Medpace Holdings, Inc. Q4 FY2020 Earnings Call

Good day, ladies and gentlemen, and welcome to the Medpace Fourth Quarter and Full Year 2020 Earnings Conference Call. As a reminder, this call may be recorded. I would now like to introduce the host for today's conference, Kevin Brady, Medpace's Executive Director of Finance. You may begin.

Good morning, and thank you for joining Medpace's Fourth Quarter 2020 Earnings Conference Call. Also on the call today is our President and CEO, August Troendle; 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-19 on our business, 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 to discuss our financial results and 2021 guidance.

Thank you, Kevin. Good morning, everyone. Our net new business awards entering backlog in the fourth quarter increased 27.6% from the prior year to $358.6 million, resulting in a 1.38 net book-to-bill. For the full year 2020, net new business awards were $1.2 billion, an increase of 7.4% and ending backlog as of December 31 was $1.5 billion, an increase of 20.1% from the prior year. Revenue was $259.7 million in the fourth quarter of 2020. This represents a year-over-year increase of 13% on a reported basis, and 12.2% on a constant currency organic basis. Full year 2020 revenue was $925.9 million, which represents a 7.5% increase from 2019 or 7.3% on a constant currency organic basis. EBITDA of $60.2 million increased 46.3% compared to $41.1 million in the fourth quarter of 2019. Full year 2020 EBITDA increased 25.5% to $187.8 million compared to $149.6 million in 2019. On a constant currency basis, fourth quarter and full year EBITDA increased 46.4% and 24.6%, respectively, compared to the prior year. EBITDA margin for the fourth quarter was 23.2% compared to 17.9% in the prior year period. For the full year, 2020 EBITDA margin was 20.3% compared to 17.4% in 2019. The higher margin was primarily attributable to lower reimbursed out-of-pocket expenses and employee-related expenses as a percentage of revenue. In the fourth quarter, 2020 net income was $50.9 million compared to net income of $29.8 million in the prior year period. For the full year 2020, net income was $145.4 million compared to $100.4 million in 2019. Net income growth was primarily driven by higher EBITDA as well as lower amortization, effective tax rate and interest expense. Net income per diluted share for the quarter was $1.35 compared to $0.78 in the prior year period. For the full year 2020, net income per diluted share was $3.84 compared to net income per diluted share of $2.67 in 2019. Regarding customer concentration, our top 5 and top 10 customers represented roughly 17% and 25%, respectively of our 2020 revenue. In the fourth quarter, we generated $105.5 million in cash flow from operating activities, and our net days sales outstanding decreased compared to the third quarter from negative 27.4 days to negative 33.6 days. During the quarter, we repurchased approximately 411,000 shares at an average price of $115.42 for a total of $47.4 million, and we have $102.6 million remaining under our current share repurchase authorization. We ended the fourth quarter with $277.8 million of cash, no outstanding debt and $50 million of undrawn capacity on our revolving line of credit. Moving now to our guidance for 2021. We are now forecasting total revenue in the range of $1.075 billion to $1.175 billion for the full year 2021, representing growth of 16.1% to 26.9% over 2020 total revenue of $925.9 million. Our 2021 EBITDA is expected in the range of $205 million to $225 million, representing growth of 9.2% to 19.8% compared to EBITDA of $187.8 million in 2020. We anticipate our 2021 effective tax rate to be in the range of 15% to 16%, we have assumed 37.8 million fully diluted shares for 2021, and there are no share repurchases in our guidance. We forecast 2021 net income in the range of $154.5 million to $170.5 million and earnings per diluted share in the range of $4.08 to $4.50. With that, I will turn the call back over to the operator so we can take your questions.

And your first question is from the line of Dave Windley of Jefferies.

I wanted to understand a little bit better your expectations, Jesse, around kind of backlog conversion. I know in the slide deck you gave the percentage of your backlog that you expect to convert over the next 12 months. But also looking at your conversion rate as it has recovered from the COVID impact in Q2 '20, how are you thinking about backlog conversion? And maybe just help us a little bit with the cadence of revenue as it progresses through '21?

Go ahead, Jesse.

Yes. Thanks, Dave. As it relates to revenue cadence, we are anticipating revenue to increase as we move through the year. So do expect revenue to be potentially slightly back-end weighted, second half versus first half of the year. But as you know, quarter-to-quarter, a number of different things can cause some volatility in the quarter-to-quarter revenue. So that's always a factor there. On the burn rate, it did tick up in the fourth quarter. The average for 2020 was, I think, 17.3%. So how that burn rate continues through the next four quarters really depends on the strength of the business environment, but I think kind of a 16% to 18% range is a reasonable expectation.

So if I'm right to interpret that from what you just said that the burn rate comes down a little bit sequentially in the first quarter or maybe more than a little bit if 16% is the lower end of your range. I mean, that's a couple of percentage points lower. Does it drop kind of within that range in the first quarter or the first half and then scale back up over the course of the year? Is that how you're thinking about that?

Not necessarily. I mean, I think it could be up or down in any sequential quarter-to-quarter as we go through these next couple of quarters. It really depends on the size of the awards, obviously, relative to the revenue sequence. But yes, I think I would not expect it to necessarily stay at or above Q4 levels necessarily.

Okay. And then a follow-up on the cost side, August, I hear your voice in there. I wasn't sure if you were on the call or not. But you've talked in the past about 20% top line growth being kind of the upper bound of a comfortable level for Medpace, obviously now guiding higher than that. Wondering if there's anything we should know in there about relative pass-through versus direct service fee, but I'm thinking more in terms of your staffing levels and ability to meet that level of growth. I noted that your headcount growth in 2020 was about 3%, so slower than your revenue growth for 2020. So maybe you could talk about where you currently stand as it relates to the billable headcount to get those projects done.

Yes. I think we're in pretty good shape. We entered 2020 with a significant surplus of staff because we were anticipating growth and hoping for more than 20% growth in that year. However, that did not occur, so we didn’t require all that staff and probably didn’t need to hire anyone in 2020, despite the revenue increase later in the year. We typically hire in advance, and as you noticed in the fourth quarter, we are beginning to add to our headcount, but we were utilizing spare capacity until then. The revenue growth may skew slightly towards pass-throughs, as payments to investigative sites are increasing and could rise faster than direct costs throughout the year. Not all revenue requires scaling up staff, but we will align our scaling with revenue this year, anticipating continued strong growth going forward. I mentioned that aiming for around 20% growth is a reasonable target, and consistently achieving more than that over several years can be challenging. We have accumulated considerable spare capacity and need to manage that over time. Overall, I believe we are in a good position now. We will evaluate how things unfold in 2022, but we expect to hire in alignment with revenue growth this year.

Your next question is from the line of Donald Hooker of KeyBanc.

You recently announced a partnership with a consulting firm called Greenleaf Health, which I believe was a week or two ago. I would love to hear more about what this regulatory affairs consulting firm offers Medpace that you didn't have before and why you decided to partner with them instead of developing this capability in-house, which is traditionally how Medpace operates.

Yes. This is truly a partnership due to the unique staff they have. They employ several former senior FDA officials who provide valuable insights into regulations and their evolution. As we expand our regulatory team, we likely won't hire individuals with this level of experience. Their location in the Washington, D.C. area, close to the FDA, adds to their advantages. They possess capabilities that we typically don't have; we don't focus on standalone regulatory consulting. While we have competent regulatory professionals for trial execution and protocol development, for insights into evolving FDA trends, it's crucial to have people with recent firsthand experience. This partnership allows us to connect clients who would benefit from their expertise to them. In return, they can help us stay ahead regarding expectations in the ever-changing landscape of regulatory affairs. Overall, this is a significant opportunity and a strong partnership that will yield benefits for both parties.

Sure. If you don't mind, maybe just as a follow-up to your comments there, you referenced sort of evolving trends in the regulatory area. There are a lot of evolving trends in the regulatory area, obviously, but are there particular examples or case studies? Or just to maybe concretize it a little bit better for us, kind of what they're going to give. I assume this is going to help you guys grow over time for that particular case. Go ahead, sorry.

Sure. No, it's across a whole spectrum, but I think kind of a little bit of a focus for us was sort of the changes towards limited patient access and virtualization of trials and new technologies and their acceptability as endpoints for trials and how that's viewed. And so I think it's kind of played off of some of the changes that have been pushed, accelerated by the pandemic and better evolving trends in the industry overall. So that was kind of one of the starting places, but they have expertise across a breadth of regulatory affairs.

Sure. I have a follow-up question. Could you provide some clarity on the free cash flow as we approach next year and what an appropriate capital expenditure number would be to help us understand our free cash flow? I don’t recall you mentioning that. I know there have been some build-outs at headquarters, so I would appreciate your insights on working capital and free cash flow or working capital and CapEx to help us gauge the direction of free cash flow for next year.

Yes. Jesse?

Yes. Thanks, Don. Let's see. So for CapEx, we're anticipating around $44 million of capital expenditures in 2021 and then DSOs have continued to be favorable for us. And so from a free cash flow conversion standpoint, we had pretty high conversion in the fourth quarter, it's 162% of EBITDA. For the full year, it was lower; it was 121%. As we think about going into 2021, we certainly like when the environment gives us that kind of cash flow conversion. But as we think about our internal modeling, we do tend to model something less than that but it would not be out of question to have 100% or high 90s percent EBITDA to get to free cash flow conversion.

Your next question is from the line of Erin Wright with Crédit Suisse.

I just wanted an update on how underlying fundamentals are trending now, whether it's RFP flow or site accessibility or study startups? Are things generally normalizing? And what are you seeing kind of across the market as it stands today and kind of what you're anticipating as things potentially normalize, hopefully over the course of this year?

Sure, Erin. From a site perspective and considering the operational challenges of the pandemic, I don't think there's been any significant change since September. I expect Q4 and into Q1 to be fairly consistent in terms of access, our utilization of remote monitoring, and the tools we implemented early in the pandemic. There hasn't been any increase in availability, and I haven’t noticed any trend toward improvement in the last four or five months. I believe we still have a way to go before we see improvements. I do think we will return to a more normal state later in the year, likely around midyear. Some of the tools we've adopted may remain in use indefinitely. However, the challenges we faced back in September are still present, and we've been managing them as effectively as before. What has changed is that more companies are moving forward despite these challenges. We've navigated around those issues effectively, and programs are generally progressing well. There are definitely more clients advancing their initiatives. Regarding your question about RFP flow and related matters, I believe those are performing well. I don't see any changes in the last five months; it has remained strong through the fourth quarter and continues to show promise. We are still encountering many opportunities and programs moving forward.

Okay. Great. And then following up on hybrid-virtual decentralized trials. How do you think about your competitive positioning there? And do you think that you do need to make stepped up investments around that arena at this point? I mean, you've clearly adapted well in this sort of environment, but I'm curious how things are shifting in a post-COVID world. Do you need to step up investments around that arena?

Yes. I don't think they'd be material investments from our financial perspective. But I think we always are investing in technologies, wearable technologies for remote data review, et cetera. So kind of hybrid trials we do, and I think we are competitive. I think we will continue to invest in the area as it evolves, as we have in the past. I think virtual trials and truly sightless trials and things like that, I don't see that as a meaningful part of the marketplace in the foreseeable future for where we operate. So we're not really investing significantly there.

And your next question is from the line of Sandy Draper of Truist Securities.

I don't think this is a repeat question. I joined a bit late, so I apologize for that. As a follow-up to the last question about when we might return to a new normal, what do you expect to change when that happens? Clearly, you and many others in the industry are adapting well. From an operational standpoint, what changes do you anticipate? And Jesse, from a financial viewpoint, what changes do you foresee? One obvious possibility is that as people return to travel, expenses will increase. I'm trying to understand what other changes might occur when everything starts to reopen, considering you've made many adaptations both operationally and financially.

Sure, Sandy. Yes, we are still experiencing more virtual access to sites than we would like, which is more efficient under the current trial designs. However, we face limitations in direct site access that lead to inefficiencies. We are managing these challenges, but there is a backlog in some review processes that need to be done on-site. As a result, I anticipate an increase in travel needs to these sites. Additionally, as we return to normal, there will be more overall travel within the business, including our internal collaboration costs among teams as well as client visits. The pandemic has highlighted the value of electronic collaboration, which has been better integrated into our regular interactions with clients, and I believe this will persist. Therefore, I don't expect things to revert completely to how they were before. We will continue to work more efficiently in this aspect, but many of these costs will return, and travel will resume significantly. This change is likely to improve patient access to sites and, hopefully, lead to an increase in recruitment rates in many therapeutic areas, resulting in a greater need for on-site presence.

Thank you. And that does conclude the Q&A session. I'll turn the call back over to Kevin Brady for any closing remarks.

Thank you for joining us on today's call and for your interest in Medpace. We look forward to speaking with you again in the first quarter 2021 earnings call. Thanks, and have a good day.

Thank you. That does conclude today's conference call. You may now disconnect.