Medpace - Earnings Call - Q3 2020

Transcript

Speaker 0

Good day, ladies and gentlemen, and welcome to the Medpace Third Quarter 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, Kevin Brady, Medpace's Executive Director of Finance.

You may begin.

Speaker 1

Good morning, and thank you for joining Medpace's third quarter twenty twenty earnings conference call. Also on the call today is our President and CEO, August Trundle 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 uncertainties as well as other important factors that could cause actual results to differ materially from our current expectations. These factors, including the ongoing impact of COVID nineteen on our business, are discussed in our Form 10 ks 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 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 August Trundle.

Speaker 2

Good day. I would like to provide an update on COVID work that you're involved with to alleviate any concern about concentration, margin, or cancellation risk. Our backlog of COVID work related work, including pass through amounts, is less than $45,000,000 at September 30. Our year to date six zero six based revenue from COVID related work is less than $10,000,000 as of September 30. Although pass through amounts are proportionally larger on our COVID awards, this difference is roughly fifteen percent relative to non COVID studies and not the large differential often seen with vaccine studies.

Most of our backlog relates to treatment studies rather than vaccine studies. In summary, it has been a slow and painful recovery, but we are now on a sustainable growth path that should accelerate into 2021 independent of COVID work. Jesse will now review our third quarter financial results and forward guidance.

Speaker 3

Thank you, August, and good morning, everyone. Net new business awards entering backlog in the third quarter increased 10.5% from the prior year to 315,400,000.0 resulting in a 1.37 net book to bill. Ending backlog as of September 30 was $1,400,000,000 an increase of 16.7% from the prior year. Revenue was $230,400,000 in the 2020, which represents year over year increase of 6.5% on a reported basis and 5.8% on a constant currency organic basis. EBITDA of $51,900,000 increased 49.4% compared to $34,800,000 in the 2019.

On a constant currency basis, third quarter EBITDA increased 49.9% compared to the prior year. EBITDA margin in the third quarter was 22.5% compared to 16.1% in the prior year period. The higher margin was primarily attributable to lower reimbursed out of pocket expenses and lower SG and A cost on higher revenue. In the 2020, GAAP net income was 41,500,000.0 compared to GAAP net income of $24,000,000 in the prior year period. Net income increase was primarily driven by higher EBITDA and a lower effective tax rate.

GAAP net income per diluted share for the quarter was $1.09 compared to $0.63 in the prior year period. Regarding customer concentration, our top five and top 10 customers represent roughly 1725%, respectively, of our total year to date revenue. In the third quarter, we generated $59,800,000 in cash flow from operating activities, and our net days sales outstanding increased compared to the second quarter from negative thirty point two days to negative twenty seven point four days. During the quarter, we did not repurchase any shares, and we had $49,200,000 remaining under our share repurchase authorization at the end of the quarter. Additionally, our Board of Directors has authorized additional share repurchases, which brings the total current authorization up to 100,000,000 We ended the third quarter with $219,200,000 of cash, no outstanding debt and $50,000,000 of undrawn capacity on our revolving line of credit.

Our guidance for 2020 is unchanged from the last quarter, and we are now in a position to provide initial 2021 guidance for revenue and EBITDA. For the full year 2021, we expect revenue in the range of $1,050,000,000 to $1,125,000,000 and EBITDA to be in the range of $200,000,000 to $220,000,000 Additionally, we are expecting a full year 2021 tax rate between 1620%. And we plan to provide additional detailed full year 2021 guidance on our fourth quarter earnings call in February. With

Speaker 2

that,

Speaker 3

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

Speaker 0

Our first question comes from the line of John Kreger with William Blair.

Speaker 4

Hi, thanks very much. August, can you talk about your ability to start studies up and get them enrolled given the pandemic? Are there any metrics you could share with us versus, let's say, a year ago?

Speaker 2

No. I don't really think I have metrics to provide you. But, look, there's still a a significant reduction in recruitment rates for many studies. There is still sometimes delays in startup related to site staff and availability and operational difficulties. But I think things have improved considerably.

We certainly have, from a total activities standpoint, are back to baseline or above. Certainly for startups, we're above the level we were a year ago. That is a reflection of both some delays and difficulty of sites as well as growth kinda growing around it. So I think the environment is strong, but there still is some difficulties. And recruitment rates, particularly based on therapeutic area, are impaired at many sites.

And of course, it changes over time. And so I think what we see at the current moment may not be what we see three months from now. But I do think that everyone is adapting very well and the business environment is strong.

Speaker 4

Great, thank you. And then a follow-up. Are you seeing any signs of sort of changes in behavior on the part of your clients given the significant funding boost that we've seen over the last couple of quarters? Or are they treating it more as sort of a not sustainable new trend? Thanks.

Speaker 2

Well, I'm not sure how much I gotta go into their head to figure that out. But I do think the environment's very strong. I do think there was quite a bit of reluctance to move forward, even having the cash and authorization on a program due COVID. I think that is alleviating. I think people are saying, well, we're kind of into maybe a headwind in terms of difficulty at sites, but things have normalized enough that we can proceed and waiting another six months may not be the most productive use of the time and resources.

So I think things are moving forward in spite of the difficulties. And so I think that's what's really changed is there's good funding environment. I think there is a lot of programs that wanna go forward. Many of them were being held. I think some still are being held, but I think more and more people are saying now is the time to move forward.

We've evaluated the situation. We can do this. It may take a little bit more resources than it might have a year ago. But, you know, this is something that should be moved forward.

Speaker 4

Thank you very much.

Speaker 0

Your next question comes from the line of Sandy Draper with Truist.

Speaker 5

Thanks very much. I guess the first question when I look at the reiterated revenue guidance and even the revenue guidance for next year, it seems like you've got factored in there the potential for another COVID slowdown. When I just think about the low end of your revenue guidance of $880 it would assume a pretty sharp drop. Just trying to think what were the key inputs you put into your guidance assuming the or around the COVID impact?

Speaker 2

Jesse?

Speaker 3

Yes. Thanks, Andy. As it relates to 2020, I'll hit that first and then maybe move into 2021. The guidance range that we maintained or held does contemplate the continued volatile environment. So we did decide to hold the range.

You know, we are tracking well within the range. You know, one potential headwind could be increased COVID related lockdowns and restrictions and site restrictions, you know, that would be factored into a low end of the range scenario. And a potential tailwind that could be in there on revenue would be a faster increase in the investigator site payment activity. You know, this would push revenue up and margin percentage down, but have little impact on EBITDA. And that's, you know, the site activity is progressing, but, you know, the trajectory of that is still somewhat uncertain.

And then as it relates to 2021, you know, we thought it was important to come out with a range here as early as we could, given the environment. And this does contemplate our current view of the range of possibilities for 2021 and, you know, the kind of some of the similar themes would hold true. You know, at the low end of 2020 revenue, you know, that could contemplate some turbulence in site access. And then, you know, at the high end of the range, that would include things like a continued robust business environment and things continuing to progress positively.

Speaker 5

Great. That's really helpful. And I guess my follow-up again thinking about especially the guidance for 'twenty one in terms of EBITDA if I'm doing the math correctly it looks like it's a relatively low contribution margin. It's about $185,000,000 ish of incremental revenue midpoint to midpoint and only 25,000,000 of EBITDA. What are the you know, when we think about the modeling are the incremental expenses coming in mostly at the cost of goods side because this is a lot more pass through revenue?

Or should we really be thinking about it on SG and A? Just trying to think where the incremental expenses you have essentially implied in the guidance you're going to be coming in.

Speaker 3

Yes, primarily cost of goods. You know, as we've discussed, you know, here recently, our costs this year have been suppressed both in terms of the pace of the hiring and headcount investments in growth this year as well as a number of areas where discretionary costs and travel and meeting expense and training and such have been lower in this environment. And so as we think about cost investments moving into 2021, you know, we do plan to hire aggressively. And we do anticipate some of the cost categories that have been a little muted this year to come back.

Speaker 5

Great. Thanks for the comments, Jesse.

Speaker 3

Yes. Thanks, Sandy.

Speaker 0

Your next question comes from the line of Dave Windley with Jefferies.

Speaker 6

Hi, thanks for taking my question. Good morning. Apologize if I missed it, but did you comment on the percentage of your bookings that came from COVID projects this quarter?

Speaker 2

No. We didn't. Hey, David. This is August. We just commented on kind of the cumulative COVID bookings we've had.

And again, I think it's probably maybe close to roughly half of that kind of was in the last quarter, but we didn't comment specifically on this quarter, no.

Speaker 6

K. And then, to to John's question on, you know, clients' willingness to move forward, your answer if I interpreted your answer correctly, it was kind of maybe awards that had already been made, but clients, you know, maybe not setting a start date or being reluctant to do that. If I back up a step into more the RFP pipeline and and kind of press on that part of the question in relation to the funding environment, are you still seeing robust? Would you are you still seeing robust RFP activity, and is that maybe even accelerating as as people get more comfortable?

Speaker 2

I I think we are seeing a very robust, RFP environment. Yes. I I think it's, as strong as as I've as I've seen it. Okay.

Speaker 6

And and then a a similarly slightly different twist on Sandy's question. Jesse, if I look at the progression of revenue relative to, say, backlog in the third quarter, you know, with any backlog already established and then, you know, what might likely to be your backlog progression with a strong RFP environment, it does look like, especially the fourth quarter assumes that your burn rate drops back down, you know, really much closer to the 2Q level than the 3Q level. And and wondering just just kinda wondering the rationale there if that's deliberate, or was it simply that you didn't really wanna signal anything by changing guidance? You're keeping guidance the same in the in the low end of the range kind of or I should say the midpoint of the range kind of just implies that burn rate?

Speaker 2

I think that's correct.

Speaker 3

That's more the case, Dave. Yes, mean the range implies a revenue burn rate of I think 14.9% to 17.7%. And we're tracking well within that range, you know, favorably. But but wanted to to keep things static on the guide.

Speaker 6

Yeah. And then to the to the question on kind of site accessibility and and the headlines that we're seeing about, you know, out regional outbreaks and and European regions kind of contemplating maybe not complete shutdowns, but certainly dialing back the level of kind of activity in their communities. Is that are you seeing that affect site operations? Or are they still able you know, are they better able to maintain levels of activity than they were, say, in the second quarter?

Speaker 2

Currently, they're up till now, they've been maintaining activities pretty well, much better than, you know, back in, you know, March, etcetera. So yeah, I think things are manageable currently. We'll have to see where things go. But we are actively working throughout Europe. And in general, sites are open with some difficulties.

But largely we are keeping things running. Yeah.

Speaker 6

And then maybe just the last question quickly on the cost and Sandy's question on margin. Is it possible to put a quantification on either you know, it sounds like headcount is perhaps the the biggest headwind. Can you put a number on on, you know, say, your your growth in headcount or or, you know, growth in COGS or something to that effect that would give us a sense for magnitude?

Speaker 2

Jesse, you want

Speaker 3

to Yes, Dave. We plan to grow headcount as rapidly as we can. When we look at the past couple of years and we've been able to do that, it's been around the 20% level or so. So we're hiring as aggressive as we can and we'll see how we can do.

Speaker 6

Okay. All right. Thank you.

Speaker 0

And at this time, there are no further questions. I would like to turn the call back over to Mr. Kevin Brady for any further comments or closing remarks.

Speaker 2

Kevin?

Speaker 1

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 fourth quarter twenty twenty earnings call. Thanks.

Speaker 0

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