Fortrea Holdings Inc. (FTRE) Q4 FY2025 Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Fortrea Q4 and Full Year 2025 Earnings Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Tracy Krumme, Senior Vice President of Investor Relations. Please go ahead.

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 that are 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 Global 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.

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 is 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 paydown 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 Dove 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 time lines 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 remained unchanged, disciplined execution and positioning Fortrea to win as demand continues to recover. Our solid performance is built upon 3 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. Q4 notable wins included a long-term clinical pharmacology partnership award with a top 5 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, midsized 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 3 Rs: reach, relevance and repeat. These 3 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 aperture. 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, new-to-Fortrea prospects and general biotech outreach. And we've made executive-led customer engagements 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 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 in 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 have 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 touch points for customers and creating more direct interaction with our therapeutic and scientific leads. We have also streamlined our planning and global processes, removing repeat 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 the 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 and improves throughput and standards. It is part of a broader push to compress trial time lines and costs, but with a hard boundary, quality is nonnegotiable. Examples of AI in use across our industry today include case intake and 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 and workflow automation and orchestration to drive speed, reduce costs and improve quality in clinical research. Our industry-leading Xcellerate 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 Xcellerate 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, which enables Fortrea to partner with clients at the beginning of a 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 streamline processes to phase 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 3 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 prioritize 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 ethnobridging 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.

Thank you, Anshul, and thank you to everyone for joining us today. Let me start by thanking the entire Fortrea organization for our solid performance in 2025. We navigated another year of significant change, and as always, the grit and resilience of this team persevered. In my prepared remarks, I'll cover the primary factors that influence our fourth quarter performance, including progress against our previously shared cost optimization initiatives, improvements in cash flow and our expectations regarding liquidity and capital structure. I will also provide our outlook and 2026 guidance. As Anshul stated, we delivered a solid fourth quarter and full year 2025. I am very proud of what the team achieved, particularly our ability to execute and deliver results in line with our guidance. Before getting into the details, I'd like to highlight our progress towards financial excellence, the third pillar of our growth strategy. First, as part of our rightsizing initiatives, we delivered full year cost savings of $153 million gross and $93 million net, exceeding our original target. Second, we generated positive full year operating and free cash flow with another significant improvement in DSO in the fourth quarter, reflecting continued improvements in our order-to-cash processes. Finally, demonstrating our continued commitment to financial discipline and balance sheet strength, we paid down approximately $76 million of our senior secured notes in the fourth quarter using cash on hand. Now I'll cover the financial results in more detail. Fourth quarter revenue was $660.5 million, 5.2% lower than the prior year quarter. The decline was driven primarily by lower pass-through costs in both our clinical pharmacology and clinical development businesses as well as continued FSP headwinds. The decline in pass-through costs was driven by study mix. Full year 2025 revenue of $2,723.4 million, in line with our guidance range, increased 1% year-on-year. The increase was driven primarily by higher revenue in our clinical pharmacology business, partially offset by lower FSP revenue. On a GAAP basis, direct costs in the quarter decreased 4.8% year-over-year, primarily due to lower headcount and personnel costs. These reductions were achieved despite the planned reintroduction of variable compensation as we remain focused on rewarding our talent while maintaining cost discipline. SG&A in the quarter decreased 30.5% year-over-year, driven primarily by lower TSA and IT-related costs. Looking at underlying controllable SG&A on a sequential basis, fourth quarter SG&A was 4.8% lower than the third quarter of 2025 and 23% lower than our fourth quarter 2024 run rate as a result of execution of our SG&A-specific cost optimization initiatives. These results also include the impact of reintroducing variable compensation. I'll discuss progress on our ongoing transformation efforts across the organization later in my remarks. Net interest expense for the quarter was $23.2 million, broadly in line with the prior year quarter. For the full year, we recorded an income tax charge of $3.2 million, resulting in an effective tax rate of negative 0.3%. The annual rate differed from our statutory rate, primarily due to the nondeductible goodwill impairment. Our book-to-bill for the quarter was 1.14x, broadly in line with the third quarter. Book-to-bill for the trailing 12 months was 1.02x. Backlog was $7.7 billion and cancellations remain in line with historical trends. Adjusted EBITDA for the quarter was $54 million compared to $56 million in the prior year period. The decline versus the prior year quarter was driven primarily by the reintroduction of variable compensation, partially offset by the benefits of our cost savings initiatives. Adjusted EBITDA for the full year was $189.9 million towards the higher end of our guidance range. The decline versus the prior year was primarily the result of lower FSP revenue, clinical pharmacology mix, the reintroduction of variable compensation as well as the negative impact of lower research and development tax credits. These impacts were largely offset by the benefits of our cost savings initiatives. Moving to net loss and adjusted net income. In the fourth quarter of 2025, net loss was $32.5 million compared to a net loss of $73.9 million in the prior year period. Adjusted net income for the quarter was $9.2 million compared to $16.6 million in the prior year period. Adjusted basic and diluted earnings per share for the quarter were $0.10 and $0.09, respectively. Turning to customer concentration. Our top 10 customers represented 56.8% of revenue for the year ended December 31, 2025. Our largest customer accounted for 18.1% of 2025 revenue. As I comment on cash flows, please note that all references to prior year cash flows are for the entirety of Fortrea as we had not segregated cash flows from discontinued operations for the businesses sold in June 2024. To more clearly see full year and fourth quarter cash flow metrics, please refer to the investor presentation posted to our website this morning. Our cash generation in the fourth quarter was particularly strong, enabling us to deliver positive operating cash flow and free cash flow for both the quarter and 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 of which exceeded our expectations. For the year ended December 31, 2025, operating cash flow was $113.5 million compared to $262.8 million in the prior year period, and free cash flow was $88.3 million compared to $237.3 million in 2024. Recall that 2024 benefited from the net proceeds of $297.9 million upon the initiation of our $300 million securitization program. On a comparable basis, excluding the impact of the securitization, operating cash flow improved year-over-year by $148.6 million and free cash flow improved by $148.9 million, reflecting meaningful underlying improvement in cash generation in 2025. Cash flow performance for both the quarter and the year was driven by a significant improvement in days sales outstanding. DSO was 16 days at year-end, improving by 17 days sequentially and 24 days year-over-year, reflecting continued enhancements in our order-to-cash processes. We also benefited from favorable payment timing during the fourth quarter. Net accounts receivable and unbilled services for continuing operations were $589.7 million of December 31, 2025, compared to $659.5 million as of December 31, 2024. This reduction is primarily driven by the improved cash collections during 2025. We ended the quarter with no borrowing on the revolver, consistent with the third quarter. Our positive operating cash flow in the quarter, combined with our undrawn revolver throughout the quarter resulted in available liquidity in excess of $600 million. Looking ahead, we are currently targeting full year 2026 operating cash flow to be positive. We anticipate first quarter cash flow to be negative, primarily driven by variable compensation payouts and a partial reversal of some timing-related DSO benefits. We are targeting first quarter use of cash to be more than offset by positive cash flow generation over the remainder of the year. With our targeted EBITDA and significant add-backs available under our credit agreement, we expect to maintain ample liquidity and significant flexibility under our financial covenants for the foreseeable future. Our capital allocation priorities continue to focus on driving organic growth and improving productivity alongside debt repayment, the latter of which was evidenced by the $75.7 million repurchase of our senior notes at par during the fourth quarter of 2025. Since the spin, we have paid down approximately 35% of our original debt. This has strengthened our balance sheet and improved our capital position, underscoring our disciplined approach to financial management. Backlog burn rate of 8.6% in the fourth quarter was lower than in prior quarters due primarily to lower pass-through costs. Now I'll give an update on execution against our cost reduction plans. I am pleased that we exceeded our annual targets for both gross and net cost reductions in 2025, with the difference between gross and net savings being reinvestments back into our people. Consistent with the timing and expectations we communicated last quarter, the fourth quarter was a strong period of execution, particularly across our SG&A-specific savings program. Turning to our transformation plans for 2026 and beyond. We believe the primary lever to our margin transformation is sustainable revenue growth, which is why we are laser-focused on strengthening our commercial engine. The second half of 2025 was a step in the right direction. We've made several changes that support more stable book-to-bill performance, including strengthening commercial leadership, improving opportunity qualification, simplifying the proposal generation process and engaging the entire leadership team in building and reinforcing customer relationships. As our commercial engine matures and the market environment continues to normalize, we anticipate that these changes could enable more stable book-to-bill performance over time. With our attractive 50-50 split between large pharma and biotech customers, we believe we are well positioned to capitalize on demand across our end markets. Margin improvement remains a multiyear journey, supported by 2 primary building blocks. The first is revenue growth, as I mentioned earlier. The second is continued structural cost actions, including ongoing rightsizing of the organization and improvements in efficiency, all while maintaining our commitment to quality delivery. As the elements of revenue growth and continued cost optimization come together, we are targeting an achievable path back to adjusted EBITDA margins more in line with peers over time. Turning now to 2026 guidance. Using exchange rates in effect on December 31, 2025, we are targeting revenue in the range of $2.55 billion to $2.65 billion and adjusted EBITDA in the range of $190 million to $220 million. The year-over-year anticipated decline in revenue primarily reflects the impact of softer bookings in the first half of 2025, continued FSP headwinds and anticipation of reductions in pass-through costs. The targeted improvements in adjusted EBITDA are driven by our continued efforts to rightsize the business and improve our efficiency and agility. We will continue our cost savings program in 2026, targeting incremental cost reductions of approximately $70 million to $80 million in gross savings and $40 million to $50 million in net savings as we move closer to normalized compensation levels by the end of 2026. In terms of quarterly progression, the first quarter has historically demonstrated a step sequential reduction as billable hours can be impacted by the timing of holidays and certain expenses increased at the start of the year. We anticipate a similar pattern this year. From a margin perspective, we expect gradual improvement as the year progresses and anticipate exiting 2026 on stronger footing. The team at Fortrea has demonstrated remarkable focus and resilience, and we welcome the opportunity to have our full engagement centered on our customers, our employees and our shareholders. We will continue on our transformation journey, sharpening our execution against the 3 pillars previously described. Through it all, our employees remain engaged and committed to quality delivery. Our customers signal that their experiences with Fortrea grow stronger, and our investors understand that we are putting the right building blocks in place to improve our financial performance over time. We are confident in the direction we are taking and are excited about the future of Fortrea. Now we'll open the call for Q&A. Operator, please open the line.

[Operator Instructions] Our first question comes from the line of Patrick Donnelly with Citi.

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 you to talk through a little bit on the overall backdrop here for bookings going forward.

Sure, Patrick. I'm happy too. Thanks for that question. And let me take the second part of your question first here. The comment around recovery in the first half, that is a comment around the 2025 first half bookings and how that reflects in revenues. But what I -- the words I use are cautiously optimistic because I do think the environment is improving. We see signs of improvement. We see signs of stabilization. We see signs of early recovery. Let me give you some evidence. Our engagement level with clients is significantly higher than it was in the first half of 2025. We think the decision-making time lines have come back to a more of a normal pace that we would expect within the industry. Our conversations with customers have become a lot more constructive, both big pharma and little pharma. So in the world of large pharma, what we're seeing is a lot of the churn around pipeline reprioritization, all of that sort of subsided as things matured in Q3, Q4, and we moved on to having very constructive dialogues about the 2026 pipeline. In our world of biotech, we're seeing a shorter time line in terms of decision-making. We're also seeing an increase in RFP flow coming now from our biotech customers. So all of these things added together, I use the words cautiously optimistic because we've had some of this momentum here in the back half of '26 -- '25, excuse me. I'd like to see some more of that momentum before I drop the word cautious in front of my statement.

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.

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 improves 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 while 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 improvements. And we think that with the -- 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 would have to revisit perhaps our -- the people side of things. But for now, we believe we would see pretty strong drop-through when the revenue starts to come back.

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

Maybe just to talk about this 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, that 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.

Elizabeth, thanks for the question. There's nothing specific to call out on the bookings. I think the if I look at the mix of our new business coming in, in the last 2 quarters, it's in line with what I would 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 IIs and Phase IIIs. So I'm actually quite happy of the quality and mix of what we're putting into the backlog over the last 2 quarters. But nothing that would be -- nothing to call out there, Elizabeth. And I'll ask Jill to comment on the second part.

Sure. Yes. Elizabeth, from an accounts payable perspective, there are a couple of things that are impacting it. It has come down to quite a lower level compared to where we were at the time of the spin in a year ago. There's a few factors for that. One, we had inherited a pretty significant payment hold at the end of the quarter as we completely unwound that. Last year, you would remember, we still had some significant onetime in TSA and other costs that were coming in. And so those would have been sitting in the [ AP ] balance at the end of the year. And then honestly, with the introduction of the new ERP, we've improved those processes and had to -- and that's allowed us to be a lot more efficient in what we're doing. I wouldn't expect the AP levels to go down much more from this. I think they're probably at a place where they would stay or be in and around that level, but it is mostly around improvements and unwinding some of the things that were spin related.

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

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 would be great. And then, Anshul, you said that 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.

Okay. Great. Eric, thanks for the question. I think it's a multipart 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, Q4, 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 IIIs come in. So it's very proud of the team in what they were able to achieve. I will 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 FSP. 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 where strategically I've been pushing the team. In terms of our win rates, I think our win rates are where I would like them to be. The win rates have been modestly consistent across Q3, Q4. The need to portray a customer hiccup that the company had in Q2 subsided very quickly in Q3 with the CEO being put in place. And for me, I've instituted that all deals are executive-led engagements. 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 biotech 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. What 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 what I think -- what my -- some of my peers have said and consistent with what we're seeing in the market. And I was very proud of Fortrea's win rates in that space. Hopefully, that helps, Eric.

It does. And I know it was a 4-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 I 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, et cetera, 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?

Yes. Sure, Eric. Happy to. So I think, again, I talked about the fact that we saw a bit of a step down sequentially in revenue, a lot of that driven by the pass-through mix. We're expecting that to continue. And in fact, part of the reduction year-on-year, a good chunk of the reduction year-on-year is related to that. So I think revenue-wise, it's going to be broadly similar to what we saw last year. That would be our expectation, but you'll see a little bit of improvement in margin just because of all the cost saving initiatives that we've done. But remember, as we've been on the journey to reintroduce variable comp, we did a step change in that in 2025, we have a little bit more headwind to absorb there, plus we always see some pickup in early on employment and some other taxes in the year. So that impacts the first quarter, but that should hopefully give you some sense of what Q1 would look like.

And just to be clear, Jill, when you say revenue similar, are you talking in terms of growth rate or absolute dollars? And then same question on margin, is it -- or profit? Is it -- you said margin would improve a little bit. I assume that was a year-over-year comment while down quarter-over-quarter, but up year-over-year.

Yes. Correct. Yes.

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

I 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've 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, say, 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.

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...

Sorry, in '24, wasn't it 14-ish percent and '25, it was 18%. That's -- so if that's wrong, I apologize.

You're talking about from the full year, sorry. We thought you were trying to say in the fourth quarter...

We're looking at fourth quarter data, sorry.

Yes, from a full year perspective.

From a full year basis, yes. That's correct.

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

So no, we've been -- the diversification of customers has been clearly a priority, and that's taking shape. And we saw good progress on that metric in Q3 and Q4. You asked a couple of different questions here on clinical pharmacology, and let me try to disaggregate them. Yes, I've mentioned in the past that in our clinical pharmacology business, we saw pass-throughs in the middle of last year that were -- those we can't predict. They come from 1 or 2 large studies from a client where we need to use multiple sites on behalf of the client. And that study causes those types of pass-throughs. That was a onetime event that has happened, those revenues largely burned last year. Now to say whether or not we would get a study like that this year, I don't see one in the pipeline, but you never know. As their journey continues, our journey also continues in terms of us continuing to be able to do on board on our own sites, but I can't predict when those type of studies are going to come. And that's what we talked about in Q3 also for that type of a clinical pharmacology study. With that said, we've seen strong demand for our clinical pharmacology business. It continues to grow quarter-over-quarter in terms of not just the pipeline, but the demand for services. So we're actually very happy with how that business is tracking, and we continue to make pushes to increase organic capacity within our units wherever we can. Hopefully, David, that answers your question. Let me know if I missed -- it's a multipart question, let me know if I missed one of the part.

[Operator Instructions] Our next question comes from the line of Jailendra Singh from Truist Securities.

Anshul, I want to go back to your comment about AI. You described as the force multiplier that accelerates 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 AI 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 [indiscernible]. Just give us a little bit more color there.

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 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. It's cautious. It's highly constrained by regulation, liability, data integrity, GCP requirements. Many of you on this call have heard written papers and reports around this topic. And I think the whole industry is kind of aligned on that. I want to make sure that market sentiment doesn't get too far away from the reality on the ground. As a result, look, 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 pipeline more than it is going to eliminate work. So I know as I talk to our C-suite of our large pharma companies, AI is already having impact in terms of the world of discovery, in terms of the world of decision-making, in terms of the world of being able to move pipelines forward, not necessarily in the terms of replacing human labor even on the pharma side to be able 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 faster, the more science there is for us to develop. I actually think it will have a positive impact in 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. Does AI come up as a topic of conversation in essentially every proposal? Yes, it does. It comes up in all of my conversations. But I find that we, as a CRO industry are fairly aligned in how I see even our peers talk, and we're fairly aligned with our customers and our clients in biotech and pharma. So we are seeing AI's ability to improve some oversight, ability to improve some trial design, ability to improve some internal decision-making and ability to give us some efficiencies in areas of task automation. But certainly, it's more of a productivity tool, 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.

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

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

Sure, Max. I mean in terms of the evolution of revenue, I think we're expecting continued growth in our clinical pharmacology business, both service fee, probably more stabilization to some of the points that Anshul made, more stabilization of pass-throughs rather than the significant growth we saw there last year, but it will still be a factor. It does impact clinical pharmacology revenue a bit differently, as you know, just the way revenue recognition works. And then I mentioned that we are expecting further headwinds in FSP. And then the -- so when you think about year-on-year, if I'm talking about ClinPharm having stable pass-throughs, the reduction that we're projecting is related to our full-service business. And I think as Anshul said, we've been focused on increasing the pipe in those. But I think '25 was -- there was a phenomenon around a handful of studies, some of which I've called out previously that were driving really high rates of pass-throughs. One of them in particular, finished early. We hit the endpoints early as that winds down. We're seeing some of that impact in the numbers for next year. So when you think about the year-on-year reduction, it's roughly split about half and half between service fee and pass-through with ClinPharm growing and then the impact in the other business.

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

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.

I think that's a great question. I'm happy to give some input 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 that doesn't have a large central labs business or other ancillary services like SMOs, et cetera, belongs. So that is our goal, and that is 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 2 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 time line and time frame looks like, well, probably for later this year.

Okay. Great. And then I don't know if I missed this, but did you talk about what -- how cancellations trended? And maybe gross bookings growth, that would be great as well?

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

It's been stable and consistent at this point.

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

Anshul, I appreciate you letting the genie out of the bottle with respect to AI. But with your comments on accelerating discovery, is that something that you're seeing like more near term or in the last like 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 2 would be, when you think about the buckets in clinical trial ops, like which functions do you think are most addressable in the near term?

Happy to talk about both. And just to be clear, I didn't let the genie out of the bottle. I think genie escaped a couple of weeks ago, and that's been a conversation topic for everybody. Look, in terms of discovery, that's not an area we're in, but this is the conversations we have with our clients. And I would say that has been happening now for a period of time. I can't give you an exact time frame, but it's not just the last few months. There's been a lot of conversation around how the use of not just AI, prior to AI, it was a use of data and the ability to process large amounts of data, how can our clients get better at what's moving through the discovery funnel and what's getting out to the clinic faster and faster. And that conversation has continued. It continues to grow. I only offered that as an observation of what I hear from our clients and where these tools are having the most impact early on. In terms of things that I talked about in earlier too, look, we see levels of task automation in pharmacovigilance. We're already doing it on our end. We have our own tools that have been deployed in pharmacovigilance such as case processing, et cetera. We're seeing it in forms of centralized monitoring, where there's things that we're doing in terms of being able to issue alerts earlier, being able to look at the data, being able to automate some fairly mundane tasks in centralized monitoring. We're already seeing some impact there. And we're starting to see some early impact in the world of data management when it comes to data cleaning, when it comes to being able to look at queries and being able to actually reduce some human labor in what we have to do in that space. We're not seeing an impact in anything that we would be doing at the site itself, relationships with the site, conversations with the site, the actual physical monitoring of the data right now. Hopefully, Justin, that answers your question.

Please go ahead.

I was just seeing if we were done with the questions, then would close out the call.

Yes, I see no further questions.

Thank you. As we come to a close today, I want to thank you for your thoughtful questions and continued engagement. Our performance this last quarter reflects the discipline and operational rigor we have really embedded throughout this organization. We continue to make progress against our strategic initiatives. We continue to strengthen our foundation and enhance our ability to serve clients globally. What matters to our clients is what matters to us most, and we remain focused on delivering high-quality execution and long-term value. The message is we are focused, we're disciplined, and we are focused on executing and executing well, and we're confident in the direction that the company is beginning to take. So with that, I thank you for your time. And for those that will be in town, we look forward to seeing you at the Barclays Conference on March 10. Thank you.

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