Medpace Holdings, Inc. (NASDAQ:MEDP) Q4 2021 Earnings Conference Call February 15, 2022 9:00 AM ET
Lauren Morris - Associate Director, Investors Relations
August Troendle - Chairman & CEO
Jesse Geiger - President
Kevin Brady - CFO & Treasurer
Conference Call Participants
John Kreger - William Blair & Company
Donald Hooker - KeyBanc Capital Markets
Good day, ladies and gentlemen, and welcome to the Medpace Fourth Quarter and Full Year 2021 Earnings Conference Call. [Operator Instructions].
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 2021 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, 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 our 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 had a good year in 2021 and is anticipating another good year in 2022. Our current 2022 guidance is essentially unchanged from our early guidance provided last October. Two issues that we are monitoring closely in 2022 are biotech funding and wage inflation. Biotech funding is down over the past year. However, we have not experienced an increase in project delays or other concerning signs related to client financial strengths. RFP dollar volume was down approximately 10% in the second half of 2021 compared to the first half and was down over 25% in January 2022 compared to January 2021. Despite this weakening in RFP flow, we believe the business environment is sufficient to maintain a strong growth trajectory. Note that backlog awards can lag RFPs by several quarters and that our current awards reflect the strong competitive win rate over the past few quarters.
Wage inflation has accelerated in the past 6 to 9 months and will be a headwind to margin. As a reminder, our bill out rates are set at time of project bid. Annual wage inflation assumptions are generally included in each project that is bid. But these assumptions are usually on the low side of actual wage inflation and will trail actual inflation by even more in the current environment. We believe that our guidance adequately addresses the anticipated margin headwind.
Jesse will now make some remarks on our performance, and then Kevin will review the quarter and guidance in more detail.
Thank you, August, and good morning, everyone. Revenue for the fourth quarter of 2021 was $308.6 million, which represents a year-over-year increase of 18.8%. Full year 2021 revenue was $1.142 billion, a 23.4% increase over 2020.
Net new business awards entering backlog in the fourth quarter increased 27.9% from the prior year to $458.7 million, resulting in a 1.49% net book-to-bill. For the full year 2021, net new business awards were $1.6 billion, an increase of 37.1% and ending backlog as of December 31 was approximately $2 billion, an increase of 29.5% from the prior year.
Overall, our COVID 9-related work for 2021 represented only 2.2% of revenue and less than 1% of backlog. We projected approximately $1.04 billion of backlog will convert to revenue in the next 12 months. Backlog conversion in the fourth quarter was 16.7% of beginning backlog. Further, we were able to grow headcount 24.3% from the prior year in a challenging and competitive labor environment and employee retention and continued robust hiring for future business will remain top priorities in 2022.
With that, I will turn the call over to Kevin to review financial performance in more detail and discuss our 2022 guidance.
Thank you, Jesse, and good morning to everyone listening in. As Jesse mentioned, revenue was $308.6 million in the fourth quarter of 2021. This represented a year-over-year increase of 18.8% on a reported basis and 19.2% on a constant currency organic basis. Full year 2021 revenue was $1.142 billion, which represents a 23.4% increase in 2020 or 22.9% on a constant currency organic basis.
EBITDA of $61.4 million increased 2% and compared to $60.2 million in the fourth quarter of 2020. Full year 2021 EBITDA increased 18.8% to $223.1 million compared to $187.8 million in 2020. On a constant currency basis, fourth quarter and full year EBITDA decreased 1.1% and increased 19.3%, respectively, compared to the prior year. EBITDA margin for the fourth quarter was 19.9% compared to 23.2% in the prior year period. For the full year, 2021 EBITDA margin was 19.5% compared to 20.3% in 2020. EBITDA margin declined from the prior year, reflecting higher reimbursed out-of-pocket expenses and increased employee-related costs.
In the fourth quarter of 2021, net income was $50 million compared to net income of $50.9 million in the prior year period. For the full year 2021, net income was $181.8 million compared to $145.4 million in 2020. Net income growth over the prior year was primarily driven by higher EBITDA as well as a lower effective tax rate.
Net income per diluted share for the quarter was $1.32 compared to $1.35 in the prior year period. For the full year 2021, net income per diluted share was $4.81 compared to net income per diluted share of $3.84 in 2020. Regarding customer concentration, our top 5 and top 10 customers represent roughly 17% and 24%, respectively, of our 2021 revenue. In the fourth quarter, we generated $70.9 million in free cash flow from operating activities, and our net days sales outstanding was negative 47.2 days.
We did not repurchase any shares during the fourth quarter, and we had $190.5 million remaining under our share repurchase authorization at the end of the quarter. Our Board of Directors also approved an increase of $300 million to our current share repurchase program. We ended the fourth quarter with $461 million of cash, no outstanding debt and $50 million of undrawn capacity on our revolving line of credit.
Moving now to our guidance for 2022. As August mentioned, we are reconfirming our 2022 guidance shared in our third quarter earnings release. We are forecasting total revenue in the range of $1.4 billion to $1.46 billion for the full year 2022, representing growth of 22.6% to 27.8% over 2021 total revenue of $1.142 billion.
Our 2022 EBITDA is expected in the range of $262 million to $278 million, representing growth of 17.4% to 24.6% compared to EBITDA of $223.1 million in 2021. We anticipate our 2022 effective tax rate to be in the range of 13.5% to 14.5%, and there are no additional share repurchases assumed in our guidance. We forecast 2022 net income in the range of $204 million to $216 million and earnings per diluted share in the range of $5.35 and to $5.67.
With that, I will turn the call back over to the operator so we can take your questions.
[Operator Instructions]. Our first question comes from the line of John Kreger with William Blair.
August, you mentioned the RFP decline in January. I think you said 25%. Just curious, are you seeing any other signs of client hesitancy such as lengthening decision cycles or slower trial start-ups, anything like that?
No. We really haven't seen any other signs. There's always -- it's difficult to pick out a metric like that and measure it over a short period of time. But I don't really think there's been a sign of real lack of funding or more difficulty. Look, in our client base, that's always an issue, getting funding, and it always does take some time, and there's frequently delays. And so it's difficult to develop a useful metric and anecdotal evidence does not raise to my level of concern.
Great. That's helpful. Totally different question. We've been hearing more commentary out of the FDA and CMS lately that there's -- they want more patient diversity in clinical trials. I'm curious if you are cognizant of that. Does that seem like a notable change? And does that have any implications on how you're going to approach new business?
Yes. No, it is an important factor in site selection and trying to get a diverse and representative sample of patients in trials. A very important issue. Generally, that is discussed with the client very early. They kind of have ideas on what sort of breakout they would like. Generally, it's not something that's stratified or greatly inhibits recruitment, but it is a consideration geographically, both around the world and within the United States, where we pick sites.
Great. And one last quick one. You mentioned wages is the other concern. Are you changing your tactics about how you're going to get in front of this, for example, where you're recruiting or maybe the level of experience that you're going after?
No, I think it's business as usual. Our wage levels are inflating, particularly at the entry level quite a bit. But I think our recruitment strategies remain intact.
[Operator Instructions]. Our next question comes from the line of Donald Hooker with KeyBanc.
I just wanted to maybe hear a little bit more on the inflation topic. I mean, you probably saw the producer price index out this morning, looks like up 10% year-over-year. I mean, these are some big inflation numbers. So I know on the -- or on the margin, are contracts changing? Like if you do a 3- to 5-year contract, I know you said in the past, I mean is there -- are you trying to push through those prices? Is the industry trying to push that through? Can you just elaborate on that a bit more because I think that's an important topic?
Okay. So I think your question is about how pricing changes in our different contracts?
Yes. Are you changing the structured contracts though? Yes. So in the past, you...
No. I think -- so a quick answer to that is no. We have the same structure to our contracts. The wage rates that are used in building the contract are fixed at time of bid. We do put wage inflation assumptions into the contracts. And in fact, we've not changed those go-forward escalation rates. But you have to realize that there's quite a bit of lag between when we set pricing and when we do the contract. So you set pricing at bid, it can be a year or 2 before it gets started and it can run for 3, 5 years. So you're many years out and a significant change in the inflation will affect your contracts under work for quite a long time. And you incrementally address that for new contracts, but that's kind of bumping our starting point in new contracts.
The wage inflation, if we think we're in a cycle of really rapidly accelerating inflation over the longer term, we would have to increase the wage inflator during the contract or go to a more variable cost structure, which is something we could do, but we've not done yet.
Yes. My sense -- I mean, correct me if I'm wrong, you guys have fairly good pricing power in the past. So I guess what I'm hearing from you is you're not doing anything radically changing in terms of escalators in your contracts, but you might do so in the future, and you might -- you feel like you probably could be able to do that in the future. Is that fair?
Yes, I think that's fair. And I think we can change our pricing for go-forward bids, which is, of course, the dynamic you're negotiating with a client. But it's difficult to address existing contracts that have a fixed reimbursement rate.
Got you. And maybe my follow-up question would be similar on the inflationary topic. You guys are holding a lot of cash on your balance sheet, which is good. And you -- obviously, you've done super well generating cash flow. Can you just maybe elaborate on your thoughts deploying that cash? Maybe just update us on any changes in thinking around kind of what the right balance sheet for Medpace is over time?
Yes. Don, this is Kevin. Just in relation to our capital allocation strategy, we're going to be consistent with where we've been for a while now, and that we'll continue to invest in the organic growth of the business, whether it's infrastructure or people or what have you, the #2 pillar for us, the primary pillar outside of that is going to continue to be opportunistic share repurchases. And you probably saw that we were granted an increase in our authorization of about $300 million from the Board.
I'm showing no further questions in the queue. I would now like to turn the call back over to Lauren 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 2022 earnings call.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.