Q2 2023 Medpace Holdings Inc Earnings Call
Participants
August James Troendle; Chairman & CEO; Medpace Holdings, Inc.
Jesse J. Geiger; President; Medpace Holdings, Inc.
Kevin M. Brady; CFO & Treasurer; Medpace Holdings, Inc.
Lauren Morris; Associate Director of Investors Relations; Medpace Holdings, Inc.
Alexander Yearley Draper; Senior MD & Healthcare IT Analyst; Guggenheim Securities, LLC, Research Division
David Howard Windley; MD & Equity Analyst; Jefferies LLC, Research Division
Eric White Coldwell; Senior Research Analyst; Robert W. Baird & Co. Incorporated, Research Division
Maxwell Andrew Smock; Research Analyst; William Blair & Company L.L.C., Research Division
Unidentified Analyst
Presentation
Operator
Good day, ladies and gentlemen, and welcome to the Medpace Second Quarter 2023 Earnings Conference Call. (Operator Instructions) 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.
Lauren Morris
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 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.
August James 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 strong 2024 in building our backlog. Jesse?
Jesse J. Geiger
Thank you. Good morning, everyone. Revenue in the second (technical difficulty) 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 detail as well as our guidance expectations for the balance of 2023.
Kevin M. Brady
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 6 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 million in the second quarter of 2022. On a constant currency basis, second quarter EBITDA increased 21.8% compared with 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 from the comparable prior year period.
EBITDA 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 costs, which accelerated further during the quarter, driven by increasing investigator site costs 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 5 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 days 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 cost 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.
Question and Answer Session
Operator
(Operator Instructions). As a reminder, -- to ask a question, press star 1 on your telephone and wait for your name to be announced. Please stand by while we Our first question comes from David Windley from Jefferies.
David Howard Windley
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.
August James Troendle
Yes, Dave, this is August. I mean I think it's a combination of things. In general, I think staffing is improvement sites, operations are coming more normalized. There was a lot of disruption for quite a bit of time. Now -- the reimbursement 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 and that speaks well for our performance on trials.
David Howard Windley
Excellent. That's helpful. So do you see that? Or is it possible to quantify how much of, I'll call it, a knock-on effect, positive knock-on effect that is having on your direct revenue. So I'm trying to get a sense for how much are pass-throughs just going up because some inflationary factor versus how much is more throughput that then would mean more direct revenue for you as the CRO? And how should we think about that, say, pulling through or continuing through the next several quarters?
August James Troendle
Yes. I mean I think that's difficult to try to sort out. There is obviously some inflationary effect. And I guess you could look at 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 in assumptions made at time of execution of the bid on -- for a project, so there is quite a bit of lag for that. Some site costs have been raised kind of midterm, and you could say there's some a bit of inflation, and that's outpaced our inflation, I think good site inflation.
But how much is increased volume at sites doesn't necessarily translate into directly into increased direct fees. I mean, it drives a number of the direct fees, but it's not a direct relation and it depends on the type of trials you're doing, and some trials have more indirect as opposed to direct. And it depends on the sort of the size of the trial and the type of trial.
And 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 fees also, and we will see a ramp in direct fees and growth of the company overall. The indirects because they were partially because you were depressed for such a time during the pandemic and things are coming better and better online.
They've outpaced as there's been a recovery or growth in our fees, 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 a part of projects going forward, but a lot of it is driven by the individual uniqueness of a project. So it's hard to sort that out. But we're growing well both direct fees and Indirect fees and it's not just an inflationary effect of investigator costs.
David Howard Windley
Got it. Last question for me. If I -- not saying my assumptions for pass-throughs were correct or whatever, but if I just kind of neutralize for the difference in what you experienced versus my expectation to see what depressive effect that -- just that higher pass-through would have had on margin. It looked like, I think, about 90 basis points, but more importantly, as what I'm looking at is first quarter was really high relative. And on that same basis, it looks like margin, so kind of normalized margin did decline by 300 basis points or so. Could you talk about mix effects or hiring trends or things like that, that would have had an effect on kind of the margin apart from the effect of pass-through dilution.
August James Troendle
Yes. Kevin, do you want to.
Kevin M. Brady
Yes. Yes. David, this is Kevin. As I talked on the first quarter call, we did expect some headwinds related to kind of 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.
Operator
Our next question comes from Max Smock with William Blair.
Maxwell Andrew Smock
I wanted to start off just following up on Dave's question 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 past dues as a percent of total revenue? Or could there be some headwind at some point in the future as pass-throughs normalized?
August James Troendle
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 (inaudible) headwind in it dropping off.
Maxwell Andrew Smock
Potentially a headwind in it dropping off. I mean, I guess the question is, is it going to remain kind of at this 38%, 39% level that we saw in the quarter? Or do you think that growth slows here as we move into the back half of 2023.
August James Troendle
Yes. I think we're 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 be trying to pick a particular quarters. A lot of things are difficult to -- it is very difficult to project the rate of recruitment and the rate of indirect fees, it's a lot easier for us to be projecting direct fees.
And so I don't want to get into trying to refine 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, and this is a new normal necessarily. It's going to vary over time.
Kevin M. Brady
Yes. Max, as August mentioned, it is very difficult to forecast the pass-through costs. But just in our guidance, we do expect it to be elevated the balance of the year. We're not going to give us a specific percentage, but we do expect it to be elevated. That is an assumption in our guidance.
Maxwell Andrew Smock
That's helpful. I guess, Kevin, following up on that point there, you mentioned you expect it 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 then to 2024?
Kevin M. Brady
Yes. I mean we're not going to speak to 2024 at this point. It's 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 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.
Maxwell Andrew Smock
Got it. And then maybe one just quick modeling cleanup one here for me. In terms of backlog conversion, again, elevated, I think last quarter, you pointed to stepping back down towards 17.5%. How should we think about backlog conversion moving forward here? And has there been any change to your assumptions in terms of mid-1.2 range book-to-bill for 2023?
Kevin M. Brady
Yes. It's a good question. I did expect the burn rate to come back down, but obviously, with the increase that we saw in pass-through activities that did remain elevated at least kind of higher 18%. And I think we'll be in that kind of 18.5% range, the balance of the year with a booking of about 1.2-ish to $1.25 range.
Maxwell Andrew Smock
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?
Kevin M. Brady
That's 2023.
Operator
Our next question comes from Sandy Draper from Guggenheim.
Alexander Yearley Draper
I guess, I want to sort of address the question around inflation and pricing and pass-throughs as it relates to bookings. Obviously, another very strong bookings quarter, you're up close to 30% year-to-date in terms of your first half of your bookings versus last year. Can you talk at all to -- is any of that as you've been -- I think, obviously, you talked about your new business you can price with the inflation, how much of an impact is that? How much is -- and I don't obviously expect exact numbers.
How much might be, okay, some of these trials that you're signing for whatever reason are ones that have more pass-through revenue. I'm just trying to think through are there things that sort of are pushing up that growth rate? Or is it really just a function of the markets improving and the mix of business is apples-to-apples, and so it's a clean nearly 30% type of growth.
August James Troendle
Well, I think it's -- things are growing across the board. We've had a greater amount of pass-through growth and direct growth just lately. It's difficult I'd say we get into trying to sort out pass-through bookings and direct bookings and all the rest of it and it is difficult to get back to … type of look at things. But look, the -- 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 has softened.
And that's come back quite a bit. A lot of it's a 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 in getting back to 605 type of look at things is difficult to do. I don't know, Kevin or Jeff, do you have any comments?
Kevin M. Brady
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.
Alexander Yearley Draper
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 got (inaudible) an aggressive target, but would just love to hear sort of your updated thoughts on your targets for hiring? Or 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 any comments on the environment and how you're tracking towards your goals for hiring?
Jesse J. Geiger
It's Jesse. We're progressing well against goal. 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.
August James Troendle
Yes, maybe one part of that. The one good thing is turnover has really drop back to normal pre-pandemic or maybe even lower in many cases. 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.
Operator
We have a question from John Sourbeer from UBS.
Unidentified Analyst
So given the current funding environment and your year-to-date performance, are you taking share versus peer? And can you have any commentary on how is Medpace waning?
August James Troendle
Are we taking share? You are asking?
Unidentified Analyst
Yes, that is correct.
August James Troendle
Look, I don't know what that really means. Look, our growth has been for years, year after year. And we have a slide in our deck on growth in revenue and EBITDA and net income, et cetera. We've on an entirely organic basis, we've outstripped the growth of any of the peers. And we've I guess the way most -- I hear most analysts talk about it, it's bookings that our share. And on that basis, I guess, we've been losing share for a decade, but I tend to look at things in terms of revenue and profit, et cetera. And we're appear to be taking share, but I can't quantify what that represents.
Unidentified Analyst
I got a second one is have you noticed any increasing project delays since 1Q? Any color on that?
Jesse J. Geiger
Yes. I mean things overall have been accelerating since the first quarter.
Operator
Our next question comes from Eric Coldwell from Baird.
Eric White Coldwell
Well, I should have lowered my hand. I think all of my topics have been covered, but congrats on a good quarter and look forward to future updates.
Operator
No further questions at this time. I'd like to turn the call back to Lauren Morris for any closing remarks.
Lauren Morris
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.
Operator
This concludes today's conference call. Thank you for participating. You may now disconnect.
