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Good morning and welcome to the Medpace First Quarter 2018 Earnings conference call. Before we begin, I will read Medpace’s Safe Harbor forward-looking statements.
During today’s call, management’s 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 the company’s future results to differ materially from management’s current expectations, including those discussed in the Risk Factors section of our Form 10-K for the year ended December 31, 2017 filed with the SEC. Management disclaims any obligations 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 management’s views as of any date after today.
During this call, management will be also referring to certain non-GAAP financial measures. A reconciliation of such non-GAAP financial measures to the most directly comparable GAAP measures is available as attachment to the earnings press release and earnings call presentation slides provided in connection with today’s call. The slides are available on the company’s Investor Relations section of its website at investor.medpace.com.
With that, I will now turn the call over to Dr. August Troendle, Medpace President and Chief Executive Officer for opening remarks. Dr. Troendle, please begin.
Thank you, Operator. Good day everyone and welcome to Medpace’s first quarter 2018 earnings call. With me on the call is Jesse Geiger, our Chief Financial Officer and Chief Operating Officer of Labs.
Please refer to slide 3 on our earnings presentation. Revenue for the first quarter of 2018 was 163.1 million. Under our old approach applying ASC 605 Q1 service revenue came in at a 108.4 million at increase of 15.6% as reported and 14.2% on a constant dollar organic basis over Q1 of 2017. Net new business awards entering backlog were 128.2 million giving a 1.18 book to bill ratio. At the end of Q1 our employee headcount was 2,555 under both ASC 605 and ASC 606. Nobody was lost in transition.
We would like to distance ourselves from the 2017 slowdown as quickly as possible and Q1 2018 was a good start. However, Q1 growth was ahead of curve benefiting from the acceleration of several projects with pull forward revenue we anticipated for Q2. Therefore, the growth trajectory will not be smooth this year, even as we expect fundamentally accelerating backlog growth and ultimately revenue at a more normalized conversion rate. I would like to recognize some of the challenges we face in achieving steady and consistent quarterly growth. Our strategy of providing exclusively full-service offerings significantly limits our opportunities in large companies where there is an interesting in more flexible outsourcing model. We therefore have a high concentration of small pre-revenue clients and greater sensitivity to biotech funding.
Although we see no signs of a slowdown at present, we must admit that we did not recognize early signs of one at late 2016, which resulted in unexpectedly low revenue growth for 2017. Our decision to expand business development bandwidth, which are discussed in our last earnings call should improve flexibility in targeting clients based on funding flows, however the long sales cycle and clinical outsourcing suggested short-term changes in funding flows will be hard to mitigate effectively. All this leads me to reiterate that we will probably experience more quarterly volatility than our peers.
That said, we see a strong demand for our services and expect continued strong backlog growth through the remainder of 2018 and borrowing a slowdown in funding double-digit service revenue growth on an ASC 605 basis going forward. Our investments in the business are progressing well and we are optimistic about our organic growth prospects. Then in attempt to save some time by anticipating questions I would add the following. The funding environment was good with projects moving forward as we would expect. RFP volume was strong in Q1. Our competitive hit rate was strong in Q1 and has been for the past three quarters. Cancellations were in line with our expectation and historical range. Oncology was our strongest therapeutic area through backlog awards. And there was no particular concentration among our backlog awards.
Now Jesse will provide a review in more detail over financial performance. Jesse?
Thank you, August and good morning to everyone listening in. As a reminder on January 1st 2018, we adopted ASC 606 using the modified retrospective approach and we now recognize revenue on a percentage of completion basis and a single performance obligation, inclusive of service revenue, reimbursed out of pocket revenue and revenue from fees paid to investigators and other arrangements where the company acts as an agent on behalf of the customer. Under this new standard, our revenues were reported within a single revenue line item and related expenses are presented with indirect costs.
For the 2018 reporting period we will continue to provide disclosures as if we were reporting under ASC 605 so that comparisons can be made on a consistent basis. In the future, we will also provide a new net business awards backlog and the related metrics on an ASC 606 basis. Revenue under ASC 606 was 163.1 million in the first quarter of 2018. Net service revenue under the previous standard ASC 605 was 108.4 million which represents year-over-year growth of 16.6% on a reported basis or 14.2% on a constant currency basis. We did experience elevated revenue in the first quarter partially driven by increased activities across several projects ramping up quicker than anticipated with heavy upfront activities.
Adjusted EBITDA was 28.7 million in the first quarter of 2018. Under ASC 605, adjusted EBITDA was 31 million which increased 18.2% compared to 26.2 million in the first quarter of 2017. Our calculation of adjusted EBITDA in the first quarter of 2018 includes an adjustment for our corporate campus lease payments.
On a constant currency basis under ASC 605 first quarter adjusted EBITDA increased 22% compared to the prior year. Adjusted EBITDA margin was 17.6% for the first quarter of 2018. Adjusted EBITDA for the quarter under ASC 605 increased 60 basis points to 28.6% versus 28% in the prior year period. This increase was primarily attributable to higher revenue, partially offset by higher employee related costs. When comparing adjusted EBITDA and adjusted EBITDA margin between ASC 606 and ASC 605, keep in mind that the inclusion of reimbursed out-of-pocket revenue and revenue from fees paid to investigators in the ASC 606 calculation has an impact on the margin percentage, and there are potential timing differences between the recognition of the revenue and the related cost in any given period. However, this does not impact the underlying economics of our contracts over the life of the contract.
In the first quarter of 2018 GAAP net income was 14.6 million under ASC 606 and 16.3 million under ASC 605, which compares to GAAP net income of 8.4 million in the prior year period. Adjusted net income under ASC 606 was 20 million in the first quarter of 2018, under ASC 605, adjusted net income of 21.8 million in the first quarter increased 54.8% compared to 14.1 million in the prior year.
Adjusted net income growth was primarily driven by revenue growth partially offset by higher employee related costs. Under ASC 606 GAAP net income per diluted share was $0.40 and adjusted net income per diluted share was $0.55 for the first quarter of 2018. Under ASC 605, GAAP net income per diluted share for the quarter was $0.45, compared to $0.20 in the prior year period. First quarter 2018, adjusted net income per diluted share of $0.60 grew 76.5% versus first quarter of 2017, adjusted net income per diluted share of $0.34.
On slide seven, we have provided a breakdown of our customer concentration by revenue across three key categories under ASC 606. Our revenue growth was primarily driven by growth within oncology and cardio metabolic therapeutic areas.
With regard to our mix by customer size, we remain focused on serving our core market of small and midsized biopharma customers that represent a large portion of our total business and a segment of the market where we see further opportunities for continued growth.
Regarding customer concentration we maintain a well-diversified mix with our top five and top 10 customers representing roughly 22% and 35% respectively of our total revenue for the year.
Slide 8 provides the summary of our leverage and liquidity positions as well as a schedule of our free cash flow conversion for the first quarter, compared to the prior year period. In the first quarter we generated 23.3 million of cash flow from operating activities and our net day sales outstanding on an ASC 605 basis increased compared to the fourth quarter from 7.6 days to 8.7 days as we experienced an increase in trade accounts receivable. Our net debt position at the end of the quarter was 176.3 million composed of gross debt of 198.5 million and cash of 22.2 million. Our net leverage ratio was approximately 1.6 times adjusted EBITDA.
Consistent with the guidance given last quarter our 2018 updated guidance we are presenting today is based on the ASC 605. As shown on Slide 9 our revised guidance reflects net service revenue in the range of 421 million to 435 million for the full year 2018, representing organic growth of 8.9% to 12.6% over 2017 net service revenue of 386.5 million. Our revised 2018 adjusted EBITDA guidance is in the range of 105 million to 111 million. Compared to full-year 2017 this range is down 2.8% to up 2.7%. Our 2018 guidance also assumes full-year exchange rates at the end of March this currency assumption template into a revenue tailwind and an adjusted EBITDA headwind compared to 2017 exchange rates.
Considering these assumptions for our 2018 guidance on a constant currency basis is revenue growth in the range of 8.1% to 11.8% and adjusted EBITDA growth in the range of 0.6% to 6.2%. We still anticipate our 2018 effective tax rate to be in the range of 22% to 25%. We forecast 2018 GAAP net income in the range of 46.2 million to 50.4 million and GAAP earnings per diluted share is expected in the range of $1.27 to $1.38. On an adjusted basis we forecast 2018 adjusted net income in the range of 68 million to 72 million representing growth of 12.5% to 19.1% and $1.87 to $1.97 per diluted share, representing growth of 22.7% to 29.9%.
With that I will turn the call back over to the operator so we can take your questions.
[Operator Instructions] The first question will come from John Kreger of William Blair. Your line is open.
August are you able to quantify the pull forward that you saw in the first quarter relating to these two projects? And maybe you can just talk a little bit more is that something that you tend to see? What's the nature of the change that would drive that?
It was a number of things some of it was a quicker startup, some of it was just heavier burn because of the position of the project that came up earlier. And I don't have an exact number for how much would have been and second quarter how much was kind of added -- add-on services that hit in the quarter but I think you will get an idea from our kind of our guidance clues and how much we've over performed, I think a good part of that was related to timing of things and that's why I think it would certainly things have been pull forward and we would expect to that to pull revenue end of the year, overall and into the third quarter and fourth quarters as the project accelerates but a lot of it was also unique things in the quarter that I think came at a second quarter, but it was going to -- it doesn't increase the entire year as proportionately. So, I don't have a specific dollar value but…
John one way to think about it is we had a conversion of 20.7% in the first quarter and we had expected a conversion or a burn rate probably closer to the 19.5% range in the first quarter.
And Jesse one for you I know there is a lot of noise around the conversion from 605 to 606, at this point do have a sense about the kind of EPS hit to '18 full-year from 606. I just saw it was $0.05 and in the quarter and longer term should we think about 606 versus 605 is sort of a loss, will it help earnings in '19 and '20 or hurt them in '19 and '20.
I think it's a little too early to tell on the full year impact it was $0.05 difference in Q1, then the one thing I can point to is that, there are just two points estimates right now there is what was the Q1 impact, and then the other piece that's reflected in what was our cumulative opening adjustment from 605 or 606 perspective and the Q1 impact was larger than the cumulative impact recognized on day one of adoption, but where that goes overtime and how it ebbs and flows I think it's too early to tell.
And larger not larger dollar wise but larger in reference kind of growth of the company. If we look at it as all these projects ongoing with 500 million in backlog, how much have we grown, it was a very large several times larger than you would have expected relative to the opening level, the opening sheet and balance sheet adjustments that were made.
So as far as what’s the overall impact for the year or thinking about it for 2019 or 2020. I think as we build some experience here on a 606 basis. We will begin to get a better idea and refine our models and likewise help you refine yours but again over the life of the project no economic impact is it going to move some activities between periods just based on the matching -- it does have the effect of disconnecting a little bit the cost and the related revenue from a period to period basis.
Thank you. The next question is from Erin Wright of Credit Suisse. Your line is open.
Just follow-up on the pull forward here I guess how much does come out of the second quarter I guess this entry what I'm looking forward how should we be thinking about that quarterly progression and what lingers maybe and to the third and fourth quarter throughout the year in terms of that progression of revenue.
I think that we are not going to give quarterly guidance and so how much was pulled out versus pull forward and so some things might have might have been projected for Q3 coming to Q2. I don’t think we are prepared to say. I do think you can look at is kind of both one-off issues in the quarter and some projects that accelerated that will -- are going to be going for a couple of years and so pulling them forward helps later in the year too. And that’s why overall guidance for the year was increased. So, I think it’s a combination. I think what you can expect this Q2 to be under Q1 but we are not giving kind of a quarter by quarter cadence.
And in the head count set up obviously in the quarter. Is this I guess ahead of some of the aforementioned acceleration in projects. I guess how should we be thinking about how that progresses throughout the year? And how is the hiring environment just generally speaking?
So, we are hiring pretty aggressively because we have backlog growth that is ahead of where we had hoped to be. And things look strong and we said something we can shut down rather rapidly if things softened but right now, the business development environment looks very strong, so we are hiring aggressively. We are also doing those investments we talked about and we had some I think pretty good luck in terms of employee departures in first quarter. So, we were able to effectively add employees.
The next question is from David Hooker of Keybanc. Your line is open.
I wanted to get a sense also [indiscernible] revenue from employee was up, but gross margins are down, I am just trying to get my bearings here in terms of what's the right gross margin for the business of all, are these investments going forward? I guess maybe for this year and then kind of structurally where are you because I guess if I look back over gross margins are above 50% going back, I don’t know if that’s the right level going forward at some point. Can you talk about -- can you bear me around gross margins?
Sure Don, our guidance still implies 25% EBITDA margin and we do anticipate while it was lower in the first quarter we do expect SG&A growth for the year in the 16% to 17% range, and so that implies gross profit in the 42% or so percent range for the year.
Is that a right gross margin for you guys at this point, long term I guess, given some of the expanded geographies that you are operating in? Or how do we think about gross margins structurally overtime for this business?
At this point as we think about what level of flat capacity we have and how much of that do we maintain as we look at the growth in the pipeline. I think it’s a good working assumption, for now. Obviously as the business development funnel expands and contracts that can change the pace at which we are hiring but right now I think it’s a good working assumption.
And maybe last just kind of hammering this theme in terms of profitability. Are there things aside from hiring and firing and moving -- managing your staff around your use of IT and technology and other things that you can do or that you had some success with driving efficiencies, perhaps outside of hiring and firing?
We are always building and we are always looking at data partnerships and use and we invest quite a bit in our IT and software systems to analyze it. So, I think we have a number of projects that are adding to our investment this year and will continue, so I would say yes there is a lot of it. I don't think we give a specific project names to them, but we have a half-dozen initiatives in enhancing our data utilization and recruitment is one of the key areas there that we are trying to improve.
[Operator Instructions] The next question is from Jason Twizell of MUfG Securities. Your line is open.
First of all, I just wanted to given the that 20 million pay down on the revolver and a strong cash flow generation in a quarter just want to get an update on cash your use of cash for the year.
Capital allocation priority for us remains debt pay down so we will continue to focus on deleveraging with our cash flow. We do expect for the elevated CapEx that we've spoken out for the year relative to prior years and so, capital expenditures and debt reduction are our top two priorities.
And then just I guess from a high level looking at the patient recruitment environment how challenging is that? How difficult it is in order to avoid having project delays occurring? Has that change overtime are you still having some where difficulties as everyone else has over the last few years.
I think it's something that deep in the industry has not solved, it's the primary issue and timing of a clinical trial particularly when you get into more rare diseases and our business is around rare disease and oncology largely today, so recruitment is a key part of that and I don’t think that anyone's got a perfect solution but I think we do a very good job at it and that's how we differentiate ourselves.
Thank you. There are no further questions in queue at this time. I’d like to turn the call back over Dr. Troendle for closing remarks.
All right, well thank you everyone for joining us on our earnings call and talk to you at our next earnings call end of Q2. Thank you.
Thank you. Ladies and gentlemen, this concludes today’s conference. You may now disconnect.