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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. [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.
Good morning. And thank you for joining Medpace's first quarter 2019 conference call. Also on the call today is our President and CEO, August Troendle and our CFO and COO of Laboratory Operations, Jesse Geiger.
Before we began, we 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 view 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 on the Earnings Press Release and Earnings Call Presentation Slides provided in connection with today's call. The slides are available on the Investor Relations section of our website at investor.medpace.com.
With that, I would now turn the call over to August Troendle for opening remarks.
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 level significantly above expectation and/or historical averages. I’m not sure if this represents bad luck or a new normal. But in any case recent cancellations represent the 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’ve have taken on a number of contract staff to fill gaps where they've come up. We expect full year margin at or slightly below the level in Q1.
Jesse will now review our financial performance for Q1.
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. And in backlog as of March 31 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 headcount 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. 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.
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 five 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 day 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 31, 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.
Thank you. [Operator Instructions] Our first question comes from the line of Erin Wright from Credit Suisse. You may begin.
Great. Thanks. You mentioned the cancellation trend and that you’re not sure if that 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.
Yes. I – so differentiate between those, but yes, mostly pipeline or product failure.
And any sort of dynamics on those biotech funding side of?
No. We 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 past times of a slowdown.
Okay. And can you speak the level of hiring that you’re doing more broadly. How should we be thinking about that quarterly progression and the margin trend from here?
So, I think we should continue hiring on the sort of rate we been hiring. We expect to hire 20% or so staff over the course of the year and pretty linearly.
And the quarterly progression of EBITDA or margin trends kind of going forward, should we think about any anomalies here?
Yes. I think from a quarterly progression, we’ll stick to kind of the full year, guidance year on margin percentage. And August comments at the beginning of the call about EBITDA margins for the year around the level that they were in Q1.
Okay, great. Thank you.
Thank you. And our next question comes from the line of John Kreger from William Blair. You may begin.
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?
That’s right. Yes.
Okay, great. Thanks. In your slide deck that shows some of the revenue mix, look 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?
No broad implications. But the shift towards small biopharma continues to be an area that we’re focus on and an area where we see good growth opportunities. The mix change by therapeutic area, I guess cardiovascular programs tend to be a little more lumpy than in some of the other therapeutic areas. So 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.
Okay. Thanks. And then one last one, August, when you talk to your clients how do they react to the increase rhetoric out of DC about drug prices being too high? Does that influence their behavior at all?
I never discussed that with them.
All right. Thank you.
Thanks, John.
Thank you. [Operator Instructions] Our next question comes from the line of Stephen Baxter from Wolf Research. You may begin.
Hi. Thanks for the question. I was wondering if you could comment on your win rate in the quarter. Just trying to think about whether there’s any material differences between RFP flow and win rates that we should consider when thinking about the bookings performance in the quarter?
Yes. Win rate was pretty strong and I think generally you see a correlation between cancellations and win rate. We said high cancellations 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 enhanced chance of winning.
Okay. That makes sense. And then is a follow-up. With the company approaching in net cash position, I was wondering if you could comment on what you think the capital’s deployment priorities would be over the next few quarters? Obviously the company is been focused on organic growth historically, but I’m wondering if that change has given evolution of your balance sheet over the past couple of years?
Yes. We’ll continue with our organic growth strategy as our primarily strategy. We’ll continue to pay down debt here over the next couple quarters. And then share repurchases could be the next logical use of capital for us.
Okay. Thank you.
Thanks, Stephen.
Thank you. And our next question, we have a follow-up from Erin Wright from Credit Suisse. You may begin.
Great. Thanks. And August, 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 you’re kind of core biotech customers. You mentioned sort of a more subdued kind of environment. How are you measuring this environment? Like what are some of the key metrics that you’re looking at that you look across to your customers or in your customer conversations that you think are important and identifying kind of the underlying trends and demand trends across this market?
I’m mostly focused on RFP flows for business environment in general, both quantitatively and subjectively, yes, because I think the actually numbers, total value is sometimes very misleading and as I’ve said, I think for all [AUDIO GAP] pretty good for funding. And I think it just pretty from both total flow and quality of the flow of RFPs and that’s [AUDIO GAP].
Okay, great. Thank you.
Thanks, Erin.
Thank you. And our next question comes from the line of David Windley from Jefferies. You may begin.
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, 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 going down. I just want to make sure that that’s actually not the case?
[AUDIO GAP].
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 a case with anybody else.
[Audio Gap] the corporate campus lease as an adjustment to get to adjusted EBITDA. So 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.
So they should be exactly comparable?
Yes.
Okay. So the burden -- the corporate campus lease burden flows through an other line, is that…?
It flows through its operating lease expense in current year EBITDA. In prior year EBITDA it flow through interest and depreciation and then we adjusted for it with a negative adjustment to burden the adjusted EBITDA as if it were an operating lease in the prior year period.
Okay. All right. Thank you for that. And then, August, from 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 into the 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 yet book-to-bill was really strong. 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?
Okay. So, multiple components to that [ph].
Yes.
So, business environment as strong as I’d like it, well, that [Indiscernible], but it was very strong middle of last year and it 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 higher cancellation rates for 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.
How we stand in terms of hiring? I think we’re good. I think we’re 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 20% or so level. We have had some staff pressure given our growth in some areas where we’ve move to some contract staff and as I mentioned that in course increase our cost base and is part of the reason for margin compression. But yes, the other thing is that we’ve had a increase 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.
Let me just ask this question one different way and I’ll leave the floor. You have in the past said to me that we’re thinking about your book-to-bill relative to competitor’s book-to-bill and then your book-to-bill relative to how you think about your ability to kind of hire relatively untrained employees, you’re hiring people that are not from your competitors for example, and train them and bring them on in a qualitative way. I think you’ve said in the past that our 1.15 to 1.2 book-to-bill is kind of the sustainable level for Medpace and kind of taking all of those things into account, you’re doing better than that, but we’re hearing from you that the environment is actually maybe a little sluggish, those things seem it odds to me. Help me to reconcile those.
Okay. So, when I said, 1.15 to 1.2 is a good level for us. That was 605 basis; 605 fair point. 606 and equivalent levels probably 1.2 to 1.25 and under 606 with the new math that nobody can understand that you got the components of it. And our 605 relative amount is actually lower than average. So, 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 a service revenue to drive employment and profitability and all the rest of it. But you got these all the moving part. And so -- what I require to get a 606 basis, 1.15 to 1.2 is – it’s a complex math, and like I said, usually its 1.2 to 1.25, but maybe its 1.3 now under the current bookings mixture. So yes, 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 in our guidance.
Appreciate that. Thank you.
Thank you. As of right now we have no further questions at this time. I’d like to turn the call back to Kevin Brady for closing remarks.
Thank you for joining us today call and for your interest in Medpace. We look forward to speaking with you again on our second quarter 2019 earnings call.
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.