Medpace Holdings, Inc. (NASDAQ:MEDP) Q4 2023 Earnings Call Transcript

Medpace Holdings, Inc. (NASDAQ:MEDP) Q4 2023 Earnings Call Transcript February 13, 2024

Medpace Holdings, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, ladies and gentlemen, and welcome to the Medpace Fourth Quarter and Full Year 2023 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. I would now like to introduce your host for today’s conference call, Lauren Morris, Medpace’s Director of Investor Relations. You may begin.

Lauren Morris: Good morning, and thank you for joining Medpace’s Fourth Quarter and Full Year 2023 Earnings Conference Call. Also on the call today is our CEO, August Troendle; our President, Jesse Geiger; and our CFO, Kevin Brady. 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 uncertainties as well as other important factors that could cause actual results to differ materially from our current expectations. These factors are discussed in our Form 10-K 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. 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 in the Investor Relations section of our website at investor.medpace.com.

With that, I would now like to turn the call over to Jesse Geiger.

Jesse Geiger: Thank you, Lauren, and good morning, everyone. Our revenue for the fourth quarter of 2023 was $498.4 million, which represents a year-over-year increase of 26.5%. Full year 2023 revenue was $1.89 billion, a 29.2% increase from 2022. Net new business awards entering backlog in the fourth quarter increased 26.7% from the prior year to $614.7 million, resulting in a 1.23 net book-to-bill. For the full year 2023, net new business awards were $2.36 billion, an increase of 28.8% and ending backlog as of December 31, 2023, was approximately $2.8 billion, an increase of 20.2% from the prior year. We project that approximately $1.53 billion of backlog will convert to revenue in the next 12 months and backlog conversion in the fourth quarter was 18.5% of beginning backlog. Now with that, I will turn the call over to Kevin to review our financial performance in more detail and discuss our 2024 guidance. Kevin?

Kevin Brady: Thank you, Jesse, and good morning to everyone listening in. As Jesse mentioned, revenue was $498.4 million in the fourth quarter of 2023. This represented a year-over-year increase of 26.5% on a reported basis and 26% on a constant currency basis. Full year 2023 revenue was $1.89 billion and increased 29.2% on a reported basis and 28.9% on a constant currency basis from 2022. EBITDA of $95.8 million increased 19.2% compared to $80.4 million in the fourth quarter of 2022. Full year EBITDA was $362.5 million and increased 17.7% from the comparable prior year period. EBITDA margin for the quarter was 19.2% compared to 20.4% in the prior year period. Full year EBITDA margin was 19.2%, compared to 21.1% in 2022. EBITDA margin compared to the prior year was impacted by higher reimbursable costs, personnel costs and the foreign exchange benefit in 2022 behind the strong US dollar.

In the fourth quarter of 2023, net income of $78.3 million increased 14% compared to net income of $68.7 million in the prior year period. For the full year 2023, net income was $282.8 million compared to $245.4 million in 2022, which represents a 15.3% increase. Net income growth lagging EBITDA growth was primarily driven by a higher effective tax rate of 15.8% compared to 13.3% in the prior year period. Net income per diluted share for the quarter was $2.46 compared to $2.12 in the prior year period. For the full year 2023, net income per diluted share was $8.88 compared to net income per diluted share of $7.28 in 2022. Regarding our customer concentration, our top 5 and top 10 customers represent roughly 23% and 30%, respectively, of our full year 2023 revenue.

In the fourth quarter, we generated $156.4 million in cash flow from operating activities, and our net days sales outstanding was negative 48.3 days. We did not repurchase any shares during the fourth quarter. For the full year 2023, we repurchased approximately 781,000 shares for $144 million. As of December 31, 2023, we had $245.4 million in cash and $308.8 million remaining under our share repurchase authorization program. Moving now to our updated guidance for 2024. Full year 2024 total revenue is expected in the range of $2.15 billion to $2.2 billion, representing growth of 14% to 16.7% over 2023 total revenue of $1.89 billion. Our 2024 EBITDA is now expected in the range of $400 million to $430 million, representing growth of 10.3% to 18.6% compared to EBITDA of $362.5 million in 2023.

We forecast 2024 net income in the range of $326 million to $348 million. This guidance assumes a full year 2024 effective tax rate of 16% to 17%, interest income of $18.4 million and 32 million diluted weighted average shares outstanding for 2024. There are no additional share repurchases in our guidance. Earnings per diluted share is now expected to be in the range of $10.18 to $10.87. Guidance is based on foreign exchange rates as of December 31, 2023. With that, I will turn the call back over to the operator so we can take your questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from David Windley with Jefferies. Your line is now open.

David Windley: Hi, good morning. Thanks for taking my questions and congrats on another good year. You’re — I gather from the absence of August’s comments at the top of the call, that things must be fairly stable and unchanged but would invite those comments. What we’ve heard from some peers is some slowing of activity in the second half of ’23, particularly maybe the last couple of months of ’23 in the biotech space. And I guess, I wondered if you at Medpace had seen that also or if you were seeing a different trend? Thanks.

August Troendle: Yeah. Hi, Dave, this is August. Yeah. I think I said last quarter that things were kind of going in a lot of different directions at once, kind of very fast but unreadable. Lot of difficulty and a lot of a very strong business environment. I think we’ve — kind of in Q4 and coming into Q1 of 2024, I think we’ve got a clear direction on that. I think things are improving from a funding standpoint. A number of installed projects are now moving forward, things that we thought were kind of just held up with weren’t going to get financing or starting to move. So I think we’re — it’s still a post-volatile period, and there may be more volatility but I think we’re more and more seeing a trend towards improvement on the funding side and project progression side.

And of course, these things take quite a while to get the backlog and to generate meaningful revenue. So I think we’re setting up largely, a lot of it — this is set up for 2025, in fact. But I do think that things have improved quite a bit. I think there was a very volatile time there in Q3, certainly and extending into Q4. But I think things have shown a correction.

David Windley: Got it. That’s helpful. And then just a follow-up and I’ll yield. If I look at what has for you guys been a pretty consistent burn rate, you’re entering ’24 at a 20% backlog growth, that revenue growth rate is that you’re projecting is a little lower than that. So it seems like you’re allowing for some moderation in the burn rate. But then you also were a little lighter than you have been on hiring in the fourth quarter. And so I just wanted to kind of understand that confluence of issues. A lot of times, you would — if you’re thinking revenue acceleration, you’d be accelerating hiring and vice versa. So just the interplay between your expectations around revenue growth and burn out of backlog versus your hiring status at the moment.

August Troendle: Sure. Yeah, Dave, I think our burn rate — our conversion rate does bounce around a bit. And it was, what, 17.6% last — Q4 of ’22. And then kind of went up quite a bit, I guess, fell the way to over 19% in Q3. And I think it kind of is in that sort of band but there is a difference, it kind of moves around a bit. I don’t see a — as you mentioned, it’s relatively stable. In terms of long term, I don’t think we see a long-term trend towards dropping and dropping like many other CROs have. But it does bounce around a little bit. The staffing is — need is going to be driven by our revenue growth, kind of looking at direct revenue. We’re looking — last year, we had — we were looking at growth above 20% and this year, in ’24, we’re looking at growth of, let’s say, roughly 15% on top line and total as well as direct, roughly.

So that’s going to drive a staffing need of about a 10% increase. It’s not that they aren’t directly in line. There’s inflation and all the rest of it that adds into that and also productivity. I think lower turnover is driving quite a bit of savings in productivity gain. So I think our — we got a bit ahead when we’re growing very fast. We have to hire quite a bit in advance. And so I think we got a bit ahead in terms of staffing. I think we’re looking at about 10% growth this year. I think it will accelerate as backlog grows and we get towards ’25. And I think our 15% growth this year is kind of a bottom. I mean, I think it will move up from there. And so hiring will then — but I think we have the time to do that. And we don’t need to do it in the next few quarters in anticipation of a Q2 or Q3 spike.

So I think that’s kind of where we are on the staffing and conversion.

David Windley: Okay. That’s helpful. Thank you.

Operator: Thank you. One moment for our next question. And our next question comes from John Sourbeer with UBS. Your line is now open.

Lucas Baranowski: This is Lucas on for John Sourbeer. I guess, first off, any updates on how RFPs are tracking? I believe those were said to be near record levels at 3Q.

August Troendle: Yeah. And we gave a lot of kind of interim metrics in the volatile period because I think everyone wants more insight into what’s going on and everything we know and even though a lot of these metrics are difficult to decipher. So I — we’re trying to avoid kind of giving — getting too much into the weeds, where we got before. But yes, just to give you an idea, they remain strong. They were very strong last quarter. I said, kind of initial awards were kind of record and our fees were very strong, et cetera. I think things have continued on — certainly on a year-over-year basis, still very strong, coming off of what was a strong business environment in Q3, I think it’s kind of continued to be a reasonably strong business environment in Q4.

Lucas Baranowski: Okay. Great. And then just one last question. Pass-throughs as a percentage of revenue, it looked like they were about the same as last quarter. I guess any additional color on what’s driving the elevated level of pass-throughs and when you could expect that to normalize?

August Troendle: Kevin?