TTEK Q1 Earnings Call: Revenue Outperforms, Margins Impacted by Client Shift and One-Time Charges

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Environmental engineering firm Tetra Tech (NASDAQ:TTEK) announced better-than-expected revenue in Q1 CY2025, with sales up 4.9% year on year to $1.1 billion. On top of that, next quarter's revenue guidance ($1.15 billion at the midpoint) was surprisingly good and 4.2% above what analysts were expecting. Its GAAP profit of $0.02 per share was 93.3% below analysts' consensus estimates.
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Revenue: $1.1 billion vs analyst estimates of $1.04 billion (4.9% year-on-year growth, 6.6% beat)
EPS (GAAP): $0.02 vs analyst expectations of $0.30 (93.3% miss)
The company lifted its revenue guidance for the full year to $4.77 billion at the midpoint from $4.57 billion, a 4.4% increase
EPS (GAAP) guidance for Q2 CY2025 is $0.38 at the midpoint, beating analyst estimates by 11.1%
Operating Margin: 3.6%, down from 11.2% in the same quarter last year
Market Capitalization: $9.34 billion
Tetra Tech's first quarter results were heavily shaped by a sharp shift in its client portfolio, most notably the loss of its largest revenue source, USAID, within a single quarter. CEO Dan Batrack described this event as unprecedented, but credited the company's broad diversification across clients, services, and geographies for helping offset the impact. Growth in state and local government work, particularly in water and disaster response, and resilience in commercial and international segments helped drive overall revenue gains. Management noted that non-reimbursable costs related to closing out USAID projects and holding staff during the transition period weighed on operating margins, while offsetting strength came from disaster response work and higher-margin municipal programs.
Looking ahead, Tetra Tech's raised guidance is underpinned by expanded contract capacity in defense and water infrastructure, as well as the integration of new digital and automation capabilities acquired through recent deals. Management emphasized a sizable pipeline in high-margin areas like data centers and digital systems, with Chief Innovation Officer Leslie Shoemaker highlighting over $5 billion in new Department of Defense contract capacity. CEO Dan Batrack cautioned that while the company expects margin improvement as USAID-related costs roll off, ongoing volatility in international markets and the variable nature of projects in regions such as Ukraine may continue to pose short-term risks. Batrack stated, 'The primary tailwinds that are driving Tetra Tech are not changing—coastal flooding, water supply issues, and digital infrastructure remain key priorities for clients.'
Tetra Tech's management attributed quarterly growth to strong state and local government demand, continued expansion in defense and water infrastructure, and the company's ability to quickly reallocate resources after the loss of its largest federal client.
State and local surge: State and local government revenues rose 44% year-over-year, with more than half of that growth stemming from episodic disaster response activities. The remainder was driven by ongoing municipal water programs, which management noted were up 19%, reflecting strong demand for infrastructure resilience and water quality projects.
Defense contract expansion: Tetra Tech secured $5 billion in new contract capacity with U.S. Department of Defense agencies, including projects supporting military infrastructure worldwide. Management emphasized that recent wins are closely aligned with national security and infrastructure priorities, such as water supply and flood control for military bases.
Disaster response offsets: The company was able to redeploy staff to high-utilization disaster response projects, particularly in areas affected by fires and hurricanes, helping to mitigate underutilization from USAID project terminations. CEO Dan Batrack stated this shift ensured continued high overall workforce utilization despite the abrupt change in client mix.
Margin dynamics and one-offs: Operating margins were negatively affected by non-reimbursable costs associated with closing out USAID work and the decision to retain staff during the transition. CFO Steve Burdick noted that, excluding these effects, core margin performance would have been 30 to 50 basis points higher.
International mixed picture: While Tetra Tech's UK and Irish water businesses delivered double-digit growth, Australian operations saw revenue declines due to delayed infrastructure funding around national elections. Management flagged that international growth rates remain sensitive to changes in trade policy and project funding clarity.
Management expects future results to be shaped by accelerating demand for water and digital infrastructure, margin recovery as one-time costs fade, and a growing contribution from recent acquisitions.
High-margin business mix shift: With the exit of USAID work, management believes the company's baseline margin profile will improve as more profitable projects in water, environmental, and digital systems become a larger share of revenue. CEO Dan Batrack said, 'Our underlying business has about a 50 basis point increase in overall margin without AID, and growth could be slightly faster going forward.'
Digital systems and data center growth: The addition of SAGE Group and ongoing investments in digital automation and high-performance building design are expected to drive double-digit growth in the data center and smart infrastructure markets. Chief Innovation Officer Leslie Shoemaker projected the digital systems practice could reach $500 million in annual revenue by 2030.
Backlog rebuilding and project funding: Management highlighted a solid book-to-bill ratio outside of USAID and a growing pipeline in defense and water. However, they cautioned that certain international and federally funded projects remain subject to political and funding volatility, especially in regions such as Ukraine and Australia.
In the coming quarters, the StockStory team will monitor (1) the pace at which Tetra Tech rebuilds its backlog outside of USAID, (2) progress in integrating SAGE Group and scaling digital automation offerings, and (3) the sustainability of state and local government demand for water and disaster response projects. Shifts in international funding environments and the impact of new defense contracts on margins will also be important to track.
Tetra Tech currently trades at a forward P/E ratio of 24.7×. Should you double down or take your chips? Find out in our full research report (it's free).
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