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Operator: 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. 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 2022 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 August Troendle.

August Troendle: Good morning. I’d like to give a quick update on the business environment. The business environment continues to be challenging. Almost forward-looking business development metrics have weakened and were depressed in the fourth quarter. New RFPs, pending RFPs and initial award notifications were all down moderately. Cancellations across the pipeline were elevated with backlog cancellations above our usual range in Q4. That is above 5% of opening backlog. Delayed financing or reprioritization of pipeline is frequently the feedback from sponsors. Biotech sentiment has remained poor to date in Q1. 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 our on-going monitoring of sponsor financial condition and consistently negotiated safe payment terms to avoid write-offs.

Our DSO and minimal write-offs of bad debt speak to our diligence. We remain confident in our 2023 guidance and believe we will continue to generate robust above-industry growth in 2024 and beyond. Jesse and Kevin will now review our financial results for Q4.

Jesse Geiger: Thank you August and good morning everyone. Revenue in the fourth quarter of 2022 was $394.1 million, which represents a year-over-year increase of 27.7% and full year 2022 revenue was $1.46 billion, a 27.8% increase from 2021. Net new business awards entering backlog in the fourth quarter increased 5.8% from the prior year and $485.1 million resulting in a 1.23% net book-to-bill. For the full year 2022 net new business awards were $1.8 billion an increase of 13.6% and ending backlog as of December 31, was approximately $2.3 billion. This was an increase of 17.2% from the prior year. We project that approximately $1.21 billion of backlog will convert to revenue in the next 12 months. conversion in the fourth quarter was 17.6% of beginning backlog.

We were able to grow headcount 15.8% from the end of the prior year in a challenging and competitive labor environment and employee retention and continued hiring for future business will remain top priorities in 2023. With that I will turn the call over to Kevin to review our financial performance in more detail and discuss our 2023 guidance. Kevin?

Kevin Brady: Thank you, Jesse, and good morning to everyone listening in. As Jesse mentioned, revenue was $394.1 million in the fourth quarter of 2022. This represented a year-over-year increase of 27.7% on a reported basis, and 28.9% on a constant currency basis. Full year 2022 revenue was $1.46 billion, which represents a 27.8% increase on a reported basis and 29.2% on a constant currency basis in 2021. EBITDA of $80.4 million increased 30.9% compared to $61.4 million in the fourth quarter of 2021. On a constant currency basis, fourth quarter EBITDA increased 23.3% compared to the prior year. Full year EBITDA was $308.1 million and increased 38.1% on a reported basis, and 32.3% on a constant currency basis from 2021. EBITDA margin for the fourth quarter was 20.4% compared to 19.9% in the prior year period.

Full year 2022 EBITDA margin was 21.1% compared to 19.5% in 2021. EBITDA margin increased 160 basis points for the year, driven primarily by slower headcount growth, and net foreign exchange benefits behind the strong U.S. dollar partially offset by higher reimbursed out of pocket expenses. 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. For the full year 2022, net income was $245.4 million, compared to $181.8 million in 2021. This represents a 34.9% increase. Net income gross lagging EBITA was primarily driven by a higher effective tax rate, and interest expense. Net income per diluted share for the quarter was $2.12 compared to $1.32 in the prior year period.

For the full year 2022, net income per diluted share was $7.28 compared to net income per diluted share of $4.81 in 2021. Regarding customer concentration, our top five and top 10 customers represent roughly 18% and 25% respectively, of our 2022 revenue. In the fourth quarter, we generated $136.7 million in cash flow from operating activities and our net day sales outstanding was negative 48.9 days. During the fourth quarter, we repurchased approximately 228,000 shares for a total of $47.2 million. For the full year 2022, we repurchased approximately 5.7 million shares for $847.7 million. As of December 31 2022 we have $452.8 million remaining under our share repurchase authorization program. During the quarter, we paid $89.7 million against the credit facility.

And our net debt position at the end of the quarter was $21.7 million. This was composed of debt of $50 million in cash of $28.3 million. Our net leverage ratio is approximately 0.1 times last 12 months EBITDA. Moving now to our guidance for 2023. Full year 2023 total revenue is now expected in the range of $1.69 billion to $1.75 billion representing growth of 15.8% to 19.9% over 2022 total revenue of $1.46 billion. Our 2023 EBITDA is expected in the range of $325 million to $350 million representing gross of 5.5% to 13.6% compared to EBITDA of $308.1 million in 2022. Guidance is based on foreign exchange rates as of December 31 .This guidance assumes a full year 2023 effective tax rate of 17.5% to 18.5% and 32.5 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 $245 million to $265 million. Earnings per diluted share is expected to be in the range of $7.53 to $8.14. With that, I will turn the call back over to the operator so we can take your questions.

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Operator: Our first question or comment comes from the line of Sandy Draper from Guggenheim Partners. Mr. Draper, your line is open.

Sandy Draper: Thanks very much. I think that was cut out for a second. So I guess the first question probably for commonly for 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 and it looks like step-up in spending. Generally, I’ve always viewed it when you guys are hiring and margins aren’t expanding, it’s because you’re pretty optimistic about the business. But if there’s some caution you’re holding back on hiring, so would love to just get your thoughts on — it 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 2023? Thanks.

August Troendle: Sure. Hi Sandy. Look, I we’ve signaled the kind of 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. So that’s and we’ve had an elevated level of cancellations. So that’s always a risk to our performance and could represent the start of a real downturn. That affects our revenue growth and our need for employees. To date, we’ve not seen that broad based pullback to the point where it’s going to pick, affect our guidance, our plans for this year, our plans for next year. So it’s out there as a risk. And I think the longer the pullback and 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. But I think we’re, we’re signaling the caution. But we are making it through, currently things are still going pretty well. I think that’s all we can say.

Sandy Draper: 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/expense a little bit lower than what I thought would have thought just given the cash flow generation, I’m assuming you pay down that 50 million debt. It’s an upper or higher and straight environment. If there’s something else in there or are you not assuming as much free cash flow out of was to the 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.

Kevin Brady: Now we’re, as you mentioned, we are expecting some level of interest expense because we’re not built into our guidance systems and their share purchases. But we still have a little bit of debt on the books and the free cash flow that we are generating in the first quarter is typically our lowest quarter. And so we will generate some cash in 2023. But it’s going to be more towards the back half of the year. And we’re assuming kind of an interest rate and 4% range for that.

Sandy Draper: Okay, that’s helpful. Thanks. I’ll turn it over.

Operator: Thank you. Our next question or comment comes from the line of Max Smock from William Blair. Mr. Smock, your line is now open.

Max Smock: Hi, can you hear me? Okay.

August Troendle: Yes. Hear You.

Max Smock: Perfect. Okay. Thanks. I just want to follow up on Sandy’s question quickly, is there any detail you can provide around cancellations beyond saying it’s above that 5%. And then in terms of the, those customers that maybe are a bit more at risk and trouble if they can’t secure funding here near term. Do you have any insight into what portion of your backlog relates to those customers? And how much of that backlog overall could be at risk here as we move up to 2023?

August Troendle: Sure, Max, cancellation rate was up not, not drastically, but it was it did get outside of the, our usual kind of 5% range. So it was moderately elevated, was not in not a particularly striking increase, but slightly up. And a portion of backlog that has clients that, are at risk, I guess you might put that into our total group of fun partnered pre revenue clients. I don’t know. I mean, it’s a handful, 10 or so clients that we’ve had discussions with about funding and difficulty or program reorganization, reprioritization, whatever. Jessie, do you have the number on the total portion of our clients that are non-partnered?

Jesse Geiger: Let me let me grab it. The group that we’ve that we’ve had specific conversations with over specific information from his is a, a subset of that of that total group. But no, let me let me grab the total.

Max Smock: And then — okay, perfect. And as a follow up, related, I guess in terms of your plans for capital allocation, right. I mean the stock 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 share repurchases in 2023, whether or not it makes sense to be buying back stock you’re given where everything is and the potential for things slowing back down as we move throughout the year here. Thank you.

Kevin Brady: Max, this is Kevin. As we’ve traditionally done, historically, I mean, we will continue to take an opportunistic approach to share repurchases. We were able to execute some in the fourth quarter and you can see what those level levels look like. But as we approach 2023, again, the extent that volatility in the market opens up opportunity, we’ll look at share repurchases again. If not, we’re not afraid to build some cash either.

Max Smock: Got it. Thank you.

Jesse Geiger: Max, just a follow up. Around 60% of our of our backlog is with customers that have that are non-partnered with, with large pharma.

Max Smock: Okay, that’s helpful. Thank you.

Operator: Thank you. Our next question or comment comes from the line of David Windley from Jefferies. Mr. Windley. Your line is now open.

David Windley: Gentlemen, thanks for taking — ladies and gentlemen thanks for taking my question. I guess August I’m interested in in kind of a further bridge to Sandy’s question around the environment. I think the first call where you sounded a little bit of caution warning to us was a year ago. 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. So I guess I’m wondering, is it easy to cut what is what’s allowing you to post numbers that can still get you to your growth outlook when it seems to be a deteriorating environment, should we just chalk that up to 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 the navigation through the turbulence here.

August Troendle: Sure. And we did talk several years back about 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. I think that’s been reasonably effective. Of course, there’s only so much you can do. I — there has been — what we’re seeing is a greater churn, greater risk to clients having stalled financing, 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 the last — not this past year but the year before that, when there was a large number of opportunities, we were able to select programs that we’re better funded than others.

And so I think it’s a mix of things. I think we’ve been fortunate to have enough opportunities to be able to switch and to fill things in when we’ve had cancellations. We’ve had a lot of cancellations 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 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 guidance.

David Windley: Got it. Following up on that, the — as you pivot to other opportunities, presumably those other opportunities, those other clients are or were being served by a competitor CRO, you — are you able to perceive that you’re taking share, and is price sensitivity is being a little bit more aggressive on price around the edges part of the lever to pry yourself into those opportunities.

August Troendle: Well, I think when you see opportunities that are kind of coming from dissatisfaction with a competitor price is not generally the feature that they’re looking for. They’re not coming to us and say, we’re just not getting the price we want somewhere else. It’s usually some other frustration. But it’s hard to sort out share — I look at share just in terms of revenue growth. Our revenue growth is fast, all the metrics on bookings and stuff, I think, are BS. I mean it all depends on your conversion rate and all the rest of it and your book-to-bill and a people talk about that in the end, it runs down to revenue growth. I think we have superior revenue growth, so we think we’re taking share. And I don’t describe any of the current environment to that. We’ve seen — we’ve just had an ability to pivot to other programs.

David Windley: Okay. Last question for me and related. I guess it’s a two-parter here. So you are very careful about your vetting and what you put into backlog to have clients without funding in backlog? I presume this is project has progressed quite a ways and they’ve burned through their — like they had financing at the time they went in backlog, but they don’t now or they’re a 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 do start pinching around on terms. And if those are not direct pricing, they are less milestones upfront, 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 betting payment terms and what’s in your backlog in that regard?

August Troendle: Sure. Yes, 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 better funded already. We might be a little bit more flexible. But in this kind of environment, we do tend to be very aggressive in terms of ensuring that we get paid for the work we do. So — and you can see that in our DSOs. We have 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, we’ll lose the work. And then your first question was about cancellations and how they occur because of fund.

David Windley: Well, no, just — I’m sorry, just kind of Max’s question around clients that are — the handful of clients that are in your backlog that have expressed a concern about 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 if they don’t have it’s a whole.

August Troendle: There’s a fair number of our clients that have funding for a first portion — first stage of a program or to a milestone that they see as an inflection point for their product. It may be an interim analysis. It might be a first part of the 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 or other spend run short of cash before they complete, and have assumed that financial markets will be able to get them there on it. So I mean I think it’s a lot of different things. And look, some of it is funding related but also the product — it’s often a fantastic revolutionary product that’s coming along is going to get funded.

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. It still looks promising, but not the breakthrough they’d hoped. And that leads to a challenge for getting funding for the next stage.

David Windley: Yes.

August Troendle: Does that help?

David Windley: It does. It does. Yes.

Jesse Geiger: Dave, let me just add one final point on active programs and backlog that had funding in the beginning, but then need to raise incremental capital at some point along the journey. We don’t pull those out of backlog every time that a sponsor is raising incremental capital in the middle of a study. But we do factor those into our detailed build up revenue projection that then becomes the basis for our guidance range. And so 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.

David Windley: Got it. I’ve taken a lot of time, sorry about that. Much appreciated on the transparency in kudos to your navigation through the tough environment. Thanks very much.

Operator: Thank you. Our next question or comment comes from the line of John Sourbeer from UBS. Mr. Sourbeer, your line is now open.

John Sourbeer: Hi, thanks for taking the questions. 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 that. Any specific therapeutic type or class or phase where you’re seeing more weakness versus others within the book of business?

August Troendle: I don’t think it’s focused on any particular therapeutic area or stage of programs. No, I don’t really have a color to that.

John Sourbeer: Got it. And then just I appreciate the color on the cost on environment. And you look at new awards growth did slow some this quarter, down from that mid-teens to around 6%. Just any color on how you think those new awards play out through 2023.

August Troendle: No. I — look, I think it’s — again, it’s a challenging environment. We’re playing it month-to-month. So far, things have been okay, but in a weaker environment. Our win rate has been very strong, which is supported things, and that’s always hard to judge. I think that we’re hoping that we continue with book-to-bills and above 1.2 range, but we have to see.

John Sourbeer: Got it. And then just last one here for me. 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 wage pressures and just the ability to pass along that on pricing and just how we think about that impacting the margins throughout the year.

August Troendle: Our turnover has come down nicely. I think we’re doing well. We’re getting good traction on new hires. I think we still are hiring reasonably rapidly. And I think that there remains a pretty tight labor market, yes, but I think we’re making good traction.

John Sourbeer: Thanks for taking the questions.

Operator: Thank you. Our next question or comment comes from the line of Eric Coldwell from RW Baird. Mr. Coldwell, your line is now open.

Eric Coldwell: Yes. Can you hear me?

August Troendle: Yes, we can.

John Sourbeer: Great. You just mentioned, 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.

August Troendle: Yes. 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 — which has really been true the last year. So we’ve had a really, really strong win rate. And I think that’s part of the selectivity, and we were using in selecting projects and all the rest of it, but that’s been a fortunate support for us, yes.

Eric Coldwell: When we — shifting gears. When we think about macro operational challenges and not necessarily your hiring things of that sort, 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, etcetera. What is the external view of the operating environment? Is it improving from where you’ve been over the last few quarters, weakening? And how does it stack up today versus, say, if you will, a normal pre-pandemic operating environment?

August Troendle: Sure. It’s been a really tight environment, particularly at sites that have been — the inflation rate at sites has far outstripped I think the inflation rate among — the wage inflation rate among CROs and the rest of the industry. So there has been very significant challenges at sites. I would say it’s maybe starting to see light at the end of the tunnel, and there’s some improvement. But it is pretty early. There has been a lot of strain there. There’s been a very tight labor market overall, but I think more so at sites. I think that we’ve seen recently still a pretty tight labor market in hiring new employees. The one area that I think we found it to be substantially easier is IT-related staff. But otherwise, we see it as still a pretty historically tight labor environment. So I don’t know if I can provide any more detail on that.

Eric Coldwell: 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 6%, 7% zone and then middle of the year, around 20%. I’m curious if you could give us more detail on the driver of the low tax rate in the fourth quarter. And do you see any — or could you, at this point, guide us to any volatility in tax rate over the next four quarters? Are there any expected periods where the tax rate might be above or below that 18% enough so that you would want to call it out.

Kevin Brady: Yes, 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 fourth quarter was the accelerated stock price increase and people exercising their options. And it’s very difficult to obviously predict when people are going to exercise options. 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 17.5% to 18.5% per quarter, and we’ll kind of see how it goes.

Eric Coldwell: Okay. That’s all from me. Thank you.

Operator: Thank you. I’m showing no additional questions in the queue at this time. I’d like to turn the conference back over to management for any closing remarks.

Lauren Morris: Thank you for joining us on today’s call, and thank you for your interest in Medpace. We look forward to speaking with you again on our first quarter 2023 earnings call.

Operator: Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.