TTEK Q3 Deep Dive: Margin Expansion and Water Services Offset Backlog Decline

Environmental engineering firm Tetra Tech (NASDAQ:TTEK) reported Q3 CY2025 results exceeding the market’s revenue expectations, with sales up 1.6% year on year to $1.16 billion. The company expects next quarter’s revenue to be around $975 million, close to analysts’ estimates. Its GAAP profit of $0.48 per share was 19.4% above analysts’ consensus estimates.

Is now the time to buy TTEK? Find out in our full research report (it’s free for active Edge members).

StockStory’s Take

Tetra Tech’s third quarter results surpassed Wall Street’s expectations for both revenue and profit, with growth driven by ongoing demand for high-end water consulting and digital automation work, particularly in government and international markets. Management attributed operating margin improvement to a favorable business mix and a strategic emphasis on fixed-price contracts. CEO Dan Batrack highlighted the company’s ability to “successfully navigate the recent changes in the U.S. federal government's priorities,” while CFO Steve Burdick noted, “We generated a record setting cash from operations that approached $0.5 billion.”

Looking ahead, Tetra Tech’s guidance for the coming quarters is shaped by anticipated growth in U.S. state and local water infrastructure, international investments, and the expanding needs of data centers for water management. Management emphasized that increased government budgets and large-scale infrastructure programs will provide a foundation for new contract opportunities. President Roger Argus pointed to the company’s “high-end water expertise and geographic footprint” as key differentiators, and Batrack cautioned that the pace of federal government contracting could create short-term fluctuations in backlog visibility.

Key Insights from Management’s Remarks

Management noted that margin expansion and growth in water-related services helped offset challenges from a declining backlog and shifting government funding patterns.

• Margin expansion drivers: Tetra Tech’s operating margin benefited from a shift toward higher-margin consulting and design work, as well as an increased share of fixed-price contracts, which reached 50% of revenue for the first time in decades. Management believes this combination allowed the company to deliver improved profitability despite a lower backlog.
• Water services demand: Over 85% of Tetra Tech’s business now centers on water services, spanning sourcing, management, reuse, and treatment. The company’s expertise in digital automation, coastal resilience, and flood protection continues to attract long-term contracts in both domestic and international markets.
• Data center market growth: Management highlighted surging demand from data center operators, who require significant water resources for cooling and operations. Tetra Tech is leveraging its municipal and industrial water management expertise to secure contracts in Texas and with major data center clients, viewing this sector as a long-term growth opportunity.
• International market dynamics: Growth in the United Kingdom and Canadian water markets, as well as stabilization in Australia due to upcoming infrastructure related to the Brisbane Olympics, contributed to international momentum. The company also pointed to new contract wins in Ireland and the U.K. for water and energy projects.
• Backlog reporting methodology: The year-over-year decline in backlog was attributed to shorter funding cycles for U.S. federal contracts, causing a “decoupling” between reported backlog and revenue growth. Management stressed that the quality of backlog remains high, with a greater proportion of fixed-price and higher-margin projects.

Drivers of Future Performance

Tetra Tech’s outlook is driven by growing infrastructure investment in water and environmental services, but tempered by federal government funding cycles and evolving project mix.

• Infrastructure program tailwinds: Management expects continued growth from large-scale government programs in the U.S., U.K., and Canada, including digital water modernization and municipal upgrades. CEO Dan Batrack indicated that state and local work could grow 10% to 15%, with Texas and California highlighted as strong markets for upcoming water projects.
• Data center and defense demand: The company is focused on expanding its presence in high-growth sectors such as data centers and defense infrastructure, including coastal resiliency and flood protection. President Roger Argus noted that Tetra Tech’s contracts with data center operators and defense agencies support a multi-year pipeline of projects, with additional opportunities arising from increased government defense budgets.
• M&A and margin strategy: Management plans to accelerate acquisitions of technical leaders and mid-sized firms, facilitated by a strong balance sheet. CFO Steve Burdick explained that the company will target further margin expansion by increasing the share of fixed-price contracts and deploying more digital tools, including software-as-a-service solutions, though acknowledged that SaaS growth has been slower than anticipated.

Catalysts in Upcoming Quarters

Looking ahead, the StockStory team will be tracking (1) the pace of new contract awards in key water and data center sectors, (2) margin sustainability as the company increases its share of fixed-price and consulting work, and (3) progress in international markets, particularly as Canadian and U.K. infrastructure programs ramp. Execution of digital initiatives and the impact of additional acquisitions will also be closely monitored.

Tetra Tech currently trades at $37.41, up from $32.41 just before the earnings. In the wake of this quarter, is it a buy or sell? See for yourself in our full research report (it’s free for active Edge members).

Stocks That Trumped Tariffs

The market’s up big this year - but there’s a catch. Just 4 stocks account for half the S&P 500’s entire gain. That kind of concentration makes investors nervous, and for good reason. While everyone piles into the same crowded names, smart investors are hunting quality where no one’s looking - and paying a fraction of the price. Check out the high-quality names we’ve flagged in our Top 9 Market-Beating Stocks. This is a curated list of our High Quality stocks that have generated a market-beating return of 244% over the last five years (as of June 30, 2025).

Stocks that have made our list include now familiar names such as Nvidia (+1,326% between June 2020 and June 2025) as well as under-the-radar businesses like the once-small-cap company Comfort Systems (+782% five-year return). Find your next big winner with StockStory today.