Good day, ladies and gentlemen, and welcome to the Medpace second 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, Mr. Kevin Brady, Medpace's Executive Director of Finance. You may begin.

Good morning, and thank you for joining Medpace's second quarter 2019 earnings 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 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 Security Litigation Reform Act of 1995. These statements involve inherent assumptions with known and unknown risk 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 and 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'll 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 on 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. Thank you, Kevin. And good morning, everyone. As August mentioned in our earnings release, the business environment remains strong in the second quarter and our competitive win rate also remained healthy. Cancellations…

[Operator Instructions] And our first question coming from the line of David Windley with Jefferies. Your line is now open.

Good morning. Thanks for taking my questions. August, I'm disappointed not to get your opening remarks. I’d be curious, I believe August is on the call, I thought that's what they said.

I’m here, David.

I’ve been curious, your description of the environment on - in maybe a little bit more detail. And then I do have a follow-up or two on some mechanics.

Okay. Business environment, I think has been pretty stable. And again, I think there’s been a lot of talk, but I did not -- I don't think I've ever said that the business environment had deteriorated badly this year at all. But compared to last year, it has been a little bit softer. This - if you look at like RFP flow, the first three quarters of last year was very strong. And it kind of dropped off some in Q4 and Q1, and that's why I’ve said that business environment had softened some, both the quality and the number of RFPs coming in. What sustained us has been outstanding win rate. Our competitive win rate in the last several quarters has been very high, and that’s made up for a bit of softening in the overall flow of RFPs. Things did tick up a little bit in the second quarter. Again, I would characterize it more as ongoing relatively strong environment that's a little bit weaker than the early, certainly in the first half of 2018, but still pretty strong and, in fact, strengthened a little bit in the latest quarter.

Okay. That’s very helpful. Thank you. So on the mechanics. So one of the pretty common outcomes for most of your peers if they experienced a couple of quarters in a row of elevated cancellations would be some disconnect in the kind of loss of revenue out of backlog and likely revenue in the relative near term and the ability to kind of cycle staff and projects into something else to actually replace that revenue. And so, one would expect that - and you actually described it last quarter as being a headwind, and yet, revenue was better than expectations, and importantly, it looks like margin and utilization was better than expectations. I guess the last point I’d think intuitively would be because you guys don't include projects in backlog until they're basically ready to start, it's not as if these projects weren't already teed up. So help me understand how you guys are so nimbly able to transition from what has to be lost revenue into more revenue?

Okay. So the cancellations were pretty sizable in Q4 and Q1, and they absolutely have a meaningful impact on our revenue generation in this year 2019. And into 2020, I think you could say whatever we would -- revenue we would have had would have been substantially better if we hadn't had cancellations. But the timing of that is there is a bit of a delay, and you don't see a material drop-off in that revenue till a few quarters out often. And we are still expecting a larger impact in the second half of the year than in the first half of the year from that. But you’re right, we do have a lot of things in play, and the environment has been very good at enabling us to fill in a lot of the gaps. And we still do expect a little bit of an air pocket here later in the year. But how well we can fit in, and just really the timing of startup of other projects, how quickly we can get them moving will determine whether how much of a slowdown that brings. But I think, there’s definitely a slowdown from whatever would have been, the environments been good enough for us and our win rate has been outstanding enough for us to generate revenue growth faster than expected. And operationally, startup of projects has gone very smoothly. So I think there's a lot of things in the mix. I don’t know exactly what the impact, but certainly we do expect some impact on revenue growth in the second half of the year.

Okay. I’ll yield the floor. I’m sure other guys have questions. I'll may come back.

Thanks, Dave.

And our next question coming from the line of Sandy Draper with SunTrust. Your line is now open.

Thanks very much. Just one industry question, probably for August. One of, hate to say competitor because they're - I don't think you guys compete with them a whole lot, they're on the very large end, mentioned maybe a little bit more wage pressure or a little bit more difficult hiring? Just wanted to, August, get your thoughts on the hiring front what you are seeing? Is there any notable change there obviously, industry is growing well. A lot of people looking to hire. A lot of demand, a lot of good book-to-bills across the board. Just wanted to get your thoughts on what the hiring environment is like.

I think it’s relatively consistent. I don't think there's been a large shift in anything. It isn't like several years ago when there was a lot of bidding for oncology CRAs and there was a fair amount of acute wage pressure in some areas. I don't see that currently. I think that we are hiring aggressively. You have grown headcount pretty rapidly and tend to continue that. But I don't see that as a major barrier, and I don't see it as a meaningful inflection in wages.

Okay. Great. That’s really helpful. And then the follow up unrelated. Just any updated thoughts on or approach to the share repurchase program. Obviously haven’t seen any recently. You have one outstanding. When you think about the use of capital and capital deployment, what - where are the priorities? And how do you see the share repurchase fitting in? Thanks.

Sure. So you’re right. We paid off the debt in the quarter. The next logical step for us in capital allocation would be share repurchases. We do have some anticipated higher capital expenditures, kind of second half of this year and late and into early part of next year relative to our campus expansion here. But beyond that, we’ll be opportunistic about the timing of share repurchases.

Great. Thanks, Jesse.

And our next question coming from the line of Erin Wright with Credit Suisse. Your line is open.

Great. Thanks. Can you speak a little bit about the nature of the new business wins in the quarter? Was there any one off or disproportionately larger factors or contracts that influenced the new business win trends? Thanks.

There really was no large award that drove anything there. It was pretty diversified.

Okay. Great. And then, I mean, on the last call, you kind of mentioned that it’s not just about RFP flow in terms of magnitude, but also the quality thereon, and you seem more optimistic here. I guess, how would you characterize kind of the quality that you're seeing out there today?

I think it’s, again, a reasonably strong, but not quite as exciting as the first two, three quarters of last year. So I think it’s kind of moderated some, but it's remained strong. And I do want to - point out one thing that I think a lot of people have focused on, they've looked at our book-to-bills and see here the 1.3 times, and maybe I should put that in context. Look, I think we're doing great, and I think we're kind of where we want to be. But a 1.3 times does not translate into what it was under 605 basis points. There is for a full service provider like us that is doing all full service and so have a lot of - a very substantial portion of our revenue is pass-throughs. Book - and those pass-through characteristics are a bit later in projects and the book-to-bill will virtually always be substantially higher under 606 basis and 605 basis points. And so like I’ve said before, I think we’ve targeted in the past to 1.15 times to 1.2 times under 605 basis points. I think we have to target a 1.3 times or so under 606 basis points. So this 1.3 times really represents something less than 1.2 times under 605 basis points. And in fact, if you’re looking at this quarter or if we did it on a service revenue basis, service fee basis our book-to-bill would have been less than 1.2 times. So don't translate this 1.3 times into a very high number relative to our historical trends.

Okay. And then with that in mind, and how should we be thinking about bookings trends into the second half in terms of the pass-through dynamic?

So, again, I would - we kind of target a 1.3 times or so, and I think we're anticipating being able to achieve that.

Okay. Great. That’s helpful.

And our next question coming from the line of Donald Hooker with KeyBanc. Your line is now open.

Hey, great. Thank you. I just want to orient myself again around the similar question to last quarter’s, orient myself around EBITDA margins. I mean, I guess maybe you can reiterate your plans? It looks like you're hiring - you're increasing your employee base pretty substantially this year. I think it was 20% you mentioned last quarter. And what is the right EBITDA margin now with all this growth coming in? I think we've talked about 16% to 17% in the past. Is that a fair or kind of as we look out beyond 2018 a normalized EBITDA margin for you guys?

Yeah. I think something in the 16% to 18% range is a good normalized margin. The Q2 level in margin level was impacted by a relatively flat pass-through cost compared to the revenue increase. So that did pop it up for the quarter. The 18.8%, I wouldn't view that a sustainable margin. We are guiding to about a 17.3% at the midpoint for the year, which I think is a reasonable expectation.

Are you guys going to be…

Sorry. I just want to add, I think our employment growth is right about in line and doing well. We kind of had expected to revenue to be a little bit lower even on the service fee basis and we expected to get farther ahead on hiring, which was kind of our plan. We wanted to aggressively look for growth and hire ahead. And I don't think we've done that. Instead, we've sort of right along the path, I guess, you'd say a little bit closer than we would have normally planned. So I think we're in a pretty good spot, but we didn't get as far ahead as we expected. So margin has popped up a bit.

Okay. I mean, when do you think you'd be sort of caught up with your hiring?

Again, I think we're caught up, but we want to get ahead. I want to really kind of get above a good buffer. And that's something, I don't know. I mean, we have time to do it. We’re expecting it in here and the rest of the year. We expect to hire ahead of revenues going in through the rest of the year. Although, I think we're in a reasonably good spot now.

Okay, guys. And maybe, one last question on that same front. Do you guys, I think, you guys rely or use any contract labor than - I think you might have mentioned, I guess with the big growth rates last year, you might have had relied on some third party contract labor. What is your sort of use of contract labor now and kind of how do you see that trend going forward into next year?

So we do have - we do have some, I wouldn’t say it's a large amount, but we did that when a quarter or two ago at began hiring some contract staff to fill in. We still have some of that know, we will unwind that at some point. But usually we hold that staff for a year or so at least. So that’s still in place.

Okay. Thank you.

And our next question coming from the line of Stephen Baxter with Wolfe Research. Your line is now open.

Hi. Thanks. I think I had some more time to look back on Q4 and Q1. Have you had any additional insights about what drove the cancellation rate up to those levels? Or I guess said in other way, what didn’t you see this quarter that resulted in the cancellation rate returning back down to those normal levels?

Yeah. Thanks, Stephen. No, nothing to kind of a look back analysis. Nothing has come out of kind of under covering what was driving the Q4, Q1 elevated levels. A lot of those at the time we identified were project reprioritizations and drug failures, nothing out of the ordinary there. And then really, Q2 has returned back to a pretty normalized level with nothing to note. But yeah, I think it was just a kind of ordinary course cancellations in those larger quarters just more of them.

Thanks. In a normal cancellation rate for you guys, I think you said in the past is somewhere around like 4% or 5% are still the right way to kind of think about what’s normal.

Yeah, that's right.

Okay. And then on the balance sheet, I wanted to kind of return to the previous question on share repurchase. You guys are thinking about doing share repurchase. Would you ever consider putting some debt back on the balance sheet to allow you to do more than just your free cash flow? I'd be curious to hear your thoughts on the pros and cons and why the capital structure without that sort of - is not the right way for you guys to trend going forward?

Yeah, if we saw the right opportunity, we would certainly put debt back on the balance sheet to take advantage of the share repurchases. And we do maintain, we paid off the term debt, but we do maintain an un-drawn $150 million revolver capacity that we would utilize for something just like that.

Okay. Thanks. Last one for me was just on some of those the customer mix disclosures. It looks like small biopharma is up something like 50% or plus year-to-date. And a little bit of that has been offset by a little bit smaller year-over-year revenue from the mid-sized biopharma group? Is there any color you guys can provide on whether it's just the mix of companies coming in and out of those classifications or whether potentially there's any impact from competition in that space? Or just - there's just noise in the numbers? Thanks.

Yeah, I think it's just mix of companies in the composition. We are seeing more of the growth come out of a small, but biopharma but we're maintaining competitive win rates in the midsize space as well.

Thanks.

Thanks, Steve.

[Operator Instructions] And our next question coming from the line of Courtney Owens with William Blair. Your line is open.

Hi, guys. Good morning. Just a couple of macro questions for me. So biotech funding we're seeing is still strong on an absolute level, but over the - it's not as strong, I guess, on a year-over-year level as it has been in the past couple of quarters. Are you hearing any commentary from clients or feeling kind of any softening in that environment longer term? I know you guys said currently the environment is pretty strong, but have you guys heard any kind of pushback from clients when they're kind of looking out a few quarters from now?

We’re not – we’re not currently seeing any increased funding delays where projects are held up or delayed for funding. The overall environment that we’re seeing in active and perspective opportunities continues to look very strong, but it is something that we keep a close eye on.

Okay. Guys, great and thanks. And then just another one, just kind of macro with continued drug pricing commentary out of Washington and more of like medical reform and stuff like that, are you guys kind of hearing any pushback or commentary from clients around that as well and though?

No, not currently.

Okay, great. Thanks.

Thanks, Courtney.

Our next question coming from the line of David Windley with Jefferies. Your line is open.

Hi, thanks. I’m coming back around. So a follow-up to Courtney's question. In your - we've tried as you probably know, we've tried to understand a little bit better the composition within your small biopharma customer mix. And I don't know if there's some any metrics that you can provide to help kind of pass that or add some color to kind of the array of those from top to bottom. What percentage of those are public companies? What percentage of those are series B, series C, VC funded? I'm trying to get a sense for, say, relative to Courtney's biotech funding question, what types of funding, what classifications of funding are the majority of your clients reliant on?

I don't have in front of me, I think we have talked in the past. I don't think we've ever broken that out. But I - we have talked in the past about how many had partnered projects versus unpartnered programs with prerevenue companies. And a good chunk of it is prerevenue. About - I think about half of its partners and half if not partnered, you kind of that sort of breakout. But I don't have that -- how many are public, and that, of course, changes over time and - quite a bit, and how many are private. But again, the more important thing for us is not public or private. It's whether they have the cash on the balance sheet or they have a partner with - partnering with a larger company that is funding things or what their approach to the funding is?

That's helpful. August, thank you for that. On the margin, this was my other account mechanic's question. So you’ve talked about the book-to-bills and you may appreciate the emphasis you put on the difference between a 606 basis points recognition and 605 basis points. And I interpreted your comments last quarter to indicate that the mix or the weight of pass-through costs in some of your more recent bookings has grown. Is that correct or not necessarily?

That was just a one off last quarter. I think it was an unusually large portion, I think last quarter. Not this quarter. It’s always going to be higher on a 606 versus 605. Virtually every quarter is going to be substantially higher number under the current reporting than it would've been under a 605 basis. But obviously it does vary quarter-to-quarter. Last quarter it was a substantial difference in it, and it made what looked like was an increase in bookings was actually a decrease in bookings quarter-to-quarter, and that's why I called it out. This quarter that's not true. Things did grow. Service revenue basis bookings were up also this quarter. Like I say, still a smaller number than 606 - than the 1.3 times, but not as large a difference as last quarter.

And so if the pass-through cost element of bookings is dragging the book-to-bill up, I mean, mechanically, that means kind of a pass-through mix is continuing to grow like you’re adding in more pass-through cost and backlog than you're burning off in revenue in that particular quarter. I mean, that comes that's a math.

If you’re doing, if you’re doing, if you’re growing, that’s always going to be the case. It's always going to be the case if you're growing, because those pass-through revenues are only burned late in projects. And so, we're burning – it’s disproportionately late in a project that the pass-through gets burned. So any reasonable company that has full service unless we have negative growth, I mean, even if I had flat growth, I’m going to have higher book-to-bill under 606 basis. If I was bleeding - I was dropping revenue over time, if I was just shrinking company, it's possible that would not be true. But there’s no situation I can see in which are 606 will be higher.

Okay. So - and I am dragging this out, I apologize. But at some point, you get to the later stage in the project and the pass-through revenue is kind of bolus. And the bookings - the pass-through bookings, if that's - if you're in steady state on that and the pass-through bookings are still a higher book-to-bill than that suggests to me that your mix of pass through and revenue is growing over time.

No, no. Because it's three years later on we're 50% larger company. And so you're only booking - you're only burning that smaller cohort of studies from three years ago. You're burning their pass-through and I’m burning new studies service revenue now and booking in lots of pass-through this going to go years from now. And unless I have flat revenue for three years, I won't get a steady state. And if we have flat revenue for three years, we're going out of business, right. And I mean, so - then you guys are right and Quintel [ph] has taken our market share faster than - it's all over for us, right.

Right. Okay. So last question to bring this to more current. The last quarter you guys said pretty clearly margin for the year will be at the first quarter level or below an updated guidance is 60 basis points above second quarter was way above.

I was wrong.

What's changed in three months?

Faster revenue growth, better bookings, quicker movement on a new projection, quicker start up on a number of things. Revenues burned through faster than we expected. And you're right, I was wrong. I mean, there's no question, my commentary about first quarter that the expectations of analysts were irrationally high on our margin, et cetera, it's true. And our margin is substantially lower than last year, it’s 200 basis points so far this year below last year's level, not what everybody was looking at. But it has gone faster than I expected, particularly in this last quarter. I did expect it to remain depressed at Q1 level, and it snapped back some.

Okay, great…

And to keep in mind, Dave, that the pass-through cost sequentially Q1 to Q2 were flat on the elevated revenue. So that drove 200 basis points of margin increase just from Q1 to Q2. We don't expect that to continue. We do expect to pass-through costs to grow in the latter half of the year, which will have an impact on margin.

And on that point, Jesse, the outsized pass-through bookings in the first quarter that were called out, we wouldn't expect those to influence Q2 because that's too soon for the burning of pass-through costs. Is that right?

That's right. That's right. That's correct.

Those past-through will burn years from now.

Yeah. Okay. All right. Thank you. Thanks for your patience.

Thanks, Dave.

And at this time, I'm showing no further questions. I would like to turn the conference back over to Mr. Kevin Brady for closing remarks.

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 2019 earnings call.

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