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Operator: Good day, ladies and gentlemen, and welcome to Medpace First Quarter 2024 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, Lauren Morris, Medpace’s Director of Investor Relations. You may begin.

Lauren Morris: Good morning, and thank you for joining Medpace’s first quarter 2024 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 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 day, everyone. Revenue for the first quarter came in a bit lower than our internal projections, and this was driven entirely by reimbursable costs coming in lower than anticipated. Reimbursable costs are difficult to model, and it is unclear if this will impact our full-year revenue numbers. Direct revenue drivers remain in line with plan, and we have not altered our revenue guidance. Net awards came in below our internal projections. This was driven by increased cancellations, which were above our usual range of below 4.5%. By and large, the cancellations were not related to funding problems. The funding environment remains guarded, but stable and improved from last year. We believe the current environment is strong enough for us to grow backlog nicely and generate accelerating revenue growth next year.

RFP dollar value and quality remain stable to improving from Q4. Our profit margin was strong in the first quarter, and we have raised our full-year guidance for EBITDA and therefore our implied margin for 2024. We are committed to delivering year-over-year margin improvement on a full-year basis. This past year, we have increased our investment productivity through automation, process improvements, and optimizing geographic distribution of staff. Last quarter, we were anticipating approximately 10% employee growth to achieve our 2024 revenue, but now expect 5% to 7% employee growth this year, while maintaining direct revenue growth of roughly 15% as previously planned. With that, I’ll turn the call over to Jesse for his comments on the quarter.

Jesse Geiger: Thank you, August. Good morning, everyone. Revenue for the first quarter of 2024 was $511 million, which represented a year-over-year increase of 17.7%%. Net new business awards entering backlog in the first quarter increased 10.8% from the prior year to $615.6 million, resulting in a 1.2 net book to bill. Ending backlog as of March 31, 2024, was approximately $2.9 billion, an increase of 18.2% from the prior year. We project that approximately $1.56 billion of backlog will convert to revenue in the next 12 months, and our backlog conversion in the first quarter was 18.2% 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 $511 million in the first quarter of 2024. This represented a year-over-year increase of 17.7% on a reported basis and 17.6% on a constant currency basis. EBITDA of $115.7 million increased 24.6% compared to $92.8 million in the first quarter of 2023. EBITDA margin for the first quarter was 22.6% compared to 21.4% in the prior year period. Similar to the first quarter of 2023, the EBITDA margin benefited from direct service activities, productivity, and foreign exchange. In the first quarter of 2024, net income of $102.6 million increased 40.7% compared to net income of $72.9 million in the prior year period. Net income gross above EBITDA gross was primarily driven by interest income in the quarter, as well as a lower effective tax rate of 9%, compared to 15.3% in the prior year period.

Net income per diluted share for the quarter was $3.20, compared to $2.27 in the prior year period. Regarding customer concentration, our top five and top 10 customers represent roughly 22% and 29%, respectively, of our first quarter 2024 revenue. In the first quarter, we generated $152.7 million in cash flow from operating activities, and our net days sales outstanding was negative 60.1 days. We did not repurchase any shares during the fourth quarter. As of March 31, 2024, we had $407 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 unchanged and 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 $415 million to $445 million, representing growth of 14.5% to 22.8%, compared to EBITDA of $362.5 million in 2023. We forecast 2024 net income in the range of $347 million to $369 million. This guidance assumes a full-year 2024 effective tax rate of 15% to 16%, interest income of $22.9 million and 32.1 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 $10.79 to $11.47. Guidance is based on foreign exchange rates as of March 31, 2024. With that, I will turn the call back over to the operator so we can take your questions.

Operator: Thank you. [Operator Instructions] And our first question is going to come from the line of Max Smock with William Blair. Your line is open. Please go ahead.

Max Smock: Hey, good morning. Thanks for taking our questions. Maybe just starting off with one on the bookings number for the quarter. So, you mentioned the miss relative to your expectations was driven by elevated cancellations. Just wondering if you can give us some commentary on how gross bookings trended in the quarter? And then if cancellations kind of were within a normal range, what would that have implied for bookings growth here in the first quarter?

August Troendle: Yes, sure. Hi. This is August. Sequentially, the gross bookings were up nicely in the quarter and it was cancellations that drove the miss and they were outside of our usual range, which we’ve taken to be less than 4.5% more recently. And so, I think that was all of it. I don’t have a specific book-to-bill number without those cancellations, but it would have been up in the range, I think, we were expecting coming into the call.

Max Smock: Got it. That’s helpful. Thanks, August. And then maybe one higher level one here just over — or in terms of the month-over-month trends you’ve seen so far in the second quarter in terms of RFP flows, bookings, and some of the other key metrics here. In general, customer sentiment around the funding environment. Obviously, we got off to a great start of the year here, but it seems like things will may be normalize a bit as we move through this year. So are you seeing clients nervous about the funding environment at all? Or in general, do you get the sense that there’s still a lot of optimism around funding from here in spite of the change in expectations for interest rates as we move throughout 2024?

August Troendle: Yes. I guess I don’t really see their expectations, their excitement, but look, I look at clients whether they are positive about moving forward with programs or not. We still have some clients that are struggling and so that hasn’t changed, but there is a very strong also business environment with opportunities, good opportunities that are moving forward. So it remains somewhat of a mix. There’s always going to be clients in our client base. There’s always going to be clients that are struggling for funding, but I think overall things are much better than last year and are continuing to improve. So, I think it looks good for the year. In terms of opportunities, we just have to win them.

Max Smock: Yes. Maybe just sneaking one final one in off that point, August. So, you mentioned, came out and confirmed that you’re still expecting revenue to — revenue growth to step up in 2025. To get to that target, what level of bookings do you think you need to see in order to have that revenue pick up next year, and how should we think about the cadence for bookings growth as we move through 2024?

August Troendle: Yes. I mean, I think that continuing bookings in what we have had in the past year will permit us, without a lot of cancellations, to generate that accelerating growth. So, it’s really a matter of getting new awards in, which even predate some of our booking numbers. And so it’s — I think the environment’s there. It’s a matter of us winning them and having the new awards that will start, push our book to bills back to the — between 2.2 something, close to 2.25. And I think we’ll see nice acceleration next year.

Max Smock: Well, I’ll leave it there. Thanks again for taking our questions.

Operator: Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of Eric Coldwell with Baird. Your line is open. Please go ahead.

Eric Coldwell: Thank you. Good morning. I want to do a couple on the reimbursable revenue. First, do you have any concept on why the reimbursable revenue was lower than expected? Are there any market drivers, or was it just the random walk that’s hard to project? And then, within the bookings that you did report in the quarter, what was the mix of reimbursable versus service revenue in the bookings? Did that change versus the recent past?

August Troendle: I guess I’ll take that bookings part of it. I don’t have that breakout, but there was nothing particularly unusual. And of course, bookings in the quarter and awards in the quarter, I think things are continuing along largely as they have. It’s the timing of burn on the indirect that is very difficult to predict. Kevin, do you want to comment on that?

Kevin Brady: Yes, I can take the first part of your question, Eric. Just in terms of reimbursable costs, I mean, as you know, quarter-to-quarter, it is very volatile. I did mention in the last call and even in the call before that that I do expect reimbursable costs to be elevated, and they were year-over-year. We were kind of seeing a similar pattern to what we saw last year. And there’s just a lot of variables in there. You’ve got study mix. You’ve got how sites are starting up. You’ve got some inflationary costs in there. And you’re talking over thousands of sites, and so it is challenging to predict. I still expect those costs to come in as a percentage of revenue similar to what we saw in 2023. And so, as a result of that, my expectation is that the balance of the year, that those reimbursable costs do accelerate from what we saw in the first quarter.

However, the weaker reimbursable costs that are in the first quarter does lead me to lean a little bit more towards the lower end of the revenue guidance. But again, we’ll have to kind of wait and see how those costs come in the balance of the year.

Eric Coldwell: If I could…

August Troendle: Eric, if you’re trying to look to our indirect, our pass-through costs going to increase or decrease as a portion of revenue going forward, they’re going to probably be in this range that we’ve seen. I mean, we’re not seeing bookings that are disproportionately indirect or disproportionately direct.

Eric Coldwell: Yes, that’s fair. And I understand the lumpiness and difficult prediction model there. On awards, this is maybe a bit — conceptually a bit hard to communicate. But Medpace has historically talked about a somewhat unique award recognition profile where you don’t go out six, 12 months on taking an award in the street facing bookings. You wait till it gets closer to revenue generation. I’m curious, and maybe my theory is wrong on this, but I’ve always thought of Medpace as a company that the bookings we see when you report a quarter might be awards that were given a quarter or two ago and are just getting to revenue generation phase. So I thought perhaps some of the bookings this quarter could be the aftermath of maybe a little bit softer awards a quarter or two ago or less of gross awards.

And of course, you mentioned the higher cancels. I’m just curious, based on the bookings or the — whether it’s initial award notifications or awards that you have but aren’t close to revenue generation, are you seeing an uplift in that performance based on the stronger biotech funding in the first quarter or is this theory that there’s a bit of a delay from when you get the award to when you actually take it into bookings? Is the theory off base relative to your peers that would take an award 12 months in advance in some cases?

August Troendle: Yes, I think everyone has a lag there, because I think a number of the other reporting companies do it based on contract. And of course, contract lags when you first hear of an award. So there’s always some lag no matter who’s reporting. So that is definitely true. There is — some things go through the same quarter. I mean, some things are right there ready to run. Sometimes it’s a change in a program and that award is recognized rather rapidly. But there is in general new studies awarded that do have a lag before they reach backlog recognition. I don’t — and then you asked about, is the change in our bookings here. I mean, our miss was — missing our expectations in our bookings that did not increase and were kind of flat quarter-over-quarter.

It was really driven by cancellations. But on the other side of it, we did have a relatively weaker win rate in the quarter. So that was true too. And that’s something that bounces around. We came off of a couple of quarters of very strong, I think we talked about strong win rates. So that was down a little bit in the quarter too, but I do think that that just bounces around and I don’t make any long-term projections based upon that.

Eric Coldwell: If I could do one more with Kevin, just the tax rate. I missed the driver of the lower tax rate in the quarter and the lowering for the year.

Kevin Brady: It’s option exercises again in the first quarter. As you know, they are discrete items in the quarter.

Eric Coldwell: That was it, just the option exercises on the stock setting new highs in the quarter.

Kevin Brady: That’s right, Eric.

Eric Coldwell: Okay. Thanks guys.

Operator: Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of Jack Wallace with Guggenheim Securities. Your line is open. Please go ahead.

Jack Wallace: Hi, thanks for taking my questions. Just wanted to ask about the hiring, slower headcount growth this year. Is any of that related to your — to lower expectations of growth rate acceleration next year or is there any change in regrettable churn versus, say, prior quarters in the first quarter?

August Troendle: [Multiple Speakers] I just wanted to say, I don’t think our hiring is at this point directed or reflective of changed optimism about 2025. I think that our hiring is influenced by productivity and where we need staff and things like that, which is, I think has improved quite a bit. And I addressed that, but Jesse, go ahead.

Jesse Geiger: No, I was just going to echo some of those same comments. Q1 traditionally is sometimes a lower net headcount quarter for us, but we feel very comfortable and in line with the staffing we have to handle current projects, to handle future projects. We will continue to hire, although as August mentioned in his opening comments, at a slightly lower rate of headcount growth projection and retention has continued to be very, very good.

Jack Wallace: Got it. That’s helpful. And then just to ask you the pass through question a different way. The mix of pass-throughs in the backlog relative to your expectations of revenue this year, is there any material change there? And maybe if you could also comment on some of the near-term awards you’re looking at. And again, the point we’re trying to get here is, you’re thinking about the direct revenue progression and if there is some noise in bookings over the next couple of quarters, if it’s going to be partially explained by changes in the pass-throughs relative to, say, prior periods where pass-throughs may have been more elevated. Thank you.

Kevin Brady: No. I mean, Jack, this is Kevin. I mean, as August had mentioned, we’re not seeing any big mix shifts in terms of bookings and backlog. It’s more just a progression of how things are burning across our portfolio of programs. And so, just in terms of kind of direct revenue, we’re seeing some continued good progress in direct activities and expect that to continue throughout 2024. As August had mentioned, kind of the guide is to expect something around a 15% direct revenue growth for 2024.

August Troendle: Yes, I think one thing we can say is, I think we feel more comfortable in our direct revenue projections than the pass-through costs, which drive the pass-through revenue. So, I think it is — I think we’re more confident in the one than the other, but so if we did have a miss, it would more likely be on the indirect.

Jack Wallace: Got it. That’s helpful. Thank you so much.

Operator: Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of Dan Leonard with UBS. Your line is open. Please go ahead.

Dan Leonard: Thank you very much. You made a comment in the prepared that RFPs were stable in Q1 compared to Q4. How does that compare to what you might have expected given the improvement in the funding environment?

August Troendle: Yes, and they were actually — I think I was saying, from last year, they were coming across both in quality and number in stable to improved. Numbers were actually a bit up in Q1 over Q4, and I think they are kind of where we expect based upon the improvement in the environment. They are very good opportunities. I mean, sometimes you get a lot of opportunities that people are just shopping around for fundraising plans, but there is a — we have strong signals that — and confidence and funded companies coming to us with programs that are moving forward. So I think the environment has improved.

Dan Leonard: Thank you. And just a quick follow-up. Do you think the recent uptick we’ve seen in biotech M&A activity over the past couple of quarters might impact your outlook at all?

August Troendle: I don’t think M&A has, particularly in the short term, has an effect on our performance. Long term sometimes takes out a client, sometimes that’s good, sometimes not, depending upon whether we keep, but on the shorter term, we tend to book and keep what we win.

Dan Leonard: Thank you.

Operator: Thank you. And one moment as we move on to our next question. Our next question is going to come from the line of Justin Bowers with Deutsche Bank. Your line is open. Please go ahead.

Justin Bowers: Hi, good morning, everyone, and thank you for the questions. So in terms of the lower employee growth assumption or projection for this year, are those — I’m just trying to understand why the change there, if there’s really no change in the revenue outlook. And it sounds like it’s related to productivity. So is that something that’s durable as we think about sort of the growth into 2025 and beyond? Is there an ability to get some more operating leverage there?

August Troendle: Yes, I think that’s — we’re signaling is that we do think we’ve invested quite a bit in productivity and are improving that. We did do a little bit of trimming and optimization of staffing. So you’ve seen a little bit of that in terms of our reduced growth rates, but that’s driven by productivity gains. Part of that is the retention that has come down over the last, from — we started with COVID and elevated turnover, and now we’re at a very good range for turnover, but it’s beyond that. It’s a lot of productivity improvement that we have tried to put in place and are improving continuously, and I think through this past year, and we’ll continue through this year. So I think there’s opportunities on at least a core margin basis to improve. There’s other factors like the proportion of pass-throughs and FX and other things that can sometimes swallow that productivity gain, but I think on net we’re improving our productivity.

Justin Bowers: Okay. And then in terms of the cancellations, you did call out that they were a little higher than normal this quarter. Do you have a sense of, was that driven more by the data or funding or programs that maybe you thought would restart and is there anything to call out by either phase or therapeutic area just to sort of help us get a better sense of the environment?

August Troendle: Yes, it was — yes, sure. It was, from our view, entirely based upon product performance and failed compounds. It’s sometimes difficult to sort out whether reprioritization and hence funding behind the scenes was a factor, but it did not appear to be in the cases by and large in the cancellations that we saw this quarter, past quarter. So it really was kind of the usual random product performance activities that led to cancellations, I think.

Justin Bowers: Okay. Thank you.

Operator: Thank you. And one moment as we move to our next question. And our next question comes from the line of David Windley with Jeffries. Your line is open. Please go ahead.

David Windley: Hi. Good morning. Thanks for taking my questions. I wanted to first start with a clarification. So to Max’s earlier question on bookings or book to bill levels that you would be looking to achieve to support that accelerating growth in 2025. August, I think you said 2.2 to 2.25. I suspect everybody knows you mean 1.2 to 1.25, but just for purposes of getting the transcript right, I just wanted to make sure.

August Troendle: Yes. I was going to the second digit to start with your idea. 1.2 something. So 1.22 to 1.25 is kind of what I was trying to say.

David Windley: Right. Figured as much. On the cancellations, just thinking more precisely about how you guys book. So the cancellations that you’re taking, you’re referencing today were taken as bookings already in the past, I would presume. And given your late — your kind of bookings very close to when the study starts, that suggests to me that maybe these studies were already started. Maybe you could talk about whether those cancellations are having any near term impact on your actual revenue cadence.

August Troendle: Yes, they do. These are ongoing. You’re right. These are studies that were in backlog, were running and do have an effect on near term revenue. But again, we do feel confident in our — in this year’s roughly 15% direct revenue in spite of that. And they were not massive. They were outside of our normal range. They did result in what would have been an in-line booking quarter to push it to a flat quarter. So that’s kind of how it played out.

David Windley: Got it. And then you also commented about win rate. In that regard, are you referencing win rate of initial award notifications from a couple of quarters ago that then manifest in lower gross bookings to be taken in this quarter? Or are you talking about like IANs and the award rate in the current quarter? I’m just trying to make sure I’m calibrating correctly on the commentary.

August Troendle: Yes. So whenever I talk about win rate, we’re talking about what happened in the current quarter and do not necessarily reflect changes in backlog. So they are awards. They’re wins or not wins, which would be initial awards, most of which do not appear in the current quarter. So I wouldn’t refer to winning a lot because a lot of things were put into backlog that quarter. They’re kind of a mixture of things that happen currently and things in the past, et cetera.

David Windley: Got it. And then on the cost points and productivity points that you’re making, and you mentioned, I think, moving some costs around by geography. Could you elaborate on that a little bit? Are those — are you offshoring some functions to take advantage of labor arbitrage or what’s going on there?

August Troendle: That’s correct. That’s exactly it. But partially on the on the IT side, but partially on operation side, too. Yes.

David Windley: And any quantification you can give us on what you think that might yield over time?

Kevin Brady: No, I don’t. We don’t pick particular specific financial goals on that, but we are moving a number of things to some cheaper geographies, both in Europe and in India. So it — but this is not going to be drastic, but I do think will provide some support for keeping our productivity improving over time.

David Windley: Yes. I’m going to ask one more and I apologize for anybody who’s behind me. But on the pass throughs, last year, the elevated level, you had talked about a few factors, but one of those was inflation coming through from the sites, essentially sites asking for more reimbursement for their participation in the trials. I wondered if — I mean, acknowledging everything that’s already been said, I wondered if that is persistent, or if some amount of that inflation or site rates, so to speak, has started to normalize in a way that would actually cause these pass throughs to bias lower.

August Troendle: I don’t think we could look at the current miss on pass through projections as reflective of that change. I mean, these are things that have been in backlog, et cetera, for a while. I do think that the inflationary spiral that we saw after COVID and the last few years, I think that’s done. I mean, I don’t know that we’re going to see a reversion to prior pricing, but I don’t think there’s a continued spiral. So it is certainly moderated, whether it will pull back down as staffing at sites improves, there was really a crunch at one time. And the bidding for staff and the kind of premium was substantial, or at least appeared that way in terms of inflation. But I don’t see that as being an acute issue. So it may come down slowly over time, but I don’t think there’s an acute change.

David Windley: Okay. Thank you.

Operator: Thank you. And I’m showing no further questions at this time. And I would like to hand the conference back over to Lauren Morris for any 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 second quarter 2024 earnings call.

Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.