TETRA TECH INC Q4 FY2024 earnings call

• Coastal protection is critical and unaffected by administration changes. - Defense services are critical and potentially a growth driver. - On-shoring and high-end manufacturing are strong growth areas, with Tetra Tech's high-performance buildings practice well-positioned. - Water work accounts for around 90% of the company's business, with modernization and treatment of emerging contaminants being key. - Renewable energy demand is high, with Tetra Tech well-positioned globally, including in offshore wind. - Subscription Software Solutions (3S service line) is a growing area with significant potential, leveraging AI and data.

Tetra Tech has two segments: Government Services Group (GSG) and Commercial International Group (CIG). In the fourth quarter, GSG revenue increased 12% year over year to $513 million, with a 16.1% margin, a 40 basis point increase from the prior year. The Commercial International Group (CIG) had revenue growth of 5% year-over-year, with a 15.6% margin, the highest in nearly a decade, up 230 basis points from the prior year. The RPS margin finished the year above 12% operating margin, up about 200 basis points from the prior year and is expected to approach mid-teens by the end of fiscal year 2025.

• First quarter 2025 net revenue guidance: $1.09 billion to $1.15 billion, with diluted earnings per share range of $0.32 to $0.34. - Fiscal year 2025 net revenue guidance: $4.565 billion to $4.765 billion, with earnings per share of $1.40 to $1.50. - Assumptions include $35 million for the year, effective tax rate of 27.5%, depreciation of $25 million, interest expense between $31 million to $35 million, and excludes contributions from acquisitions.

• Potential impact of U.S. Federal funding changes, particularly in international development. - Uncertainty around the new administration's policies and their effect on business. - Impasse in government that could lead to shutdowns, though Tetra Tech believes it's less likely to be a major issue.

Q: Is the software angle something Tetra Tech wants to accelerate, and is it capital intensive?

A: Tetra Tech's Subscription Software Solutions (3S) is not capital intensive, with no reselling of others' software. It requires domain expertise staff, but resources are available within the company.

Q: How is the margin side potentially pulled on in the next one to two years while the new administration settles in?

A: Margin model driven by increased efficiency using digital tools and AI, shifting portfolio to higher-margin front-end consulting engineering, and growth of Subscription Software Solutions which provides better, cheaper, faster solutions for clients