Q4 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.
David Howard Windley; MD & Equity Analyst; Jefferies LLC, Research Division
Eric White Coldwell; Senior Research Analyst; Robert W. Baird & Co. Incorporated, Research Division
Jack Dawson Wallace; VP & Equity Research Analyst; Guggenheim Securities, LLC, Research Division
Lucas Grant Baranowski; Associate Analyst; UBS Investment Bank, Research Division
Maxwell Andrew Smock; Research Analyst; William Blair & Company L.L.C., Research Division
Presentation
Operator
Good day, ladies and gentlemen, and welcome to the Medpace Fourth Quarter and Full Year 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 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.
Jesse J. 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. Kevin?
Kevin M. Brady
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 U.S. 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 gross 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.
Question and Answer Session
Operator
(Operator Instructions) Our first question comes from David Windley with Jefferies.
David Howard Windley
Congrats on another good year. You're -- I gather from the absence of August's comments at the top of the call, that things must be fairly stable and unchanged but would invite those comments. What we've heard from some peers is some slowing of activity in the second half of '23, particularly maybe the last couple of months of '23 in the biotech space. And I guess, I wondered if you at Medpace had seen that also or if you were seeing a different trend?
August James Troendle
Yes. Dave, this is August. Yes. I think I said last quarter that things were kind of going in a lot of different directions at once, kind of very fast but unreadable. You might have difficulty and a lot of a very strong business environment. I think we've -- kind of in Q4 and coming into Q1 of 2024, I think we've got a clear direction on that. I think things are improving from a funding standpoint. A number of installed projects are now moving forward, things that we thought were kind of just held up with weren't going to get financing or starting to move.
So I think we're -- it's still post-volatile period, and there may be more volatility but I think we're more and more seeing a trend towards improvement on the funding side and project progression side. And of course, these things take quite a while to get the backlog and to generate meaningful revenue. So I think we're setting up largely, a lot of it -- this is set up for 2025, in fact. But I do think that things have improved quite a bit. I think there was a very volatile time there in Q3, certainly and extending into Q4. But I think things have shown the direction.
David Howard Windley
Got it. That's helpful. And then just a follow-up and I'll yield. If I look at what has for you guys been a pretty consistent burn rate, you're entering '24 at a 20% backlog growth, that revenue growth rate is that you're projecting is a little lower than that. So it seems like you're allowing for some moderation in the burn rate. But then you also were a little lighter than you have been on hiring in the fourth quarter. And so I just wanted to kind of understand that confluence of issues. A lot of times, you would -- if you're thinking revenue acceleration, you'd be accelerating hiring and vice versa. So just the interplay between your expectations around revenue growth and burn out of backlog versus your hiring status at the moment.
August James Troendle
Sure. Yes, Dave, I think our burn rate -- our conversion rate does bounce around a bit. And it was, what, 17.6% last -- Q4 of '22. And then kind of went up quite a bit, I guess, fell the way to over 19% in Q3. And I think it kind of is in that sort of band but there is a difference, it kind of moves around a bit. I don't see a -- as you mentioned, it's relatively stable. In terms of long term, I don't think we see a long-term trend towards dropping and dropping like many other CROs have. But it does bounce around a little bit.
The staffing is -- need is going to be driven by our revenue growth, kind of looking at direct revenue. We're looking -- last year, we had -- we were looking at growth above 20% and this year, in '24, we're looking at growth of, let's say, roughly 15% on top line and total as well as direct, roughly. So that's going to drive a staffing need of about a 10% increase. It's not that they aren't directly in line. There's inflation and all the rest of it that adds into that and also productivity. I think lower turnover is driving quite a bit of savings in productivity gain.
So I think our -- we got a bit ahead when we're growing very fast. We have to hire quite a bit in advance. And so I think we got a bit ahead in terms of staffing. I think we're looking at about 10% growth this year. I think it will accelerate as backlog grows and we get towards '25. And I think our 15% growth this year is kind of a bottom. I mean, I think it will move up from there. And so hiring will then -- but I think we have the time to do that. And we don't need to do it in the next few quarters in anticipation of a Q2 or Q3 spike. So I think that's kind of where we are on the staffing and conversion.
Operator
And our next question comes from John Sourbeer with UBS.
Lucas Grant Baranowski
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.
August James Troendle
Yes. And we gave a lot of kind of interim metrics in the volatile period because I think everyone wants more insight into what's going on and everything we know and even though a lot of these metrics are difficult to decipher. So I -- we're trying to avoid kind of giving -- getting too much into the weeds, where we got before. But yes, just to give you an idea, they remain strong. They were very strong last quarter. I said, kind of initial awards were kind of record and our fees were very strong, et cetera. I think things have continued on -- certainly on a year-over-year basis, still very strong, coming off of what was a strong business environment in Q3, I think it's kind of continued to be a reasonably strong business environment in Q4.
Lucas Grant Baranowski
Okay. Great. And then just 1 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?
August James Troendle
Kevin?
Kevin M. Brady
Yes. 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.
Lucas Grant Baranowski
Okay. Great. That was all I had.
Operator
Our next question comes from Max Smock with William Blair.
Maxwell Andrew Smock
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 this 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?
August James Troendle
Yes. I think a lot of it compared to our first look is turnover. Turnover has really come down to a 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 time frame. 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.
Maxwell Andrew Smock
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?
August James Troendle
Yes. And of course, we're not giving guidance on '24 but things look good in terms -- we had a very choppy period and quite a bit of cancellations and funding difficulties. And that's moving away. Like I said, I think we see a clear direction in the last 3, 4 months in terms of projects starting to install, and that makes us very optimistic. These -- again, these things take quite a while to get to start up and to get to revenue burned. I mean, these are multiple quarters for things to move forward but that does make us feel more optimistic on the go-forward next year, et cetera.
Maxwell Andrew Smock
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?
August James Troendle
Yes. Our win rate was -- has been very good the last 2 quarters, above the kind of the long-term trend. So that looks good. I don't -- these things do bounce around though. And I look at -- you want to look at share, I look at revenue. And that's the only way I know how to look at it. People have backlog different ways and conversion is a major factor. And I don't know what it means to be share gain to put up a book-to-bill. So I just look at revenue and revenue trend over time.
And look, we're growing at -- organically at multiples of the average of the rest of the industry. So I just -- we're clearly doing a good job in terms of taking share. Where it's coming from, I don't know but we're growing at a rate considerably above the peers, and we will continue to. And this may be a low year of 15% but long term, we've grown well above the industry.
Maxwell Andrew Smock
Got it.
Operator
Our next question comes from Jack Wallace with Guggenheim Partners.
Jack Dawson Wallace
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 tracks 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?
August James Troendle
Cancellations were in a good range, well within our usual range. I don't know if that's driving any particular -- we had a spike in 2022 but things came down after -- maybe after first quarter to a reasonable rate in the Q2 through Q4. And as far as I -- we kind of expect them to stay in that usual range of less than 4.5%.
Kevin M. Brady
Yes, the expectation for '24 is it stays within our normal range.
Jack Dawson Wallace
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?
August James Troendle
No, I really don't have anything. Of course, if you -- if the smaller clients are starting to unfreeze, eventually that leads to proportional reduction in top 10 revenue because you get other newer clients coming in. But I think it's too early to expect that but I don't make anything out of it.
Operator
Our next question comes from Eric Coldwell with Baird.
Eric White Coldwell
First question, just hoping for an update on the labs business and maybe early clinical, just -- you recently made some internal expansions, brought some work in-house microbiology, certain parts of pathology, I believe. I was just curious about the traction there and ability to cross-sell those new solutions?
Jesse J. Geiger
Yes, 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.
Eric White Coldwell
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 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?
Kevin M. Brady
Yes, Eric, this is Kevin. I think as you think about the quarters and you know that we're -- our quarters can be very lumpy even from a revenue perspective. And so there's nothing that I would call out necessarily specifically in terms of do we see an acceleration in Q1 and a drop-off? Or do we kind of see steady state throughout the quarter and you see sequential growth throughout the quarters? I guess I don't know the answer to that, as August had mentioned, if things do pick up, there's a possibility that you start to see some acceleration in the fourth quarter and into 2025.
But nothing specific to call out. I do think the first quarter, from a margin perspective, it's likely to be better than the balance of the year, similar to what we saw this year just because some of the wage inflation pressures will pick up again and the end of the first quarter, beginning of the second quarter this year. But nothing else specific to call out on that front, Eric.
Eric White Coldwell
Okay. The market has been extremely focused on this GLP-1 category. And it's -- we hear a lot about the big pharmas that are active in that space but there are lots of trials out there and Medpace has a notable history in metabolic. I'm just curious, are you seeing some trial demand in GLP-1s? Are you participating in that market? Is it a contributor to any of your win rates or your RFPs? I'm just trying to get a sense on how impactful that's been, if at all, to this point.
August James Troendle
Yes. Not. We're -- not really have much of any exposure to GLP-1 directly. Obesity overall, a little bit more but the GLP-1s are largely a large pharma phenom in terms of dollar spend, and so have not been a meaningful part of our revenue now.
Eric White Coldwell
That's actually somewhat reassuring and good, I think. Last question. We have seen a number of companies this quarter that we find out (inaudible) maybe somewhat after the fact that OpEx looked a little high in the quarter, and we got some pick up 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.
Kevin M. Brady
Yes, 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 3 buckets quarter-to-quarter.
Eric White Coldwell
All right. Great job.
Kevin M. Brady
Thanks, Eric.
Operator
Thank you. This concludes today's conference call. I would now like to turn it back to Lauren Morris for 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 first quarter 2024 earnings call.
Operator
Thank you for participating. You may now disconnect.
