管理層發言
Good day, and thank you for standing by. Welcome to the ICON plc Q1 2026 Earnings Conference Call. Please be advised that today's conference is being recorded. I will now hand the conference over to your first speaker today, Kate Haven, Vice President of Investor Relations. Please go ahead.
Hello, and thank you for joining us today. I'm joined on the call by our Chief Executive Officer, Barry Balfe; and our Chief Financial Officer, Nigel Clerkin. I would like to note that this call is webcast and that there are slides available to download on our website to accompany today's call. Certain statements in today's call will be forward-looking statements. These statements are based on management's current expectations and information currently available, including current economic and industry conditions. Actual results may differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with the company's business, and listeners are cautioned that forward-looking statements are not guarantees of future performance. Forward-looking statements are only as of the date they are made, and we do not undertake any obligation to update publicly any forward-looking statements, either as a result of new information, future events or otherwise. More information about the risks and uncertainties relating to these forward-looking statements may be found in the most recently filed annual report on Form 20-F. This presentation includes selected non-GAAP financial measures, which Barry and Nigel will be referencing in their prepared remarks. For a presentation of the most directly comparable GAAP financial measures, please refer to the section of the press release dated June 23, 2026, titled Consolidated Statements of Operations. While non-GAAP financial measures are not superior to or a substitute for the comparable GAAP measures, we believe certain non-GAAP information is more useful to investors for historical comparison purposes. Included in the press release and the earnings slides, you will note a reconciliation of the non-GAAP measures. Adjusted EBITDA, adjusted net income and adjusted diluted earnings per share exclude amortization, stock-based compensation, foreign currency gains and losses, restructuring, transaction, integration-related and other adjustments, transaction-related financing costs, fair value movement on investments in equity, goodwill impairment, impairment of nonfinancial assets and the related taxation effect. In the interest of time, we ask participants to keep their questions to one. I will now hand the call over to our Chief Executive Officer, Barry Balfe.
Thank you, Kate. ICON's results in quarter 1 were in line with our expectations and reflected sustained progress in commercial performance alongside the expected impacts of previous demand and conversion dynamics on financial results for the quarter. Commercial excellence has been a central priority for me and for the team, so I'm encouraged by the progress that we've seen over multiple quarters now. We prioritized diversification of sales channels in large pharma, expanding our footprint in the midsized segment and increasing RFP flow and win rate in biotech. So it's gratifying to see significant progress in these areas, reflecting our strategy in action and its resonance with our customers. Quarter 1 gross bookings were $3.3 billion, matching the strong performance in quarter 4 2025 and up 22% year-over-year. Cancellations were also in line with the improved levels seen in quarter 4, a total of $383 million for the quarter. For transparency, we have also provided cancellations under our old methodology, although notably, there was very little impact of the methodology change on reported cancels in the quarter. With that being said, cancellations are inherently volatile on a quarterly basis, and we consider it likely that the future cancellation run rate may be somewhat higher than these levels as intra-quarter cancellations in quarter 4 and quarter 1 were lower than historical averages. Strength of gross bookings and cancels resulted in net business wins of $2.88 billion in the quarter, an increase of 42% year-over-year and a net book-to-bill of 1.42x. Encouragingly, we again saw a solid contribution of direct fee versus pass-through awards with our book-to-bill on a direct fee basis in excess of 1.3x for the quarter. This strong bookings performance was broad-based and supported by particularly strong RFP flow in both our Pharma full service and our Development Solutions businesses. RFP flow also increased low double digits sequentially in the biotech full-service business. Win rates remained strong in both large pharma and biotech full service, sustaining the step-up seen in quarter 4. Therapeutic mix continues to favor oncology and cardiometabolic areas of the portfolio. Importantly, within cardiometabolic, we've seen good diversification in awards in the last two quarters in terms of both the number of customers that we're supporting and the distribution of indications, including areas such as NASH, obesity and kidney disease. In large pharma, ICON is positioned as a scaled integrated partner with leading capabilities across full service and FSP models as well as a broad range of adjacent functions. Our capacity to hybridize FSO and FSP models remains central to our value proposition as customers increasingly require the best of both solutions, while ensuring seamless interoperability with their internal functions. As I mentioned earlier, we continue to see meaningful opportunity to deepen established partnerships by increasing the range of services we provide to large pharma customers. One strong example of this in quarter 1 was the award of a central labs partnership from a top 5 pharma customer, where we had limited labs business in the past. Flexibility, strong project management, our kit operations strategy and long-standing delivery in other functions were cited by the sponsor as key factors in that award. Moving on to midsized pharma, I previously emphasized the importance of increasing our relatively low level of penetration in this important market. While win rates remained flat in that sector in the quarter, opportunity flow is improving, up high teens on a year-over-year basis with several strategic partnership discussions underway. In quarter 1, ICON's global execution capabilities, commitment to strategic collaboration and focus on digital innovation were central to securing a new midsized partnership and displacing the incumbent large CRO provider. In biotech, the market environment remained generally positive. ICON sustained the improved win rates seen in quarter 4 with a good balance of repeat business and new customers contributing to awards in the period. Commercial performance continued to be aided by our evolved biotech strategy with consulting engagements and early development projects continuing to drive demand into Phases 2 and 3, supported by enhanced therapeutic and medical expertise. Now turning to our financial results for the first quarter. Performance in the quarter was in line with the expectations we detailed on our most recent earnings call in May. Revenue of $2.0 billion was up approximately 1% year-over-year on a reported basis, but down 1.9% on a constant currency basis, reflecting challenging prior demand dynamics, including elevated cancellations in earlier periods. Quarter 1 adjusted EBITDA margin of 15.6% increased 10 basis points sequentially, consistent with our prior indications. While margin performance was primarily impacted by organic revenue decline, we also saw pressure from mix shifts in favor of functional versus full service revenue, foreign exchange and to a lesser degree, the flow-through of pricing dynamics from previous periods. We continue to anticipate that we will see modest sequential margin improvement throughout the year as our commercial strategy delivers increased full-service direct fee revenue as a proportion of the overall mix and as we continue to drive disciplined cost management in the business with incremental benefits throughout the year. Importantly, this margin trajectory is driven by actions that are already in flight, not by future assumptions. As such, our financial guidance for the full year 2026 remains unchanged, with revenue expected in the range of $7.85 billion to $8.15 billion and adjusted diluted earnings per share in the range of $10 to $11. In terms of the macro demand environment, we continue to see things broadly as we outlined on our May call. Biotech funding remains constructive with ongoing activity in larger follow-on capital raises supporting late-stage clinical programs. In large pharma, customers continue to invest in their clinical pipelines with encouraging deal flow suggestive of incremental opportunity for ICON. We remain encouraged by the quality of opportunities in our pipeline in key areas we've identified for further expansion as we focus on converting demand into high-quality profitable revenue. Against this backdrop, we continue to make targeted investments that support our growth ambitions, including talent and capabilities in key functional and therapeutic areas. We are expanding our central laboratory facility in Singapore to support two strategic objectives: a focused effort to expand our laboratory offering in addition to accelerating our growth in Asia. In addition, oncology remains a core therapeutic area and our innovative solutions are strengthened by ICON's growing Accellacare site network. We recently expanded its oncology research capabilities through our partnership with the Brian Moran Cancer Institute in the U.S. By establishing this flagship oncology site, we're working to address persistent industry challenges, particularly in patient recruitment. Historical industry data suggests that the overall number of clinical trial sites conducting oncology research in the U.S. is declining with access to trials highly concentrated as nearly 70% of U.S. counties lack active oncology trials for patients. At the same time, regulators and sponsors continue to target 20% of global patient enrollment from U.S. sites. Our expanded Accellacare footprint across the U.S., including community-based cancer centers, along with our partnership with Advara to support research-naive sites will help to expand patient access to cancer therapies, ensuring that more individuals benefit from innovative treatment options. Separately, we continue to execute on our innovation strategy as we evolve ICON's digital architecture to an intelligence-led platform. Through our recently announced partnership with Microsoft, we are building on the strong foundations already in place to deliver on three key strategic priorities in this area. Firstly, we are developing the intelligence layer that powers Orbis. This is ICON's Agentic AI platform, connecting our expertise, data and AI across the trial life cycle to enable seamless navigation and facilitate teams to make better decisions faster for our customers. Secondly, our focus on driving incremental efficiency is supported by an enterprise-wide deployment of Copilot embedded in key workflows, allowing our employees to automate repetitive activity and shift their focus to higher-value work. And finally, perhaps most importantly, by combining Microsoft tools with access to frontier models from other leading providers, ICON will continue to develop and deploy best-in-class domain-specific agents embedded directly into clinical development workflows, powered by our deep expertise and execution capabilities. In summary, while 2026 will require us to navigate the near-term headwinds we've discussed, we are executing well on our strategy and the underlying momentum in our business gives me confidence in our trajectory. Before I close out my comments, I want to extend my thanks to our dedicated team at ICON for their continued efforts in delivering for our company, for our customers and for patients in need. Now I'll hand you over to Nigel to take you through our results in further detail.
Thanks, Barry. Revenue in quarter 1 was $2.0 billion, representing a year-on-year increase of 0.9% or a decrease of 1.9% on a constant currency basis. Overall, customer concentration in our top 25 customers was aligned with quarter 4 2025. Our top 5 customers represented 25% of revenue in the quarter. Our top 10 represented 40.3%, while our top 25 represented 63.4%. Adjusted gross margin for the quarter was 24.4% compared to 28.4% in quarter 1 2025. Adjusted SG&A expense was $178.5 million in quarter 1 or 8.8% of revenue compared to $173.4 million in quarter 1 2025 or 8.6% of revenue. Adjusted EBITDA was $317.7 million for the quarter or 15.6% of revenue. This compares to $398 million in Q1 2025 or 19.8% of revenue. Adjusted net interest expense was $44.7 million for quarter 1. In the comparable period last year, net interest expense was $44.3 million. The effective tax rate was 17.2% for the quarter. We continue to expect the full year 2026 adjusted effective tax rate to be approximately 17%. Adjusted net income for the quarter was $192.9 million, equating to adjusted earnings per share of $2.50. U.S. GAAP income from operations amounted to $173.8 million or 9% of quarter 1 revenue. U.S. GAAP net income in quarter 1 was $104.8 million or $1.36 per diluted share. From a cash perspective, quarter 1 had cash from operating activities of $167 million. Capital expenditure was $30.8 million, resulting in free cash flow in the quarter of $136.2 million. At March 31, 2026, cash totaled $765.2 million and debt totaled $3.4 billion, leaving a net debt position of $2.6 billion. This was a decrease on net debt of $2.8 billion at December 31, 2025, and $2.9 billion net debt at March 31, 2025. We ended the quarter with a leverage ratio of 1.8x net debt to adjusted trailing 12-month EBITDA. Our balance sheet position remains strong, reflecting our disciplined approach to capital deployment and solid cash generation in our business. While returning capital to shareholders through share repurchases remains our top capital deployment priority, we will also continue to invest in expanding our capabilities and solutions to support future growth and strengthen our leading market position. And with that, I believe we're ready to open up for questions.
分析師問答
We will now open the call for questions. Your first question comes from the line of Eric Coldwell from Baird.
I just wanted to check on the spread between backlog and performance obligations. It did widen this period. I just wanted to confirm that that was due to growth in new awards that are not yet contracted as opposed to any adjustments to the realizable value of contracted awards or for some other reason?
Eric, it's two things. As you rightly say, it's strong book-to-bill, back-to-back. So you're going to see some drag there. The other side of it is seasonality-wise, Q1 isn't always the strongest quarter for signings. I will tell you that Q2 is looking like a very strong quarter for signings. So I'd expect a significant shift in that number in Q2.
Your next question comes from the line of Michael Ryskin from Bank of America.
Congrats on the quarter. You had a comment earlier in your prepared remarks on cancellations and just something along the lines that you wouldn't be surprised to have higher cancellations going forward because intra-quarter cancellations in 4Q, 1Q were lower. Could you expand on that a little bit, sort of what drove that lower cancellation? Is that just noise? And is that indicative of what you've seen in 2Q so far because you are two-thirds of the way through the quarter? Just maybe give us an update on that.
Yes, Mike, it's two things, honestly. If you look at Q4 and Q1, we gave it to you both ways. So if you look at Q4, there was some benefit to the methodology change at the end of Q3, albeit the underlying cancels were significantly down. In Q1, there's not really any material benefit from the methodology change, but it is a notably low cancels quarter. My comment really is only intended to reflect that I don't think anyone should take an exceptionally low cancels quarter and call it par by default. Regarding your question about Q2, Q2 will pick up a bit, certainly nothing like the concerning levels of cancellations we saw in the past. But as I've been saying for a while, if cancels bounce around between, I don't know, $500 million and $600 million, I don't think that's going to be out of the ordinary for a business of our size. But my comment was really more broad-based than that. It was simply looking at, I think it was $383 million in the quarter, which looks conspicuously low, and I certainly wouldn't want to anchor off that as guaranteed for go-forward quarters.
Your next question comes from the line of David Windley from Jefferies.
I wondered, Barry, if you could expound on the quality of pipeline that you're referring to. It sounds like diversity is reasonably good, but I'd be interested in a little more color on how much labs are contributing, how much you are pushing Phase 1, and within that, is quality also reflected in the pricing that you're seeing in the awards that you're chasing and winning?
There's a lot in there, Dave. I'll do my best. I think the point about qualitative pipeline flowing into quality of opportunities, quality of awards and quality of backlog is exactly the point. The way we think about demand is not simply volume of demand. We're focused on convertibility of the pipeline we see—quality opportunities we can turn into significant revenue that drives significant profitability. We're reasonably encouraged to be candid. Adding a new midsized partnership in the quarter and a labs partnership in large pharma in the quarter, albeit they didn't particularly contribute to awards in the quarter, I think, is encouraging. We continue to see good opportunities to grow our labs business. That's no surprise. I've called it out in the past. I would also say the skew towards Phase III in recent quarters is interesting. So I think the number of Phase III trials in the Q2 awards were up around 38% to 39% average skews from 29% to 45%. In Q2, that's going to be substantially higher as I understand it. Obviously, we haven't closed that just yet, but that's encouraging. But the area where caliber of pipeline would have been a question 12 or 18 months ago was in biotech, and that's where I'm perhaps most encouraged. We've talked about getting the RFP flow up in certain quarters. We've talked about getting the wins up and the win rates up and sustaining those. That's pretty encouraging. These things are inherently volatile. Pharma had a particularly strong quarter in Q1 for RFP flow that probably dropped a little in Q2. And then biotech has a notably strong input in Q2 RFP flow. One of the metrics I look at is the percentage of RFPs that are ballparks. For example, in quarter 1, that bounced from about 12% in quarter 4 up to about 17%. Those ballparks skew heavily towards our Development Solutions business. I think that's actually expected and welcome. What we're looking at there is a stated objective to bid on development solutions businesses, whether it's early development, specialty labs, central labs, bioanalytical, whatever that may be that we weren't bidding on before. And sometimes you have to jump through hoops before you get to really productive work there. So that's not unexpected. Likewise, in biotech, I think we'll see a tick up in the proportion of biotech RFP flow that's ballpark in quarter 2 with very significant increases in RFP volumes there. So these things bounce around, but I would characterize the pipeline environment as positive and really focusing on taking a qualitative approach. We're looking to drive volume where we want to drive volume, and we're looking to convert wins where we need to convert wins. And so far, the teams have been doing a good job with that. On pricing, I would see that as a separate question. My views on pricing haven't really changed. There's never been a quarter where we weren't wrangling with pricing dynamics. Our business really is to try and understand what problem customers are trying to solve. Where we can meet them in a place where our ways of working, our strategy, our technology, our teams, and our superior expertise in particular functions and indications can drive cost out of their business, there are customers that we think we can create significant value for. When they meet us there, they tend to profit from it. There will always be quarters where people want to get all the way home in terms of rate negotiations or discounts. While I respect the needs of our customers, my consistent feedback to them and to my own team is that you can't cut your way to victory. The way to do it is to work smarter, to work with better teams who've done the work before and know how to execute in a superior way. So that's where we are. No underlying change in the pricing environment; it's the same knife fight it is every quarter.
Your next question comes from the line of Michael Cherny from Leerink Partners.
Maybe if I can go back, I think there was a comment you made, Barry, regarding margins and the in-flight opportunities. As you think about the embedded ramp in guidance over the course of the year, how do we think about the confidence intervals and the split between direct costs versus SG&A and the biggest proactive opportunities you're taking versus areas where it could be a mix-related contribution?
Mike, it's Nigel. Why don't I take that? We reported 15.6% EBITDA margin in Q1, right in line, slightly above actually what we had flagged four weeks ago as to where we thought that would land. Nothing has fundamentally changed in terms of our outlook for margin through the course of the rest of the year. As a reminder, when you look at our guidance range for the year, it is a range. But just taking the midpoint for modeling purposes for a moment, that implies an EBITDA margin for the year of approximately 16.5%. Looking at where we see that evolving, we are very much focused on EBITDA margin dollars much more than EBITDA margin percentage. We've talked about that before, where pass-through volatility can impact the margin percent. So we're much more focused on margin dollar gradual improvement as we go through the year. Looking at Q2, particularly, where we are now at this stage in the quarter, we would anticipate some continued margin progression in the second quarter, somewhere in the order of about 0.5% or so. So EBITDA margin for Q2 is somewhere around 16%. From there through the balance of the year, we will continue to focus on executing. The drivers for that margin expansion through the course of the year will be, one, that mix impact mitigating somewhat as we go through the year as we see further progression in direct fee growth through the back end of the year and the mix of that between full service and FSP that continues to be the expectation. And secondly, cost actions and managing the P&L efficiently, which we would also expect to contribute more heavily in the second half, given that the actions Barry mentioned that are already in flight come to fruition and flow into the P&L. So it will be a mixture of both, Mike, but nothing changed in our fundamental expectations from a month ago.
Your next question comes from the line of Charles Rhyee from TD Cowen.
Barry, I just wanted to go back to your earlier comment. You mentioned that in 1Q demand, pharma was particularly strong and that 2Q has been stronger in biotech. If we think about the balance between those, now that we're basically at the end of the quarter, can you give us a sense on how to think about 2Q demand in the sense that for gross bookings dollars or gross awards, 1Q is maybe more seasonally a step down from 4Q and 2Q tends to be a step up? Can you give us a sense on where 2Q demand is shaking out relative to 1Q?
Demand is broadly comparable. It's always dangerous to do quarter-over-quarter comparisons on numbers like RFP flow because there's inherent volatility, so I tend to look at it over multiple quarters. Quarter-over-quarter, not much to say in terms of broad demand dynamics. As I said in my prepared remarks, we see the world broadly as we did 3.5 weeks ago when we spoke to you. In terms of outlook, I'm always a little bit reticent to call quarters before they're closed, but I see no reason why performance shouldn't be broadly in line. That's certainly what we're shooting for. If you think about the things that matter to us—continuing to lead and diversify our sales in large pharma, adding partnerships in midsize, and sustaining a good win rate in biotech—these are the things we've got to do. In terms of that demand environment, we've had two notably strong quarters in terms of the direct fee contribution as part of that overarching book-to-bill. I wouldn't necessarily expect it to stay that high, but if the direct fee book-to-bill stays up in the 1.2x territory, that's indicative of good potential for future growth. I haven't seen anything in the quarter that suggests that isn't achievable for us in Q2. Thoughts then turn immediately to Q3 and the incredibly condensed quarter; it tends to be much more back-ended into Q3. So while the teams are busily locking out Q2, we're planning for the next quarter and the back end of the year. That's business as usual on our side, Charles.
The one thing I might add is coming back to the guidance and the financial outlook for the balance of the year. We've obviously reiterated the financial guidance for the full year with an EPS range of $10 to $11. So again, nothing has fundamentally changed in our outlook for the balance of the year in terms of P&L performance. It's great to see that commercial traction. The Q1 book-to-bill print that we've seen was already factored into the guidance for the year. The outlook for the balance of the year reflects a book-to-bill assumption for the balance of the year of somewhere around 1.0. That said, if we continue to see commercial traction flowing in stronger, that's more of a tailwind as we head into 2027, but it wouldn't change materially our outlook for the balance of this year. So we continue to feel that the $10 to $11 range is appropriate and nothing has massively changed in our view since a month ago.
Your next question comes from the line of Patrick Donnelly from Citi.
Nigel, maybe a follow-up on the margin piece. I know the pass-through and pricing dynamic is ongoing. Can you just talk about how that plays out as the year goes and how that plays into the margin bridge? And then a follow-up on that, on the cash flow front, how we should be thinking about the cadence there throughout the year after the 1Q results?
Sure, Patrick. On margin, Q1 came in pretty much bang on what we had flagged a month ago. Pass-throughs were especially high in the fourth quarter and they came down by about $100 million in the first quarter versus the fourth quarter. We talked about pass-throughs being broadly stable at the midpoint in our guidance year-over-year. So, the working assumption at that midpoint would be that pass-throughs are broadly stable quarter-to-quarter as we go through the year, similar to Q1 levels. As we go through each quarter, we will flag any deviations from that up or down and what impact that has on our perspective on the midpoint and margin evolution. Again, we're much more focused on margin dollars than margin percent for that reason. On cash flow, free cash flow in Q1 was about $100 million lower than Q1 last year, which is broadly consistent with the EBITDA decrease year-over-year, which is about $80 million. As we go through the year, focus on that EBITDA movement year-over-year. We had an expectation last year of free cash flow in the $700 million to $800 million range, and we outperformed that with $862 million. So at the midpoint, our EBITDA is forecasted to be about $200 million lower than last year. I point to that as an anchor point, and we'll talk about where we end up on that depending on performance. For Q2 specifically, Q2 free cash flow is generally lower than Q1 because of the timing of interest and tax payments. So that's likely to be the case in Q2 as well.
Your next question comes from the line of Elizabeth Anderson from Evercore.
Given the strong book-to-bill performance and your comments about continued strength in oncology and metabolic, how do you think about the conversion of bookings, primarily in the last two quarters, into revenues? Is that typically in the 6 to 12 month window? Anything you would call out on the conversion timing of these bookings?
It's kind of in line with the usual story. The burn rate on a study in the quarter you win it is about 0%. Subsequent quarters might be 1%, 3%, 4% and 6%, so it is a while before you get to those 9% and 10% burn rates. It also depends on whether you're winning FSP, labs, or stand-alone work. Oncology and cardiometabolic burn at different speeds once they're up and running, and oncology probably skews a little bit further ex-U.S., so it might burn a little bit slower. The increase in the full service book-to-bill in quarter 4 and quarter 1 and what I hope will be sustained in quarter 2 are more relevant for 2027 than for 2026. It's part of the story of where we'll see some direct fee and full service direct fee revenue mix uptick in the back end of this year, but it's not particularly material for 2026. The number one indicator for sustained top-line growth will be whether we can sustain that level of commercial performance; then we'll see it start to tick up as we get to the back end of 2026 into 2027 and beyond. It takes a while to push it all through the pipes.
Your next question comes from the line of Sean Dodge from BMO Capital Markets.
Maybe, Barry, just to clarify one of the last points you made on bookings and some of the dynamics, anything you can share overall on FSO versus FSP mix? Are you still seeing the pendulum shift toward FSP in terms of what's going into backlog? And what is the mix now on FSP in backlog and revenue?
The disproportionate presence of FSP is a comment on revenue in the quarter, while book-to-bill is the opposite. Because we only take 12-month values into backlog, you won't see wild oscillations in book-to-bill from FSP. When you see significant uptick in book-to-bill, it's being driven primarily by full service and other areas like the lab. The overarching business mix doesn't change much quarter-to-quarter. FSP has been growing a little faster, while full service direct fee revenue has actually declined a little bit. If we sustain these book-to-bills, that changes in time, which is part of the math related to the back end of 2026 and the longer-term flows into direct fee revenue and associated margins in 2027 and beyond. The book-to-bills we've been talking about are being driven largely by strong book-to-bills in both pharma and biotech. There's no sponsor over 10% of revenue. The number of deals over $50 million are up again in Q1 on what was already a good Q4. I said a year ago I wanted to see more repeat business in biotech, but of course you want to see lots of new business as well. It was good to see a mix of new and repeat customers in the quarter. Pipeline becomes RFP flow, becomes awards, becomes backlog, becomes revenue. So good Phase III presence in the mix and good full service presence in the mix are to be welcomed, and the direct fee component is particularly significant. We're reasonably pleased with how that panned out over the last couple of quarters.
Your next question comes from the line of Ann Hynes from Mizuho.
I know you don't have any share repurchase in your guidance. Can you remind us how you view any share repurchase potential in 2026 and 2027?
Ann, you're right; the guidance excludes any benefit from buybacks. We currently are not able to do buybacks because of the delay in publishing our year-end results, which has meant we have not actually been able to enter into an open period yet, and we're still in the close period until we publish our Q2 results. We would anticipate being in a position to go back to start buybacks again in the third quarter. On magnitude, I would point you back to our track record. Last year, we spent pretty much all of our free cash flow dollars on buybacks. We continue to see share buybacks as a high-priority capital allocation choice in the current environment and at the current share price.
Your next question comes from the line of Justin Bowers from Deutsche Bank.
Two-parter. First, are you still constrained by free cash flow in the period given the moratorium in the last few quarters and the accrual of cash on the balance sheet? And are you constrained on M&A as well? Second, going back to Barry's prepared remarks on the mix shift in the back half of the year, is that pointing to a return of growth in service fee revenue this year, or more that pass-throughs decline as a percentage of mix and/or a shift in favor of more FSO versus FSP? Directionally, that would be helpful.
I'll take the second one first. We've said that we anticipate top-line revenue to be broadly consistent throughout the year, but the business mix improves as we go through the year. You can do the math on the direct fee versus pass-through components there. FSP has been growing very nicely—I am pleased with how that business has been progressing—but because of the relative mix of FSP and FSO revenue, that creates some margin pressure. As we think about incremental margin performance over time, it's not just cost action and pass-through mix; it's also about returning to sustainable levels of growth in the FSP business. That will take time to bleed through into the P&L. Perhaps not massively material to 2026, but something that these book-to-bill trends suggest is on the agenda longer term.
On your first question: there is some pent-up capacity from not being in the market for buybacks in the first half of this year, so that is helpful in terms of free cash flow capacity as we come into the third quarter and are able to get back to the market. We're not constrained by free cash flow in the quarter; it's cumulative. On M&A, we do have constraints in Irish company law rules around share buybacks from a free cash flow and leverage perspective, but not so in M&A. We could look at M&A without being constrained by free cash flow as such. Barry would reiterate our strategic priorities and where we would focus. Our priority from a capital allocation perspective is buybacks, but we continue to look at M&A opportunities opportunistically.
Your next question comes from the line of Luke Sergott from Barclays.
On the $100 million sequential reduction in pass-through benefiting Q1, is that a function of part of the cleanup done in Q4? Is that the new steady state going forward, or is it more a function of how trials were shaking out at that time?
Luke, yes. The decline in pass-throughs is roughly $100 million from Q4 to Q1, and that's the main driver of the change in revenue between the quarters. At the midpoint of our guidance, the working assumption is that pass-throughs would be broadly stable at Q1 levels through the rest of the year, and that is currently our expectation for Q2 also. Regarding the investigation, there's no real material impact from the other factor we talked about in Q4, the $50 million decrease in Q4 revenue related to full service complete estimate changes. There's a bounce back effect from that in the first quarter because that decrease isn't there, but there's no material bleed of that into future quarters; it will come in gradually.
Your next question comes from the line of Casey Woodring from JPMorgan.
You said you sustained the improved win rate you saw last quarter in Q1. Can you elaborate on that? Did win rates accelerate from last quarter? Was strength more in pharma or biotech from a competitive perspective? And comment on any changes you've made in the commercial strategy over the last few months that are driving that step-up in win rates—are you focusing more on labs work, for example?
The win rates were broadly consistent in both pharma and biotech full service, which was notable, within about a percentage point for both of them. That's largely a product of what the teams have been doing over the last five or six quarters. We sharpened up how we map the market, both in terms of old-school customer engagement and newer technologies that allow you to better map the molecular landscape in early development to engage entities at the right time. The way you do business with a very small nascent entity is different from how you do business with a long-standing alliance partner. Reflecting that in our go-to-market approach, ensuring the right level of regulatory and scientific consulting is available to potential customers, and triaging biotech opportunities like they're gold dust has helped. Breaking down silos internally so we're selling holistically to our large pharma customers matters. A huge piece is advising customers well on strategy—development plans, assets, programs, or specific studies—getting feasibility and intel right, and making sure an expert-led sale is present, particularly for biotech customers. These are consistent with what we said in early 2025 about sharpening commercial focus. It's about disciplined commercial hygiene and execution. I give the teams credit for how they've executed.
Your next question comes from the line of Ryan Halsted from RBC.
I wanted to follow up on the business mix and the hybridization of your offering. How has that strategy impacted your mix and why does it lead you to expect a greater proportion of direct fee going forward?
They're slightly related and slightly different. I was with a customer last week who prioritizes internalized development supported by FSP, but when they outsource fully, they outsource completely. With a customer like that, where you're an established FSP provider but you've also won full service or labs work, it's important to optimize interfaces and not come with a rigid playbook. Sometimes the playbook is a white page: how can we make this work seamlessly for you? It can be as simple as saying we've run a large full-service study for you and that team is now available—there's economic and strategic value to recycle that team into the new engagement for continuity and expertise. Other times, customers want a standardized function across their portfolio, so we might deliver a start-up or data management function horizontally rather than at the study level. We don't want to withhold tools or services because a customer isn't outsourcing in the way we prefer. We want to be the best partner in the business. If we can deliver what customers need in the way they want it, we're more likely to be top of mind when new work arises. That's what happened with the labs partnership in Q1: a customer we had been delivering for across other functions invited us to expand the partnership into labs. That's a core example of our partnership philosophy.
We will now take our final question for today. The final question comes from the line of Josh Waldman from Cleveland Research.
Two-part question. First, can you provide more context on where you're seeing the strength in Q2 signings? Is it biotech, or is large pharma improving as well? Second, it sounds like you had assumed that H1 bookings would be stronger than H2 bookings. If so, what was the reason for that assumption in the initial guide? When do you think you could start to get more confidence that H2 bookings could come in like H1, if that ends up being the case?
I'll answer the second part first. When we were guiding, we were already through Q1, so we knew what the Q1 book-to-bill was at the time of guiding. While we took a conservative outlook for full-year commercial numbers, it seemed prudent to include the actuals for quarter 1 that we had in hand. Regarding the back half of the year, I'm uncomfortable calling it—I'm not going to call the back half of the year today. But if your question is whether there's an opportunity to do better than a 1.0 book-to-bill in the back half given a more benign demand environment and improved commercial execution, I certainly hope so. We provided transparency on how the guide is constructed. The only thing I'll repeat is that moving the book-to-bill by 20 basis points up or down in the back half of the year won't have much impact on 2026 financials; it's more relevant for 2027. On signings, Q4 tends to be a strong signing quarter for reasons such as annual budgets. There was a strong signing quarter in Q4, a little less so in Q1, and I suspect a notably strong signing quarter in Q2. When you think about how book-to-bill works, FSP work orders often have annual extensions that can skew Q4. Movement between Q1 and Q2 signings is likely disproportionately ex-FSP. Think about Q2 signings as related to awards from earlier quarters; it's partly seasonality and partly the increase in gross bookings we saw moving through 2025. There's nothing particularly alarming about it.
Thank you. I will now hand the call back to Barry Balfe for closing remarks.
Well, thank you, and thank you, everybody, for joining today. We're pleased to have had the time to answer your questions. We're pleased with the print today; it's largely in line with expectations. We were with you only 3.5 to 4 weeks ago, so it would be a problem if there were any major surprises. Pleased with the work the teams have done. I'd reemphasize the demand environment is what it is, but our job is to understand it qualitatively and to execute on it selectively because that's what drives high-quality growth. That's what will drive top-line expansion in the longer term. As we take the actions we need to take and improve the underlying margins, these things are going on in parallel at ICON. We will continue to invest on the strategic side while executing on the near term, and I'm encouraged by the underlying momentum in the business that gives us confidence in the trajectory. Thank you all very much.
Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.