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.

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.

Good morning. I’d like to give a quick update on the business environment. The business environment continues to be challenging. Almost all 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 the 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 the quality of assets and likelihood of financing, tightened our ongoing monitoring of sponsor financial conditions, 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.

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 to $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. The 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.

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 from 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, which 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 growth lagging EBITDA 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 growth 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.

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

Thanks very much. I think there was a brief interruption. So my first question is directed towards Jesse and August. Considering the comments you made about the macro environment, August, and the implied EBITDA margin, it appears there is an increase in spending. Generally, I’ve perceived that when you are hiring and margins aren’t improving, it indicates a positive outlook for the business. However, if you are exercising some caution regarding hiring, I would like to hear your thoughts on this. It seems there are some cautious remarks about the macro situation, August, but at the same time, you are still hiring, and the margins suggest this trend will continue into 2023. Thank you.

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 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 in 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 signaling the caution. But we are making it through; currently, things are still going pretty well. I think that's all we can say.

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 interest rate environment. If there's something else in there, or are you not assuming as much free cash flow, out of which 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.

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 in the 4% range for that.

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

Hi, can you hear me? Okay.

Yes. Hear you.

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 those customers that maybe are a bit more at risk and in 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?

Sure, Max. Cancellation rate was up not drastically, but it did get outside of our usual kind of 5% range. So it was moderately elevated, was not in not a particularly striking increase, but slightly up. A portion of backlog that has clients that are at risk, I guess you might put that into our total group of funded 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. Jesse, do you have the number on the total portion of our clients that are non-partnered?

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

And then, as a follow-up regarding your plans for capital allocation, the stock is near all-time highs, and while you're indicating that things might be slowing down, you still have $450 million of share repurchase authorization. Could you help us understand your thoughts on share repurchases in 2023? Does it make sense to buy back stock given the current situation and the potential for slowdowns as the year progresses? Thank you.

Max, this is Kevin. As we've traditionally done, historically, 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 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, just a follow up. Around 60% of our backlog is with customers that are not partnered with large pharma.

Okay, that's helpful. Thank you.

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

Thank you for taking my question. In August, I'm looking for more insight to complement Sandy's question about the current environment. I recall that during last year's call, you expressed some caution, but you've managed to navigate things quite effectively. Although bookings growth has declined year-over-year, it is still positive. I'm curious about what factors are enabling you to achieve numbers that align with your growth outlook despite a challenging environment. Should we attribute this to conservative guidance or to a more robust sales effort that is identifying more opportunities, thus allowing you to manage the higher number of drop-offs? It would be helpful if you could provide additional details on how you are handling the current turbulence.

We previously discussed our efforts to expand our approach and enhance our business development pipeline, enabling us to be more selective and avoid the challenges we faced in the last cycle. This strategy has proven to be fairly effective, though there are limits to what we can achieve. Currently, we are experiencing increased churn and greater risks related to clients facing stalled financing, which poses a challenge. However, this doesn't preclude the existence of other options and opportunities, and we have successfully adapted to these changes. During the period before last year, we faced numerous opportunities and were able to choose programs that had stronger funding. Fortunately, we have had enough opportunities to adjust and address cancellations that have occurred. We remain cautious, especially in a volatile environment, and our guidance reflects a conservative stance. If the situation does not worsen as we anticipate it will not, we can potentially outperform our guidance.

Got it. Following up on that, as you shift towards new opportunities, it seems those opportunities and clients were likely connected to a competing CRO. Are you noticing that you’re gaining market share, and is being more competitive on pricing a strategy to help you access these new opportunities?

I believe that when we encounter opportunities arising from customers' dissatisfaction with a competitor, they are generally not focused on price. They don't approach us expressing that they're unhappy with pricing elsewhere; it typically stems from different frustrations. Analyzing market share through revenue growth is essential. Our revenue growth is strong, and I find other metrics like bookings somewhat misleading, since they hinge on conversion rates and various factors. Ultimately, it comes down to revenue growth, and I believe we have superior growth, indicating our market share is increasing. I do not attribute our performance to the current market conditions; rather, we have adapted well to different programs.

I have one last question that relates to the previous discussion. Are you cautious about the clients you add to your backlog, particularly regarding those without funding? It seems that these projects might have progressed significantly but used up their financing when they entered the backlog, and now they may need funds soon. Could you clarify that? Additionally, we've noticed that smaller clients, who often find it harder to secure capital, tend to negotiate tougher terms. If those are not about direct pricing, they might involve fewer upfront milestones or delayed payment terms. Your Days Sales Outstanding suggest that you're either not experiencing this or not accepting it. Could you provide some insights on your balance sheet, payment terms, and what's currently in your backlog?

Sure. Yes, I'll start there. You're absolutely right. In this environment, there is increased pressure to be flexible with financing coming in. We are also very determined to ensure advanced payment for our services. It's a negotiation, and clients who are more likely to secure funding tend to be better funded already, so we might be a bit more flexible there. However, in this kind of environment, we remain aggressive in making sure we are compensated for the work we deliver. This is evident in our Days Sales Outstanding. We generally have favorable payment terms due to the risks our clients recognize. I believe there is a balance to strike, but we handle it well. We are not compromising significantly to secure work and are not in a position where we lessen our terms to win projects. We are firm in our negotiations and prioritize getting paid. If it means losing work, then we will choose to lose it. And then your first question was about cancellations and how they occur because of funding.

I'm sorry, I need clarification on Max's question regarding clients in your backlog who are facing challenges in securing their next round of funding. I'm interested in understanding the situations that result in these clients being in your backlog despite lacking funding.

Many of our clients have secured funding for the initial phase of a program or a milestone that they consider crucial for their product. This could be an interim analysis or the first part of a study. However, there are also clients who believe they are fully funded for a project from the start, but due to unforeseen circumstances, such as other programs they are backing or mismanaged expenses, they may run out of cash before completion, relying on financial markets to bridge the gap. This situation is influenced by various factors. While some funding issues exist, the development of an innovative product tends to attract investment. Running out of funding isn't typically a fundamental issue; it's often tied to how well the product performs. During a trial, signals regarding safety or other factors may suggest that they want to proceed. The product may still appear interesting and promising, but it might not meet their expectations for a breakthrough, which creates challenges in securing funding for the next stage.

Yes.

Does that help?

It does. It does. Yes.

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.

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

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

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?

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.

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.

No. I think it's a challenging environment. We're taking it month-to-month. So far, things have been okay, but it’s a weaker climate. Our win rate has been very strong, which supports our performance, though it's always difficult to assess. We hope to maintain book-to-bill ratios above 1.2, but we'll have to wait and see.

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.

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.

Thanks for taking the questions.

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

Yes. Can you hear me?

Yes, we can.

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 or decline here in the fourth quarter? Any additional quantitative data would be helpful.

Yes. I don’t want to dive into the precise numbers, as they can fluctuate quite a bit. It did decrease slightly in Q4, but it remains within a historically strong range, which has been the case for the past year. We’ve experienced a very strong win rate, which I believe is due to our careful selection of projects and other factors. This has been a beneficial support for us.

When we think about macro operational challenges, there have been mentions in the industry about study sites not having access to adequate staffing or facing various supply chain issues in lab-based businesses. What is the external perspective on the operating environment? Is it improving compared to the last few quarters, weakening? And how does it compare today to a typical pre-pandemic operating environment?

It's been a really tight environment, especially at sites. The inflation rate at these locations has outpaced the wage inflation among contract research organizations and the rest of the industry, leading to significant challenges. There may be some signs of improvement, but it's still early, and there's been a lot of strain. The labor market remains tight overall, but it’s particularly pronounced at sites. We continue to see a challenging environment when hiring new employees, although we've found it substantially easier to recruit IT-related staff. Overall, it remains a historically tight labor market, and I don’t have much more detail to share on that.

That's great. I have a question for Kevin regarding the tax rate. Historically, there has been significant volatility in your quarterly tax rates, with this past year being no different, seeing rates around 6% to 7% in the first and fourth quarters, and about 20% in the middle of the year. Can you provide more details on what led to the low tax rate in the fourth quarter? Looking ahead, do you anticipate any volatility in the tax rate over the next four quarters? Are there certain periods where you expect the tax rate to be significantly above or below 18% that you would want to mention?

Yes, in the fourth quarter, our rate is significantly impacted by stock option exercises. The 7% rate in the fourth quarter was largely driven by a rise in stock prices and individuals exercising their options. Predicting when these options will be exercised is challenging. Ideally, as our operating income grows, the influence of stock options should diminish over time. Therefore, for 2023, it’s difficult to forecast the quarterly impact. For now, I suggest using a range of 17.5% to 18.5% per quarter, and we will monitor how it develops.

Okay. That’s all from me. Thank you.

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.

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.

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