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Good day, ladies and gentlemen, and welcome to the Medpace, Fourth Quarter Earnings Conference Call. At this time all participants are in a listen-only mode. [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 fourth quarter 2018 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.
Good day everyone. I have two topics to comment on before Jesse reviews the fourth quarter and full year 2018 results: Number one, business environment. We saw a significant softening in both RSP flow and overall business environment in the fourth quarter. I believe this is stabilizing in Q1 and we anticipate continued growth in revenue although at a slower pace than experienced in 2018. Our cancellation rate in Q4 was roughly twice the run-rate of the first three quarters of 2018.
Number two, margin. We did not experience the margin contraction we forecast last year due to a rapid rate of revenue growth. However, we are confident our margin will contract in 2019. This should be apparent starting in Q1. Given our past commentary, the margin expectations built in the consensus projections are irrationally high.
Jesse will now review our financial performance for 2018 and our 2019 guidance.
Thank you, August, and good morning to everyone listening in. Today we are presenting the fourth quarter and full year on both the ASC 606 and ASC 605 basis. This will be the last quarter we present this way before fully transitioning to ASC 606 only in the first quarter of 2019.
Net new business awards entering backlog in the fourth quarter under ASC 606 were $231.2 million, resulting in a 1.2 net book-to-bill. On an ASC 605 basis, net new business awards were $146.7 million, representing a net book-to-bill of 1.15.
For the full year 2018 net new business awards were $899.4 million. On an ASC 605 basis full year net new business awards were $581 million, representing an increase of 36.4%.
Ending backlog ASC 6060 was $1.1 billion. Under ASC 605 backlog increased 19.4% over 2017 to 626.1 million. Revenue under ASC 606 was $192.1 million in the fourth quarter of 2018 and $704.6 million in the full year 2018.
Net service revenue under ASC 605 was $127.9 million, which represents year-over-year growth of 28.6% on a reported basis or 29.1% on a constant currency organic basis. Full year 2018, net service revenue was $478.1 million, which represents a 23.7% increase from 2017 or 23.4% on a constant currency organic basis.
Adjusted EBITDA was $39.7 million for the fourth quarter of 2018 and $137.8 million for the full year. Under ASC 605 adjusted EBITDA was $38.6 million, which increased 43% compared to $27 million in the fourth quarter of 2017.
Full year ASC 605 adjusted EBITDA increased 37% to $148 million compared to $108 million in 2017. On a constant currency basis under ASC 605 fourth quarter and full year adjusted EBITDA increased 38% and 36.2% respectively compared to the prior year.
Adjusted EBITDA margin was 20.7% for the fourth quarter of 2018 and 19.6% for the full year. Adjusted EBITDA margin for the quarter under ASC 605 increased 300 basis points to 30.2% versus 27.2% in the prior year period.
For the full year 2018 adjusted EBITDA margin also increased 300 basis points to 31% from 28% in 2017. These increases were primarily attributable to higher revenue, partially offset by higher employee related costs. We increased employee headcount to 19.1% to 2,909 employees at the end of the year and we will continue to hire across the company throughout 2019.
In the fourth quarter of 2018 GAAP-net income was $22.8 million under ASC 606 and $22.5 million under ASC 605, which compares to GAAP-net income of $11.3 million in the prior year period.
For the full year 2018 GAAP-net income was $73.2 million and under ASC 605 GAAP-net income was $81.6 million compared to $39.1 million in 2017. Adjusted net income under ASC 606 was $28.1 million in the fourth quarter of 2018 and $95.5 million for the full year.
Under ASC 605 adjusted net income of $27.8 million in the fourth quarter increased 88.2% compared to $14.8 million in the prior year. Full year 2018 adjusted net income of $103.8 million increased 71.7% compared to $60.5 million in 2017. 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 $0.61 and adjusted net income per diluted share was $0.76 for the fourth quarter of 2018. For the full year 2018 GAAP-net income per diluted share was $1.97 and adjusted net income per diluted share was $2.59.
Under ASC 605 GAAP-net income per diluted share for the quarter was $0.60 compared to $0.30 in the prior year period. For the full year 2018 GAAP-net income per diluted share was $2.20 compared to GAAP-net income per diluted share of $0.98 in 2017.
Fourth quarter 2018 adjusted net income per diluted share of $0.75 grew 92.3% versus fourth quarter 2017 adjusted net income per diluted share of $0.39. For the full year of 2018 adjusted net income per diluted share was $2.81 compared to $1.52 per diluted share in 2017.
We remain focused on serving small and mid-sized biopharma customers. They represent a large portion of our total business and a segment of the market where we see continued opportunities for growth.
Regarding customer concentration, we will maintain a well-diversified mix with our top five and top 10 customers representing roughly 22% and 33% respectively of our total revenue for the year.
Turning now to our leverage and liquidity positions, as well as free cash flow conversion. In the fourth quarter we generated $39.4 million of cash flow from operating activities and our net day sales outstanding on an ASC 605 basis increased compared to the third quarter from a negative 3.7 days to negative 0.9 days.
Our net debt position at year end was $57.2 million composed of gross debt of $80.4 million and cash of $23.3 million. Our net leverage ratio is approximately 0.4x 2018 adjusted EBITDA.
Moving now to our newly established 2019 guidance. The guidance we are presenting today is based on ASC 606 and using the exchange rates as of December 31, 2018. We are forecasting total revenue in the range of $783 million to $807 million for the full year 2019, representing growth of 11.1% to 14.5% over 2018 total revenue of $704.6 million.
Following 2018 where we grew headcount organically by 19.1%, we plan to continue to make investments in people and grow headcount rapidly to position the company for future growth. Our 2019 adjusted EBITDA is expected in the range of $137 million to $145 million compared to adjusted EBITDA of $137.8 million in 2018.
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 guidance and no stock repurchases in our guidance.
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]. And our first question comes from John Kreger with William Blair. Your line is now open.
Hey, thanks very much. Well August, you certainly gave us – got our attention at the beginning of the call. Could you maybe just elaborate on your sort of macro demand commentary? So it sounds like you saw slowing in Q4, but a bit of normalization in the first quarter. Can you just, based upon your experience in the industry, does this feel like just sort of normal volatility around year end or do you think there's something else driving it?
Yeah I don't know. I think there is volatility; I don't know that that's a year end phenomenon. I think that Q4 was a little bit of volatility for whatever reason, and we certainly had an elevated it in conjunction with slowing in our fee flow. We saw a number of cancellations. We talked about one on the last call that had already happened in the quarter and we had a number of cancellations that drove a substantially higher overall cancellation rate, a number of them due to reprioritizations and changes in market expectations. So I don't know, I don't write it off as an end-of-year cyclical thing, but I do think that there was some shop in the fourth quarter.
Okay, thanks. And then given your margin commentary, can you just remind us what your philosophy is in terms of balancing; you know managing growth versus, maintaining what you do as an appropriate return on the business.
Well, I think we’ve many times said that we don't target a specific margin, but we have repeatedly said that our margin was running too high in 2018. In fact we had I think projected a mid-twenties margin rate on a 605 basis that did come up some. During the year we were talking about a go forward expectation of the margin moving to the upper twenties, mid-upper 20s. So I don't think the margin put into our guidance here should be a surprise at all. I think it's absolutely consistent with what we've been saying quarter after quarter.
And we did need to increase our headcount to enable significant double digit growth going forward, and I think we are catching up on that. I think we're in a pretty good shape now and continue to hire. So I don’t put a specific dollar number on it, and it really depends upon a lot of factors in terms of how fast we are growing and the business environment, but we certainly would favor ability to grow faster over the higher margin.
Understood, thank you.
Thank you, and the following question comes from David Windley with Jefferies. Your line is now open.
Hi, August and Jesse, thanks for taking the questions. So to follow up there on John’s question on your macro demand commentary, August I guess it sounds maybe like the chop in fourth quarter was perhaps more driven by reprioritization than it was lack of funding, but I'd be curious for you to confirm that.
Yeah, it's always hard to separate those two. But yes, the projects that were canceled did not run out of funding, there was not a payment issue and we've not seen the slowing of movement into backlog and progression of study starting. So I would say overall funding environment is much better than we saw you know a year or so back when we saw of slowing of things, you know about a couple years ago. But certainly I think that you know funding environment is always a factor in decisions around many of our client’s prioritizations.
And is sort of maybe – I appreciate the answer, so maybe reposition that question a little bit. I would have through that the volatility in raising funds that the market has seen in the fourth quarter and in January would have had a lag before you would begin to feel that, and so your answer kind of you know is consistent with that. As we said at the end of February, you said that things have improved, but the funding environment really hasn't, at least not yet. Is funding beginning to creep into potential booking discussions?
Look, it’s always there and I said things have I think stabilized, I didn’t say you know snapped back. So I don't – we don't see as much chop as we saw in the fourth quarter. I think things are –you know so yes, I guess putting it together what you’re saying, the funding hasn’t accelerated, while we haven’t seen a particular acceleration either. But how much of fourth quarter was a one-off and how much is a continuing sort of thing, you know I think it takes some time to sort out.
Okay, and as you think about – I guess thinking about backlog on policy, the bookings that you would have included in your fourth quarter book-to-bill, I would think would have been solidly in your funnel in the third quarter a lot of it, and so the slowdown in RFP activity in the fourth quarter would probably be kind of producing the result that we should expect in book-to-bill in the first quarter. So am I right there and could you give us some parameters around how we should expect you know book-to-bill to start off the year?
The environment is still such that we should be able to make our kind of target, you know one point I think under 606, by 1.2 book-to-bill, borrowing substantial increase in cancellations.
Now we saw that and when I talked on the last call I said I thought we would replace everything. Despite having it in accelerated cancellations, we actually had a number of additional cancellations and the environment did soften a little bit terms of things progressing into back log. So bookings came out a little bit lower in Q4 than I would have expected. Q1 I don’t know, but softening RFP flow does have quite a bit of delay and I would say it's something that affects things one to two to three quarters out.
So it is quite aways out and you know things kind of move through the funnel and can be held up at any time due to funding. It could be held up – we got a definite go and we're waiting for it you know we're moving towards the start date and then you know, hey let's put that on hold, because you know we've got you know some financial or prioritization changes.
Great, thank you for that. I'll yield the floor.
Thanks Dave.
Thank you. Our following question comes from Donald Hooker with KeyBanc. Your line is now open.
Great. So maybe just one last question on this topic. You all feel like your win rates are pretty stable, so kind of just the slowing and stabilization and all this sort of market movement you are talking about, is probably something that’s been see broadly by your peers?
I don't know if it’s seen broadly by peers. I think we have a different segment that we you know sell into than our peers. I think it's very different even when they talk about their biotech part of their business. It could be a different area of biotech. We tend to have quite a bit of concentration of pre-revenue bio-tech.
So I think it’s such a different and it's maybe such a small – you know where we are, such a small part of most of the others, it's difficult for that to maybe show up at all in their kind of numbers. So it’s hard to know whether they're seeing the same thing or not, but I would think that some of that dynamics certainly in there smaller biotech clients would be seen, yes. I don't think it's unique for us.
And our win rate was – in the fourth quarter was consistent with the year and with our longer term.
Yeah I think our win rate’s been fine. It does bounce around quite a bit, but I think it's been relatively stable, yeah.
Okay, great. And then maybe, I'm not sure if you're – Jesse if you are willing to sort of help us a little bit with the margin dynamics in 2018. I think when we think about gross margins, kind of what is sort of the implied gross margin in your sort of guidance for EBITDA?
Yeah sure, Don. So we’ve got about a – think about a gross margin in the 28% to 29% range that's inclusive of you know both the internal direct cost and the out of pocket expenses. So I did a running of a 606 basis and about 11% or so SG&A, kind of gets you down to that 17% or 18% adjusted EBITDA margin on a 606 basis at the mid-point of guidance.
Got you. And it seems like you had a strong year in 2018 in your project. So you are hiring a catch up to that and I guess maybe conceptually as we go beyond 2019, maybe it will be – is it fair to think maybe you are caught up there and maybe see some sort of scale and gross margins in SG&A beyond that or is this sort of just a kind of a one off investment year or how do we think about kind of the longer term vision around margin progression.
I think we’ve messaged that longer term we expect our margin to be at a lower rate than it has been in 2018 and so I think it’s more of a the normal than the unusual. Going forward we expect lower margin.
Okay, great and last question for me. It’s sort of obviously a nice improvement from the balance sheet in recent quarters. It looks like you are going to be totally out of debt I guess in the next few quarters if you keep paying down debt. Is the playbook going to be paid down debt all the way down and then start repurchasing shares or how does the use of cash proceed going forward?
Yes, so we’ll – you are right, we’ll continue to pay down debt as a priority. We should be out of the facility this year in 2019 if cash flows continue. We are investing organically in the business and that's reflected in the margin guidance. Beyond debt pay downs, we do have the $50 million share buyback authorization from our board. You know how and when we execute against that will depend on a number of factors and market conditions. You know if you look at our short, but history on share repurchases, you know we will be opportunistic at some point there as opposed to being more systematic on a quarterly basis.
Thank you.
Thank you. And our following question comes from Jason Twizell with MUFG. Your line is now open.
Thank you very much, good morning everyone. Just quickly, you talked about the cancellation rate accelerating. Is there going to be some challenges around staffing utilization in the first quarter and resulting in kind of a different seasonality and earnings ramp that we've seen in prior years? Is it going to be more second half weighted?
I mean the cancellations will impact short term revenue. Our utilization has been higher than we've wanted it to be, so that does create some opportunity to add a little bit of cushion there. But as far as the quarterly phasing of its impact and you know we are really just commenting on the full year period you know and how the business evolves throughout the quarters will really be a function of how successful we are in the rate of hiring that we are trying to achieve through the year versus how the revenue performs, really all the commentary we’ll give on a on a quarterly basis.
Okay, seems fair. And then just quickly on the outlook for therapeutic mix changes in 2019, are you still seeing – expecting growth in the oncology sector or you expect to be other therapeutics that are going to be increasing the mix.
Yeah, oncology remains very strong for us, but also we're seeing good opportunities across the different therapeutic areas. So we shouldn't see any large swings in mix change.
Okay, alright thank you.
Thanks Jason.
Thank you. [Operator Instructions]. And our next question comes from Sandy Draper with SunTrust. Your line is open.
Thanks very much, maybe just a follow-up to Don’s question around the spending. I'm just trying to get a sense of the level spending. How much of this is just sort of people CRA, in order to support the business or are they discreet sort of IT or infrastructure investments that you are making for the long term growth or is it really just you know you need more bodies into order to support the trial growth. Thanks.
It’s primarily people, people and you know support cost related to people.
Okay, so and just as you pointed out, you hired a bunch last year, but you are still maybe a little bit behind and you are just continuing to add bodies to support the growth.
That’s right, yep.
Okay, that’s my follow-up. Thanks.
Thanks Sandy.
Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back to August Troendle for any closing remarks.
Alright, thank you everyone for participating in this call on Medpace’s 2018 results and look forward to speaking to everyone after Q1 closes in a few months. Thanks everyone.
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!