Good day, ladies and gentlemen, and welcome to the Medpace 4th quarter and full year 2022 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. As a reminder, this call may be recorded. I would now like to introduce your host for today's conference call, Lauren Morris, Medpace's Director of Investor Relations. You may begin.
Good morning, and thank you for joining Medpace's fourth quarter and full year 2022 earnings conference call. On the call today is our CEO, August Troendle; our President, Jesse Geiger; and our CFO, Kevin Brady. 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 uncertainties as well as other important factors that could cause actual results to differ materially from our current expectations. These factors are discussed in our Form 10-K and other filings with the SEC. Please note that we assume no obligation to update forward-looking statements 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 will also be referring to certain non-GAAP financial measures. These non-GAAP measures are not superior to or 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 morning. I'd like to give a quick update on the business environment. The business environment continues to be challenging. Our most forward-looking business development metrics have weakened and were depressed in the fourth quarter. New RFPs, pending RFPs, and initial award notifications were all down moderately. Cancellations across the pipeline were elevated, with backlog cancellations above our usual range in Q4. That is, above 5% of opening backlog. Delayed financing or reprioritization of pipeline is frequently the feedback from sponsors. Biotech sentiment has remained poor to date in Q1. I believe we've prepared as best as possible for this downturn. We have diversified our pipeline, improved selectivity of clients based on quality of asset and likelihood of financing, tightened our ongoing monitoring of sponsor financial condition, and consistently negotiated safe payment terms to avoid write-offs.
Our DSO and minimal write-offs of bad debt speak to our diligence. We remain confident in our 2023 guidance and believe we will continue to generate robust above-industry growth in 2024 and beyond. Jesse and Kevin will now review our financial results for Q4.
Thank you, August. Good morning, everyone. Revenue in the fourth quarter of 2022 was $394.1 million, which represents a year-over-year increase of 27.7%. Full year 2022 revenue was $1.46 billion, a 27.8% increase from 2021. Net new business awards entering backlog in the fourth quarter increased 5.8% from the prior year and $485.1 million, resulting in a 1.23 net book-to-bill. For the full year 2022, net new business awards were $1.8 billion, an increase of 13.6%, and ending backlog as of December 31st was approximately $2.3 billion. This was an increase of 17.2% from the prior year.
We project that approximately $1.21 billion of backlog will convert to revenue in the next 12 months. Backlog conversion in the fourth quarter was 17.6% of beginning backlog. We were able to grow headcount 15.8% from the end of the prior year in a challenging and competitive labor environment. Employee retention and continued hiring for future business will remain top priorities in 2023. With that, I will turn the call over to Kevin to review our financial performance in more detail and discuss our 2023 guidance. Kevin.
Thank you, Jesse. Good morning to everyone listening in. As Jesse mentioned, revenue was $394.1 million in the fourth quarter of 2022. This represented a year-over-year increase of 27.7% on a reported basis and 28.9% on a constant currency basis. Full year 2022 revenue was $1.46 billion, which represents a 27.8% increase on a reported basis and 29.2% on a constant currency basis from 2021. EBITDA of $80.4 million increased 30.9% compared to $61.4 million in the fourth quarter of 2021. On a constant currency basis, fourth quarter EBITDA increased 23.3% compared to the prior year.
Full year EBITDA was $308.1 million and increased 38.1% on a reported basis and 32.3% on a constant currency basis from 2021. EBITDA margin for the fourth quarter was 20.4% compared to 19.9% in the prior year period. Full year 2022 EBITDA margin was 21.1% compared to 19.5% in 2021. EBITDA margin increased 160 basis points for the year, driven primarily by slower headcount growth and net foreign exchange benefits behind the strong US dollar, partially offset by higher reimbursed out-of-pocket expenses. In the fourth quarter of 2022, net income of $68.7 million increased 37.2% compared to net income of $50 million in the prior year period.
For the full year 2022, net income was $245.4 million compared to $181.8 million in 2021. This represents a 34.9% increase. Net income growth lagging EBITDA was primarily driven by a higher effective tax rate and interest expense. Net income per diluted share for the quarter was $2.12 compared to $1.32 in the prior year period. For the full year 2022, net income per diluted share was $7.28 compared to net income per diluted share of $4.81 in 2021. Regarding customer concentration, our top five and top 10 customers represent roughly 18% and 25%, respectively, of our 2022 revenue.
In the fourth quarter, we generated $136.7 million in cash flow from operating activities, and our Net Days Sales Outstanding was -48.9 days. During the fourth quarter, we repurchased approximately 228,000 shares for a total of $47.2 million. For the full year 2022, we repurchased approximately 5.7 million shares for $847.7 million. As of December 31, 2022, we had $452.8 million remaining under our share repurchase authorization program. During the quarter, we paid $89.7 million against the credit facility and our net debt position at the end of the quarter was $21.7 million. This was composed of debt of $50 million and cash of $28.3 million.
Our net leverage ratio is approximately 0.1x last twelve months EBITDA. Moving now to our guidance for 2023. Full year 2023 total revenue is now expected in the range of $1.69 billion-$1.75 billion, representing growth of 15.8%-19.9% over 2022 total revenue of $1.46 billion. Our 2023 EBITDA is expected in the range of $325 million-$350 million, representing growth of 5.5%-13.6% compared to EBITDA of $308.1 million in 2022. Guidance is based on foreign exchange rates as of December 31st.
This guidance assumes a full year 2023 effective tax rate of 17.5%-18.5% and 32.5 million diluted weighted average shares outstanding for 2023. There are no additional share purchases in our guidance. We forecast 2023 net income in the range of $245 million-$265 million. Earnings per diluted share is expected to be in the range of $7.53-$8.14. I will turn the call back over to the operator, so we can take your questions.
Ladies and gentlemen, if you have a question or comment at this time, please press star one one on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, simply press star one one again. Again, if you have a question or comment at this time, please press star one one on your telephone keypad. Please stand by while we compile the Q&A roster. Our first question or comment comes from the line of Sandy Draper from Guggenheim Partners. Ms. Draper, your line is open.
Thanks very much. I think that was me. It cut out for a second. I guess the first question probably for a combination of Jesse and August. Trying to sort of think about the comments you just made about the macro environment, August, but also looking at sort of the implied EBITDA margin and looks like step-up in spending. Generally, I've always viewed it when you guys are hiring and margins aren't expanding, it's because you're pretty optimistic about the business. If there's some caution, you're holding back on hiring. Would love to just get your thoughts on, you know, it sounds like some cautionary comments about the macro, August, but at the same time, you're still hiring and the margins would suggest that's gonna continue in 2023. Thanks.
Sure. Thanks, Sandy. Yeah, look, I, we signaled the kind of turmoil in the market and among our clients. There's a lot of financial distress. A number of our clients have had difficulties and have not been able to proceed with programs they thought they were gonna proceed with. We've had an elevated level of cancellations. That's always a risk to our performance and could represent the start of a real downturn that affects our revenue growth and our need for employees. To date, we've not seen that broad-based pullback to the point where it's gonna, you know, affect our guidance, our plans for this year, our plans for next year.
It's out there as a risk, and I think the longer the pullback in funding continues, the greater the risk it will impact our ability to grow. So far, we still see robust growth and are continuing to hire. I think we're signaling the caution, but, you know, we are making it through. Currently, things are still going pretty well. I think that's all we can say.
Okay. That's helpful. Just one quick follow-up, I'll turn it over. This is for Kevin. Just looking at the guidance on interest income/expense, a little bit lower than what I would have thought just given the cash flow generation. I'm assuming you pay down that $50 million debt. It's in an upper higher interest rate environment. Is there something else in there, or are you not assuming as much free cash flow? I would have sort of thought that the interest income would have been a little bit higher given where rates are and what you can actually earn on your cash.
No. We're, you know, as you mentioned, we are expecting some level of interest expense because we're not, you know, built into our guidance assumes no share repurchases. We still have a little bit of debt on the books, and the free cash flow that we generate in the first quarter is typically our lowest quarter. You know, we will generate some cash in 2023, but it's gonna be more towards the back half of the year. You know, we're assuming, you know, kind of an interest rate in the 4% range for that.
Okay. That's helpful. Thanks. I'll turn it over.
Thank you. Our next question or comment comes from the line of Max Smock from William Blair. Mr. Smock, your line is now open.
Hi, can you hear me okay? Thanks much .
Yes. We hear you.
Perfect. Okay. Thanks. I just wanted to follow up on Sandy's question quickly. Is there any detail you can provide around cancellations beyond saying it's above that 5%? In terms of the, you know, those customers that maybe are a bit more at risk and in trouble if they can't secure funding here near term, do you have any insight into what portion of your backlog relates to those customers and how much of that backlog overall could be at risk here as it moves throughout 2023?
Sure. H i Max. You know, cancellation rate was up, not drastically, but it did get outside of the, you know, our usual kind of 5% range. It was moderately elevated. Was not a particularly, you know, striking increase, but slightly up. And a portion of backlog that has clients that, you know, are at risk, I guess you might put that into our total group of unpartnered pre-revenue clients. I don't know. I mean, you know, it's a handful of, you know, 10 or so, you know, clients that, you know, we've had discussions with about, you know, funding and difficulty or, you know, program reorganization, reprioritization, whatever.
Jesse, do you have the number on the total portion of our clients that are non-partnered?
Let me grab it.
Okay.
Just...
Don't have it at my fingertips, but yeah.
The group, yeah, the group that we've had specific conversations with or specific information from is a subset of that, of that total group. No, let me, let me grab the total.
We can, and then-
Okay. Perfect. As a follow-up and related, I guess in terms of your plans for capital allocation, right? I mean, the stock near all-time highs here. You're pointing to things slowing down, but you still have this $450 million of share repurchase authorization out there. Can you just help us think through share repurchases in 2023, whether or not, you know, it makes sense to be buying back stock here given where everything is at and the potential for things slowing back down as we move throughout the year here. Thank you.
Yeah, Max, this is Kevin. You know, as we've traditionally done historically, I mean, we will continue to take an opportunistic approach to share purchases. You know, we were able to execute some in the fourth quarter, and you can see what those levels look like. As we approach 2023, you know, again, to the extent that volatility in the market opens up opportunity, we'll look at share repurchases again. If not, we're not afraid to build some cash either.
Got it. Thank you.
Max, just to follow up, around 60% of our backlog is customers that are non-partnered with large pharma.
Okay, that's helpful. Thank you.
Thank you. Our next question or comment comes from the line of David Windley from Jefferies. Mr. Windley, your line is now open.
Gentlemen, thanks for taking... Ladies and gentlemen, thanks for taking my question. I guess, August, I'm interested in kind of a further bridge to Sandy's question around the environment. You know, I think the first call where you sounded a little bit of caution warning to us was a year ago, and you've been able to navigate, as you said, been able to navigate pretty effectively. Bookings growth was down year-over-year, but still growing. I guess I'm wondering, is it, you know, what's allowing you to, you know, post numbers that can still get you to your growth outlook when it seems to be a deteriorating environment?
Should we just chalk that up to conservative guidance, or a sales effort that is kind of turning over more rocks, and so you have more things going in the top of the funnel that allows you to absorb, you know, something, a higher percentage of opportunities dropping out? Maybe you could add a little more detail to the navigation through the turbulence here.
Sure. We did talk, you know, several years back about expanding our, you know, our look at things, and, you know, our business development pipeline to be able to be more selective when needed and to avoid the kind of difficulty we ran into the last, you know, cycle. You know, I think that's been reasonably effective. Of course, there's only so much you can do. I, you know, what we're seeing is a greater churn, you know, a greater risk to clients having stalled financing, and that's a headwind.
It doesn't mean there's not other options and other opportunities, and we've been able to pivot to those, and we've been more selective during the period of, you know, the last, well, you know, not this past year, but the year before that, when there was a large number of opportunities. We were able to select programs that, you know, were better funded than others. I think it's a, it's a mix of things. I think we've been fortunate to have enough opportunities to be able to switch and to, and to fill things in when we've had cancellations. We've had a lot of cancellations we've been able to fill in. I, you know, I think there's a lot of things there.
We always try to be a bit conservative, particularly in a volatile environment with our guidance. We do come out with a bit more conservatism when we have this kind of environment. If things do not deteriorate as we, you know, as we hope they don't, then we can exceed where we come out in the guidance.
Got it. Following up on that, as you pivot to other opportunities, you know, presumably those other opportunities, those other clients are, or were being served by a competitor CRO, are you able to perceive that you're taking share? And is price sensitivity, you know, being a little bit more aggressive on price around the edges, part of the lever to pry yourself into those opportunities?
Well, I think when you see opportunities that are kinda coming from dissatisfaction, with a, you know, competitor, you know, price is not generally the, you know, the feature that they're looking for. They're not coming to us and saying, "You know, we're just not getting the price we want somewhere else." It's usually some other frustration. You know, it's hard to sort out, you know, share. I look at share just in terms of, you know, revenue growth. You know, if our revenue growth is fast... Look, all the metrics on bookings and stuff I think are, you know, are BS. I mean, you know, it, it all depends on your conversion rate and all the rest of it, and your, you know, book-to-bill, and people talk about, you know, that.
You know, in the end, it runs down to revenue growth. I think we have superior revenue growth. I think we're taking share. You know, I don't ascribe any of the current environment to that. You know, we've just had an ability to pivot to other programs.
Okay. Last question for me and related. I guess it's two-parter here. So you are very careful about your vetting and what you put into backlog. To have clients without funding in backlog, I presume this is project has progressed quite a ways and they've burned through their, like, they had financing at the time they went in backlog, but they don't now, or they're in need soon, something like that. Maybe just clarify on that. Then relatedly, we hear a lot of, especially with small clients where capital is somewhat harder to get, that they do start pinching around on terms. If those are not direct pricing, they are, you know, less milestones up front, delays in payment terms and things like that.
Your DSOs would suggest that you're, you know, you're not seeing that or you're not accepting that. Maybe kind of a little bit around, you know, balance sheet vetting, payment terms and what's in your backlog in that regard.
Sure. Yeah, I'll start there. You know, you're absolutely right. There is, in this environment, there's a lot more pressure to be flexible because their financing is coming. You know, they and we are, I guess, in this environment, just as adamant to make sure that we have, you know, advanced payment of things. It is a negotiation. You know, a client that we believe is more likely to get funding is better funded already, we might be a little bit more flexible. In this kind of environment, we do tend to be very aggressive in terms of ensuring that we get paid for the work we do. You can see that in our DSOs.
We, you know, we have, you know, generally favorable terms payment because of the risk that our clients acknowledge they have. I think that is a give and take, but I think we do a good job at it. You can see we're not giving considerably there in order to get work. We're not in that kind of situation where we give up terms in order to win work. We are very firm in our negotiations that we have to make sure that we get paid. If that means losing work, we'll lose the work. Then your first question was about cancellations and-
Well...
... how they occur because of fund, you know, funding-
Well, no, just...
... after we awarded?
I'm sorry, just the kind of Max's question around clients that are, the handful of clients that are in your backlog that have expressed a concern about, you know, some difficulty in getting their next round of funding, if I'm understanding that correctly? I'm asking for the scenarios in which those even are in your backlog.
Yeah.
If they don't have funding.
It's a whole, there's a fair number of our clients that have funding for a first portion of a, you know, first stage of a program or, you know, to a milestone that they see as, you know, an inflection point for their, for their product. It may be an interim analysis, it might be a first part of a, you know, study. There's also clients that look to be fully funded for a project going in, but because of other things that they might do that we may not be aware of in terms of other programs they're supporting or other spend, you know, run short of cash before they complete.
You know, if have assumed that financial markets will be able to get them there on it. I mean, I think it's a lot of different things. Look, some of it is funding related, but also the product not... You know, it's often, you know, a fantastic revolutionary product that's coming along is gonna get funded. You know, I mean, them running out of funding is not a problem. It's always in the context of how well the product is performing, too. During a trial, you sometimes get signs, whether it's safety signals or otherwise, that they might wanna continue on. It's not a killer for the product. It still looks interesting. It still looks promising, but not the breakthrough they'd hoped. You know, that leads to a challenge for getting funding for the next stage.
Yeah.
Does that help? I mean...
It does. It does. Yes.
Dave-
Thank you.
Dave, let me just add, you know, one finer point on, you know, active programs and backlog that had funding in the beginning but then need to raise incremental capital at some point along the journey. You know, we don't pull those out of backlog every time that a sponsor is, you know, raising incremental capital in the middle of a study. We do factor those into our detailed build-up revenue projection that then becomes the basis for our guidance range. We've risk assessed and risk adjusted the revenue projection leading into backlog, while there may still be some of that unfunded activity sitting in the backlog balance.
Got it. I've taken a lot of time. Sorry about that. Much appreciated on the transparency and kudos to your navigation through the tough environment. Thanks very much.
Thank you. Our next question or comment comes from the line of John Sourbeer from UBS. Mr. Sourbeer, your line is now open.
Hi. Thanks for taking the question. I know there's been a lot of questions here on the cancellations and what you're seeing there, I guess just maybe one more on this. You know, any, you know, specific therapeutic type or class or phase I, II, III, where you're seeing more, you know, weakness versus others within the book of business?
I don't think it's focused on any particular therapeutic area or or stage of programs. No, I don't really have a color to that.
Yep, got it. And then just, you know, August, I appreciate, you know, the color on the cautioning environment. You know, if you look at new awards growth did slow, some this quarter down from that, you know, mid-teens to around 6%. Just any color on how you think those new awards play out through 2023?
No. I, you know, look, I think it's again, back to you, it's a challenging environment. We're playing it, you know, month to month. So far, things have been okay, but in a weaker environment. Our win rate has been very strong, which has, you know, supported things. That's always hard to judge. You know, I think that we're hoping that we continue with some, you know, book-to-bills and, you know, above 1.2 range. You know, we have to see.
Got it. Just last one here from me. You know, I think back in December, there were some local reports, you know, just on the hiring there. Just maybe any additional color just on, you know, turnover you're seeing, you know, wage pressures and just the ability, to, you know, pass along that on pricing and just how we think about that impacting the margins throughout the year?
Our turnover's come down, you know, nicely. I think we're doing well. We're getting good traction on new hires. I think we still are hiring reasonably rapidly. Yeah, I think that there remains a pretty tight labor market, yes. I think we're making good traction.
Thanks for taking the questions.
Thank you. Our next question or comment comes from the line of Eric Coldwell from RW Baird. Mr. Coldwell, your line is now open.
Yes. Can you hear me?
Yeah. Yes, sir. Yeah.
Hey. Great. Thanks. You just mentioned it, August, on the hit rate, but I was hoping to get a little more detail on where it stands versus recent history, longer term history. Did it sequentially improve, decline here in the fourth quarter? Any additional quantitative data would be helpful.
Yeah, I think numerically, and I don't wanna get into, you know, the actual numbers and start reporting that as a, as a metric. It does bounce around quite a bit. I think it ticked down slightly in Q4, but it's still in a very strong range, in a historically strong range. You know, which has really been true the last, you know, year or so. We've had a really strong win rate. I think that's, you know, part of the selectivity and, you know, we were using in selecting projects and all the rest of it. That's been a fortunate support for us. Yeah.
Thank you. Shifting gears. When we think about macro operational challenges, and not necessarily your hiring, things of that sort, but there have been mentions in the industry about study sites not having access to ample staffing or at times various supply chain challenges in lab-based businesses, et cetera. What is the external view of the operating environment? Is it improving from where you've been over the last few quarters, weakening? How does it stack up today versus, say, if you will, a normal pre-pandemic operating environment?
Sure. It's been a really tight environment, particularly at sites. Sites have been, and the inflation, you know, the inflation rate at sites has far outstripped, I think, the inflation rate among CROs and, you know, the rest of the industry. There has been very significant challenges at sites. I would say it's maybe starting to see, you know, light at the end of the tunnel and there's, you know, some improvement, but it is pretty early. There has been a lot of strain there. There's been a very tight labor market overall, but I think more so at sites.
I, you know, I think we've seen recently, still a pretty tight labor market in hiring new employees. The one area that I think we've found it to be substantially easier is IT- related staff. Otherwise, we see it as still a pretty historically tight labor environment. I don't know if I can provide any more detail on that.
No, that's great. Maybe, maybe for Kevin, one on the tax rate here. I know you have historically had some fairly pronounced volatility in quarters. This last year was no exception with first quarter and fourth quarter in that 6%-7% zone, and then middle of the year around 20%. I'm curious if you could give us more detail on the driver of the low tax rate in the fourth quarter. Do you see any or could you at this point, guide us to any volatility in tax rate over the next four quarters? Are there any expected periods where the tax rate might be above or below that 18%, enough so that you would wanna call it out?
Yeah. Eric, you know, in the fourth quarter, as you know, our rate is heavily influenced by stock option exercises. What we saw in the fourth quarter and what really drove that 7% rate in fourth quarter was the accelerated stock price increase in people exercising their options. It's very difficult to obviously predict when people are gonna exercise options. You know, we don't. In each passing year, you know, the influence of stock options, in theory, should get a little bit less as our operating income, you know, increases and the impact of that goes down. To answer your question in relation to 2023, it's hard to predict what that quarterly impact could be.
For now, I would just recommend using kind of that 17.5%-18.5% per quarter, and we'll just have to kinda see how it goes.
Okay. That's, that's all for me. Thank you.
Thank you. I'm showing no additional questions in the queue at this time. I'd like to turn the conference back over to management for any closing remarks.
Thank you for joining us on today's call, and thank you for your interest in Medpace. We look forward to speaking with you again on our first quarter 2023 earnings call.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.