Tetra Tech, Inc. (TTEK) | The Buildout — AI Infrastructure
The Verdict
Tetra Tech is a consulting and engineering firm. It designs water systems, environmental cleanups, flood protection and infrastructure for government and commercial clients. Its connection to the AI buildout is narrow: developers hire it for data-center feasibility studies, siting, permitting, and power and water supply engineering. The company owns no data centers or generation assets and runs no manufacturing plants. Management argues this front-end work — tied to site geology, regulations and community input — is bespoke rather than routine design, and therefore less exposed to displacement by AI. That claim is central to how the company wants investors to see it.
| Market Cap | — |
| Revenue (TTM) | $5.1B |
| Revenue Growth | +10.2% |
| EBITDA Margin (TTM) | 13.0% |
| Net Debt | $793M |
| Earnings Beats | 6 of 7 |
| P/E (TTM) | — |
| EV/EBITDA (TTM) | — |
What We Like
- Backlog rose for a second consecutive quarter, up 5% sequentially to just under $4.5B and up $208M. It counts only contracted, funded and authorized work.
- Fixed-price work moved from about 37% of net revenue in 2023 to about 48% year to date. Management says fixed-price work carries higher margins and lower working capital needs.
- Operating cash flow has exceeded net income for 21 consecutive years. Return on capital employed is over 20%, and net debt/EBITDA is 0.88x against a stated 1–2x target.
- Defense is now a bigger customer than the departing USAID. DoD was 11.6% of FY2025 revenue, up from 8.5% in FY2024, while USAID at 10.6% no longer exists.
- The U.K. AMP water cycle represents about GBP 105B of sector investment through 2030, and Tetra Tech holds more than GBP 2B in contract capacity across the U.K., Ireland and the Netherlands.
What We’re Watching
- U.S. commercial grew just 1% in Q3 after management raised its second-half outlook to 8–12%. It is 20% of revenue.
- Federal order flow is throttled even with a budget in place. Management cited a constrained contracting-office staff pool and a significant reduction in force.
- Data center work is about $60M for the year, roughly 1.4% of FY2026 net revenue guidance, despite more than 20 active feasibility assessments.
- Backlog duration is shorter and there is more book-and-burn, management said, so the headline backlog may cover less future revenue than it appears to.
The thesis is strengthening on cash, backlog and mix, and mixed on end-market demand. Backlog has inflected, guidance has been raised twice in consecutive quarters, and the mix is rotating toward higher-margin fixed-price work. Against that, U.S. commercial badly missed its raised outlook, state and local growth landed at the low end of a lowered range, and USAID no longer exists as a customer. The AI connection remains a narrative rather than a revenue line. The open question is whether the backlog inflection and the mix shift can offset a weaker U.S. commercial market and a throttled federal order pipeline.
Earnings Beat
Q3 FY2026 revenue was $1.31B at an 18.6% gross margin and $172.7M of EBITDA. Net revenue was $1.1B and adjusted EPS was $0.42 — both above the high end of guidance. Operating cash flow was $229M in the quarter and $467M year to date, an all-time high for the first three quarters and up 31% versus fiscal 2025. Backlog rose 5% sequentially to just under $4.5B.
| Metric | Q3 FY2026 | Q2 FY2026 | Q3 FY2025 | YoY |
|---|---|---|---|---|
| Revenue | $1.3B | $1.2B | $1.2B | +13.5% |
| Gross margin | 18.6% | 17.5% | 21.8% | -320bps |
| EBITDA | $173M | $146M | $179M | −3.4% |
| EPS | $0.42 | $0.36 | $0.42 | −0.6% |
| Backlog | Just under $4.5B | $4.28B | n/a | — |
| Days sales outstanding | 56 days | 58 days | Similar to last year | — |
our backlog was up for the second consecutive quarter, increasing sequentially by 5% to just under $4.5 billion.— Roger Argus, CEO, 2026-07-30
Management tone: Tone was steadier than the prior quarter. In Q2 management called the backlog an inflection point; in Q3 it confirmed a second consecutive increase and raised full-year guidance again. On U.S. federal, the message turned more cautious — management said order flow is constrained by contracting-office staffing even with a budget in place. On U.S. commercial, management named the miss plainly, citing client trepidation and offshore wind cancellations. It declined to preview FY2027 and did not repeat the fixed-price mix metric it had highlighted in Q2.
Management Guidance
Management raised FY2026 net revenue guidance to $4.315–$4.365B from $4.25–$4.40B, and adjusted EPS to $1.56–$1.59 from $1.50–$1.58. It initiated Q4 guidance at $1.12–$1.17B net revenue and $0.45–$0.48 adjusted EPS. FY2026 assumptions include $34M of intangible amortization, $23M of depreciation, $30M of interest expense, a 27.3% effective tax rate, and no future acquisitions. On next year's margin, management said "50 is about right" for expansion but that it could be a little less or a little more based on history.
Trajectory
Revenue is accelerating sequentially — $1,211M, $1,220M, then $1,309M over the last three quarters — but is down year over year because USAID, 10.6% of FY2025 revenue, stopped existing. Q3 net revenue of $1.1B was about 3.7% below a year earlier, while net revenue excluding USAID, the Department of State and episodic disaster response rose 8%. The mix underneath is shifting: international grew 12% and U.S. federal 12% in Q3, while U.S. commercial grew 1%. Margins track that mix — management said adjusted EBITDA margin on net revenue was about 80 bps higher year to date, and roughly 240 bps higher on a net-service-revenue basis. The computed trend shows gross margin compressing while operating and EBITDA margins are roughly stable.
The Model
The model projects FY+1 revenue of $5,444M and EBITDA of $719M, a 13.2% margin. For FY+2 it projects revenue of $5,764M and EBITDA of $790M, a 13.7% margin. The near term is anchored by backlog that has risen for two straight quarters and by company guidance of $4.315–$4.365B net revenue for FY2026. FY+2 depends on the mix shift continuing — more fixed-price water and defense work — and on U.S. commercial demand recovering or at least stabilizing.
| Metric | FY2025 | Next FY (E) | Following FY (E) |
|---|---|---|---|
| Revenue | $4.8B | $5.4B | $5.8B |
| YoY Growth | — | +13.8% | +5.9% |
| EBITDA | $457M | $719M | $790M |
| EBITDA Margin | 9.6% | 13.2% | 13.7% |
Projections are the median of 5 independent model runs. The model’s revenue sits 32.6% above analyst consensus.
Management raised FY2026 net revenue guidance to $4.315–$4.365B from $4.25–$4.40B, and adjusted EPS to $1.56–$1.59 from $1.50–$1.58. It initiated Q4 guidance at $1.12–$1.17B net revenue and $0.45–$0.48 adjusted EPS. FY2026 assumptions include $34M of intangible amortization, $23M of depreciation, $30M of interest expense, a 27.3% effective tax rate, and no future acquisitions. On next year's margin, management said "50 is about right" for expansion but that it could be a little less or a little more based on history.
What Could Go Right — and Wrong
- U.S. commercial returns to the 8–12% second-half pace management had guided, restoring growth from a 20%-of-revenue segment.
- Federal contracting bottlenecks ease, letting the $30B of stated federal contract capacity convert into funded backlog faster.
- Data center work moves materially above about $60M a year as the more than 20 feasibility assessments convert into funded power and water engineering.
- Fixed-price mix keeps climbing above 48% and DSO moves toward about 50 days, supporting margins and cash conversion.
- Canada and Arctic infrastructure, the U.K. AMP cycle and Australia digital water add international task orders on top of existing capacity.
- U.S. commercial stays near +1% or turns negative. It is 20% of revenue.
- Federal order flow remains throttled by contracting-office staffing, capping how fast federal capacity converts into revenue.
- Backlog duration keeps shortening, so the headline backlog covers less future revenue than it appears to.
- USAID is gone and the roughly $66M per quarter of Department of State and Ukraine work normalizes down or stops.
- Margin expansion converges toward about 50 bps in FY2027 rather than the 70–80 bps of recent years.
Looking Ahead
Over the next 12 months the tests are backlog, end-market demand and margin cadence. Management is focused on growing backlog again in Q4 and building a stable base into FY2027, with Q4 guided to $1.12–$1.17B net revenue and $0.45–$0.48 adjusted EPS. FY2027 guidance is where the market learns whether margin expansion settles near the long-term ~50 bps target. On the AI side, the question is whether more than 20 data center feasibility assessments turn into funded power and water engineering, or stay near about $60M a year.
- Q4 FY2026Q4 results vs guide — Net revenue $1.12–$1.17B; tests a third straight backlog increase.
- FY2026 year-endFull-year results — Tests net revenue $4.315–$4.365B and about 70 bps margin expansion.
- FY2027FY2027 guidance — Tests whether margin expansion settles near the ~50 bps target.
- Multi-yearFixed-price mix and DSO — Tracking fixed-price mix above 48% and DSO toward ~50 days.
- Through 2030U.K. AMP water cycle — About GBP 105B of sector investment; over GBP 2B capacity.
- FY2027+Canada Arctic infrastructure — Management does not expect an FY26 impact; awards seen later.
Financials
Annual Summary
| Metric | FY2024 | FY2025 | TTM | YoY |
|---|---|---|---|---|
| Revenue | $4.3B | $4.8B | $5.1B | +10.7% |
| Gross Margin | 20.0% | 20.1% | 18.8% | +7bps |
| EBITDA | $574M | $457M | $660M | -20.4% |
| EBITDA Margin | 13.3% | 9.6% | 13.0% | 374bps |
| Net Income | $333M | $248M | $436M | -25.7% |
| Free Cash Flow | $341M | $439M | $548M | — |
| Net Cash | — | — | — | — |
Key Ratios (Trailing)
- P/E TTM—
- EV/EBITDA TTM—
- EV/Revenue TTM—
- Price/FCF TTM—
- Gross Margin (TTM)18.8%
- EBITDA Margin (TTM)13.0%
- Net Margin (TTM)8.6%
- ROIC18.0%
- FCF Conversion83.1%
- SBC / Revenue-1.9%
The Company
Tetra Tech is a consulting and engineering firm focused on water, environment and sustainable infrastructure, operating under the "Leading with Science" brand for more than 50 years. It does not make hardware, generate power or own data centers. Its AI-adjacent work is front-end: data-center feasibility and siting studies, permitting, and power and water supply engineering. Management argues this site-specific work is not the routine commodity design that AI could displace.
The company reports in two segments, Government Services Group and Commercial/International Group, from offices rather than plants: Pasadena, Arlington, Boston, Irvine, London, Melbourne, New York, Oakland, Portland and Sydney. Client-sector mix in the latest quarter was international at 47% of the business, U.S. federal at 20%, U.S. commercial at 20%, and the remainder U.S. state and local. It carries no manufacturing footprint, owned generation or owned data-center assets.
Business Segments
Competitive Landscape
Tetra Tech competes with much larger engineering and consulting firms. Its 10-K lists 17 named competitors, including AECOM, Jacobs Solutions, Stantec, ICF International, WSP Global and Arcadis. Tetra Tech's data-center work is about $60M a year. The company's stated differentiation is bespoke, site-specific water and environmental engineering rather than routine design.
- AECOMNamed in Tetra Tech's 10-K competitor list.
- Jacobs SolutionsNamed in Tetra Tech's 10-K competitor list.
- StantecNamed in Tetra Tech's 10-K competitor list.
- AtkinsRéalisNamed in Tetra Tech's 10-K competitor list.
- ICF InternationalNamed in Tetra Tech's 10-K competitor list.
Supply Chain
Tetra Tech sits at the front end of the engineering chain: feasibility, siting, permitting, and power and water supply analysis. It owns no data centers, generation or manufacturing. No neighbor transcript in the source set mentions Tetra Tech by name.
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