Q2 2023 Medpace Holdings Inc Earnings Call

Speaker 1: in the prior year period.

Even a margin for the quarter was impacted by reimbursable cost.

which accelerated further during the quarter driven by increasing investigator site costs and continued improvement in site activity across the portfolio.

In the second quarter of 2023, net income of $61.1 million increased 23.7% compared to net income of $49.4 million in the prior year period.

That income growth over the prior year was primarily driven by higher EBITDA and a lower effective tax rate.

Compared to $1 46 in the prior year period.

Regarding customer concentration our top five and top 10 customers represent roughly 23% and 30% respectively.

Our year to date revenue.

In the second quarter, we generated $82 5 million in cash flow from operating activities and our net days sales outstanding was negative 42 six days.

During the quarter, we repurchased approximately 126000 shares for a total of $23 9 million.

As of June 32023, we had $308 8 million remaining under our share repurchase program.

During the quarter, we paid $60 million against our credit facility and our net debt position at the end of the quarter was $15 9 million.

Which was composed of debt of 55 million in cash of $39 1 million.

Moving now to our updated guidance for 2023.

Full year 2023 total revenue is now expected in the range of $1 84 billion to $1 88 billion representing.

Representing growth of 26% to 28, 8% over 2022 total revenue of one point or $6 billion.

Our 2023 EBITDA is now expected in the range of 340 million to $358 million.

Representing growth of 10, 4% to 16, 2% compared to EBITDA of $308 1 million in 2022.

The revenue guidance anticipates, the higher second quarter investigators site activity and costs continue the balance of the year as.

As well as continued growth in the direct service activities.

Guidance is based on foreign exchange rates as of June 32023.

This guidance assumes a full year 2023 effective tax rate of 17, 5% to 18, 5% and $31 8 million diluted weighted average shares outstanding for 2023.

There are no additional share repurchases in our guidance.

We forecast 2023 net income in the range of $256 million to $271 million.

Earnings per diluted share is now expected to be in the range of $8 four.

The $8 50.

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

Thank you as a reminder to ask a question press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.

Please standby, while we compile the Q&A roster.

Our first question comes from David Windley from Jefferies. Your line is open.

Hi, Good morning, excuse me good morning, Thanks for taking my questions.

I wanted to dig in on.

On the site commentary from from a few different angles.

August I think.

Well several of you actually commented that the level of throughput or activity at sites is improving.

I wondered what you would attribute that to is it better staffing.

Or is it perhaps.

Higher levels of payment to them to.

To either support them or incentivize them to get more done.

Yes, Dave This is August .

I mean, I think it's a combination of things.

In general.

I think staffing is improving its sights operations are coming more.

More normalized.

There was a lot of disruption for quite a bit of time now.

Right.

Sure.

The reimbursement of <unk> has gone up in many cases in some cases it helps but it's fundamentally.

Staffing and other.

Other reasons art.

Costs are going up and our activity is also that.

Positioning of programs that.

A lot of awards over the last period of time and things getting into.

The rapidly recruiting phase.

Phase of trials, but I think it's all good good news in that.

In general.

I think things are getting back to a normalized pace and things are moving along nicely in that.

Speaks well for our performance on droughts.

Excellent that's helpful. Thank you. So so do you.

Do you see that or is it possible to quantify.

How much of a I'll call it a knock on effect.

Positive knock on effect that is having on your direct revenue.

I'm trying to get a sense for.

How much are pass throughs, just going up because.

Some inflationary factor versus how much is more throughput than would mean more direct revenue for you as the CRO and how should we think about that.

Pulling through are continuing through the next several quarters.

Yes, I think thats difficult to try to sort out.

There is obviously some inflationary effect on I guess, you could look at inflationary inject on both sides although.

Our.

Our margins are strained by the fact that our contracts are fixed price and.

Last for a number of years.

Inflation inflation already and assumptions made a time for execution.

Up to bid for a project so.

So there is quite a bit of lag for some site costs have been raised kind of mid term and you could say there is some.

A bit of inflation and Thats outpaced our inflation I think it's safe inflation, but how.

How much is.

Increased.

Increased volume at sites doesn't necessarily translate into directly into <unk>.

Increased.

Direct visa made drives a number of the direct fees, but it's not up.

Relation and it depends on the type of trials Youre doing.

Some trials out more.

Indirect as opposed to direct in.

It depends on the sort of the size of the trial and the type of trial.

It's really.

Possible I think try to.

Sort that out in terms of.

What.

What percent is being driven by different factors, but we do see good traction in.

In activity I think that is driving direct fees also and we will see a ramp in.

Direct fees and growth of the company overall.

Yes.

Indirect because they were partially because they were depressed for such a time during.

The pandemic and things are coming better and better online outpaced.

As there has been a recovery.

Both in Rfps.

There has been a greater amount of inflation. So we might consider there to be some amount of.

Increased average percentage of pass throughs as a part of projects going forward, but a lot of it is driven by the individual uniqueness of our project. So it's hard to hard to sort that out.

Growing well.

Both direct and indirect fees and it's not just inflation.

Inflationary effect of investigator cost.

Got it last question for me if I.

Not saying my assumptions for pass throughs were correct or or whatever but if I just kind of neutralize for the difference in what you experienced versus my.

Expectation to see what depressive effect that just that higher pass through would have had on margin.

It looked like I think about 90 basis points.

But more importantly, I guess, what I'm looking at is first quarter was really high relative and on that same basis. It looks like margin. So kind of normalized margin did declined by 300 basis points or so.

Could you talk about mix effects or.

Hiring trends or things like that that would've had an effect on.

You know kind of the margin apart from the effect of pass through dilution.

Yes, Kevin you want to yes, yes, Dan this is Kevin as I talked on the first quarter call. We did expect some some headwinds related to kind of our incremental hiring and then just wage inflation is that being our annual merit.

On the second quarter here.

And so we did see some of that inflationary impact and the impact of the hiring that we've done.

We see that impact in the second quarter. In addition to as you mentioned the impact from the Reimbursable costs.

Got it that's all for me thank you very much.

Thank you one moment for our next question.

Our next question comes from Max Smock with William Blair. Your line is open.

Hey, good morning, and thank you for taking my questions I wanted to start off just following up on <unk> questions on pass throughs here August you mentioned being back at sort of a normalized level do you think it is fair to say we're at the right level now in terms of past days as a percentage of total revenue or could there be Jason headwind at some point in the future as Pat stated normalized thank you.

I'm sorry. So the question is do I think that the level percentage of pass throughs as a part of our total revenue will remain the same going forward.

Headwind in a dropping off.

Potentially a headwind in that job I mean, I guess the question is is it going to remain kind of at this 38, 39% level that we saw in the second quarter or do you think that growth slows here as we move into the back half of 2023.

Yes.

I think.

Projecting precisely where it where it is going to go in a given quarter is difficult I do think that.

It's not going to continue rising beyond that significantly.

And I think it will tend to normalize a bit lower over the longer term, but.

I don't want to be.

Tried to trying to pick particular quarters.

Lot of things.

A difficult.

Okay.

It is very difficult to project.

The rate of recruitment and the rate of <unk>.

Indirect fees, it's a lot easier for us to be projecting direct fees and so I don't want to get into trying to.

Claire.

Refine that in terms of.

Model, but.

I do think that we're kind of at a.

And a higher level of indirect.

But again, it's the type of studies Youre doing that can influence things quite a bit.

Not just recovery from.

Covid and this is a new normal necessarily.

Very overtime.

Yes, Max has mentioned it is very difficult to forecast the pass through costs.

In our guidance, we do expect it to be elevated the balance of the year, we're not going to give us a specific percentage, but we do expect it to.

Elevated that as an assumption in our guidance.

Okay. That's helpful. Thank you both I guess, Kevin following up on that point that you mentioned.

Expect it to be elevated thats incorporated in the guidance, but be curious to hear what is baked into the guidance for direct fee revenue in particular up 24% year over year. So far here in the first half of 2023.

Can you just talk about what you have embedded for Directv revenue in particular as we move into the back half of 'twenty, three and then to 2024.

Yes, I mean, we're not going to speak to 2024 at this point.

Terms of 2023.

Largest portion of the guide increase was driven by the elevated pass throughs and so.

Again.

Back to my comment on we do expect.

Pass through costs to be elevated similar to what we saw in the second quarter and this is what's built into our guidance.

Got it and then maybe one just quick modeling clean up one for here for me.

In terms of backlog conversion again elevated I think last quarter, you had pointed to stepping back down towards 17, 5% how.

How should we think about backlog conversion moving forward here and is there any has there been any change to your assumptions in terms of mid one two range book to Bill for 2020.

Yes, good question.

I did expect.

The burn rate to come back down, but obviously with the.

The increase that we saw in pass through activities.

Remain elevated at least kind of.

At the higher 18% and I think we'll be in that.

Youre kind of at 18, 5% range the balance of the year with the booking of about a one two ish.

It's one to five range.

Sorry, Kevin just to clarify that one two to one to five range. That's for the back half of the year or is that for 2023 and 2023.

Got it thank you.

Thank you one moment for our next question.

Our next question comes from Sandy Draper from Guggenheim. Your line is open.

Okay.

Thanks, so much.

Guess wanted to sort of address the question around inflation and pricing and pass throughs as it relates to bookings obviously, another very strong bookings quarter youre up close to 30% year to date in terms of your first half of your bookings versus last year.

Can you talk at all too.

Is any of that as you've been I think obviously you talked about your new business you can price with the inflation how much of an impact is that how much is it.

I've done obviously expect exact numbers how much might be okay. Some of these trials that youre signing for whatever reason are ones that have more pass through revenue I'm.

I'm just trying to think through are there things that sort of are pushing up that growth rate or is it really just a function of the market is improving and the mix of businesses is apples to apples and so it's a it's a clean nearly 30% type of growth.

Well.

I think it's yes things are.

Our growing across the board, we've had a greater amount of pass through growth and direct growth.

Lately.

It's difficult unless we get into.

Trying to sort out.

Pass through bookings and direct bookings and all the rest of it.

It is difficult to get back to a 605 type of look at things, but look at GE.

There is a lag between.

Sure.

Winning work and working.

Working its way through.

Things look very good from our perspective in terms of the opportunities now I mean, there was a time for several quarters that.

Yeah.

Award notifications and.

Rfps and overall business environment has softened and that's come back quite a bit and a lot of it as a pivot to better funded.

Clients.

I don't know how much of its funding itself, but.

Business environment has improved quite a bit so where we are.

We're lining up new work and I think we're going to have.

Good growth going forward this year and next year, we're not going to get into that.

Specifics on 2024.

And guidance their deal.

Next quarter, but.

Things are looking.

Much improved over what they were a couple of quarters ago. So.

I think it looks good.

Trying to sort out and getting back to a 605 type of.

Hey.

Look at things is as difficult to do Patrick Kevin or Jeff do you have any comments.

No I think it was well said.

If you look at kind of the composition, we don't see a significant change, but it's kind of hard to sort some of that out just given the overall portfolio that we have.

Okay I appreciate that that's definitely helpful commentary.

Maybe one follow up on the on the hiring side I believe you guys were targeting I think it was close to 20% growth I think that's right you are tracking toward a mid teens I know you've got set an aggressive target, but would just love to hear sort of your updated thoughts on your targets for <unk>.

Hiring are you do you feel like you're.

Progressing well.

And again it doesn't look like there's any indication that you guys would be slowing down hiring but just any commentary on the environment and how you are tracking towards your goals for hiring.

Yes, Hi, it's Jesse.

Dressing well against goals. It is still a challenging environment I would say for the year, we're likely going to end up in the high teens to 20% growth for the year.

Yes, maybe I got it just one part of that the one good thing is.

Turnover has really dropped back to normal pre.

<unk>.

Pandemic or may be even lower in many cases.

So.

The churn is has dropped and makes things a lot easier to manage so I think we are in.

Good shape with hiring and staffing.

<unk>.

Super Thanks targets and thanks.

Yes.

Yes.

Alright.

Thank you and one moment for our next question.

We have a question from Jon <unk> from UBS. Your line is open.

Hi, Hello. This is Tien Chicago for Johnson <unk> here, Thanks for taking the question.

So given the current funding environment in your year to date performance are you taking share versus peer and.

Do you have any commentary on how is meta pace are waning.

Are we taking share.

Asking.

Yes that is correct.

Look I don't I don't know what that really means that look our growth has been.

For years here.

After year end, we have a slide in the.

In our in our deck on growth in revenue and EBITDA and net income et cetera.

Yeah.

Iron ore cannot an entirely organic basis, we've outstripped the growth of any of the peers.

And.

I guess the way most.

Most analysts talk about it.

It's bookings that are.

Sure.

And on that basis, I guess, we've been losing share for <unk>.

For a decade.

But.

I tend to look at things in terms of revenue.

And profit et cetera.

Sure.

Appear to be taking share but.

Can't quantity quantify.

What that what that represents.

Thank you.

Second one is <unk>.

Have you noticed any increasing project delays.

Thanks <unk>.

No.

Any color on that.

Yes, I mean things things overall have been accelerating.

Since the first quarter.

Thank you very much that's all for me.

Thank you.

Okay and our next question comes from Eric Coldwell from Baird. Your line is open.

Well. Thank you very much I I should have lowered my hand, I think all of my topics have been covered but congrats on a good quarter and look forward to future updates. Thank you.

Thanks sure. Thanks, Eric.

Thanks.

Okay I'm showing no further questions at this time I would like to turn the call back to Lauren Morris for any closing remarks.

Thank you for joining us on today's call and for your interest in Med base. We look forward to speaking with you again on our third quarter 2023 earnings call.

This concludes today's conference call. Thank you for participating you may now disconnect.

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