Long live the buyback king
Medpace’s Q2 Earnings
(Medpace is a company I profiled in May of 2025. You can read the in-depth report here)
I know it feels like I say this over and over again (maybe I do?), but Medpace reported very strong earnings this week. The stock rose considerably the following day and is up 53% from the Q1 post-earning sell-off (are you not entertained?):
In some way, earnings were the exact opposite than they were in Q1. Recall that Medpace reported an extremely solid top line (+27% YoY) but a relatively weak book to bill (0.88x) last quarter. The commentary wasn’t great either: despite growing nicely, August Troendle (Medpace’s Founder and CEO) claimed that cancellations had been higher than usual, which put pressure on net new awards (gross awards were fine) and therefore on the book to bill. The stock reacted pretty negatively, dropping 22% in a single day. The market seemed worried about how Medpace would be able to sustain high growth rates with lackluster net bookings and not-great backlog growth. While the fears were “warranted” albeit short-sighted, the reality is that Medpace (at the valuation at the time) did not need to continue growing at a similar pace to be a good investment, but that’s a topic for another day.
Q1 also seemed like a repeat of management’s “plan” (which I discussed in this article). The thing is that Medpace only returns capital to shareholders through share repurchases, but they refuse to repurchase at elevated valuations (as they should). This is why it seems that some earnings are downplayed on purpose to be able to repurchase at more attractive valuations. Q1 seemed like such a scenario as management repurchased $300 million worth of stock at an average price of $417. Medpace’s buyback chart is a thing of beauty:
Q2 was actually quite the “opposite” to Q1. Revenue growth came in considerably lighter (and the guide implies it will get significantly lighter in H2) at +17%, but the pipeline commentary was very positive (net new awards were up 28% YoY) and probably calmed the market in terms of what can be expected going forward:
The business environment was strong in Q2. Cancellations were well-behaved and supported a record quarter for net bookings. RFPs were up sequentially and year over year, generating high-quality opportunities.
While many expected FY 2027 to be a “cliff” year after two consecutive quarters of weak book to bill, it seems like the pipeline is filling up nicely and the cliff will most likely be avoided. This is a very interesting topic because the backlog figure is actually a terrible leading indicator of future revenue growth. You’ll be wondering “how can this be?.” There are two reasons. First (and as I’ve discussed in other articles), Medpace also has a pre-backlog. This pre-backlog gets filled with business that has been awarded to Medpace but in which management is not yet “completely” sure that will make it through to revenue.
Say that a customer awards Medpace with a Phase III trial but Medpace’s management is unsure that they’ll get funding to conduct it. This award then goes into pre-backlog, but won’t make it into backlog unless management is “certain” that it’ll convert into revenue. This pre-backlog, by the way, is larger than the reported backlog and growing faster over the last twelve months. Considering that the reported backlog is around $3 billion and growing 5%, we know that Medpace’s total backlog (pre-backlog + reported backlog) is at least $6 billion and growing faster than 5%. This to an extent invalidates the “cliff” thesis, but there’s more.
Management mentioned this quarter that, due to the elevated cancellations that they have suffered in past quarters, they have become stricter in terms of what makes it into the backlog. So much so that something could go into backlog (from pre-backlog) and revenue within the same quarter!
Analyst: Do you have any meaningful amount of revenue where, say, a decision point or some factor would cause value to be added to backlog and go right into revenue in the same quarter?
August’s answer: Oh definitely.
This ultimately means that some things that could’ve made it into the backlog in previous periods (when criteria was less stringent) are being left out now. Conclusion: the backlog and its growth rate are poor leading indicators of what’s to come for Medpace. Now, we got plenty of great news regarding the pipeline. First around RFPs:
RFPs were up meaningfully, certainly on a sequential basis. The quality has been good and improved. We saw a lot of clients that have had recent funding. I think the big thing is funding has been a lot broader rather than just a few companies getting quite a bit of money.
This is great news, but maybe better news is the fact that management expects quite a bit of these RFPs (and things in the pre-backlog) to make it into gross bookings in H2 2026. They claimed that the strong net bookings number in Q2 (which evidently surprised analysts) was a consequence of lower cancellations, as gross bookings remained at a similar level than in prior periods. However, the growth lever of net bookings strength is about to flip:
If you look at the net bookings, a bigger driver of the net bookings increase from last quarter was due to reduced cancellations, rather than the kind of gross bookings.
I expect a ramp in gross bookings. I would expect that to translate into a ramp in net bookings, but cancellations are always a wild card.
This ultimately means that if cancellations are lowish in the following quarters, we should see net bookings ramp up quite significantly (therefore somewhat invalidating the “cliff” thesis in case it needed invalidating). If we join this with the fact that Medpace expects slower revenue growth, the book to bill should go bananas.
The other thing that the market is worried about (and I’ve seen a lot of people claim that Medpace is overearning for this exact reason) is the metabolic mix. Metabolic as a percentage of Medpace’s business has crept up quite significantly over the past few years (the GLP-1 effect) and many believe it is not sustainable. In that “many” we could also include Medpace’s management, but the company is substituting the metabolic projects with oncology trials.
Oncology has come back quite a bit in terms of both our awards notifications. Our bookings, particularly in this last quarter, were very strong in oncology. Oncology represented over half of our overall bookings and our award notifications.
They believe metabolic and oncology will eventually go back to a more normal proportion of the business. The above seems to somewhat invalidate the thesis that Medpace is overearning. Yes, the company was definitely overearning on metabolic, but they were maybe also underearning on oncology!
Now, all the above said, the guidance makes little sense even after the raise. Management raised its revenue growth guide to a midpoint of 12.5% from a midpoint of 10.9%. With revenue having grown 21% over the first 6 months, this means they expect revenue growth of 5% in H2! This is potentially possible because a lot of business might be “delayed” or “deferred” to FY 2027, but still seems like it has been sandbagged because it’s not coherent with the commentary. I believe, however, that it’s a win-win situation. If revenue grows faster this year then great. If it doesn’t because it gets deferred into FY 2027 then good as well because we’ll get growth durability (after enjoying yet another double digit growth year!).
We did not get any commentary on how FY 2027 might look like, but management did say that headcount is expected to grow HSD (high single digits) this year and also in FY 2027. In a labor-driven business, this is probably a good sign of what’s to come! All in all, a great quarter by Medpace not only due to the quarter itself but because it “invalidates” several known bear cases. Oh, I forgot one: management mentioned that turnover was low once again, which also invalidates the historic bear case that claimed that Medpace treated its workers terribly!