Operator: Good day, ladies and gentlemen, and welcome to the Medpace Third Quarter 2023 Earnings Conference Call. [Operator Instructions] 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 third quarter 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. Good morning, everyone. Revenue in the third quarter of 2023 was $492.5 million, which represented a year-over-year increase of 28.3%. Net new business awards entering backlog in the third quarter increased 29.9% from the prior year to $611.5 million, resulting in a 1.24 net book-to-bill. Ending backlog as of September 30, 2023, was approximately $2.7 billion, an increase of 20.3% from the prior year. We project that approximately $1.46 billion of backlog will convert to revenue in the next 12 months. And our backlog conversion in the third quarter was 19.1% of beginning backlog. Now, with that, I will turn the call over to Kevin to review our financial performance in more detail as well as our guidance expectations for the balance of 2023 and our initial guidance for 2024.

A medical professional in a lab coat discussing with a colleague.

Kevin Brady: Thank you, Jesse, and good morning to everyone listening in. As Jesse mentioned, revenue was $492.5 million in the third quarter of 2023. This represented a year-over-year increase of 28.3% on a reported basis and 27.6% on a constant currency basis. Revenue for the nine months ended September 30, 2023, was $1.39 billion and increased 30.2% on a reported basis and 30% on a constant currency basis from the comparable prior year period. EBITDA of $90.2 million increased 1% compared to $89.3 million in the third quarter of 2022. Year-to-date EBITDA was $266.7 million and increased 17.1% from the comparable prior year period. EBITDA margin for the third quarter was 18.3% compared to 23.3% in the prior year period. Year-to-date EBITDA margin was 19.2% compared to 21.4%.

EBITDA margin compared to the prior year period was impacted by higher reimbursable costs, personnel costs and the foreign exchange benefit in 2022 behind the strong U.S. dollar. In the third quarter of 2023, net income of $70.6 million increased 6.9% compared to net income of $66 million in the prior year period. Net income growth ahead of EBITDA growth was primarily driven by a lower effective tax rate of 15.2% compared to 19.4% in the prior year period as well as lower interest expense. Net income per diluted share for the quarter was $2.22 compared to $2.05 in the prior year period. Regarding customer concentration, our Top 5 and Top 10 customers represent roughly 23% and 29%, respectively, of our year-to-date total revenue. In the third quarter, we generated $114.4 million in cash flow from operating activities, and our net days sales outstanding was negative 42.2 days.

During the quarter, we paid off our outstanding debt, and we have $95.2 million in cash as of September 30, 2023. Moving now to our updated guidance for 2023. Full year 2023 total revenue is now expected in the range of $1.87 billion to $1.89 billion, representing growth of 28.1% to 29.5% over 2022 total revenue of $1.46 billion. Our 2023 EBITDA is now expected in the range of $353 million to $361 million, representing growth of 14.6% to 17.2% compared to EBITDA of $308.1 million in 2022. Guidance is based on foreign exchange rates as of September 30, 2023. We forecast 2023 net income in the range of $272 million to $276 million. This guidance assumes a full year 2023 effective tax rate of 16.25% to 17.25%, and 31.8 million diluted weighted average shares outstanding for 2023.

There are no additional share repurchases in our guidance. Earnings per diluted share is now expected to be in the range of $8.54 to $8.66. As Jesse mentioned, we are providing initial 2024 guidance for revenue and EBITDA. For the full year 2024, we expect revenue in the range of $2.15 billion to $2.2 billion, and EBITDA to be in the range of $390 million to $415 million. In addition to continued growth in direct service activities, the revenue guidance anticipates investigator site activity and costs remain elevated, similar to what we have seen recently in 2023. We plan to provide additional detailed full year 2024 guidance on our fourth quarter earnings call in February. With that, I will turn the call back over to the operator so we can take your questions.

Operator: [Operator Instructions] Our first question will come from Max Smock of William Blair. Your line is open. Pardon me Mr. Max Smock, your line is open. [Operator Instructions] Hello, Mr. Smock of William Blair, are you able to hear me?

Jesse Geiger: Operator, we can move on to the next and get Max back in the queue.

Operator: Thank you. [Operator Instructions] Our next question will come from David Windley of Jefferies. Your line is open.

David Windley: Hi, hopefully, you can hear me. Working?

Kevin Brady: Yes, we hear you David.

David Windley: Okay, fantastic, great. Good morning. Thank you for taking my question. I wondered if you could comment a little bit on environment. The – kind of the rate of biotech restructuring announcements and things of that sort has attenuated maybe ever so slightly in 2023. Your – everybody, I think, is aware that your exposure to that part of the customer base is pretty high. So wondered if you could comment on that maybe qualitatively. And then quantitatively, are you seeing more activity at the beginning of the funnel. Are you seeing your win rates improve? Like from a metric standpoint, what would you attribute to your booking success? Thanks.

August Troendle: Sure. Sure, Dave. Yes, the environment is kind of hard to comment on because it’s pretty variable. I mean, we’re still seeing quite a bit of funding challenges by clients. And we’ve been through a period of a lot of clients in distress and a number of bankruptcies and challenges. I think that’s actually derisked our backlog quite a bit of those that are going to have a problem, I think, most of them have. And, on the other side, we’re seeing very strong business environment. Just surprisingly, you know to see the disparity is amazing. We have a very strong RFP flow. I think our RFPs – total RFPs pending is the second highest we’ve ever had. And to fill the pipeline, the new awards, initial awards, as we’ve talked about, that were awarded in Q3 were a record highest we’ve ever had. So, we’re seeing great business environment and a horrible business environment. So I don’t know. It’s just kind of schizophrenic.

David Windley: Yes, interesting. So it would suggest that you’re able – I mean, that you’re taking share, you must be able to find enough of the positive ones to offset the absence of clients that are being hit by the financial concerns. Any color that you could provide around sales strategy or investment in sales force more recently. I know you did that years ago, but has there been further investment to try to cultivate more opportunity?

August Troendle: No, I wouldn’t say investment in terms of expanding the size and breadth of the group. I think we’re in pretty good shape there. I think we’re much better able to address the challenges this time because I think we were scaled, and there has been quite a bit of shifting focus to funding capabilities on the clients’ part. So we have moved to a somewhat different subset of small biotech that has funded programs. But that’s really it. It’s just kind of been a pivot on that side and found lots of opportunities despite the environment.

David Windley: Okay. Last question for me. The pass-through – the elevated pass-throughs have maybe persisted to a greater degree than you expected. Can you talk to that a little bit? Has the composition of work changed? Is it more client – I guess I’m wondering, is it a therapeutic area thing where the work that you’re doing just naturally has more pass-through associated with it. Is it an inflationary environment at the site level where those activities are just costing more or are you being asked to do that more? I’m just trying to understand why the significantly elevated pass-through growth and your expectations for that to continue? Thank you.

August Troendle: Yes, I think it’s kind of combination of all of the above. There’s been quite a bit of inflationary changes, particularly in some therapeutic areas and part of that is competition and all the rest of it. And so I think investigator fees have gone up as a percent of budgets and higher percent than our costs. And there’s obviously the mix of Phase IIIs and large studies and particularly maybe more expensive patient populations have been a factor too. But I think it’s really a combination of therapeutic area, the type of study, the cost of the patient and inflationary factors that are all driving up the pass-through prefunded investigator cost. I think that may, over time, lessen a little, but I think kind of the percent of investigator fees as a proportion of the total projects may remain elevated for quite a while.

David Windley: Okay, great. Thank you.

Operator: Thank you. [Operator Instructions] Our next question will come from John Sourbeer of UBS. Your line is open.

John Sourbeer: Thanks for taking the question. I guess just following up there a little bit on the beat in the quarter and just some of the disclosures, it seems like midsized biotech and metabolism are very strong, and I guess, also coupled with those large pass-throughs. Is the beat mostly driven by a couple of larger studies or are you seeing broad-based strength here currently?

August Troendle: It’s pretty broad-based. We don’t have – yes, Jesses, go ahead.

Jesse Geiger: Yes, I’d just say it’s broad, it’s not concentrated in any one study and metabolic has been running pretty hot past couple of quarters and it’s continuing to contribute, but plenty of good contribution from other therapeutic areas as well in the quarter.

John Sourbeer: Thanks. And your funding was pretty good in 2Q, but rates are higher again. Any additional color you can provide on where you see the funding environment going maybe in the second half of this – or I guess, remainder of this year or into next year, and could there be any impact there on a lag basis?

August Troendle: I’m sorry, the funding, and how that might play out going forward?

John Sourbeer: Yes. Just what are your expectations around maybe for 4Q and then for next year?

August Troendle: Things look strong. As I said, we got record kind of levels of both RFP and awards. And we had a drop-off in award. So Q4, Q1, we had kind of a very weak time period. And it was all a question of how quickly we could refill things compared to the food moving through the pipeline kind of thing. I think things look pretty good. We won’t see a drop off and we’re hoping that the business environment holds up and we’ll have a very strong ’24.

John Sourbeer: Thanks. And last one here on my end. Just any additional color you can provide on the 2024 EBITDA margin guidance? And just remind us, even over the long term, I guess, what is the margin expansion opportunity there or a target level?

Kevin Brady: Yes John, this is Kevin. I don’t expect – I mean it’s going to be somewhat contingent on what happens with the reimbursable activities, right? Just given the impact that, that has on margin percentage. But if that level is off, and kind of remains elevated, consistent to where we were in the past couple of quarters here. I don’t expect there to be a margin expansion. We still have some level of pressure from wage and benefit inflation. So, I don’t see 2024 as being a huge margin expansion opportunity.

John Sourbeer: And then, I guess, even beyond ’24, any color on long-term targets?

Kevin Brady: I mean, it’s just down. I mean, we’ve kind of said if things kind of normalize, like something in the high teens, but it remains to be exchange just in terms of what the environment and what hiring looks like too.

John Sourbeer: Great. Thanks for taking the questions.

Operator: Thank you. [Operator Instructions] Our next question will come from Eric Coldwell of Baird. Your line is open.

Eric Coldwell: Thank you. Good morning. Just a few quick ones here. On the wage inflation, my understanding was that it had peaked a few quarters ago and was still elevated, but starting to perhaps moderate a bit. Has that continued? Do I understand that correctly?

Jesse Geiger: Hey Eric, that’s right, kind of mid-to-high single digit.

Eric Coldwell: Jesse, what do you see on the next 12 months? Stable at these levels, perhaps some continued moderation, just any sense on what the outlook is?

Jesse Geiger: Yes. I think stable at these levels. At this point, I don’t see anything that would drive that higher or lower, though the markets from a hiring standpoint is more stable than it has been in the past. We’ve also had good success with lower turnover. So employee base is stable. We’re continuing to grow, but wage pressures have moderated a little bit, and I would expect it to be fairly consistent.

Eric Coldwell: Okay. And then, in terms of cancellation profile – if I missed this, I apologize, but have you returned fully to normal levels, which I believe are somewhere in the 4% to 5% of backlog or what’s going on with the cancellations, anything abnormal there?

Jesse Geiger: Yes, normal level. Pretty well back to normal at least for the third quarter and towards the lower end of that range.

Eric Coldwell: Okay. And then, hit rate, my understanding from our visit a month or two ago was that hit rate was back to solid but normal levels. Has that continued? And have you seen any change in rescue award activity. There was a lot of disruption in this sector over the last couple of years, and some of your peers had obviously were giving up some work. I’m just curious what the rescue activity looks like these days.

August Troendle: No particular rescue activity. It’s been very little. And yes, it’s been pretty mild.

Eric Coldwell: Okay. Last one, and I hate to go there. It’s unfortunate circumstance, but I am curious about your Middle East exposure, just in case the situation that’s unfolding continues to escalate, what kind of concentrations or exposures might you have in the Middle Eastern region?

Kevin Brady: Yes. Thanks for asking, Eric. All of our Israeli employees are safe and accounted for people working remotely at this point. Our concentration there, it’s less than 1% of our total headcount and less than 1% of active site. But activity is continuing, and we’re keeping a close eye on it.

Eric Coldwell: Okay, thanks very much, guys. Congrats on the good performance.

Operator: Thank you. [Operator Instructions] Our next question will come from Jack Wallace of Guggenheim Partners. Your line is open.

Jack Wallace: Hey, thanks and congrats on the quarter. A couple of questions here, one around headcount. It looks like we’re trending to the mid-to-high teens growth rate this year. And given the strength of the RFP awards in the pipeline, you mentioned earlier, maybe you think this is the right level of headcount growth over the next year or so? Or maybe said a different way, are we on plan with hiring now or is there any catch-up that’s needed? Thank you.

Jesse Geiger: Yes, thanks, Jack. Yes, we’d expect headcount here for the balance of the year to remain in that mid-to-high teens level. And then, for 2024, we anticipate headcount growing in line with revenue?

Jack Wallace: Got you. That’s helpful. And then just thinking about the comments. On one hand, there’s maybe some of the less promising lead targets and lesser funded companies have kind of sorted themselves out. But it does sound like promising lead candidates are getting funded, and there’s a good amount of jump balls for you to go after. Have you – I mean had to have any changes in your selectivity of trials. And if so, has that played any role in your hiring plan, and just thinking about how much hiring ahead is taking place. Thank you.

Jesse Geiger: Yes. I mean we continue to be selective always in terms of targets and opportunities, but its impact on hiring plans, not too much of an impact. I think we’re well positioned for current work. We’re well positioned with our hiring plans for upcoming work. And we’ve had really good retention and that’s really helped us as well in terms of the capacity that we have for trials. We’ve had good employee retention, and that’s always easier than hiring and onboarding new people.

Jack Wallace: Yes, the hidden cost of running the business. And then just kind of lastly or just more of a housekeeping item. It looks like the – your customers six to 10 were down sequentially from a revenue standpoint. I was wondering if there’s any just trial roll-offs in there or kind of any kind of noise factors. So just looking historically, at the Top 10 and really the six to 10 category looks like there’s been some trading between, say, the Top 5. It didn’t look like there’s a graduate this year. So, just wondering if there’s any kind of timing nuances or anything going on there? Thanks.

August Troendle: Yes. I don’t think there’s anything and maybe we shouldn’t provide the detail. I don’t know. It’s like, you can’t – it’s a different subset of companies every time. You’re comparing apples to oranges. I guess you’re looking at a nine months ’22 versus a nine months ’23. I mean if you look at it quarter-by-quarter, what revenue is coming from our six to – clients six to 10, it’s increased sequentially every quarter over the past year. I really don’t – companies move in and out and up and down and it’s by the quarter and you’re looking at a three month, you’re looking at a three-quarter trailing and it’s – I just – I don’t think there’s anything there that’s meaningful or represents any large roll off or anything like that.

Jack Wallace: That’s it. Thank you. Appreciate it. Congrats again on the quarter.

Jesse Geiger: Thanks Jack.

Operator: Thank you. [Operator Instructions] And again, we have on the line, Max Smock of William Blair. Your line is open.

Christine Rains: Hi, thank you for coming back to us. Can you hear me?

August Troendle: Yes.

Christine Rains: Okay great. Thank you. It’s Christine Rains on for Max Smock. So I was wondering, now that you’ve paid off your debt, how should we think about capital allocation moving forward? And then also relatedly, how much interest income could you earn next year?

Kevin Brady: Yes, I think the capital allocation – or kind of our methodology, Christine will remain the same, continued investment in the organic growth of the business. In 2024 and the next couple of years, we will have some increased capital expenditures related to the expansion of our headquarters here in Cincinnati. But beyond that, we’ll opportunistically look for share repurchases. To the extent that we’re not able to execute that at the levels that we want, we’re okay building some cash. And to your question on kind of interest and how to think about that, I think the simplest way is to kind of think of it as, at current rates, a blended rate of kind of 4.5% or so is a reasonable assumption to build into your model.

Christine Rains: Great, thank you. And then not to dig too deep in the details, but it seems like you had a relative jump in your metabolic exposure. It sounds like it wasn’t just one larger study. So hoping you can give any color there.

Jesse Geiger: Yes, Christine, a couple of studies in the category have been burning really well. It’s – nothing to call out there other than this year, we’ve had good success in the space over the past couple of quarters and that’s continuing.

Christine Rains: Great. Thank you. That’s all for us.

Operator: Thank you. This will end the Q&A portion of today’s conference. I would now like to turn the conference back to Lauren Morris for closing remarks.

Lauren Morris: 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 2023 earnings call.

Operator: This concludes today’s conference call. Thank you all for participating. You may now disconnect, and have a pleasant day.

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