Q4 2022 Medpace Holdings Inc Earnings Call
Speaker 1: You you.
Speaker 2: The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 1-1.
Speaker 3: Good day, ladies and gentlemen, and welcome to the MedPACE fourth quarter and full year 2022 Earnings Conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. As a reminder, this call may be recorded.
Speaker 3: I would now like to introduce your host for today's conference call, Lauren Morris, Matt Pace's Director of Investor Relations. You may begin.
Speaker 4: Good morning and thank you for joining MedPace's fourth order in full year 2022 earnings conference call. Also on the call today is our CEO August Tremel, our president Jesse Geiger and our CSO Kevin Brady. Before we begin I would like to remind you that our remarks and responses to your questions during this telecom print.
Speaker 4: may include forward-looking statements within the meaning of the Private Security Litigation Reform Act of 1995. These statements involve inherent assumptions with known and unknown risks and uncertainties, as well as other important factors that could cause actual results to differ materially from our current expectations.
Speaker 4: These factors are discussed in our form 10K and other filings with the SEC. Please note that we assume no obligation to update forward-looking statements 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.
Speaker 4: During this call, we will also be referring to certain non- GAAP financial measures. These non- GAAP measures are not superior to or 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 to the most directly comparable GAAP measures .
Speaker 4: is available in earnings press release and earnings call presentation slides provided in connection with today's call. The slides are available in the Investor Relations section of our website at investor.medpace.com. With that, I would now like to turn the call over to August Krendel.
Speaker 5: Good morning.
Speaker 6: I'd give a quick update on the business environment.
Speaker 6: The business environment continues to be challenging.
Speaker 6: Our most forward-looking business development metrics have weakened and were depressed in the fourth quarter.
Speaker 6: New ARFPs, pending ARFPs, and initial award notifications were all down moderately.
Speaker 6: Cancelations across the pipeline were elevated with backlog cancellations above our usual range in Q4. That is above 5% of opening backlog.
Speaker 6: Delayed financing or reprioritization of pipeline is frequently the feedback from sponsors.
Speaker 6: Biotech sentiment has remained poor to date in Q1.
Speaker 6: I believe we've prepared as best as possible for this downturn. We have diversified our pipeline, improved selectivity of clients based on quality of asset and likelihood of financing, tightened their ongoing monitoring of sponsor financial conditions.
Speaker 6: and consistently negotiated safe payment terms to avoid write offs. Our DSO and minimal write offs of bad debt speak to our diligence.
Speaker 6: We remain confident in our 2023 guidance and believe we will continue to generate robust above industry growth in 2024 and beyond.
Speaker 6: Jesse and Kevin will now review our financial results for Q4.
Speaker 7: Thank you August and good morning everyone.
Speaker 7: Revenue in the fourth quarter of 2022 was 394.1 million.
Speaker 7: which represents a year-over-year increase of 27.7%.
Speaker 7: and 4 year 2022 revenue was 1.46 billion.
Speaker 7: A 27.8% increase from 2021.
Speaker 7: Net new business awards entering backlog in the fourth quarter increased 5.8% from the prior year and 485.1 million.
Speaker 7: resulting in a 1.23 net book to bill.
Speaker 7: For the four year 2022, net new business awards were 1.8 billion.
Speaker 7: an increase of 13.6%.
Speaker 7: An ending backlog as of December 31st was approximately 2.3 billion.
Speaker 7: This was an increase of 17.2% from the prior year.
Speaker 7: We projected approximately 1.21 billion of backlog will convert to revenue in the next 12 months.
Speaker 7: And back conversion in the fourth quarter was 17.6% of beginning backlog.
Speaker 7: We were able to grow headcount 15.8% from the end of the prior year.
Speaker 7: in a challenging and competitive labor environment.
Speaker 7: An employee retention and continued hiring for future business will remain top priorities in 2023.
Speaker 7: With that, I will turn the call over to Kevin to review our financial performance in more detail and discuss our 2023 guidance.
Speaker 8: Kevin?
Speaker 9: Thank you, Jesse, and good morning to everyone listening in.
Speaker 9: As Jesse mentioned, revenue was 394.1 million in the fourth quarter of 2022.
Speaker 9: This represented a year-over-year increase of 27.7% on a reported basis in 28.9% on a constant currency basis.
Speaker 9: Full year 2022 revenue was 1.46 billion, which represents a 27.8% increase on a reported basis in 29.2% on a constant currency basis from 2021.
Speaker 9: EBITDA of 80.4 million increased 30.9% compared to 61.4 million in the fourth quarter of 2021.
Speaker 9: On a constant currency basis, 4.4 EBITDA increased 23.3% compared to the prior year.
Speaker 9: 4-year EBITDA was 308.1 million and increased 38.1% on a reported basis.
Speaker 9: In 32.3% on a constant currency basis from 2021.
Speaker 9: Even a margin for the fourth quarter was 20.4% compared to 19.9% in the prior year period.
Speaker 9: 4-year 2022 EBITDA margin was 21.1% compared to 19.5% in 2021.
Speaker 9: Even a margin increased 160 basis points for the year, driven primarily by slower head count throws and that foreign exchange benefits behind the strong US dollar.
Speaker 9: partially offset by higher reimbursed out-of-pocket expenses.
Speaker 9: In the fourth quarter of 2022, net income of 68.7 million increased 37.2% compared to net income of 50 million in the prior year period.
Speaker 9: For the four year 2022, net income was $245.4 million compared to $181.8 million in 2021.
Speaker 9: This represents a 34.9% increase.
Speaker 9: Net income gross lagging EVITA was primarily driven by a higher effective tax rate and interest expense.
Speaker 9: Let income per deluded share for the quarter was $2.12 compared to $1.32 in the prior year period.
Speaker 9: For the 4 year 2022, net income for deleted share was $7.28.
Speaker 9: Compared to that income for the limited share of $4.81 in 2021.
Speaker 9: Regarding customer concentration, our top five and top ten customers represent roughly 18% and 25% respectively of our 2022 revenue.
Speaker 9: In the fourth quarter, we generated 136.7 million in cash flow from operating activities.
Speaker 9: and our net day sales outstanding was negative 48.9 days.
Speaker 9: During the fourth quarter, we repurchased approximately 228,000 shares, for a total of 47.2 million.
Speaker 9: year 2022 we repurchased approximately 5.7 million shares.
Speaker 9: or 847.7 million.
Speaker 9: As of December 31st, 2022, we had 452.8 million remaining under our share of purchase authorization program.
Speaker 9: During the quarter, we paid 89.7 million against the credit facility.
Speaker 9: In our net debt position, at the end of the quarter was 21.7 million.
Speaker 9: This was composed of death of 159
Speaker 9: in cash of 28.3 million.
Speaker 9: Our net leverage ratio is approximately 0.1 times last 12 months EBITDA.
Speaker 9: Moving now to our guidance for 2023.
Speaker 9: 4-year 2023 total revenue is now expected in the range of 1.69 billion to 1.75 billion.
Speaker 9: representing gross of 15.8%.
Speaker 9: to 19.9% over 2022 total revenue of 1.46 billion.
Speaker 9: Our 2023 EVADA is expected in the range of $325 million.
Speaker 9: $350 million.
Speaker 9: representing gross of 5.5% to 13.6% compared to EBITDA of 308.1 million in 2022.
Speaker 9: Guidance is based on foreign exchange rates as of December 31st.
Speaker 9: This guidance assumes a full year 2023 effective tax rate of 17.5% to 18.5%.
Speaker 9: and 32.5 million diluted weighted average shares outstanding for 2023.
Speaker 9: There are no additional share purchases in our guidance.
Speaker 9: We forecast 2023 net income in the range of 245 million to 265 million.
Speaker 9: Earnings per diluted share is expected to be in the range of $7.53 to $8.14.
Speaker 9: With that, I will turn the call back over to the operator so we can take your questions.
Speaker 3: Ladies and gentlemen, if you have a question or comment at this time, please press star 11 on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, simply press star 11 again.
Speaker 3: Again, if you have a question or comment at this time, please press star 11 on your telephone keypad.
Speaker 3: Please stand by while we compile the Q&A roster.
Speaker 3: Our first question of comment comes from the line of Sandy Draper from Guggenheim Partners. This draper your line is open.
Speaker 10: Thanks very much. I think that was me cut out for a second. So I guess the first question probably for a combination of Jesse and August , trying to sort of think about the comments you just made about the macro environment August , but also looking at sort of the implied EBITDA margin. So I guess the first question probably for a second.
Speaker 10: thoughts on, you know, that sounds like some cautionary comments about the macro August , but at the same time, you're still hiring and the margins would suggest that's going to continue in 23. Thanks.
Speaker 6: Sure. Hi, Sandy. Yeah, look, we signaled the
Speaker 6: and a turmoil in the market and among our clients. There's a lot of financial distress. A number of our clients have had difficulties and have not been able to proceed with programs they thought they were going to proceed with.
Speaker 6: So that's, and we've had a elevated level of cancellation. So that's always a risk to our performance and could represent the start of a real downturn.
Speaker 6: that affects our revenue growth and our need for employees.
Speaker 6: to gate we have not seen that broad based.
Speaker 6: pull back to the point where it's going to, you know, affect our guidance, our plans for this year, our plans for next year.
Speaker 6: So it's out there as a risk, and I think the longer the pullback in funding continues, the greater the risk it will impact our ability to grow. But so far we still see robust growth and are continuing to hire.
Speaker 6: But I think we're signaling the caution, but we are making it through. Currently, things are still going pretty well.
Speaker 6: I think that's all we can say.
Speaker 10: Okay, that's helpful. And just one quick follow up and I'll turn it over. And this is for Kevin. Just looking at the guidance on interest income slash expense, a little bit lower than what I thought would have thought just given the cashflow generation. I'm assuming you pay down that 50 million debt.
Speaker 10: It's an upper higher and straight environment. Is there something else in there or are you not as semi as much free castle out of what you thought that the interest income would have been a little bit higher given where rates are and what you can actually earn on your cash?
Speaker 9: No, we're, you know, as you mentioned, we are expecting some level of interest expense because we're not, you built into our guidance assumes and they're share of purchases. But we still have a little bit of debt on the books and the free cash flow that we generate in the first quarter is typically our lowest quarter.
Speaker 9: And so, we will generate some cash in 2023, but it's going to be more towards the back after the year. We're assuming kind of an interest rate in the 4 percent range for that.
Speaker 10: Okay, that's helpful. Thanks. I'll turn it over.
Speaker 3: Thank you. Our next question or comment comes from the line of Max Smart from William Blair. Mr. Smock, your line is now open.
Speaker 11: Hi, can you hear me okay?
Speaker 12: I just wanted to follow up on Sandy's question quickly. Is there any detail you can provide around cancellations beyond saying it's above that 5 percent? And then in terms of the – those customers that maybe are a bit more at risk and in trouble if they can't secure funding here near term, do you have any insight into – South Carolina found to be a bad person standing, but were there still people wanting to son
Speaker 12: what portion of your backlog relates to those customers and how much of that backlog overall could be at risk here as they move throughout 2023.
Speaker 6: Sure, Max. Cancellation rate was up, not drastically, but it did get outside of our usual kind of 5% range. So it was moderately elevated. That was not a particularly striking increase.
Speaker 6: um, uh, pre-revenue clients. Uh, I, I don't know. I mean, uh, uh, you know, it's, it's a handful of, you know, uh, uh, 10 or so, you know, clients that, uh, uh, uh, uh,
Speaker 6: you know, we've had discussions with about, you know, funding and difficulty or, you know, program reorganization, reprioritization, whatever. Jesse, do you have the number on the total?
Speaker 6: What, um, uh, portion of the clients that are nonpartners?
Speaker 7: Let me grab it. The group that we've had specific conversations with or specific information from is a subset of that total group. But now let me, let me grab the total.
Speaker 12: Okay, perfect. And then as a follow up, I'm related. I guess in terms of your plans for capital allocation, right? I mean, the stock. Okay.
Speaker 12: near all-time highs here you're pointing to things slowing down but you still have this 450 million of share repurchase authorization out there so you just help us think through
Speaker 12: share purchases in 2023, whether or not, you know, it makes sense to be fine backstack. You're given where everything is at and the potential for things flowing back down as we move throughout the year here. Thank you.
Speaker 9: Yeah, Max, this is Kevin. You know, as we've traditionally done historically, I mean, we will continue to take an opportunistic approach to share our purchases.
Speaker 9: Yeah, we were able to execute some in a fourth quarter and you can see what those levels look like
Speaker 9: But as we approach 2023, again, the extent that volatility in the market opens up opportunity, we'll look at share of purchases again.
Speaker 9: If not, we're not afraid to build some cash either.
Speaker 11: Thank you.
Speaker 7: Max just to follow up around 60% of our backlog is customers that have that are non-partnerd with the large pharma.
Speaker 11: Okay, that's helpful. Thank you.
Speaker 3: Thank you. Our next question of comment.
Speaker 3: comes from the line of David Wimley from Jeffries. Mr. Wimley, your line is now open.
Speaker 13: Thank you. Gentlemen, thank you for taking the ladies and gentlemen. Thanks for taking my question. I guess August , I'm interested in kind of a further...
Speaker 13: bridge to Sandy's question around the environment.
Speaker 13: You know, I think the first call where you sounded a little bit of caution warning to us was a year ago.
Speaker 13: and you've been able to navigate, as you said, been able to navigate pretty effectively. Bookings growth was down year over year, but still growing.
Speaker 13: So I guess I'm wondering is it you know cut what is
Speaker 13: What's allowing you to...
Speaker 13: post numbers that can still get you to your growth.
Speaker 13: Outlook when it seems to be a deteriorating environment. Should we just chalk that up to...
Speaker 13: conservative guidance or a sales effort that is kind of turning over more rocks and so you have more things going in the top of the funnel that allows you to absorb something a higher percentage of opportunities dropping out. Maybe you could add a little more detail to...
Speaker 13: the navigation through the turbulence here.
Speaker 6: Sure. And we did talk several years back about...
Speaker 6: expanding our look at things and our business development pipeline to be able to be more selective when needed and to avoid the kind of difficulty we ran into the last cycle.
Speaker 6: I think that's been reasonably effective. Of course, there's only so much you can do. There has been, what we're seeing is a greater adjourn. A greater risk to clients having installed financing.
Speaker 6: And that's a headwind, but it doesn't mean there's not other options and other opportunities. And we've been able to pivot to those, and we've been more selective during the period of...
Speaker 6: In the last, well, you know, not this past year, but the year before that when there was a large number of opportunities, we were able to select programs that, you know, were better funded than others. And so I think it's a mix of things. I think we've been fortunate to have enough.
Speaker 6: opportunities to be able to switch and to fill things in. When we've had cancellations, we've had a lot of cancellations, and we've been able to fill in. So I think there's a lot of things there. We always try to be a bit conservative, particularly in a...
Speaker 6: volatile environment with our guidance. So we do come out with a bit more conservatism when we have this kind of environment and if things do not deteriorate as we hope they know, then we can exceed where we come out in the guide.
Speaker 13: Are you able to perceive that you're taking share?
Speaker 13: and is price sensitivity.
Speaker 13: is being a little bit more aggressive on price around the edges, part of the lever to pry yourself into those opportunities.
Speaker 6: Well, I think we do see opportunities that are kind of coming from dissatisfaction with a
Speaker 6: You know, competitor, you know, price is not generally the feature that they're looking for. Then I come and doesn't say, you know, we're just not getting the price we want somewhere else. It's usually some other frustration. But, you know, it's hard to sort out.
I look at share just in terms of revenue growth. If our revenue growth is fast, all the metrics on bookings and stuff, I think are B.S. It all depends on your conversion rate and all the rest of it. You're book the bill and talk to people, talk about it. You're book the bill and talk about your conversion rate and all the rest of it.
You know, in the end, it runs down to revenue growth. I think we have superior revenue growth, so I think we're taking share. And I don't describe any of the current environment to that. We've just had an ability to pivot to other programs. .?????????
Okay, last question for me and related.
I guess it's two-parter here, so you are very careful about your vetting and what you put into backlog.
to have clients without funding and backlog. I presume this is project has progressed quite a ways and they've burned through their cat that like they had financing at the time they went in backlog but they don't now or they're in need soon, something like that. So maybe just clarify on that. And then relatedly,
we hear a lot of especially with small clients where capital is somewhat harder to get that they
that they do start pinching around on terms. And if those are not, they're not going to be as big of a problem as they are.
direct pricing, they are less milestones up front, delays in payment terms and things like that and your DSOs would suggest that you're not seeing that or you're not accepting that. So maybe kind of a little bit around balance sheet vetting payment terms and what's in your backlog.
in that regard. Sure, I'll start there. You're absolutely right. There is in this environment, there's a lot more pressure to be flexible because their financing is coming. And we are...
I guess in this environment just as adamant to make sure that we have advanced payment of things. So it is a negotiation and a client that we believe is more likely to get funding is
generally favorable terms.
payment because of the risk that our clients acknowledge they have. So I think that is a give and take, but I think we do a good job at it. You can see we're not giving considerably there in order to get work. We're not in that kind of situation where we give up terms in order to win work. We are very...
firm in our negotiations that we have to make sure that we get paid. So if that means losing work will lose the work.
And then your first question was about cancellations and how they occur because of funding. Well no, just. After we were awarded.
I'm sorry, just kind of maxed this question around clients that are the handful of clients that are in your backlog that have expressed a concern about.
You know, some difficulty in getting their next round of funding if I'm understanding that correctly.
And I'm asking for the scenarios in which those even are in your backlog.
Yes sir, if they don't have fun.
It's a whole, there's a fair number of art clients that have funding for a first stage of a program or to a milestone that they see as an inflection point for their...
for their product. It may be an interim analysis, it might be a first part of a study, and there's also clients that look to be fully funded for a project going in but because of other things that they might do that we may not be aware of in terms of other programs they're supporting.
And look, some of it is funding related, but also the product. It's often a fantastic...
a revolutionary product that's coming along is going to get funded. You know, I mean, they're running out of funding is not a problem. It's always in the context of how well the product is performing too. And so during a trial, you sometimes get signs whether it's safety signals or otherwise that they might want to continue on. It's not a killer for the product. It still looks interesting.
on you know active programs and backlog that had funding in the beginning but then need to raise incremental capital at some point along the journey you know we don't pull those out of backlog every time that a that a sponsor is is raising incremental capital in the middle of a study but we do factor those into our
our detailed build up revenue projection that then becomes the basis for our guidance range. We've risk assessed and risk adjusted the revenue projection leading into backlog while there may still be some of that unfunded activity sitting in the backlog balance.
Got it. I've taken a lot of time. Sorry about that. Much appreciated on the transparency and kudos to your navigation through the TUF environment. Thanks very much.
Thank you.
Our next question or comment comes from the line of John Sauerbeer from UBS. Mr Sauerbeer, your line is now open.
All right. Thanks for taking the question. And I know there's been a lot of questions here on the cancellations and what you're seeing there. But I guess just maybe one more on this. Any specific therapeutic type or class or phase, one, two, three, where you're seeing more weakness versus others within the...
I know there's been a lot of questions here on the cancellations and what you're seeing there, but I guess this maybe one more on this, you know any specific therapeutic type or class or phase, you know, one, two, three, where you're seeing more, you know, weakness versus others within the book of business.
I don't think it's focused on any particular therapeutic area or stage of programs.
Now, I don't really have a call out for that.
Yep, got it. And then just, you know, August , I appreciate, you know, the color on the cautioning environment. And you know, you look at new awards growth, did slow some discord down from that, you know, mid teens to around 6%. Just any color on how you think those new awards play out through 2023.
No, I, you know, look, I think it's a, again, back to the challenge environment. We're playing it, you know, month to month, so far, things have...
been okay, but in a week or a week or environment, our win rate has been very strong, which is, you know, supported things, and that's always hard to judge. You know, I think that we're hoping that we continue with...
You know, book the bills and, you know, above 1.2 range, but, you know, we have to see.
And then just last one here for me, you know, I think back in December there were some local reports just on the hiring there. Just maybe any additional color, just on turnover you're seeing, you know, wage pressures and just the ability to pass along that on print pricing and how we think about that impacting the margins throughout the year.
But our turnovers come down nicely. I think we're doing well. We're getting good traction on new hires. We still are hiring reasonably rapidly. And I think that there remains a pretty tight flavor market, yes, but I think we're making
Come! Yep, just heard me-
Great, thanks. You just mentioned it August on the hit rate, but I was hoping to get a little more detail on where it stands versus recent history, longer term history. Did it sequentially improve decline here in the fourth quarter? Any additional?
quantitative data would be helpful? Yeah, I think numerically, and I don't want to get into the actual numbers and start reporting that as a metric. It does bounce around quite a bit. I think it ticked down slightly in Q4, but it's still in a very strong range, in a historically strong range.
So, you know, which has really been true the last, you know, year. So we've had a really, really strong win rate. And I think that's, you know, part of the selectivity. And, you know, we were using in selecting projects and all the rest of it. But that's been a fortunate support for us, yeah.
When we thank you shifting years when we think about
macro operational challenges and not necessarily your hiring things of that sword but
There have been mentions in the industry about study sites not having access to ample staffing or at times various supply chain challenges in lab-based businesses, etc. What is the external view of the operating environment? Is it improving from where you've been over the last few quarters? Well first we can aim ...
and the inflation, you know, that's the...
inflation rate at sites has far outstripped I think the inflation rate among you know the wage inflation rate among CROs and you know the rest of the industry. So there has been very significant challenges at sites.
I would say it's maybe starting to see late at the end of the tunnel and there's some improvement, but it is pretty early. There has been a lot of strain there.
It's been a very tight labor market overall, but I think more so at sites.
I think we've seen recently still a pretty tight labor market in hiring new employees. The one area I think we've found to be substantially easier is IT related staff.
Otherwise, you see it is still a pretty historically tight labor environment. So I don't know if I can provide any more detail in that.
That's great. And then maybe for Kevin, one on the tax rate here, I know you have historically had some fairly pronounced volatility in quarters. This last year was no exception with first quarter and fourth quarter in that six, seven percent zone and then middle of the year, around 20 percent. And...
where the tax rate might be above or below that 18%, enough so that you would want to call it out.
Yeah, Eric, in the fourth quarter, as you know, our rate is heavily influenced by stock option exercises.
And so what we saw in the fourth quarter and what really drove that 7% in the fourth quarter was the accelerated stock price increase in people exercising their options.
And it's very difficult to obviously predict when people are going to exercise options. Yeah, we don't.
In each passing year, the influence of stock options in theory should get a little bit less as our operating income increases and the impact of that goes down. So to answer your question in relation to 2023, it's hard to predict.
what that quarterly impact could be. And so for now, I would just recommend using kind of that 17 and a half to 18 and a half percent for quarter. And we'll set the count to see how it goes.
Okay, that's all for me. Thank you.
Thank you. I'm sure no additional questions in the queue at this time. I'd like to turn the conference back over to management for any closing remarks.
Thank you for joining us on today's call and thank you for your interest in med-based. We look forward to speaking with you again on our first quarter 2023 earnings call.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day. Speaker, stand by.