Good day, ladies and gentlemen. Welcome to the Medpace Q1 2023 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 the 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, thank you for joining Medpace's Q1 2023 earnings conference call. Also 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 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.
Thank you, Lauren. The business environment improved in Q1 with RFP flow up on a sequential and year-over-year basis. The total dollar value of pending RFPs also improved significantly. Although award notifications were down on the quarter, they showed sequential improvement January to February to March and have improved even further to a relatively strong level in the first three weeks of April. Total pipeline cancellations were down over 50% on a sequential basis in Q1. The trends at this point look favorable and we are cautiously optimistic about our backlog build toward 2024. We are raising 2023 guidance in line with our strong financial performance in Q1 and greater visibility we now have into the full year results. Jesse and Kevin will now review Q1 financial results in detail and our updated 2023 guidance.
Thank you, August. Good morning, everyone. Our revenue in the Q1 of 2023 was $434.1 million, which represents a year-over-year increase of 31.2%. Net new business awards entering backlog in the Q1 increased 31.4% from the prior year to $555.8 million, resulting in a 1.28 net book-to-bill. Ending backlog as of March 31st was approximately $2.5 billion, which was an increase of 17.8% from the prior year. We project that approximately $1.33 billion of backlog will convert to revenue in the next 12 months. Backlog conversion in the Q1 was 18.6% of beginning backlog.
In 2023, we continued to make progress in hiring in the Q1, adding 4.3% from the end of 2022 and over 15.8% from the prior year. 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 $434.1 million in the Q1 of 2023. This represented a year-over-year increase of 31.2% on a reported basis and 31.8% on a constant currency basis. The strong revenue results for the quarter reflected less funding challenges than anticipated for our clients. EBITDA of $92.8 million increased 31.9% compared to $70.4 million in the Q1 of 2022. On a constant currency basis, EBITDA for the Q1 increased 28.6% compared to the prior year. EBITDA margin for the Q1 was 21.4% compared to 21.3% in the prior year period. EBITDA margin for the quarter was positively impacted by the strong revenue.
We anticipate margin headwinds the balance of the year as a result of wage inflation, headcount growth, and higher reimbursable costs as a proportion of total revenue. In the Q1 of 2023, net income of $72.9 million increased 18.9% compared to net income of $61.3 million in the prior year period. Net income growth lagging EBITDA was primarily driven by a higher effective tax rate of 15.3% compared to 6.1% in the prior year period. Net income per diluted share for the quarter was $2.27 compared to $1.69 in the prior year period. Regarding customer concentration, our top 5 and top 10 customers represent roughly 22% and 29%, respectively, of our Q1 revenue.
In the Q1, we generated $80.1 million in cash flow from operating activities. Our net Days Sales Outstanding was -43.2 days. During the quarter, we repurchased approximately 650,000 shares for a total of $120.1 million. As of March 31, 2023, we had $332.7 million of authorizations remaining under our share repurchase program. Our net debt position at the end of the quarter was $68.1 million, which was composed of debt of $115 million and cash of $46.9 million. Our net leverage ratio is approximately 0.2 times last twelve months EBITDA. Moving now to our updated guidance for 2023.
Full year 2023 total revenue is now expected in the range of $1.745 billion-$1.805 billion, representing growth of 19.5%-23.6% over 2022 total revenue of $1.46 billion. Our 2023 EBITDA is expected in the range of $335 million-$355 million, representing growth of 8.7%-15.2% compared to EBITDA of $308.1 million in 2022. Guidance is based on foreign exchange rates as of March 31st. This guidance assumes a full year 2023 effective tax rate of 17.5%-18.5% and 32 million diluted weighted average shares outstanding for 2023. There are no additional share repurchases in our guidance.
We forecast 2023 net income in the range of $250 million-$269 million. Earnings per diluted share is expected to be in the range of $7.81-$8.40. With that, I will turn the call back over to the operator, so we can take your questions.
Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Very first question. It comes from the line of David Windley from Jefferies. David, your line is open. Please ask your question.
Hi. Thanks for taking my question. I apologize, I toggled over a little bit late, so I may have missed some of this. For the group, I guess we are seeing in some of our data, a buildup of studies that seem to be proposed but are not starting. Call it t o be specific, estimated start dates in ClinicalTrials.gov that are not flipping to actual starts, kind of not getting the first patient in. I wondered in the environment, it sounds like you said RFPs were stronger, but maybe awards were a little softer. I wonder if that juxtaposes with anything that you're seeing, this kind of studies that seem to be sitting in limbo and not moving forward.
Yeah, Dave, this is August. Yeah, I mean, well, I think RFPs are not at that stage. I guess things that are awarded but not gotten into our backlog would sort of represent that class of studies where it's kinda stalled. Client maybe doesn't have the funding or unsure thinking of redesigning their program, has put things on hold. Certainly, we have a number of programs like that, this environment tends to cause it's a greater number of those. I think what we've seen in the last quarter was less of that than we kind of anticipated and more things moving forward.
We had seen quite a bit of pause by a lot of our clients i n Q4. We were kind of expecting a worsening kind of a snowballing of this effect, but, did not see that and things have kind of improved. You certainly do see programs that are stalled and unable to move forward.
Got it. Historically, given the small biotech focus, your customer concentration has usually been quite diverse. We noticed in the slide deck that both your customer concentration and your therapeutic concentration kind of jumped in tandem. I'm assuming those are related to the same thing. Perhaps you could flesh out what the driver was there.
Well, I think first off, you're looking at suddenly at Q1 this year versus Q1 of last year. T hose pie charts are kinda cumulative for the year. T his is a Q1 comparison rather than a Q2, Q3, Q4 comparison. There's been no. I guess the trends that we've seen over this downturn is a greater amount of our bookings and awards have been more in the mid-size clients. Many of our very small clients have had challenges.
We have had very strong metabolic awards, oncology, which tends to be toward our biotech clients and aid and anti-virals, anti-infectives, which infectious disease type studies have, which always tend to have a lot of funding difficulties, have been smaller in number. That's the kinda profile I'd provide.
Got it. Okay. I guess the maybe more specific question around that is the metabolic jump that you mentioned, is that multiple clients driving that? I guess what you'd be saying is the 1Q over 1Q is a little idiosyncratic, but that perhaps you're insinuating that the growth has been building over the course of 2022 in those buckets. Is that?
That's right. I think what you're seeing is a cumulative rise in our metabolic, which has been very strong throughout the past year. There is no one client pushing that. There's no large study. There's no, it's a, it's a very diversified pool. We have no real strong concentration there. Nothing unusual, nothing particularly large that came in or anything, just across the board of a large number of studies.
Okay. Got it. Thanks. I'll yield. Thank you very much.
One moment for your next question. For your next question, it comes from the line of Max Smock from William Blair. Max, your line is now open. Please ask your question.
Good morning. One quickly here for me on the lack of growth and backlog not expected to convert to revenue over the next 12 months here. I think it was flat quarter-over-quarter, first time that we've seen this. Just wondering if you could help us understand how this would happen given the really strong bookings that you saw in the quarter. Does this mean that the outsized portion of bookings are coming from change orders and pass-throughs as opposed to customers booking out new longer term studies that go beyond the next 12 months?
Sorry, Max, what are you seeing in terms of next 12 months? You're saying it's flat?
Yeah. If you look at your portion of backlog and if you look at total backlog and subtract out the portion that you called out that you expect to convert to revenue over the next 12 months, that's actually flat quarter-over-quarter, suggesting that a lot of the backlog growth or all of the backlog growth rather, is expected to convert to revenue over the next 12 months, right? On a non next 12-month backlog metric, you're at 1.13. Going into the Q1, that stayed the same in spite of the big jump up in bookings that you saw in the quarter.
Just wondering why the portion of your backlog that is not expected to convert beyond the next 12 months, why that would actually be flat given the really large step up in bookings that you saw here in the Q1?
No, from the Q4, you should have seen an increase in the next 12 months roll off t o 1.3 or so for, again, the next 12 months relative to in Q4, we might have been kind of in the 1.21 maybe range.
It jumped to $120 million, I thought.
Sorry, I'm doing a poor job of phrasing this, I suppose. I'm talking about. If you back out that $1.33 billion right from your total ended backlog number, you get the portion that's not. I'm talking about the portion that's not expected to convert to revenue over the next 12 months, which would be $1.13 billion. If you go back to the Q4 and you back out the $1.21 billion that you're.
Our conversion rate has increased. That's what you're pointing out.
Okay. Got it. Yeah. Thank you.
Is that it, I think?
Yeah. I mean, that's a function of the heavy revenue growth and the conversion rate ticking up here in the Q1. I f you're saying.
I don't think we have any reason for drawing that out or anything. I don't think it's pretty. No, Max. T ypically we're in kind of the low 50% of our backlog will convert into revenue over the next 12 months. That's what we continue to see here in the Q1 . Nothing's really changed in that regard. C learly, as you think about we've got existing backlog and those programs, it's a mix of portfolio and at different stages of progression. Then you're adding in the new awards that we saw in the quarter, which were very strong. It's kind of a balance of studies that are starting up through the new awards and what we've got in existing backlog.
Okay. Got it. Thank you. Yeah, it just stood out because I think it's the first time that that non next 12-month backlog number hasn't jumped up. Appreciate your point there about conversion picking up. Following up on Dave's question here, i n acknowledging that revenue growth outside your top five customers was still pretty strong. I did wanna dig into the revenue from the top five customers since it's really accelerated over the last couple of quarters. Going back to the Form 10-K from the Q4 here, it looks like revenue from LIB Therapeutics is a key driver.
Can you just confirm how much revenue and bookings came from LIB in the Q1? August, given your role with that company, is there any detail you can provide around what exactly is causing that big step up that we've seen recently and the expected contribution from LIB moving forward here in 2023? Thank you.
Yeah, I think the amount of revenue will be on our queue. I don't have it in front of me, I think at that peak point of its phase three programs. I don't think there's anything unusual there.
All right, I'll leave it there. Thank you.
One moment for your next question. Your next question comes from the line of Sandy Draper from Guggenheim Partners. Sandy, your line is open. Please ask your question.
Thanks very much. Really just some modeling questions right now for me. One, when I sort of look at your revenue guidance and the current backlog conversion rate, which as you pointed out was 18.6 and up, obviously some of this will depend on what bookings are, but it looks like in your guidance that you're assuming that the backlog conversion rate starts to moderate back down. Otherwise I get way above your revenue guidance. One, just wanted to make sure I'm right on that, and then if you can sort of give me an idea of what you're sort of targeting for the backlog conversion rate, that would be my first question.
Yes, Sandy, you're right. We do expect things to slow down a little bit in the back half or the rest of the balance of the year. For the year, a book-to-bill somewhere in the 1.25 range with a burn rate for the year of kind of 17.5%-18%. Kind of going back to where we were in the third and Q4 of 2022. T he Q1 really just it was accelerated with less funding challenges than anticipated with clients and lower cancellations as August had pointed out in his prepared remarks.
We've kind of had a perfect setup for us in the Q1, with reimbursable activities and direct service activities that really drove that Q1 revenue. We expect that to come back to ranges that we saw in the Q3 and Q4 of 2022.
Okay, great. That's really helpful. My, my next question, when I look at the Q1 EBITDA and then the full year guide, it obviously assumes there's some EBITDA reduction over the next three quarters. I just wanted to, I guess, a two-part question. One, is that more gross margin driven or, and so margins are expected to come down some or SG&A is gonna go up because of hiring? I guess if it is the margin, is that more on the mix of pass through revenues staying higher increasing or is it expecting the service margins to come back down because you're hiring aggressively? Thanks.
Yeah, good question. T he raise that we had was really driven by the Q1 revenue and the leverage that it enabled on our cost structure. If you think about the balance of the year, we expect our cost structure to remain pretty much the same in that we do expect headwinds the rest of the year. H eadwinds from a couple of things. O ne is hiring that we pointed out in the last quarter. We do intend to continue aggressive hiring the balance of the year. We made some progress in the Q1. The Q2 typically is our highest hiring quarter.
We've got wage inflation pressures, but then as you pointed out, we do expect our reimbursable cost as a % of revenue to continue to be elevated the balance of the year. It's a combination of those three factors really.
Okay, great. And then my last question is probably for August or, and maybe Jesse, and I'm not sure it's really a fair question because this is about competitors and just breaking news. Obviously August, Your commentary about the environment and RFP flow awards was, yeah, to me, notably more positive than what we've seen the last Q2, Q3, Q4. Sounds like things are better. W hen I look at some comments out of Danaher and Labcorp/Covance and WuXi, there was definitely seems more concern in calling out the biotech funding environment. Just any thoughts you can think of. Do you think you guys are winning more share operating just obviously different spaces?
Just because it's a little bit confusing when to me you had a positive tonal shift, but other folks out there seem to be calling out some concerns. I'd just love any commentary there. Thanks.
I don't know. Everyone's client base is a bit different and profile, et cetera. We certainly have seen the funding difficulty and drop off of things. I would characterize this quarter as less bad than we anticipated. T hings have certainly, c ome down over time. O ur growth this year is not like last year and last few years. We have seen a turn through the quarter through Q1 of improving profile in both RFPs and programs not getting stalled. The clients that were kind of on a cash basis accrual.
We thought they were going under, and continued to pay us and, have. T hings have just seemed to improve over the, over the quarter. T here's certainly still a number of our clients that are having funding difficulty, installed programs and. I think we're, we think we've seen the low in the near term. T hings could always turn again, but things are in the right direction as far as we can see at this point.
Okay, great. That's really helpful. Thanks.
Once again, as a reminder to ask a question, please press star one one on your telephone. To withdraw a question, you may also press star one one again. One moment please for your next question. Your next question comes from the line of Dan Leonard from UBS. Dan, please go ahead.
Hi. Thanks for taking the question. I guess it's maybe digging in a little bit deeper just on what Sandy asked there. It sounds like RFPs up quarter-to-quarter, year-over-year. I guess, just. I mean, is this despite the funding environment, where do you think that this strength is coming on? Is there like additional specific indications? Is it going into larger customers? I guess just any additional color there, just despite some of the commentary that peers have out there.
Yeah. So I mean, I guess I'd say that RFPs have kind of still mirrored our usual client profile. We have had a stronger awards and programs that are moving forward from the larger companies. I n our breakout that we provide, it shows you'd see a larger number coming from mid-size pharma rather than smaller biotech. It's been kind of moving up the chain even within the biotech. It tends to be the better funded companies. There's still a lot of the very small companies that are challenged and having much more funding difficulty than they have in the past.
Our RFP flow is actually not very predictive of that in terms of it tends to have the same breakout as historically with a lot of biotech is our l argest client. The proportions have remained about at the same. I don't know if that helps?
Yeah, appreciate it. Also, I know you mentioned I think pipeline cancellation is down 50%. Just any additional color there? W hy do you think you might have seen that spike in the Q4 , and what's normalizing here? Then just any anecdotal color you can provide since the SVB takeover and maybe how that's trended into early April here.
Well, we had a lot of clients that were having difficulty raising funding and we had some that declared bankruptcy and are stopped their programs. L argely that was a Q4 phenomena. We haven't seen as much. W e kind of anticipated seeing more of that and have not seen as much in Q1. Things, I don't know, maybe it's the clients that had challenged profile are now not part of it. Remaining companies are able to raise funds. But that's just been the profile we've seen.
Great. Well, thanks for taking the questions.
There are no further questions at this time. I would now like to turn the conference back over to Lauren Morris, Medpace's Director of Investor Relations, 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 Q2 2023 earnings call.
This concludes today's conference call. Thank you for participating. You may now disconnect.