Forgent Power Solutions, Inc. 2026 Q4 Earnings Call

Kate, please go ahead. Thank you, Operator, and thank you everyone for joining us today for Forgent Power Solutions' Fiscal Fourth Quarter and Full Year 2026 earnings call.

With me today are Gary Niederpruem, our Chief Executive Officer, and Ryan Fiedler, our Chief Financial Officer. On this call, management will be making forward-looking statements based on current expectations and assumptions, which are subject to risks and uncertainties. Actual results could differ materially from our forward-looking statements if any of our key assumptions are incorrect because of various factors, including those discussed in today's earnings release and during this conference call, and in our latest filings with the Securities and Exchange Commission, each of which can be found on our website. Today's presentation also includes references to non-GAAP financial measures, including adjusted EBITDA, adjusted EBITDA margin, adjusted net income, and adjusted earnings per share.

You should refer to the information contained in the company's earnings release and presentation for definitional information and reconciliations of historical non-GAAP measures to the comparable GAAP financial measures. With that, let me turn the call over to Gary.

Thank you, Kate, and good morning, everyone. As is our practice, I'll begin with our fourth quarter financial highlights and a business update. Since this is our year-end call, I'll spend a few minutes reviewing our full-year results against the commitments and priorities we outlined during our IPO process earlier this year. After that, I'll turn it over to Ryan to walk through our fourth quarter and full-year financial results in more detail. Then I'll conclude with a discussion of our strategic priorities for the coming year and provide our fiscal 2027 guidance. Turning to slide 5. We closed fiscal 2026 with the strongest quarter in Forgent's history, delivering record quarterly revenues, adjusted EBITDA, and adjusted net income. Fourth quarter revenues increased 94% to a record $462 million. Adjusted EBITDA increased 163% to a record $113 million, and adjusted EBITDA margin expanded 200 basis points sequentially to 24.4%.

Importantly, Q4 represented the second consecutive quarter of significant margin expansion, which aligns with the expectations we set throughout the year. Adjusted net income increased 275% to $77 million. For the full year, revenues increased 89% to $1.42 billion. Adjusted EBITDA increased 91% to $323 million, and adjusted net income increased 136% to $208 million. These results reflect the strength of our value proposition and our team's unwavering commitment to delivering for our customers and our shareholders. Taking a company public, expanding manufacturing capacity five-fold, and doubling revenue all in the same year while continuing to meet our customer commitments is an extraordinary achievement. I'm incredibly proud of and grateful to our employees for their exceptional skill and dedication. Thank you, Forgent family. Turning to slide 6, I'll frame our business update for the quarter around seven takeaways.

First, we continue to see strong demand for our products and solutions, and we are managing that demand effectively. That is reflected in our performance relative to guidance with each of our KPIs all exceeding the high end of our guidance. Guidance that, as a reminder, we raised in May. Second, our commercial strategy continues to drive growth well above the market, a clear indication that we are gaining share, and our rate of growth is still increasing despite our significantly larger scale. To put that in perspective, fourth quarter revenue growth exceeded our full-year growth rate by approximately 500 basis points. We also booked more than $1.5 billion of orders in the quarter alone. That's more than our total revenue for all of fiscal 2026. Third, we are delivering on the margin expansion we committed to.

Adjusted EBITDA margin increased 200 basis points sequentially for the second consecutive quarter, primarily due to operating leverage as volumes grew. Fourth, our scale is beginning to drive significant cash generation, resulting in our operating cash flow increasingly approximately 2.5 times in fiscal 2026 versus fiscal 2025. Fifth, demand for modular solutions is growing rapidly. Customers increasingly want to shift work from the field to the factory in order to reduce reliance on field labor and accelerate speed to power. This trend benefits Forgent in two important ways. It expands our addressable wallet by allowing us to capture value that historically would have been performed by contractors on site, and it plays directly to our strength as one of the few companies with the capability to deliver these types of integrated solutions at scale.

Our momentum in this area is evident in our fourth quarter Powertrain Solutions booking and in our backlog, which is now approximately 40% Powertrain Solutions. Six, we already have sufficient demand visibility to justify adding manufacturing capacity beyond the expansion we recently completed. We plan to make an incremental investment at our Tijuana campus to increase Powertrain Solutions capacity, and we are again accelerating hiring in the first quarter to prepare for a significant production ramp in the quarters ahead. Finally, the quality and depth of our demand visibility are the strongest in our company's history. At this point last year, we entered fiscal 2026 with $850 million of backlog. Today, our backlog stands at $3 billion, more than 3.5 times higher, placing us in a fundamentally stronger position as we enter fiscal 2027, and providing substantially greater confidence in our outlook for the year ahead.

Moving to slide seven. Let me put some numbers around the demand environment. Fourth quarter bookings reached $1.5 billion, a new company record, increasing 375% year-over-year and 73% sequentially. Order strength was broad-based across all three of our end markets, led by data centers and extended across both custom products and Powertrain Solutions. Year-over-year bookings growth was higher in the fourth quarter than the third quarter, despite comping to a much higher prior year result. Our book-to-bill ratio reached a new record of 3.3 times, also on a much larger revenue base. Backlog increased to $3 billion at year-end, an all-time high, up 256% year-over-year and 53% sequentially.

The fact that Forgent set new records for bookings and backlog for seven consecutive quarters underscores the durability of the demand we are seeing, our continued share gains, and the strength of our visibility on future revenue growth. Turning to slide eight. When I joined Forgent in 2025, our data center business was largely focused on selling point products, individual pieces of equipment, and we primarily reached the market through EPCs, engineering firms, and OEMs that acted as intermediaries. Since then, we have made deliberate investments in our sales and engineering capabilities to engage end customers directly and support a broader, more integrated set of solutions across the powertrain. You can see that progression on the slide. We started with EPCs, engineering firms, and OEMs, then expanded into regional colocation providers, national and international colos, and neo-cloud customers.

Each step moved us closer to the end user and increased the portion of customer spend available to us. Our next major step is to enter the frontier AI labs and hyperscalers, shown on the right side of this slide. We received our first direct order from a frontier AI lab in the fourth quarter, and we have also signed an MSA with a hyperscaler. We view these milestones as proof points, and more than that, as the foundation for meaningful direct orders from both of these customer types as fiscal 2027 progresses. The key takeaway is that we are still in the early innings of expanding our direct customer base in the data center market. We have already demonstrated the ability to move upmarket from intermediated point product sales to direct engagement with some of the most technically demanding data center customer types in the world.

But we believe the hyperscaler and frontier AI lab opportunity remains largely untapped for Forgent and represents a significant organic growth opportunity for us over the next 24 months. Building on that progression, slide nine gives you a concrete example of what this move upmarket looks like in practice. This recent win with the frontier AI lab demonstrates that Forgent now has a seat at the table with the largest electrical equipment providers in the industry. This customer is pursuing one of the largest AI infrastructure build-outs in the U.S. These programs are highly technical, qualification standards are rigorous, and proper engagement is paramount. Securing this award reflects the strength of our engineering capabilities, the quality of our solutions, and our growing credibility with the most demanding data center customers. Importantly, this is only the initial award.

The customer's first campus alone is expected to exceed one gigawatt, and the broader opportunity for additional orders is measured in multiple gigawatts. While this win is meaningful on its own, we view that as an even more important proof point of our ability to penetrate frontier AI customers directly and build a foundation for significantly larger opportunities ahead. Turning to slide 10. Let me zoom out to a shift that is reshaping how our customers build the move towards more modular solutions. As a reminder, a modular solution is a prefabricated factory-built system, such as power, cooling, or compute modules that can be deployed on-site much faster than traditional field-built infrastructure. It shifts working from the construction site to a controlled manufacturing environment, reducing reliance on field labor, improving quality and scalability, and accelerating speed to power.