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Medpace Holdings, Inc.  (NASDAQ:MEDP)
Q1 2019 Earnings Call
April 30, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Medpace First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this call may be recorded.

I would now like to introduce your host for today's conference call Kevin Brady, Medpace's Executive Director of Finance. You may begin.

Kevin M. Brady -- Executive Director of Finance

Good morning, and thank you for joining Medpace's first quarter 2019 earnings conference call. Also on the call today is our President and CEO, August Troendle and our CFO & COO of Laboratory Operations, Jesse Geiger.

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 other important factors that could cause actual results to differ materially from our current expectations, including the impact of the changes to the revenue recognition standards. These factors are discussed in the Risk Factors section of our Form 10-K and other filings with the SEC. Please note that we assume no obligation to update forward-looking statements in the future, 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 for opening remarks.

August Troendle -- President and Chief Executive Officer

Thank you, Kevin. Good morning, everyone. I have three quick topics to comment on before Jesse reviews our financial results for the quarter.

Number one, business environment; the business environment remains consistent with last quarter and somewhat below the level of the past year. Although overall net awards were sequentially higher in Q1 at $249 million, the level of net direct revenue or service revenue based awards were down in the quarter, reflecting a higher proportion of pass-through amounts.

Number two, cancellations; cancellations in Q1 have continued at levels significantly above expectation and our historical averages. I'm not sure if this represents bad luck or a new normal, but in any case recent cancellations represent a meaningful headwind in 2019.

Number three, margin; as anticipated, our margin has come down in Q1. This reflects good progress in hiring effectively and in line with our 2019 plan. We anticipate continued success hiring well in advance of business needs. In addition, we have taken on a number of contract staff to fill gaps, where they have come up. We expect full year margin at or slightly below the level in Q1.

Jesse will now review our financial performance for Q1.

Jesse Geiger -- Chief Financial Officer & Chief Operating Officer of Laboratory Operations

Thank you, August, and good morning to everyone listening in. As a reminder, all financial and backlog metrics in the presentation are now on an ASC 606 basis unless otherwise noted.

Net new business awards entering backlog in the first quarter increased 23.9% from the prior year to $248.7 million resulting in a 1.24 net book-to-bill. Ending backlog as of March 31st was $1.1 billion, an increase of 21.8% from the prior year. Revenue was $200.7 million in the first quarter of 2019, which represents year-over-year growth of 23.1% on a reported basis and 23.7% on a constant currency organic basis.

EBITDA of $33.4 million increased 12.7% compared to $29.7 million in the first quarter of 2018. On a constant currency basis, first quarter EBITDA increased 9.2% compared to the prior year. EBITDA margin for the quarter declined 150 basis points to 16.7% versus 18.2% in the prior year period. The decrease was primarily attributable to higher employee-related costs, reimbursed out-of-pocket expenses and operating lease expense under ASC 842, partially offset by higher revenue.

For the first quarter of 2019 we did not have any adjustments to EBITDA. The first quarter of 2018 EBITDA excluded $1 million of corporate campus lease payments. And as of January 1st, we converted these buildings from deemed assets and liabilities to operating leases with the adoption of ASC 842. Therefore, we no longer have the adjustment and we are no longer showing adjusted EBITDA. We increased employee headcount to 3,062 employees at the end of the first quarter and head count growth continues to be an area of focus this year.

In the first quarter of 2019, GAAP net income was $19.2 million, compared to GAAP net income of $14.6 million in the prior year period. Adjusted net income of $23.8 million in the first quarter increased 18.9% compared to $20 million in the prior year. Adjusted net income growth was primarily driven by revenue growth, partially offset by higher employee-related costs and reimbursed out-of-pocket expenses. GAAP net income per diluted share for the quarter was $0.51 compared to $0.40 in the prior year period. First quarter 2019 adjusted net income per diluted share of $0.64, grew 16.4% versus first quarter 2018 adjusted net income per diluted share of $0.55, and we did not purchase any shares in the first quarter.

Regarding customer concentration, we remain -- we maintain a well diversified mix with our Top 5 and Top 10 customers representing roughly 21% and 32% respectively of our total revenue for the quarter. In the first quarter, we generated $34 million in cash flow from operating activities and our net days sales outstanding decreased compared to the fourth quarter from negative 6.9 days to negative 9.2 days. Our net debt position at the end of the quarter was $26.3 million composed of gross debt of $56.4 million and cash of $30.1 million. And our net leverage ratio is approximately 0.2 times LTM EBITDA.

Moving now to our updated guidance for 2019. We now forecast total revenue in the range of $813 million to $837 million for the full year 2019, representing growth of 15.4% to 18.8% over 2018 total revenue of $704.6 million. We are expecting elevated reimbursed out-of-pocket expenses and we are maintaining our 2019 EBITDA expectation in the range of $137 million to $145 million, compared to EBITDA of $140.9 million in 2018. Our previous adjusted EBITDA guidance assumed ASC 842 lease treatment and no further adjustment for the corporate campus lease. So our new EBITDA guidance is comparable to our previous adjusted EBITDA guidance with respect to these leases.

We anticipate our 2019 effective tax rate to be in the range of 22% to 24%. We have assumed 37.6 million fully diluted shares for 2019. No stock repurchases in our guidance and exchange rates as of March 31st, 2019. We forecast 2019 GAAP net income in the range of $85.2 million to $89.2 million, and GAAP earnings per diluted share in the range of $2.27 to $2.38. On an adjusted basis, we forecast 2019 adjusted net income in the range of $97 million to $101 million, and adjusted EPS in the range of $2.58 to $2.69.

With that I will turn the call back over to the operator, so we can take your questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Erin Wright from Credit Suisse. You may begin.

Erin Wright -- Credit Suisse -- Analyst

Great. Thanks. You mentioned the cancellation trend and that you're not sure if that's some sort of continuing trends, but what were the nature of the cancellation, which is it pipeline reprioritization or funding dynamics that are influencing this? I'm just curious if there's any -- a little bit more color there. Thanks.

Kevin M. Brady -- Executive Director of Finance

Yeah. I -- so differentiate between those, but yeah, mostly pipeline or product failure.

Erin Wright -- Credit Suisse -- Analyst

And any sort of dynamics on those biotech funding side of?

Kevin M. Brady -- Executive Director of Finance

No. We have -- really have not seen a slowdown in funding that's really impacted things. Again it's always difficult to know a pipeline reprioritization from a -- of a total funding issue. But, no, we haven't seen things that are stalling like in the past times of a slowdown.

Erin Wright -- Credit Suisse -- Analyst

Okay. And can you speak to the level of hiring that you're doing more broadly, how should we be thinking about that quarterly progression in the margin trend from here?

Kevin M. Brady -- Executive Director of Finance

So I think we should continue hiring on the sort of rate we've been hiring. We expect to hire 20% or so staff over the course of the year and pretty linearly.

Erin Wright -- Credit Suisse -- Analyst

And the quarterly progression of EBITDA or margin trends, kind of going forward, should we think about any anomaly here?

Kevin M. Brady -- Executive Director of Finance

Yeah. I mean, I can think, from a quarterly progression we'll stick to kind of the full-year guidance here on margin percentage in August's comments at the beginning of the call about EBITDA margins for the year around the level that they were in Q1.

Erin Wright -- Credit Suisse -- Analyst

Okay. Great. Thank you.

Operator

Thank you. And the next question comes from line of John Kreger from William Blair. You may begin.

John Kreger -- William Blair -- Analyst

Hi. Thanks very much. And Jesse, just to clarify the guidance change, so revenue went up I think about $30 million, but EBITDA did not again, should we just think about that is higher or reimbursed expenses flowing through the topline?

Jesse Geiger -- Chief Financial Officer & Chief Operating Officer of Laboratory Operations

That's right. Yeah.

John Kreger -- William Blair -- Analyst

Okay. Great. Thanks. In your slide deck that shows some of the revenue mix and looked like there was a pretty significant change and revenue coming from cardiovascular, on the therapeutic side, and from small biopharma on the franchise side, anything you could add to what's driving those mix changes or does that have any other implications from your perspective.

Jesse Geiger -- Chief Financial Officer & Chief Operating Officer of Laboratory Operations

No broad implications, but the shift toward small biopharma continues to be an area that we're focused on, and an area where we see good growth opportunities. The mix change by therapeutic area, yeah, I guess, cardiovascular programs tend to be a little more lumpy than there is in some of the other therapeutic areas. So as I think that has an influence there period to period on that particular percentage, but nothing else that I would call out notable about any specific drivers in any of the therapeutic classes.

John Kreger -- William Blair -- Analyst

Okay. Thanks. And then one last one. August, when you talk to your clients, how did they react to the increase rhetoric out of DC about drug prices being too high. Does that influence their behavior at all?

August Troendle -- President and Chief Executive Officer

I never discuss that with them.

John Kreger -- William Blair -- Analyst

All right. Thank you.

August Troendle -- President and Chief Executive Officer

Yeah. Thanks.

Jesse Geiger -- Chief Financial Officer & Chief Operating Officer of Laboratory Operations

Thanks, John.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of Stephen Baxter from Wolfe Research. You may begin.

Stephen Baxter -- Wolfe Research -- Analyst

All right. Thanks for the question. I was wondering if you could comment on your win rates in the quarter. Just trying to think about whether there's any material differences between the RFP flow and win rates that we should consider when thinking about the bookings performance in the quarter?

Kevin M. Brady -- Executive Director of Finance

Yeah. Win rate was pretty strong and I think in generally, you see a correlation between cancellations and win rates. We said high cancellations and that often result in strong win rates. I think when you have very strong teams that are coming off of projects that are winding down, you have an enhanced chance of winning.

Stephen Baxter -- Wolfe Research -- Analyst

Okay. That makes sense. And then as a follow-up. With the Company approaching a net cash position, I was wondering if you could comment on what you think the capital deployment priorities will be over the next few quarters? Obviously, the Company has been focused on an organic growth historically, but I'm wondering if that changes, given the evolution of your balance sheet over the past couple of years?

Kevin M. Brady -- Executive Director of Finance

Yeah. We'll continue with our organic growth strategy as our primary strategy. We'll continue to pay down debt here over the next couple of quarters and then share repurchases could be the next logical use of capital for us.

Stephen Baxter -- Wolfe Research -- Analyst

Okay. Thank you.

Kevin M. Brady -- Executive Director of Finance

Thanks, Stephen.

Operator

Thank you. And our next question, we have a follow-up from Erin Wright from Credit Suisse. You may begin.

Erin Wright -- Credit Suisse -- Analyst

Great. Thanks. And obviously, at the beginning of the call, you mentioned sort of a continuing environment from what you saw last quarter. And I'm just curious, particularly across your kind of core biotech customers, you mentioned sort of a more subdued kind of environment. It's -- how are you measuring this environment, like what are some of the key metrics that you're looking at, that you looked across to your customers and in your customer conversations that you think are important in identifying kind of the underlying trends in demand trends across this market?

Kevin M. Brady -- Executive Director of Finance

I am mostly focused on RFP flows, you know, for both the business environment in general, both, you know, quantitatively and subjectively, because I think the actual numbers, the total value it sometimes are misleading and I have said, I think overall (technical difficulty) RFP flows and quality of them, which is maybe more important, which is difficult to quantify, but if the feeling for expanding our (technical difficulty) teams pretty well, we pretty much -- a lot of (ph) things are installed and install that for that will be closed, but, you know, just on (technical difficulty). So I think the environment is pretty good from funding and I think it's pretty good from both total flow and quality of the flow of RFPs and that's (technical difficulty).

Erin Wright -- Credit Suisse -- Analyst

Okay. Great. Thank you.

Kevin M. Brady -- Executive Director of Finance

Thanks, Erin.

Operator

Thank you. And our next question comes from the line of David Windley from Jefferies. You may begin.

David Windley -- Jefferies -- Analyst

Hi. Jumping on late, I apologize if this has been asked, but just want to confirm that the guidance that you provided last night in the deck, and you shift from an adjusted EBITDA description to an EBITDA description, which last year there was a delta between those two and if we apply a delta similar to that, it would imply that your EBITDA guidance is actually kind of apples-to-apples gone down. I just want to make sure that that's actually not the case. (technical difficulty) And the audio, by the way is really bad, at least on my end. It's kind of breaking up. I'm not sure if that's the case, I think, (inaudible).

Kevin M. Brady -- Executive Director of Finance

(technical difficulty) EBITDA, the corporate campus lease as an adjustment to get to adjusted EBITDA. So where -- in the current year EBITDA, that P&L is already burdened by the campus lease on adjusted basis. So that's the one delta between prior year EBITDA and current year EBITDA, is the change in the lease accounting.

Jesse Geiger -- Chief Financial Officer & Chief Operating Officer of Laboratory Operations

So they should be exactly comparable.

David Windley -- Jefferies -- Analyst

Okay. And --

Jesse Geiger -- Chief Financial Officer & Chief Operating Officer of Laboratory Operations

We have marked (ph) down in...

David Windley -- Jefferies -- Analyst

And so the burden, the corporate campus lease burden flows through another line, is that...

Kevin M. Brady -- Executive Director of Finance

It flows through this operating lease expense in current year EBITDA. In prior year EBITDA, it flowed through interest and depreciation and then we adjusted for it with a negative adjustment to adjusted -- to burden the adjusted EBITDA as if it were an operating lease in the prior year period.

David Windley -- Jefferies -- Analyst

Okay. All right. Thank you for that. And then August for me, I caught the tail end of one of your answers, where you said you have some teams coming out of projects and kind of that makes it easier to sell-in into a new project, is your answer to Erin that the environment is still not maybe as healthy, if I understand correctly, not as healthy as you like to see it. But your book-to-bill was really strong, and is it unchanged, is it improving and then where does your kind of staffing level match against a book-to-bill that came in pretty high.

August Troendle -- President and Chief Executive Officer

Okay. So, multiples were companies add (ph), but so is business environment as strong as I'd like it. Well, I don't -- that's (technical difficulty). But it is -- was very strong middle of last year and it's soft, but it's been relatively consistent, Q4 and Q1. And I think that level of business environment is adequate to -- for us to book along our plan and meet our guidance. So I think it's adequately strong. I do think that it's been strong enough for us to rebook despite some very high cancellation rates the last two quarters, surprisingly high and historically very high. And again, I always think you've got a little bit of advantage in bookings. When you have high cancellations, because again you've got very strong ready teams. I think that's true in any case.

So how we stand in terms of hiring, I think, we are good. I think we are at a good level relative to the business environment and our upcoming projects. I do think that we anticipate continued growth and so we are continuing to hire at a 20% or so level. We have had some staff pressure given our growth in some areas, where we've moved at least some contract staff. And as I mentioned, that in course increases our cost base some, and is part of reason for margin compression.

But, yeah, the other thing is that we've had a increased level of pass-through component of our mix in awards. And so the booking, as I mentioned, the bookings look a little higher than they really are in terms of staff capacity needs.

David Windley -- Jefferies -- Analyst

Let me just ask this question one different way and I yield it for. You have in the past said to me that when we're thinking about your book-to-bill relative to competitors' book-to-bill and then your book-to-bill relative to how you think about your ability to kind of higher relatively untrained employees, you're hiring people that are not from your competitors, for example, and bring -- and train them and bring them on in a quality way.

I think you've said in the past that a 1.15 to 1.2 book-to-bill was kind of a sustainable level for Medpace. And kind of pressing (ph) all of those things into account, you're doing better than that, but we are hearing from you that the environment is actually, maybe a little sluggish. Those things seem at odds to me. Help me to reconcile those?

August Troendle -- President and Chief Executive Officer

Okay. So when I said 1.15 to 1.2 is a good level for us, that was 605 basis (ph) so far.

David Windley -- Jefferies -- Analyst

Fair point.

August Troendle -- President and Chief Executive Officer

Under 606, on equivalent levels, probably 1.2 to 1.25 and under 606 with the new math that nobody can understand, there you got the components of it and our 605 relative amount is actually lower than average. So it's that 1.2 is probably a 1.3 given the current mix of our pass through pre-fund versus service revenue. What you care about is service revenue to drive employment and profitability and all the rest of it, but you've got this other moving part and so know what I required to get 1 -- at 605 basis, 1.15 to 1.2 is -- is complex math and like I said, usually it's 1.2 to 1.25, but maybe it's 1.3 now under the current bookings mixture.

So yeah, we're not booking where I'd like to, we're not booking where we could work at. But I think the environment is consistent with us meeting our plan. And our...

David Windley -- Jefferies -- Analyst

Yeah. I appreciate that.

August Troendle -- President and Chief Executive Officer

In our guidance.

David Windley -- Jefferies -- Analyst

Thank you.

Operator

Thank you. And as it -- right now we have no further questions at this time. I'd like to turn the call back to Kevin Brady for closing remarks.

Kevin M. Brady -- Executive Director of Finance

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 second quarter 2019 Earnings Call.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.

Duration: 25 minutes

Call participants:

Kevin M. Brady -- Executive Director of Finance

August Troendle -- President and Chief Executive Officer

Jesse Geiger -- Chief Financial Officer & Chief Operating Officer of Laboratory Operations

Erin Wright -- Credit Suisse -- Analyst

John Kreger -- William Blair -- Analyst

Stephen Baxter -- Wolfe Research -- Analyst

David Windley -- Jefferies -- Analyst

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