Earnings Call Transcript - FTRE Q4 2025

Operator, Operator

Good day, and thank you for joining us. Welcome to the Fortrea Q4 and Full Year 2025 Earnings Conference Call. Please note that this conference is being recorded. I would now like to turn the call over to our first speaker, Tracy Krumme, Senior Vice President of Investor Relations. Please proceed.

Tracy Krumme, Senior Vice President of Investor Relations

Thank you. Good morning, everyone, and welcome to Fortrea's Fourth Quarter and Full Year 2025 Earnings Conference Call. With me today on the call is Anshul Thakral, Chief Executive Officer and Director; and Jill McConnell, Chief Financial Officer. Before we begin, please note this call is being webcast. There is an accompanying slide presentation, which can be found on the Investor Relations section of our 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 filed with the SEC regarding these risks and uncertainties, in particular, those described in the cautionary statement concerning forward-looking statements and risk factors in our press release and presentations that are posted on our website. Please note that any forward-looking statements represent our views as of today, February 26, 2026, and that we assume no obligation to update the forward-looking statements even if estimates change. 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 provide investors with a more complete understanding of results. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures is available in the earnings press release and the earnings call presentation slides that are provided in connection with today's call. Lastly, I would like to add that Anshul, Jill and I will be attending the Barclays Level Healthcare Conference on March 10 in Miami. If anyone would like to meet with us on these dates, please contact me or a sales representative from the firm. And with that, I'd like to turn the call over to Anshul Thakral, Chief Executive Officer and Director. Anshul, please go ahead.

Anshul Thakral, Chief Executive Officer and Director

Thank you, Tracy. Good morning, everyone, and thank you for joining us today. I'm pleased to report our fourth quarter and full year 2025 results. Before I begin, I want to express my sincere appreciation to our colleagues across Fortrea, our Board of Directors, our clients and our broader stakeholder community. This was my first full quarter here, hard as that is to believe, given how deeply rooted I feel at Fortrea. The progress we will cover today reflects a tremendous amount of dedication across our entire global community, and I'm proud to share it with you today. We delivered solid fourth quarter and full year performance in line with our guidance despite a challenging and uneven operating environment. Jill will walk through the financials in more detail, but I want to highlight a few key points upfront. We delivered revenue and adjusted EBITDA in line with our full year expectations. We closed the year with a Q4 book-to-bill of 1.14x and a trailing 12-month book-to-bill of 1.02x, reflecting improvement in demand during the second half of the year. We generated positive operating and free cash flow in Q4, resulting in positive operating and free cash flow for the full year. Importantly, we exceeded our gross and net savings targets, delivering approximately $153 million in gross savings and $93 million in net savings for the year. We continued to strengthen our balance sheet through disciplined debt payout using cash on hand, reinforcing our commitment to improving our capital structure. We expanded our leadership team, welcoming Aggie Gallagher as General Counsel in the fourth quarter. More recently, we appointed Dr. Scott Dave to lead our clinical pharmacology business. Dr. Oren Cohen, who previously led this business, is now fully dedicated to his role of Chief Medical Officer, where he is focused on strengthening our clinical development and medical expertise as we continue to leverage our scientific and therapeutic experience with customers. Stepping back to the broader environment, the macro backdrop remains cautious. But importantly, it continues to show signs of stabilization and early recovery. Funding activity rebounded meaningfully in the second half of 2025 with the strongest activity in the fourth quarter. Large pharma budgets have largely stabilized following pipeline reprioritizations and the market is currently signaling improving biotech funding flow through 2026. With this backdrop, we are seeing higher client engagement levels, shorter decision-making timelines, and more concrete customer conversations, particularly within biotech. That said, we continue to expect our recovery to be somewhat uneven in the first half of 2026, which reflects the new business wins we saw earlier in 2025. Looking further ahead, we're cautiously optimistic about building momentum in the second half of the year as outsourcing trends remain steady and access to capital looks to improve. Through all of this, our focus remains unchanged: disciplined execution and positioning Fortrea to win as demand continues to recover. Our solid performance is built upon three pillars of excellence: commercial, operational, and financial. We use these pillars to prioritize our actions and measure our progress in our journey to growth and margin expansion. I'll provide an update on our commercial excellence and operational excellence pillars, while Jill will discuss the financial excellence pillar. Starting with commercial excellence. We secured significant new and repeat wins in the quarter, underscoring both our differentiated capabilities and the strength of our client relationships. Notable Q4 wins included a long-term clinical pharmacology partnership award with a top five large pharma company, several FSP renewals from long-standing large pharma clients, and a healthy balance of Phase II and Phase III global clinical development wins across biotech, midsize pharma, and large pharma as well as across various therapeutic areas. Overall, I really like the mix of our current pipeline. As I said last quarter, we have a commercial framework to expand our commercial opportunities, which we call the three Rs: Reach, Relevance, and Repeat. These three Rs guide how we are rebuilding growth, strengthening execution, and improving consistency across the organization. First, Reach, expanding the top of the funnel and increasing access to customers. Over the last several quarters, we've taken deliberate actions to broaden our operation. We've restructured our global sales organization to increase capacity and capabilities focused on hunting new client relationships. We're building our inside sales, otherwise known as our Reach engine, focused on early-stage qualification needed for Fortrea prospects and general biotech outreach. And we've made executive-led customer engagement a standard part of our go-to-market discipline. Second, Relevance, creating bespoke solutions that leverage our recognized therapeutic and scientific expertise, in ways that are relevant and resonate with clients. Our clients have come to expect that Fortrea leads with science. Now we are infusing our medical expertise deeper into how we deliver our clinical programs. As I mentioned earlier, Dr. Oren Cohen is now spending all of his time as Chief Medical Officer to deepen relationships with clients. He's engaging earlier in the scientific dialogue and collaborating closely with our physicians and therapeutic leaders to ensure Fortrea's solutions address the complex development challenges our clients face. We also have been sharpening our focus on biotech opportunities, assembling biotech ready teams that understand the unique constraints and needs of the biotech sector as they advance scientific innovation. On the flip side, we maintained strong discipline, including a willingness to walk away if opportunities do not meet our strategic or margin criteria. Third, Repeat, earning the next study by delivering consistently and creating long-term relationships. We've strengthened the interface between sales, delivery, and project management to ensure seamless handoffs, improved visibility, and streamlined client experience. This focus is showing up in execution and our clients are noticing the difference. Our Net Promoter Score, which is how we track client satisfaction, improved year-over-year. Now let me share some progress we have made under our operational excellence pillar. As a provider of professional services, operational excellence is baked into how we manage projects. We continue to optimize our approach to project management with a relentless focus on the client experience based on reliable and predictable delivery. Let me share some recent updates. We've created a stronger alignment to evolving regulatory requirements with risk-based quality management embedded as a cornerstone of how we deliver quality and oversight across the development life cycle. Notably, we've streamlined the design of our project management capabilities, reducing touchpoints for customers and creating more direct interaction with our therapeutic and scientific leads. We have also streamlined our planning and global processes, removing repeated actions and simplifying workflows. These process changes are enabled by technology. Now given technology underpins so much of operational excellence, let me take a pause here from the quarterly updates and address the topic of technology more holistically, particularly as it relates to AI in our industry. I'm very aware that there has been a great deal of discussion and frankly, concerns raised in recent weeks about how AI will impact the CRO sector. So here's how we are thinking about it. Speaking broadly, we see AI as a force multiplier that can accelerate execution and ultimately can drive more science, more trials, and more growth. AI is a way to advance science faster, which ultimately expands demand for CROs rather than shrinking it. AI is a margin and productivity lever, not a people replacement or a cost cutter. AI will automate specific task-level work rather than replace core CRO roles. It eliminates routine and repeatable work, improves throughput and standards. It is part of a broader push to compress trial timelines while maintaining the hard boundary that quality is non-negotiable. Examples of AI in use across our industry today include case and taking reporting in pharmacovigilance, central monitoring documentation checks and alert triggers, site selection, and study design optimization. At Fortrea, more specifically, we are making focused investments in AI, machine learning, and other advanced technologies in workflow automation and orchestration to drive speed, reduce costs, and improve quality in clinical research. Our industry-leading accelerate platform remains central to that strategy. By integrating real-time role-based insights across the trial ecosystem, we are able to reduce manual effort, accelerate decision-making, and improve quality at scale. You may recall, last quarter, I reported that the AI-enabled risk radar update to accelerate was in production, and we are beginning to roll out the CRA mobile app Digital Assistant and our Start My Day platform to increase CRA productivity. We advanced deployment of these tools in the fourth quarter and introduced further innovation. Currently, we're wrapping up a pilot of our new feasibility intelligence engine that enables Fortrea to partner with clients at the beginning of the program to make better-informed feasibility decisions that improve operational outcomes. With all of our investments in technology, we are ultimately driven to improve the efficiency of drug development, streamline the experience for clients and investigator sites, and improve the overall quality of clinical trials. From project management to streamlined processes to face deployment of AI-enabled tools, we track our operational excellence progress in terms of outcomes. Are we delivering faster, better, or changing the experience for our clients? That is the key question. For example, we recently accelerated recruitment by three months in a complex respiratory study and completed enrollment in a Phase II Alzheimer's study. These achievements matter to our clients and make a meaningful difference to the patients who will eventually benefit from new treatments. As a service-driven organization, our people are the foundation of operational excellence. Beyond adoption of new technology and processes, we prioritized employee engagement and development. I'm pleased to report that in our recent annual engagement survey, our overall scores improved year-over-year. Alongside a significant increase in response rate, scores increased across all categories with most exceeding cross-industry benchmarks. I said earlier that I am proud of Fortrea's performance and recent progress, but I'm even more proud of the impact our work has on patients. I continue to make time to meet with our teams and clients in person around the world. A few weeks ago, I had the pleasure of visiting our clinical research unit in Dallas, Texas, just days after a significant winter storm disrupted the region. While the weather created disruptions, our research did not stop. Members of our team stayed overnight to ensure study volunteers were cared for and that planned dosing continued on schedule. During the visit, I met with our principal investigator and observed an ESMO bridging study in progress. Demand for these studies is growing as the global regulatory environment evolves, and our global clinical network has earned a tremendous reputation for delivering this critical work. Moments like this reinforce what sets Fortrea apart: the dedication of our physicians and clinical operations teams united by our shared purpose of bringing new treatments to patients faster. Before I turn it over to Jill, let me close with a few key points. Fortrea is executing against a clear strategy and building momentum. This is a high-quality business with strong fundamentals now operating with greater discipline, focus, and accountability. We've taken meaningful steps to strengthen our commercial engine and improve our cost structure. We are advancing operational excellence from streamlining project delivery to transforming our processes and tools and we're innovating in ways that are meaningful to clients. These actions position us well to benefit from an improving market. While this remains a journey, the direction is clear. Early proof points are in place, and we are confident in our ability to deliver consistent long-term value creation. With that, I'll turn the call over to Jill.

Jill McConnell, Chief Financial Officer

Thank you, Anshul, and thank you to everyone for joining us today. I want to begin by expressing gratitude to the entire Fortrea organization for our strong performance in 2025. We successfully navigated another year of significant change, thanks to the determination and resilience of our team. I'll discuss the main factors affecting our fourth quarter results, including advances in our cost optimization initiatives, improvements in cash flow, and our outlook on liquidity and capital structure, as well as our guidance for 2026. As Anshul mentioned, we achieved a solid fourth quarter and full year 2025. I am very proud of our team's achievements, particularly in executing and delivering results aligned with our guidance. Before I delve into the details, I want to underscore our progress towards financial excellence, a key part of our growth strategy. First, through our rightsizing initiatives, we achieved full year cost savings of $153 million gross and $93 million net, surpassing our original goal. Second, we produced positive full year operating and free cash flow, with another significant improvement in DSO in the fourth quarter, highlighting enhancements in our order to cash process. Lastly, to reinforce our commitment to financial discipline and a strong balance sheet, we repaid approximately $76 million of our senior secured notes in the fourth quarter using cash on hand. Now, I'll go over the financial results in more detail. Fourth quarter revenue totaled $660.5 million, a 5.2% decrease compared to the same quarter last year. This decline was mainly due to lower pass-through costs in both our clinical pharmacology and clinical development sectors, along with ongoing FSP headwinds. The drop in pass-through costs resulted from a steady mix. For the full year 2025, revenue reached $2,723.4 million, which is within our guidance range, marking a 1% year-over-year increase primarily driven by higher revenue in our Clinical Pharmacology sector, partially offset by a decline in FSP revenue. On a GAAP basis, direct costs for the quarter decreased by 4.8% year-over-year, largely due to reductions in headcount and personnel expenses. These reductions occurred despite the planned reintroduction of variable compensation, as we aim to reward our talent while keeping cost discipline. SG&A in the quarter fell by 30.5% year-over-year, mainly because of lower TSA and IT-related costs. Looking at underlying controllable SG&A sequentially, fourth quarter SG&A was 4.8% lower than the third quarter of 2025 and 23% lower compared to our fourth quarter 2024 run rate due to the implementation of our SG&A-specific cost optimization initiatives. These results also reflect the impact of reintroducing variable compensation. I'll provide more details on our ongoing transformation efforts later in my remarks. The net interest expense for the quarter was $23.2 million, roughly in line with the prior year's quarter. For the full year, we recognized an income tax charge of $3.2 million, resulting in an effective tax rate of negative 0.3%. This annual rate varied from our statutory rate, mainly due to the non-deductible goodwill impairment. Our book-to-bill ratio for the quarter was 1.14x, consistent with the third quarter. For the trailing 12 months, the book-to-bill ratio stood at 1.02x. Backlog was $7.7 billion, and cancellations were consistent with historical trends. Adjusted EBITDA for the quarter was $54 million, compared to $56 million in the previous year's quarter, with the decrease largely attributable to the reintroduction of variable compensation, somewhat offset by the advantages of our cost savings initiatives. For the full year, adjusted EBITDA came in at $189.9 million, close to the upper end of our guidance range. The decline compared to the prior year primarily stemmed from decreased FSP revenue, clinical pharmacology mix, the reintroduction of variable compensation, and a negative effect from reduced research and development tax credits, all of which were largely mitigated by our cost savings. Moving on to net loss and adjusted net income. In the fourth quarter of 2025, the net loss stood at $32.5 million, an improvement over a net loss of $73.9 million in the same period last year. Adjusted net income for the quarter was $9.2 million, down from $16.6 million the previous year. Adjusted basic and diluted earnings per share were $0.10 and $0.09, respectively, for the quarter. Concerning customer concentration, our top 10 customers represented 56.8% of our revenue for the year ending December 31, 2025, with our largest customer accounting for 18.1% of that revenue. Regarding cash flows, please note that all references to prior year cash flows pertain to the entire Fortrea, as we had not separated cash flows from discontinued operations for businesses sold in June 2024. For clarity on full year and fourth quarter cash flow metrics, please see the investor presentation posted on our website this morning. Our cash generation in the fourth quarter was notably strong, allowing us to achieve positive operating cash flow and free cash flow for both the quarter and the full year. In the fourth quarter, we generated positive operating cash flow of $129.1 million and free cash flow of $121.6 million, both exceeding our expectations. For the year ended December 31, 2025, operating cash flow was $113.5 million compared to $262.8 million in the previous year, and free cash flow totaled $88.3 million compared to $237.3 million in 2024. It's worth noting that 2024 benefited from the net proceeds of $297.9 million from the initiation of our $300 million securitization program. On a comparable basis, excluding the effects of the securitization, operating cash flow improved year-over-year by $148.6 million and free cash flow improved by $148.9 million, showcasing significant underlying improvements in cash generation for 2025. The strong cash flow performance for both the quarter and the year was driven by a considerable improvement in day sales outstanding. DSO was 16 days at year-end, decreasing by 17 days sequentially and 24 days year-over-year, reflecting ongoing enhancements in our order to cash processing. Additionally, we benefited from favorable payment timing during the fourth quarter. As of December 31, 2025, net accounts receivable and unbilled services for continuing operations totaled $589.7 million, down from $659.5 million as of December 31, 2024, primarily due to improved cash collections during 2025. We concluded the quarter with no borrowing on the revolver, consistent with the third quarter. Our positive operating cash flow in the quarter and the undrawn revolver throughout the period resulted in available liquidity exceeding $600 million. Looking ahead, we are currently targeting positive operating cash flow for the full year of 2026. We expect the first quarter cash flow to be negative, mainly due to variable compensation payouts and a partial reversal of some timing-related DSO benefits. However, we aim for the first quarter cash flow usage to be more than compensated by positive cash flow generation for the remainder of the year. With our targeted EBITDA and significant add-backs available under our credit agreement, we anticipate maintaining ample liquidity and considerable flexibility under our financial covenants for the foreseeable future. Our capital allocation priorities remain focused on driving organic growth and improving productivity alongside debt repayment, evidenced by the $75.7 million repurchase of our senior notes at par during the fourth quarter of 2025. Since the spin-off, we have paid down approximately 35% of our original debt, strengthening our balance sheet and enhancing our capital position, which underscores our disciplined approach to financial management. The backlog burn rate of 8.6% in the fourth quarter was lower than in previous quarters, mainly due to reduced pass-through costs. Now, I'll update you on our execution of the cost reduction plans. I’m pleased to report that we surpassed our annual targets for both gross and net cost reductions in 2025, with the difference reinvested back into our people. Following the timing and expectations communicated last quarter, the fourth quarter demonstrated strong execution, particularly in our SG&A-specific savings program. Focusing on our transformation plans for 2026 and beyond, we believe sustainable revenue growth is vital for margin transformation, which is why we are concentrating on enhancing our commercial engine. The second half of 2025 marked positive progress in this regard. We've implemented several changes to support more stable book-to-bill performance, including bolstering commercial leadership, improving opportunity qualification, simplifying the proposal generation process, and engaging the leadership team in strengthening customer relationships. As our commercial engine develops and the market environment normalizes, we expect these changes to foster more consistent book-to-bill performance over time. With a balanced split between large pharma and biotech customers, we believe we are well-positioned to capitalize on demand in our end markets. Margin improvement is a multiyear journey supported by two essential building blocks: revenue growth and continued structural cost measures, including ongoing rightsizing of the organization and efficiency improvements, while ensuring our commitment to quality delivery. As these revenue growth elements and continuous cost optimization align, we aim for an achievable path back to adjusted EBITDA margins more in line with our peers over time. Now, regarding our guidance for 2026, using exchange rates as of December 31, 2025, we are targeting revenue between $2.55 billion and $2.65 billion and adjusted EBITDA between $190 million and $220 million. The anticipated year-over-year revenue decline primarily reflects the effects of bookings in the first half of 2025, ongoing FSP challenges, and expectations for decreased pass-through costs. The targeted adjusted EBITDA improvements stem from our continued efforts to rightsize the business and enhance efficiency and agility. We will persist with our cost savings programs in 2026, aiming for additional gross savings of approximately $70 million to $80 million and net savings of $40 million to $50 million as we approach normalized compensation levels by the end of 2026. In terms of quarterly progression, the first quarter has historically shown a step sequential reduction due to billable hours being influenced by holiday timing and certain expenses rising at the beginning of the year. We expect a similar pattern this year. From a margin standpoint, we foresee gradual improvements as the year advances and expect to exit 2026 on a stronger footing. The team at Fortrea has shown remarkable dedication and resilience, and we look forward to fully engaging with our customers, employees, and shareholders. We will continue our transformation journey, sharpening our execution against our described pillars. Throughout this process, our employees remain focused and committed to quality delivery, our customers report strengthened experiences with Fortrea, and our investors see that we are establishing the right foundations for improved financial performance over time. We are confident in the direction we are heading and excited about Fortrea's future. Now, we’ll open the call for Q&A.

Operator, Operator

Our first question comes from Patrick Donnelly with Citi.

Patrick Donnelly, Analyst

Anshul, you sound cautiously optimistic on the overall backdrop, particularly on the biotech side; it does seem like the market has firmed up. You talked about the funding piece, obviously. Can you just talk through the outlook a bit? You mentioned the uneven first half. Is that more just a comment on the past bookings rolling through, but feeling better about the position on new bookings front going forward? Just given your conversations with customers, are you seeing any changes on the share front? Would love for you to talk through a little bit on the overall backdrop here for bookings going forward?

Anshul Thakral, Chief Executive Officer and Director

Sure, Patrick. I'm happy to address your question. Let me start with the second part. The comment regarding recovery in the first half relates to our bookings in the first half of 2025 and how that will reflect in revenues. I describe my outlook as cautiously optimistic because I believe the environment is improving. We are observing signs of improvement, stabilization, and early recovery. For instance, our engagement level with clients has greatly increased compared to the first half of 2025. We anticipate that the decision-making timeline will return to a more normal pace expected in the industry. Our discussions with both large and small pharma customers have become much more constructive. In large pharma, we have noticed a decrease in concerns about turnaround pipeline reprioritization, and now we are having productive conversations regarding the 2026 pipeline. In biotech, the decision-making timeframe appears to be shortening, and we are seeing a rise in engagement from our biotech clients. Taking all these factors into account, I use the term cautiously optimistic because we’ve experienced positive momentum in the latter half of 2025. I would like to see more of that momentum before I feel comfortable removing the cautious label from my statement.

Patrick Donnelly, Analyst

Understood. Okay. That's helpful. And then maybe one for Jill. The quarter definitely saw some encouraging signs on the margin, EBITDA cash flow front. It seems like '26 implying continued improvement. Can you just expand a little bit on the key margin levers? It sounds like a steady ramp throughout the year is the right way to think about it there. And if you were to see any upside to revenue, how should we think about the potential flow-through to the bottom line? You did talk about revenue growth being the key driver. So I just wanted to talk through that.

Jill McConnell, Chief Financial Officer

Sure, Patrick. Yes, I mean, you're right in my remarks in terms of the progression through the course of the year. We do see usually a bit of a step down in the first quarter, and then it improved over the course of the year. The key drivers, it is revenue growth. And I think as we've said previously, that is going to be the key to getting back to peer margins over time. And in this year, we're seeing a bit of a step back in revenue. It's roughly split, quite frankly, between pass-through mix and then some continued headwinds in FSP primarily, but we're going to continue with the cost savings optimization. So the cost journey is what's going to help us as well. Revenue is still a bit measured to continue to expand the bottom line. We're very focused on delivering both margin and adjusted EBITDA dollar improvement. And we think that with what we demonstrated this year around the cost savings and hitting those goals, we feel good. Most of what we've built into the guide has already been initiated for this year. So I think when revenue comes back, assuming the demand environment continues to be supportive, we would expect that to flow through pretty strongly, especially in the beginning as we continue to pick up some of that trapped demand that we have. And obviously, in time as we grow more, we may have to revisit perhaps our people side of things. But for now, we believe you will see pretty strong drop through when the revenue starts to come back.

Operator, Operator

The next question comes from the line of Elizabeth Anderson with Evercore ISI.

Elizabeth Anderson, Analyst

Maybe just to talk about the back half of '25 bookings a little bit more. Anything you would call out in terms of like mix composition or steady start times or something? Or is that sort of very characteristic to what we generally think about in terms of the timing of those bookings starting to phase in? And then anything to call out timing-wise on the accounts payable side, the debt number seems to have flipped around a little bit, and I just didn't know if there was a timing aspect of that at all?

Anshul Thakral, Chief Executive Officer and Director

Elizabeth, thanks for the question. There's nothing specific to call out on the bookings. I think if I look at the mix of our new business coming in, in the last two quarters, it's in line with what I expect in terms of therapeutic area mix, in terms of study mix of types of studies that are coming in. We've had strength in both clinical pharmacology as well as our full-service business in the late stage, a mix of Phase II and Phase III. So I'm actually quite happy with the quality and mix of what we're putting into the backlog over the last two quarters, but nothing that would be one thing to call out there as ask Jill to comment on the second part.

Jill McConnell, Chief Financial Officer

Sure. Elizabeth, from an accounts payable perspective, several factors are influencing it. The levels have decreased significantly compared to a year ago for a few reasons. First, we dealt with a considerable payment hold at the end of the quarter, which we have now resolved. Last year, we had some substantial one-time costs that contributed to the accounts payable balance at year-end. Additionally, the implementation of the new ERP system has streamlined our processes, leading to greater efficiency. I don't anticipate accounts payable levels decreasing much further from here; they are likely to remain stable around this level, mainly due to improvements and the resolution of spin-related issues.

Operator, Operator

The next question comes from the line of Eric Coldwell with Baird.

Eric Coldwell, Analyst

You've already addressed a couple of these, but I was hoping maybe you could give a little more color on some of the commentary around RFP flow. It sounds like it's improving. If you could add any detail on that, that would be great. And then Anshul, you said you're happy with the bookings mix. I was hoping we could get some better directionality on bookings mix in the fourth quarter in terms of FSP versus full service or direct versus indirect. I'm interested in your win rate. And then finally, new to Fortrea clients, are there any updates on that front? Because I know that was a big initiative for you to not only retain and grow existing clients but also to bring new clients into the fold?

Anshul Thakral, Chief Executive Officer and Director

Okay. Great, Eric, thanks for the question. I think it's a multi-part question. I'll do my best to answer as much of it as I remember. In terms of the mix of bookings, we don't typically comment on pass-throughs versus direct. But I will tell you, there's nothing unusual in Q3 or Q4. It is in line with what I would expect to see in terms of the mix of the type of work coming in. It was a good healthy mix of Phase II, Phase III which is good for Fortrea. We'd like to see some more of those larger Phase III come in. So I was very proud of the team in what they were able to achieve. I'll give a couple more comments around the bookings. We have seen a pickup in full-service work, which has been a lot of my push has been to be very selective when it comes to FSD. We want to continue to be strategic and we want to continue to be disciplined. FSP does cause a lot of headwinds when you're on a margin improvement journey. And so I'm very proud of the team that the shape of our pipe, the shape of what's coming in has been towards the FSO world, which is more of what I would like, and it is more of where strategically I've been pushing the team. In terms of our win rate, I think our win rates are where I would like them to be. The win rates have been modestly consistent across Q3 and Q4. The new-to-Fortrea customer HICA that the company had in Q2 subsided very quickly in Q3 with the CEO being put in place. For me, I've instituted that all deals are executive-led engagements, and all of our biotech and biopharma customers are getting a different level of executive involvement than they typically would have been in the commercial process, and we're doing that pretty consistently. That took away any fears that new-to-Fortrea customers would have, and I saw none of that hesitation in Q4. What I did like about Q4 from an RFP flow, that was another one of the questions that you asked, but I liked about Q4 was we had a lot more RFP flow coming from biotech. So we saw growth in our biotech RFP flow, which is consistent with, I think, what some of my peers have said and consistent with what we're seeing in the market. I was very proud of Fortrea's win rates in that space. Hopefully, that helps, Eric.

Ishan Majumdar, Analyst

It does. And I know it was a four-part question, but I am going to ask a follow-up. On Q1 specifically in terms of the phasing, I know you briefly touched on that, but just given the lumpiness in the pass-through revenue and how much that can gyrate quarter-to-quarter, coupled with the seasonality and the impact of still working through the transition and rebuild of the company, the bad 1H '25 bookings, etc. Can you just help us hold our hand a little more on modeling so we don't get ahead of our skates going into Q1?

Jill McConnell, Chief Financial Officer

Yes, Eric, I’m happy to. We observed a slight decrease in revenue sequentially, primarily influenced by the pass-through mix, and we expect this trend to continue. A significant portion of the year-on-year reduction is attributed to that. Therefore, we anticipate that revenue will be largely comparable to what we experienced last year. However, we do expect a small improvement in margins due to the cost-saving initiatives we have implemented. It’s important to note that as we work on reinstating variable compensation, we’ll face some challenges in 2025. Additionally, we typically experience increased early employment costs and other taxes in the year, which will affect the first quarter. This should provide you with some insight into what to expect for Q1.

Operator, Operator

The next question comes from the line of David Windley with Jefferies.

David Windley, Analyst

And appreciate the information. The customer mix, I guess, and revenue growth metrics along with your clinical pharmacology business, I'm trying to disaggregate a little bit. Your top customer appears to have grown in the high 20% range. You also had, as you had earlier described, this kind of large and perhaps somewhat unique, albeit you told me not completely unique clinical pharmacology package in GLP-1s, burned quickly, incorporated a lot of sites, not all of which were yours, which drove some of the excess pass-through. I guess what I'm getting at is to what extent did those overlap, and to what extent are these trends continuing or repeatable? In other words, is some of the headwind that you have to overcome in '26 because you don't get a repeat CP package like that, and maybe you also are not expecting to see a top customer continue to outgrow the rest of the base as fast as it has?

Anshul Thakral, Chief Executive Officer and Director

Okay. So I'm going to try to disaggregate some of that, David. And I think when we talk later, we can talk in more detail on that. I'm not sure we're following the same statistic in terms of our largest customer growing 20%. I don't think that was the right math for us, I think. But we can sit back and...

Jill McConnell, Chief Financial Officer

I'm sorry, but in 2024, wasn't it around 14 percent, and in 2025, it was 18 percent? If that's incorrect, I apologize.

Anshul Thakral, Chief Executive Officer and Director

We understood that you were referring to the fourth quarter data in relation to the full year. Yes, that is correct on a full-year basis.

Jill McConnell, Chief Financial Officer

It actually stepped down a little bit though in the fourth quarter just relative. So, yes.

Anshul Thakral, Chief Executive Officer and Director

We've prioritized diversifying our customer base, and we've seen tangible results from that in Q3 and Q4. Regarding your questions about clinical pharmacology, we did encounter unexpected pass-throughs in the middle of last year due to a large study from a client that required multiple sites. This was a one-time event, and the related revenues were mostly realized last year. At this point, I don't see similar studies in our pipeline for this year, although that can change. As our client’s work progresses, so does ours in onboarding new sites. However, predicting the timing of these studies is challenging, which we discussed in Q3. On a positive note, demand for our clinical pharmacology services remains robust, growing each quarter in both pipeline and services. We're pleased with the performance of this business and are actively seeking to increase our organic capacity. I hope that addresses your questions. Let me know if I overlooked anything, as it was a multi-part question.

Operator, Operator

Our next question comes from Jailendra Singh from Tourist Securities.

Jailendra Singh, Analyst

Anshul, I want to go back to your comment about how you described it as a force multiplier that can accelerate execution and expand demand for CROs. Clearly, the way CRO shares have traded recently. There's a lot of fear out there in terms of CRO services getting disrupted. I would love your thoughts there. And additionally, can you elaborate on how all this focus on beginning to influence customer conversations or your differentiation? For example, are biotech and large pharma looking at AI-enabled execution as a key factor while deciding on CROs? Just give us some a little bit more color there.

Anshul Thakral, Chief Executive Officer and Director

Sure, Jailendra. I'm happy to talk about this. As you can imagine, this topic comes up very often right now. But I think the topic is being driven more by sentiment and headlines than the changes we're actually seeing on the ground in terms of either customer behavior or demand. As I've mentioned, I think the AI adoption in clinical trials remains early and cautious and is highly constrained by regulation, liability, data integrity, and GCP requirements. Many of you on this call have read written papers and reports around this topic. I want to make sure that market sentiment doesn't get too far away from the reality on the ground. As a result, we're not seeing AI replace the need for large-scale clinical execution, patient recruitment, monitoring, or regulatory-grade delivery. I do think AI is going to accelerate the pipeline more than it is going to eliminate work. So I know as I talk to our suite of large pharma companies, AI is already having an impact in terms of discovery, decision-making, and the ability to move pipelines forward—not necessarily in terms of replacing human labor, even on the pharma side to run the actual clinical trials and do clinical development. As I said a couple of times, I think I do see this as a force multiplier, and the more we can move science forward the faster, the more science there is for us to develop. I actually think it will have a positive impact on how our market grows. As far as the behaviors in outsourcing, that was the second part of your question. We've not seen large pharma or biotech materially change anything in their outsourcing behavior as a result of AI coming up as a topic of conversation in essentially every proposal. Yes, it does come up in all of my conversations. But I find that we as an industry are fairly aligned now with how I see in our peers talk and we're fairly aligned with our customers and our clients in biotech and pharma. We are seeing AI's ability to improve some oversight, enhance trial design, improve internal decision-making, and give us some efficiencies in the areas of past automation. But certainly, it's more of a productivity tool and not a replacement tool, and that's been pretty consistent in the conversations I'm having, and it has not been an influence in any RFP or proposal that we've seen thus far. Hopefully, that answers your question, Jailendra.

Operator, Operator

The next question comes from the line of Max Smock with William Blair.

Max Smock, Analyst

Maybe just following up on a portion of Eric's question earlier on mix. I wonder if there's any detail you can give around expectations for direct fee revenue versus pass-through revenue in 2026. Just how changes in mix that are going to impact margins this year?

Jill McConnell, Chief Financial Officer

Sure, Max. Regarding the evolution of revenue, we anticipate ongoing growth in our clinical pharmacology business, particularly in service fees. However, we expect pass-throughs to stabilize rather than experience the significant growth we saw last year, though they will still play a role. This stabilization affects clinical pharmacology revenue differently because of the way revenue recognition is handled. Additionally, we foresee further challenges in FSP. Year-on-year, the stable pass-throughs we expect relate to our full-service business reduction. As Anshul mentioned, we're focused on increasing the pipeline in that area. In 2025, there were particular studies that resulted in unusually high rates of pass-throughs, and one of them finished early, which will affect our numbers as that study winds down. Consequently, the anticipated year-on-year reduction will be approximately evenly divided between service fees and pass-throughs, with growth in the other business impacting the overall figures.

Operator, Operator

The next question comes from the line of Ann Hynes with Mizuho Securities.

Ann Hynes, Analyst

Just on the margins, I know you said you want to get to peers over time. Can you give us a sense, is it high teens, low 20s? Like what is your ultimate goal and maybe a timetable; that would be great.

Anshul Thakral, Chief Executive Officer and Director

I think that's a great question. I'm happy to give some thoughts there. I think it's hard to look at peers when most of our peers are not necessarily in the public market. But our belief is mid-teens is where a pure-play CRO like ours, which is a group that has a large central labs business, or other ancillary services, like SMOs, etc., tend to be at. So that is our goal, and that's what we're targeting. It is a multiyear journey, and it is going to take some time to get there. I've been here for about two quarters at this point. I'd like to get a full year under my belt, and I would like to spend some time doing some form of an Investor Day and actually having some discussions and giving more details around what that timeline and time frame looks like well for later this year.

Ann Hynes, Analyst

Okay. Great. Did you discuss how cancellations trended and maybe the growth in gross bookings? That would be helpful as well.

Jill McConnell, Chief Financial Officer

Ann, we haven't had a question on it. I briefly mentioned in the remarks, we've actually continued to see historic low levels and cancellation trends—nothing made around of the ordinary. So just kind of par for the course.

Anshul Thakral, Chief Executive Officer and Director

It's been stable and consistent at this point.

Operator, Operator

Our final question comes from the line of Justin Bowers with DB.

Justin Bowers, Analyst

Anshul, I appreciate your insights on the impact of AI. But with your comments on accelerating discovery, is that something that you're seeing like more near-term or in the last 12 to 18 months? Or is that just sort of like a longer duration observation over the last several years? So that's part one. And then part two would be, when you think about the buckets in clinical trial ops, which functions do you think are most addressable in the near term?

Anshul Thakral, Chief Executive Officer and Director

I'm happy to discuss both points. To clarify, I didn’t let any information out prematurely; there was some discussion a few weeks ago that has been on everyone’s mind. Regarding discovery, it's not our primary focus, but it is a topic we often discuss with our clients, and this has been ongoing for quite some time. While I can’t pinpoint an exact timeframe, it has been more than just the last few months. There’s a growing conversation around the use of AI and the management of data. Clients are interested in how they can improve the efficiency of the discovery process and expedite progress to the clinic. This observation comes from what I’ve gathered from our clients and where these tools are beginning to show significant benefits. As for previous discussions, we are witnessing an increase in task automation within pharmacovigilance, where we have implemented our own tools. We’re also making strides in centralized monitoring, allowing for earlier alerts and automation of routine tasks. We’re seeing early benefits in data management concerning data cleaning and query handling, reducing some of the manual effort needed. However, we aren’t noticing any effects on site-level activities, such as direct monitoring of data at the sites. I hope that addresses your question, Justin. I wanted to ensure I addressed all inquiries before wrapping up. Thank you for your thoughtful questions and ongoing engagement as we conclude today’s session. Our recent quarter reflects our operational discipline and rigor that we’ve instilled in our organization. We are making strides in our strategic initiatives and strengthening our ability to serve clients effectively on a global scale. Our clients’ priorities align with our own, and we remain committed to delivering quality and long-term value. In summary, we are focused and disciplined, executing effectively, and confident about the company's future. Thank you for your time, and for those attending, I look forward to seeing you at the Barclays conference on March 10. Thank you.

Operator, Operator

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