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. If anyone should require operator assistance, please press star then zero on your touchtone telephone. 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, thank you for joining Medpace's third quarter 2020 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 uncertainties, as well as other important factors that could cause actual results to differ materially from our current expectations. These factors, including the ongoing impact of COVID-19 on our business, 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 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. I would like to provide an update on COVID work that we're involved with to alleviate any concern about concentration, margin, or cancellation risk. Our backlog of COVID-related work, including pass-through amounts, is less than $45 million at September 30. Our year-to-date 606-based revenue from COVID-related work is less than $10 million as of September 30. Although pass-through amounts are proportionally larger on our COVID awards, this difference is roughly 15% relative to non-COVID studies and not the large differential often seen with vaccine studies. Most of our backlog relates to treatment studies rather than vaccine studies. In summary, it has been a slow and painful recovery, but we are now on a sustainable growth path that should accelerate into 2021 independent of COVID work. Jesse will now review our third quarter financial results and forward guidance.
Thank you, August, and good morning, everyone. Net new business awards entering backlog in the third quarter increased 10.5% from the prior year to $315.4 million, resulting in a 1.37 net book-to-bill. Ending backlog as of September 30th was $1.4 billion, an increase of 16.7% from the prior year. Revenue was $230.4 million in the third quarter of 2020, which represents year-over-year increase of 6.5% on a reported basis and 5.8% on a constant currency organic basis. EBITDA of $51.9 million increased 49.4% compared to $34.8 million in the third quarter of 2019. On a constant currency basis, third quarter EBITDA increased 49.9% compared to the prior year. EBITDA margin in the third quarter was 22.5% compared to 16.1% in the prior year period. The higher margin was primarily attributable to lower reimbursed out-of-pocket expenses and lower SG&A costs on higher revenue.
In the third quarter of 2020, GAAP net income was $41.5 million compared to GAAP net income of $24 million in the prior year period. Net income increase was primarily driven by higher EBITDA and a lower effective tax rate. GAAP net income per diluted share for the quarter was $1.09 compared to $0.63 in the prior year period. Regarding customer concentration, our top five and top 10 customers represent roughly 17% and 25%, respectively, of our total year-to-date revenue. In the third quarter, we generated $59.8 million in cash flow from operating activities, and our net days sales outstanding increased compared to the second quarter from -30.2 days to -27.4 days. During the quarter, we did not repurchase any shares, and we had $49.2 million remaining under our share repurchase authorization at the end of the quarter.
Additionally, our board of directors has authorized additional share repurchases, which brings the total current authorization up to $100 million. We ended the third quarter with $219.2 million of cash, no outstanding debt, and $50 million of undrawn capacity on our revolving line of credit. Our guidance for 2020 is unchanged from the last quarter, and we are now in a position to provide initial 2021 guidance for revenue and EBITDA. For the full year 2021, we expect revenue in the range of $1.05 billion-$1.125 billion, and EBITDA to be in the range of $200 million-$220 million. Additionally, we are expecting a full year 2021 tax rate between 16% and 20%, and we plan to provide additional detailed full year 2021 guidance on our fourth quarter earnings call in February.
With that, I will turn the call back over to the operator so we can take your questions.
At this time if you like to register your question, please press star then number one on your telephone keypad. Start with star then number one. Our first question comes from the line of John Kreger with William Blair.
Hi, thanks very much. August, can you talk about your ability to start studies up and get them enrolled, given the pandemic? Are there any metrics you could share with us versus, let's say, a year ago?
No, I don't really think I have metrics to provide you. Look, there's still a significant reduction in recruitment rates for many studies. There is still sometimes delays in startup related to site staff and availability and operational difficulties. I think things have improved considerably. We certainly have, from a total activity standpoint, are back to baseline or above. Certainly for startups, we're above the level we were a year ago. That is a reflection of both some delays and difficulty at sites as well as growth, kind of growing around it. I think the environment is strong, but there still is some difficulties and recruitment rates, particularly based on therapeutic area, are impaired at many sites, and of course, it changes over time.
I think what we see at the current moment may not be what we see three months from now, but I do think that everyone is adapting very well and the business environment is strong.
Great. Thank you. A follow-up. Are you seeing any signs of sort of changes in behavior on the part of your clients, given the significant funding boost that we've seen over the last couple of quarters? Are they treating it more as sort of a not sustainable new trend? Thanks.
Well, I'm not sure how much I got to go into their head to figure that out. I do think the environment is very strong. I do think there was quite a bit of reluctance to move forward, even having the cash and authorization on a program due to COVID. I think that is alleviating. I think people are saying, "Well, we're kind of into maybe a headwind in terms of difficulty at sites, but things have normalized enough that we can proceed, and waiting another six months may not be the most productive use of the time and resources." I think things are moving forward in spite of the difficulties. I think that's what's really changed, is there's a good funding environment. I think there is a lot of programs that want to go forward. Many of them were being held.
I think some still are being held, but I think more and more people are saying, "Now is the time to move forward. We've evaluated the situation. We can do this. It may take a little bit more resources than it might have a year ago, but this is something that should be moved forward.
Thank you very much.
Your next question comes from the line of Sandy Draper with Truist.
Thanks very much. I guess the first question, when I look at the reiterated revenue guidance and even the revenue guidance for next year, it seems like you've got factored in there the potential for another COVID slowdown. When I just think about the low end of your revenue guidance of $880, I would assume a pretty sharp drop. Just trying to think, what were the key inputs you put into your guidance, assuming or around the COVID impact?
Jesse?
Yeah, thanks, Sandy. As it relates to 2020, I'll hit that first and then maybe move into 2021. The guidance range that we maintained or held does contemplate the continued volatile environment. We did decide to hold the range. We are tracking well within the range. One potential headwind could be increased COVID-related lockdowns and restrictions and site restrictions that would be factored into a low end of the range scenario. A potential tailwind that could be in there on revenue would be a faster increase in the investigator site payment activity. This would push revenue up and margin percentage down, but have little impact on EBITDA. The site activity is progressing, but the trajectory of that is still somewhat uncertain. As it relates to 2021, we thought it was important to come out with a range here as early as we could, given the environment.
This does contemplate our current view of the range of possibilities for 2021. Some of the similar themes would hold true. At the low end of 2020 revenue, that could contemplate some turbulence in site access. At the high end of the range, that would include things like a continued robust business environment and things continuing to progress positively.
Great. That's really helpful. I guess my follow-up, again, thinking about especially the guidance for 2021 in terms of EBITDA, if I'm doing the math correctly, it looks like it's a relatively low contribution margin. It's about $185 million-ish of incremental revenue midpoint to midpoint, but only $25 of EBITDA. When we think about the modeling, are the incremental expenses coming in mostly at the cost of goods side, because this is a lot more pass-through revenue, or should we really be thinking about it on SG&A? Just trying to think where those incremental expenses you have essentially implied in the guidance are going to be coming in.
Yes, primarily cost of goods. As we've discussed here recently, our costs this year have been suppressed, both in terms of the pace of the hiring and headcount investments and growth this year, as well as the number of areas where discretionary cost and travel and meeting expense and training and such have been lower in this environment. As we think about cost investments moving into 2021, we do plan to hire aggressively, and we do anticipate some of the cost categories that have been a little muted this year to come back.
Great. Thanks for the comments, Jesse.
Yeah. Thanks, Sandy.
Your next question comes from the line of Dave Windley with Jefferies.
Hi. Thanks for taking my question. Good morning. I apologize if I missed it, but did you comment on the percentage of your bookings that came from COVID projects this quarter?
No, we didn't. Hey, Dave, this is August Troendle .
Hi.
We just commented on kind of the cumulative COVID bookings we've had. Again, I think it's probably maybe close to roughly half of that was in the last quarter. We didn't comment specifically on this quarter, no.
Okay. To John's question on clients' willingness to move forward, if I interpreted your answer correctly, it was maybe awards that had already been made, but clients maybe not setting a start date or being reluctant to do that. If I back up a step into more the RFP pipeline and kind of press on that part of the question in relation to the funding environment, are you still seeing robust RFP activity, and is that maybe even accelerating as people get more comfortable?
I think we are seeing a very robust RFP environment. Yes. I think it's as strong as I've seen it.
Okay. Then a similarly slightly different twist on Sandy's question, Jesse, if I look at the progression of revenue relative to, say, backlog in the third quarter, with any backlog already established, then what might likely to be your backlog progression with a strong RFP environment, it does look like especially the fourth quarter assumes that your burn rate drops back down really much closer to the Q2 level than the Q3 level. Just kind of wondering the rationale there, if that's deliberate, or was it simply that you didn't really want to signal anything by changing guidance? You're keeping guidance the same and the low end of the range, or I should say the midpoint of the range kind of just implies that burn rate.
I think that's correct.
That's more the case, Dave. Yeah. The range implies a revenue burn rate of, I think, 14.9%-17.7%, and we're tracking well within that range favorably, but wanted to keep things static on the guide.
Yeah. To the question on site accessibility and the headlines that we're seeing about regional outbreaks in European regions kind of contemplating, maybe not complete shutdowns, but certainly dialing back the level of activity in their communities. Are you seeing that affect site operations, or are they better able to maintain levels of activity than they were, say, in the second quarter?
Currently, up till now, they've been maintaining activities pretty well, much better than back in March, et cetera. Yeah, I think things are manageable currently. We'll have to see where things go, but we are actively working throughout Europe and in general, sites are open with some difficulties, but largely we are keeping things running.
Yeah. Then maybe just the last question quickly on the cost and Sandy's question on margin. Is it possible to put a quantification on either It sounds like headcount is perhaps the biggest headwind. Can you put a number on, say, your growth in headcount or growth in COGS or something to that effect that would give us a sense for magnitude?
Jesse.
Yeah, Dave, we plan to grow headcount as rapidly as we can. When we look at the past couple of years when we've been able to do that, it's been around the 20% level or so. We're hiring as aggressive as we can, and we'll see how we can do.
Okay. All right. Thank you.
At this time, there are no further questions. I would like to turn the call back over to Mr. Kevin Brady for any further comments or closing remarks.
Kevin?
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 fourth quarter 2020 earnings call. Thanks.
Ladies and gentlemen, this concludes today's conference. Thank you for your participating. You may now disconnect.