Good day, ladies and gentlemen, and welcome to the Medpace's Second Quarter 2023 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 second 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 investors.medpace.com. With that, I would now like to turn the call over to August Troendle.

Good day. I'm going to make a couple of quick comments on the business environment and turn things over to Jesse and Kevin to review the details. The business environment continues to improve. RFP volume in Q2 was up sequentially over an already strong Q1. Award notifications rebounded strongly in Q2. We're making good progress toward a strong 2024 in building our backlog. Jessie?

Thank you. Good morning, everyone. Revenue in the second quarter was $460.9 million, which represents a year-over-year increase of 31.2%. Net new business awards entering backlog in the second quarter increased 27.6% from the prior year to $574.8 million, resulting in a 1.25 net book-to-bill. Ending backlog as of June 30, 2023, was approximately $2.57 billion. This was an increase of 18.6% from the prior year. We project that approximately $1.42 billion of backlog will convert to revenue in the next 12 months, and backlog conversion in the second quarter was 18.7% of beginning backlog. And 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.

Thank you, Jesse. And good morning to everyone listening in. As Jesse mentioned, revenue was $460.9 million in the second quarter of 2023. This represented a year-over-year increase of 31.2% on a reported basis and 31% on a constant currency basis. Revenue for the six months ended June 30, 2023, was $894.9 million and increased 31.2% on a reported basis and 31.3% on a constant currency basis from the comparable prior year period. Revenue growth for the quarter was favorably impacted by higher pass-throughs, particularly at investigator sites. As a reminder, pass-throughs impact both revenue and cost under the Accounting Standard 606 for revenue recognition. EBITDA of $83.6 million increased 22.8%, compared to $68.1 in the second quarter of 2022. On a constant currency basis, second quarter EBITDA increased 21.8% compared to the prior year. Year-to-date, EBITDA was $176.5 million and increased 27.4% on a reported basis and 25.2% on a constant currency basis in the comparable prior year period. EBITDA margin for the second quarter was 18.1%, compared to 19.4% in the prior year period. Year-to-date, EBITDA margin was 19.7%, compared to 20.3% in the prior year period. EBITDA margin for the quarter was impacted by reimbursable cost, which accelerated further during the quarter, driven by increases in investigator site cost and continued improvement in site activity across the portfolio. In the second quarter of 2023, net income of $61.1 million increased 23.7% compared to net income of $49.4 million in the prior year period. Net income growth over the prior year was primarily driven by higher EBITDA and a lower effective tax rate. Net income per diluted share for the quarter was $1.93, compared to $1.46 in the prior year period. Regarding customer concentration, our top five and top 10 customers represent roughly 23% and 30%, respectively, of our year-to-date revenue. In the second quarter, we generated $82.5 million in cash flow from operating activities. And our net day sales outstanding was negative 42.6 days. During the quarter, we repurchased approximately 126,000 shares, for a total of $23.9 million. As of June 30, 2023, we had $308.8 million remaining under our share repurchase program. During the quarter, we paid $60 million against the credit facility, and our net debt position at the end of the quarter was $15.9 million, which was composed of debt of $55 million and cash of $39.1 million. Moving now to our updated guidance for 2023. Full year 2023 total revenue is now expected in the range of $1.84 billion to $1.88 billion, representing growth of 26% to 28.8% over 2022 total revenue of $1.46 billion. Our 2023 EBITDA is now expected in the range of $340 million to $358 million, representing growth of 10.4% to 16.2% compared to EBITDA of $308.1 million in 2022. The revenue guidance anticipates the higher second quarter investigator site activity and costs continue the balance of the year, as well as continued growth in direct service activities. Guidance is based on foreign exchange rates as of June 30, 2023. This guidance assumes a full year 2023 effective tax rate of 17.5% to 18.5% and $31.8 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 $256 million to $271 million. Earnings per diluted share is now expected to be in the range of $8.04 to $8.50. With that, I will turn the call back over to the operator, so we can take your questions.

Thank you. Our first question comes from David Windley from Jefferies. Your line is open.

Hi, good morning. Excuse me. Good morning. Thanks for taking my questions. I wanted to dig in on the site commentary from a few different angles. August, I think, well several of you actually commented that the level of throughput or activity at sites is improving. I wondered what you would attribute that to. Is it better staffing, or is it perhaps higher levels of payment to them to either support them or incentivize them to get more done?

Yeah. Dave, this is August. I think it's a combination of things. In general, I think staffing is improving at sites and operations are becoming more normalized. There's a lot of disruption for quite a bit of time. Now, the reimbursement to sites has gone up in many cases, and in some cases, that helps, but it's fundamentally staffing. The other reason our costs are going up and our activity is also the positioning of programs that a lot of awards over the last period of time and things getting into the rapidly recruiting phase of trials. But I think it's all good news, and that, in general, I think things are getting back to a normalized pace. And things are moving along nicely. That speaks well for our performance on trials.

Thank you for your insight. Can you estimate the positive impact on your direct revenue? I'm trying to understand how much of the increase in pass-throughs is driven by inflation versus how much is due to increased throughput, which would contribute directly to your revenue as the CRO. How should we anticipate this trend continuing over the next several quarters?

Yeah. I mean, I think that's difficult to try to sort out. There are obviously some inflationary effects. And I guess you could look at the inflationary effect on both sides. Although our margins are strained by the fact that our contracts are fixed price and last for a number of years inflation, already assumptions made at the time of execution of the bid for a project. So, there is quite a bit of lag for that. Some site costs have been raised, kind of midterm, and you can say there is some bit of inflation, and that's outpaced our inflation, I think site inflation. But how much increased volume at sites doesn't necessarily translate directly into increased direct fees. I mean, it drives a number of direct fees, but it's not a direct relation. It depends on the type of trials you're doing. Some trials have more indirect as opposed to direct, and it depends on the sort of the size of trial and the type of trial. It's really impossible, I think, to try to sort that out in terms of what percent is being driven by different factors. But we do see good traction in activity. I think that is driving direct revenue, and we will see a ramp in direct fees and growth of the company overall. The indirect, partially because they were depressed during the pandemic, and things are becoming better and better online, I believe, outpaced as there's been a recovery of growth in RFPs, and there has been a greater amount of inflation, so we might consider there to be some amount of increased average percentage of pass-throughs as part of projects going forward. But a lot of it's driven by the individual uniqueness of a project. So it's hard to sort that out. But we're growing well, both direct and indirect fees, and it's not just an inflationary effect of investigator costs.

Got it. Last question for me. If I neutralized for the difference between what you experienced and my expectations regarding the impact of higher pass-throughs on margin, it seems like the effect would be about 90 basis points. More importantly, the first quarter showed a high relative margin, but on that same basis, it appears that normalized margin declined by around 300 basis points. Could you discuss mix effects, hiring trends, or other factors that may have influenced the margin aside from the impact of pass-through dilution?

Kevin, you want to?

Yeah, Dave, this is Kevin. As I talked on the first quarter call, we did expect some headwinds related to our incremental hiring and then just wage inflation, that being our annual merit hitting in the second quarter here. And so, we did see some of that inflationary impact and the impact of the hiring that we've done. We see that impact in the second quarter in addition to, as you mentioned, the impact from the reimbursable costs.

Got it. That's all for me. Thank you very much.

Thank you. One moment for our next question. Our next question comes from Max Smock with William Blair. Your line is open.

Hey, good morning. Thank you for taking our questions. I wanted to start off just following up on Dave's questions on pass-throughs here. August, you mentioned being back at sort of a normalized level. Do you think it's fair to say we're at the right level now in terms of pass-throughs as a percent of total revenue, or could there be potentially some headwind at some point in the future as pass-throughs are lost? Thank you.

I'm sorry. So the question is, do I think that the level percentage of pass-throughs as a part of our total revenue will remain the same going forward?

Yeah.

Or would there be a headwind and it dropping off?

Potentially, a headwind and it dropping off? I mean, I guess the question is, yeah, is it going to remain kind of at this 38%-39% level that we saw in the second quarter? Or do you think that growth slows here as we move into the back half of 2023?

Yeah, I think projecting precisely where it's going to go in a given quarter is difficult. I do think that it's not going to continue rising beyond that significantly. And I think it will tend to normalize a bit lower over the longer term. But I don't want to try to pick particular quarters. A lot of things are difficult; it is very difficult to project the rate of recruitment and the rate of direct or indirect fees. It's a lot easier for us to project direct fees. So, I don't want to get into trying to clarify that in terms of a model. But I do think that we're kind of at a higher level of indirect. But again, it's the type of studies you're doing that can influence things quite a bit. And it's not just the recovery from COVID. This is a new normal necessarily. It's going to vary over time.

Yeah, Max, as mentioned, it is very difficult to forecast the pass-through costs. But just in our guidance, we do expect it to be elevated for the balance of the year. We're not going to give a specific percentage, but we do expect it to be elevated; that is an assumption in our guidance.

Yeah, that's helpful. Thank you both. I guess, Kevin, following up on that point that you mentioned, expected to be elevated, that's incorporated in the guidance. But be curious to hear what is baked into the guidance for direct fee revenue in particular, up 24% year-over-year so far here in the first half of 2023? Can you just talk about what you have embedded for direct fee revenue in particular as we move into the back half of '23 and into 2024?

Yeah, I mean, we're not going to speak to 2024 at this point. In terms of 2023, the largest portion of the guide increase was driven by the elevated pass-throughs. And so that, again, coming back to my comment on that we do expect pass-through costs to be elevated similar to what we saw in the second quarter is what's built into our guidance.

Got it. Could you provide a brief update on backlog conversion? Last quarter, it was mentioned that it might decrease to 17.5%. How should we anticipate backlog conversion progressing from here? Also, have there been any adjustments to your assumptions regarding the mid-1.2 range book-to-bill for 2023?

Yeah, good question. I did expect the burn rates to come back down. But obviously, with the increase that we saw in pass-through activities that did remain elevated, at least at that higher 18%. I think we'll be in that kind of 18.5% range the balance of the year, or the booking of about a 1.2-ish to 1.25 range.

Sorry, Kevin. Just to clarify that 1.2 to 1.25 range, that's for the back half of the year, or is that for 2023 in total?

That's for 2023.

Got it. Thank you.

Thank you. One moment for our next question. Our next question comes from Sandy Draper from Guggenheim. Your line is open.

Thank you very much. I want to address the question regarding inflation, pricing, and pass-throughs in relation to bookings. We've had another very strong quarter for bookings, with an increase of nearly 30% year-to-date compared to last year. Can you discuss whether any of this is related to your new business which you can price in line with inflation? How significant is that impact? Additionally, without expecting exact figures, could some of the trials you are currently signing involve more pass-through revenue? I'm trying to understand if there are factors contributing to that growth rate or if it is primarily due to an improvement in the markets, with the mix of businesses being consistent, resulting in a clear nearly 30% growth.

Well, I think things are growing across the board. We've had a greater amount of pass-through growth and direct growth just lately. It's difficult enough to get into trying to sort out pass-through bookings and direct bookings and all the rest of it. It is difficult to get back to a 605-type of look at things. But look, there is a lag between winning work and it working its way through. Things look very good from our perspective in terms of the opportunities now. I mean, there was a time for several quarters that award notifications and RFPs, and overall business environment had softened. That's come back quite a bit. A lot of its pivot to better-funded clients. I don't know how much of it's funding itself, but the business environment has improved quite a bit. So, we're lining up new work, and I think we're going to have good growth going forward this year and next. We're not going to get into specifics on 2024 and guidance there until next quarter. But, things are looking much improved over what they were a couple of quarters ago. So, I think it looks good, trying to sort out and getting back to a 605-type of look at things is difficult to do. Kevin or Jesse, do you have any comments? No, I think it was well said. If you look at kind of the composition, we don't see a significant change. But it's kind of hard to sort some of that out, just given the overall portfolio that we have.

Okay, I appreciate that. That's definitely helpful commentary. And maybe one follow-up on the hiring side. I believe you guys were targeting, I think it was close to 20% growth, I think that's right. You're tracking sort of mid-teens. I know you guys set an aggressive target, but would just love to hear sort of your updated thoughts on your targets for hiring. Do you feel like you're progressing well? And again, it doesn't look like there's any indication that you guys would be slowing down hiring, but just any comments on the on the environment and how you're tracking towards your goals for hiring? Thanks.

Yeah. Hi, it's Jesse. We're progressing well against goals. It is still a challenging environment. I would say for the year, we're likely going to end up in the high-teens to 20% growth for the year.

Yeah, maybe I'll add to that one part of that. The one good thing is turnover has really dropped back to normal pre-pandemic or maybe even lower in many cases. And so, the churn has dropped and makes things a lot easier to manage. So, I think we're in good shape with hiring and staffing.

Super. Thanks, August and thanks.

Thank you. And one moment for our next question. We have a question from John Sourbeer from UBS. Your line is open.

Hi, hello. This is Chin Shi calling in for John Sourbeer. Thanks for taking the question. So given the current funding environment and your year-to-date performance, are you taking share versus peers? And do you have any commentary on how is Medpace winning?

Are we taking share, you asking?

Yes, that is correct.

I’m not entirely sure what that means. Our growth has been consistent year after year. We have a slide in our presentation that shows our revenue, EBITDA, and net income growth. On an entirely organic basis, we have surpassed the growth of our peers. Most analysts talk about bookings as a measure of our market share, and based on that, it seems we've been losing share for about a decade. However, I prefer to focus on revenue and profit. From that perspective, it appears we are gaining share, but I can't provide a specific figure to quantify that.

Thank you. Sort of second one is, have you noticed any increase in project delays since 1Q, any color on that?

Yeah, I mean, things overall have been accelerating since the first quarter.

Thank you very much. That's all for me.

Thank you. Okay, well, our next question comes from Eric Coldwell from Baird. Your line is open.

Well, thank you very much. I should have lowered my hand. I think all of my topics have been covered. But congrats on a good quarter. And I look forward to future updates. Thank you.

Thanks, Eric.

Thanks, Eric.

Yeah. Thanks.

Okay, I'm showing no further questions at this time. I'd like to turn the call back to Lauren Morris 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 on our third quarter 2023 earnings call.

This concludes today's conference call. Thank you for participating. You may now disconnect.