Good day, ladies and gentlemen, and welcome to the Medpace Fourth Quarter and Full Year 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 Fourth Quarter and Full Year 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.

Thank you, Lauren, and good morning, everyone. Our revenue for the fourth quarter of 2023 was $498.4 million, which represents a year-over-year increase of 26.5%. Full year 2023 revenue was $1.89 billion, a 29.2% increase from 2022. Net new business awards entering backlog in the fourth quarter increased 26.7% from the prior year to $614.7 million, resulting in a 1.23 net book-to-bill. For the full year 2023, net new business awards were $2.36 billion, an increase of 28.8%, and ending backlog as of December 31, 2023, was approximately $2.8 billion, an increase of 20.2% from the prior year. We project that approximately $1.53 billion of backlog will convert to revenue in the next 12 months, and backlog conversion in the fourth quarter was 18.5% 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.

Thank you, Jesse, and good morning to everyone listening in. As Jesse mentioned, revenue was $498.4 million in the fourth quarter of 2023. This represented a year-over-year increase of 26.5% on a reported basis and 26% on a constant currency basis. Full year 2023 revenue was $1.89 billion and increased 29.2% on a reported basis and 28.9% on a constant currency basis from 2022. EBITDA of $95.8 million increased 19.2% compared to $80.4 million in the fourth quarter of 2022. Full year EBITDA was $362.5 million and increased 17.7% from the comparable prior year period. EBITDA margin for the quarter was 19.2% compared to 20.4% in the prior year period. Full year EBITDA margin was 19.2%, compared to 21.1% in 2022. EBITDA margin compared to the prior year was impacted by higher reimbursable costs, personnel costs, and the foreign exchange benefit in 2022 behind the strong US dollar. In the fourth quarter of 2023, net income of $78.3 million increased 14% compared to net income of $68.7 million in the prior year period. For the full year 2023, net income was $282.8 million compared to $245.4 million in 2022, which represents a 15.3% increase. Net income growth lagging EBITDA growth was primarily driven by a higher effective tax rate of 15.8% compared to 13.3% in the prior year period. Net income per diluted share for the quarter was $2.46 compared to $2.12 in the prior year period. For the full year 2023, net income per diluted share was $8.88 compared to net income per diluted share of $7.28 in 2022. Regarding our customer concentration, our top 5 and top 10 customers represent roughly 23% and 30%, respectively, of our full year 2023 revenue. In the fourth quarter, we generated $156.4 million in cash flow from operating activities, and our net days sales outstanding was negative 48.3 days. We did not repurchase any shares during the fourth quarter. For the full year 2023, we repurchased approximately 781,000 shares for $144 million. As of December 31, 2023, we had $245.4 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 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 $400 million to $430 million, representing growth of 10.3% to 18.6% compared to EBITDA of $362.5 million in 2023. We forecast 2024 net income in the range of $326 million to $348 million. This guidance assumes a full year 2024 effective tax rate of 16% to 17%, interest income of $18.4 million, and 32 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 $10.18 to $10.87. Guidance is based on foreign exchange rates as of December 31, 2023. With that, I will turn the call back over to the operator so we can take your questions.

Our first question comes from David Windley with Jefferies. Your line is now open.

Hi, good morning. Thank you for taking my questions and congratulations on another successful year. From the absence of August's comments at the beginning of the call, I assume that things must be relatively stable and unchanged, but I would appreciate any additional insights. We've heard from some peers about a slowdown in activity during the second half of 2023, particularly in the last couple of months, especially in the biotech sector. I was curious if Medpace has experienced a similar trend or if you are observing something different. Thank you.

Hi, this is August. Last quarter, I mentioned that things were moving in many directions quickly and were somewhat unclear. Despite the challenges, the business environment remains strong. Looking ahead to Q4 and into Q1 of 2024, we now have a clearer direction. Funding is improving, and several projects that were previously stalled are now progressing. While we may experience some ongoing volatility, the trend appears to be shifting positively regarding funding and project advancement. It takes time to build up our backlog and generate significant revenue, so much of our progress is aimed at 2025. Overall, I believe there has been considerable improvement, especially following a turbulent period in Q3 and extending into Q4. We are starting to see a correction.

Got it. That's helpful. I have a follow-up question. Looking at your consistent burn rate, you're entering 2024 with a 20% backlog growth, but the projected revenue growth rate is slightly lower. This suggests you're anticipating some moderation in the burn rate. Additionally, you've been a bit lighter on hiring in the fourth quarter. I want to understand how these factors interact. Typically, if you're expecting revenue acceleration, you'd increase hiring, and the opposite applies as well. So, can you clarify the relationship between your revenue growth expectations, the burn out of backlog, and your current hiring situation?

Sure. Our burn rate and conversion rate fluctuate, having been around 17.6% in Q4 of '22 and rising to over 19% in Q3. While it tends to stay within that range, there are variations. I don’t foresee a long-term downward trend in contrast to many other CROs. Staffing needs will be driven by our revenue growth; last year, we aimed for over 20% growth, and for this year, we are targeting approximately 15% growth in total revenue. This is expected to necessitate about a 10% increase in staffing. Factors like inflation and productivity also play a role, with lower turnover contributing to savings and productivity gains. We initially hired ahead of growth expectations, and now we anticipate about 10% growth this year. As our backlog increases, we expect growth to accelerate as we approach '25. Our projected 15% growth this year is likely a baseline, and hiring will follow, but we have time to make these adjustments without rush in the next few quarters.

Okay. That’s helpful. Thank you.

Thank you. One moment for our next question. And our next question comes from John Sourbeer with UBS. Your line is now open.

This is Lucas on for John Sourbeer. I guess, first off, any updates on how RFPs are tracking? I believe those were said to be near record levels at 3Q.

We provided a lot of interim metrics during this volatile period because there's a desire for more insight into our situation, even though many of these metrics can be hard to interpret. We're aiming not to get too bogged down in details like we did previously. Overall, I can say the metrics remain strong. They were very strong last quarter, with initial awards at record levels and our fees also quite robust. Year-over-year, things continue to be strong, following a solid business environment in Q3, and we are seeing a reasonably strong business environment carry into Q4.

Okay. Great. And then just one last question. Pass-throughs as a percentage of revenue, it looked like they were about the same as last quarter. I guess any additional color on what's driving the elevated level of pass-throughs and when you could expect that to normalize?

Yeah. As we said kind of in the last quarter, it's really driven by a couple of things. One is just the inflationary costs that we're seeing at investigator sites. Just the activity in investigator sites is picking up, and really just the mix of projects that we have in place and some large Phase III studies are really driving that acceleration. And we do expect those elevated costs to continue into 2024. Now when or if we'll see a retraction back to more normal levels, it remains to be seen, but we do expect it to remain elevated here through 2024.

Okay. Great. That was all I had.

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

Hey, good morning guys. Thanks for taking my questions. So just following up on Dave's question on headcount earlier. August, you mentioned about 10% growth in '24 but in the past, I think you've talked about headcount growth being more in line with the mid-teens revenue growth that you're expecting this year. So I know you talked about it some already but just wondering if there's anything else that's enabled you to pull back some on those hiring plans a little bit? Is it due to a lower outlook for direct revenue next year, or is it more just due to maybe some of the efficiencies you've been able to drive more recently as you scale the business?

Yeah. I think a lot of it compared to our first look is turnover. Turnover has really come down to a very, very tight level. And the amount you have to hire in advance, kind of ahead of the curve, depends upon keeping staff. I mean, if there's a lot of churn, there's a lot of hiring and you've got to go in with a much higher number in terms of staff to beginning of the year. So I think the big driver is that productivity increase. I think that we were thinking that turnover might still be high so we have to continue to hire at a fast rate. But turnover has dropped very nicely. And that is the biggest driver. I think our expectations on direct revenue is the same as it was along with our revenue. We expected it to be about that 15%, both on the top line and total and direct. And if anything, we see an improvement in the business environment, which would imply greater growth in the Q4 next year kind of timeframe. These things do take quite a bit of time, but things are looking very good for that. And that's why I say I think we're looking at our low in terms of a growth year of 15%. So I think that will take off, but I think we have time to do that, hiring as things ramp late in the year.

Makes sense. And maybe just segueing off that. So I wanted to drill in a little bit on some of the drivers behind the increased outlook for EBITDA next year, given you didn't change your outlook for revenue. And it sounds like your expectations for direct fee versus pass-throughs are consistent from that initial guide. And so beyond maybe a pullback in hiring relative to your initial expectations, is there anything to call out in terms of what's driving that increased outlook for EBITDA in 2024?

We are not providing guidance for 2024, but the situation looks promising. After a challenging period with numerous cancellations and funding issues, we are seeing improvements. In the past three to four months, we have noticed a clear upward trend in the initiation of projects, which brings us hope. However, it's important to note that these projects take time to commence and generate revenue, often spanning multiple quarters. Nevertheless, we feel more optimistic about the upcoming year and beyond.

Got it. And then maybe just sneaking a final one in here for me. Competition and just thinking about share gains here. August, when we talked at the end of last year, you mentioned seeing higher-quality opportunities maybe than you have in the past and winning a greater share of those than maybe you would have expected historically. Just wondering if that has continued here given maybe some potential disruptions from one of your competitors recently? And just any thoughts on how your win rate has trended over the last couple of quarters in particular?

Our win rate has been very strong over the past two quarters, surpassing the long-term trend, which is encouraging. However, these figures can fluctuate. While some focus on market share, I prefer to focus on revenue, as that’s how I evaluate our performance. There are various ways to measure backlog, and conversion plays a vital role. I'm not sure what it means to gain market share in terms of book-to-bill ratios, but I concentrate on revenue and its trends over time. We're experiencing organic growth at rates that are significantly higher than the industry average. Clearly, we’re effectively capturing market share. While I cannot pinpoint the exact sources of that share gain, our growth rate considerably exceeds that of our competitors, and I believe this will continue. Though this year may reflect a lower growth rate of around 15%, we have historically outpaced the industry growth rates.

Got it. Thank you for taking our questions.

Thank you. One moment for our next question. Our next question comes from Jack Wallace with Guggenheim Partners. Your line is now open.

Hey, thanks for taking my questions and congrats on another great quarter. It sounds like things are getting better on the demand front. I was wondering if you could also just touch on cancellations, how those track in the quarter? And I guess depending on the funding environment, sounds like those should be in a pretty good shape as well. Is that fair to say that it's baked into the outlook, kind of a more normalized reduced level of cancellations in the last couple of years?

Cancellations were within a good range, consistent with our usual levels. We experienced a spike in 2022, but things returned to a reasonable rate after the first quarter, remaining stable throughout Q2 to Q4. We expect them to continue to stay below 4.5%.

Yeah, the expectation for '24 is it stays within our normal range.

Thank you. That's helpful. And then the comments you made earlier, August, about the kind of acceleration of decisions potentially just around funding and the like. But I did notice that your customers out of your top 10 look like they were down sequentially in the quarter in terms of revenue, and I wasn't sure if that comp was any more at that cohort or if there's anything else to call out with that revenue trend because it does sound like everything you're saying is that things are going well and continue to get better and expected to get even better than that. So I just wasn't sure if there was anything to call out from a customer cohort standpoint? Thank you.

No, I really don't have anything. If the smaller clients are starting to unfreeze, that could eventually lead to a proportional reduction in top 10 revenue as newer clients come in. However, I think it's too early to expect that, and I don't draw any conclusions from it.

Excellent. Thank you so much. Appreciate it.

Thank you. And one moment for our next question. Our next question comes from Eric Coldwell with Baird. Your line is now open.

Thanks. Good morning. First question, could you provide an update on the labs business and any early clinical developments? I understand you've made some internal expansions, including bringing certain microbiology and parts of pathology in-house. I'm curious about the traction you're seeing there and how well you're able to cross-sell those new solutions.

Yeah, Eric, it's Jesse. The lab is growing nicely along with the business. And the expansions in terms of investments in the lab, we've been kind of around the globe with different parts of our geography needing expansions, which for the lab tend to be on a more a step basis. It's not as linear every year, but we outgrow areas. And we're always looking at the full suite of offerings, whether that's standing up a specific test or an essay or bringing in wholesale capabilities. And the things we've invested in recently and things we've added have been off to a good start.

Good to hear. Next question, revenue phasing. So a bit of a setup here, maybe wonky, but hopefully you can muscle through it with me. So on one hand, really tough comps going into '24. I mean, the first half of last year, you grew over 31%. At the same time, 15% revenue guidance, consistent, very good, excellent compared to the peer group. I'm just curious, 26%, 27% growth in the fourth quarter, do we drop immediately here in the first quarter and then recover or not recover but reaccelerate in the back half as the funding and the demand is strong and you think things are going to pick up? There was a mention of a better fourth quarter or do you start stronger and phase down through the year? I'm just trying to get a sense on how to model this revenue phasing, given, one, tough comps but, two, the most recent quarter, you grew nearly 27%. So where do we go here in Q1 and then phase through the year?

Yeah, Eric, this is Kevin. When considering the quarters, it's clear that our revenue can be quite variable. I wouldn’t highlight anything specific regarding whether we will see an increase in Q1 followed by a decline or if we will maintain steady growth throughout the quarter. I'm not certain about that. As August mentioned, if conditions improve, there is a chance for increased activity in the fourth quarter and into 2025. However, I don't have any specific insights to share. I believe the first quarter will likely show better margins than the rest of the year, similar to our experience this year, due to recurring wage inflation pressures at the end of Q1 and the beginning of Q2. But there’s nothing else significant to mention on that topic, Eric.

The market has been highly focused on the GLP-1 category. We often hear about the major pharmaceutical companies involved in that area, but there are numerous trials underway, and Medpace has a significant track record in metabolic studies. I'm interested to know if you're observing any trial demand in GLP-1s? Are you engaged in that market? Is it contributing to your win rates or RFPs? I'm trying to understand how significant that has been, if at all, up to this point.

We don't have significant exposure to GLP-1s directly. While there is a bit more involvement with obesity, GLP-1s are mostly a large pharmaceutical phenomenon in terms of spending, and they haven't contributed meaningfully to our revenue at this time.

That's actually somewhat reassuring and good, I think. Last question. We have seen a number of companies this quarter that we find out, maybe somewhat after the fact that OpEx looked a little high in the quarter, and we got some pickup below the line. We weren't quite sure why. I wouldn't call it a big notable item at Medpace this quarter but I am curious if you had any unusual items running through the P&L or abnormally large changes in the P&L due to things like deferred compensation adjustments or anything else? That will be my last one. Thank you.

Yeah, Eric, nothing on deferred compensation. We don't have a deferred comp program. The stuff that for us that's sitting in kind of miscellaneous income, it's primarily going to be foreign exchange or VAT. And we do have some investments that roll through there as well. And the volatility is typically caused by FX but nothing specific to call out in that particular area, just kind of the normal fluctuations that we see in those three buckets quarter-to-quarter.

All right, well good stuff. Great job, thanks, guys.

Thanks, Eric.

Thank you. This concludes today's conference call. I would now like to turn it back to Lauren Morris for 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 first quarter 2024 earnings call.

Thank you for participating. You may now disconnect.