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Fortrea Holdings Inc. (FTRE)·Q3 2025 Earnings Summary

Executive Summary

  • Revenue of $701.3M grew 3.9% YoY and beat S&P Global consensus by 9.0% ($643.2M est. vs. $701.3M actual). Adjusted diluted EPS of $0.12 missed consensus by ~$0.04 (est. $0.162) as pass-through mix and reintroduced variable comp weighed on margins .
  • Book-to-bill improved to 1.13x (TTM 1.07x) and backlog reached $7.644B; management raised FY25 revenue guidance to $2.70–$2.75B and narrowed adjusted EBITDA guidance to $175–$195M .
  • Operating execution improved: DSO fell to 33 days, Q3 operating cash flow was ~$87M and free cash flow ~$80M; available liquidity exceeded $500M, aided by a $25M divestiture milestone and a tender offer to repurchase up to $75.7M senior secured notes .
  • Strategic narrative: sales win rates were the highest in six quarters, particularly in biotech; AI-enabled “Accelerate Risk Radar” and digital tools (iCRA, Start My Day) are driving measured productivity gains and client NPS improvements .
  • Key stock-reaction catalysts: revenue beat with raised FY revenue outlook, but margin compression vs. last year (gross margin 17.5% vs. 22.0% in Q3’24) and EPS miss on higher pass-throughs and compensation likely tempered enthusiasm near term .

What Went Well and What Went Wrong

What Went Well

  • “Fortrea delivered a solid performance that met expectations” with revenue $701.3M, adjusted EBITDA $50.7M, book-to-bill 1.13x, and backlog >$7.6B; win rates reached the highest level in six quarters, doubling with biotech QoQ .
  • Operating cadence and client delivery improved: time-to-site selection reduced 33%; recruitment accelerated by three months in a complex respiratory study; phase 2 Alzheimer’s enrollment finished five months early; NPS improved YoY .
  • Cash discipline and liquidity: Q3 operating cash flow ~$87M and FCF ~$80M; DSO down 13 days sequentially to 33; undrawn revolver and liquidity >$500M; debt paydown actions including a tender offer for senior secured notes .

What Went Wrong

  • Margins compressed: adjusted EBITDA fell to $50.7M (vs. $64.2M in Q3’24) and gross margin to 17.5% (vs. ~22.0% in Q3’24), driven by higher pass-through mix, reintroduced variable comp, and lower R&D tax credits .
  • EPS miss vs. consensus: adjusted diluted EPS of $0.12 came in below S&P Global consensus (~$0.162), despite the revenue beat, as mix and compensation limited flow-through .
  • Slight uptick in cancellations and competitive pricing pressure (particularly in FSP); mix in clinical pharmacology requires external sites for large bioequivalence cohorts, raising pass-throughs and diluting margins .

Financial Results

Quarterly Actuals

MetricQ1 2025Q2 2025Q3 2025
Revenue ($USD Millions)$651.3 $710.3 $701.3
GAAP Diluted EPS$(6.25) $(4.14) $(0.17)
Adjusted Diluted EPS$0.02 $0.19 $0.12
Adjusted EBITDA ($USD Millions)$30.3 $54.9 $50.7
Gross Margin %17.9% (=(651.3−534.8)/651.3) 18.8% (=(710.3−576.8)/710.3) 17.5% (=(701.3−578.6)/701.3)

Q3 2025 vs Prior Periods

MetricQ3 2024Q3 2025
Revenue ($USD Millions)$674.9 $701.3
Adjusted Diluted EPS$0.23 $0.12
Adjusted EBITDA ($USD Millions)$64.2 $50.7
Gross Margin %22.0% (=(674.9−526.6)/674.9) 17.5% (=(701.3−578.6)/701.3)

Actual vs S&P Global Consensus

MetricQ1 2025Q2 2025Q3 2025
Revenue Actual ($USD Millions)$651.3 $710.3 $701.3
Revenue Consensus ($USD Millions)$607.9*$631.5*$643.2*
Adjusted Diluted EPS Actual ($)$0.02 $0.19 $0.12
EPS Consensus ($)$(0.066)*$0.075*$0.162*

*Values retrieved from S&P Global.

KPIs and Balance Sheet

KPIQ3 2025
Backlog ($USD Millions)$7,644
Book-to-Bill (Quarter)1.13x
Book-to-Bill (TTM)1.07x
DSO (Days)33
Operating Cash Flow (Quarter)~$87
Free Cash Flow (Quarter)~$80
Cash & Equivalents ($USD Millions)$131.3
Available Liquidity>$500M
Largest Customer Concentration19.8% of revenue
Top 10 Customer Concentration60% of revenue
Interest Expense (Quarter, $M)$22.6

Narrative drivers:

  • Clinical Pharmacology: higher demand, larger pass-through mix; healthy utilization; some large bioequivalence studies necessitate multi-site execution .
  • Clinical Development: recent net new awards with increased pass-throughs; lower FFP revenue .

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Revenue ($USD Billions)FY 2025$2.45–$2.55 (Q1) → $2.60–$2.70 (Q2) $2.70–$2.75 Raised (Q1→Q2→Q3)
Adjusted EBITDA ($USD Millions)FY 2025$170–$200 (Q1) ; reaffirmed (Q2) $175–$195 Narrowed
Operating Cash FlowFY 2025Not specified (Q1)Marginally negative; positive in Q4 (Q2/Q3 commentary) Maintained qualitative outlook
FX AssumptionFY 2025Rates as of 12/31/24 Same assumption Maintained

Earnings Call Themes & Trends

TopicPrevious Mentions (Q1 & Q2)Current Period (Q3)Trend
AI/Tech initiativesAccelerate platform modules; TSA exit, ERP transition (Q2) “Accelerate Risk Radar” AI agent; iCRA mobile; Start My Day pilots; early 5–10% efficiency gains Improving
Demand and bookingsQ2: CEO transition temporarily dampened new-to-Fortrea biotech wins; cancellations aligned with historical Win rates highest in 6 quarters; biotech win rates doubled QoQ; slight cancellation uptick but within historical range Improving
Pricing environmentCompetitive but disciplined; avoid low-margin FSP Continue pricing discipline; walk away from uncongruent terms; competitive pressure stronger in FSP Stable/Competitive
Pass-through mixElevated pass-throughs lifting revenue but diluting margins (Q2) Still elevated; one heavy pass-through study ended early; expect moderation in 2H Moderating 2H
CancellationsLow and consistent; lower in Q2 vs Q1 Slightly higher in Q3 vs recent quarters but in line historically Stable
Liquidity/cashQ2: Positive OCF/FCF; ample revolver Q3: ~$87M OCF, ~$80M FCF; liquidity >$500M; revolver undrawn Improving
FSP strategyDedicated sales team launched; cautious on margin profile (Q2) Sequential increase in RFPs; longer sales cycles; walking away from unattractive margins Building selectively

Management Commentary

  • CEO strategic pillars: “Commercial excellence… Operational excellence… Financial excellence,” with focus on right-sizing, margin expansion in 2026, and consistent backlog growth .
  • Client engagement: “Our win rates improved significantly, reaching the highest level in six quarters… with biotech clients, our win rates doubled compared to the prior quarter” .
  • Technology productivity: “Accelerate Risk Radar… uses AI and ML to automate risk identification and suggest mitigation strategies… iCRA mobile app… Early users report 5–10% efficiency gains” .
  • Margin path: “I don’t see any structural reason why we can’t return back to more industry-standard margins… it’s going to take… right-sizing… and consistent delivery of book-to-bill” .

Q&A Highlights

  • Pricing and margin leverage: Management is vigilant on pricing, willing to walk away from deals; revenue beats driven by pass-through mix reduce EBITDA flow-through; focus on direct service fee revenue to restore margin leverage .
  • Biotech vs. large pharma: Decision timelines improving in biotech; large pharma resilient amid tariff/pricing uncertainty; RFP volumes up ~40% QoQ for new-to-Fortrea customers, win rates doubled in biotech .
  • FSP: Sequential RFP increase, but longer cycles; cautious participation to avoid unattractive margin work .
  • Cancellations: Slight increase but within historical range; lower exposure to vaccines/government-funded programs helps resilience vs. peers .
  • 2026 outlook: Too early for guidance; focus remains on executing cost programs and improving SG&A through 2026 .

Estimates Context

  • Revenue beat: Q3 revenue $701.3M vs. $643.2M consensus (+9.0%); Q2 $710.3M vs. $631.5M (+12.5%); Q1 $651.3M vs. $607.9M (+7.2%) .
  • EPS outcome: Q3 adjusted diluted EPS $0.12 vs. ~$0.162 consensus (miss ~$$0.04); Q2 $0.19 vs. $0.075 (beat); Q1 $0.02 vs. $(0.066) (beat) .
  • Consensus values above are from S&P Global; EBITDA consensus appears to reference GAAP EBITDA, which is not directly comparable to management’s adjusted EBITDA disclosure—focus estimate comparisons on revenue and adjusted EPS for clarity.*

*Values retrieved from S&P Global.

Key Takeaways for Investors

  • Revenue momentum and backlog health are improving; raised FY25 revenue guidance signals confidence in pipeline conversion and burn, but pass-through mix continues to limit margin expansion near term .
  • EPS miss vs. consensus and YoY margin compression reflect reinvestment in variable compensation and mix; watch for 2H pass-through moderation and SG&A savings ramp to support margin recovery .
  • Liquidity is robust (>$500M), with Q3 OCF/FCF strength and revolver undrawn; debt tender offers and DSO improvements provide additional balance-sheet flexibility .
  • Commercial execution is a bright spot (record win rates, biotech improvement); AI-enabled productivity tools and NPS gains support sustained delivery, potentially aiding pricing discipline over time .
  • Near-term trading: revenue beat and guidance raise are positives; EPS miss and margin pressure may cap upside until mix/SG&A trajectory is clearer—watch Q4 margin and cash flow prints .
  • Medium-term thesis: No structural impediments to returning to peer-level margins per management; execution on right-sizing, direct service fee growth, and backlog diversity are the key levers for 2026 .
  • Risk monitoring: Competitive pricing in FSP, cancellation trends, and pass-through intensity; regulatory/macro headlines (tariffs, pricing) could affect decision timing and mix .