Good day, ladies and gentlemen, and welcome to the Medpace Third 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. You may begin.

Good morning, and thank you for joining Medpace's third 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 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 in 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 steady in the third quarter, and cancellations have continued at normal levels within our historical range. Net new business awards entering backlog in the third quarter increased 25.4% from the prior year to $285.4 million, resulting in a 1.32 net book to bill. Ending backlog as of September 30th was $1.2 billion, an increase of 19.9% from the prior year. Revenue was $216.2 million in the third quarter of 2019, which represents year-over-year growth of 20.6% on a reported basis, and 21% on a constant currency organic basis. As anticipated, revenue growth on a sequential basis slowed in Q3. This reflects the anticipated air pocket we projected for the second half of 2019, as a result of higher cancellations in Q4 2018 and Q1 2019. Third quarter reimbursed out-of-pocket expenses of $71 million were relatively consistent with Q1 and Q2, and represented 32.8% of revenue. In the third quarter, Medpace Investors, LLC, which is a related party of Medpace, completed a tender offer and purchased approximately 229,000 vested stock options from Medpace employees. Medpace was not a party to this transaction. There were no changes to the terms of the stock options, and the same stock options that were previously held by employees and tendered are still outstanding and now held by Medpace Investors, LLC. Since the tender was initiated by an economic interest holder of the company, GAAP requires Medpace to account for this as if the employee stock options were settled and new stock options were issued to Medpace Investors, LLC, at the fair values as of the transaction date. This resulted in recognition of an additional $5.1 million of GAAP stock-based compensation expense recorded in selling, general and administrative…

[Operator Instructions] And our first question is from Dave Windley from Jefferies. Your line is now open.

Good morning. Thanks for taking my questions. August, as for usual, I’d be interesting in your characterization of the demand environment, and obviously, Jesse has also already said the cancellations were fairly normal. But just interest in, I guess, both general RFP flows, and then also your experience from the win rate standpoint?

Dave, it’s horrible. Things are really going bad. Going staff [ph] real fast.

Clearly.

Yeah, yeah, clearly. No, the things have been really pretty stable. We saw a very strong period a year ago, and dropped off a little bit, and it’s just been kind of sailing along at a reasonably nice run rate. And RFP flow has been reasonably stable. It paved, tipped down numerically just slightly, but it is in the latest quarter, but it is still pretty strong. I think things are going along. Our win rate has remained in a comfortable range. It’s dropped off a little bit in this quarter from some of the highs we hit in the last couple of quarters, but is in a nice historical range. And so, I think things are clear sailing.

Okay, great. From a -- Jesse, maybe this one for you, and then I’ll yield the floor. But the guidance, as I look at, what the midpoints of your guidance imply for the fourth quarter suggest that; one, the burn rate drops off again, so that would be two quarters of fairly significant reduction in burn rate. And then your EBITDA margin would pop back up from this lower level, which after your explanation on the stock-based comp, I guess, is fairly apparent, fairly obvious, but if you could talk about, maybe the air pocket impact, and how your backlog conversion and progression looks, and if that is a persistent effect beyond fourth quarter?

Sure. Thanks, Dave. So first to address the cost items, you're right, it’s the tender offer, which really elevated the SG&A expense in the third quarter. We do anticipate SG&A expenses to be more inline on a percentage of revenue basis with other quarters, outside of Q3, kind of around that 11% or so percent of revenue. I think you if you normalize for the tender, that's about where it actually was in Q3 as well. And then on the revenue side, yeah, we have seen some of the impact of the earlier cancellations in the third quarter. We do expect that to continue to have an impact for the next couple of quarters, again, in the fourth quarter, and into the early part of next year. So it does result in a burn rate reduction that you noticed in the third quarter, and you're right, that kind of guidance midpoint that implies another step-down in the conversion rate in the fourth quarter. But the new projects, that is somewhat being offset a little bit by good business environment and new projects that are that are progressing nicely, but we do think there will be a couple of quarter affect from what we're now seeing is the flow through of those cancellations from a couple of quarters ago. And that definitely has …

I don't know how much the burn rate drop is related to that. I’m sure it’s partially, but you also have to look at the burn rate spiked to an unusually high -- historically high range. And I think its returning back towards more than the median of our longer-term average. So I don’t look at - I don’t expect it to go back, to above 19% conversion rate, that’s just not our historical experience. So I think that it's - you’ve got some normalization to the mean.

Right. I think my interest was given that momentum in the first half of the year was to understand specifically what, like stopped that momentum assured in the cancellation [indiscernible] you answered that question, I think.

Yeah, I think - right, the cancellations may have -- in fact, have accelerated some of that outside of the normal range, but I just -- I don’t want to give you impression that we’re dipping down and we're going to come back up to 19% or something.

Thank you. Our next question is from Sandy Draper from SunTrust. Your line is now open.

Thanks very much. I guess, Jesse, if your clarifications make sure, all of that excess dotcom was in SG&A correct, none of it was up in cost to goods?

Correct, all in SG&A.

Okay, great, thanks. And then either I’m not sure, August or Jesse, on the hiring front, even with the sort of slow down, you’ve added looks like about another 200 people, sort of consistent sequentially for you’ve been adding, I guess, the philosophy here is just continuing to hire ahead of the strong bookings and the expectation of growing the revenue next year. Just trying to get some thoughts around the pace of hiring, how hard it is? And then, as it pretty much unless something changes dramatically for the better or worse, you’re just going to consistently hire as much as you can and figure it up the business comes along to eventfully [ph] support that. Thanks.

Yeah, Sandy, I think, we’re along our target of hiring about 20% a year. And I think we are going forward as you say the slowdown. We really haven’t had much of a slowdown revenue growth dipped because of those cancellations, but there is some movement of people between projects et cetera, a little bit of less efficiency, but things are still growing nicely and along kind of 20% rate that we do expect to drop off at some point, but right now we have targeted 20% growth this year, and we’re continuing with that rapid rate of growth.

Okay. That’s really helpful. I’ll jump back in the queue. Thanks.

Thank you. Our next question is from John Kreger from William Blair. Your line is now open.

Hi. Thanks very much. August or Jesse, it seems like, I think, you had five quarters now of backlog growth rate around 20%. Would it be reasonable to assume over the next year or two, that’s about where the company is kind of top line growth will trend? Or is there anything else that you seen in the backlog that would cause the number to, perhaps, much lower than that?

I don’t think that’s a reasonable expectation going forward far into the future. I think that’s where our current roll-off is, but we do see, I suspect, in the next -- in this next year with the election cycle, and certainty around that, we will have some softening. And I do not believe that a 20% growth is a long-term expectation. Jesse, do you want to add?

No. That’s -- I wouldn’t say anything else.

Great, thank you. That’s helpful. August, anything else do you kind of call out in the industry in terms of what’s hard and then what’s maybe calling off? It seems like you’ve continued to see a little bit of shift in the therapeutic concentration?

No, look, I think that oncology has remained very strong, and a lot of, I think, you see are the areas of other -- kind of some other rare diseases that don’t -- aren’t easily fit a blender in one of the buckets we have. But, I think things have been reasonably consistent across the therapeutic areas with [indiscernible] strength in oncology.

Great. Thanks. And then lastly, Jesse, any change in the bad debt accruals that you had in the quarter?

No, no. We had no bad debt in the third quarter.

Great. Thank you.

Thank you. Our next question is from Erin Wright from Credit Suisse. Your line is now open.

Thanks. In terms of a competitive landscape, are you seeing any sort of changes in the pricing environment? Is it fairly rationale in your view? And are you seeing any prior adjustments to small biopharma category? I’m just curious if you’re seeing any changes out there from a competitive standpoint.

Thanks, Erin. No, it remains pretty consistent. Nothing that we’re noticing unusual and no new competitors, it’s a pretty consistent group that we’re up against on a regular basis.

Okay, great. And then also, could you give us an update on the central lab business? I haven't heard you talk about it in a while. And, I guess is that so an area of further investment for you or how have the trends been, I guess, across the central lab business for you? Thank you.

Sure. Yeah, the lab offering, it’s growing - lab activities growing right along with kind of the overall company rates. We have made investments there this year in expanding some of our facilities that we have in different locations. And they’re consistent with other parts of the business where we're expanding for growth in both people and lab to little more CapEx heavy. So there is some investment in platforms and some real estate to continue that growth, but it's moving along nicely, along with the rest of the organization.

Thank you. Our next question is from Donald Hooker from KeyBanc. Your line is now open.

Good morning. So with regards to the hiring activity, are you guys using any contract labor at this point or these are all FTEs?

Little bit of contract labor, probably, it’s up a little bit from what it has been over the past couple of years, but still fairly minimal relative to the overall employee costs. And then even this - these contractor costs, just to clarify, are not included in our headcount numbers that we closed.

Got you. Would that be maybe a little bit of a head of expenses or is that too minimal to have any real taxes?

I think it’s small, but it's not happened. On a relative basis that it’s not really having an impact.

Okay, super. And then, I guess, the other question you're going to be getting a lot and you have been getting a lot in terms of the balance sheet. What's the current thinking there in terms of an appropriate debt ratio for Medpace now that you're building cash reserves?

Yeah, longer-term, yeah, we’re certainly comfortable with a churn or two of leverage on the balance sheet. Right now, we're in a net cash position. Our capital allocation priorities are to continue to focus on organic investment. The capital spending will be a little bit heavier. It picked up in the third quarter. It will be -- it should be continuing for the next couple of quarters as we build out some of the real estate, but then beyond that, we will look towards share repurchases opportunistically at some point, and then longer-term, we may consider a dividend. But as far as how much of our operating cash funds that versus would we take advantage of an opportunity and put a little bit of leverage on the balance sheet. We're certainly comfortable with that up to a turn or two.

Okay, super. Another last one for me. I guess, in the past, as we're kind of sort of - major growing your employee base so rapidly and you’re evidenced as well. How do we think about margins next year kind of for EBITDA? I think, in the past you’ve talked about kind of long-term target of 17% to 17.5%. I just want to make sure how that rate sort of a normalized EBITDA margin that we should expect from net basis?

Yeah, I mean, I think, we will give more clarity on EBITDA guidance and margin guidance in February, but, I guess, the comment I’ll make, two comments, today on the cost going into next year. As August mentioned earlier, we’re continuing to hire aggressively. We do expect that - we anticipate that there could be some impact of top line softening next year related to the election, but we do plan to hire, certainly start the year hiring, continuing to hire aggressively in light of our organic growth model and our training mentality. So we’ll continue to add heads that are pretty aggressive pace entering the year. And then the other comment I’d make is, we do have, as a reminder, the new building coming online here at the corporate headquarters that will be a $6 million additional cost for the year starting in the second quarter at about $2 million a quarter, but we’ll come back in February with more refined EBITDA and EBITDA margin guidance, but I just wanted to point out those two influences as we head into the year.

Thank you. Our next question is from Stephen Baxter from Wolfe Research. Your line is now open.

Hi, thanks. I just wanted to make 100% clear on the discussion on the stock comp charge. Can you confirm that the $5 million charge was not excluded from your adjusted earnings in the quarter? I don’t see anything for that reconciliation, but just wanted to make a 100% sure I’m not assumes?

See, that’s correct. We have not made any add-backs or adjustments for the tender offer stock comp or any stock comp?

Okay, great. So it sounds to me like the charge wasn’t assumed in your prior guidance, but you’ve been able to digest to within the existing range. So I guess, first, could you confirm that and then by definition, would it be reasonable to think that EBITDA guidance would have gone higher absent that charge?

Yeah, I mean, it was -- there was lot of considerations as we think about the potential impact on the tender as far as what the level of participation would be and what the stock price would be on the settlement date. But no, we did not assume $5.1 million of additional stock comp in our guidance. And, so we’re either - we’re hiring that range or guidance could have been potentially higher had -- having not had the charge.

Okay. Thanks. And then I wanted to come back to the share purchase question just tell you in a different way. When you were last active on share purchase in 2017, your leverage was already over a ton. So now you’ve been in a net cash position for two quarters. And I was hoping that you could more contrast, I guess, your previous outlook, and what drove you to get active in the market the last time in 2017, against your current process, and hopefully, some insight about where you need to see before getting more active. I guess you were talking about some additional capital spending, but year-to-date cash flow significantly in excess of your CapEx. So trying to understand whether you’re signaled and that there is going to be some material step-up in a very -- from a very low level of CapEx that we’re seeing currently? Thanks.

The stock price is in the 30s.

So we’re not going to get into specific price points on share repurchases. If you look at our prior trading activity, we had been more and continue to be of the view that it’s better to be more opportunistic rather than programmatic about just buying shares, because we have cash. And so we’ll look for opportunities in the future as we have in the past. Now the stock - the CapEx will be stepping up a little bit, it won’t be that material. It’s up in the third quarter to $6.2 million. We anticipate something around that range or a little bit higher in the fourth quarter. And that could lead -- some of that could lead in next year early half of the year, as we sit out the building, but it’s not going to be that much of a material impact on our cash.

Okay. That’s fair enough. And then one last one on your customer and concentration, I wanted to ask about the large and midsized client base. Obviously, the small biopharma revenue is up over 30% this year, but the remainder is tracking down a little bit. And I guess, as you look what you have currently in backlog is reasonable to think that it, on a dollar basis at least, that you could see large pharma and midsized pharma to stabilize a bit as we look into the next couple of years? Or do you think that that’s going to kind of a little bit of a melting ice cube as you allocate more resources towards the small biopharma opportunity? Thanks.

I think more of a melting ice cube. Our focus is on small biopharma, and that's where a lot of the continued opportunities are and where we're winning business.

[Operator instructions] And our next question is from David Windley from Jefferies. Your line is now open.

Just coming back around for a couple of clarifications. Jesse, you said on the cost from the building, I think you said $6 million in the past, I've heard $8 million. I wanted to make sure I heard that right on your operating cost for the new corporate building for 2020.

It's an $8 million annual cost of $2 million per quarter. The building will be available in April. So it starts in the second quarter, $6 million for 2020, $8 million for 2021.

Right, okay. So is that a quarter later than you had planned to open it before?

It has slipped a little bit, but its reasonably on track.

Okay fine. And then, second, from the therapeutic mix standpoint, August, I’m curious how you think about -- oncology has grown for you, it’s grown for everybody, how do you think about the diversification within the oncology project portfolio that you have? Are there mechanisms of action concentration, platform concentrations where you need to be wary of negative results from a particular project that would have ripple effect in a class of drugs?

Yeah, I don't think so. We’re pretty diversified in oncology, and you talk about some of the very high level of spending on PD1 inhibitors. We just don't have that kind of concentration. I think a lot of that really is large pharma-driven and we're not involved. Now we do have a number of studies that involve other agents in synergy, and in combination with those agents, but it's just not an overwhelming part of our oncology business, and it is pretty broad. So a new oncology is a large part of it, but it's pretty diverse there.

Our next question is from Donald Hooker from KeyBanc. Your line is now open.

One last quick one to follow up. In terms of capital spending, I know you guys have talked about you're growing fast and, obviously adding capacity. On the capital spending side, there has been some lumpiness there. How do we think about capital spending going forward in terms of your lab space and facilities?

Yeah, so we -- this year capital spending includes some growth capital in each of our lab locations. So that sets us up -- the lab tends to be a little bit lumpier on some of the spending that gives us some runway going into the next couple of years, but it’s going to be continued spending, but not, it’s a smaller part of the business, so it doesn't have that big of an impact on the overall capital spending.

Thank you. At this time, I’m showing no further questions. I would like to turn the call back over to Kevin Brady for closing remarks.

Thank you for joining us today on this call, and for your continued interest in Medpace. We look forward to speaking with you again on our fourth quarter 2019 earnings call.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.