Good day, ladies and gentlemen, and welcome to the Medpace Third Quarter 2025 Earnings Conference Call. As a reminder, this call is being 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 Third Quarter 2025 Earnings Conference Call. Also on the call today are 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 day, everyone. Cancellations were well behaved in Q3, permitting record net bookings and a net book-to-bill of 1.20. RFP quality remains solid with decisions progressing at a usual tempo. Initial award notifications were strong and our total dollar value of awarded work not yet recognized in the backlog was up approximately 30% in Q3 on a year-over-year basis. We are making good progress toward refilling our pipeline of opportunities. We will provide 2026 guidance when we report full-year 2025 results in February. However, I will provide a brief preliminary view in an attempt to avoid significant divergence between our view and analyst models. We anticipate 2026 revenue to grow in a low double-digit range off our updated 2025 full-year guidance. We expect EBITDA to grow at a high single-digit pace or greater. We believe pass-through costs will remain high compared to historical levels and represent between 41% and 42% of revenue. Jesse will now provide comments on the Q. Jesse?

Thank you, August. Good morning, everyone. Revenue in the third quarter of 2025 was $659.9 million, which represents a year-over-year increase of 23.7%. Net new business awards entering backlog in the third quarter increased 47.9% from the prior year to $789.6 million, resulting in a 1.20 net book-to-bill. Ending backlog as of September 30, 2025, was approximately $3 billion, an increase of 2.5% from the prior year. We project that approximately $1.84 billion of backlog will convert to revenue in the next 12 months, and our backlog conversion in the third quarter was 23% of beginning backlog. With that, I'll turn the call over to Kevin to review our financial performance in more detail as well as our guidance expectations for the balance of 2025. Kevin?

Thank you, Jesse, and good morning to everyone listening in. As Jesse mentioned, revenue was $659.9 million in the third quarter of 2025. This represented a year-over-year increase of 23.7%. Revenue for the 9 months ended September 30, 2025, was $1.82 billion and increased 15.9%. As expected, revenue for the quarter was favorably impacted by higher reimbursable cost activity, particularly investigator sites, driven by a therapeutic mix shift to faster burning studies in areas which have a higher concentration of reimbursable costs. EBITDA of $148.4 million increased 24.9% compared to $118.8 million in the third quarter of 2024. Year-to-date EBITDA was $397.5 million and increased 14.7% from the comparable prior year period. EBITDA margin for the third quarter was 22.5% compared to 22.3% in the prior year period. Year-to-date EBITDA margin was 21.8% compared to 22% in the prior year period. EBITDA margins benefited from productivity and lower employee-related costs, offset by higher reimbursable costs. In the third quarter of 2025, net income of $111.1 million increased 15.3% compared to net income of $96.4 million in the prior year period. Net income growth below EBITDA growth was primarily driven by a higher effective tax rate and lower interest income compared to the prior year period. Net income per diluted share for the quarter was $3.86 compared to $3.01 in the prior year period. Regarding customer concentration, our top 5 and top 10 customers represent roughly 23% and 33%, respectively, of our year-to-date revenue. In the third quarter, we generated $246.2 million in cash flow from operating activities, and our net days sales outstanding was negative 64.3 days. During the quarter, we repurchased approximately 14,649 shares for $4.5 million. Year-to-date, we repurchased 2.96 million shares for $912.9 million. As of September 30, 2025, we had $821.7 million remaining under our share repurchase authorization program. Moving now to our updated guidance for 2025. Full year 2025 total revenue is now expected in the range of $2.48 billion to $2.53 billion, representing growth of 17.6% to 20% over 2024 total revenue of $2.11 billion. Our 2025 EBITDA is now expected in the range of $545 million to $555 million, representing growth of 13.5% to 15.6% compared to EBITDA of $480.2 million in 2024. We forecast 2025 net income in the range of $431 million to $439 million. This guidance assumes a full-year 2025 effective tax rate of 18.25% to 18.75%, interest income of $12.2 million, and 29.5 million diluted weighted average shares outstanding. There are no additional share repurchases in our guidance. Earnings per diluted share is now expected to be in the range of $14.60 to $14.86. Guidance is based on foreign exchange rates as of September 30, 2025. With that, I will turn the call back over to the operator so we can take your questions.

Our first question comes from Charles Rhyee with TD Cowen.

Obviously, congrats on the quarter here. When we think about the ranges that you've given for next year, how should we think about the pass-throughs in relation to maybe the increase in metabolic work? Obviously, we saw another increase here as a percent of total revenue to 30% in the third quarter from 25% in the first half. But you're still calling out for pass-throughs to remain stable in '26 at that sort of 41% to 42% range. When we think out of your current bookings, are you seeing less metabolic trials compared to your current burn? Or should we expect to see some kind of leveling off in terms of the higher metabolic mix?

Yes. I think over the course of 2026, it will stabilize somewhat and may even decrease slightly. However, it's not solely due to the shift towards metabolic studies, although that is the primary factor we have discussed. The timing of projects and having a significant number of late-stage projects are influencing our expenses as we prepare to initiate new studies. New studies tend to incur higher direct costs early on in a trial, even if they maintain the same pass-through cost mix. Pass-through costs typically occur later in the trial. In some cases, a trial can progress to the halfway point regarding direct fees while we have recognized half of our revenue from our activities, yet we may not have compensated the sites significantly at that point. Start-up phases, particularly in brief trials where start-up costs are substantial, contribute to this. Therefore, since pass-through components of a trial are backloaded, having a back-loaded portfolio will mean more pass-through costs at that stage. Multiple factors are influencing this situation. Nevertheless, we do anticipate that pass-through expenses may peak in the fourth quarter and then decline throughout 2026.

And our next question comes from the line of Ann Hynes with Mizuho.

Thank you for the guidance for 2026. Usually, your EBITDA increases more than your initial expectations, but it seems to be growing at a slower pace than revenue. Is this solely due to the pass-through dynamic, or are there other factors at play? Additionally, could you provide insights on the pricing environment?

Yes. The main factor here is the pass-throughs. There are several challenges affecting EBITDA, including exchange rates and other factors, but the most significant issue seems to be the pass-throughs that create some difficulties. Regarding pricing, we've discussed the pricing environment as it has slowed in the industry over the past few years, leading to a greater emphasis on pricing. Large pharmaceutical companies tend to be more aggressive in this area and have the capability to do so. While it's a consistently competitive space and always a priority, it's becoming particularly important. Some clients struggle to secure the funds necessary to make it work, so we're looking for solutions to assist them. However, I do not believe that pricing will significantly impact margins.

Our next question is going to come from the line of Michael Cherny with Leerink Partners.

Maybe I can revisit your earlier comment, August, about some of the pre-backlog filling, which is encouraging to see, particularly given your customer base. As you consider your initial thoughts on fiscal year 2026, how do you view the conversion rate of the pre-backlog and your win rate, and how should that be weighed against what you have experienced over the past couple of years?

Yes, I don't have the specific breakdown of how much will be converted to revenue versus backlog. There has been some concern about our increased burn rate, and our backlog has only seen a slight increase this year, up a few percent. However, I want to emphasize that our overall pipeline of awarded studies is strong. This includes fixed scope projects where we've already negotiated prices and received written commitments, though they have not yet begun enrollment. This pre-backlog is up 30% and is larger than our current backlog. This positions us well for replenishing our backlog in the coming year, alleviating concerns about a potential gap in our revenue growth. We are enhancing our prospects for converting backlog into revenue in 2026.

Our next question will come from the line of David Windley with Jefferies.

So that's good timing. I'll follow that up. In August 2023 and 2024, many of your peers experienced a decline in activity levels, which was similar to the initial award timing, as they began to feel the effects of reduced funding. For Medpace, this became evident in the weaker book-to-bill ratios around mid-2024 as some of the pre-backlog was canceled and not moved forward. The same timing dynamics set the stage for a weak funding environment in the first half of 2025. Your previous answer may have been directed at me, and I'll take that. What makes this time different?

I don't know. A significant difference is that this situation has been driven by cancellations rather than weak business. There are numerous clients facing challenges, which impacts the business environment. We've encountered a notably unusual series of cancellations, but the overall business environment has remained relatively stable. While you might think it seems weaker compared to a few years ago, it's still fairly solid. Despite the substantial cancellations from the pre-backlog awarded study bucket, we still managed to grow that bucket by 30% over the past year. It could have grown much faster, and our backlog would be larger now if those cancellations hadn't occurred. The key point is that this situation has been caused by cancellations, not a weak funding environment leading to fewer opportunities.

Got it. After the last quarter, we discussed how your burn rate has been rising, mainly because you haven't added many new early-stage studies to the backlog. It seems like you’re entering a phase where that will likely change, leading to a healthier addition to the backlog. I also appreciate the comments regarding 2026. If I interpret this correctly, you anticipate that the backlog will grow more rapidly, the burn rate will decrease, and your need to hire to support that growth will likely increase. Is that the correct way to view the evolution of the business?

Yes. I think that's a reasonable scenario.

Regarding hiring, can you provide an update on your offshoring activities that began in 2024? How is that progressing and where are you focusing your hiring efforts? That's my final question.

Sure. Year-to-date and in the last quarter, the largest region for growth was North America, primarily the United States. The second largest region was Asia Pacific. The two areas where we haven't really increased staff are Europe and China. Throughout Asia Pacific, although our largest hiring area in that region as a single country was India. Over the last few years, we began hiring in India, which has significantly increased our staff number over time, even if it's modest compared to our overall totals. This has been a focal point in Asia Pacific. Overall, hiring has been quite balanced, with most recent hiring occurring in the U.S. This reflects a shift in the market, as there has been more U.S.-focused work lately, particularly in metabolic areas, making this a very strong growth segment.

Our next question comes from the line of Max Smock with William Blair.

August, maybe one on the just expectations for book-to-bill here moving forward. You talked about initial awards being up 30% year-over-year. But based on kind of the midpoint of the guide here, I think you need to do 55% growth in bookings in 4Q to put up a 1.2 book-to-bill in the quarter. Can you help us bridge that gap? And maybe just elaborate on your booking expectations for 4Q and what you've embedded in your guide for bookings in 2026?

We are not providing guidance for 2026 as I cannot predict the bookings outcome. However, we believe there is a reasonable chance to reach 1.15 in the second half of 2025, which is our target for Q4. This estimate seems reasonable, but I won't discuss next year yet.

Maybe just following up on that point. I mean, 1.15 still kind of implies 45% plus bookings growth in 4Q. Is that disconnect from the 30% growth in initial awards to that 45%, give or take, on net new business awards in 4Q. Is that disconnect? Is that typically there in a quarter? Like what's your visibility into that bookings in 4Q, given the initial awards up 30%?

Well, as I mentioned, that category has grown a bit larger, showing a 30% growth overall, not just a 30% increase in new awards. I'm referring to the total amount being up by 30%. New awards saw a slight sequential increase, but it's all about the total. I can't specify how much of that is necessary to achieve a certain booking number.

Yes. Okay. That makes sense. Maybe just as a quick follow-up here. You gave some color on decisions progressing at a usual tempo. Just wondering how those decision-making timelines have changed more recently and what you're hearing from customers around their confidence in the funding environment moving forward?

Yes, I think things are progressing. In Q1, we faced some delays with our pending RFPs, and the total dollar amount of pending decisions had increased, causing a slowdown. However, that situation has improved significantly. While funding challenges for clients still exist, leading to some delays, overall, things are moving along at a reasonable pace and have somewhat normalized. There hasn't been a significant increase in pending work or decision-making delays. Overall, feedback indicates that people are receiving funding. Although some groups are still stalled and facing difficulties, we have the flexibility to adapt as needed.

Our next question will come from the line of Jailendra Singh with Truist Securities.

First, a quick clarification on your preliminary 2026 growth expectations or numbers. Just to clarify, that underlying assumption there is, the environment looks similar to what you are seeing in Q3 in terms of bookings, flow and pipeline, right? That's the underlying assumption. I want to make sure that.

Yes, we consistently pursue opportunities in the environment. However, cancellations in 2026 present a significant uncertainty. You’re correct that the business landscape still contains new awards that will impact next year. Most of our pipeline is established, and the main concern is the cancellation rate. We expect it could be slightly higher than it has been in the recent quarters, but it is not anticipated to reach the levels seen in the first and fourth quarters.

Okay. I have a quick follow-up on the trends in margins. Thank you for the details on the growth expectations for next year. Beyond pass-through impacts, could you discuss the gross margin leverage and SG&A in relation to the margins on core direct service revenue? You showed a good improvement this quarter, and I'm trying to grasp what the trends are. Do you believe that you are nearing the peak of those margins, again excluding the effects of pass-through?

Yes, Jailendra, as August mentioned, we provided some color on both revenue and EBITDA for 2026. And the margin for the most part is expected to remain in a very good spot. And so we're continuing to see improved productivity from our existing employee base. Some of that is just driven by improved attrition rates. They remain very low. Great utilization levels and studies are progressing at a very good pace. As we said in the third quarter, we are seeing improved funding and with fewer cancellations, things are progressing in a very good way. So we do expect margins to remain in a good spot in 2026, and it's really driven by just continued productivity of the business.

Our next question is going to come from the line of Dan Leonard with UBS.

I'm curious how you would describe the breadth of outperformance in Q3. Would you attribute the upside to a narrow set of 1 to 2 customers? Or was it broader than that?

In terms of what, revenue?

Yes, exactly. Just looking at the revenue in Q3 compared to Q2, it looks like the growth came in top 5, it came in metabolic. I'm just looking for color on breadth versus what otherwise might suggest that there was just a big trial that landed in the quarter?

Kevin, do you want to...

Yes, Dan, I'd say it's pretty broad-based. I mean, certainly, some of that was just influenced by the pass-throughs. I mean pass-throughs continue to increase. I think for the quarter, we were right around 42%. So that certainly had an influence. But then also just the carryover of the improvements that we saw coming out of our conversation in Q2, where we saw improved funding in those studies progressing forward, the fewer cancellations in the second quarter and that translating further into the third quarter. So it's pretty broad-based. I wouldn't say it's isolated to a handful of studies.

Okay. Appreciate that. And then just a quick follow-up. Do you need to accelerate headcount growth further to service your sales forecast for next year? Or is that low single-digit growth rate in headcount growth the right number?

Yes. We expect headcount acceleration as we head into next year.

Our next question will come from the line of Luke Sergott with Barclays.

Great. I also thought there would be a gap. I want to discuss the competitive win rate you are experiencing. We have heard from some of the larger CROs that usually do not participate in your market segment that they plan to start competing or bidding for some of this business. Are you beginning to see them enter the field? Could you provide any insights on that?

Yes, they've always been present. I'm unsure about the extra effort or focus on that. There’s definitely a lot of discussion surrounding it, but we continue to see the same key players, primarily the large providers we often compete with. Our win rate has been decent. As I mentioned last quarter, it actually slipped a bit, but we had positive results because the total number of decisions increased. This quarter, our win rate improved again with fewer decisions, but we still achieved good awards. We do not observe any trend indicating that increased competition is negatively impacting our win rate. There has been some change over the past year to include more providers in the bidding process, increasing the number from the typical 3 or 4 CROs to sometimes 6 or more. This naturally lowers the win rate for everyone involved. However, I feel that we can adapt to those conditions, and I believe our competitive position remains very strong.

Great. As a follow-up, could you share your thoughts on the burn rate as we look ahead to next year? Specifically, where do you see it settling over the long term? Do you think it will be higher compared to what you had prior to the increase, perhaps in the high teens?

Yes. I mean, I don't think we can answer that question in terms of long term. It's a lot dependent on our mix of programs, where they are in their life cycle. It depends on future bookings. If you go back to a couple of years coming out of COVID when our bookings were very strong, our burn rate came down quite a bit. So it is influenced by how things are progressing from award notifications into programs in the backlog. So it's hard to say. Our range has been quite wide.

Our next question comes from the line of Justin Bowers with DB.

All right. So I just want to follow up on Luke's comment and your remarks on the win rate, August. You said fewer decisions, but good awards, and the win rate was up. So are we to infer that your average award size was larger or more than substantial this quarter? So that's part one. And then part two is just, can you give us a sense of how your conversion or retention or win rates have been trending, call it, over the last couple of years of programs that progress from Phase II to Phase III?

Yes, I don't think there's been any change in that. It's somewhat unpredictable. Typically, we can move from Phase II to III, but often our products are sold or transferred to others. Additionally, we sometimes do not succeed in Phase III because we may not be perceived as strong enough in a certain market. So, I don’t believe that situation has changed at all.

Okay. And then in terms of the award size in the quarter?

Yes, I'm sorry. I don't actually have that. Anybody on the line have that?

I would say it's pretty normal, Justin. There were no significant decisions. Remember, decisions where we receive notification of an award do not go in the backlog; they fit into a sort of pre-backlog category. Overall, I wouldn't say there was anything unusual in the quarter regarding decisions.

Okay. In terms of the pre-backlog, how does the therapeutic mix compare to the current revenue you're showing? For context, oncology accounted for 30% in the third quarter, and metabolic was 27%. When reviewing the pre-backlog, is it more or less weighted towards those two therapeutic areas?

It's over-indexed in metabolic, as you might expect. Not massively, but there's a higher proportion. And that fits in with what we're currently seeing and burning.

Our next question comes from the line of Eric Coldwell with Baird.

I have maybe 3. First, on the preliminary views of 2026, talking about the revenue outlook. If we run various inputs on what the fourth quarter service revenue might look like and then also what does low double-digit growth mean and 41% to 42% pass-throughs, you can run various scenarios. They all lead to service revenue implied growth or preliminary view growth of being somewhere in the upper mid-single digits to low double digits growth. Is that your interpretation as well? Or am I missing something?

I believe your math. All right, Kevin, do you want to comment on that?

Eric, could you repeat that? Upper mid to upper mid double-digit.

No, no, go ahead. Say it again.

Yes. I understand this might be frustrating on the call, but I’m not sure if you will achieve $400 million. Please continue.

No, no, go ahead.

Yes, I mean, it's going to be a bit frustrating here, but I can't say if you'll reach $400 million in service revenue for Q4 or $410 million. I’m uncertain about that figure. We have different starting points for growth. However, if I project low double-digit revenue growth, bringing it up to 12.5%, which I consider the upper limit of low double digits, and then assume pass-throughs at the lower end of the mix at 41%, even with different assumptions, I estimate service revenue growth ranging from the mid- to upper single digits at the lowest to low double digits at the highest. The reason I'm emphasizing this is clear.

That's fair, that sounds reasonable.

Yes, that's fair.

I thought last quarter we were expecting service revenue growth to be around 15%. Maybe I misinterpreted the comments from last quarter, but I was a bit optimistic about my service revenue outlook for the next year.

Yes. I don't think we made any comments about next year's growth at all, let alone service revenue.

I might have misunderstood something. Regarding the pre-backlog, you confirmed that it's above backlog, so it's over $3 billion. There seems to be a range for where it might be, more than $3 billion but less than another amount. I was hoping you could provide more clarity since there is still confusion in the market about these quarterly net new awards. They are not events happening within the current quarter; rather, they represent the accumulation of all previous efforts transitioning into revenue generation. Knowing the range for that pre-backlog, whether it's $4 billion, $5 billion, or $6 billion, could help people understand how much of that pre-backlog needs to convert to the revenue generation phase before it is included in your reported backlog.

It's part of an overall pipeline. These are firm awards at that stage, but they are part of a larger pipeline. We have experienced significant cancellations in this area, so we don't consider it as backlog. Until the studies are underway and patients are enrolled, there is a greater risk. However, I don't want to assign specific numbers and track their size in relation to other categories. We believe we provide sufficient information regarding the overall parameters we monitor and assess to identify trends. But yes, that total is somewhere below $4 billion.

Okay, that's very helpful. Thank you for your time. You mentioned earlier that the total amount of awarded work not in backlog has increased by 30% year-over-year. You also noted that the first patient hasn't been enrolled yet. This made me wonder whether you wait to include an award in your backlog until the first patient is in the study. I initially thought the requirement was to be within 30 days of generating revenue. However, it seems that the actual requirement might be that you are live in the study and generating revenue before you add anything to the backlog.

That's correct. It could be that there's revenue prior to reaching backlog.

So this is how the revenue began to grow before the headcount increased. I'm trying to understand how things picked up speed perhaps faster than you anticipated six months ago when you faced some cancellations and market uncertainty. The pace of work accelerated sometime between April and July, and the tone and messaging clearly changed. It seems like this work truly gained momentum, and you were not quite in backlog yet, but suddenly, the work is in backlog and we are experiencing a significant revenue spike. I'm trying to understand the dynamics between the reported backlog, the pre-backlog, and the fact that your revenue actually accelerated quite rapidly before your headcount growth did.

There are a few factors to consider here. Firstly, you are correct that we introduced it quite late. Generally, we expect patients to enter very soon, ideally right as we begin to receive our first patients. However, there are additional reasons for potential concerns. We have encountered manufacturing issues in the past, which was a recent problem. There is significant work ongoing, and while we haven't enrolled patients yet, there is uncertainty surrounding drug availability. We may also need to receive decisions from regulatory authorities before we can proceed. These kinds of factors do not get included in the backlog, creating multiple checkpoints. Ultimately, situations can be very close to generating substantial revenue when they enter the backlog.

And we have a follow-up question from the line of David Windley with Jefferies.

Eric asked one of the two points I wanted to follow up on. The other point concerns your metabolic indexing. Many of the questions I receive about this topic focus on GLP-1. August, would you be able to clarify the extent of your involvement in metabolic indexing? I have a feeling that it's broader than just GLP-1 and primarily involves non-GLP-1 aspects, but I'd appreciate your insights on this to help us understand the factors driving this rapidly growing area of your revenue and backlog.

Yes. GLP-1 accounts for about two-thirds of our obesity-related business, making it a significant part of the overall market, but it is not the only component. There are still many other aspects involved.

And I'm showing no further questions. And I would like to hand the conference back over 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 fourth quarter 2025 earnings call.

This concludes today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.