Fortrea reaffirms $2.45B–$2.55B revenue guidance for 2025 as transformation efforts progress

Earnings Call Insights: Fortrea Holdings Inc. (FTRE) Q1 2025

Management View

• CEO Tom Pike reported that "our revenues and adjusted EBITDA came in just about where we expected and we are reaffirming our guidance." Pike highlighted a 1.02 times book-to-bill for the quarter and a trailing 12-month book-to-bill of 1.14 times, with the overall pipeline "higher than the average of the past three years and growing on a trailing 12-month basis." He explained that while large pharma opportunities progressed as anticipated, there were "delays to close some biotech awards and a little softness in Clinical Pharmacology in the quarter."

• Pike discussed expansion of a Phase 2/3 partnership into an observational development program leveraging real-world evidence, significant wins across multiple therapeutic areas, and a growing biotech opportunity pipeline partially due to commercial organizational changes and brand recognition.

• He pointed to resilience in the broader pharmaceutical sector but noted "some biotech customers are discussing a more challenging funding environment," though Fortrea's own pipeline is "growing."

• Additional focus was placed on transformation initiatives, including AI integration for commercial workflows and ongoing improvements in sales capacity, account planning, gross margin, and SG&A cost optimization. Pike stated, "we’re reaffirming guidance for the year. I’m pleased with the results of the improvements we’ve made to our forecasting system since the end of last year. The first quarter was a quarter of solid execution."

• On management changes, Pike confirmed his planned departure as CEO, with Peter Neupert serving as interim CEO and Chairman.

• CFO Jill McConnell reported, "for the first time since the spin, we delivered year-over-year growth in adjusted EBITDA and adjusted EPS, which is a positive step forward." She detailed cost reduction achievements, adding, "permanent headcount across all of Fortrea is down more than 8% over the last 12 months."

Outlook

• Fortrea reaffirmed its 2025 full-year guidance, targeting revenues of $2.45 billion to $2.55 billion and adjusted EBITDA of $170 million to $200 million. McConnell stated, "We continue to target our revenues to be in the range of $2.45 billion to $2.55 billion and our adjusted EBITDA to be in the range of $170 million to $200 million."

• Management cited ongoing market uncertainties, especially around biotech funding and macroeconomic policies, as variables impacting the pace of new business wins and revenue recognition.

Financial Results

• First quarter 2025 revenues were $651.3 million, a year-on-year decrease of 1.6%. Adjusted EBITDA was $30.3 million, compared to $27.1 million in the previous year. Net loss for the quarter was ($562.9 million), primarily due to a non-cash goodwill impairment charge of $488.8 million.

• Adjusted net income was $1.9 million for the quarter, with adjusted basic and diluted EPS at $0.02. Operating cash flow was negative $124.2 million, largely attributed to an ERP conversion that caused an 11-day increase in days sales outstanding.

• Book-to-bill for the quarter was 1.02 times, with a trailing 12-month figure of 1.14 times. The backlog grew 4% over the past 12 months, totaling over $7.7 billion.

Q&A

• David Windley, Jefferies: Asked about revenue cadence and margin improvement given flat revenue expectations. Jill McConnell responded that margin expansion will be phased, with "more of the revenue dropping through in the back half of the year as we start to see the benefit of those efficiency programs."

• Justin Bowers, DB: Asked about Clinical Pharmacology RFP volume and pricing. Tom Pike responded that "the Clinical Pharmacology business remains strong for no obvious reason. The first quarter bookings were a little softer there, but that pipeline has returned."

• Patrick Donnelly, Citi: Questioned the bookings backdrop and competitive landscape. Pike noted that "our biotech pipelines continue to grow. Our large pharma partners, we’re continuing to see opportunities... pricing remains disciplined."

• Eric Coldwell, Baird: Inquired about SG&A expectations and margin trends. McConnell stated that "you’ll see it much more dramatically improve in Q3 and Q4," targeting $40 million to $50 million of net reductions in SG&A for the year.

• Elizabeth Anderson, Evercore: Sought color on DSO improvement and CEO search. McConnell said DSO is targeted to be "low to mid-40s by year end," and Neupert noted the CEO search is "far along and we’re very optimistic that we will have somebody in the seat in the not-too-distant future."

• Charles Rhyee, TD Cowen: Asked about biotech funding and bad debt risks. Pike explained funding uncertainties are slowing decision-making but not causing cancellations. McConnell added, "we have not seen any spike in terms of our credit provisions to-date."

• Luke Sergott, Barclays: Asked about burn rate assumptions and differences between biotech and large pharma projects. McConnell said, "oncology... burns about 20% more slowly," and biotech projects "start more slowly" but "once they get running, they tend to run a little bit faster."

• Matt Sykes, Goldman Sachs: Asked about book-to-bill trajectory and controllable factors. Pike emphasized, "controlling the controllables is the word of the day... on the booking side, it really is working hard on early engagement."

• Max Smock, William Blair: Asked about gross margin trends and SG&A savings. McConnell said gross margin improvement will be "a little bit choppy over the course of the year" but weighted to the second half.

• Michael Ryskin, Bank of America: Asked about incremental cost savings versus prior guidance. McConnell clarified that the $150 million gross cost reductions, with $40 million to $50 million from SG&A, are consistent with previous guidance.

Sentiment Analysis

• Analysts displayed a neutral to slightly cautious tone, focusing on revenue pacing, margin improvements, and cash flow, repeatedly probing for clarity on cost structure, burn rate, and competitive dynamics.

• Management maintained a neutral to slightly positive tone in prepared remarks, transitioning to a more measured and occasionally defensive tone during Q&A, especially when addressing uncertainties in biotech funding, macro risks, and margin expansion. Pike's language included "we believe our pipeline has the ability to produce attractive book-to-bills for the remainder of the year," and McConnell's responses highlighted the company's ongoing transformation and cost-saving efforts.

• Compared to the previous quarter, analyst skepticism and probing on structural and operational risks remained high. Management tone remained consistent, with continued emphasis on transformation, cost control, and reaffirmation of guidance, though now with additional focus on succession planning.

Quarter-over-Quarter Comparison

• Guidance for 2025 revenues and adjusted EBITDA remains unchanged from the previous quarter’s outlook.

• The book-to-bill ratio declined to 1.02 times in Q1 2025 from 1.35 times in Q4 2024, while the backlog remained stable at over $7.7 billion.

• The quarter marked the first year-over-year growth in adjusted EBITDA and adjusted EPS since the spin, contrasting with prior periods of decline.

• Net loss increased sharply due to a large goodwill impairment, compared to a smaller loss in the previous quarter.

• Management succession planning was announced, with the CEO transition to an interim leader highlighted.

• Transformation efforts intensified, with more specifics on AI initiatives, cost optimization, and SG&A savings than prior quarters.

• Analysts maintained a consistent focus on cost management, burn rate, and backlog quality.

Risks and Concerns

• Management cited delays in biotech decision-making and a "more challenging funding environment" for some biotech customers.

• There was acknowledgment of macroeconomic and policy uncertainty, including recently announced U.S. drug pricing policies.

• The non-cash goodwill impairment was attributed to "uncertain global macroeconomic conditions and the decline in our share price."

• The company is monitoring customer credit and DSO metrics but reports no increase in bad debt provision.

• Transformation execution risks remain, particularly around SG&A cost reduction and timely realization of operational efficiencies.

Final Takeaway

Fortrea’s first quarter of 2025 demonstrated solid execution amid a complex environment, with management reaffirming full-year revenue and adjusted EBITDA guidance. The company emphasized progress in cost optimization and transformation, including AI adoption and commercial enhancements, while addressing uncertainties in biotech funding and ongoing macroeconomic risks. Leadership succession is underway, and management remains focused on improving gross margins and SG&A efficiency to support long-term growth and value creation.

Read the full Earnings Call Transcript