in the in the third quarter.

Great. Thank you.

Thank you. Our next question comes from Aaron Right from Credit Suisse. Your line is now fan.

Great, Thanks, and come to the competitive landscape.

Any sort of changes in pricing environment fairly rational in your view and are you seeing any new players dipping into the smaller bio pharma category.

Any change there from a competitive standpoint.

Thanks, Aaron no it remains pretty consistent nothing that we're noticing unusual and no no new.

Competitors, it's a pretty consistent group that we're up against on a on a regular basis.

Okay, Great and then also could you give us an update on the Central lab business I haven't heard you talk about it in a while and I guess is that still further investment for you or or how have the trends that I got the across central lab.

Sure Yeah. The lab the lab offering you know, it's growing lab activities growing along right along with the.

It was kind of the overall company rates you know, we we have made a investments there. This year you know in expanding some of our.

Facilities or that we haven't different locations and I'm very consistent with other other parts of the business, where we're expanding for growth in both people and.

The lapped a little more capex heavy so there's there's some and investment in new platforms and in some real estate to ER to continue that growth, but it's it's moving along nicely along with the rest of the organization.

Great. Thank you so much thanks Aaron.

Thank you.

Next question comes from Donald Hooker from Keybanc. Your line is now open.

Hey, Greg Good morning, So with regards to the hiring activity are you guys I'm using any contract labor at this point or the adult dissolve.

Ft East.

Little bit of contract labor or you know, probably it's up a little bit from what it has been.

Over the past couple of years, but still fairly minimal relative to the overall employee cost.

And any of those contract those contractor costs just to clarify are not included in our our head count numbers that we that we club.

Got you would that be maybe a little bit of a headwind to expenses or is it two minimal.

Any real side I think it's it's so small that it's not happening on a relative basis that it's not really having an impact.

Okay Super.

And then I guess the other question you you're gonna be getting a lot.

I've been getting a lot in terms of the balance sheet, what's the current thinking there in terms of an appropriate that ratio for permit pace.

Now that you're building cash reserves.

Yeah, I mean <unk> longer term you know we were certainly comfortable with a turn or to have leverage on the balance sheet right now we're in a net cash position.

Our capital allocation priorities are to you know to continue to focus on organic investment the capital spending will be a little bit heavier you know it ticked up in the third quarter it'll be you should be continuing for the next couple of quarters as we build out some of their real estate.

But then beyond that.

You know will will look towards share repurchases opportunistically at some point.

And then longer term, we may consider a dividend, but as far as how much of our operating cash funds that versus.

I would we do take advantage of an opportunity and but a little bit leverage on the balance sheet, we're certainly comfortable with that up to it at Turner too.

Okay Super and then the last one for me I guess in the past <unk>, we're trying to sort of because you're growing your employee base so rapidly.

And your revenues as well how do we think about margins next year kind of for EBITDA I think in the past you've talked about kind of a long term target a 17% in 17 and a half are sent us and make sure I have that right sort of a.

Normalized EBITDA margin that we should expect from Medicaid.

Yeah, I mean, I think it'll give you ever give 'em, we'll give more clarity on on EBITDA guidance in margin guidance in February .

February but I guess the to the comment I'll make two comments today on.

Yeah, the cost going into next year.

Yes as August mentioned earlier, you know, we're continuing to higher aggressively you know, we do expect a that the air anticipate that there could be some.

Some impact of Ah.

You know of topline softening next year, yeah were related to the election.

But we do you plan to higher certainly start the year hiring a continuing to higher aggressively.

In light of our organic growth model in our training mentality. So well continue to add at heads out at a pretty aggressive pace entering the year and then the other comment I'd make is we do have as a reminder of the new building coming online here at the corporate headquarters.

You know that'll be a 6 million dollar additional cost for the year starting in the second quarter at about 2 million a quarter, but we'll come back in February with with more refined EBITDA and EBITDA margin guidance, but I just wanted to point out those two influences as we head into the year.

Thank you very much.

Thank you. Our next question is from Stephen Baxter from Wolfe Research. Your line is now fan.

Hi, Thanks, just wanted to make a 100% clear on the discussion on the stock comp charge can you confirm that the $5 million charge was not excluded from your adjusted earnings in the quarter I don't see anything for the reconciliation, but just want to make 100% sure I'm not Miss wells.

That's correct, we've not made any add backs or adjustments for the.

Tender offer stock comp or any stock comp.

Okay, great. So it sounds to me like the charge wasn't assumed in your prior guidance, but you've been able to digested within the existing range. So I guess first can you confirm that and then by definition would it be reasonable to think that EBITDA guidance would have gone higher absent that charge.

Yeah, I mean, it was that there was a lot of considerations as we think about the potential impact on the tender.

As far as what a you know what the level of participation would be and what the stock price would be on on the settlement date, but know that we know we did not assume $5.1 million of of additional stock comp in our in our guidance and.

So worried or you know were higher in that range or guidance could have been potentially higher had.

Had we not had the charge.

Okay. Thanks, and then I wanted to come back to the share repurchase question, a slightly different way a you know when you were last active on share repurchase in 2017 or leverage was already over it turn so now you're going into net cash position for two quarters and I was hoping that you could more contrasts I guess your previous outlook in what drove you to get active in the market the last time.

In 2017 against your current process and hopefully some insight about you know what do you need to see before getting more active I get that you're talking about some additional capital spending, but you know year to date cashflow significantly in excess of your capex. So trying to understand whether you're signaling that there's going to be some material step up in a very you know from a very low level of capex that we're seeing car.

Thanks, the stock price isn't a thirtys [laughter], so we're not going to get into specific.

You know specific price points on on share repurchases you know if you look at our prior.

Yeah, just trading activity, we had been more and continued to be a of the view that it's it's better to be more opportunistic rather than than programmatic about just buying shares because we have cash.

And so we'll look for opportunities in the future is as we have a in the past.

Now the stock the the Capex will be stepping up a little bit it won't be a you know that material I think you know it's up in the you know in the third quarter.

Got to $6.2 million, you know, we anticipate something around that range, we're a little bit higher in the fourth quarter and that could bleed in some of that could bleed into next year early early happened here as we fit out the the building, but it's not going to be that much of the other material impact on our cash.

Okay Fair enough and then one last one on your new your customer concentration I wanted to ask about the large and mid size client because obviously the the small biopharma revenues up over 30% this year, but the remainders tracking down a little bit and I guess as you look at where you have a you know currently in backlog is it reasonable to think that it on a dollar basis.

At least that you could see large pharma midsize pharma stabilize a bit as we look into the next couple of years or do you think that that's going to you know kind to be a little bit of the melting ice cube is you allocate more resources towards the small biopharm opportunity. Thanks, I think more of a melting ice cube. Our focus is on small small biopharma and that's where.

You know a lot of the continued opportunities are and where we're winning business.

Thanks Rocco.

Thanks.

Thank you as a reminder, ladies and gentlemen, if you have a question. Please press the stars and the number one key.

Touchtone telephone.

And our next question is from Dave Windley from Jefferies. Your line is now open.

Hi, Thanks coming background for a couple of a couple of clarifications I'm guessing you said on the on the call from the building you said 6 million in the past I've heard a 8 million I wanted to make sure I.

I heard that right on your operating costs for the new corporate building for 20 Twond.

It's an 8 million dollar annual cost of $2 million per quarter. The building will be available in April so it starts in the second quarter.

66 million for 26 million for 2020 8 million for 2021.

Right, Okay. So it.

Is that a quarter later than you had planned to open it before.

Oh, it's has slipped a little bit, but it's it's reasonably on track.

Okay. Okay Fine and then second on a from a therapeutic mix standpoint August I'm curious how you think about oncology is grown for you it's grown for everybody.

How do you think about the diversification with in the oncology project portfolio that you have is there are there.

The mechanism of action concentration platform concentrations were.

You need to be wary of you know say negative results.

Seculert project that would have ripple effect in a you know in a class of drugs.

Yeah, I don't think so were pretty diversified in oncology and you know you talk about.

Some of the very high level of spending on PD one.

Inhibitors.

And I had we just don't have that kind of concentration I think a lot of that really is.

A large pharma driven and we're not involved.

Now we do have a number of studies that involve other agents in in synergy and in combination with yeah. Those agents, but I. It's it's it's just not an overwhelming part of our oncology business and it is pretty broad. So immuno oncology is is a large part of it but it's pretty diverse there.

Okay, great. Thank you.

Thank you Sir our next question is from Donald Hooker from Keybanc. Your line is now fan.

Oh, great. One last quick one to follow up in terms of capital spending I know you guys talked about how you're growing fast and obviously, adding capacity on the capital spending side, there's been some lumpiness there how do we think about capital spending going forward in terms of your lab space and facilities.

Yeah. So we this year's capital spending includes some.

<unk> growth capital and in each of our lab locations. So that sets us up the lab tends to be a little bit lumpier on on on some of the spending that gives us.

You know some runway going into the next couple of years.

But it's going to be continued spending but not it's it's a smaller part of the business. So it doesn't have that big of an impact on the.

On the overall.

Capital spending.

Okay. Thanks that clarifies that thank you.

Thanks, Tom.

Thank you at this time I'm showing no further questions I would like to turn the call back over to Kevin Brady for closing remarks.

Thank you for joining us today on this call and for continued interest in bed days, we look forward to speaking with you again on our fourth quarter 29, Tiering earnings call.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.