Fortrea Holdings Inc. Q1 FY2024 Earnings Call

Ladies and gentlemen, thank you for standing by. Welcome to Fortrea First Quarter 2024 Earnings Conference Call. Please be advised that today's conference is being recorded. I would like now to turn the conference over to your speaker today, Hima Inguva, Head of Investor Relations and Corporate Development. Please go ahead.

Good morning, and thank you for joining Fortrea's First Quarter 2024 Earnings Conference Call. I am Hima Inguva, Head of Investor Relations and Corporate Development at Fortrea. On the call with me today are our CEO, Tom Pike; and CFO, Jill McConnell. The call is being webcasted, and the slides accompanying today's presentation have been posted to the Investor Relations website, fortrea.com. During this call, we'll make certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to significant risks and uncertainties that could cause actual results to differ materially from our current expectations. We strongly encourage you to review the reports we file with the SEC regarding these risks and uncertainties, in particular, those that are described in the cautionary statement concerning forward-looking statements and risk factors in our press release and presentation that we posted on the website. Please note that any forward-looking statements represent our views as of today, May 13, 2024, and that we assume no obligation to update the forward-looking statements even if estimates change. During this call, we'll 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 help investors gain a more complete understanding of our 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. With that, I'd like to turn it over to our CEO, Tom Pike. Tom?

Good morning. I appreciate everyone joining this morning. We have a good deal of ground to cover, so let's get into it. In summary, the environment for and reception of Fortrea's clinical services offerings remains strong and is good enough to meet our growth ambitions. Post-spin book-to-bills are adequate for growth so far, and our pipeline is good. Revenues are returning more slowly than planned, and we're addressing it. The rest of our transformation is on track. The work we're doing transforming the business is building momentum for 2025, and we expect to be beyond the complexities of the spin and historical challenges. So let's dive deeper into the growth environment. The drug development landscape remains attractive. Biotech funding had a nice first quarter leading to optimism for the sector, which is good for CROs. The demand for Fortrea's services is good and improving. At Fortrea, we are building a distinctive CRO that's agile and innovative to help our customers with drug development. My leadership team and I have spent a lot of time with customers this quarter, and customers are responding well. We are spending time on and improving how we interact with customers of all sizes. We call this our commercial transformation. But the positive response is also due to the investments we're making. Our opportunity pipeline has grown versus the prior quarter, both in terms of quantity, up mid-single digits, and up solid double digits on a dollar value basis across the clinical business. We are seeing some potential for new or expanded relationships with larger firms. We've had some very attractive wins since we spun and interesting ones this quarter. Let me share a few examples of some wins. We won a large Phase II neuroscience study with a large pharma customer. This award was meaningful both for its size and patient impact, spanning North America, Europe, and Asia Pacific. This award and others confirm that our continued investment and commitment to expanding our neuroscience therapeutic area is working. We're known for our experience in oncology, and we're earning repeat business. We were awarded a large oncology program by a midsized pharma company based on our delivery of its first oncology molecule. We have good access to large and midsized pharma who understand the advantages of our ideal scale. In clinical pharmacology, we were awarded the largest study since Dr. Oren Cohen joined about 7 years ago to lead this business. The award was based on our medical and scientific expertise in a sophisticated, exciting therapeutic area. Dr. Cohen is leading from the front with customers. Two other things I should highlight before I move on from our demand situation. First, I want to share that we're at the table in some key partnering discussions. We need to show success this year on these kinds of opportunities to meet our goals. We're already being viewed differently than in the past, competitive with the larger CROs. Second, while the Fortrea brand is relatively young, our pipeline and mix of opportunities are attractive and growing. Our plans are to make the pipeline larger as the brand becomes more widely known. This quarter, we continued to advance our differentiation in the market. Our Site Advisory Board has grown in membership globally, providing us with the insights that we're applying to improve site performance for customers. Our customers are responding well to our technology and data partnering and innovation. In addition to these investments in differentiation, we kicked off additional efforts to improve operational effectiveness and operating margins over time. We're excited about these improvements and believe they will also translate into a better experience for our customers. We remain committed to bringing the margins of Fortrea in line with peers. While we fell short of our targeted book-to-bill of 1.2 for Q1, I'm still pleased that we're averaging over 1.2 book-to-bill since we spun with a good mix. Note that I've said our commercial transformation will take a year. As we told you in January, we had a tough start to the quarter, and we hoped we could still deliver on our target on our last call. Unfortunately, a couple of transactions made the difference. With Q1 behind us, given the size and quality of our pipeline, we see no reason we cannot achieve a book-to-bill of 1.2 or greater in coming quarters. As you've seen in our guidance, we believe now we will have slower revenue burn than initially forecast. Our analysis is that this is a timing issue. To address this, we put a program in place to track everyone in detail and use the power of our team to accelerate from award to first patient enrolled to drive faster overall delivery. Our team is working hard to minimize the impact of less planned revenue in our organization and financials. While the top priorities are winning business, customer delivery, and getting out of these burdensome transition service agreements (TSAs), given our situation, we're pushing even harder on expense controls and cost improvements in operations and SG&A. We continue to analyze options to improve the capital structure we inherited. We made two planned changes this quarter which we noted in a filing on Thursday. Our lenders are very supportive of us. We continue to methodically work through the books and accounts we inherited from the spin. Our accounting team, with consultants, went very deep this quarter. We're trying to put such spin-related issues behind us. We feel confident about the progress we're making transforming the organization and exiting TSAs. Let me ask you to listen closely to Jill as we had a lot going on this quarter, knowing that our pipeline of opportunities is strong. We're on track with our operations and cost structure improvements. Our hardworking team expects to build momentum through the year and, to be clear of the spin-related tactical issues in 2025. We not only expect better results in 2025, but greater clarity and predictability. Jill, over to you.

Thank you, Tom, and thank you to everyone for joining us today. The company is in the process of completing its unaudited interim condensed, consolidated, and combined financial statements for the first quarter ended March 31, 2024. Accordingly, the financial information included herein may be subject to further adjustments, which we would expect to be immaterial. Before covering the detailed financial elements of the quarter, I want to take a moment to reinforce some of the things we're doing to position the company for success over the medium to longer term. We're taking action to improve our capital structure. We're also making progress on our transformation program to enable us to reduce our operating expenses and to deliver projects faster and more efficiently for our customers. All of these initiatives are intended to position us to deliver the financial performance we want as we move forward. I’ll provide more detail on these later. There is a fair amount to cover in my remarks, so I will take you through things in this order. First, financial results for the continuing operations of Fortrea, including some changes to our financial reporting this quarter; second, a brief summary of the proposed divestiture and progress toward closure; third, recent actions we have taken to bolster our capital structure; fourth, our progress on transformation, margin expansion, and expectations for 2025; and finally, our revised outlook for 2024. As you've seen in the press release and heard in Tom's remarks, our first quarter results primarily reflect the softness we have previously indicated relative to the mix and lower net new business awards won during the year prior to the spin late in June of last year. While our book-to-bill for the trailing 9 months since the spin is a solid 1.22x, this particular quarter it fell slightly short of the 1.2x goal we have been targeting. We disclosed some risk to you earlier in the quarter, and outside of one project being rescheduled late in the quarter and one customer who decided to take a project in-house, we expect we would have achieved a 1.2x for the quarter. Now for this quarter's results. This quarter, as stated previously, was expected to be the nadir of our performance due to the lower sales during the spin year and it generally came in line with the expectations we had shared. Our backlog, which you will recall, we have calculated differently post-spin to demonstrate a measure that will more appropriately signal future growth, has grown approximately 6% since the spin and 0.4% sequentially, ending the quarter at $7.4 billion. The continued spin year headwinds of lower full-service clinical sales, elevated infrastructure costs, and the resources associated with the transition services agreement have continued to weigh on our results. We expected the elevated costs, and we are making progress on exiting the TSA and working to mitigate other headwinds. I will provide an update later on the key actions we are taking to achieve our target performance. In my remarks, and as you will see in our accompanying presentation, we are focusing on the results of continuing operations, which excludes the impact of the Endpoint and Patient Access businesses that are intended for divestiture later this quarter. Clinical Services revenues of $662.1 million declined 4.6% year-on-year. This was driven by higher pass-through revenues which were more than offset by lower service fee revenues. The lower service fee revenues were due to the reduced quantity of new business wins prior to the spin, along with the mix shift, including studies moving to longer duration. Let me provide more detail on our cost base. As shared previously, we have recast first quarter 2024 and first quarter 2023 direct costs and SG&A expenses to be more consistent with our peer set for comparison purposes. We believe this will allow you to see the significant opportunity we have to improve margins, post full TSA exit, by reducing our SG&A costs as a percent of revenue over time. On a GAAP basis, direct costs in the quarter increased 2.3% year-over-year, primarily due to higher pass-through costs and stock compensation awards. SG&A in the quarter was lower year-over-year by 1.7% due primarily to the removal of former parent corporate allocations, partially offset by the cost of standalone operations, TSA costs, and one-time spin costs as well as additional stock compensation awards. The company reclassified $45.4 million from direct costs to SG&A expenses, primarily related to information technology costs and certain non-clinic facility charges. For the first quarter, you will see SG&A as a percent of revenue at around 18%. However, it contains $17 million of one-time costs. You can see that even excluding the one-time costs, there is significant opportunity for margin expansion through reducing SG&A costs over time. Net interest expense for the quarter was $34.3 million. Turning to our tax rate. The effective tax rate for continuing operations for the quarter was negative 5.3%, primarily due to the combined effect of a forecasted pretax loss in 2024, given our large one-time costs, a change in the valuation allowance, and earnings mix. During the first quarter, we have recognized tax expense of $4.1 million in continuing operations primarily due to a forecasted valuation allowance on our deferred tax asset related to disallowed interest expense. We have plans that we expect could reduce the impact of disallowed interest expense over time. As part of our work to make enhancements to our control framework and disentangle the Endpoint and Patient Access businesses for reporting as discontinued operations, we became aware of historical misstatements of certain financial line items, which we have identified. The overall impact of these adjustments is not considered material to any given year. The adjustments in the aggregate would be material if all years of adjustments were made in the first quarter of 2024. In light of this, these adjustments will be recorded in a footnote into our first quarter Form 10-Q which we plan to issue within the extended filing period. As a result of these findings, we are continuing to bolster our financial control environment. Continued operations adjusted EBITDA for the quarter of $29.5 million decreased 29.3% year-over-year compared to adjusted EBITDA of $41.7 million in the prior year period. Adjusted EBITDA margin for the first quarter was 4.5% compared to 6% in the prior year period. Adjusted EBITDA margin in the quarter was negatively impacted by lower service fee revenues from the lower awards during the pre-spin year, mix to longer-duration studies, higher pass-through revenues, and higher SG&A costs post-spin to support standalone operations. These were partially offset by the benefit from the restructuring program we initiated in the third quarter of 2023. In the first quarter of 2024, adjusted net loss of $3.5 million decreased 112% compared to adjusted net income of $29.1 million in the prior year period. Adjusted net loss for both basic and diluted shares for the quarter was $0.04 compared to adjusted net income of $0.33 in the prior year period. Turning to customer concentration. In our continuing operations post-divestiture, our top 10 customers represented slightly more than half of our first quarter 2024 revenues. One customer accounted for 14% of revenues, and another customer accounted for 13% of revenues. In my comments on cash flows, note these relate to Fortrea in total as we have not segregated cash flows from discontinued operations. In the first quarter, we reported negative $25.6 million in cash flow from operating activities compared to negative $1.6 million generated in the prior year. The primary drivers of the negative cash flow from operating activities were annual tax resets, spend to support TSA exits, interest expense, and other items, including a bonus earned as part of our former parent. Free cash flow was negative $34.9 million compared to negative $17.8 million in 2023. Cash flows used for operations decreased due to the reduction in net income offset by an improvement in unbilled services and deferred revenue and lower cash used for accrued expenses. Due to process and contracting changes we have been implementing, we are seeing initial improvements in unbilled and unearned balances. Net accounts receivable and unbilled services for continuing operations were $941 million as of March 31, 2024, compared to $988.5 million as of December 31, 2023. Days sales outstanding from continuing operations was 97 days as of March 31, 2024, 4 days lower than December 31, 2023. The reduction versus the prior year-end is primarily due to improvements in cash collections and an increase in advances. We continue to make these changes to our contracting and order to cash processes to enable further improvement in our DSO profile over time. Because our contracts provide services over multiple years, there is a lag in seeing those changes reflected in our performance while we work through the historic portfolio. Now I will briefly touch on progress towards the previously announced divestiture of our Endpoint and Patient Access businesses. These businesses' results are now being accounted for as discontinued operations, the details of which will be included in our Form 10-Q. We continue to make progress towards closing the transaction in the second quarter. Consistent with our internal planning, we recently made two adjustments to our capital structure. We worked with our lenders to amend our credit agreement and create temporary adjustments to our financial covenants. Our maximum total leverage ratio was increased from 5.3x to 6x, and our minimum interest coverage ratio was reduced from 2x to 1.7x. In both cases, the new ratios are effective in the second quarter of 2024 and step down over time until reverting to prior levels as of the third quarter of 2025. We intend to update the presentation posted on our website in connection with this call to include the trailing 12-month adjusted EBITDA measure used for leverage calculations for continuing operations after we file our Form 10-Q. Recall that under our credit agreement, we have additional add-backs beyond our adjusted EBITDA results, including public company costs, spin-related costs, and the pro forma benefits from cost savings initiatives. We expect that we will remain fully compliant for the first quarter of 2024 and for the foreseeable future. We have also executed a receivables purchase agreement to sell a portion of our receivables on a recurring basis and will use the proceeds to pay down higher rate term loan debt to reduce our ongoing interest expense. We expect this arrangement would reduce our effective net annual interest expense by approximately $7 million. We intend to fully utilize this facility with the initial sale occurring before the end of the second quarter. Note that in connection with entering this facility, we terminated our existing factoring arrangement. Upon closure of the proposed divestiture, we will apply 100% of the net proceeds from the sale of the Endpoint and Patient Access businesses to pay down a portion of our term loan debt, which will also improve our covenant ratios and reduce the ongoing interest expense. Our capital allocation priorities are unchanged, focusing on infrastructure investments for the timely exit of the transition services agreement, targeted investments to drive organic growth and debt repayment. Our target for net leverage ratio continues to be 2.5x to 3x over the medium term. Now I will provide an update on our transformation program. It is a multifaceted program that requires thoughtful execution as we balance improving financial results with making changes to increase the longer-term health and performance of Fortrea. We've now exited roughly half of our TSAs with our former parent and we have robust plans in place to exit the majority of the remaining TSAs around the end of 2024. Let me remind you about other initiatives we have commenced to propel our transformation and deliver results that are more in line with peers. First, we have targeted programs to selectively reduce pockets of excess costs, areas of lower productivity, and to flatten the organization. The first one began in the third quarter of 2023, and a second one is planned for 2024. These programs are intended to show benefits over time. Also, as previously discussed, we have benchmarked our SG&A against our peers and are building more efficient supporting organizations. In some key areas, we expect to begin to see benefits emerge later this year, with others planned for next year as we fully exit the TSA. As you can see from our recasted SG&A expense line item, this is critical for us to be competitive with our peers. In addition, this quarter, we identified and started setting targets in some key areas to drive operating margin improvement. In addition to the cost structure improvements, we remain laser-focused on building our backlog with the right mix and volume of new business awards. We literally have everyone in sales in Fortrea and have granted more than 80 spot awards for individuals outside of our sales organization who have brought in qualified RFPs for us to pursue. Putting more revenue through the global footprint we require to be competitive will improve our operating leverage. Most of these changes will start to benefit us in 2025, where we expect to realize margin improvement arising from revenue growth and operational productivity, as well as our post-TSA streamlined SG&A cost infrastructure. We believe this transformation will enable us to reduce our expenses and deliver projects faster and more efficiently for our customers. Assuming our ability to continue to drive trailing book-to-bill metrics of at least 1.2x for the remainder of 2024 and exiting our remaining TSAs per our current plan, we continue to target full year 2025 adjusted EBITDA margins at least consistent with 2022 at approximately 13%. The improved revenues and margins will also enhance our debt-to-EBITDA ratios. Finally, I will cover our updated guidance for continuing operations. For full year 2024, we now target revenues to be in the range of $2.785 billion to $2.855 billion. This adjustment reflects slower study start-up due to the therapeutic mix and certain biotech programs, our lower-than-anticipated first quarter book-to-bill, and lower recent pass-through trends. As a result of these headwinds, we now expect to have overall revenue growth broadly flat versus 2023, although the second half is targeted to be modestly positive at around 3%. Our updated adjusted EBITDA target is in the range of $240 million to $260 million. We have taken a number of actions to reduce the typical drop-through of revenue reductions, as I mentioned earlier. Note that our former recommendation on assuming approximately $250 million in revenue and $30 million in adjusted EBITDA for full year 2024 for the businesses to be divested still applies. Fortrea's leadership team brings a wealth of experience and is delivering innovative solutions to improve efficiency in clinical development. Our clinical services offerings are resonating with our customers where we are being invited to conversations that weren't available previously. As a pure-play CRO, we will be focused on implementing our transformation initiatives and are poised to become a leader in the industry to capture the substantial margin expansion opportunity that lies in front of us. Now I'll turn it back to Tom for the remainder of his remarks.

Thanks, Jill. We're roughly at the midpoint of an 18-month transition period after our spin. While there are challenges, the returns for going on this journey, whether as a customer, an employee, or an investor, are very attractive. Fortrea can deliver innovations to customers while growing and improving margins in ways unmatched in our segment of the industry. We have a good pipeline that should deliver a solid book-to-bill in the future and will enable a return to growth. Customers are responding well to our offerings. We have a strong team making progress with our transformation. That includes more innovation, better customer delivery, exiting the TSAs with our former parent, reducing SG&A costs, and ensuring we have strong financial internal controls. We are getting it done. We're taking a solid division of a larger company with historical roots in one of the leading CROs, Covance, and transforming it into a distinctive CRO that becomes the favorite choice for customers. I'm encouraged by the tenacity of the Fortrea team. We work very hard. We have great experience and skill. We're attracting great people. Just Friday, I met with one of our new executives who said both employees and customers can feel the energy and excitement in the organization. The entire Fortrea team is focused on our mission of delivering solutions that bring life-changing treatments to patients faster. As we do that, we're committed to, and will create value for, all of our stakeholders. We will build momentum and enter 2025 with growing strength. If I had one theme for you, it's this: We're making real progress on the important stuff. With that, operator, let's open it up for questions.

Stand by for our first question, which comes from David Windley at Jefferies.

I want to focus on demand, Tom. So you talked about pipeline of opportunities, book-to-bill a little below what you were hoping to get to this quarter, and it sounds like a couple of opportunities made the difference. If you could talk about win rate. And I guess I'm getting at win rate versus maybe opportunities that didn't go to decision in the first quarter. And then I've got a follow-up after that.

Yes. Actually, Dave, our win rate is strong. We had a strong win rate for this quarter. It's the best one since we spun. I think the challenge really was that we had one fairly sizable opportunity rescheduled, which we've signed a start-up agreement now. And we expect it will not be a problem, but it got rescheduled. And then we also had a cancellation that was fairly large that came in right at the end. And as you know, you know this industry well. It only takes a couple of those this size and you lose that 0.1. I will say, though, Dave, the two things I really like about our demand situation. One is we are at the table with some large customers who are thinking about how they're going to proceed with providers, and we're being viewed as a peer. And then the other one is just the pure number of opportunities. That solid really strong double-digit growth in dollar value of our pipeline is really a good thing for us. So I think we're just in a situation where we need to execute against the opportunities in front of us because we're getting the at-bats now.

That maybe segues nicely into my second question, which is, what is getting you those at-bats? So I hear you talking about more modern CRO differentiation. I guess I'm listening closely for what are the elements of that differentiation partnerships that you're striking, things like that? What maybe overarching themes would you put over the top of that? And maybe give some specific examples of what you're doing to create that differentiation?

Yes. A few things, Dave. One, the way we're thinking about sites, and I mentioned the Site Advisory Board, but there's really much more there is really resonating with customers. I think they know that, that last mile issue in our industry, that making sure the sites are productive, that we've kind of gone beyond simply trying to understand whether there are patients in the local geography or in the electronic medical records of the site. And now we're talking about how do you really execute on bringing people through enrollment in a study in innovative ways? And so we're pushing on that. They like the way we're thinking about data and technology. I think the notion that we have here of partnering with some of the leaders, like Veeva, Advarra, and Medidata, leveraging what they're doing, partnering with some of the leaders in data, the TriNetX and Komodos and others, those kind of partnerships are the way to go. And then I have to say some of the innovations we're doing, we had a session right in the room that we're sitting in today with a leading pharmaceutical firm where we talked about how we view artificial intelligence impacting clinical services. We have to ensure this is an industry where we have to make sure that patients stay safe. The data has to be high quality. We can't make bad decisions. But we do see a number of areas where our operational intelligence that we've gained over the years can help us simplify processes and make better decisions in the process. And so really, Dave, they're responding to that. I think they feel the difference when they meet with us. They'll meet with Jill, me, other executives. I think they feel the difference in this organization in terms of how we have our hands really deeply into what makes this industry tick.

The next question comes from Elizabeth Anderson with Evercore.

I was wondering if you could talk about the burn rate. I think you obviously talked about that a little bit in the prepared remarks. But if you could talk about a little bit of more detail about how that assumption tracks as we go through the year, and what the specific drivers are of that increase in the burn rate.

Yes. Let me give a little overview, and then Jill can add some comments. I think I've been in this industry for a long time, and we use heuristics to think about how quickly new opportunities burn that are based on the experiences we all have. And there's this general view that new sold business burns in 6 to 9 months. I think what we found here, with the mix we have, with the amount of oncology that we do here. Plus, we do a lot of biotechs. We've talked about it before, Elizabeth, that we're 50% biotechs. And some of the biotechs are not quite as far along. There are more changes to the protocols, more elements of startup that need to be worked through in terms of responsibilities in detail. And so what we found is that some of the traditional metrics for those first few months of business after we spun that we sold aren't quite right and the burn is a little bit slower. The good news is that it looks like it's a timing issue. I would be worried if there were cancellations or other things that were causing that. But it looks like it's more timing and startup. And so what we're doing is we're working as a group to do what we do here. Now we have a call every other Friday looking at exactly what we've won and then how it's starting to progress. And we will try to do what we can to help teams, whether it's through leadership relationships, whether it's through tactical changes to help them speed things up. So Jill, I don't know if there's much to add to that.

I don't think there is, Tom. I think you've described the environment well. And we do expect as we continue to build the net new business awards over time, it will start to pick up and the momentum will pick up. But it's probably going to take a little bit for us to get to that point, later next year, more so into 2025.

Got it. That makes sense. And I appreciate your comments about the timing impact and sizable agreement that got rescheduled and is now signed. Would you say in terms of if we're thinking about like the second quarter in April and May, that those comments in terms of like the broadly increasing momentum and what you said about the RFP flow. How would you characterize that having flowed into the second quarter?

Yes. I mean, we'll probably say the same words. If we execute against the pipeline we have, we should be able to meet our targets. And it's a little earlier than last time we talked, Elizabeth, in the quarter. But we should be able to meet our targets if we execute against the pipeline we have. I will say the commercial team and our operations team are doing a very good job with these relationships. And it's an important quarter for us, obviously, to demonstrate that we can deliver what we'd like to deliver.

Next question comes from Patrick Donnelly with Citi.

Jill, I have a question for you regarding margins. You're indicating an exit rate of 13% as we approach year-end. Can you discuss the path to reaching that rate, specifically in terms of gross margins and SG&A? Given that this quarter was slightly below expectations, what is your level of confidence in achieving that 13%?

Thanks for the question. It's really about one quarter that will reflect the cost actions, especially regarding SG&A and the changes and programs we've implemented to boost productivity. The remaining three quarters will largely come from leveraging the modest revenue growth we anticipate in the second half. We believe that we don't need to significantly add resources to support that growth since we've maintained our existing infrastructure, which is essential for global competitiveness. Therefore, most of that revenue can translate into strong results. This is how we anticipate moving from our current position this quarter to the end of the year.

Okay, that's helpful. Tom, I have one more question about the demand side. It seems that RFPs are doing well, and the win rate is looking good. Given your extensive experience in this industry, could it simply be a matter of landing one or two contracts? You sounded optimistic in mid-March about securing one of those soon. Is the book-to-bill situation just a bit inconsistent because you're a smaller company compared to others? Overall, you seem confident about the demand environment and maintaining a ratio above 1.2 going forward. I'd like to discuss that further.

Yes, Patrick, I think you characterized it well. We are a little smaller. So when we have a couple of larger transactions, it can influence that number in the way it did by 0.1 points there. So I still feel good about the environment we're in. We still are in that commercial transformation. So we've talked with our Chief Commercial Officer about scheduling and estimating. He and his team are really doing an excellent job. But obviously, we didn't quite get to where we hoped to get mid-March. And we're doing what we do here, so we're going to get better at it. So I do feel good. As we said, this solid double-digit growth of dollar value of pipeline is great. Some of the partnering discussions are really exciting. I spent a week in Europe a couple of weeks ago and met with many customers. And I'll tell you, we're having some great discussions. We're in the mix. So this is an important quarter, and it's going to be an important summer as well. These next 2 quarters are going to be very important for us to show everybody what we can do here.

The next question comes from Eric Coldwell with Baird.

I wanted to come back to the cancellation. I have a few just housekeeping questions. So on the cancellations, you did mention the one fairly large cancel at the end of the quarter. Other than that, how were cancellations tracking in the period? Were they normal, below normal? Just trying to get a sense on the overall magnitude of cancellations.

Yes, Eric, they were normal in the quarter.

Great. And then on the mix of awards, could you talk a little bit about direct versus indirect revenue? And then also functional versus full-service mix?

Talk about the pass-throughs versus other? Is that what you mean by direct versus indirect? Yes, let's go with it.

We are continuing to see an increase in the percentage of pass-through revenue year-on-year for the quarter. However, part of our reduction in the revenue guidance is due to it being lower than what we experienced in the fourth quarter of last year. Pass-throughs are challenging to forecast, as we had several significant studies last year that contributed to growth, which now appear to be more moderated. Currently, we are uncertain if that growth will return, so we approached our revenue projections for the remainder of the year with caution. Nonetheless, pass-throughs are representing a higher percentage compared to last year.

And was that the same comment on bookings this quarter, that the direct fee bookings continued to improve in pass-through or indirect?

Yes, I think we've actually seen fairly consistent between the 605 and the 606 on bookings in the quarter.

Yes. There’s nothing notable there. Our mix is good and represents the overall business well, Eric. It's very consistent with our clinical pharmacology, which performed strongly. We have a normal rate of functional service provision and a normal rate for what we refer to as GCD, or full-service outsourcing. Of course, we would have preferred to achieve more, but the mix itself was solid.

And then if I could just do one last one. You made a number of comments about how the pipeline and opportunity set is out there. I am curious, halfway through Q2 to date, how do you stand on awards and cancels at the halfway point in terms of what you might have seen, say, just not very many quarters since the spin, but recent experience or expectations. Are you at, below, or above where you feel like you need to be at the 1.2?

I think it's consistent with what we would expect to see at this point in the quarter. As Tom shared in his remarks, the pipeline is really strong, we've been pleased to see the growth in it, and we feel good about where we are at this point in the quarter. As you know, it always comes down to the last weeks of the last month. But at this point, we feel good about where we sit.

The next question comes from Max Smock with William Blair.

Tom, over the last couple of quarters, it feels like you were maybe moving away from large pharma a bit, or at least being a little bit more selective about those opportunities and really talking about biotech. I didn't hear as much of that today. So wondering if there's been any change in terms of how you're thinking about prioritizing opportunities here near term. And then any incremental color you can give us around demand trends for biotech and how those compare to large pharma.

I may have miscommunicated, Max, if that's the case. I think of this as a very balanced business. We want to make progress with large pharma because it offers the consistency of being assigned projects, whether through competition or direct allocation. We appreciate that aspect and recognize the need to expand in that area. However, this organization has historically focused a lot on biotech, which is experiencing significant growth. Statistics indicate that around 65% of innovative drug development is currently originating from biotech firms, and this trend is expected to continue to rise in the coming years. In discussions with industry executives, there is a shared belief in this growth, and companies are acting on it. Therefore, we will continue to pursue biotech opportunities and are working on enhancing our biotech offerings. I hope to have an announcement on that soon, as I will be participating in a panel at BIO in the next few weeks. This balance is important to us, and I'm highlighting it this quarter because we have some promising partnering opportunities. At the very least, we anticipate gaining valuable insights from these partnerships, and optimally, it could be extremely beneficial for Fortrea. That's why I'm emphasizing this today. Does that make sense, Max?

Yes, it does. And apologies, some of the misunderstanding was probably on my end as well. But in terms of the demand trends, the second part of that question. Have you seen an uptick from biotech? Is large pharma still strong? How do you think about demand trends for each of those buckets?

Yes, I can confirm that the reports we receive are quite consistent. Whenever we conduct these calls, we observe what third parties, including Windley, are reporting about biotech. This aligns with Dave's observations, which indicate a stable outlook. While not every financing aspect is fully addressed, we are witnessing biotechs we collaborate with successfully securing funding, and new opportunities continue to arise. We are still thoroughly evaluating them because some may want to work with us based on funding contingencies, which makes us cautious. However, the overall funding landscape appears solid, and there are promising developments and innovative products to discuss.

That's helpful. And maybe just sneaking a quick follow-up in there on pricing dynamics. Any commentary around how those have changed over the last couple of months? Are you seeing customers become even more price-sensitive? And do you have competitors out there that are starting to compete more aggressively on price here over the last couple of months?

It's funny. Customers have been price-competitive since I've been in this industry, so it makes me smile to hear that. So they're always price-competitive and very proud of it. But that being said, there's nothing particularly new there. I do think the largest FSP is becoming very competitive. So I will say that. Sometimes, we participate in larger FSPs; sometimes we don't, but it's becoming very competitive. And certainly, we're all keeping an eye on the private CROs. What we're hoping is that everyone understands that disciplined pricing is good for the entire industry. But we're keeping a close eye on it, Max, because we've seen a couple of examples where it looks like work is being purchased or bought. So we're keeping a close eye on it. What Jill and I always say, though, is that in general, a lot of our customers will throw out the highest bid and the lowest bid if they're too far off because they feel like something may be wrong. And so there's this band that I think we all want to optimally price in where we can be successful financially and we can deliver them a good result without a lot of change orders. And so that's the band that we try to be in, the one where both sides win, and we don't have to change our way out of some project.

I show no further questions at this time. I would now like to turn the call back to Tom Pike for closing remarks.

Thank you. I'll just close by saying we're making solid progress toward our goal of being the best choice among clinical research organizations for customers, large and small, trying to create a positive and distinctive experience for those customers as well as our employees. So we appreciate your support, and we'll talk to you soon. Thank you.

This does conclude today's conference call. Thank you for your participation. You may now disconnect.