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Good day, ladies and gentlemen, and welcome to the Medpace Third [ph] 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 at that time. [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. Sir, you may begin.
Good morning, and thank you for joining Medpace's fourth 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 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 Factor 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'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 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.
Good day. Medpace performed well in 2019 and ended on a strong note. Full-year revenue, new business awards and ending backlog were each up over 20%. Despite heavy investments in organic growth globally in 2019, we executed with what we believe is the industry leading EBITDA margin among clinical CROs and generated free cash flow over 120% of EBITDA.
I would like to point out that our reported EBITDA is not inflated by adding back recurring and real operating costs such as stock-based compensation, program cost to improve operating efficiency, restructuring cost, severance payments or integration costs.
On our Q1 2019 earnings call, I mentioned about our 606 basis net business awards were somewhat misleading that quarter, in that bookings appeared increase on a sequential basis and yet net service based awards essentially 605 basis net bookings were sequentially down. The opposite happened in Q4.
Net new business awards entering backlog in Q4 2019 at $281.1 million were sequentially down in total, but on a service or essentially 605 basis, net new business awards were actually up 10% sequentially over Q3. Our Q4 book-to-bill ratio on a 605 basis was the highest level achieved on year. Our bookings were very strong in Q4 and right where we wanted them to drive 2020 revenue. We entered 2019 strong and exited even stronger.
I will now turn the call over to Jesse
Thank you, August and good morning, everyone. Net new business awards entering backlog in the fourth quarter increased 21.6% from the prior year to $281.1 million resulting in a 1.22 net book-to-bill. For the full year 2019 net new business awards were $1.1 billion an increase of 21.7%.
Ending backlog as of December 31 was $1.3 billion an increase of 21.3% from the prior year. Revenue was $229.9 million in the fourth quarter of 2019, which represents year-over-year growth of 19.7% on a reported basis and 19.5% on a constant currency organic basis. Full year 2019 revenue was $861 million, which represents a 22.2% increase from 2018 or 22.4% on a constant currency organic basis.
EBITDA of $41.1 million increased 1.2% compared to $40.7 million in the fourth quarter of 2018. Full year 2019 EBITDA increased 6.2% to $149.6 million compared to $140.9 million in 2018. On a constant currency basis, fourth quarter full year EBITDA increased 0.5% and 4.3% respectively compared to the prior year.
EBITDA margin for the fourth quarter was 17.9% compared to 21.2% in the prior year period. For the full year 2019, EBITDA margin was 17.4% compared to 20% in 2018. The decrease was primarily attributable to higher employee-related costs and reimbursed out-of-pocket expenses.
In the fourth quarter of 2019 GAAP net income was $29.8 million compared to GAAP net income of $22.8 million in the prior year period. For the full year 2019 GAAP net income was $100.4 million compared to $73.2 million in 2018. Adjusted net income of $32.2 million in the fourth quarter increased 14.5% compared to $28.1 million in the prior year.
Full year 2019 adjusted net income of $113.3 million increased 18.7% compared to $95.5 million in 2018. Adjusted net income growth was primarily driven by revenue growth, lower interest expense and effective tax rate, partially offset by higher employee-related costs and reimbursed out-of-pocket expenses.
GAAP net income per diluted share for the quarter was $0.78 compared to $0.61 in the prior year period. For the full year 2019, GAAP net income per diluted share was $2.67 compared to GAAP net income per diluted share of $1.97 in 2018. Fourth quarter 2019 adjusted net income per diluted share of $0.85 grew 11.8% versus fourth quarter 2018 adjusted net income per diluted share of $0.76.
For the full year 2019, adjusted net income per diluted share was $3.02 compared to $2.59 per diluted share in 2018. Regarding customer account inflation, our top five and top 10 customers represent roughly 19% and 29% respectively of our total 2019 revenue.
In the fourth quarter, we generated $56.9 million in cash flow from operating activities and our net day sales outstanding decreased compared to the third quarter from negative 12.5 days to negative 14.7 days. We ended the quarter with $131.9 million of cash and in February 2020, Board of Directors authorized a share repurchase program of up to $100 million.
Moving now to our newly established 2020 guidance; we are forecasting total revenue in the range of $975 million to $1.05 billion for the full year 2020, representing growth of 13.2% to 16.7% over 2019 total revenue of $861 million. Our 2020 EBITDA is expected in the range of $170 million to $178 million representing growth of 13.6% to 19% compared to EBITDA of $149.6 million in 2019.
We anticipate our 2020 effective tax rate to be in the range of 19% to 21%. We have assumed 38.1 million fully diluted shares for 2020 and there are no stock repurchases in our guidance. We forecast 2020 GAAP net income in the range of $123.4 to $127.4 million and GAAP earnings per diluted share in the range of $3.24 to $3.34.
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 John Kreger with William Blair. Your line is open.
August thanks for those initial comments about finishing the year strong. If you kind of look back and reflect on that success does it feel like the market is more active or that you are winning market?
I think the market has remained active, I think it's been strong all year. Again we've talked about how there was a real strength bit over a year ago, year and half ago and then it just settled into a very strong and active market. We actually had elevated cancellations in Q4 like we did last Q4 and we replaced it and actually had very strong bookings in the end right where we wanted them to be on a service basis.
So I think the market remains very strong and compatible with even with substantial cancellations being able to refill everything.
Excellent thanks. Jesse one for you just kind of expanding on the guidance, so realizing you're only giving GAAP guidance can you give us what if anything you expect in terms of unusual spending or investment spending maybe as it might compared to '19, would you expect any unusual items to be sort of larger or smaller than last year, thanks?
Yeah thank you, John. I guess the only item I point out is just the headcount growth. We grew headcount around 20% each of the past two years we're very comfortable with the current level of staff to support existing and near-term upcoming projects.
So as our 2020 projections, revenue projections are lower than the past couple of years experience and we effectively caught up on the hiring we are continuing to invest in people to sustain long-term growth but at a lower rate than in 2019. So this will lift some margin and tend to offset the additional office lease costs this year.
Okay. And just to clarify, are you assuming the headcount grows in sync with revenue or perhaps a little bit slower?
Generally in sake perhaps a little bit slower but it will depend on how the year progresses and the lease cost for the building comes on just as a reminder second quarter at about $2 million clip per quarter. So first quarter does not have that incremental cost Q2, Q3 and Q4 about $2 million a quarter.
Thank you. Our next question comes from the line of David Windley with Jefferies. Your line is open.
Has there been any change in the composition of your backlog including average duration of backlog and I am kind of getting that whether or not you expect your conversion rate to stay relatively stable or change?
I don’t know if there is going to be a big change. So we did have -- we had stuttering cancellations probably at elevated level several times in the last well three of the last five quarters. So that kind of throws a curveball in there but I would not expect a meaningful change in our conversion rate. I don’t think it's going to be going up or particularly going down much, but it could trail down slightly.
Yeah I think about 18% Dave is a good working assumption.
And that segues into my second question nicely, which is around quarterly cadence if you care to give us any specifics. You mentioned the cancellations fourth quarter but also in some other quarters. We're those studies in flight or not yet contributing revenue and should we think about those impaction near-term quarters in terms of the level of growth relative to the full-year?
Yeah I don’t think it will have that big of an impact on the near-term quarters. If anything it's a headwind a couple quarters out. So we're kind of stocking to the annual guidance here. We're not giving any quarterly commentary. As you know we can be a bit irregular quarter to quarter, but the cancellations in the fourth quarter could create a little bit of a headwind in the second half of this year, but if the business environment remains strong, we may not feel much of the impact there.
So that's the only thing I will comment on phasing of revenue and then on the cost side we have the CapEx cost picking up in Q2 that we do not have in Q1.
We've have to hedge a little bit on the revenue growth because of the cancellations and I think the environment remains relatively consistent and I think that we would achieve a third consecutive year of growth -- topline growth over 20% this year if it wasn't for cancellations. I think elevated, but if that's kind of the new normal, then we'll just have to grow through it.
And then last question your slide six with the four bar charts focusing on EBITDA it stands out to me at least that in 2018 margin steadily grew through the year in 2019 the quarter to quarter change -- sequential change in margin was fairly dramatic and more choppy. Would you expect 2020 to be smoother or will it -- will have some of the same factors that influenced 2019?
It should be pretty similar to the other one. Wild card is just the out of pocket expenses and kind of how those play out quarter to quarter. Those can be a little bit -- a little bit choppy.
Okay. All right. That's all for me. Thank you.
Thank you. Our next question comes from the line of Erin Wright with Credit Suisse. Your line is open.
Great. Thanks. When you're thinking about capital deployment here, I understand you’ve historically been focused on largely organic growth efforts but how are you evaluating the potential opportunities out there from an M&A standpoint? Are there any -- does anything interest you or expanding into other areas or expanding in central lab? Just curious what your thought on that front, thanks?
We're not.
We're still focused on organic growth. We do look at what's out there but there's nothing that's in the market that we're interested in that we aren’t already doing organically whether that's growing across the geographies that we're in or adding expanding our laboratory capabilities etcetera. We're doing all everything we want to do organically.
And especially it's just a distraction. We've got plenty of growth opportunities organically and it's just a distraction to go after acquisitions.
Okay. Good to hear and then also heading into 2020 there are some kind of anomaly going it's an election cycle, we also have coronavirus. Have you thought about or anticipated any sort of fluctuation may be and decision-making that you’ve historically seen around your core biotech customer heading into an election cycle and then also on coronavirus is there anything embedded in your expectations? Can you remind us of how you're thinking about your exposure there, thanks?
Yeah we haven’t seen -- we haven’t seen any real slowdown in funding or any sort of pullback in the biotech funding environment. So the market continues to be strong. At the moment how that plays out towards the end of the year is still a wild card but we're keeping a close eye on funding of active programs and the funding health of new opportunities and right now we're seeing no signs currently of anything retracting.
As far as the virus is concerned, it has impacted our operations in Asia, particularly Mainland China and Hong Kong. We've been able to maintain sufficient operating capacity to serve our clients needs. We continue to monitor the situation. If it stays contained, we do not anticipate a meaningful financial impact and we believe any negative economic impact is covered within our current guidance range. We'll keep an eye on it.
It changes by the day. We woke up and Sunday we had Italy our main office in Italy is in Milan and the office is now shut. People are working from home a lot of monitoring visits cancelled and Italy is a bigger market than China although we have laboratory operations as well as clinical in both Beijing and Shanghai, which has been frustrating.
So there is lot of moving parts. We believe that it will not be material but here things change by the day. So it's really kind of hard to predict anything. We do not have any particular specific hedge in the guidance based upon Coronavirus effects as we do think it will be non-material in the end but it is a difficulty obviously.
Thank you. Our next question comes from the line of Sandy Draper with SunTrust. Your line is open.
Thanks very much. A lot of my questions have been asked, so maybe just on the share repurchase I appreciate Jesse you said it's not in the guidance but August in the past you have typically said your view of share repurchases to be very opportunistic when you feel like there's a dislocation not sort of a steady cadence. With this new authorization is there any change in your philosophy about how you think about share buybacks thanks?
Yeah this is Jesse. I said no change in our philosophy. We will continue to be more opportunistic than systematic from quarter to quarter. The authorization is there just so that we take advantage of opportunities as they present. Sandy are you there?
Yeah sorry. I was on mute, but I appreciate and that was my only question. Thanks Jesse.
Thank you. [Operator instructions] Our next question comes from the line of Donald Hooker with KeyBanc. Your line is open.
Great. Good morning. So you guys are working through a pretty material expansion in Cincinnati as you’ve mentioned a number of times. Can you update us in terms of your location and facility capacity elsewhere I think you have some facilities in Texas and overseas as well. Can you update us more broadly on your facility capacity given your rapid growth?
In the US we do have operations, we do have several offices in Dallas, Denver and Blame [ph] Minneapolis relatively small compared to Cincinnati operation. Globally we have offices around the world that's I think too numerous to count.
And just from a capacity utilization standpoint there is varying degree of excess capacity in each of those offices depending on the growth rates in that jurisdiction and just where we are and every year, we're outgrowing some number of offices and we're either expanding in a current location taking on another floor or we're moving to a new location to expand and that's happening regularly around the world and kind of in the run rate.
The only reason we've called out so much attention to the Cincinnati expansion is it is such a large bolus of incremental capacity that we're doing here all at once at our campus as opposed to the regular cadence of office expansions that happen around the globe for us.
Super, thanks for that and then maybe on slide seven you gave your pie charts of your customer concentrations and whatnot and there is a little bit of a lift in the Large Pharma bucket from 7% to 10% if I am reading this correctly and you alluded to a acquisition of one of your clients. I guess what we think in your guidance there is maybe I presume maybe a hick up in terms of one of your clients being acquired or what is the nature of that specifically and how does that plan to you financially?
Yeah there is no hiccup or soft spot to overcome as a result of that transaction. We have a small customer that was acquired by Large Pharma in 2019. It's about 4% of our revenue with that customers for the year and we've reclassified that as you noted on slide seven. We do have a strong relationship with the acquired company and we're continuing to perform work on the active studies which extend into the next few years.
Okay. Super and I guess that's all for me. Thank you.
Thank you. I am showing no further questions at this time. I would now like turn the call back over to 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 first quarter 2020 earnings call.
Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.