Medpace Holdings, Inc. Common Stock (MEDP) Q2 2022 Earnings Call Transcript

Medpace Holdings, Inc. Common Stock (MEDP 0.82%)
Q2 2022 Earnings Call
Jul 26, 2022, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Medpace second quarter 2022 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, Lauren Morris, Medpace director of investor relations. You may begin.

Lauren Morris -- Director, Investor Relations

Good morning, and thank you for joining Medpace's second quarter 2022 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, including the ongoing impact of COVID-19 on our business, are discussed in our Form 10-K and filings with the SEC. Please note that we have 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 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 Troendle -- Chief Executive Officer

Good day, everyone. Liquidity and sufficiency of trial funding for our clients, which are overwhelmingly pre-commercial biotech companies, remains a top focus for us. To date, we have seen a low level of cancellations that are directly related to financial distress. The risk of this accelerating depends upon the severity and duration of ongoing funding slowdown.

I would like to characterize in a bit more detail than usual, our pipeline of business opportunities. And to do this -- I do this because RFP values in the quarter are not necessarily reflective and present a complete and fair reflection of the landscape. It's somewhat of a mixed picture. Looking at the overall business -- new business process in our industry, opportunities generally progress through three important steps.

As background, I want to provide kind of an overview of these steps. Step one, I'm going to call it request for proposal and RFP is issued by a sponsoring company of a clinical trial, and multiple CROs respond with formal proposals to perform the work. RFP metrics are generally not disclosed by CROs. And this is because a number does not do justice to the issue.

There are important qualitative differences making a summary number of the value of these RFPs largely meaningless, i.e. quality is more important than quantity. Step two, I'm going to call is, the winning CRO has given an award notice. And I'm going to call this an initial award notification.

The very fact that I have to make up a name for this suggests that this metric is also not shared by any reporting CROs. The reason again is quality. There is significant uncertainty at this point in the process as to the value of the initial award. Timing, funding, sometimes overall scope is not fully defined.

However, one advantage of this metric is it can't be manipulated and timing is entirely dictated by the sponsor. Step three. In step three, company-specific criteria are applied, and eventually, the award may be recognized as a backlog booking. Generally, this is called a new business award and used to calculate book-to-bill.

This is generally reported by CROs. But this number should not be confused with what I have named an initial award notification in step two. CROs generally require verification of client funding, execution of contract, etc., prior to recognition of an award into backlog. They also apply subjective and qualitative criteria that may delay recognition of all or part of an award such as concerned about possible cancellation risk.

Now -- OK, so how are these steps looking at Medpace? I want to review that. If I look at step one, RFPs, our RFP flow is strong in Q2. In Q2, it is up 31% from Q1 on a sequential basis. However, I have to point out that rapid growth in RFP volume is often seen in weak environments due to elevated scenario planning and to support fundraising efforts by small biopharmaceutical companies, at least in our segment of the market that can sometimes be driven by other things than just strong business environment.

So part of our assessment of RFP quality relates to anticipated timing of the program start and the presence of a credible defined path toward start-up. This has slowed and is somewhat less clear in the current environment. So I think I can summarize this by saying that quantitatively, things look great, but it's hard to draw firm conclusions on any impact of funding slowdown on business. If I look at step two, initial award notifications, our initial award notifications are down in Q2, meaningfully.

They're down 45% year on year and 42% sequentially. So they're substantially down. And -- however, on the other hand, July initial award notifications have recovered quite a bit and look to be tracking more in line with the prior 12-month average. And we're hopeful that marked weakness seen in Q2 is not lasting.

If I look at step three, new business awards that are generally reported and recognized into backlog, they remain strong with a book-to-bill of 1.28 in Q2. But again, you should recognize that this largely represents initial award notifications from prior quarters that have now reached contract execution and nearing first patient first visit in the study and therefore, meet our backlog recognition criteria. So -- well, business development in the CRO industry has a long cycle length. COVID opportunities move very quickly, but the average RFP takes considerable time, and there can be several quarters lag between initial award notification and new business award backlog recognition.

Thus, Q2 weakness in initial award notifications might not meaningfully impact backlog bookings until Q4. So we do have some concern, but things are looking by a number of metrics, reasonably good, particularly RFP volume. And other factors, cancellations. Cancellations can occur at any stage after initial award notification, but they are most impactful if the program is in backlog and ongoing.

As mentioned at the start of my remarks, cancellations in Q2 remain modest and do not signal a problem. I do remain confident in our future success and above-industry organic revenue growth over the longer term, and this confidence is reflected in our stock purchases in Q1 and Q2. With that, I'll let Jesse and Kevin update in more detail our Q2 results. Jesse?

Jesse Geiger -- President

Thank you, August. Good morning, everyone. Our revenue for the second quarter of 2022 was $351.2 million. This represents a year-over-year increase of 26.2%.

Our net new business awards entering backlog in the second quarter increased 16.3% from the prior year to $450.6 million. This resulted in a 1.28 net book-to-bill, and ending backlog as of June 30 was approximately $2.2 billion, an increase of 24.4% from the prior year. We project that approximately $1.13 billion of backlog will convert to revenue in the next 12 months, and backlog conversion in the second quarter was 16.8% of beginning backlog. In 2022, we continued to make progress in hiring, adding 8% from the end of 2021 and 16.8% from the prior year.

With that, I'll turn the call over to Kevin to review our financial performance in more detail and discuss our updated 2022 guidance. Kevin?

Kevin Brady -- Chief Financial Officer

Thank you, Jesse, and good morning to everyone listening in. As Jesse mentioned, revenue was $351.2 million in the second quarter of 2022. This represented a year-over-year increase of 26.2% on a reported basis and 27.7% on a constant currency organic basis. EBITDA of $68.1 million increased 42%, compared to $47.9 million in the second quarter of 2021.

On a constant currency basis, second quarter EBITDA increased 36.3% compared to the prior year. EBITDA margin for the second quarter was 19.4%, compared to 17.2% in the prior year period. The increased EBITDA margin was driven by net foreign exchange benefits behind the strong U.S. dollar and slower headcount growth than 2021.

In the second quarter of 2022, net income of $49.4 million increased to 23.6%, compared to net income of $39.9 million in the prior year period. Net income growth over the prior year was primarily driven by higher EBITDA, offset by a higher effective tax rate. Net income per diluted share for the quarter was $1.46, compared to $1.06 in the prior-year period. Share repurchases during the quarter benefited EPS by $0.04.

Regarding customer concentration, our top five and top 10 customers represent roughly 17% and 25%, respectively, of our year-to-date revenue. In the second quarter, we generated $96.6 million in cash flow from operating activities, and our net days sales outstanding was negative 45.5 days. During the quarter, we repurchased approximately 2.7 million shares at an average price of $137.86 for a total of 374.6 million. During the second quarter, our board of directors approved increases of 110 million to our share repurchase program.

As of the end of the quarter, we had no share repurchase authorization remaining. Year to date, we have repurchased 5.5 million shares, which represented 15.2% of our common stock outstanding at the end of 2021. Our net position at the end of the quarter was $207.1 million, composed of: Debt of $249.7 million; and cash of $42.6 million. Our net leverage ratio is approximately 0.8 times last 12 months EBITDA.

Moving now to our updated guidance for 2022. Full year 2022 total revenue is now expected in the range of $1.405 billion to $1.435 billion, representing growth of 23% to 25.6% over 2021 total revenue of $1.142 billion. Our 2022 EBITDA is now expected in the range of $268 million to $280 million, representing growth of 20.1% to 25.5%, compared to EBITDA of $223.19 million in 2021. Based on foreign exchange rates as of June 30, this revised guidance includes an additional foreign exchange headwind on revenue of approximately $4 million and a foreign exchange tailwind on EBITDA of approximately $3 million related to the strengthening of the U.S.

dollar. This guidance assumes a full year 2022 effective tax rate of 14.5% to 15.5% and 33.8 million diluted weighted average shares outstanding for 2022. There are no additional share repurchases in our guidance. We forecast 2022 net income in the range of $205 million to $215 million, which includes $4.3 million of interest expense on our outstanding debt.

Earnings per diluted share is now expected to be in the range of $6.07 to $6.36. With that, I will turn the call back over to the operator so we can take your questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] And our first question comes from the line of Dave Windley with Jefferies. Your line is open. Please go ahead.

Dave Windley -- Jefferies -- Analyst

Hi. Thanks. Good morning. I wanted to take your comments and tie them in with comments you made last quarter.

In the last quarter, you described to us, in air quotes, cancellations to what might be called a pre-bookings bucket of awarded programs that had not advanced the backlog yet. So I'm using your terminology today, I'm interpreting that those would have been at or past that initial award notification stage. And then today, you're talking about that initial award notification being down, that being the bucket that is down substantially. Are those one and the same, or are your comments today kind of adding to what you told us last quarter? And how should we think about those two descriptions impacting bookings in the second half of 2022?

August Troendle -- Chief Executive Officer

OK. Thanks, Dave. Yeah. I think my comments are really independent.

We did mention that we've seen some evidence of some cancel projects. Again, you're right that we're in that bucket of awarded to us, so met an initial award notification but had not been recognized in the backlog, and so were not backlog cancellations. But I'm not talking about the -- when I talked about our numbers being down for the quarter, I'm not talking about the bucket, which of course would have been influenced by prior cancellations. I'm talking about the new flow into the bucket.

So I'm not talking about the level of bucket, I'm talking about the new flows. And so it has nothing to do with cancellations in the prior quarter. It is new activity is down in the second quarter. So the bucket, which, of course, is continually emptying into backlog is getting lower.

But I'm not talking about the level, I'm talking about the flows, they were substantially down. So it's kind of a real-time look at how things are progressing in business development. And the kind of thing you'd see if people were slowing down decisions and not -- or canceling things before they even award them, then that wouldn't be a cancellation for us. We've never got the award.

But it does represent a weakness in the pipeline. And as I said, that's something that does tend to feed through a couple of quarters out. And so it would affect bookings in the -- later in the year, but there is a delay from getting from that bucket of initial award notifications all the way into backlog and then, of course, you have a revenue impact even being down that.

Dave Windley -- Jefferies -- Analyst

Thank you for that. On the guidance for the remainder of the year, you obviously had a very nice 2Q, some upsides on both revenue and EBITDA. When we take those in combination with the FX impact for the second half, you appear to be trimming ever so slightly your revenue and EBITDA expectations on a constant currency basis. Is that a reflection of some of these issues that you're highlighting? Is it a reflection of clients maybe not starting projects as quickly as you had anticipated, or perhaps not being able to hire quite as many people as you hoped? Or is it just kind of rounding error?

Kevin Brady -- Chief Financial Officer

Dave, this is Kevin. On the margin side of the equation, you can see that at the midpoint, we do still expect margins to decline a bit further in the second half, and it's pretty consistent with what we said in the first quarter call, that we do see some inflationary costs still coming in. We are continuing to hire. We have a lot of retention efforts in place to reduce some of the attrition that we've seen in previous quarters.

And we've got some office expansion coming up that are offsetting some of that net tailwind that we're seeing on FX.

Dave Windley -- Jefferies -- Analyst

OK. Thank you very much. I'll yield. Thanks.

Operator

Thank you. And our next question is going to be from the line of Christine Rains with William Blair. Your line is open. Please go ahead.

Christine Rains -- William Blair and Company -- Analyst

Hi. Thank you for taking the question. My first one is that I appreciate you commenting on cancellations. But curious if you have noticed a notable increase in project delays.

August Troendle -- Chief Executive Officer

Yeah -- no. I wouldn't say that we've specifically seen a large number of delays, but there is some of that. We've seen a bit of weakening and more clients are fishing for funding, etc. So it's hard to give a measure for it and to have a consistent metric that I could point to.

But anecdotally, we see some. I can't say that it is concerning at this point.

Christine Rains -- William Blair and Company -- Analyst

Great. Thanks. And then just an update would be appreciated on staffing overall as it relates to turnover and hiring. Specifically, I noticed that Medpace's had count growth slowed from the mid-20s in the back half of the year to 20% last quarter and then 17% this quarter.

So just in general, are you moderating hiring plans at all? Or do you expect an uptick as the year progresses? Thanks.

Jesse Geiger -- President

Yes, this is Jesse. We are moderating a little bit just given the business environment. I think we're well-positioned for the current work that we have. We're well-positioned for upcoming projects.

As Kevin mentioned, we are continuing to hire, but just at a slightly slower rate than we've had last year in 2021. And turnover has come down, too. So we're spending efforts on retention. And for now, that seems to have improved and hopefully, that continues.

Christine Rains -- William Blair and Company -- Analyst

Great. That's all for me. Thank you.

Operator

Thank you. Our next question comes from the line of Sandy Draper with Guggenheim Partners. Your line is open. Please go ahead.

Sandy Draper -- Guggenheim Partners -- Analyst

Thanks so much. Maybe just a couple of housekeeping items and start to start, probably for Kevin. One, can you remind me, Kevin, if I just do the simple math of taking ending backlog from last quarter, add the bookings and subtract revenue, the number doesn't quite put. I'm assuming FX is the majority of that.

It's not a huge difference, but just can you remind me why that simple math doesn't necessarily always line up?

Kevin Brady -- Chief Financial Officer

Yes. You're right, Sandy. The biggest impact there is going to be just changes in FX that don't allow you to do the basic math.

Sandy Draper -- Guggenheim Partners -- Analyst

OK. OK. Got it. Second question, can you -- so the debt -- remind me the structure of the debt because it's showing up on the balance sheet as all $250 million is basically current portion is -- I feel like there's a revolver, is that necessarily due, you have to pay it off in the next 12 months, which doesn't seem likely.

Kevin Brady -- Chief Financial Officer

Yes. Sandy, it's a one-year revolver. The term is in March of 2023. And obviously, we've got the intent and ability to refinance that.

But yes, that's why it's classified as short term.

Sandy Draper -- Guggenheim Partners -- Analyst

OK. So is there any -- what is sort of thinking of refinancing and putting that out longer versus, oh, let's just try to get it down and we're comfortable? Any thoughts about just sort of the long-term comfort with the debt?

Kevin Brady -- Chief Financial Officer

Yes. I think our intent right now is to go ahead and start paying that facility off. As you know, we generate some significant amounts of free cash flow, and so we'll start to pay that facility down. We do want to make sure that we keep an eye on the stock price and what's going on there.

And so we -- there is some ability to also look at additional share repurchases. But yes, the intent is to pay down that facility. And we're in discussions with our banking partners, and we'll kind of see what makes sense in the coming quarters in terms of refinancing.

Jesse Geiger -- President

And Sandy, we are comfortable with the leverage. We're comfortable with leverage on the balance sheet. It's something that we're considering right now is how much do we need for how long do we need? And as Kevin mentioned, primary use of that would be for potential share repurchases. But we're working through a valuation of capital structure currently.

Sandy Draper -- Guggenheim Partners -- Analyst

OK. Great. And then I know I'm sure it's out there. What -- can you remind me what the rate is on the -- is it floating? Or is it fixed? And what is it?

Kevin Brady -- Chief Financial Officer

It's floating. It's so for plus 1%.

Sandy Draper -- Guggenheim Partners -- Analyst

OK. OK. Got it. Which obviously in a rising environment makes I would assume a little more focused on paying it down.

So and I guess there was the final one, which you led me into, Kevin, which is the board has not expanded its share repo at this point. I would assume that's because you've capped out on the current line. You're in the process of reevaluating. But it's not a signal one way or the other that you're absolutely not or absolutely are, it's just you're reassessing your balance sheet and where the stock is? And if you think there's an opportunity, you can pursue that.

But if at this point, you're going through the evaluation process and complete it without trying to put words in your mouth. Is that sort of a fair summary --

Kevin Brady -- Chief Financial Officer

That's exactly right, Sandy. We'll continue to evaluate facility and what the -- a little bit longer-term nature of what we want to do looks like. And will determine what's in the best interest of the company in the coming quarters here. You're exactly right.

Sandy Draper -- Guggenheim Partners -- Analyst

OK. Great. Thanks. And then my last one, just following up on the hiring question.

Jesse, can you remind me as you said, a little bit slower hiring this quarter but still at a pretty reasonable level. If the market really comes back, how long does it take you to rebuild -- so an RFP pipeline not of deals but of resonate? If things come back, what's the lag time before you can really try to step on the gas and start hiring aggressively. Obviously, slowing down is probably easier. But just trying to think about if you're in a more moderate pace right now, when things come back at some point, how quickly can you start ramping hiring back up?

Jesse Geiger -- President

Ramping up rather quickly is subject to what the labor market and the competitiveness is there. But just as a reminder, it does take a little bit longer, a couple of quarters up to a year sometimes, for people to get fully trained and new hires to be at a good utilization and contribution. So there is a lead time there. We're not talking about a significant pullback in hiring.

We still anticipate hiring at a good rate. And more importantly, with retention as a key focus that it's much easier and more productive to hang on to somebody who's already functioning and active than attention on hiring a new individual. So I think through a combination of retention effort focused and just keeping an eye on the pulse of the business environment and how we modulate the rate of gross new hires, that's our strategy here as we navigate through the coming business environment.

Sandy Draper -- Guggenheim Partners -- Analyst

Great. That's all my question. Thanks so much.

Operator

Thank you. [Operator instructions] And our next question comes from the line of Eric Coldwell with Baird. Your line is open. Please go ahead.

August Troendle -- Chief Executive Officer

Eric?

Operator

Mr. Coldwell, your line might be on mute. OK. We'll go ahead and move to our next question.

We do have a follow-up question from the line of Paul Knight with KeyBanc.

Paul Knight -- KeyBanc Capital Markets -- Analyst

A notification stage, a decline of 45% year over year in the second quarter, and then it recovered in July. Was that July recovery kind of back to what backlog growth has been, meaning around mid-20s? And then why do you think that decline happened and then maybe there was a rally. Do you think they're reevaluating budgets? What's your thought on why maybe there was this drop and then recovery?

August Troendle -- Chief Executive Officer

I have no idea. I'm hopeful that there was a pause here and things are now rolling along. There is a -- look, there's a fair amount of volatility on a month-to-month basis. And the only reason I would call out the prior quarter's reduction, usually I wouldn't, but in the current context of us being very vigilant around looking at impact of funding flows and the fact that RFPs are not particularly reflective of the environment, that we have actually a very strong RFP.

I didn't want to leave the impression that RFPs are great. And so things look fantastic. There was a -- what is really a rather substantial reduction in those awards, those initial awards in Q2, they snapped back in July. Not to the extent of like things were all backed up and then there was a huge outflow.

But the July numbers are looking in line for a quarter similar to the prior four quarters. So it looks like it's come back to, kind of, our baseline run rate. But that's a partial month so far. I mean it's -- I don't know that that's reflective of the next quarter, but we are hopeful it is.

Paul Knight -- KeyBanc Capital Markets -- Analyst

And this volatility you're seeing, is it concentrated in that small biopharma group of customers that's 79% of revenue year to date that we see.

August Troendle -- Chief Executive Officer

Yes. That drives our numbers. And yes, that's exactly where we see this quite -- I mean, look, you're going to see volatility in -- independent of the size of the company. Look, sometimes the company has a lot of work coming along, and so there can be volatility just in general.

But I think the weakness that we're seeing is being driven by that smaller biotech company, yes.

Paul Knight -- KeyBanc Capital Markets -- Analyst

OK. And then, I guess, last question is, do you see any therapeutic area that's weaker, like cell therapy that seems to be the most troublesome spot in the clinical trial market right now. But what are your thoughts?

August Troendle -- Chief Executive Officer

That's a small enough area for us that it's not going to drive any of the larger numbers. Is it -- the slowdown, I do not have a particular categorization of the therapeutic area or type of study. I -- it's broad as far as I can see.

Paul Knight -- KeyBanc Capital Markets -- Analyst

OK. Thanks.

Operator

Thank you. And our next question is a follow-up question from the line of Christine Rains with William Blair. Please go ahead.

Christine Rains -- William Blair and Company -- Analyst

Hi. Thanks for taking the additional questions. I was just wondering if you can comment on the trial delays from initial awards to executed awards, sort of, in other words, the progression from bucket two to bucket three. And should we assume net awards are lower in Q3 as a result, or more like Q4 and just kind of what you're assuming in guidance?

August Troendle -- Chief Executive Officer

Yeah. And look, some things move faster, some things move slower in times of -- if there's funding difficulties. Or sometimes in a more difficult market, things can slow down. As I mentioned during COVID, you guys used to things moving for COVID, of course not, work.

I think everyone saw that there was a very rapid from award to execution was very quick. But on average, it's a few quarters. I don't know how to characterize it better than that. There is quite a bit of variability.

But a slowdown in things being initially awarded in Q2, I pointed out in my prepared remarks that we generally see that in Q4 as sort of an average time frame.

Christine Rains -- William Blair and Company -- Analyst

Great. That's helpful. And for the Q4, just to clarify what's included in guidance right now. And then just as a follow-up question, your operating costs have been well below our expectations for the last two quarters.

Just curious what you're eliminating on that front. And then that's all for me. Thank you.

August Troendle -- Chief Executive Officer

I'll take the first part of that. We don't give guidance on bookings. And bookings in Q4, that is -- things moving in the backlog would have an immaterial impact on this year's revenue. And so it would not be part of guidance, they would potentially affect 2023 guidance when we get there.

But they really wouldn't have any impact on this year's performance financially.

Kevin Brady -- Chief Financial Officer

Christine, what was the second part of your question? I'm sorry.

Christine Rains -- William Blair and Company -- Analyst

No. It was just on operating costs. They've been below expectations for the last two quarters. Just curious on what you're eliminating on the cost front thing.

Kevin Brady -- Chief Financial Officer

Yes. As I had commented before, we do expect the balance of this year for some of our cost to increase as you think about there's still inflation out there. Some of our discretionary type activities, we're starting to see travel -- come back a bit. Things like training come back a bit.

We are continuing to hire, albeit at maybe a slower pace, but we're continuing to hire. We've got a lot of retention efforts in place, again, to try to improve our attrition rate. We've got some office expansions overseas that are going to be coming online in the second half. So that's really what's driving some of the expected increases in costs in the second half.

Christine Rains -- William Blair and Company -- Analyst

OK. Thank you.

Operator

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

Eric Coldwell -- Robert W. Baird and Company -- Analyst

OK. Thank you. We'll try this on a new phone. Can you hear me now?

August Troendle -- Chief Executive Officer

Yes.

Eric Coldwell -- Robert W. Baird and Company -- Analyst

OK. Good. I was hoping -- and I'm sorry if I missed this while I was dialing back in, but hit rates on your RFPs. I'm curious if you could quantify what level that is at, and then qualify how that stands up versus the recent past and then perhaps your longer-term averages?

August Troendle -- Chief Executive Officer

Yeah. And sort of what impact that might have is a very good point, Eric. It could also affect the award -- initial award notifications. Obviously, that's what goes into that rate.

They did -- so that's a very good question, how much of it is slowing of overall decisions and how much of it is slowing in our wins on those decisions. Our hit rate did drop a little bit in the quarter, but it was not the driver of that reduction. I would have pointed out that it was a hit rate rather than flow of decisions. It was a substantial reduction in new award notifications was really driven by much fewer decisions in the quarter rather than our win rate on those.

But there was a little -- a bit of a reduction in win rate. We've had sort of a very high win rate in the prior couple of quarters, and it came down a bit closer to our average over time.

Eric Coldwell -- Robert W. Baird and Company -- Analyst

Are you willing to share broadly what your average hit rate over time has been?

August Troendle -- Chief Executive Officer

No. I don't think we -- I don't think we've provided that in the past, and I don't see a need to here.

Eric Coldwell -- Robert W. Baird and Company -- Analyst

OK. Second topic is you had a very sharp snapback in free cash flow this quarter. And I believe last quarter was chalked up to some timing. You had obviously a very good quarter on cash flow, which tends to be indicative of a healthier environment.

And then as a follow-on to that, I would say, bad debt is obviously a topic we would want to look at if there is, in fact, a slowdown or financial distress in the client base. So I was hoping you could talk a bit about what you're seeing on the bad debt side, even leading indicators there. And any recent reviews of client creditworthiness that you might be willing to discuss.

Kevin Brady -- Chief Financial Officer

Yeah. Eric, this is Kevin. On the bad debt side, specifically, we haven't seen an increase in bad debt. If you look at the cash flow, there's very little, if any, bad debt expense that was incurred in the quarter.

We continue to monitor our client payments and expectations and funding very closely, and we've been able to hold that down at this point in time. What was the first part of your question, Eric?

Eric Coldwell -- Robert W. Baird and Company -- Analyst

Just the strength in the free cash flow, which looked to be a bit of a timing from last quarter.

Kevin Brady -- Chief Financial Officer

Yeah. And we saw a similar timing on the other side. So we had great collections in the fourth quarter, which resulted in kind of a slowdown in the first quarter. And then things snapped back on some advanced billings and collections in the second quarter.

Eric Coldwell -- Robert W. Baird and Company -- Analyst

Got it. Last one for me, and it's more thematic. I'm not asking you to give '23 guidance. But in a scenario where the small biotech base does slow, or really any channel slows, but obviously biotech's been the majority of your book, your hiring would slow.

I suspect some of your investments would slow, you tightened the reins a bit. In this hypothetical scenario where demand slows and therefore, future revenue slows, what do you see happening with margins? Is it a scenario where you could actually have margin stability or expansion because your cost reduction and your hiring demands would come in so much? Or would there still potentially be some deleveraging across the organization on fixed cost, and perhaps activities you wouldn't be willing to see sort of slowdown, because whatever the environment is, perhaps it's just a short life nature? Just giving a sense on what your considerations are for future margin if, in fact, there is an eventual, more notable slowdown due to lower bookings in the future?

August Troendle -- Chief Executive Officer

Yeah. Let me jump in there. Historically speaking, our margin increases in such an environment. And I would expect that to continue to be the case.

It does -- how much it does and whether it does is very dependent upon not just revenue decrease, but opportunities and what we're seeing in the future few quarters. But yes, there's really a slowdown, and so we're seeing a slow -- fewer opportunities. That's an environment in which our margin would tend to increase, may be materially because we give up a lot of our hiring and acquisition and trying to stay well ahead of demand on staff. So I would expect the margin would go up.

Eric Coldwell -- Robert W. Baird and Company -- Analyst

OK. Good. Thank you very much. I'll let others jump in.

Operator

Thank you. And our next question is a follow-up question from David Windley with Jefferies. Your line is open. Please go ahead.

Dave Windley -- Jefferies -- Analyst

Hi. Thanks for taking the follow-up. I wanted to tie together a couple of Eric's good questions there. So August on this last, your -- I just want to make sure I understand your point on opportunities that you take your cues on hiring based on opportunities coming into the top of the funnel.

And so the more true the opportunities are, the better you're able to calibrate your hiring. Is that the right interpretation of what you said?

August Troendle -- Chief Executive Officer

That's right. It would be a qualitative and quantitative assessment of the funnel and what we see a couple of quarters out in project ramp. And that's going to drive our hiring more than current -- directly current environment.

Dave Windley -- Jefferies -- Analyst

Right. And then a question on hit rate, and you commented that, that was down, but only a very little. Are you able to tell -- one of the comments I think you've made in the past is that in a tight environment, a client might actually issue RFPs more broadly, kind of fishing for price, so to speak, in a way that would kind of artificially inflate the RFP flow to the industry perhaps, and that's something that you have to be wary of is -- are you able to tell if -- like you mentioned in your response to Eric, that decisions were down in 2Q. Is that an indicator that some of the RFP flow is not real, is kind of that fishing for price type of stuff?

August Troendle -- Chief Executive Officer

That's always hard to come up with a single metric. You see anecdotal things. It's hard to get an assessment of whether that's driving how much of it. But you're right, sometimes in a weak environment, you see a lot of -- some of it's fishing for price to try to get the price down.

A lot of it's really -- is part of the funding process. It's getting a bid to then go to look for funding with, and they need that in advance before they can raise the funds. And of course, that's -- many of our clients need to raise funds before initiating a trial. So that's hard to sort out whether that's more or less than usual.

Some of it is -- they have a certain budget and they're doing scenario planning for what they could accomplish with different amounts of funding. Also, they might have multiple different type of RFPs for really looking for what they can accomplish. So you're right, some of it is a bit increased churn and less likely to move forward. But how to quantitate that and say that is what drove fewer decisions and that, that drove RFPs, it's hard for us to sort that out.

Dave Windley -- Jefferies -- Analyst

OK. I appreciate the answers. Thank you very much.

Operator

Thank you. And I am showing no further questions. And I would like to turn the conference back over to Lauren Morris for any further remarks.

Lauren Morris -- Director, Investor Relations

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 2022 earnings call.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Lauren Morris -- Director, Investor Relations

August Troendle -- Chief Executive Officer

Jesse Geiger -- President

Kevin Brady -- Chief Financial Officer

Dave Windley -- Jefferies -- Analyst

Christine Rains -- William Blair and Company -- Analyst

Sandy Draper -- Guggenheim Partners -- Analyst

Paul Knight -- KeyBanc Capital Markets -- Analyst

Eric Coldwell -- Robert W. Baird and Company -- Analyst

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