Medpace Holdings, Inc. Q4 FY2024 Earnings Call

And good day, ladies and gentlemen, and welcome to the Medpace Holdings, Inc. Fourth Quarter and Full Year 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' remarks, there will be a question and answer session. Please press star one again. As a reminder, this call is being recorded. And now, I would like to introduce your host for today's conference call, Lauren Morris, Medpace Holdings, Inc.'s Director of Investor Relations. You may begin.

Good morning, and thank you for joining Medpace Holdings, Inc.'s fourth quarter and full year 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-Ks 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 investors.medpace.com. With that, I would now like to turn the call over to August Troendle.

Thank you, Lauren. Good day. Backlog cancellations in Q4 were within our normal range. Our book-to-bill ratio was 0.99, influenced by prior pipeline cancellations as well as the delay of some projects previously expected to enter backlog. RFPs were down slightly in Q4 compared to Q3 as the overall business environment weakened somewhat but remained up relative to Q4 2023. For the 2024 calendar year, backlog increased 3%. However, total awards and outstanding unperformed work, considering both backlog and pre-backlog awards, was down slightly. This reflects the high level of cancellations we experienced in 2024. All this provides a challenging backdrop to growth in 2025. Assuming cancellations remain in our historical range, and the business environment does not continue to deteriorate, we remain hopeful that we can achieve growth in bookings with a book-to-bill ratio above 1.15 in the second half of the year. Revenue growth for 2025 is expected to be in the low single digits. I will now turn things over to Jesse Geiger for comments on Q4.

Thank you, August, and good morning, everyone. Our revenue in the fourth quarter of 2024 was $536.6 million, which represents a year-over-year increase of 7.7%, and full year 2024 revenue was $2.11 billion, an 11.8% increase from 2023. Net new business awards entering backlog in the fourth quarter decreased 13.8% from the prior year to $529.7 million, resulting in a 0.99 net book-to-bill. For the full year 2024, net new business awards were $2.23 billion, a decrease of 5.4%, and ending backlog as of December 31, 2024, was approximately $2.9 billion, an increase of 3.2% from the prior year. Projected approximately $1.63 billion of backlog will convert to revenue in the next twelve months, and backlog conversion in the fourth quarter was 18.3% of beginning backlog. Now with that, I will turn the call over to Kevin Brady to review our financial performance in more detail and discuss our 2025 guidance.

Thank you, Jesse, and good morning to everyone listening in. As Jesse mentioned, revenue was $536.6 million in the fourth quarter of 2024. This represented a year-over-year increase of 7.7%. Full year 2024 revenue was $2.11 billion and increased 11.8% versus 2023. EBITDA of $133.5 million increased 39.3% compared to $95.8 million in the fourth quarter of 2023. Full year EBITDA was $480.2 million and increased 32.5% from the comparable prior year period. EBITDA margin in the fourth quarter was 24.9% compared to 19.2% in the prior year period. Full year EBITDA margin was 22.8% compared to 19.2% in 2023. EBITDA margin for the quarter and for the full year were favorably impacted by reimbursable costs, which decreased by 400 basis points and 180 basis points respectively from the comparable prior year periods. EBITDA margin also benefited from direct service activities and productivity on slower headcount growth. The fourth quarter saw additional benefit from foreign exchange behind the strengthening of the U.S. dollar in the quarter. In the fourth quarter of 2024, net income of $117 million increased 49.5% compared to net income of $78.3 million in the prior year period. For the full year of 2024, net income was $404.4 million compared to $282.8 million in 2023, which represents a 43% increase. Net income growth ahead of EBITDA growth was driven by interest income and a lower effective tax rate. Net income per diluted share for the quarter was $3.67, compared to $2.46 in the prior year period. For the full year 2024, net income per diluted share was $12.63, compared to net income per diluted share of $8.88 in 2023. Regarding customer concentration, our top five and top ten customers represent roughly 22% and 29% respectively of our full year 2024 revenue. In the fourth quarter, we generated $190.7 million in cash flow from operating activities, and our net days sales outstanding was negative 71 days. As of December 31, 2024, we had $669.4 million in cash. During the fourth quarter and full year 2024, we repurchased approximately 527,000 shares for $174.2 million. At the end of the quarter, we had $134.6 million remaining under our share repurchase authorization program. Moving now to our guidance for 2025. Full year 2025 total revenue is expected in the range of $2.11 billion to $2.21 billion, which represents flat to 4.8% growth over 2024 total revenue of $2.11 billion. Our 2025 EBITDA is expected in the range of $462 million to $492 million, representing a decline of 3.8% to growth of 2.5% compared to EBITDA of $480.2 million in 2024. We forecast 2025 net income in the range of $378 million to $402 million. This guidance assumes a full year 2025 effective tax rate of 18% to 19%, interest income of $30.5 million, and 31.7 million diluted weighted average shares outstanding for 2025. There are no additional share repurchases reflected in our guidance. Earnings per diluted share is expected to be in the range of $11.93 to $12.69. Guidance is based on foreign exchange rates as of December 31, 2024. With that, I will turn the call back over to the operator so we can take questions.

Certainly. And our first question for today comes from the line of Dan Leonard from UBS. Your question, please?

Thank you. Couple questions. First off, on the service gross margins in the quarter, I understand the pass-through mix component. I was hoping you could elaborate on some of the other factors that drove the outperformance on that line, whether they be headcount related or otherwise?

Hey, Dan. This is Kevin. No. It's really just the productivity of our existing staff and the programs that are in backlog progressing very nicely. And so it's really the kind of second quarter that we've seen great progress on the direct service side.

Okay. And then as a follow-up, what are the assumptions that would get you to the high end of your revenue guidance in 2025?

Yeah. I mean, really just the business environment improving a bit and programs that are sitting in that pre-backlog bucket progressing into the backlog as awards and those programs continuing.

Understood. Thank you.

Thank you. And our next question comes from the line of Max Fleishman from William Blair. Your question please.

Good morning, everyone. Thanks for taking our questions. August, you mentioned the business environment deteriorated some over the last couple of months here. My question is, are you surprised by that given the better funding environment that we saw in 2024? What do you think is behind that deterioration? Do you think it could just be some of these companies maybe pausing to digest some of the uncertainty caused by the election, or is there something else going on that you would call that is really driving that weakness?

I don't really have an explanation for it, and this is a subjective thing. RFP flow was fine. It's the qualitative aspects of the type and size of projects we're getting and the likelihood of them moving forward. I just thought it wasn't quite as robust as what we've seen in the prior couple quarters. That prior period was really kind of accelerating and it seemed to decelerate some. I don't know if it's because of the election and concerns about where things are going or what the situation is, whether it's going to turn around. I did note that it wasn't as robust as it had been the prior couple quarters in terms of our core business department. Now cancellations on the other side, there's kind of two sides to the environment: new opportunities may be weakening a bit, but cancellations were down in Q4 relative to the prior three quarters. So it was the first quarter of the year that we had a closer to normalized cancellation rate, although the cancellations were still toward the high side. So cancellations are improving. The business environment may be a little bit weaker. We'll have to see.

Understood. Thank you for that helpful commentary. And then just following up on your comments about some of those delays. I think you called out a couple that were expected to hit bookings in the quarter. Is there any color you can provide around what was behind that or those delays and how much visibility you have into those projects hitting bookings in the next couple of quarters here? And then how do you think about the risk that those delays eventually turn into cancellations in the first half of this year? Thank you.

I do expect those studies I mentioned, being delayed, to progress and be only slightly delayed, not greatly delayed. We do have some projects that are on a longer hold pattern, and there's always a risk that anything cancels. Cancellations are still top of mind in terms of risks to our performance this year. But I think most of what was pushed out of Q4 will hit here in the first half of 2025.

Understood. Thanks again for taking the questions. I'll hop back in the queue.

Thank you. And our next question comes from the line of Eric Coldwell from Baird. Your question please.

Thanks very much. Good morning. I'm curious about the revenue phasing expectations through the year with a zero to five percent growth range. Are you anticipating a big drop-off here in the beginning of the year and then a ramp towards the back half? Is it more linear through the year? And then what is the indirect revenue mix component or growth component? Is it down like you saw here in the fourth quarter and the deceleration seen over the last year? Are you expecting it to stabilize at this percent of revenue, go back up? What's the mix between direct and indirect fees, please?

Yeah, Eric. As it relates to the indirect, our modeling would suggest that 2025 as a percentage of revenue will be somewhere around where we landed in the fourth quarter here. So you're down from where we were in total year 2024 at levels similar to what we saw in the fourth quarter. What was the first part of your question?

Phasing on revenue. The zero to five range, are we starting at the low end and moving to a higher level in the back half, is it more linear growth through the year or just the thought process on timing the revenue production?

It will somewhat depend on how those programs progress into awards throughout the year. Certainly, we've got a pipeline of backlog opportunities. So I would expect there to be some linear progression throughout the year. I wouldn't expect a major step up in the first quarter here, but hopefully sequentially growing revenues throughout the year from there. But it will depend on how bookings progress as well.

And then if I could just squeeze in one more. Advanced billings, kind of an intriguing topic, doesn't get a lot of airtime, but you did show quarter-to-quarter increases in advanced billings in 2Q, 3Q, and 4Q. You finished the year with advanced billings up 27% year over year. I'm not quite sure what drove that and how that happens in a year where bookings were down 5% plus and down 14% in the fourth quarter. Revenue slowed. What's keeping these advanced billings at such a high level?

A lot of that is timing based on the active programs that are in backlog and how those programs are progressing. You saw the strong growth rates on the direct side of the business, and we try to create payment schedules and milestone payments that stay a bit ahead of the work that we're doing. A lot of it is timing related on how the mix of programs is going and our ability to bill according to milestones and collect against those. We stay on top of sponsors and credit and make sure we're getting paid as we're going to work.

Fewer clients that are not paying us. We continue work. Maybe that's it.

Thanks very much. Thank you. And our next question comes from the line of David Windley from Jefferies. Your question please.

Hi. Good morning. Thank you for taking my questions. I wanted to focus on the cost side a little bit. I wondered when we were together in November, you talked about retention being at very high levels, much higher than historical norms, and that was leading to greater levels of productivity. I think the expectation was that it was probably at a peak and couldn't get much better. The fourth quarter was better. It seems like at least some of your margin expectation next year assumes that that continues. So I wondered if you could provide a little more precision around the productivity levels of the staff, and when you would anticipate or if you are anticipating restarting hiring at any point during the 2025 calendar year or if the guidance basically assumes that staff continues to be relatively flat. Thanks.

Hey, Dave. In terms of productivity, it does remain at a very high level. Good productivity continues and good retention continues. A lot of experienced staff are continuing to work diligently on projects. Headcount growth was fairly flat in 2024. We do anticipate accelerating hiring here in 2025. We are targeting headcount growth in the mid to upper mid single-digit level for the year. How that progresses throughout the year will be somewhat determined by the business environment. But we do anticipate hiring and restarting the hiring engine more aggressively as we work through the year, and that will likely have a bit of an impact on margins.

We do expect headwinds on margins if you look at the guidance that's out there. And the other thing to call out on the question I answered previously relates to the indirect and reimbursable cost. We do expect 2025 to be at a level similar to what we saw in the fourth quarter, which would mean that as a percentage of revenue in 2025 it comes down a little bit.

Right. On other cost actions, one of the things you had talked about was the beginnings of investment in offshoring some back-office functions, maybe data management, things like that. Where do those stand, and are some of the benefits of that activity beginning to show through in your financial expectations?

We're just getting started there. That's more of a long-term play. We haven't really seen positive impact of that yet, but we are continuing to hire in India in a couple of back-office and administrative functions. Any margin help from that will be some, but it won't be a major margin driver in 2025. It's a longer-term play.

Got it. And then last question for me is around competition. It kind of comes back to bookings, but from a margin sustainability standpoint, what we hear is that in a weaker demand environment, bigger competitors are moving down into your more traditional space more aggressively. So I wonder if you're seeing that, and I would assume your reaction would be to not sacrifice price. August, could you speak to that?

The environment has tightened everybody's belt. Clients are funding challenged frequently, and there is heightened competition. Pricing is a part of that, and you have to be as efficient as possible. We have to be competitive and bring value to the table. Price is part of that, and we've had to defend our volume as well as our margin.

Got it. That's helpful. Thank you very much.

Thank you. And our next question comes from the line of Jalindra Singh from Truist Securities. Your question please.

Thank you, and good morning, everyone. Going back to the comment around biotech slow, making delays, etc. I understand it is tough to know what's driving that. But based on your conversation with these companies, are there any key catalysts they're watching for before they feel comfortable moving forward with the project? Related to that, have you seen any signs that sponsors are putting pressure on companies to put dollars into play? Because it seems funding is not an issue broadly, and if that's the case, it could create some pent-up demand in the near term. Any thoughts?

For our clients, funding is the issue. I can't speak to clients that have cash and don't want to spend it. Things take time; clients that have cash may not be ready with their IP to move forward for other reasons. I don't perceive a significant number of our clients holding on to cash despite having a program ready to move forward and not wanting to spend. I just don't see that, but I don't know.

Okay. That makes sense. And then my follow-up on the RFP trends in the quarter being down slightly sequentially versus Q3, can you speak a bit more to the quality of RFPs? Are you seeing customers prioritizing drugs with more promising data or later-stage trials? Is the mix of RFPs and focus still pretty consistent? And can you remind us where your mix is across phases one through four?

RFPs were okay in Q4. Q4 tends to be a little lighter in general. The dollar volume of RFPs was fine, but the qualitative side had fewer opportunities that looked promising in size and likelihood of moving forward. There was a bit more churn in RFPs. In terms of our breakout by phase, phase one itself is a very small part of our business—around a couple percent, perhaps one percent. If you include oncology phase one activity, you can throw that in with phase two and three. The majority of the business is in those categories. Phase two and phase three are somewhat comparable in dollar size. We don't have a lot of very late-phase trials.

Great. Thanks a lot.

Thank you. And our next question comes from the line of Justin Bowers from Deutsche Bank. Your question please.

Hi. Good morning, everyone. Can you talk about the trends you are seeing in your pre-backlog awards and how cancellations are trending there? Is there a similar pattern that you're seeing in cancellations in the pre-backlog awards versus what you're seeing in your net business?

Our flow is still okay. The business environment did soften a little in Q4, but our win rate was fine. Things moving into awarded but not yet in backlog is still looking okay and good enough to get what we want in the second half of this year if everything else remains the same. Cancellations came down across the portfolio, both in backlog and in the pre-backlog phase. Those pre-backlog cancellations were actually the bigger part of cancellations in 2024 and drove most of our booking difficulty. They came down quite a bit and drove some of the improvement.

Understood. And then in terms of the demand environment, piecing together some of the other questions, it seems quality started to improve late last year and pricing was at least stabilizing, maybe improving a bit. Is that still the trajectory or could that start to gain direction as well? And comments on decision making—there have been a lot of delays throughout 2024. Is that persistent or is the velocity changing at all?

The business environment was much improved for the first three quarters of 2024, with opportunities accelerating. Q4 was a little weaker, but the environment is still not horrible. I don't know which direction it's going. It could be a slight slowdown in Q4 and then reaccelerate, or it could be the start of a broader slowdown. The delays we've had were largely funding related. We've had a few delays pushing things out of Q4, but earlier in the year it was more financial difficulty and cancellations rather than quarter-to-quarter scheduling delays.

Yes. Thank you, August.

And as a reminder, if you do have a question, please press star one. Our next question comes from the line of Charles Rhyee from TD Cowen. Your question please.

Thanks for taking the questions. Maybe a little more clarification on cancellation rates. You're saying that's come back to normal. How much longer should we expect these dynamics to impact book-to-bill as we move through the year? Do you feel like we're getting to the end of that? When we think about the difference between the 0.99 book-to-bill in the fourth quarter and getting to 1.15 in the back half of the year, how would you characterize that as a mix between reducing pre-backlog cancellations or expectations for RFP growth and awards?

The elevated pre-backlog cancellations throughout 2024 will have an impact throughout 2025. I expect weak bookings in the first couple quarters of 2025, and then hopefully in the second half we will see bookings accelerate and get above that 1.15 threshold. I would expect to see improvement into 2026 toward a higher book-to-bill, but that trajectory is based on cancellations in our portfolio of pre-backlog work, which can take up to a year to translate into backlog.

So if that activity is relatively constant, when we think about weaker first-half bookings, is that because RFP activity is lower in the first quarter and therefore fewer awards are moving into backlog?

I'm not projecting future RFPs; I'm projecting bookings. I'm hoping bookings are not lower than Q4. I'm hoping they are improved but still well below the 1.15 threshold. I'm looking for rather weak bookings in the first couple quarters in 2025. I would hope bookings are above 1.0, and I have every reason to believe they will be, but not near our longer-term run rate.

Got it. Appreciate that. Thank you.

Thank you. And our next question comes from the line of Ann Hynes from Mizuho. Your question please.

Hi, great. Thank you. Given your guidance, do you think your revenue guidance encompasses the uncertainty? When you talk to your customers, how much visibility do they have in the funding environment? With this guidance, how confident are you in the visibility you have at this time? And what do you think would drive upside versus downside?

It's a little tough. I have no idea where the business is going in 2025. We tried to make reasonable assumptions about the future path and that's the guidance we put out. I think there's substantial downside potential with further cancellations and a weakening business environment, and substantial upside if cancellations drop to well within our normal range and the business environment strengthens as it had been in most of 2024. We're kind of equipoised here. Our guidance reflects the environment, but there's quite a bit of uncertainty. Much of 2025 revenue is already in established backlog; it's a matter of cancellations and cancellations can change outcomes materially, but there's also the opportunity that cancellations are very low, which would be a major driver to the upside.

Maybe on the cancellation part, were there any trials canceled that surprised you? Is the industry different than historical drivers of cancellations? And any notable sequential changes in the competitive environment?

No real changes in the competitive environment. Cancellations this past year have been largely funding related. Cancellations can occur for a number of reasons—products failing, strategic changes, or competitive shifts—but overwhelmingly they've been linked to funding. That's the primary driver we've seen.

Alright. Thank you.

Thank you. And our next question is a follow-up from the line of Max Smock from William Blair. Your question please.

Hi. Thanks for squeezing in a follow-up here. I wanted to ask a clarifying question on gross margin. One question we've been getting is whether there's any tailwind to gross margin from the elevated cancellations that you saw in 2024. Could you walk through the payments you received for cancellations—payments for work completed and wind-down costs—and confirm there's not any incremental payments that would have artificially inflated your margins this year and therefore be a headwind in 2025 as cancellations normalize?

Cancellations historically have been something of a tailwind for margin. Often they accelerate work on closeout, and our routine monitoring of percent completion is conservative, which can catch up at closeout. In general, there is some tailwind from cancellations.

I can't quantify it, but while there is some slight tailwind from cancellations and program closeouts, the core tailwind on margins this year has been the productivity of the existing employee base. Headcount is flat year over year, utilization is strong, and execution has been driving margins. There might be a slight tailwind from cancellations, but by and large it's retention, utilization, and execution.

Understood. Thanks again for squeezing in a follow-up.

Thank you. And our next question is a follow-up from the line of Eric Coldwell from Baird. Your question please.

Hey, thanks. I was hoping you could help with performance obligations. Your performance obligations as reported in SEC filings actually grew at a nice and accelerating clip all year. Third quarter was up 25% year over year and up over 9% quarter over quarter. I'm struggling to triangulate between that and future revenue growth. Historically that's been highly correlated to future revenue growth. Why is that not correlating to your bookings and the revenue outlook for 2025?

Those performance obligations can be far out. We have multi-year projects, and all of it goes into performance obligations. Only a portion of that is near term. We typically include only the first few years in our backlog accounting. If average duration goes up, that increases the gap between performance obligations and backlog. So it's not unexpected that performance obligations can grow faster while near-term backlog conversion remains constrained.

Would there be anything, beyond timing and cancellations, like a structural shift such that the average duration of incremental programs coming in today is longer than in the past? And would you be willing to foreshadow what performance obligations will look like in the upcoming 10-K?

We'll publish the 10-K later today. I don't think you'll see a dramatic change from what you saw in the third quarter. The tail on studies is the largest driver of the delta. We only put certain portions of programs into backlog under our backlog methodology, and there are differences between accounting performance obligations and backlog. There's no structural change to call out.

Okay. Thank you. I do think backlog is a better reflection of what we're likely to perform since it reflects the signed contracts and near-term work.

Thank you. And our next question comes from the line of David Windley from Jefferies. Your question please.

Hi. The beauty of a short cover call is we get multiple follow-ups. I wanted to ask one as well. To clarify an earlier answer: August, when you said late-stage programs burn more directly into revenue versus early-stage programs, you meant the latter part of a given program rather than phase differences, correct?

Right.

Appreciate that. Kevin, you mentioned on margin some benefit from FX. Can you quantify that, and what is your FX assumption in the guidance for 2025?

The guidance assumes FX rates as of December 31, 2024. The fourth-quarter FX impact was about a $4 million EBITDA benefit in the quarter.

Okay. Thanks. That's all for me.

This concludes the question and answer session of today's program. I'd like to hand the program back to Lauren Morris for any further remarks.

Thank you for joining us on today's call and for your interest in Medpace Holdings, Inc. We look forward to speaking with you again on our first quarter 2025 earnings call.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.